Understanding Canadian Business, 10th Canadian Edition by William Nickels - Compressed

T E N T H

C A N A D I A N

E D I T I O N

William G. Nickels University of Maryland

James M. McHugh

St. Louis Community College at Forest Park

Susan M. McHugh Applied Learning System

Rita Cossa

DeGroote School of Business, McMaster University

Julie Stevens Brock University

Understanding Canadian Business Tenth Canadian Edition Copyright © 2019, 2016, 2013, 2010, 2007, 2005, 2003, 2000, 1997, 1993 by McGraw-Hill Ryerson Limited. Copyright © 2016, 2013, 2010, 2008, 2005, 2002, 1999, 1996, 1993, 1990, 1986 by McGraw-Hill Education LLC. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of McGraw-Hill Ryerson Limited, or in the case of photocopying or other reprographic copying, a license from The Canadian Copyright Licensing Agency (Access Copyright). For an Access Copyright license, visit www.accesscopyright.ca or call toll free to 1-800-893-5777. The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a Web site does not indicate an endorsem*nt by the authors or McGraw-Hill Ryerson, and McGraw-Hill Ryerson does not guarantee the accuracy of the information presented at these sites. ISBN-13: 978-1-25-965495-4 ISBN-10: 1-25-965495-8 1 2 3 4 5 6 7 8 9 0 TCP 1 2 3 4 5 6 7 8 9 Printed and bound in Canada. Care has been taken to trace ownership of copyright material contained in this text; however, the publisher will welcome any information that enables them to rectify any reference or credit for subsequent editions. Product Director, Canada: Rhondda McNabb Portfolio Manager: Amy Clarke-Spencley Marketing Manager: Emily Park Senior Content Developer: Amy Rydzanicz Senior Portfolio Associate: Stephanie Giles Supervising Editor: Janie Deneau Photo/Permissions Editor: Monika Schurmann Copy Editor: Margaret Henderson Plant Production Coordinator: Michelle Saddler Manufacturing Production Coordinator: Jason Stubner Cover Design: Jodie Bernard, Lightbox Communications, Inc. Cover Image: © Rob Ball Interior Design: Liz Harasymczuk Page Layout: SPi Global Printer: Transcontinental Printing Group

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About the Authors Bill Nickels is emeritus professor of business at the University of Maryland, College Park. He has over 30 years’ experience teaching graduate and undergraduate business courses, including introduction to business, marketing, and promotion. He has won the Outstanding Teacher on Campus Award four times and was nominated for the award many other times. He received his MBA degree from Western Reserve University and his PhD from The Ohio State University. He has written a marketing communications text and two marketing principles texts in addition to many articles in business publications. He has taught many seminars to business people on subjects such as power communications, marketing, non-business marketing, and stress and life management. Jim McHugh holds an MBA degree from Lindenwood University and has had broad experience in education, business, and government. As chairman of the Business and Economics Department of St. Louis Community College–Forest Park, Jim coordinated and directed the development of the business curriculum. In addition to teaching several sections of Introduction to Business each semester for nearly 30 years, Jim taught in the marketing and management areas at both the undergraduate and graduate levels. Jim enjoys conducting business seminars and consulting with small and large businesses. He is actively involved in the public service sector and served as chief of staff to the St. Louis County Executive. Susan McHugh is a learning specialist with extensive training and experience in adult learning and curriculum development. She holds an MEd degree from the University of Missouri and completed her coursework for a PhD in education administration with a specialty in adult learning theory. As a professional curriculum developer, she has directed numerous curriculum projects and educator training programs. She has worked in the public and private sectors as a consultant in training and employee development. Rita Cossa is an Assistant Professor at the DeGroote School of Business, McMaster University. This textbook marks her seventh edition as an author for Understanding Canadian Business. She primarily teaches introduction to business courses to undergraduate students. Other courses taught include Business Policy & Strategic Management, as well as Marketing courses at both the undergraduate and graduate levels. Teaching highlights include a nomination to TV Ontario’s Best Lecturer Competition, multiple nominations for a McMaster Student Union Teaching Award, and notations in the Maclean’s Guide to Canadian Universities as a Popular Prof for Marketing. Her pedagogical interests include active learning, student engagement, and self-reflection. Prior to teaching, Rita held management-level positions in the banking industry.

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About the Authors

Julie Stevens is an Associate Professor in the Department of Sport Management at Brock University. During the past twenty years she has taught several graduate and undergraduate management courses related to organization theory, policy, change and innovation, governance, and professionalism within commercial, non-profit, and public sectors. She holds Instructional Skills Workshop training and has served on various teaching and learning committees. Her teaching philosophy, which emphasizes critical commentary and active learner engagement, is enacted through a diverse range of practices within classroom and online forums. Drawing upon her background as a Research Fellow with the North American Society for Sport Management, she integrates current affairs and scholarship to provide relevant, problem-based learning opportunities for students.

Dedication To my children, Leila and Mattia, and my husband, Stephen, for their support during the creation of this edition. And to my students whose questions and discussions have contributed to a textbook with their learning in mind. Rita Cossa

To Ron, my husband, and our children, Nolan and Turner, for their support, encouragement, and patience. For my past and present students whose dreams for the future inspired much of my writing. Julie Stevens

To our families – Marsha, Joel, Carrie, Claire, Casey, Dan, Molly, Michael, Patrick, and Quinn. Thank you for making everything worth doing and giving us the support to do it well! Bill Nickels, Jim McHugh, Susan McHugh

Brief Contents Preface xvii

PART 1 CHAPTER 1 APPENDIX A CHAPTER 2 CHAPTER 3 CHAPTER 4 CHAPTER 5

BUSINESS TRENDS: CULTIVATING A BUSINESS IN DIVERSE GLOBAL ENVIRONMENTS 2 The Dynamic Business Environment 2 Using Technology to Manage Information 42 How Economic Issues Affect Business 68 Competing in Global Markets 102 The Role of Government in Business 142 Ethics and Social Responsibility 176

PART 2

BUSINESS OWNERSHIP AND SMALL BUSINESS 214

PART 3

LEADERSHIP, ORGANIZATION, AND PRODUCTION TO SATISFY CUSTOMERS 286

CHAPTER 6 Forms of Business Ownership 214 CHAPTER 7 Entrepreneurship and Starting a Small Business 246

CHAPTER 8 Management and Leadership 286 CHAPTER 9 Structuring Organizations for Today’s Challenges 318 CHAPTER 10 Producing World-Class Goods and Services 354

PART 4

MANAGEMENT OF HUMAN RESOURCES 396

PART 5

MARKETING: DEVELOPING AND IMPLEMENTING CUSTOMERORIENTED MARKETING PLANS 514

CHAPTER 11 Motivating Employees 396 CHAPTER 12 Human Resource Management: Finding and Keeping the Best Employees 432 CHAPTER 13 Dealing with Employee–Management Issues 474

CHAPTER 14 Marketing: Helping Buyers Buy 514 CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion 554

PART 6

ACCOUNTING INFORMATION AND FINANCIAL ACTIVITIES 600

CHAPTER 16 Understanding Accounting and Financial Information 600 CHAPTER 17 Financial Management 636 CHAPTER 18 The Canadian Financial System 670 APPENDIX B Managing Personal Finances 708 ONLINE SUPPLEMENT 1 Working Within the Legal Environment of Business ONLINE SUPPLEMENT 2 Managing Risk Endnotes EN-1 Glossary GL-1 Index IN-1

Contents Preface xvii

Progress in Service Industries 32 Your Future in Business 33

PART 1

BUSINESS TRENDS: CULTIVATING A BUSINESS IN DIVERSE GLOBAL ENVIRONMENTS 2 CHAPTER 1

The Dynamic Business Environment 2 PROFILE: Getting to Know: Ron Foxcroft, CEO, Fox 40

International Inc. 2

SUMMARY 35 KEY TERMS 37 CAREER EXPLORATION 37 CRITICAL THINKING 38 DEVELOPING CAREER SKILLS 38 ANALYZING MANAGEMENT DECISIONS 39

APPENDIX A

Using this Course to Prepare for Your Career 4

Using Technology to Manage Information 42

Business Fundamentals 7

PROFILE: Getting to Know: Ben Fried, CIO, Google 42

Revenues, Profits, and Losses 7 Matching Risk with Profit 8 Standard of Living and Quality of Life 8 Responding to the Various Business Stakeholders 9 Using Business Principles in Non-Profit Organizations 11

Entrepreneurship Versus Working forOthers 13 The Importance of Entrepreneurs to the Creation of Wealth 14

The Business Environment 16 The Legal Environment 17

Making Ethical Decisions: How Ethical Are You? 18

The Economic Environment 18 The Technological Environment 19

Adapting to Change: Up, Up, and Away 21 The Competitive Environment 23

Spotlight on Small Business: Fighting for Air Space: Chinook Helicopters Ltd. 25

The Social Environment 26 The Global Environment 28

Reaching Beyond Our Borders: Hollywood Climbs the Great Wall 29

Seeking Sustainability: Services Expand the Circular Economy and Reduce Waste 30

The Evolution of Canadian Business 31 Progress in the Agricultural and Manufacturing Industries 31

The Role of Information Technology 43 Evolution from Data Processing to BusinessIntelligence 44 How Information Technology ChangesBusiness 45

Types of Information 47 Managing Information 48 Big Data and Analytics 49 Using Information from Social Media 49

The Heart of Knowledge Management: The Internet 50 Broadband Technology 52 Social Media and Web 2.0 54

Spotlight on Small Business: Want to Be a Social Media Manager? 54

Web 3.0 56

Adapting to Change: How Social Media Move TV Ratings 57

Virtual Networking and Cloud Computing 59 Effects of Information Technology onManagement 60 Human Resources Issues 60 Security Issues 62 Privacy Issues 64 Stability Issues 65

Technology and You 66 KEY TERMS 66

Contents

CHAPTER 2

How Economic Issues Affect Business 68 PROFILE: Getting to Know: Thomas Piketty,

Economist 68

How Economic Conditions Affect Business 70 What Is Economics? 70 The Secret to Creating a Wealthy Economy 72

Adapting to Change: World Population Is Popping 72

Seeking Sustainability: 2015 Pan Am and Parapan Am Is LEEDing the Way 73

Growth Economics and Adam Smith 74 How Businesses Benefit the Community 74

Understanding Free-Market Capitalism 76 How Free Markets Work 76

Spotlight on Small Business: The Key to Capitalism Is Capital 77

How Prices Are Determined 77 The Economic Concept of Supply 78 The Economic Concept of Demand 79 The Equilibrium Point and the Market Price 79

Making Ethical Decisions: Bad Medicine for Consumers 80

CHAPTER 3

Competing in Global Markets 102 PROFILE: Getting to Know: Indra Kishnamurthy Nooyi,

CEO, PepsiCo 102

The Dynamic Global Market 104 Why Trade with Other Nations? 105 The Theories of Comparative and Absolute Advantage 105

Getting Involved in Global Trade 107 Importing Goods and Services 107 Exporting Goods and Services 108 Measuring Global Trade 109

Spotlight on Small Business: Let the Games Begin 110

Trading in Global Markets: The Canadian Experience 111 Canada’s Priority Markets 111

Strategies for Reaching Global Markets 113 Licensing 113 Exporting 114 Franchising 114 Contract Manufacturing 115

Adapting to Change: Many Flags Fly Over the Golden Arches 116

Competition Within Free Markets 81

International Joint Ventures and Strategic Alliances 117

Benefits and Limitations of Free Markets 82

Foreign Direct Investment 118

Understanding Socialism 84

Forces Affecting Trading in Global Markets 120

The Benefits of Socialism 84

Sociocultural Forces 120

The Negative Consequences of Socialism 84

Economic and Financial Forces 122

Understanding Communism 85 The Trend Toward Mixed Economies 85 Canada’s Mixed Economy 88 Understanding Canada’s EconomicSystem 89 Key Economic Indicators 89

Reaching Beyond Our Borders: Inflation at the Speed of Sound 94

The Business Cycle 95 SUMMARY 96 KEY TERMS 98 CAREER EXPLORATION 98

Legal Forces 123 Physical and Environmental Forces 124

Making Ethical Decisions: Exporting Your Problems Away 125

Trade Protectionism 125 The GATT and the WTO 127 The IMF and the World Bank 128 Producers’ Cartels 128 Common Markets 128

Seeking Sustainability: The Politics of Oil 132

Globalization and Your Future 133 Reaching Beyond Our Borders: My Home Is Your Home 136

CRITICAL THINKING 99

SUMMARY 137

DEVELOPING CAREER SKILLS 99

KEY TERMS 139

ANALYZING MANAGEMENT DECISIONS 99

CAREER EXPLORATION 139

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Contents

CRITICAL THINKING 140 DEVELOPING CAREER SKILLS 140 ANALYZING MANAGEMENT DECISIONS 141

CHAPTER 4

The Role of Government in Business 142 PROFILE: Getting to Know: Lisa von Sturmer, CEO/

Founder, Growing City 142

Government Affects Business 143 Government Involvement in the Economy 145

Crown Corporations 146 The Role for Crown Corporations 147

Laws and Regulations 148 Federal Government Responsibilities 149 Provincial Government Responsibilities 152 Municipal Government Responsibilities 154

The Bank of Canada 155 Using Monetary Policy to Keep the Economy Growing 156 Transmission of Monetary Policy 157

Taxation 159 Stabilizing the Economy Through Fiscal Policy 160

Making Ethical Decisions: Fiscal Policy Decisions 162

Government Expenditures 163 Financial Aid 164 Major Federal Programs 165

Spotlight on Small Business: Sustainable

Development Technology Canada 166

CHAPTER 5

Ethics and Social Responsibility 176 PROFILE: Getting to Know: Matthew Flannery, CEO/ Founder, Branch, Former CEO/Co-Founder Kiva 176

Ethics Is More Than Legality 178 Ethical Standards Are Fundamental 180 Ethics Begins with Each of Us 180

Making Ethical Decisions: Canadian Ponzi Schemes 182

Managing Businesses Ethically and Responsibly 183 Spotlight on Small Business: Meathead Movers 184 Setting Corporate Ethical Standards 185

Corporate Social Responsibility 189 Adapting to Change: Social Entrepreneurship 191 Concepts of Social Corporate Responsibility 192 Responsibility to Customers 195 Responsibility to Investors 195 Responsibility to Employees 196 Responsibility to Society 197

Seeking Sustainability: Green Is the New Black 199 Responsibility to the Environment 199 Social Auditing 201

International Ethics and Social Responsibility 203 Reaching Beyond Our Borders: Ethical Culture Clash 205

SUMMARY 206 KEY TERMS 207 CAREER EXPLORATION 207

Purchasing Policies 167

CRITICAL THINKING 208

Services 167

DEVELOPING CAREER SKILLS 208

Seeking Sustainability: Procurement for the Planet 168

ANALYZING MANAGEMENT DECISIONS 209

Innovation, Science and Economic Development Canada 168

Running Case: Ron Foxcroft: The Dream for a Pealess Whistle 211

Global Affairs Canada 169

Role of the Canadian Government—Some Final Thoughts 170 SUMMARY 171 KEY TERMS 173 CAREER EXPLORATION 173 CRITICAL THINKING 174 DEVELOPING CAREER SKILLS 174 ANALYZING MANAGEMENT DECISIONS 175

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PART 2

BUSINESS OWNERSHIP AND SMALL BUSINESS 214 CHAPTER 6

Forms of Business Ownership 214 PROFILE: Getting to Know: Brian Scudamore, CEO/Founder, 02E Brands, Parent Company of 1-800-GOT-JUNK?, WOW 1 DAY PAINTING, You Move Me, and Shack Shine 214

Contents

Starting a Small Business 215 Sole Proprietorships 216 Advantages of Sole Proprietorships 216 Disadvantages of Sole Proprietorships 217

Partnerships 219 Advantages of Partnerships 219 Disadvantages of Partnerships 221

Making Ethical Decisions: Outsourcing or Outsmarting? 222

Corporations 224 Adapting to Change: Challenges of Family Businesses 226

Advantages of Corporations 226

Seeking Sustainability: B Corporations Let Sustainability Set Sail 227

Disadvantages of Corporations 231 Business Regulations 231

Franchising 233 Advantages of Franchises 234

Spotlight on Small Business: Unlocking a Growing Franchise 236

Disadvantages of Franchises 236 E-Commerce in Franchising 237 Home-Based Franchises 238 Franchising in International Markets 238

What Does It Take to Be an Entrepreneur? 252 Turning Your Passions and Problems into Opportunities 253 Female Entrepreneurs 254 Entrepreneurial Teams 255 Micropreneurs and Home-Based Businesses 256 Online Businesses 257 Entrepreneurship Within Firms 258

Encouraging Entrepreneurship: What Government Can Do 259 Getting Started in Small Business 260 Small Versus Big Business 260 Small Business Statistics 260 Importance of Small Businesses 261 Small-Business Success and Failure 262

Learning About Small-Business Operations 264 Learn from Others 265 Get Some Experience 265 Buy an Existing Business 265

Making Ethical Decisions: Should You Stay or Should You Go? 266

Buy a Franchise 266 Inherit/Take Over a Family Business 267

Managing a Small Business 268

Co-Operatives 239

Planning 268

Which Form of Ownership Is Best for You? 241

Seeking Sustainability: Kickstarting a Benefit

SUMMARY 242 KEY TERMS 243 CAREER EXPLORATION 243 CRITICAL THINKING 244 DEVELOPING CAREER SKILLS 244 ANALYZING MANAGEMENT DECISIONS 245

CHAPTER 7

Financing Your Business 269 Corporation 273

Knowing Your Customers 273

Adapting to Change: Building Relationships by Building Subscribers 274

Reaching Beyond Our Borders: Listening to What Your Customers Need 275

Managing Your Employees 275 Keeping Records 276 Looking for Help 276

Entrepreneurship and Starting a Small Business 246

Going Global: Small-Business Prospects 277

PROFILE: Getting to Know: Tonia Jahshan, Founder,

KEY TERMS 280

SUMMARY 278

Steeped Tea 246

CAREER EXPLORATION 280

The Age of the Entrepreneur 247

CRITICAL THINKING 280

Well-Known Canadian Entrepreneurs 248

Spotlight on Small Business: Student Startups 250

Why People Take the Entrepreneurial Challenge 250

DEVELOPING CAREER SKILLS 281 ANALYZING MANAGEMENT DECISIONS 281 Running Case: Fox 40 International Inc.: A Family Business 283

Contents

PART 3

LEADERSHIP, ORGANIZATION, AND PRODUCTION TO SATISFY CUSTOMERS 286 CHAPTER 8

Management and Leadership 286 PROFILE: Getting to Know: Kevin Plank, Founder, Under

Armour 286

Managers’ Roles are Evolving 288 The Four Functions of Management 289 Planning and Decision Making 291 Adapting to Change: Will Strategy Robots Replace Managers? 295

Decision Making: Finding the Best Alternative 297 Spotlight on Small Business: I’d Rather Be Blue 298

Organizing: Creating a Unified System 299 Tasks and Skills at Different Levels of Management 301

Reaching Beyond Our Borders: Back to School for Top Managers 303

Staffing: Getting and Keeping the Right People 303

Leading: Providing Continuous Visionand Values 304 Making Ethical Decisions: What Do You Tell the Team? 304

Seeking Sustainability: Leadership in Sustainability 305

Leadership Styles 306 Managing Knowledge 308

Adapting to Change: Using Social Media During the Worst of Times 309

Controlling: Making Sure It Works 310 A Key Criterion for Measurement: Customer Satisfaction 311

CHAPTER 9

Structuring Organizations for Today’s Challenges 318 PROFILE: Getting to Know: Denise Morrison, CEO,

Campbell Soup Company 318

Everyone’s Reorganizing 320 Building an Organization from the Bottom Up 320

Making Ethical Decisions: Safety and Environmental Concerns Versus Profit 321

The Changing Organization 322 The Development of Organizational Design 322 Turning Principles into Organizational Design 325

Decisions to Make in Structuring Organizations 326 Choosing Centralization Versus Decentralization of Authority 326 Choosing the Appropriate Span of Control 327 Choosing Between Tall and Flat Organization Structures 328 Weighing the Advantages and Disadvantages of Departmentalization 329

Organization Models 332 Line Organizations 333 Line-and-Staff Organizations 333 Matrix-Style Organizations 333 Cross-Functional, Self-Managed Teams 336

Adapting to Change: Going Bossless 338

Managing Interactions Among Firms 339 Virtual Organizations 339

Seeking Sustainability: Ethical Consumerism 339

Spotlight on Small Business: Canadian Virtual Assistant Association 340

Benchmarking and Core Competencies 341

Adapting to Change 343 Adapting to Change: When Open Communication Should Not Be So Open 344

Restructuring for Empowerment 344 The Restructuring Process 345

SUMMARY 312

Creating a Change-Oriented Organizational Culture 347

KEY TERMS 314

The Informal Organization 348

CAREER EXPLORATION 315

SUMMARY 349

CRITICAL THINKING 315

KEY TERMS 351

DEVELOPING CAREER SKILLS 315

CAREER EXPLORATION 351

ANALYZING MANAGEMENT DECISIONS 316

CRITICAL THINKING 351

Contents

DEVELOPING CAREER SKILLS 351 ANALYZING MANAGEMENT DECISIONS 352

CHAPTER 10

Producing World-Class Goods andServices 354 PROFILE: Getting to Know: Shahid Khan, Owner,

Flex-N-Gate 354

Canada Today 356 Research and Development 357

Canada’s Evolving Manufacturing andServices Base 359 From Production to Operations Management 360

Adapting to Change: The Vast Possibilities of 3D Printing 385

Control Procedures: PERT andGantt Charts 386 Preparing for the Future 388 SUMMARY 388 KEY TERMS 391 CAREER EXPLORATION 391 CRITICAL THINKING 392 DEVELOPING CAREER SKILLS 392 ANALYZING MANAGEMENT DECISIONS 393 Running Case: Leadership, Benchmarking, and Operations Management Planning at Fox 40 International Inc. 394

Seeking Sustainability: Carbon Capture and Storage 361

Reaching Beyond Our Borders: How Does Canada Shape Up as an International Competitor? 362

Operations Management in the Service Sector 363 Measuring Quality in the Service Sector 364

Operations Management Planning 365 Facility Location 365

PART 4

MANAGEMENT OF HUMAN RESOURCES 396 CHAPTER 11

Motivating Employees 396 PROFILE: Getting to Know: Lisa Lisson, President,

Federal Express Canada (FedEx) 396

Making Ethical Decisions: Do We Stay or Do We

The Value of Motivation 398

Facility Layout 369

Frederick Taylor: The Father of Scientific Management 400

Go? 366

Materials Requirement Planning (MRP) 370 Purchasing 372 Just-in-Time Inventory Control 372

Elton Mayo and the Hawthorne Studies 402

Quality Control 373

Abraham Maslow’s Hierarchy of Needs 403

Spotlight on Small Business: Meeting the Six Sigma

Frederick Herzberg’s Motivating Factors 404

Standard 374

Supply Chain Management 377

Adapting to Change: Your Own Farm in a Box 378

Production Processes 380 Improving Production Techniques andCutting Costs 381 Flexible Manufacturing 382 Lean Manufacturing 382 Mass Customization 383 Robotics 384 Computer-Aided Design and Manufacturing 384 3D Printing and Additive Manufacturing 385

Applying Herzberg’s Theories 407

Douglas McGregor’s Theory X and Theory Y 407 Theory X 407

Seeking Sustainability: Values Drive Vancity’s Initiatives 408

Theory Y 409

Goal-Setting Theory and Management by Objectives 410 Meeting Employee Expectations: Victor Vroom’s Expectancy Theory 411 Reinforcing Employee Performance: Reinforcement Theory 412 xi

Contents

Treating Employees Fairly: Equity Theory 413 Putting Theory into Action 414 Motivating Through Job Enrichment 414 Motivating Through Open Communication 415

Adapting to Change: Employee Engagement’s Mood Ring 417

Applying Open Communication in Self-Managed Teams 418 Recognizing a Job Well Done 418

Making Ethical Decisions: Motivating Temporary Employees 418

Spotlight on Small Business: Motivators for Small Businesses 420

Personalizing Motivation 421 Motivating Employees Around the Globe 421 Motivating Employees Across Generations 421

Reaching Beyond Our Borders: Beyond Just Knowing Cross-Cultural Differences 422

SUMMARY 426 KEY TERMS 429 CAREER EXPLORATION 429 CRITICAL THINKING 429 DEVELOPING CAREER SKILLS 430 ANALYZING MANAGEMENT DECISIONS 430

CHAPTER 12

Human Resource Management: Finding and Keeping the Best Employees 432 PROFILE: Getting to Know: Linda Hasenfratz, CEO,

Linamar Corporation 432

Working with People Is Just the Beginning 434

Training and Developing Employees for Optimum Performance 446 Management Development 448 Networking 450 Diversity in Management Development 450

Appraising Employee Performance to Get Optimum Results 451 Compensating Employees: Attracting and Keeping the Best 453 Pay Systems 454 Compensating Teams 454 Fringe Benefits 456

Reaching Beyond Our Borders: Cultural Challenges Working Worldwide 458

Scheduling Employees to Meet Organizational and Employee Needs 458 Flex-Time Plans 459 Telecommuting 460

Seeking Sustainability: How Employers Can Support Work–Life Balance 461

Job-Sharing Plans 462

Career Management: Up, Over, and Out 462 Promoting and Reassigning Employees 462 Terminating Employees 463 Retiring Employees 463 Losing Valued Employees 463

Laws Affecting Human Resource Management 464 Pay Equity 465 Employment Equity 466 Laws that Protect the Disabled 467 Effects of Legislation 467 SUMMARY 468

Developing the Ultimate Resource 434

KEY TERMS 470

Human Resource Challenges 434

CAREER EXPLORATION 471

Determining a Firm’s Human Resource Needs 436

CRITICAL THINKING 471

Recruiting Employees from a Diverse Population 438

ANALYZING MANAGEMENT DECISIONS 472

Making Ethical Decisions: Recruiting Employees from Competitors 440

Spotlight on Small Business: Competing Through Social Media 441

Selecting Employees Who Will Be Productive 442 Adapting to Change: Let’s Face It 443 Hiring Contingent Workers 444

xii

DEVELOPING CAREER SKILLS 471

CHAPTER 13

Dealing with Employee–Management Issues 474 PROFILE: Getting to Know: Gerald (Gerry) Varricchio,

Regional Organizing Director for Central and Eastern Canada, Labourers’ International Union of North America (LiUNA) 474

Contents

Employee–Management Issues 476 Labour Unions Yesterday and Today 477 The Early History of Organized Labour 478

The Structure of Labour Unions in Canada 479 Union Coverage 481 Canada’s Largest Unions 483

Labour Legislation 483 Workplace Laws 484 Sexual Harassment 485 Violence and Bullying in the Workplace 486

Spotlight on Small Business: Helping Reduce

Harassment and Violence in the Workplace 487

Labour Relations Boards 488

The Collective Bargaining Process 489 Objectives of Organized Labour 489 Resolving Labour–Management Disputes 493 Conciliation, Mediation, and Arbitration 494

Negotiation Tactics 496 Union Tactics 496 Management Tactics 497

Making Ethical Decisions: Walking a Fine Line 498

Legislation 498

The Future of Unions and Labour–Management Relations 499 Controversial Employee–Management Topics 501 Executive Compensation 501

Adapting to Change: Paying for Underperforming 502

Seeking Sustainability: The Living Wage: Why Minimum Wage Is Not Enough 503

Child Care 504 Elder Care 505

You and Unions 506 SUMMARY 506

PART 5

MARKETING: DEVELOPING AND IMPLEMENTING CUSTOMERORIENTED MARKETING PLANS 514 CHAPTER 14

Marketing: Helping Buyers Buy 514 PROFILE: Getting to Know: Michelle Phan, Founder,

ipsy 514

What is Marketing? 516 The Evolution of Marketing 517

Adapting to Change: Snapping Up a Customer Base 521

Non-Profit Organizations Prosper from Marketing 521

The Marketing Mix 522 Applying the Marketing Process 523 Designing a Product to Meet Customer Needs 523

Reaching Beyond Our Borders: Oreo: World’s Favourite Cookie? 526

Setting an Appropriate Price 526 Getting the Product to the Right Place 527 Developing an Effective Promotional Strategy 527

Providing Marketers with Information 528 The Marketing Research Process 528

Making Ethical Decisions: No Kidding 532 The Marketing Environment 533

Spotlight on Small Business: Creating Mass Appeal for a Custom Product 534

Two Different Markets: Consumer andBusiness-to-Business 536 The Consumer Market 536 The Business-to-Business (B2B) Market 536

Defining Your Market 539 Market Segmentation: Segmenting the Consumer Market 539

KEY TERMS 508

Target Marketing and Reaching Smaller Market Segments 541

CAREER EXPLORATION 508

Positioning 542

CRITICAL THINKING 509 DEVELOPING CAREER SKILLS 509 ANALYZING MANAGEMENT DECISIONS 510 Running Case: Human Resources at Fox 40 International Inc. 512

Building Marketing Relationships 543

Consumer Behaviour 544 Seeking Sustainability: When Green Is Not Really Green 546

Your Prospects in Marketing 547

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Contents

SUMMARY 547 KEY TERMS 550 CAREER EXPLORATION 550

Adapting to Change: Outdoor “Eyes” Are Watching You 581

Seeking Sustainability: Corporate Knights and Sustainability 582

CRITICAL THINKING 551

Personal Selling: Providing Personal Attention 583

DEVELOPING CAREER SKILLS 551

Public Relations: Building Relationships 584

ANALYZING MANAGEMENT DECISIONS 552

CHAPTER 15

Managing the Marketing Mix: Product, Price, Place, and Promotion 554 PROFILE: Getting to Know: Michael Dubin, CEO/

Co-Founder, Dollar Shave Club 554

Product Development and the Total Product Offer 556 Reaching Beyond Our Borders: Playing with the Social Gaming Stars 557

Developing a Total Product Offer 558 Product Lines and the Product Mix 559 Product Differentiation 559

Spotlight on Small Business: Made by Mommy 560 Packaging Changes the Product 560

Branding 562 Generating Brand Equity and Loyalty 562 Brand Management 563

The Product Life Cycle 563 Example of the Product Life Cycle 564

Sales Promotion: Giving Buyers Incentives 585

Making Ethical Decisions: Is the Ad as Honest as the Product? 586

Direct Marketing 588

Word of Mouth and Other Promotional Tools 588 Social Networking 589 Blogging 590 Podcasting 590 Mobile Marketing 590

Managing the Promotion Mix: Putting it all Together 591 Push and Pull Strategies 591 SUMMARY 592 KEY TERMS 593 CAREER EXPLORATION 594 CRITICAL THINKING 595 DEVELOPING CAREER SKILLS 595 ANALYZING MANAGEMENT DECISIONS 596 Running Case: Marketing the Fox 40® Sonik Blast Whistle: Breaking the Sound Barrier! 597

Using the Product Life Cycle 564

Competitive Pricing 566 Pricing Objectives 566 Break-Even Analysis 568 Pricing Strategies for New Products 568 Retailer Pricing Strategies 569 How Market Forces Affect Pricing 569

Non-Price Competition 569 The Importance of Channels of Distribution 570 How Intermediaries Create Exchange Efficiency 571

Retail Intermediaries 573 Retail Distribution Strategy 573 Non-Store Retailing 573 Choosing the Right Distribution Mode 577

Promotion and the Promotion Mix 578 Advertising: Informing, Persuading, and Reminding 579 xiv

PART 6

ACCOUNTING INFORMATION AND FINANCIAL ACTIVITIES 600 CHAPTER 16

Understanding Accounting and Financial Information 600 PROFILE: Getting to Know: Shelly Sun, CEO, BrightStar

Care 600

The Role of Accounting Information 601 What Is Accounting? 602

Accounting Disciplines 603 Managerial Accounting 603 Financial Accounting 604

Seeking Sustainability: Sustainability Reports 605 Reaching Beyond Our Borders: Speaking a Universal Accounting Language 607

Contents

Auditing 608

Acquiring Needed Inventory 647

Tax Accounting 608

Making Capital Expenditures 647

Government and Not-for-Profit Accounting 608

Making Ethical Decisions: Not What the Doctor

Adapting to Change: Accounting: CSI 609 The Chartered Professional Accountant (CPA) Designation 610

The Accounting Cycle 611 Using Technology in Accounting 612

Understanding Key Financial Statements 613 The Fundamental Accounting Equation 614 The Balance Sheet 614 The Income Statement 618

Spotlight on Small Business: Out with the Old, In with the New 621

The Statement of Cash Flows 623

Making Ethical Decisions: Would You Cook the Books? 625

Analyzing Financial Performance Using Ratios 626 Liquidity Ratios 626 Leverage (Debt) Ratios 627 Profitability (Performance) Ratios 628 Activity Ratios 629 SUMMARY 630 KEY TERMS 632 CAREER EXPLORATION 633 CRITICAL THINKING 633 DEVELOPING CAREER SKILLS 633 ANALYZING MANAGEMENT DECISIONS 634

CHAPTER 17

Financial Management 636 PROFILE: Getting to Know: Kathy Waller, Executive Vice

President/CFO, Coca Cola 636

The Role of Finance and FinancialManagers 638 The Value of Understanding Finance 639 What is Financial Management? 640

Financial Planning 641 Forecasting Financial Needs 641 Working with the Budget Process 642 Establishing Financial Controls 645

The Need for Operating Funds 645 Managing Day-to-Day Needs of the Business 645 Controlling Credit Operations 646

Ordered! 647

Alternative Sources of Funds 648

Obtaining Short-Term Financing 649 Trade Credit 649 Family and Friends 649 Commercial Banks 650 Different Forms of Short-Term Loans 650

Adapting to Change: Financing Just a Click Away 652

Factoring Accounts Receivable 653 Commercial Paper 653 Credit Cards 653

Obtaining Long-Term Financing 654 Debt Financing 655

Seeking Sustainability: Buying Green Bonds 656 Equity Financing 658

Spotlight on Small Business: Looking for a Slam Dunk 661

Comparing Debt and Equity Financing 662 Your Prospects in Finance 664 SUMMARY 664 KEY TERMS 666 CAREER EXPLORATION 666 CRITICAL THINKING 667 DEVELOPING CAREER SKILLS 667 ANALYZING MANAGEMENT DECISIONS 668

CHAPTER 18

The Canadian Financial System 670 PROFILE: Getting to Know: Jim Cramer, Host, CNBC’s

Mad Money 670

Why Money is Important 672 What is Money? 672 Electronic Money 674

The Canadian Financial System 674 Adapting to Change: What’s in Your Wallet? 675 Regulating the Financial System 675

The Canadian Financial System: Financial Institutions 678 Commercial Banks 678

Making Ethical Decisions: An Open and Shut Option? 680

Credit Unions and Trust Companies 681 xv

Contents

Other Financial Institutions: Non-Banks 682 Using Technology to Improve Efficiency 682

Spotlight on Small Business: Becoming Your Best Friend in Banking 683

The Canadian Financial System: Financial Markets 686 The Function of Securities Markets 687 The Role of Investment Bankers 688 Stock Exchanges 688 Securities Regulations 689

How Investors Buy Securities 690 Investing Through Online Brokers 690 Choosing the Right Investment Strategy 691 Reducing Risk by Diversifying Investments 691

Reaching Beyond Our Borders: Global Stocks: Love Them or Leave Them 692

Investing in Stocks and Bonds 693 Investing in Stocks 693 Investing in Bonds 695

Investing in Mutual Funds and Exchange-Traded Funds 697 Seeking Sustainability: Socially Responsible

The Need for Personal Financial Planning 709 Financial Planning Begins with Making Money 710 Six Steps to Controlling Your Assets 710

Building Your Financial Base 714 Tax-Free Savings Account (TFSA) 714 Real Estate 715 The Stock Market 716 Learning to Manage Credit 717

Adapting to Change: R2-D2 to the Investor’s Rescue 718

Protecting Your Financial Base: Buying Insurance 720 Disability Insurance 722 Homeowner’s or Renter’s Insurance 722 Other Insurance: Car and Liability Insurance 723

Planning Your Retirement 723 The Three Pillars Approach 723 Financial Planners 727 Estate Planning 727

Making Ethical Decisions: Money Going Up in Smoke 728

KEY TERMS 729

Investing (SRI) 699

The Canadian Financial System: Clearing and Settlement Systems 700 SUMMARY 701

ONLINE SUPPLEMENT 1

Working Within the Legal Environment of Business (On Connect)

KEY TERMS 703 CAREER EXPLORATION 703 CRITICAL THINKING 703 DEVELOPING CAREER SKILLS 704 ANALYZING MANAGEMENT DECISIONS 704 Running Case: Accounting, Financial Management, and Risk Management at Fox 40 International Inc. 706

APPENDIX B

Managing Personal Finances 708 PROFILE: Getting to Know: Alexa Von Tobel,

Founder/CEO, LearnVest 708

xvi

ONLINE SUPPLEMENT 2

Managing Risk (On Connect) Endnotes EN-1 Glossary GL-1 Index IN-1

Preface Understanding Canadian Business has been created with you and your students in mind. We’ve listened and that’s helped us offer you: Resources that were developed based directly on your feedback—all geared to make the most of your time and to help students succeed in this course. The supplemental resources have been reviewed to ensure cohesion with the text. Technology that leads the way and is consistently updated to keep pace with you and your students. Connect offers students a truly interactive and adaptive study arena. Interactive applications, SmartBook, and Connect Insight are designed to engage students and have been proven to increase grades by a full letter. Support that is always available to help you plan your course, work with technology, and meet the needs of you and your students.

Keeping up with What’s New Users of Understanding Canadian Business have always appreciated the currency of the material and the large number of examples from for-profit and nonprofit companies of all sizes and industries in Canada and around the world. Accordingly, this edition features the latest business practices and other developments affecting business including: ∙ Sustainability

∙ Social enterprise ∙ Crowdfunding ∙ The gig economy ∙ Social media examples ∙ The mobile/on-demand marketing era ∙ Big data, data analytics, and data mining ∙ Green procurement and green marketing ∙ Ethical consumerism ∙ Global freelancing and virtual professionals ∙ Trade agreements and trade protectionism ∙ Public-private partnerships ∙ Digital currencies ∙ The living wage ∙ Violence and bullying in the workplace ∙ And much more We remain dedicated to listening vigilantly to what you tell us you need in this course. We have made changes and enhancements in this revision that are all based on what we heard from you. As you look through the next few pages, you’ll find what you need to navigate your way most effectively through this book and its supplements.

Integration of Important Concepts Throughout the Text Understanding Canadian Business, Tenth Canadian Edition, is revised, updated, and filled with new examples of business in Canada and around the world.

∙ Humanistic management

xvii

Preface

CHAPTER 2

LEARNING OBJECTIVES

Tied directly to the summaries at the end of the chapter and to the test bank questions, the learning objectives help students preview what they should know after reading the chapter, and then test that knowledge by answering the questions in the summary. These

learning objectives are also incorporated in the margins

How Economic Issues Affect Business throughout the chapter, at the start of the discussion that pertains to the learning objective. This way, students can quickly see where the content aligns with each objective.

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1

Describe basic economics.

LO2

Explain what capitalism is and how free markets work.

LO3

Compare the benefits and negative consequences of socialism and communism.

LO4

Describe the mixed economy of Canada.

LO5

Illustrate the significance of key economic indicators and the business cycle.

P R O F I L E

GETTING TO KNOW BUSINESS PROFESSIONALS

GETTING TO KNOW: THOMAS PIKETTY, ECONOMIST

Each chapter begins with a profile of a business person At nearly 700 pages, Thomas Piketty’s book Capiwhose career relates closely the material tal in the to Twenty-First Century iscovered an unlikely in blockbuster to say the least. Despite length and that chapter. Not all of the personalities are its famous, scholarly subject matter, the book climbed to the since some of them work in small businesses and nontop of the New York Times Best Seller list in 2014 and became instant amongtheir academprofit organizations. Take some antime toclassic consider ics and casual readers alike. Thomas Piketty (procareer choices and hownounced they Tome-ah spend Peek-et-ee) their time applying went from being a the business principlesrespected discussed in the text. but little-known economist to an interrenowned scholar on income inequality. A wide variety ofnationally analytical tools is available for As the years go by, his insights could have a major data scientists. Their work iseconomic also creating a new field effect on policies around the globe. Piketty was born in 1971 to politically minded of marketing research that focuses on data visualization, parents living in the suburbs of Paris. His parents or the presentation of the results of the analysis. Are there any courses that you could take in your program that would support 68 a career as a data scientist?

participated in the massive socialist protests of

monthly for shipment to 140 cou

1968 that nearly brought France’s economy to a

sold to referees, coaches, water s

standstill. By the time Thomas was born, his parents

rescue teams, personal security, a

had left their radical days behind them. Politics were never discussed in their household. Instead, they taught their son to trust his judgment and form his own opinions. These lessons gave Piketty the confidence

sport enthusiasts, as well as the o

mium incentive markets. The com

40 products has grown substantia

active stock-keeping units (SKUs)

to become a top student. His academic success

following: 21 styles of Fox 40 Wh

gained him admittance to one of the most presti-

attachments; Fox 40 gear; Smart

gious higher education institutions in France, the École Normale Supérieure, when he was just 18. Piketty earned his PhD four years later with a dissertation that focused on wealth redistribution.

boards; the SICK Self Impression Heat Alert mouthguards; marine

ucts; pink products; and logo-impri

An avid sportsman, Foxcrof

“be the best at what you do” has c

success both on and off the basket

been named one of the 52 most in

in North American Officiating of a

the National Association of Sports

him—the only Canadian—to a grou nic54958_ch02_068-101.indd

11/27/18 02:36 PM

made a difference in the world o

He spent fourteen seasons as a ga

the National Basketball League (NB Source: Courtesy of Fox 40 International Inc. Used with permission.

PROFIT magazine voted him to b

ten Canadian businessmen of the

xviii

1987, this finely tuned precision instrument does

been honoured as Entrepreneur o

not use a pea to generate sound. In fact, there

Burlington Economic Developme

are no moving parts whatsoever. There is nothing

More recently, he has been featu

to obstruct sound, nothing to stick, freeze, or fail.

York Times, CBC ESPN, the Histo

The patented design moves the air blast through

had an audience with the Queen

three tuned chambers. Fox 40 whistles are con-

Palace and received the prestigi

structed entirely of high-impact ABS plastic so they

Whistle Award, this honour is cons

are impervious to moisture. A quick rinse in disin-

est distinction bestowed on a refe

fectant eliminates bacteria. Every time, they deliver

He was also gratified to receive an

on faultless performance (e.g., loudness), and they

uation Diploma from Mohawk Col

never fail.

croft continues his active role as Fo

In 1987, Shepherd said to Foxcroft, “Ron, we

Executive Officer (CEO) of Fox 40

have just developed the ‘best whistle in the world.’

and Chairman and CEO of Fluke Tr

You must pledge to me that you will dedicate your

Foxcroft credits his customer

life to making the Fox 40 whistle better.” To this day,

for the improvements to the origin

Foxcroft and the company employees continue to

words, “When you are the best, you

lyzing large sets of data in order to identify patterns and other information that helps business technologies. people make effective decisions now and in the future.22) Using specialized computer sys23 tems, meaning is extracted from raw data with conclusions drawn and patterns identified. In Appendix A, you were also introduced to data mining, as a component of data analytics. (Recall that data mining is a technique to find hidden patterns and previously unknown relationships among the data.) By extracting large amounts of hidden predictive information from large databases, one can find statistical links between consumer purchasing patterns and ILLUSTRATION marketing actions. For example, companies put this new science into action by trackPHOTO AND ESSAYS ing what is selling where and who is buying the good More and more students have expressed that they or service. Would you have expected that men buying are visually diapers oriented therefore, increased in thelearners; evening sometimes buy a six-pack of beer well?pedagogical Supermarkets discovered thisillustrations when they mined emphasis on asthe value of from scanners. they placed diapers is essential. checkout Somedataphotos and Soillustrations areand beer near each other, then placed potato chips between accompanied by a short caption that highlights the them. This resulted in increased sales on all three items. relevance of the visuals the material the text. Still, datato mining ultimately in depends on humans— the marketing managers and researchers—and their judgements on how to select, analyze, and interpret the Second Pass information. Additionally, new techniques and methods are always emerging and marketing researchers need to keep abreast of such developments. For example, the Internet and social media is exploding as infor- © Monty Rakusen/Image Source mation obtained via cookies, Facebook pages, Twitter A wide variety of analytical tools is available for data PART 1 Business Trends: Cultivating a Business in Diverse Global Environments scientists. Their work is also creating a new field of accounts, and Google Ad Preferences is leading to onemarketing research that focuses on data visualization, or to-one personalization and consumer targeting. the presentation of the results of the analysis. Are there ■You FIGURE may 2.3 wish to consider a career in big data. any courses that you could take in your program that Canada’s Data Consortium THEBig EQUILIBRIUM POINTestimates that Canada’s would support a career as a data scientist? big data talent gap is between 10 500 and 19 000 The place where quantity demanded and supplied meet is called the equilibrium point. When we put both the supply and demand curves on the same graph, we find that they intersect at a price where the nic54958_ch14_514-553.indd 531 quantity supplied and the quantity demanded are equal. In the long run, the market price will trend toward the equilibrium point.

Preface

50 45 40 Price ($)

BOXED FEATURES

531 Demand curve Supply curve

25 20 15

Important business concepts and themes 10are incorporated throughout the text. Certain topics deserve 5 0 special emphasis and are highlighted in feature boxes 5 titled “Spotlight on Small Business,” “Making Ethical

11/28/18 Second Pass

05:55 PM

Second Pass Decisions,” “Seeking Sustainability,” “Reaching Beyond Second Pass Equilibrium Our Borders,” and “Adapting to Change” appearing point throughout the chapters. 10 15 20 25 30 35 40 45 50

Quantity of T-Shirts CHAPTER 2 How Economic Issues Affect Business CHAPTER 2 How Economic Issues Affect Business PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

quantity demanded), a signal is sent to sellers to increase the price. Eventually, supply will Some macroeconomists believe BUSINESS that a large population, especially an educated one, Spotlight On again SMALL equal demand if nothing interferes with market forces. can be a valuable resource. You’ve probably heard the saying “Give a man a fish and you The Making Ethical Decisions box raises an interesting question about when pricing feed The him forKey a day,to butCapitalism teach a man fish youkings feedand himqueens for a lifetime.” add to had most of the wealth, Imagine thetoworld when and otherYou richcan landowners Isand Capital may be a bit out of control and what to do about it. that: “Teach a person to start a fish farm, of andthe hepeople or she were will be able to The feedpeasants a villagehad for many a and the majority peasants. children, and it may FINCA (the Foundation for International Community lifetime.” The secret to economic development contained that in this lastsituation statement. Businessas usual there would soon have seemed a naturalisconclusion if the continued Assistance) is a non-profit organization whose mission owners provide jobs and be economic growth forand their andand communities as wellEconomist as too many people notemployees enough food other resources. Thomas Malthus is to alleviate poverty through lasting solutions that Making 13 ETHICAL DECISIONS for themselves. madecreate this argument the their late 1700s and early 1800s, leading the writer Thomas Carlyle to help people build assets, jobs, andin raise The challenge forTheir macroeconomists is atodismal determine what makes some countries relstandard of living. is to build global netcallvision economics “the science.” Bad Medicine for Consumers Second Pass work of sustainable and scalablerelatively social enterprises atively wealthy and other countries poor,today and then policies and still believe Followers of Malthus (whotoareimplement called neo-Malthusians) there are

The Secret to Creating a Wealthy Economy

that lives worldwide. Yourimprove company, a large acquired toopharmaceutical many peoplefirm, in the world and that the solution to poverty is radical birth control, FINCA offersRelivoform small loans, savings, and other finana drug called when it bought a generic including forced abortions and sterilization.10 The latest world statistics, however, show cial servicesThe to purchased those often turned was down tradidrugmaker. company the by market’s population increasing more slowly than expected.11 In some industrial countries—like tional banks. With microloans, can in leading supplier of the drug, andfamilies it was by farinvest its most Japan, Germany, Italy, and Russia—population growth maywith be permission. so slow that eventually and build their own small businesses and increase Courtesy of FINCA. Used profitable product. Relivoform is a major chemotherapy PARTtheir 1 Business Trends:capacity. Cultivating a Business in Diverse Global Environments currently serves willFINCA be too many old people and too few young people to care for them.12 In the drug income-earning important in the there treatment of liver cancer. It cost nearly two treatment, million clients across 23 countries onother loan in order towill rebuild herrelatively family’s business developing world, on the population climb quickly and andmake may lead $3002015 per and many Am patients rely on itfive to hand, The Pan Am and Parapan Games in Toronto continents. Worldwide, their borrowers have on-time better life for her children. control thean spread of their cancer. tolegacy greater and16more unrest.a Studies about the effects of population growth on the represent important for poverty each of the southrepayment rates of over 98 percent. Yvrose obtained a small loan from FINCA, and with Currently, your company hasare many drugsTen in western Ontario communities who hosted the economy partnew of event. macroeconomics. The Adapting to Change box discusses significant The story costing of one hardworking FINCA small entrehelp from her FINCA credit agent, got her store going development the company millions in research new, world-class facilities werepopulation built including an athletglobal shifts that are expected the next years. Suchfrom studies about preneur will help yoube understand the process. Yvrose again andover she was soon 25 earning enough it that she the and testing. It may years Health Canada ics stadium, aquatics centre and before field house, velodrome, effects ofyou population on thecould economy part of macroeconomics. St. Louis lives in Haiti, where the poverty rategrowth is a stagaffordare to better feed her family and repay her loan approves the new drugs and can get them into and soccer stadium. A key part of the host committee © fluxfoto/Getty RF store is not only back on its feet, gering 80 percent. She committee had a littlehas grocery store in on time. Today,Images Yvrose’s the market. Your recommended mission is to leavefinance a Games legacy sustainable If you but—like are familiar with the Rule of of 72, you knowexcelit’s in a town, many everything but her business is growing steadily. Her children are in increasing the this price ofHaitians—she Relivoform to lost $3,000 per treatlence. To meet goal, Games organizers wanted each simple way to measure how long it would for prices the that struck in 2010. Shetake heard school and the family can put aside money for savings, increase 10-fold, the public reacted with a rage, accusmentearthquake totohelp alleviate the development costs ofabout new venue be friendly. For The $674 milto double at aaenvironmentally given rate and of inflation. example, FINCA from neighbour decided to the apply for aif helping for and build a brighter future. needs. ing yourthem firm plan of favouring profits over patients’ drugs. Since your company now controls distribulion Pan Am/Parapan Am Games infrastructure budget inflation is growing at 6 percent a year, prices would Will you follow your committee’s recommendation and tion of thebuilding drug (even though it’sthat a generic), you doubt included environdouble in 12 yearsrequirements (6 divided into 72). ensured This would be an raise the price? What are your alternatives? What might any competitors could immediately impact your marmental factors.inflation Each building is Leadership unacceptable rate in Canada, whereintheEnergy Bank be the consequences of each? ket. When word leaked out(LEED) that Relivoform’s price may and Environmental Design certified, which means of Canada targets keeping price increases at 2 percent Population forecasts from the United Nations estimate the buildings focus on healthy indoor environments, (or less) a year. what if prices went up will 221increase percent that by the yearWell, 2050, global population reduce greenhouse gas emissions, and not efficiently use Courtesy of the Pan Am/Parapan Am Games TO2015 Organizing in one Impossible? Unfortunately, Venezu9.7 month? billion people. Understanding numand to sellers negotiating prices for goodswhere and inthis energy, water, and other resources. Since 2004, the Committee. Used with permission. ela, comes which isfrom the most recent example of me) hyperinflation. ber may be surprising. services. Consumers (such as you and 80 Canada Green Building Council has certified over 1800 Hyperinflation is of when the price population of goods and serMore than half the world’s growth sendLEED signals to telland producers what make, buildings registered overto 5000 in starts Canada. Vice President of Cannon Design, the architect of record vicescome rises by 50Africa, percent a month. It often when will from where the continent’s popula© Manaure Quintero/Bloomberg/Getty how amany, in what colours, andmore so on. Wevenues: Bouygues Building Canada built three on all three projects. “The re-useImages of all of these venues country’s government prints money to pay the for tion will double to 2.5 billion. Nigeria will experience Milton velodrome, the Hamilton soccer stadium,byand after the games was the impetus to fund these projects.” do that by choosing to buy (or not to buy) excess spending. In Venezuela, prices increased 63 the world’s fastest-growing population. It is expected

Seeking SUSTAINABILITY

2015 Pan Am and Parapan Am Is LEEDing the Way Reaching Beyond OUR BORDERS Inflation at the Speed of Sound Adapting to CHANGE

World Population Is Popping

xix

for Canadians. The organization employs approximately 2800 full-time employees and generates over CAD$1 million in revenue?23 The organization provides assistance to around 30 million people annually, from refugees to victims of natural disasters. Why do good management principles Preface apply equally to profit-seeking businesses and non-profit organizations?

entrepreneur? Your interests may lead you to work for a nonprofit organization. Two million people, including professionals and staffers, work for Canada’s approximately 170 000 charities and non-profit organizations.25 This does not mean, however, that you should not study business. If you want to start or PROGRESS ASSESSMENTS Pass work in a non-profit organization, you will need to learn business skills suchSecond as information management, leadership, and financial management. Therefore, is the a knowlTo ensure that students understand and marketing, retain the Progress Assessment proven learning tool edge and skills you acquire in this other business courses will becomprehend useful for careers in retain material. material, Progress Assessments stop them andandshow helps students and any organization, including non-profits. We shall explore entrepreneurship right after the PART 1 Business Trends: Cultivating a Business in Diverse Global Environments them what they needProgress to review before proceeding. The Assessment. depression

A severe recession.

that

3. A depression is a severe recession usually accompanied by deflation. Business cycles

rarely go through a depression phase. In fact, while there were many business cycles during the twentieth century, there was only one severe depression (in the 1930s).

PROGRESS ASSESSMENT recovery 4. A recovery occurs when the economy stabilizes and starts to grow. This eventually

• • • •

When the economy

leads to an economic boom, starting the cycle all over again.

grow.

One goal of some economists is to predict such ups and downs. That is very difficult

stabilizes starts to What isand the difference between revenue and profit?

to do. Business cycles are What is risk, and how is it related toidentified profit?according to facts, but we can explain those facts only by using theories. Therefore, one cannot predict with certainty. But one thing is certain:

What is the difference between standard quality of life? over time, the economy will rise andof fallliving as it hasand done in recent years.

Since dramatic swings up and down in the economy cause all kinds of disruptions to

What do the termsbusinesses, stakeholders, offshoring, outsourcing, insourcing the government tries to minimize such changes.and The government uses mean? fiscal policy and monetary policy to try to keep the economy from slowing too much or growing too rapidly. We will discuss both of these policies in Chapter 4.

INTERACTIVE SUMMARIES

PROGRESS ASSESSMENT

• •

What factors have contributed to the decision to have a mixed economy in Canada? Name three economic indicators and describe how well Canada is doing using

each one. The end-of-chapter summaries are directly tied question-and-answer format—great for chapter review • What is the difference between a recession and a depression? to the Learning Objectives and are written in a and studying. nic54958_ch01_002-041.indd 12

11/27/18Pass 02:33 PM Second

SUMMARY LO1

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

KEY TERMS

Second Pass What are the two branches of economics? What are aretwo themajor key terms used describemacroeconomics the Canadian economic There branches of to economics: studies thesystem? operation of a nation’s econGross domestic product (GDP) is the total value of goods and services produced in a country in a given omy as a whole, and microeconomics studies the behaviour of people and organizations in particular year. The(e.g., unemployment thewhen number unemployed markets why people rate buyrepresents smaller cars gasof prices go up). persons expressed as a percentage of the labour force. The consumer price index (CPI) measures changes in the prices of a basket of goods and Explain what capitalism is It and freestatistic markets work. LO2 servicesTrends: that consumers is ahow monthly measures the pace of inflation (consumer prices PART 1 Business Cultivatingbuy. a Business in Diverse Global that Environments Capitalism is deflation an economic system prices in which all or most Productivity of the means isofthe production and distribution going up) or (consumer going down). total volume of goods and(e.g., serland, railroads, and stores) are privately owned and operated forhas profit. vicesfactories, one worker can produce in a given period. Productivity in Canada increased over the years due What are the key terms used to describe the Canadian economic system? to the use of computers and other technologies. Who decides what to produce under capitalism? Gross domestic productbusiness (GDP) ispeople the total value of goods and services produced in workers; a countryhow in a much given In capitalist countries, decide what to produce; how much to pay What are the four phases of business cycles? year. The for unemployment rate represents the number ofcertain unemployed in persons expressed as a percentage of to goods andbusinesses services; whether their import those Incharge an economic boom, do well.toAproduce recession occursgoods when two or own morecountries, quarters show declines the labour force. Themade consumer price index (CPI) measures changes in the prices of a basket of goods and goods, have them in other countries; andproducts, so on. and in the or GDP, prices fall, people purchase fewer businesses fail. A depression is a severe services that consumers buy. It is a monthly statistic that measures the pace of inflation (consumer prices recession. Finally, recovery is when the economy stabilizes and starts to grow. going up) or deflation (consumer prices going down). Productivity is the total volume of goods and services one worker can produce in a given period. Productivity in Canada has increased over the years due to the use of computers and other technologies.

Important terms, highlighted throughout the text with an accompanying definition, are listed in

alphabetical order at the end of the chapter and in the glossary.

KEY TERMS

What are the four phases of business cycles? do well.94A recession occurs whenmixed two oreconomies more quarters boom 95 In an economic boom, businesses disinflation 86 show declines the GDP, prices fall, people purchase fewer products, and businesses fail. A competition depression is81 a severe brain drainin84 economic cycles (business monopolistic recession. Finally, recovery is when the 95 economy stabilizes and starts to grow. 82 business cycles cycles) monopoly (economic cycles) 95 economics 70 oligopoly 81 nic54958_ch02_068-101.indd 96 11/27/18 02:36 PM capitalism 76 free-market economy 85 perfect competition 81 command economy 86 gross domestic product (GDP) 89 recession 95 communism 85 human development index 95 recovery 96 boom 95 price index disinflation mixed economies 86 71 consumer inflation 93 94 resource development brain drain economic cycles monopolistic (CPI) 94 84 invisible hand 74(business socialism 84 competition 81 business cycles) 95 monopoly deflation cycles 94 macroeconomics 70 stagflation 82 94 (economic economics oligopoly demand 79 cycles) 95 market price7079 supply 78 81 capitalism free-market economy perfect competition 81 depression 76 96 microeconomics 70 85 unemployment rate 91 command economy 86 gross domestic product (GDP) 89 recession 95 communism 85 human development index 95 recovery 96 consumer price index inflation 93 resource development 71 (CPI) 94 invisible hand 74 socialism 84 deflation 94 macroeconomics 70 stagflation 94 If you are interested in pursuing a career in econom∙ Statistican—applies mathematical or statistical demand 79 market price 79 supply 78 ics, here are96 a few to consider. Find outmicroeconomics about the tasks 70 theory and methods to collect,rate organize, interpret, depression unemployment 91 performed, skills needed, pay, and opportunity outlook and summarize numerical data to provide useful in these fields through Internet sites that include the information. Government of Canada Job Bank, Workopolis, Mon∙ Marketing research analyst—studies market condister, CareerBuilder, Glassdoor, and Indeed, as well as tions and helps companies understand what products through the Career Centre at your school. people want, who will buy them, and at what price. If you are interested in pursuing a career in econom∙ Statistican—applies mathematical or statistical ∙ Economist—studies the production and distribution ∙ Actuary—analyzes the financial costs of risk and ics, here are a few to consider. Find out about the tasks theory and methods to collect, organize, interpret, uncertainty and uses mathematics, statistics, and of resources, goods, and services by collecting and performed, skills needed, pay, and opportunity outlook and summarize numerical data to provide useful financial theory to assess the risk that an event will analyzing data, researching trends, and evaluating in these fields through Internet sites that include the information. economic issues. occur. Government of Canada Job Bank, Workopolis, Mon∙ Marketing research analyst—studies market condister, CareerBuilder, Glassdoor, and Indeed, as well as tions and helps companies understand what products through the Career Centre at your school. people want, who will buy them, and at what price.

KEY TERMS

CAREER EXPLORATION

At the end of each chapter, we offer a brief list of CAREER EXPLORATION potential careers that deal with the concepts present in the chapter. The examples are drawn from the Canadian

Occupational Projection System and we encourage you to find out more about them in the Government of Canada Job Bank.

CAREER EXPLORATION

∙ Economist—studies the production and distribution of resources, goods, and services by collecting and analyzing data, researching trends, and evaluating economic issues.

nic54958_ch02_068-101.indd 98

∙ Actuary—analyzes the financial costs of risk and uncertainty and uses mathematics, statistics, and financial theory to assess the risk that an event will occur. 11/27/18 02:36 PM

Preface

CRITICAL THINKING QUESTIONS Found in each chapter, Critical Thinking Questions ask students to pause and think about how the material

Second Pass

they are reading applies to their own lives. CHAPTER 2 How Economic Issues Affect Business

Second Pass Second Pass

CRITICAL THINKING

Many say that business people do not do enough they believe that businesses create all the wealth that CHAPTER 2 How Economic Issues Affect Business for society. Some students choose to work for nonnon-profit groups distribute. Can you find some midPART Trends: Cultivating a Business organizain Diverse Global profit1 Business organizations instead of for-profit dleEnvironments ground in this debate that demonstrates how both tions because they want to help others. However, business people and those who work for non-profit business people say that they do more to help others organizations contribute to society and need to work than non-profit groups because they provide jobs for together more closely to help people? Could you use Many say that business people do not do enough they believe that businesses create all the wealth that people rather than giving them charity, which often the concepts of Adam Smith to help illustrate your for society. Some students choose to work for nonnon-profit groups distribute. Can you find some midprecludes them from searching for work. Furthermore, position? 1. About 99 percent of the world’s population 3. Countries like Canada that have a high stanprofit organizations instead of for-profit organizadle ground in this debate that demonstrates how both lives outside Canada, but many Canadian dard of living are referred to as industrialtions because they want to help others. However, business people and those who work for non-profit companies, especially small businesses, still ized nations. Countries with a low standard business people say that they do more to help others organizations contribute to society and need to work do not engage in global trade. Why not? Do of living and quality of life are called develthan non-profit groups because they provide jobs for together more closely to help people? Could you use you think more small businesses will particoping countries. (Terms formerly used were people rather than giving them charity, which often the concepts of Adam Smith to help illustrate your ipate in global Team markets in the future? Why or underdeveloped or less-developed Key: Analytic Communication Technologycountries.) precludes them from searching for work. Furthermore, position? why not? What factors prevent developing nations from 1. In teams, develop a list of the advantages of living be workers, and another will be government becoming industrialized nations? 2. What can businesses do to prevent unexpected in a capitalist society. Then develop lists headed leaders. Within your group discuss and list problems in dealing with sociocultural, eco4. How would you justify the use of revenue or “What are the disadvantages?” and “How could the advantages and disadvantages to you of protective tariffs in today’s global market? nomic and financial, legal, and physical and such disadvantages be minimized?” Describe lowering taxes on businesses. Then have each environmental forces in global markets? why a person Team in a socialist country might reject group choose a representative to go to the Key: Analytic Communication Technology capitalism and prefer a socialist state. front of the class and debate the tax issue with 1. In teams, develop a list of the advantages of living be workers, and another will be government the representatives from the other groups. 2. Show your understanding of the principles in a capitalist society. Then develop lists headed leaders. Within your group discuss and list of supply and demand by looking at the oil 4. Draw a line and mark one end “capitalism” and “What are the disadvantages?” and “How could the advantages and disadvantages to you of market today. Go online and search for a chart the other end “socialism.” Mark where Canada such disadvantages be minimized?” Describe lowering taxes on businesses. Then have each of oil prices for the last few years. Why does is now on that line. Explain why you marked Key: Team Analytic Communication Technology why a person in a socialist country might reject group choose a representative to go to the the price of oil fluctuate so greatly? What will the spot you did. Students from other countries capitalism and prefer a socialist state. front of the class and debate the tax issue with 1. Find outasfirsthand impact of in global trade 4. In a group the top happen more andthe more people China and may want toofdofour, this list exercise for five theirCanadianown counthe representatives from the other groups. 2. Show your of the countries’ principles on your life.understanding How different based When toresearching, India decide to buy many automobiles? What would tries andmultinationals. explain the differences the class. of supply and on demand by looking atclothes? the oil 4. Draw aaline andthat mark oneinclude end “capitalism” and names appear the labels in your create table will the following happen if most Canadian consumers decided 5. Break into small groups. In your group, discuss market today.languages Go online and search for a chart the otherofend “socialism.”the Mark where Canada How many pieces information: company names, to drive electric cars? do your classmates how the following have affected people’s purof oil prices last few years. Why is that line. marked speak? List for thethe ethnic restaurants in does your thenow yearoneach was Explain created,why the you number of 3. This exercise will help you understand socialchasing behaviours and attitudes toward Canada the price of oil so greatly? What will the spot employees, you did. Students from otherorcountries community. Arefluctuate they family-owned or corpoglobal the industry indusism from different perspectives. Form three and its economy: development of the Alberta oil happen as more and more people in China and may want to do this exercise for their own counrate chains? tries in which they operate, annual revenues, groups. Each group should adopt a different sands; the Atlantic seal hunt; mad cow disease; India decide to buy automobiles? What would tries and explain the differences to thethey class. and number of countries in which have 2. Prepare list of the advantages and disrole in aa short socialist economy: one group will and the growth of the Internet. Have a group happen if most Canadian consumers decided Present findings the class. 5. offices. Break into small your groups. In yourtogroup, discuss advantages of trade protectionism. be the business owners, another Share groupyour will member prepare a short summary for the class. to drive electric cars? how the following have affected people’s purideas with others in the class and debate the 5. Form an imaginary joint venture with three 3. This exercise will helpCanada you understand socialchasing behaviours and attitudes toward Canada following statement: should increase classmates and select a product, service, or ism from different to perspectives. Form and the Alberta oil trade protectionism save Canadian jobsthree and ideaitstoeconomy: market development to a specificofcountry. Have groups. Each group should adopt a different sands; the Atlantic hunt; madglobal cow disease; companies. each team memberseal select a key market role in a socialist economy: one group will and growth of the(sociocultural, Internet. Haveeconomic a group forcethe in that country The economies Ontario and British ColumThe3.Rule 72 ofowners, be theof business another group will member preparelegal a short for the class. and financial, andsummary regulatory, or physibia depend heavily on exports. Ontario relies cal and environmental) to research. Have each primarily on useful trade tofortheunderstanding United Statesinflaand No formula is more highlighted in the Reaching Beyond Our Borders box report his or her findings. Then, as a group, British Columbia relies tion thanEurope, the rulewhile of 72. In fact, The Rule of heavily 72 was in this chapter. prepare a short explanation of whether the on trade with Asia. In a group of four, research market is worth pursuing. these statements. Use Excel to develop two

CRITICAL THINKING CRITICAL THINKING

DEVELOPING CAREERDEVELOPING SKILLS CAREER SKILLS The Developing Career Skills section has activities designed to increase student involvement in the learning process. The exercises develop analytical DEVELOPING CAREER SKILLS communication, technological, and team-based skills.

Some of these mini-projects require library or online searches, while others can be used as team activities either in or out of the classroom.

DEVELOPING CAREER SKILLS

ANALYZING MANAGEMENT DECISIONS

Each chapter concludes with a case thatMANAGEMENT allows studentsDECISIONS are intentionally brief and are meant to initiate discussion ANALYZING to analyze management decision making. These cases rather than take up the entire class period. ANALYZING MANAGEMENT DECISIONS The Rule ofthat 72break down the exporting coungraphs

tries that trade with each of these provinces. No formula is more useful for understanding inflaPresent your findings to the class. tion than the rule of 72. In fact, The Rule of 72 was

highlighted in the Reaching Beyond Our Borders box in this chapter.

nic54958_ch02_068-101.indd 99

11/27/18 02:36 PM

140

END-OF-PART RUNNING CASE The chapters in this edition are divided in six parts. A six-part running case has been created based on Fox 40 International Inc., a proudly Canadian company that dominates the global whistle industry. For successful Canadian entrepreneur and inventor Ron Foxcroft, it all started with a dream for a pealess whistle. Read the nic54958_ch02_068-101.indd 99

nic54958_ch03_102-141.indd 140

case at the end of each part to learn how Ron, his son Dave, and their management team apply the business principles introduced in the chapters for each part. First Pass The discussion questions encourage students to further evaluate these business concepts. 11/27/18 02:36 PM 11/27/18 02:39 PM

CHAPTER 7 Entrepreneurship and Starting a Small Business

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Market Leading Technology Learn Without Limits McGraw-Hill Connect® is an award-winning digital teaching and learning platform that gives students the means to better connect with their coursework, with their instructors, and with the important concepts that they will need to know for success now and in the future. With Connect, instructors can take advantage of McGrawHill’s trusted content to seamlessly deliver assignments, quizzes and tests online. McGraw-Hill Connect is a learning platform that continually adapts to each student, delivering precisely what they need, when they need it, so class time is more engaging and effective. Connect makes teaching and learning personal, easy, and proven.

Connect Key Features: SMARTBOOK® As the first and only adaptive reading experience, SmartBook is changing the way students read and learn. SmartBook creates a personalized reading experience by highlighting the most important concepts a student needs to learn at that moment in time. As a student engages with SmartBook, the reading experience continuously adapts by highlighting content based on what each student knows and doesn’t know. This ensures that he or she is focused on the content needed to close specific knowledge gaps, while it simultaneously promotes long-term learning.

CONNECT INSIGHT® Connect Insight is Connect’s new one-of-a-kind visual analytics dashboard—now available for instructors— that provides at-a-glance information regarding student performance, which is immediately actionable. By presenting assignment, assessment, and topical performance results together with a time metric that is easily visible for aggregate or individual results, Connect Insight gives instructors the ability to take a justin-time approach to teaching and learning, which was

never before available. Connect Insight presents data that empowers instructors improve class performance in a way that is efficient and effective.

SIMPLE ASSIGNMENT MANAGEMENT With Connect, creating assignments is easier than ever, so instructors can spend more time teaching and less time managing. ∙ Assign SmartBook learning modules. ∙ Edit existing questions and create their own questions. ∙ Draw from a variety of text-specific questions, resources, and test bank material to assign online. ∙ Streamline lesson planning, student progress reporting, and assignment grading to make classroom management more efficient than ever.

SMART GRADING When it comes to studying, time is precious. Connect helps students learn more effectively by providing feedback and practice material when they need it and where they need it. This is done in several ways. ∙ Automatically score assignments, giving students immediate feedback on their work and comparisons with correct answers. ∙ Access and review each response; manually change grades or leave comments for students to review. ∙ Track individual student performance—by question, assignment or in relation to the class overall—with detailed grade reports. ∙ Reinforce classroom concepts with practice tests and instant quizzes. ∙ Integrate grade reports easily with Learning Management Systems including Blackboard, D2L, and Moodle.

MOBILE ACCESS Connect makes it easy for students to read and learn using their smartphones and tablets. With the mobile app, students can study on the go—including reading and listening using the audio functionality—without constant need for Internet access. xxiii

Preface

INSTRUCTOR LIBRARY The Connect Instructor Library is a repository for additional resources to improve student engagement in and out of the class. It provides all the critical resources instructors need to build their course. ∙ Access Instructor resources. ∙ View assignments and resources created for past sections. ∙ Post your own resources for students to use.

Instructors’ Resources Understanding Canadian Business, Tenth Edition, offers a complete, integrated supplements package for instructors to address all of their needs. Connect assets have been prepared by Grace O’Farrell from the University of Winnipeg. Instructor’s Manual: The instructor’s manual, prepared by Peter Mombourquette, Mount Saint Vincent University, accurately represents the text’s content and supports instructors’ needs. Each chapter includes the learning objectives, the glossary of key terms, a chapter synopsis, a lecture outline, and solutions to the end-of-chapter discussion questions and videos. Computerized Test Bank: This flexible and easy-to-use electronic testing program allows instructors to create tests from book-specific items. Created by Sandra Wellman, Seneca College, the test bank has undergone a rigorous auditing and revision process for the tenth edition. It contains a broad selection of multiple choice, true/false, and essay questions. Instructors may add their own questions as well. Each question identifies the relevant page reference and difficulty level. Multiple versions of the test can be created and printed. PowerPoint Presentations: These robust presentations offer high-quality visuals from the text and highlight key concepts from each chapter to bring key business concepts to life. Two different presentations offer instructors choice on how

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they like to present the material to their classes. Both the basic and enhanced sets were authored by Michael Wade, Seneca College. Videos for All Chapters: Customized business segments from the M cGraw-Hill Management Library filmed specifically for the Nickels text can be accessed on the password-protected area of Connect. Detailed teaching notes are available in the instructor’s manual and on the instructor area of Connect.

MANAGER’S HOTSEAT The Manager’s HotSeat video cases allow students to watch real managers apply their years of experience to confront daily issues, such as ethics, diversity, teamwork, and the virtual workplace. The Manager’s HotSeat videos are ideal for group or classroom discussion.

APPLICATION-BASED ACTIVITIES The Connect Application-Based Activities are highly interactive and automatically graded, application- and analysis-based exercises wherein students immerse themselves in a business environment, analyze the situation, and apply their knowledge of business strategies to real-world situations. Students progress from understanding basic concepts to using their own knowledge to analyze complex scenarios and solve problems.

SUPERIOR LEARNING SOLUTIONS AND SUPPORT The McGraw-Hill Education team is ready to help instructors assess and integrate any of our products, technology, and services into your course for optimal teaching and learning performance. Whether it’s helping your students improve their grades, or putting your entire course online, the McGraw-Hill Education team is here to help you do it. Contact your Learning Solutions Consultant today to learn how to maximize all of McGraw-Hill Education’s resources. For more information, please visit us online: http://www.mheducation.ca/he/solutions.

Acknowledgements Development of the Text and Supplements Package To ensure continuous improvement of our product, we have used an extensive review and development process for each of our editions. Building on that history, the development process for this tenth edition included evaluation by a broad panel of instructors where new ideas were exchanged. The tenth Canadian edition continues to be the market’s gold standard due to involvement of these committed instructors. We thank them all for their help, support, and friendship—your suggestions to improve the quality, coverage, and the supplements package were invaluable. Reviewers who were vital in helping us develop the tenth edition include: Ramon Baltazar, Dalhousie University Rod Hayward, University of the Fraser Valley Tannys Laughren, Laurentian University

Josephine McMurray, Wilfrid Laurier University Zorana Svedic, University of British Columbia Dave Swanston, University of Toronto Many thanks are also due to the following people who worked hard to make this book a reality: Alwynn Pinard and Amy Clarke-Spencley, Portfolio Managers; Amy Rydzanicz, Senior Content Developer; Jeanette McCurdy and Janie Deneau, Supervising Editors; Michelle Saddler, Production Coordinator; Margaret Henderson, Copy Editor; Monika Schurmann, Permissions and Photo Researcher; and Jodie Bernard, Designer. The authors would also like to extend their appreciation to Ron Foxcroft for allowing them to highlight Fox40 International Inc. as this edition’s running case. Started over twenty-five years ago, this privately held, family-run organization exemplifies many of the business principles introduced in this edition.

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PART 1 CHAPTER 1

The Dynamic Business Environment

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Illustrate the importance of key business fundamentals to wealth generation. LO2 Identify business stakeholders and their importance to non-profit organizations and business activities.

LO3 Explain how entrepreneurship is critical to the wealth of an economy, and list the five factors of production that contribute to wealth.

LO4 State the six elements that make up the business environment and explain why the business environment is important to organizations.

LO5 Give examples of how the service sector has replaced manufacturing as the principal provider of jobs, but why manufacturing remains vital for Canada.

P R O F I L E GETTING TO KNOW: RON FOXCROFT, CEO, FOX 40 INTERNATIONAL INC.

For successful Canadian entrepreneur and inven-

The formation of Fox 40 International Inc. is

tor Ron Foxcroft, it all started in 1982 when he

the result of a dream for a pealess whistle. When

purchased Fluke Transport, a Southern Ontario

Foxcroft began developing the whistle, he was moti-

trucking business. The company slogan—If It’s

vated by his knowledge and experience as an inter-

On Time... t’s A “FLUKE”—was soon recognized

national basketball referee. Frustrated with faulty

throughout North America. Over the years, Foxcroft

pea whistles, he spent three years of development

diversified into new ventures and the Foxcroft Group

with design consultant Chuck Shepherd, resulting

of Companies now includes Fluke Transportation

in the creation of the Fox 40 Classic Whistle. (The

Group, Fluke Warehousing Inc., Foxcroft Capital

whistle was named for Foxcroft, who was 40 when

Corp., Fox 40 International Inc., and Fox 40 USA Inc.

his invention was being developed). Introduced in

CHAPTER 1 The Dynamic Business Environment

monthly for shipment to 140 countries. They are sold to referees, coaches, water safety, search and rescue teams, personal security, animal trainers, all sport enthusiasts, as well as the outdoor and premium incentive markets. The complete line of Fox 40 products has grown substantially with over 900 active stock-keeping units (SKUs) that include the following: 21 styles of Fox 40 Whistles; lanyards & attachments; Fox 40 gear; SmartCoach coaching boards; the SICK Self Impression Custom Kit and Heat Alert mouthguards; marine & outdoor products; pink products; and logo-imprinted products. An avid sportsman, Foxcroft’s philosophy of “be the best at what you do” has contributed to his success both on and off the basketball court. He has been named one of the 52 most influential persons in North American Officiating of all time. In 2010, the National Association of Sports Officials named him—the only Canadian—to a group of 30 who have made a difference in the world of sports officials. He spent fourteen seasons as a game observer for the National Basketball League (NBA). Off the court, Source: Courtesy of Fox 40 International Inc. Used with permission.

PROFIT magazine voted him to be one of the top ten Canadian businessmen of the decade. He has

1987, this finely tuned precision instrument does

been honoured as Entrepreneur of the Year by the

not use a pea to generate sound. In fact, there

Burlington Economic Development Corporation.

are no moving parts whatsoever. There is nothing

More recently, he has been featured in the New

to obstruct sound, nothing to stick, freeze, or fail.

York Times, CBC ESPN, the History Channel, he’s

The patented design moves the air blast through

had an audience with the Queen at Buckingham

three tuned chambers. Fox 40 whistles are con-

Palace and received the prestigious NASO Gold

structed entirely of high-impact ABS plastic so they

Whistle Award, this honour is considered the high-

are impervious to moisture. A quick rinse in disin-

est distinction bestowed on a referee in the world.

fectant eliminates bacteria. Every time, they deliver

He was also gratified to receive an Honourary Grad-

on faultless performance (e.g., loudness), and they

uation Diploma from Mohawk College. Today, Fox-

never fail.

croft continues his active role as Founder and Chief

In 1987, Shepherd said to Foxcroft, “Ron, we have just developed the ‘best whistle in the world.’

Executive Officer (CEO) of Fox 40 International Inc. and Chairman and CEO of Fluke Transportation.

You must pledge to me that you will dedicate your

Foxcroft credits his customers and employees

life to making the Fox 40 whistle better.” To this day,

for the improvements to the original whistle. In his

Foxcroft and the company employees continue to

words, “When you are the best, you need to be bet-

honour this pledge.

ter.” This all starts with watching people to under-

Fox 40 International Inc., a proudly Canadian

stand their needs. It involves developing products

company, dominates the global whistle industry.

and services that customers might want. Making

Tens of thousands of Fox 40 whistles are produced

decisions along the way is challenging, but if you

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

are successful, you can make a lot of customers very

who have started a business. You will also learn

happy. Throughout this process, you need to have a

about people who work for companies and have

vision, be focused, adapt to change, and never give

succeeded far beyond their original expectations.

up. His advice for future entrepreneurs, in the words

You will learn about all aspects of business: man-

of Walt Disney, is to “Get a good idea and stay with

agement, human resourcemanagement, marketing,

it. Dog it, and work it until it’s done and done right.”

accounting, finance, and more. You will also learn

The purpose of this text is to introduce you

about businesses of all sizes. We begin by looking

to the exciting and challenging world of business.

at some key terms and exploring the rapidly chang-

Each chapter will begin with a story similar to this

ing business environment so that you can prepare

one. You will meet more successful entrepreneurs

to meet tomorrow’s challenges today.

Sources: Ron Foxcroft, CEO of Fox 40 International Inc. and Chairman and CEO of Fluke Transportation, and Juliana Child, VP Promotional Sales & Events, Fox40 International Inc., September 22, 2017; “The Story of Fox 40,” Fox 40 International Inc., February 21, 2014, http://www.fox40world.com/index. cfm?id=55884l; “Ron Foxcroft presented with prestigious Queen Elizabeth II Diamond Jubilee Medal,” Fox 40 International Inc., August 15, 2012, http:// www.fox40world.com/index.cfm?returnid=56106&newsid=3393&pagepath=KEEPING_IN_TOUCH/News_Releases&id=57428; Ron Foxcroft, Founder and CEO, Fox 40 International Inc., in-person interview, December 19, 2011; “BEDC Inducts Mr. Ron Foxcroft into the Entrepreneur Hall of Fame,” Burlington Economic Development Corporation, June 10, 2011, www.bedc.ca/sites/default/files/PDF/businessnews/MediaRelease—BEDCInductsMr.Ron FoxcroftintotheEntrepreneurHallofFame.pdf; John Kernaghan, “Fox 40 founder Foxcroft feted,” The Hamilton Spectator, October 18, 2010, www.thespec. com/sports/local/article/268488—fox-40-founder-foxcroft-feted; Referee Staff, “Not An Inadvertent Whistle,” Referee Magazine, July 2007, 45–47; and Global TV, “Ron Foxcroft,” The Globe and Mail, June 29, 2005.

Using this Course to Prepare for Your Career Since you have signed up for this course, we are guessing you already know the value of higher education. When averaged across gender and fields of study, the holders of a post-secondary education make a cumulated average of about $1,000,000 over 20 years compared to a cumulated average of about $670,000 for high school graduates.1 That is nearly 60 percent more for post-secondary graduates compared to those with just a high school diploma. Thus, what you invest in a post-secondary education is likely to pay you back many times. See Figure 1.1 for more of an idea of the earnings of a business post-secondary education after 20 years compared to an overall post-secondary and high school education. That does not mean there are not good careers available to non–post-secondary graduates. It just means those with an education are more likely to have higher earnings over their lifetime. In addition, for both men and women, a degree is associated with more years of coverage in an employer-sponsored pension plan and fewer layoffs than a person with a high school diploma.2 The value of a post-secondary education is more than just a larger paycheque. Other benefits include increasing your ability to think critically and communicate your ideas to others, improving your ability to use technology, and preparing yourself to live in a diverse and competitive world. Knowing you have met your goals and earned a degree also gives you the self-confidence to work toward future goals. Experts say today’s post-secondary graduates will likely hold seven or eight different jobs (often in several different careers) in their lifetime.3 You too may want to 4

CHAPTER 1 The Dynamic Business Environment

■ FIGURE

1.1

EARNINGS COMPARISON OF POST-SECONDARY AND HIGH SCHOOL GRADUATES OVER 20 YEARS

$1,400,000

Earnings

$1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 Post-secondary— Business Degree

Post-secondary— Overall

High School

Type of Education Note: Earnings are averaged across men and women; Post-secondary-Overall earnings is averaged across nine areas of study. Source: Yuri Ostrovsky and Marc Frenette, “The Cumulative Earnings of Postsecondary Graduate Over 20 Years: Results by Field of Study,” Statistics Canada, October 2014, Catalogue no. 11–626–X, accessed March 15, 2015, http://www.statcan.gc.ca/pub/11–626–x/11–626–x2014040-eng.htm.

change careers someday. It can be the path to long-term happiness and success. That means you will have to be flexible and adjust your strengths and talents to new opportunities. Learning has become a lifelong job. You will need to constantly update your skills to achieve high competence and remain competitive. If you are typical of many p ost-secondary students, you may not have any idea what career you would like to pursue. That is not necessarily a big disadvantage in today’s fast-changing job market. After all, many of the best jobs of the future do not even exist today. Figure 1.2 lists 10 careers that did not exist 10 years ago. There are no perfect or certain ways to prepare for the most interesting and challenging jobs of tomorrow. Rather, you should continue your education, © Laura Doss/Getty Images The rewards of post-secondary education are well worth the effort develop strong technology and Internet skills, improve your verbal and written communica- for graduates, who can expect to earn nearly 60 percent more than tion skills, and remain flexible and forward high school graduates over the 20 years. Businesses like graduates too, because the growing needs of a global workplace require thinking while you explore the job market. knowledgeable workers to fill the jobs of the future. What other But without a doubt, business knowledge benefits do you see from earning a degree? will be valuable in the future. 5

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

■ FIGURE

1.2

NEW CAREERS These careers did not exist 10 years ago: • App Developer • Social Media Manager • Uber Driver • Driverless Car Engineer • Cloud Computing Specialist • Big Data Analyst/Data Scientist • Sustainability Manager • YouTube Content Creator • Drone Operator • Millennial Generational Expert Source: World Economic Forum, weforum.org, accessed June 2018.

One of the objectives of this class, and this book, is to help you choose an area in which you might enjoy working and have a strong chance to succeed. You will learn about economics, global business, ethics, entrepreneurship, management, marketing, accounting, finance, and more. At the end of the course, you should have a much better idea which careers would be best for you and which you would not enjoy. But you do not have to be in business to use business principles. You can use marketing principles to get a job and to sell your ideas to others. You can use your knowledge of investments to make money in the stock market. You will use your management skills and general business knowledge wherever you go and in whatever career you pursue including government agencies, charities, and social causes. Post-secondary courses are best at teaching you concepts and ways of thinking about business. However, to learn first-hand how to apply those ideas to real business situations, you need to explore and interact with other resources. You can extend your understanding and awareness of the business world through contact with others who have business experience. For example, many post-secondary students have had experience working in business or non-profit organizations. Hearing and talking about those experiences exposes you to many real-life examples that are invaluable for understanding busi© Sam Edwards/age fotostock ness. Outside contact also offers a wealth of There are many opportunities for you to gain knowledge from information. Who can tell you more about industry experts. You may work in a company, volunteer in an what it is like to start a career in accounting organization, or plan to take a placement or internship course. What than someone who is doing it now? One of programs are offered at the career services office at your university the best ways to learn about different busior college that will help you learn more about possible career nesses is to visit them in person. The world options directly from those who work in the field? can be your classroom. 6

CHAPTER 1 The Dynamic Business Environment

Business Fundamentals

LO1

One thing that you can learn from the chapter-opening Profile is that success in business is often based on the strategy of finding a need and filling it. Ron Foxcroft saw the need for a pealess whistle and he filled it. This strategy lets you help the community in several ways. You provide needed goods, jobs, and services to people in the area. Goods are tangible products such as computers, food, clothing, cars, and appliances. Services are intangible products (i.e., items that cannot be held in your hand) such as education, health care, insurance, recreation, and travel and tourism. Although you do not need to have wealth as a primary goal, one result of successfully filling a market need is that you can make money for yourself, sometimes a great deal, by giving customers what they want. A business is any activity that seeks to provide goods and services to others while operating at a profit. An entrepreneur is a person who risks time and money to start and manage a business. You will read more about successful entrepreneurs throughout this text. An entrepreneur learns early that a business needs a reliable accountant, a good lawyer, and strong managers. Entrepreneurs may have to go to financial institutions (e.g., banks) or to venture capital firms to borrow money. In today’s economy, borrowing from a financial institution is harder than usual.4 Therefore, later on in the text, we will talk about ways to get closer to financial institutions so that they will be more inclined to give you a loan. Entrepreneurs will also need to learn more about business, including how to deal with unions, what kind of insurance to buy, and how to find the right people to hire. Usually that means studying business at a post-secondary institution.5 Access to a college or university education is much easier today now that so many courses are available online.6

Illustrate the importance of key business fundamentals to wealth generation. goods

Tangible products such as computers, food, clothing, cars, and appliances.

services

Intangible products (i.e., products that can’t be held in your hand) such as education, health care, insurance, recreation, and travel and tourism.

business

Any activity that seeks to provide goods and services to others while operating at a profit.

Revenues, Profits, and Losses Revenue is the total amount of money received during a given period for goods sold and services rendered and from other financial sources. Profit is the amount of money a business earns above and beyond what it spends for salaries and other expenses. Since not all businesses make a profit, starting a business can be risky. A loss occurs when a business’ expenses are more than its revenues. If a business loses money over time, it will likely have to close, putting its employees out of work. It should be no surprise, therefore, that thousands of businesses enter and exit the marketplace throughout the year.7 Some owners close down one business to start another one or to retire. Even though such closings are not failures, they are reported as exits by Innovation, Science and Economic Development Canada. A 2016 report indicated a net decrease of approximately 4,800

In 1979, Geral Fauss took 5000 oversized foam fingers to the Sugar Bowl in New Orleans not knowing if he would sell a single one. The former high school shop teacher created the now-famous fingers a few years earlier and they became a big hit with his students. Fortunately, the Sugar Bowl crowd liked them, too. He sold every last finger and launched a company that is still going strong. What risks and rewards did Fauss face when starting his business?

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

entrepreneur

A person who risks time and money to start and manage a business.

revenue

The total amount of money received during a given period for goods sold and services rendered, and from other financial sources.

profit

The amount a business earns above and beyond what it spends for salaries and other expenses.

loss

When a business’s expenses are more than its revenues.

risk

The chance of loss, the degree of probability of loss, and the amount of possible loss (i.e., time and money).

small a medium-sized businesses in Canada.8 Only a small proportion of firms that exit the marketplace end up filing for bankruptcy, which refers to the liquidation of the business debtor’s assets and the end of the commercial entity’s operations.9 As discussed later in this text, most business failures are due to poor management or problems associated with cash flow. The business environment is constantly changing. What seems like a great opportunity one day—for example, online grocery shopping—may become a failure when the economy changes. Starting a business may come with huge risks. But huge risks can result in huge profits. We’ll explore that concept next.

Matching Risk with Profit Starting a business involves risk. Generally speaking, risk refers to the chance of loss, the degree of probability of loss, and the amount of possible loss. Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable. Profit, remember, is the amount of money a business earns above and beyond what it pays out for salaries and other expenses. For example, if you were to start a business selling hot dogs in the summer, you would have to pay for the cart rental, for the hot dogs and other materials, and for someone to run the cart while you were away. After you paid your employee and yourself, paid for the food and materials you used, paid the rent on the cart, and paid your taxes, any money left over would be profit. Keep in mind that profit is over and above the money you pay yourself in salary. You could use any profit you make to rent or buy a second cart and hire other employees. After a few summers, you might have a dozen carts employing dozens of workers. Even among companies that do make a profit, not all make the same amount. Those companies that take the most risk may make the most profit. There is high risk, for example, in making a new kind of automobile.10 Elon Musk, CEO of Tesla Motors, has experienced both success and failure as the company tries to move the automotive industry toward electric cars. Regardless of production concerns, Tesla has grown its revenues fivefold from 2013–2018.11 As a potential business owner, you need to do research (e.g., talk to other business people and read business publications) to find the right balance between risk and profit for you. Different people have different tolerances for risk. To decide which is the best choice for you, you have to calculate the risks and the potential rewards of each decision. The more risks you take, the higher the rewards may be. In Chapter 7, you will learn more about the risks and rewards that come with starting a business.

Standard of Living and Quality of Life Entrepreneurs such as Elon Musk, the founder of Tesla Motors and SpaceX, not only became wealthy themselves, they also provide employment for many other people. Businesses and their employees pay taxes to the different levels of government (federal, provincial, and municipal). This money is used to build hospitals, schools, libraries, playgrounds, roads, and other public facilities. Taxes also help to keep the environment clean, support people in need, and provide police and fire protection. Thus, the wealth businesses generate and the taxes they pay help everyone in their communities. A country’s businesses are part of an economic system that contributes to the standard of living 8

CHAPTER 1 The Dynamic Business Environment

and quality of life for everyone in the country (and, potentially, the world). How has the most recent economic slowdown affected the standard of living and quality of life in Canada? The term standard of living refers to the amount of goods and services people can buy with the money they have. For example, Canada has one of the highest standards of living in the world, even though workers in some other countries may on average make more money per hour. How can that be? Prices for goods and services might be higher than in Canada, so a person in that country can buy less than what a person in Canada can buy with the same amount of money. For example, a kilogram of © Skip Brown/National Geographic/Getty Images local cheese may cost $20.65 in Japan and $11.60 in When Nick Woodman wanted to show off videos of his stunts to other surfers, he used rubber bands and a surfboard leash Canada.12 to attach cameras to his wrist. His early attempts did not Often, goods cost more in one country than work, but after a lot of work and a $235,000 investment, another because of higher taxes and stricter governhis GoPro cameras are now the gold standard for selfment regulations. Finding the right level of taxes and documenting extreme sports. Today, Woodman’s company regulation is important in making a country or city brings in $526 million in annual revenue. What risks and rewards did Woodward face when starting his business? prosperous. We’ll explore that issue more deeply in Chapter 2. At this point, it is enough to understand that Canada enjoys a high standard of living partly because of the wealth created by its businesses. The term quality of life refers to the general well-being of a society in terms of standard of living its political freedom, natural environment, education, health care, safety, amount of The amount of goods and services people leisure, and rewards that add to the satisfaction and joy that other goods and services can buy with the provide. Maintaining a high quality of life requires the combined efforts of businesses, money they have. non-profit organizations (to be discussed soon), and government agencies. The more quality of life money businesses create, the more is potentially available to improve the quality of The general well-being life for everyone. It’s important to be careful, however. Working to build a higher stan- of a society in terms of dard of living may lower the quality of life if it means less time with family or more its political freedom, natural environment, stress.13 education, health

Responding to the Various Business Stakeholders Stakeholders are all of the people who stand to gain or lose by the policies and activities of a business and whose concerns the business needs to address. As noted in Figure 1.3, stakeholders include many different groups such as customers, employees, financial institutions (e.g., banks and credit unions), investors (e.g., shareholders), environmentalists, and government. Stakeholders may also have direct and indirect impact upon a business or organization. Each of the stakeholder types shown in Figure 1.3 can be considered either primary, those who without their participation the business would not exist, or secondary, those whose influence is not essential to the survival of a business. Don’t forget that businesses can also influence government policies through the activities and efforts of their associations, lobbyists, and trade unions.

care, safety, amount of leisure, and rewards that add to the satisfaction and joy that other goods and services provide.

LO2

Identify business stakeholders and their importance to non-profit organizations to business activities. 9

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

■ FIGURE

1.3

A BUSINESS AND ITS STAKEHOLDER Often the needs of a firm’s various stakeholders will conflict. For example, paying employees more may cut into shareholders’ profits. Balancing such demands is a major role of business managers.

STAKEHOLDERS

Shareholders Bankers Customers Media

Suppliers

Surrounding community

Typical Canadian Business

Environmentalists Government leaders Employees

Dealers (retailers)

Source: John Mackey and Raj Sisodia, Conscious Capitalism (Boston, MA: Harvard Business Review Press, 2013).

stakeholders

All the people who stand to gain or lose by the policies and activities of a business.

offshoring

Sourcing part of the purchased inputs outside of the country.

outsourcing

Assigning various functions, such as accounting, production, security, maintenance, and / or legal work, to outside organizations.

The challenge of the twenty-first century will be for organizations to balance, as much as possible, the needs of all stakeholders. For example, the need for the business to make profits must be balanced against the needs of employees for sufficient income. Ignore the media, and they might attack your business with articles that hurt sales. Oppose the local community, and it may stop you from expanding. The need to stay competitive may call for offshoring jobs to other countries, recognizing that this sound business strategy might do harm to the community because jobs would be lost.14 Offshoring entails sourcing part of the purchased inputs outside of the country.15 Outsourcing means contracting with other companies to do some or all of the functions of a firm, such as production or accounting.16 You may be wondering, how are the terms insourcing, outsourcing, and offshoring different? A Statistics Canada report highlights the distinction. As stated, “Outsourcing decisions affect the boundaries of the firm—what production takes place within the firm and what is purchased from outside the firm. Changes in offshoring may be, but are not necessarily, related to changes in outsourcing. They involve decisions both to purchase outside of the firm and to do so from abroad. Considerations to do the latter are at the heart of the study of international trade. Interest in outsourcing arises because it may foretell

CHAPTER 1 The Dynamic Business Environment

changes in industrial structure. Interest in offshoring arises because it may signify changes in international trading patterns.”17 Companies have gone from outsourcing production jobs to offshoring research and development and design functions. Such decisions may prove disastrous to these firms doing the offshoring if the overseas companies use the information to produce their own competitive products.18 In Canada, most of the offshoring that occurs is with the United States, though there has been some increase over the last decade with developing countries.19 A recent study indicated outsourcing will continue to grow at 12 to 26 percent across functions such as information technology, legal services, and human resource management.20 It is also expected that governments will create legislation to reduce offshoring. Insourcing initiatives to return jobs to companies exist in various industries, such as the automotive sector, where Ford Motor Company advanced workers to higher pay scales and as a result, hired more entry-level employees.21 It is legal to outsource and offshore, but is that best for all stakeholders, including workers? Business leaders must make decisions based on all factors, including the need to make a profit. As you can see, pleasing all stakeholders is not easy and it calls for trade-offs that are not always acceptable to one or another stakeholder. Keep in mind that regardless of temptations, company officials do have a responsibility to their stakeholders. Such trade-offs are also apparent in the political arena. As will be discussed in Chapter 4, governments make policies that affect many stakeholders. However, budget limitations force governments to make difficult choices, and these decisions are often not popular. Consequently, after years of insufficient funding, any changes in the areas of the environment, health care, and education generate a great deal of attention. As you will learn, balancing the demands of stakeholders is not limited to for-profit businesses.

insourcing

Assigning various functions that could go to an outside organization to employees in the company.

non-profit organization

An organization whose goals do not include making a personal profit for its owners or organizers.

Using Business Principles in Non-Profit Organizations Despite their efforts to satisfy all of their stakeholders, businesses cannot do everything that is needed to make a community all it can be. Non-profit organizations— such as schools, hospitals, charities like the United Way and the Salvation Army, and groups devoted to social causes—also make a major contribution to the welfare of society, as well as economic activity and jobs. A non-profit organization is an organization whose goals do not include making a personal profit for its owners

Media have also become an important stakeholder in the business environment. Two telecommunications conglomerates, Bell and Rogers, paid CAD$1.32 billion to acquire a 75 percent share of Maple Leaf Sports and Entertainment. The purchase gave them a majority share of the corporation that owns and manages the Toronto Maples Leafs, Marlies, Raptors, Toronto FC, real estate such as the Air Canada Centre, and television properties. What media stakeholders impact business in other industries? How do they impact the business? Are they primary or secondary stakeholders?22

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

or organizers. Non-profit organizations strive for financial gains because revenue is needed to operate, but such gains are used to meet their social or educational goals rather than for personal or shareholder profit. Non-profit organizations also include the different levels of government in our country. They are increasingly involved in business decisions and operations even though the primary purpose is not to generate a profit. We will consider the role of government in business in Chapter 4. Social entrepreneurs are people who use business principles to start and manage non-profit organizations and help address social issues. Muhammad Yunus won the Nobel Prize for starting the Grameen Bank, a microlending organization that provides small loans to entrepreneurs too poor to qualify for traditional loans. Yunus has started 30 of what he calls social businesses that do not © Jorge Guerrero/AFP/Getty Images have profit as their goal. One, for example, proThe goals of non-profit organizations are social and vides cataract operations for a fraction of the usual educational, not profit-oriented. The Red Cross, for example, cost.23 The Adapting to Change box in Chapter 5 is a national, not-for-profit charitable organization whose features the Canadian Social Entrepreneurship mission is to manage the blood and blood products supply Foundation. Would you consider becoming a social for Canadians. The organization employs approximately entrepreneur? 2800 full-time employees and generates over CAD$1 million 25 Your interests may lead you to work for a nonin revenue? The organization provides assistance to around 30 million people annually, from refugees to victims profit organization. Two million people, includof natural disasters. Why do good management principles ing professionals and staffers, work for Canada’s apply equally to profit-seeking businesses and non-profit approximately 170 000 charities and non-profit organizations? organizations.24 This does not mean, however, that you should not study business. If you want to start or work in a non-profit organization, you will need to learn business skills such as information management, leadership, marketing, and financial management. Therefore, the knowledge and skills you acquire in this and other business courses will be useful for careers in any organization, including non-profits. We shall explore entrepreneurship right after the Progress Assessment.

PROGRESS ASSESSMENT

• • • •

What is the difference between revenue and profit? What is risk, and how is it related to profit? What is the difference between standard of living and quality of life? What do the terms stakeholders, offshoring, outsourcing, and insourcing mean?

CHAPTER 1 The Dynamic Business Environment

Entrepreneurship Versus Working forOthers

LO3

Explain how entrepreneurship is critical to the wealth of an economy, and list the five factors of production that contribute to wealth.

There are two ways to succeed in business. One is to rise up through the ranks of large companies such as Royal Bank of Canada or Manulife Financial. The advantage of working for others is that somebody else assumes the entrepreneurial risk and provides you with benefits such as paid vacation time and health insurance. It’s a good option and many people choose it. The other, riskier, path is to start your own business and become an entrepreneur. While you may hear about success stories, keep in mind that many small businesses fail each year; thus, it takes a brave person to start a small business or to turn a business around. Furthermore, as an entrepreneur you do not receive any benefits such as paid vacation time and health insurance. You have to provide them for yourself! Before you take on the challenge of entrepreneurship, it makes sense to study the experiences of those who have succeeded to learn the process. Consider the example of Ron Joyce, who purchased a Dairy Queen outlet in 1963. Two years later, he invested $10,000 to become a franchisee in the first Tim Hortons (we will discuss franchising in Chapter 6). By 1967, he became a full partner in the company with Tim Horton. In the early years, both partners worked on expanding the business. When Horton died in 1974, Joyce became the sole owner of the chain. In the following years, he continued to develop the business, spending hundreds of hours piloting his plane in search of new franchise opportunities and doing everything from training new store owners to baking donuts. When Joyce sold the chain to Wendy’s for US$450 million in 1995, there were more than 1000 Tim Hortons restaurants. Tim Hortons became Canada’s largest quick-service restaurant chain, with 5515 systemwide restaurants, including 4590 in Canada, 869 in the United States, and 56 in the Gulf Cooperation Council, an alliance of six Middle Eastern countries.26 In 2014, the company merged with Burger King to form a new Canadian-based parent company, called Restaurant Brands International, and become the third-largest fastfood chain in the world.27 What you can learn from successful entrepreneurs like Ron Joyce is that you need to find something that you love to do. Before he became an entrepreneur, Joyce was a police officer. He started to get experience in business with his Dairy Queen outlet, and © AndreyPopov/iStock/Thinkstock from there went on to great success with his How well do you know yourself? Are you more excited at the Tim Hortons restaurants. While there were many challenges along the way, he was will- prospect of starting your own small business or would you prefer to work for a large- or medium-sized business? The answer to this ing to put in the long hours needed to be sucquestion may start with understanding your personal risk tolerance. cessful. In addition to the original coffee and

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

donut offerings, he continuously added new products to the restaurants to meet his customers’ needs. This is also the case for Ron Foxcroft, the focus of the chapter-opening Profile. Nearly 30 years after introducing the Fox 40 Classic Whistle, Fox 40 International Inc. sells an expanded whistle product line, pro coaching boards, mouthguards, and Fox 40 marine products (e.g., first aid and safety kits). Small businesses and entrepreneurs contribute enormously to the Canadian economy. While these terms have been briefly mentioned in this chapter, be aware that more time will be spent discussing their significance in Chapters 6 and 7. After all, without the initial ideas and risks taken by entrepreneurs, we would not have successful businesses today.

The Importance of Entrepreneurs to the Creation of Wealth

factors of production

The resources used to create wealth: land, labour, capital goods, entrepreneurship, and knowledge.

Have you ever wondered why some countries are relatively wealthy and others are poor? Economists have been studying the issue of wealth creation for many years. They began the process by studying potential sources of wealth to determine which are the most important. Over time, they came up with five factors that seemed to contribute to wealth, which they called factors of production. Figure 1.4 describes those five factors, which are: 1. Land (or natural resources). Land and other natural resources are used to make homes,

cars, and other products. 2. Labour (workers). People have always been an important resource in producing goods

and services, but many people are now being replaced by technology.

■ FIGURE

1.4

Source: Drucker Institute, druckerinstitute.com, April 2017.

ge led ow Kn

pr en eu rs h En

tre

l Ca pi ta

bo u La

THE FIVE FACTORS OF PRODUCTION

CHAPTER 1 The Dynamic Business Environment

3. Capital Goods. This includes machines, tools, buildings, or

whatever else is used in the production of goods. It does not include money. Money is used to buy factors of production but is not always considered to be a factor by itself. 4. Entrepreneurship. All the resources in the world have little

value unless entrepreneurs are willing to take the risk of starting businesses to use those resources. 5. Knowledge. Information technology has revolutionized busi-

ness, making it possible to quickly determine wants and needs and to respond with desired goods and services. Traditionally, business and economics textbooks have empha© Rosemarie Gearhart/E+/Getty Images RF sized only four factors of production: land, labour, capital, and To create wealth for its citizens, a country entrepreneurship. But management expert and business consultant requires more than natural resources like Peter Drucker said that the most important factor of production in timber. No matter how vast its forests or other our economy is and always will be knowledge. inputs, like labour, fuel, and waterways, a country needs the efforts of entrepreneurs, What do we find when we compare the factors of production and the skill and knowledge to produce in rich and poor countries? Some poor countries often have plenty goods and services. How can the government of land and natural resources. Russia, for example, has vast areas of support entrepreneurship and the spread of land with many resources such as timber and oil, but it is not conknowledge? sidered a rich country (yet). In contrast, Japan is a relatively rich country but is poor in land and other natural resources. Therefore, land is not the critical element for wealth creation. Most poor countries, such as Mexico, have many labourers, so labour is not the primary source of wealth today. Labourers need to find work to make a contribution; that is, they need entrepreneurs to provide jobs for them. Furthermore, capital—machinery and tools—is now easy for firms to find in world markets, so capital is not the missing ingredient. Capital is not productive without entrepreneurs to put it to use. What makes countries rich today is a combination of entrepreneurship and the effective use of knowledge. Entrepreneurs use what they have learned (knowledge) to grow their businesses and increase wealth. Economic and political freedom also matter. The business environment either encourages or discourages entrepreneurship. That helps explain why some provinces and cities in Canada grow rich while others remain relatively poor. In the following section, we’ll explore what makes up the business environment and how to build an environment that encourages growth and job creation.

PROGRESS ASSESSMENT

• • •

What are some of the advantages of working for others? What benefits do you lose by being an entrepreneur, and what do you gain? What are the five factors of production? Which ones seem to be the most important for creating wealth?

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

LO4

State the six elements that make up the business environment and explain why the business environment is important to organizations. business environment

The surrounding factors that either help or hinder the development of businesses. ■ FIGURE

The Business Environment The business environment consists of the surrounding factors that either help or hinder the development of businesses. Figure 1.5, which summarizes some of the points discussed in this chapter, shows the six elements in the business environment: 1. The legal environment 2. The economic environment 3. The technological environment 4. The competitive environment 5. The social environment 6. The global environment

Businesses that create wealth and jobs grow and prosper in a healthy environment. Thus, creating the right business environment is the foundation for social benefits of all kinds, including good schools, clean air and water, good health care, and low rates of

1.5

TODAY’S DYNAMIC BUSINESS ENVIRONMENT

NESS ENVIR BUSI ON L A ME B O NT L G The Economic Environment 1. Income and expenditures 2. Currency shifts 3. Economic systems

The Technological Environment 1. Information and technology 2. Databases 3. The Internet

The Social Environment 1. Diversity 2. Demographic changes 3. Family changes

N FR E

BUSINESS GROWTH AND JOB CREATION

E TR AD E

IT YI MP ERA TIVE

IO IT ET MP CO GLOBAL

The Competitive Environment 1. Components of competition 2. Customer-driven 3. Organization structure

The Legal Environment 1. Tax laws 2. Contract laws 3. Elimination of corruption

QU E TH

CHAPTER 1 The Dynamic Business Environment

crime. Businesses normally cannot control their environment, but they need to monitor it carefully and do what they can to adapt as it changes.

The Legal Environment People are willing to start new businesses if they believe that the risk of losing their money is not too great. Part of that decision is affected by how governments work with businesses. Governments can do a lot to lessen the risk of starting and running a business through the laws (also known as Acts) that are passed by its elected officials. The Constitution Act defines the powers that can be exercised by the different levels of government. In Chapter4, we will review some of the responsibilities of these different levels. Each piece of legislation authorizes an agency (such as Innovation, Science and Economic Development Canada) to write regulations that interpret the law in more detail and indicate how it will be implemented and enforced. Consequently, regulations consist of restrictions that provincial and federal laws place on businesses with respect to the conduct of their activities.28 Regulations exist to protect consumers as well as businesses.29 In Chapter 4, you will be introduced to some government departments that deal with businesses.

regulations

Restrictions that provincial and federal laws place on businesses with respect to the conduct of their activities.

LAWS AFFECT BUSINESS Businesses need to be aware of the laws that are in place (or that may be passed) that will affect their operations. For example, government can keep taxes and regulations to a minimum, thereby encouraging entrepreneurship and increasing wealth. Entrepreneurs are looking for a high return on investment (ROI), including the investment of their time. If the government takes away much of what the business earns through high taxes, the ROI may no longer be worth the risk. Provinces and territories that have high taxes and restrictive regulations tend to drive entrepreneurs out, while areas with low taxes and less restrictive regulations can attract entrepreneurs. The government can also lessen the risks of entrepreneurship by passing laws that enable business people to write contracts that are enforceable in court. You can read more about the importance of business law in Canada in an online supplement to this text. There are many laws in Canada that are intended to minimize corruption, and businesses can flourish when these laws are followed. Nonetheless, corrupt and illegal activities at some companies do negatively affect the business community and the economy as a whole.30 Ethics is so important to the success of businesses and the economy as a whole that we feature Making Ethical Decisions boxes in each chapter and devote Chapter 5 to the subject. The capitalist system relies heavily on honesty, integrity, and high ethical standards. Failure of those fundamentals can weaken the whole system as was the case with the subprime mortgage scandal in the United States.31 The faltering economy of 2008–2009 was due in large part to such failure. Some mortgage lenders, for instance, failed to do the research necessary to ensure their borrowers’ creditworthiness. Many subprime borrowers forfeited their loans. The ripple effects of these unpaid debts not only cost many people their homes but also reduced the value of housing across the country and made it difficult for even business borrowers to get new loans. Part of the blame for this economic disaster can be placed on the borrowers who did not tell the truth about their income or who 17

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

Making ETHICAL DECISIONS How Ethical Are You? It is easy to criticize the ethics of people whose names appear in the headlines. It is more difficult to see the moral and ethical misbehaviour of your own social group. Do you find some of the behaviours of your friends morally or ethically questionable? A survey found that the number of employees calling in sick had reached a five-year high, and threefifths were not sick at all. Other employees have been caught conducting personal business at work, such as paying their bills or going on Facebook. And others play video games on their work computers. We are sure you can add many more examples. Several companies today are creating ethics codes to guide their employees’ behaviour. We believe the trend toward improving ethical behaviour is so important that we have made it a major theme of this book. Throughout the text you will see boxes like this one, called Making Ethical Decisions, that pose ethical dilemmas and ask what you would do to resolve them. The idea is for you to think about the moral and ethical dimensions of every decision you make.

Here is your ethical dilemma. You have become addicted to your electronic gadgets. Some days at work you spend most of the time playing games, watching TV, texting, sending e-mails to friends, or reading a book or magazine on your devices. What is the problem in this situation? What are your alternatives? What are the consequences of each alternative? Which alternative will you choose? Is your choice ethical?

otherwise deceived the lenders. Financiers also assume blame for irresponsible lending decisions that exposed their bank or financial institution to significant risk.32 This subprime mortgage crisis will be discussed in Chapter 4. It is easy to see the damage caused by the poor moral and ethical behaviour of some business people. What is not so obvious is the damage caused by the moral and ethical lapses of the everyday consumer—that is, you and me. The Making Ethical Decisions box discusses that issue in more depth. Governments from different countries can work together to create an environment that allows entrepreneurship to thrive. For example, in 2015 the United Nations adopted what it calls Sustainable Development Goals (SDGs) that list specific targets for ending poverty and improving the lives of the disadvantaged in the next 15 years. The ultimate goal is to move toward prosperity by partnering governments, businesses, and non-profits in order to solve problems at the ground level in developing countries.

The Economic Environment The economic environment affects both businesses and consumers. For our discussion, the focus will be on businesses. The economic environment looks at income, expenditures, and resources that affect the cost of running a business. Businesses review the results of major economic indicators such as consumer spending, employment levels, 18

CHAPTER 1 The Dynamic Business Environment

and productivity. This analysis will give them a sense of what is happening in the marketplace and what actions they may need to take. Since Chapter 2 is dedicated to how economic issues affect businesses, the discussion here will be very brief. The movement of a country’s currency relative to other currencies also pertains to this environment. Currency movements are especially critical for countries that generate a great deal of business activity from exports, such as Canada. For instance, in the late 2000s the Ontario economy was negatively impacted as a result of the © Partha Pal/The Image Bank/Getty Images strong Canadian dollar, which surpassed Starting a business is more difficult in some countries than in parity with the U.S. dollar in the fall of others. In India, for example, it is a time-consuming and bureaucratic process to obtain government permission. Nonetheless, new 2007. The province lost tens of thousands businesses can become a major source of wealth and employment. of manufacturing jobs in just a few years as This sari shop is one small example. What do you think would be the manufacturers shifted operations overseas. effect of a little more freedom to create business opportunities in Some of the province’s flagship employers, this country of over a billion people? like General Motors, closed factories and trimmed production at other manufacturing facilities.33 The opposite is also true. For example, a lower Canadian dollar value relative to the U.S. dollar makes our exports cheaper and more attractive to the U.S. market, as consumers can buy more products with their higher-valued currency. What is the value of the Canadian dollar compared to other currencies today? How does it compare to the value of the U.S. dollar? What is the impact of the currency difference upon the Canadian economy? Another aspect of the economic environment is the degree of entrepreneurship that is present. One way for governments to actively promote entrepreneurship is to allow private ownership of businesses. In some countries, the government owns most businesses and there is little incentive for people to work hard or create a profit. Around the world today, however, some governments are selling those businesses to private individuals to create more wealth. In Chapter 2, we will discuss the different economic systems around the world. You should soon realize, as we continue with our brief introduction to the other business environments, that the activities occurring in one environment have an impact on the others. In short, all of the environments are linked. For example, if a new government regulation decreases business taxes, then the impact will be seen in the economic environment when one considers expenditures. As a business person you need to scan all of the environments to make good business decisions.

The Technological Environment Since prehistoric times, humans have felt the need to create tools that make work easier. Few technological changes have had a more comprehensive and lasting impact on businesses, however, than the emergence of information technology (IT): computers, networks, 19

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

smartphones, and the Internet. The Adapting to Change box discusses how one form of technology, drones, can make businesses more effective and efficient. Smartphones and other mobile devices, as well as social media like Facebook and Twitter, have completely changed the way people communicate with one another. Advertisers and other business people have created ways of using these tools to reach their suppliers and customers. Even politicians have harnessed the power of the Internet to advance their causes.34 IT is such a major force in business today that we discuss its impact on businesses throughout the entire text. New technologies are dramatically changing business practices and the way businesses and customers buy and sell.35

HOW TECHNOLOGY BENEFITS WORKERS AND YOU One of the advantages of working for others is that the company often provides the tools and technology to make your job Vivametrica, a Calgary-based data analytics more productive. Technology means everything from phones platform company, is a new entrant in and copiers to computers, mobile devices, medical imaging the wearable intelligence industry. The machines, and the various software programs and apps that Canadian firm is taking advantage of the emerging wearable technology market, make business processes more effective, efficient, and producwhich is expected to reach US$2 billion by tive. Applied science or engineering research often leads to new 2018. While its services target consumers, technology. Effectiveness means producing the desired result. health-care providers, and researchers, the Efficiency means producing goods and services using the least company’s immediate appeal is to corporate amount of resources. Effectiveness is usually more important wellness programs for various enterprises than efficiency. that seek to improve employee productivity. Companies in the manufacturing, financial, Productivity is the amount of output you generate given the oil and gas, insurance, education, and health amount of input, such as the number of hours you work. The more industries see the value data analytics can you can produce in any given period, the more money you are serve to improve their return on investment for worth to companies. Today, the high rate of productivity means employee wellness initiatives.38 employers need fewer workers, which in turn, contributes to the high unemployment rate we are now experiencing.36 technology Technology affects how and where people work. For example, in the years since the Everything from recession of 2007–2009, freelancers have become more important to the business world phones and copiers than ever before. Rather than spend money on recruiting and retaining full-time employto computers, mobile ees, many companies prefer to hire temporary workers to cut costs. In fact, thanks to the devices, medical imaging machines, and Internet, freelance employees do not even need to live in the same country as their employthe various software ers to do good, lucrative work. programs and apps The company Elance acts as an online marketplace that connects freelancers with that make business companies looking for contractors.37 For instance, if a Silicon Valley start-up is looking processes more effective, efficient, and for an affordable engineer, Elance can introduce the company to a qualified candidate from productive. Eastern Europe or India. Elance then collects an 8.75 percent transaction fee from the productivity company. With more than 8million registered individuals, in 2013 Elance saw its revenues The amount of output grow to $300 million. Following a merger with its former rival oDesk, Elance expects that is generated given billings to increase by more than $1 billion annually as businesses become more dependent the amount of input (e.g., hours worked). on freelance labour, and workers adapt to its flexible structure. “Millennials want to work © danlefeb/Getty Images

CHAPTER 1 The Dynamic Business Environment

Adapting to CHANGE Up, Up, and Away Sure drones can deliver a wide variety of things— everything from your Amazon order to a precisely targeted bomb. But they can also help businesses be more productive and efficient. Drones can scan, map, and gather data, tasks that used to require satellites, planes, and helicopters that only the deepest-pocketed companies could afford. Today even small businesses can pick up a drone for a few hundred dollars. Construction companies can use drones to collect data far more frequently and accurately than they can with manned aircraft and human surveyors. Farmers can survey their fields of crops. Communication companies can inspect lofty cell towers. Property inspectors can inspect buildings. And this can all be done at much lower costs than traditional methods. For example, building inspectors usually charge $200–$300 for a typical home roof inspection that can take six hours. However, if the inspector uses a drone, the cost is $10 and takes only an hour. And piloting a drone is much less risky than climbing ladders or cell towers.

Of course, there are many concerns about the use of drones. Drones have been used to buzz planes, endanger military aircraft, and spy on neighbours’ property with tiny video cameras. To combat these threats, the U.S. Congress has proposed giving the Federal Aviation Administration (FAA) more authority to regulate the use of drones. The drone industry is concerned that the lawmakers will inhibit the development and use of drones in their effort to rein in the people who misuse them. What do you think the government should do to regulate drones?

Sources: Mark Sundeen, “Welcome to Drone-Kota,” Popular Science, May/June 2016; Ashley Halsey III, “Senate Considers Ramping Up FAA Oversight of Drone Use,” The Washington Post, March 16, 2016; Mikal E. Belicove, “How Will Drones Change My Business?” Entrepreneur, April 16, 2016; Clay Dillow, “A Drone for Every Job Site,” Fortune, September 15, 2016; Chris Anderson, “Drones Go to Work,” Harvard Business Review, May 2017.

independently and control their careers,” says Elance founder Fabio Rosati. “If I had to give advice to anybody about their careers, I would say your number one priority should be to remain employable as opposed to remaining employed.”

THE GROWTH OF ELECTRONIC COMMERCE (E-COMMERCE) E-commerce is the buying and selling of goods and services online. There are two major types of e-commerce transactions: business-to-business (B2B) and business-to-consumer (B2C). In 2013, Canadian enterprises sold $136 billion in goods and services over the Internet. Approximately 61 percent of the sales involved wholesale trade, manufacturing, and retail trade.39 The increase resulted from more online shoppers (B2C) as well as a higher volume of Internet B2B orders. In 2017, estimates showed Canadian retailer e-commerce sales reached $18 billion.40 As important as the Internet has been in the consumer market to retailers like Amazon, it has become even more important in the B2B market, which consists of selling goods and services from one business to another, such as IBM selling consulting services to a local bank. Websites have become the new stores.

e-commerce

The buying and selling of goods and services over the Internet.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

e-business

Any information system or application that empowers business processes.

database

An electronic storage file for information.

Traditional businesses have been learning how to deal with the competition from B2B and B2C firms, and vice versa. People would just as soon sell used items posted on Kijiji and Craigslist than throw away unwanted household items.41 Many entrepreneurs use e-commerce to start a business and are recognized by eBay through its Entrepreneur of the Year awards.42 Just consider one country: over 215 million Chinese citizens are using the Internet.43 And what did people do before they could Google? E-commerce has become so important that we will discuss it throughout the text. Do not confuse e-commerce with electronic business (e-business). Mostly done with web technologies, the term e-business refers to any information system or application (e.g., business software) that empowers business processes. While e-commerce is frequently mixed up with the term e-business, e-commerce only covers one aspect of e-business (i.e., the use of an electronic support for the commercial relationship between a company and individuals).44

USING TECHNOLOGY TO BE RESPONSIVE TO CUSTOMERS

A major theme of this text is that those businesses most responsive to customer wants and needs will succeed. That realization points to one way in which even traditional retailers identity theft can use Internet technology. For example, businesses use bar codes to identify products Obtaining an individual’s personal that customers buy and their size, quantity, and colour. The scanner at the checkout counter information, such can read that information and put it into a database, an electronic storage file in which as Social Insurance information is kept. Number and credit Databases enable stores to carry only the merchandise their local population wants. card numbers, for illegal purposes. But because companies routinely trade database information, many retailers know what you buy and from whom you buy it. Thus they can send you catalogues and other direct mail advertising offering the kind of products you might want, as indicated by your past purchases. We discuss other ways businesses use technology to be responsive to consumers throughout the text and in more detail in Appendix A. Unfortunately, the legitimate collection of personal customer information also opens the door to identity theft. Identity theft is the act of obtaining personal information about a person, such as social insurance number and/ or credit card numbers, and using that information for illegal purposes, such as making © Jennifer Blankenship RF purchases. For example, in 2017 even though Walt Disney World introduced MyMagic+, a convenient way for Apple itself was not hacked, it reported that guests to create their ideal vacation experience. The key element is the MagicBand, providing an all-in-one way to effortlessly connect some Apple customers who secured their all the vacation choices guests make online. The MagicBand uses iCloud accounts with the same passwords RF technology and serves as park ticket, hotel room key, access to they use on other sites that were hacked FastPass+ advance reservation of attraction times, and Disney’s (especially accounts on LinkedIn, Yahoo!, PhotoPass. Disney hotel guests may use the bands to charge meals and Dropbox) suffered breaches to their and merchandise to their hotel account. Apple accounts as well.45 Experts advise us 22

CHAPTER 1 The Dynamic Business Environment

to create new passwords for each account so that if the password on one account is stolen, the hackers can’t access the rest of your accounts too. They also recommend storing them in a password manager, and activating two-factor authentication, which is an additional layer of security, when possible.46 In response to consumer complaints, federal privacy laws have been created. The Personal Information Protection and Electronic Documents Act (PIPEDA) sets out ground rules for how private sector organizations may collect, use, or disclose personal information in the course of commercial activities.47 If you think an organization covered by the Act is not living up to its responsibilities under the law, you have the right to lodge an official complaint. The Office of the Privacy Commissioner of Canada advocates privacy rights for Canadians. What you should learn from this example is to limit those to whom you give personal information.48 You also need antivirus software on your computer as well as a firewall and antispyware software. You may also want to monitor your credit report. It is important for you to understand identity theft, security, privacy, stability, and other important IT issues.

SOCIAL MEDIA MARKETING49 In Chapter 14 you will read how some Canadian companies are in the midst of the emergence of the social media marketing era. The most common tools or platforms used by both consumers and organizations are social networking sites (e.g., Twitter, Facebook, and Instagram), blogs, wikis, podcasts, and other shared media sites (e.g., YouTube). To survive in this social media world, organizations must understand, navigate, and adapt to this new landscape. Some organizations are heeding this advice. A recent report found 57 percent of small business owners use social media, and Facebook and LinkedIn are the most common tools.50 In particular, small businesses and entrepreneurs are leveraging social media as a way to connect and communicate with current and potential customers. Social media is also used for crowdsourcing, which helps a business find solutions to challenges. It is a valuable tool to better understand the dynamics of a business market.51 The future may also utilize crowdsourcing to build better collaboration between government and citizens, students and universities, patients and hospitals.52

crowdsourcing

Using the expertise of a large group of people to solve a business problem.

PROGRESS ASSESSMENT

• • •

List the six elements of the business environment. What are four ways in which the government can foster entrepreneurship? How does technology benefit workers and customers?

The Competitive Environment Competition among businesses has never been greater than it is today. Some companies have found a competitive edge by focusing on quality. The goal for many companies is zero defects—no mistakes in making the product. However, simply making a high-quality product is not enough to allow a company to stay competitive in world markets. Companies 23

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

now have to offer both high-quality products and good value—that is, outstanding services and products at competitive prices. Figure 1.6 shows how competition has evolved to a new, world-class model.

COMPONENTS OF COMPETITION53 When developing their strategies, companies must consider the factors that drive competition: entry, bargaining power of buyers and suppliers, existing rivalries, and substitution possibilities. Scanning the competitive environment requires a look at all of these factors. Entry In considering the competition, a firm must assess the likelihood of new entrants. Additional producers increase industry capacity and tend to lower prices. Barriers to entry are business practices or conditions that make it difficult for new firms to enter the market. Barriers to entry can be in the form of capital requirements, product identity, distribution access, or switching costs. The higher the expense of the barrier, the more likely it will deter new entrants, and vice versa (e.g., barriers to exit). Power of Buyers and Suppliers Powerful buyers exist when they are few in number, there are low switching costs, or the product represents a significant share of the buyer’s total costs. This last factor leads the buyer to exert significant pressure for price competition. A supplier gains power when the product is critical to the buyer and when it has built up switching costs. Existing Competitors and Substitutes Competitive pressure among existing firms depends on the rate of industry growth. In slow-growth settings, competition is more heated for any possible gains in market share. High fixed costs also create competitive pressures for firms to fill production capacity. (We will discuss production in Chapter 10.) For example, airlines offer discounts for making early reservations and ■ FIGURE

1.6

HOW COMPETITION HAS CHANGED BUSINESS Traditional Businesses

Modern Businesses

Customer satisfaction

Delighting the customer*

Customer orientation

Customer and stakeholder orientation**

Profit orientation

Profit and social orientation†

Reactive ethics

Proactive ethics‡

Product orientation

Quality and service orientation

Managerial focus

Customer focus

* Delight is a term from total quality management. Bewitch and fascinate are alternative terms. ** Stakeholders include customers, employees, investors, suppliers, dealers (e.g., retailers), and the community; the goal is to please all stakeholders. † A social orientation goes beyond profit to do what is right and good for others.

CHAPTER 1 The Dynamic Business Environment

charge penalties for changes or cancellations in an effort to fill seats, which represent a high fixed cost.

COMPETING BY EXCEEDING CUSTOMER EXPECTATIONS Manufacturers and service organizations throughout the world have learned that today’s customers are very demanding. Companies have to offer both high-quality products and outstanding service at competitive prices (value). Business is becoming customer-driven, not management-driven as in the past. This means that customers’ wants and needs must come first. Read the Spotlight on Small Business box to discover how one company tracks their customers’ needs to remain vital. Customer-driven organizations include Disney amusem*nt parks, where the parks are kept clean and appeal to all ages, and Moto Photo, which does its best to please customers

Spotlight On SMALL BUSINESS Fighting for Air Space: Chinook Helicopters Ltd. When it comes to services we purchase on a daily basis, helicopter pilot certification isn’t one that normally comes to mind. But for Chinook Helicopters Ltd., teaching people how to fly helicopters is a core competence. Formed in 1982, Chinook Helicopters is privately owned and holds 25 percent of the Canadian market in helicopter training. The company has become a national leader in helicopter pilot and helicopter maintenance certification. Although Chinook is based in Abbotsford, British Columbia, the company notes 30 percent of its 2017 student admissions came from beyond Canadian borders. This is one indication of how the company sets its expertise apart from others in the global environment. Its success is dependent upon how well the company can keep pace with change in the technological environment, such as innovation in robotics and Unmanned Aerial Vehicles (UAVs). The competition environment is also challenging as commercial piloted unmanned aircraft systems often get contracts for pipeline surveillance. Nevertheless, the demand for helicopter pilots in all regions of the world means the company must remain up to date on domestic and international standards so it can set its service apart from others in a competitive landscape.

At a meeting of the Helicopter Association of Canada in 2011, an expert panel discussed the impact of economic cycles on business. Flight training is dependent upon the economy so when industries such as forestry, oils and gas, mining and exploration, resource management, and aerial media work experience growth, Chinook’s needs to outmaneuvre its competitors. Tracking the dynamic business environment is what makes Chinook’s training opportunities cutting edge and attractive to anyone looking to have a career in the helicopter industry.

Sources: Chinook Helicopters Ltd., accessed May 22, 2018, chinookhelicopters.com; Woodrow Bellamy III, “Canadian Helicopters: Operating, Training for Challenging Missions,” Rotor and Wing International, April/May 2018, accessed May 22, 2018 http://digitaledition. rotorandwing.com/april-may-2018/canadian-helicopters-operating-training-for-challenging-missions/; Matt Nichols, “Forecasting the Future: Industry Experts Discuss Key Issues at Helicopter’s First Roundtable,”Helicopters Magazine, July, 18, 2011, accessed May 22, 2018, https://www.helicoptersmagazine.com/standards-regulations/forecasting-the-future-2884.

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with fast, friendly service. Such companies can successfully compete against Internet firms if they continue to offer better and friendlier service. Successful organizations must now listen more closely to customers to determine their wants and needs, then adjust the firm’s products, policies, and practices to meet those demands. We will explore these concepts in more depth in Chapter 14.

COMPETING BY RESTRUCTURING AND EMPOWERMENT

empowerment

Giving frontline workers the responsibility, authority, and freedom to respond quickly to customer requests.

demography

The statistical study of the human population with regard to its size, density, and other characteristics, such as age, race, gender, and income.

Generation X

A demographic group of Canadians who were born in the period from 1965 to 1976.

Generation Y (Millennials)

A demographic group of Canadians who were born in the period from 1977 to 1994; the children of the Baby Boomers.

Baby Boomers

A demographic group of Canadians who were born in the period from 1946 to 1964.

Generation Z

A demographic group of Canadians who were born in the period from 1995 onward.

To meet the needs of customers, firms must give their front-line workers (e.g., office clerks, front-desk people at hotels, and salespeople) the responsibility, authority, freedom, training, and equipment they need to respond quickly to customer requests. They must allow workers to make other decisions essential to producing high-quality goods and services. The process is called empowerment, and we’ll be talking about it throughout this book. To implement a policy of empowerment, managers must train front-line people to make decisions within certain limits, without the need to consult managers. As many companies have discovered, it sometimes takes years to restructure an organization so that managers are willing to give up some of their authority and employees are willing to assume more responsibility. We’ll discuss such organizational changes and models in Chapter 9.

The Social Environment Demography is the statistical study of the human population with regard to its size, density, and other characteristics such as age, race, gender, and income. In this book, we are particularly interested in the demographic trends that most affect businesses and career choices (see Chapter 11 for more details on generational trends and employees). The Canadian population is going through major changes that are dramatically affecting how people live, where they live, what they buy, and how they spend their time. Furthermore, tremendous population shifts are leading to new opportunities for some firms and to declining opportunities for others. For example, there are many more retired workers than in the past, creating new markets for all kinds of goods and services.

THE AGING POPULATION

The Canadian population has been aging for several decades.54 More people are living longer due to better medical knowledge and technology, better health habits, more exercise, and a reduction in the number of people who smoke. The portion of the population that is very young continues to decrease because of birth rates that have declined since the mid-1960s. Generation X represents the demographic group that were born in the period 1965-1976. Generation Y, also known as Millennials (those born in the period from 1977 to 1994) represents the children of the large number of Baby Boomers (those born in the period from 1946 to 1964). Some students are part of Generation Y while others may be part of Generation Z, who include those born from 1995 onward. Figure 1.7 shows the population projections for Canada. You will notice that the 20–34 years and 35–64 years age groups are declining, while the 65 years and over age

CHAPTER 1 The Dynamic Business Environment

■ FIGURE

1.7

POPULATION DISTRIBUTION BY AGE GROUP YEAR

0–4

5–19

20–34

35–64

65 AND ABOVE

2016

5.7%

16.3%

20.5%

41.2%

16.3%

2021

5.6%

16.5%

19.3%

40.1%

18.5%

2026

5.5%

16.9%

18%

38.8%

20.8%

2031

5.2%

16.8%

17.5%

37.7%

22.8%

2036

16.5%

17.7%

37.1%

23.7%

Source: Adapted from “Population Projections for Canada, Provinces and Territories 2009–2036,” Cat. No. 91–520–X, June 2010. Retrieved from http://www. statcan.gc.ca/pub/91–520–x/2010001/t370-eng.htm.

group is increasing steadily. Based on these projections, it is expected that seniors will become more numerous than children sometime around 2021. According to Statistics Canada, by 2036 nearly one quarter of the population will be Generation Z.55

WORKFORCE TRENDS What do such demographics mean for you and for businesses in the future? In his book Boom Bust& Echo: Profiting from the Demographic Shift in the 21st Century, economist and demographer David Foot writes that demographics play a pivotal role in the economic and social life of our country. According to Foot, demographics explain about two-thirds of everything—including which products will be in demand in five years.56 According to Statistics Canada, by 2031 seniors will account for nearly 25 percent of the Canadian population. This amount continues to grow through to 2036.57 Immigration and the projected birth rates are not expected to balance the workforce losses created by the aging population, either in Canada or globally.58 We will discuss some of the human resource management issues related to an aging population in Chapter 12. Think of the products and services that m iddle-aged and elderly people will need—anything from travel and recreation to medicine, nursing homes, assisted-living facilities,

Canada boasts enormous ethnic and racial diversity. Its workforce is also widely diverse in terms of age, which means that managers must adapt to the generational demographics of the workplace. In addition to changes in the demand of goods and services the demographic shift also impacts labour supply. What are some challenges of working with someone much younger or much older thanyou?

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

adult day care, home health care, and the like—and you will see opportunities for successful businesses of the twenty-first century. Don’t rule out computer games and online services. Don’t forget the impact of aging baby boomers: more grandparents with extra money in their pockets will buy extra gifts for their grandchildren. Businesses that cater to older consumers will have the opportunity for exceptional growth in the near future. The market is huge.

MANAGING DIVERSITY59 Canada has a strong multicultural population. In the last ten years, it has welcomed close to 2.7million permanent residents. The high level of annual admission of immigrants and the relatively slow rate of natural growth of the population explain why the proportion of the foreign-born in the Canadian population has been increasing since the 1990s. Citizenship and Immigration Canada’s plan is to admit approximately 250 000 immigrants each year.60 In order to meet this target, the government manages a number of immigration programs to enable people from other countries to become Canadian citizens. Approximately 62 percent of immigrants come to Canada through economic categories, such as the skilled worker, skilled trade, and business immigrant. The remaining 38 percent gain citizenship through family and humanitarian categories. While this information is not exhaustive, it should give you an idea of some of the demographic trends that business people track as they develop their products and services. Can you think of some opportunities that are not currently being met as a result of some of these trends?

PROGRESS ASSESSMENT

• • •

Describe the components of competition. What is empowerment? What social trends are evident in Canada?

The Global Environment The global environment of business is so important that we show it as surrounding all other environmental influences in Figure 1.5. Two important environmental changes in recent years have been the growth of global competition and the increase of free trade among nations. World trade, or globalization, has grown thanks to the development of efficient distribution systems (we’ll talk about these later in the text) and communication advances such as the Internet. Globalization has greatly improved living standards around the world. China and India have become major competitors. For example, Lenovo, a Chinese firm, bought IBM’s PC unit. Shop at Walmart and most other retail stores, and you cannot help but notice the number of “Made in China” stickers you see. Call for computer help, and you are as likely to be talking with someone in India as someone in Canada. As the Reaching Beyond our Borders box discusses, China has become a key to success for even Hollywood and the movie business.

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Reaching Beyond OUR BORDERS Hollywood Climbs the Great Wall In late 2016, the producers of the remake of the movie Jumanji put out a casting call to talent agencies across Hollywood. Their quest was to find a Chinese actor to play a major role in the film. Like many others, this casting of Chinese actors in U.S. films was an obvious effort to appeal to audiences in China. Today, China is the world’s second-largest movie market, with over $5billion in ticket sales in 2016. It is expected to surpass the world leader, the United States, in the next few years. Studios also note that even though China limits the number of foreign films that can be shown in the country, more than half of the top 10 grossing films in China are from Hollywood. Chinese investors today are not just interested in distributing Hollywood films in their country. They intend to become major players in the entire film industry. For example, Wang Jianlin, the wealthiest man in China, is a major buyer in Hollywood. His Dalian Wanda Group has interests in every stage of the entertainment industry including ownership of the theatre chain AMC Entertainment Holdings, which he purchased in 2012 for $1 billion. He intends to make AMC the largest theatre chain in the United States. Wang also actively sought to buy a stake in Paramount Pictures until the company decided not to sell. Wang promises to pursue his goal of being a key part of the movie business and has a personal goal to make China a movie-making power in its own right.

Sources: Jacky Wong, “Wanda-Sony Pictures: China Coming to Theater Near You,” The Wall Street Journal, September 24, 2016; Erich Schwartzel, Kathy Chu, and Wayne Ma, “China’s Play for Hollywood,” The Wall Street Journal, October 2, 2016; Michal Lev-Ram, “Can China Save Hollywood?” Fortune, May 22, 2017.

World trade has its benefits and costs. You will read much more about its importance in Chapter 3 and in the Reaching Beyond Our Borders boxes in each chapter.

HOW GLOBAL CHANGES AFFECT YOU As businesses expand to serve global markets, new jobs will be created in both manufacturing and service industries. Global trade also means global competition. The students who will prosper will be those prepared for the markets of tomorrow. Rapid changes create a need for continuous learning, so be prepared to pursue your education throughout your career. You will have every reason to be optimistic about job opportunities in the future if you prepare yourself well.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

climate change

The movement of the temperature of the planet up or down over time.

greening

The trend toward saving energy and producing products that cause less harm to the environment.

sustainability

Social perspectives focus on quality of human life; economic views emphasize a steady-state economy.

THE ECOLOGICAL ENVIRONMENT Few issues have captured the attention of the international business community more than climate change.61 Climate change is the movement of the temperature of the planet up or down over time. The issue now is global warming. Some of the world’s largest firms— including General Electric, Coca-Cola, Shell, Nestlé, DuPont, Johnson & Johnson, British Airways, and Shanghai Electric — say the evidence for climate change is overwhelming. Saving energy and producing products that cause less harm to the environment is a trend called greening. Greening has become such a pervasive issue that impacts every type of business decisions. The term sustainability has different meanings depending upon the context in which it is used. Social perspectives of sustainability focus upon the quality of human life over time while economic views of sustainability emphasize a steady-state economy.62 We shall discuss business and sustainability issues in the Seeking Sustainability boxes throughout the text and in Chapter 5.

Seeking SUSTAINABILITY Services Expand the Circular Economy and Reduce Waste Have you ever bought a movie on DVD? Today most of us watch movies on Netflix or some other on-demand service. it is the same with music—why store stacks of CDs when you can use services like Spotify? All sorts of products are becoming services. For example, you can store files in the cloud instead of your computer. You can take Ubers or Lyfts instead of owning a car. Businesses can rent office carpets by the month, rent lighting, or print by the page. Technology enables a large variety of products to be offered as services. The Internet of Things put sensors on all sorts of things that allow companies to track usage, measure performance, and develop new business models. For example, GPS enables car companies to provide “mobility services” (such as BMW’s ReachNow, General Motor’s Maven, and Zipcar’s car-sharing services). Some ride-sharing services are beginning to use technology called telematics to track drivers’ performance. Sensors in the drivers’ cell phones can track when they speed, cut corners, brake suddenly, or send texts while driving. The product-as-service model is one way to move away from a “take-make-dispose” economy (i.e., take

raw materials, make a product, and dispose of it when you’re finished with it) toward a more circular economy that reduces waste. Companies that retain ownership of their products maintain them and extend their life cycles. Instead of planning for obsolescence so we buy new versions of the products more often, companies that provide products as services have an incentive to make products that last as long as possible and that can be repaired easily and cheaply. Think of all the landfill space that would save.

Sources: Greg Gardner, “GM Launches Shared-Ride Service Called Maven,” USA Today, January 22, 2016; Douglas MacMillian, “Car Apps Test Tracking of Drivers,” The Wall Street Journal, January 27, 2016;Ben Schiller, “How Netflixication Can Deliver a Waste-Free Circular Economy,” Fast Company, March 13, 2017.

CHAPTER 1 The Dynamic Business Environment

The Evolution of Canadian Business Many managers and workers are losing their jobs in major manufacturing firms. Businesses in Canada have become so productive that, compared to the past, fewer workers are needed in industries that produce goods. If global competition and improved technology are putting skilled people out of work, should we be concerned about the prospect of high unemployment rates and low incomes? Where will the jobs be when you graduate? These important questions prompt us to look briefly at the manufacturing and service sectors.

Progress in the Agricultural and Manufacturing Industries

LO5

Give examples of how the service sector has replaced manufacturing as the principal provider of jobs, but why manufacturing remains vital for Canada.

Canada has seen strong economic development since the nineteenth century. The agricultural industry led the way, providing food for Canadians and people in other parts of the world. Inventions such as the harvester and cotton gin did much to make farming successful, as did ongoing improvements to such equipment. The modern farming industry has become so efficient through the use of technology that the number of farms has dropped. Due to increased competition, many of the farms that existed even 50 years ago have been replaced by some huge farms, some merely large farms, and some small but highly specialized farms. The loss of farm workers over the past century is not a negative sign. It is instead an indication that Canadian agricultural workers are more productive. Most farmers who lost their jobs went to work in factories. The manufacturing industry, much like agriculture, used technology to become more productive. The consequence, as in farming, was the elimination of many jobs. Again, the loss to society is minimal if the wealth created by increased productivity and efficiency creates new jobs elsewhere. This is exactly what has happened over the past 50 years. Many workers in the industrial sector found jobs in the service sector. Most of those who cannot find work today are people who need retraining and education to become qualified for jobs that now exist.

CANADA’S MANUFACTURING INDUSTRY The goods-producing sector includes the manufacturing, construction, utilities, agriculture, forestry, fishing, mining, quarrying, and the oil and gas industries. Of this sector, manufacturing employs just under ten percent of Canada’s working population, as noted in Figure 1.8. Manufacturing is diverse in Canada and it includes food, beverage, clothing, chemical, machinery, wood, and petroleum and coal products manufacturing.63 Tens of thousands of Canadian jobs were lost in the late 2000s. The rising Canadian dollar and increasing global competition were two of the reasons for these losses. Despite such losses, manufacturing still remains an important contributor to the Canadian economy. The Canadian Manufacturers & Exporters highlights some of the reasons why this sector is important to Canada: ∙ Employs 1.8 million Canadian and represented 10.5 percent of the workforce in 2012;64 ∙ Generates $3.15 in economic spin-off of every for every $1.00 in manufacturing output;65 31

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

■ FIGURE

1.8

THE IMPORTANCE OF THE SERVICES-PRODUCING AND GOODS-PRODUCING SECTORS INCANADA Canada is a service economy, where the majority of jobs are generated in the services-providing sector. This table highlights the importance of each sector, as well as the three largest-employer industries in each.

Number of Employed (thousands)

Total Workforce (percent)

TOTAL EMPLOYED IN CANADA

18,464

100.0

Services-Producing Sector

14,541

Trade

2,809.6

15.2

Health Care and Social Assistance

2,383.2

12.9

Professional, Scientific & Technical Services

1,448.8

9.9

3,876

Manufacturing

1,724.8

9.3

Construction

1,409.3

7.6

329.6

1.7

Goods-Producing Sector

Forestry, Fishing, Mining, Quarrying, Oil & Gas

Source: Statistics Canada. Employment by Industry and Sex, 2017, accessed May 19, 2018, http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/ labor10a-eng.htm.

∙ 45 percent of manufacturers and exporters foresee a 1 to 10 percent rise in their workforce;66and ∙ 59 percent of manufacturers and exporters plan to increase research and development investments.67 While the manufacturing sector is much smaller today than it was 25 years ago, it is still clearly an integral part of our business economy. We will discuss the manufacturing sector and production in more detail in Chapter 10.

Progress in Service Industries In the past, the dominant industries in Canada produced goods such as steel, railroads, and machine tools. The shift in Canada’s employment profile began slowly in the early twentieth century, and has accelerated rapidly since the 1950s. Today, the leading firms are in services (such as legal, health and wellness, telecommunications, entertainment, financial services, etc.). As noted in Figure 1.8, the services-producing sector employs almost 79percent of the working population. There are several reasons why there has been growth in this sector. First, technological improvements have enabled businesses to reduce their payrolls while increasing their 32

CHAPTER 1 The Dynamic Business Environment

output. Since staffing has been downsized by many companies, business has become more complex and specialized companies have relied more heavily on outside services firms. Secondly, as large manufacturing companies seek to become more efficient, they contract out an increasing number of services, creating more opportunities for business people. Other service firms have risen or expanded rapidly to provide traditional services that used to be performed by women at home. Since many women have entered the workforce, there is increased demand for food preparation, child care, and household maintenance, to name just a few services. Chances are very high that you will work in a service job at some point in your career. Another bit of good news is that there are more high-paying jobs in the services-producing sector than in the goods-producing sector. High-paying service-sector jobs abound in health care, accounting, finance, entertainment, telecommunications, architecture, law, software engineering, and more. Projec© Erik Isakson/Blend Images LLC tions are that some areas of the service sector will grow rapidly, while others may have much slower growth. F igure1.9 lists many The entire process of growing food and getting it to our tables is so smooth that service-sector jobs; look it over to see where the careers of the it’s easy to take the agriculture industry future are likely to be. Retailers like SportChek are part of the for granted. But behind those well-stocked service sector. Each new retail store can create managerial jobs for supermarkets is an army of farmers and post-secondary graduates. distributors who supply our needs. The use of The strategy for graduates is to remain flexible, find out where technology has led to increased productivity jobs are being created, and move when appropriate. Such was the and made farmers more efficient, resulting case for Edmonton-based FourQuest Energy, which was singled in larger farms. This trend has meant less expensive food for us, but a continual out by PROFIT 200 as Canada’s Fastest-Growing Company. The reduction in the number of small, family-run company provides mechanical pre-commissioning, shutdown, farms. Is it still possible for small farms to be and maintenance services for oil-and-gas facilities. “I just felt the successful, and if so, how? business had such a great probability of success. I couldn’t see any potential for failure if we could just get it started.” says Nik Grgic, President. He and fellow entrepreneur, Karl Gannon, Executive Vice President, decided it was worth abandoning a steady paycheque with a multinational energy firm to start this company.68

Your Future in Business Despite the growth in the service sector, the service era now seems to be coming to a close as a new era is beginning. We are now in the midst of an information-based global revolution that will alter all sectors of the economy. It’s exciting to think about the role you will play in that revolution. As mentioned earlier in this chapter, business is an activity that seeks to provide goods and services to others while operating at a profit. This text introduces you to areas such as business trends, business ownership, leadership and organizations, management of human resources, marketing and accounting and financial activities. As you learn more about business, it is important to keep in mind there are two management approaches that influence these fundamental areas—scientific and humanistic management. 33

1.9

Civic associations

Selected Membership Organizations

Surveying

Miscellaneous Services Telecommunications

Non-commercial museums

Cultural Institutions

Engineering

Botanical and zoological gardens

Stenographic services

Accounting

Computer programming

Restaurants

Diaper service

Laundries

Insurance

Truck rental

Child care

Drive-ins

Physicians

Sharpening

Utilities

Reuphoistery

Lawn care

Carpet cleaning

Funeral homes

Auto rental

Medical labs

Video rentals

Carnivals

Watch repair

Vending

Linen supply

Paint shops

Dental labs

Employment agencies

Commercial art

Welding

Delivery

Parking lots

Ad agencies

Exterminating Research & development labs

Fairs

Botanical gardens Infotainment

Computer schools

Interior design

Commercial photography

Trash collection

Symphony orchestras

Pool halls

Trailer parks and campsites for transients

Septic tank cleaning Radio and television

Architectural

Business associations

Art galleries

Sporting and recreation camps

Child care

Health clubs

Hotels, rooming houses, and other lodging places

Beauty shops

Lodging Services

Tax preparation

Photographic studios Shoe repair

Investment firms (brokers)

Personal Services

Real estate agencies

Car washes

Exhaust system shops

Banking

Tire retreading

Transmission repair

Automotive Repair Services and Garages

Family services

Theatres

Dentists

Online schools

Notary public

Detective agencies

Web design

Equipment rental

Golf courses

Bowling alleys

Financial Services

Elder care

Job training

Social Services

Nursery care Distribution

Chiropractors

Health Services

Libraries

Motion Picture Industry Production

Schools

Educational Services

Consulting

Public relations Paralegals

Tax preparation

Window cleaning

Lawyers

Management services

Circuses

Race tracks

Collection agencies

Ice skating rinks

Amusem*nt parks

Legal Services

Business Services

Amusem*nt and Recreation Services

There’s much talk about the service sector, but few discussions actually list what it includes. Here are examples of businesses in the service sector.

WHAT IS THE SERVICE SECTOR?

■ FIGURE

CHAPTER 1 The Dynamic Business Environment

Scientific management studies work to find the most efficient ways of doing things and then teach people those techniques. As we will discuss in Chapter 11, Frederick Taylor, referred to as the father of scientific management, sought to increase worker productivity. His views became the dominant strategy for how business operates. But according to the International Humanistic Management Association, the consequence of thinking exclusively in terms of productivity is that “those things that have a price take priority over those that do not, [such as] human integrity, environmental beauty, or quality of life.”69 However, the second type of management, humanistic management, presents a different view where a worker is not viewed simply as a machine for efficiency, but as person who really matters. It is often referred to as people-oriented management because rather than treat people as a simple resource for profits, the approach seeks profits for human ends.70 It may be said that this type of management, which focuses upon human dignity and well-being, presents a new perspective where issues of inequality, poverty, environmental destruction, and mass migration force us to change the way we do business.71 As you read the chapters in this textbook, keep in mind how each of the business fundamentals you learn might be impacted by humanistic management. How might such an approach change they was we do business? Given what you have learned in this chapter about the dynamic business environment, Is this approach going to play an important role in the future economy? You may be a leader, that is, you may be one of the people who will implement the changes and accept the challenges of world competition based on world quality standards. This text will introduce you to some of the concepts that will make such leadership possible, not just in business but also in government agencies and non-profit organizations. Business cannot prosper in the future without the co-operation of government and social leaders throughout the world.

humanistic management

A people-oriented management approach that emphasizes the dignity and well-being of employees.

PROGRESS ASSESSMENT

• • •

What changes have affected the global environment? Give examples of how the service sector has replaced manufacturing as the principal provider of jobs, but why manufacturing remains vital for Canada. Why is the services-producing sector important to the economy?

SUMMARY LO1

Illustrate the importance of key business fundamentals to wealth generation. A business is any activity that seeks to provide goods and services to others while operating at a profit. What are the relationships between risk, profit, and loss? Profit is money a business earns above and beyond the money that it spends for salaries and other expenses. Business people make profits by taking risks. Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable. A loss occurs when a business’ costs and expenses are higher than its revenues. 35

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

LO2

Identify business stakeholders and their importance to non-profit organizations and business activities. Stakeholders include customers, employees, shareholders, suppliers, dealers, bankers, the media, people in the local community, environmentalists, and elected government leaders. The goal of business leaders is to try to recognize and respond to the needs of these stakeholders and still make a profit. How do non-profit organizations differ from profit-seeking organizations? A non-profit organization is an organization whose goals do not include making a personal profit for its owners or organizers. Which stakeholders are most important to a business? The goal of business leaders is to try to balance the needs of all stakeholders and still make a profit. Some businesses put the needs of shareholders above the other interests, but most businesses today seek a balance among the needs of the various stakeholders.

LO3

Explain how entrepreneurship is critical to the wealth of an economy, and list the five factors of production that contribute to wealth. Working for others means getting benefits like paid vacations and health insurance. Entrepreneurs are people who risk time and money to start and manage a business. They gain the freedom to make their own decisions, more opportunity, and possible wealth. What are the five factors of production? Businesses use five factors of production: land (natural resources), labour (workers), capital goods (buildings and machinery), entrepreneurship, and knowledge. Of these, the most important are entrepreneurship and knowledge, because without them land, labour, and capital are not of much use. What makes rich countries rich today is a combination of entrepreneurship and the effective use of knowledge.

LO4

State the six elements that make up the business environment and explain why the business environment is important to organizations. The business environment consists of the surrounding factors that either help or hinder the development of businesses. The six elements are the legal environment, the economic environment, the technological environment, the competitive environment, the social environment, and the global environment. The legal environment in influenced by government who may allow private ownership of businesses, pass laws that enable business people to write contracts that are enforceable in court, establish a currency that is tradable in world markets, help to lessen corruption in business and government, and keep taxes and regulations to a minimum. From a business perspective, lower taxes mean lower risks, more growth, and thus more money for workers and the government. Technology enables workers to be more effective, efficient, and productive. Effectiveness means doing the right thing in the right way. Efficiency means producing items using the least amount of resources. Productivity is the amount of output you generate given the amount of input (e.g., hours worked). Within the social environment, diversity has come to mean much more than recruiting and keeping minority and female employees. Diversity efforts now include seniors, disabled people, people with different sexual orientations, atheists, extroverts, introverts, married people, singles, and the devout. Managing diversity means dealing sensitively with workers and cultures around the world.

CHAPTER 1 The Dynamic Business Environment

Explain why the business environment is important to organizations. Scanning the business environment on a continual basis is important to organizations so that they can take advantage of trends. These trends could affect the organization’s ability to achieve its objectives, steer clear of threats, or take advantage of new opportunities. LO5

Give examples of how the service sector has replaced manufacturing as the principal provider of jobs, but why manufacturing remains vital for Canada. Canada has evolved from an economy based on manufacturing to one based on services. Why is manufacturing still a vital industry for Canada? While the services-producing sector employs almost 78 percent of the working population, the manufacturing industry employs approximately 9.6 percent of workers. Every $1 of manufacturing in Canada generates $3.15 in total economic activity. Forty-five percent of manufacturers foresee a growth in their workforce and nearly 60 percent plan to increase research and development investment.

KEY TERMS baby boomers 26 business 7 business environment 16 climate change 30 crowdsourcing 23 database 22 demography 26 e-business 22 e-commerce 21 empowerment 26 entrepreneur 7 factors of production 14

Generation X 26 Generation Y 26 Generation Z 26 goods 7 greening 30 humanistic management 35 identity theft 22 insourcing 11 loss 7 non-profit organization 11 offshoring 10

outsourcing 10 productivity 20 profit 7 quality of life 9 regulations 17 revenue 7 risk 8 services 7 stakeholders 9 standard of living 9 sustainability 30 technology 20

CAREER EXPLORATION Since this first chapter is an overview of all the different fields of business, we thought we’d concentrate on identifying a few careers in the sector with the most jobs: services. If you are interested in pursuing a career in the services sector, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Lodging manager—ensures that guests on vacation or business travel have a pleasant experience at a

hotel, motel, or other type of establishment with accommodations and that the business is run efficiently and profitably. ∙ Meeting and event planner—coordinate all aspects of events and professional meetings, including arranging meeting locations, transportation, and other details. ∙ Interior designer—select and specify colors, furniture, and other materials to create useful and stylish interiors for buildings. ∙ Network and computer systems administrator— responsible for the day-to-day operation of computer networks. 37

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

CRITICAL THINKING Imagine that you are thinking of starting a restaurant in your community. Answer the following questions. 1. Who will be the various stakeholders of your

business?

4. What are some of the things you could do to

benefit your community other than provide jobs and generate tax revenue? 5. You are considering paying your employees

the minimum wage. Do you think that you would attract better employees if you offered higher wages?

2. How will you establish good relationships

with your suppliers? With your employees? 3. You need to consider whether you will purchase

locally grown produce versus foreign-grown produce. What are the advantages and disadvantages of using either, especially if the foreign-grown produce is cheaper or of better quality?

6. How might you be affected by the six environ-

mental factors outlined in this chapter? Which factor(s) might have the biggest impact on your business?

DEVELOPING CAREER SKILLS Key: Team

Analytic

1. Make a list of non-profit organizations in your

community that might offer you a chance to learn some of the skills you will need in the job you hope to have when you graduate. How could you make time in your schedule to volunteer or work at one or more of those organizations? Write a letter to a non-profit organization to inquire about such opportunities. Hint: You can identify organizations and events in your city by going to 411 Local Search and inputting “non-profit organizations and events your city name” in the cell under Business, near the top. A less-targeted source is the Charity Village website. Charity Village supports Canada’s charities and nonprofit organizations as well as the stakeholders who support them.

2. Form into teams of four or five and discuss

creating an entirely new product or service. What value does this new product or service create? Who are the stakeholders for this new product or service? Could an entrepreneur readily produce it or would its chance of success be higher if it was produced by a large company? Explain. 38

Communication

Technology

3. Imagine that you are a local business per-

son who has to deal with the various issues involved with outsourcing. You want to begin with the facts. How many jobs have been lost to outsourcing in your area, if any? Are there any foreign firms in your area that are creating jobs (insourcing)? You will need to use the Internet to find the data you need. 4. Form into teams of four or five and discuss

the technological and e-commerce revolutions. How many students now shop for goods and services online? What have been their experiences? What other high-tech equipment do they use to make purchases (smartphones, tablets, laptops, etc.)? What products do they plan on buying in the next year?

5. Use Yelp to find five businesses that pro-

vide services in your area. List those businesses and, for each, describe how social trends might affect them in both positive and negative ways. Be prepared to explain your descriptions to your team or the whole class, as your instructor directs.

CHAPTER 1 The Dynamic Business Environment

ANALYZING MANAGEMENT DECISIONS Canada’s Fastest-Growing Companies Every year, PROFIT magazine publishes a list of Canada’s fastest-growing companies. The importance of many of the points we discussed in this chapter is evident in a recent issue, especially when one considers

Focus

the breakdown among the types of companies. Service providers dominate the marketplace, which reinforces that Canada is a service economy. Here is a breakdown of the Top 100:

Number of Firms

Software

Manufacturing

Marketing and Media

Retail

Construction

Consumer Service

Industrial Service

Financial Services

Information Technology

Wholesale and Distribution

Human Resources

Professional Service

Transportation and Logistics

Real Estate

Agriculture

Telecommunication

While the companies were located across Canada, Ontario continued to support the largest share of these companies. What makes these companies leaders is that they grew rapidly. It does not matter whether they are hightech or old-economy companies, manufacturing or

service companies, they all are exceptional. A remarkable assortment of products and services are offered by these companies. Examples include trucking, car parts, exterior painting services, steeped tea, gaming, sustainable office furniture, business performance consultants, and construction management. 39

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

Province/Territory

Number of Firms

Ontario

British Columbia

Quebec

Alberta

Saskatchewan

Manitoba

Nova Scotia

Source: “Profit 500: A complete ranking of Canada’s fastest growing companies,” Canadian Business, September 14, 2017, accessed June 24, 2018, http://www. canadianbusiness.com/profit500/2017-ranking-p500/.

Discussion Questions 1. Which of these data support the information

3. Review the most recent edition of PROFIT

discussed in the chapter? Explain your answer.

500 for information on the companies that have made the list. Are there any surprises? How much has changed since these results were posted?

2. Why do certain provinces or regions have so

many (e.g., Ontario) or few (e.g., Atlantic Canada) companies?

APPENDIX A

Using Technology to Manage Information

P R O F I L E GETTING TO KNOW: BEN FRIED, CIO, GOOGLE Since its founding in the late 1990s, Google has aimed to change the way that people communicate and manage information over the Internet. And judging from the billions of dollars that the search giant earns each year, it’s safe to say it has been successful in its mission. Still, setting the standard for innovation is no easy task. In order to develop the latest online tools that consumers depend on, Google must make certain that its employees can use the most innovative procedures and have the most up-to-date technology they need for their work. That’s where chief information officer Ben Fried comes in. As CIO, it’s his job to manage how the company uses information technology (IT) and data to accomplish its goals. Although he is an executive, Fried considers his job to be more about employee empowerment rather than strict management.

“The

overwhelming

philosophy

of my organization is to empower Googlers with world-leading technology,” said Fried. “But the important part is that we view our role as empowerment, and not standard-setting or constraining or dictating or something like that. We define our role as an IT department in helping people get their work done better than they could without us.”

Before he became the head of IT at one of the most technologically advanced organizations in history, Fried graduated from Columbia University

APPENDIX A Using Technology to Manage Information

and worked as a researcher there for several years.

Part of what drew Fried to Google was the

As a top computer engineer, he developed software

company’s policy of granting employees the free-

programs for some of the world’s leading scientific

dom to use technology in the ways that’s best for

institutions. One of his most distinguished accom-

them. In fact, Google employees can spend as much

plishments includes designing a m ission-scheduling

as 20 percent of their time on passion projects. As

system for NASA’s orbital telescopes. Fried even-

CIO, though, Fried must also ensure that people

tually left academia and joined the technology

follow the rules. For instance, a colossal business like

department of the investment bank Morgan Stanley.

Google requires many security measures to stay safe.

During his 13 years with the company, Fried over-

So while the IT department lets employees work with

saw essential IT tasks like e-commerce, organiza-

whatever devices they choose, staffers also need to

tion of market data, computer programming, e-mail

comply with certain security protocols. And with tens

management, videoconferencing, employee pro-

of thousands of employees at Google, managing this

ductivity, and much more.

aspect of the business is a full-time pursuit.

In 2008 Fried joined Google as its CIO and

For Fried and his colleagues in Google’s IT

faced his greatest challenge yet. After all, the com-

department, this task is just one small part of a con-

pany’s employees knew plenty about technology

stantly evolving and expanding operation. “Tech-

themselves. In order to win the confidence and

nology moves very fast, and enterprises often feel

respect of these expert colleagues, Fried knew

the rational need to have a slower pace of change,

he had to staff his IT department with people who

so they can get a better return on investment, or so

were just as informed and eager to work as he

they don’t need to make people learn new things all

was. “When the people you deliver technology to

the time,” said Fried. “But if you slow things down

are technology experts ... it’s really important that

too much, you have no change at all.”

you make sure that that daily impression, that first

As CIOs like Ben Fried and tech companies

impression they get of IT, is a good impression,”

continue to change the face of the digital landscape,

said Fried. “To do this you have to have IT people

it’s possible that even the most entrenched technol-

who are more knowledgeable about the technol-

ogies could become obsolete in a few years. In this

ogy and the best ways to use it than the average

chapter you’ll learn about how this ever-changing

employee.”

tech world affects business.

Sources: Peter High, “Google CIO Ben Fried Makes Change a Core Competency,” Forbes, March 14, 2016; Scott Matteson, “Meet Google CIO Ben Fried,” TechRepublic, November 26, 2013; Walter Frick, “Google’s CIO on How to Make Your IT Department Great,” Harvard Business Review, August13, 2013; “Learn from a CIO: 6 Lessons from Google CIO Ben Fried,” Nerdio, October 6, 2016;“Benjamin Fried,” www.columbia.edu, accessed October 2017.

The Role of Information Technology The importance of business knowledge is not new; however, what is new is the recognizing the need to manage it like any other asset. To manage knowledge, a company needs to share information efficiently throughout the organization and to implement systems for creating new knowledge. This need is constantly leading to new technologies that support the exchange of information among staff, suppliers, and customers. Studies have shown that data-driven decision making (i.e., collecting data, analyzing them, and using them to make crucial decisions, like whether to create a new product or service) can lift productivity 43

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

5percent higher than decision making based on experience and intuition.1 Who wins and who loses will be decided by who harnesses the technology that provides the pipeline of interaction and information flows between and among individuals and organizations.

Evolution from Data Processing to BusinessIntelligence What has been the role of information technology? To understand technology today it is helpful to understand how we reached this stage. data processing (DP)

Name for business technology in the 1970s; included technology that supported an existing business and was primarily used to improve the flow of financial information.

information systems (IS)

Technology that helps companies do business; includes such tools as automated teller machines (ATMs) and voice mail.

information technology (IT)

Technology that helps companies change business by allowing them to use new methods.

business intelligence (BI) (or analytics)

The use of data analytic tools to analyze an organization’s raw data and derive useful insights.

∙ In the 1970s, business technology was known as data processing (DP). (Although many people use the words data and information interchangeably, they mean different things. Data are raw, unanalyzed, and unorganized facts and figures. Information is processed and organized data that managers can use for decision making.) The primary purpose of data processing was to improve the flow of financial information. Employees who performed data-processing tasks were support staff who rarely came into contact with customers. ∙ In the 1980s, business technology became known as information systems (IS) when it moved out of the back room and into the centre of the business. Its role changed from supporting the business to doing business. Customers began to interact with a wide array of technological tools, from automated teller machines (ATMs) to voice mail. As business increased its use of information systems, it became more dependent on them. ∙ Until the late 1980s, business technology was just an addition to the existing way of doing business. Keeping up to date was a matter of using new technology on old methods. But things started to change when businesses applied new technology to new methods. Business technology then became known as information technology (IT), and its role became to change business by sorting, retrieving, and sending information efficiently. ∙ In the 1990s, the introduction of the World Wide Web changed the way that people interacted with one another and information. Online services such as Google offered a new way of accessing information. In addition, Bluetoothtechnology created conveniences by providing wireless communication systems to replace cables that typically connected devices, thus freeing people to access information wherever they wanted. ∙ During the 2000s, as technology became more sophisticated, it became better known as business intelligence (BI). BI refers to a variety of software applications used to analyze an organization’s raw data and derive useful insights from the data. BI activities include data mining (which we discuss later in this appendix), online analytical processes, querying, and reporting.2 Knowledge is information charged with enough intelligence to make it relevant and useful. Knowledge technology adds a layer of intelligence to filter appropriate information and deliver it when it is needed. BI changes the traditional flow of information. Instead of an individual going to the database, the database comes to the individual. Managers can put a new employee at a workstation using BI training software and let the system take over everything from laying out a checklist of the tasks required on a shift to providing answers and insights that once would have taken up a supervisor’s time.

APPENDIX A Using Technology to Manage Information

BI helps businesspeople focus on what’s important: deciding how to react to problems and opportunities. For example, imagine you’re a sales rep who just closed an important deal. While you celebrate your success, the finance department is upset because your customer never pays on time, which costs the company a lot of money. BI could provide you that insight so that you could negotiate different payment terms with the customer, thus connecting sales activity to financial requirements in a seamless process. Technology changes react with one another to create more change. Maintaining the flexibility to successfully integrate these changes is crucial to business survival. For instance, Kodak once dominated the camera industry but failed to compete effectively and lost market share. Even though it invented the first digital camera, the company was concerned that digital photography would eat into its traditional film business. So Kodak decided to continue focusing on film rather than digital cameras, a decision that eventually led to the company’s bankruptcy.3 Despite its size and money, Kodak wasn’t flexible enough to adapt to changing trends. Knowledge sharing is at the heart of keeping pace with change. Of course, it can be difficult to predict which new technologies will be successful. For a fun look at the worst technology predictions of all time, see Figure A.1. Obviously, the role of the IT staff has changed as technology itself has improved and evolved. The chief information officer (CIO) has moved out of the back room and into the boardroom, and now spends less time worrying about keeping systems running and more time finding ways to boost business by applying technology to purchasing decisions, operational strategy, and marketing and sales. Today the role of the CIO is to help the business use technology to communicate better with others, while offering better service and lower costs.4

The Amazon Echo is more than just an ordinary sound system: the hands-free device is powered by Alexa, Amazon’s artificial intelligence software. All a user has to do is say “Alexa” and he or she has the device’s attention. From there the user can ask Alexa to play music, check the weather, or even order groceries. But software glitches occur, as in one case where Alexa sent a family’s personal conversations to a third party without their knowledge.5 Do you think voice-activated appliances like this will become more popular in the future?

How Information Technology ChangesBusiness Time and place have always been at the centre of business. Customers once had to go to the business during certain hours to satisfy their needs. For example, people went to the store to buy clothes. They went to the bank to arrange for a loan. Businesses decided when and where they did business with them. Today, IT allows businesses to deliver goods and services whenever and wherever the customer wants them. You can order books and clothes, arrange a home mortgage loan, and buy music or a car online, anytime you choose. Consider how IT has changed the entertainment industry. Fifty years ago, you had to go to a movie theatre if you wanted to see a movie. Forty years ago, you could wait for it to be on television. Thirty years ago, you could wait for it to be on cable television. Twenty-five years ago, you could go to a video store and rent it. Now you can order video on demand by satellite, cable, or streaming services that let you watch on your TV, computer, smartphone, tablet, or other device whenever and wherever you wish. 45

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

■ FIGURE

A.1

THE WORST TECHNOLOGY PREDICTIONS OF ALL TIME You cannot be right all the time. Here are a few quotes from technology leaders who got it wrong.

“I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.”

“Television won’t be able to hold onto any market it captures after the first six months. People will soon get tired of staring at a plywood box every night.”

—Robert Metcalfe, founder of 3Com, 1995

—Darryl Zanuck, executive at 20th Century Fox, 1946

“Inventions have long since reached their limit, and I see no hope for further developments.”

“This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication.” — Western Union internal memo, 1876

—Roman engineer Julius Sextus Frontinus, 10 A.D.

“I think there is a world market for maybe five computers.” —Thomas Watson, president of IBM, 1943

“Do not bother to sell your gas shares. The electric light has no future.”

“Who the hell wants to hear actors talk?” —H. M. Warner, Warner Brothers, 1927

—Professor John Henry Pepper, scientist, 1870s

“There is no reason anyone would want a computer in their home.” —Ken Olsen, founder of Digital Equipment Corporation, 1977

“Remote shopping, while entirely feasible, will flop.” —Time, 1966

Sources: Entrepreneur Staff, “10 of the Worst Tech Predictions of All Time,” Entrepreneur, July 1, 2016; “Worst Tech Predictions of All Time,” The Telegraph, June 29, 2016.

As IT broke time and location barriers, it created new organizations and services that were independent of location. That independence brought work to people instead of people to work. Smartphones, laptop computers, netbooks, and personal digital assistants allow employees to have access to people and information as if they were in the office. For example, the TSX Venture Exchange is an electronic stock exchange where buyers and sellers make trades electronically. The way people do business drastically changes when companies increase their technological capabilities. Electronic communications can provide substantial time savings. E-mail and texting have put an end to tedious games of telephone tag and are far faster than paper-based correspondence. Internet and intranet communications using shared documents and other methods allow contributors to work on a common document without time-consuming meetings. See Figure A.2 for other examples of how IT changes business. 46

APPENDIX A Using Technology to Manage Information

■ FIGURE

A.2

HOW INFORMATION TECHNOLOGY IS CHANGING BUSINESS Organization Technology is breaking down corporate barriers, allowing functional departments or product groups (even factory workers) to share critical information instantly. Operations Technology shrinks cycle times, reduces defects, and cuts waste. Service companies use technology to streamline ordering and communication with suppliers and customers. Staffing Technology eliminates layers of management and reduces the number of employees. Companies use computers and telecommunication equipment to create “virtual offices” with employees in various locations. New products Information technology shortens development cycles by feeding customer and marketing comments to product development teams quickly so that they can revive products and target specific customers. Customer relations Customer service representatives can solve customers’ problems instantly by using company-wide databases to complete tasks from changing addresses to adjusting bills. Information gathered from customer service interactions can further strengthen customer relationships. New markets Since it is no longer necessary for customers to walk down the street to get to stores, online businesses can attract customers to whom they would not otherwise have access.

Types of Information Today, information flows into and through an organization from many different directions. The types of information available to businesses today include: ∙ Business Process Information. This includes all transaction data gathered at the point of sale as well as information gained through operations like enterprise resource planning, supply chain management (these are discussed in Chapter 10), and customer relationship management systems. ∙ Physical-World Observations. These result from the use of radio frequency identification (RFID) devices, miniature cameras, wireless access, global positioning systems (GPSs), and sensor technology—all of which have to do with where people or items are located and what they are doing. Computer chips cost pennies apiece and can be found in a wide range of products including credit cards, printer ink cartridges, baseballs, tire valves, running shoes, and 47

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

vacuum cleaners. For example, the Montreal Transit Corporation has installed RFID readers in several terminal entrances and exits.6 As soon as a bus enters the terminal, a large electronic display board is updated so that waiting passengers know their bus is about to pull up; if a bus does not pass the entrance on time, the board indicates that it is delayed.7

Biometric technology such as fingerprint sensors and retinal scanners allow organizations to identify people with near perfect accuracy. For instance, some hospitals scan patients’ fingerprints so doctors can easily identify their medical histories. In the business world, retailers can use retinal scanners to track which products a customer views. What other ways do you think a business can make use of biometric technology?

∙ Biological Data. Forms of identification include improved fingerprinting technology and biometric devices that scan retinas, recognize faces and voices, and analyze DNA. Although such information usually serves security purposes, it can also be used to customize products and services by tracking shoppers’ eyes in stores.8 ∙ Public Data. Free and accessible, public data includes electronic traces that people leave when posting to the Internet, sending e-mail, and using IM. More and more, public data are being stored, shared, or sold.

∙ Data that Indicate Personal Preferences or Intentions. Internet shoppers leave a trail of information that can reveal personal likes and dislikes. More details about about how to help consumers buy goods and services is covered in Chapter 14). The volume and complexity of all these data and information is staggering. Computing systems can search through text, numbers, audio, and video—and identify, categorize, and refine relevant opinions on any topic imaginable.

Managing Information Even before the use of computers, managers had to sift through mountains of information to find what they needed to help them make decisions. Today, business people are faced with infoglut, an overabundance of data. Too much information can confuse issues rather than clarify them. Obviously, not all the information that ends up on your desk will be useful. The usefulness of management information depends on four characteristics: 1. Quality. Quality means that the information is accurate and reliable. When the clerk at

a fast-food restaurant enters your order into the cash register, it may be automatically fed to a computer that calculates the day’s sales and profits as soon as the store closes. The sales and expense data must be accurate or the rest of the calculations will be wrong. Quality can be a real problem when a large number of calculations are based on questionable sales forecasts rather than actual sales. 2. Completeness. There must be enough information to allow you to make a decision, but

not so much as to confuse the issue. Today, as we have noted, the problem is often too much information rather than too little. 3. Timeliness. Information must reach managers quickly. E-mail and texting can let mar-

keting, engineering, and production know about a problem with a product the same 48

APPENDIX A Using Technology to Manage Information

day the salesperson hears about it, so customer complaints can be handled instantly if possible, or certainly within a day. Product changes can be made on the spot using computer-integrated manufacturing, as discussed in Chapter 10. 4. Relevance. Different managers have different information needs. Since information

systems often provide too many data, managers must learn which questions to ask to get the answers they seek. Remember, though, that you can never read everything available. Set objectives for yourself and do the best you can.

Big Data and Analytics Chances are that some program is keeping track of every click you make online, every movement you make as you shop in stores, every restaurant you go to for lunch—even what you eat. Only collecting the data isn’t enough because the real value for an organization comes from the meaning of the data. When you collect more data you also need more storage. How do businesses store and organize a data glut so that it eventually becomes useful information? For many companies the solution is data analytics. Data analytics is the process of collecting, organizing, storing, and analyzing large sets of data (“big data”) in order to identify patterns and other information that helps business people make effective decisions now and in the future.9 One part of data analytics, data mining, is a technique to find hidden patterns and previously unknown relationships among the data. Many companies put this new science into action by tracking what is selling where, and who is buying the good or service. For example, data mining showed Walmart that consumers like to buy Pop-Tarts (particularly strawberry) just before a hurricane hits. Based upon this analysis the company makes sure the product is available at the right place and time in its stores. The lesson here is that companies can gain a competitive advantage with high-quality data that support management decisions (the ethical use of data is addressed in Chapter5). Companies can better target their goods and service, attract new customers, and adjust prices. Figure A.3 offers a few examples of sectors that benefit from big data and data analytics. When many sources of data and types of powerful analytic tools are used by so many companies, mistakes are bound to happen. For example, an out-of-print book was recently listed on Amazon as having 17 copies available: 15 were used with prices starting at $35.54 and two were new with prices starting at $23,698,655.93 (plus $3.99 shipping). The astronomical price was the result of two sellers’ automated programs that each raised the book price based on the other’s price. While the only thing these two sellers lost in this automated bidding war was a book sale, the lesson to be learned is that companies must make certain that the applications they use to analyze data are not flawed.10

data analytics

The process of collecting, organizing, storing, and analyzing large sets of data (“big data”) in order to identify patterns and other information that is most useful to the business now and for making future decisions.

data mining

A technique to find hidden patterns and previously unknown relationships among the data.

Using Information from Social Media Every day millions of people share their thoughts and photos on social media. This information doesn’t go out just to their friends and followers, though. Businesses also keep a close eye on social networks to gather up-to-the-minute data about consumers. In fact, approximately 90 percent of the data used by businesses today were collected over the past two years, with much of it coming from “unstructured” sources like social media. This wealth of topical information then helps companies develop new strategies to reach out to customers.11 49

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■ FIGURE

A.3

EXAMPLES OF SECTORS THAT BENEFIT FROM BIG DATA AND DATA ANALYTICS E-commerce Online sellers can analyze cart data to change prices for people who leave items behind in order to attract them back to the site and follow through on the purchase. Retail Stores such as Target can analyze previous purchases to identify buyers who prefer gluten-free products. It can then send the buyers coupons and other promotions for health food products. Real estate Beach house rental agents can target vacation promotions to people who buy sunscreen frequently. Law enforcement Video cameras in light fixtures collect and feed data to software that can spot long lines, recognize licence plates, and even identify suspicious activity. The software will send alerts to the appropriate staff. Health care Smart phones with motion sensors can detect early signs of Parkinson’s disease. Sources: Thomas H. Davenport, “How Big Data Is Helping the NYPD Solve Crimes Faster,” Fortune, July 17, 2016; Alex Woodie, “9 Ways Retailers Are Using Big Data and Hadoop,” Datanami, July 20, 2016; Carolyn Gregoire, “How Big Data Could Transform the Health Care Industry,” Huffington Post, February 1, 2017; Oscar Waterworth, “How Big Data Improves the Real Estate Industry,” Inman, March 17, 2017.

At Domino’s Pizza, for instance, the company’s AnyWare platform allows customers to place orders on any social media platform and device imaginable. Once they create a “Pizza Profile” on the Domino’s site they can summon a pie in a variety of ways: by clicking a button on Facebook Messenger, tapping their Apple watch, pressing a button on a smart TV remote, or even tweeting a pizza emoji. Along with providing exceptional convenience to customers, Domino’s AnyWare also collects a ton of data through more than 85 000 different channels. The company can find out a lot about individual customers this way, including their purchasing habits and whether or not they are the dominant buyer in their household. All these data will help Domino’s continue to sell more than 1 million pizzas a day across 70 countries.12

The Heart of Knowledge Management: The Internet You already know that the Internet is a network of computers that evolved from a oneto-one communications tool to a one-to-many broadcast communications tool. Today it is the heart of knowledge management. Internet users can point and click their way 50

APPENDIX A Using Technology to Manage Information

from site to site with complete freedom. But what if you don’t want just anybody to have access to your website? You might create an intranet, extranet, or virtual private network.

INTRANET An intranet is a companywide network that is closed to public access and uses Internet-type technology. To prevent unauthorized outsiders (particularly the competition) from accessing their sites, companies can construct a firewall between themselves and the outside world. A firewall can consist of hardware, software, or both. Firewalls allow only authorized users to access the intranet. Some companies use intranets only to publish information for employees, such as phone lists and employee policy manuals, while others create interactive applications that fully exploit the technology’s possibilities. They allow employees to update their addresses or submit company forms such as supply requisitions, time sheets, or payroll forms online, eliminating paper handling and speeding decision making.13

EXTRANET Many businesses choose to open their intranets to other, selected companies through the use of extranets. An extranet is a semi-private network that uses Internet technology and allows more than one company to access the same information or allows people on different servers to collaborate. Now almost all companies can use extranets for electronic data interchange (EDI) functions like sharing data and processing orders, specifications, invoices, and payments. Notice that we described an extranet as a semi-private network. This means that outsiders cannot access the network easily, but since an extranet does use public lines, knowledgeable hackers (people who illegally access online information for purposes such as transferring funds from someone’s bank account to their own without authorization) can gain unauthorized access. Most companies want a network as private and secure as possible, so they use dedicated lines (lines reserved solely for the network). Most companies want a network that is as private and secure as possible, so they use dedicated lines (lines reserved solely for the network). There are two problems with this method: it is expensive and it limits use to computers directly linked to those lines. What if your company needs to link securely with another firm or individual for just a short time? Installing dedicated lines between companies in this case would be too expensive and time-consuming. Virtual private networks are a solution.

intranet

A companywide network, closed to public access, that uses Internet-type technology.

extranet

A semi-private network that uses Internet technology and allows more than one company to access the same information or allows people on different servers to collaborate.

hackers

People who illegally access online information.

VIRTUAL PRIVATE NETWORKS A virtual private network (VPN) is a private data network that creates secure connections, or “tunnels,” over regular Internet lines. It gives users the same capabilities as an extranet at a much lower cost by using shared public resources rather than private ones. Just as phone companies provide secure shared resources for voice messages, VPNs provide the same secure sharing of public resources for data. This allows for on-demand networking: an authorized user can join the network for any desired function at any time, for any length of time, while keeping the corporate network secure.

virtual private network (VPN)

A private data network that creates secure connections, or “tunnels,” over regular Internet lines.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

enterprise portal

A centralized and secure online network for information and transactions.

You probably use a VPN when you log on to your university or college’s website. VPNs are commonplace in educational institutions across the country that want to allow only affiliated students and faculty access to accounts. For example, a VPN is used for online teaching and learning tools such as Blackboard, Moodle, and Sakai, to share course documentation, and to register for courses. If you do not have access to a corporate VPN, you can easily set up an account at a public VPN provider like WiTopia, StrongVPN, or Hotspot Shield.14 How do users log on to an organization’s network? They do so through a secure enterprise portal that centralizes information and transactions and serves as an entry point to a variety of resources, such as e-mail, financial records, schedules, and employment and benefits files. Portals can even include streaming video of the company’s day care centre. They are more than simply web pages with links. They identify users and allow them access to areas of the intranet according to their roles: customers, suppliers, employees, and so on. They make information available in one place so that users do not have to deal with different web interfaces. The challenge to the Chief Information Officer (CIO) (see the Profile in this chapter for more on what a CIO must do) is to integrate resources, information, reports, and so on—all of which may be in a variety of places—so that they appear seamless to the user and save money for the firm.

Broadband Technology broadband technology

Technology that offers users a continuous connection to the Internet and allows users to send and receive mammoth files that include voice, video, and data much faster than ever before.

The more traffic on the Internet, the slower connections become. In 2017, 93.3 percent of Canadian households had access to the Internet.15 Tools to unlock the resulting traffic jams include broadband technology, a continuous connection to the Internet that allows users to send and receive mammoth files that include voice, video, and data much faster than ever before. Broadband is dramatically faster than dial-up connections. It should be no surprise to learn that about 97 percent of Canadian households with home Internet access reported a high-speed connection.16 Even though broadband in Canada is dramatically faster than old dial-up connections, its average fixed broadband download and upload speeds are 80.1 and 27.7 megabits per second (Mbps) respectively.17 This download speed ranks 14th in the world and is well behind Singapore, which enjoys speeds of 175 Mbps (download) and 185 Mbps (upload).18 As people use more and more bandwidth to stream videos on services like Netflix or music on apps like Pandora, Internet Service Providers have begun to place caps on the amount of broadband consumers can use. Right now this isn’t a problem for most users since average usage is well below the current caps, but as more mobile devices and services come online, the more likely broadband will become a consumption-based service (i.e., you pay for the broadband you use).

NET NEUTRALITY Today there is plenty of debate about “net neutrality” in Canada and the Canadian Radio-television and Telecommunication Commission’s (CRTC) role in regulating it.19 One issue is defining what net neutrality even is. Some say it is treating all traffic on the Internet the same, whether it is e-mail from your mom or web page traffic on Google. Others say net neutrality is treating all the same type of content the same way, whether it is 52

APPENDIX A Using Technology to Manage Information

a video of frolicking kittens or a video of an ongoing surgery. Still others say net neutrality is nothing more than forbidding Internet Service Providers (ISPs) from blocking specific websites or services.20 As video streaming services like Netflix and Amazon increasingly dominate the lines, the debate over how the existing broadband should be distributed and who should regulate the distribution will continue for quite some time. What does this mean to you? If ISPs can charge for speed, then deep-pocketed companies like Netflix and Amazon can pay the fees (passing them on to you, the customer, of course); and low-budget and start-up sites are likely to lose customers unwilling to travel at slower speeds, reducing competition and innovation. It is also possible that ISPs can begin charging people to go to certain websites; the more money you are willing to pay, the more sites you will have access to. Rich customers and poor customers will get two different webs.21 Meanwhile new services like Google Fiber, a high-speed fibre network up to 100 times faster than average connections, give us hope that broader pipes may be on the horizon.22

INTERNET2

How the existing broadband should be distributed and who should regulate the distribution are major concerns today. Why does it matter how broadband is divided and distributed? Some people are concerned that ISPs will charge customers to go to certain websites: the more money you’re willing to pay, the more sites you’ll have access to. Rich customers and poor customers could get two different webs. Other people say that it’s only fair that whoever uses the most broadband should pay the most. What do you think?

Even with broadband technology, scientists and other scholars who access, transmit, and manipulate complex mathematical models, data sets, and other digital elements need a faster solution. Their answer? Create a private Internet reserved for research purposes only. Internet2 runs more than 22 000 times faster than today’s public infrastructure and supports heavy-duty applications such as video-conferencing, collaborative research, distance education, digital libraries, and full-body simulations known as tele-immersion.23 A key element of Internet2 is a network called very-high-speed backbone network service (vBNS), which was set up in 1995 as a way to link government supercomputer centres and a select group of universities. The power of Internet2 makes it possible for a remote medical specialist to assist in a medical operation over the Internet without having the connection deteriorate as, say, home users watch Fuller House. Although Internet2 initially became available to only a few select organizations in 1997, there are now more than 500 member universities, government agencies, corporations, and laboratories in over 100 countries.24 Whereas the public Internet divides bandwidth equally among users (if there are 100 users, they each get to use 1 percent of the available bandwidth), Internet2 is more capitalistic. Users who are willing to pay more can use more bandwidth. Some fear that Internet2 may soon be overrun by undergraduate students engaged in video streaming and other resource-hogging pursuits. But the designers of Internet2 are thinking ahead. Not only do they expect Internet history to repeat itself, they are counting on it. They are planning to filter the Internet2 technology out to the wider Internet community in such a way that there is plenty of room on the road for all of us—at a price, of course.

Internet2

The private Internet system that links government supercomputer centres and a select group of universities; it runs more than 22 000 times faster than today’s public infrastructure and supports heavy-duty applications.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

Social Media and Web 2.0 For businesses, social media provide an array of opportunities and challenges. It provides businesses with an inexpensive tool to collaborate with consumers on product development, service enhancement, and promotion. Until now, using social media has been optional for most businesses but it is now argued that businesses that do not have a social media presence will not survive. A social media presence means more than just a Facebook page with an occasional update. Successful businesses will have a social media ecosystem and comprehensive strategy where every part of the organization collaborates and where customers are part of the conversation instantly. Interested in being part of a company’s social media strategy? Read more in the Spotlight on Small Business. Created in 2008 by student entrepreneur Ryan Holmes, Hootsuite has become the world’s most widely used social media platform for people and companies.25 The company boasts 16 million users, but it faced difficulty when the company’s growth stalled in 2015. As the CEO, Holmes decided to clear house by laying off 65 employees and building a new executive.26 The company’s services moved in a new direction through targeted acquisitions, new service integrations, and a development fund. Although the company is based in Vancouver, it employs 400 people in over 175 countries. Nowadays, Hootsuite appears to be back on track and growing once again, with an emphasis upon financial services, health care, government, and higher education sectors.27

Spotlight On SMALL BUSINESS Want to Be a Social Media Manager? One of the fastest-growing careers today didn’t exist a few years ago: social media manager. Increasingly, social media has gained importance as it presents the face and voice of an organization. If you are interested in becoming a social media manager, do you have the skills it takes? According to social media management site Buffer, you’ll need to be curious, able to adapt quickly, and understand the role that social media plays in meeting the organization’s goals. You’ll also need skills in the following areas: • • • • • •

Writing Graphic and video design Public speaking Customer service and community engagement Behavioral psychology Analyzing social media metrics (e.g., likes, comments, shares, etc.) and business metrics (e.g., traffic, leads, revenue, etc.) • Budgeting

If you are interested in knowing how you can develop these skills, go online to blog.bufferapp.com/ social-media-manager-job-description. This post identifies many resources that can help you work on the skills. While you may not be strong in all of these areas, being proficient in a few of them will help make you a great social media manager.

Sources: Alfred Luna, “10 Important Skills Your Social Media Manager Needs in 2017,” Entrepreneur, February 23, 2017; Polly Mosendz, “Trump Has Made the Social Media Manager Your Most Valuable Employee,” Bloomberg, February 6, 2017; Sofie Maerowitz, “7 Social Media Trends to Watch in 2017 from Yelp’s Manager of Local Business Outreach,” PR News, January 17, 2017.

APPENDIX A Using Technology to Manage Information

Successful large companies, such as McDonald’s, also find effective ways to use social media.28 The company has three digital media hubs around the world, one at its headquarters in Oak Brook, Illinois, and two others in London and Singapore. Employees constantly monitor what is said and respond when needed. When the social media team discovered that only one in five Millennials ever tried a Big Mac, they started tossing around ideas about offering the sandwich in a smaller size. The current Big Mac size was determined to be too big for the health-conscious crowd. However, the biggest change to come from the social media team is the introduction of all-day breakfast. For decades, breakfast ended at 10:30 sharp and burgers took sausages’ place on the grill. After the Mickey D team fielded countless complaints online, it saw an opportunity. The demand pushed the company to test offering a limited menu of breakfast items all day in select stores. The response was huge and people clamoured for more stores to offer all-day breakfast. After all-day breakfast was rolled out to all stores, 78 percent of Millennials said they visited a McDonald’s at least once more a month. McDonald’s expanded the all-day breakfast menu to include more items people requested through social media. While McDonald’s captures data through social media to make successful strategic decisions, it is inevitable that at some point the company is going to suffer some negative social media buzz. For example, when McDonald’s introduced its new Happy Meal mascot, Happy, the company was hit with a storm of social media criticism about the weird-looking guy. What did McDonald’s do? The company simply acknowledged it and tweeted back with an image of Happy reading all the negative comments on his laptop. After the image was sent to McDonald’s 2.5 million Twitter followers and 31 million Facebook friends, a social media monitoring tool showed that there were 190 positive comments to every one negative comment about Happy. Soon there were no comments at all. The lesson to be learned from this example is that all businesses and organizations should monitor social chatter and respond quickly to the content. When bad buzz happens, a company should identify the source and nature of the buzz and develop a quick response.29 Figure A.4 offers suggestions to consider when using social media in business. The most important point to remember is that social media have to serve a unique purpose and not be just a gimmicky add-on. For all its strengths and weaknesses, social networking is the best example of what technology publisher Tim O’Reilly dubbed “Web 2.0.” Web 2.0 is the set of tools that allow people to build social and business connections, share information, and collaborate on projects online with user-generated sites like blogs, wikis, social networking sites and other online communities, and virtual worlds. (In this context, Web 1.0 refers to corporate-generated sites like Google and Amazon.) Facebook, YouTube, and the micro blogging site Twitter are among the largest Web 2.0 businesses, where ordinary people create all the content. See the Adapting to Change box below for a discussion of how social media can track television viewership trends. Today’s Web 2.0 companies may be transformed by yet another generation of web innovators that expand the utility of the web, create location-based services, and tie financial payment systems to existing sites. Translation: they make money. Location-based services are tied to devices that can track a user’s whereabouts and suggest places, like restaurants or shops, in the area. If you happen to have a GPS device in your car, this location-based technology is not new to you, but now that same location-tracking power

Web 2.0

The set of tools that allow people to build social and business connections, share information, and collaborate on projects online (including blogs, wikis, social networking sites and other online communities, and virtual worlds).

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■ FIGURE

A.4

TIPS FOR USING SOCIAL MEDIA TO PARTNER WITH CUSTOMERS Using social media is about trusting your brand and identity to your customers, partners, and the world at large. The world is going to do things with your brand, whether or not you participate in the process. Here are some tips to keep in mind. • If your competition is using social media, you had better be using it too. More than 50 percent of Twitter users say that they follow companies, brands, or products on social networks. • Let the network mature and develop a comprehensive social media strategy. Do not just set up a network and immediately begin exploiting it. For example, when the list of online supporters started to grow, the Obama fundraisers wanted to immediately tap them for contributions. They were persuaded to wait until his e-mail team created an environment that let people know they were part of the campaign. • Take customers’ comments seriously and establish two-way communication. People expect to be listened to. If you respond, they will keep coming back. Post questions and surveys. • Ask your customers to answer common questions. Asking your most active fans and advocates to answer common questions is an effective way of acknowledging the value of loyal customers while adding credibility to information about your product or service. • Be authentic. You have to talk directly with your customers, not just make an announcement as you would in a press release. Keep it authentic and you will build a personality around your company and your brand. • Make your corporate site social. Provide social sharing opportunities by offering share buttons, tweet widgets, and Facebook Like buttons to make it easier to share across social networks. Sources: Timothy Sykes, “8 Tips to Grow Your Business Using Social Media,” Entrepreneur, July 6, 2016; Dominique Jackson, “An Introduction to Social Media for Business,” Sprout Social, August 23, 2016; Danielle Corcione, “Social Media for Business: A Marketer’s Guide,” Business News Daily, January23, 2017.

can be put in a portable device like your cellphone. Someday, you could get a message from Starbucks offering you a discount on a latte as you walk by its door. Recent reports indicate the portable location-based services generates $150–$270 billion in revenue.30 Itlooks like the start of Web 3.0.

Web 3.0

A combination of technologies that adds intelligence and changes how people interact with the web, and vice versa (consists of the semantic web, mobile web, and immersive Internet). 56

Another generation of web innovators has expanded the utility of the web to enable an unprecedented level of intelligence in almost all applications. The objective is to pull data in real time on an “as needed” basis. As you pull data, the system learns about you and your interests, and creates information it “thinks” you might like and sends it back to you.31 Known as Web 3.0, this technology represents a shift in how people interact with the web, and how the web interacts with people.32 The main distinction is to refer to Web1.0 as the Static Web, Web 2.0 as the Social Web, and Web 3.0 as the Personal Web. You could think of Web 3.0 as Web 2.0 with a brain. Web 3.0 technology consists of three basic components: semantic web, mobile web, and immersive Internet, which are all leading to what many call the Internet of Things.33

SEMANTIC WEB

The semantic web refers to powerful, intelligent decision-making applications.34 For example, Amdocs is a company that interacts with customers on behalf of its clients in service industries such as telecommunications, health care, utilities, and insurance.

APPENDIX A Using Technology to Manage Information

Adapting to CHANGE How Social Media Move TV Ratings For decades the popularity of a TV show was measured by the number of viewers tuned in at a prescribed time. Now, in the age of DVRs, on-demand video, and many apps, there needs to be more than one way of measuring a show’s reach. Some shows, like Mozart in the Jungle and Stranger Things, never even air on network or cable television. How do production companies learn about what is working and what is not? Nielsen, the experts in television ratings, started tracking Twitter buzz in 2013. In 2016, Nielsen added Facebook activity and is planning on introducing Instagram content analysis in its studies in the near future. Today’s ratings track not just the number of tweets and posts but also the number of authors and the reach each one has within the social media community. There is still a limited time measured, though. Tracking starts looking at social media activity three hours before a program’s airing to three hours after. Since it’s still taking into account the number of viewers and posts on the actual day of airing, many on-demand viewings and posts are not noted because programs usually don’t hit those platforms for at least 24 hours. Some shows may take up to a week to be added to an on-demand lineup. So if you’re catching up on past Game of Thrones episodes on HBO On Demand and tweeting your reactions, Nielsen does not measure it.

What could this mean for television’s future? Many Millennials are already shirking traditional TV and relying on their laptops, Roku, Sling, and other devices and apps. Some catch premium content, like clips of Last Week Tonight, on Facebook through shares. Could Facebook become a content provider too? Facebook Live already allows celebrities, companies, and Regular Joes to reach large numbers of viewers in an instant. Facebook TV could come our way sooner than we think.

Sources: Mike Snider, “Nielsen to Add Facebook Buzz to Its TV Ratings,” USA Today, January 21, 2016; Adrianne Pasquarelli, “The Next Generation Learns to Live without TV Sets,” Advertising Age, April 18, 2016; Maureen Morrisson, “Can Facebook Live Take on TV?”Advertising Age, April 18, 2016; Jeanine Poggi, “Nielsen Caves in on New TV Ratings Push,” Advertising Age, January 5, 2017.

Amdocs representatives generate real-time knowledge from internal sources—such as service disruptions and policy management—and external forces—such as social trends and competitive offers. Using Web 3.0 semantic technologies, Amdocs combines information from a variety of sources in real time to anticipate the reason for a customer’s call. Responses can be given up to 30 percent faster, which makes customers happy.35

MOBILE WEB The mobile web allows people to use the web as they move from one device to another and one location to another. Location-based services are tied to devices that can track a user’s whereabouts and provide suggestions of places in the area such as restaurants or shops. For example, you might receive a message from a local diner offering you a discount on lunch as you walk by their door. If you decide to go into the restaurant then you can use an app on your smartphone to pay for your meal. Since many customers use multiple devices 57

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

throughout the day, it is important that a business include the same design in apps for all types of computers, phones, and tablets. This consistency will ensure users can rely on high-quality access no matter what type of device they use. Users can be frustrated or annoyed when they cannot find what they need.36

THE IMMERSIVE INTERNET

Internet of Things (IoT)

Refers to datacollecting technologies that connect ordinary objects to the Internet through sensors, cameras, software, databases, and massive data centres. Often, those technologies can communicate with one another.

The immersive Internet includes virtual worlds, augmented reality, and 3D environments. The use of virtual worlds, simulations, augmented reality, and multiplayer gaming technologies is expected to increase dramatically for learning in the next few years. For example, Google Expeditions uses virtual reality (VR) headsets to take students on detailed tours of almost any place you can imagine. Another company called Boulevard lets users tour some of the world’s finest art galleries. Of course, visiting these virtual worlds requires the use of headsets like Facebook’s Oculus Rift or the Microsoft Hololens. This can end up being an expensive investment for educators. After all, Oculus Rift and Hololens users currently need to buy high-performance computers in order to use their headsets. Customers can end up spending thousands of dollars per unit if they don’t already have the necessary hardware. Still, there are cheap alternatives like Google Cardboard, a $15 headset made of heavy paper that requires only a smartphone to use. Virtual reality costs are also expected to drop as the technology potentially grows into a $16 billion industry.37

THE INTERNET OF THINGS

More than ever before, the Internet provides a fast connection while mobile devices provide constant connection. However, it is not just phones and tablets that connect us to the Internet. There are so many other devices that connect us that the term the “Internet of Things” has become popular in mainstream media. The Internet of Things (IoT) refers to technology that connects ordinary objects to the Internet through sensors, cameras, software, databases, and massive data centres.38 There are WiFi-based home automation networks that automatically cool or heat your home, turn the lights on and off, and lock your doors, all from your smartphone or computer. People can also use voice-activated speakers like Amazon’s Echo or Google Home to accomplish these tasks and more. Wearables such as smart watches or conductive fibres woven into the fabric of your workout clothes can monitor your breathing and heart rate, count your steps, and send the information to Courtesy of Owlet your phone.39 The Owlet Smart Sock keeps track of an infant’s heart rate and Soon every part of our lives will be quanoxygen levels so that parents can know exactly how their baby is tifiable and we could be even more accountdoing at any given time. As wearable technology like this becomes able for our decisions. For example, skipping more popular, it may change the ways people go about their daily the gym too many times may prompt your lives. What do you think are the benefits and drawbacks of smart gym shoes to auto-text your health insurclothing and other types of wearable tech? ance network, which may decide to increase 58

APPENDIX A Using Technology to Manage Information

your premiums. While this may seem futuristic, there are many companies today that get measurable results by analyzing data collected from networked things. For example, John Deere can do remote, wireless diagnostics of tractors and combines, saving farmers days of down time. Union Pacific reduced the number of train derailments caused by failed bearings by 75 percent using near-real-time analysis of data collected by sensors along the tracks.40

Virtual Networking and Cloud Computing Computers can be networked a couple of ways: by hardware (i.e., cables, switches, etc.) or by software. For every computer a company has in its hardware-based network, an array of potential problems, from time-wasting crashes to crippling viruses, lurks in the shadows. To remedy this problem, many companies have turned to virtual networking, a process that allows software-based networked computers to run multiple operating systems and programs and share storage. Virtual networking can be either external or internal. External networking treats the network as a single pool of resources that can all be accessed regardless of its physical components (i.e., networked computers share the resources of all the other computers on the network). Internal networking shares the resources of one central computer with all the networked computers.41 External networking may be considered decentralized while internal networking may be viewed as centralized. Companies that want to virtualize but not store all the data in their own offices need only look to the sky for a solution called cloud computing. This technology stores a company’s data and applications at offsite data centres that are accessed over the Internet.42 The data are not necessarily stored in a single data centre; portions of data may be in a series of centres anywhere in the world. The data are easily accessible from any computer with an Internet connection. Vendors like Amazon, Google, Apple, and IBM offer cloud computing for a monthly pay-as-you-go fee.43 There are three types of cloud computing: (1) private clouds (wholly behind a firewall), (2) public clouds (run on remote computers), and (3) hybrid clouds (consist of a private cloud for essential tasks, but use a public cloud as needed).44 © Jozsef Bagota/Shutterstock RF The advantages of cloud computing include:45 1. Reduced software costs. Most software is free

because is it supplied by the service provider. No need to pay for upgrades or spend time installing all those patches since they are installed in the cloud.

virtual networking

A process that allows software-based, networked computers to run multiple operating systems and programs, and share storage.

cloud computing

A form of virtualization in which a company’s data and applications are stored at offsite data centres that are accessed over the Internet (the cloud).

Cloud computing changes the way people and businesses use technology. Since their data are stored in the cloud rather than locked on their computers, users are free to access files from anywhere with any device. How has cloud computing changed the way you access your programs and files?

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

2. Improved security. Offsite centres provide full and regular backups of data, which is

something many small businesses fail to do regularly. 3. Flexible capacity. Sometimes businesses need large chunks of capacity during peak

demand periods, but much less at other times. Cloud computing allows the company to rent only what is required when it is required. If the company’s needs increase, it just rents more. This is especially important to growing businesses that do not know what their needs will be. 4. Lower equipment costs. Since applications run in the cloud and not on your desk,

you do not need to buy expensive equipment. 5. Easier access. Since you access all of your documents in the cloud via the Internet,

it is much easier to share documents and make sure that everyone is working with the latest version. Of course, cloud computing also has disadvantages. Primarily these difficulties involve concerns about security, stability, and control of data (we’ll discuss these issues in more detail later in the appendix).46 For instance, in early 2017 Amazon Web Services accidentally shut down several servers while trying to fix a bug in its billing system. The mistake prevented hundreds of thousands of websites from being able to access their cloud storage, causing them to go offline for several hours.47 Also, when the popular cloud-storage service Dropbox was hacked, it led to the unauthorized release of 68 million user passwords.48 VMware provides a service that lets IT managers control the data on private and public clouds so that they can enjoy the cost savings and flexibility of cloud services but still maintain control over security.

Effects of Information Technology onManagement The increase of IT has affected management greatly and will continue to do so in the future. Four major issues arising from the growing reliance on IT relate to the areas of human resources, security, privacy, and stability.

Human Resources Issues Human resources managers need to recruit employees who know how to use the new technology or train those who already work in the company. The rapid advance of technology has created a generational divide in terms of technical skills among different-aged workers. The difference leads to greater recruitment and training challenges. Companies often hire consultants instead of internal staff to address these concerns because outsourcing technical training allows the business to concentrate on their core competencies. Perhaps the most revolutionary effect of computers and the Internet is telecommuting, also known as telework. Using computers linked to the company’s network, mobile employees can transmit their work to the office from anywhere as easily as they can walk to the boss’ office. Naturally, this practice decreases travel time and overall costs and often increases productivity. Having fewer employees in the office also means that a company 60

APPENDIX A Using Technology to Manage Information

can get by with smaller, and therefore less expensive, office space than before. As we’ll discuss in Chapter10, organizations can have tall or flat structures; IT often eliminates middle-management functions, which in turn flattens an organizational structure. Telecommuting enables men and women to work while staying home with small children or elders. It has also been a tremendous boon for workers with disabilities. Employees who can work after hours on their home computers rather than staying late at the office report lowered stress and improved morale. Telecommuting is most successful among people who are © pixdeluxe/Getty Images RF self-starters, who do not have home distractions, and Telecommuting is one of the biggest human resource whose work does not require face-to-face interaction boons of the wireless age, but some employees are better suited to its demands than others. Do you have what it with co-workers. takes? Electronic communication can never replace faceto-face communication for creating enthusiasm and team spirit, however. Even as telecommuting has grown in popularity, some telecommuters report that a consistent diet of long-distance work leaves them feeling dislocated or left out of the loop. Some miss the energy of social interaction or dislike the intrusion of work into what is normally a personal setting. Often people working from home do not know when to turn the work off. Some companies are therefore using telecommuting only as a part-time alternative. In fact, industry now defines telecommuting as working at home a minimum of two days a week. Figure A.5 illustrates how IT changes the way managers and workers interact. For additional information about telecommuting and home-based workers, review Chapters 7 and 12. ■ FIGURE

A.5

WHEN INFORMATION TECHNOLOGY ALTERS THE WORKPLACE Managers Must

Workers Must

• Instill commitment in subordinates rather than rule by command and control

• Become initiators, able to act without management direction.

• Become coaches, training workers in necessary job skills, making sure they have resources to accomplish objectives, and explaining links between a job and what happens elsewhere in the company.

• Become financially literate so that they can understand the business implications of what they do and changes they suggest.

• Give greater authority to workers over scheduling, priority setting, and even compensation.

• Learn group interaction skills, including how to resolve disputes within their work group and how to work with other functions across the company.

• Use new information technologies to measure workers’ performance, possibly based on customer satisfaction orthe accomplishment of specific objectives.

• Develop new math, technical, and analytical skills to use newly available information on their jobs.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

Security Issues “Secure” information may be at risk from hackers who break into companies’ networks, from employees who steal it, or from companies’ own incompetence, poor gatekeeping, or sloppy procedures. Computer security is more complicated than ever as hackers target web-enabled smart phones and the 3G networks they run on, social networks and online games, and USB storage devices (flash drives and memory cards). When information was processed on mainframes, the single data centre was easier to control because there was limited access to it. Today, however, computers are accessible not only in all areas within the company but also in all areas of other companies with which the firm does business.

virus

A piece of programming code inserted into other programming to cause some unexpected and, for the victim, usually undesirable event.

VIRUSES An ongoing security threat is the spread of computer viruses over the Internet. A virus is a piece of programming code inserted into other programming that usually lies dormant until triggered to cause some unexpected and, for the victim, usually undesirable event. Users pick up viruses by unknowingly downloading infected programming over the Internet or sharing an infected USB storage device. Often the source of the infected file is unaware of the virus. Some viruses are playful (“Kilroy was here!”), but some can be quite harmful, erasing data or causing your hard drive to crash. Programs such as Norton Antivirus inoculate your computer so it does not catch a known virus. But because new viruses are being developed constantly, antivirus programs may have only limited success. Keep your antivirus protection up to date and, more important, practice safe computing by not downloading files from unknown sources.

HACKERS

Were you among the hundreds of millions who had their e-mail account compromised when hackers breached Yahoo! in 2014? What can you do to protect yourself from loss when someone steals your vital information from a third party? How did the hacking affect Yahoo!’s relationship with you and other users? Do you think it played a part in the company’s 2017 sale to Verizon?

If a business stores customer data then it is subject to laws and regulations regarding the proper protection of these data (see Chapter 5 for more discussion on the ethical use of user data). Many small businesses do not have the personnel to handle security concerns and might consider hiring a managed security services provider (MSSP) like Alert Logic or Perimeter E-Security.49 MSSPs can install and manage firewalls, virtual private networks, web filtering and anti-spam programs, security intelligence services, and wireless and mobile functions. Even with all of this security protection, it is still possible that hackers can illegally access your information. Yahoo! disclosed that more than one billion accounts became compromised when hackers breached the site and stole personal information like names and passwords. The hacking ruined Yahoo!s already shaky reputation with customers and also hurt the company’s negotiating position during its sale to Verizon.50

APPENDIX A Using Technology to Manage Information

Even organizations charged with protecting your most vital information are vulnerable to hackers. In 2017, 153 million people had their social security numbers, birth dates, and other critical information stolen when hackers breached the consumer credit reporting agency Equifax. The hack exposed these millions of people to great risk of having their identities stolen. In response to the growing fear of identify theft, 70 percent of employers now offer identity-theft protection as an employee benefit. This option may benefit the employers as much as employees since 56 percent of victims report that they needed to take off work to deal with the issue. More than a third of the victims suffered moderate to severe emotional distress as a result of the theft. Some security experts advise businesses to assume that their systems have been breached and take the fight to the hackers. They recommend using methods that will frustrate the hackers and drive up their cost in order to deter them from future hacking. These methods include planting false information on their systems to mislead data thieves, and creating decoys that gather information about intruders. If a hacker tries to access a company through one of these false gateways, IT workers can easily identify and take countermeasures against them.51 The bottom line is that businesses that store data will need stronger and smarter tools to protect themselves from hackers.

PHISHING Phishing is another type of online security threat. The action involves e-mails embellished with a stolen logo for a well-known enterprise, such as eBay, PayPal, or a financial institution, that makes the messages look authentic. The messages often state something like “Dear Customer” (rather than your name), “Account activation required,” or “Your account will be cancelled if you do not verify.” When the victims click the link contained in the message, they are sent to phony websites that take personal data and use it to commit fraud. The best way to avoid this scam is to never access a website through a link in an e-mail message. Instead, open a new window and go to the website directly. Cybercrimes cost companies billions of dollars a year. In 2013, the Canadian AntiFraud Centre received over 16 000 complaints about cyber-fraud, such as e-mail and website scams, with an estimated loss of more than $29 million.52 The Competition Bureau Canada stated that from January 2014 to December 2017, Canadians lost more than $405million to fraudsters, of which $94 million was taken from Canadian 60-79 years of age.53 Other sources estimate the cost of cybercrime in Canada is 0.17 percent of the gross domestic product, which is a much higher amount.54 Cyber crimes cost companies as much as $450 billion a year.55 Companies that insure businesses against security breaches are demanding that strong measures be put in place, and it is also becoming the law.56 Privacy regulations such as the Digital Privacy Act in Canada, Sarbanes-Oxley in the United States, and the European Data Protection Act stipulate that organizations doing business in their jurisdiction have systems in place to protect and preserve data from misuse, alteration, or destruction.57 Phishing targets any organization, including higher education institutions. In 2016, the University of Calgary paid $20,000 in a ransomware attack where network data were locked by cyberattackers. But an $11.8 million phishing scam in 2017 targeted MacEwan University where an accounts payable employee believed an email message was from a legitimate construction vendor only to be informed later that it was a scam.58

phishing

E-mails embellished with a stolen logo from a well-known enterprise (often from financial institutions) that makes the messages look authentic, but which are used to collect personal data and use it to commit fraud.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

Existing laws do not address all of the problems with today’s direct, real-time communication. As more and more people log on to the Internet, the number of legal issues likely will increase. Today, copyright and p*rnography laws are crashing into the virtual world. Other legal questions—such as those involving intellectual property and contract disputes, online sexual and racial harassment, and the use of electronic communication to promote crooked sales schemes—are being raised as millions of people go online (see the Online Supplement Working Within the Legal Environment of Business for more details about legal issues in business).

Privacy Issues The increasing use of technology creates major concerns about privacy. In 2013, Edward Snowden leaked classified documents to the media regarding the United States National Security Agency’s (NSA) tactics in tracking citizens, international governments, and companies. Snowden’s revelations changed the public conversation about privacy and security.59 You don’t need to be the target of a criminal investigation to have your e-mail or phone calls snooped, and you’re being watched by many more entities than the government. Of course, we’ve already talked about how your online clicks are monitored by private industry.60 You do not need to be the target of a criminal investigation to have your e-mail snooped. Companies today scan employees’ e-mails regularly and legally. Just as employers can log and listen to employees’ telephone conversations, they can track e-mail in a search for trade secrets, non-work-related traffic, harassing messages, and conflicts of interest. Also, most e-mail travels over the Internet in unencrypted plain text. Any hacker with a desire to read your thoughts can trap and read your messages. Some e-mail systems, such as Lotus Notes, can encrypt messages so that you can keep corporate messages private. If you use browser-based e-mail, you can obtain a certificate that has an encryption key from a company such as VeriSign. Legitimate users who want to decrypt your mail need to get an unlocking key. The Internet presents increasing threats to your privacy, as more and more personal information is stored in computers and people are able to access that data, legally or illegally. Some websites allow people to search for vehicle ownership from a licence number or to find individuals’ real estate property records. One © Tribune Content Agency LLC / Alamy Stock Photo key question in the debate over protecting our privacy Were you one of the tens of millions who had to get a new credit or debit card when hackers breached Target’s is: “Is this personal information not already public?” system and stole credit and debit card numbers?61 What Civil libertarians have long fought to keep certain can you do to protect yourself from loss when someone kinds of information available to the public. If access to steals your vital information from a third party? How did such data is restricted on the Internet, wouldn’t we have the hacking affect Target’s relationship with you and other to re-evaluate our policies on public records entirely? customers? How did it affect the company’s finances? The privacy advocates do not think so. After all, the 64

APPENDIX A Using Technology to Manage Information

difference is that the net makes obtaining personal information too easy. It is unlikely your neighbours or friends even consider going to the appropriate local agency and sorting through public documents for hours to find your driving records or to see your divorce settlement. But they might dig into your background if all it takes is a few clicks of a button. Many web servers track the online movements of users willing to swap personal details for free access to online information. Site owners can send cookies to your computer that stay on your hard drive. These are pieces of information—such as registration data (name and password) or user preferences—that the browser sends back to the server whenever you return to that website. Other cookies track your movements around the web and then blend that information with a database so that a company can tailor the ads you receive. Some software, known as spyware, can be installed on your computer without your knowledge. The spyware can then infect your system with viruses and track your online behaviour. Do you mind someone watching over your shoulder while you are on the web? Tim Berners-Lee, the researcher who invented the © Design Pics Inc./Alamy RF World Wide Web, led the development of a way to prevent you How many of the online and mobile apps that you use track your whereabouts (both your from receiving cookies without your permission. His Platform for physical location and where you go online) Privacy Preferences, or P3, allows a website to automatically send and share that information with third parties? 62 information on its privacy policies. With P3 you can set up your Probably more than you think. web browser to communicate only with those websites that meet certain criteria. You need to decide how much information about yourself you are willing to give away. Remember, we are living in an information econ- cookies omy, and information is a commodity—that is, an economic good with a measurable value. Pieces of information,

Stability Issues Although technology can provide significant increases in productivity and efficiency, instability has a substantial impact on business. Candy maker Hershey discovered that the Halloween trick was on it one year when the company could not get its treats to the stores on time. Failure of its new $115-million computer system disrupted shipments, and retailers were forced to order Halloween treats from other companies. Consequently, Hershey suffered a 12 percent decrease in sales that quarter. What is to blame for instability? Experts say it is a combination of computer error, human error, malfunctioning software, and an overly complex marriage of software, hardware, and networking equipment. Some systems are launched too quickly to be bug-proof, and some executives do not have the technical knowledge to challenge computer specialists. For example, in 2014, the Ontario government implemented a new software program, called Social Assistance Management System (SAMS), to handle thousands of social assistance payments and case files. Unfortunately, programming errors in the software resulted in $20 million in overpayments to 17 000 recipients.63 As critical as technology is to business, some of it is not built with rigorous engineering, and some people are not properly trained to use it. As business practices become more complex, we will probably be prone to more errors.

such as registration data or user preferences, sent by a website over the Internet to a web browser that the browser software is expected to save and send back to the server whenever the user returns to that website.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

Technology and You If you are beginning to think that being computer illiterate may negatively affect your career, you are getting the point. As IT eliminates old jobs while creating new ones, it will be up to you to learn and maintain the skills you need to be certain you aren’t left behind. And, who knows, maybe you’ll launch your career online like Gabi Gregg did. MTV appreciated so much the trust and passion she shared with her many Twitter followers that the company hired her as its first “TJ.” Along with a $100,000 salary, the job also provided her with a platform to become a successful swimwear designer and blogger.64 It just goes to show that you can achieve anything these days with an appealing web presence and good work ethic.

KEY TERMS broadband technology 52 business intelligence (BI) (or analytics) 44 cloud computing 59 cookies 65 data analytics 49 data mining 49 data processing 44

enterprise portal 52 extranet 51 hackers 51 information systems (IS) 44 information technology (IT) 44 Internet2 53 Internet of Things (IoT) 58 intranet 51

phishing 63 virtual networking 59 virtual private network (VPN) 51 virus 62 Web 2.0 55 Web 3.0 56

CHAPTER 2

How Economic Issues Affect Business

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Describe basic economics. LO2 Explain what capitalism is and how free markets work. LO3 Compare the benefits and negative consequences of socialism and communism. LO4 Describe the mixed economy of Canada. LO5 Illustrate the significance of key economic indicators and the business cycle.

P R O F I L E GETTING TO KNOW: THOMAS PIKETTY, ECONOMIST

At nearly 700 pages, Thomas Piketty’s book Capi-

participated in the massive socialist protests of

tal in the Twenty-First Century is an unlikely block-

1968 that nearly brought France’s economy to a

buster to say the least. Despite its length and

standstill. By the time Thomas was born, his parents

scholarly subject matter, the book climbed to the

had left their radical days behind them. Politics were

top of the New York Times Best Seller list in 2014

never discussed in their household. Instead, they

and became an instant classic among academ-

taught their son to trust his judgment and form his

ics and casual readers alike. Thomas Piketty (pro-

own opinions.

nounced Tome-ah Peek-et-ee) went from being a

These lessons gave Piketty the confidence

respected but little-known economist to an inter-

to become a top student. His academic success

nationally renowned scholar on income inequality.

gained him admittance to one of the most presti-

As the years go by, his insights could have a major

gious higher education institutions in France, the

effect on economic policies around the globe.

École Normale Supérieure, when he was just 18.

Piketty was born in 1971 to politically minded

Piketty earned his PhD four years later with a dis-

parents living in the suburbs of Paris. His parents

sertation that focused on wealth redistribution.

CHAPTER 2 How Economic Issues Affect Business

modern age: income inequality. Piketty set out to correct this when he returned to Paris in the mid1990s. He spent the next two decades at various French institutions researching the accumulation of private wealth and how it related to overall income growth. But unlike many scholars, Piketty didn’t want his findings to be accessible only to the academic elite. He chose instead to write an absorbing book that uses data to paint a vivid picture of the last 100 years of economic activity. Various reports that are based upon his concepts demonstrate a marked imbalance. For example, 82 percent of wealth generated in 2017 went to the richest 1 percent of the global population. In Canada, a 2016 analysis found that five Canadians held the same amount of wealth as 30 percent of the rest of the population. In the United Source: © Eric Fougere/Corbis/Getty Images

States, the richest 1 percent of Americans now earn almost a quarter of the nation’s income, the high-

During hese years Piketty took a trip that would

est total since 1928. Piketty concludes that this

shape his view of the world. Traveling to Romania

ever-expanding concentration of wealth is unsus-

shortly after the nation had gained independence

tainable for a healthy world economy. This mes-

from the Soviet Union in 1990, he was shocked

sage resonated across the globe, pushing sales

by the sorry state of the former communist repub-

of C apital past 1.5 million copies so far. And while

lic. “This sort of vaccinated me for life against lazy,

some of Piketty’s proposals for solving income

anticapitalist rhetoric, because when you see these

inequality have been disputed, few professionals

empty shops, you see these people queuing for

can argue with the power of his data.

nothing in the street,” Piketty said, “it became clear

Many people don’t realize the importance of

to me that we need private property and market

the economic environment to the success of busi-

institutions, not just for economic efficiency but for

ness. That is what this chapter is all about. You will

personal freedom.”

learn to compare different economic systems to see

Still, not every aspect of the capitalist free

the benefits and the drawbacks of each. You will

market pleased Piketty. After earning his doctorate,

learn how the free-market system of Canada works.

he became a professor and researcher at the Mas-

And you will learn more about what makes some

sachusetts Institute of Technology. He went back to

countries rich and other countries poor. By the end

France two years later, however, disillusioned with

of the chapter, you should understand the direct

American economists. In his mind, the economists

effect economic systems have on the wealth and

had failed to address one of the major issues of the

happiness of communities throughout the world.

Sources: Patricia Cohen, “A Bigger Economic Pie, but a Smaller Slice for Half of the U.S.,” The New York Times, December 6, 2016; Steven Erlanger, “Taking on Adam Smith (and Karl Marx),” The New York Times, April 19, 2014; John Cassidy, “Forces of Divergence,” The New Yorker, March 31, 2014; Anne-Sylvaine Chassany, “Lunch with the FT: Thomas Piketty,” Financial Times, June 26, 2015; Thomas Piketty, “We Must Rethink Globalization, or Trumpism Will Prevail,” The Guardian, November 16, 2016; Peter Coy, “Piketty’s Capital Was So Popular There’s a Sequel,”Bloomberg Businessweek, May 8, 2017; Murad Hemmadi, “Five Canadian are as rich as 30% of the population, not two", Canadian Business, January 16, 2017; Della Goland, “Wealth imbalance will be disastrous: wealth wake-up call,” Toronto Star, January 27, 2018.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

How Economic Conditions AffectBusiness

economics

The study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.

LO1

Describe basic economics.

macroeconomics

The part of economic study that looks at the operation of a nation’s economy as a whole.

microeconomics

The part of economic study that looks at the behaviour of people and organizations in particular markets. 70

If you want to understand the underlying situation and conditions in which Canadian businesses operate, it is essential that you (1) have some grasp of economics, (2) be aware of the impact of the global environment, and (3) understand the role of the federal and provincial governments in Canada. The Canadian economy is an integral part of the world economy. Business firms use labour from other countries, export to and import from other countries, buy land in other countries for their facilities, and receive money from foreign investors. To understand events in the Canadian economy, therefore, one has to understand the world economy. Why is South Korea comparatively wealthy and North Korea suffering economically, with many of its people starving? Why is China’s income per person lower than Taiwan’s? Such questions are part of the subject of economics. In this chapter, we explore the various economic systems of the world and how they either promote or hinder business growth, the creation of wealth, and a higher quality of life for all. A major part of business success is due to an economic and social climate that allows businesses to operate freely. Foreign investors like Canada because we have a stable economic and political environment. Investing is risky enough without having to worry about unpredictable governments, massive corruption, and weak laws. Therefore, any change in our economic or political system can have a major influence on businesses. Global economics and global politics also have a major influence on businesses in Canada. For example, there is even some talk today about rewriting international tax rules.1 For example, a one-time global wealth tax was proposed by the International Monetary Fund (IMF).2 The idea is to tax the wealth of individuals around the world by 10 percent to bring the debt of nations closer to the pre-recession levels. Think of how such a tax would affect businesses and workers in Canada. Clearly, to understand business, you must also understand basic economics and politics.3 This is especially true of new post-secondary graduates looking for jobs.

What Is Economics? Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. Remember from Chapter 1 that these resources (land, labour, capital goods, entrepreneurship, and knowledge) are called factors of production. Businesses may contribute to an economic system by inventing products that greatly increase available resources. For example, businesses may discover new energy sources, new ways of growing food, and new ways of creating needed goods and services.4 Ballard Power Systems, a global leader in the design, development, and manufacture of hydrogen fuel cells, is doing just this. Among other initiatives, Ballard is working with auto manufacturers to develop the next generation of efficient and clean engines for buses, automobiles, and trucks.5 There are two major branches of economics: macroeconomics looks at the operation of a nation’s economy as a whole, and microeconomics looks at the behaviour of people and organizations in particular markets.6 For example, while macroeconomics looks at how many jobs exist in the whole economy, microeconomics examines how many people will be hired in a particular industry or a particular region of the country. A question in macroeconomics might

CHAPTER 2 How Economic Issues Affect Business

Your buying behaviour falls under the study of microeconomics. How does understanding spending patterns benefit a country’s economy?

be: What should Canada do to lower its national debt?7 Macroeconomic topics in this chapter resource include gross domestic product (GDP), the unemployment rate, and price indexes. A question development The study of how to in microeconomics might be: Why do people buy smaller cars when gas prices go up? increase resources Some economists define economics as the allocation of “scarce” resources. They and the creation of believe that resources are scarce and that they need to be carefully divided among peo- the conditions that will ple, usually by the government. There’s no way to maintain peace and prosperity in the make better use of those resources (e.g., world by merely dividing the resources we have today among the existing nations. There recycling). are not enough known resources available to do that. Resource development is the study of how to increase resources (say by getting oil from shale and oil sands) and to create the conditions that will make better use of them (like recycling and oil conservation).8 Businesses can contribute to an economic system by inventing products that greatly increase available resources. For example, they can discover new energy sources (natural gas for autos), new ways of growing food (hydroponics), and new ways of creating needed goods and services such as nanotechnology and 4D technology (moving 3D, with time as the fourth dimension). Mariculture, or raising fish in pens out in the © Mark Conlin/Getty Images ocean, could lead to more food for everyone and more New ways of producing goods and services add resources to employment. It is believed that Canada could become the economy and create more employment. Fish farms, for one of the world’s top three aquaculture producers instance, create both food and jobs. Can you think of other with an industry value of approximately $6.6 billion innovations that can help increase economic development? annually.9 71

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

The Secret to Creating a Wealthy Economy Imagine the world when kings and queens and other rich landowners had most of the wealth, and the majority of the people were peasants. The peasants had many children, and it may have seemed a natural conclusion that if the situation continued as usual there would soon be too many people and not enough food and other resources. Economist Thomas Malthus made this argument in the late 1700s and early 1800s, leading the writer Thomas Carlyle to call economics “the dismal science.” Followers of Malthus today (who are called neo-Malthusians) still believe there are too many people in the world and that the solution to poverty is radical birth control, including forced abortions and sterilization.10 The latest world statistics, however, show population increasing more slowly than expected.11 In some industrial countries—like Japan, Germany, Italy, and Russia—population growth may be so slow that eventually there will be too many old people and too few young people to care for them.12 In the developing world, on the other hand, population will climb relatively quickly and may lead to greater poverty and more unrest. Studies about the effects of population growth on the economy are part of macroeconomics. The Adapting to Change box discusses significant global population shifts that are expected over the next 25 years. Such studies about the effects of population growth on the economy are part of macroeconomics.

Adapting to CHANGE World Population Is Popping Population forecasts from the United Nations estimate that by the year 2050, global population will increase to 9.7 billion people. Understanding where this number comes from may be surprising. More than half of the world’s population growth will come from Africa, where the continent’s population will double to 2.5 billion. Nigeria will experience the world’s fastest-growing population. It is expected to grow to 413 million people by 2050, making it the third-largest country in the world, surpassing the United States. China and India will remain the most populated countries, with almost 38 percent of the world’s people. India will be the world’s most populated nation by 2022. The largest decline in population will be in Europe, which will see a decrease of 4.3 percent. Over one-third of the population in Europe will be over age 60 by 2050. The predicted increase in population in what are some of the world’s poorest countries will present significant economic challenges. Combating hunger and malnutrition, expanding education, providing adequate

health care, and eradicating poverty will not be easy tasks. Fortunately, the twenty-first century has been good for Africa. The continent boasts three of the fastest-growing economies in the world and has the world’s fastest-growing middle class. India has also made significant strides in growing its economy and is expected to be a strong global competitor. With an expanding population, economic development is the key to every developing country’s prosperity.

Sources: Rishi Iyengar, “India No Longer the World’s Fastest Growing Economy,” CNN Money, January 16, 2017; Raymond Zhong, “India Is No Longer the World’s Fastest Growing Large Economy, IMF Says,” The Wall Street Journal, January 16, 2017;“World Population Projected to Reach 9.7 Billion by 2050,”United Nations Department of Economics and Social Affairs, July 29, 2015, accessed July 30, 2018, http://www.un.org/en/development/desa/news/population/2015-report.html.

CHAPTER 2 How Economic Issues Affect Business

Some macroeconomists believe that a large population, especially an educated one, can be a valuable resource. You’ve probably heard the saying “Give a man a fish and you feed him for a day, but teach a man to fish and you feed him for a lifetime.” You can add to that: “Teach a person to start a fish farm, and he or she will be able to feed a village for a lifetime.” The secret to economic development is contained in this last statement. Business owners provide jobs and economic growth for their employees and communities as well as for themselves.13 The challenge for macroeconomists is to determine what makes some countries relatively wealthy and other countries relatively poor, and then to implement policies and

Seeking SUSTAINABILITY 2015 Pan Am and Parapan Am Is LEEDing the Way The 2015 Pan Am and Parapan Am Games in Toronto represent an important legacy for each of the 16 southwestern Ontario communities who hosted the event. Ten new, world-class facilities were built including an athletics stadium, aquatics centre and field house, velodrome, and soccer stadium. A key part of the host committee mission is to leave a Games legacy of sustainable excellence. To meet this goal, Games organizers wanted each venue to be environmentally friendly. The $674 million Pan Am/Parapan Am Games infrastructure budget included building requirements that ensured environmental factors. Each building is Leadership in Energy and Environmental Design (LEED) certified, which means the buildings focus on healthy indoor environments, reduce greenhouse gas emissions, and efficiently use energy, water, and other resources. Since 2004, the Canada Green Building Council has certified over 1800 LEED buildings and registered over 5000 in Canada. Bouygues Building Canada built three venues: the Milton velodrome, the Hamilton soccer stadium, and the York University rugby stadium, in a joint venture with Kenaidan Contracting and Infrastructure Ontario. Each venue has LEED certification, reflecting Canada’s goal for the Games to be completely “green” and carbon neutral. The projects include the use of materials with low volatile organic compound emissions, indoor air quality controls, and waste sorting and recycling. The Markham PanAm Centre complies with FLAP (Fatal Light Awareness Program) guidelines for Bird-Friendly buildings. “It’s important when you design venues for international games to create a legacy use,” says Bob Fatovic,

Courtesy of the Pan Am/Parapan Am Games TO2015 Organizing Committee. Used with permission.

Vice President of Cannon Design, the architect of record on all three projects. “The re-use of all of these venues after the games was the impetus to fund these projects.” The athletes’ village, which housed 10 000 athletes, coaches, and team officials during the competition, is earmarked as a mixed-use neighbourhood with affordable housing, new condominiums, a YMCA and college dormitory. The massive scale of major international sport events means governments and communities must pay greater attention to the “triple bottom line”: “people, planet and profits” of hosting an event of this kind. Are new facilities, such as arenas, pools, recreation centres, and libraries being built in your community? Does sustainability pay a role in the decisions and plans made by your city council?

Sources: 2015 PanAm/ParapanAm Games, http://www.toronto2015.org/; Canada Green Building Council, http://www.cagbc.org; “Backgrounder: PanAmerican Aquatics Centre, Field House and Canadian Sport Institute Project,” Infrastructure Ontario, June 1, 2011, http://www.infrastructureontario.ca/uploadedFiles/PAAC%20-%20Pre-Qualified%20Bidder%20-%20Backgrounder%20-%20Final%20 %28Revised%29.pdf; Bouygues Building Canada-PanAm Games Facilities, http://www.buildingandconstruction-canada.com/index.php/ sections/community/586-bouygues-building-canada-panam-games-facilities.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

programs that lead to increased prosperity for everyone in all countries. One way to begin understanding this challenge is to consider the theories of Adam Smith.

Growth Economics and Adam Smith

invisible hand

A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all.

Rather than believing that fixed resources had to be divided among competing groups and individuals, Scottish economist Adam Smith envisioned creating more resources so that everyone could become wealthier. The year was 1776. Adam Smith’s book, An Inquiry into the Nations and Causes of the Wealth of Nations (simply called The Wealth of Nations), was later considered the foundation of the study and understanding of the newly developing capitalist industrial society. Smith believed that freedom was vital to the survival of any economy, especially the freedom to own land or property and the freedom to keep profits from working the land or owning a business.14 He believed that people will work hard if they have incentives for doing so—that is, if they know that they will be rewarded.15 According to Smith, as long as farmers, labourers, and business people (entrepreneurs) could see economic rewards for their efforts (i.e., receive enough money in the form of profits to support their families), they would work long hours and work hard. As a result of these efforts, the economy would prosper—with plenty of food and all kinds of products available to everyone. Smith’s ideas were later challenged by Malthus and others who believed economic conditions would only get worse, but Smith is considered the father of modern economics.

How Businesses Benefit the Community

In Adam Smith’s view, business people do not necessarily deliberately set out to help others. They work primarily for their own prosperity and growth. Yet as people try to improve their own situation in life, Smith said, their efforts serve as an “invisible hand” that helps the economy grow and prosper through the production of needed goods, services, and ideas. Thus, the invisible hand turns self-directed gain into social and economic benefits for all. How is it that people working in their own self-interest produce goods, services, and wealth for others? The only way farmers in a given area can become wealthy is to sell some of their crops to others. To become even wealthier, farmers would have to hire workers to produce more food. As a consequence, people in that area would have plenty of food © Kim Karpeles/Alamy available and some would have jobs on the According to Adam Smith’s theory, business owners are motivated farms. So the farmers’ self-centred efforts to to work hard because they know they will earn, and keep, the become wealthy lead to jobs for some and rewards of their labour. When they prosper, as the owner of this food for almost all. Stop and think about that restaurant has, they are able to add employees and grow, indirectly process for a minute because it is critical to helping the community and the larger economy grow in the process. your understanding of economic growth in What might motivate you to start your own business? Canada and other countries in the world. 74

CHAPTER 2 How Economic Issues Affect Business

The economic contrast is remarkable. Business is booming in Seoul, South Korea (as shown on the left). But North Korea, a communist country, is not doing well (as the picture on the right shows). What do you think accounts for the dramatic differences in the economies of these neighbouring countries?

The same principle applies to other products as well—everything from clothing to houses to iPhones. Smith assumed that as people became wealthier, they would naturally reach out to help the less fortunate in the community.16 That has not always happened. In fact today there is a great disparity between the amount of money the wealthy have and the amount of money poor people have.17 This is called “inequality” and is the central concern of many political, religious, and social leaders today.18 Many business people are becoming more concerned about social issues and their obligation to return to society some of what they have earned.19 The Giving Pledge, a philanthropic initiative started by billionaires Bill Gates and Warren Buffett, encourages the world’s wealthiest individuals and families to donate the majority of their wealth to fight poverty, health issues, and education.20 The economic question is: What can and should we do about poverty and unemployment in Canada and around the world? As we mentioned in Chapter 1, it is important for businesses to be ethical as well as generous. Unethical practices undermine the whole economic system.

PROGRESS ASSESSMENT

• •

What is the difference between macroeconomics and microeconomics? What does Adam Smith’s term invisible hand mean? How does the invisible hand create wealth for a country?

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

LO2

Explain what capitalism is and how free markets work.

capitalism

An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit.

Understanding Free-Market Capitalism Basing their ideas on free-market principles, such as those of Adam Smith, business people began to create more wealth than had ever been created before. They hired others to work on their farms and in their factories, and nations began to prosper as a result. Business people soon became the wealthiest people in society. While there were great disparities between the wealthy and the poor, there was always the promise of opportunities to become wealthy. However, great disparities in wealth remained or even increased. Many business people owned large homes and fancy carriages while most workers lived in humble surroundings. Nonetheless, there was always the promise of better times. One way to gain wealth was to start a successful business of your own. Of course, it wasn’t that easy—it never has been. Then and now, you have to accumulate some money to buy or start a business, and you have to work long hours to make it grow. But the opportunities are there. The economic system that has led to wealth creation in much of the world is known as capitalism. Under capitalism, all or most of the factors of production and distribution— such as land, factories, railroads, and stores—are owned by individuals (i.e., not owned by the government). They are operated for profit, and business people, not government officials, decide what to produce and how much, what to charge, and how much to pay workers. They also decide whether to produce goods in their own countries or have them made in other countries. Capitalism is the popular term used to describe free-market economies. No country is purely capitalist, however. Often the government gets involved in issues such as determining minimum wages and subsidizing certain sectors, as the federal government does in Canada for the agriculture sector. Today, capitalism is the foundation for the economies of Canada, England, Australia, the United States, and most other developed nations. We will discuss Canada’s mixed economy in some detail later in this text. Capitalism, like all economic systems, has its faults, and income inequality is a major issue that concerns many today.21 However, John Mackey, CEO of Whole Foods, believes that “conscious capitalism,” that is, capitalism based on businesses that serve all major stakeholders, is the best system in the world.22 Here is what he says about capitalism: “In the long arc of history, no human creation has had a greater positive impact on more people more rapidly than free-enterprise capitalism.” Mark Benioff, CEO of Salesforce, concurs and uses the term compassionate capitalism. He believes that not just businesses but also stakeholders—from customers to environmentalists—should share in the benefits of capitalism.23 The root word of capitalism is “capital.” The Spotlight on Small Business box shows how a little capital can help small businesses grow in the poorest countries of the world.

A free-market system is evident at a farmer’s market. As a buyer, what can you do to ensure that you pay the best price for produce?

How Free Markets Work The free market is one in which decisions about what to produce and in what quantities are made by the market—that is, by buyers

CHAPTER 2 How Economic Issues Affect Business

Spotlight On SMALL BUSINESS The Key to Capitalism Is Capital FINCA (the Foundation for International Community Assistance) is a non-profit organization whose mission is to alleviate poverty through lasting solutions that help people build assets, create jobs, and raise their standard of living. Their vision is to build a global network of sustainable and scalable social enterprises that improve lives worldwide. FINCA offers small loans, savings, and other financial services to those often turned down by traditional banks. With microloans, families can invest in and build their own small businesses and increase their income-earning capacity. FINCA currently serves nearly two million clients across 23 countries on five continents. Worldwide, their borrowers have on-time repayment rates of over 98 percent. The story of one hardworking FINCA small entrepreneur will help you understand the process. Yvrose St. Louis lives in Haiti, where the poverty rate is a staggering 80 percent. She had a little grocery store in town, but—like many Haitians—she lost everything in the earthquake that struck in 2010. She heard about FINCA from a neighbour and decided to apply for a

Courtesy of FINCA. Used with permission.

loan in order to rebuild her family’s business and make a better life for her children. Yvrose obtained a small loan from FINCA, and with help from her FINCA credit agent, got her store going again and she was soon earning enough from it that she could afford to better feed her family and repay her loan on time. Today, Yvrose’s store is not only back on its feet, but her business is growing steadily. Her children are in school and the family can put aside money for savings, helping them plan for and build a brighter future.

and sellers negotiating prices for goods and services. Consumers (such as you and me) send signals to tell producers what to make, how many, in what colours, and so on. We do that by choosing to buy (or not to buy) certain goods and services. Note that just as no country is purely capitalist, no market is truly free. “Free” markets work not just from the interaction of buyers and sellers, but also from government signals (e.g., laws and regulations, taxes, warnings, advice, etc.).

How Prices Are Determined In a free market, prices are not determined by sellers; they are determined by buyers and sellers negotiating in the marketplace. A seller may want to receive $50 for a T-shirt, but the quantity demanded at that price may be quitelow.

The economic concept of demand measures the quantities of goods and services that people are willing to buy at a given price. All else equal, the lower the price, the higher the demand will be. Do you think there would be this many customers rushing to shop on Boxing Day if it wasn’t for those low price/low quantity deals?

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

If the seller lowers the price, the quantity demanded is likely to increase. How is a price that is acceptable to both buyers and sellers determined? The answer is found in the microeconomic concepts of supply and demand.

The Economic Concept of Supply Supply refers to the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Generally speaking, the amount supplied will increase © Frank Gunn/CP Images as the price increases because sellers can With 75 000 hotel rooms and an estimated 300 000 visitors, some make more money with a higher price. Vancouverites rented out their homes during the 2010 Vancouver Economists show this relationship Olympics. Would you have paid $36,000 for a two-bedroom condo between quantity supplied and price on a for one month? Do you think people were willing to pay the same graph. Figure 2.1 shows a simple supply curve price for accommodation in Sochi, Russia, during the 2014 Olympic for T-shirts. The price of the T-shirts in dollars Winter Games? What about during the 2015 Pan Am/Parapan Am is shown vertically on the left of the graph. Games in Toronto? The quantity of T-shirts that sellers are willing to supply is shown horizontally at the bottom supply of the graph. The various points on the curve indicate how many T-shirts sellers would proThe quantity of products that vide at different prices. For example, at a price of $5 a T-shirt, a vendor would provide only manufacturers or five T-shirts, but at $50 a T-shirt the vendor would supply 50 shirts. The supply curve indiowners are willing to cates the relationship between the price and the quantity supplied. All things being equal, the sell at different prices higher the price, the more the vendor will be willing to supply. at a specific time. ■ FIGURE

2.1

THE SUPPLY CURVE AT VARIOUS PRICES 50 45 40 35 Price ($)

The supply curve rises from left to right. Think it through. The higher the price of T-shirts goes (the vertical axis), the more sellers will be willing to supply.

Supply curve

30 25 20 15 10 5 0

5 10 15 20 25 30 35 40 45 50 Quantity of T-Shirts

CHAPTER 2 How Economic Issues Affect Business

The Economic Concept of Demand Demand refers to the quantity of products that people are willing to buy at different prices at a specific time. Generally speaking, the quantity demanded will increase as the price decreases. Again, the relationship between price and quantity demanded can be shown in a graph. Figure 2.2 shows a simple demand curve for T-shirts. The various points on the graph indicate the quantity demanded at various prices. For example, at a price of $45, the quantity demanded is just five T-shirts, but if the price were $5, the quantity demanded would increase to 35 T-shirts. All things being equal, the lower the price, the more buyers are willing to buy. The line connecting the dots is called a demand curve. It shows the relationship between quantity demanded and price.

demand

The quantity of products that people are willing to buy at different prices at a specific time.

The Equilibrium Point and the Market Price It should be clear to you after reviewing Figures 2.1 and 2.2 that the key factor in determining the quantity supplied and the quantity demanded is price. Sellers prefer a high price, and buyers prefer a low price. If you were to lay one of the two graphs on top of the other, the supply curve and the demand curve would cross. At that crossing point, the quantity demanded and the quantity supplied are equal. Figure 2.3 illustrates that point. At a price of $15, the quantity of T-shirts demanded and the quantity supplied are equal (25 shirts). That crossing point is known as the equilibrium point or the equilibrium price. In the long run, that price will become the market price. Market price, then, is determined by supply and demand. Supporters of a free market would argue that because supply and demand interactions determine prices, there is no need for government involvement or government planning. If surpluses develop (i.e., if quantity supplied exceeds quantity demanded), a signal is sent to sellers to lower the price. If shortages develop (i.e., if quantity supplied is less than

■ FIGURE

market price

The price determined by supply and demand.

2.2

THE DEMAND CURVE AT VARIOUS PRICES 50 45 40 Price ($)

Demand curve

30 25 20 15 10 5 0

This is a simple demand curve showing the quantity of T-shirts demanded at different prices. The demand curve falls from left to right. It is easy to understand why. The lower the price of T-shirts, the higher the quantity demanded.

5 10 15 20 25 30 35 40 45 50 Quantity of T-Shirts

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

■ FIGURE

2.3

THE EQUILIBRIUM POINT 50 45 40 35 Price ($)

The place where quantity demanded and supplied meet is called the equilibrium point. When we put both the supply and demand curves on the same graph, we find that they intersect at a price where the quantity supplied and the quantity demanded are equal. In the long run, the market price will trend toward the equilibrium point.

Demand curve Supply curve

25 20 15 10 5 0

Equilibrium point 5 10 15 20 25 30 35 40 45 50 Quantity of T-Shirts

quantity demanded), a signal is sent to sellers to increase the price. Eventually, supply will again equal demand if nothing interferes with market forces. The Making Ethical Decisions box raises an interesting question about when pricing may be a bit out of control and what to do about it.

Making ETHICAL DECISIONS Bad Medicine for Consumers Your company, a large pharmaceutical firm, acquired a drug called Relivoform when it bought a generic drugmaker. The purchased company was the market’s leading supplier of the drug, and it was by far its most profitable product. Relivoform is a major chemotherapy drug important in the treatment of liver cancer. It cost $300 per treatment, and many patients rely on it to control the spread of their cancer. Currently, your company has many new drugs in development costing the company millions in research and testing. It may be years before Health Canada approves the new drugs and you can get them into the market. Your finance committee has recommended increasing the price of Relivoform to $3,000 per treatment to help alleviate the development costs of new drugs. Since your company now controls the distribution of the drug (even though it’s a generic), you doubt any competitors could immediately impact your market. When word leaked out that Relivoform’s price may

increase 10-fold, the public reacted with a rage, accusing your firm of favouring profits over patients’ needs. Will you follow your committee’s recommendation and raise the price? What are your alternatives? What might be the consequences of each?

CHAPTER 2 How Economic Issues Affect Business

In countries without a free market, there is no mechanism to reveal to businesses (via price) what to produce and in what amounts, so there are often shortages (not enough products) or surpluses (too many products). In such countries, the government decides what to produce and in what quantity, but without price signals it has no way of knowing what the proper quantities are. Furthermore, when the government interferes in otherwise free markets, such as when it subsidizes farm goods, surpluses and shortages may develop. Competition differs in free markets, too. We shall explore that concept next.

Competition Within Free Markets Economists generally agree that four different degrees of competition exist: (1) perfect competition, (2) monopolistic competition, (3) oligopoly, and (4) monopoly. Perfect competition exists when there are many sellers in a market and no seller is perfect competition large enough to dictate the price of a product. Under perfect competition, sellers’ products The market situation in which there are many appear to be identical. Agricultural products (e.g., apples, corn, potatoes) are often con- sellers in a market sidered to be the closest examples of such products. You should know, however, that there and no seller is large are no true examples of perfect competition. Today, government price supports and drastic enough to dictate the reductions in the number of farms make it hard to argue that even farming is an example price of a product. monopolistic of perfect competition. Monopolistic competition exists when a large number of sellers produce goods that competition The market situation in are very similar but are perceived by buyers as different (e.g., personal computers, candy, which a large number and T-shirts). Under monopolistic competition, product differentiation (the creation of real of sellers produce very or perceived product differences) is a key to success. Through advertising and packaging, similar products that sellers try to convince buyers that their products are different from competitors’, though buyers nevertheless perceive as different. they may be very similar or even interchangeable. The fast-food industry, in which there are often promotional battles between hamburger restaurants, offers a good example of oligopoly A form of competition monopolistic competition. in which just a few An oligopoly occurs when a few sellers dominate a market. Oligopolies exist in indus- sellers dominate the tries that produce goods in the areas of oil and gas, tobacco, automobiles, aluminum, and air- market. craft. One reason some industries remain in the hands of a few sellers is that the initial investment required to enter the business is tremendous. In an oligopoly, prices for products from different companies tend to be close to the same. The reason for this is simple. Intense price competition would lower profits for all competitors, since a price cut on the part of one producer would most likely be matched by the others. Note, for example, that most cereals are priced about the same, as are soft drinks. Thus, adver© rmnoa357 / Shutterstock.com tising is a major factor determining which of the Although WestJet Airlines Ltd. operates within an oligopoly in few available brands consumers buy, because often it is advertising that creates the perceived Canada, it still has to listen to the needs of its customers and try to be innovative. As a result, customers can choose to check in differences. As in monopolistic competition, at the counter, on the web, on mobile devices, at kiosks, and they product differentiation, rather than price, is usucan tag their own bags. ally the major factor in market success. 81

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

monopoly

A market in which there is only one seller for a product or service.

A monopoly occurs when there is only one seller for a good or service, and that one seller controls the total supply of a product and the price. Traditionally, monopolies were common in areas such as water, electricity, and telephone services that were considered essential to a community. Legislation has ended the monopoly status of utilities in some areas, letting consumers choose among providers. The intention of such deregulation is to increase competition among utility companies and, ultimately, lower prices for consumers. Figure 2.4 highlights where these forms of free-market competition fall when one considers the number of sellers (i.e., competitors) in the marketplace.

Benefits and Limitations of Free Markets One benefit of the free market is that it allows open competition among companies. Businesses must provide customers with quality products at fair prices with good service. If they do not, they lose customers to businesses that do. Do government services have the same incentives? The free market—with its competition and incentives—was a major factor in creating the wealth that industrialized countries now enjoy. Some people even talk of the free market as an economic miracle. Free-market capitalism, more than any other economic system, provides opportunities for poor people to work their way out of poverty. C apitalism also encourages businesses to be more efficient so they can successfully compete on price and quality. Would you say that Canada is increasing or decreasing the emphasis on capitalism? Why? Yet even as free-market capitalism has brought prosperity, it has brought inequality as well. Business owners and managers make more money and have more wealth than workers. There is much poverty, unemployment, and homelessness. People who are old, disabled, or sick may not be able to support themselves. What should society do about such inequality?24 Smith assumed that as people became wealthier, they would naturally reach out and help the less fortunate in the community. As was discussed earlier, while this has not always happened, business people are becoming more concerned about social issues and their obligation to return to society some of what they have earned. For example, Warren Buffet, Chairman and Chief Executive Officer of Berkshire Hathaway and ranked as one of the world’s wealthiest people, and Bill and Melinda Gates, who formed the Bill and Melinda Gates Foundation, signed the Giving Pledge which promises to give away at ■ FIGURE

2.4

FREE-MARKET COMPETITION BASED ON THE NUMBER OF SELLERS Oligopoly

Monopolistic Competition

One

Many

Monopoly Sellers

Perfect Competition

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least half of their vast wealth to philanthropic causes.25 In another example, every year an amount equivalent to 1 percent of Cirque du Soleil’s earnings is dedicated to environmental policies for sustainable development managed by Cirque, as well as to the ONE DROP Foundation.26 An example of the limitation of a free market is also illustrated through the case of the North American professional sport industry. Revenue for this industry is expected to reach $73.5 billion by 2019.27 Given the industry operates within the United States and Canada, it is fair to believe it is subject to the forces of a free market economy. But when you look closely at the leagues who manage the big four sports – Major League Baseball, the National Basketball Association, the National Football League, and the National Hockey League, the form of competition is far from perfect. Consider the profit generated by these four leagues – revenues sources include sponsorship, merchandise, gate receipts (tickets), and broadcast/media rights. One would believe that these profits are distributed through perfect competition among businesses that operate within each of the professional sports, but that is not the case. The North A merican professional sport leagues operate as a monopoly and as a result the market fails to be competitive.28 For example, The National Hockey League (NHL) is the only seller of premiere professional hockey in North America. The league, through its owners who sit on the Board of Governors, and its Commissioner, control the supply of the product through decisions about franchise expansion. This is why few Canadian franchises exist.29 The NHL also controls the price as each team owner has exclusivity within a specific city or market, and can set its ticket price as desired. How strong is the monopoly of a North American professional sport league, such as the NHL? Do you believe open competition among many premiere professional leagues would improve the quality of professional hockey for consumers? Do you believe a rival league is possible? One of the dangers of free markets is that some people let greed dictate how they act. Criminal charges brought against some big businesses in banking, oil, accounting, telecommunications, insurance, and pharmaceuticals indicate the scope of the potential problem. Some business people have deceived the public about their products; others have deceived shareholders about the value of their stock, all in order to increase executives’ personal assets. Clearly, some government rules and regulations are necessary to make sure that all of a business’ stakeholders are protected and that people who are unable to work get the basic care they need. To overcome the limitations of capitalism, some countries have adopted an economic system called socialism. It, too, has its good and bad points. We explore the advantages and disadvantages of socialism after the Progress Assessment questions.

PROGRESS ASSESSMENT

• • • •

How do business people know what to produce and in what quantity? How are prices determined? Describe the four degrees of competition. What are some of the limitations of free markets?

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

LO3

Compare the benefits and negative consequences of socialism and communism. socialism

An economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be evenly distributed among the people.

Understanding Socialism Socialism is an economic system based on the premise that some, if not most, basic businesses—such as steel mills, coal mines, and utilities—should be owned by the government so that profits can be evenly distributed among the people. Entrepreneurs often own and run the smaller businesses, and individuals are often taxed relatively steeply to pay for social programs. Socialists acknowledge the major benefit of capitalism—wealth creation—but believe that wealth should be more evenly distributed than occurs in free-market capitalism. They believe that the government should be the agency that carries out the distribution and be much more involved in protecting the environment and providing for the poor.30

The Benefits of Socialism The major benefit of socialism is supposed to be social equality. Ideally, it comes about because the government takes income from wealthier people, in the form of taxes, and redistributes it to poorer people through various government programs. Free education, free health care, and free child care are some of the benefits socialist governments, using the money from taxes, may provide to their people. Workers in socialist countries usually get longer vacations, work fewer hours per week, and have more employee benefits (e.g., generous sick leave) than those in countries where free-market capitalism prevails.

The Negative Consequences of Socialism

Socialism has been more successful in some countries than in others. This photo shows Denmark’s clean and modern public transportation system. In Greece, overspending caused a debt crisis that forced the government to impose austerity measures that many Greeks oppose. What other factors might lead to slower growth in socialist countries?

Socialism may create more equality than capitalism, but it takes away some of business people’s incentives to work hard, as their profits will be heavily taxed. For example, tax rates in some nations once reached 85 percent. Today, doctors, lawyers, business owners, and others who earn a lot of money pay very high tax rates. As a consequence, some of them leave socialist countries for capitalistic countries with lower taxes, such as the United States. This loss of these educated people to other countries is called a brain drain. Imagine an experiment in socialism in your own class. Imagine that after the first exam, those with grades of 90 and above have to give some of their points to those who make 70 and below so

CHAPTER 2 How Economic Issues Affect Business

that everyone ends up with grades in the 80s. Would those who got 90s study as hard for the second exam? What about those who got 70s? Can you see why workers may not work as hard or as well if they all get the same benefits regardless of how hard they work? Socialism also results in fewer inventions and less innovation because those who come up with new ideas usually do not receive as much reward as they would in a capitalist system. Generally speaking, over the past decade or so, most socialist countries have simply not kept up with more capitalist countries in new inventions, job creation, or wealth creation.31 Communism may be considered a more intensive version of socialism. We shall explore that system next.

brain drain

The loss of educated people to other countries.

Understanding Communism Communism is an economic and political system in which the state (the government) makes almost all economic decisions and owns almost all of the major factors of production. Communism affects personal choices more than socialism does. For example, some communist countries have not allowed their citizens to practice certain religions, change jobs, or move to the town of their choice. One problem with communism is that the government has no way of knowing what to produce because prices do not reflect supply and demand as they do in free markets. As a result, shortages of many items may develop, including shortages of food and basic clothing. Another problem with communism is that it does not inspire business people to work hard, because the government takes most of their earnings. Therefore, although communists once held power in many nations around the world, communism is slowly disappearing as an economic form. Most communist countries today are suffering severe economic depression. In North Korea, many people are starving. In Cuba, people suffer from a lack of goods and services readily available in most other countries, and some fear the government. While some parts of the former Soviet Union remain under communist ideals, Russia itself now has a flat tax of 13 percent. Even this low tax rate increased the government’s tax revenues by nearly 30 percent, because more people were willing to pay.

communism

An economic and political system in which the state (the government) makes all economic decisions and owns almost all of the major factors of production.

The Trend Toward Mixed Economies The nations of the world have largely been divided between those that followed the concepts of capitalism and those that adopted the concepts of communism or socialism. Thus, to sum up the preceding discussion, the two major economic systems vying for dominance in the world today can be defined as follows: 1. A free-market economy exists when the market largely determines what goods and

services are produced, who gets them, and how the economy grows. Capitalism is the popular term used to describe this economic system.

free-market economy

An economy in which the market largely determines what goods and services are produced, who gets them, and how the economy grows.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

2. A command economy exists when the govern-

ment largely decides what goods and services are produced, who gets them, and how the economy will grow. Socialism and communism are the popular terms used to describe variations of this economic system. Experience has shown that neither of these systems has resulted in optimum economic conditions. Free-market mechanisms have not been responsive enough to the needs of the poor, the old, or the disabled. Some people also believe that businesses in © Dmitry Lovetsky/AP Images free-market economies have not done enough to proRussia has been moving away from communism toward tect the environment. Over time, voters in free-market a viable market economy. As poverty begins to decline, a countries, such as Canada, have therefore elected middle class is emerging, but many of the country’s vast officials who have adopted social and environmental natural resources are difficult to tap. Laws that promote programs such as medicare, unemployment compenbusiness are few, and an active black market for goods sation, and various clean air and water acts. What new exists. Many observers are optimistic that Russia can prosper. What do you think? or enhanced social policies do you know of that have been enacted or are being considered today? Socialism and communism, for their part, have command economy not always created enough jobs or wealth to keep economies growing fast enough. As a An economy in which consequence, communist governments are disappearing and socialist governments have the government largely been cutting back on social programs and lowering taxes for businesses and workers. The decides what goods idea is to generate more business growth and thus generate more revenue.32 and services are produced, who gets The trend, then, has been for so-called capitalist countries to move toward socialthem, and how the ism and so-called socialist countries to move toward more capitalism. We say “so-called” economy will grow. because no country in the world is purely capitalist or purely socialist. All countries have some mix of the two systems. Thus, the long-term global trend is toward a blend of capitalism and socialism. This trend likely will increase with the opening of global markets as a result of the Internet. The net effect of capitalist systems moving toward socialism and socialist systems moving toward capitalism is the emergence throughout the world of mixed economies. mixed economies Mixed economies exist where some allocation of resources is made by the market and Economic systems in some is made by the government. Most countries do not have a name for such a system. which some allocation If the dominant way of allocating resources is by free-market mechanisms, then the leadof resources is ers of such countries still call their system capitalism. If the dominant way of allocating made by the market and some by the resources is by the government, then the leaders call their system socialism. Figure 2.5 government. compares the various economic systems.

PROGRESS ASSESSMENT

• • • 86

What led to the emergence of socialism? What are the benefits and drawbacks of socialism? What are the characteristics of a mixed economy?

CHAPTER 2 How Economic Issues Affect Business

■ FIGURE

2.5

COMPARISONS OF KEY ECONOMIC SYSTEMS Capitalism (U.S.A.)

Socialism (Sweden)

Communism (North Korea)

Mixed Economy (Canada)

Social and Economic Goals

Private ownership of land and business. Freedom and the pursuit of happiness. Free trade. Emphasis on freedom and the profit motive for economic growth.

Public ownership of major businesses. Some private ownership of smaller businesses and shops. Government control of education, health care, utilities, mining, transportation, and media. Very high taxation. Emphasis on equality.

Public ownership of all businesses. Government-run education and health care. Emphasis on equality. Many limitations on freedom, including freedom to own businesses, change jobs, buy and sell homes, and assemble to protest government actions.

Private ownership of land and business with government regulation. Government control of some institutions (e.g., mail). High taxation for the common welfare. Emphasis on a balance between freedom and equality.

Motivation of Workers

Much incentive to work efficiently and hard, because profits are retained by owners. Workers are rewarded for high productivity.

Capitalist incentives exist in private businesses. Government control of wages in public institutions limits incentives.

Very little incentive to work hard or to produce quality products.

Incentives are similar to capitalism except in government-owned enterprises, which have few incentives.

Control over Markets

Complete freedom of trade within and among nations. No government control of markets.

Some markets are controlled by the government and some are free. Trade restrictions among nations vary and include some free trade agreements.

Total government control over markets except for illegal transactions.

Some government control of trade within and among nations (trade protectionism).

Choices in the Market A wide variety of products is available. Almost no scarcity or oversupply exists for long because supply and demand control the market.

Variety in the marketplace varies considerably from country to country. Choice is directly related to government involvement in markets.

Very little choice among competing products.

Similar to capitalism, but scarcity and oversupply may be caused by government involvement in the market (e.g., subsidies for farms).

Social Freedoms

Similar to mixed economy. Government may restrict job choice, movement among countries, and who may attend upper-level schools (i.e., post-secondary institution).

Very limited freedom to protest the government, practice religion, or change houses or jobs.

Some restriction on freedoms of assembly and speech. Separation of church and state may limit religious practice in schools.

Freedom of speech, press, assembly, religion, job choice, movement, and elections

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

LO4

Describe the mixed economy of Canada.

Canada’s Mixed Economy

Like most other nations of the world, Canada has a mixed economy. The degree of government involvement in the economy today—in areas such as health care, education, and business regulation, just to name a few—is a matter of some debate. (In Chapter 4, we will discuss the role of government in more detail.) The government’s perceived goal is to grow the economy while maintaining some measure of social equality. The goal is very hard to attain. Nonetheless, the basic principles of freedom and opportunity should lead to economic growth that is sustainable. Several features have played a major role in Canada becoming an independent economic entity with high government involvement in the economy. First, we are one of the largest countries in the world geographically, but we have a small population (over 35million).33 We have one of the lowest population densities in the world. Most important, our neighbour to the south has ten times the population and an economy even greater than that proportion, speaks our language, is very aggressive economically, and is the most powerful country in the world. The United States exerts a very powerful influence on Canada as our largest trading partner. (We will discuss details in Chapter 3.) To control our destiny, Canadian governments have passed many laws and regulations to ensure that significant economic and cultural institutions, such as banks, insurance companies, and radio and TV stations, remain under Canadian control. (Even powerful countries like the United States and Japan have similar regulations.) All of these factors led to the Canadian capitalist system taking on many characteristics of a mixed economy. Massive government support was necessary to build our first national rail line, the CPR, in the 1880s. When air transport was beginning in the 1930s no company wanted to risk investing heavily in such a large country with only 10 million people spread thinly across the land. So the government set up Air Canada (then called Trans Canada Airlines) to transport mail, people, and freight. There are many such examples of government action to protect the national interest. In the 1980s, many countries, including Canada, began to reduce government involvement in, and regulation of, the economy. This trend toward deregulation was widespread. In Canada, airlines, banks, and the trucking industry have all seen a marked reduction in regulatory control. © Spotmatik Ltd/Shutterstock This trend continues today as groups lobby the government to relax regulations Governed by the Canada Health Act, public care is designed to make sure that all eligible people in the country have reasonable to allow them to be more competitive. For access to insured health services on a prepaid basis, without direct example, to encourage competitiveness, the charges at the point of service. Private care covers anything beyond Competition Policy Review Panel recomwhat the public system will pay for. Who would benefit from private mends lowering barriers to foreign investhealth coverage? What happens if someone is not eligible for private ment in a number of industries, including coverage? telecommunications and air transportation.34 88

CHAPTER 2 How Economic Issues Affect Business

The Conference Board of Canada has released a report that warns that Canadian industries need to do a better job competing for global investment dollars, attracting foreign investors, and establishing new investments overseas.35 There are also many new players entering the Canadian marketplace that are competing with publicly funded (i.e., government-funded) institutions. One such industry is health care, where private health care supporters continue to lobby for a greater presence in Canada. In the years to come, we can expect to see more examples of our mixed economy moving toward a more capitalist system, as the private sector will play a greater role in delivering some goods and services (e.g., health care) that have historically been managed by public institutions. Keep in mind that during tough economic times, voters demand more government involvement. Thus, it is a traditional and desirable role of government to increase expenditures (e.g., provide financial aid to industries, increase spending on infrastructure, etc.) to support and stabilize the economy. The question is how much involvement, debt, etc. is appropriate.

Understanding Canada’s EconomicSystem The strength of the economy has a tremendous effect on business. When the economy is strong and growing, most businesses prosper and almost everyone benefits through plentiful jobs, reasonably good wages, and sufficient revenues for the government to provide needed goods and services. When the economy is weak, however, businesses are weakened, employment and wages fall, and government revenues decline as a result. Because business and the economy are so closely linked, business literature is full of economic concepts. It is virtually impossible to read business reports with much understanding unless you are familiar with the economic terms being used. One purpose of this chapter is to help you learn additional economic concepts, terms, and issues—the kinds that you will be seeing daily if you read the business press, as we encourage you to do.

LO5

Illustrate the significance of key economic indicators and the business cycle.

Key Economic Indicators Three major indicators of economic conditions are (1) the gross domestic product (GDP), (2) the unemployment rate, and (3) the price indexes. Another important statistic is the increase or decrease in productivity. When you read business literature, you will see these terms used again and again. It will greatly increase your understanding if you learn the terms now.

GROSS DOMESTIC PRODUCT Gross domestic product (GDP) is the total value of final goods and services produced in a country in a given year. Either a domestic company or a foreign-owned company may produce the goods and services included in the GDP as long as the companies are located within the country’s boundaries. For example, production values from Japanese automaker Toyota’s factory in Cambridge, Ontario, would be included in the Canadian GDP. Likewise, revenue generated by Magna International’s manufacturing and assembly

gross domestic product (GDP)

The total value of goods and services produced in a country in a given year.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

REPORT CARD Economy Indicators Income per capita

GDP growth

Labour productivity growth

Inflation

Unemployment Employment rate growth

Inward FDI Performance Index

Outward FDI Performance Index

Australia

Austria

Belgium

Canada

Denmark

Finland

France

Germany

Ireland

Japan

Netherlands

Norway

Sweden

Switzerland

U.K.

U.S.

Note: Data for the most recent year available used. For details on data sources, see the Methodology section of this website. Source: The Conference Board of Canada.

Courtesy of The Conference Board of Canada. Used with permission.

According to the Conference Board of Canada (www.conferenceboard.ca), businesses need to work smarter to improve productivity. This includes producing higher-value-added products and services that are worth more in the marketplace. This report card summarizes country ratings in a variety of areas.

plants in Brazil would be included in Brazil’s GDP, even though Magna is a Canadian company. If GDP growth slows or declines, there are often many negative effects on business. What can account for increases in GDP? A major influence on the growth of GDP is how productive the workforce is—that is, how much output workers create with a given amount of input. This is linked to the combination of creating jobs, working longer hours, or working smarter. Working smarter means being more productive through the use of better technology and processes and employing a more educated and efficient workforce. In the past, GDP growth has been affected by rising employment (to be discussed soon), low inflation, and low interest rates.36 The more you produce, the higher the GDP and vice versa. The economy benefits from a strong GDP. Money that is earned from producing goods and services goes to the employees that produce them in the form of wages. People who own the business generate a return on their investment, and government benefits from tax collection. A strong economy usually leads to a high standard of living for Canadians. In your opinion, have too many people in Canada sacrificed their quality of life to have a higher standard of living by working more? Since productivity is central to a country’s GDP, we will look at this next. 90

CHAPTER 2 How Economic Issues Affect Business

PRODUCTIVITY IN CANADA An increase in productivity means a worker can produce more goods and services than before in the same time period, usually thanks to machinery or other equipment. Productivity in Canada has risen because computers and other technology have made production faster and easier. Improved productivity can decrease production costs which can then result in lower prices. Therefore, business people are eager to increase productivity. The Canadian economy is a service economy. Productivity is an issue because service firms are very labour-intensive. Spurred by foreign competition, productivity in the goods-producing sector is rising rapidly. In the service sector, however, productivity is growing more slowly because service workers—like teachers, clerks, lawyers, and barbers—have fewer new technologies available than there are for factory workers.

PRODUCTIVITY IN THE SERVICES-PRODUCING SECTOR One problem with the services-producing sector is that an influx of machinery may add to the quality of the service provided but not to the output per worker. For example, you have probably noticed how many computers there are on campus. They add to the quality of education but they do not necessarily boost professors’ productivity. The same is true of some equipment in hospitals, such as CAT scanners, PET scanners (more modern versions of the X-ray machine), and MRI scanners. They improve patient care but they do not necessarily increase the number of patients doctors can see. In other words, today’s productivity measures in the services-producing sector fail to capture the improvement in quality created by new technology. Clearly Canada and other countries need to develop new measures of productivity for the service economy, measures that include quality as well as quantity of output. Productivity is extremely important to a country, as it is a measure of its economic prosperity. Canadian businesses are criticized for not spending enough on research and development, relative to other advanced countries. By not doing so, these businesses will fall behind in the fierce global competitive battle. We will discuss the importance of research and development in Chapter 10. Of course, technological advances usually lead to people being replaced by machines, often contributing to unemployment. We will now examine this important issue.

unemployment rate

The percentage of the labour force that actively seeks work but is unable to find work at a given time.

THE UNEMPLOYMENT RATE The unemployment rate refers to the percentage of the labour force (15 years and over) that actively seeks work but is unable to find work at a given time.37 Figure 2.6 describes different

It can be difficult to measure productivity in the service sector. New technology can improve the quality of services without necessarily increasing the number of people served. A doctor can make more-accurate diagnoses with scans, for instance, but still can see only so many patients in a day. How can productivity measures capture improvements in the quality of service?

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■ FIGURE

2.6

FOUR TYPES OF UNEMPLOYMENT The types of unemployment are: Frictional unemployment Frictional unemployment refers to those people who have quit work because they didn’t like the job, the boss, or the working conditions and who haven’t yet found a new job. It also refers to those people who are entering the labour force for the first time (e.g., new graduates) or are returning to the labour force after significant time away (e.g., parents who reared children). There will always be some frictional unemployment because it takes some time to find a first job or a new job. Structural unemployment Structural unemployment refers to unemployment caused by the restructuring of firms or by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs (e.g., coal miners in an area where mines have been closed). Cyclical unemployment Cyclical unemployment occurs because of a recession or a similar downturn in the business cycle (the ups and downs of business growth and decline over time). This type of unemployment is the most serious. Seasonal unemployment Seasonal unemployment occurs where demand for labour varies over the year, as with the harvesting of crops.

types of unemployment. Figure 2.7 highlights Canada’s unemployment rate over 25 years. The real rate is higher because Statistics Canada does not include people who have given up looking for jobs, those who were unable to work, those who stay in or return to school because they cannot find full-time work, and various other categories of people. The unemployment rate is a key indicator of the health of the economy and of society more generally. That is, when economic growth is strong, the unemployment rate tends to be low and a person who wants a job is likely to experience little trouble finding one. On the other hand, when the economy is stagnating or in recession (to be discussed soon), unemployment tends to be higher.38 People are unemployed in Canada for various reasons. Perhaps their employer goes out of business or their company cuts staff. Young persons enter the job market looking for their first job and other employees quit their jobs but have trouble finding new ones. Companies merge and jobs are consolidated or trimmed. Companies transfer their operations to another country, or a branch of a foreign company is closed down. When a job is lost, not only is it a loss to society and the economy, but the loss of income can also create hardship for individuals and families. According to Statistics Canada, the unemployed include persons who (during the reference period) were as follows: (1) on temporary layoff during the reference week with an expectation of recall and were available for work; (2) without work, had looked for work in the past four weeks, and were available for work; or (3) about to start a new job within four weeks from reference week, and were available for work.39 Unemployment insurance only goes so far to relieve such unemployment. Which type(s) of unemployment seems to be the most serious to the economy? 92

CHAPTER 2 How Economic Issues Affect Business

■ FIGURE

2.7

THE UNEMPLOYMENT RATE IN CANADA 1989–2014 12 10

Percent

8 6 4 2

19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17

Source: Statistics Canada. Table 282-0087 - Labour force survey estimates (LFS), by sex and detailed age group, annual (persons unless otherwise noted), CANSIM (database), accessed 2017-01-27; Statistics Canada, Labour Force Survey, http://www.stats.gov.nl.ca/statistics/Labour/PDF/UnempRate.pdf.

THE PRICE INDEXES The price indexes indicate the health of the economy by measuring the levels of inflation, disinflation, deflation, and stagflation. Inflation refers to a general rise in the prices of inflation goods and services over time. The official definition is “a persistent increase in the level A general rise in the prices of goods and of consumer prices or a persistent decline in the purchasing power of money, caused by services over time. an increase in available currency and credit beyond the proportion of goods and services.” Thus, it is also described as “too many dollars chasing too few goods.” Go back and review the laws of supply and demand to see how that works. Rapid inflation is scary. If the cost of goods and services goes up by just 7 percent a year, everything will double in cost in just ten years or so. Inflation increases the cost of doing business. When a company borrows money, interest costs are higher, employees demand increases to keep up with the rise in the cost of living, suppliers raise their prices, and as a result the company is forced to raise its prices. If other countries © Paul Sakuma/ AP Images/CP Images succeed in keeping their inflation rates down, The overall unemployment rate in Canada fluctuates. Over the last then Canadian companies will become less decade, it has been as low as 6 percent and as high as 8 percent. competitive in the world market. The Reach- Unemployment insurance goes only so far to relieve the loss of ing Beyond Our Borders box highlights sev- income caused by losing your job. How high is the unemployment rate in your area today? eral examples of inflation out of control. 93

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

Reaching Beyond OUR BORDERS Inflation at the Speed of Sound If you are familiar with the Rule of 72, you know it’s a simple way to measure how long it would take for prices to double at a given rate of inflation. For example, if inflation is growing at 6 percent a year, prices would double in 12 years (6 divided into 72). This would be an unacceptable inflation rate in Canada, where the Bank of Canada targets keeping price increases at 2 percent (or less) a year. Well, what if prices went up 221 percent in one month? Impossible? Unfortunately, not in Venezuela, which is the most recent example of hyperinflation. Hyperinflation is when the price of goods and services rises by 50 percent a month. It often starts when a country’s government prints more money to pay for excess spending. In Venezuela, prices increased by 63 percent in 2014, 121 percent in 2015, and 481 percent in 2016. Expectations are that prices will increase by 1,600 percent in 2017. In fact, things got so bad that Venezuela’s currency, the Bolivar, collapsed. It’s value was so low that cash to pay for goods and services was being weighed instead of counted. The country is now facing shortages of food and medicine, with children being affected harshly. Venezuela is not the first country to suffer the ravages of hyperinflation. German hyperinflation was a classic

example after World War I, when prices were doubling every three days. Pictures of Germans pushing wheelbarrows full of marks (German currency) to buy a loaf of bread were common. Zimbabwe had hyperinflation from 2004 to 2009. Its economy faced an inflation rate of 98 percent a day, with prices doubling every 24 hours. The price of a Big Mac or cup of Starbucks coffee doubling every day doesn’t sound great to us. Let’s hope the Bank of Canada stays vigilant against inflation and keeps our rate at or below 2 percent.

Sources: Luke Graham, “Inflation in Venezuela Seen Hitting 1,500% in 2017 as Crisis Goes from Bad to Worse,” CNBC, accessed September 2017; Ben Bartenstein and Mark Glassman, “Hyperinflation,” Bloomberg Businessweek, January 8, 2017; Kimberly Amadeo, “What Is Hyperinflation: Its Causes, Effects, and Examples,” The Balance, accessed September 2017; Guillermo Garcia Montenegro, “The Case for Currency Substitution in Venezuela,” Forbes, January 11, 2017.

disinflation

A situation in which price increases are slowing (the inflation rate is declining).

deflation

A situation in which prices are declining.

stagflation

A situation in which the economy is slowing but prices are going up regardless.

consumer price index (CPI)

A monthly statistic that measures the pace of inflation or deflation. 94

Disinflation describes a condition where price increases are slowing (the inflation rate is declining). Deflation means that prices are actually declining.40 It occurs when countries produce so many goods that people cannot afford to buy them all. That is, too few dollars are chasing too many goods. While declining prices might sound good, it’s an indication that economic conditions are deteriorating.41 Stagflation occurs when the economy is slowing but prices are going up regardless.42 The consumer price index (CPI) is a monthly statistic that measures the pace of inflation or deflation. To determine the CPI, costs of a “basket” of goods and services for an average family—including food, shelter, transportation, and clothing and footwear—are calculated to see if they are going up or down. For example, Canadian consumers paid, on average, 1.9 percent more for such a basket in December 2017, than twelve months earlier; this was led by increases in the costs of fresh vegetables (6.9 percent).43 The CPI is an important figure because it affects nearly all Canadians, either directly or indirectly. For example, government benefits (such as Old Age Security and Canada Pension Plan), rental agreements, some labour contracts, and interest rates are based on the CPI.

CHAPTER 2 How Economic Issues Affect Business

Other indicators of the economy’s condition include housing starts, retail sales, motor vehicle sales, consumer confidence, and changes in personal income. You can learn more about such indicators by reading business periodicals, contacting government agencies, listening to business broadcasts, and exploring the Internet. The United Nations suggests the development of a country cannot be based only upon economic measures. Some indexes measure social factors that are considered along with economic information. One example is the human development index (HDI), which examines the wealth, health, and education of a country according to incomes, life expectancy, and years of schooling. A recent United Nations report identifies the HDI for many countries throughout the world is slowing down.44

human development index

A measure of a country’s progress that includes wealth, health, and education.

The Business Cycle Business cycles (also known as economic cycles) are the periodic rises and falls that occur in economies over time.45 These fluctuations are often measured using the real GDP.46 Economists look at a number of types of cycles, from seasonal cycles that occur within a year to cycles that occur every 48 to 60 years. Economist Joseph Schumpeter identified the four phases of long-term business cycles as boom, recession, depression, recovery, as illustrated in Figure 2.8. 1. An economic boom is just what it sounds like—business is booming. Periods of eco-

nomic boom bring jobs, growth, and economic prosperity. 2. Two or more consecutive quarters of decline in the GDP result in a recession. In a

recession, prices fall, people purchase fewer products, and businesses fail. A recession has many negative consequences for an economy: high unemployment, increased business failures, and an overall drop in living standards. The 2009 recession is an example.

■ FIGURE

business cycles (economic cycles)

The periodic rises and falls that occur in economies over time.

boom

A period that brings jobs, growth, and economic prosperity.

recession

Two or more consecutive quarters of decline in the GDP.

2.8

THE BUSINESS CYCLE Boom Boom very

GDP Growth

o Rec

Recession

Depression

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

depression

A severe recession.

recovery

When the economy stabilizes and starts to grow.

3. A depression is a severe recession usually accompanied by deflation. Business cycles

rarely go through a depression phase. In fact, while there were many business cycles during the twentieth century, there was only one severe depression (in the 1930s). 4. A recovery occurs when the economy stabilizes and starts to grow. This eventually

leads to an economic boom, starting the cycle all over again. One goal of some economists is to predict such ups and downs. That is very difficult to do. Business cycles are identified according to facts, but we can explain those facts only by using theories. Therefore, one cannot predict with certainty. But one thing is certain: over time, the economy will rise and fall as it has done in recent years. Since dramatic swings up and down in the economy cause all kinds of disruptions to businesses, the government tries to minimize such changes. The government uses fiscal policy and monetary policy to try to keep the economy from slowing too much or growing too rapidly. We will discuss both of these policies in Chapter 4.

PROGRESS ASSESSMENT

• • •

What factors have contributed to the decision to have a mixed economy in Canada? Name three economic indicators and describe how well Canada is doing using each one. What is the difference between a recession and a depression?

SUMMARY LO1

Describe basic economics. Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. What are the two branches of economics? There are two major branches of economics: macroeconomics studies the operation of a nation’s economy as a whole, and microeconomics studies the behaviour of people and organizations in particular markets (e.g., why people buy smaller cars when gas prices go up).

LO2

Explain what capitalism is and how free markets work. Capitalism is an economic system in which all or most of the means of production and distribution (e.g., land, factories, railroads, and stores) are privately owned and operated for profit. Who decides what to produce under capitalism? In capitalist countries, business people decide what to produce; how much to pay workers; how much to charge for goods and services; whether to produce certain goods in their own countries, import those goods, or have them made in other countries; and so on.

CHAPTER 2 How Economic Issues Affect Business

How does the free market work? The free market is one in which decisions about what to produce and in what quantities are made by the market—that is, by buyers and sellers negotiating prices for goods and services. Buyers’ decisions in the marketplace tell sellers what to produce and in what quantity. When buyers demand more goods, the price goes up, signalling suppliers to produce more. The higher the price, the more goods and services suppliers are willing to produce. Price, then, is the mechanism that allows free markets to work. What is supply and demand? Supply refers to the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Demand refers to the quantity of products that people are willing to buy at different prices at a specific time. The key factor in determining the quantity supplied and the quantity demanded is price. What is the relevance of the equilibrium point? The equilibrium point, also referred to as the equilibrium price, is the point where the quantity demanded is the same as the quantity supplied. In the long run, that price becomes the market price. LO3

Compare the benefits and negative consequences of socialism and communism. Socialism is an economic system based on the premise that some businesses should be owned by the government. Socialism creates more social equality. Compared to workers in capitalist countries, workers in socialist countries not only receive more education and health care benefits but also work fewer hours, have longer vacations, and receive more benefits in general, such as child care. The major disadvantage of socialism is that it lowers the profits of owners, thus cutting the incentive to start a business or to work hard. Socialist economies tend to have a higher unemployment rate and a slower growth rate than capitalist economies. Under communism, the government owns almost all major production facilities and dictates what gets produced and by whom. Communism is more restrictive when it comes to personal freedoms, such as religious freedom. With communism, one can see shortages in items such as food and clothing, and business people may not work as hard as the government takes most of their earnings. While many countries practice socialism, only a few (e.g., North Korea) still practice communism.

LO4

Describe the mixed economy of Canada. A mixed economy is one that is part capitalist and part socialist. That is, some businesses are privately owned, but taxes tend to be high to distribute income more evenly among the population. What countries have mixed economies? Canada has a mixed economy, as do most other countries of the world. What does it mean to have a mixed economy? A mixed economy has most of the benefits of wealth creation that free markets bring plus the benefits of greater social equality and concern for the environment that socialism offers.

LO5

Illustrate the significance of key economic indicators and the business cycle. Three major indicators of economic conditions are (1) the gross domestic product (GDP), (2) the unemployment rate, and (3) the price indexes.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

What are the key terms used to describe the Canadian economic system? Gross domestic product (GDP) is the total value of goods and services produced in a country in a given year. The unemployment rate represents the number of unemployed persons expressed as a percentage of the labour force. The consumer price index (CPI) measures changes in the prices of a basket of goods and services that consumers buy. It is a monthly statistic that measures the pace of inflation (consumer prices going up) or deflation (consumer prices going down). Productivity is the total volume of goods and services one worker can produce in a given period. Productivity in Canada has increased over the years due to the use of computers and other technologies. What are the four phases of business cycles? In an economic boom, businesses do well. A recession occurs when two or more quarters show declines in the GDP, prices fall, people purchase fewer products, and businesses fail. A depression is a severe recession. Finally, recovery is when the economy stabilizes and starts to grow.

KEY TERMS boom 95 brain drain 84 business cycles (economic cycles) 95 capitalism 76 command economy 86 communism 85 consumer price index (CPI) 94 deflation 94 demand 79 depression 96

disinflation 94 economic cycles (business cycles) 95 economics 70 free-market economy 85 gross domestic product (GDP) 89 human development index 95 inflation 93 invisible hand 74 macroeconomics 70 market price 79 microeconomics 70

mixed economies 86 monopolistic competition 81 monopoly 82 oligopoly 81 perfect competition 81 recession 95 recovery 96 resource development 71 socialism 84 stagflation 94 supply 78 unemployment rate 91

CAREER EXPLORATION If you are interested in pursuing a career in economics, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school.

∙ Statistican—applies mathematical or statistical theory and methods to collect, organize, interpret, and summarize numerical data to provide useful information.

∙ Economist—studies the production and distribution of resources, goods, and services by collecting and analyzing data, researching trends, and evaluating economic issues.

∙ Actuary—analyzes the financial costs of risk and uncertainty and uses mathematics, statistics, and financial theory to assess the risk that an event will occur.

∙ Marketing research analyst—studies market conditions and helps companies understand what products people want, who will buy them, and at what price.

CHAPTER 2 How Economic Issues Affect Business

CRITICAL THINKING Many say that business people do not do enough for society. Some students choose to work for nonprofit organizations instead of for-profit organizations because they want to help others. However, business people say that they do more to help others than non-profit groups because they provide jobs for people rather than giving them charity, which often precludes them from searching for work. Furthermore,

they believe that businesses create all the wealth that non-profit groups distribute. Can you find some middle ground in this debate that demonstrates how both business people and those who work for non-profit organizations contribute to society and need to work together more closely to help people? Could you use the concepts of Adam Smith to help illustrate your position?

DEVELOPING CAREER SKILLS Key: Team

Analytic

Communication

1. In teams, develop a list of the advantages of living

be workers, and another will be government leaders. Within your group discuss and list the advantages and disadvantages to you of lowering taxes on businesses. Then have each group choose a representative to go to the front of the class and debate the tax issue with the representatives from the other groups.

in a capitalist society. Then develop lists headed “What are the disadvantages?” and “How could such disadvantages be minimized?” Describe why a person in a socialist country might reject capitalism and prefer a socialist state.

2. Show your understanding of the principles

of supply and demand by looking at the oil market today. Go online and search for a chart of oil prices for the last few years. Why does the price of oil fluctuate so greatly? What will happen as more and more people in China and India decide to buy automobiles? What would happen if most Canadian consumers decided to drive electric cars?

3. This exercise will help you understand social-

ism from different perspectives. Form three groups. Each group should adopt a different role in a socialist economy: one group will be the business owners, another group will

Technology

4. Draw a line and mark one end “capitalism” and

the other end “socialism.” Mark where Canada is now on that line. Explain why you marked the spot you did. Students from other countries may want to do this exercise for their own countries and explain the differences to the class.

5. Break into small groups. In your group, discuss

how the following have affected people’s purchasing behaviours and attitudes toward Canada and its economy: development of the Alberta oil sands; the Atlantic seal hunt; mad cow disease; and the growth of the Internet. Have a group member prepare a short summary for the class.

ANALYZING MANAGEMENT DECISIONS The Rule of 72 No formula is more useful for understanding inflation than the rule of 72. In fact, The Rule of 72 was

highlighted in the Reaching Beyond Our Borders box in this chapter.

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

Basically, the rule allows you to quickly compute how long it takes the cost of goods and services to double at various compounded rates of growth. For example, if houses were increasing in cost at 9 percent a year, how long would it take for the price of a home to double? The answer is easy to calculate. Simply divide 72 by the annual increase (9 percent) and you get the approximate number of years it takes to double the price (eight years). Of course, the same calculation can be used to predict how high food prices or auto prices will be 10 years from now.

Here is an example of how you can use the rule of 72. If the cost of attending a post-secondary institution increases by 6 percent a year, how much might you have to pay to send your child to a post-secondary institution in 24 years (this assumes you will have a child six years from now) if costs are now $10,000 a year? To find the answer, you divide 72 by 6, which shows that the cost of an education would double in 12 years. It would double twice in 24 years. Your son or daughter can expect to pay $40,000 per year to attend college.

Discussion Questions 1. If the cost of a post-secondary institution edu-

2. If the value of a home doubles in 12 years,

cation is about $20,000 per year now, what will it cost your children per year if costs go up 9 percent a year and your children go to a post-secondary institution 16 years from now?

what is the annual rate of return? (Hint: Use the rule of 72 in reverse.)

100

3. If you put $1,000 into a savings account and

earned 6 percent per year, how much money would you have in the account after 48 years?

CHAPTER 3

Competing in Global Markets

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Describe the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.

LO2 Explain the importance of importing and exporting, and define key terms used in global business. LO3 Illustrate the strategies used in reaching global markets, and explain the role of multinational corporations in global markets.

LO4 Evaluate the forces that affect trading in global markets. LO5 Debate the advantages and disadvantages of trade protectionism, define tariff and non-tariff barriers, and give examples of common markets.

LO6 Discuss the changing landscape of the global market.

P R O F I L E GETTING TO KNOW: INDRA KRISHNAMURTHY NOOYI, CEO, PEPSICO

102

Indra Nooyi grew up in southeast India, the daughter

She earned a bachelor’s degree in physics,

of an accountant and a stay-at-home mother. Every

chemistry, and mathematics before receiving mas-

night at dinner her mother would present a world prob-

ter’s degrees in business from the Indian School

lem to Indra and her sister, and they would compete

of Management in Calcutta and the Yale School of

to solve it as if they were prime minister or president.

Management in Connecticut. After completing grad-

As a schoolgirl, she was on the debate team, played

uate school, Nooyi worked for the Boston Consult-

cricket, and was part of an all-girl rock band in which

ing Group before moving on to a strategic-planning

she played guitar (an instrument she still enjoys.)

position at Motorola. She was prepared to move on

CHAPTER 3 Competing in Global Markets

as well as its first CEO not born in the United States. As CEO, she proclaimed a new theme of “Performance with purpose,” Pepsi’s promise to do what’s right for the business by doing what’s right for people and the planet. She reclassified the company’s products into three categories: “fun for you” (such as potato chips and regular sodas), “better for you” (diet or low-fat versions of snacks and sodas), and “good for you” (products such as oatmeal). She put a good deal of Pepsi’s money behind the effort to help global customers develop healthier lifestyles. The company has made some progress in making unhealthy products less so by removing 400 000 tons of sugar from its drinks over the past 10 years and reducing salt and saturated fats from Lay’s and Ruffles chips. PepsiCo has grown substantially under Nooyi’s leadership. Today, PepsiCo is a $66 billion global company that boasts 22 brands that generate over $1 billion each. The company has over 264 000 employees worldwide and is sold in more than 200 countries and territories around © Monica Schipper/Getty Images

the globe. Nooyi recently announced the company would expand the corporate global agenda she had started, emphasizing health and social accountabil-

to a management position with General Electric in

ity. She pledged PepsiCo would continue to focus

1994 when PepsiCo was able to lure her away. By

on making its products healthier, empowering the

1996, Pepsi’s sales had slowed and the company

company’s global employees, and encouraging

was losing the global market to competitor Coca-

environmental responsibility.

Cola big time. Coca-Cola was earning over 70 per-

Indra Nooyi is an example of a success-

cent of its revenue from global sales while Pepsi

ful global businessperson who has proven that it

generated only 29 percent. As strategy chief and

doesn’t matter who you are or where you come

head of mergers and acquisitions, Nooyi advised

from if you have the will and determination to suc-

the company to buy Tropicana and Quaker Oats

ceed. She understands cultural and economic dif-

(which would bring Gatorade to Pepsi) and to sell

ferences, and knows how to adapt her company to

company restaurant subsidiaries Pizza Hut, Taco

global changes successfully. This chapter explains

Bell, and KFC. Her goal was to increase global sales.

the opportunities and challenges businesspeople

In 2001, Nooyi became CFO of PepsiCo. Five

like Indra Nooyi face every day in dealing with the

years later she became PepsiCo’s first female CEO,

dynamic environment of global business.

Sources: Lyndon Driver, “How Indra Nooyi Changed the Face of PepsiCo,” World Finance, October 14, 2016; Jennifer Reingold, “Indra Nooyi Was Right. Now What?” Fortune, June 15, 2015; Robert Safian, “How PepsiCo CEO Indra Nooyi Is Steering the Company to a Purpose-Driven Future,” Fast Company, January 19, 2017; www.pepsico.com, accessed September 2017.

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PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

LO1

Describe the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.

■ FIGURE

The Dynamic Global Market Have you ever dreamed of travelling to exotic cities such as Paris, Tokyo, Rio de Janeiro, or Cairo? Today, over 90 percent of the companies doing business globally believe it is important for their employees to have experience working in other countries.1 The reason is not surprising. Although Canada is a market of more than 37 million people, there are over 7 billion potential customers in the 194 independent countries that make up the global market.2 (See Figure 3.1 for a map of the world and important statistics about the world’s population.3) That is too many people to ignore. In 2017, Canadian consumers bought nearly $70.9 billion in merchandise from China.4 Canadian companies, both large and small, continuously look for opportunities to grow their businesses. For example, Rogers Communication signed a 12-year, $5.2 billion deal with the National Hockey League (NHL) for the league’s broadcast and media rights.5 TSN and Sportsnet paid an undisclosed amount to share the multimedia rights for 380 Barclays Premiere League football matches.6 More broadly, other companies actively seek opportunities around the globe. United Parcel Service (UPS) has experienced solid market growth in its global operations and Walmart and Starbucks have opened stores in South Africa. Major League Baseball is broadcast in hundreds of countries in 17 languages.7 The National Basketball Association (NBA) and the National Football League (NFL) played regular season games in London and Mexico in 2017.8 NBC paid $1 billion to telecast six full seasons of England’s Barclays Premier Soccer League in the United States.9 American film stars Matt Damon, Tom Cruise, and Meryl Streep draw crowds to movie theatres around the globe. Bombardier Inc. is a world-leading manufacturer of innovative transportation solutions in the areas of aerospace and rail transportation.10 Headquartered in Montreal, the company has 80 production and engineering sites in 28 countries, and a worldwide network of service centres.11

3.1

WORLD POPULATION BY CONTINENT As shown on this map, 60.2 percent of the world’s population lives in Asia while only 7.4 percent lives in North America.

Europe 12.5% 10.7%

North America 7.9% 7.4%

Asia 60.2% Africa 14.9% 12.7%

South America 5.6% 6.3% Australia 0.5%

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CHAPTER 3 Competing in Global Markets

Companies also continuously review their global operations to ensure that they are operating at a profit. One Canadian industry that has been particularly hard hit as a result of global trends is the auto industry. Factors such as the increasing price of gas and weakening demand for trucks and sport utility vehicles (SUVs) have forced companies to consider restructuring plans. As a result, thousands of Canadian jobs have been eliminated. Layoffs have occurred at General Motors Canada, Fiat Chrysler Automobiles, Ford Motor Company of Canada, and many parts suppliers.12 Canada’s share of North American auto production fell to a record low of 14 percent in 2013.13 The global market is truly dynamic, and progressive companies continuously scan the business environment to ensure that they © Gerry Penny/EPA/Newscom take advantage of the opportunities and minimize the It may not be what the rest of the world calls “football,” impact of threats. but American football is attracting an audience outside Because the global market is so large, it is important the United States. London’s Wembley Stadium has been to understand the language of international trade. Canada home to the NFL’s International Series since 2007. What cultural factors must U.S. sports franchises overcome in is a large exporting nation. Exporting is selling products order to increase popularity abroad? (i.e., goods and services) to another country. Importing is buying products from another country. Competition in exporting is very intense and Canadian companies face aggressive rivalry from exporters around the world who also have the same objectives of growing their businesses. This chapter will familiarize you with global business and its many challenges. As exporting competition in global markets increases, the demand for students with training in global Selling products to another country. business is almost certain to grow. If you choose such a career, prepare yourself to work hard and always be ready for new challenges. importing

Why Trade with Other Nations? No country, not even a technologically advanced one, can produce all of the goods that its people want and need. Even if a country did become self-sufficient, other nations would seek to trade with that country to meet the needs of their citizens. Some nations, like Venezuela and Russia, have an abundance of natural resources but have limited technological know-how. Other countries, such as Japan and Switzerland, have sophisticated technology but few natural resources. Global trade enables a nation to produce what it is most capable of producing and to buy what it needs from others in a mutually beneficial exchange relationship. This happens through the process of free trade. Free trade is the movement of goods and services among nations without political or economic barriers. It is often a hotly debated concept.14 Figure 3.2 offers some of the pros and cons of free trade.

The Theories of Comparative and Absolute Advantage

Buying products from another country.

free trade

The movement of goods and services among nations without political or economic barriers.

Global trade is the exchange of goods and services across national borders. Exchanges between and among countries involve more than goods and services, however. Countries also exchange art, sports, cultural events, medical advances, space exploration, and labour. 105

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

■ FIGURE

3.2

THE PROS AND CONS OF FREE TRADE PROS

CONS

• The global market contains more than 7 billion potential customers for goods and services.

• Domestic workers (particularly in manufacturing-based jobs) can lose their jobs due to increased imports or production shifts to low-wage global markets.

• Productivity improves when countries produce goods and services in which they have a comparative advantage.

• Workers may be forced to accept pay cuts from employers who can threaten to move their jobs to lowercost global markets.

• Global competition and less-costly imports keep prices down, so inflation does not curtail economic growth.

• Moving operations overseas because of intense competitive pressure often means the loss of service jobs and white-collar jobs.

• Free trade inspires innovation for new products and keeps firms competitively challenged.

• Domestic companies can lose their comparative advantage when competitors build advanced production operations in low-wage countries.

• The uninterrupted flow of capital gives countries access to foreign investments, which helps keep interest rates low.

comparative advantage theory

A theory that states that a country should sell to other countries those products that it produces most effectively and efficiently, and buy from other countries those products that it cannot produce as effectively or efficiently trade.

absolute advantage

The advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries.

106

Comparative advantage theory, suggested in the early nineteenth century by English economist David Ricardo, was the guiding principle that supported this idea of free economic exchange.15 Comparative advantage theory states that a country should sell to other countries those products that it produces most effectively and efficiently, and buy from other countries those products it cannot produce as effectively or efficiently. Japan has shown this ability with cars and electronic items. Canada has such an advantage with certain forestry and agricultural products, and various minerals. In contrast, Canada lacks a comparative advantage in growing coffee; thus, we import most of the coffee we consume. By specializing and trading, Canada and its trading partners can realize mutually beneficial exchanges.16 In practice, the comparative advantage theory does not work so neatly. For various reasons, many countries decide to produce certain agricultural, industrial, or consumer products despite a lack of comparative advantage. To facilitate this plan, they restrict imports of competing products from countries that can produce them at lower costs. The net result is that the free movement of goods and services is restricted. We will return to the topic of trade protectionism later in the chapter. A country has an absolute advantage if it has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries. However, an absolute advantage in natural resources does not last forever. For instance, South Africa once had an absolute advantage in diamond production but this is no longer the case.

CHAPTER 3 Competing in Global Markets

Global competition also causes other absolute advantages to fade. Today there are very few instances of absolute advantage in global markets.

Getting Involved in Global Trade People interested in finding a job in global business often think of firms like Bombardier, Magna International, and Sony, which have large multinational accounts. The real job potential, however, may be with small businesses. Small businesses contribute between 25 and 41 percent to Canada’s gross domestic product and employ approximately seven million individuals (or 69.7 percent of the total labour force in the private sector). As well, small businesses account for about 90 percent of Canadian exporters.18 With the help of government agencies, such as Foreign Affairs and International Trade Canada and Export Development Canada, many small businesses are becoming more involved in global markets. Getting started globally is often a matter of observation, determination, and risk. What does that mean? First, it is important to observe and study global markets. Your library, the Internet, and your fellow classmates are good starting points for doing your research. Second, if you have the opportunity, travelling to different countries is a great way to observe foreign cultures and lifestyles and see if doing business globally appeals to you. A poll of Canadian small business owners between 25 and 39 years of age found that 72 percent export their goods and services.19 Global trade is an effective strategy for businesses of any size.

Canada became a diamond producer in 1998 when the Ekati diamond mine opened about 300 kilometres northeast of Yellowknife. Here you see the Diavik Diamond Mine, located on a 20-square-kilometre island in the same area. With the opening of new mines, Canada’s global diamond market share is expected to grow to a world-leading 25.2 percent in 2018.17

Importing Goods and Services20 The Canada Border Services Agency deals with importers across the whole range of goods and services that enter our country. These products (also referred to as articles) are subject to compliance with certain conditions imposed by the federal and, sometimes, provincial government(s). Some of the conditions may include the following: ∙ Is the article prohibited entry into Canada (e.g., baby walkers are prohibited due to Canadian safety standards)?

LO2

Explain the importance of importing and exporting, and define key terms used in global business.

∙ Is the article allowed to be imported only under the authority of an import permit? Examples include textiles and clothing, steel, wheat, barley and their products, certain farm products (e.g., dairy, chicken, eggs, and turkey), and firearms. ∙ Is the article subject to some other federally-imposed condition? For example, goods for retail sale have to comply with labelling laws; motor vehicles have to meet emission control standards; and food and agricultural products have to pass the necessary health and sanitary checks. 107

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

∙ Is the article subject to some privately-certified standard? For example, all electrical appliances and equipment must be certified by a recognized certification body before they can be sold in Canada. ∙ Is there a provincial rule to comply with? For example, imports of liquor, wine, and beer require prior authorization from the appropriate liquor commission. Review Figure 3.3 for categories and examples of goods and services that are imported as well as exported.

Exporting Goods and Services21

China produces and exports 80 percent of the toys manufactured in the world. What products do you use that are imported from China?

■ FIGURE

You may be surprised at what you can sell in other countries. The fact is, you can sell just about any good or service that is used in Canada to other countries— and often the competition is not nearly as intense for

3.3

CATEGORIES AND EXAMPLES OF CANADA’S GOODS AND SERVICE TRADE Categories

Examples

Merchandise Trade Categories Industrial Goods and Materials

Metals and metal ores, chemicals and plastics, and other industrial goods and materials

Machinery and Equipment

Industrial and agricultural machinery, aircraft and other transportation equipment, and other machinery and equipment

Energy Products

Crude petroleum and other energy products such as natural gas, petroleum, and coal products

Automotive Products

Passenger autos and chassis, trucks and other motor vehicles, and motor vehicle parts

Agricultural and Fishing Products

Wheat, fruits and vegetables, and other agricultural and fishing products such as live animals, feed, beverages, and tobacco

Forestry Products

Lumber and sawmill products, wood pulp and other wood products, and newsprint and other paper products

Other Consumer Goods

Apparel and footwear, and miscellaneous consumer goods such as watches, sporting goods and toys, and television and radio sets

Service Trade Categories Travel Services

Business travel and personal travel

Transport Services

Air transport, water transport, land, and other transport

Commercial Services

Communication, construction, insurance, computer and information, architectural, engineering, research and development, and other financial services

Government Services

Military activities and business support

Sources: “Canada’s International Trade in Services, 2013,” Statistics Canada, October 1, 2014, http://www.statcan.gc.ca/daily-quotidien/141001/ dq141001b-eng.pdf; Canadian International Merchandise Trade, Statistics Canada, January 2015, Catalogue no. 65-001-X.

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CHAPTER 3 Competing in Global Markets

producers in global markets as it is at home. You can, for example, sell snowplows to Saudi Arabians who use them to clear sand off their driveways. Don’t forget that services can be exported as well. Why is trade so important? Trade with other countries enhances the quality of life for Canadians and contributes to our country’s economic well-being. Exports alone account for one in five Canadian jobs. Canadian goods and services can be sold abroad directly as an export from a Canadian company or they can be sold indirectly via a foreign-located subsidiary of a Canadian company. Sales by majority-owned for© Cal Sport Media / Alamy Stock Photo eign affiliates of Canadian businesses are an important Shania Twain began singing in clubs and community events in her hometown of Timmins, Ontario, and to date means by which Canadian companies engage in interhas sold millions of records worldwide. Other Canadiannational commerce. born entertainers that have global appeal include Justin Spend some time reviewing Figure 3.4. By underBieber, Celine Dion, Drake, and Michael Bublé. Do you standing this information, you will realize why you hear prefer to support Canadian talent? so much about imports and exports in the news. After all, such activities are vital to our economy. What quesbalance of trade tions might you ask about Canada’s trade performance? A nation’s ratio of It is also important for businesses to be aware of these great opportunities. But don’t be exports to imports. misled. Selling in global markets is not by any means easy. (Review the Spotlight on Small trade surplus Business box for an example of one export area where Canadian businesses thrive.) Adapt- A favourable balance ing goods and services to specific global markets is potentially profitable but can be very of trade; occurs when difficult. We shall discuss a number of forces that affect global trading later in this chapter. the value of a country’s

exports exceeds that of its imports.

Measuring Global Trade In measuring the effectiveness of global trade, nations carefully follow two key indicators: balance of trade and balance of payments. The balance of trade is a nation’s ratio of exports to imports. A favourable balance of trade, or trade surplus, occurs when the value of the country’s exports exceeds that of its imports. An unfavourable balance of trade, or trade deficit, occurs when the value of the country’s imports exceeds that of its exports. ■ FIGURE

trade deficit

An unfavourable balance of trade; occurs when the value of a country’s imports exceeds that of its exports.

3.4

CANADA’S GOODS AND SERVICES IMPORT/EXPORT PERFORMANCE, 2016 SERVICES

Value (billions) Annual Growth (%)

GOODS

Exports

Imports

Exports

Imports

$107,164

$129,261

$521,368

$547,237

4.8%

2.0%

0.1%

Source: “Canada’s State of Trade: Trade and Investment Update—2017,” Office of the Chief Economist, Global Affairs Canada, accessed May 20, 2018, http://www.international.gc.ca/economist-economiste/performance/state-point/state_2017_point/index.aspx?lang=eng#1_0.

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PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

Spotlight On SMALL BUSINESS Let the Games Begin Members of Generation Z, a demographic group born between 1995 and the present, love to play video games. Statistics show they multitask across five screens daily and spend 41 percent of their time outside of school with computers or mobile devices. While many of the video gaming platforms have big business names, such as Sony, Apple, and Nintendo, much of the work to design the games comes from small businesses. In 2013, Canada’s video gaming industry ranked third in the world and contributed $2.3 billion in GDP to the Canadian economy.

The Canadian companies are primarily small and micro-sized businesses based in urban centres. But there are exceptions: Other Ocean Interactive, which operates from offices in Charlottetown, Prince Edward Island, and St. John’s, Newfoundland, is best known for the development of Konami’s award-winning Xbox LIVE™ Arcade download, Castlevania™; Symphony of the Night™, Midway’s Nintendo DS release of the popular franchise Ultimate™ Mortal Kombat®; and the highly popular Sega’s Super. While a location away from the California gaming hub may seem a challenge, studio head Deidre Ayre sees the choice a different way, “I am proud to say we have created 75 jobs in the Atlantic region so far and that number is still growing.” Bight Games, also in PEI, built success on “freemium” games (apps that are free with fees for virtual goods) Trade Nation, a perennial top-grossing game in the App Store, and The Simpsons: Tapped, a popular mobile video game. The business was so successful Electronic Arts (EA) acquired the indie mobile games developer. “Video games are not IT in the traditional sense. We’re in the entertainment business,” says Stuart Duncan, founder of Bight Games. “We employ as many artists as programmers, and deal with original intellectual property, as well as patents. And, we make more money than Hollywood.” With these products, both companies gain an edge in the competitive environment of the global gaming industry that has an estimated value of $30 billion. According to the Entertainment Software Association of Canada, 65 percent of Canadians believe the video gaming industry has a positive effect on the Canadian economy. Thanks to small businesses like these, it’s true.

Source: Matthew Bambach, “Canada’s video-game industry ranks No. 3 worldwide,” The Globe and Mail, March 18, 2013, http://www .theglobeandmail.com/report-on-business/small-business/sb-digital/biz-categories-technology/canadas-video-game-industry-ranksno-3-worldwide/article9875545/;“Our Industry is Thriving,” Entertainment Software Association of Canada, accessed June 27, 2018, theesa.ca; Hayley Peterson, “Millennials are old news – Here’s everything you should know about Generation Z,” Business Insider, June 25. 2014, http://www.businessinsider.com/generation-z-spending-habits-2014-6; “Prince Edward Island’s Video Gaming Industry Showing Signs of Making Serious Noise,” The Guardian, January 8, 2008, http://www.gameplan.ca/documents/guardianstory1.pdf; Dean Takahashi, “EA acquires mobile game developer Bight Games,” VB, August 15, 2011, http://venturebeat.com/2011/08/15/ ea-acquires-mobile-game-developer-bight-games/.

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In 2009, Canada registered its first trade deficit in 15 years and this continued to be the case in 2014.22 It is easy to understand why countries prefer to export more than they import. If I sell you $200 worth of goods and buy only $100 worth, I have an extra $100 available to buy other things. However, I’m in an unfavourable position if I buy $200 worth of goods from you and sell you only $100. The balance of payments is the difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows coming into or leaving a country from other factors such as tourism, foreign aid, military expenditures, and foreign investment. The goal is always to have more money flowing into the country than flowing out of the country; in other words, a favourable balance of payments. Conversely, an unfavourable balance of payments is when more money is flowing out of a country than coming in.

Trading in Global Markets: The Canadian Experience At first glance, Canada’s foreign trade statistics seem impressive. While our abundant natural resources are a major area for exports, developing countries continue to give Canada stiff competition in these areas. When we look carefully at the numbers in Figure 3.5, we see that we are dependent on one country, the United States. Over the long-term, Derek Burleton, Deputy Chief Economist with Toronto-Dominion Bank (TD), expects that Canada’s economic prosperity will be increasingly driven by trade with economies other than the United States’. He predicts that by 2020, the United States will account for only two-thirds of Canada’s exports, down from a peak of 85 percent in 2002.23 Read the next section to learn about these priority markets.

Canada’s Priority Markets24

Although Funko’s Pop! line of toys aren’t very lifelike, that hasn’t stopped these big-headed figurines from becoming a global sensation. Funko’s toys usually take on the appearance of famous fictional characters or pop culture icons, giving them widespread appeal to collectors around the world. As a result, each year Funko earns tens of millions from sales of its Pop! toys. Does a career in the global collectibles market seem appealing to you?

Technological advances in most fields, primarily in the area of transmission and storage of information, have shattered the archaic notions of how things ought to function, from production and trade to war and politics. The new ways of communicating, organizing, and working are inviting the most remote corners of the world to be actors on the global economic stage. These emerging economies are enjoying high growth rates, rapid increases in their living standards, and a rising global prominence. Tapping into these markets is crucial. For example, in 30 years a gain of just 0.1 percent in the Canadian share of the import markets of Brazil, Russia, India, and China (BRIC countries) would mean an export gain of $29 billion. Based on extensive consultation with government, academic, and Canadian business and industry representatives, the federal government developed its Global Markets Action Plan. The plan identifies three priority market types: emerging markets with broad Canadian interests, emerging markets with specific opportunities for Canadian businesses, and established markets with broad Canadian interests. These emerging market types include 21 countries and focus upon Asia Pacific (ten countries),

balance of payments

The difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment. 111

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

■ FIGURE

3.5

CANADA’S GOODS AND SERVICES TRADE BY REGION, 2016 SERVICES

GOODS

Exports %

Imports %

Exports %

Imports %

United States

55.1

54.4

75.3

65.8

European Union

16.8

9.5

China

–*

–

4.3

6.9

Japan

1.6

2.1

Mexico

–

1.7

3.5

India

–

0.8

0.5

South Korea

–

0.9

1.6

Rest of World

26.5

6.9

10.1

*indicates no services export or import values for the region were provided in the federal government report. Source:“Canada’s State of Trade: Trade and Investment Update—2017,” Table 4.2-“Goods Exports 2016”, Table 4.3-“Goods Imports 2016”, and Table 4.6-“Services Exports and Imports by Region 2016”, Global Affairs Canada, accessed May 20, 2018, http://www.international.gc.ca/economist-economiste/ performance/state-point/state_2017_point/index.aspx?lang=eng#1_0.

One objective of the federal government’s Science and Technology program is to identify and incorporate world-leading research into the development of innovative processes, goods, and services in Canada. What are some other benefits of such initiatives?

112

Latin America and Caribbean (four countries), North America (one country), Middle East and Africa (four countries), and Europe (two countries).25 China and India are of particular interest as they are growing and emerging markets due to their size and economic transformation. A Conference Board of Canada report notes that by 2050, India will be the world’s third-largest economy, with a GDP approaching US$30 trillion, behind only the United States and China, which will top the list. Steps already taken to encourage a stronger Canadian presence in the global marketplace include tax cuts, increased support for research and development, and critical investments in infrastructure at Canada–U.S. border crossings and Canada’s Asia-Pacific Gateway.

CHAPTER 3 Competing in Global Markets

PROGRESS ASSESSMENT

• • •

How do world population and market statistics support the expansion of Canadian businesses into global markets? What is comparative advantage? How does this differ from absolute advantage? How are a country’s balance of trade and balance of payments determined?

Strategies for Reaching Global Markets

LO3

Businesses use many different strategies to compete in global markets. The key strategies include licensing, exporting, franchising, contract manufacturing, creating international joint ventures and strategic alliances, and engaging in foreign direct investment. Each of these strategies provides opportunities for becoming involved in global markets, along with specific commitments and risks. Figure 3.6 places the strategies discussed on a continuum showing the amount of commitment, control, risk, and profit potential associated with each one. Take a few minutes to look it over before you continue.

Illustrate the strategies used in reaching global markets, and explain the role of multinational corporations in global markets.

Licensing A firm (the licensor) may decide to compete in a global market by licensing the right to manufacture its product or use its trademark to a foreign company (the licensee) for a fee (a royalty). A company with an interest in licensing generally needs to send company representatives to the foreign producer to help set up the production process. The licensor may also assist or work with a licensee in such areas as distribution, promotion, and consulting. A licensing agreement can benefit a firm in several ways. First, the firm can gain revenues it would not otherwise have generated in its home market. Also, foreign licensees ■ FIGURE

licensing

A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee (a royalty).

3.6

STRATEGIES FOR REACHING GLOBAL MARKETS

Licensing

LEAST

Exporting

Franchising

Contract manufacturing

International joint ventures and strategic alliances

Amount of commitment, control, risk, and profit potential

Foreign direct investment

MOST

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must often purchase start-up supplies, component materials, and consulting services from the licensing firm. Coca-Cola has entered into global licensing agreements with over 300 licensees that have extended into long-term service contracts that sell over $1 billion of the company’s products each year. Service-based companies are also active in licensing. For example, Tokyo Disneyland, the first Disney theme park opened outside the United States, is operated by Oriental Land Company under a licensing agreement with the Walt Disney Company. In fact, Disney is the largest licensor of consumer products globally, with over $50 billion of licensed products.26 © Albert L. Ortega/Getty Images A final advantage of licensing is that licensors Marvel has licensed many companies to make products spend little or no money to produce and market their related to successful film franchises like Guardians of products. These costs come from the licensee’s pocket. the Galaxy. Do you think Marvel-licensed products will maintain their global popularity with new generations of Therefore, licensees generally work hard to succeed. viewers? However, licensors may also experience some problems. Often, a firm must grant licensing rights to its product for an extended period, 20 years or longer. If a product experiences remarkable growth in the foreign market, the bulk of the revenues earned belong to the licensee. Perhaps even more threatening is that a licensing firm is actually selling its expertise. If a foreign licensee learns the company’s technology or product secrets, it may break the agreement and begin to produce a similar product on its own. If legal remedies are not available, the licensing firm may lose its trade secrets, not to mention promised royalties.

Exporting Canadian companies export goods and services (e.g., call centres, IT consultants, and cultural and performing artists). As you will see in the chapters on marketing, many decisions have to be made when a company markets a new product or goes into new markets with existing products. Often the first export sales occur as a result of unsolicited orders received. Regardless of how a company starts exporting, it must develop some goals and some strategies for achieving those goals. Canadian firms that are still hesitant can engage in indirect exporting through specialists called export-trading companies (or export-management companies) that assist in negotiating and establishing trading relationships. An export-trading company not only matches buyers and sellers from different countries but also deals with foreign customs offices, documentation, and even weights and measures conversions to ease the process of entering global markets. It also helps exporters get paid. If you are considering a career in global business, export-trading companies often provide internships or part-time opportunities for students.

Franchising Franchising is a contractual agreement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service in a given territory in a specified manner. Franchising is popular domestically and internationally. (We will 114

CHAPTER 3 Competing in Global Markets

discuss it in depth in Chapter 6.) Canadian franchisors such as Molly Maid and Tim Hortons have global units operated by foreign franchisees. In 1986, brothers Michael and Aaron Serruya, then aged 19 and 20, wanted to buy a franchise, but no one would take a chance on them. So, they started their own frozen yogourt shop, Yogen Früz. Today, Yogen Früz has grown to be a world leader in the frozen yogourt category, with over 1300 locations worldwide and a 20-year Top 500 Global Franchise rating.27 Another Canadian business, BeaverTails Pastry, was started in 1978. The company produces whole-wheat pastries that are stretched by hand to resemble the tail of a beaver, one of Canada’s best-known national symbols. The pastries are then float cooked on high-quality canola oil and served piping hot, topped with butter and a choice of delectable flavours. The company operates © Aneta_Gu/Getty Images RF over 80 franchised and licensed outlets across Canada, Tired of studying and want a quick snack? How about together with two locations in Saudi Arabia and two a piping hot pizza topped with pickled peppers and cucumbers drizzled with mayo like the one above. stores in Colorado’s ski country.28 International chains like Pizza Hut serve pies like these Franchisors have to be careful to adapt their prodaround the globe in order to appeal to different tastes. uct or service to the countries they serve. Yum! Brands’ How can franchises ensure their products are appropriate has 40 000 of its KFC, Taco Bell, and Pizza Hut restaufor global markets? rants in 130 countries around the world.29 They learned quickly that preferences in pizza toppings differ globally. Japanese customers, for example, enjoy squid and sweet mayonnaise pizza. In the company’s KFC restaurants in China, the menu is chicken with Sichuan spicy sauce and rice, egg soup, and a “dragon twister” (KFC’s version of a traditional Beijing duck wrap).30 Dunkin’ Donuts’ donut holes might look the same in its 3200 franchises in 36 countries across the globe, but local taste preferences are anything but the same. For example, in the company’s donut shops in China, the donut of choice is dry pork and seaweed. Read the Adapting to Change box that highlights another global franchise champion, McDonald’s.

Contract Manufacturing Contract manufacturing involves a foreign company’s production of private-label goods to which a domestic company then attaches its own brand name or trademark. (This practice falls under the broad category of outsourcing, which we introduced in Chapter 1 and which will be discussed in more depth later in this chapter.) For example, contract manufacturers make circuit boards and components used in computers, printers, smartphones, medical products, airplanes, and consumer electronics for companies such as Dell, Apple, and IBM. Foxconn is the world’s largest contract manufacturer and makes such well-known products as the iPhone and Microsoft’s XBox One. Nike has more than 800 contract factories around the world that manufacture all its footwear and apparel. The pharmaceutical industry also makes use of contract manufacturing and is expected to grow to an $84 billion market by 2020.31 Worldwide contract manufacturing is estimated to be an over $300 billion industry.

contract manufacturing

A foreign country’s production of privatelabel goods to which a domestic company then attaches its brand name or trademark; also called outsourcing.

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Adapting to CHANGE Many Flags Fly Over the Golden Arches For decades McDonald’s has been the undisputed king of global food franchising. With almost 39 000 restaurants in 120 countries, Mickey D’s serves more than 68 million customers every day. So how did McDonald’s become such a global powerhouse? It certainly didn’t get there through hamburgers alone. Since it first began expanding overseas, McDonald’s has been careful to include regional tastes on its menus along with the usual Big Mac and french fries. For instance, in Thailand patrons can order the Samurai Burger, a pork-patty sandwich marinated in teriyaki sauce and topped with mayonnaise and a pickle and salmon rice. In Germany, a McNurnburger is three bratwurst served on a bun with mustard and onions. Japanese customers can have their famous fries drizzled with pumpkin and chocolate sauces. McDonald’s is also careful to adapt its menus to local customs and culture. In India, the company pays

respect to religious sentiments by not including any beef or pork on its menu. Mickey D’s recently launched a meatless Big Mac for India’s many vegetarian customers, using two corn and cheese patties. This complements its best-selling Maharaja Mac, a chicken patty with jalapenos and habanero sauce. In Israel, all meat served in the chain’s restaurants is 100 percent kosher beef. The company also closes many of its restaurants on the Sabbath and religious holidays. For more examples, go to www.mcdonalds.com and explore the various McDonald’s international franchises websites. Notice how the company blends the culture of each country into the restaurant’s image. McDonald’s is also determined to stay on top as the premier global franchisor. Starting in 1961, McDonald’s became the first restaurant company in the world to develop a training center, Hamburger University. Today, McDonald’s has campuses in Oak Brook, Illinois, Tokyo, London, Sydney, Munich, Sao Paolo, Moscow, and Shanghai. Globally, over 275 000 students have graduated. In Shanghai, the company’s Hamburger University attracts top-level college graduates to be trained for management positions. Only about 8 out of every 1000 applicants makes it into the program, an acceptance rate even lower than Harvard University’s. Today, over 40 percent of the senior managers at McDonald’s are graduates of Hamburger University. By successfully mixing its image with many cultures, McDonald’s has woven itself into the world’s fabric. Going forward, McDonald’s remains dedicated to quality as it continues adapting and expanding further into the global market.

Sources: Newley Purnell, “McDonald’s Fan Scours the Globe to Dish on Menu Variations,” The Wall Street Journal, February 19, 2016; Natalie Walters, “McDonald’s Hamburger University an Be Harder to Get into Than Harvard and Is Even Cooler Than You’d Imagine,” AOL. com, October 24, 2015; Preetika Rana, “U.S. Chains Redo Menus in India,” The Wall Street Journal, March 23, 2016; McDonald’s, www .mcdonalds.com, accessed September 2017.

Contract manufacturing enables a company to experiment in a new market without incurring heavy start-up costs such as building a manufacturing plant. If the brand name becomes a success, the company has penetrated a new market with relatively low risk. A firm can also use contract manufacturing temporarily to meet an unexpected increase in orders and, of course, labour costs are often very low. One company, featured in PROFIT magazine’s ranking of Canada’s emerging growth companies, has used contract manufacturing successfully. FouFou Dog is a dog apparel company whose collection includes canine track suits, hoodies, jewelled collars and leashes, as well as chew toys. At the age of 24, Cheryl Ng, owner of a Maltese dog 116

CHAPTER 3 Competing in Global Markets

named Ernie, started the company because she liked how Paris Hilton dressed her dog. Today, the company exports 95 percent of its products. According to Ng, “All our stuff is made in Argentina. In China, quality control can be hit-and-miss or downright sloppy— you could have a disaster on your hands—but it’s been consistently good from my suppliers.” And she has other reasons for heading south instead of east: “My suppliers will make me a small quantity if I want to try something out. You can’t get that from China anymore, and I don’t want to be stuck with a colour or style nobody wants; besides, they let me check out the textiles before I buy and they always have good stuff.” She also likes the shorter flights and the fact that she only has to cross two time zones.32

International Joint Ventures and Strategic Alliances

Bombardier Transportation was awarded a contract to supply Bombardier Flexity Swift high-floor light rail vehicles to the Bursa Metropolitan Municipality, Turkey. The vehicles will be built at Bombardier’s manufacturing facility in Bautzen, Germany. Train cars will come from the Siegen site, while the electrical equipment will be supplied by the Mannheim plant.

A joint venture is a partnership in which two or more companies (often from different countries) join to undertake a major project. Joint ventures are often mandated by governments as a condition of doing business in their country, as often occurs in China. For example, Disney and state-owned Shanghai Shendi Group’s $5.5 billion joint venture created the first Disneyland theme park in China, which opened in 2016.33 Joint ventures are developed for many different reasons. Marriott International and AC Hotels in Spain entered a joint venture to create AC Hotels by Marriott in order to increase their global footprint and future growth.34 PepsiCo, as part of its Performance with Purpose global vision, agreed to joint ventures with Tata Global Beverages of India to develop packaged health and wellness beverages for the mass consumer market in India and the Strauss Group in Mexico to provide fresh dips and spreads.35 The benefits of international joint ventures are clear:

joint venture

A partnership in which two or more companies (often from different countries) join to undertake a major project.

1. Shared technology and risk. 2. Shared marketing and management

expertise. 3. Entry into markets where foreign compa-

nies are often not allowed unless goods are produced locally. The drawbacks are not so obvious but are important.36 One partner can learn the other’s technology and practices, and then use what it learned to its own advantage. Also, a shared technology may become obsolete or the joint venture may become too large to be as flexible as needed.

The Bank of Nova Scotia formed a joint venture with the Bank of Beijing. The Bank of Beijing Scotiabank Asset Management Co. Ltd. markets mutual funds to retail and institutional customers through the Chinese bank’s national branch network. 117

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

strategic alliance

A long-term partnership between two or more companies established to help each company build competitive market advantages.

The global market is also fuelling the growth of strategic alliances. A strategic alliance is a long-term partnership between two or more companies established to help each company build competitive market advantages. Unlike joint ventures, strategic alliances do not share costs, risks, management, or even profits. Thanks to their flexibility, strategic alliances can effectively link firms from different countries and firms of vastly different sizes. Strategic alliances with Daimler AG and Toyota were crucial to Tesla helping to ensure early success for the company. A later alliance with Panasonic was a major boost in assisting with the company’s battery technology.37

Foreign Direct Investment foreign direct investment (FDI)

The buying of permanent property and businesses in foreign nations.

foreign subsidiary

A company owned in a foreign country by the parent company.

multinational corporation

An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management.

Investment Canada Act

Legislation that provides rules to review significant investment in Canada by non-Canadians. 118

Foreign direct investment (FDI) is buying permanent property and businesses in foreign nations. As the size of a foreign market expands, many firms increase FDI and establish a foreign subsidiary. A foreign subsidiary is a company owned in a foreign country by another company (called the parent company). The subsidiary operates like a domestic firm, with production, distribution, promotion, pricing, and other business functions under the control of the subsidiary’s management. The subsidiary must observe the legal requirements of both the country where the parent firm is located (called the home country) and the foreign country where the subsidiary is located (called the host country). The primary advantage of a subsidiary is that the company maintains complete control over any technology or expertise it may possess. The major shortcoming is the need to commit funds and technology within foreign boundaries. Should relationships with a host country falter, the firm’s assets could be expropriated (taken over by the foreign government). Swiss-based Nestlé has many foreign subsidiaries. The consumer-products giant spent billions of dollars acquiring foreign subsidiaries such as Jenny Craig (weight management), Gerber Baby Foods, Ralston Purina, Chef America (maker of Hot Pockets), Libby Foods, and Dreyer’s and Häagen-Dazs Ice Cream in the United States as well as Perrier in France. Nestlé employs over 333 000 people in 86 countries and has operations in almost every country in the world.38 Nestlé is a multinational corporation, one that manufactures and markets products in many different countries and has multinational stock ownership and management. Multinational corporations are typically extremely large corporations like Nestlé, but not all large global businesses are multinationals. A business could export everything it produces, deriving 100 percent of its sales and profits globally, and still not be a multinational corporation. Only firms that have manufacturing capacity or some other physical presence in different nations, such as Magna International, can truly be called multinational. Figure 3.7 lists the ten largest multinational corporations in the world. Canadian subsidiaries of foreign-based companies have played a major role in developing the Canadian economy. There are, however, several disadvantages to foreign investment. One is that Canada has been criticized for having a “branch plant economy.” This occurs when many subsidiaries are owned by foreign companies and profits are returned to the home country rather than reinvested in Canada. A second concern is the outright purchase of Canadian companies, where non-Canadian companies gain more control of the economic activity within Canada. During the past decade the degree of Chinese ownership among Canadian companies has increased, particularly in sensitive industries such as health care, oil and gas, natural resources, and technology. However, questions have been raised whether this change is best for Canada’s economic interests.39 The Investment Canada Act provides the rules

CHAPTER 3 Competing in Global Markets

■ FIGURE

3.7

THE LARGEST MULTINATIONAL CORPORATIONS IN THE WORLD (USD) Company

Country

Revenue

1. Walmart Stores

United States

$482,130,000

2. State Grid

China

$329,691,000

3. China National Petroleum

China

$299,271,000

4. Sinopec Group

China

$294,344,000

5. Royal Dutch Shell

Netherlands

$272,156,000

6. Exxon Mobil

United States

$246,204,000

7. Volkswagon

Germany

$236,600,000

8. Toyota Motor

Japan

$236,592,000

9. Apple

United States

$233,715,000

10. BP

Great Britain

$225,982,000

Source:Fortune, www.fortune.com, accessed June 2017.

to review significant investments in Canada by non-Canadians.40 However, the federal government has loosened these rules and approved various purchases. There are several examples of non-Canadian purchases of shares in Canadian companies in the past decade. For example, the 2017 purchase of Retirement Concepts, a Vancouver-based retirement home chain, by Cedar Tree Investments Canada (owned by China’s Anbang Insurance), which gave Chinese owners an entry into the Canadian healthcare sector.41 In 2013, Nexen Inc., a Canadian oil and gas company, was sold to the Chinese National Offshore Oil Corporation (CNOOC).42 PetroChina purchased Encana Corporation’s shale gas property in northern British © Cole Burston/Bloomberg via Getty Images Columbia in 2011, which raised concerns that the deal While Chinese ownership of Canadian companies has was designed to lock up the supply of gas, at a relaincreased during the past decade, the federal government tively low price, and move it to China.43 Finally, the does have the power to reject purchases by non-Canadians. purchase of Norsat International, a high-tech firm that The decision to veto the purchase of Aecon Group Inc., a sells satellite equipment, by Chinese-owned Hytera Canadian construction company, by China Communications Construction Co. Ltd. (CCCC) demonstrates the sensitive Communications was approved in 2017.44 Should the nature of these transactions.45 Do you consider federal federal government be flexible or firm on the foreign government review of foreign ownership a deals important ownership of Canada in companies? Should certain to protect Canadian interests? industries be protected more than others? 119

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In the early 1990s, Michael Porter, the competition guru from Harvard University Business School, released a report titled The Competitive Advantage of Nations that was commissioned by the Canadian government. While this report is now 25 years old, some of his points still ring true today: One of Canada’s competitive problems is the high concentration of foreign-owned firms that perform little sophisticated production or R&D. It matters a lot where a multinational calls home, because a company’s home base is where the best jobs exist, where core R&D is undertaken, and where strategic control rests.... Home bases are important to an economy because they support high productivity and productivity growth. Regardless of these concerns, more countries are welcoming subsidiaries as a way to develop their economies. Getting involved in global business requires selecting an entry strategy that best fits your business goals. The different strategies discussed reflect different levels of ownership, financial commitment, and risk. However, this is just the beginning. You should also be aware of market forces that affect a business’ ability to trade in global markets. After the Progress Assessment, we will discuss them.

PROGRESS ASSESSMENT

• • •

LO4

Evaluate the forces that affect trading in global markets.

culture

The set of values, beliefs, rules, and institutions held by a specific group of people.

ethnocentricity

An attitude that one’s own culture is superior to all others. 120

What are the advantages to a firm of using licensing as a method of entry in global markets? What are the disadvantages? What is the key difference between a joint venture and a strategic alliance? What makes a company a multinational corporation?

Forces Affecting Trading in Global Markets The hurdles to success are higher and more complex in global markets than in domestic markets. Such hurdles include dealing with differences in sociocultural forces, economic and financial forces, legal forces, and physical and environmental forces. Let’s take a look at each of these global market forces to see how they challenge even the most established and experienced global businesses.

Sociocultural Forces The word culture refers to the set of values, beliefs, rules, and institutions held by a specific group of people.46 Culture can also include social structures, religion, manners and customs, values and attitudes, language, and personal communication. An attitude that one’s own culture is superior to all others is known as ethnocentricity. If you hope to get involved in global trade, it is critical to be aware of the cultural differences among nations. Different nations have very different ways of conducting business. Canadian businesses that wish to compete globally must adapt to those ways. In North America, we like to do

CHAPTER 3 Competing in Global Markets

things quickly. We tend to call each other by our first names and try to get friendly even on the first encounter. In Japan, China, and other countries these actions would be considered surprising and even rude. Canadian negotiators will say no if they mean no, but Japanese negotiators usually say maybe when they mean no. Religion is an important part of any society’s culture and can have a significant impact on business operations. Consider the violent clashes between religious communities in India, Pakistan, Northern Ireland, and the Middle East—clashes that have wounded these areas’ economies. Companies sometimes ignore religious implications in business decisions. Both McDonald’s and Coca-Cola offended Muslims in Saudi Arabia by putting the Saudi Arabian flag on their packaging. The flag’s design contains a passage from the Quran (Islam’s sacred scripture), and Muslims feel that their holy writ should never be wad© Keith Homan/Alamy Stock Photo ded up and thrown away. Formed in 1994, Spin Master Toys is the 4th largest toy Successful companies are those that can manufacturer in the United States. The company was formed in understand these differences and develop 1994 by two young entrepreneurs straight out of university. Since goods and services accordingly. Regardless then they have grown from a “single product toy company into a of whether the focus is a large or small global leading global, diversified, multi-platform and highly innovative market, understanding sociocultural differ- children’s entertainment company.” What social trends do you think ences is important when managing employ- impact the toy industry? How might demographic trends around the 47 ees. In Latin American countries, workers world influence Spin Master Toys’ future marketplace? believe that managers are placed in positions of authority to make decisions and be responsible for the well-being of their workers. Consider what happened to one North American manager in Peru who was unaware of this characteristic and believed that workers should participate in managerial functions. This manager was convinced that he could motivate his workers to higher levels of productivity by instituting a more democratic decision-making style than the one already in place. Soon workers began quitting their jobs in droves. When asked why, the workers said the new manager did not know his job and was asking the workers what to do. All stated that they wanted to find new jobs, since obviously this company was doomed due to incompetent managers. Many companies still fail to think globally. A sound philosophy is: Never assume that what works in one country will work in another. Companies such as Roots, Nike, and Toyota have developed brand names with widespread global appeal and recognition. However, even these successful global marketers often face difficulties.48 To get an idea of the problems companies have faced with advertising translations, take a look at Figure 3.8. 121

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■ FIGURE

3.8

OOPS, DID WE SAY THAT? A global marketing strategy can be very difficult to implement. Look at the problems these well-known companies encountered in global markets.

PepsiCo attempted a Chinese translation of “Come Alive, You’re in the Pepsi Generation” that read to Chinese customers as “Pepsi Brings Your Ancestors Back from the Dead.”

KFC’s patented slogan “Finger-Lickin’ Good” was understood in Japanese as “Bite Your Fingers Off.”

Coors Brewing Company put its slogan “Turn It Loose” into Spanish and found it translated as “Suffer from Diarrhea.”

On the other side of the translation glitch, Electrolux, a Scandinavian vacuum manufacturer, tried to sell its products in the North American market with the slogan “Nothing Sucks Like an Electrolux.”

Economic and Financial Forces

exchange rate

The value of one nation’s currency relative to the currencies of other countries. 122

Economic differences can also make entering global markets more challenging. In Qatar, annual per capita income is almost $130,000, the highest in the world. In economically strapped Haiti, per capita income is barely over $1,800.49 It is hard for us to imagine buying chewing gum by the stick instead of by the package. Yet this buying behaviour is commonplace in economically depressed nations like Haiti, where customers can afford only small quantities. You might suspect with over 1.2 billion potential customers, India would be a dream market for Coca-Cola. Unfortunately, Indians consume only 12 eight-ounce bottles of co*ke per person a year due to low per-capita income. The same is true in the booming beauty and personal care market in India. Cosmetic giant L’Oréal sells primarily small, sample sizes of shampoo, tiny tubes of men’s face wash, and petite pouches of Garnier hair colour due to low incomes.50 Global financial markets unfortunately do not have a worldwide currency. Mexicans shop with pesos, South Koreans with won, Japanese with yen, and Canadians with dollars. Globally, the U.S. dollar is considered a dominant and stable currency.51 However, it does not always retain the same market value.52 In an international transaction today, one dollar may be exchanged for eight pesos; tomorrow, you may only get seven. The exchange rate is the value of one nation’s currency relative to the currencies of other countries. Changes in a nation’s exchange rates can have important implications in global markets. A high value of the dollar means that a dollar would be traded for more foreign

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currency than normal. The products of foreign producers would be cheaper because it takes fewer dollars to buy them, but the cost of Canadian-produced goods would become more expensive to foreign purchasers because of the dollar’s high value. Conversely, a low value of the dollar means that a dollar is traded for less foreign currency than normal. Therefore, foreign goods become more expensive because it takes more dollars to buy them, but Canadian goods become cheaper to foreign buyers because it takes less foreign currency to buy Canadian goods. Global financial markets operate under a system called floating exchange rates, in which currencies “float” according to the supply and demand for them in the global mar- devaluation ket for the currency. This supply and demand is created by global currency traders, who Lowering the value develop a market for a nation’s currency based on the perceived trade and investment of a nation’s currency relative to other potential of the country. currencies. Changes in currency values cause many problems globally.53 For instance, labour costs for multinational corporations like Bombardier, Nestlé, General Electric, and Sony countertrading A complex form of can vary considerably as currency values shift, causing them to juggle production from one bartering in which country to another. several countries may Currency valuation problems can be especially harsh on developing economies. At be involved, each certain times a nation’s government will intervene and adjust the value of its currency, trading goods for goods or services for often to increase the export potential of its products. Devaluation is lowering the value of services. a nation’s currency relative to other currencies. Argentina and Venezuela both devalued their currencies in 2014 to try to alleviate severe economic problems in each country.54 Unfortunately, the move did little to solve the country’s problems. Inflation in Venezuela is expected to hit 1600 percent in 201755 (see Chapter 2). Sometimes, due to a nation’s weak currency, the only way to trade is bartering, which is the exchange of merchandise for other merchandise, or service for other service, with no money involved.56 Countertrading is a complex form of bartering in which several countries may be involved, each trading goods for goods or services for services. Let’s say that a developing country such as Jamaica wants to buy vehicles from Ford Motor Company in exchange for bauxite, a mineral compound that is a source of aluminum ore. Ford does not need Jamaican bauxite, but does need compressors. In a counter-trade agreement, Ford may trade vehicles to Jamaica, which then trades bauxite to another country —say, India—which then exchanges compressors with Ford. All three parties benefit in the process, and avoid some of the financial problems and currency constraints in global markets. Estimates are that countertrad© SkyF/iStock/Thinkstock ing accounts for over 20 percent of all global exchanges, especially with When the dollar is “up,” foreign goods developing countries.57

Legal Forces In any economy, the conduct and the direction of business are firmly tied to the legal environment. In Canada, federal and provincial laws heavily affect business practices. In global markets, the absence of a central system of law means many different systems of laws may apply. This makes conducting global business difficult as business people navigate a sea of laws that are often inconsistent. Antitrust rules, labour relations, patents,

and travel are a bargain for Canadian consumers. When the dollar trades for less foreign currency, however, foreign tourists (like these viewing Niagara Falls) often flock to Canadian cities to enjoy relatively cheaper vacations and shopping trips. Do Canadian exporters profit more when the dollar is up or when it is down?

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copyrights, trade practices, taxes, child labour, product liability, and other issues are governed differently country by country. The Making Ethical Decisions box questions selling products in a global market with a different legal system. Canadian businesses must follow Canadian laws in conducting business globally. For example, bribery is not considered legal in Canada. The problem is that this runs contrary to beliefs and practices in many countries where corporate or government bribery not only is acceptable, but also may be the only way to secure a lucrative contract. The Organisation for Economic Co-operation and Development (OECD) and Transparency International have led a global effort to fight corruption and bribery in foreign markets, with limited success.58 Figure 3.9 shows a partial list of countries where bribery or other unethical business practices are most common. The co-operation and sponsorship of local business people can help a company penetrate the market and deal with laws and bureaucratic barriers in their country.

Physical and Environmental Forces Certain technological forces can also have an important impact on a company’s ability to conduct business in global markets. In fact, technological constraints may make it difficult given the nature of exportable products. For example, houses in most developing countries do not have electrical systems that match those of Canadian homes, in kind or in capacity. How would the differences in electricity available (110 versus 220 volts) affect a Canadian appliance manufacturer wishing to export? Also, computer and Internet usage in many developing countries is rare or nonexistent. You can see how this would make for a challenging business environment in general and would make e-commerce difficult, especially as this is becoming a critical element of business. After the Progress Assessment, we will explore how trade protectionism affects global business. ■ FIGURE

3.9

COUNTRIES RATED HIGHEST ON CORRUPT BUSINESS The corruption perceptions index ranks countries and territories according to their perceived level of public sector (government) corruption. This list starts with the most corrupt countries.

1. Somalia 2. SouthSudan 3. North Korea 4. Syria 5. Yemen 6. Sudan 7. Libya 8. Afganistan 9. Venezuela 10. Iraq 165. Canada (9th least corrupt country in the world) 174. Denmark (least corrupt country in the world) Source: Transparency International, 2017.

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Making ETHICAL DECISIONS Exporting Your Problems Away As the top manager of Nighty Nite, a maker of children’s sleepwear, you received notification from the Health Canada that the fabric you use in your girl’s nightgowns has been deemed unsafe. A study of the product was conducted after a child was seriously burned

while wearing a nightgown that burst into flames when she ventured too close to a gas stove. Health Canada ruled the material used did not have sufficient flameretardant capabilities to meet Canadian standards. Your company was instructed to immediately remove the product from store shelves and issue a product recall. This is a tough blow for the company since the nightgowns are popular and sell well in the market. Plus, you have a large supply of the product in your warehouse that now is just taking up space. A big financial loss for the company is likely. Your sales manager reminds you that many countries do not have such strict product laws as Canada. He suggests the product could be exported to a country with less stringent product safety rules. Exporting the product to another country would solve your inventory and profit concerns, but you wonder about sending a product deemed unsafe in Canada to children in another market. What are the consequences of each alternative? What will you do?

PROGRESS ASSESSMENT

• • •

What are the major hurdles to successful global trade? What does ethnocentricity mean, and how can it affect global success? How would the low value of the dollar affect Canadian exports?

Trade Protectionism As we discussed in the previous section, sociocultural, economic and financial, legal, and physical and environmental forces are all challenges to global trade. What is often a much greater barrier to global trade, however, is trade protectionism. Trade protectionism is the use of government regulations to limit the import of goods and services. Supporters of trade protectionism believe that it allows domestic producers to survive and grow, producing more jobs. Those against trade protectionism argue that it not only impedes global trade, but that it also adds millions of dollars to the price of products, costing consumers billions of dollars. Countries often use protectionist measures to guard against practices such as dumping. Dumping is selling products in a foreign country at lower prices than those charged in the producing country. This tactic is sometimes used to reduce surplus products in foreign markets or to gain a foothold in a new market. Some governments may offer financial

LO5

Debate the advantages and disadvantages of trade protectionism, define tariff and non-tariff barriers, and give examples of common markets. trade protectionism

The use of government regulations to limit the import of goods and services.

dumping

Selling products in a foreign country at lower prices than those charged in the producing country. 125

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incentives to certain industries to sell goods in global markets for less than they sell them at home. China and Taiwan for example, were found guilty of dumping solar panels in the United States.59 To understand how trade protectionism affects global business, let’s briefly review some global economic history. Business, economics, and politics have always been closely linked. What we now call economics was once referred to as the political economy, indicating the close ties between politics (government) and economics. In the seventeenth and eighteenth centuries, busi© Elenathewise/Getty Images ness people and governments advocated an Business leaders believe that too many sales have been lost due to economic policy called mercantilism. The the growing number of imported products. This is the case in the overriding idea of mercantilism was for a renewable energy industry where Canada placed a tariff on cheap nation to sell more goods to other nations Chinese-made solar panels.60 While the change protects Canadian than it bought from them; that is, to have a companies, will it slow the development of solar projects in Canada? favourable balance of trade. According to the mercantilists, this resulted in a flow of money to the country that sold the most globally. This philosophy led governments to implement tariffs, which are taxes on imports, thus making imported goods more expensive to buy. tariff A tax imposed on There are two kinds of tariffs: protective and revenue. Protective tariffs (import imports. taxes) are designed to raise the retail price of imported products so that domestic products will have a more competitive price. These tariffs are meant to save jobs for domestic workers and to keep industries—especially infant industries that have companies in the early stages of growth—from closing down entirely because of foreign competition. Such tariffs are usually met with resistance. Sometimes a tariff affects products and services indirectly. For example, in a dispute over labelling laws the World Trade Organization has ruled that American beef producers have an unfair advantage over Canadian producers. As discussed early in this chapter, Canada needs to increase its exports to other countries but in doing so Canadian businesses may be subject to tariffs. For exam© REUTERS/Paul Darrow ple, past U.S. protective tariff policy, which Believing that the annual seal hunt off the East Coast is inhumane, raised the price of Canadian-made beef sold the European Union has imposed an import ban (or trade embargo) in the United States, reduced sales and costs on all products from Canada’s seal hunt. The Canadian government Canada’s beef and pork industries more believes that it is a trade law violation and has appealed this than $1 billion a year.61 Revenue tariffs, the decision to the World Trade Organization. Which perspective do you second kind of tariff, are designed to raise support? money for the government. 126

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An import quota limits the number of products in certain categories that a nation can import. Canada has import quotas on a number of products including textiles and clothing, agricultural products, steel, and softwood lumber.62 The goal is to protect Canadian companies and to preserve jobs. Products subject to export controls include softwood lumber, firearms, sugar and sugar-containing products, peanut butter, and B.C. logs.63 The Canadian Export and Import Control Bureau sets various regulations regarding import controls (goods and services entering Canada) and export controls (goods and services exiting Canada) in accordance with the Export and Import Permits Act (EIPA). An embargo is a complete ban on the import or export of a certain product or the stopping of all trade with a particular country. Political disagreements have caused many countries to establish embargoes, such as Canada’s embargo against North Korea, reflecting its condemnation of the North Korean regime’s complete disregard for human rights and ongoing repression of the democratic movement.64 Non-tariff barriers are not as specific or formal as tariffs, import quotas, and embargoes but can be as detrimental to free trade.65 Such barriers include restrictive standards that detail exactly how a product must be sold in a country. For example, India imposes a number of restrictive standards like import licensing, burdensome product testing requirements, and lengthy customs procedures that inhibit the sale of imported products. The discovery of mad cow disease resulted in a temporary import ban of Canadian beef by Taiwan, Peru, Belarus, China, and other countries.66 Would-be exporters might view trade barriers as good reasons to avoid global trade, but overcoming trade constraints creates business opportunities. Next, we’ll look at organizations and agreements that attempt to eliminate barriers.

import quota

A limit on the number of products in certain categories that a nation can import.

embargo

A complete ban on the import or export of a certain product or the stopping of all trade with a particular country.

General Agreement on Tariffs and Trade (GATT) A 1948 agreement that established an international forum for negotiating mutual reductions in trade restrictions.

The GATT and the WTO In 1948, government leaders from 23 nations formed the General Agreement on Tariffs and Trade (GATT), a global forum for reducing trade restrictions on goods, services, ideas, and cultural programs. In 1986, the Uruguay Round of the GATT convened to renegotiate trade agreements. After eight years of meetings, 124 nations voted to lower tariffs an average of 38 percent worldwide, and expand new trade rules to areas such as agriculture, services, and the protection of patents. The Uruguay Round also established the World Trade Organization (WTO) to mediate trade disputes among nations. The WTO, headquartered in Geneva, Switzerland, is an independent entity of 164 member nations, and its purpose is to oversee cross-border trade issues and global business practices among those nations.67 Trade disputes are presented by member nations with decisions made within a year, rather than languishing for years, as in the past. The WTO has not solved all global trade problems. Legal differences (discussed earlier) often impede

Canada’s long dispute with the United States over softwood lumber cost the economy billions of dollars and thousands of jobs. In 2002, the United States imposed duties of 27 percent on Canadian softwood lumber, arguing that Canada unfairly subsidized producers of spruce, pine, and fir lumber. While international trade tribunals sided with Canada, it was not until 2006 that an agreement between both countries was signed. The United States agreed to return over $4.5 billion in duties it had collected and remove tariffs on lumber. In 2017, the ongoing challenges of the softwood lumber dispute led Canada to file a wideranging complaint with other trade concerns to the WTO.68

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trade expansion. And a wide gap separates developing nations (80 percent of the WTO membership) and industrialized nations like Canada. The WTO meetings in Doha, Qatar, began in 2001 to address dismantling protection of manufactured goods, eliminating subsidies on agricultural products, and overturning temporary protectionist measures. Unfortunately, the Doha Round ended in 2008 with no significant agreements.69

The IMF and the World Bank The International Monetary Fund (IMF) was created in 1944. The IMF is an international bank supIn the past, this Indian family used to use bullocks to ported by its members that usually makes short-term pull their plow, but had to sell them because the cost to loans to countries experiencing problems with their maintain the animals is now too high. Do you think a Doha resolution regarding tariff protection would help families balance of trade. The IMF’s basic objectives are to like these? promote exchange stability, maintain orderly exchange arrangements, avoid competitive currency depreciaWorld Trade Organi- tion, establish a multilateral system of payments, eliminate exchange restrictions, and crezation (WTO) ate standby reserves. The IMF makes long-term loans at low interest rates to the world’s The international most destitute nations to help them strengthen their economies. The function of the IMF is organization that very similar to that of the World Bank. replaced the General The World Bank, an autonomous United Nations agency, is concerned with develAgreement on Tariffs and Trade, and was oping infrastructure (e.g., roads, schools, hospitals, power plants, etc.) in less-developed assigned the duty to countries. The World Bank borrows from more prosperous countries and lends at favourmediate trade disputes able rates to less-developed countries. (In recent years, the IMF and the World Bank have among nations. forgiven some loans to highly indebted countries, such as Guinea.) To qualify for the proInternational Monegram, numerous macroeconomic policies (such as inflation and poverty reduction) have to tary Fund (IMF) be implemented. These new requirements allow the lending organizations to continue to An international bank that makes short-term fulfill their objectives. loans to countries Some countries believe that their economies will be strengthened if they establish forexperiencing problems mal trade agreements with other countries. Some of these agreements, involving forming with their balance of trade. producers’ cartels and common markets, are discussed next. © Sam Panthaky/AFP/Getty Images

World Bank

An autonomous United Nations agency that borrows money from the more prosperous countries and lends it to less-developed countries to develop their infrastructure.

producers’ cartels

Organizations of commodity-producing countries that are formed to stabilize or increase prices to optimize overall profits in the long run. 128

Producers’ Cartels Producers’ cartels are organizations of commodity-producing countries. They are formed to stabilize or increase prices, in order to optimize profits over the long term. The most obvious example today is the Organization of the Petroleum Exporting Countries (OPEC). Similar attempts have been made to manage prices for copper, iron ore, bauxite, bananas, tungsten, rubber, and other important commodities. These cartels are all contradictions to unrestricted free trade and letting the market set prices.

Common Markets An issue not resolved by the GATT or the WTO is whether common markets create regional alliances at the expense of global expansion. A common market (also called a trading bloc) is a regional group of countries that have a common external tariff, no

CHAPTER 3 Competing in Global Markets

internal tariffs, and the coordination of laws to facilitate exchange among member countries. Two examples are the United States-Mexico-Canada Agreement and the European Union. Let’s look briefly at both.

THE UNITED STATES-MEXICO-CANADA AGREEMENT (FORMERLY THE NORTH AMERICAN FREE TRADE AGREEMENT)

common market (trading bloc)

A regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange; also called a trading bloc. An example is the European Union.

In North America, the United States-Mexico-Canada Agreement (USMCA) exists to coordinate trade among the three member countries—Canada, the United States, and Mexico. In order to examine how the USMCA impacts the Canadian economy, it is important to understand the origin of the agreement and trade issues that have arisen over time. These United Statespoints are discussed next. Mexico-Canada A widely debated issue of the early 1990s was the ratification of the North American Agreement Free Trade Agreement (NAFTA), which created a free-trade area among Canada, the (USMCA) The agreement United States, and Mexico. In January 1993, NAFTA came into effect, replacing the among three memberprevious Free Trade Agreement between Canada and the United States. The objectives countries that of NAFTA were to (1) eliminate trade barriers and facilitate cross-border movement of coordinates trade. goods and services among the three countries; (2) promote conditions of fair competition Replaces the NAFTA agreement. in this free-trade area; (3) increase investment opportunities in the territories of the three nations; (4) provide effective protection and enforcement of intellectual property rights (e.g., patents, copyrights, etc.) in each nation’s territory; (5) establish a framework for further regional trade co-operation; and (6) improve working conditions in North America. NAFTA was driven by the desire of Mexico to have greater access to the U.S. market. Improved access would spur economic growth, provide more employment for Mexicans, and raise the low standard of living in Mexico. The U.S. government hoped creating more jobs in Mexico would stop the flow of illegal immigrants who were crossing their border. Canada was really a minor player in the deal, but the Canadian government was concerned that it would be left out or penalized indirectly unless it joined the bloc. Canadians would see a small gain with freer access to the growing Mexican market, but the country was still a minor customer for Canada. The NAFTA agreement permitted all three countries to reduce trade barriers with one another while maintaining independent trade agreements with other countries. The NAFTA timetable also set a date when the agreement would expire. During the time leading up to the expiry deadline, the three countries negotiated to work out exemptions, tariffs, and dispute-resolution procedures to handle trade disagreements. The politics of free trade change and the desire for a government to protect or open its economy through trade will vary, and that was the case as the agreement’s expiry date © THE CANADIAN PRESS/AP/Judi Bottoni approached.70 Officially, almost all trade in the region now flows tariffThere was concern by some groups (e.g., unions) free. Leaders from Canada, the United States, and in Canada and the United States that NAFTA had conMexico meet to discuss several major areas of dispute. tributed to employment losses and that economic beneMany areas have yet to be resolved including trucking, fits were not realized. Some Canadian business people immigration, the environment, and agricultural tariffs. remained opposed because they did not like many of

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the details in NAFTA. In addition, Mexico had a weak policy on environmental problems, poor working conditions, and a questionable record on human rights and political freedom. That country had repeatedly been condemned by many organizations in North America and abroad for serious flaws on all these counts. Some believed NAFTA had forced Mexico to gradually improve these conditions and saw signs of this happening, albeit slowly. In was within this climate of both approval and disapproval for NAFTA that negotiations to renew the trade agreement began in 2017. In September 2018, NAFTA was replaced with a new free trade agreement called the United States-Mexico-Canada Agreement (USMCA). During the 14-month negotiation period, Canadian businesses were hesitant to implement long-term commitments because future access to the United States market was unclear. But when the agreement was finally reached, many argued it provided the certainty necessary to motivate investors to begin supporting the Canadian economy.71 At the time of this writing, the USMCA is a new trade agreement, and early reviews of its impact for Canada are both positive and negative. On one hand, the renewed agreement maintains the dispute-resolution system and the protection of cultural industries that were important to Canada within the previous NAFTA agreement.72 It also provides Canadian consumers with more choice through easier access to goods and services from the U.S. along with lower duties.73 On the other hand, the USMCA still allows protective tariffs, such as those the U.S. has imposed upon aluminum and steel from Canada, and import quotas in relation to the automotive industry.74 In addition, the requirement that Canada must inform the United States of intentions to pursue trade negotiations with a non-market country raises alarms that Canada’s autonomy to strengthen relations with existing trading partners, such as China, and new trading partners is reduced.75 In any trade agreement it is difficult to ensure all the interests of a country are met. Usually, trade negotiations strive for a balance, with negotiators, business leaders, and citizens understanding that there will be both benefits and costs to an agreement. In the early days of the new agreement, Canadian businesses will be looking to answer many questions. Does the USMCA open the American and Mexican markets for Canadian businesses? Or are the partner countries, particularly the U.S., able to implement a protectionist trade policy? What might be the overall impact of the USMCA upon the Canadian economy or upon specific industries, such as automotive and agriculture? The USMCA is a 16-year agreement with an option to extend it for an additional six years. The answers to these questions, and many others related to the original objectives of NAFTA—such as the elimination of trade barriers, free competition, and better working conditions—will only become evident over time.

THE EUROPEAN UNION The EU began in the late 1950s as an alliance of six trading partners (then known as the Common Market and later the European Economic Community). Today it is a group of 28 nations (see Figure 3.10) with a combined population of over 510 million and a GDP of $16.5 trillion. Though the EU is represented as a unified body in the WTO, the economies of six members (Germany, France, United Kingdom, Italy, Spain, and the Netherlands) account for over three-fourths of the EU’s GDP. European unification was not easy, but in 1999 the EU took a significant step by adopting the euro as a common currency. The euro has helped EU businesses save billions by eliminating currency conversions and has challenged the U.S. dollar’s dominance in 130

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■ FIGURE

3.10

MEMBERS OF THE EUROPEAN UNION Current EU members are highlighted in yellow. Countries that have applied for membership are in orange.

AZORES (P)

ICELAND

750 Kilometers

MADEIRA (P)

FINLAND

CANARY IS. (S)

NORWAY SWEDEN ESTONIA LATVIA

DENMARK

IRELAND

RÉUNION (F)

RUSSIA

BELARUS POLAND

GERMANY

BELGIUM CZECH LUXEMBOURG REPUBLIC SLOVAKIA LIECHTENSTEIN AUSTRIA FRANCE HUNGARY SWITZERLAND

SPAIN

BRAZIL

LITHUANIA R.

UNITED NETHERLANDS KINGDOM

PORTUGAL

GUIANA (F) SURINAME

GUADELOUPE (F)

500

ST. MARTIN/ ST. MAARTEN (F) (N)

500 Miles

250 250

(F)

0 0

MARTINIQUE

Scale: 1 to 34,848,000

UKRAINE MOLDOVA

SAN SLOVENIA ROMANIA CROATIA MARINO ANDORRA BOSNIA & HERZEGOVINA SERBIA ITALY MONACO BULGARIA KOSOVO

GEORGIA AZERBAIJAN ARMENIA

MACEDONIA MONTENEGRO ALBANIA

VATICAN CITY

TURKEY

GREECE

Member States of the European Union in 2016 Members of the European Union Nonmembers of the European Union Applicants of the European Union Exiting the European Union

MALTA CYPRUS

global markets. Eighteen member nations now use the euro as their common currency. In 2013, the EU faced debt, deficit, and growth problems due to financial difficulties in member nations Greece, Italy, Portugal, and Spain that required bailout assistance.76 EU officials moved forward with broad economic policies to ensure the financial stability of the union. The EU is facing the loss of a major member, the United Kingdom (UK). In 2016, the UK voted to leave the EU (an action called Brexit, a combination of the words Britain and exit). As of this writing, the UK has begun the process of exiting the EU. The UK is the first nation to withdraw from the EU.77 Even though the EU faces challenges going forward, it still considers continued economic integration among member nations as the way to compete globally against major competitors like the United States and China. Just as it did with NAFTA, Canada negotiated the Canada–European Union Comprehensive Economic Trade Agreement (CETA) in order to provide preferential treatment for Canadian goods and services to enter the EU market78 The Seeking Sustainability box 131

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Seeking SUSTAINABILITY The Politics of Oil The tar-like bitumen has to be melted out of the ground and processed in a highly energy-intensive manner before it can be refined like regular oil. The U.S. Environmental Protection Agency says that “GHG emissions from the Canadian oil sands crude would be approximately 82 percent greater than the average crude refined in the U.S. on a well-to-tank basis.” And in confidential briefing notes, the Canadian government has acknowledged that the emissions-per-barrel will likely increase as the industry is forced to pursue harder-to-access reserves deeper underground. Further expansion of the oil sands—which are the fastest growing source of greenhouse gas emissions in Canada, and the biggest energy project in the world—would lock Canada into a high-carbon economy for decades to come. The EU has adopted a “Fuel Quality Directive” aimed at making those who sell and supply fuel reduce the carbon footprint of their products by 6 percent over the next decade. The EU is ranking fuels to help sellers and buyers identify those fuels with the largest carbon footprint. In line with that position, some members of the EU are pushing to rate oil sands fuel as more environmentally damaging than fuel from conventional crude oil. The federal government and the government of Alberta lobbied the EU, at a cost of $30 million, to prevent the EU rating from happening. A “dirty oil”

classification would amount to a European ban on oil sands crude. It would impose financial disincentives to discourage refiners and marketers from using fuel derived from oil sands bitumen in favour of lower-carbon sources of fuel. In Fall 2014, the Canadian government’s effort paid off. The EU voted not to impose a veto on Alberta bitumen (also called tar sands) oil. The decision was a setback in Europe and North America for supporters of low-carbon fuel regulations that are aimed at reducing greenhouse gas emissions in the transportation sector. Although Canadian oil companies gained better access to the EU market, the ability to move Alberta bitumen deposits to other global markets remains delayed. U.S. President Barack Obama vetoed the Keystone pipeline and a U.S. Senate vote in March 2015 failed to overturn his decision. The Alberta government also faces difficulty in getting political leaders in British Columbia to support the Trans Mountain pipeline. The federal government purchased the pipeline from Kinder Morgan Canada, at a $4.5 million price tag, in an effort to alleviate both political and crude oil supply bottlenecks. With the global demand for oil increasing, the inability of Canadian companies to access the market is a challenge. The debate of the merits of any type of pipeline creates opposing views. On one hand, government leaders could capitalize on the situation and create higher standards that ensure regulations are in place to keep oil companies honest while at the same time enable them to sell to global markets. On the other hand, environmental lobbyists believe the decision not to permit the pipeline will delay further oil sands investment and generate momentum toward a clean energy future. How have the Canadian government and environmentalists reacted to the EU, United States, and interprovincial decisions? What are the economic and environmental implications of each decision?

Sources: Julie Gordon and Rod Nickel, “Canada dreams of sending its oil to Asia via Trans Mountain, but most of it will end up in California,”Financial Post, June 27, 2018, accessed July 30, 2018, https://business.financialpost.com/commodities/energy/canadadreams-of-oil-exports-to-asia-but-california-beckons; Glen Hodgson, “Can Canada remain an energy ‘superpower’?”The Globe and Mail, September 26, 2017; Jonathan Waldman, “Don’t kill Keystone XL. Regulate It,” The New York Times, March 6, 2015, http://www.nytimes .com/2015/03/06/opinion/dont-kill-keystone-xl-regulate-it.html?ref=topics; Coral Davenport, “Senate fails to override Obama’s Keystone Pipeline veto,” The New York Times, March 4, 2015, http://www.nytimes.com/2015/03/05/us/senate-fails-to-override-obamas-keystonepipeline-veto.html?ref=topics&_r=0; Mark Downie, “Keystone and the Riddle if the Tar Sands,” Newsweek, February 25, 2015, http:// www.newsweek.com/keystone-and-riddle-tar-sands-309522; Barbara Lewis, “EU lawmakers fail to approve tar sands oil veto,” Reuters, December 17, 2014, http://www.reuters.com/article/2014/12/17/eu-energy-canada-idUSL6N0U12Q820141217; “Stopping the Keystone XL,” Natural Resources Defense Council, accessed March 27, 2015, http://www.nrdc.org/; Lorne Gunter, “A European reprieve for Canada’s oil sands,” The Globe and Mail, February 24, 2012, A14.

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outlines just some of the complexities of these agreements. For example, Canadian shrimp faced up to a 20 percent duty, making it more expensive for consumers and, therefore, less competitive compared to shrimp products from other countries. CETA eliminates this duty, making Canadian-produced shrimp more affordable in the EU and giving these businesses a 20 percent boost in competitiveness.79

OTHER TRADE AGREEMENTS 80 According to Foreign Affairs, Trade and Development Canada, Canada is involved in 11 free-trade agreements (FTA) including the Canada–Korea FTA effective in 2015 and the Canada–Honduras FTA brought into effect in 2014. Negotiations for new FTAs are ongoing with many countries. For example, a Canada–Caribbean Community (CARICOM) agreement seeks to create new opportunities for Canadian business in sectors including manufacturing, agriculture and financial services. A Canada–India FTA presents estimated GDP gains from US$6–$15 billion for Canada and US$6–$12 billion for India with potential exports gains ranging between 36 to 60 percent for each country.

PROGRESS ASSESSMENT

• • • • •

What are the advantages and disadvantages of trade protectionism? What is the difference between protective tariffs and revenue tariffs? What is the primary purpose of the WTO? State four objectives of NAFTA. What is the primary objective of a common market like the EU?

Globalization and Your Future Not long ago, FDI in China was considered to be not worth the risk, but the value of Chinese trade has roughly doubled every four years over the last three decades.81 In 2013, China attracted US$117 billion in FDI.82 Today, over 400 of the Fortune 500 companies (the world’s largest companies) have invested in China. According to Goldman Sachs Group and the London Center for Economic and Business Research, China could overtake the United States as the world’s largest economy by 2028.83 Since 2009, China has been the largest motor vehicle market in the world with sales and production topping nearly 22 million vehicles in 2013.84 It is estimated that by 2030, there could be more cars on the road in China than all the cars in the world today. Walmart began operations in China in 1996 and now has 443 stores with plans to open more. Even newcomers like IMAX Corporation are expanding in this fast-growing market. By 2021, it is expected that China will have 80 000 movie screens, which is twice the number in the United States, of which 575 will be IMAX 3D screens.85 Many view China as a free trader’s dream, where global investment and entrepreneurship will lead to wealth. However, concerns remain about China’s one-party political system, human rights abuses, currency issues, and increasing urban population growth. China’s underground economy also generates significant product piracy and counterfeiting, although the country has been more responsive to these problems since its admission

LO6

Discuss the changing landscape of the global market.

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to the WTO. With the global economy continuing to grow, China will be a key driver of the world economy along with the United States, the EU, and Japan. While China attracts most of the attention in Asia, India’s population of 1.3 billion presents a tremendous opportunity. With nearly 575 million of its population under 25, India’s working-age population will continue to grow while Canada expects a decline in the 2020s. Already India has seen huge growth in information technology and biotechnology, and its pharmaceutical business is expected to grow to $30 billion, a jump of over 150 percent by 2020. Still, it remains a nation with difficult trade laws and an inflexible © MIKE CASSESE/Reuters bureaucracy.87 Bombardier Inc. is the world’s largest manufacturer of Russia is an industrialized nation with large planes and trains. Its 2012–2033 market forecast shows a reserves of oil, gas, and gold that became a member strategy to expand in markets including China, the Middle 86 of the WTO in 2012. Multinationals like Chevron, East, and Africa. What challenges will the company have ExxonMobil, and BP have invested heavily in developto address in order to enter these markets? ing Russia’s oil reserves. However, Russia’s economy slowed when world oil prices declined and the government admitted that growth prospects for the economy were not strong for the next two decades.88 Unfortunately, Russia is plagued by political, currency, and social problems. Brazil is an emerging nation that, along with China, India, and Russia, was projected to be one of the wealthier global economies by 2030. In fact, the term BRIC has been used as an acronym for the economies of Brazil, Russia, India, and China. Today, Brazil is the largest economy in South America and the seventh-largest economy in the world with well-developed agriculture, mining, manufacturing, and service sectors. Along with Russia, Brazil was expected to dominate the global market as a supplier of raw materials. China and India were predicted to be leading global suppliers of manufactured goods and services. Unfortunately, the past few years have been difficult for Brazil’s economy with increasing inflation and slow growth. Still, its expanding consumer market of over 200 million people is a target for major exporters like the United States and China. The BRIC economies are certainly not the only areas of opportunity in the global market. The developing nations of Asia, including Indonesia, Thailand, Singapore, the Philippines, Korea, Malaysia, and Vietnam, also offer great potential for Canadian businesses. Africa, especially South Africa, has only begun to emerge as a centre for global economic growth. Business today is truly global and your role in it is up to you. As you learned in Chapter 1, outsourcing means contracting with other companies to do some or all of the functions of a firm, rather than providing them within the company. In Canada, companies have outsourced payroll functions, accounting, and some manufacturing operations for many years. However, the shift in outsourcing manufacturing and services from domestic businesses to primarily low-wage markets outside of Canada is getting more attention. This shift is referred to as offshoring. Take a look at the pros and cons of offshore outsourcing in Figure 3.11.

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China’s economy is booming, and a highly educated middle class with money to spend is emerging, especially in the cities. Many observers believe China will continue its rapid growth and play a major role in the global economy. Are Canadian firms prepared to compete?

To remain competitive, Canada must focus on innovation and entrepreneurship. It is increasingly important for Canadian workers to obtain the proper education and training needed to stay ahead in the future. Whether you aspire to be an entrepreneur, a manager, or some other type of business leader, think globally in planning your career. ■ FIGURE

3.11

THE PROS AND CONS OF OFFSHORE OUTSOURCING PROS

CONS

• Less strategic tasks can be outsourced globally so companies can focus on where they can excel and grow.

• Jobs are lost permanently and wages fall due to low-cost competition offshore.

• Outsource work allows companies to create efficiencies that in fact let them hire more workers.

• Offshoring may reduce product quality, which can cause permanent damage to a company’s reputation.

• Consumers benefit from lower prices generated by effective use of global resources and developing nations grow, thus fuelling global economic growth.

• Communication within the company, with its suppliers, and with its customers becomes much more difficult.

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Reaching Beyond OUR BORDERS My Home Is Your Home “Share your homes, but also share your world.” This short statement formed the mission statement of Airbnb’s founder Brian Chesky. He started Airbnb in San Francisco, targeting customers wanting to list or book accommodations as part of the growing sharing economy that allows owners to rent their homes or rooms to strangers. He believed his competitors in the travel industry had lost touch with their customers by providing only “cookie cutter” rooms in downtown areas. He felt such accommodations didn’t allow travelers a real chance to “experience” the cities they visited. Today, Airbnb has 2 million listings across the globe with a company valuation of $25.5 billion, making it (on paper) the largest hotel chain in the world. The company initially did extensive research to test if its “don’t just go there, live there” message would resonate with potential users. The “live there” campaign focused on encouraging travelers to live like locals and experience the cities they visit like local residents. A social media marketing campaign using 3D technology delivered a new style of visual advertising. The video received 11 million views on Facebook, 56 000 “likes,” and 5200 comments. The company also made effective use of Instagram by partnering with professional photographers to create images that had a smart design and message that clearly spoke to its target customers. This year, Airbnb is on track to book almost $1 billion in revenue, with projections rising to $10 billion per year by 2020. If you haven’t already, check out Airbnb promotions and offers on its website.

Sources:Max Chafkin, “Airbnb Opens Up the World,” Fast Company, February 2016; Katie Richards, “Put Away the Selfie-Stick and Act Like a Local, Urges Airbnb’s New Campaign,” Ad Week, April 19, 2016; Thales Teixeira and Michael Blanding, “How Uber, Airbnb, and Etsy Turned 1,000 Customers into a $1 Million,” Forbes, November 16, 2016; www.airbnb.com, accessed September 2017.

By studying foreign languages, learning about foreign cultures, and taking business courses (including a global business course), you can develop a global perspective on your future. As you progress through this text, keep two things in mind: globalization is real, and economic competition promises to intensify. Also keep in mind that global market potential does not belong only to large, multinational corporations, as the Reaching Beyond Our Borders box describes. Small and medium-sized businesses have a world of opportunity in front of them. In fact, these firms are often better prepared to leap into global markets and react quickly to opportunities than are large firms. Finally, don’t forget the potential of franchising, which we will examine in more detail in Chapter 6. 136

CHAPTER 3 Competing in Global Markets

PROGRESS ASSESSMENT

• • • •

How has the Internet affected doing business in global markets? What are the economic risks of doing business in countries like China? What might be some important factors that will have an impact on global trading? What can you do in the next few years to ready yourself for a career in global business?

SUMMARY LO1

Describe the importance of the global market and the roles of comparative advantage and absolute advantage in global trade. Canada has a population of more than 37 million people. The world market for trade is huge. Over 99 percent of the people in the world live outside Canada. Major Canadian companies routinely cite expansion to global markets as a route to future growth. Why should nations trade with other nations? Nations should trade globally as (1) no country is self-sufficient, (2) other countries need products that prosperous countries produce, and (3) natural resources and technological skills are not distributed evenly around the world. What is the theory of comparative advantage? The theory of comparative advantage contends that a country should make and then sell those products it produces most efficiently but buy those it cannot produce as efficiently. What is absolute advantage? Absolute advantage means that a country has a monopoly on a certain product or can produce the product more efficiently than any other country. There are few examples of absolute advantage in the global market today.

LO2

Explain the importance of importing and exporting, and define key terms used in global business. Anyone can get involved in world trade through importing and exporting. Business people do not have to work for big multinational corporations. What kinds of products can be imported and exported? Just about any kind of product can be imported and exported. Companies can sometimes find surprising ways to succeed in either activity. Selling in global markets is not necessarily easy, though. What terms are important in understanding world trade? Exporting is selling goods and services to other countries. Importing is buying goods and services from other countries. The balance of trade is the relationship of exports to imports. The balance of payments is the balance of trade plus other money flows such as tourism and foreign aid. Dumping is selling products for less in a foreign country than in your own country. See the Key Terms list after this Summary to be sure you know the other important terms. 137

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

LO3

Illustrate the strategies used in reaching global markets, and explain the role of multinational corporations in global markets. A company can participate in world trade in a number of ways. What are some ways in which a company can get involved in global business? Ways of entering world trade include licensing, exporting, franchising, contract manufacturing, joint ventures and strategic alliances, foreign direct investment, and sovereign wealth funds. How do multinational corporations differ from other companies that participate in global business? Unlike other companies that are involved in exporting or importing, multinational corporations also have manufacturing facilities or some other type of physical presence in different nations.

LO4

Evaluate the forces that affect trading in global markets. The forces include sociocultural, economic and financial, and legal. Each can be examined in detail to determine their impact in various global markets. What are some of the forces that can discourage participation in global business? Potential stumbling blocks to global trade include sociocultural forces (e.g., religion), economic and financial forces (e.g., disposable income), legal forces (e.g., laws on bribery), and physical and environmental forces (e.g., Internet usage).

LO5

Debate the advantages and disadvantages of trade protectionism, define tariff and non-tariff barriers, and give examples of common markets. Political differences are often the most difficult hurdles to international trade. What is trade protectionism? Trade protectionism is the use of government regulations to limit the import of goods and services. Supporters believe that it allows domestic producers to survive and grow, producing more jobs. The key tools of protectionism are tariffs, import quotas, and embargoes. What are tariff and non-tariff barriers? Tariffs are taxes on foreign products. There are two kinds of tariffs: (1) protective tariffs, which are used to raise the price of foreign products, and (2) revenue tariffs, which are used to raise money for the government. Non-tariff barriers include safety, health, and labelling standards. What are some examples of trade organizations that try to eliminate trade barriers and facilitate trade among nations? The World Trade Organization (WTO) replaced the General Agreement on Tariffs and Trade (GATT). The purpose of the WTO is to mediate trade disputes among nations. The International Monetary Fund (IMF) is an international bank that makes short-term loans to countries experiencing problems with their balance of trade. The World Bank is a United Nations agency that borrows money from the more prosperous countries and lends it to less-developed countries to develop their infrastructures. What is a common market? State some examples. A common market is a regional group of countries that have a common external tariff, no internal tariff, and a coordination of laws to facilitate exchange. The idea behind a common market is the elimination of trade barriers that existed prior to the creation of this bloc. Examples include USMCA and the EU.

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CHAPTER 3 Competing in Global Markets

LO6

Discuss the changing landscape of the global market. The landscape of global business is changing and it is important for graduates to learn about global market trends in order to consider possible career options. How is business changing? New and expanding markets present great potential for trade and development. For example, changes in technology, especially through the Internet, allow access to global customers. What countries offer opportunities for Canadian businesses? Expanding markets such as China, India, Brazil, and Russia present great potential for trade and development.

KEY TERMS absolute advantage 106 balance of payments 111 balance of trade 109 common market (trading bloc) 128 comparative advantage theory 106 contract manufacturing 115 countertrading 123 culture 120 devaluation 123 dumping 125 embargo 127 ethnocentricity 120 exchange rate 122

exporting 105 foreign direct investment (FDI) 118 foreign subsidiary 118 free trade 105 General Agreement on Tariffs and Trade (GATT) 127 import quota 127 importing 105 Investment Canada Act 118 International Monetary Fund (IMF) 128 joint venture 117 licensing 113

multinational corporation 118 producers’ cartels 128 strategic alliance 118 tariff 126 trade deficit 109 trade protectionism 125 trade surplus 109 trading bloc (common market) 128 United States-Mexico-Canada Agreement (USMCA) 129 World Bank 128 World Trade Organization (WTO) 127

CAREER EXPLORATION If you are interested in pursuing a career in international business, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Customs broker—acts as a liaison between the federal government and import/export firms; handles the logistics of moving products across borders. ∙ Translator—converts information from one language into another language

∙ Wholesale and manufacturing sales representative —sells goods for wholesalers or manufacturers to businesses, government agencies, and other organizations in global markets. ∙ Buyer and purchasing agent—buys products and services for organizations to use or resell; evaluates suppliers, negotiates contracts, and reviews the quality of products. ∙ Trade analyst—researchers market data, analyzes trade data to generate strategic plans and policy within private and public sectors.

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CRITICAL THINKING 1. About 99 percent of the world’s population

3. Countries like Canada that have a high stan-

lives outside Canada, but many Canadian companies, especially small businesses, still do not engage in global trade. Why not? Do you think more small businesses will participate in global markets in the future? Why or why not?

dard of living are referred to as industrialized nations. Countries with a low standard of living and quality of life are called developing countries. (Terms formerly used were underdeveloped or less-developed countries.) What factors prevent developing nations from becoming industrialized nations?

2. What can businesses do to prevent unexpected

problems in dealing with sociocultural, economic and financial, legal, and physical and environmental forces in global markets?

4. How would you justify the use of revenue or

protective tariffs in today’s global market?

DEVELOPING CAREER SKILLS Key: Team

Analytic

1. Find out firsthand the impact of global trade

Communication

on your life. How many different countries’ names appear on the labels in your clothes? How many languages do your classmates speak? List the ethnic restaurants in your community. Are they family-owned or corporate chains?

3. The economies of Ontario and British Colum-

bia depend heavily on exports. Ontario relies primarily on trade to the United States and Europe, while British Columbia relies heavily on trade with Asia. In a group of four, research these statements. Use Excel to develop two graphs that break down the exporting countries that trade with each of these provinces. Present your findings to the class.

140

4. In a group of four, list the top five Canadian-

based multinationals. When researching, create a table that will include the following pieces of information: the company names, the year each was created, the number of global employees, the industry or industries in which they operate, annual revenues, and number of countries in which they have offices. Present your findings to the class.

2. Prepare a short list of the advantages and dis-

advantages of trade protectionism. Share your ideas with others in the class and debate the following statement: Canada should increase trade protectionism to save Canadian jobs and companies.

Technology

5. Form an imaginary joint venture with three

classmates and select a product, service, or idea to market to a specific country. Have each team member select a key global market force in that country (sociocultural, economic and financial, legal and regulatory, or physical and environmental) to research. Have each report his or her findings. Then, as a group, prepare a short explanation of whether the market is worth pursuing.

CHAPTER 3 Competing in Global Markets

ANALYZING MANAGEMENT DECISIONS The Challenge of Offshoring Outsourcing, as noted in Chapter 1, is the process of assigning various functions, such as accounting, production, security, maintenance, and legal work to outside organizations. In Canada, companies have outsourced payroll functions, accounting, and some manufacturing operations for many years. However, the shift to primarily low-wage global markets, called offshoring (or offshore outsourcing), has become a major issue. Export Development Canada believes that there are about 4000 Canadian companies with some sort of overseas presence, an increase from 10 years ago. Canadian companies such as Bombardier Inc. (manufactures state-of-the-art planes and trains) and Gildan Activewear Inc. (one of the world’s largest T-shirt makers) have outsourced manufacturing offshore for years. Fundamentally, as lower-level manufacturing became more simplified, Canadian companies shifted focus from assembling products to design and architecture. Today, economists agree that we are moving into the “second wave” of offshoring that involves sizable numbers of skilled, well-educated middle-income workers in service-sector jobs such as accounting, law, financial and risk management, health care, and information technology that were thought to be safe from foreign market competition. For example, the financial sector, including the Royal Bank of Canada, has been criticized for making its employees train the foreign workers hired to replace them. This shift is potentially more disruptive to the

Canadian job market than was the first, which primarily involved manufacturing jobs. The pros and cons of offshoring were identified earlier in this chapter (see Figure 3.11). China and India are oftentimes named as country providers of offshoring. Currently, China is primarily involved with manufacturing at the low end of the technology scale, and India focuses on call centres, telemarketing, data entry, billing, and low-end software development. However, China is intent on developing advanced manufacturing technology and India has a deep pool of scientists, software engineers, chemists, accountants, lawyers, and physicians. The technology talent in these nations also keeps growing: China graduates 250 000 engineers each year and India about 150 000. When you consider the impact of offshoring on Canada, research supports that more than two-thirds of imported services are from the United States, not China and India. A Statistics Canada paper finds that globalization and technology are the two key factors driving offshoring by Canadian companies. Services offshoring does not seem to affect productivity or employment. It does seem to reduce wages in the services-producing sector, though not in the goods-producing sector. Finally, on an industry-by-industry basis, rising offshoring of services seems to be associated with rising valueadded activities. In the financial sector, for instance, low value-added activities such as general accounting are outsourced while high value-added activities such as strategizing are kept in-house and in-country.

Sources: “RBC Foreign Workers Controversy: No more replacing Canadians, bank vows,” Huffington Post Canada, May 24, 2013, http://www.huffingtonpost .ca/2013/05/24/rbc-foreign-workers-hire-canadians_n_3332240.html; John Baldwin and Wulong Gu, “Offshoring and Outsourcing in Canada,” Economic Analysis Research Paper Series, 11F0027M No. 055, Statistics Canada, http://www.statcan.gc.ca/pub/11f0027m/2008055/s7-eng.htm; Christine Dobby, “Offshore opportunities ‘too good to pass up’,” The Financial Post, November 22, 2011, FP16; William Watson, “Myth-Busting Offshoring,” National Post, May 30, 2008, http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/5/30/myth-busting-offshoring.aspx; Pete Engardio, “The Future of Outsourcing,” BusinessWeek, January 30, 2006, 50–58; and Richard Ernsberger, “The Big Squeeze: A ‘Second Wave’ of Offshoring Could Threaten Middle-Income, White-Collar and Skilled Blue-Collar Jobs,” Newsweek International, May 30, 2005.

Discussion Questions 1. Why are more Canadian companies investigat-

ing offshoring as a possible business strategy?

3. In your opinion, what are some business activ-

ities that should not be offshored? Explain.

2. Do you think that offshoring is detrimental to

the Canadian economy? Explain. 141

CHAPTER 4

The Role of Government in Business

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 List the seven categories of government activities that can affect business. LO2 Trace the historical role of government in the Canadian economy, and explain why Crown corporations were created.

LO3 Demonstrate why understanding laws and regulations at all levels of government is critical to business success.

LO4 Describe how the Bank of Canada influences monetary policy. LO5 Explain how taxation and fiscal policy affect the Canadian economy. LO6 Describe how government expenditures benefit consumers and businesses alike. LO7 Illustrate how purchasing policies and services assist Canadian businesses.

P R O F I L E GETTING TO KNOW: LISA VON STURMER, CEO/FOUNDER, GROWING CITY

142

In this chapter, you will learn how government

Based in Vancouver, Growing City is the first

activities can assist businesses of all sizes. To this

company in North America to offer a corporate

end, there are many government agencies man-

organics composting program. Like many entre-

dated to provide support for entrepreneurs. One

preneurs, von Sturmer got the idea from personal

example is Futurpreneur Canada, where Lisa von

experience. While vacationing on Savary Island in

Sturmer obtained a start-up loan of $15,000 for her

British Columbia, where recycling and compost-

company, Growing City.

ing are mandatory, she realized the opportunity of

CHAPTER 4 The Role of Government in Business

uniforms, ethically-made bins, and soil donation programs to non-profit organizations. In 2012, Growing City won the National Best Green Business Award from the Canadian Youth Business Foundation followed by an appearance on CBC’s Dragon’s Den in 2013. At the time, von Sturmer serviced 82 offices in Vancouver, but the television exposure generated so much interest that Growing City considered a franchise model to meet global demand. As of 2014, the company was expanding its 10-person workforce and already had 200 clients in Metro Vancouver. Corporate customers are the target and current clients include BC Hydro and the South Terminal of the Vancouver International Airport. von Sturmer was an official Canadian Delegate for the 2014 G20 Young Entrepreneurs Source: © Ben Nelms

social enterprise. Social enterprise is a small but growing segment of the Canadian economy. Social enterprises are organizations that make money and deliver social or environmental benefits. They may be not-for-profits organizations or profit-making companies. The company provides office composting, recycling, and event services. It also puts sustainability into its own business practices through supportable

Alliance Summit in Sydney, Australia. She, along with other young Canadians, have found a niche in social enterprise. “I wanted to create a business where I knew I was making a tangible, positive impact,” von Sturmer said. What’s the key to success? “I think the thing that makes Growing City so special and different is that we really look at the problem of waste production from a service standpoint.” Five years ago, reports indicated Canada was lagging behind in social enterprise activity. With small businesses like Growing City, the gap is closing.

Sources: Rhea Seymour, “The Rise of Social Enterprise,” Women of Influence, November 3, 2014, http://www.womenofinfluence.ca/2014/11/03/risesocial-enterprise/; Brian Morten, “Turning garbage into gold – Vancouver organics recycling program growing like a weed,” The Vancouver Sun, July18, 2014, http://www.vancouversun.com/technology/Turning+garbage+into+gold/10043546/story.html; Mary Teresa Bitti, “Growing City composting company put the brakes on franchising after dragon’s Den appearance,” Financial Post, January 28, 2013, http://business.financialpost.com/2013/01/28/ growing-city-composting-company-puts-the-brakes-on-franchising-after-dragons-den-appearance/; “About Us,” Growing City, accessed June 28, 2018, http://www.growingcity.com/; Simon Avery, “Canada playing catch-up in social enterprise,” The Globe and Mail, October 19, 2010, http://www .theglobeandmail.com/report-on-business/small-business/sb-growth/sustainability/canada-playing-catch-up-in-social-enterprise/article1316055/.

Government Affects Business Government activities that affect business may be divided into seven categories: Crown corporations, laws and regulations, the Bank of Canada, taxation, government expenditures, purchasing policies, and services. Because all of these activities are scattered among different levels of government and many departments, agencies, and corporations, it is not possible to present this information in such neatly divided categories. However, as you

LO1

List the seven categories of government activities that can affect business. 143

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

make your way through the rest of the chapter you will be able to see how elements of these different aspects of government actions affect business. It should become obvious as you read that governments are trying to respond to businesses’ needs. This includes anything from creating laws that create a level playing field to providing services that support business initiatives. Figure 4.1 provides an overview of the seven categories of government activity discussed in this chapter. The focus of this chapter is on the role of government in business and this knowledge can open up discussion about how business affects government. The general government-business connection is important but will be different depending on the country. As discussed in Chapter 2, economic systems vary around the world. This also means the extent to which a government intervenes in the economy will vary from country to country. The seven government activities highlighted in this chapter provide the basis upon which you may compare and contrast different governments around the world and their impact on business. As you read this chapter about the role of Canadian government in business, you can also consider the role of government in other countries with which you are familiar, whether you are an international student, a first-generation student from an immigrant family, or simply have an interest in international business. You can also choose a country and specifically explore its government and business dynamic—you never know if your future career will take you there one day! ■ FIGURE

4.1

GOVERNMENT INVOLVEMENT WITH BUSINESS Government activities that affect business can be divided into seven categories. (LO1) 1. Crown Corporations. There are hundreds of such companies, and they play an important role in the economy. Crown corporations sometimes compete with for-profit businesses. (LO2) 2. Laws and Regulations. These cover a wide range, from taxation and consumer protection to environmental controls, working conditions, and labour−management relations. Review Online Supplement 1: Working Within the Legal Environment of Business for some examples. (LO3) 3. The Bank of Canada.Canada’s central bank promotes the economic and financial welfare of the country. The bank is responsible for areas such as monetary policy and currency. (LO4) 4. Taxation. All levels of government collect taxes—income taxes, the GST or HST, provincial sales taxes, and property taxes. Taxation is also fine-tuned by government to achieve certain goals or to give effect to certain policies. This is called fiscal policy. (LO5) 5. Government Expenditures. Governments pay out billions of dollars to Canadians. When these recipients spend this money, businesses benefit. All levels of government provide a host of direct and indirect aid packages as incentives to achieve certain goals. These packages consist of tax reductions, grants, loans, and loan guarantees. (LO6) 6. Purchasing Policies. Governments are very large purchasers of ordinary supplies, services, and materials to operate the country. Because the federal government is the single largest purchaser in Canada, its policies regarding where to purchase have a major effect on particular businesses and the economy. (LO7) 7. Services. These include a vast array of direct and indirect activities, among them helping companies go international, bringing companies to Canada, and training and retraining the workforce. (LO7)

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CHAPTER 4 The Role of Government in Business

Government Involvement in the Economy As noted in Chapter 2, the Canadian economic system is described as a mixed economy— that is, an economic system in which some allocation of resources is made by the market and some is made by the government. Every country’s government is involved in its economy, but the specific ways in which the governments participate vary a great deal. There are particular historical reasons why Canada developed into a nation in which governments play very important roles. When Canada was formed as a country in 1867, the federal government was given the power to “regulate trade and commerce.” When the western provinces later joined this Confederation, it became clear that it would take special efforts to build a unified Canada. The very small population was scattered across a huge country, and there was no railway to connect it. Trading patterns were in a north to south configuration because, like today, most people lived near the U.S. border. The United States developed much faster and with a larger population and a bigger economy—which provided products not available in the provinces, either because they were not made in Canada or because there was no transportation to distribute them. This led the Canadian governments, starting with our first prime minister, Sir John A. Macdonald, to develop what was called a National Policy. The policy placed high tariffs on imports from the United States to protect Canadian manufacturing, which had higher costs. In addition, the federal government began to grapple with the difficult question of building a costly rail line from the east coast to the west coast. These two issues set the tone for the continuous and substantial involvement of Canadian governments in developing and maintaining the Canadian economy. As you make your way through this chapter and read about these complex activities, you should

LO2

Trace the historical role of government in the Canadian economy, and explain why Crown corporations were created.

National Policy

Government directive that placed high tariffs on imports from the United States to protect Canadian manufacturing, which had higher costs.

Reproduced with the permission of the Public Service Commission of Canada, 2012

Various government programs support student employment opportunities. For example, the Federal Student Work Experience Program provides thousands of full-time students with work experience. With only one application, you can be considered for temporary jobs in various federal organizations across the country.

145

PART 1 Business Trends: Cultivating a Business in Diverse Global Environments

not be surprised to learn that the different levels of government are large employers in the country. The federal government and the provinces with the largest populations and levels of economic activity—namely, Ontario, Quebec, British Columbia, and Alberta—have been excellent sources of employment for graduates in the past. As you will see in this chapter, we also have an interventionist government that, through its activities (e.g., regulatory and fiscal policy), tries to create a stable economy for businesses. In Chapter 3, you learned that trade agreements, such as the North American Free Trade Agreement (NAFTA) and the European Union (EU) have focused on eliminating tariffs between countries. But the work has not stopped, and the federal government is in the midst of negotiating 34 international investment and free trade agreements.1 Before we explore the seven government activities within the Canadian context in more detail, let us briefly review how the Canadian government affects business as a whole. You never know, one day you may have a job in one of these areas.

PROGRESS ASSESSMENT

•

What are the seven categories of government involvement with business?

Crown Corporations Crown corporations Companies that are owned by the federal or a provincial government. ■ FIGURE

In Canada, an important aspect of the role of government is expressed through Crown corporations, which are companies that are owned by the federal or provincial government. Review Figure 4.2 for a brief list of the top federal and provincial Crown corporations in Canada. The federal government has Crown corporations related to

4.2

CANADA’S LARGEST FEDERAL AND PROVINCIAL CROWN CORPORATIONS BY REVENUE Rank

Federal Crown Corporation

2017 Revenue ($ billions)

Canada Pension Plan Investment Board

$36.273

Canadian Commercial Corporation

$2.657

Public Sector Pension Investment Board

$15.913

Canadian Mortgage and Housing Corporation

$9.159

Canada Post Corporation

Category

Wal-Mart Canada

US$25.40

Retail

Costco Wholesale Canada

US$17.94

Retail

Direct Energy Marketing Ltd.

C$ 20.69

Utilities

Desjardins Group

C$ 16.98

Financial

McKesson Canada

US$13.70

Wholesale

Sources: “Top 1000: Public (Top 1000)” and “Top 1000: Private (Top 1000),” ROB Magazine, June 27, 2017, https://beta.theglobeandmail.com/report-onbusiness/rob-magazine/top-1000/top-1000-stocks-rated-canada/article35448077/?ref=http://www.theglobeandmail.com&.

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PART 2 Business Ownership and Small Business

corporate governance

The process and policies that determine how an organization interacts with its stakeholders, both internal and external.

7. Separation of ownership from management. Corporate governance refers to

the process and policies that determine how an organization interacts with its stakeholders. Corporate governance is necessary because of the evolution of public ownership. In public corporations, unlike sole proprietorships and partnerships, there is a separation between ownership and management.22As a result, the board of directors was created. With corporate governance, rules outline how the organization is to be managed by the board of directors and the officers. The board assumes many of the same responsibilities that would typically rest with the sole proprietor, partners, or owners of a private corporation. Board members are often chosen based on their business experience and level of expertise. Those who serve on boards (both for-profit and nonprofit) may be held personally liable for the misconduct of the organization. Having directors insurance is one way to try to limit this risk. Risk will be discussed in Online Supplement 2. The corporate hierarchy in Figure 6.5 shows how the owners/shareholders are separate from the managers and employees. The owners/shareholders elect a board of directors, who in turn hire the officers of the corporation that oversee major policy issues. The owners/shareholders thus have some say in who runs the corporation but have no real control over the daily operations (e.g., setting the price for a product).23

■ FIGURE

6.5

HOW OWNERS AFFECT MANAGEMENT Owners have an influence on how business is managed by electing a board of directors. The board hires the top officers (and fires them if necessary). It also sets the pay for those officers. The officers then select other managers and employees with the help of the Human Resource Department.

Owners/shareholders (elect board of directors)

Board of directors (hire officers)

Officers (set corporate objectives and select managers) Managers (supervise employees)

Employees

230

CHAPTER 6 Forms of Business Ownership

Disadvantages of Corporations There are so many sole proprietorships and partnerships in Canada that there must be some disadvantages to incorporation. Otherwise, more people would incorporate their businesses. The following are a few of the disadvantages. 1. Initial cost. Incorporation may cost thousands of dollars and involve the services of

lawyers and accountants. 2. Extensive paperwork. The paperwork filed to start a corporation is just the beginning.

A sole proprietor or a partnership may keep rather broad accounting records. A corporation, in contrast, must keep detailed financial records, the minutes of meetings, and more. 3. Double taxation. Corporate income is taxed twice. First the corporation pays tax on

income before it can distribute any net income, as dividends, to shareholders. Then the shareholders pay tax on the dividends they receive from the corporation. While this is double taxation, it is not excessive taxation, as the tax system is designed to provide some offsetting credits such as the dividend tax credit for investors. 4. Two tax returns. An individual who incorporates must file both a corporate tax return

and an individual tax return. Depending on the size of the corporation, a corporate return can be quite complex and require the assistance of a chartered professional accountant (CPA). 5. Size. Size may be one advantage of corporations, but it can be a disadvantage as well.

Large corporations sometimes become too inflexible and tied down in red tape (i.e., have to follow many regulations) to respond quickly to market changes, and their profitability can suffer. 6. Difficulty of termination. Once a corporation has started, it is relatively difficult to end.

Legal procedures are costly and more complex than for unincorporated companies. 7. Possible conflict with shareholders and their board of directors. Conflict may brew if

the shareholders elect a board of directors who disagree with management.24 Since the board of directors chooses the company’s officers, entrepreneurs serving as managers can find themselves forced out of the very company they founded. This happened to Tom Freston, one of the founders of MTV, and Steve Jobs, a founder of Apple Computer. (Jobs returned to the company later.)

Some business people are discouraged by the costs, paperwork, and special taxes that corporations must pay. However, many others believe that the advantages of incorporation outweigh the challenges. Figure 6.6 compares the three main types of organizations.

Business Regulations Companies that wish to operate in Canada must follow federal and provincial/territorial business laws and regulations. Among other things, this applies to registration and to reporting and information.

REGISTRATION Governments need to know what businesses are in operation to ensure that a wide range of laws and regulations are being followed. Guaranteeing that the names of businesses are not duplicated is important to avoid confusion. Additionally, governments have to be sure 231

PART 2 Business Ownership and Small Business

■ FIGURE

6.6

COMPARISON OF FORMS OF BUSINESS OWNERSHIP PARTNERSHIPS

CORPORATION

Sole Proprietorship

General Partnership

Limited* Partnership

Public Corporation

Private Corporation

Documents Needed to Start Business

None, may need permit or licence

Partnership agreement (oral or written)

Written agreement; must file certificate of limited partnership

Articles of incorporation, bylaws

Articles of incorporation, bylaws; must meet criteria

Ease of Termination

Easy to terminate: just pay debts and quit

May be hard to terminate, depending on the partnership agreement

Same as general partnership

Hard and expensive to terminate

Not difficult; pay off debts, sell off assets, withdraw cash, and pay taxes

Length of Life

Terminates on the death of owner, sale, or retirement

Terminates on the death or withdrawal of partner

Same as general partnership

Perpetual life

Transfer of Ownership

Business can be sold to qualified buyer

Must have agreement of other partner(s)

Same as general partnership

Easy to change owners; just sell shares

Easy—just sell shares†

Financial Resources

Limited to owner’s capital and loans

Limited to partners’ capital and loans

Same as general partnership

More money to start and operate: sell stock and bonds; loans

Owners’ capital and loans; no public stock issue allowed

Risk of Losses

Unlimited liability

Limited liability

Taxes

Taxed as personal income

Same as general partnership

Corporate, double taxation

Same as public corporation

Management Responsibilities

Owner manages all areas of the business

Partners share management

Cannot participate in management

Separate management from ownership

Owners usually manage all areas

Employee Benefits

Usually fewer benefits and lower wages

Often fewer benefits and lower wages; promising employee could become a partner

Same as general partnership

Usually better benefits and wages, advancement opportunities

Same as public corporation

*There must be at least one general partner who manages the partnership and has unlimited liability. †Unless the agreement specifies otherwise.

that taxes are being paid. To ensure these and other goals, every company must register its business. This is a simple, routine, and inexpensive procedure. Companies wanting to incorporate must fill out articles of incorporation and file these with the appropriate provincial/territorial or federal authority. Articles of incorporation are a legal authorization from the federal or provincial/territorial government for a 232

CHAPTER 6 Forms of Business Ownership

company to use the corporate format. The main advantage of being a federally incorporated company is that incorporation gives the company name added protection and guarantees its usage across Canada. Depending on the type of business you are considering, you may be required to incorporate federally.

REPORTING AND INFORMATION Businesses receive many documents from the different levels of government during the course of a year. Some are just information about changes in employment insurance, the Canada or Quebec Pension Plan, or tax legislation as it affects them or their employees. Then there are various forms that all companies must complete so that governments can compile statistical reports that businesses, individuals, research organizations, and governments need to operate effectively. For example, Statistics Canada maintains vast databases and creates useful reports from this information. All public corporations must file annual reports containing basic data about themselves. An annual report should include the name of the officers, how many shares have been issued, and the head office location. Of course, every corporation must also file an annual tax return containing financial statements and pay the necessary taxes during the year. Review Chapter 16 for examples of financial statements.

PROGRESS ASSESSMENT

• • •

What are the major advantages and disadvantages of incorporating a business? What is the role of owners (shareholders) in the corporate hierarchy? If you buy shares in a corporation and someone is injured by one of the corporation’s products, can you be sued? Explain.

Franchising In addition to the three basic forms of business ownership, there are two special forms: franchising and co-operatives. Let’s look at franchises first. A franchise agreement is an arrangement whereby someone with a good idea for a business (the franchisor) sells the rights to use the business name and to sell a good or service (the franchise) to others (the franchisee) in a given territory. As you might suspect, both franchisors and franchisees have a stake in the success of the franchise. Some people, uncomfortable with the idea of starting their own business, would rather join a business with a proven track record through a franchise agreement. A franchise can be formed as a sole proprietorship, a partnership, or a corporation. Some students mistakenly identify franchising as an industry. It is not a specific industry. Rather, franchising is a business model; it is a method of distributing a good or service, or both, to achieve a maximum market impact with a minimum investment. It is not a separate form of business ownership from those already summarized in Figure 6.6, and it does not replace a form of business. How the franchisee sets up the franchise business (i.e., sole proprietorship, partnership, or corporation) and operates it, however, is dependent on the advantages and disadvantages of each form of business ownership.

articles of incorporation

A legal authorization from the federal or provincial/territorial government for a company to use the corporate format.

franchise agreement

An arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell its goods and services in a given territory.

franchisor

A company that develops a product concept and sells others the rights to make and sell the products.

LO4

Outline the advantages and disadvantages of franchising. Include the challenges of global franchising. franchise

The right to use a specific business’ name and sell its goods or services in a given territory.

franchisee

A person who buys a franchise.

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Often, what looks like a chain of stores—Home Hardware Stores Ltd., Quiznos, and Great Canadian Dollar Stores—is usually a franchise operation with each unit owned by a different person or company. (There are also corporate locations owned by the franchisor.) Sometimes one person or group may own and operate more than one franchise unit. Regardless of the form of business ownership (e.g., partnership), all units are part of a franchise operation. In the following pages you will see the advantages and disadvantages of this type of business operation, and you will learn what to consider before buying a franchise unit. Courtesy of Booster Juice. Used with permission According to the Canadian Franchise Association, Promoted as Canada’s premium juice and smoothie chain, 25 Booster Juice operates over 400 franchise units. Would there are over 78 000 franchise units across Canada and you be interested in purchasing a franchise? If not this they employ more than one million people.26 Franchisone, what type of good or service franchise might appeal ing is more than food (e.g., Dairy Queen, Swiss Chalet, to you as a business owner? Cora, and Pizza Pizza) as 60 percent of franchises can be found in non-food sectors and industries (e.g., Oxford Learning, Mr. Lube Canada, Molly Maid, and First Choice Haircutters).27 Have you ever considered owning one of these? Review Figure 6.7 for some tips in evaluating franchises.

Advantages of Franchises Franchising has penetrated every aspect of Canadian and global business life by offering goods and services that are reliable, convenient, and competitively priced. The worldwide growth of franchising could not have been accomplished by accident. Franchising clearly has some advantages. 1. Management and marketing assistance. Compared with someone who starts a new

business, a franchisee usually has a much greater chance of succeeding because he or she has established products or services to sell, help choosing a location, and assistance in all phases of promotion and operation. It is like having your own store but with full-time consultants when you need them. Franchisors usually provide intensive management training since they want the franchisees to succeed. For example, franchisor Boston Pizza International Inc. provides an extensive seven-week training program for new franchisees and their management teams. Trainers provide in-store staff training two weeks prior to opening and support for two weeks post-opening. After this, the restaurant is assigned a Regional Business Manager for dedicated support.28 Some franchisors help their franchisees with local marketing efforts rather than having franchisees depend solely on national advertising. Franchisees also have a network of fellow franchisees facing similar problems who can share their experiences. The goal is to support franchisees however possible. 2. Personal ownership. A franchise operation is still your business, and you enjoy as

much of the incentives and profit as any sole proprietor would. You are still your 234

CHAPTER 6 Forms of Business Ownership

■ FIGURE

6.7

BUYING A FRANCHISE Since buying a franchise is a major investment, be sure to check out a company’s financial strength before you get involved. A good source of information about evaluating a franchise deal is the handbook, “Investigate Before Investing,” available from International Franchise Association Publications.

Checklist for Evaluating a Franchise The Franchise Did your lawyer approve the franchise contract you’re considering after he or she studied it paragraph by paragraph? Does the franchise give you an exclusive territory for the length of the franchise? Under what circ*mstances can you terminate the franchise contract and at what cost to you? If you sell your franchise, will you be compensated for your goodwill (the value of your business’reputation and other intangibles)? If the franchisor sells the company, will your investment be protected? The Franchisor How many years has the firm offering you a franchise been in operation? Does it have a reputation for honesty and fair dealing among the local firms holding its franchise? Has the franchisor shown you any certified figures indicating exact net profits of one or more going firms that you personally checked yourself with the franchisee? Ask for the company’s disclosure statement. Will the firm assist you with: A management training program? An employee training program?

Will the firm assist you with: A public relations program? Capital? Credit? Merchandising ideas? Will the firm help you find a good location for your new business? Has the franchisor investigated you carefully enough to assure itself that you can successfully operate one of its franchises at a profit both to itself and to you? You, the Franchisee How much capital will you need to purchase the franchise and operate it until your income equals your expenses? Does the franchisor offer financing for a portion of the franchising fees? On what terms? Are you prepared to give up some independence of action to secure the advantages offered by the franchise? Do you have your family’s support? Does the industry appeal to you? Are you ready to spend much or all of the remainder of your business life with this franchisor, offering its products or services to the public? Your Market Have you made any study to determine whether the products or services that you propose to sell under the franchise have a market in your territory at the prices you’ll have to charge? Will the population in the territory given to you increase, remain static, or decrease over the next five years? Will demand for the products or services you’re considering be greater, about the same, or less five years from now than it is today? What competition already exists in your territory for the products or services you contemplate selling?

Sources: U.S. Department of Commerce, Franchise Opportunities Handbook; and Steve Adams, “Buying a Brand,” Patriot Ledger (Quincy, MA), March 1, 2008.

own boss, although you must follow more rules, regulations, and procedures than you would with your own privately owned business. The Spotlight on Small Business box features an example of a growing franchise that is attracting new franchisees. 3. Nationally recognized name. It is one thing to open a gift shop or ice cream store. It is

quite another to open a new Hallmark store or a Baskin-Robbins. With an established franchise, you get instant recognition and support from a product group with established customers around the world. 4. Financial advice and assistance. Two major problems for small-business owners are

arranging financing and learning to keep good records. Franchisees get valuable assistance and periodic advice from people with expertise in these areas. In fact, some 235

PART 2 Business Ownership and Small Business

Spotlight On SMALL BUSINESS Unlocking a Growing Franchise Have you ever locked your keys in your car? Whom did you call? Chances are you called a locksmith you didn’t know. Pop-A-Lock, a fast-growing franchise, provides trusted locksmiths 24 hours a day. Although it started out specializing in opening car doors, it has grown into a security firm that works on electronic access to buildings, closed circuit TVs, smart key rekeying, commercial automotive security, and more. Pop-A-Lock believes that it is critical to support franchisees. It provides a 24/7 hotline for any tech who runs into problems. The in-house marketing team keeps the buzz going through social media. And CEO Don Marks makes twice-a-month calls in which he coaches franchisees on how to grow their businesses. Pop-A-Lock supports the community as well as its franchisees by offering free school security auditing. Through its PALSavesKids program, it directs techs immediately to kids left unattended in locked cars. With franchised locations in Canada, Australia, and the United States, the

Courtesy of System Forward America, Inc.

company plans to add 150 units to its 500-unit system in the next two years. Could you hold the keys to one of them?

Sources: “About Pop-A-Lock,” Pop-A-Lock, accessed October 31, 2017, www.popalock.com; and Jason Daley, “How Franchises Grow Fast,” Entrepreneur, February 2016.

franchisors, such as Meineke Car Care Centers, Gold’s Gym, and UPS Stores, provide financing to potential franchisees they believe will be valuable partners of the franchise system.29 5. Lower failure rate. Historically, the failure rate for franchises has been lower than that

of other business ventures. This is one reason why Canadians find them so attractive. However, franchising has grown so rapidly that many weak franchises have entered the field, so you need to be careful and invest wisely.30

Disadvantages of Franchises There are some potential pitfalls to franchising. Disadvantages of franchising include the following: 1. Large start-up costs. Most franchises will demand a fee for the rights to the fran-

chise. Fees for franchises can vary considerably. The startup capital range for College Pro Painters is $0 to $5,000 with $0 investment required.31But if you want to own a Boston Pizza franchise, you will need more money. The franchise fee is $60,000 and one needs to have a minimum of $600,000 (unencumbered) for startup capital with between $1.7 to $2.6 million in investment is required.32 2. Shared profit. The franchisor often demands either a large share of the profits in addi-

tion to the start-up fees or a percentage commission based on sales, not profit. This share is called a royalty. For example, if a franchisor demands a 10-percent royalty on 236

CHAPTER 6 Forms of Business Ownership

a franchise’s net sales, 10 cents of every dollar the franchisee collects (before taxes and other expenses) must be paid to the franchisor.33 regulation. Management “assistance” has a way of becoming mana gerial orders, directives, and limitations. Franchisees feeling burdened by the company’s rules and regulations may lose the spirit and incentive of being their own bosses with their own businesses. Often franchisees will band together to resolve Trademarks of Canadian Tire Corporation, Limited use under licence their grievances with franchisors rather To become a Canadian Tire Associate Dealer, successful candidates must be well-rounded individuals who have a positive attitude for than each fighting their battles alone. For success and the passion and dedication necessary to excel. Selfexample, some Tim Hortons franchisees motivation is key. Along with a good mix of experience and personal created an association, Great White North characteristics, candidates must be willing to make a personal Franchisee Association, to address their and financial investment—a minimum of $125,000 of accessible capital—to become a Dealer.35 Does this franchise interest you? grievances with franchisor, Restaurant Brands International Inc. An $850 million class-action lawsuit alleges that the franchisor is trying to intimidate its restaurant owners and force the franchisees who formed the association out of their restaurants.34

3. Management

4. Coattail effects. The actions or failures of other franchisees have an impact on your

future growth and profitability. Due to this coattail effect, you could be forced out of business even if your particular franchise has been profitable. For example, the customer passion for high-flying franchisor Krispy Kreme sank as the southern Ontario market became flooded with new stores and the availability of the product at retail locations caused overexposure. McDonald’s and Subway franchisees complain that due to the company’s relentless growth, some new stores have taken business away from existing locations, squeezing franchisees’ profits per outlet. 5. Restrictions on selling. Unlike owners of private businesses, who can sell their com-

panies to whomever they choose on their own terms, many franchisees face restrictions in the reselling of their franchises. To control quality, franchisors often insist on approving the new owners, who must meet their standards. 6. Fraudulent franchisors. Contrary to common belief, most franchisors are not large

systems like Liberty Tax Service or Booster Juice. Many are small, rather obscure companies that prospective franchisees may know little about. Most franchisors are honest, but there has been an increase in complaints about franchisors that deliver little or nothing of what they promised. Before you buy a franchise, make certain you check out the facts fully and remember the old adage “You get what you pay for.”

E-Commerce in Franchising The Internet has changed franchising in many ways. Most brick-and-mortar franchises have expanded their businesses online and created virtual storefronts to deliver increased value to customers. Franchisees like Carole Shutts, a Rocky Mountain Chocolate Factory franchisee, 237

PART 2 Business Ownership and Small Business

increased her sales by setting up her own website. Many franchisors, however, prohibit franchisee-sponsored websites because conflicts can erupt if the franchisor creates its own website. Sometimes franchisors send “reverse royalties” to franchisees who believe their sales were hurt by the franchisor’s online sales, but that doesn’t always bring about peace. Before buying a franchise, read the small print regarding online sales. Today potential franchisees can make a choice between starting an online business or a business requiring an office or storefront outside of the home. © PropertyGuys.com Quite often the decision comes down to financing. No real estate license is required to be a franchisee with Traditional bricks-and-mortar franchises require findpart of PropertyGuys.com, Canada’s largest private sale ing real estate and often require a high franchise fee. franchise network. Would you be willing to list your home Online franchises, like Printinginabox.com, charge no with someone from this company? up-front franchise fee and require little training to start a business. Franchisees pay only a set monthly fee. Online franchises also do not set exclusive territories limiting where the franchisee can compete. An online franchisee can literally compete against the world. Franchisors often use technology, including social media, to extend their brands, to meet the needs of both their customers and their franchisees, and even to expand their businesses. Formed in Moncton, New Brunswick, PropertyGuys.com has built on the “For Sale by Owner (FSBO)” Internet concept. The company offers a high tech / high touch service delivered by its expert online PGPros (also known as the local franchise operator), innovative real estate brokers to connect clients to realtor.ca, certified professional appraisers, a unique answering and appointment booking service, and access to real-estate lawyers.36

Home-Based Franchises Home-based businesses offer many obvious advantages, including relief from the stress of commuting, extra time for family activities, and lower overhead expenses. One disadvantage is the feeling of isolation; however, compared to home-based entrepreneurs, homebased franchisees feel less isolated. Experienced franchisors often share their knowledge of building a profitable enterprise with other franchisees. Home-based franchises can be started for as little as $2,000. Today you can be a franchisee in areas ranging from cleaning services to tax preparation, child care, pet care, or cruise planning.37 Before investing in a home-based franchise, it is helpful to ask yourself the following questions: Are you willing to put in long hours? Can you work in a solitary environment? Are you motivated and well organized? Does your home have the space you need for the business? Can your home also be the place you work? It’s also important to check out the franchisor carefully.

Franchising in International Markets Franchising today is truly a global effort. Canadian franchisors are counting their profits in euros, yuan, pesos, won, krona, baht, yen, and many other currencies. For example, McDonald’s has more than 36 000 restaurants in more than 100 countries serving over 69 million customers each day.38 238

CHAPTER 6 Forms of Business Ownership

What makes franchising successful in international markets is what makes it successful domestically: convenience and a predictable level of service and quality. Because of proximity and language, the United States is by far the most popular target for Canadian-based franchises. Franchisors, though, must be careful and do their homework before entering into global franchise agreements.39 Three questions to ask before forming a global franchise are: Will your intellectual property be protected? Can you give proper support © Stephan Gabriel/imageBroker/age fotostock to global partners? Are you able to adapt to franchise regulations in other countries? If Holiday Inn’s InterContinental Amstel hotel in Amsterdam has been celebrated as the Netherlands’ most beautiful and luxurious hotel. the answer is yes to all three questions, global Holiday Inn franchises try to complement the environment of the franchising creates great opportunities. It’s area they serve. This hotel is on the crossroads of Amsterdam’s also important to remember that adapting financial and exclusive shopping districts. What do you think would products and brand names to different have been the reaction if Holiday Inn built the typical Canadian-style hotel in this area? countries creates challenges. In France, people thought a furniture-stripping franchise called Dip ’N Strip was a bar that featured strippers. In 1986, brothers Michael and Aaron Serruya, then aged 19 and 20, wanted to buy a franchise, but no one would take a chance on them. So, they started their own frozen yogurt shop, Yogen Früz, in Toronto, Ontario. Today, Yogen Früz has grown to be a world leader in the frozen yogurt category, with over 1400 locations operating in 47 countries around the world.40

Co-Operatives41 Some people dislike the notion of having owners, managers, workers, and buyers as separate individuals with separate goals, so they have formed co-operatives, a different kind of organization to meet their needs for child care, housing, food, and financial services. A co-operative (co-op) is an organization owned and controlled by people— producers, consumers, or workers—with similar needs who pool their resources for mutual gain. Co-operatives are locally owned and democratically controlled by the members who use their services. They are founded on the common idea that people know what’s best for them and can work together to achieve their goals. Worldwide, more than one billion people are members of co-operatives. There are over 9000 co-operatives, credit unions, and mutuals in Canada and over 750 000 across the world. Together, Canadian co-operatives have over 18 million members and employ more than 150 000 people. Members democratically control these businesses by electing a board of directors that hires professional management. Some co-operatives ask consumer-members to work for a number of hours a month as part of their membership duties. Other co-operatives are made up of members who actually make the product being sold. One example is

LO5

Describe the role of co-operatives in Canada. co-operative (co-op)

An organization owned and controlled by people—producers, consumers, or workers—with similar needs who pool their resources for mutual gain.

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Gay Lea Foods, the second-largest dairy co-operative in Canada, and owned by over 1200 dairy farmers. Others are worker-owned co-operatives, which are self-managed by employees who directly hire and fire their managers. In their over one-hundred year history in Canada, co-operatives represent a large and diverse heritage of Canadians working together to build better communities based upon co-operative principles. These principles differ from other business principles in several ways:

Mountain Equipment Co-operative (MEC) was formed in Vancouver, British Columbia, in 1971. MEC started with $65 in capital and a goal of providing affordable, good-quality climbing gear to an underserved mountaineering community. It is now Canada’s largest retailer co-operative in terms of membership. Have you shopped at a local co-op?

∙ A different purpose. Co-operatives meet the common needs of their members, whereas most investor-owned businesses exist to maximize profit for their shareholders. Figure 6.8 summarizes some of the philosophical and community benefits of co-operatives.

∙ A different control structure. Co-operatives use a system of one-member/one-vote, not the onevote-per-share system used by most businesses. This helps the co-operatives serve the common need rather than the individual need. ∙ A different allocation of profit. Co-operatives share profits among their member-owners on the basis of how much they use the organization, not on how many shares they hold. Profits tend to be invested in improving services for the members. ■ FIGURE

6.8

SOME CO-OPERATIVE BENEFITS Philosophical Benefits

Community Benefits

People favoured over money in terms of priorities

Ability to change things that do not work

Greater community autonomy

Fair market prices

Product and service development by the people for the people

Strong customer/client loyalty

Opportunities to strengthen community bonds by helping one another

Greater employment opportunities

You can define your own needs instead of letting a conglomerate do it for you

Better access to quality products and services

Modest savings for all instead of the excessive accumulation of profits by a few

Economic and social growth in the community

Source: “The Co-Operative Advantage,” CoopZone Developers’ Network Co-operative, accessed November 3, 2017, http://www.coopzone.coop/ about-co-operatives/the-co-operative-advantage/.

240

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■ FIGURE

6.9

CO-OPERATIVES IN CANADA BY AREA OF ACTIVITY Co-operatives offering child care or early childhood education 6%

Worker co-operatives 5%

Credit unions and caisses populaires 14% Retail co-operatives 10%

Health care co-operatives 2%

Housing co-operatives 42%

Agricultural co-operatives 21% Source: Courtesy of Canadian Co-operative Association, The Power of Co-operation: Co-operatives and Credit Unions in Canada, Ottawa. Used with permission.

Since co-operatives distribute their profits to members as a reduction in members’ costs, these profits are not subject to income tax. From time to time, various business organizations assert that many co-operatives are now more like large businesses and should be taxed. So far, this viewpoint does not appear to have extensive support. Co-operatives are major players in many sectors in Canada. Figure 6.9 provides a breakdown of the number of co-operatives by area of activity. Housing co-operatives form the largest category, followed by agricultural co-operatives, and then credit unions and caisses populaires. You can infer that co-operatives can be found in many industries. The co-operative model has a long history and a proven track record in social and economic development, having served thousands of groups in both urban and rural areas. They are especially important to many rural and remote communities. In some communities, co-operatives are the only providers of retail and financial services, health and home care services, communications and utility services, tourism facilities, and other basic amenities.

Which Form of Ownership Is Best for You? You can build your own business in a variety of ways. You can start your own sole proprietorship, partnership, or corporation. Or, you can buy a franchise and be part of a larger corporation. Co-operatives are corporations that usually have a different motivation than traditional for-profit businesses. There are advantages and disadvantages to each. However, there are risks no matter which form you choose. Before you decide which form is best for you, you need to evaluate all of the alternatives carefully. 241

PART 2 Business Ownership and Small Business

PROGRESS ASSESSMENT

• • •

What are some of the factors to consider before buying a franchise? What opportunities are available for starting a global franchise? What is a co-operative? How does it differ from a for-profit organization?

SUMMARY LO1

List the advantages and disadvantages of sole proprietorships. A business owned, and usually managed, by one person is called a sole proprietorship. What are the advantages and disadvantages of sole proprietorships? The advantages of sole proprietorships include ease of starting and ending the business, being your own boss, pride of ownership, retention of profits, no special taxes, and less regulation than for corporations. The disadvantages include unlimited liability, limited financial resources, difficulty in management, overwhelming time commitment, few fringe benefits, limited growth, limited lifespan, and the possibility of paying higher taxes depending on the level of income.

LO2

Describe the advantages and disadvantages of partnerships. Include the differences between general and limited partners. When two or more parties legally agree to become co-owners of a business, a partnership is formed. What are the advantages and disadvantages of partnerships? The advantages include more financial resources, shared management and pooled knowledge, longer survival than sole proprietorships, and less regulation than corporations. The disadvantages include unlimited liability, division of profits, possible disagreements among partners, difficulty of termination, and the possibility of paying higher taxes depending on the level of income. What are the main differences between general and limited partners? General partners are owners (partners) who have unlimited liability and are active in managing the company. Limited partners are owners (partners) who have limited liability and are not active in the company.

LO3

Discuss the advantages and disadvantages of corporations. A corporation is a legal entity with authority to act and have liability separate from its owners. What are the advantages and disadvantages of corporations? The advantages include more money for investment, limited liability, size, perpetual life, ease of ownership change, ease of drawing talented employees, and separation of ownership from management. The disadvantages include initial costs, paperwork, size, difficulty of termination, double taxation, and possible conflict with a board of directors. What are some categories of corporations? Figure 6.3 lists some corporation types. Organization types include Benefit, Crown, domestic, multinational, private, professional, and public.

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LO4

Outline the advantages and disadvantages of franchising. Include the challenges of global franchising. A franchise agreement is an arrangement whereby the franchisor sells the rights to use the business name and to sell a good or service (the franchise) to others (the franchisee) in a given territory. What are the benefits and drawbacks of being a franchisee? The benefits include a nationally recognized name and reputation, a proven management system, promotional assistance, and pride of ownership. Drawbacks include high franchise fees, managerial regulation, shared profits, and transfer of adverse effects if other franchisees fail. What is the major challenge to global franchises? It may be difficult to transfer an idea or product that worked well in Canada to another culture. It is essential to adapt to the region.

LO5

Describe the role of co-operatives in Canada. A co-operative is an organization that is owned and controlled by people with similar needs who pool their resources for mutual gain. What is the role of a co-operative? Co-operatives are organizations owned by members/customers. Some people form co-operatives to give members more economic power than they would have as individuals. Small businesses often form co-operatives to give them more purchasing, marketing, or product development strength. How do co-operatives’ principles differ from other business principles? Co-operatives have a different purpose, control structure, and allocation of profit than traditional forprofit businesses. Review Figure 6.8 for a discussion of co-operative benefits.

KEY TERMS articles of incorporation 232 co-operative (co-op) 239 corporate governance 230 corporation 216 franchise 233 franchise agreement 233 franchisee 233

franchisor 233 general partner 219 general partnership 219 limited liability 219 limited liability partnership (LLP) 219 limited partner 219

limited partnership 219 partnership 216 partnership agreement 222 private corporation 225 public corporation 224 sole proprietorship 216 unlimited liability 217

CAREER EXPLORATION Whether you choose to structure your business as a sole proprietorship, partnership, or corporation, you can operate in any industry you like. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school.

∙ Graphic design service—creates visual concepts to communicate ideas that inspire, inform, and attract consumers; develops the overall layout and production design for various applications such as advertisem*nts, brochures, magazines, and corporate reports. ∙ Lawn care service—makes sure the grounds of houses, businesses, and parks are attractive, orderly, and healthy. 243

PART 2 Business Ownership and Small Business

∙ Information technology support service— provides help and advice to people and organizations using computer software or equipment.

∙ Pet care service—feeds, grooms, bathes, and exercises pets and other non-farm animals.

CRITICAL THINKING 1. Have you ever dreamed of opening your own

business? If so, what kind of business? Could you start such a business in your own home? How much would it cost to start? Could you begin the business part-time while you attend school? What satisfaction and profit could you get from owning your own business? What could you lose? (Be aware that you must be careful not to use a name for your business that has already been used or registered by someone else. You may face some

local restrictions and licence requirements if you operate from your residence such as requiring to have a certain number of parking spaces for your clients, having a limit on the size and type of vehicle and signage permitted, etc.) 2. Is it accurate to say that franchisees have the

true entrepreneurial spirit? Could you see yourself as a franchisee or franchisor? Which one? Do you have an idea that you think could eventually grow into a franchise? Explain.

DEVELOPING CAREER SKILLS Key: Team

Analytic

Communication

1. Research businesses in your area and identify

two companies that use the following forms of ownership: sole proprietorship, partnership, and corporation. Arrange interviews with managers from each form of ownership and get their impressions about their businesses. (If you are able to work with a team of fellow students, divide the interviews among team members.) Some questions that you might ask include: How much did it cost to start this business? How many hours do you work? What are some drawbacks that you have encountered with the way your business is set up (i.e., business form), if any? What are the specific benefits of this business form? Share the results with your class.

244

you and your friend(s) might bring to your new venture. How much capital and what personal skills do you need but lack? Develop an action plan to obtain them.

3. Let’s assume you want to open one of the fol-

lowing new businesses. What form of business ownership would you choose for each business? Why?

a. Wedding planning service

b. Software development firm

c. Video game rental store

d. Online bookstore

4. Find out how much it costs to incorporate a

company in your province or territory. Then compare it to the cost of federal incorporation. Is there a significant difference? Why might you choose not to incorporate federally?

2. Have you thought about starting your own

business? What opportunities seem attractive? Think of a friend or friends whom you might want as a partner or partners in the business. List all of the financial resources and personal skills you will need to launch the business. Then make separate lists of the personal skills and the financial resources that

Technology

5. Find information online about a business

co-operative (e.g., Vancouver City Savings Credit Union, Welch’s, etc.). Research how it was formed, who can belong to it, and how it operates.

CHAPTER 6 Forms of Business Ownership

ANALYZING MANAGEMENT DECISIONS Going Public George Zegoyan and Amir Gupta face a difficult decision. Their private auto parts manufacturing company has been a great success—too quickly. They cannot keep up with the demand for their product. They must expand their facilities, but have not had time to accumulate sufficient working capital, nor do they want to acquire long-term debt to finance the expansion. Discussions with their accountants, lawyers, and stockbrokers have confronted them with the necessity of going public to raise the required capital. Zegoyan and Gupta are concerned about maintaining control if they become a public company. They are also worried about loss of privacy because of the required reporting to various regulatory bodies and to their shareholders. Naturally, they are also pleased that the process will enable them to sell some of their

shareholdings to the public and realize a fair profit from their past and expected future successes. They will be able to sell 40 percent of the shares for $500,000, which is ten times their total investment in the company. It will also allow them to raise substantial new capital to meet the needs of their current expansion program. The proposed new structure will allow them to retain 60 percent of the outstanding voting shares, so they will keep control of the company. Nevertheless, they are somewhat uneasy about taking this step, because it will change the nature of the company and the informal method of operating they are used to. They are concerned about having “partners” in their operations and profits. They are wondering whether they should remain as they are and try to grow more slowly, even if it means giving up profitable orders.

Discussion Questions 1. Do they have any other options besides going

3. Would you advise them to sell their business

public? Is the franchise route a viable option? Explain.

now if they can get a good price and then start a new operation? Explain.

2. Do you think they should try to limit their growth

to a manageable size to avoid going public, even if it means forgoing profits now? Why?

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Entrepreneurship and Starting a Small Business LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Explain why people are willing to become entrepreneurs, and describe the attributes of successful entrepreneurs.

LO2 Discuss the importance of small business to the Canadian economy. LO3 Summarize ways to learn how small businesses operate. LO4 Analyze what it takes to start and run a small business. LO5 Outline the advantages and disadvantages that small businesses have in entering global markets.

P R O F I L E GETTING TO KNOW: TONIA JAHSHAN, FOUNDER, STEEPED TEA On a vacation getaway in 2006 to a bed and breakfast in Mahone Bay, Nova Scotia, Tonia Jahshan and her husband, Hatem, tasted loose-leaf tea for the very first time. They liked it so much that they brought some home to share with friends and family. Before Jahshan knew it, she was holding fifteen tea parties a month. Started in 2006, Steeped Tea sells looseleaf tea and accessories. The company began with minimal investment. The couple bought their teas in small quantities and stored them in their garage. They grew the business by using a direct-sales model whereby they sold their tea through independent consultants rather than building their own

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sales force. Mostly women working part-time, these

When Jahshan launched the company, it was

consultants are independent business owners who

a one-woman show. Since then, the company has

run tea parties in people’s homes. They earn up to

grown exponentially. Her success—annual sales of

39 percent commission.

more than $20 million and 9000 salespeople across

A turning point for the company was when the

North America—earned Jahshan the top spot on the

couple appeared on Dragons’ Den. Their venture-

2016 W100 ranking of Canada’s Top Female Entre-

capital pitch resulted in four offers. Dragons David

preneurs. The vision is to have at least 20 000 rep-

Chilton and Jim Treliving each invested $125,000

resentatives in Canada, and 10 000 representatives

for a 10 percent ownership in the company, result-

in the United States, and to keep growing.

ing in an overall $250,000 offer for 20 percent

Stories about people like Tonia Jahshan, who

ownership. The owners chose them as Treliving

take on the challenge of starting their own business,

had great connections in the United States—where

are commonplace in this age of the entrepreneur.

the Jahshans wanted to establish a presence—and

As you read about more examples in this book,

Chilton showed a solid understanding of the com-

maybe you will become inspired to become an

pany’s business model.

entrepreneur yourself!

Sources: Mai Nguyen, “The Secret of Steeped Tea’s Phenomenal Growth,” PROFITguide.com, May 16, 2016, http://www.profitguide.com/ manage-grow/success-stories/w100-tonia-jahshan-steeped-tea-growth-103020/3; “Our Story,” Steeped Tea, 2015, http://www.steepedtea.com/ our-story/; “In pictures: Dragons’ Den success story feels the summer doldrums,” The Globe and Mail, August 14, 2014, http://www.theglobeandmail. com/report-on-business/small-business/sb-growth/the-challenge/summer-doldrums-sour-the-milk-for-tea-company/article13736933/; “Stories from the Den: Tonia and Hatem Jahshan, Steeped Tea,” YouInc.com, April 28, 2014, https://youinc.com/content/lifestyle/stories-from-the-den-tonia-andhatem-jahshan-steeped-tea; Julia Chapman, “Steeped in Dragons’ Den dollars, Hamilton tea firm grows up,” CBC News, October 5, 2013, http://www. cbc.ca/news/canada/hamilton/news/steeped-in-dragons-den-dollars-hamilton-tea-firm-grows-up-1.1913049; Dan Misener, “Dragons’ Den success story has caught a cold,” The Globe and Mail, August 14, 2013, http://www.theglobeandmail.com/report-on-business/small-business/sb-growth/ the-challenge/dragons-den-success-story-has-caught-a-summer-cold/article13729083/; and Marjo Johne, “How couple’s perfect pitch yielded four offers on Dragons’ Den,” The Globe and Mail, December 7, 2012, http://www.theglobeandmail.com/report-on-business/small-business/starting-out/ how-couples-perfect-pitch-yielded-four-offers-on-dragons-den/article6007914/.

The Age of the Entrepreneur1 Today most young people know that it is unlikely they will get a job in a large corporation and stay there for 30 years. For those who want more control over their destiny, working in or starting a small business makes sense. Entrepreneurship is accepting the challenge of starting and running a business. The word entrepreneur originates from the French word, entreprendre, which means “to undertake.” In a business context, it means to start a business. You can imagine how the concept of entrepreneurship has a wide variety of meanings. On the one extreme, an entrepreneur is a person of very high aptitude who pioneers change, possessing characteristics found in only a very small fraction of the population. On the other extreme, anyone who wants to work for himself or herself is considered an entrepreneur. It is for this reason that we discuss both entrepreneurship and small business in this chapter. While many people use the terms entrepreneurship and small business interchangeably, there are significant differences. Entrepreneurial ventures differ from small businesses in the following four ways:2

entrepreneurship

Accepting the challenge of starting and running a business.

1. Amount of Wealth Creation. Rather than simply generating an income stream that

replaces traditional employment, a successful entrepreneurial venture creates substantial wealth, typically in excess of several million dollars of profit. 247

PART 2 Business Ownership and Small Business

2. Speed of Wealth Creation. While a successful

small business can generate several million dollars of profit over a lifetime, entrepreneurial wealth creation often is rapid. For example, this may occur within five years. 3. Risk. The risk of an entrepreneurial venture must

be high. Otherwise, with the incentive of sure profits, many people would pursue the idea of entrepreneurship, making business ventures impossibly competitive. 4. Innovation. Entrepreneurship often involves sub-

Courtesy of Roots Canada

Inspired by their passion for Algonquin Park, Michael Budman and Don Green created Roots Canada in 1973. Since the business was not going to be passed on to their children, they sold a majority stake in their clothing and leather goods company in 2015.3 Do you know of any other Canadian companies that have gone through ownership changes? What has motivated these changes?

stantial innovation beyond what a small business might exhibit. This innovation gives the venture the competitive advantage that results in wealth creation. Innovation may be in new products, new production methods, new markets, and new forms of organizations.

From this list, you can quickly gather that entrepreneurship is not always small and small business is not always entrepreneurial. While most businesses start small, it is the intent to stay small that separates them from entrepreneurship. Explore this chapter and think about the possibilities. That is, the possibility of entrepreneurship and the possibility of starting a small business in your future.

Well-Known Canadian Entrepreneurs4 Entrepreneurs have played a major role in developing the Canadian economy. For example, Kenneth Colin Irving opened Bouctouche, New Brunswick’s first garage and service station in 1924. That same year, he opened a Ford dealership in Saint John and established Irving Oil. He was 25 years old. Today, Irving Oil operates Canada’s largest refinery, 10 distribution terminals, a fleet of delivery trucks, and over 900 fuelling locations serving its wholesale, commercial, and retail customers. It sells a range of finished energy products including gasoline, diesel, home heating fuel, jet fuel, and complementary products. Next, consider other examples of entrepreneurs who have created companies that are now household names in Canada. Do you recognize these logos? Courtesy of Leon’s. Used with permission.

Trademarks of Canadian Tire Corporation, Limited use under licence.

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∙ Ablan Leon began his career selling clothing from a suitcase door-to-door. When he had enough money, he bought a small building in Welland, Ontario, and in 1909 the A. Leon Company was established. Today, Leon’s Furniture Limited is one of Canada’s largest retailers, selling a wide range of merchandise including furniture, major appliances, and home electronics. The company continues to be run by the Leon family. ∙ In 1922, two brothers, John W. and Alfred J. Billes, purchased the Hamilton Tire and Garage Ltd. store in Toronto, Ontario, with a combined savings of $1800. In 1923, the brothers sold the shop and moved to the corner of Yonge and Gould streets in Toronto under the name Canadian Tire Corporation. Today, Canadian Tire Corporation, Limited (CTC) is a family of companies. They include Canadian Tire, FGL (Sport Chek,

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Hockey Experts, Sports Experts, National Sports, Intersport, and Atmosphere), Pro Hockey Life, Mark’s, Canadian Tire Financial Services, CT REIT, PartSource, Gas+, and Canadian Tire Jumpstart Charities. The latter is a national charity that is dedicated to helping kids overcome financial and accessibility barriers to sport and recreation in order to provide inclusive play for kids of all abilities. ∙ In 1907, J. W. Sobey started a meat delivery business in Stellarton, Nova Scotia. With a horse-drawn meat cart, he purchased and collected livestock from local farmers for resale. The first modern Sobeys supermarket opened in 1947. One of Canada’s two national grocery retailers with approximately 1500 stores in all 10 provinces, retail banners include Sobeys, Safeway, IGA, Foodland, FreshCo, Price Chopper, Thrifty Foods, and Lawtons Drugs, as well as more than 380 retail fuel locations. Sobeys Inc. is a wholly-owned subsidiary of Empire Company Limited, headquartered in Stellarton. ∙ In 1957, Wallace and Harrison McCain, supported by brothers Andrew and Robert, founded McCain Foods Limited in Florenceville, New Brunswick. Today, the privatelyowned company is an international leader in the frozen-food industry. While potatoes are at the heart of its offerings, the company also produces other food products that include pizza, appetizers, oven meals, and desserts that are found in more than 160 countries. McCain also owns the Day & Ross Transportation Group, one of the largest transportation companies in Canada. ∙ In 1969, Jean Coutu and Louis Michaud opened a discount pharmacy in Montreal, Quebec. They offered a large array of products, high-quality professional services, and longer store-opening hours. Under the banners of PJC Jean Coutu, PJC Clinique, PJC Santé, and PJC Santé Beauté, the company grew to be a leading pharmacy franchisor in Canada with 418 stores in Ontario, Quebec, and New Brunswick. In 2017, the Jean Coutu Group was acquired by Metro Inc. (Canada’s third-largest grocer) for $4.5 billion. This acquisition gives Metro an expanded foothold in the drug business, similar to Loblaw Companies Ltd.’s acquisition of Shoppers Drug Mart four years earlier. These stories have much in common. One or a couple of entrepreneurs had a good idea, borrowed some money from friends and family, and started a business. That business now employs thousands of people and helps the country prosper. Canada has plenty of entrepreneurial talent. Names such as Mike Lazaradis (Research in Motion Limited), Frank Stronach (Magna International), Ratana Stephens (Nature’s Path Foods), Guy Laliberté (Cirque du Soleil), and Susan Niczowski (Summer Fresh, Inc.) have become as familiar as those of the great entrepreneurs of that past. Some of our chapter profiles highlight other entrepreneurs, such as this chapter’s profile, Tonia Jahshan (Steeped Tea), Canada’s Top Female Entrepreneur for 2016. The Spotlight on Small Business box highlights several entrepreneurially minded individuals who created businesses while in school.

Courtesy of Sobeys Inc. Used with permission.

McCain Foods Limited

Courtesy of The Jean Coutu Group (PJC) Inc. Used with permission.

Guided by academic advisors and business experts, “the student leaders of Enactus Canada create and implement community empowerment projects and business ventures in communities coast to coast. The focus is advancing the economic, social, and environmental health of Canada.”5 Is there an Enactus group on your campus?

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Spotlight On SMALL BUSINESS Student Startups Although most entrepreneurs wait until they finish their education to make the jump into their own businesses, some aspiring entrepreneurs choose to buck the trend. Here are just a few examples of young entrepreneurs who found success in their post-secondary years. Jennifer Ger and Suzie Chemel met while studying for their business degrees at the University of Western Ontario. They set out to build their company, Foxy Originals, with a vision: to make high-style fashion jewellery accessible to everyone. Upon graduation, they focused full-time on their business. All pieces are designed and made in Canada with products sold through retailers and online. Marie Wright is both the owner of Mirror Image Media and a student at St. Francis Xavier University. The company is a video production company that helps to

Courtesy of Foxy Originals. Used with permission

promote businesses, non-profits, and events. It develops stories through concept development, script writing, creative direction, filming and post-production services. Matt Rendall met his Clearpath Robotics co-founders while a student in the University of Waterloo’s robotics engineering program. The company develops autonomous mobile robots that will take on the sometimes risky and tedious materials-handling jobs in warehouse operations. Ann Yang and Phil Wong sought a solution for the waste of billions of pounds of produce that go unharvested or unsold each year because it is the wrong size, shape, or colour to sell in stores. The Georgetown University students’ solution was to start Misfit Juicery, a company that makes juice from misfit fruits and vegetables. Kyle Pham and Nick Nguyen wanted to find a fun and easy way to help the public experience 3D printing technology in their homes. The two University of Southern California students started CubeForme. The company is a subscription-box service that connects designers with the public by shipping a variety of products such as gadgets, games, and art pieces each month. Diane Fairburn made stained-glass gifts in her first-year college dorm room and sold them at a table near the cafeteria. It has been over 30 years since she started her business, Decorative Glass Solutions. It has survived more than three decades of economic ups and downs.

Sources: “The Foxy Story,” Foxy Originals, accessed November 7, 2017, http://www.foxyoriginals.com/Designer-Profile.html; “Our Story,” Misfit Juicery, accessed November 6, 2017, https://misfitjuicery.co/about/; Andrew Seale, “Toronto Jewelry Designers Foxy Originals Were Cool Before Made in Canada Was,” Startup HERE Toronto, October 3, 2017, http://startupheretoronto.com/type/profiles/toronto-jewelrydesigners-foxy-originals-cool-made-canada/; “About Foxy Originals,” TalentEgg Inc., 2017, https://talentegg.ca/employer/foxy-originals; “Coolest College Startups 2016,” Inc., accessed January 2017, https://www.inc.com/college-startups; Tim Talevich, “Business Class,” The Costco Connection, August 2016; Jen Falzon, “St. Francis Xavier University Student Entrepreneur Named 2016 Provincial Champion,” Enactus Canada, February 16, 2016, http://enactus.ca/st-francis-xavier-university-student-entrepreneur-named-2016-provincialchampion/; and “Support Kitchener’s Robot Revolution,” The Business Development Bank of Canada, June 3, 2015, https://www.bdc.ca/ en/about/mediaroom/news_releases/pages/yea2015_finalist_on.aspx.

LO1

Explain why people are willing to become entrepreneurs, and describe the attributes of successful entrepreneurs. 250

Why People Take the Entrepreneurial Challenge Taking the risk of starting a business can be scary and thrilling at the same time. One entrepreneur described it as almost like bungee jumping. You might be scared, but if you watch six other people do it and they survive, you are then able to do it yourself. Here are some reasons why people are willing to take the entrepreneurial challenge:

CHAPTER 7 Entrepreneurship and Starting a Small Business

∙ Opportunity.6 Many people, including immigrants new to Canada, may not have the skills for today’s complex organizations, but they do have the initiative and drive to work the long hours demanded by entrepreneurship. The same is true of many corporate managers who leave corporate life (by choice or after downsizing) to run businesses of their own. The opportunity may arise due to a sudden inheritance whereby some individuals decide to try something different, a change in health may force a career path adjustment, or even disliking a supervisor so much that being self-employed is an attractive option. Others, including an increasing number of Millennials, women, minorities, older people, and people with disabilities, find that starting their own businesses offers them more opportunities than working for others.

Tops, bottoms, and accessories are produced by lululemon athletica for women, men, and girls. Under what conditions would you prefer to purchase products in-store versus online?

∙ New Idea, Process, or Product. Some entrepreneurs are driven by a firm belief, perhaps even an obsession, that they can produce a better product, or a current product at a lower cost, than anybody else. Perhaps they have gotten hold of a new widget or have conceived of an improvement that they are convinced has a large potential market. Creating ecofriendly, yet effective, cloth diapers, is what encouraged Ilana Grostern and Amy Appleton to start AppleCheeks Cloth Diapers. “We felt we could design something better,” says Grostern.7 ∙ Profit. It is natural for people to benefit monetarily from their ideas and dedication and to be rewarded for the money they risk and their hard work when they run a business. Yet long after a business has produced substantial profits and amassed personal fortunes for its owners, many continue to enjoy the challenge of overcoming the endless problems that every business faces and the satisfaction of continued success. ∙ Challenge.Some people believe that entrepreneurs are excitement junkies who thrive on risk. Entrepreneurs take moderate, calculated risks; they do not just gamble. In general, though, entrepreneurs seek achievement more than power. ∙ Independence.Many entrepreneurs simply do not enjoy working for someone else. They want to be free to roam, create, work, and delegate. ∙ Family Pattern. Some people grow up in an atmosphere in which family members have started their own businesses, perhaps going back several generations. The talk at the dinner table is often about business matters. This background may

Cindy Tran started Sweet Petite Confectioner in Vancouver, British Columbia. She was influenced by watching her father as a child:“Seeing how he navigated the ups and downs that come with owning a business didn’t deter me from my own dreams of being an entrepreneur,” she says. “I viewed his experiences as lessons I could learn from when I eventually built my company.”8 251

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predispose young men or women to think along the same lines. Sometimes there is a family business, and the next generation grows up expecting to take its place there in due course.

What Does It Take to Be an Entrepreneur? Would you succeed as an entrepreneur? You can learn about the managerial and leadership skills needed to run a firm. However, you may not have the personality to assume the risks, take the initiative, create the vision, and rally others to follow your lead. Those traits are harder to learn or acquire. A list of entrepreneurial attributes to look for in yourself includes:9 ∙ Self-directed. You should be self-disciplined and thoroughly comfortable being your own boss. You alone will be responsible for your success or failure. ∙ Self-nurturing. You must believe in your idea even when no one else does, and be able to replenish your own enthusiasm. Gary Mauris, President and co-founder of Dominion Lending Centres Inc., Canada’s top national mortgage company advises, “Prepare yourself for the storm. Everyone, from your family to your competitors, will take a run at you to instill doubt. You have to be passionate and believe in your business model.”10 ∙ Action-Oriented. Great business ideas are not enough. The most important thing is a burning desire to realize, actualize, and build your dream into reality. ∙ Highly Energetic. It is your own business and you must be emotionally, mentally, and physically able to work long and hard. For example, when starting Extreme Pita, brothers Mark and Alex Rechichi were so consumed with work that they often slept on cots in the shop’s backroom after their evening shifts. That way, they could get a few hours of sleep before starting all over again the next morning.

Courtesy of Megan Gibson, PB&Jams

Megan Gibson has always been a big fan of peanut butter, but it wasn’t until she sampled a spicy Haitian variety that she began experimenting with her own recipes. Rave reviews from family and friends inspired Gibson to buy a food truck and start PB&Jams, a company that Gibson operates while also working full-time as a high school health teacher.

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∙ Tolerant of Uncertainty. Successful entrepreneurs take only calculated risks (if they can help it). Still, they must be able to take some risks. Remember, entrepreneurship is not for the squeamish or those bent on security. You can’t be afraid to fail. The late football coach Vince Lombardi summarized the entrepreneurial philosophy when he said, “We didn’t lose any games this season, we just ran out of time twice.” New entrepreneurs must be prepared to run out of time a few times before they succeed. ∙ Able to Learn Quickly. Making errors is inevitable. Only those who do nothing make no mistakes. What is important is what you learn from them. Good entrepreneurs are quick to learn such lessons.

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They adapt and change direction as required instead of letting pride stand in the way of admitting mistakes. While courage is not considered a skill, it is nevertheless an important element of an entrepreneur. Courage is required to challenge the status quo, to see an opportunity, and then most importantly, to try to do something about it. Entrepreneurs are doers. They do not just think and talk about an idea, they act on it! Also be aware that even if you possess many (or even all) of these attributes, there is no guarantee that you will be successful with every endeavour.

Turning Your Passions and Problems into Opportunities

Courtesy of Mabel’s Labels. Photo copyright of Mabel’s Labels.

Four moms started Mabel’s Labels when they got tired of their children losing their belongings or getting them mixed up with those of their friends. Labels go on everything from clothing to containers, for children and adults alike. What items would you label?

While many entrepreneurs’ business ideas are inspired by their passions, many see business opportunities in their problems. For example, while Celtel’s founder Mo Ibrahim saw the opportunity to bring mobile phones to over 1 billion people in Africa who had never even used a phone much less owned one, large telecommunication companies saw only poor peasants and logistical hurdles. Celtel became Africa’s largest cell provider.11 Ibrahim sold the company for $3.4 billion.12 Most entrepreneurs do not get ideas for products and services from some flash of inspiration. The source of innovation is more like a flashlight. Imagine a search party walking in the dark, shining lights, looking around, asking questions, and looking some more. “That’s how most creativity happens,” says business author Dale Dauten. “Calling around, asking questions, saying ‘What if?’ till you get blisters on your tongue.” To look at problems or passions and see opportunities in them, ask yourself these questions: What do I want, but can never find? What product or service would improve my life? What really irritates me and what product or service would help? Keep in mind, however, that not all ideas are opportunities. If your idea does not meet anyone else’s needs, the business will not succeed. You may have a business idea that is © YAY Media AS / Alamy Stock Photo a good opportunity if:13 ∙ It fills customers’ needs. ∙ You have the skills and resources to start a business.

Take a survey to find out if you might have the entrepreneurial spirit by going online to the Business Development Bank of Canada (www.bdc.ca) and searching for Entrepreneurial Potential Self-Assessment.

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∙ You can sell the product or service at a price customers are willing and able to pay— and still make a profit. ∙ You can get your product or service to customers before your window of opportunity closes (i.e., before competitors with similar solutions beat you to the marketplace). ∙ You can keep the business going.

Female Entrepreneurs14

SMEs (small and medium-sized enterprises)

Refers to all businesses with fewer than 500 employees.

In the past few decades, more women have gone into business for themselves. Throughout this book, you will see some examples. According to Statistics Canada’s Labour Force Survey report, there were 950 000 self-employed women in Canada, accounting for approximately 36 percent of all self-employed persons. A greater concentration of women run small and medium-sized enterprises (SMEs), which are businesses with fewer than 500 employees. SMEs owned by female entrepreneurs are concentrated in the services-producing sector and include industries such as information, administration, health care, and recreation. When a woman does decide to start a business, she tends to stay in business longer. In other words, survival rates are higher. Have these numbers changed since this chapter was written? Studies have shown a variety of reasons for the emergence of female entrepreneurs: ∙ Financial Need. Fluctuating employment and drops in average real incomes over the years have encouraged many women to start a business. Steeped Tea, the focus of this chapter’s profile, has been successful in attracting consultants who are looking to supplement their incomes. ∙ Lack of Promotion Opportunities. Most positions in higher management are still dominated by men. Although the situation is improving, the pace is extremely slow. Many women who are frustrated by this pace may take the entrepreneurial route. ∙ Women Returning to the Workforce. Many women who return to the job market after raising a family find that their skills are outdated. They also encounter subtle age discrimination. These factors encourage some to try self-employment.

Courtesy of Indigo. Used with permission.

Heather Reisman is the founder, Chair, and CEO of Indigo Books & Music Inc., Canada’s largest book, gift, and specialty toy retailer.15 In addition to offering online sales, the company operates in all 10 provinces and one territory in Canada through 89 superstores under the banners Chapters and Indigo, and 123 small-format stores under the banners Coles, Indigospirit, SmithBooks, and The Book Company.16 Have you considered following the careers of business people such as Reisman to learn how they became successful?

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∙ Family and Personal Responsibility. The increased rate of divorced women and single mothers in recent years has created a situation in which many women find themselves with children and little or no financial support. Some even refuse such support to be more independent. Affordable technology has made it possible for women to start home-based businesses. ∙ Public Awareness of Women in Business. As more publicity highlights that growing numbers of

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women have started their own ventures, the idea catches on and gives others the confidence to try. Often two or more women will team up to form a partnership. ∙ Part-Time Occupations. Often women with some particular talent—for example, publicity, writing, designing, making clothes, cooking, organizing, or human relations— are encouraged to develop their hobby or skills on a part-time basis to see how far they can go with it. This focus has resulted in many notable success stories. ∙ Higher Rate of Success for Women. Female entrepreneurs seem to have a better success rate than men. Various factors may account for this. Women feel less pressured than men to achieve quick results. They are a little more cautious, so they make fewer mistakes. They also accept advice more readily than men, who may feel that they need to know it all. It will be interesting to follow this process to see if women continue to start ventures at the same rate and maintain their remarkable track record. There are many resources available to help female entrepreneurs network and get general support. Some examples include the Canadian Women’s Business Network, Women’s Enterprise Centre, and the Canadian Association of Women Executives & Entrepreneurs. Financial institutions also offer small-business products and services aimed at women, which often can be accessed on their websites. In the meantime, if you wish to learn about some of Canada’s top female entrepreneurs, review the annual PROFIT/Chatelaine W100 rankings.

Entrepreneurial Teams An entrepreneurial team is a group of experienced people from different areas of business who join together to form a managerial team with the skills needed to develop, make, and market a new product. A team may be better than an individual entrepreneur because team members can combine creative skills with production and marketing skills right from the start. Having a team also can ensure more co-operation and coordination among functions. While Steve Jobs was the charismatic folk hero and visionary of Apple Inc., it was Steve Wozniack who invented the first personal computer model, and Mike Markkula who offered the business expertise and access to venture capital. The key to Apple’s early success was that the company was built around this “smart team” of entrepreneurs. The team wanted to combine the discipline of a big company with an environment where people could feel they were participating in a successful venture. The trio of entrepreneurs recruited seasoned managers with similar desires. All of the managers worked as a team. Everyone worked together to conceive, develop, and market products.

entrepreneurial team

A group of experienced people from different areas of business who join together to form a managerial team with the skills needed to develop, make, and market a new product.

PROGRESS ASSESSMENT

• What are key differences between entrepreneurial ventures and small businesses? • Why are people willing to become entrepreneurs? • What are the advantages of entrepreneurial teams?

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Micropreneurs and HomeBased Businesses Not every person who starts a business wants to grow it into a mammoth corporation. Some are interested in maintaining a balanced lifestyle while doing the kind of work they want to do. The smallest of small businesses are called micro-enterprises, most often defined as having one to four employees.17 While other entrepreneurs are committed to the quest for growth, micropreneurs (owners of micro-enterprises) know they can be happy even if their companies never appear © MonkeyBusiness / Image Source on a list of top-ranked businesses. Many small businesses start out as micro-enterprises. Many micropreneurs are owners of homeDo you know of any local micropreneurs? based businesses. According to Industry Canada, approximately 54 percent of all employer businesses 18 (632 460 in number) were micro-enterprises. Micropreneurs include consultants, video micro-enterprises A small business producers, architects, and bookkeepers. Many with professional skills such as graphic defined as having one design, writing, and translating have found that one way of starting a freelance business to four employees. is through websites such as Upwork and Freelancer that link clients and freelancers. The micropreneurs sites post job openings and client feedback and serve as secure intermediaries for clients’ Small-business owners payments. with fewer than five Many home-based businesses are owned by people combining career and family. employees who are willing to accept the Don’t picture just moms with young children; men also run home-based businesses. Here risk of starting and are more reasons for the growth of home-based businesses: managing the type of business that remains small, lets them do the kind of work they want to do, and offers them a balanced lifestyle.

∙ Computer Technology. Computer technology has levelled the competitive playing field, allowing home-based businesses to look and act as big as their corporate competitors. Broadband Internet connections, smartphones, and other technologies are so affordable that setting up a business takes a much smaller initial investment than it once did. ∙ Corporate Downsizing. Downsizing has led some to venture out on their own. Meanwhile, the work of the downsized employees still needs to be done and corporations are outsourcing much of the work to smaller companies. ∙ Change in Social Attitudes. Whereas home-based entrepreneurs used to be asked when they were going to get a “real” job, they are now likely to be asked instead for how-to-do-it advice. Working at home has its challenges, of course. Here are a few: ∙ Getting New Customers. Getting the word out can be difficult because you do not have a retail storefront. ∙ Managing Time. You save time by not commuting, but it takes self-discipline to use that time wisely. ∙ Keeping Work and Family Tasks Separate. It is great to be able to throw a load of laundry in the washer in the middle of the workday if you need to, but you have to keep such distractions to a minimum. It also takes self-discipline to leave your work at the office if the office is at home.

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■ FIGURE

7.1

POTENTIAL HOME-BASED BUSINESSES Many businesses can be started at home. To turn a home business into a success, you need to be prepared to work at it and have the appropriate knowledge and skills that you need to run any business. 1. Home Renovation Services

6. Wedding Planner Services

2. Pet Products and Services

7. E-commerce

3. Catering Services

8. In-Home Beauty Services

4. Cleaning Services

9. Sewing and Alteration Services

5. Fall Prevention Products - Sales and Service

10. Business/Life Coach Services

Source: Susan Ward, “The Best Home Business Opportunities,” The Balance, July 20, 2017, https://www.thebalance.com/top-home-business-opportunities-2948561.

∙ Abiding by City Ordinances. Government ordinances restrict the types of businesses that are allowed in certain parts of the community and how much traffic a home-based business can attract to the neighbourhood. ∙ Managing Risk. Home-based entrepreneurs should review their homeowner’s insurance policy since not all policies cover business-related claims. Some even void the coverage if there is a business in the home. Home-based entrepreneurs should focus on finding opportunity instead of accepting security, getting results instead of following routines, earning a profit instead of earning a paycheque, trying new ideas instead of avoiding mistakes, and creating a long-term vision instead of seeking a short-term payoff. Figure 7.1 lists ten ideas for potentially successful home-based businesses. You can find a wealth of online information about starting a home-based business in the “Start a Business” section of www. entrepreneur.com.

Online Businesses There is a multitude of small businesses selling everything online from staplers to refrigerator magnets to wedding dresses. These small businesses compete with other small businesses as well as large web-based and bricks-and-mortar businesses. According to a Forrester Research report, online spending will account for about 9.5 percent of overall retail purchases in Canada by 2019, amounting to $39 billion a year.19 Web-based businesses have to offer more than the same merchandise customers can buy at stores—they must offer unique products or services. For example, Marc Resnik started his web-based distribution company after waking up one morning laughing about his business idea. Now ThrowThings.com makes money for him as he’s shipped products to more than 44 countries. Although the company’s offerings seem like a random collection of unrelated items, everything it sells can be thrown. You can buy promotional products in the “Throw Your Name Around!” section, ventriloquist dummies in the “Throw Your 257

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Each year, Canadian couples get married. For soon-to-be newlyweds, TheKnot.com may be an invaluable resource for planning the big day. From sharing gifts registries to creating detailed schedules, the website helps ease the stress that inevitably comes with getting ready for a wedding. What does the site offer that other wedding planners do not?

Voice!” section, and sporting equipment in the “Things to Throw!” section. About twothirds of the company’s revenue comes from the promotional products section, which allows customers to add a logo to thousands of products. Why is Resnik’s business so successful? One frequent customer believes it’s because of Resnik’s exceptional service and quick turnaround time.20 A web-based business is not always a fast road to success. It can sometimes be a shortcut to failure. Hundreds of h igh-flying dotcoms crashed after promising to revolutionize the way we shop. That is the bad news. The good news is that you can learn from someone else’s failure and spare yourself some pain. And, of course, you can learn from their successes as well. Many people have started online businesses by following these steps:

1. Find a need and fill it. 2. Write copy that sells. 3. Design and build an easy-to-use website. 4. Use search engines to drive traffic to your site. 5. Establish an expert reputation for yourself. 6. Follow up with your customers and subscribers with e-mail. 7. Increase your income through back-end sales and upselling.

You can learn much more about how to implement each of these steps by going online to www.entrepreneur.com and reading the article, “How to Start a Business Online.”

Entrepreneurship Within Firms intrapreneurs

Creative people who work as entrepreneurs within corporations.

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Entrepreneurship in a large organization is often reflected in the efforts and achievements of intrapreneurs. Intrapreneurs are creative people who work as entrepreneurs within corporations. The idea is to use a company’s existing resources—human, financial, and physical—to launch new products and generate new profits. At 3M, which produces a wide array of products from adhesives like Scotch tape to non-woven materials for industrial use, managers are expected to devote 15 percent of their time to thinking up new products or services.21 You know those brightly coloured Post-it Notes that people use to write messages on just about everything? That product was developed by Art Fry, a 3M employee. He needed to mark the pages of a hymnal in a way that would not damage or fall out of the book. He came up with the idea of the self-stick, repositionable paper. The 3M labs soon produced a sample, but distributors were unimpressed and market surveys were inconclusive. Nonetheless, 3M kept sending samples to secretaries of top executives. Eventually, after a major sales and marketing

CHAPTER 7 Entrepreneurship and Starting a Small Business

program, the orders began pouring in, and Post-it Notes became a big winner. The company continues to update the product; making it from recycled paper is just one of many innovations. Post-it Notes have gone international as well—the notepads sent to Japan are long and narrow to accommodate vertical writing. Now you can even use Post-it Notes electronically—the software program Post-it Software Notes allows you to type messages onto brightly coloured notes and store them on memo boards, embed them in documents, or send them through e-mail. Other examples of intrapreneurial ventures include Apple’s Mac; Google’s Gmail, Google News, and Google AdSense; General Motors’ Saturn; 3M’s Scotch Pop-Up Tape; and Sony’s PlayStation.22

Encouraging Entrepreneurship: What Government Can Do The different levels of government provide many services to help entrepreneurs and small businesses succeed. Canada Business Network promotes © Lucidio Studio, Inc./Moment/Getty Images RF entrepreneurship and innovation, and it provides assistance through an When you come up with a winning organized network of service centres across Canada.23 This collaborative idea, stick with it. That has certainly arrangement among federal departments and agencies, provincial and terribeen the motto of the 3M company, the maker of Post-it Notes. 3M encourages torial governments, and not-for-profit entities has the goal to provide businesses with the resources they need to grow and prosper, including a wide intrapreneurship among its employees by requiring them to devote at least range of information on government services, programs, and regulations. 15 percent of their time to thinking about Innovation, Science, and Economic Development Canada (ISED) pronew products. How has this commitment vides research and business intelligence information. There (www.ic.gc.ca) to innovation paid off for 3M and its one can find small business research and statistics on Canadian SMEs. employees? Entrepreneurs and new start-ups can also find assistance from business incubators. Business incubators provide space, services, advice, and support to assist new and growing businesses to become established and business incubators successful. The business incubator’s main goal is to produce successful firms that will Centres that provide leave the program financially viable and freestanding. The other goals of incubation pro- space, services, advice, and support grams are creating jobs, retaining businesses in a community, building or accelerating to assist new and growth in a local industry, and diversifying local economies. growing businesses to The National Business Incubator Association estimates that there are about 7000 become established and successful. business incubators worldwide. Incubator sponsors—organizations or individuals who support an incubation program financially—include academic institutions, economic development organizations, government entities, and for-profit organizations. According to a recent study, 87 percent of incubator graduates remain in business.24 Business incubators vary in the way they deliver their services, in their organizational structure, and in the types of clients they serve. Incubators frequently help entrepreneurs prepare plans and proposals, assist them in making contacts to find financing, and assist participants to obtain cheaper insurance. However, most incubators themselves are not investors. The majority of activities are in the form of services and indirect support. The earliest incubation programs focused on technology companies and service firms. In more recent years, they are targeting industries such as food processing, arts and crafts, telecommunications, and software development. Another focus is micro-enterprise creation. 259

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PROGRESS ASSESSMENT

• How do micropreneurs differ from other entrepreneurs?

• What are some of the opportunities and risks of web-based businesses?

• List some services for entrepreneurs provided by the federal government.

Photo by Mariane Bulger. Used with permission

The DMZ at Ryerson University is a university-affiliated business incubator. It is Canada’s largest incubator and multidisciplinary co-working space for young entrepreneurs. The DMZ helps startups fast-track product launches, grow their companies, and reach customers in a supportive community by connecting them with customers, advisors, industry professionals, and one another. Does your school have an incubator?

LO2

Discuss the importance of small business to the Canadian economy.

Getting Started in Small Business

Let’s suppose you have a great idea for a new business, you have the attributes of an entrepreneur, and you are ready to take the leap into business for yourself. How do you start? That’s what the rest of this chapter is about. It may be easier to identify with a small neighbourhood business than with a giant global firm, yet the principles of management are similar for each. The management of charities, government agencies, churches, schools, and unions is much the same as the management of small, medium, and large businesses. So, as you learn about small-business management, you will make a giant step toward understanding management in general. All organizations demand capital, good ideas, planning, information management, budgets (and financial management in general), accounting, marketing, good employee relations, and good overall managerial know-how. We shall explore these areas as they relate to small businesses and, later in the book, apply the concepts to large firms, even to global organizations.

Small Versus Big Business25 small business

A business that is independently owned and operated, is not dominant in its field, and meets certain standards of size in terms of employees or annual revenues.

It would be helpful to define what is meant by the term small business. A small business can be defined as a business that is independently owned and operated, is not dominant in its field, and meets certain standards of size in terms of employees or annual revenues. Many institutions define small business according to their own needs. For example, ISED defines a small business as one that has fewer than 100 employees (i.e., 1 to 99 employees). According to ISED, there are over 1.1 million employer businesses in Canada. Figure 7.2 breaks down the number of businesses by sector and number of employees. Small businesses account for the vast majority (97.9 percent) of all employer businesses. As you can see, small business is really a big part of the Canadian economy. How big a part? We’ll explore that question next.

Small Business Statistics26 Small businesses are a dynamic part of the Canadian economy. Nearly all small businesses are Canadian-owned and managed. This is in contrast to large businesses, of which many are foreign-owned and managed. Small businesses thus play a major role in helping to maintain the Canadian identity and Canadian economic independence. 260

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■ FIGURE

7.2

NUMBER OF EMPLOYER BUSINESSES BY SECTOR AND FIRM SIZE (NUMBER OF EMPLOYEES), DECEMBER 2015 Approximately 98 percent of Canadian employers’ businesses are considered small businesses.

NO. OF BUSINESS LOCATIONS Percentage of Employer Businesses

Total

Goods-Producing Sector

Services-Producing Sector

97.9

1,143,630

245,540

898,090

Medium-sized businesses (100–499 employees)

1.8

21,415

5,342

16,073

Large businesses (500+employees)

0.3

2,933

569

2,364

100.0

1,167,978

251,451

916,527

Small businesses (1–99 employees)

Total

Source: Statistics Canada, “Number of Employer Businesses by Sector and Firm Size (number of employees), December 2015,” Innovation, Science and Economic Development Canada, 2, June 2016, https://www.ic.gc.ca/eic/site/061.nsf/vwapj/KSBS-PSRPE_June-Juin_2016_eng-V2.pdf/$file/KSBS-PSRPE_ June-Juin_2016_eng-V2.pdf.

Small businesses also continue to be feeders for future large businesses. As they prosper and develop new goods and services, they are often bought out by large companies, which in turn become more competitive. Alternatively, after small businesses establish a good track record, some of them convert from private to public companies, enabling them to obtain significant financing and become larger companies. According to the most recent Key Small Business Statistics, here are some quick facts about small businesses: ∙ 97.9 percent of businesses in Canada have fewer than 100 employees of which 54.1 percent are micro-enterprises. ∙ They created approximately 1.1 million jobs between 2005 and 2015. ∙ They employed 8.2 million individuals (70.5 percent of the total private labour force). ∙ They contributed an average of 30 percent to the gross domestic product of their province. ∙ SMEs exported $106 billion (25.2 percent of Canada’s total exports). ∙ 15.7 percent of small businesses were solely owned by females while over 19.7 percent were owned in equal partnerships between male and female owners.

Importance of Small Businesses Since most of Canada’s jobs are in small businesses, there is a very good chance that you will either work in a small business some day or start one. In addition to providing employment opportunities, small firms believe they offer other advantages over 261

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According to a CIBC Small Business Poll, nearly half of Canada’s young small business owners (ages 25–39) have increased their focus on international growth in the last five years.27 Are you surprised by any of the statistics above?

larger companies—more personal customer service and the ability to respond quickly to opportunities. Bigger is not always better. Picture a hole in the ground. If you fill it with big boulders, there are many empty spaces between them. However, if you fill it with sand, there is no space between the grains. That is how it is in business. Big businesses do not serve all the needs of the market. There is plenty of room for small companies to make a profit filling those niches.

Small-Business Success and Failure

Tutors often operate independently and teach a limited number of pupils at any given time. Despite their small-scale businesses, tutors can have a big impact on the educational development of their clients. Can you see why tutors are considered micropreneurs?

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You cannot be naïve about business practices, or you will go broke. There is some debate about how many new small businesses fail each year. There are many false signals about entries and exits. When small-business owners go out of business to start new and different businesses, they may be included in the “failure” category when obviously this is not the case. Similarly, when a business changes its form of ownership from partnership to corporation, it may be counted as a failure. Retirements of sole owners may also be in this category. Thousands of businesses enter and exit the marketplace throughout the year. Key Small Business Statistics discusses survival in the following way:

CHAPTER 7 Entrepreneurship and Starting a Small Business

Survival is defined as the percentage of new firms that continue to operate when they reach a given age. Geographic location, type of industry, size and age, general economic conditions, and market influences (e.g., the number and size of competitors and new entrants) impact how long a business stays active. Survival reflects their productivity, innovation and resourcefulness, as well as their adaptability to changing market conditions. When considering SMEs, survival rates decline with time. About 80 percent of businesses survive for one year and 72 percent of enterprises that entered the marketplace survived for two years.28 Figure 7.3 lists reasons for small-business failure. Managerial incompetence and inadequate financial planning are among them. Keep in mind that when a business fails, it is important that the owners learn from their mistakes. Some who have failed are more realistic than novice business people. Because of the lessons they’ve learned, they may be more successful in their future ventures. Milton Hershey, for example, tried starting candy businesses in Chicago and New York and failed both times. He could have followed in the footsteps ■ FIGURE

7.3

CAUSES OF SMALL-BUSINESS FAILURE Plunging in without first testing the waters on a small scale.

Buying too much on credit.

Underpricing or overpricing goods or services.

Extending credit too freely.

Underestimating how much time it will take to build a market.

Expanding credit too rapidly.

Starting with too little capital.

Failing to keep complete, accurate records so that the owners drift into trouble without realizing it.

Starting with too much capital and being careless in its use.

Carrying habits of personal extravagance into the business.

Going into business with little or no experience and without first learning something about the industry or market.

Not understanding business cycles.

Borrowing money without planning just how and when to pay it back.

Forgetting about taxes, insurance, and other costs of doing business.

Attempting to do too much business with too little capital.

Mistaking the freedom of being in business for oneself for the liberty to work or not, according to whim.

Not allowing for setbacks and unexpected expenses.

CAUSES OF SMALL-BUSINESS SUCCESS The customer requires a lot of personal attention, as in a beauty parlour.

A large business sells a franchise operation to local buyers. (Don’t forget franchising as an excellent way to enter the world of small business.)

The product is not easily made by mass-production techniques (e.g., custom-tailored clothes or custom autobody work).

The owner pays attention to new competitors.

Sales are not large enough to appeal to a large firm (e.g., a novelty shop).

The business is in a growth industry (e.g., computer services or web design).

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of his father, a dreamer who lacked the perseverance and work ethic to stick to an idea long enough to make it work. Instead Hershey kept trying and eventually built not only the world’s largest candy company, but also schools, churches, and housing for his employees. Arianna Huffington, cofounder of the Huffington Post, put learning from failure this way: “I failed, many times in my life ... but my mother used to tell me, ‘failure is not the opposite of success, it’s a stepping stone to success.’ So at some point, I learned not to dread failure.”29 According to Ranford Neo, author of The Instant Entrepreneur, “Most successful entrepreneurs will tell you that they have failed at some point in time. But rather than look at the failure as an assertion of their inability, they chose to look at it objectively, as a learning experience.”30 Choosing the right type of business is critical. Many of the businesses with the lowest failure rates require advanced training to start—veterinary services, dental practices, medical practices, and so on. While training and degrees may buy security, they do not tend to produce much growth—one dentist can fill only so many cavities. If you want to be both independent and rich, you need to go after growth. Often high-growth businesses, such as technology firms, are not easy to start and are even more difficult to keep going. The easiest businesses to start have the least growth and the greatest failure rates (like restaurants). The easiest to keep alive are difficult to get started (like manufacturing). And the ones that can make you rich are the ones that are both hard to start and hard to keep going (like automobile assembly). See Figure 7.3 to get an idea of the business situations that are most likely to lead to success. When you decide to start your own business, think carefully. You are unlikely to find everything you want—easy entry, security, and reward—in one business. Choose those characteristics that matter most to you; accept the absence of the others; plan, plan, plan; and then go for it!

PROGRESS ASSESSMENT

• What are some quick facts about small businesses? • Why are small businesses important to Canada? • What are causes of small-business failure? LO3

Summarize ways to learn how small businesses operate.

Learning About Small-Business Operations Hundreds of would-be entrepreneurs of all ages have asked the same question: How can I learn to run my own business? There are several ways to get into your first business venture. They are: 1. Learn from others. 2. Get some experience. 3. Buy an existing business. 4. Buy a franchise. 5. Inherit/take over a family business.

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Learn from Others Investigate your local school for classes on small business and entrepreneurship. There are entrepreneurship programs in post-secondary schools throughout Canada. Some entrepreneurs have started businesses as students—see the Analyzing Management Decisions case near the end of the chapter for an example. One of the best things about such courses is that they bring together entrepreneurs from diverse backgrounds who form helpful support networks. Talk to others who have already done it. They will tell you that location is critical and caution you not to be under-capitalized; that is, to start with enough money. “Everything takes twice as long and costs twice as much as you think it will,” shares Rene Goehrum, President and CEO of BioSyent Inc., one of Canada’s fastestgrowing independent pharmaceutical companies.31 They will warn you about the problems of finding and retaining good workers. And, most of all, they will tell you to keep good records and hire a good accountant and lawyer before you start. Free advice like this is invaluable.

Get Some Experience

Sharon Anderson Wright spent her teenage years sorting novels, nonfiction, and newspapers at her family’s used bookstore. She knew what her customers liked to read and worked closely with her mother to learn the fine details of the business. This experience served her well as she expanded Half Price Books into a national company earning $240 million in annual revenue. How do you think Wright’s experience helped the business succeed?

There is no better way to learn small-business management than by becoming an apprentice or working for a successful entrepreneur. Many small-business owners got the idea for their businesses from their prior jobs. An industry standard is to have three years’ experience in a comparable business. By running a small business part-time during your off hours or on weekends, you can experience the rewards of working for yourself while still enjoying a regular paycheque at another job. This is what John Stanton, founder of the Running Room, did when he first started his company. He kept his full-time job as a food industry executive when he opened the Running Room in a house in Edmonton, Alberta. At first, he only sold cotton T-shirts and running shoes. Four years later, he was confident that the company had growth potential.32 He quit his job and concentrated on building the Running Room chain. Today, the company is North America’s largest chain of running stores, operating over 110 stores in Canada and the United States.33 Learning a business while working for someone else may also save you money because you are less likely to make “rookie mistakes” when you start your own business. The Making Ethical Decisions box presents ethical questions about using the knowledge you have gained as an employee to start your own business.

Buy an Existing Business Small-business owners work long hours and rarely take vacations. After many years, they may feel stuck in their businesses. They may think they cannot get out because they have too much time and effort invested. Consequently, there are some small-business owners out there eager to get away, at least for a long vacation. This is where you come in. Find a successful business person who owns a small business. Tell him or her that you are eager to learn the business and would like to serve an apprenticeship—that is, a training period. State that at the end of the training period (one 265

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Making ETHICAL DECISIONS Should You Stay or Should You Go? Suppose you have worked for two years in a company and you see signs that the business is beginning to falter. You and a co-worker have ideas about how to make a company similar to your boss’ succeed. Rather than share your ideas with your boss, you and your friend are considering quitting your jobs and starting your own company together. Should you approach other co-workers about working for your new venture? Will you try to lure your boss’ customers to your own business? What are your alternatives? What are the consequences of each alternative? What is the most ethical choice? © abluecup/iStock/Thinkstock

year or so), you would like to help the owner or manager by becoming assistant manager. As assistant manager, you would free the owner to take off weekends and holidays, and to take a long vacation—a good deal for him or her. For another year or so, work very hard to learn all about the business—suppliers, inventory, bookkeeping, customers, promotion, and so on. At the end of two years, make the owner this offer: the owner can retire or work only part-time and you will take over the business. You can establish a profit-sharing plan for yourself plus a salary. Be generous with yourself; you will earn it if you manage the business. You can even ask for 40 percent or more of the profits. The owner benefits by keeping ownership in the business and making 60 percent of what he or she earned before—without having to work. You benefit by making 40 percent of the profits of a successful firm. This is an excellent deal for an owner about to retire—he or she is able to keep the firm and a healthy profit flow. It is also a clever and successful way to share in the profits of a successful small business without any personal monetary investment. If you think that this is not realistic, be aware that “three-quarters of all small business owners plan to exit their enterprises in the next decade, according to a survey by the Canadian Federation of Independent Business. The vast majority of those departures—85 percent—will result from a desire to retire.”34 If profit-sharing does not appeal to the owner, you may want to buy the business outright. How do you determine a fair price for a business? Value is based on (1) what the business owns, (2) what it earns, and (3) what makes it unique. Naturally, your accountant will need to help you determine the business’ value.35 If your efforts to take over the business through either profit-sharing or buying fail, you can quit and start your own business fully trained.

Buy a Franchise In Chapter 6, you were introduced to franchising. Many business people first get into business via franchising. Recall that franchising is a method of distributing a good or service, or both, to achieve a maximum market impact with a minimum investment. From 266

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your investment perspective, you are not creating a product or service from nothing. Rather, you are benefiting from the experience of the franchisor. Franchising is a way that you can start a business venture, especially if you are more comfortable doing so with an established product and process. When deciding which method is best for you in terms of getting into your first business venture, be sure to weigh the advantages and disadvantages of each option before proceeding. One example of a successful franchise business is Molly Maid International Inc., a leader in the cleaning industry.

® Registered trademark of Recipe Unlimited Corporation and its affiliates.The Ultimate Dining Card artwork as of July 2018.

Inherit/Take Over a Family Business37

Recipe Unlimited Corporation (formerly Cara Operations Ltd.) is Canada’s oldest and largest full-service restaurant company.36 It franchises and/or operates the restaurant brands noted above. Have you ever considered buying one of these franchises?

It is not uncommon for the dream of one to evolve into a family business as was the case for Irving Oil (introduced earlier) or Kit and Ace. Husband and wife teams (such as Timothy Snelgrove and Teresa Snelgrove, founders of Timothy’s World Coffee, and the Jahshans, highlighted in the chapter profile) are also quite common when you review the Canadian landscape of family businesses. There are a number of factors that make family businesses unique. One is ownership. Public companies are typically owned by a large number of shareholders whose primary interest in ownership is generating the best return on investment. However, family businesses are often owned by a much smaller group whose ownership often has elements of personal identity, family legacy, and community responsibility entwined with its economic interests. This “emotional ownership” often results in family businesses having a longer-term view. Another factor that tends to separate successful family firms from their public counterparts is the concept of stewardship. Many family businesses have a clear understanding that the business is something to be preserved and grown for future generations. As Bill Ford, the chairman of Ford Motor Company once said, “I’m working for my children and grandchildren and feel I’m working for our employees’ children and grandchildren as well.” As with any form of business, there are some challenges associated with a family business. According to the Family Business Institute, only about 30 percent of family businesses survive into the second generation, and 12 percent are still viable into the third generation. For example, Israel (Izzy) Asper, founder of CanWest Global Communications Corp., once dreamed of creating a worldwide media empire. When he died in 2003, his son, Leonard, was left in charge as CanWest’s CEO. Leonard stepped down as CEO in 2010 when the company was restructured due to bankruptcy. There are two common reasons why a family does not retain its business. The first reason is straightforward—there is no qualified successor. The second major reason for unsuccessful business transitions is more unfortunate. In many cases, businesses fail or are sold off due to a lack of planning. The Adapting to Change box in Chapter 6 highlights management problems as another factor. Regardless of such challenges, inheriting or taking over a family business is another way that one can learn about small business.

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PROGRESS ASSESSMENT

• What are ways that one can get into a business venture? • What are benefits of acquiring an existing business? • What are challenges associated with family businesses? LO4

Analyze what it takes to start and run a small business.

Managing a Small Business One of the major causes of small-business failure is poor management. Keep in mind, though, that the term poor management covers a number of faults. It could mean poor planning, record keeping, inventory control, promotion, or employee relations. Most likely it includes poor capitalization. To help you succeed as a business owner, in the following sections we explore the five functions of business in a small-business setting, which are as follows: 1. Planning your business 2. Financing your business (finance) 3. Knowing your customers (marketing) 4. Managing your employees (human resources) 5. Keeping records (accounting)

Although all of the functions are important in both the start-up and management phases of the business, the first two functions—planning and financing—are the primary concerns when you start your business. The others are the heart of your operations once the business is underway.

Planning

Summer Company gives students the opportunity to receive hands-on training and mentoring as well as grants of up to $3,000 to start and operate a summer business. If you do not live in Ontario, is there a similar program in your area?

268

Many people eager to start a small business come up with an idea and begin discussing the idea with professors, friends, and other business people. At this stage, the entrepreneur needs a business plan. A business plan is a detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to competition, and the resources and qualifications of the owner(s). A business plan forces potential owners of small businesses to be quite specific about the goods or services they intend to offer. They must analyze the competition, calculate how much money they need to start, and cover other details of operation. A business plan is also mandatory for talking with bankers or other

CHAPTER 7 Entrepreneurship and Starting a Small Business

investors. Put another way, a business plan is a tool that is used to transition the entrepreneur from having an idea to actually developing a strategic and operational framework for the business. Lenders want to know everything about an aspiring business. First, pick a financial institution, such as a bank, that serves businesses the size of yours. Have a good accountant prepare a complete set of financial statements and a personal balance sheet. Make an appointment before going to the bank, and go to the bank with an accountant and all of the necessary financial information. Demonstrate to the banker that you are a person of good character, civic minded, and respected in business and community circles. Finally, ask for all the money you need, be specific, and be prepared to personally guarantee the loan.

business plan

A detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to competition, and the resources and qualifications of the owner(s).

WRITING A BUSINESS PLAN A good business plan takes a long time to write, but you have got only minutes in the Executive Summary to convince readers not to throw it away. Since bankers receive many business plans every day, the summary has to catch their interest quickly. There’s no such thing as a perfect business plan; even the most comprehensive business plan changes as the new business evolves. Figure 7.4 gives you an outline of a comprehensive business plan. Many software programs can help you get organized. One highly rated business-plan program is Business Plan Pro. You can also review sample business plans and templates on the Canada Business Network. Getting the completed business plan into the right hands is almost as important as getting the right information into the plan. Finding funding requires research. Next, we discuss sources of money available for new business ventures. All require a comprehensive business plan. The time and effort you invest before starting a business will pay off many times over. The big payoff is survival.

Financing Your Business When starting a business, an entrepreneur can consider different types of financing, as listed in Figure 7.5. Personal financing (84 percent) and credit from financial institutions (45 percent) represent the most frequently used sources for SMEs.38 You may even want to consider borrowing from a potential supplier to your future business. Helping you get started may be in the supplier’s interest if there is a chance you will be a big customer later. This is what Ray Kroc did in the early years of McDonald’s. When Kroc didn’t have the funds available to keep the company going, he asked his suppliers to help him with the necessary funds. These suppliers grew along with McDonald’s. It’s usually not a good idea to ask such an investor for money at the outset. Begin by asking for advice; if the supplier likes your plan, he or she may be willing to help you with funding too.

Inder Bedi wrote a business plan for Matt & Nat as his final assignment in an entrepreneurship class during his final semester at Concordia University.39 See if such a course is available in your program.

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■ FIGURE

7.4

SAMPLE OUTLINE OF A BUSINESS PLAN Length of a Comprehensive Business Plan A good business plan is between 25 and 50 pages long and takes at least six months to write. Cover Letter Only one thing is certain when you go hunting for money to start a business: You will not be the only hunter out there. You need to make potential funders want to read your business plan instead of the hundreds of others on their desks. Your cover letter should summarize the most attractive points of your project in as few words as possible. Be sure to address the letter to the potential investor by name. “To Whom It May Concern” or “Dear Sir” is not the best way to win an investor’s support. Section 1—Executive Summary Begin with a two-page or three-page management summary of the proposed venture. Include a short description of the business, and discuss major goals and objectives. Section 2—Company Background Describe company operations to date (if any), potential legal considerations, and areas of risk and opportunity. Summarize the firm’s financial condition, and include past and current balance sheets, income and cash-flow statements, and other relevant financial records. (You will learn about these financial statements in Chapter 16.) It is also wise to include a description of insurance coverage. Investors want to be assured that death or other mishaps do not pose major threats to the company. Section 3—Management Team Include an organization chart, job descriptions of listed positions, and detailed resumés of the current and proposed executives. A mediocre idea with a proven management team is funded more often than a great idea with an inexperienced team. Managers should have expertise in all disciplines necessary to start and run a business. If not, mention outside consultants who will serve in these roles and describe their qualifications. Section 4—Financial Plan Provide five-year projections for income, expenses, and funding sources. Do not assume the business will grow in a straight line. Adjust your planning to allow for funding at various stages of the company’s growth. Explain the rationale and assumptions used to determine the estimates. Assumptions should be reasonable and based on industry/historical trends. Make sure all totals add up and are consistent throughout the plan. If necessary, hire a professional accountant or financial analyst to prepare these statements. Stay clear of excessively ambitious sales projections; rather, offer best-case, expected, and worst-case scenarios. These not only reveal how sensitive the bottom line is to sales fluctuations but also serve as good management guides. Section 5—Capital Required Indicate the amount of capital needed to commence or continue operations, and describe how these funds are to be used. Make sure the totals are the same as the ones on the cash-flow statement. This area will receive a great deal of review from potential investors, so it must be clear and concise. Section 6—Marketing Plan Do not underestimate the competition. Review industry size, trends, and the target market segment. Discuss strengths and weaknesses of the good or service. The most important things investors want to know are what makes the product more desirable than what is already available and whether the product can be patented. Compare pricing to the competition’s. Forecast sales in dollars and units. Outline sales, advertising, promotion, and public relations programs. Make sure the costs agree with those projected in the financial statements. Section 7—Location Analysis In retailing and certain other industries, the location of the business is one of the most important factors. Provide a comprehensive demographic analysis of consumers in the area of the proposed business as well as a traffic-pattern analysis and vehicular and pedestrian counts. Section 8—Manufacturing Plan Describe minimum plant size, machinery required, production capacity, inventory and inventory-control methods, quality control, plant personnel requirements, and so on. Estimates of product costs should be based on primary research. Section 9—Appendix Include all marketing research on the good or service (off-the-shelf reports, article reprints, etc.) and other information about the product concept or market size. Provide a bibliography of all the reference materials you consulted. This section should demonstrate that the proposed company will not be entering a declining industry or market segment.

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■ FIGURE

7.5

SOURCES OF FINANCING FOR SMES (2014) Fifty-one percent of Canadian SMEs requested external financing in 2014. Since they often lack both a credit history and the collateral needed to secure a loan, it is not surprising that personal financing represents the largest source (84 percent) of funding.

Personal Financing

Financial Institutions

Trade Credit

Friends or Relatives

Retained Earnings

Capital Leasing Government Loans, Grants, and Subsidies

Other Angel Investors and Venture Capital

2 0

% 10

Note: Multiple responses were possible, so estimates will not add up to 100 percent. Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2014.

angel investors

ANGEL INVESTORS AND VENTURE CAPITALISTS Individual investors are also a frequent source of capital for most entrepreneurs. Angel investors are individuals, often successful business people, who invest their own money into a potentially rewarding private company.40 Angel investors may be willing to invest in early-stage, start-up businesses, and established businesses, as well as have experience and contacts to contribute.41 A number of websites match people who want money with those willing to lend it. They include Angel One Investor Network, Canadian Investment Network, and Angel Investment Network. Venture capitalists may finance your project—for a price. Venture capitalists use other firms’ money (e.g., money raised through investment banks, insurance companies,

Private individuals, often successful business people, who invest their own money into a potentially rewarding private company.

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pension funds, and other financial institutions) and other people’s money that they then invest in private companies.42 For example, Disruption Ventures is a woman-led venture fund seeking to invest solely in tech businesses founded or run by women — still a rarity in Canada.43 Venture capitalists are seldom interested in early-stage companies, unless there are compelling reasons (e.g., a high tech business with already successful founders). Venture capitalists may ask for a hefty stake (as much as 60 percent) in your company in exchange for the cash to start your business or to expand it. If the venture capitalist takes too large a stake, you could lose control of the business. Since the widespread failure of early web startups, venture capitalists have been willing to invest less and expect more return on their investment if the new company is sold.44 Therefore, if you’re a very small company, you likely won’t have a good chance of getting venture capital. You may have more success with an angel investor. If your proposed venture does require millions of dollars to start, experts recommend that you talk with at least five investment firms and their clients in order to find the right venture capitalist. You may be able to connect with potential investors through various organizations such as the Canadian Venture Capital & Private Equity Association and Kensington Capital Partners.

crowdfunding

Raising funds through the collection of small contributions from the general public (known as the crowd) using the Internet and social media.

CROWDFUNDING45 Crowdfunding is the raising of funds through the collection of small contributions from the general public (known as the “crowd”) using the Internet and social media. Examples of crowdfunding platforms where individuals can ask for or donate money include Kickstarter and Indiegogo. Read the Seeking Sustainability box for more on Kickstarter. Crowdfunding has its origins in the concept of crowdsourcing. Crowdsourcing is the practice of obtaining needed services, ideas, or content by soliciting contributions from a large group of people and especially from the online community rather than from traditional employees or suppliers. The key to crowdfunding is its link to online social networking and its ability to harness the power of online communities in order to extend a project’s promotion and financing opportunities. Crowdfunding is becoming an increasingly common form of raising funds in the technology and media industries (including music, film, and video games) as these sites tend to work out best for people whose ideas play to an Internet audience. These artists and video game designers may reward contributors with T-shirts or products. Traditionally, crowdfunding is used to raise money to fund the development of a well-defined, singular project. It offers business people a chance at success by showcasing their businesses and projects to the entire world. It also has a unique dual function of providing both private financing and generating publicity and attention for a project.

ONLINE FINANCING SOURCES There are many information sources for financing. Examples of government grants and programs include the Scientific Research and Experimental Development program and the National Research Council’s Industrial Research Assistance Program. From the comfort of your desk, you can visit government sites, such as the Business Development Bank of Canada or Canada Business Network Industry, to find financing sources. You can discover funding programs for your small business through the Centre for Small Business Financing’s Grant Finder program. Another site for federal, provincial, 272

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Seeking SUSTAINABILITY Kickstarting a Benefit Corporation The crowdsourcing site, Kickstarter, has helped nearly 10 million people raise more than $2.2 billion to meet all sorts of funding needs. In India, for example, the crowdfunding platform helped a group of artists raise $16,000 to create colourful interior designs for taxis.

But while it is great to help Kickstarter’s users get the funding they seek, the company has a broader goal than just making money. It wants to make a positive difference to society. The company believes so strongly in doing good that it reincorporated as a benefit corporation in 2015. Benefit corporations, introduced in Chapter 6, are mission-based companies that are judged by how well they meet their own set of socially or environmentally beneficial goals Kickstarter does not take advantage of tax loopholes and donates 5 percent of its post-tax profit to arts-education programs and organizations fighting inequality. Today there are more than 3000 benefit corporations, including Patagonia and Etsy. It just goes to show that profits aren’t the only way to measure success in the business world.

© Taxi Fabric/Barcroft India/Getty Images Sources:Jorge Newbery, “Can Millennials, Crowdfunding, and Impact Investing Change the World?” Huffington Post, March 10, 2017;“Dawn of the Do-Gooders,” Fast Company, January 2016; and Nikita Richardson, “Kickstarting a Pro-Social Trend,” Fast Company, April 2016.

municipal, and private funding is Fundica at fundica.com. Financing information can also be found at profitguide.com on the “Finances” page. While this list is not exhaustive, it serves to highlight that there are many sources. Obtaining money from financial institutions, investors, and government sources can be a challenge for most small businesses. (You will learn more about financing in Chapter 17.) Those who do survive the planning and financing of their new ventures are eager to get their businesses up and running. Your success in running a business depends on many factors, especially knowing your customers, managing your employees, and keeping good records. These topics will be discussed next.

Knowing Your Customers One of the most important elements of small-business success is knowing the market. In business, a market consists of people with unsatisfied wants and needs who have both the resources and the willingness to buy. Many of our students have the willingness to own a brand-new Maserati sports car. However, few have the resources necessary to satisfy this want. Would you be a good market for a luxury car dealer? Once you have identified your market and its needs, you must set out to fill those needs. The way to meet your customers’ needs is to offer top quality at a fair price with great service. Remember, it is not enough to get customers—you have to keep them. As sales coach Phil Glosserman says, “People buy in order to experience the feelings they

market

People with unsatisfied wants and needs who have both the resources and the willingness to buy.

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Adapting to CHANGE Building Relationships by Building Subscribers It seems every time we use websites to search for information or products, we’re asked to subscribe to the site’s e-mail list or to provide small bits of information about who we are. Why is that? Marketers are finding that more contact with you and information gathered about you leads to a greater chance of satisfaction on your part, and a far greater chance of sales.

The more we engage in discussions of beauty products on Birchbox’s Facebook page, the more likely we are to venture over to its site and subscribe to its box service. When interest is shown in the box service, questions are asked about beauty regimens, skin types, colour preferences, and the like. From there, the company designs a box of samples catered to your likes and what will work for you. Getting users to make the jump into subscription is the hardest part. Marketers need to know the difference between someone “liking” an article, song, video, or product and actually commenting and interacting with other users as well as the content providers. Research has shown people who have a higher level of interaction feel more strongly committed to the company than those who “lurk” or passively consume the information. Discussion needs to be designed to get more users into the conversation and thereby learn what it is users want to see. This type of engagement is found not just from things we buy. When logging in to Spotify or YouTube accounts, users are given songs and videos that closely resemble what they’re already interested in. News websites do this as well. What other industries do you think will embrace this type of customer interaction next?

Sources:Marguerite Ward, “Birchbox CEO: Sending Great Cold Emails Was How I First Found Success,” CNBC, February 10, 2017; Gerry Smith, “New York Times Offers Free Spotify Service to Boost Subscribers,” Bloomberg, February 8, 2017; and Lior Zalmanson and Gal Oestreicher-Singer, “Turning Content Viewers into Subscribers,” MIT Sloan Management Review, Spring 2016.

get from having their needs met.” Sure, your product may meet those needs now. However, if customers tell you they’ve discovered something they don’t like in your product, call them back when you fix it and tell them, “Thanks for the good idea.”46 Take a look at the Adapting to Change box to see how companies are using interactions with their customer base to improve and tailor offerings to individuals. One of the greatest advantages that small businesses have over larger ones is the ability to know their customers better and to adapt quickly to their ever-changing needs. The only way to know what your customers’ needs are is to listen, listen, listen. Don’t let your passion and ego get in the way of changing your products or services to fit what customers really want. The Reaching Beyond Our Borders box discusses how you can let customers and others from around the world help you design your products. You will gain more insights about marketing in Chapters 14 and 15. Now let’s consider the importance of effectively managing the employees who help you serve your market.

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Reaching Beyond OUR BORDERS Listening to What Your Customers Need What’s better than knowing what your customers need and then designing products to meet those needs? Getting your customers to design the products themselves. That’s what Quirky has done. You may be familiar with Quirky’s most successful product, Pivot Power, the pivoting power strip that allows you to bend the strip in order to fit large adapters in every outlet. Pivot Power’s creator, Jake Zien, will be the first Quirky inventor to earn $1 million in royalties a year.

When Zien was a college student, he joined the Quirky community and submitted his idea as a simple, basic drawing. A week later, it was selected for development. A year after that, it was on sale at Bed Bath & Beyond. Zien just submitted an idea; everything else was done by the Quirky community (i.e., all inventors, influencers, staff, and customers from around the world). Those who contribute their ideas regarding design, style, enhancing, packaging, naming, taglines, or pricing are called influencers. The influencers don’t just get a pat on the back for helping out; if their ideas are used, they are paid a portion of the royalty as well. Once a product is ready for production, Quirky decides which of its 21 suppliers and factories (mostly in Asia) will make the product. Quirky founder and CEO, Ben Kaufman, knew Quirky would work two years ago when he saw a tweet of a Target advertisem*nt for Quirky products. The tweeter wrote, “I made that.” Actually, the person hadn’t made that. But he was part of the community that helped create it, an experience that gave him a sense of ownership. You can’t build a customer relationship stronger than that!

Sources: Stephanie Mlot, “Quirky’s Ben Kaufman Gets GE to Share Its Patents,” Bloomberg Businessweek, March 20, 2014; “Quirky, GE Unveil Aros Smart Air Conditioner,” PC Magazine, March 19, 2014; and Josh Dean, “Is This the World’s Most Creative Manufacturer?” Inc., October 2013.

Managing Your Employees As a business grows, it becomes impossible for an entrepreneur to oversee every detail, even if he or she is working 60 hours per week. This means that hiring, training, and motivating employees is critical. It is not easy to find good, qualified help when you offer less money, fewer benefits, and less room for advancement than larger firms do. That is one reason why employee relations is important for small-business management. Employees of small companies are often more satisfied with their jobs than are their counterparts in big businesses. Why? Quite often they find their jobs more challenging, their ideas more accepted, and their bosses more respectful.47 Often entrepreneurs reluctantly face the reality that to keep growing, they must delegate authority to others. To whom should you delegate authority, and how much? “The art of management is delegation,” says Andrew Faridani, President and CEO of BreezeMaxWeb Ltd., Canada’s leading provider of online solutions. “You’ve got to be able to

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relinquish some of the hold or grip that you have on particular departments. And that was the biggest learning curve for me. By nature, I’m fanatic about being in control of the business. You have to realize that when you delegate to people in particular departments, life becomes much easier and everything runs more smoothly. I firmly believe it is the number one thing that makes businesses effective and successful.”48 This can be a particularly touchy issue in small businesses with long-term employees and in family businesses. As you might expect, entrepreneurs who have built their companies by themselves often feel compelled to promote employees who have been with them from the start—even when they aren’t qualified to serve as managers. Common sense probably tells you this could be detrimental to the business. The same can be true of family-run businesses that are expanding. Attitudes such as “You can’t fire family” or “You must promote certain workers because they’re family” can hinder growth. Entrepreneurs can best serve themselves and the business if they gradually recruit and groom employees for management positions. By doing this, entrepreneurs can enhance trust and the support of the manager among other employees and themselves. You will learn more about managing employees in Chapters 11, 12, and 13.

Keeping Records Small-business owners often say that the most important assistance they received in starting and managing the business involved accounting. A business person who sets up an effective accounting system early will save much grief later. Accurate record keeping enables an owner to follow daily sales, expenses, and profits, as well as help owners with inventory control, customer records, and payroll. Many business failures are caused by poor accounting practices that lead to costly mistakes. A good accountant can help you decide whether to buy or lease equipment and whether to own or rent a building. Help may also be provided for tax planning, financial forecasting, choosing sources of financing, and writing requests for funds. Other small-business owners may tell you where to find an accountant experienced in small business. It pays to shop around for advice. You will learn more about accounting in Chapter 16.

A necessary and invaluable aide is a competent, experienced lawyer who knows and understands small businesses. Lawyers can help with a variety of matters, including leases, contracts (e.g., partnership agreements), and protection against liabilities. They do not have to be expensive. In fact, several prepaid legal plans offer services such as drafting legal documents for a low annual rate.

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Looking for Help Small-business owners have learned, sometimes the hard way, that they need outside consulting advice early in the process. This is especially true of legal, tax, and accounting advice but may also be true of marketing, finance, and other areas. Most small and medium-sized firms cannot afford to hire such experts as employees, so they must turn to outside assistance. Make your marketing decisions long before a product is produced or a store is opened. An inexpensive marketing

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research study may help you determine where to locate, whom to select as your target market, and what would be an effective strategy for reaching those people. Thus, a marketing consultant with small-business experience can be of great help to you, especially one who has had experience with building websites and using social media. Two other invaluable experts are a commercial account officer and an insurance agent. The commercial account officer can help you design an acceptable business plan and give you valuable financial advice as well as lend you money when you need it. An insurance agent will explain the risks associated with a small business and how to cover them most efficiently with insurance and other means like safety devices and sprinkler systems. Often business professors from local colleges and universities will advise smallbusiness owners free or for a small fee. Some universities have clubs or programs that provide consulting services by master of business administration (MBA) candidates for a nominal fee. Does your school provide such services? It also is wise to seek the counsel of other small-business owners. Review smallbusiness articles on marketing, business planning, incorporation, and financial management. Peer groups within specific industries can give you better insights into the challenges and solutions encountered by other business owners in your field. Other sources of advice include local chambers of commerce, the Better Business Bureau, national and local trade associations (such as the Canadian Federation of Independent Business), the business reference section of your library, and small-business-related sites on the Internet. Some have been noted in this chapter.

Going Global: Small-Business Prospects As we noted in Chapter 3, the world market is a much larger, much more lucrative market for small businesses than focusing on Canada alone. Despite that potential, most small businesses still do not think internationally, and only a small percentage of small businesses export. Technological advances have helped increase small-business exporting. For example, PayPal makes it possible for small businesses to get paid automatically when they conduct global business online. The Internet also helps small businesses find customers without the expense of international travel. As people acquire more wealth, they often demand specialized products that are not mass-produced and are willing to pay more for niche goods that small businesses offer. Still, many small businesses have difficulty getting started in global business. Why are some companies missing out on the huge global markets? Primarily because getting there involves a few major hurdles: (1) financing is often difficult to find, (2) would-be

LO5

Outline the advantages and disadvantages that small businesses have in entering global markets.

Courtesy of Milt Reimer, FXR Racing. Used with permission.

Milt Reimer, founder of FXR Racing, a $50 million-a-year snowmobile and motocross clothing empire, has 600 dealers across 13 countries.49 Have you thought of a product that can address an unmet need and would be successful not only in Canada, but globally?

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exporters do not know how to get started and do not understand the cultural differences between markets, and (3) the bureaucratic paperwork can threaten to bury a small business. Besides the fact that most of the world’s market lies outside of Canada, there are other good reasons for going global. Exporting can absorb excess inventory, soften downturns in the domestic market, and extend product lives. It can also spice up dull routines. Small businesses have several advantages over large businesses in international trade, which include the following: ∙ Overseas buyers enjoy dealing with individuals rather than with large corporate bureaucracies. ∙ Small companies can usually begin shipping much faster. ∙ Small companies can support a wide variety of suppliers. ∙ Small companies can give customers more personal service and more undivided attention because each overseas account is a major source of business to them. The growth potential of small businesses overseas is phenomenal. This is why there are many organizations that offer assistance. Some of these have been cited in this chapter as well as in Chapter 4. Web-based business applications are helping small businesses cross boundaries like never before and, in some instances, levelling some of the advantages that large businesses traditionally have had.

PROGRESS ASSESSMENT

• What are the five functions of business in a small-business setting? • There are nine sections in the business plan outline in this chapter. Can you describe at least four of those sections?

• What are some of the advantages and challenges that small businesses have over large businesses in selling in global markets?

SUMMARY LO1

Explain why people are willing to become entrepreneurs, and describe the attributes of successful entrepreneurs. Entrepreneurship is accepting the challenge of starting and running a business. What are a few of the reasons people start their own businesses? Reasons include profit, independence, opportunity, and challenge. What are the attributes of successful entrepreneurs? Successful entrepreneurs are self-directed, determined, action-oriented, highly energetic, tolerant of uncertainty, and able to learn quickly.

LO2

278

Discuss the importance of small business to the Canadian economy. A small business is often defined as a business that is independently owned and operated, is not dominant in its field, and meets certain standards of size in terms of employees or annual revenues.

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Why are small businesses important to the Canadian economy? In Canada, 97.9 percent of businesses have fewer than 100 employees, of which 54.1 percent are microenterprises. SMEs exported goods totalling $106 billion. Perhaps more important to tomorrow’s graduates, small businesses employ a large portion (70.5 percent) of the total private labour force. Why do so many small businesses fail? Many small businesses fail because of managerial incompetence and inadequate financial planning. See Figure 7.3 for a list of causes of small-business failure. Some of these causes include attempting to do too much business with too little capital, underestimating how much time it will take to build a market, and not allowing for setbacks and unexpected expenses. What factors increase the chances for success? Figure 7.3 outlines some situations for small-business success. This includes whether the product is not easily made by mass-production techniques, whether sales are not large enough to appeal to a large firm, and whether the owner pays attention to new competitors. LO3

Summarize ways to learn how small businesses operate. Most people have no idea how to go about starting a small business. What hints would you give someone who wants to learn about starting a small business? An entrepreneur can improve the odds by learning from others. First, take courses and talk with some small-business owners. Second, get some experience working for others. Finally, study the latest in small-business management techniques, including the use of programs for things such as payroll, inventory control, and mailing lists.

LO4

Analyze what it takes to start and run a small business. Writing a business plan is the first step in organizing a business. What goes into a business plan? See Figure 7.4 to see what goes into a business plan. A business plan includes a section on company background, the financial plan, and the location analysis. What sources of funds should someone wanting to start a new business consider investigating? A new entrepreneur has several sources of capital: personal savings, relatives, banks, finance companies, venture-capital organizations, government agencies, angel investors, and more. What are some of the special problems that small-business owners have in dealing with employees? Small-business owners often have difficulty finding competent employees. Grooming employees for management responsibilities can be challenging. Where can potential entrepreneurs find help in starting their businesses? Help can be found from many sources: accountants, lawyers, marketing researchers, loan officers, insurance agents, the Business Development Bank of Canada, and your instructors. What online sources are available to assist entrepreneurs? Entrepreneurs can start by visiting government sources, such as the Innovation, Science and Economic Development Canada website. Financial services providers also have sites dedicated to small businesses.

LO5

Outline the advantages and disadvantages that small businesses have in entering global markets. The future growth of some small businesses is in foreign markets. 279

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What are some advantages small businesses have over large businesses in global markets? Some reasons why foreign buyers enjoy dealing with small businesses rather than large corporations include (1) small businesses can support a wide variety of suppliers, (2) they can ship products more quickly, and (3) small businesses give more personal service. Why don’t more small businesses start trading internationally? Reasons why small businesses don’t trade internationally include: (1) financing is often difficult to find, (2) would-be exporters do not know how to get started and do not understand the cultural differences between markets, and (3) the bureaucratic paperwork can threaten to bury small businesses.

KEY TERMS angel investors 271 business incubators 259 business plan 268 crowdfunding 272 entrepreneurial team 255

entrepreneurship 247 intrapreneurs 258 market 273 micro-enterprise 256 micropreneurs 256

small and medium-sized enterprises (SMEs) 254 small business 260 venture capitalists 271

CAREER EXPLORATION You can start a small business in any industry you like. We’ve talked about a few throughout the chapter, but here are a few more with low start-up costs to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Craft and fine artist—uses a variety of materials and techniques to create art for sale. Craft artists create handmade objects, such as pottery, glassware, textiles, and other objects. Fine artists

create original works of art such as paintings and sculptures. ∙ Web developer—designs and creates websites, which means they are responsible for the look of the site and for its technical aspects, and may create content for the site. ∙ General repair service—paints, makes household repairs, works on plumbing and electrical systems, and so on. ∙ Small engine mechanic—inspects, services, and repairs motorized power equipment such as outdoor power equipment (lawnmowers, leaf blowers, etc.).

CRITICAL THINKING 1. Small businesses continue to be feeders for

future large businesses. As they prosper and develop new goods and services, they are often bought out by large companies. Is this good or bad? Should we do anything about it? If so, what? 2. Are there any similarities between the char-

acteristics demanded of an entrepreneur and those of a professional athlete? Would an 280

athlete be a good prospect for entrepreneurship? Why or why not? Could teamwork be important in an entrepreneurial effort? 3. Imagine yourself starting a small business.

What kind of business would it be? How much competition is there? What could you do to make your business more attractive than those of your competitors? Would you be willing to work 60 to 70 hours a week?

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DEVELOPING CAREER SKILLS Key: Team

Analytic

1. Find issues of Canadian Business, Canadian

Business Franchise, and PROFIT magazines in the library, your local bookstore, or on the Internet. Read about the entrepreneurs who are heading today’s dynamic new businesses. Write a profile about one entrepreneur.

Technology

businesses. (Hint: Each organization has a website: www.edc.ca and www.bdc.ca.)

4. Contact a local financial institution (e.g.,

bank) and make an appointment to speak with a commercial accounts officer. Ask this person what a small business owner should consider if she or he is looking for financing. (This may include a discussion on the requirements of a business plan and what that institution wishes to see in this document.) Review other sources of financing that might be available. What other resources are available to assist small-business owners. Bring this information to class and share it with your peers.

2. Select a small business that looks attractive

as a career possibility for you. Talk to at least one person who manages such a business. Ask how he or she started the business. Ask about financing, personnel challenges (e.g., hiring, firing, training, and scheduling), accounting issues, and other managerial matters. Prepare a summary of your findings, including whether the manager found the job to be rewarding, interesting, and challenging—and why.

Communication

5. There has been some discussion in this

chapter about entrepreneurship and traits of entrepreneurs. In a group, highlight the differences between a small business owner and an entrepreneur.

3. Contact a government agency such as Export

Development Canada or Business Development Bank of Canada. Write a brief summary of the services that they offer small

ANALYZING MANAGEMENT DECISIONS Starting a Small Business While in School Brett Sheffield, full-time student at the University of Manitoba and owner of Sheffield Farms and Stay Fit Health Club, was named the 2012 Student Entrepreneur National Champion by the national charitable organization, Advancing Canadian Entrepreneurship (ACE). Sheffield was triumphant after provincial, regional, and national rounds of competition because of his extraordinary achievements operating one flourishing business and launching a second while attending school full-time. Sheffield Farms is a grain farm located in rural Manitoba that was founded in 2008, and Stay Fit Health Club is a 24-hour fitness centre in its first year of operation. “Sheffield’s determination and proven business achievements, such as expanding his farm from

160 to 1,700 acres and pioneering a second business while maintaining his honour roll status at school, are ideal qualities of a Student Entrepreneur champion,” said Amy Harder, President, ACE. “ACE is confident that Brett will make Canada proud at the Global Student Entrepreneur Awards in New York City.” Sheffield competed at the national level against five other regional finalists, to a panel of 50 industry leaders and CEOs. In addition to the national title, he received a $10,000 cash prize. “Competitions like the ACE National Exposition allow students from all corners of Canada to showcase our entrepreneurial talent,” said Sheffield. “I’m honoured at being named the Student Entrepreneur National Champion and I look forward to continuing to take my business to new heights.” 281

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Sources: Sean Stanleigh, “Manitoba student wins national competition,” The Globe and Mail, May 10, 2012, www.theglobeandmail.com/report-on-business/ smallbusiness/sb-tools/small-business-briefing/manitoba-student-wins-national-competition/article2428615/#in; “University of Manitoba Student Wins 2012 Student Entrepreneur National Champion Title,” Advancing Canadian Entrepreneurship Inc., May 9, 2012, www.acecanada.ca/news/newsItem.cfm?cms_news_ id5591; and Martin Cash, “U of M student farmer aces biz award,” Winnipeg Free Press, May 1, 2012, www.winnipegfreepress.com/business/u-of-m-studentfarmer-aces-biz-award-149618705.html.

Discussion Questions 1. What are the advantages and potential prob-

lems of starting a business while in school? 2. What kinds of small businesses operate

around your school? Talk to the owners and learn from their experiences. 3. What opportunities exist for satisfying stu-

dent needs at your school? Pick one idea,

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write a business plan, and discuss it in class (unless it is so good you do not want to share it; in that case, good luck). 4. Search and find what other Canadian compe-

titions exist for student entrepreneurs. Would you enter any of them?

CHAPTER 7 Entrepreneurship and Starting a Small Business

RUNNING CASE Fox 40 International Inc.: A Family Business For successful Canadian entrepreneur and inventor Ron Foxcroft, it all started in 1982 when he purchased Fluke Transport, a Southern Ontario trucking business. The company slogan—If It’s On Time... It’s A “FLUKE”—was soon recognized throughout North America. Over the years, Ron diversified into new ventures and the Foxcroft Group of Companies now includes Fluke Transportation Group, Fluke Warehousing Inc., Foxcroft Capital Group, and Fox 40 International Inc. (Fox 40). All of these companies are private corporations. Although the word corporation makes people think of big businesses, it is not necessary to be big to incorporate. As introduced in this text, one of the biggest advantages of incorporation is limited liability. Owners of private corporations can also make decisions more quickly than is typically the case for large, public corporations. The formation of Fox 40 is the result of a dream for a pealess whistle. When developing his first whistle, Ron was motivated by his knowledge and experience as an international basketball referee. “I always had a problem with whistles,” he explains. “They have a cork pea in them and when you blow a pea-whistle really hard, nothing comes out. When they’re frozen or wet or get some dirt inside, they lose their efficiency.” As a result, Ron, like many other referees, sometimes found himself unable to stop play even though he saw a clear violation take place. In a fast-moving game like basketball, a whistle that fails does not get a second chance to sound. In a really big game, even when the whistle did work, the play occasionally was not stopped because the whistle’s sound was drowned out by the noise of the roaring crowds. Frustrated with faulty pea whistles, he spent three years of development with design consultant Chuck Shepherd, resulting in the creation of the Fox 40® Classic Whistle. Although Ron was convinced a better whistle would sweep the basketball market, he was unable to obtain bank financing for the venture. Very few thought that a pealess whistle would turn out and some

believed that it would only be used by a few hundred referee friends. Despite the critics, Ron managed to put together $150,000 from his own private funds and in 1987 he created Fox 40. Ron risked everything as he pursued this dream: his family’s financial future (only his wife, Marie, knew how much he was risking), Fluke Transport’s reputation, and Fluke Transport’s money. While Ron had complete confidence in manufacturing a pealess whistle that would work, he did not know that it would be the commercial success that it is today. Twentyfive years later, Fox 40 remains a proudly Canadian company. It dominates the global whistle industry and tens of thousands of Fox 40® Whistles are produced monthly for shipment to 140 countries. What about succession planning? Today, Ron plays an active role as Founder and Chief Executive Officer (CEO) of Fox 40, and Chairman and CEO of Fluke Transportation Group. While he has passed the day-to-day running of Fox 40 to his son, Dave, Ron continues to focus on the company’s strategic direction. This includes listening to customers and employees (Ron insists that the best ideas still come from them), and concentrating on increasing brand recognition for the Fox 40® brand. While it is up to Ron and Dave to approve a new idea, it is up to Dave and his team to implement it. “Once you have decided on a course of action,” says Ron, “failure is not an option.” Dave has listened to whistles all of his life, in addition to the people who use them. As Fox 40’s President and Chief Operating Officer, he is responsible for managing Fox 40’s global sales, marketing, and operations. This includes overseeing the development of the company’s diverse, innovative product base and strategic acquisitions with the company’s highly capable team. Outside of the company, he is involved in industry events (e.g., as a delegate for the World Federation of Sporting Goods), he actively supports several charitable associations that support youth, and he works as a professional referee in the Canadian Football League (CFL Referee #30) and the National Football Development League (NFL #167).

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To achieve sales and profit growth targets of 10 to 15 percent per year, efforts focus on the development of Fox 40 products. As a take on the “Build a better mousetrap” catchphrase, Dave believes, “You have to build it and then the world will beat a path to your door . . . but you need to still sell it, work it, and be innovative.” While Ron recognizes that very few “seconds in command” (i.e., presidents) are happy, he is quick to point out that these are the individuals who run the show. “Dave is the ideas guy,” Ron emphasizes. Examples include new product introductions (e.g., the marine line, the Heat Alert Mouthguard, and the CAUL Fingergrip whistle), and social media initiatives such as Facebook contests. Dave remains modest. “My job is to keep him [Ron] as the face of the company and it will always be the case... Maybe it is the referee training. The good one [referee] is never seen.” Ron was motivated to become an entrepreneur for reasons that include, “My fear of working for a dumb

boss and fear of being hungry.” What is it like for the next generation to work in the family business? “Working for your dad is just like refereeing,” says Dave. “The first game you work, they expect you to be perfect. Every game after, they expect you to improve... just like working for your dad.” It is evident that there is mutual respect between the Foxcrofts. When asked how they are able to successfully work together, Ron had some answers. “Don’t hold grudges,” he said. “We do not discuss work outside of the office. When you walk out of the building, it is over until the next morning . . . It cannot be allconsuming in your private life.” Both Ron and Dave are often approached by individuals that seek investment in their ideas or that wish to discuss their ideas. The advice that they routinely give these individuals is: “Don’t give away ownership of your business or your product!” Ron adds, “We are not a distributor. We are a manufacturer distributor and we own everything we sell.”

Source: Ron Foxcroft, CEO of Fox 40 International Inc. and Chairman and CEO of Fluke Transportation, in-person interview, September 22, 2017, Hamilton, Ontario.

Discussion Questions 1. What are some advantages of Canadian-

3. “Immediate family members are given an

owned, private corporations over public corporations?

opportunity to work for the company for a living,” says Dave Foxcroft. What are some possible challenges in working with family members? How can these challenges be managed?

2. What are reasons why people are willing to

take the challenge of starting a business?

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Management and Leadership

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Describe the changes occurring today in the management function. LO2 Describe the four functions of management. LO3 Relate the planning process and decision making to the accomplishment of company goals. LO4 Describe the organizing function of management. LO5 Explain the differences between leaders and managers, and describe the various leadership styles. LO6 Summarize the five steps of the control function of management.

P R O F I L E GETTING TO KNOW: KEVIN PLANK, FOUNDER, UNDER ARMOUR Confidence is an essential quality for any aspiring

up thousands of dollars of credit card debt launch-

leader, but that doesn’t mean it’s an easy thing to

ing the company. With hardly any money left, Plank

maintain. Just ask Kevin Plank, who, as a young

tried to turn his luck around by betting his last $100

college graduate, spent his life savings on starting

at a blackjack table. He lost it all. Already feeling

Under Armour. Plank’s path to success was far from

crushed, Plank’s night got worse when he arrived

smooth. Over the years he has overcome numerous

at a toll booth and had no money to pay his way

hurdles that tested his confidence both as a busi-

through. “It was the single worst moment of my life,

nessperson and a leader.

having to face that poor toll booth operator, waiting

Plank faced one of these setbacks soon after

286

for her two dollars,” said Plank.

he started selling moisture-wicking athletic shirts

He spent the rest of the night in tears, terri-

from his grandmother’s basem*nt in W ashington,

fied that his business was doomed to fail. Then the

DC. Along with investing his nest egg, he also racked

next morning he visited the company’s PO box and

CHAPTER 8 Management and Leadership

Armour came to him while playing football for the University of Maryland. Although quick on his feet, Plank felt weighed down by his sweat-soaked undershirt. So after graduation, he spent weeks searching New York City’s Garment District for moisture-removing alternatives to ordinary cotton fabric. Plank found what he was looking for, developed some prototypes, and then sent the items off to a unique test market. “I graduated from college and realized, I know 60 people playing in the NFL who have careers that are going to be somewhere between three and five years,” said Plank. “And I either take advantage of it now or lose it forever.” Fortunately, the players liked the product and started telling their coaches about it. Soon Plank received orders from college athletic programs as well as professional teams. While this outside assistance helped build the brand, sales at Under Armour remained low for the first few years. But Plank changed the game in 1999 with a risky decision to place a half-page ad in ESPN Magazine. With a price tag of $12,000, the ad cost nearly as much as the company’s entire earnings from 1996. But unlike Plank’s trip to the blackjack table, this time his gamble worked. The year ended with Under Armour bringing in $1 million in sales. By 2002, revenue topped out at more than $50 million. Under Armour now earns billions of dollars annually on products ranging from standard shirts and shoes to a growing line of “smart” athletic wear. Plank plans to expand Under Armour into one of the © Nathaniel Welch/Redux

biggest companies in the world. Of course, reaching such a lofty goal will take a confident leader who

founda cheque for $7,500 that he had been wait-

can make the right decisions at the right time. Given

ing to receive for a while. “That was the last time

those requirements, Kevin Plank seems like a good

I doubted the company,” said Plank. He told him-

bet: “Respect to Silicon Valley and all the great com-

self, “Wipe the tears away, stand up, be a man, run

panies that are out there, but we feel we are just

your business, find a way.” And that’s precisely what

getting started, we have a long way to go, and we

Plank did as he took Under Armour out of the base-

like our odds.”

ment and into locker rooms across the country.

This chapter is all about leadership and man-

Along with business, sports has been one of

agement. You will learn that shared leadership is

Plank’s lifelong passions. In fact, the idea for Under

more widespread than you might have imagined.

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You will also learn about the functions of manage-

All in all, you should get a better idea of what lead-

ment and how management differs from leadership.

ers and managers do and how they do it.

Sources: Rachel Monroe, “Under Armour’s Quest to Dethrone Nike and Jump-Start Baltimore,” Bloomberg Businessweek, June 28, 2016; J. D. Harrison, “When We Were Small: Under Armour,” The Washington Post, November 12, 2014; Parmy Olson, “Silicon Valley’s Latest Threat: Under Armour,” Forbes, October 19, 2015; Richard Feloni, “The Billionaire Founder of Under Armour Was Once So Broke He Couldn’t Pay a $2 Toll—Here’s What the Experience Taught Him,” Business Insider, January 26, 2016; Lorraine Mirabella, “Under Armour Brings in New President; Plank Remains CEO,” The Baltimore Sun, June 27, 2017.

LO1

Describe the changes occurring today in the management function.

Managers’ Roles are Evolving

Managers must practise the art of getting things done through organizational resources. Resources is a general term that incorporates human resources (e.g., employees), natural resources (e.g., raw materials), and financial resources (e.g., money). Resources include the factors of production, which were introduced in Chapter 1. Every business has scarce resources, and management is about deciding how to effectively use these scarce resources. resources At one time, managers were called bosses, and their job consisted of telling people A general term that what to do and watching over them to be sure they did it. They were typically more proincorporates human ficient and knew more than the employees they supervised. Bosses tended to reprimand resources, natural resources, and those who did not do things correctly and, generally, were impersonal. Many managers still financial resources. behave that way. Perhaps you have witnessed such behaviour; some coaches use this style. Today, however, most managers tend to be more progressive. For example, they emphasize teams and team building; they create drop-in centres, team spaces, and open work areas. They may change the definition of work from a task you do for a specified period in a specific place to something you do anywhere, anytime. They tend to guide, train, support, motivate, and coach employees rather than tell them what to do.1 Thus most modern managers emphasize teamwork and co-operation rather than discipline and order giving.2 They may also open their books to employees to share the company’s financials. Managers of high-tech firms, like Google and Apple, realize that many workers often know more about technology than they do. At first, Google tried to get by with no managers. Soon, however, they found that managers were necessary for communicating strategy, helping employees prioritize projects, © Robert Nicholas / age fotostock facilitating co-operation, and ensuring that processes and sysCanada still trails the United States and the rest tems aligned with company goals.3 of the world in developing female leaders. Over 80 percent of organizations don’t have a clear The people entering management today are different from strategy for developing female leaders and yet those who entered in the past. Leaders of Fortune 100 compastudies have shown that having more senior level nies tend to be younger, more of them are female, and fewer women improves company profit.5 What should of them were educated at elite universities.4 Managers in the be included in leadership development programs future are more likely to be working in teams and assuming for women? completely new roles in the firm. For one thing, they’ll be 288

CHAPTER 8 Management and Leadership

Rather than telling employees exactly what to do, managers today tend to give their employees enough independence to make their own informed decisions about how best to please customers. How do you think most employees respond to this empowerment on the job?

doing more expansion overseas.6 Further, they may be taking a leadership role in adapting to climate change.7 Future managers will need to be more globally prepared; that is, they need skills such as adaptability, foreign language skills, and ease in other cultures.8 Future changes in the work environment will mean that work will increasingly be completed by teams, and change will come more quickly. Transparency in how managers do their job (in terms of corporate governance, found in Chapter 6) and how they address corporate social responsibility (discussed in Chapter 5) will become increasingly important. What this means for you and other graduates of tomorrow is that successful management will demand a new kind of person: a skilled communicator and team player as well as a planner, coordinator, organizer, and leader.9 These trends will be addressed in the next few chapters to help prepare you for your future career in management. In the following sections, management in general and the functions managers perform are discussed.

The Four Functions of Management Well-known management consultant Peter Drucker says that managers give direction to their organizations, provide leadership, and decide how to use organizational resources to accomplish goals.10 This description gives you some idea of what managers do. In addition to those tasks, managers today must deal with conflict resolution, create trust in an atmosphere where trust has been badly shaken, and help create balance between work lives and family lives.11 Managers look at the big picture, and their decisions make a major difference in organizations.12 The following definition of management provides the outline of this chapter: Management is the process used to accomplish organizational goals through planning, organizing, leading, and controlling people and other organizational resources. (Figure 8.1 provides a comprehensive listing of all the critical tasks in this process.)

LO2

Describe the four functions of management. management

The process used to accomplish organizational goals through planning, organizing, leading, and controlling people and other organizational resources. 289

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■ FIGURE

8.1

WHAT MANAGERS DO Some modern managers perform all of these tasks with the full co-operation and participation of workers. Empowering employees means allowing them to participate more fully in decision making. Planning • Setting organizational goals. • Developing strategies to reach those goals. • Determining resources needed. • Setting precise standards.

Leading • Guiding and motivating employees to work effectively to accomplish organizational goals and objectives. • Giving assignments. • Explaining routines. • Clarifying policies. • Providing feedback on performance.

Organizing • Allocating resources, assigning tasks, and establishing procedures for accomplishing goals. • Preparing a structure (organization chart) showing lines of authority and responsibility. • Recruiting, selecting, training, and developing employees. • Placing employees where they will be most effective.

Controlling • Measuring results against corporate objectives. • Monitoring performance relative to standards. • Rewarding outstanding performance. • Taking corrective action when necessary.

planning

A management function that includes anticipating trends and determining the best strategies and tactics to achieve organizational goals and objectives.

organizing

A management function that includes designing the structure of the organization and creating conditions and systems in which everyone and everything work together to achieve the organization’s goals and objectives.

leading

Creating a vision for the organization and guiding, training, coaching, and motivating others to work effectively to achieve the organization’s goals and objectives. 290

Planning includes anticipating trends and determining the best strategies and tactics to achieve organizational goals and objectives, for example, pleasing customers. The trend today is to have planning teams to help monitor the environment, find business opportunities, and watch for challenges. Planning is a key management function because the other management functions depend heavily on having a good plan. Most often this plan is reflected in a set of budgets, which will be talked about more in Chapter 17. Organizing includes designing the structure of the organization and creating conditions and systems in which everyone and everything work together to achieve the organization’s goals and objectives. Many of today’s organizations are being designed to please the customer and in turn, generate a profit. Thus, organizations must remain flexible and adaptable because when customer needs change, organizations must change along with them or risk losing business.13 Whole Foods Market, for example, is known for its high-quality, high-priced food items. But it has introduced many lower-cost items to adjust to the financial losses of its customer base. In 2016, Whole Foods launched its first lower-cost store, called 365, to appeal to cash-strapped Millennials. The 365 stores will offer only a quarter of the products carried by the traditional stores and will have no butchers, wine experts, or fishmongers, which will help reduce costs.14 Amazon purchased Whole Foods in 2017. Do you think Whole Foods will undergo further changes? Leading means creating a vision for the organization and communicating, guiding, training, coaching, and motivating others to work effectively to achieve the organization’s goals and objectives. Researchers have spent a considerable amount of time studying motivation, given the direct relationship between motivation and output. This subject is explored further in Chapter 11. The trend is to empower employees and give them as much freedom as possible to become self-directed and self-motivated. Empowerment will

CHAPTER 8 Management and Leadership

be further discussed in Chapter 12, Human Resource Management. This function was once known as directing; that is, telling employees exactly what to do. In many smaller firms, that is still the role of managers. In most large modern firms, however, managers no longer tell people exactly what to do because knowledge workers and other employees often know how to do their jobs better than the manager.15 Nonetheless, leadership is necessary to keep employees focused on the right tasks at the right time along with training, coaching, motivating, and the other leadership tasks.16 © Creatas/photolibrary RF Controlling involves establishing clear stanPlanning is what helps managers understand the dards to determine whether an organization is proenvironment in which their businesses must operate. When gressing toward its goals and objectives, reporting people’s tastes and preferences for restaurant meals change, the results achieved, rewarding people for doing a food service managers must respond with menu alternatives. What changes have occurred in your preferences? good job, and taking corrective action if work is not proceeding according to plan. Basically, it means measuring whether what actually occurs meets the controlling A management organization’s goals. The four functions—planning, organizing, leading, and controlling—are the heart of function that involves establishing clear management, so let’s explore them in more detail. The process begins with planning; we’ll standards to determine look at that right after the Progress Assessment. whether or not

PROGRESS ASSESSMENT

• What is the definition of management used in this chapter? • What are the four functions of management?

an organization is progressing toward its goals and objectives, rewarding people for doing a good job, and taking corrective action if they are not.

LO3

Planning and Decision Making Planning, the first managerial function, involves setting the organizational vision, values, goals, and objectives. Executives rate planning as the most valuable tool of their workbench. Part of the planning process involves the creation of a vision for the organization. A vision is more than a goal; it is a broad explanation of why the organization exists and where it is trying to head.17 A vision gives the organization a sense of purpose and a set of values that unite workers in a common destiny.18 Values are a set of fundamental beliefs that guide a business in the decisions it makes. Values guide strategic planning through to day-to-day decisions by being mindful of how all stakeholders will be treated. Vision informs values, and together they unite workers in a common purpose. Managing an organization without first establishing a vision can be counterproductive. It is like getting everyone in a rowboat excited about going somewhere, but not telling them exactly where. The boat will just keep changing directions rather than speeding toward an agreedupon goal.

Relate the planning process and decision making to the accomplishment of company goals. vision

An encompassing explanation of why the organization exists and where it is trying to head.

values

A set of fundamental beliefs that guide a business in the decisions it makes.

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mission statement

An outline of the fundamental purposes of an organization.

Top management usually sets the vision for the organization and then works with others in the organization to establish a mission statement. A mission statement is an outline of the organization’s fundamental purposes and it should address: ∙ the organization’s self-concept; ∙ the organization’s philosophy and goals; ∙ long-term survival; ∙ customer needs; ∙ social responsibility; and ∙ the nature of the organization’s product or service.

goals

The broad, long-term accomplishments an organization wishes to attain.

objectives

Specific, measurable, short-term statements detailing how to achieve the organization’s goals.

■ FIGURE

Figure 8.2 contains the mission statements for a number of well-known businesses. How well do their mission statements address all of the issues listed above? The mission statement becomes the foundation for setting specific goals and selecting and motivating employees. Goals are the broad, long-term accomplishments an organization wishes to attain. Goals need to be mutually agreed on by workers and management. Thus, goal setting is often a team process. Objectives are specific, short-term statements detailing how to achieve the organization’s goals. One of your goals for reading this chapter, for example, may be to learn basic concepts of management. An objective you could use to achieve this goal is to answer the chapter’s Progress Assessment questions correctly. Objectives must be measurable. For example, you can measure your progress in answering questions by determining what percentage you answer correctly over time. Planning is a continuous process. It is unlikely that a plan that worked yesterday would be successful in today’s market. Most planning follows a pattern. The procedure you would follow in planning your life and career is basically the same as that used by businesses for their plans. Planning answers two fundamental questions for businesses: What is the gap between where an organization is now and where it wants to be? and then, How can we get there from here?

8.2

SAMPLE COMPANY MISSION STATEMENTS Maple Leaf Sports and Entertainment Ltd.’s mission: “Bring the world to its feet.” Google’s mission: “To organize the world’s information and make it universally accessible and useful.” Nike’s mission: “To bring inspiration and innovation to every athlete* in the world. *If you have a body, you are an athlete.” Starbuck’s mission: “To inspire and nurture the human spirit—one person, one cup and one neighborhood at a time.” Loblaw Companies Ltd.’s mission: “Live Life Well - Supports the needs and well-being of Canadians.” FGL Sports’ mission: “To help Canadians live healthy, active lives.” Sources: According to the websites of MLSE, http://mlse.com/our-company/our-mission/; Google, https://www.google.com/about/our-company/; Nike, https://about.nike.com/; Starbuck’s, https://www.starbucks.ca/about-us/company-information/mission-statement; Loblaw Companies Ltd., https://www .loblaw.ca/en/about-us/mission---values.html; and FGL Sports, http://www.fglsports.com/corporateMission.html. All accessed July 7, 2018.

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1. What is the situation now? What are the success factors affecting the industry par-

ticipants and how do we compare? What is the state of the economy and other environments? What opportunities exist for meeting people’s needs? What products and customers are most profitable? Who are our major competitors? What threats are there to our business? These questions frame the SWOT analysis.19 This is an analysis of an organization’s Strengths, Weaknesses, Opportunities, and Threats—how can strengths be used and capitalized on, how can weaknesses be improved, how can opportunities be exploited, and how can threats be mitigated. A company begins such a process by soliciting input from all key stakeholders in order to create a general review of the business situation. Then it identifies its internal strengths and weaknesses, relative to its competitors.

SWOT analysis

A planning tool used to analyze an organization’s strengths, weaknesses, opportunities, and threats.

These strengths and weaknesses are for the most part internal and therefore within the control of the organization. They include elements that are referred to as P RIMO-F: people, resources, innovation and ideas, marketing, operations, and finance. Next, a business environment analysis (you were introduced to some elements, such as the legal environment, in Chapter 1) is conducted. Opportunities and threats in the marketplace are identified—and, while they cannot always be controlled or anticipated, they most definitely affect the organization. Opportunities and threats include concepts referred to as PESTLE: political, economic, social, technological, legal, and environmental. Figure 8.3 lists some of the potential issues companies consider when conducting a SWOT analysis: What external success factors affect the industry? How does our organization measure up to other organizations? What are our social objectives? What are our personal development objectives? What can we do to survive and prosper during a

■ FIGURE

8.3

SWOT ANALYSIS This matrix identifies potential strengths, weaknesses, opportunities and threats organizations may consider in a SWOT analysis. Potential Internal STRENGTHS • an acknowledged market leader • core competencies in key areas • proven and respected management team • well-conceived functional area strategies • cost advantages • better advertising campaigns

Potential Internal WEAKNESSES • no clear strategic direction • weak market image • subpar profitability • obsolete facilities • lack of managerial depth and talent • too narrow a product line

Potential External OPPORTUNITIES • ability to serve additional customer groups • expand product lines • ability to grow due to increases in market demands • falling trade barriers in attractive foreign markets • ability to transfer skills/technology to new products • complacency among rival firms

Potential External THREATS • recession and changing (negative) economic conditions • rising sales of substitute products (by competitors) • costly regulatory requirements • entry of low-cost foreign competitors • changing buyer needs and tastes

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recession? A SWOT analysis is framed by the vision and when completed may result in the vision being revisited. All of the data are gathered and organized to reflect where a company is today and where a company would like to be. Differences between the two represent gaps. These gaps should then be addressed in the planning described next. 2. How can we get there from here? This is the most important part of planning. It takes

four forms: strategic, tactical, operational, and contingency planning. See Figure 8.4 for a visual of this. Notice the continuous connection between the four forms. Not only does this illustrate the relationship between them, but also that planning is a continuous process where each of the forms is informed by another of the forms. strategic planning

The process of determining the major goals of the organization and the policies and strategies for obtaining and using resources to achieve those goals.

■ FIGURE

Strategic planning outlines how the company will meet its objectives and goals. It provides the foundation for the policies, procedures, and strategies for obtaining and using resources to achieve those goals.20 Policies are broad guides to action, and strategies determine the best way to use resources. At the strategic planning stage, top managers of the company decide which customers to serve, what goods or services to sell, and the geographic areas in which the firm will compete.21 For example, in response to the economic slump that impacted global and North American markets in 2008, Taco Bell introduced a “value menu” of items like cheese roll-ups and bean burritos with low prices. It also went after the “fourth-meal” (late-night) crowd and introduced several low-calorie, low-fat Fresco items. However, Blockbuster was not as successful in fighting off the introduction of new technology offered by Netflix and Hulu, making its brick and mortar stores obsolete. In today’s rapidly changing environment, strategic planning is becoming more difficult because changes are occurring so quickly that plans—even those set for just months into the future—may soon be obsolete. Think of how the used car dealership had to adjust the price for small fuel-efficient cars when the price of gas went from a dollar per litre to nearly two dollars and then dropped back to the dollar and a half range again.

8.4

PLANNING FUNCTIONS Very few firms bother to make contingency plans. If something changes the market, such companies may be slow to respond. Most organizations do strategic, tactical, and operational planning.

294

FORMS OF PLANNING STRATEGIC PLANNING The setting of broad, long-range goals by top managers

TACTICAL PLANNING The identification of specific, short-range objectives by lower managers

CONTINGENCY PLANNING Backup plans in case primary plans fail

OPERATIONAL PLANNING The setting of work standards and schedules

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Clearly, some companies are making shorter-term plans that allow for quick responses to customer needs and requests. The goal is to be flexible and responsive to the market.22 Even though top managers are responsible for strategic planning, it is important for them to listen to those who might have the best strategic insights—employees. Employees whose ideas about strategy are ignored might leave. For example, when John Lasseter worked as a young animator for Disney, he lobbied the company to take computer animation seriously. He believed that animation technology would be central to Disney’s future. The company didn’t agree and fired him. Lasseter then joined Lucasfilm’s growing computer graphics team. Later Disney realized that Lasseter was right and tried to lure him back, but it was too late. Lucasfilm became Pixar, the powerhouse animation company that created the Toy Story series, Finding Nemo, and many others. Two decades later Disney bought Pixar for $7.4 billion and made Lasseter chief creative officer.23 Clearly, some companies are making plans that allow for quick responses to customer needs and requests. The goal is to be flexible and responsive to the market. The Adapting to Change box talks about how some managers partner with robots to develop strategic plans.

Adapting to CHANGE Will Strategy Robots Replace Managers? Some machines can beat humans in just about any game, recommend cancer cures and diabetes treatments, manufacture products, make insurance underwriting and bank credit decisions, and a multitude of other tasks. But can machines produce strategic plans? Is there a robot capable of making big strategic plans, such as a plan for what a car company should do now that there is an increasing number of teens less

interested in driving, ride services like Uber and Lyft are becoming increasingly popular, and self-driving cars are likely to be in our future? Well, robots aren’t ready yet to make those “big-picture” decisions, but experts say their time may come. In fact, some computers now can handle more specific strategic problems. For example, IBM uses an algorithm rather than depending solely on human judgment to evaluate potential acquisition targets. Netflix uses analytics for its movie recommendation engine as well as to help decide what programs to create. Amazon uses 21 data systems to optimize supply chains, forecast inventory, forecast sales, optimize profits, and recommend purchases. All of the systems are tightly integrated with each other and human strategists. Yes, humans still play a vital role in designing experiments and reviewing data traces in order to plan the evolution of the machines. For now, there is still a level of reasoning only human strategists can do. This ability to think strategically will be even more prized in this era of strategic human–machine partnerships.

Sources: Martin Reeves and Daichi Ueda, “Designing the Machines That Will Design Strategy,” Harvard Business Review, April 18, 2016; Thomas H. Davenport, “Rise of the Strategy Machines,” Sloan Management Review, Fall 2016; Tim O’Reilly, “Managing the Bots That Are Managing the Business,” Sloan Management Review, Fall 2016; Landon Thomas, Jr., “At BlackRock, Machines Are Rising Over Managers to Pick Stocks,” The New York Times, March 28, 2017.

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tactical planning

Tactical planning is the process of developing detailed, short-term statements about what is to be done, who is to do it, and how it is to be done. Tactical planning is normally the responsibility of managers or teams of managers at lower levels of the organization, whereas strategic planning is the responsibility of the top managers of the firm (e.g., the president and vice-presidents of the organization). Tactical planning, for example, involves setting annual budgets and deciding on other details and activities necessary to meet the strategic objectives. If the strategic plan of a truck manufacturer, for example, is to sell more trucks in northern Canada, the tactical plan might be to fund more research of northern truck drivers’ wants and needs, and to plan advertising to reach those customers. Operational planning is the process of setting work standards and schedules necoperational planning essary to implement the company’s tactical objectives. Whereas strategic planning views The process of setting the organization as a whole, operational planning focuses on the specific responsibilities work standards and of supervisors, department managers, and individual employees. Operational plans can schedules necessary to implement the include operational budgets. You will read about budgets in more detail in Chapter 17. company’s tactical The operational plan is the department manager’s tool for daily and weekly operations. objectives. An operational plan could also include, say, the specific dates for certain truck parts to be completed and the quality specifications those parts must meet. You will read about operations management in more detail in Chapter 10. contingency Contingency planning is the process of preparing alternative courses of action that planning may be used if the primary plans do not achieve the organization’s objectives. The ecoThe process of nomic and competitive environments change so rapidly that it is wise to have alternative preparing alternative plans of action ready in anticipation of such changes. For example, if an organization does courses of action that may be used not meet its sales goals by a certain date, the contingency plan may call for more advertisif the primary plans ing or a cut in prices at that time. do not achieve Some companies see opportunities where others see threats. Morneau Shepell Inc. prothe organization’s vides global benefits consulting, administration systems, and outsourcing services. Morobjectives. neau Shepell believes that most companies view contingency planning solely as a tool to prevent operational shutdowns. A company should be able to mitigate the potential damage and financial loss resulting from an unforeseen emergency or catastrophe, but it encourages companies to re-evaluate their thinking regarding contingency planning and the importance of anticipating health care– related emergencies (HREs). For example, at the time of the widespread SARS epidemic in 2003, a survey to examine how Canadian businesses were managing the health crisis found only 11 percent of the employers had a © Jonathan Ernst/Reuters/Corbis human resource policy to address HREs. The Organizations of all kinds need contingency plans for unexpected benefits of an HRE contingency plan include events. Here, airport first responders participate in a drill with ensuring business continuity, reducing risk to volunteers who are pretending to be victims in a simulated employees and their dependents, maintaining airplane crash. What contingency plans are you aware of on your productivity, and minimizing the possibility of campus or at work? litigation.24 The process of developing detailed, short-term statements about what is to be done, who is to do it, and how it is to be done.

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Crisis planning is a part of contingency planning. Crisis planning involves reacting to sudden changes in the environment.25 For example, many cities and businesses have developed plans to respond to terrorist attacks. You can imagine how important such plans would be to hospitals, airlines, the police, and public transportation authorities. In short, crisis planning is a critical component of contingency planning that requires understanding and acceptance throughout the whole organization. You will read more about risk management in Online Supplement 2. Instead of creating detailed strategic plans, the leaders of market-based companies (companies that respond quickly to changes in competition or to other environmental changes) often simply set direction. They want to stay flexible, listen to customers, and seize opportunities—expected or not. Think of how stores selling to teenagers must adapt to style changes.26 The opportunities, however, must fit into the company’s overall goals and objectives; if not, the company could lose its focus. Before we consider decision making, let us summarize some of the points in this chapter. A vision (“WHERE we are going . . .”), in combination with values (HOW we will treat our stakeholders...), and the mission statement (“Our purpose IS ...”), provides direction for the company. A company’s objectives (WHAT we want to accomplish) are linked to its strategy (HOW we will accomplish the objectives). So, there is a progression from vision and values, to mission, to objectives, and to strategy. Once the strategy has been established, plans must be developed and implemented to ensure that objectives are met. There is never a strategy without there first being an objective. A SWOT analysis alone has little effect unless you match it to the company’s strategy and plan. Clearly, then, much of management and planning requires decision making. The Spotlight on Small Business box illustrates how one unique small business handles planning and decision making.

crisis planning

Involves reacting to sudden changes in the environment.

Decision Making: Finding the BestAlternative All management functions require decision making. Decision making is choosing among two or more alternatives. It sounds easier on paper than it is in practice. In fact, decision making is the heart of all management functions. The rational decision-making model is a series of steps that managers often follow to make logical, intelligent, and well-founded decisions.27 These steps can be thought of as the six Ds of decision making:

decision making

Choosing among two or more alternatives.

1. Define the situation. 2. Describe and collect needed information. 3. Develop alternatives. 4. Decide which alternative is best. 5. Do what is indicated (begin implementation). 6. Determine whether the decision was a good one and follow up. 297

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Spotlight On SMALL BUSINESS I’d Rather Be Blue Some of the best-managed organizations can be found in the most unusual situations. Consider, for example, three entrepreneurs whose product involved shaving their heads, slathering themselves with blue paint, and drumming on homemade instruments such as PVC pipe. Enter the Blue Man Group. The original Blue Men—Matt Goldman, Phil Stanton, and Chris Wink—manage an organization of over 500 employees, 70 of whom appear nightly as Blue Men in cities around the world. Their Megastar World Tour included a number of shows in central Canada featuring their unique music, comedy, and multimedia theatrics. Like the founders of any other company, the Blue Man Group creators knew they had to tinker with their product if they wanted to expand and be successful. Planning and organization were critical. The partners locked themselves away for several days to write a detailed 132-page Blue Man operating manual. Writing the manual made the partners realize the vast market potential for their concept, but it also taught them the importance of managing the product’s growth and everyday operations. The three leaders also knew they needed to think strategically about how to build their business and maintain audience interest. The result was their first tour in Latin America and expansion into other areas including albums, film scores, orchestra performances, and advertising campaigns.

In 2017, the Montreal-based circus group, Cirque du Soleil, acquired Blue Man Productions in an effort to diversify its entertainment offerings. Given Blue Man’s origins as street performers, it should be a great fit!

Sources: Mark Rendell, “Cirque du Soleil Acquires Blue Man Group Production Company,” The Globe and Mail, July 16, 2017; “Blue Man Group to Launch First Latin American Tour this Summer,” BroadwayWorld.com, May 1, 2015, http://www.broadwayworld.com/brazil/article/ Blue-Man-Group-to-Launch-First-Latin-American-Tour-This-Summer-20150501#; Liz Welch, “How We Did It: The Blue Man Group,” Inc., August 2008; and Blue Man Group, www.blueman.com, accessed January 29, 2009.

problem solving

The process of solving the everyday problems that occur. Problem solving is less formal than decision making and usually calls for quicker action.

brainstorming

Generating as many solutions to a problem as possible in a short period of time with no censoring of ideas. 298

Managers do not always go through this six-step process. Sometimes decisions have to be made on the spot—when little information is available. Managers must make good decisions in all such circ*mstances. Problem solving is the process of solving the everyday problems that occur. It is less formal than the decision-making process and usually calls for quicker action to resolve everyday issues. Problem-solving teams are made up of two or more workers who are given an assignment to solve a specific problem (e.g., Why are customers not using our service policies?). Problem-solving techniques that companies use include brainstorming, which involves generating as many solutions as possible in a short period of time with no censoring of ideas, and PMI, which includes listing all the pluses for a solution in one column, all the minuses in another, and the interesting points for each solution in a third column.

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PMI is a tool developed by Edward de Bono as part of his work on lateral and creative thinking strategies. You can practise using the PMI system on almost all of your decisions. For example, should you stay home and study tonight? You would list all benefits of your choice (Pluses) in one column: better grades, improved self-esteem, more responsible, and so forth. In the other column, you would put the negatives (Minuses): boredom, less fun, etc. In the third column you would write down the outcomes of taking the action, which often helps to clarify your decision. We hope that the pluses outweigh the minuses most of the time, and that you study often, but sometimes it is best to go out and have fun. In that case, the Interesting would be having fun in a way that would not hurt your grades or job prospects.

PMI

A creative thinking strategy that lists all the pluses, minuses, and interesting points for a solution in separate columns.

PROGRESS ASSESSMENT

• What is the difference between goals and objectives? • What does a company analyze when it does a SWOT analysis? • What is the difference between strategic, tactical, and operational planning? • What are the six Ds in decision making?

Organizing: Creating a Unified System After managers have planned a course of action, they must organize the firm to accomplish their goals. Operationally, organizing means allocating resources (such as funds for various departments), assigning tasks, and establishing procedures for accomplishing the organizational objectives. When organizing, a manager develops a framework that relates all workers, tasks, and resources to each other. That framework is called the organizational structure. In Chapter 9, we will look at examples of several organizational structures and will review some of the challenges in developing an organization structure. Most organizations draw a diagram showing these relationships. This tool is called an organization chart. An organization chart is a visual device that shows relationships among people and divides the organization’s work; it shows who is accountable for the completion of specific work and who reports to whom. Figure 8.5 shows a simple one. Each rectangle indicates a position (and usually who holds this position) within the organization. The chart plots who reports to whom (as indicated by the lines) and who is responsible for each task. For example, in Figure 8.5, manager C is the finance manager, and this middle manager reports directly to the president. Reporting directly to the finance manager are three first-line supervisors and in turn, three employees report directly to each of these first-line supervisors. The corporate hierarchy illustrated on the organization chart includes top, middle, and first-line managers. The problems involved in developing an organization structure will be discussed later in the text. For now, it is important to know that the corporate hierarchy usually includes three levels of management (see Figure 8.6). Top management (the highest level of management) consists of the president and other key company executives who develop strategic plans. Terms you are likely to see

LO4

Describe the organizing function of management.

organization chart

A visual device that shows relationships among people and divides the organization’s work; it shows who is accountable for the completion of specific work and who reports to whom.

top management Highest level of management, consisting of the president and other key company executives, who develop strategic plans.

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■ FIGURE

8.5

TYPICAL ORGANIZATION CHART This is a snapshot of a rather standard chart with managers for major functions and supervisors reporting to the managers In this example, each supervisor manages three employees.

President

Manager A (production)

First-line supervisor

■ FIGURE

First-line supervisor

Manager B (marketing)

First-line supervisor

Manager C (finance)

First-line supervisor

8.6

LEVELS OF MANAGEMENT This figure shows the three levels of management. In many firms, there are several levels within middle management. Many firms have eliminated middlelevel managers because fewer staff are needed to oversee selfmanaged teams and higher skilled employees.

TOP MANAGEMENT President Vice presidents MIDDLE MANAGEMENT Plant managers Division heads Branch managers SUPERVISORY (FIRST-LINE) MANAGEMENT Supervisors, Foremen Department heads Section leaders NON-SUPERVISORY Employees

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First-line supervisor

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often are chief executive officer (CEO), chief operating officer (COO), chief financial officer (CFO), and chief information officer (CIO), or in some companies, chief knowledge officer (CKO). The CEO is often the president of the firm and is responsible for all top-level decisions in the firm. The CEO and president are the same person in a majority of large companies, such as United Parcel Services, John Deere, and General Electric. CEOs are responsible for introducing change into an organization.28 The COO is responsible for putting those changes into effect. His or her tasks include structuring work, controlling operations, and rewarding people to ensure that everyone strives to carry out the leader’s vision. Today, many companies are eliminating the COO function as a cost-cutting measure and assigning that role to the CEO. The CFO is responsible for obtaining funds, planning budgets, collecting funds, and so on. The CIO or CKO is responsible for getting the right information to other managers so they can make correct decisions. CIOs are more important than ever to the success of their companies given the crucial role that information technology serves in every aspect of business. Many companies are simplifying their executive committee by combining some of the positions, like COO and CFO, which they believe provides better focus.29 Loblaw Companies Limited has been making significant changes in its operations over the past few years. Faced with the growing presence of Walmart and general merchandising distribution problems, which resulted in significant losses for a few years, they are looking to Galen Weston Jr., the executive chairman and president, to implement a series of strategic initiatives to restore their former glory. Loblaws is refocusing on its strong brands, including President’s Choice, re-pricing some staple products to provide best-value-for-money, and improving efficiencies in its supply chain. While profits slowly improve the company is still involved in a major overhaul of its infrastructure, which included a decrease of top management jobs at its head office and an increase of supervisory management positions at new store openings.30 Middle management includes general managers, division managers, and branch and plant managers (in your post-secondary institution, deans and department/area heads) who are responsible for tactical planning and controlling. Many firms have eliminated some middle managers through downsizing, and have given the remaining managers more employees to supervise. Supervisory management includes those who are directly responsible for supervising workers and evaluating their daily performance; they are often known as first-line managers (or supervisors) because they are the first level above workers.31

middle management

The level of management that includes general managers, division managers, and branch and plant managers, who are responsible for tactical planning and controlling.

supervisory management

Managers who are directly responsible for supervising workers and evaluating their daily performance.

Tasks and Skills at Different Levels of Management Few people are trained to be good managers. Usually a person learns how to be a skilled accountant or sales representative or production-line worker, and then—because of his or her technical skills—is selected to be a manager. Once someone becomes a manager she or he spends more time supporting those people they supervise, showing them how to do things, helping them, supervising them, and generally being very active in the operating task. Robert Katz developed a model to explain the types of skills necessary to be a good manager, and the mix of these skills through the various management levels. The further up the managerial ladder a person moves, the less important his or her original job skills become. At the top of the ladder, the need is for people who are 301

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technical skills

The ability to perform tasks in a specific discipline or department.

human relations skills

visionaries, planners, organizers, coordinators, communicators, morale builders, and motivators.32 Figure 8.7 shows that a manager must have three categories of skills: 1. Technical skills involve the ability to perform tasks in a specific discipline (such as

selling a product or developing software) or department (such as marketing or information systems).

The ability to communicate and motivate, enabling managers to work through and with people.

2. Human relations skills involve communication and motivation; they enable manag-

conceptual skills

tionships among its various parts. Conceptual skills are needed in planning, organizing, controlling, systems development, problem analysis, decision making, coordinating, and delegating (see the Reaching Beyond our Borders box for more insight about skills training for top managers).

The ability to picture the organization as a whole and the relationships among its various parts.

■ FIGURE

ers to work through and with people. Such skills also include those associated with leadership, coaching, morale building, delegating, training and development, and help and supportiveness. 3. Conceptual skills involve the ability to picture the organization as a whole and the rela-

While it is not specifically stated, you can see how time-management skills are a necessary component of each one of these categories of skills. Successful managers effectively handle the daily points of contact that require their attention. This includes a high volume of phone calls, interruptions, meetings, and e-mails. Looking at Figure 8.7, you will notice that first-line managers need to be skilled in all three areas. However, most of their time is spent on technical and human relations tasks (assisting operating personnel, giving directions, etc.). First-line managers spend little time on conceptual tasks. Top managers, in contrast, need to use few technical skills. Instead, almost all of their time is devoted to human relations and conceptual tasks. A person who is competent at a low level of management may not be competent at higher levels, and vice versa. The skills needed are different at each level of management.

8.7

SKILLS NEEDED AT VARIOUS LEVELS OF MANAGEMENT All managers need human relations skills. At the top, managers need strong conceptual skills and rely less on technical skills. First-line managers need strong technical skills and rely less on conceptual skills. Middle managers need to have a balance between technical and conceptual skills.

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Top Managers

Middle Managers

First-line Managers

Conceptual skills

Human relations skills

Technical skills

Human relations skills

Conceptual skills

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Reaching Beyond OUR BORDERS Back to School for Top Managers As the overseer of an organization’s “big picture,” CEOs need to have strong conceptual skills. In today’s global market, the scope of those skills is expanding rapidly as businesses increasingly focus on globalization in their long-term planning. The shift from a country-focused company to a global-focused company increases the CEO “to-do” list. Business leaders need to study a country’s political, legal, and regulatory systems and the impact of each system upon important business functions such as supply chains, capital markets, and the productivity of human resources. It’s also critical to thoroughly understand a nation’s culture and respect its strengths and challenges. There isn’t a single global market, but rather a complex network of globally connected “local markets.” Such “local markets” require their own set of local training, development, and assessment standards. Aligning a company’s business applications across such diverse networks is no simple task. However, leaders at companies such as Coca-Cola, Nestlé, and IBM have done a noteworthy job.

Samuel Palmisano, former CEO of IBM, perhaps summed up the global management challenge best in his book Adapting from Re-Think: A Path to the Future. In it he states, “The fundamental question for companies is not whether to compete globally, but how to compete globally.” That’s the challenge CEOs will have to answer company-by-company as they refine their conceptual skills.

Sources: Josh Bersin, “The World Is Not Global, It’s Local,” Forbes, April 23, 2013; Samuel J. Palmisano, “The New Era for Global Enterprise,” Bloomberg Businessweek, March 28, 2014; and Rana Foroohar, “Globalization in Reverse,” Time, April 7 2014.

Staffing: Getting and Keeping the Right People The right kind of incentive is needed to get the right kind of people to staff an organization. For example, Google’s gourmet chefs cook up free lunches, dinners, and snacks for employees. Would such an incentive appeal to you? How important to you is pay relative to other incentives? Staffing is recruiting, hiring, motivating, and retaining the best people available to accomplish the company’s objectives. Today, staffing is critical, especially in the Internet and high-tech areas. At most high-tech companies, like Google, Sony, and Microsoft, the primary capital equipment is brainpower. A firm with innovative and creative workers can go from start-up to major competitor in just a few years.33 Many people are not willing to work at companies unless they are treated well and get fair pay. They may leave to find a better balance between work and home.34 Staffing is becoming a large part of each manager’s assignment, and all managers need to co-operate with the human resource department of her or his organization in order to attract and maintain effective workers. Chapter 12 is devoted to human resource issues, including staffing.

staffing

A management function that includes hiring, motivating, and retaining the best people available to accomplish the company’s objectives.

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LO5

Explain the differences between leaders and managers, and describe the various leadership styles.

Leading: Providing Continuous Visionand Values In business literature there’s a trend toward separating the notion of management from that of leadership. One person might be a good manager but not a good leader. Another might be a good leader without being a good manager. One difference between managers and leaders is that managers strive to produce order and stability, whereas leaders embrace and manage change. Leadership is creating a vision for others to follow, establishing corporate values and ethics, and transforming the way the organization does business to improve its effectiveness and efficiency. Good leaders motivate workers and create the environment for workers to motivate themselves.35 Management is the carrying out of the leadership’s vision.36 Leaders must therefore: ∙ Communicate a vision and rally others around that vision. The leader should be openly sensitive to the concerns of followers, give them responsibility, and win their trust. A successful leader must influence the actions of others. Ellen Kullman took the reins at DuPont in the middle of a crisis. Nonetheless, she set the tone for growth and prosperity in the future. ∙ Establish corporate values. These values (as discussed earlier in this chapter) include a concern for employees, for customers, for the environment, and for the quality of the company’s products. When companies set their business goals, they are defining the values of the company as well. The most important trait that others look for in a leader is honesty, followed by forward looking vision. ∙ Promote corporate ethics. Ethics include an unfailing demand for honesty and an insistence that everyone in the company is treated fairly. That is why we stress ethical decision making throughout this text (as covered in the Making Ethical Decision boxes within each chapter). Many business people have made the news by giving away huge amounts to charity, thus setting a model of social concern for their employees and others.37

Making ETHICAL DECISIONS What Do You Tell the Team? First-line managers assist in the decisions made by their department heads. The department heads retain full responsibility for the decisions—if a plan succeeds, it’s their success; if a plan fails, it’s their failure. Now imagine this: As a first-line manager, you have new information that your department head hasn’t seen yet. The findings in this report indicate that your manager’s recent plans are sure to fail. If the plans do fail, the manager will probably be demoted, and you’re the most likely candidate to fill the vacancy. Will you give your department head the report? What is the ethical thing to do? What might be the consequences of your decision?

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∙ Embrace transformational change. A leader’s most important job may be to transform the way the company does business so that it is more effective (does things better) and efficient (uses fewer resources to accomplish the same objectives).38 The Seeking Sustainability box illustrates how management can provide leadership in the area of sustainability. ∙ Stress accountability and responsibility. One thing we have learned from the global recession of 2008–09 is that leaders need to be responsible for their actions and held accountable for their actions. A key word that has emerged from the crisis is transparency. Transparency is the presentation of a company’s facts and figures in a way that is clear, accessible, and apparent to all stakeholders. Governments are trying to make companies (and themselves) more transparent so that everyone is more aware of what is happening to the economy and to specific businesses and government agencies.39 All organizations need leaders, and all employees can help lead. You do not have to be a manager to perform a leadership function. That is, any employee can motivate others to work well, add to a company’s ethical environment, and report ethical lapses when they occur. Over the past 10 years, there has been an increasing trend in compensation packages that involve share ownership for top executives. These packages have been justified as necessary

transparency

The presentation of a company’s facts and figures in a way that is clear, accessible, and apparent to all stakeholders.

Seeking SUSTAINABILITY Leadership in Sustainability Sustainability was introduced and defined in C hapters1 and 5. Sustainability has now become a leadership issue for business. This is due, in part, to the fact that customers make purchase decisions based on the sustainable practices of a business, and companies realizing that through sustainable practices they can also reduce their costs if they implement sustainable practices. Leadership is shown by making sustainability part and parcel of how a business operates. Leadership opportunities can be found from how a business sources its inputs, to how it produces the goods or services, to how it distributes and services products. Furthermore, standards are emerging that measure sustainability, including measures of energy efficiency, carbon emissions, water usage, and labour practices (examples were discussed in Chapter 5). As businesses become more mature in their view of sustainability they have moved from initially wanting to protect their value through compliance with regulations to embedding real, measurable, ongoing commitments to sustainability that they believe will differentiate them in the market.

The Network for Business Sustainability is a community of managers and researchers who advance the “profits, people, and planet” approach. Leaders from companies with a strong sustainability reputation share their insights with leaders from other organizations. How might each management function (planning, organizing, leading, controlling) be applied to sustainability?

Sources: Tima Bansal, “Sustainability is not a buzzword. It’s the future for Canadian business,” The Globe and Mail, April 23, 2015, http://www.theglobeandmail.com/report-on-business/careers/leadership-lab/sustainability-is-not-a-buzzword-its-the-future-for-canadianbusiness/article23990341/; PwC, www.pwc.com/ca/en/sustainability/publications.jhtml; Sustainability Advantage, www .sustainabilityadvantage.com/; Simply Sustain, www.simplysustain.com/a/Sustainability/Ourviews/tabid/57/Default.aspx; and Network for Business Sustainability, https://nbs.net/.

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autocratic leadership A style that involves making managerial decisions without consulting others.

participative (democratic) leadership A style that consists of managers and employees working together to make decisions.

free-rein leadership A style that involves managers setting objectives and employees being relatively free to do whatever it takes to accomplish those objectives.

to attract and keep good leaders, but some critics argue that they actually inhibit leadership. McGill University’s Henry Mintzberg has been vocal in his disagreement with the increasing CEO compensation packages. In his view, many CEOs focus solely on the short-term increase in the share value of the company and their bonuses. “Find me a chief executive who refuses those bonuses, who takes the long-term view and says his team will share the spoils of their mandate in 10 years’ time, and I’ll show you a leader,” he said.40 Do you agree that top executives should receive such lucrative packages in today’s environment?

Leadership Styles Nothing has challenged researchers in the area of management more than the search for the “best” leadership traits, behaviours, or styles. Thousands of studies have tried to identify characteristics that distinguish leaders. Intuitively, you would conclude about the same thing they did; leadership styles are hard to pin down. Some leaders are well groomed and tactful, while others are unkempt and abrasive—yet the latter may be just as effective as the former. Just as no one set of traits describes a leader, no one style of leadership works best in all situations. Even so, we can look at a few of the most commonly recognized leadership styles (see Figure 8.8) and see how they may be effective: 1. Autocratic leadership involves making managerial decisions

without consulting others. Such a style is effective in emergencies and when absolute “followership” is needed—for example, when fighting fires. Autocratic leadership is also effective sometimes with new, relatively unskilled workers who need clear direction and guidance. Former Los Angeles Lakers Coach Phil Jackson used an autocratic leadership style to take the team to three consecutive National Basketball Association championships in his first three seasons. By following his leadership, a group of highly skilled individuals became a winning team. Do you think he is using the same leadership style as president as he did as coach? What kind of leadership do you see being used most successfully in baseball, football, and other areas? Can you think of a situation where Jackson’s leadership style makes sense? 2. Participative (democratic) leadership consists of man-

Tony Hsieh, CEO of Zappos.com, views culture as his company’s top priority. He believes that all other aspects of business fall easily into place as long as employees are happy and motivated by their work. Hsieh got rid of middle managers and allowed employees to make more decisions on their own. Do you think you would thrive in a selfmanaged workplace? 306

agers and employees working together to make decisions. Research has found that employee participation in decisions may not always increase effectiveness, but it usually increases job satisfaction.41 Many large organizations like Google, Apple, IBM, Cisco, and AT&T, and most smaller organizations have been highly successful using a democratic style of leadership that values traits such as flexibility, good listening skills, and empathy. Employees meet to discuss and resolve management issues by giving everyone an opportunity to contribute to decisions. 3. Free-rein leadership involves managers setting objectives

and employees being relatively free to do whatever it takes

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■ FIGURE

8.8

VARIOUS LEADERSHIP STYLES Boss-centred leadership

Subordinate-centred leadership

Use of authority by manager Area of freedom for employee Manager Manager makes “sells” decision and decision announces it

Autocratic

Manager presents ideas and invites questions

Manager presents tentative decision subject to change

Manager presents problem, gets suggestions, makes decision

Manager defines limits, asks group to make decision

Participative/democratic

Manager permits employee to function within limits defined by superior Free rein

Source: Robert Tannenbaum; Warren Schmidt, “How to Choose a Leadership Pattern,” Harvard Business Review. (May/June 1973).

to accomplish those objectives. Free-rein leadership is often the most successful leadership style in organizations in which managers supervise doctors, professors, engineers, or other professionals. The traits needed by managers in such organizations include warmth, friendliness, and understanding. More and more firms are adopting this style of leadership with at least some of their employees. Individual leaders rarely fit neatly into just one of these categories. Researchers illustrate leadership as a continuum with varying amounts of employee participation, ranging from purely boss-centred leadership to subordinate-centred leadership Other research has identified two other styles that can be included in this discussion. Transformational leadership occurs when visionary leaders can influence others to follow them in working to achieve a desired outcome or goal. This leadership style works best in situations where dramatic organizational change is required. Can you think of leaders who have been transformational for their organization? Transactional leadership is associated with employees who are motivated by a system of reward. Here the leader is given power to assign tasks and their successful completion earns rewards and reinforcement. The difference between this style and the autocratic style is that with the former the source of motivation is a reward, while with the latter it is punishment. Which leadership style is best? Research suggests that it depends largely on a combination of factors such as organizational goals and values, those being led, and the situation. A manager may be autocratic but friendly with a new trainee, democratic with an experienced

Alan Mulally, former CEO of Ford Motors, managed to lead the U.S. auto manufacturer back to profitability after the global economic recession—without a government financial bailout. The reason for this success was the leadership style of the most authoritarian CEO that Ford has seen since its founder, Henry Ford. When an organization is under extreme pressure, why might autocratic leadership be necessary? 307

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transformational leadership

Leadership style that occurs when leaders can influence others to follow them in working to achieve a desired outcome or goal.

transactional leadership

employee, and free-rein with a trusted long-term supervisor. No single leadership trait is effective in all situations nor is there one leadership style that will always be effective. A successful leader in one organization may not be successful in another organization. There’s no such thing as a leadership style that always works best. A truly successful leader has the ability to use the leadership style most appropriate to the situation and the employees involved.

Managing Knowledge

“Knowledge is power.” Empowering employees means giving them knowledge—that is, getting them the information they need to do the best job they can. Finding the right information, keeping the information in a readily accessible place, and making the information known to everyone in the firm constitutes knowledge management. For example, Canadian Tire was the first major Canadian retailer to use an Internet-based eLearning program. eLearning is an online training and education program that delivers product knowledge and skills training on everything from plumbing to paint mixing. The program is credited knowledge with improved customer and employee satisfaction levels. According to Janice Wismer, management Finding the right former vice-president of human resources, “People say the lessons have increased their information, keeping confidence, that they’re happier working here because the company is committing to their the information in a growth and development.”42 This is good news for store sales. readily accessible Today there is no shortage of information to manage. In fact, the amount of data gathplace, and making the information known to ered has grown so much that the term big data has become a popular term to describe everyone in the firm. the vast collection of available information. These data are collected from both traditional sources like sales transactions and digital sources like social media from both inside and outside the company. The first step to developing a knowledge management system is determining what knowledge is most important. Do you want to know more about your customers? Do you want to know more about competitors? What kind of information would make the company more effective or more efficient or more responsive to the marketplace? Once you have decided what you need to know, you set out to find answers to those questions. Knowledge management tries to keep people from reinventing the wheel— that is, duplicating the work of gathering information—every time a decision needs to be made. A company really progresses when each person in the firm asks continually, “What do I still not know?” and “Whom should I be asking?” It is just as important to know what is not working as what is working. Employees and managers now have e-mail, text messaging, and other means of keeping in touch with each other, with cus© RosaIreneBetancourt 9 / Alamy Stock Photo tomers, and with other stakeholders. The At fast food chains, the typical approach for managers is to key to success is learning how to process supervise and direct employees rather than empower employees. that information effectively and turn it into What do you think are some of the consequences for managers who knowledge that everyone can use to improve do not empower their staff with decision-making authority? processes and procedures. That is one way to Leadership style where the leader is given the power to assign tasks and their successful completion leads to rewards and reinforcement.

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enable workers to be more effective. (Recall that there is a brief discussion in Appendix A: Using Technology to Manage Information, about information technology and knowledge management.) See the Adapting to Change box for an example of how GM used social media to manage information customers needed during a time of crisis for the company.

Adapting to CHANGE Using Social Media During the Worst of Times When a company struggles with a recall of 1.6 million of their products that are linked to 13 deaths, managers naturally expect a harsh backlash from consumers. This was the situation Mary Barra faced, just a few short weeks after being named CEO of General Motors (GM). GM was forced to recall 2006 Saturn Ions and five other models because of a defective ignition switch that, if bumped or weighed down by a heavy key ring, could turn off, shutting down the engine and disabling the car’s air bags. To make matters worse for the company, investigations indicated that there were employees within the company who knew about the defective switch years ago; yet the problem was not corrected. At the deadline for submitting claims for compensation in early 2015, over 4000 claims had been submitted for review to receive funds from the Victim Compensation Fund. Barra knew it was impossible to undo the damage already done. She decided the best path was to try to redefine GM as an open, transparent, listening organization that customers could trust. One of her first moves was appointing a vehicle-safety czar whose job is to quickly identify and resolve any safety issues facing the company. She also wanted worried owners of recalled vehicles to know that GM was listening and ready to address their concerns. To achieve this, GM’s social media group was deployed to reach out to impacted customers to explain their cars were drivable while they waited for repairs so long as extra items were not attached to their key rings. Despite such assurances, GM provided more than 6000 loaner cars to customers who were skeptical about their car’s safety. The company’s social media staffers also set up dealership appointments with frustrated owners to have the problem fixed.

CEO Barra’s overriding concern was that the recall not permanently tarnish GM’s image going forward. The company had made strong financial progress since emerging from bankruptcy and a government bailout. She knew that when it came to social media like Facebook and Twitter, a customer’s perception of a brand is influenced by what an organization does and other people’s opinion of it. Therefore, GM’s social media commitment was to search for complaints, respond quickly, and solve the problems. Professor Roland Rust from the University of Maryland, an expert in managing brand crises, believed GM’s responsiveness online was “absolutely the right thing to do.” According to Rust, “If they didn’t respond to customers, then those customers are going to continue to flame them.” Mary Barra certainly hopes he is right and GM’s response was on target. For right now, it remains to be seen whether GM can repair its internal quality-control issues and whether consumers will trust its products again.

Sources: James Healey, “GM victims’ fund closes with 51 deaths – so far,” USA Today, February 2, 2015, http://www.usatoday.com/story/ money/2015/02/02/gm-ignition-switch-recall-death-victims-compensation/22741027/; “GM ignition-switch victims accepting offers, Feinberg says,” Automotive News, January 30, 2015, http://www.autonews.com/article/20150130/OEM11/150139985/gm-ignitionswitch-victims-accepting-offers-feinberg-says; Vince Bond Jr., “GM Uses Social Media to Respond to Customer Gripes,” Automotive News, March 8, 2014; Lindsay Gellman, “Companies Turn to Social-Media Coaches,” The Wall Street Journal, March 26, 2014; and Vindu Goel, “G.M. Uses Social Media to Manage Customers and Its Reputation,” The New York Times, March 23, 2014.

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PROGRESS ASSESSMENT

• What are some characteristics of leadership today that make leaders different from traditional managers?

• Explain the differences between autocratic and democratic leadership styles. • What is the first step in developing a knowledge management system?

Controlling: Making Sure It Works LO6

Summarize the five steps of the control function of management.

The control function involves measuring performance relative to the planned objectives and standards, rewarding people for work well done, and then taking corrective action when necessary. Thus, the control process (see Figure 8.9) is the heart of the management system because it provides the feedback that enables managers and workers to adjust to any deviations from plans and to changes in the environment that have affected performance. Controlling consists of five steps: 1. Establish clear performance standards. This ties the planning function to the control

function. Without clear standards, control is impossible. 2. Monitor and record actual performance (results).

■ FIGURE

8.9

THE CONTROL PROCESS The control process is based on clear standards. Without such standards, the other steps are difficult, if not impossible. With clear standards, performance measurement is relatively easy and the proper action can be taken.

Establish clear standards

Monitor and record performance

Compare results against standards

Communicate results

If needed, take corrective action

Are standards realistic?

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3. Compare results against plans and standards. 4. Communicate results and deviations to the employees involved. 5. Take corrective action when needed and provide positive feedback for work

welldone. This control process is ongoing throughout the year. Continuous monitoring ensures that if corrective action is required, there is enough time to implement changes. When corrective action is necessary, the decision-making process is a useful tool to apply (recall the six Ds of decision making). Simply, managers are encouraged to review the situation and, based on collected information, develop alternatives with their staff and implement the best alternative. Or, in some circ*mstances, if significant changes have occurred, management can implement a contingency plan (as discussed earlier in the chapter). The focus is to meet the standards that were initially established during the planning stage or the standards that have since been modified. Since this process is continuous, it may take several attempts before standards are successfully met. The control system’s weakest link tends to be the setting of standards. To measure results against standards, the standards must be specific, attainable, and measurable. Vague goals and standards such as “better quality,” “more efficiency,” and “improved performance” are not sufficient because they do not describe what you are trying to achieve. For example, let’s say you are a runner and you want to improve your distance. When you started your improvement plan last year, you ran 2 kilometres a day. Now you run 2.1kilometres a day. Did you meet your goal? You did increase your distance, but certainly not by very much. A more appropriate goal statement would be: To increase running distance from 2 kilometres a day to 4 kilometres a day by January 1. It is important to establish a time period for when specific goals are to be met. Here are examples of goals and standards that meet these criteria: ∙ Cut the number of finished-product rejects from 10 per 1000 to 5 per 1000 by March 31. ∙ Increase the number of times managers praise employees from 3 per week to 12 per week by the end of the quarter. ∙ Increase sales of product X from $10,000 per month to $12,000 per month by July 31. One way to make control systems work is to establish clear procedures for monitoring performance. Accounting and finance are often the foundation for control systems because they provide the numbers management needs to evaluate progress. We shall explore both accounting and finance in detail later in the text.

A Key Criterion for Measurement: Customer Satisfaction Traditional measures of success are usually financial: that is, they define success in terms of profits or return on investment. Certainly these measures are still important, but they are not the whole purpose of a firm. Other purposes may include pleasing customers

external customers

Dealers, who buy products to sell to others, and ultimate customers (or end users), who buy products for their own personal use.

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One way colleges and universities measure their performance is to track the number of students who complete their degrees or who graduate within a certain number of years. What are some of the factors that could affect the achievement of this performance standard, and how do post-secondary administrators take corrective action when necessary?

internal customers

Individuals and units within the firm that receive services from other individuals or units.

(including both external and internal customers). External customers include dealers, who buy products to sell to others, and ultimate customers (also known as end users) such as you and me, who buy products for their own personal use. Internal customers are individuals and units within the firm that receive services from other individuals or units. For example, the field salespeople are the internal customers of the marketing research people who prepare research reports for them. One goal today is to go beyond simply satisfying customers to “delighting” them with unexpectedly good products and services. We’ll discuss management in more detail in the next few chapters. Let’s pause now, review, and do some exercises. Management is doing, not just reading.

PROGRESS ASSESSMENT

• What are the five steps in the control process? • What is the difference between internal and external customers?

SUMMARY LO1

Describe the changes occurring today in the management function. Many managers are changing their approach to corporate management. What reasons can you give to account for these changes in management? Business people are being challenged to be more ethical and to make their accounting practices more visible to investors and the general public. Change is happening faster than ever, and global competition is just a click away. Managing change is an important element of success, particularly in light of today’s emphasis on speed in the global marketplace. National borders mean much less now compared to the past, and co-operation and integration among companies have greatly increased. Within companies, knowledge workers are demanding managerial styles that allow for freedom, and the workforce is becoming increasingly diverse, educated, and self-directed. How are managers’ roles changing? Leaders of Fortune 100 companies today tend to be younger, more of them are female, and fewer of them are educated at elite universities. They appreciate that many of their employees know more about

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technology and other practices than they do. Therefore, they tend to put more emphasis on motivation, teamwork, and co-operation. Managers in the future are likely to assume completely new roles in the firm. No matter what, managers will be taking a leadership role in adapting to climate change. Further, they’ll be doing more expansion overseas. LO2

Describe the four functions of management. Managers perform a variety of functions. What are the four primary functions of management? The four primary functions are (1) planning, (2) organizing, (3) leading, and (4) controlling. Describe each of the four functions. Planning includes anticipating trends and determining the best strategies and tactics to achieve organizational goals and objectives. Organizing includes designing the structure of the organization and creating conditions and systems in which everyone and everything works together to achieve the organization’s goals and objectives. Leading involves creating a vision for the organization and guiding, training, coaching, and motivating others to work effectively to achieve the organization’s goals and objectives. Controlling involves establishing clear standards to determine whether an organization is progressing toward its goals and objectives, rewarding people for doing a good job, and taking corrective action if they are not.

LO3

Relate the planning process and decision making to the accomplishment of company goals The planning function involves the process of setting objectives to meet the organizational goals. Goals are broad, long-term achievements that organizations aim to accomplish. What are the four types of planning, and how are they related to the organization’s goals and objectives? Strategic planning is broad, long-range planning that outlines the goals of the organization. Tactical planning is specific, short-term planning that lists organizational objectives. Operational planning is part of tactical planning and involves setting specific timetables and standards. Contingency planning involves developing an alternative set of plans in case the first set does not work out. What are the steps involved in decision making? Decision making is choosing among two or more alternatives and it is the heart of all management functions. The six Ds of decision making are (1) define the situation, (2) describe and collect needed information, (3) develop alternatives, (4) decide which alternative is best, (5) do what is indicated (begin implementation), and (6) determine whether the decision was a good one and follow up.

LO4

Describe the organizing function of management. Organizing means allocating resources (such as funds for various departments), assigning tasks, and establishing procedures for accomplishing the organizational objectives. What are the three levels of management in the corporate hierarchy? The three levels of management are (1) top management (highest level consisting of the president and other key company executives who develop strategic plans); (2) middle management (general managers, division managers, and plant managers who are responsible for tactical planning and controlling); and (3) supervisory management (first-line managers/supervisors who evaluate workers’ daily performance). What skills do managers need? Managers must have three categories of skills: (1) technical skills (ability to perform specific tasks such as selling products or developing software), (2) human relations skills (ability to communicate and

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motivate), and (3) conceptual skills (ability to see organizations as a whole and how all the parts fit together). Managers at different levels need different skills. LO5

Explain the differences between leaders and managers, and describe the various leadership styles. Executives today must be more than just managers; they must be leaders as well. What’s the difference between a manager and a leader? A manager plans, organizes, and controls functions within an organization. A leader has vision and inspires others to grasp that vision, establishes corporate values, emphasizes corporate ethics, and does not fear change. Which leadership style is most effective? Figure 8.8 shows a continuum of leadership styles ranging from boss-centred to subordinate-centred leadership. The most effective leadership style depends on the people being led and the situation.

LO6

Summarize the five steps of the control function of management. The control function of management involves measuring employee performance against objectives and standards, rewarding people for a job well done, and taking corrective action if necessary. What are the five steps of the control function? Controlling incorporates (1) setting clear standards, (2) monitoring and recording performance, (3) comparing performance with plans and standards, (4) communicating results and deviations to employees, and (5) providing positive feedback for a job well done and taking corrective action if necessary. What qualities must standards possess to be used to measure performance results? Standards must be specific, attainable, and measurable.

KEY TERMS autocratic leadership 306 brainstorming 298 conceptual skills 302 contingency planning 296 controlling 291 crisis planning 297 decision making 297 external customers 312 free-rein leadership 306 goals 292 human relations skills 302 internal customers 312 knowledge management 308

314

leading 290 management 289 middle management 301 mission statement 292 objectives 292 operational planning 296 organization chart 299 organizing 290 participative (democratic) leadership 306 planning 290 PMI 298 problem solving 298

resources 288 staffing 303 strategic planning 294 supervisory management 301 SWOT analysis 293 tactical planning 296 technical skills 302 top management 299 transactional leadership 307 transformational leadership 307 transparency 305 values 291 vision 291

CHAPTER 8 Management and Leadership

CAREER EXPLORATION If you are interested in pursuing a career in management, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Administrative services manager—plans, directs, and coordinates supportive services of an organization; maintains facilities and supervises activities that include record keeping, mail distribution,and office upkeep.

∙ Construction manager—plans, coordinates, budgets, and supervises construction projects from start to finish. ∙ Emergency management director—prepares plans and procedures for responding to natural disasters or other emergencies. ∙ Food service manager—responsible for the daily operation of restaurants and other establishments that prepare and serve food and beverages. ∙ Computer and information technology (IT) manager—plans, coordinates, and directs computer-related activities in an organization.

CRITICAL THINKING Many students say they would like to be a manager someday. Here are some questions to get you thinking like a manager. 1. Would you like to work for a large firm or a

small business? Private or public? In an office or out in the field? Give your reasons for each answer. 2. What type of leader would you be? What type of

3. Do you see any problems with a participative

(democratic) leadership style? Can you see a manager getting frustrated when he or she exercises less control over others? 4. Can someone who is trained to give orders

(like a military sergeant) be retrained to be a participative leader? How? What problems may emerge?

a leader would you most enjoy working with?

DEVELOPING CAREER SKILLS Key: Team

Analytic

1. Allocate some time to do some career plan-

ning by doing a SWOT analysis of your present situation. Choose one career you are interested in and answer the following questions: What does the marketplace for your chosen career(s) look like today? What skills

Communication

Technology

do you have that will make you a winner in that type of career? What weaknesses might you target to improve? What are the threats to that career choice? What are the opportunities? Prepare a two-minute presentation for the class.

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2. Bring several decks of cards to class and have the

class break up into teams of four or so members. Each team should then elect a leader. Each leader should be assigned a leadership style: autocratic, participative, or free-rein. Have each team try to build a house with a given design. The team that completes the task the quickest wins. Each team member should then report his or her experience under that style of leadership.

3. In class, discuss the advantages and disadvan-

tages of becoming a manager. Does the size of the business make a difference? What are the advantages of a career in a p rofit-seeking business versus a career in a non-profit organization?

4. Review Figure 8.8 and discuss managers you

have known, worked for, or read about who have practised each style. Students from other countries may have interesting experiences to add. Which management style did you like best? Why? Which were most effective? Why?

5. Because of the illegal and unethical behaviour

of a few managers, managers in general are under suspicion for being greedy and dishonest. Discuss the fairness of such charges, given the thousands of honest and ethical managers, and what could be done to improve their opinion of managers among the students in your class.

ANALYZING MANAGEMENT DECISIONS Leading in a Leaderless Company In an issue of BusinessWeek devoted to the future of business, writer John Byrne speculated about the future of leadership. He said that the twenty-first century would be unfriendly to leaders who try to run their companies by sheer force of will, and that success would come instead to companies that are “leaderless”—or companies whose leadership is so widely shared that they resemble ant colonies or beehives. In a world that is becoming more dependent on brainpower, having teams at the top will make more sense than having a single top manager. The Internet enables companies to act more like beehives because information can be shared horizontally rather than sent up to the top manager’s office and then back down to lower organizational levels again. Decisions can be made instantly by the best people equipped

to make them. One of the best examples of this is Wikipedia. In the past, uniform thinking from the top could cripple an organization. Today, however, team leadership is ideally suited for the new reality of fast-changing markets. Urgent projects often require the coordinated contribution of many talented people working together. Such thinking does not happen at the top of the organization; it takes place lower down the organization among the workers. In the future, therefore, managers are more likely to be chosen for their team experience and their ability to delegate rather than to make all key decisions themselves. Companies in the future, it is said, will be led by people who understand that in business, as in nature, no one person can be in control.

Sources: John A. Byrne, “The Global Corporation Becomes a Leaderless Corporation,” BusinessWeek, August 30, 1999, 88–90; and Etienne C. Wenger and William M. Synder, “Communities of Practice: The Organizational Frontier,” Harvard Business Review, January–February 2000, 139–145.

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Discussion Questions 1. What would you look for on a resumé that

3. What would happen if all businesses in your

would indicate that a job candidate was a self-motivated team player? Are you that type? How do you know?

area had their employees interact with customers to hear their comments and complaints? Would that be an effective or ineffective approach? Why?

2. Given your experience with managers in the

past, what problems do you see for managers who let employees decide for themselves the best way to do things and give them the power to obtain needed equipment?

4. What are the various ways you can think of for

companies to pay bonuses to team members? One way is to divide the money equally. What are other ways? Which would you prefer as a team member?

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Structuring Organizations for Today’s Challenges LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Outline the basic principles of organization management. LO2 Compare the organizational theories of Henri Fayol and Max Weber. LO3 Evaluate the choices managers make in structuring organizations. LO4 Contrast the various organizational models. LO5 Identify the benefits of inter-firm co-operation and coordination. LO6 Explain how organizational culture can help businesses adapt to change.

P R O F I L E GETTING TO KNOW: DENISE MORRISON, CEO, CAMPBELL SOUP COMPANY

318

Since 1869, the Campbell Soup Company has been

unhealthy ingredients with sustainable ones. This

one of America’s most iconic brands. Its products

required far more effort than a standard rebrand-

are familiar not only to millions of consumers, but

ing project: she and her colleagues had to evaluate

also to art lovers around the world, thanks to Andy

every aspect of the business and how it could be

Warhol’s legendary paintings of the company’s

changed for the better.

soup cans. As a result, Campbell must walk a fine

Fortunately, Morrison has been training for

line between catering to people’s prior expectations

enormous tasks like this one since she was a child.

and updating the business to reflect current trends.

Her father, a top executive at companies like AT&T,

It’s CEO Denise Morrison’s job to keep the

encouraged his four daughters to get a head start

company on this narrow path. After earning the top

on their careers. “He was talking to us at a very

position in 2011, she went on to oversee a major

early age that he thought the world was going

operational transformation that replaced Campbell’s

to open up for women and he wanted us to be

CHAPTER 9 Structuring Organizations for Today’s Challenges

and Kraft. After building extensive experience in the food industry, Morrison took a position at Campbell as president of global sales. She moved on to chief operating officer in 2010 and then became CEO a year later. As she climbed up the corporate ladder, Morrison took careful notice of how the food industry was changing. By the 2010s consumers started to move away from processed, unhealthy options and toward organic cuisine. This “seismic shift” in people’s preferences convinced Morrison that Campbell had to change with the times. “We believe that we need to participate in this, so you can either lead change or be a victim of it,” said Morrison. “I’d much rather lead it.” In order to achieve this goal, she knew the company had to radically alter its operational structure. So along with acquiring healthy brands like Bolthouse Farms, Morrison closed down five underperforming plants while improving others. © Andrew Cutraro/Redux

prepared,” said Morrison. “So, he taught us business.” Each night he brought products home for his daughters to discuss at the dinner table. During these family focus groups, Morrison learned how to evaluate items and communicate her thoughts to her peers. Their father also placed a “job jar” in the house containing all the chores that needed to get done that week. His daughters had to decide among themselves who got assigned which chore, teaching them valuable lessons about negotiation and goal achievement. This homegrown expertise proved to be essential for Morrison’s future accomplishments. Her first taste of success came at Boston College, where she graduated magna cum laude with degrees in economics and psychology. She then landed a job at Procter & Gamble, soon followed by a series of other senior roles at Nabisco, Nestlé,

The company also had to find several new suppliers as it made the switch to sustainable ingredients. After that, Campbell then needed to determine how these added costs would affect production as a whole. So far, the company has spent about half a decade refining this process and will likely continue to do so for years to come. Thankfully for Campbell, Morrison remains determined to see this monumental chore through to the end. “We’re talking, thinking and acting differently about the food we make,” said Morrison. “We will be more honest about what goes in our food, how we made our food.” This chapter is about changing and adapting organizations to today’s markets, as Denise Morrison is doing at Campbell. Most managers never face challenges that big, but there are plenty of opportunities in every firm to use the principles of organizing to manage—and benefit from—change.

Sources: “How Campbell Soup and Panera See Shifting Consumer Tastes,” The Wall Street Journal, October 16, 2016; Jane M. Von Bergen, “Campbell Soup CEO Knew as a Child She Wanted to Be the Boss,” Seattle Times, July 10, 2016; Jennifer Kaplan, “Campbell to Cut Artificial Flavors, Colors by End of 2018,” Bloomberg Businessweek, July 22, 2015; Denise Morrison, “CEO of Campbell Soup: The Biggest Challenge of Leading an Iconic Food Brand,” Fortune, October 27, 2015; “Denise M. Morrison: President and Chief Executive Officer,” Campbellsoupcompany.com, accessed September 2017.

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LO1

Outline the basic principles of organization management.

Everyone’s Reorganizing You don’t have to look far to find examples of companies reorganizing.1 A. G. Lafley, CEO of legendary Procter & Gamble, transformed the company into one of the most innovative firms in the world. Some entrepreneurial companies are organizing globally from the start, and succeeding. Other organizations have been declining, including some builders within the housing market.2 Clearly the challenge to reorganize is strong.3 Few firms have established as strong an image as Starbucks, but even that company had to restructure to keep its customer base. As the company expanded its menu to include more sandwiches, one of the unexpected results was a change in the smell of the stores (the odour of burning cheese was overwhelming the smell of coffee). The company restored the stores’ aroma by cutting back on sandwiches for a while. Many stores had to be closed and other stores were remodelled to recapture the feel of a Milan coffee bar. In the end, Starbucks regained its market image and is prospering again. Adjusting to changing markets is a normal function in a capitalist economy. There will be big winners, like Amazon, Google and Facebook, and big losers as well.4 The key to success is remaining flexible enough to adapt to the changing times.5 Often that means going back to basic organizational principles and rebuilding the firm on a sound foundation.6 This chapter will begin by discussing such basic principles.

Building an Organization from the Bottom Up The principles of management are much the same, no matter the size of the business. Management, as you learned in Chapter 8, begins with planning. Let’s say, for example, that you and two of your friends plan to start a lawn-mowing business. One of the first steps is to organize your business. Organizing, or structuring, begins with determining what work needs to be done (mowing, edging, trimming, etc.) and then dividing up tasks among the three of you; this is called a division of labour. One of you, for example, might have a special talent for trimming bushes, while another is better at mowing. The success of a firm often depends on management’s ability to identify each worker’s strengths and assign the right tasks to the right person. Often a job can be done quickly and well when each person specializes. Dividing tasks into smaller jobs is called job specialization. For example, you might divide the mowing task into mowing, trimming, and raking. If your business is successful, you will probably hire more workers to help. You might then organize © Huntstock/age fotostock RF them into teams or departments to do the various tasks. The principles of organization apply to businesses of all One team, for example, might mow the lawn while sizes. Structuring the business, making an appropriate another team uses blowers to clean up the leaves and division of labour using job specialization and cut grass. If you are really successful over time, you departmentalization, establishing procedures, and might hire an accountant to keep records for you, variassigning authority are tasks found in most firms. How do ous people to do your marketing (e.g., advertising), and these principles operate at your current or most recent job? repair people to keep the equipment in good shape. 320

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You can see how your business might evolve into a company with several departments: operations (all tasks related to mowing the lawns), marketing, accounting, and maintenance. The process of setting up individual departments to do specialized tasks is called departmentalization. Finally, you would need to assign authority and responsibility to people so that you could control the whole process. If something went wrong in the accounting department, for example, you would know who was responsible. Structuring an organization, then, consists of devising a division of labour (sometimes resulting in specialization), setting up teams or departments to do specific tasks (e.g., human resources and accounting), and assigning responsibility and authority to people. It also includes allocating resources (such as funds for various departments), assigning specific tasks, and establishing procedures for accomplishing the organizational objectives. Right from the start, you have to make some ethical decisions about how you will treat your workers (see the Making Ethical Decisions box). Finally, as you learned in Chapter 8, you may develop an organization chart that shows relationships among people: it shows who is accountable for the completion of specific work and who reports to whom. Finally, you have to monitor the environment (environmental factors were discussed in Chapter 1) to see what competitors are doing and what customers are demanding. Then, you must adjust to the new realities. For example, a major lawn care company may begin promoting its services in your area. You might have to make

Making ETHICAL DECISIONS Safety and Environmental Concerns Versus Profit Imagine that you have begun a successful lawn-mowing service in your neighbourhood. To get some input on what is needed, you observe other lawn-mowing services in the area. Several seem to hire untrained workers, many of them from other countries. The companies pay the workers minimum wage or slightly more, and often provide no safety equipment. Workers do not have ear protection against the loud mowers and blowers, and many do not wear goggles when operating the shredder. Very few workers wear masks when spraying potentially harmful fertilizers. You are aware that there are many hazards connected with yard work. You also know that safety gear can be expensive and that workers often prefer to work without such protection. You are interested in making as much money as possible, but you also are concerned about the safety and welfare of your workers. Furthermore, you are aware of the noise pollution caused by blowers and other equipment and would like to keep noise levels down, but quiet equipment is expensive. The corporate culture you create as you begin your service will last for a long time. If you emphasize

safety and environmental concern from the start, your workers will adopt your values. On the other hand, you can see the potential for making faster profits by ignoring as many safety rules as you can and by paying little attention to the environment. What are the consequences of each choice? Which will you choose?

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some organizational changes to offer even better service at competitive prices. What would be the first thing you would do if you began to lose business to competitors? LO2

Compare the organizational theories of Henri Fayol and Max Weber.

The Changing Organization Never before in the history of business has so much change been introduced so quickly— sometimes too quickly, as we saw with the 2011 earthquake and tsunami in Japan. As you learned in earlier chapters, much of that change is due to the dynamic business environment, including heightened global competition, a stagnating economy, faster technological change, and pressure to preserve the natural environment.7 Equally important to many businesses is the change in customer expectations. Consumers today expect high-quality products and fast, friendly service—at a reasonable cost. Doug Rauch, former President of Trader Joe’s grocery chain, views employees and customers as two wings of a bird: you need both of them to fly. They go together—if you take care of your employees, they’ll take care of your customers. When your customers are happier and they enjoy shopping, it also makes your employees’ lives happier, so it’s a virtuous cycle.8 Managing change, then, has become a critical managerial function. It may sometimes include redesigning the whole organizational structure. For example, in 2015 technology giant Google restructured its organization into a conglomerate called Alphabet. Alphabet consists of independent units including Google (the search engine and related businesses such as Gmail and YouTube), Calico (health care), Verily (“smart” contact lens), Deep Mind (artificial intelligence), and several others. These smaller units have more flexibility to listen to customers and adapt accordingly.9 Such change may occur in non-profit and government organizations as well as businesses. Many organizations in the past were designed more to facilitate management than to please the customer. Managers were typically the only members of an organization who had some level of training, and possessed most of the knowledge needed to run the business. Companies designed many rules and regulations to give managers control over employees. As you will learn later, that is called bureaucracy. Where did bureaucracy come from? What are the alternatives? To understand where we are, it helps to know where we have been.

The Development of Organizational Design economies of scale

The situation in which companies can reduce their production costs if they can purchase raw materials in bulk and develop specialized labour, resulting in the average cost of goods going down as production levels increase. 322

Until the twentieth century, most businesses were rather small, the processes for producing goods were relatively simple, and organizing workers was fairly easy. Organizing workers is still not too hard in most small firms, such as a lawn-mowing service or a small shop that produces custom-made boats. Not until the 1900s and the introduction of mass production (efficiently producing large quantities of goods) did business production processes and organizations become complex. Usually, the bigger the plant, the more efficient production became. Business growth led to what was called economies of scale. This term refers to the fact that companies can reduce their production costs if they can purchase raw materials in bulk. The average cost of goods decreases as production levels rise. The cost of building a car, for example, declined sharply when automobile companies adopted mass production and GM and Ford built huge factories.10 Over time, such innovations became less

CHAPTER 9 Structuring Organizations for Today’s Challenges

meaningful as other companies copied their processes. You may have noticed the benefits of mass production in housing and computers.11 During the era of mass production, organization theorists emerged. In France, Henri Fayol published his book Administration industrielle et générale in 1919. It was popularized in North America in 1949 under the title General and Industrial Management.

FAYOL’S PRINCIPLES OF ORGANIZATION In France, economic theoretician Henri Fayol published his book Administration industrielle et générale in 1919. Fayol introduced various management principles, including the following: ∙ Unity of command. Each worker is to report to one, and only one, boss. The benefits of this principle are obvious. What happens if two different bosses give you two different assignments? Which one should you follow? To prevent such confusion, each person should report to one manager. (later we’ll discuss an organizational plan that seems to violate this principle.) ∙ Hierarchy of authority. All workers should know to whom they should report. Managers should have the right to give orders and expect others to follow. (In Chapter 12 we will talk about a change to this concept, called empowerment.) ∙ Division of labour. Functions are to be divided into areas of specialization such as production, marketing, and finance. This principle is now being questioned or modified, as you’ll read later, and cross-functional teams are gaining more emphasis. ∙ Subordination of individual interests to the general interest. Workers are to think of themselves as a coordinated team. The goals of the team are more important than the goals of individual workers. Have you heard this concept applied to professional hockey and football teams? Did you see this principle at work in the last Stanley Cup playoff? ∙ Authority. Managers have the right to give orders and the power to enforce obedience. Authority and responsibility are related: whenever authority is exercised, responsibility arises. This principle is also being modified as managers are beginning to empower employees. ∙ Degree of centralization. The amount of decision-making power vested in top management should vary by circ*mstances. In a small organization, it is possible to centralize all decision-making power in the top manager. In a larger organization, however, some decision-making power, for both major and minor issues, should be delegated to lower-level managers and employees. ∙ Clear communication channels. All workers should be able to reach others in the firm quickly and easily. ∙ Order. Materials and people should be placed and maintained in the proper location.

Public Domain

Henri Fayol introduced several management principles still followed today, including the idea that each worker should report to only one manager and that a manager, in turn, should have the right to give orders for others to follow and the power to enforce them. Which of Fayol’s principles have you observed?

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∙ Equity. A manager should treat employees and peers with respect and justice. ∙ Esprit de corps. A spirit of pride and loyalty should be created among people in the firm. These principles became synonymous with the concept of management. Organizations were designed so that no person had more than one boss, lines of authority were clear, and everyone knew to whom they were to report. Naturally, these principles tended to be written down as rules, policies, and regulations as organizations grew larger. That process of rulemaking often led to rather rigid organizations that did not always respond quickly to consumer requests. So, where did the idea of bureaucracy come from? We talk about that next.

MAX WEBER AND ORGANIZATIONAL THEORY Sociologist Max Weber (pronounced “Vay-ber”) was writing about organization theory in Germany around the same time Fayol was writing his books in France. Weber’s book The Theory of Social and Economic Organizations, like Fayol’s, also appeared in North America in the late 1940s. He promoted the pyramid-shaped organization structure that became very popular in large firms. Weber put great trust in managers and felt that the firm would do well if employees simply did what they were told. The less decision making employees had to do, the better. Clearly, this is a reasonable way to operate if you are dealing with relatively uneducated and untrained workers. (Where are you likely to find such workers today?) Often, such workers were the only ones available at the time Weber was writing; most employees did not have the kind of educational background and technical skills that today’s workers generally have. Weber’s principles of organization were similar to Fayol’s. In addition, Weber emphasized: ∙ Job descriptions; ∙ Written rules, decision guidelines, and detailed records; ∙ Consistent procedures, regulations, and policies; and ∙ Staffing and promotion based on qualifications.

Max Weber promoted an organizational structure composed of middle managers who implement the orders of top managers. He believed workers were best managed if managers or supervisors gave them strict rules and regulations to follow and monitored their performance. What industries or businesses today would benefit by using such controls?

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Weber believed that large organizations demanded clearly established rules and guidelines that were to be followed precisely. In other words, he was in favour of bureaucracy. Although his principles made a great deal of sense at the time, the practice of establishing rules and procedures was so rigid in some companies that it became counterproductive. However, some organizations today still thrive on Weber’s theories.12 United Parcel Service (UPS), for example, still has written rules and decision guidelines that enable the firm to deliver packages quickly because employees do not have to pause to make decisions—procedures are clearly spelled out for them. Other organizations are not as effective because they do not allow employees to respond quickly to new challenges. That is clearly the case with disaster relief in many areas, as was the case when Hurricane

CHAPTER 9 Structuring Organizations for Today’s Challenges

Katrina hit New Orleans. Later, we shall explore what can be done to make organizations more responsive. First, let’s look again at some basic terms and concepts.

Turning Principles into Organizational Design Following the concepts of theorists like Fayol and Weber, managers in the latter part of the 1900s began designing organizations so that managers could control workers. Many organizations are still organized that way, with everything set up in a hierarchy. A hierarchy is a system in which one person is at the top of the organization and there is a ranked or sequential ordering from the top down of managers and others who are responsible to that person. Since one person cannot keep track of thousands of workers, the top manager needs many lower-level managers to help. The chain of command is the line of authority that moves from the top of the hierarchy to the lowest level. Some organizations have a dozen or more layers of management between the chief executive officer (CEO) and the lowest-level employees. If employees want to introduce work changes, they ask a supervisor (the first level of management), who asks his or her manager, who asks a manager at the next level up, and so on. It can take weeks or months for a decision to be made and passed from manager to manager until it reaches employees. At pharmaceutical company Pfizer, for example, there were once 17 layers in the hierarchy between the chief executive and the lowest employee. Max Weber used the word bureaucrat to describe a middle manager whose function was to implement top management’s orders. Thus, bureaucracy came to be the term used for an organization with many layers of managers. When employees in a bureaucracy of any size have to ask managers for permission to make a change, the process may take so long that customers become annoyed. Has this happened to you in a department store or some other organization? Since many customers want efficient service—and they want it now—slow service is simply not acceptable in many of today’s competitive firms. Some companies are reorganizing to let employees make decisions on their own to please the customer no matter what. Home Depot has adopted this approach to win more customers from competitors. Nordstrom, a fashion specialty retailer, empowers employees to accept a return from a customer without managerial approval, even if the item was not originally sold at that store.13 As you will see in Chapter 12, giving employees such authority and responsibility to make decisions and please customers is called empowerment. Remember that empowerment works only when employees are given the proper training and resources to respond. Can you see how much training would help first responders in crisis conditions? It is important to note that well-run bureaucratic organizations can be extremely effective in certain contexts—when there is little innovation in the marketplace, consistency in demand, low-skilled workers, and adequate time to weigh the consequences of decisions.

hierarchy

A system in which one person is at the top of the organization and there is a ranked or sequential ordering from the top down of managers who are responsible to that person.

chain of command The line of authority that moves from the top of a hierarchy to the lowest level.

bureaucracy

An organization with many layers of managers who set rules and regulations and oversee all decisions.

PROGRESS ASSESSMENT

• What do the terms “division of labour” and “job specialization” mean? • What are the principles of management outlined by Fayol? • What did Weber add to Fayol’s principles? 325

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LO3

Evaluate the choices managers make in structuring organizations.

Decisions to Make in Structuring Organizations Henry Mintzberg, an expert on management and business, supports the current view that there is no single structure that will lead to success for all organizations. “Structure should reflect the organization’s situation—for example, its age, size, type of production system, and the extent to which its environment is complex and dynamic. Small businesses with up to five employees do not need to spend time on how to structure themselves. However, the effectiveness of larger organizations or those experiencing significant change is impacted by structure. As well, a firm’s design decisions (such as span of control, centralization versus decentralization, and matrix structures) need to work within the chosen structure and design.”14 These design decisions will be discussed in this chapter. Mintzberg has also written a book on MBA programs entitled Managers Not MBAs,15 which is an insightful review of the soft practice of managing and management development. When designing responsive organizations, firms have to make decisions about several organizational issues: (1) centralization versus decentralization, (2) span of control, (3) tall versus flat organization structures, and (4) departmentalization. Their specific choices are based upon a process called change management. This strategic approach begins by preparing for the change, then managing the change, and concludes with re-enforcing the change. Given the risk involved with this type of change, a formal process increases the likelihood of success.

Choosing Centralization Versus Decentralization of Authority centralized authority

An organization structure in which decision-making authority is maintained at the top level of management at the company’s headquarters.

decentralized authority

An organization structure in which decision-making authority is delegated to lower-level managers more familiar with local conditions compared to headquarters’ management.

326

Centralized authority occurs when decision-making authority is maintained at the top level of management at the company’s headquarters. For example, Burger King has a globally centralized structure in which most major decisions are made by a core management team. While this organizational structure has the advantage of providing strong global control, it limits the flexibility to immediately respond to regional or local market changes and trends.16 McDonald’s believes that purchasing, promotion, and other such decisions are best handled centrally. There’s usually little need for each McDonald’s restaurant in Canada to carry different items, although, as you have read, the restaurants’ menus are often quite different in other countries. The company leans toward centralized authority. Today’s rapidly changing markets and global differences in consumer tastes tend to favour some decentralization and thus more delegation of authority, even at McDonald’s. Its restaurants in England offer tea, those in France offer a Croque McDo (a hot ham-and-cheese sandwich), those in Japan sell rice, and those in China offer taro and red bean desserts.17 Decentralized authority occurs when decision-making authority is delegated to lower-level managers and employees who are more familiar with local conditions compared to headquarters’ management. Roots customers in Kelowna, for example, are likely to demand clothing styles different from those in Charlottetown or Lethbridge. It makes sense, therefore, to give store managers in various cities the authority to buy, price, and promote merchandise appropriate for each area. Such delegation of authority is an example of decentralized management. Magna International has a decentralized operating structure. Magna’s manufacturing divisions operate as independent profit centres aligned by geographic region in each of the

CHAPTER 9 Structuring Organizations for Today’s Challenges

company’s product areas. This decentralized structure prevents bureaucracy and makes Magna more responsive to customer needs and changes within the global automotive industry as well as within specific regions.18 Figure 9.1 lists some advantages and disadvantages of centralized versus decentralized authority.

Choosing the Appropriate Span of Control Span of control refers to the optimum number of subordinates a manager supervises or should supervise. There are many factors to consider when determining span of control. At lower levels, where work is standardized, it is possible to implement a wide span of control (15 to 40 workers). For example, one supervisor can be responsible for 20 or more workers who are assembling computers or cleaning up movie theatres. However, the number gradually narrows at higher levels of the organization because work is less standardized and there’s more need for face-to-face communication. Variables in span of control include the following:

span of control

The optimum number of subordinates a manager supervises or should supervise.

∙ Capabilities of the manager. The more experienced and capable the manager, the broader the span of control can be. (A large number of workers can report to that manager.) ∙ Capabilities of the subordinates. The more subordinates need supervision, the narrower the span of control should be. Employee turnover at fast-food restaurants, for example, is often so high that managers must constantly be training new people and thus need a narrow span of control. ∙ Geographical closeness. The more concentrated the work area, the broader the span of control can be. ∙ Functional similarity. The more similar the functions, the broader the span of control can be. ∙ Need for coordination. The greater the need for coordination, the narrower the span of control might be. ∙ Planning demands. The more involved the plan, the narrower the span of control might be. ■ FIGURE

9.1

ADVANTAGES AND DISADVANTAGES OF CENTRALIZED VERSUS DECENTRALIZED MANAGEMENT ADVANTAGES

DISADVANTAGES

Centralized

• Greater top-management control • More efficiency • Simpler distribution system • Stronger brand/corporate image

• Less responsiveness to customers • Less empowerment • Interorganizational conflict • Lower morale away from headquarters

Decentralized

• Better adaptation to customer wants • More empowerment of workers • Faster decision making • Higher morale

• Less efficiency • Complex distribution system • Less top-management control • Weakened corporate image

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∙ Functional complexity. The more complex the functions, the narrower the span of control might be. Other factors to consider include the professionalism of superiors and subordinates and the number of new problems that occur in a day. The trend today is to expand the span of control as organizations adopt empowerment, reduce the number of middle managers, and hire more educated and talented lower-level employees. Information technology makes it possible for managers to handle more information, so the span can be broader still.19 More companies could expand the span of control if they trained their employees better and were willing to trust them more. Figure 9.2 lists some advantages and disadvantages of a narrow versus a wide span of control. tall organization structure

An organization structure in which the pyramidal organization chart would be quite tall because of the various levels of management.

flat organization structure

An organization structure that has few layers of management and a broad span of control.

■ FIGURE

Choosing Between Tall and Flat Organization Structures In the early twentieth century, organizations grew bigger and bigger, adding layer after layer of management to create tall organization structures. Some organizations had as many as 17 levels, and the span of control was small (few people reported to each manager). Imagine how a message might be distorted as it moved up through each level of managers, management assistants, secretaries, assistant secretaries, supervisors, trainers, and so on. The cost of all of these managers and support people was quite high, the paperwork they generated was enormous, and the inefficiencies in communication and decision making often became intolerable. More recently, organizations have adopted flat organization structures with fewer layers of management (see Figure 9.3) and a broad span of control (many people reporting to each manager). Flat structures can respond readily to customer demands because l ower-level employees have authority and responsibility for making decisions,

9.2

ADVANTAGES AND DISADVANTAGES OF A NARROW VERSUS A WIDE SPAN OF CONTROL The flatter the organization the wider the span of control.

ADVANTAGES

DISADVANTAGES

Narrow • More control by top management • More chances for advancement • Greater specialization • Closer supervision

• Less empowerment • Higher costs • Delayed decision making • Less responsiveness to customers Wide

• Reduced costs • More responsiveness to customers • Faster decision making • More empowerment

328

• Fewer chances for advancement • Overworked managers • Loss of control • Less management expertise

CHAPTER 9 Structuring Organizations for Today’s Challenges

■ FIGURE

9.3

NARROW VERSUS WIDE SPAN OF CONTROL TALL STRUCTURE WITH NARROW SPAN OF CONTROL

FLAT STRUCTURE WITH WIDE SPAN OF CONTROL

This figure describes two ways to structure an organization with the same number of employees. The tall structure with a narrow span of control has two managers who supervise four employees each. Changing to a flat surface with a wide span of control, the company could eliminate two managers and perhaps replace them with one or two employees, but the top manager would have to supervise ten people instead oftwo.

and managers can be spared certain day-to-day tasks. In a bookstore with a flat organizational structure, employees may have authority to arrange shelves by category, process special orders for customers, and so on. Large organizations use flat structures to try to match the friendliness of small firms, whose workers know customers by name. The flatter organizations became, the broader the span of control, which means the elimination of some management positions.

Weighing the Advantages and Disadvantages of Departmentalization Departmentalization divides an organization into separate units. The traditional way to departmentalize organizations is by function, such as design, production, marketing, and accounting. Departmentalization groups workers according to their skills, expertise, or

A broad span of control allows one supervisor to be responsible for many workers whose work tasks are predictable and standardized. In addition to assembly lines, can you think of other management situations that might benefit from a broad span of control? What about ina service industry?

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departmentalization Dividing an organization into separate units.

resource use so that they can specialize and work together more effectively. It may also save costs and improve efficiency. Other advantages of departmentalization include the following: 1. Employees can develop in-depth skills and progress within a department as they

master those skills. 2. The company can achieve economies of scale by centralizing all the resource needs

and locating various experts in a specific area. 3. Employees can coordinate work within the function, and top management can easily

direct and control various departments’ activities. Disadvantages of departmentalization by function include the following: 1. Communication across departments may be problematic. For example, the production

department may be so isolated from the marketing department and as a result, does not get feedback from customers. 2. Employees may identify with their department’s goals rather than the organization’s

goals. For example, the purchasing department may save money buying a huge volume of goods from one supplier, which is a benefit to the department, but the high cost of storing the goods hurts the overall profitability. 3. The company’s response to external

changes may be slow. 4. People may not be trained to fulfill multiple

managerial responsibilities and as a result they tend to become narrow specialists. 5. Department members may engage in

groupthink (they think alike) and may need input from outside the department to become more creative.

Loblaw Companies Limited, Canada’s largest food distributor, operates a number of supermarket chains across Canada including Atlantic Cash & Carry, Dominion, Fortinos, Loblaws, Provigo, and Real Canadian Superstore. The company also acquired T&T Supermarket, which has stores based in Vancouver. The company has operated since the 1960s and developed many excellent brands, including the President’s Choice line of products. Since 2006, Loblaws has gone through a series of senior management shake-ups as it responds to growing competition from major U.S. merchandisers. Consolidating its distribution centres resulted in serious problems with its supply chain, costing millions of dollars. Loblaws continued to work on this issue over the next five years. How well do you think Loblaws performs today? Has the company’s move to a more “responsive organization structure” fostered effective competition with the foreign retail Goliaths?

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LOOKING AT ALTERNATIVE WAYS TO DEPARTMENTALIZE Functional separation is not always the most responsive form of organization. So what are the alternatives? Figure 9.4 shows five ways a firm can departmentalize. One way is by product. A book publisher might have a trade book department (for books sold to the general public), a textbook department, and a technical book department, each with separate development and marketing processes. Such product-focused departmentalization usually results in positive customer relations. Some organizations departmentalize by customer group. A pharmaceutical company

CHAPTER 9 Structuring Organizations for Today’s Challenges

■ FIGURE

9.4

WAYS TO DEPARTMENTALIZE Marketing manager

By product

Trade books

President

By function

Production

Technical books

Textbooks

Marketing

Commercial users

By geographic location

Canadian division

Accounting

President

By customer group

Consumers

Human resources

Finance

A computer company may want to departmentalize by geographic location, a manufacturing company by function, a pharmaceutical company by customer group, a leather manufacturer by process, and a publisher by product. In each case the structure must fit the firm’s goals.

Manufacturers

Institutions

Vice president (international operations)

Japanese division

European division

Korean division

Production manager

By process

Cutters

Dyers

Stitchers

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might have one department for the consumer market, another that calls on hospitals (the institutional market), and another that targets doctors. You can see how the customer groups might benefit from having specialists satisfying their needs. Some firms group their units by geographic location because customers vary so greatly by region. Japan, Europe, and Korea may involve separate departments with obvious benefits. The decision about how to departmentalize depends greatly on the nature of the © Amy Sancetta/AP Images product and the customers. A few firms find After the material for footballs has been cut and sewn in the Wilson that it is most efficient to separate activities Sporting Goods factory, it moves on to the lacing department by process. For example, a firm that makes where workers like this one open up the deflated balls and prepare leather coats may have one department cut them for lacing. What are the advantages and disadvantages of the leather, another dye it, and a third sew the departmentalizing by process similar to Wilson? coat together. Such specialization enables employees to do a better job because they can focus on learning a few critical skills. Some firms use a combination of departmentalization techniques; they would be called hybrid forms. For example, a company could departmentalize by function, by geography, and by customer groups.

PROGRESS ASSESSMENT

• What is bureaucracy? What challenges do bureaucratic organizations face inatime of rapid change?

• Why are organizations becoming flatter? • What are some reasons for having a narrow span of control in an organization? • What are the advantages and disadvantages of departmentalization? • What are the various ways a firm can departmentalize?

LO4

Contrast the various organizational models.

332

Organization Models Now that we have explored the basic issues of organizational design, let’s look in depth at four ways to structure an organization: (1) line organizations, (2) line-and-staff organizations, (3) matrix-style organizations, and (4) cross-functional self-managed teams. You will see that some of these models contradict traditional management principles. The business community is in a period of transition, with some traditional organizational models giving way to new structures. Such transitions can be not only unsettling to employees and managers but also be fraught with problems and errors.

CHAPTER 9 Structuring Organizations for Today’s Challenges

Line Organizations A line organization has direct two-way lines of responsibility, authority, and communication running from the top to the bottom of the organization, with everyone reporting to only one supervisor. The military and many small businesses are organized in this way. For example, the locally owned pizza parlour has a general manager and a shift manager. All general employees report to the shift manager, and he or she reports to the general manager or owner. A line organization does not have any specialists who provide managerial support. For example, there would be no legal department, accounting department, human resource department, or information technology (IT) department. Line organizations follow all of Fayol’s traditional management rules. Line managers can issue orders, enforce discipline, and adjust the organization as conditions change. In large businesses, a line organization may have the disadvantages of being too inflexible, of having few specialists or experts to advise people along the line, and of having lengthy lines of communication. Thus a large line organization may be unable to handle complex decisions relating to thousands of products and tons of paperwork. Such organizations usually turn to a line-and-staff form of organization.

line organization

An organization that has direct two-way lines of responsibility, authority, and communication running from the top to the bottom of the organization, with all people reporting to only one supervisor.

Line-and-Staff Organizations To minimize the disadvantages of simple line organizations, many organizations today have both line and staff personnel. A couple of definitions will help. Line personnel are responsible for directly achieving organizational goals and include production workers, distribution people, and marketing personnel. Staff personnel advise and assist line personnel in meeting their goals and include those in marketing research, legal advising, information technology, and human resource management. See Figure 9.5 for a diagram of a line-and-staff organization. One important difference between line and staff personnel is authority. Line personnel have formal authority to make policy decisions. Staff personnel have the authority to advise the line personnel and influence those decisions, but they cannot make policy changes themselves. The line manager may choose to seek or to ignore the advice of staff personnel. Many organizations have benefitted from the expert staff advice on safety, legal issues, quality control, database management, motivation, and investing. Staff positions strengthen the line positions and are similar to having well-paid consultants on the organization’s payroll.

line personnel

Employees who are part of the chain of command that is responsible for achieving organizational goals.

staff personnel

Employees who advise and assist line personnel in meeting their goals.

Matrix-Style Organizations Both line and line-and-staff organization structures suffer from inflexibility. Both allow for established lines of authority and communication, and work well in organizations with stable environments and slow product development (such as firms selling household appliances). In such firms, clear lines of authority and relatively fixed organization structures are assets that ensure efficient operations. Today’s economy, however, is dominated by high-growth industries like telecommunications, nanotechnology, robotics, and biotechnology, where competition is brisk and the life cycle of new ideas is short. Emphasis is on product development, creativity, special projects, rapid communication, and interdepartmental teamwork. From those changes 333

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■ FIGURE

9.5

A SAMPLE LINE-AND-STAFF ORGANIZATION Chief executive officer

Human resource department Legal department

Marketing research department

Plant manager

Supervisor

Assembly line workers

= line = staff

matrix organization

A system in which specialists from different parts of the organization are brought together to work on specific projects but still remain part of a line-and-staff structure.

grew the popularity of the matrix organization, in which specialists from different parts of the organization work temporarily on specific projects but still remain part of a line-andstaff structure (see Figure 9.6.). In other words, a project manager can borrow people from different departments to help design and market new product ideas.20 The matrix structure was developed in the aerospace industry and is now familiar in banking, management consulting firms, accounting firms, advertising agencies, and school systems. Matrix structure advantages include: ∙ Gives managers flexibility in assigning people to projects. ∙ Encourages inter-organizational co-operation and teamwork. ∙ Generates creative solutions for product development problems. ∙ Makes efficient use of organizational resources. Matrix structure disadvantages include: ∙ Is costly and complex. ∙ Confuses employees about where their loyalty belongs—with the project manager or their functional unit.

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■ FIGURE

9.6

A MATRIX ORGANIZATION In a matrix organization, project managers are in charge of teams comprised of members of several departments. In this case, Project manager 2 supervises Employees A, B, C, and D. These employees are accountable not only to Project manager 2 but also to the head of their individual departments. For example, Employee B, a market researcher, reports to Project manager 2 and to the Vice president of marketing.

President

Vice president (project management)

Vice president (manufacturing)

Vice president (marketing)

Vice president (finance)

Vice president (engineering)

Employee A (buyer)

Employee B (market research)

Employee C (budget analyst)

Employee D (product designer)

Project manager 1

Project manager 2

Project manager 3

∙ Requires effective interpersonal skills as well as co-operative employees and managers to avoid communication problems. ∙ Provides only a temporary solution to a long-term problem. If you are thinking that matrix organizations violate some traditional managerial principles, you are right. Normally a person cannot work effectively for two bosses. Who has the real authority? Which directive has first priority? In reality, however, the system functions more effectively than you might imagine. To develop a new product, a project manager may be given temporary authority to “borrow” line personnel from production, marketing, and other line functions. The employees work together to complete the project and then return to their regular positions. Thus, no one really reports to more than one manager at a time. A potential problem with matrix management, however, is that the project teams are not permanent. They form to solve a problem or develop a new product, and then they disband. There is little chance for cross-functional learning because teams work together for such a short period of time. In the future, decision making will be distributed throughout the organization so that people can respond rapidly to change, says the Harvard Business Review. Global teams 335

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will collaborate on the Internet for a single project and then disband. It is likely younger employees who play online games will feel quite comfortable working in such groups. Matrix organizations are also an effective structure in the world of international sport events. The 2015 Pan Am/Parapan Am Games Organizing Committee (TO2015) is an example of a project-based organization. When a major international sporting event is awarded to a city, an organizing committee is formed to serve as the event host. The host committee operations are critical for a successful event that athletes © PCN Photography/Alamy and spectators will enjoy. TO2015 was responsible International sport competitions rely upon organizing committees to plan, manage, and stage each event. for the planning, organizing, financing, and staging of Amatrix structure ensures all the critical areas, such as the 2015 Pan Am/Parapan Am Games. The organizamarketing, sponsorship, volunteer, security, and logistics tion’s overall budget was $1.4 billion and its workforce are provided and properly managed at each location included 20 000 volunteers. How do you structure this where the competition is held. type of massive organization that lasts for such a short time? You design a matrix organization. TO2015 was structured in a way that managed both the sporting competition and cross-functional, business operations. Departments included marketing, volunteers, ceremonies, logisself-managed teams Groups of employees tics (transportation), medical services, and security. Each of these areas were centralized from different departments but also important aspects for each location, or venue, where a sport compedepartments who work tition was held. Given this, project teams of specialists from each department were formed together on a longto manage operations at each venue where the competitions were held. term basis.

Cross-Functional, Self-Managed Teams

You can think of a team of medical specialists in an operating room as a cross-functional, self-managed team. Doctors, nurses, technicians, and anesthesiologists from different departments and areas in the hospital work together to complete successful operations. What kinds of tasks do cross-functional, self-managed teams complete in an office or retail environment?

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One solution to the disadvantage of the temporary nature of matrix teams is to establish long-lived teams and to empower them to work closely with suppliers, customers, and others to quickly and efficiently bring out new, high-quality products while giving great service. Cross-functional, self-managed teams are groups of employees from different departments who work together on a long-term basis (as opposed to the temporary teams established in matrix-style organizations).21 Usually the teams are empowered to make decisions without management approval.22 The barriers among design, engineering, marketing, distribution, and other functions are reduced when interdepartmental teams are created. One Smooth Stone is a corporate events company. They put together large, one-time functions for corporate clients. They have a team of highly skilled and trained staff that go from the planning and

CHAPTER 9 Structuring Organizations for Today’s Challenges

execution of one corporate function to another. Sometimes the self-managed teams are interfirm. Toyota, for example, works closely with teams at other firms to produce its cars. Figure 9.7 lists the advantages and disadvantages of these four types of organizations. Cross-functional teams should be empowered and collaborative. They work best when leadership is shared. An engineer may lead the design of a new product, but a marketing expert may take the leadership position once it’s ready for distribution. See the Adapting to Change box to learn about how some organizations are taking self-management to a new level.

GOING BEYOND ORGANIZATIONAL BOUNDARIES Cross-functional teams work best when the voice of the customer is prioritized, especially in product development tasks.23 Suppliers and distributors should be on the team as well. A self-managed team that includes customers, suppliers, and distributors goes beyond organizational boundaries. When suppliers and distributors are in other countries, ■ FIGURE

9.7

TYPES OF ORGANIZATIONS Each form of organization has its advantages and disadvantages.

ADVANTAGES

DISADVANTAGES

• Clarifies responsibility and authority • Simplifies structure and easy understand • Establishes one supervisor for each person

• Is too inflexible • Limits number of specialists to advise workers • Extends lines of communication • Hinders ability to quickly handle complex questions

Line and Staff

• Provides expert advice from staff to line personnel • Establishes lines of authority • Encourages co-operation and better communication at all levels

• Risks overstaffing • Risks overanalyzing • Blurs lines of communication • Increases staff frustrations because of lack of authority

Matrix

• Is flexible • Encourages co-operation among departments • Produces creative solutions to problems • Allows organization to take on new projects without adding to the organizational structure • Provides for more efficient use of organizational resources

• Is costly and complex • Confuses employees • Requires effective interpersonal skills and co-operative managers and employees • Inhibits employee evaluation and reward systems

CrossFunctional, Self-Managed Teams

• Enhances interdepartmental coordination and co-operation • Enables quicker response to customers and market conditions • Increases employee motivation and morale

• Confuses responsibility and authority • Generates a perceived loss of control by management • Inhibits employee evaluation and reward systems • Requires self-motivated and highly trained workers

Line

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Adapting to CHANGE Going Bossless Why stop at self-managed teams? Why not apply self-management principles to the whole organization? That’s what companies like Zappos, Morning Star, and W.L. Gore have done. Using an organizational structure known as holacracy, these companies have eliminated hierarchies (aka bosses) altogether. In holacratic organizations, authority and decision making are given to “circles” (think of circles as teams of teams) throughout the organization. A circle is a group of “roles” working toward the same purpose that is formed or dissolved as the organization’s needs change. A role is a set of responsibilities for certain outcomes or processes. Roles can be created, revised, or abolished as needed. Individuals usually have more than one role, in multiple circles. As new goals and tasks develop, individuals create circles to deal with them. For example, a St. Louis television station mobilized temporary teams to add community voices to stories about major events, such as the financial crisis and the events in Ferguson. When the goals are reached, the circles disband. It would be impossible to keep track of who’s doing what where and when without technology. Systems such as GlassFrog or holaSpirit are used to list the purpose, accountability, and decision rights of every circle and every role. This information is available for everyone to see.

Self-management isn’t appropriate for all organizations, or for all workers. When Zappos offered severance packages to all employees who didn’t think self-management was a good fit for them, 18 percent accepted the offer. What do you think it would be like to work in an organization with no bosses?

Sources: Ethan Bernstein, John Bunch, Niko Canner, and Michael Lee, “Beyond the Holacracy Hype,”Harvard Business Review, July–August 2016; Erik Roelofsen and Tao Yue, “Case Study: Is Holocracy for Us?” Harvard Business Review, March–April 2017.

cross-functional teams may share market information across national boundaries. Government coordinators may assist such projects, letting cross-functional teams break the barriers between government and business. Cross-functional teams are only one way in which businesses can interact with other companies. In the next section we look at other ways that organizations manage their various interactions.

PROGRESS ASSESSMENT

• What is the difference between line and staff personnel? • What management principle does a matrix-style organization challenge? • What is the main difference between the structure of a matrix-style organization and the use of cross-functional teams?

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Managing Interactions Among Firms Whether it involves customers, suppliers, distributors, or the government, networking between firms is using communications technology and other means to link organizations and allow them to work together on common objectives. Let’s explore this concept further.

Virtual Organizations Networked organizations are so closely linked by the Internet that each can find out what the others are doing in real time. Real time simply means the present moment or the actual time in which something takes place. The Internet has allowed companies to send real-time data to organizational partners as they are developed or collected.24 The result is transparency. Transparency occurs when a company is so open to other companies working with it that the once-solid barriers between them become see-through and electronic information is shared as if the companies were one. With this integration, two companies can work as closely as two departments once did in traditional firms. As part of the movement to increase corporate social responsibility (as discussed in Chapter 5) many businesses want to ensure that their suppliers are meeting certain standards. The Seeking Sustainability box below describes the approach taken by Loblaw Companies Limited.

LO5

Identify the benefits of inter-firm co-operation and coordination. networking between firms

Using communications technology and other means to link organizations and allow them to work together on common objectives.

Seeking SUSTAINABILITY Ethical Consumerism Like many companies, Loblaws is working closely with its suppliers to align its values in areas from labour conditions to animal welfare. The year 2016 marked the 10th corporate social responsibility (CSR) report by the company. Its CSR focuses primarily upon three pillars—environment, sourcing, and community. The company documents its strategies and achievements in its Corporate Social Responsibility Report. Highlights from the 2016 report include the following future targets: • Reduce operational carbon footprint 20 percent by 2020 and 30 percent by 2030. • Transition all shell eggs to cage-free by year-end 2025. • Disclose on the Loblaws corporate website the list of offshore apparel factories we do direct business with, and update the list twice a year. • Raise and donate $3 million to various charities as part of our “Save It Forward” program in discount stores by year-end 2018. To ensure these practices continue, Loblaws now requires all existing and new suppliers to be subject to,

at a minimum, an annual Corporate Social Responsibility Audit. Loblaws engages qualified auditors to review all the processes and records of their suppliers. These auditors then report to Loblaws on the results of their investigation. This transparency on the part of Loblaws’ suppliers is repeated in many industries so that retailers can demonstrate their social responsibility to consumers. Loblaws’ purpose, Live Life Well, demonstrates how the company thinks about CSR!

Source: “2016 Corporate Social Responsibility Report,” Loblaws, http://www.loblaw.ca/en/responsibility/reports.html.

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real time

The present moment or the actual time in which something takes place; data sent over the Internet to various organizational partners as they are developed or collected are said to be available in real time.

virtual corporation

A temporary networked organization made up of replaceable firms that join and leave as needed.

Can you see the implications for organizational design? Most organizations are no longer self-sufficient or self-contained. Rather, they are part of a vast network of global businesses that work closely together (see the Spotlight on Small Business box below for more discussion). An organization chart showing what people do within any one organization is simply not complete, because the organization is part of a much larger system of firms. A modern chart would show people in different organizations and indicate how they are networked. This is a relatively new concept, however, and very few such charts are yet available. Networked organization structures tend to be flexible.25 A company may work with a design expert from a different company in Italy for a year and then not need that person anymore. It may hire an expert from a company in another country for another project. Such a temporary network, made of replaceable firms that join and leave as needed, is called a virtual corporation (see Figure 9.8). People who work within a virtual organization still need to communicate. Many options help ensure co-workers may collaborate and co-operate even though they may be in

Spotlight On SMALL BUSINESS Canadian Virtual Assistant Association As a new graduate looking for work, how can you create the best opportunity to find a job? The answer is to make yourself, and your skills, available to as many employers as possible. That is the goal of a virtual assistant (VA). VAs are typically self-employed and provide professional administrative, technical, and creative services. Their clients need the expertise but want to save the cost of hiring a permanent employee to work “in house.” The Canadian Association of Virtual Assistants (CAVA) helps people establish and build their personal business. It provides a forum for independent professionals to network and obtain support as they develop their business. CAVA’s mission seeks to establish global connection between and among VAs and clients. Various websites, such as People Per Hour, help VAs find and bid on contracts, but competition is fierce so many VAs gravitate to sites like Time Etc. where the work is found for you. Time Etc. founder Barnaby Lashbrooke believed an online clearinghouse that matched clients with needs to professionals with skills filled an important gap. “The responsibility of having to find new business is what puts some people off. Being a

VA requires being proactive, but many VAs find they have excellent contacts who are more than willing to recommend them, or keep them on part time” There are many other VA services that connect companies to highly effective remote professionals. “The world is your oyster” is a saying often told to new graduates when they finish their education and enter the workforce. With the growth of virtual organizations, this saying has never been so true.

Sources: Alison Coleman, “How to set-up a home-based virtual assistant business,” The Guardian, April 23, 2015, http://www.theguardian. com/small-business-network/2013/nov/25/virtual-assistant-small-business; “What is CAVA?” Canadian Association of Virtual Assistants, http://canadianava.org/what-is-cava/, accessed May 9, 2015; Sara Angeles, “10 virtual assistant services for your business,” Business News daily, February 5, 2014, http://www.businessnewsdaily.com/5878-virtual-assistant-services.html.

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■ FIGURE

9.8

A VIRTUAL CORPORATION

Production Firms Accounting Firm

Distribution Firm CORE Firm

Legal Firm

A virtual corporation has no permanent ties to the firms that do its production, distribution, legal, and other work. Such firms are very flexible and can adapt to changes in the market quickly.

Advertising Agency Design Firm

different physical locations. Simple information-sharing platforms such as Dropbox have expanded into virtual private networks to share knowledge. For example, the life sciences industry has a large number of multi-partner virtual organizations that use online collaboration platforms to connect pharmaceutical executives and life sciences researchers.26 When knowledge sharing reaches a point where face-to-face communication is needed, employees turn to online tools such as Skype and GoToMeeting for business web conferencing. Business leaders are always searching for new virtual team members and these practices help ensure a virtual organization can be successful.

Benchmarking and Core Competencies Historically, organizations have tried to do all functions themselves. Each had its own department for accounting, finance, marketing, production, and so on. As we have noted, today’s organizations look to other organizations to help in areas where they do not generate world-class quality. Benchmarking compares an organization’s practices, processes, and products against the world’s best. As one example, K2 Skis is a company that makes skis, snowboards, in-line skates, and related products. It studied the compact-disc industry and learned to use ultraviolet inks to print graphics on skis. It went to the aerospace industry to get piezoelectric technology to reduce vibration in its snowboards (the aerospace industry uses the technology for wings on planes). It learned from the cable television industry how to braid layers of fibre-glass and carbon, and adapted that knowledge to make skis. Wyeth, a pharmaceutical company, benchmarked the aerospace industry for project management, the shipping industry for standardization of processes, and computer makers to learn the most

benchmarking

Comparing an organization’s practices, processes, and products against the world’s best.

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efficient way to make prescription drugs. As another example, Suncor, one of Canada’s largest emitters of greenhouse gases, continually benchmarks its environmental and social progress.27 By doing so, they are able to evaluate their performance in reducing their impact in various areas such as greenhouse gas emissions, water, land and tailings, and improve their impact on biodiversity and renewable energy. Benchmarking also has a direct competitive purpose. In retailing, Sam Walton used to do competitive benchmarking regularly. He would visit the stores of competitors and see what, if anything, the competitor was doing better. When he found something better—say, a pricing program—he would come back to Walmart and make the appropriate changes. Target may compare itself to Walmart to see what, if anything, Walmart does better. Target will then try to improve its practices or processes to become even better than Walmart. How well did this strategy help the company’s performance in Canada? Benchmarking has become a significant activity in Canada. Governments and large and small companies are all involved in procedures to discover and apply the best practices available. Industry Canada and Statistics Canada have accumulated extensive statistics on the use of benchmarking in a variety of industries. Some examples are breweries, flour mixing and cereal production, electronic computing, paperboard manufacturing, musical instruments, and the recording industry. If an organization cannot do as well as the best in, say, shipping, it will try to outsource the function to an organization like UPS or FedEx that specializes in shipping. Remember, outsourcing means assigning one or more functions, such as accounting, production, security, maintenance, and legal work, to outside organizations. Even small firms are getting involved in outsourcing. We have already discussed some problems associated with outsourcing, especially when companies outsource to other countries. Jobs are lost in Canada and this has a negative impact on our economy. Some functions, such as information management and marketing, may be too important to assign to outside firms. In that case, the organization should benchmark the best firms and restructure its departments to try to be equally good. core competencies Those functions that an It is important to remember that companies in other countries often outsource their functions organization can do as to companies in Canada. We call that insourcing and it is the basis of many jobs.28 well as or better than When a firm has completed its outsourcing process, the remaining functions are the any other organization in the world. firm’s core competencies, those functions that the organization can do as well as or better than any other organization in the world. For example, Nike is great at designing and marketing athletic shoes. Those are its core competencies. It outsources the manufacturing of those shoes, however, to other companies that can make shoes better and less expensively than Nike itself can.29 Similarly, Dell is best at marketing computers and outsources most other functions, including manufacturing and distribution, to others. © Jens Kalaene/picture-alliance/dpa/AP Images Canadian banks, such as the Royal Bank of Canada, Nike’s core competencies are designing and marketing have been criticized for outsourcing jobs in areas such athletic shoes. The company outsources other functions as information technology and finance operations.30 (i.e., manufacturing) to other businesses that assemble After you have structured an organization, you shoes better and cheaper than Nike could do on its own. must keep monitoring the environment (including cusWhat are the advantages of focusing on the company’s tomers) to learn what changes are needed. Dell, for core competencies? What are the disadvantages? example, recently reversed its practice of outsourcing 342

CHAPTER 9 Structuring Organizations for Today’s Challenges

customer support and now offers a premium service that enables Canadian customers to access tech support in North America. The following section discusses organizational change in more detail.

Adapting to Change Once you have structured an organization, you must be prepared to adapt that structure to changes in the market. That is not always easy to do.31 Over time an organization can get set in its ways. Employees have a tendency to say, “That’s the way we’ve always done things. If it isn’t broken, don’t fix it.” Managers also get complacent. They may say that they have 20 years’ experience when the truth is that they have had one year’s experience 20 times. Do you think that slow adaptation to change was a factor in the decline of the manufacturing sector in Canada? Introducing change is one of the hardest challenges facing any manager. Nonetheless, change is what is happening at General Motors (GM), Ford, Facebook, and other companies eager to become more competitive. If you have old facilities that are no longer efficient, you have to unload or update them. That is exactly what GM and other companies are doing.32 In fact, they have asked the government to lend them billions of dollars to help.33 The Internet has created new opportunities, not only to sell to customers directly but also to ask them questions and provide them with any information they want. To win market share, companies must coordinate the efforts of their tradiitonal departments and their Internet staff to create friendly, easy-to-manage interactions. Young people today are called digital natives because they grew up with the Internet and cell phones. Using these devices is second nature to them. On the other hand, companies often need to retrain older employees to be more tech-savvy. While the ease and immediacy of communication created by technology may be powerful, there are disadvantages to being constantly connected to work (see the Adapting to Change box). Although Target is a highly centralized organization, the company tries to respond to changes in consumer preferences, in part by keeping in touch with an enormous web of people of all ages, interests and nationalities—its “creative cabinet”—via the Internet. The members of the “cabinet,” who never meet so they cannot influence each other, evaluate various new initiatives and recommend new programs to help Target determine out what belongs on store shelves. But when Target entered the highly competitive Canadian retail market, it faced many challenges that ultimately led to failure. Why didn’t the centralization and “cabinet” structure that proved so effective for Target in other markets work for the company in Canada? As soon as Target Canada opened its doors the losses mounted to $1 billion in the first year. In less than two years, the doors closed at 133 stores and 17 000 employees were laid off.34 It seemed the senior executives didn’t know how to communicate with the frontline staff. Even though staff knew all the customer complaints about the lack of product on the shelves and the over-pricing, the centralized structure made it difficult to respond. Management couldn’t connect to the staff in the stores, many of whom described the atmosphere as “... akin to swimming with smiling sharks.”35 The next section, about restructuring in ways to empower employees, provides insight about the Target Canada story.

digital natives

Young people who grew up using technology including the Internet and electronic devices such as cell phones.

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Adapting to CHANGE When Open Communication Should Not Be So Open People today use technology to text, tweet, surf the web, and run apps as they go about their personal lives and, in many cases, their business lives. In fact, many companies provide work-issued smartphones, tablets, and other mobile technology to their employees. The blending of mobile technology and work has been a boon to employees and businesses in many ways, particularly in terms of speed, reach, and efficiency. Unfortunately, it has also encroached on the traditional boundaries between work and home. According to a survey conducted by Right Management, a career and outplacement service, more than one-third of employees receive work-related e-mails after work hours. According to Monika Morrow, senior vice president at Right Management, “The boundaries of the workplace are expanding and now reach deeper into employees’ lives. Workers can no longer leave the office at the office.” While no one disputes the value of technology, many believe its use has gone overboard and is affecting employees’ quality of life. Companies such as Volkswagen, PricewaterhouseCoopers, and shipping company PBD have heard the complaints and created both formal and informal rules regarding e-mail.

The e-mail encroachment problem is not just in Canada. France is considering legislation that would block work e-mails and phone calls, and legally give employees at least 11 hours of daily rest free from mobile technology. What do you think would be the impact upon businesses of imposing a similar law in Canada?

Sources: Scott Sayare, “In France, a Move to Limit Off-the-Clock Work Emails,” The New York Times, April 11, 2014;Chris Baysden, “Why You’re Never Safe from More Work—Even After Hours,” CGMA Magazine, July 4, 2013; andCecilia Kang, “Firms Tell Employees: Avoid After-Hours E-Mail,” The Washington Post, September 21, 2012.

Companies that are the most successful in adapting to change have these common traits: (1) listening to customers, (2) inspiring managers who drive new ideas throughout the organizations, and (3) having experience almost going out of business.36 Of course, adapting to change is difficult, but not changing can be disastrous. restructuring

Redesigning an organization so that it can more effectively and efficiently serve its customers.

inverted organization

An organization that has contact people at the top and the chief executive officer at the bottom of the organization chart. 344

Restructuring for Empowerment To empower employees firms must reorganize dramatically to make front-line workers their most important people. Restructuring is redesigning an organization so it can more effectively and efficiently serve its customers. Until recently, department-store clerks, bank tellers, and front-desk staff in hotels were not considered key employees. Instead, managers were considered more important, and they were responsible for directing the work of the front-line people. The organization chart in a typical firm looked much like the pyramid in Figure 9.9. A few service-oriented organizations have turned the traditional organization pyramid structure upside down. An inverted organization has contact people (like nurses) at the top and the chief executive officer (like the hospital CEO) at the bottom. Management

CHAPTER 9 Structuring Organizations for Today’s Challenges

■ FIGURE

9.9

COMPARISON OF A TRADITIONAL ORGANIZATION STRUCTURE AND AN INVERTED ORGANIZATION STRUCTURE

Top management

Empowered front-line workers (often in teams)

Support personnel Middle management

Top management

Supervisory management

Front-line workers Traditional Organization

Inverted Organization

layers are few, and the manager’s job is to assist and support front-line people, not boss them around. Figure 9.9 illustrates the difference between an inverted and a traditional organizational structure. A good example of an inverted organization is NovaCare, a diversified health care company.37 At its top are some 5000 physical, occupational, and speech therapists. The rest of the organization is structured to serve those therapists. Managers consider the therapists to be their bosses, and the manager’s job is to support the therapists by arranging contacts with nursing homes, handling accounting and credit activities, and providing training. Companies based on this organization structure support front-line personnel with internal and external databases, advanced communication systems, and professional assistance. Naturally, this means that front-line people have to be better educated, better trained, and better paid than in the past. It takes a great deal of trust for top managers to implement such a system—but when they do, the payoff in customer satisfaction and in profits is often well worth the effort.38 In the past, managers controlled information—and that gave them power. In more progressive organizations everyone shares information, often through an elaborate database system, among firms as well as within them. No matter what organizational model you choose or how much you empower your employees, the secret to successful organization change is to focus on customers and give them what they want.

The Restructuring Process It is not easy to move from an organization dominated by managers to one that relies heavily on self-managed teams. How you restructure an organization depends on the status of the present system. If the system already has a customer focus but is not working well, a total quality management approach may work. 345

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total quality management (TQM) Striving for maximum customer satisfaction by ensuring quality from all departments.

continuous improvement (CI)

Constantly improving the way the organization operates so that customer needs can be better satisfied.

re-engineering

The fundamental rethinking and radical redesign of organizational processes to achieve dramatic improvements in critical measures of performance.

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Total quality management (TQM) is the practice of striving for maximum customer satisfaction by ensuring quality from all departments. TQM calls for continual improvement of present processes. Processes are sets of activities joined together for a reason, such as the process for handling a customer’s order. The process may consist of receiving the order in the mail, opening it, sending it to someone to fill, putting the order into a package, and sending it out. In Chapter 10 we will review the importance of quality control in operations management. Continuous improvement (CI) means constantly improving the way the organization operates so that customer needs can be satisfied. Many of the companies spotlighted in this book practice CI. No matter what the size of the organization it is possible to innovate. Re-engineering and change is not the sole domain of small, nimble organizations and large companies also demonstrate a propensity for change management.39 For example, Canadian companies such as HootSuite and Shopify continuously improve products and constantly challenge employees to be creative despite their increase in size. It is possible, in an organization with few layers of management and a customer focus, that new computer software and employee training could lead to a team-oriented approach with few problems. However, in bureaucratic organizations with many layers of management, TQM is not useful. Continual improvement does not work when the whole process is incorrect. When an organization needs dramatic changes, only re-engineering will do. Re-engineering is the fundamental rethinking and radical redesign of organizational processes to achieve dramatic improvements in critical measures of performance. Note the words radical redesign and dramatic improvements. Stanfield’s, a Canadian clothing manufacturer based in Nova Scotia, was established in 1856. A “Made in Canada” philosophy is important to the company, both for its brand and its customers. Stanfield’s has faced many challenges that prompted it to re-engineer in order to remain competitive.40 Jon Stanfield, the fifth-generation family member who currently serves as president, recognized the need to adapt: “We have re-engineered the factory as far as making it more efficient and cutting waste to deal with the competitive pressures that occurred during the Free Trade Agreements and then subsequently the North American Free Trade Agreement.” Changes have occurred in many areas including revised packaging to develop better supplier relations and energy consumption technology to reduce the company’s carbon footprint. Can you see how re-engineering is often necessary to change a firm from a managerial orientation to one based on self-managed teams? Re-engineering may also be necessary to adapt an organization to fit into a virtual network. Remember, re-engineering involves radical redesign and dramatic improvements. Not all organizations need such dramatic change. In fact, because of the complexity of the process, many re-engineering efforts fail. In firms where re-engineering is not feasible, restructuring may do. As discussed earlier in this chapter, restructuring involves making relatively minor changes to an organization in response to a changing environment. For example, many firms have added an Internet marketing component to the marketing department. That is a restructuring move, but it is not drastic enough to be called re-engineering.

CHAPTER 9 Structuring Organizations for Today’s Challenges

Creating a ChangeOriented Organizational Culture Any organizational change is bound to cause some stress and resistance among members. Firms adapt best when their culture is change-oriented. Organizational (or corporate) culture is the widely shared values within an organization that foster unity and co-operation to achieve common goals. Usually the culture of an organization is reflected in its stories, traditions, and myths. Each McDonald’s restaurant has the © Onoky/SuperStock Empowering employees who deal directly with customers to solve same feel, look, and atmosphere; in short, problems without needing a manager’s approval makes a higher each has a similar organizational culture. It is level of customer service possible and also helps employees obvious from visiting almost any M cDonald’s develop. What kind of guest issues do you think a front-line hotel that the culture emphasizes quality, service, employee should be allowed to solve on his or her own? cleanliness, and value. An organizational culture can also be negative. Have you ever been in an organization where you feel that no one cares about service or quality? The clerks may seem LO6 uniformly glum, indifferent, and testy. The mood pervades the atmosphere and patrons become unhappy or upset. It may be hard to believe that an organization, especially a Explain how profit-making one, can be run so badly and still survive. Clearly then, when you search for organizational culture can help a job, study the organizational culture to see whether you will thrive in it. Mintzberg notes that culture affects the way in which employees are chosen, devel- businesses adapt oped, nurtured, interrelated, and rewarded. The kinds of people attracted to an organization to change. and the way they can most effectively deal with problems and each other are largely a function of the culture an organization builds and the practices and systems that support the culture.41 Some of the best organizations have cultures that emphasize service to others, especially customers. The atmosphere reflects friendly, caring people who enjoy working together to provide a good product at a reasonable price. Companies that have such a culture have less need for close supervision of employees. That usually means fewer policy manuals, organization charts, and formal rules, procedures, and controls. The key to a productive culture is mutual trust. You receive such trust by giving it. The very best companies stress high moral and ethical values such as honesty, reliability, fairness, environmental protection, and social involvement. One such example is TD Bank Group. They have been recognized for multiple years as one of the best workplaces in Canada. The Careers section of their home page provides numerous employee video testimonials on the culture that contributes to this success.42 Thus far, we have been talking as if organizational matters were mostly controllable by management. The fact is that the formal organization structure is just one element of the

organizational (or corporate) culture

Widely shared values within an organization that provide coherence and co-operation to achieve common goals.

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total organizational system. In the creation of organizational culture, the informal organization is of equal or even greater importance. Let’s explore this notion next.

The Informal Organization All organizations have two organizational systems. The formal organization details lines of responsibility, authority, and position. It is the structure shown on organization charts. The other is the informal organization, the system that develops spontaneously as employees meet and form © Geber86/Getty Images RF cliques, relationships, and lines of authorThe informal organization is the system that develops as employees ity outside the formal organization. It is the meet and form relationships. The grapevine, or the unofficial flow of human side of the organization that does not information among employees, is the nerve centre of the informal show on any organization chart. organization. How does the informal organization affect the work No organization can operate effectively environment? How might it affect organizational performance? without both types of organization. The formal system is often too slow and bureaucratic to let the organization adapt quickly although it does provide helpful guides and lines of formal organization The structure that authority for routine situations. details lines of The informal organization is often too unstructured and emotional to allow careful, responsibility, authority, reasoned decision making on critical matters. It is extremely effective, however, in genand position; that is, erating creative solutions to short-term problems and creating camaraderie and teamwork the structure shown on organization charts. among employees.43 In any organization, it is wise to learn quickly who is important in the informal informal organization. Following formal rules and procedures can take days. Who in the orgaorganization nization knows how to obtain resources immediately without the normal procedures? The system of relationships and Which administrative assistants should you see if you want your work given first priority? lines of authority Answers to these questions help people work effectively in many organizations. that develops The informal organization’s nerve centre called the grapevine, is the system through spontaneously as employees meet and which unofficial information flows between and among managers and employees. Key form power centres; people in the grapevine usually have considerable influence. that is, the human side In the old “us-versus-them” system of organizations, where managers and employees of the organization that were often at odds, the informal system hindered effective management. Within a more does not appear on any organization chart. open organization, managers and employees work together to set objectives and design procedures. The informal organization is an invaluable managerial asset that can promote harmony among workers and establish the corporate culture.44 As effective as the informal organization may be in creating group co-operation, it can still be equally powerful in resisting management directives. Employees may form unions, go on strike together, and generally disrupt operations. Learning to create the right corporate culture and to work within the informal organization is a key to managerial success.

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PROGRESS ASSESSMENT

• What is an inverted organization? • Why do organizations outsource functions? • What is organizational culture?

SUMMARY LO1

Outline the basic principles of organization management. The basic principles of organization are much the same regardless of the size of the business. What is happening today to Canadian businesses? Canadian businesses are adjusting to changing markets. This is a normal function in a capitalist economy. There will be big winners, like Google and Facebook, and big losers, like Target (in Canada). The key to success is remaining flexible and adapting to the changing times. What are the principles of organization management? Structuring an organization means devising a division of labour (sometimes resulting in specialization), setting up teams or departments, and assigning responsibility and authority. It includes allocating resources (such as funds), assigning specific tasks, and establishing procedures for accomplishing the organizational objectives. Managers also have to make ethical decisions about how to treat workers.

LO2

Compare the organizational theories of Henri Fayol and Max Weber. Until the twentieth century, most businesses were rather small, the processes of producing goods were rather simple, and organizing workers was fairly easy. Not until the early 1900s and the introduction of mass production did businesses become complex. During this era, business theorists emerged. What were Fayol’s basic principles? Fayol introduced principles such as unity of command, hierarchy of authority, division of labour, subordination of individual interests to the general interest, authority, clear communication channels, order, and equity. What principles did Weber add? Weber added principles of bureaucracy such as job descriptions, written rules and decision guidelines, consistent procedures, and staffing and promotions based on qualifications.

LO3

Evaluate the choices managers make in structuring organizations. What are the four issues in structuring organizations? Issues involved in structuring and restructuring organizations are (1) centralization versus decentralization, (2) span of control, (3) tall versus flat organization structures, and (4) departmentalization.

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What are the latest trends in structuring? Departments are often replaced or supplemented by matrix organizations and cross-functional, self- managed teams that decentralize authority. The span of control becomes larger as employees become self-directed. Another trend is to eliminate managers and flatten organizations. LO4

Contrast the various organizational models. Organizational design is the coordination of workers so that they can best accomplish the firm’s goals. New forms of organization are emerging that enable firms to be more responsive to customers. What are the two major organizational models? Two traditional forms of organization are (1) line organizations and (2) line-and-staff organizations. Aline organization has clearly defined responsibility and authority, is easy to understand, and provides each worker with only one supervisor. The expert advice of staff assistants in a line-and-staff organization helps in areas such as safety, quality control, computer technology, human resource management, and investing. What are the key alternative forms to the major organizational models? Matrix organizations assign people to projects temporarily and encourage inter-organizational co- operation and teamwork. Cross-functional self-managed teams have all the benefits of the matrix style and are long term.

LO5

Identify the benefits of inter-firm co-operation and coordination. Networking is using communications technology and other means to link organizations and allow them to work together on common objectives. What are the major concepts involved in inter-firm communications? Communications technology allows firms to work together on common objectives. A virtual corporation is a networked organization of replaceable firms that join and leave as needed. Benchmarking tells firms how their performance measures up to that of their competitors in specific functions. The business may then outsource to companies that perform its weaker functions more effectively and efficiently. The functions that remain within the organization are the firm’s core competencies. What is an inverted organization? An inverted organization places employees at the top of the hierarchy; managers are at the bottom to train and assist employees.

LO6

Explain how organizational culture can help businesses adapt to change. Organizational (or corporate) culture may be defined as widely shared values that foster unity and co-operation to achieve common goals. What is the difference between the formal and informal organization of a firm? The formal organization details lines of responsibility, authority, and position. It is the structure shown on organization charts. The informal organization is the system that develops spontaneously as employees meet and form cliques, relationships, and lines of authority outside the formal organization. It is the human side of the organization. The informal organization is an invaluable managerial asset that often promotes harmony among workers and establishes the corporate culture. As effective as the informal organization may be in creating group co-operation, it can still be equally powerful in resisting management directives.

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KEY TERMS benchmarking 341 bureaucracy 325 centralized authority 326 chain of command 325 continuous improvement (CI) 346 core competencies 342 cross-functional, self-managed teams 336 decentralized authority 326 departmentalization 329 digital natives 343

economies of scale 322 flat organization structure 328 formal organization 348 hierarchy 325 informal organization 348 inverted organization 344 line organization 333 line personnel 333 matrix organization 334 networking between firms 339

organizational (or corporate) culture 347 real time 339 re-engineering 346 restructuring 344 span of control 327 staff personnel 333 tall organization structure 328 total quality management (TQM) 346 virtual corporation 340

CAREER EXPLORATION If you are interested in pursuing a career in organizational management, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school.

∙ Top executive—works in nearly every industry in both large and small businesses and non-profit organizations, ranging from companies in which there is only one employee to firms with thousands of employees. ∙ Management analyst—proposes ways to improve an organization’s efficiency.

CRITICAL THINKING Now that you have learned some of the basic principles of organization, pause and think about where you have already applied such concepts yourself or when you have been part of an organization that did. 1. Did you find a division of labour necessary

and helpful?

3. Were promotions based strictly on qualifica-

tions, as Weber suggested? What other factors may have been considered? 4. What problems seem to emerge when an

organization expands in size? 5. What organizational changes might you recom-

2. Were you assigned specific tasks or left on

your own to decide what to do?

mend to Canadian manufacturers, such as the auto companies, airlines, and technology firms?

DEVELOPING CAREER SKILLS Key: Team

Analytic

1. There is no better way to understand the

effects of having many layers of management on communication accuracy than to play the game of Message Relay. Choose seven or more members of the class and have them leave the

Communication

Technology

classroom. Then choose one person to read the following paragraph and another student to listen. Call in one of the students from outside and have the “listener” tell him or her the information contained in the paragraph.

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Then bring in another student and have the new listener repeat the information to him or her. Continue the process with all those who left the room. Do not allow anyone in the class to offer corrections as each listener becomes the storyteller in turn. In this way, all students can hear how the facts become distorted over time. The distortions and mistakes are often quite humorous, but they are not so funny in organizations such as Ford, which once had 22 layers of management. Here is the paragraph: Dealers in the Maritimes have received more than 130 complaints about steering on the new Commander and Roadhandler models of our minivans. Apparently, the front suspension system is weak and the ball joints are wearing too fast. This causes slippage in the linkage and results in oversteering. Mr. Berenstein has been notified, but so far only 213 of 4300 dealers have received repair kits. 2. Describe some informal groups within an

organization with which you are familiar (at school, at work, etc.). What have you noticed about how those groups help or hinder progress in the organization? 3. Imagine that you are working for Kitchen

Magic, an appliance manufacturer that produces, among other things, dishwashers for the home. Imagine further that a competitor introduces a new dishwasher that uses sound

waves to clean dishes. The result is a dishwasher that cleans even the worst burned-on food and sterilizes the dishes and silverware as well. You need to develop a similar offering fast, or your company will lose the market. Write an e-mail to management outlining the problem, explaining your rationale for recommending the use of a cross-functional team to respond quickly, and identifying the type of skills you need. 4. Divide the class into teams of five. You are a

producer of athletic shoes and you have been asked to join a virtual network. How might you minimize the potential problems of joining? Begin by defining a virtual corporation and listing its advantages and disadvantages. Each team should report its solutions to the class. 5. A growing number of work groups, includ-

ing management, are cross-functional and self-managed. To practice working in such an organization, break into groups of five or so students, preferably with different backgrounds and interests. Each group must work together to prepare a report on the advantages and disadvantages of working in teams. Many of the problems and advantages of cross-functional, self-managed teams should emerge in your group as you try to complete this assignment. Each group should report to the class how it handled the problems and benefitted from the advantages.

ANALYZING MANAGEMENT DECISIONS IBM Is Both an Outsourcer and a Major Outsource for Others Few companies are better known for their manufacturing expertise than IBM. Nonetheless, even IBM has to adapt to today’s dynamic marketplace. In the area of personal computers, for example, IBM was unable to match the prices or speed of delivery of mail-order firms such as Dell Computer. Dell built machines after receiving orders and then rushed the computers 352

to customers. IBM, in contrast, made machines ahead of time and hoped that the orders would match its inventory. To compete against firms like Dell, IBM had to custom-make computers for its business customers, but IBM was not particularly suited to do such work. To address this issue IBM entered into a relationship with

CHAPTER 9 Structuring Organizations for Today’s Challenges

Lenovo whereby Lenovo became the manufacturer of IBM personal computers and over time replaced IBM in the personal computer market. IBM’s long-range strategy was to move away from hardware toward software development. It acquired PricewaterhouseCoopers to put more emphasis on services rather than hardware. As a result, IBM dominated the IT industry. They offered outsourcing for IT infrastructure, application development, and IT support services. They spent over $6 billion annually on research and development and held the most patents of any U.S. technology company. While growing this side of their business they outsourced a number of jobs to India in sales, semiconductor, and finance groups, resulting in the layoff of 4600 U.S.-based employees in these positions in 2009. Today IBM continues to face many challenges. While revenues from cloud computing have helped the company, major competitors such as Amazon, Google,

and Microsoft have gained ground in this area. The drop in server hardware sales led IBM to sell this part of its business to Lenovo and focus upon business acquisitions to capitalize on growth within cloud computing. While generating profit for the company, the switch to acquisitions led to a de-emphasis upon innovation. Despite explicitly stating three strategic areas— clients, innovation, and trust—decision making was driven by a desire to earn more for shareholders. This focus upon investment returns, referred to as “Roadmap 2015,” led to massive cost-cutting measures that created high costs for the company and led to further employee layoffs. Nevertheless, the company still finds ways to innovate. IBM Research has defined the future of information technology with more than 3000 researchers in 12 labs located across 6 continents. IBM inventors received over 5000 patents in 2017, marking the company’s 25th consecutive year of patent leadership.

Sources: “IBM Breaks Records to Top U.S. Patent List for 25th Consecutive Year,” Canada NewsWire, January 8, 2018; “IBM Reveals Five Innovations That Will Help Change Our Lives in the Next Five Years,” Canada NewsWire, January 5, 2017; Steve Denning, “Why IBM is in decline,” Forbes, May 30, 2014, http://www .forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/; Julie Bort, “IBM CEO Ginni Rometty is a year away from delivering on a plan that has tied her hands for years,” Business Insider, May 22, 2014, http://www.businessinsider.com/ibm-ginni-rometty-and-2015-road-map-2014-5; Michael Useem and Joseph Harder, “Leading Laterally in Company Outsourcing,” Sloan Management Review, Winter 2000, 25–36; Alison Overholt, “In the Hot Seat,” Fast Company, January 2003, 46; “IBM Outsourcing Thousands of Jobs to India,” Exposing the Elitist Agenda Blog, www.peacerebelgirl.wordpress.com/2009/03/26/ibm-outsourcingthousands-of-jobs-to-india/, March 26, 2009; and “IBM Outsourcing with Big Blue,” www.itouotsourcinghq.com/it-outsourcing-to-ibm, April 12, 2011.

Discussion Questions 1. What does it say about today’s competitive

environment when leading companies such as IBM give up competing in an area of their business that they dominated for many years and expand significantly into a related area of

business they have only been involved in for a relatively short period of time? 2. In what ways does this example demonstrate an organization’s ability and/or inability to adapt to change?

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Producing World-Class Goods and Services

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Describe the current state of Canadian manufacturing and how companies are becoming more competitive.

LO2 Describe the evolution from production to operations management. LO3 Describe operations management planning issues, including facility location, facility layout, materials requirement planning, purchasing, just-in-time inventory control, quality control.

LO4 Identify various production processes and describe techniques that improve productivity, including computer-aided design and manufacturing, flexible manufacturing, lean manufacturing, mass customization, robotics, and 3D printing.

LO5 Explain the use of PERT and Gantt charts to control manufacturing processes.

P R O F I L E GETTING TO KNOW: SHAHID KHAN, OWNER, FLEX-N-GATE

354

At just 16 years old, Shahid Khan moved to Cham-

His fears subsided the next morning when he

paign, Illinois, ready to live the American Dream.

discovered a notice about an opening for a dish-

However, the young Pakistani immigrant quickly lost

washing job in the YMCA kitchen. With a starting

his confidence when he discovered an enormous

salary of $1.20 per hour, Khan was shocked that

blizzard had hit his new Midwestern home. To make

he could recoup his losses from the previous night

matters worse, the dorms at the University of Illinois

so quickly. “It’s like, wow,” said Khan. “If you put the

hadn’t opened yet, forcing Khan to pay $3 for a

$1.20 per hour in terms of Pakistan, you’re making

room and a meal at the local YMCA. With precious

more than 99% of the people over there. I’m breath-

little money to his name, he began to worry about

ing oxygen for the first time.” The new opportuni-

how he would survive the next four years at college.

ties fuelled Khan’s enthusiasm for his work and after

CHAPTER 10 Producing World-Class Goods and Services

client, General Motors, passed off his bumper design to their large-scale suppliers. Other entrepreneurs would have reacted angrily to such a slight, but Khan remained positive. “It really was the right thing for them,” he says. “We had no business going from making 200 bumpers a day to making 40 000.” Plus, his dealings with GM put him in contact with executives at Isuzu, one of Japan’s biggest auto companies. Khan travelled to Japan in the early 1980s in a last-ditch effort to win clients. His timing couldn’t have been better. Japanese car companies had been preparing to enter the American market, but needed more domestic suppliers to fuel their growth. Khan fit this need perfectly thanks to his manufacturing experience © Michael Hickey/Getty Images

and his game-changing bumper design. Soon FlexN-Gate was manufacturing parts for Toyota, Isuzu,

graduating he landed a job overseeing production

and Mazda. As these brands grew into some of the

for a local aftermarket auto parts company called

biggest names on the American market, Khan’s

Flex-N-Gate. At first Khan couldn’t believe the ineffi-

company grew right along with them. By 2011,

cient manufacturing methods the company used to

two-thirds of cars and trucks sold in America used

make its bumpers, which sometimes involved weld-

Flex-N-Gate parts. And since Khan is the sole share-

ing together as many as 15 different parts. Using his

holder, all profits from the company’s sales go to

engineering expertise, Khan refined the process to

him. He’s now worth about $7 billion.

make it less complicated. His hard work paid off in

In 2012 he used some of that immense

the form of a revolutionary new product: a bumper

wealth to purchase the Jacksonville Jaguars, ful-

stamped from a single piece of steel that managed

filling a personal dream to own a NFL franchise.

to slim down the rear end of a truck.

Although the Jaguars haven’t exactly been Super

After seven years in the aftermarket business,

Bowl contenders in recent years, Khan is confident

Khan realized that the value-focused industry didn’t

that someday the team will become another one of

provide much room for innovation. If Khan wanted

his comeback stories.

his product to succeed, he knew he had to sell

By setting Flex-N-Gate on the path to pro-

directly to automakers instead of to consumers. So,

ductivity, Shahid Khan made a fortune while also

armed with little more than a post office box and a

creating thousands of jobs. It has also earned him

small business loan, Khan started his own company.

great respect in the auto industry. In this chapter

Within two years he earned enough money to buy

you’ll learn about how other company leaders thrive

the failing Flex-N-Gate from his old boss, giving him

and survive in the production and operations sector.

additional revenue streams as well as an estab-

You’ll also find out why Canada is generally mov-

lished brand name. While business boomed at first,

ing from a production-based economy to a service

sales eventually ground to a halt when its biggest

economy.

Sources: P. R. Sanjai, Jie Ma, and John Lippert, “NFL’s Jaguars Billionaire Rises From Dishwasher to Takata Suitor,” Bloomberg, September 28, 2016; Brent Snavely, “Shahid Khan’s Advice to Engineers: ‘Make Sure You Make Money’,” Detroit Free Press, April 12, 2016.

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PART 3 Leadership, Organization, and Production to Satisfy Customers

LO1

Describe the current state of Canadian manufacturing and how companies are becoming more competitive.

■ FIGURE

Canada Today Canada is a large industrial country with many major industries. We are one of the largest producers of forest products in the world, with plants in nearly all provinces turning out a vast array of wood, furniture, and paper products. There are giant aluminum mills in Quebec and British Columbia, automotive-related manufacturing plants in Ontario and Quebec, and aircraft plants in Ontario, Quebec, and Manitoba. Oil, natural gas, and coal are produced in Alberta, Saskatchewan, Newfoundland and Labrador, Nova Scotia, and British Columbia, and a vast array of metals and minerals come from all parts of Canada. These are only some of the thousands of components, products, and natural resources produced or processed in Canada. Given that most of our industry is focused on natural resources we can experience significant growth in times when world economies are growing, offset by an equally large retraction when world economies are stagnant or in recession. Such has been the case over the past 7 to 10 years. What happens in the United States, along with world economies including China and India, has a dramatic impact on Canada, as was discussed in Chapter 3. Canada is facing some serious challenges to its ability to remain a modern, competitive industrial country. Today’s business climate is characterized by constant and restless change and dislocation, as ever-newer technologies and increasing global competition force companies to respond quickly to these challenges. Many factors account for our difficulties in the world’s competitive race. Among them are inadequate improvement in productivity and unrelenting competition from the United States, Japan, Germany, and more recently from India, China, and other Southeast Asian countries; inadequate education and retraining programs for our workforce; our “branch plant economy,” whereby many subsidiaries are owned by foreign parent companies and profits are mostly returned to these foreign-based companies rather than invested in Canada; and a lack of money spent on research and development. Where Canada used to be able to rely on a lower-valued Canadian dollar compared to the U.S. dollar to sustain our exports, an exchange rate closer to parity negates this advantage. Figure 10.1 lists priorities that could improve Canada’s competitiveness.

10.1

MAKING CANADA MORE COMPETITIVE The Canadian Manufacturing Coalition published a report identifying priorities that would make our country more competitive.

1. Retain and attract investment to expand manufacturing capacity through new domestic and foreign sources of capital in order to expand existing facilities and create new facilities.

2. Manufacture more products and technologies in Canada in ways to improve demand for for Canadian-made products.

3. Accelerate adoption of new technologies and processes so that Canadian manufacturers can improve efficiency, improve environmental performance and increase competitiveness.

4. Sell more to customers in Canada and around the world by promoting products that are designed, engineered, and manufactured in Canada.

Source: “Industrie 2030: Manufacturing, Growth, Innovation and Prosperity for Canada,” Canadian Manufacturing Coalition, 2016, accessed August 26, 2017, http://www.industrie2030.ca/download.php?id=77/download.

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CHAPTER 10 Producing World-Class Goods and Services

Despite these challenges, Canada still ranks fairly well in world competitiveness (see the Reaching Beyond Our Borders box in this chapter). However, one cannot expect this to continue, as other countries are becoming stronger and more competitive. In response, the federal government’s innovation strategy focuses on research and development as a way to improve our competitiveness. Let us look at research and development next.

Research and Development According to the Canadian Oxford Dictionary, research and development (R&D) is defined as work directed toward the innovation, introduction, and improvement of products and processes. When evaluating why some companies are more competitive than others, the terms technology and innovation often come up. What do these terms mean? The Centre for Canadian Studies at Mount Allison University, in co-operation with the Canadian Heritage Canadian Studies Programme, produces the About Canada series. Innovation in Canada is the focus of one of these documents.

research and development (R&D) Work directed toward the innovation, introduction, and improvement of products and processes.

Technology is know-how, knowing how to make and use the tools for the job. It’s the combination of technology with markets that creates innovation and gives a competitive edge. An innovation is a new product or process that can be purchased. Put another way, an idea may lead to an invention, but it cannot be called an innovation until it is commercialized. When technological know-how is developed, sold, distributed, and used, then it becomes an innovation.1 In the Survey of Innovation conducted by Statistics Canada, respondents indicated that the three most important objectives of innovation are to improve product quality, to increase production capacity, and to extend product range. Since that time, the Science, Innovation, and Electronic Information Division (SIEID) of Statistics Canada has piloted a greater number of surveys that focus on the importance of innovation. SIEID believes that innovation and the adoption and dissemination of innovative technologies and processes are vital to economic growth and development. It continues to elaborate by stating that, through innovation, new products are introduced in the market, new production processes are developed and introduced, and organizational changes are made. Through the adoption of newer, more advanced technologies and practices, industries can increase their production capabilities, improve their productivity, and expand their lines of new goods and services.2 Private industry, Canadian universities, hospitals, and government laboratories are key contributors to R&D in Canada. In 2014, Canada dropped out of the world’s top-ten list for R&D spending.3 Future R&D expansion in Canada will depend upon three key drivers: revenues and profitability, government policy, and corporate strategy.4 Figure 10.2 outlines Canada’s top ten corporate R&D spenders. In 2015, the Top 100 Corporate R&D spending rose 6.9 percent from 2014.5 Two companies with a significant decline in R&D spending were Syncrude Canada Ltd. and Cenovus Energy Inc. Offsetting the steep declines was the significant increase in R&D by Open Text Corporation and Mitel Networks Corporation. Based on its research, what does RE$EARCH Infosource Inc. forecast? First, the financial crisis in 2008–2009 was a logical reason for a decline in R&D spending. 357

PART 3 Leadership, Organization, and Production to Satisfy Customers

However, given the decrease in manufacturing and the increase in the service industry, it will be difficult to reverse the trend. Manufacturing typically needs to invest in R&D and has been supported by government in the past, however a similar R&D environment does not traditionally exist in the service sector.

■ FIGURE

10.2

CANADA’S TOP CORPORATE R&D SPENDERS Rank

2015 2014 Company

Revenue

Research Intensity

% Change 2014–2015

FY2015 $000

R&D as % of Revenue Industry

R&D Expenditures FY2015 $000

FY2014 $000

Bombardier Inc.

$2,293,988 $2,022,340

13.4

$23,236,536

9.9

Aerospace

Magna International Inc.

$639,350 $585,385

9.2

$41,089,746

1.6

Automotive

Blackberry Limited

$599,710 $785,300

–23.6

$2,761,992

21.7

Communication/ Telecom Equipment

BCE Inc.

$530,300 $546,000

–2.9

$21,514,000

2.5

Telecommunication Services

Canadian Natural $527,000 $450,000 Resources Limited

17.1

$12,795,000

4.1

Energy/Oil and Gas

Pratt & Whitney Canada Corp.

$518,000 $542,000

–4.4

Aerospace

IBM Canada Ltd.

$477,000 $466,000

2.4

Software & Computer Services

Valeant Pharmaceuticals International Inc.

$427,597 $271,707

57.4

$13,357,940

3.2

Pharmaceuticals/ Biotechnology

Rogers Communication Inc.

$425,287 $418,000

1.7

$13,414,000

3.2

Telecommunication Services

Constellation Software Inc.

$349,325 $287,518

21.5

$2,350,646

14.9

Software & Computer Services

Notes: nd = Not disclosed Source: © RE$EARCH Infosource Inc.

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Canada’s Evolving Manufacturing andServices Base Over the previous two decades, foreign manufacturers captured huge chunks of the North American market for basic products such as steel, cement, machinery, and farm equipment using the latest in production techniques. That competition forced companies to greatly alter their production techniques and managerial styles. Many firms are now as good as or better than competitors anywhere in the world. What have Canadian manufacturers done to regain a competitive edge? They have emphasized the following: ∙ Focus on customers; ∙ Maintain close relationships with suppliers and other companies to satisfy customerneeds; ∙ Practise continuous improvement; ∙ Focus on quality; ∙ Save on costs through site selection; ∙ Rely on the Internet to unite companies; and ∙ Adopt production techniques such as enterprise resource planning, computer-integrated manufacturing, flexible manufacturing, and lean manufacturing. As you may recall from Figure 1.8 in Chapter 1, the goods-producing sectors employ 21.2 percent of Canada’s working population. R&D spending by businesses is also critical to our economy, as the business enterprise sector contributed 46 p ercent of total R&D expenditure in 2014.6 This sector is highly innovative and technology-driven. It continues to invest in facilities increasing production agility, expanding automation capabilities, and facilitating new product introductions.7 As we progress through this chapter, you will see that operations management has become a challenging and vital element of Canadian business. The growth of Canada’s manufacturing base will likely remain a major business issue in the near future. There will be debates about the merits of moving production facilities to foreign countries. Serious questions will be raised about replacing workers with robots and other machinery. Major political decisions will be made regarding protection of Canadian manufacturers through quotas and © Kim Kyung-Hoon/Reuters/Landov other restrictions on free trade. Concerns about the Each year companies discover new ways of automating that eliminate the need for human labour. This robot impact of manufacturing on our environment will demonstrates an ability to cook Okonomiyaki, a Japanese result in the development of new green technolopancake. The robot can take verbal orders from customers gies (as discussed in the Seeking Sustainability box and use standard kitchen utensils. Do you think the robot in this chapter). Regardless of how these issues are has a better chance to get your order right compared to a human cook? decided, however, there will be many opportunities along the way. 359

PART 3 Leadership, Organization, and Production to Satisfy Customers

LO2

Describe the evolution from production to operations management.

The service sector will also continue to get attention as it continues to become a larger part of the overall economy. Service productivity is an important issue, as is the blending of service and manufacturing through the Internet. Since many of tomorrow’s graduates will likely find jobs in the service sector, it is important to understand the latest operations management concepts and how they apply to the service sector.

PROGRESS ASSESSMENT

• What are some challenges that Canada is facing in its ability to remain a competitive country?

• How is innovation related to research and development?

production

The creation of finished goods and services using the factors of production: land, labour, capital, entrepreneurship, and knowledge.

From Production to Operations Management

Production is the creation of goods and services using the factors of production: land, labour, capital, entrepreneurship, and knowledge (see Chapter 1). Production has historproduction ically meant manufacturing and the term production management has described the management The term used to management activities that helped firms create goods. But the nature of business has describe all of the changed significantly in the last 20 years or so as the service sector, including Interactivities that managers net services, has grown dramatically. As discussed in Chapter 1, Canada is a service do to help their firms create goods. economy—that is, one dominated by the service sector. This can be a benefit to future graduates because many of the top-paying jobs are in legal services, medical services, entertainment, broadcasting, and business services such as accounting, finance, and management consulting. Operations management is a specialized area in management that converts or transforms resources (including human resources) into goods and services. It includes inventory management, quality control, production scheduling, follow-up services, and more. In an automobile plant, operations management transforms raw materials, human resources, parts, supplies, paints, © Mark Edward Atkinson/Getty Images RF tools, and other resources into automobiles. It Operations management for services is all about enriching the does this through the processes of fabrication customer experience. Hotels, for instance, have responded to the and assembly. needs of business travellers with in-room Internet access and other In a college or university, operations kinds of office-style support, as well as stored information about management takes inputs—such as inforthe preferences of frequent guests. What other amenities do hotels mation, professors, supplies, buildings, provide for business people on the go? offices, and computer systems—and creates 360

CHAPTER 10 Producing World-Class Goods and Services

Seeking SUSTAINABILITY Carbon Capture and Storage One of Canada’s primary resources is its fossil fuels. Abundant supplies of oil, natural gas, and coal make this country one of the world’s most attractive energy centres for continuing investment and development. However, with this economic opportunity comes a challenge, to mitigate greenhouse gas (GHG) emissions and their impact on climate change. More and more evidence is being gathered by the scientific community that supports the claim that global emissions growth could bring rapid climate change. The challenge is to reduce GHG emissions while continuing economic progress. Carbon dioxide capture and storage (CCS) is one way to address the carbon challenge. With CCS, carbon dioxide emissions from large industrial facilities are separated from the plant’s process or exhaust system, compressed, and injected deep underground. CCS can be built as an add-on to existing fossil energy infrastructure or incorporated into new and future facilities. The main components of this operation are: capture, transportation, and storage. Once the carbon dioxide is captured at a plant, it needs to be transported to a location with the appropriate geological formation. These stable sedimentary rock formations, that formerly securely held vast oil and gas reserves, can now be used to hold carbon dioxide, which is injected into the underground space. Both the federal and a number of provincial governments are financially supporting the development of CCS and introducing legislation to reduce GHG emissions. A total of $3 billion in funding for CCS has been

provided by all levels of government during the past few years. Carbon dioxide capture and storage is used by SaskPower where a large-scale CCS operation was built for a coal-fired power plant in Estevan, Saskatchewan. The project cost $1.4 billion and officials claim the GHG reduction is equivalent to removing a quarter of a million cars from the road. While you may initially assume the most important area for CCS is in manufacturing, there are a variety of industries that can benefit from CCS. According to the Integrated CO2 Network, approximately 24 percent of GHG emissions are generated from personal transportation and residential areas. Do you believe CSC technology will expand beyond large industry to also help Canadians make their everyday living more GHG efficient?

Source: “A Strategic Investment,” Integrated CO2 Network,2015,http://www.ico2n.com/, accessed May 10, 2015; “Carbon capture history made in Saskatchewan, besting once ambitious Alberta,” CBC News, October 3, 2014, http://www.cbc.ca/news/canada/calgary/carboncapture-history-made-in-saskatchewan-besting-once-ambitious-alberta-1.2786478; “Quick Facts on CO2 Capture and Storage in Canada,” Natural Resources Canada, www.CO2network.gc.ca; and Rachel Pulfer, “Burying King Coal,” Canadian Business, April 28, 2008, 21–22.

services that transform students into educated people. It does this through a process called education. Some organizations—such as factories, farms, and mines—produce mostly goods. Others—such as hospitals, schools, and government agencies—produce mostly services. Still others produce a combination of goods and services. For example, an automobile manufacturer not only makes cars but also provides services such as repairs, financing, and insurance. Wendy’s provides goods such as hamburgers and fries, but customers also receive services such as order taking, order filling, food preparation, and cleanup.

operations management

A specialized area in management that converts or transforms resources (including human resources) into goods and services.

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Reaching Beyond OUR BORDERS How Does Canada Shape Up as an International Competitor? How does Canada rank when compared to other industrialized countries? Canadian businesses have been criticized for not being more productive as productivity contributes to competitiveness. Analysts are concerned that an under-investment in innovation and technology will have a negative impact on the longterm productivity of Canadian businesses. In order to remain competitive with other countries in the world, Canada needs to invest in R&D and higher education. Assessing international competitiveness is complex and open to varying opinions. There are several indexes that attempt to measure competitiveness, and different criteria and weightings are used by the agencies that produce them. You will notice the importance of economic conditions and the role of government when evaluating a country’s attractiveness. Let us consider two popular rankings. The prestigious World Economic Forum produces the annual Global Competitiveness Report. The Growth Competitiveness Index is based on estimates of each country’s ability to grow over the next five to ten years. Thus, economic conditions and institutions (e.g., government and financial markets) are reviewed. It was determined that Canada’s future competitiveness and productive potential would benefit by improving the sophistication and innovative potential of the private sector with greater R&D spending and producing goods and services higher on the value chain. The International Institute for Management Development (IMD) produces the World Competitiveness Yearbook, which ranks the ability of a nation to provide

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an environment that sustains the competitiveness of enterprises. The ranking considers four criteria: economic performance, government efficiency, business efficiency, and infrastructure. In the past it was determined that while Canada ranks well on government policies conducive to competitiveness, Canada would rank higher if it had a more enterprising business community. There is no single authority on ranking a country’s competitiveness. These two examples highlight how different criteria are considered by different organizations. What should be of interest is that the criteria incorporate some of the concepts that are discussed in this text (e.g., economic performance). As a business student, be assured that the concepts that you are learning are in fact incorporated in business decision making.

Year

Canada’s Rank, WEF’s Growth Competitiveness Index

Canada’s Rank, IMD’s World Competitiveness Ranking

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

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The business environment is clearly influenced by factors such as economic performance and government policies. Canada’s ranking is influenced not only by what happens domestically, but also by what happens internationally. Our fall in the rankings is influenced by our strengths and weaknesses (as assessed

by the organizations listed above) and measured against the strengths and weaknesses of other countries. As other countries improve their competitiveness, this will contribute to Canada’s fall in the rankings if we do not improve accordingly.

Sources: “The 2017 IMD World Competitiveness Ranking,” IMD, accessed August 27, 2017, https://www.imd.org/globalassets/wcc/docs/ release-2017/2017-world_competitiveness_ranking.pdf; “IMD World Competitive Yearbook, 2015,” imd.org, accessed August 27, 2017, http:// www.imd.org/news/IMD-releases-its-2015-World-Competitiveness-Ranking.cfm; “The Global Competitiveness Report, 2016-2017—Canada,” World Economic Forum, http://www3.weforum.org/docs/GCR2016-2017/05FullReport/TheGlobalCompetitivenessReport2016-2017_FINAL. pdf; “The Global Competitiveness Report, 2015-2016—Canada,” World Economic Forum, accessed August 27, 2017, http://www3.weforum. org/docs/gcr/2015-2016/Global_Competitiveness_Report_2015-2016.pdf; David Parkinson, “Canada slips a notch in global competitiveness ranking,” The Globe and Mail, September 3, 2014, http://www.theglobeandmail.com/report-on-business/economy/canada-slips-a-notch-inglobal-competitiveness-ranking/article20313100/; “The Global Competitiveness Report 2014-2015 – Canada,” World Economic Forum, 2014, accessed May 10, 2015, http://www3.weforum.org/docs/GCR2014-15/Canada.pdf; “Canada falls to 15th in global competitiveness ranking,” CBC News, September 3, 2014, http://www.cbc.ca/news/business/canada-falls-to-15th-in-global-competitiveness-ranking-1.2754078; “IMD releases its 25thanniversary World Competitiveness Rankings,” IMD, May 29, 2013, http://www.imd.org/news/World-Competitiveness-2013.cfm.

Operations Management in the Service Sector Operations management in the service industry is all about creating a good experience for those who use the service.8 For example, in a Hilton hotel operations management includes smooth-running elevators, fine restaurants, comfortable beds, and a front desk that processes people quickly. It may also include fresh-cut flowers in lobbies and dishes of fruit in every room. Along with these classic amenities, Hilton must also stay innovative so it can cater to the ever-changing needs of its guests. Most business travellers today expect in-room WiFi as well as work centres that provide all the resources of a modern office. Hilton provides these services and also develops new features that could someday become standard in their hotels. One such innovation is keyless room entry. Rather than give guests a keycard they can easily lose, Hilton is creating a system that would allow guests to use their smartphone to enter their room.9 Another ambitious Hilton project is Connie, a two-foot tall front desk robot that can answer guests’ basic questions.10 Named after company founder Conrad Hilton, the robot uses IBM’s Watson system to learn new information and tasks. So while Connie is currently capable of little more than providing directions to the gym, someday it could be the centre of operations at every Hilton hotel. The company tests all these new ideas at a hotel located near its headquarters.11 This allows Hilton to observe the ways that guests react to new features and how it affects overall operations. Operations management is responsible for locating and providing such amenities to make customers happy. In short, pleasing customers by anticipating their needs has become the quality standard for hotels like Hilton, as it has for many other service businesses. But knowing customer needs and satisfying them are two different things. That is why operations management is so important: it is the implementation phase of management that allows companies to turn their ideas into actual goods and services. 363

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Can you see the need for better operations management in airports, hospitals, government agencies, schools, and non-profit organization such as the Red Cross? The opportunities seem almost unlimited. Although manufacturing still needs innovation, much of the future of Canada’s economic growth is in these service areas.

Measuring Quality in the Service Sector There’s strong evidence that productivity in the service sector is rising, but productivity measures do not capture improvements in quality. In an example from health care, positron emission tomography (PET) scans are much better than X-rays, but the quality difference is not reported in productivity figures. The traditional way to measure productivity involves tracking inputs (worker hours) compared to outputs (dollars). Notice that there is no measure for quality improvement. When new information systems are developed to measure the quality improvement of goods and services—including the speed of their delivery and customer satisfaction—productivity in the service sector will go up dramatically. Using computers is one way in which the service sector is improving productivity, but not the only one. Think about labour-intensive businesses such as fast-food restaurants, where automation plays a big role in controlling costs and improving service. Today, at Burger King, for example, customers fill their own drink cups from pop machines, which allows workers to concentrate on preparing the food. And because the people working at the drive-up window now wear headsets instead of using stationary mikes, they are no longer glued to one spot and can do four or five tasks while taking an order. Most of us have been exposed to similar productivity gains in banking. For example, people in most cities no longer have to wait in long lines for tellers to help them deposit and withdraw money. Instead, they use automated teller machines (ATMs), which usually involve little or no waiting and are available 24 hours a day. Another service that was once very slow was grocery store checkout. The system of marking goods with universal product codes (UPC) enables computerized checkout and allows cashiers to be much more productive than before. Now, many stores have set up automated systems that enable customers to go through the checkout process on their own. Some grocery chains, such as Longo’s, are implementing Internet services that allow customers to place orders online and receive home delivery. The potential for © vasabii/iStock/Thinkstock productivity gains in this area are enormous. Information Mapping helps leading organizations focus In short, operations management has led to treon improving performance through better written communication. Clients, including Citizenship and mendous productivity increases in the service sector Immigration Canada and the Ontario Pension Board, have but there is still a long way to go to capture potential increased productivity through better implementation of improvements. Also, service workers are losing jobs policies and procedures.12 What types of measures could to machines just as manufacturing workers did. The you implement to track whether a company’s efforts to secret to obtaining and holding a good job is to acquire manage customer complaints were effective? appropriate education and training. Such education and 364

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training must go on for a lifetime to keep up with the rapid changes that are happening in all areas of business. That message cannot be repeated too frequently.

PROGRESS ASSESSMENT

• Explain the difference between production management and operations management.

• What is the biggest issue with productivity in the service sector?

Operations Management Planning Operations management planning helps solve many of the problems in the service and manufacturing sectors. These include facility location, facility layout, and quality control. The resources used in the two sectors may be different, but the management issues are similar.

LO3

Describe operations management planning issues, including facility location, facility layout, materials requirement planning, purchasing, justin-time inventory control, and quality control.

Facility Location Facility location is the process of selecting a geographic location for a company’s operations. In keeping with the need to focus on customers, one strategy is to find a site that makes it easy for consumers to use the company’s services and to communicate about their needs. For example, German food company Dr. Oetker’s opened a new pizza plant in London, Ontario, because the location provided skilled workers and a close proximity to consumers in Canada and the United States.13 Flower shops and banks are putting facilities in supermarkets so that their products are more accessible than they are in freestanding facilities. You can find a McDonalds’ inside some Walmart stores and there are Tim Hortons outlets in some gas stations. Customers can buy gas and their meals, all in one location. The ultimate in convenience is never having to leave home to get goods and services. That is why there is so much interest in online banking, shopping, education, and other services. E-commerce (a topic discussed earlier in Chapter 1) uses Facebook and other social media to make transactions even easier. For brick-and-mortar businesses to beat such competition, they have to choose good locations and offer outstanding service. Study the location of service-sector businesses—such as hotels, banks, athletic clubs, and s upermarkets-—and you will see that the most successful ones are conveniently located. Google builds large data centres in jurisdictions that give tax breaks and have lower cost electricity readily available. They are also located near bodies of water for cooling their servers.

facility location

The process of selecting a geographic location for a company’s operations.

e-commerce

The buying and selling of goods and services over the Internet.

FACILITY LOCATION FOR MANUFACTURERS A major issue of the recent past has been the shift of manufacturing organizations from one city or province to another in Canada, or to other foreign sites. In the past few years several prominent plant closures impacted the Canadian processed food industry. For example, Kellogg Canada closed its cereal plant in London, Ontario, and Heinz closed its tomato-processing plant in Leamington, Ontario.14 Such shifts sometimes result in pockets of unemployment in some geographic areas and lead to tremendous economic growth in others that benefit from these shifts. The Making Ethical Decisions box considers some of the issues surrounding such moves. 365

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Making ETHICAL DECISIONS Do We Stay or Do We Go? Suppose the hypothetical company ChildrenWear Industries has long been the economic foundation for its hometown. Most of the area’s small businesses and schools either supply materials the firm needs for production or train its future employees. ChildrenWear has learned that if it were to move its production facilities to Asia it could increase its profits by 15 percent. Closing operations in the company’s hometown would cause many of the town’s other businesses, such as restaurants, to fail, which would leave a high percentage of the town’s adults unemployed, with no options for re-employment within the local community. As a top manager at ChildrenWear, you must help decide whether the plant should be moved. What alternatives do you have? What are the consequences of each? Which will you choose? Inexpensive resources are another major reason for moving production facilities. Companies usually need water, electricity, wood, coal, and other basic resources. By moving to areas where natural resources are inexpensive and plentiful, firms can significantly lower not only the cost of buying such resources but also the cost of shipping finished products. Often the most important resource is people, so companies tend to cluster in a location where smart and talented people are readily available. Witness the Ottawa area, also known as Silicon Valley North. Time-to-market is another decision-making factor. As manufacturers attempt to compete globally, they need sites that allow products to move quickly, so that they can offer fast delivery to customers. Thus, access to highways, rail lines, waterways, and airports is critical. Information technology (IT) is also important to quicken response time, so many firms are seeking countries with the most advanced information systems. Another way to work closely with suppliers in order to satisfy your customers’ needs is to locate your production facilities near supplier facilities. This option cuts the cost of distribution and makes communication easier.

Many businesses are building factories in foreign countries to get closer to their international customers. That is a major reason why the U.S. automaker General Motors builds cars in Oshawa, Ontario, and Japanese automaker Toyota builds cars in Cambridge, Ontario. Japanese-based automaker Honda opened an engine factory plant in Alliston, Ontario, in 2008, close to its two assembly plants. Honda Canada president Hiroshi Kobayashi told a news conference that this site selection “supports Honda’s global strategic manufacturing focus of bringing manufacturing and sales operations to the local market.” In 2014, Honda announced it will make a $857 million investment to expand the plant in Alliston, Ontario, to upgrade vehicle assembly and engine manufacturing. When firms select foreign sites, they consider whether they are near airports, waterways, and highways so that raw materials and finished goods can be moved quickly and easily. Businesses also study the quality of life for workers and managers. Are there good schools nearby? Is the weather nice? Is the crime rate low? Does the local community welcome new businesses? Do the chief executive and other key managers want to live there? Sometimes a region with a high quality of life is also an expensive one, which complicates the decision. In short, facility location has become a critical issue in operations management.

Sources: David Simchi-Levi, James Paul Peruvankal, Narenda Mulani, Bill Read, and John Ferreira, “Is It Time to Rethink Your Manufacturing Strategy?” MIT Sloan Management Review, Winter 2012; Gary Norris, “Honda Putting New Assembly Plant in U.S.; Ontario Gets $154M Engine Factory,” Canadian Business Online, May 17, 2006, www.canadianbusiness.com/markets/headline_news/article.jsp?content=b051777A; and Canadian Press, “Honda to invest $857M in Ontario plant to build next generation of Civic car,” Financial Post, November 6, 2014, http:// business.financialpost.com/news/transportation/honda-to-invest-857-million-in-alliston-operations-ontario-kicks-in-10.

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Why would companies spend millions of dollars to move their facilities from one location to another? In making these decisions they consider labour costs; availability of resources, including labour; access to transportation that can reduce time-to-market; proximity to suppliers; proximity to customers; crime rates; quality of life for employees; cost of living; and the need to train or retrain the local workforce. Even though labour is becoming a smaller percentage of total cost in highly automated industries, availability of low- © Gino de Graff/Alamy RF cost labour or the right kind of skilled Facility location is a major decision for manufacturing and other labour remains a key reason many produc- companies that must take into account the availability of qualified ers move their plant to Malaysia, China, workers; access to suppliers, customers, transportation, and local regulation including zoning and taxes. How has the growth of India, Mexico, and other countries. Some Internet commerce affected company location decisions? of these firms have been charged with providing substandard working conditions, exploiting children, or both in the countries where some manufacturers have set up factories. Others, such as Grupo M, a textile products and services company in the Dominican Republic, are being used as role models for global manufacturing. Grupo M provides its employees with higher pay relative to local businesses, transportation to and from work, daycare centres, discounted food, and health clinics. Its operations are so efficient that it can compete in world markets and provide world-class services to its employees.

OUTSOURCING The previous chapter noted that many companies now try to divide their production between core competencies, work they do best in-house, and outsourcing, using outside companies with expertise to service specific functional areas. The result is intended to achieve the best-quality products at the lowest possible costs. Outsourcing goods and services has become a hot practice in North America. Software development, call-centre jobs, and back-office jobs have been moving to developing countries for some time. The range of jobs now shifting to these countries expands beyond manufacturing to also include accounting, financial analysis, medical services, architecture, aircraft maintenance, law, film production, and banking activities.15 Based on a survey of its over 120 000 members and affiliates, the International Association of Outsourcing Professionals has found that increasing business flexibility is the most prominent reason for outsourcing.16 According to Jerome Thirion with KPMG Canada, consumer-facing companies may renew approximately one-third of a product line on an annual basis in order to remain competitive.17 In these situations, it makes better economic sense to work with an outsourcer who can adapt to a company’s changing production needs. 367

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In the manufacturing sector, employment continues to drop lower and lower through outsourcing. However, outsourcing is expected to also expand in other industries in the future. The survey also found the demand for outsourcing higher-skill activities as opposed to lower-skilled activities rose 6 percent from the previous year. In the past outsourcing was driven by a need for cheap labour but it is now more often that labour expertise is the key reason.18 Another industry where significant outsourcing happens is software R&D. For Canadian companies needing software, hourly rates outside of Canada are much lower. Keep in mind that while outsourcing may look good on paper financially, if a company does not do its homework, outsourcing can become a problem due to language and cultural differences, differences in expectations, etc. A Canadian organization, the Centre for Outsourcing Research and Education (CORE), has been formed to provide organizations with the knowledge and skills to manage outsourcing activities.19 More than just a cost-saving tool, outsourcing is being used as a strategic tool to focus scarce human capital on core business activities. Future global outsourcing trends are uncertain, but the overall volume of outsourcing by companies around the world is expected to grow. Both private and public sectors need to invest in areas that improve Canada’s attraction as a viable and affordable outsourcing destination.20 © Agencja Fotograficzna Caro / Alamy Stock Photo

A great deal of Germany’s economic success is attributed to the strength of its industrial sector, consisting of a longstanding group of small manufacturers, many of which have been in business for centuries. At the core of this manufacturing juggernaut is the Mittelstand, consisting of family-owned, small to midsize companies that account for 52 percent of the country’s economic output and supply almost two-thirds of the nation’s jobs. The Mittelstand are able to build Germany’s economy, especially its exports, without moving facilities to other countries.

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TAKING OPERATIONS MANAGEMENT TO THE INTERNET Many rapidly growing companies do very little production themselves. Instead, they outsource engineering, design, manufacturing, and other tasks to other companies that specialize in those functions. They create new relationships with suppliers over the Internet, making operations management an inter-firm process in which companies work closely together to design, produce, and ship products to customers. Many manufacturing companies are developing Internet-focused strategies that will enable them and others to compete more effectively in the future.21 These changes have a dramatic effect on operations managers as they adjust from a one-firm system to an inter-firm environment and from a relatively stable environment to one that is constantly changing and evolving. This linking of firms is called supply chain management. We will briefly introduce you to this concept later in the chapter. Manufacturing companies are developing Internet-focused strategies that will enable them and others to compete more effectively in the future.

FACILITY LOCATION IN THE FUTURE The use of information technology (IT) such as computers, modems, e-mail, voice mail, text messaging, teleconferencing, etc. gives employees the flexibility to choose where they work while at the same helps keeps the firm in the competitive mainstream (see also the discussion on virtual organizations in Chapter 9). Telecommuting, working from home via computer, is a major trend in business. Companies that no longer need to locate near sources of labour will be able to move

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to areas where land is less expensive and the quality of life may be higher. Furthermore, more salespeople are keeping in touch with the company and its customers through videoconferencing apps like Skype and Adobe Connect.22 One strong incentive for a business to locate in a particular city, province, or territory is the tax situation. Some provincial and local governments have higher taxes than others, yet many compete fiercely by offering companies tax reductions and other support, such as zoning changes and financial aid, in order to convince the company to locate within its boundaries. The previously mentioned Honda plant expansion in Alliston included a provincial government grant of up to $85.7 million. Have you seen advertisem*nts for entrepreneurs to locate in your hometown?

Facility Layout

In 2013, the Canadian Auto Workers (CAW) and Communications, Energy, and Paperworkers Union of Canada (CEP) merged to form a new union called Unifor. The organization, which represents Canada’s biggest private sector union and spans approximately 20 sectors, still represents workers in automotive manufacturing. Many jobs have been lost in this sector due to imports and the global financial crisis. What priorities do you think Unifor should focus upon to help its members who face the challenges of a changing global marketplace?24

Facility layout is the physical arrangement of resources, including people, to most efficiently produce goods and provide services to customers. Facility layout depends greatly on the processes that are to be performed. For services, the layout is usually designed to help the consumer find and buy services, including on the Internet. Some stores have added kiosks that enable customers to search for goods online and place orders or make returns and credit payments in the store. In short, the facilities and Internet capabilities of service organizations are becoming more customer-oriented. Similar to manufacturers, some service-oriented organizations, such as hospitals, use layouts that improve the efficiency. For manufacturing plants, facilities layout has become critical because the possible cost savings are enormous. Many companies are moving from an assembly-line layout, in which workers do only a few tasks at a time, to a modular layout, in which teams of workers combine to produce more complex units of the final product.23 There may have been a dozen or more workstations on an assembly line to complete an automobile engine in the past, but all of that work may be done in one module today. When working on a major project, such as a bridge or airplane, companies use a fixed-position layout that allows workers to congregate around the product to be completed. A process layout is one in which similar equipment and functions are grouped together. The order in which the product visits a function depends on the design of the item. This allows for flexibility. The Igus manufacturing plant in Cologne, Germany, can shrink or expand in a flash. Its flexible design keeps it competitive in a fast-changing market. Because the layout of the plant changes so often, some employees use scooters to more efficiently provide needed skills, supplies, and services to multiple

telecommuting

Working from home via computer.

facility layout

The physical arrangement of resources (including people) in the production process.

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workstations. A fast-changing plant needs a fast-moving employee base to achieve maximum productivity. Figure10.3 illustrates typical layout designs.

Materials Requirement Planning (MRP) Materials requirement planning (MRP) is a computer-based operations management system that uses sales forecasts to ensure that needed parts and materials are available at the right time and place. In a diner, for example, employees could enter the sales forecast into the computer, which would specify how many eggs and how much coffee to order, and then print out the proper scheduling and routing sequence. The same can be done with orders for the seats and other parts of an automobile. In the next section, you will read how just-intime inventory control has a similar objective. Enterprise resource planning (ERP), a newer version of MRP, combines the computerized functions of all the divisions and subsidiaries of the firm—such as finance, human resources, and order fulfillment—into one integrated software program that uses a single database (see Figure 10.4). The result is shorter time between orders © Lipo Ching/MCT/Landov and payment, less staff to do ordering and order processing, reduced At Cisco Systems, work spaces in some offices are fluid and unassigned, so inventories, and better customer service. For example, the customer employees with laptops and mobile can place an order, either through a customer service representative phones can choose where to sit when or online, and immediately see when the order will be filled and how they arrive each day. What do you think much it will cost. The representative can instantly see the customare some of the advantages of such er’s credit rating and order history, the company’s inventory, and the nontraditional facility layouts? Are there shipping schedule. Everyone else in the company can see the new any disadvantages? order as well; thus when one department finishes its portion of the task, the order is automatically routed via the ERP system to the next materials requirement planning (MRP) department. The customer can see exactly where the order is at any point by logging into A computer-based the system. production management By entering customer and sales information in an ERP system, a manufacturer can system that uses sales generate the next period’s demand forecast, which in turn generates orders for raw materiforecasts to make sure that needed parts and als, production scheduling, and financial projections. materials are available ERP software enables the firm to monitor quality and customer satisfaction as it at the right time and is happening. ERP systems are going global now that the Internet is powerful enough place. to handle the data flows. At the plant level, dynamic performance monitoring enables enterprise resource plant operators to monitor the use of power, chemicals, and other resources and to make planning (ERP) A computer application needed adjustments. In short, flows to, through, and from plants have become automated. that enables a firm Some firms are providing a service called sequential delivery. These firms are supto manage all of its pliers that provide components in an order sequenced to their customers’ production operations (finance, process. For example, Ford’s seat supplier loads seats onto a truck such that, when requirements planning, human resources, and off-loaded, the seats are in perfect sequence for the type of vehicle coming down the order fulfillment) on assembly line. the basis of a single, While ERP can be an effective tool, it also can have its problems. The Royal Canadian integrated set of Mint had difficulties extracting and manipulating data from its integrated softwaresystem. corporate data.

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■ FIGURE

10.3

TYPICAL LAYOUT DESIGNS A. ASSEMBLY-LINE LAYOUT Used for repetitive tasks.

B. PROCESS LAYOUT Frequently used in operations that serve different customers’ different needs. Storage

Cutting

Stamping

Deburring

Shipping

Packing

Assembly

Bending

C. MODULAR LAYOUT Can accommodate changes in design or customer demand. Planning machines

Drills Assembly tables

Saws Lathes

Sanders

D. FIXED POSITION LAYOUT A major feature of planning is scheduling work operations. Finish Painting Plaster Architect contractor carpentry contractor Grading equipment Electrical and operators contractor General carpentry Masonry and supplies contractor Roofing Plumbing contractor contractor

■ FIGURE

10.4

ENTERPRISE RESOURCE PLANNING Multifirm Functions

Computer Software

System Output

Requirement planning

Manufacturing resource plan

Finance

Master production schedule

Human resources

Financial report

Order fulfillment

Distribution plan

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Courtesy of SAS Institute

SAS is the leader in business analytics software and services, and the largest independent vendor in the business intelligence market. SAS Business Analytics helps organizations improve performance and deliver value by making better decisions faster. SAS and the Toronto Maple Leafs formalized a partnership for hockey analytics that will see the Club use SAS analytics to help analyze aspects of the team’s performance; applying a data-driven approach to everything from player performance to on-ice strategy. The analysis will include the use of player performance data to help hockey executives make better decisions at the National Hockey League entry draft and trade deadline.29

purchasing

The functional area in a firm that searches for quality material resources, finds the best suppliers, and negotiates the best price for goods and services.

Departments operated independently, and because it took so long to produce reports for analysis, employees did not trust the reliability of the information once it was in their hands. “Anyone who has used an ERP system knows that reporting can be problematic,” says Azfar Ali Khan, director of operations and systems at the Mint’s sales and marketing departments. “They’re wonderful transactional engines, but getting the richness of the data in front of the people in a context they can understand is particularly challenging.”25 Information technology (IT) has had a major influence on the entire production process, from purchasing to final delivery. Many IT advances have been add-ons to ERP. To solve its difficulties, the Mint turned to Cognos for its enterprise solution. Cognos’ Analytic Applications solution made it possible for users to access data right to the day, as well as to create new reporting opportunities. The Mint’s s elf-service, web-enabled, enterprise-wide solution allowed it to act quickly and thereby improve customer service. According to Ali Khan, “Buying a prepackaged solution and customizing it to our own unique business requirements has saved us a lot of time and a lot of money.”26

Purchasing Purchasing is the function that searches for high-quality material resources, finds the best suppliers, and negotiates the best price for quality goods and services. In the past, manufacturers dealt with many suppliers so that if one could not deliver, the firm could get materials from a different supplier. Today, however, manufacturers rely more heavily on just one or two suppliers, because the relationship between suppliers and manufacturers is much closer than before.27 Producers share a great deal of information and consequently, they want as few suppliers as possible knowing their business. The Hudson’s Bay Company shifted to single merchandise buyers for a growing number of departments at its Bay, Saks Fifth Avenue, and Home Outfitters chains. This move was designed to help improve product selection and save money through less duplication and larger purchase orders.28 The Internet has transformed the purchasing function. A business looking for supplies can contact an Internet-based purchasing service and find the best items at the best price. Similarly, a company wishing to sell supplies can use the Internet to find all companies looking for such supplies. Thus, the time and dollar cost of purchasing items has been reduced tremendously.

Just-in-Time Inventory Control One major cost of production is holding parts and other items in storage for later use. Storage not only subjects such items to obsolescence, pilferage, and damage, but also requires 372

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construction and maintenance of costly warehouses. To cut such costs, many companies have implemented a concept called just-in-time (JIT) inventory control. JIT systems keep a minimum of inventory on the premises and delivers parts, supplies, and other needs just in time to go on the assembly line. To work effectively, however, the process requires an accurate production schedule (using ERP) and excellent coordination with carefully selected suppliers, who are usually connected electronically so they know what is needed and when. Sometimes the supplier builds new facilities close © Alistair Berg/Getty Images to the main producer to minimize distribution time. JIT runs into problems when suppliers are farther away. Huge warehouses such as the one depicted in the photo would become a thing of the past if all companies Weather may delay shipments, for example, as hapimplemented just-in-time (JIT) inventory control. What pened when weather (earthquakes and the resulting are the advantages and disadvantages of having large tsunami) disrupted the supply chain of materials from amounts of inventory available? Japan to Canada in 2011. Delays require that companies adjust their JIT just-in-time (JIT) schedules. Today, the longer delays at border crossings due to increased traffic and security inventory control measures have forced companies to do just that. Other limitations are that JIT works best A production process with standard products, needs a high and stable demand to justify the cost and savings, and in which a minimum of inventory is kept on the requires extremely reliable suppliers. premises and parts, JIT systems ensure that the right materials are at the right place at the right time at the supplies, and other cheapest cost in order to meet both customer and production needs. That is a key step in needs are delivered just in time for use on modern production innovation. the assembly line.

Quality Control Maintaining quality means consistently producing what the customer wants while reducing errors before and after delivery to the customer. In the past, firms often conducted quality control at the end of the production line. Products were completed and then tested for quality. This resulted in several problems, including the need to: 1. Utilize extra workers and resources to inspect

work. 2. Correct the mistake or scrap the product if an error

was found, resulting in higher costs. 3. Risk customer dissatisfaction if she or he found

the mistake, and decided to buy from another firm thereafter. Such problems led to the realization that quality is not an outcome; it is a never-ending process of continually improving what a company produces. Quality

What happens when you combine the zeal of technical innovators with the Six Sigma discipline of a large company like General Electric? You get a medical breakthrough. Janet Burki and her 280-person operations team developed the world’s fastest CT scanner. It works ten times faster than other systems and produces clear 3-D images of the beating heart. Can you see how efforts to build in quality lead to better (and faster) products?

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quality

Consistently producing what the customer wants while reducing errors before and after delivery to the customer.

Six Sigma quality

A quality measure that allows only 3.4 defects per million events.

control should be part of the operations management planning process rather than simply an end-of-the-line inspection. Companies have turned to the use of modern quality control standards, such as Six Sigma. Six Sigma quality, which sets a benchmark of just 3.4 defects per million opportunities, detects potential problems to prevent their occurrence. That is important to a company that makes 4 million transactions a day, like some banks. The Spotlight on Small Business box explores how small businesses can apply Six Sigma to their operations. Statistical quality control (SQC) is the process some managers use to continually monitor all phases of the production process and assure quality is built into the product from the beginning. Statistical process control (SPC) is the process of testing statistical

Spotlight On SMALL BUSINESS Meeting the Six Sigma Standard Six Sigma is a quality measure that allows only 3.4 defects per million opportunities. Here is how Six Sigma works: If you can make it to the level of one sigma, two out of three products will meet specifications. If you can reach the two sigma level, then more than 95 percent of products will qualify. But when you meet Six Sigma quality, as we have said, you have only 3.4 defects in a million opportunities (which means that 99.99966 percent of your products will qualify), a quality standard that approaches perfection. Service organizations are also adopting Six Sigma standards through the elimination of any activity involved with the service they provide that does not add value to the customer. It is one thing for Motorola (often cited as the driving force behind the development of this standard) or General Electric (GE) to reach for such standards given their vast resources, but what about a small company like Dolan Industries? Dolan is a 41-person manufacturer of fasteners. It spent a few years trying to meet ISO 9000 standards, which are comparable to Six Sigma. Dolan had to do that because its customers were demanding that level of quality. Small companies can successfully implement Six Sigma if the owner is committed, the company has a routine core of work that can benefit from the standard, and the company’s culture is open to change. Any change that is part of a Six Sigma project should not be so significant that any problem would have a major

impact on customer relations. While the management buy-in for a Six Sigma initiative may be easier in a small business, resource commitment and employee training are more challenging compared to large companies. As a general rule, a small business can begin deploying Six Sigma when one employee can devote one day per week to this work, which represents 0.5 to 1 percent of employee hours (i.e., a minimum of 20 employees is required, which results in combined work hours of 800—based on 8 hour days). They should invest in software and books on the subject, access outside expertise, and pursue each project aggressively—completing most projects in four to six weeks. While Six Sigma techniques can result in specific improvements, the true value of working toward the standard comes from an organization-wide culture shift. No matter what the size of the organization, there is much to be gained from finding cost-effective methods to deliver quality goods and services.

Sources: Charles Waxer, “Is Six Sigma Just for Large Companies? What about small companies?” ISix Sigma, 2015, http://www.isixsigma. com/new-to-six-sigma/getting-started/six-sigma-just-large-companies-what-about-small-companies/, accessed May 11, 2015; Virginia Galt, “There’s heavy demand in all sectors for ‘lean’ specialists,” The Globe and Mail, August 15, 2013, http://www.theglobeandmail.com/reporton-business/careers/career-advice/life-at-work/heavy-demand-for-lean-specialists/article13795394/; and “Training,” Six Sigma Canada Inc., http://www.sixsigmacanada.net/training/, accessed May 15, 2015.

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samples of product components at each stage of production and plotting the test results on a graph. Managers can thus see and correct any deviation from quality standards. Making sure products meet standards all along the production process reduces the need for a quality-control inspection at the end because mistakes are caught much earlier in the process. Consequently, SQC and SPC save companies much time and money. Some companies use a quality-control approach called the Deming cycle (after the late W. Edwards Deming, the father of the movement toward quality).30 Its steps are: Plan, Do, Check, Act (PDCA). Again, the idea is to find potential errors before they happen. Deming’s approach, including implementing standards, was used for many years before the International Organization for Standardization (ISO), which we will talk about shortly, came into being. Businesses are getting serious about providing top customer service, and many are already doing it. But while physical goods can be designed and manufactured to near perfection, there’s no similar process that can be applied to services. Service organizations find it difficult to provide outstanding service every time because the process is so labour intensive. Physical goods (e.g., a gold ring) can be designed and manufactured to near perfection. However, it is hard to reach such perfection when designing and providing a service experience such as a dance on a cruise ship or a cab drive through Vancouver.

QUALITY AWARD: THE CANADA AWARDS FOR EXCELLENCE31 Excellence Canada is the leading authority in Canada on organizational excellence based on quality systems, innovation, and healthy workplace criteria. The Canada Awards for Excellence (CAE) are presented annually to private, public, and not-for-profit organizations that have demonstrated continual innovation and sustainable improvement across all business drivers and all departments, including: Leadership and Governance, Corporate Social Responsibility, Planning and Strategy, People Engagement, Psychological and Physical Health & Safety, Customer Experience, Process and Project Management, and relationships with Partners and Suppliers. The award has honoured hundreds of Canadian organizations, including Manulife Investment, Toronto East General Hospital, Hill & Knowlton Strategies Canada, and the Peel Regional Police. Recent recipients also include Ceridian HCM Canada, British Columbia Pension Corporation, the Canadian Forces Housing Agency, and the Toronto Transit Commission, CAE awards categories are: Excellence, Innovation and Wellness; Healthy Workplace; and Mental Health at Work. For more information, visit the Excellence Canada website.

statistical quality control (SQC)

The process some managers use to continually monitor all phases of the production process to assure that quality is being built into the product from the beginning.

statistical process control (SPC)

The process of testing statistical samples of product components at each stage of the production process and plotting those results on a graph. Any variances from quality standards are recognized and can be corrected if beyond the set standards.

Courtesy of Excellence Canada

Excellence Canada (formally the National Quality Institute) is an independent, not-for-profit organization founded by Industry Canada. It helps companies understand and apply a focus on excellence through the adoption of the Excellence, Innovation and Wellness Standard. This approach will help companies reduce waste and costs while improving productivity and competitiveness. Do you see how this framework incorporates principles discussed in this textbook?

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ISO 9000 AND ISO 14000 SERIES AND STANDARDS

ISO 9001

The common name given to quality management and assurance standards.

ISO 14001

A collection of the best practices for managing an organization’s impact on the environment.

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The International Organization for Standardization (ISO) is a worldwide federation of national standards bodies from more than 160 countries that set the global measures for the quality of individual products.32 ISO is a nongovernmental organization established in 1947 to promote the development of world standards to facilitate the international exchange of goods and services (ISO is not an acronym. It comes from the Greek word isos, meaning equal). Within the ISO 9000 series are specific standards, such as ISO 9001. ISO 9001 is the common name given to quality management and assurance standards. A more recent standard that focuses upon sustained success, ISO 9004:2018, primarily targets the strategic and operational management of organizations.33 The standards require that a company must determine customer needs, including regulatory and legal requirements, and make communication arrangements to handle issues such as complaints. Other standards involve process control, product testing, storage, and delivery. Improving quality is an investment that can pay off in better customer relations and higher sales. It is important to know that ISO did not start as a quality certification, the way many people think. In the beginning, it simply meant that your process was under control. In short, it looked to see that companies were consistently producing the same products each time. There is a difference between consistency (flawed products every time) and quality (products free from defects). Today, ISO has developed over 22 000 international standards and includes 162 member countries.34 What makes ISO 9001 so important is that the European Union (EU) demands that companies that want to do business with the EU be certified by ISO standards. Some major Canadian companies are also demanding that suppliers meet these standards. Several accreditation agencies in Europe and in North America will certify that a company meets the standards for all phases of its operations, from product development through production and testing to installation. SNC-Lavalin Group Inc., one of the leading groups of engineering and construction companies in the world, has met such standards. It provides engineering, procurement, construction, project management, and project financing services to a variety of industry sectors in more than 120 countries. The Quality Policy at SNC-Lavalin is to “achieve client satisfaction through the careful management of our work processes, with due attention to value creation through scope, schedule, cost control, and with emphasis on safety and the environment.” To best serve its various stakeholders, the company has implemented Client Satisfaction and Continual Improvement Programs in every division, business unit, geographic office, and subsidiary. These programs are based on the applicable requirements of ISO 9001 International Standard for Quality Management Systems.35 Another series, the ISO 14000 series, deals with environmental management, Within this series, ISO 14001 is a collection of specific standards that address the best practices for managing an organization’s impact on the environment. As an environmental management system, it does not prescribe a performance level. Requirements for certification include having an environmental policy, having specific improvement targets, conducting audits of environmental programs, and maintaining top management review of the processes. Certification in both ISO 9001 and ISO 14001 would show that a firm has a worldclass management system in both quality and environmental standards. In the past, firms assigned employees separately to meet each set of standards. Today, ISO 9001 and ISO

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14001 standards have been blended so that an organization can work on both at once. ISO is now working on ISO 26000 standards, which are designed to give guidance on social responsibility.36 More recently, consumers have begun to support companies that produce environmentally friendly goods (as discussed earlier in Chapter 5). As a result, businesses have begun to re-examine their operations in order to create sustainable production processes. In 2002, William McDonough and Dr. Michael Braungart published the book Cradle to Cradle: Remaking the Way We Make Things which discusses the need to shift from a linear cradleto-grave production process to an endless, eco-effective production process.37 The sustainability advocates gifted the licence to provide Cradle to Cradle (C2C) certification to the non-profit organization called the Cradle to Cradle Products Innovation Institute. The Cradle to Cradle Certified Mark demonstrates a manufacturer’s commitment to sustainability. You know C2C certification has made an impact when you see a major m ulti-national manufacturer such as Nike take notice. The company responded to the sustainable manufacturing movement through its “Nike Considered” design ethos where the company adopts a sustainable approach to its footwear innovation. Its product redesign included the Nike Trash Talk shoe, which is endorsed by former NBA player Steve Nash, that is manufactured from leather waste and scrap-ground foam, and environmentally-preferred rubber made with fewer toxins.38 The company continued this trend through its Nike Free footwear line which has reduced waste by nearly 2 million pounds through its Nike Flyknit technology.39 The company has made a commitment to develop a closed-loop business model that includes reusing, reducing, and composting materials in order to decrease its waste production.40

Supply Chain Management Before we discuss this next topic, it is important to introduce some terms. Logistics involves those activities that focus on getting the right amount of the right products or services to the right place at the right time at the lowest possible cost. A supply chain is a sequence of firms that perform activities required to create and deliver a good or service to consumers or industrial users. Some companies have been successful in attracting more customers due to their supply chain management efficiencies. Supply chain management is the integration and organization of information and logistics activities across firms in a supply chain for the purpose of creating and delivering goods and services that provide value to customers. The Adapting to Change box highlights how one company created a unique business that resolved a logistics issue in their supply chain. Facilities in supply chain management include factories, processing centres, warehouses, distribution centres, and retail outlets (Figure 10.5). Functions and activities include forecasting, purchasing, inventory management, information management, quality assurance, scheduling, production, delivery, and customer service. Today, the major factors contributing to the importance of supply chain management include: (1) the need for improvement to remain competitive, (2) the increase in outsourcing, (3)shorter product life cycles and increased customization, (4) globalization, (5) the growth of technology and e-commerce, (6) the increase in complexity through JIT inventory, and (7) the need for better management of inventories. When implementing supply chain management, firms try to improve quality, reduce costs, increase flexibility and speed, and

logistics

Those activities that focus on getting the right amount of the right products or services to the right place at the right time at the lowest possible cost.

supply chain

The sequence of firms that perform activities required to create and deliver a good or service to consumers or industrial users.

supply chain management

The integration and organization of information and logistics activities across firms in a supply chain for the purpose of creating and delivering goods and services that provide value to customers. 377

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Adapting to CHANGE Your Own Farm in a Box Imagine sitting in your favourite restaurant in Calgary in the middle of winter with a 12-inch snowfall coming your way. You crave some of the fresh, locally grown produce you enjoy so much in the warmer months. Unfortunately, it’s winter so it probably won’t be on the menu. Well, crave no more. Help is on the way thanks to a couple of entrepreneurs. Brad McNamara and Jon Friedman could not get the results they wanted growing produce in a rooftop greenhouse. Frustrated, Jon came up with the idea that using a shipping container to grow produce might be more appropriate. Thanks to his insight, Freight Farms’ customers can now grow leafy greens, vine crops, and mushrooms hydroponically in insulated, climate-controlled containers. The company uses 320-square-foot shipping containers that are retrofitted and converted into modular, stackable farms that can produce 900 heads of leafy greens per container each week. The entire hydroponic system is simple enough that it can be digitally monitored and controlled from a smartphone. The weekly output from one of Freight Farms containers is approximately equivalent to the annual yield of a one-acre farm. The immediate goal of Freight Farms is to create an appropriate infrastructure that fosters local food economies. The company targets small and medium-sized

food distributors such as wholesalers and restaurants with revenues between $3 million and $75 million. The result is a simpler and shorter supply chain for getting food from “farm to table.” Friedman and McNamara also want to attract nonprofit groups involved in food distribution in depressed or disaster-relief areas as buyers for their $60,000 farms-in-a-box. But they don’t want to stop here. While attracting enough customers to make local farming a cost-effective option is the key goal of Freight Farms today, the founders have a much broader objective for the future. Predicting a global food shortage in 2050, they believe Freight Farms is the first step in the redesign of the global food system. Bon Appetit!

Sources: Jeremy Quittner, “A One-Acre Farm in a 320-Square-Foot Box,” Inc., March 2013; Peter Cohan, “Grow Produce Anywhere in Freight Farms’ $60,000 Shipping Container,” Forbes, June 27, 2013; and Leon Neyfakh, “If Urban Farming Took Off, What Would Boston Look Like?” The Boston Globe, January 19, 2014.

improve customer service while at the same time reduce the number of suppliers used. Two examples follow: ∙ The Coca-Cola Company sought to streamline and simplify its supply chain through a number of measures. Historically, the company has worked with independent bottlers to produce and distribute its products. That changed in 2010 when CocaCola purchased its largest bottler and began to reduce its bottling operations. Since 2010, the company’s bottling plant network has dropped from 353 ownerships to 73 ownerships with only 100 plants. This change is even more difficult given Coca-Cola’s entire line includes 3500 products. In order to respond to changes, the planners are constantly adjusting the supply chain through one guiding principle—DOIP (Demand, Operations, and Inventory Planning). Given Coca-Cola’s global reach, operation management is a critical part of the company’s success. Their mantra—“There is a person at the end of our supply chain”—clearly highlights this priority.41 378

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■ FIGURE

10.5

SUPPLY CHAIN MANAGEMENT

Manufacturer Distributor/ reseller

Retailer

Customer

Supplier

This is an image of supply chain management showing the interrelationships between all of the types of firms involved in the provision of a good or a service to a customer.

Logistics

∙ Source for Sports is a national brand with over 150 independently owned and operated sport retailers across Canada. Its approach is to enable independents to purchase products at a cheaper price than if stores owners had to buy products on their own. No two stores are alike and therefore operations management is an important part of making this approach a success. In order to build retailer–supplier collaboration, the company adopted a big data analytics platform, called Askuity. The software will help the head office be more responsive to supply needs for each store and better manage the availability of stock as products change from one season to the next. For example, Askuity will identify which types of hockey equipment sold the best at different times of the season, which in turn improves purchase and distribution planning the following year.42

PROGRESS ASSESSMENT

• Can you name and define three functions that are common to operations management in both the service and the manufacturing sectors?

• What are the major criteria for facility location? • What is the difference between materials resource planning (MRP) and enterprise resource planning (ERP)?

• What is just-in-time inventory control? • What is involved in implementing each of the following: Six Sigma, SQC, SPC, ISO 9000, and ISO 14000?

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LO4

Identify various production processes and describe techniques that improve productivity, including computeraided design and manufacturing, flexible manufacturing, lean manufacturing, mass customization, robotics, and 3D printing. form utility

The value added by the creation of finished goods and services.

process manufacturing

That part of the production process that physically or chemically changes materials.

assembly process That part of the production process that puts together components.

■ FIGURE

Production Processes Common sense and some experience have already taught you much of what you need to know about production processes. You know what it takes to write a term paper or prepare a dinner. You need money to buy the materials, you need a place to work, and you need to be organized to get the task done. The same is true of the production process in industry. It uses basic inputs to produce outputs (see Figure 10.6). Production adds value, or utility, to materials or processes. Form utility is the value producers add to materials in the creation of finished goods and services, such as the transformation of silicon into computer chips or putting services together to create a vacation package. Form utility can exist at the retail level as well. For example, a butcher can produce a specific cut of beef from a whole cow or a baker can make a specific type of cake out of basic ingredients. To be competitive, manufacturers must keep the costs of inputs down. That is, the costs of workers, machinery, and so on must be kept as low as possible. Similarly, the amount of output must be relatively high. The question today is: How does a producer keep costs low and still increase output? This question will dominate thinking in the manufacturing and service sectors for years to come. In the next few sections, we explore production processes and the latest technology used to cut costs. Manufacturers use several different processes to produce goods. Andrew S. Grove, chairman of computer chip manufacturer Intel, offers a great analogy to explain production: Imagine that you’re a chef...and that your task is to serve a breakfast consisting of a three-minute soft-boiled egg, buttered toast, and coffee. Your job is to prepare and deliver the three items simultaneously, each of them fresh and hot. Grove says this task encompasses the three basic requirements of production: (1) to build and deliver products in response to the demands of the customer at a scheduled delivery time, (2) to provide an acceptable quality level, and (3) to provide everything at the lowest possible cost. Let’s use the breakfast example to understand process and assembly. Process manufacturing physically or chemically changes materials. For example, boiling physically changes the egg. Similarly, process manufacturing turns sand into glass or computer chips. The assembly process puts together components (eggs, toast, and coffee) to make a product

10.6

THE PRODUCTION PROCESS The production process consists of taking the factors of production and using the inputs to produce goods, services, and ideas. Planning, routing, scheduling, and the other activities are the means to accomplish the objective—output. INPUTS Land Labour Capital Entrepreneurship Knowledge

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PRODUCTION CONTROL Planning Routing Scheduling Dispatching Follow-up

OUTPUTS Goods Services Ideas

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(breakfast). Cars are made through an assembly process that puts together the frame, engine, and other parts. Production processes are either continuous or intermittent. A continuous process is one in which long production runs (lots of eggs) turn out finished goods over time. As the chef, you could have a conveyor belt that lowers eggs into boiling water for three minutes and then lifts them out. A three-minute egg would be available whenever you want. A chemical plant, for example, is run on a continuous process. It usually makes more sense when responding © ChameleonsEye / Shutterstock.com to specific customer orders to use an intermittent process. Here the production run is short (one or two Production lines allow for the efficient and speedy production of goods that are consistent in size, weight, eggs) and the producer adjusts machines frequently to colour, and other measures of quality. How many products make different products (like the oven in a bakery or the can you think of that are likely made on a production line? toaster in the diner). Manufacturers of custom-designed furniture would use an intermittent process. An example of a product that uses both long and short production runs is Kodiak boots. continuous process In 2006, the company re-established production in Canada after a nine-year absence. “At A production process in which long the end of the day, we’re going to service customers a lot better through this core Canadian production runs turn production,” says Kevin Huckle, president of Kodiak Group Holdings Inc., which plans to out finished goods do a third of its production in Canada. Domestic production offers quick, efficient service for over time. Canadian retailers, who may require only small numbers of boots, but need them in a hurry. intermittent process With Asian production, he has to contract for long production runs—more than 1200 pairs— A production process and has to carry a high volume of inventory. With domestic manufacturing, the plant keeps in which the production run is short and the enough materials available for relatively short runs. Because of automation and location, it machines are changed can turn around Canadian production orders in 21 days, compared with 90 days for orders in frequently to make Asia. While Canadian workers gained jobs from this manufacturing facility re-location, there different products. are also times when a move isn’t as beneficial. In 2014, Kodiak announced it would relocate its Terra Nova Shoes plant in Harbour Grace, Newfoundland, to Cambridge, Ontario. The result was a loss of 80 jobs in Harbour Grace.43 At the same time, the company obtained support from the Southwestern Ontario Development Fund, a Government of Ontario program, to expand its Cambridge, Ontario, plant operation and in turn create 80 additional jobs.44 Today, many new manufacturers use intermittent processes. Computers, robots, and flexible manufacturing processes allow firms to turn out custom-made goods as fast as mass-produced goods were produced. We’ll discuss how they do that in more detail in the next few sections as we explore advanced production techniques and technology.

Improving Production Techniques andCutting Costs The ultimate goal of operations management is to provide high-quality goods and services instantaneously in response to customer demand. As we stress throughout this text, traditional organizations were simply not designed to be so responsive to the customer. Rather, they were designed to make goods efficiently (inexpensively). The idea behind mass production was to make a large number of a limited variety of products at very low cost. 381

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Over the years, low cost often came at the expense of quality and flexibility. Furthermore, suppliers did not always deliver when they said they would, so manufacturers had to carry large inventories of raw materials and components to keep producing. Such inefficiencies made Canadian companies vulnerable to foreign competitors that were using more advanced production techniques and less expensive labour. As a result of global competition, companies have had to make a wide variety of high-quality, custom-designed products at very low cost. Clearly, something had to change on the production floor to make that possible. Several major developments have made companies more competitive: (1) flexible manufacturing, (2) lean manufacturing, (3) mass customization, (4) robotics, (5) computer-aided design and manufacturing, and (5) 3D printing and additive manufacturing.

Flexible Manufacturing Flexible manufacturing means designing machines to do multiple tasks so they can produce a variety of products. Allen-Bradley, part of Rockwell Automation, uses flexi© Philip Friedman/Studio D ble manufacturing to build motor starters. Orders come in Bakers, like Duff Goldman of Charm City Cakes, daily, and within 24 hours the company’s 26 machines and add form utility to materials by transforming basic robots manufacture, test, and package the starters—which ingredients into special customized cakes. Can you are untouched by human hands. Allen-Bradley’s machines see how the production of such cakes involves both are so flexible that managers can include a special order, process manufacturing and assembly processes? even a single item, in the assembly without slowing down the process. Did you notice that this product was made without any labour? One way to compete with cheap labour in other facility locations is flexible to have as few workers as possible. manufacturing Designing machines to do multiple tasks so that they can produce a variety of products.

lean manufacturing The production of goods using less of everything compared to mass production.

Lean Manufacturing Lean manufacturing is the production of goods using less of everything compared to mass production: less human effort, less manufacturing space, less investment in tools, and less engineering time to develop a new product.45 A company becomes lean by continuously increasing its capacity to produce high-quality goods while decreasing its need for resources.46 Here are some characteristics of a lean company: ∙ Takes half the human effort.47 ∙ Has half the defects in the finished product or service. ∙ Requires one-third the engineering effort. ∙ Uses half the floor space for the same output. ∙ Carries 90 percent less inventory. Technological improvements are largely responsible for the increase in productivity and efficiency of Canadian plants. That technology made labour more productive and made

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it possible to pay higher rates. On the other hand, employees can get frustrated by innovations (e.g., they must learn new processes), and companies must constantly train and retrain employees to stay competitive. The need for additional productivity and efficiency has never been greater. The solution to the economic crisis depends on such innovations. One step in the process is to make products more individualistic. The next section discusses how that happens.

Mass Customization To customize means to make a unique good or provide a specific service to an individual. Although it once may have seemed impossible, mass customization, which means tailor- mass customization ing products to meet the needs of a large number of individual customers, is now practised Tailoring products to meet the needs of widely. The National Bicycle Industrial Company in Japan made 18 bicycle models in individual customers. more than 2 million combinations, each designed to fit the needs of a specific customer. The customer chose the model, size, colour, and design. The retailer took various measurements from the buyer and faxed the data to the factory, where robots handled the bulk of the assembly. Thus, flexible manufacturing (discussed earlier) is one of the factors that makes mass customization possible. More and more manufacturers are learning to customize their products. The fashion startup Proper Cloth uses software called Smart Sizes to custom-design shirts for online shoppers.48 At General Nutrition Center (GNC), health-minded buyers can customize their own vitamin plans. For those with more of a sweet tooth, you can even buy custom-made M&M’s in colours of your choice. General Nutrition Center (GNC) stores feature machines that enable shoppers to custom-design their own vitamins, shampoo, and lotions. The Custom Foot stores use infrared scanners to precisely measure each foot so that shoes can be made to fit perfectly. One unique way of using mass customization can be seen at Moniker Guitars.49 The company follows Nike’s model called NikeiD that allows consumers to customize their shoes. This customer customization is also the basis of Moniker’s guitar business. By using online design tools and advanced manufacturing techniques, Moniker can produce top-quality, personalized guitars for what a guitar player would pay for a generic model. Today, Moniker’s website guides guitar pickers through a number of steps to customize their instruments using colour and graphics, as well as hardware and pickups. The company uses PPG paint on its g uitars—the same paint used for Lamborghini and Ferrari automobiles. If polka dots are your passion, or tiger stripes turn you on, Moniker will deliver. According to founder Kevin Tully, “Every design is different. You never paint the same guitar twice. Every day is a new project. I love it.” © Lisa James/Zuma Press/Alamy Mass customization can be used in the service Not only can you customize the colours of your M&M’s, sector as well. Capital Protective Insurance (CPI) uses you can also have personal messages and/or images the latest computer software and hardware to sell cusimprinted on them. What other customized products can tomized risk-management plans to companies. Health you think of? clubs offer unique fitness programs for individuals, 383

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travel agencies provide vacation packages that vary according to individual choices, and some schools allow students to design their own majors. Actually, it is much easier to custom-design service programs than it is to custom-make goods, because there is no fixed tangible good that has to be adapted. Each customer can specify what he or she wants, within the limits of the service organization—limits that seem to be ever widening.

Robotics

computer-aided design (CAD)

The use of computers in the design of products.

computer-aided manufacturing (CAM)

The use of computers in the manufacturing of products.

Mass customization is easy for industrial robotics where machines can work 24 hours a day, seven days a week, with great precision. Robots have completely changed manufacturing by improving productivity while also reducing the number of jobs available to humans.50 Along with assembly line jobs in factories, robots have also begun to take over in service businesses as well. At Aloft Hotels, a robot butler called Botlr roams the halls delivering room service to guests.51 Even Wall Street financial analysts have had to start competing for jobs with robots.52 In other words robots are slowly but surely either helping people perform better or are replacing them completely. Soon we may be entering what could be known as the robot economy.53 Many people think that China is so successful because of cheap labour, but China may soon be the world’s largest robot market.54 Current studies predict that almost a quarter of automated tasks will be performed by robots in the next decade.55 The adoption of robotics in manufacturing is strongly influenced by the cost of labour compared to the cost of robotic labour. As the cost of robot technology drops and the cost of employees rises, Canada’s manufacturing sectors are poised for some drastic changes. How do you think robotics will impact the workplace in the future?

Computer-Aided Design and Manufacturing

3D tools allow designers to create cloth prototypes without a pattern’s traditional stages (seaming, trying on, alternations, etc.). What advantages might this technology offer to small manufacturing companies?

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One development that has changed production techniques is the use of computers to design products. Called computer-aided design (CAD), businesses ranging from construction companies to carmakers to video game designers depend on 3D modelling software to create new products.56 The next step was to bring computers directly in the production process with computer-aided manufacturing (CAM). CAD/CAM, the use of both computer-aided design and computer-aided manufacturing made it possible to custom-design products to meet the needs of small markets with very little increase in cost. A manufacturer programs the computer to make a simple design change, and that change is directly incorporated into production. In the clothing industry, a computer program establishes a pattern and cuts the cloth automatically, even adjusting to a specific person’s dimensions to create custom-cut clothing at little additional cost. In food service, CAM supports on-site, small-scale, semi-automated, sensor-controlled baking in fresh-baked cookie shops to make consistent quality easy to achieve. The latest CAM technology includes 3D printers that make a product layer by layer until it appears as a finished good.

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CAD has doubled productivity in many firms. But in the past CAD machines could not talk to CAM machines directly. Today, however, software programs unite CAD with CAM: the result is computer-integrated manufacturing (CIM). The software is expensive, but it cuts as much as 80 percent of the time needed to program machines to make parts.

3D Printing and Additive Manufacturing

computer-integrated manufacturing (CIM) The uniting of computer-aided design with computer-aided manufacturing.

One of the most exciting production processes to emerge in recent years has been 3D printing. During this advanced procedure also known as additive manufacturing, a product is created one layer at a time by a nozzle similar to those found in inkjet printers. So far manufacturers have largely used 3D printing to create prototype models or molds for other industrial projects.57 But experts claim that 3D printing could someday revolutionize the production of all sorts of items. The Adapting to Change box looks at some of these potential developments and how they could affect several industries.

Adapting to CHANGE The Vast Possibilities of 3D Printing As 3D printers become more reliable and affordable, many commentators hail the process as the future of all sorts of industries. These experts claim that 3D printing will change everything from manufacturing to medicine to fashion. Of course, no one can predict the future. While the possibilities of “additive manufacturing” are vast, only time will tell which methods succeed and which fail. So far, 3D printing has shown the most promise when used in factories. Manufacturers have used the process for years to create molds for parts or to develop prototypes. At the same time, though, factories couldn’t produce working parts from 3D printers since the machines could only use plastic. Now, engineers have developed 3D printers that can create objects out of strong carbon fibre material or even metal. As additive manufacturing becomes more efficient, these advancements could completely transform production. 3D printing could also prove to be revolutionary for the medical industry. Along with producing models that help with organ transplants, additive manufacturing could be used to design better medicines or improve medical imaging.

Even the fashion industry sees a bright future in 3D printing. The footwear company Feetz, for instance, depends on additive manufacturing to produce a line of customizable shoes. Some clothing makers claim that the 3D printer could be just as transformative to the industry as the sewing machine. In fact, one day your favourite outfit could emerge from a 3D printer installed in your house. Still, no one knows for sure if 3D printing will live up to this enormous promise. Stay tuned to see how this advanced process improves in your lifetime.

Sources: Ted Mann, “3-D Printing Expands to Metals, Showing Industrial Promise,” The Wall Street Journal, November 11, 2016; Constance Gustke, “Your Next Pair of Shoes Could Come From a 3-D Printer,” The New York Times, September 14, 2016; Bhaskar Chakravorti, “3 Ways in Which a 3D Printer May One Day Save Your Life,” The Washington Post, March 7, 2016.

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PROGRESS ASSESSMENT

• What are three basic requirements of production? • Define and differentiate the following: process manufacturing, assembly process, continuous process, and intermittent process.

• How does flexible manufacturing differ from lean manufacturing? • What are CAD, CAM, and CIM?

Control Procedures: PERT andGanttCharts LO5

Explain the use of PERT and Gantt charts to control manufacturing processes. program evaluation and review technique (PERT)

A method for analyzing the tasks involved in completing a given project, estimating the time needed to complete each task, and identifying the minimum time needed to complete the total project.

critical path

In a PERT network, the sequence of tasks that takes the longest time to complete.

Gantt chart

Bar graph showing production managers what projects are underway and what stage they are in at any given time.

386

Operations managers must ensure products are manufactured and delivered on time, on budget, and to specification. How can managers be sure all will go smoothly and be completed by the required time? One popular technique for monitoring the progress of production was developed in the 1950s for constructing nuclear submarines: the program evaluation and review technique (PERT). PERT users analyze the tasks to complete a given project, estimate the time needed to complete each, and compute the minimum time needed to complete the whole project. The steps used in PERT are (1) analyze and sequence tasks that need to be done, (2) estimate the time needed to complete each task, (3) draw a PERT network illustrating the information from steps 1 and 2, and (4) identify the critical path. The critical path is the sequence of tasks that takes the longest time to complete. We use the word critical because a delay anywhere along this path will cause the project or production run to be late. Figure 10.7 illustrates a PERT chart for producing a music video. The squares indicate completed tasks, and the arrows indicate the time needed to complete the next task. The path from one completed task to another illustrates the relationships among tasks; the arrow from “set designed” to “set materials purchased” indicates we must design the set before we can purchase the materials. The critical path, indicated by the bold black arrows, indicates producing the set takes more time than auditioning dancers, choreographing dances, or designing and making costumes. The project manager now knows it is critical that set construction remain on schedule if the project is to be completed on time, but short interruptions in dance and costume preparation are unlikely to delay it. A PERT network can be made up of thousands of events over many months. Today, a computer is utilized to create this complex procedure. Another, more basic strategy manufacturers use for measuring production progress is a Gantt chart. A Gantt chart (named for its developer, Henry L. Gantt) is a bar graph, now also prepared by computer, that clearly shows what projects are underway and how much of the project has been completed at any given time. Figure 10.8, a Gantt chart for a doll manufacturer, shows that the dolls’ heads and bodies should be completed before the clothing is sewn. It also shows that at the end of week 3, the dolls’ bodies are ready, but the heads are about half a week behind. Using a Gantt-like computer program, a manager can trace the production process minute by minute to determine which tasks are on time and which are behind, so that adjustments can be made to allow the company to stay on schedule.

CHAPTER 10 Producing World-Class Goods and Services

■ FIGURE

10.7

PERT CHART FOR A MUSIC VIDEO

s) (2 weeks)

w (6 weeks)

Dancers selected

Dance choreographed (4 weeks) s)

Costumes designed

Dancers measured

Costumes made

(1 week)

(4 weeks)

s) ek

(2 weeks)

= The critical path

(4 weeks)

((1 1 week)

■ FIGURE

Video filmed

Dance rehearsed

ek )

(4 w (3

(1 week)

Set constructed

) eek

Star and song chosen

Start

Set materials purchased

Set designed

w (1

eek s)

The minimum amount of time it will take to produce this video is 15 weeks. To get that number, you add the week it takes to pick a star and a song to the four weeks to design a set, the two weeks to purchase set materials, the six weeks to construct the set, the week before rehearsals, and the final week when the video is made. That is the critical path. Any delay in that process will delay the final video.

10.8

GANTT CHART FOR A DOLL MANUFACTURER A Gantt chart enables a production manager to see at a glance when projects are scheduled to be completed and what the current status is. For example, the dolls’ heads and bodies should be completed before the clothing is sewn, but they could be a little late as long as everything is ready for assembly in week 6. This chart shows that at the end of week 3, the dolls’ bodies are ready, but the heads are about half a week behind.

Week 1

Week 2

Week 3

Week 4

Week 5

Week 6

Week 7

Machine A (Heads molded) Machine B (Bodies molded) Machine C (Fabric cut) Machine D (Clothing sewn) Line A (Assembly) Line B (Painting) = Completed work

= Work to be done

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PART 3 Leadership, Organization, and Production to Satisfy Customers

Preparing for the Future Canada is a major industrial country, but competition is growing stronger each year. Tremendous opportunities for careers in operations management exist as both manufacturing and service companies fight to stay competitive. Students who can see future trends and have the skills to own or work in tomorrow’s highly automated factories and modern service facilities will benefit.

PROGRESS ASSESSMENT

• Draw a PERT chart for making a breakfast of three-minute eggs, buttered toast, and coffee. Define the critical path.

• How could you use a Gantt chart to keep track of production?

SUMMARY LO1

Describe the current state of Canadian manufacturing and how companies are becoming more competitive. Canada’s industrial profile results in significant swings in activity and a number of challenges are faced in an increasingly competitive global environment. Activity in the manufacturing sector has declined which has also led to job loss. Even though manufacturing companies offer fewer jobs, they have become more productive, meaning that they need fewer employees to do the same amount of work. Where is most of Canada’s industry focused? Most of our industry is focused on natural resources, which results in significant progress when world economies are growing, but is offset by significant retraction when the world economies are stagnant. What have Canadian manufacturers done to achieve increased output? Activity in Canada’s manufacturing sector has declined since its height. The result has been fewer jobs in manufacturing. Even though manufacturing companies offer fewer jobs, they have become more productive, meaning that they need fewer employees to do the same amount of work. Canadian manufacturers have increased output by emphasizing strategies such as close relationships with suppliers and other companies to satisfy customer needs; continuous improvement; quality; site selection; use of the Internet to unite companies; and production techniques such as enterprise resource planning, computer-integrated manufacturing, flexible manufacturing, lean manufacturing, and robotics. Today some manufacturing jobs are coming back to Canada as labour costs increase in other countries. Much of this chapter is devoted to showing you what manufacturers and service providers can do to revive the Canadian economy to become world-class competitors.

LO2

388

Describe the evolution from production to operations management. Production management consists of all the activities managers do to help their firms create goods. To reflect the change in importance from manufacturing to services, the term production is often replaced by the term operations. Operations management is a specialized area in management that converts or transforms resources (including human resources) into goods and services.

CHAPTER 10 Producing World-Class Goods and Services

What kinds of firms use operations managers? Firms in both the manufacturing and the service sectors use operations managers. Why is productivity so hard to measure? The traditional way to measure productivity involves tracking inputs (worker hours) compared to outputs (dollars). Quality improvements are not weighed. New information systems must be developed to measure the quality of goods and services, the speed of their delivery, and customer satisfaction. LO3

Describe operations management planning issues including facility location, facility layout, materials requirement planning, purchasing, just-in-time inventory control, quality control, and supply chain management. Issues involved in both the manufacturing and the service sectors include facility location, facility layout, materials requirement planning, purchasing, just-in-time inventory control, quality control, and supply chain management. What is facility location and how does it differ from facility layout? Facility location is the process of selecting a geographic location for a company’s operations. Facility layout is the physical arrangement of resources (including people) to produce goods and services effectively and efficiently. Why is facility location so important, and what criteria are used to evaluate different sites? The very survival of manufacturing depends on its ability to remain competitive, and that means either making inputs less costly (reducing costs of labour and land) or increasing outputs from present inputs (increasing productivity). Labour costs and land costs are two major criteria for selecting the right sites. Other criteria include whether (1) resources are plentiful and inexpensive, (2) skilled workers are available or are trainable, (3) taxes are low and the local government offers support, (4) energy and water are available, (5) transportation costs are low, and (6) the quality of life and quality of education are high. What relationship do materials requirement planning (MRP) and enterprise resource p lanning (ERP) have with the production process? MRP is a computer-based operations management system that uses sales forecasts to make sure the needed parts and materials are available at the right time and place. Enterprise resource planning (ERP), a newer version of MRP, combines the computerized functions of all the divisions and subsidiaries of the firm—such as finance, material requirements planning, human resources, and order fulfillment—into an integrated software program that uses a single database. The result is a shorter period of time between orders and payment, less staff to complete orders and order processing, reduced inventories, and better customer service for all the firms involved. What is just-in-time (JIT) inventory control? JIT involves having suppliers deliver parts and materials just in time to go on the assembly line so they do not have to be stored in warehouses. What are the latest quality control concepts? Six Sigma quality (just 3.4 defects per million products) detects potential problems before they occur. Statistical quality control (SQC) is the process that some managers use to continually monitor all processes in production to ensure that quality is being built into the product from the beginning. Statistical process control (SPC) tests statistical samples of product components at each stage of the production process and plots the results on a graph so managers can recognize and correct deviations from quality standards. 389

PART 3 Leadership, Organization, and Production to Satisfy Customers

What quality standards do firms use in Canada? International standards that Canadian firms strive to meet include ISO 9000, ISO 9001, and ISO 14001. The first two are European standards for quality and the last is a collection of the best practices for managing an organization’s impact on the environment. LO4

Identify various production processes and describe techniques that improve productivity, including computer-aided design and manufacturing, flexible manufacturing, lean manufacturing, mass customization, robotics, and 3D printing. There are several different processes that manufacturers use to produce goods along with varying techniques to improve productivity. What is process manufacturing, and how does it differ from assembly processes? Process manufacturing physically or chemically changes materials. Assembly processes put together components. Are there other production processes? Production processes are either continuous or intermittent. A continuous process is one in which long production runs turn out finished goods over time. An intermittent process is an operation where the production run is short and the machines are changed frequently to manufacture different products. What is flexible manufacturing? Flexible manufacturing involves designing machines to produce a variety of products. What is lean manufacturing? Lean manufacturing is the production of goods using as little of the needed inputs as possible compared to mass production: less human effort, less manufacturing space, less investment in tools, and less engineering time to develop a new product. What is mass customization? Mass customization means making custom-designed goods and services for a large number of individual customers. Flexible manufacturing makes mass customization possible. Given the exact needs of a customer, flexible machines can produce a customized good as fast as mass- produced goods were once made. Mass customization is also important in service industries. How do CAD/CAM systems work? Design changes made in computer-aided design (CAD) are instantly incorporated into the computer-aided manufacturing (CAM) process. The linking of the two systems—CAD and CAM—is called computer-integrated manufacturing (CIM). How do robotics help make manufacturers more competitive? Industrial robotics can work 24 hours a day, seven days a week, with great precision. Most of the jobs they replace are dirty or so repetitive that robots are necessary, or at least helpful. What is 3D printing and what are its uses? 3D printing (also known as additive manufacturing) is technology that creates a product one layer at a time by a nozzle similar to those found in inkjet printers. Today 3D printing is largely used to create prototype models or molds for other industrial projects.

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CHAPTER 10 Producing World-Class Goods and Services

LO5

Explain the use of PERT and Gantt charts to control manufacturing processes Operations managers must ensure their products or services are provided on time and on budget. Is there any relationship between a PERT chart and a Gantt chart? Figure 10.7 shows a PERT chart. Figure 10.8 shows a Gantt chart. Whereas PERT is a tool used for planning, a Gantt chart is a tool used to measure progress.

KEY TERMS assembly process 380 computer-aided design (CAD) 384 computer-aided manufacturing (CAM) 384 computer-integrated manufacturing (CIM) 385 continuous process 381 critical path 386 e-commerce 365 enterprise resource planning (ERP) 370 facility layout 369 facility location 365 flexible manufacturing 382

form utility 380 Gantt chart 386 intermittent process 381 ISO 9001 376 ISO 14001 376 just-in-time (JIT) inventory control 373 lean manufacturing 382 logistics 377 mass customization 383 materials requirement planning (MRP) 370 operations management 360 process manufacturing 380 production 360

production management 360 program evaluation review technique (PERT) 386 purchasing 372 quality 373 research and development (R&D) 357 Six Sigma quality 374 statistical process control (SPC) 374 statistical quality control (SQC) 374 supply chain 377 supply chain management 377 telecommuting 368

CAREER EXPLORATION If you are interested in pursuing a career in production, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Production, planning and expediting clerks— Coordinate and expedite the flow of work and materials within or between departments according to production schedule. ∙ First-line supervisors—Directly supervise and coordinate the activities of production and

operating workers, such as inspectors, precision workers, machine setters and operators, assemblers, fabricators, and plant and system operators. ∙ Industrial production managers—oversee the daily operations of manufacturing and related plants. They coordinate, plan, and direct the activities used to create a wide range of goods, such as cars, computer equipment, or paper products. ∙ Producers and directors—create motion pictures, television shows, live theatre, commercials, and other performing arts productions.

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PART 3 Leadership, Organization, and Production to Satisfy Customers

CRITICAL THINKING 1. Workers on the manufacturing floor are being

replaced by robots and other machines. On the one hand, that is one way in which companies compete with cheap labour from other countries. On the other hand, automation eliminates many jobs. Are you concerned that automation may increase unemployment or under-employment in Canada and around the world? Why or why not?

What will such changes mean for the clothing industry, the shoe industry, and other fashion-related industries? What will they mean for other consumer and industrial goods industries? How will you benefit as a consumer? 3. One way to create new jobs in Canada is to

have more innovation from new graduates of engineering and the sciences. How can Canada motivate more students to study in those areas?

2. Computer-integrated manufacturing (CIM)

has revolutionized the production process.

DEVELOPING CAREER SKILLS Key: Team

Analytic

1. Choosing the right location for a manufac-

turing plant or a service organization is often critical to its success. Form small groups and have each group member pick one manufacturing plant or one service organization in town and list at least three reasons why its location helps or hinders its success. If its location is not ideal, what location would be a better one?

3. Discuss some of the advantages and disad-

vantages of producing goods overseas using inexpensive labour. Summarize the moral and ethical issues of this practice.

4. Think of any retail outlet (e.g., bookstore or

food outlet) or service centre (e.g., library,

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Technology

Registrar’s Office) at your university or college and redesign the layout (make a pencil sketch) to more effectively serve customers and allow employees to be more effective and efficient.

5. Think about recent experiences you have had

with service organizations and select one in which you had to wait for an unreasonable length of time to get what you wanted. Describe what happens when customers are inconvenienced, and explain how management could make the operation more efficient and customer-oriented.

2. In teams of four or five, discuss the need for

better operations management in the airline industry. Have the team develop a report listing (1) problems team members have encountered in travelling by air, and (2) suggestions for improving operations so such problems will not occur in the future.

Communication

6. In teams of four or five, have each team build

a PERT chart for a business of their choosing. First have each team identify all the tasks involved in producing the good or providing the service and then organize the tasks into a chart. Have teams identify the critical path and identify the minimum amount of time it will take to produce the good or provide the service to customers.

CHAPTER 10 Producing World-Class Goods and Services

ANALYZING MANAGEMENT DECISIONS Why Big Companies Fail to Innovate Matthew Kiernan, based in Unionville, Ontario, is a management consultant whose views command attention. He has a PhD degree in strategic management from the University of London and was a senior partner with an international consulting firm, KPMG. Subsequently, he founded his own firm, Innovest Group International, with staff operating out of Geneva, Switzerland; London, United Kingdom; and Toronto, Canada. He was also a director of the Business Council for Sustainable Development based in Geneva. His book Get Innovative or Get Dead took aim at big corporations for their poor record on innovation. Any five-year-old could tell you that companies must innovate to survive, he said, so what’s the problem? According to Kiernan, it is one thing to understand something in your head but quite another thing to really feel it in your gut. This is further complicated by the difficulty of getting a big company to shift gears, to turn its culture around so that innovation becomes the norm rather than the special effort. Look back at the discussion on innovation at the beginning of the chapter to re-visit its importance in our increasingly competitive world. Kiernan called for a company to develop a style and atmosphere that favours individual risk-taking,

similar to the intrapreneurial approach discussed in Chapter 7. That means that if a team tries something that does not work, you do not shoot it down. Encouraging innovation, which inevitably involves taking risks with the unknown, means accepting the fact that it may take two or three attempts before something useful is developed. Recently, Matthew has applied this principle to sustainable development, including the topic of carbon finance. The 3M company is often used as a great example of a company that encourages creativity. Its policy dictates that 30 percent of annual sales come from products less than four years old. However, 3M was not always that progressive. When the now legendary Post-it Notes were first developed by an employee, he had a hard time getting the company to see the potential in his idea. This ultimately triggered a major change in the company’s policy. Kiernan pointed out that most companies give lip service to the necessity of innovation but do not act in a credible way as far as their employees are concerned. If you mean business, you must take that “bright guy out of the basem*nt, [the one] everybody knows is a genius, but whose last two enterprise efforts came to grief, and visibly promote him.”

Discussion Questions 1. Why do large companies find it difficult to

innovate? Is it because they are big or because they are afraid of the unknown? Explain. 2. Do smaller companies do better at innova-

tion? Is that because most of them are private

companies and not accountable to outside stakeholders? Explain. 3. Do some research on 3M and find out how

this large company encourages innovation and what it means to them.

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PART 3 Leadership, Organization, and Production to Satisfy Customers

RUNNING CASE Leadership, Benchmarking, and Operations Management Planning at Fox 40 International Inc. For successful Canadian entrepreneur and inventor Ron Foxcroft, it all started in 1982 when he purchased Fluke Transport, a Southern Ontario trucking business. The company slogan—If It’s On Time . . . It’s A “FLUKE”—was soon recognized throughout North America. Over the years, Ron diversified into new ventures and the Foxcroft Group of Companies now includes Fluke Transportation Group, Fluke Warehousing Inc., Foxcroft Capital Corp., Fox 40 International Inc., and Fox 40 USA Inc. The formation of Fox 40 International Inc. (Fox 40) is the result of a dream for a pealess whistle. When developing his first whistle, Ron was motivated by his knowledge and experience as an international basketball referee. Frustrated with faulty pea whistles, he spent three years of development with design consultant Chuck Shepherd, resulting in the creation of the Fox 40® Classic Whistle. (The whistle was named for Ron and that he was 40 when he applied for the patent.) Introduced in 1987, this finely tuned precision instrument does not use a pea to generate sound. In fact, there are no moving parts. The patented design moves the air blast through three tuned chambers. This whistle, and all the subsequent whistles that have been introduced, is 100 percent constructed of high-impact ABS plastic so it is impervious to moisture. Wet or dry, Fox 40 Pealess Whistles cannot be overblown and never fail—the harder you blow, the louder the sound! They can be heard for miles and work in all conditions. They are faultless, reliable, and trusted. Fox 40, a proudly Canadian company, dominates the global whistle industry. Tens of thousands of Fox 40 Whistles are produced monthly for shipment to 140 countries. A mould may be made offshore due to the cost savings (at least $100,000); however, Fox 40 owns all of its moulds. Approximately 90 percent of the company’s products are made in Canada with select components coming from overseas markets. Final assembly occurs in Canada. While the first product was the Fox 40® Classic Whistle, the company now has over 900 active stock-keeping units (SKUs). 394

Its product mix includes 19 Whistles Styles (e.g., Fox 40 electronic whistle); Lanyards & Attachments (e.g., flex coils); additional brands that include Fox 40 Gear; SmartCoach Coaching Boards; SICK Self Impression Custom Kit, and Heat Alert Mouthguards; Marine & Outdoor Products (e.g., Xplorer LED Light); Pink Products; and Logo Imprinted Products. Leadership at Fox 40 is very much a reflection of the vision of the company’s founder and CEO, Ron Foxcroft, along with Dave Foxcroft, President and COO. Over the past 25 years of growth, Ron and Dave continue to appreciate that success is very much related to both customers and employees. The importance of satisfying customer needs is central to all they do. As Ron states, “no one (i.e., any employee) needs permission to satisfy a customer.” Every employee will do whatever it takes. One of the company’s values is to respond to any customer question in 12 seconds, either with an answer or a commitment to, “I don’t know but will find out.” This vision is also reflected in a firm belief that any employee should be prepared to do any job, except take out the garbage; that is Ron’s job. They also know their vision can only be continually and consistently fulfilled if it is embodied by every employee. So, when hiring staff, Fox 40 knows the importance of hiring the right kind of people; honesty and integrity being key and a very much a reflection of how Ron and Dave behave. Starting in entry-level positions, each employee’s strengths and weaknesses are assessed through the assignment of tasks with specific time lines. Performance is monitored not only by management, but by peers. Strengths are channelled to customer satisfaction issues. Weaknesses are discussed and plans for improvement are identified. Senior management are directly accessible to any customer and to any employee. Ron and Dave embody the importance of front-line interaction. For example, Ron is the first person at work every day and both of them come and leave through the front doors, passing through the main areas of the company’s facility to their offices.

CHAPTER 10 Producing World-Class Goods and Services

Fox 40 embodies benchmarking by comparing itself to the very best. Much of the research and development is focused on “not” robbing and duplicating what very successful companies have done. One method is to look to companies that started with a single, simple, product and then have expanded through the addition of complementary products. Gillette started with a shaving blade, added shaving cream, and then deodorant. Wrigley’s started with gum. There is also a focus on brand recognition and so they look to market leaders in this area, including co*ke. When making decisions on potentially entering a market new to them, the Foxcrofts are guided by a belief that no market is worth considering unless they believe they can become the number one company, in terms of sales, in the new market. They expect to be able to sell to all customers in any market they enter. When planning facility location, key factors are once more impacted by customers and employees. With sales in 140 countries, both men know the overriding

perception of their customers of the importance of “Made in Canada.” So, that is an overarching criterion. The large number of global customers supports a focus on logistics. Transportation infrastructure, including highways, shipping, airlines and close proximity to the border, are also important. The majority of employees work in distribution and rely on public transportation to get to work. This is an equally important criterion. For their large customer base in the United States, they have chosen to do customs clearing, so they have a distribution centre in that country, located in Niagara Falls, New York, which is very close to their facilities in Hamilton, Ontario. The importance of employee input also plays out in terms of layout decisions. The company has recently moved to a new location. Their entire location is very clean and has “hospital operating room” white walls as Dave is a strong proponent of “employees act their environment.”

Discussion Questions 1. The leadership of Ron and Dave Foxcroft has

been influenced by Donald Cooper, former founder and president of Cooper Sporting Goods. Research Donald Cooper’s leadership ideas including his concept of “front-line interaction.” 2. Access the company’s online sites for Fox40,

offerings of all three companies and comment on how Fox40 has benchmarked itself to the other two companies. 3. Fox 40 has just relocated its business to 340

Grays Road, Hamilton, Ontario. Referring to the above discussion, identify the specifics that supported a move to this location.

Gillette, and Wrigley. Compare the product

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PART 4 CHAPTER 11

Motivating Employees

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Explain Taylor’s theory of scientific management, and describe the Hawthorne studies and their significance to management.

LO2 Identify the levels of Maslow’s hierarchy of needs and apply them to employee motivation. Contrast this with the motivators and hygiene factors identified by Herzberg.

LO3 Differentiate between McGregor’s Theory X and Theory Y. LO4 Explain the key principles of goal-setting, expectancy, reinforcement, and equity theories. LO5 Show how managers put motivation theories into action through such strategies as job enrichment, open communication, and job recognition.

LO6 Show how managers personalize motivation strategies to appeal to employees around the globe and across generations.

P R O F I L E GETTING TO KNOW: LISA LISSON, PRESIDENT, FEDERAL EXPRESS CANADA (FEDEX)

396

Lisa Lisson, President of FedEx Express Canada

centres (Vancouver, Toronto, and Montreal) respond

(FedEx), leads a team of more than 5000 employ-

to 36 500 calls a day.

ees in 63 facilities. They serve shipping needs from

As a student studying at the University of

coast-to-coast, to the United States, and internation-

Guelph for a Bachelor of Commerce degree with a

ally to 211 countries. There are over 1000 FedEx

major in marketing, “I knew I wanted to work in the cor-

drop-off locations in Canada and the three call

porate environment,” says Lisson. After graduation,

CHAPTER 11 Motivating Employees

fedex.ca, shipping and tracking software, and led initiatives to increase brand awareness and market share for FedEx. Lisson also launched a full range of new domestic and international products reinforced with award-winning advertising and new methods for measuring customer satisfaction. In the annual internal opinion survey, Lisson’s own employees have ranked her above the country average in each year that she has been a manager. In an Undercover Boss Canada episode, Lisson wanted to ensure that employees had the tools they needed to succeed—and that FedEx not only delivered to its customers, but also to its valuable employees. Lisson disguised herself as new employee Suzanne, a mother of two re-entering the workforce. The employees she met were all real people, survivors who had come through very difficult life challenges and chosen to move forward with remarkable optimism and hope. And they did so in a corporate culture that supported them—by creating a “second family” for them. It was a powerful lesson for Lisson: if you hire the right people, © FedEx

train them well, engender a strong sense of belonging, listen to their ideas, and expect high standards,

she targeted FedEx as a potential employer. “What

you will achieve business success.

I loved about what I read is they talked about this

Says Lisson, “Going undercover was a life-

thing called PSP. The philosophy is people, service,

changing experience for me on so many levels but,

profit.... Treat your people well with utmost respect

more importantly, it reinforced my strong belief in the

and they in turn will provide service to your custom-

importance of being a leader who knows the front

ers that’s exceptional, which will deliver profit to your

line. Unless you walk in someone else’s shoes and

shareholders and then you can reinvest back in the

experience what they do, you never actually know. I

people.” Lisson joined the company as a junior mar-

encourage every FedEx manager—in fact, any man-

keting specialist in 1992. She quickly progressed

ager of any company—to get out on the front line and

and in 2003 was appointed Vice-President of Sales,

burn the shoe leather. Go and spend a day doing what

Marketing, and Corporate Communications. In 2006,

your employees do and experience what they experi-

Lisson gained responsibility for improving the FedEx

ence day in and day out. And do it often. I always say

customer experience in Canada. Four years later, she

that it’s my front-line teams who create my “to-do” list.

became the first Canadian to be appointed president

As a single mother with a high-stress job,

of FedEx.

she believes in maintaining a healthy work–life

Under her leadership, FedEx has imple-

balance. Under her leadership, FedEx employees

mented critical improvements to the operation of the

have ranked FedEx Express Canada one of the best

sales team, resulting in significant revenue growth

places to work in Canada. She has also helped make

for the company. She also drove the introduction of

the company one of the most respected brands

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PART 4 Management of Human Resources

in Canada. On advancing women into leadership:

use in motivating their employees to focus on

“I mentor many young women who often tell me

goals common to them and the organization. This

they can have it all—a family and a great career—

includes being introduced to some motivation the-

just not at the same time. I’m a widow and I’m raising

ories. As you read through this chapter, consider

four young children, so I’m living proof that you can

situations in which you have been involved. Did

have it all at the same time. You can be a devoted

you witness some of the theories being applied?

mom and a successful, senior leader.”

Looking back, could some of these situations

In this chapter, you will learn about the theories and practices managers like Lisa Lisson

have been handled differently to better motivate the audience?

Sources: “FedEx Canada History,” Federal Express Canada Corp., 2017, http://www.fedex.com/ca_english/about/overview/fastfacts/canadahistory.html; “5:30 Club: Lisa Lisson, president of FedEx Express Canada,” University of Guelph, February 11, 2015, https://www.uoguelph.ca/business/530-clublisa-lisson-president-fedex-express-canada; “FedEx Express Facts - Canada,” Federal Express Canada Corp., 2015, http://www.fedex.com/ca_english/ about/overview/fastfacts/expressfactscanada.html; Angus Gillespie, “Lisa Lisson - FedEx President Triumphs Over Personal Tragedy,” The Canadian Business Journal, September 12, 2014, http://www.cbj.ca/LISA_LISSON_FEDEX_PRESIDENT_TRIUMPHS_OVER_PERSONAL_TRAGEDY/; “Canada’s Most Powerful Women: Top 100 – Current Winners, LISA LISSON PRESIDENT, FEDEX EXPRESS CANADA Bio,” WXN, 2014, https://www.wxnetwork .com/TOP-100/TOP-100-WINNERS/; Lisa Lisson, “Uncovering the Heart of FedEx,” FedEX Express Canada, May 21, 2012, http://blog.fedex.designcdt .com/blog/uncovering-heart-fedex?page=2; Heather Connelly, “Undercover Analysis: Episode 10; FedEx CEO Lisa Lisson,” Financial Post, April 6, 2012, http://business.financialpost.com/2012/04/06/undercover-analysis-episode-10-fedex-ceo-lisa-lisson/; and “FedEX,” Undercover Boss Canada, 2012, www.wnetwork.com/Shows/Undercover-Boss-Canada.aspx.

The Value of Motivation motivation

The overall desire to excel.

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“If work is such fun, how come the rich don’t do it?” quipped comedian Groucho Marx. Well, the rich do work—Bill Gates did not make his billions playing computer games. And workers can have fun—if managers make the effort to motivate them. motivation refers to the overall desire to excel.1 This is the extent to which persistent effort is directed toward a goal as a motivated person usually works “hard,” “keeps at” his or her work, and directs his or her behaviour toward appropriate outcomes.2 Have you heard the motivation myths listed in Figure 11.1? It is difficult to overstate the importance of workers’ job satisfaction as this contributes to motivation. Happy workers lead to happy customers, and happy customers lead to successful businesses. On the other hand, unhappy workers are likely to leave. When that happens, the company usually loses more than an experienced employee. It can also lose the equivalent of six to nine months’ salary to cover the costs of recruiting and training a replacement. Other costs of losing employees are even greater: loss of intellectual capital, decreased morale of remaining workers, increased employee stress, increased employee gossip, decreased customer service, interrupted product development, and a poor reputation.3 Although it is costly to recruit and train new workers, it’s also expensive to retain those who are disengaged. The word engagement is used to describe employees’ level of motivation, passion, and commitment. Engaged employees work with passion and feel a connection to their company.4 Disengaged workers have essentially checked out; they plod through their day putting in time, but not energy. Not only do they act out their unhappiness at work, but disengaged employees undermine the efforts of engaged employees.

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■ FIGURE

11.1

MOTIVATION MYTHS Money is the only effective motivator. In some situations, money is one of the best methods to motivate people. In others, it is entirely ineffective. Most importantly, it is certainly not the only motivator. What will motivate always depends on the people and the situation. Everyone is motivated by the same things I am. Although many people share common needs and desires, different people in different situations are motivated by an extraordinary range of factors, including financial gain, recognition, esteem, personal achievement, desire for equity, need to belong, fear, freedom, involvement, interesting work, and so on. What motivates one may not motivate another, and the same factor that motivates a person in one situation may not motivate that same person in a different situation. Punishment does not motivate. Although rarely the first choice to influence behaviour, punishment, or the threat of it, can be an effective motivator. The problem, however, is that this type of motivation tends to be short term and rarely is associated with getting people to do more than the minimum. Its appropriateness will depend on the situation. In some cases, it may be the only or most effective consequence available, and thus it is important to learn how to most fairly administer punishment. Low performance is always attributable to low motivation. Any performance is a function of motivation, ability, and the opportunity to perform. So, although low motivation is a common cause of low performance, it is certainly not the sole cause. Low performers may well lack the ability or the opportunity to achieve high performance. Lack of motivation stems largely from lazy and apathetic people. That is sometimes the case, of course, but more often it is the situation that lacks sufficient incentives to energize people. People labelled as unmotivated in one situation (say their job) are sometimes highly engaged and committed in another case (for example, as a Little League coach). The managerial challenge is to discover what brings out the effort in your people and to influence what you can. Smart people don’t need to be motivated. This is a dangerous myth that can have consequences well beyond what a manager may realize. Because smart people have high ability, their motivation is key to obtaining high levels of performance. A smart, but unmotivated person may still perform at an acceptable level, but that person is capable of much more and ultimately will probably become disillusioned with the job and leave it—leaving a hole bigger than will be immediately obvious to most managers. Source: Timothy T. Baldwin, William H. Bommer, and Robert S. Rubin, Managing Organizational Behavior, What Great Managers Know and Do, 2nd ed. (New York: McGraw-Hill Irwin, 2013), 198.

Motivating the right people to join the organization and stay with it is a key function of managers. Top-performing managers are usually surrounded by top-performing employees. It is no coincidence that geese fly faster in formation than alone. Although the desire to perform well ultimately comes from within, good managers stimulate people and bring out their natural drive to do a good job. People are willing to work, and work hard, if they feel that their work makes a difference and is appreciated.5 People are motivated by a variety of things, such as recognition, accomplishment, and status. An intrinsic reward is the personal satisfaction you feel when you perform well and achieve goals. The belief that your work makes a significant contribution to the organization or society is a form of intrinsic reward. An extrinsic reward is something given to you by someone else as recognition for good work. Pay increases, praise, and promotions are examples of extrinsic rewards.6 Although ultimately motivation—the drive to satisfy a need—comes from within an individual, there are ways to stimulate people that bring out their natural drive to do a good job.

intrinsic reward

The good feeling you have when you have done a job well.

extrinsic reward

Something given to you by someone else as recognition for good work; extrinsic rewards include pay increases, praise, and promotions. 399

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Image courtesy of DAC Group. Used with permission.

Selected as one of Canada’s 100 Best Small and Medium Employers, DAC Group is a digital performance marketing agency that seeks employees with technical skills, industry passion, and the curiosity to learn. New-grad recruiters (above) look to hire “geeks with personalities.” Would you be motivated if you worked for a company like this whose work space includes gaming stations, lounge areas, and calming rooms?7

Intrinsic (inner) rewards include the personal satisfaction you feel for a job well done. People who respond to such inner promptings often enjoy their work and share their enthusiasm with others. Are you more strongly motivated by your own desire to do well, or by extrinsic (external) rewards like pay and recognition?

This chapter will help you understand the concepts, theories, and practice of motivation. We begin with a look at some traditional theories of motivation. Why should you bother to know about these theories? Because sometimes “new” approaches are not really new; variations of them have been tried in the past. Knowing what has gone before will help you see what has worked and what has not. First we discuss the Hawthorne studies because they created a new interest in worker satisfaction and motivation. Then we’ll look at some assumptions about employees that come from the traditional theorists. You will see the names of these theorists over and over in business literature and future courses: Taylor, Mayo, Maslow, Herzberg, and McGregor. Finally, we’ll introduce modern motivation theories and show you how managers apply them. Ultimately, the goal of this chapter is to provide you with information needed to motivate different types of people, to do different types of things, in different circ*mstances.8 The question, “How do you motivate people?” should be expanded to “How do you motivate who, to do what, and under what circ*mstances?” as effective motivation strategies always depend on the people involved, their history, and the context.9 LO1

Explain Taylor’s theory of scientific management, and describe the Hawthorne studies and their significance to management. 400

Frederick Taylor: The Father of Scientific Management Several nineteenth-century thinkers presented management principles, but not until the early twentieth century did there appear any significant works with lasting implications. The Principles of Scientific Management was written by American efficiency engineer Frederick Taylor and published in 1911, earning Taylor the title “father of scientific management.” Taylor’s goal was to increase worker productivity to benefit both the firm and the worker. The solution, he thought, was to scientifically study the most efficient ways

CHAPTER 11 Motivating Employees

to do things, determine the one “best way” to perform each task, and then teach people those methods. This became known as scientific management. Three elements were basic scientific to Taylor’s approach: time, methods, and rules of work. His most important tools were management Studying workers observation and the stopwatch. Taylor’s thinking is behind today’s measure of how many to find the most burgers McDonald’s expects its cooks to flip. efficient ways of A classic Taylor story involves his study of men shovelling rice, coal, and iron ore doing things and then with the same type of shovel. Believing that different materials called for different shovels, teaching people those techniques. he proceeded to invent a wide variety of sizes and shapes of shovels and, with stopwatch in hand, measured output over time in what were called time-motion studies. These were time-motion studies studies of the tasks performed to complete a job and the time needed to do each task. Sure Studies, begun by Frederick Taylor, of enough, an average person could shovel 25 to 35 tons more per day using the most effiwhich tasks must be cient motions and the proper shovel. This finding led to time-motion studies of virtually performed to complete every factory job. As the most efficient ways of doing things were determined, efficiency a job and the time needed to do became the standard for setting goals. each task. Taylor’s scientific management became the dominant strategy for improving productivity in the early 1900s. Hundreds of time-motion specialists developed standards in plants throughout the country. One follower of Taylor was Henry L. Gantt, who developed charts by which managers plotted the work of employees a day in advance down to the smallest detail. Engineers Frank and Lillian Gilbreth used Taylor’s ideas in a three-year study of bricklaying. They developed the principle of motion economy, which showed that every job could be broken down into a series of elementary motions. They then analyzed each motion to make it more efficient. Some interpreted scientific management as viewing people largely as machines that needed to be properly programmed. There was little concern for the psychological or human aspects of work. Taylor believed that workers would perform at a high level of effectiveness—that is, be motivated—if they received high enough pay. While Taylor did not use this comparison to machines, he had very precise ideas about how to introduce his system: “It is only through enforced standardization of methods, enforced adoption of the best implements and working conditions, and enforced co-operation that this faster work can be assured. And the duty of enforcing the adoption of standards and enforcing this co-operation rests with management alone.”10 A crusader for better working conditions and pay for the working class, Taylor believed that the resulting improved productivity should then benefit both the workers and the company. Some of Taylor’s ideas are still being implemented. Some companies continue to emphasize conformity to work rules rather than creativity, flexibility, and responsiveness. For example, United Parcel Service (UPS) tells drivers how to © Dennis MacDonald/Alamy get out of their trucks (with the right foot first), how fast to walk (three feet per UPS tells drivers how to get second), how many packages to pick up and deliver a day (average of 125 to 175 in out of their trucks, how fast to off-peak seasons), and how to hold their keys (teeth up, third finger). Drivers use walk, how many packages to a handheld computer called Delivery Information Acquisition Device to scan bar pick up and deliver a day, and codes on packages. This lets a customer check online and know exactly where a even how to hold their keys. package is at any given moment. If a driver is considered slow, a supervisor rides Can you see how UPS follows the principles of scientific along, prodding the driver with stopwatches and clipboards. UPS has training cenmanagement by teaching tres in nine U.S. cities with simulators that teach employees how to properly lift people the one “best way” to and load boxes, drive their trucks proficiently, and even lessen the risk of slipping perform each task? and falling when carrying a package.11 401

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principle of motion economy Theory developed by Frank and Lillian Gilbreth that every job can be broken down into a series of elementary motions.

The benefits of relying on workers to come up with solutions to productivity problems have long been recognized, as we shall discover next.

Elton Mayo and the Hawthorne Studies One study, inspired by Frederick Taylor’s research, began at the Western Electric Company’s Hawthorne plant in Cicero, Illinois. The study began in 1927 and ended six years later. Let’s see why it was one of the major studies in management literature. Elton Mayo and his colleagues from Harvard University went to the Hawthorne plant to test the degree of lighting associated with optimum productivity. In this respect, their research was a traditional scientific management study. The idea was to keep records of the workers’ productivity under different levels of illumination. But the initial experiments revealed what seemed to be a problem. The researchers had expected productivity to fall as the lighting was dimmed. Yet the experimental group’s productivity went up regardless of whether the lighting was bright or dim, and even when the lighting was reduced to about the level of moonlight. In a second series of 13 experiments, a separate test room was set up where researchers could manipulate temperature, humidity, and other environmental factors. Productivity went up each time; in fact, it increased by 50 percent overall. When the experimenters repeated the original condition, they expected productivity to fall to original levels; however, productivity increased yet again. The experiments were considered a total failure at this point. No matter what the experimenters did, productivity went up. What was causing the increase? In the end, Mayo guessed that some human or psychological factor was at play. He and his colleagues interviewed the workers, asking about their feelings and attitudes toward the experiment. The answers began a profound change in management thinking that has had repercussions today. Here is what the researchers concluded: ∙ The workers in the test room thought of themselves as a social group. The atmosphere was informal, they could talk freely, and they interacted regularly with their supervisors and the experimenters. They felt special and worked hard to stay in the group. This motivated them.

Little did Elton Mayo and his research team know that their work would forever change managers’ beliefs about employee motivation. Their research at the Western Electric Hawthorne plant (pictured here) gave birth to the concept of human-based motivation by showing that employees behaved differently simply because they were involved in planning and executing the experiments.

402

∙ The workers were included in the planning of the experiments. For example, they rejected one kind of pay schedule and recommended another, which was adopted. They believed that their ideas were respected and they felt engaged in managerial decision making. This, too, motivated them. ∙ No matter the physical conditions, the workers enjoyed the atmosphere of their special room and the additional pay for being more productive. Job satisfaction increased dramatically.

CHAPTER 11 Motivating Employees

Researchers now use the term Hawthorne effect to refer to the tendency for people to behave differently when they know they are being studied. The Hawthorne study’s results encouraged researchers to study human motivation and the managerial styles that lead to greater productivity. Research emphasis shifted from Taylor’s scientific management toward Mayo’s new human-based management. Mayo’s findings led to completely new assumptions about employees. One was that pay is not the only motivator. In fact, money was found to be a relatively ineffective motivator. New assumptions led to many theories about the human side of motivation. One of the best-known motivation theorists was Abraham Maslow, whose work we discuss next.

Abraham Maslow’s Hierarchy of Needs Psychologist Abraham Maslow believed that to understand motivation at work, one must understand human motivation in general. It seemed to him that motivation arises from need. That is, people are motivated to satisfy unmet needs. Needs that have been satisfied no longer provide motivation. He thought that needs could be placed on a hierarchy of importance. Figure 11.2 shows Maslow’s hierarchy of needs, whose levels—from lower to higher—are as follows: ∙ Physiological Needs. Basic survival needs, such as the need for food, water, and shelter. ∙ Safety Needs. The need to feel secure at work and at home. ∙ Social Needs. The need to feel loved, accepted, and part of the group. ■ FIGURE

11.2

Hawthorne effect

The tendency for people to behave differently when they know they are being studied.

LO2

Identify the levels of Maslow’s hierarchy of needs and apply them to employee motivation. Contrast this with the motivators and hygiene factors identified by Herzberg. Maslow’s hierarchy of needs

Theory of motivation that places different types of human needs in order of importance, from basic physiological needs to safety, social, and esteem needs to selfactualization needs.

MASLOW’S HIERARCHY OF NEEDS

Selfactualization

Esteem needs

Social needs

Safety needs

Physiological needs

Maslow’s hierarchy of needs is based on the idea that motivation comes from need. If a need is met, it is no longer a motivator, so a higher-level need becomes the motivator. Higher-level needs demand the support of lowerlevel needs. This chart shows the various levels of need. Do you know where you are on the chart right now?

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∙ Esteem Needs. The need for recognition and acknowledgement from others, as well as self-respect and a sense of status or importance. ∙ Self-Actualization Needs. The need to develop to one’s fullest potential. When one need is satisfied, another higher-level need emerges and motivates us to do something to satisfy it. The satisfied need is no longer a motivator. For example, if you just ate a full-course dinner, hunger would not (at least for several hours) be a motivator, and your attention may turn to your surroundings (safety needs) or family (social needs). Of course, lower-level needs (perhaps thirst) may re-emerge at any time they are not met and take your attention away from higher-level needs (perhaps the need for recognition or status). To compete successfully, firms must create a work environment that includes goals such as social contribution, honesty, reliability, service, quality, dependability, and unity—for all levels of employees. Chip Conley of Joie de Vivre, a chain of of more than 20 boutique hotels, thinks about higher-level needs such as meaning (self- actualization) for all employees, including lower-level workers. Half his employees are housekeepers who clean toilets all day. How does he help them feel they are doing meaningful work? One technique is what he calls the George Bailey exercise, based on the main character in the movie It’s a Wonderful Life. Conley asks small groups of housekeepers what would happen if they weren’t there every day. Trash would pile up, bathrooms would be full of wet towels, and let’s not even think about the toilets. Then he asked them to come up with some other name for housekeeping. They offer suggestions like “serenity keepers,” “clutter busters,” or “the peace-of-mind police.” In the end, these employees have a sense of how the customer’s experience would not be the same without them. This gives meaning to their work that helps satisfy higher-level needs.12

PROGRESS ASSESSMENT

• What are the similarities and differences between Taylor’s time-motion studies and Mayo’s Hawthorne studies?

• How did Mayo’s findings influence scientific management? • Draw a diagram of Maslow’s hierarchy of needs. Label and describe the parts.

Frederick Herzberg’s Motivating Factors Another direction in managerial theory is to explore what managers can do with the job itself to motivate employees. In other words, some theorists ask, “Of all the factors controllable by managers, which are most effective in generating an enthusiastic work effort?” In the mid-1960s, psychologist Frederick Herzberg conducted the most-discussed study in this area. Herzberg asked workers to rank various job-related factors in order of

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importance relative to motivation. The question was: “What creates enthusiasm for workers and makes them work to full potential?” The most important motivating factors were: 1. Sense of achievement. 2. Earned recognition. 3. Interest in the work itself. 4. Opportunity for growth. 5. Opportunity for advancement. 6. Importance of responsibility. 7. Peer and group relationships. 8. Pay. 9. Supervisor’s fairness. 10. Company policies and rules. 11. Status. 12. Job security. 13. Supervisor’s friendliness. 14. Working conditions.

motivators

In Herzberg’s theory of motivating factors, job factors that cause employees to be productive and that give them satisfaction.

hygiene (maintenance) factors

Factors receiving the most votes all clustered around job content. Workers like to feel that they contribute to the company (sense of achievement was number 1). They want to In Herzberg’s theory earn recognition (number 2) and feel that their jobs are important (number 6). They want of motivating factors, responsibility (which is why learning is so important), and to earn recognition for that job factors that can responsibility by having a chance for growth and advancement. Of course, workers also cause dissatisfaction if missing but that want the job to be interesting. Is this the way you feel about your work? do not necessarily Workers did not consider factors related to the job environment to be motivators. It motivate employees if was interesting to find that one of those factors was pay. Workers felt that the absence of increased. good pay, job security, and friendly supervisors could cause dissatisfaction, but their presence did not motivate employees to work harder; it just provided satisfaction and contentment. Would you work harder if you were paid more? Herzberg concluded that certain factors, which he called motivators, made employees productive and gave them satisfaction. These factors, as you have seen, mostly related to job content. Herzberg called other elements of the job hygiene (maintenance) factors (or maintenance factors). These related to the job environment and could cause dissatisfaction if missing but would not necessarily motivate employees if © Jetta Productions/Getty Images Herzberg believed that motivational factors such as increased. See Figure 11.3 for a list of both motivators recognition increase worker performance. How do you and hygiene factors. think Herzberg’s motivational factors encourage workers Herzberg’s motivating factors led to the following to a higher level of performance on the job? conclusion—the best way to motivate employees is to

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■ FIGURE

11.3

HERZBERG’S MOTIVATORS AND HYGIENE FACTORS There’s some controversy over Herzberg’s results. For example, sales managers often use money as a motivator. Recent studies have shown that money can be a motivator if used as part of a recognition program.

Motivators

Hygiene (Maintenance) Factors

(These factors can be used to motivate workers.)

(These can cause dissatisfaction, but changing them will have little motivational effect.)

Work itself Achievement Recognition Responsibility Growth and advancement

Company policy and administration Supervision Working conditions Interpersonal relations (co-workers) Salary, status, and job security

make their jobs interesting, help them achieve their objectives, and recognize their achievements through advancement and added responsibility.13 A review of Figure 11.4 shows the similarity between Maslow’s hierarchy of needs and Herzberg’s motivating factors. Look at Herzberg‘s motivating factors, identify those that motivate you, and rank them in order of importance to you. Keep them in mind as you consider jobs and careers. ■ FIGURE

11.4

COMPARISON OF MASLOW’S HIERARCHY OF NEEDS AND HERZBERG’S MOTIVATING FACTORS Maslow

Self-actualization

Motivational

Work itself Achievement Possibility of growth

Esteem

Advancement Recognition Status

Social

Interpersonal relations Superior Subordinates Peers Supervision

Safety

Physiological

406

Herzberg

Hygiene (Maintenance)

Company policy and administration Job security Working conditions Salary Personal life

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What motivators do your job opportunities offer you? Evaluating your job offers in terms of what is really important to you will help you make a wise career choice. This technique was used by Lisa Lisson, the focus of this chapter’s profile.

Applying Herzberg’s Theories Improved working conditions (such as better wages or increased security) are taken for granted after workers get used to them. This is what Herzberg meant by hygiene (maintenance) factors: their absence causes © Canadian Pacific, photo by Neil Zeller dissatisfaction, but their presence (maintenance) does not motivate. The best motivator for some employees is Each year, Canadian Pacific Railway Ltd.’s Holiday Trains make stops in communities raising food and a simple and sincere “Thanks, I really appreciate what cash donations for local food banks. Free concerts and you’re doing.” seasonal festivities are offered from the travelling stage. Mediacorp Canada Inc. annually publishes a list of Can you think of other company examples of community Canada’s Top 100 Employers. Companies are evaluated involvement? on eight key areas: (1) physical workplace; (2) work atmosphere and social; (3) health, financial, and family benefits; (4) vacation and time off; (5) employee communications; (6) performance management; (7) training and skills development; and (8) community involvement.14 For example, Air Canada offers its employees discounted seats on available flights, “work trading” opportunities that can include a long-term special assignment training other employees, acting as brand ambassadors at major conferences, and trying out other roles (e.g., moving from a call centre to the airport or from economy to premium check-in). Employees can also recognize other staff through Air Canada’s online SHINE system.15 The Seeking Sustainability box highlights Vancity, an organization that has been recognized not only as one of Canada’s Top 100 Employers, but also as #1 among Canada’s Top 50 Socially Responsible Corporations.

Douglas McGregor’s Theory X and Theory Y The way managers go about motivating people at work depends greatly on their attitudes toward workers. Management theorist Douglas McGregor observed that managers’ attitudes generally fall into one of two entirely different sets of managerial assumptions, which he called Theory X and Theory Y.

LO3

Differentiate between McGregor’s Theory X and Theory Y.

Theory X The assumptions of Theory X management are: ∙ The average person dislikes work and will avoid it if possible. ∙ Because of this dislike, workers must be forced, controlled, directed, or threatened with punishment to make them put forth the effort to achieve the organization’s goals. 407

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Seeking SUSTAINABILITY Values Drive Vancity’s Initiatives Vancouver City Savings Credit Union (Vancity) is Canada’s largest community credit union with $25.6 billion in assets, 523 000 member owners, and 59 branches in Metro Vancouver, the Fraser Valley, Victoria, Squamish, and Alert Bay. A financial co-operative, Vancity’s triple-bottom line business model is driven by its vision to redefine wealth and focus on building healthy communities that are financially, socially, and environmentally sustainable. For example, the company allocates 30 percent of its net earnings to be shared with its members, communities, and employees. The company believes in impact investing and lending. Providing credit is the biggest way to help members and their communities thrive and prosper. Deposits are invested in local businesses, organizations, and initiatives that create positive impacts in the community, such as creating jobs, reducing greenhouse gases, and fighting homelessness. “If you’re a business, notfor-profit, First Nation government, social enterprise, co-operative, or strata,” asserts the website, “and you’re looking to finance a green building project, energy- efficiency upgrade, or innovative environmental or clean technology initiative, then we want to talk to you.” The Green Business program provides support in the forms of financing (eco-efficiency and micro-loans for green business start-up and expansion), grants, partnerships, and learning, networking, resources, and events. You have learned a little about Vancity and its value-driven business model. Visit its site to read

stories of impact investing in the energy and environment fields. Would you like to work for an organization that is committed to addressing climate change?

Sources: “Vancity at a Glance,” Vancouver City Savings Credit Union, 2017, https://www.vancity.com/AboutVancity/VisionAndValues/ Glance/?xcid=about_megamenu_glance; and “Energy and environment,” Vancouver City Savings Credit Union, 2017, https://www.vancity. com/BusinessBanking/Financing/SpecializedSectorSolutions/EnergyEnvironment/.

∙ The average worker prefers to be directed, wishes to avoid responsibility, has relatively little ambition, and wants security. ∙ Primary motivators are fear and money. The natural consequence of these assumptions is a manager who is very busy and who watches people closely, telling them what to do and how to do it. Motivation is more likely to take the form of punishment for poor work rather than reward for good work. Theory X managers give their employees little responsibility, authority, or flexibility. Taylor and other theorists who preceded him would have agreed with Theory X. Time-motion studies calculated the one best way to perform a task and the optimal time to devote to it. Researchers assumed workers needed to be trained and carefully watched to see that they conformed to standards. 408

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Some managers and entrepreneurs still suspect that employees cannot be fully trusted and need to be closely supervised.16 No doubt you have seen such managers in action. How did they make you feel? Were these managers’ assumptions accurate regarding the workers’ attitudes?

Theory Y Theory Y makes entirely different assumptions about people: ∙ Most people like work; it is as natural as play or rest. ∙ Most people naturally work toward goals to which they are committed. ∙ The depth of a person’s commitment to goals depends on the perceived rewards for achieving them. ∙ Under certain conditions, most people not only accept responsibility, but also seek it. ∙ People are capable of using a relatively high degree of imagination, creativity, and cleverness to solve problems. ∙ In industry, the average person’s intellectual potential is only partially realized.

Theory X managers come in all sizes and shapes. Such managers may have an in-your-face style. Would you prefer to work for a Theory X or a Theory Y manager?

∙ People are motivated by a variety of rewards. Each worker is stimulated by a reward unique to that worker (e.g., time off, money, recognition, etc.). Rather than authority, direction, and close supervision, Theory Y managers emphasize a relaxed managerial atmosphere in which workers are free to set objectives, be creative, be flexible, and go beyond the goals set by management. (Figure 11.5 compares both Theories X and Y.) A key technique in meeting these objectives is empowerment, which

■ FIGURE

11.5

A COMPARISON OF THEORIES X AND Y Theory X

Theory Y

1. Employees dislike work and will try to avoid it.

1. Employees view work as a natural part of life.

2. Employees prefer to be controlled and directed.

2. Employees prefer limited control and direction.

3. Employees seek security, not responsibility.

3. Employees will seek responsibility under proper work conditions.

4. Employees must be intimidated by managers to perform.

4. Employees perform better in work environments that are non-intimidating.

5. Employees are motivated by financial rewards.

5. Employees are motivated by many different needs.

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goal-setting theory

The idea that setting ambitious but attainable goals can motivate workers and improve performance if the goals are accepted, accompanied by feedback, and facilitated by organizational conditions.

management by objectives (MBO)

A system of goal setting and implementation that involves a cycle of discussion, review, and evaluation of objectives among top and middle-level managers, supervisors, and employees.

LO4

Explain the key principles of goalsetting, expectancy, reinforcement, and equity theories.

includes giving employees the authority to make decisions and the tools to implement the decisions they make. For empowerment to be a real motivator, management should follow these three steps: 1. Find out what people think the problems in the organization are. 2. Let them design the solutions. 3. Get out of the way and let them put those solutions into action.

Often employees complain that although they are asked to engage in company decision making, their managers fail to actually empower them to make decisions. Have you ever worked in such an atmosphere? How did that make you feel?

PROGRESS ASSESSMENT

• Explain the distinction between what Herzberg called motivators and hygiene factors.

• Briefly describe the managerial attitudes behind Theories X and Y. • Which of the theories introduced so far resonates the most with you? Explain.

Goal-Setting Theory and Management by Objectives

Goal-setting theory says setting ambitious but attainable goals can motivate workers and improve performance if the goals are accepted, accompanied by feedback, and if conditions in the organization pave the way for achievement. All organization members should have some basic agreement about both overall goals and specific objectives for each department and individual. Thus, there should be a system to engage everyone in the organization in goal setting and implementation. The late management expert Peter Drucker developed such a system in the 1960s. “Managers cannot motivate people; they can only thwart people’s motivation because people motivate themselves,” he said. Managers, he believed, can only create the proper environment for the seed to grow. Called management by objectives (MBO), Drucker’s system of goal setting and implementation involves a cycle of discussion, © Sam Edwards/Getty Images review, and evaluation of objectives among top- and When applying MBO, managers provide direction to middle-level managers, supervisors, and employees. It their employees. For their part, employees are asked to calls on managers to formulate goals in co-operation participate in the process and to take responsibility for the with everyone in the organization, to commit employoutcome. Would you prefer a manager that helps you or ees to those goals, and then to monitor results and coaches you to success? reward accomplishments. 410

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MBO is most effective in relatively stable situations when managers can make longrange goals and implement them with few changes. Managers must also understand the difference between helping and coaching subordinates. Helping means working with the subordinate and doing part of the work, if necessary. Coaching means acting as a resource—teaching, guiding, and recommending—but not participating actively or doing the task. The central idea of MBO is that employees need to motivate themselves. Employee input and expectations are important. Problems can arise when management uses MBO as a strategy for forcing managers and workers to commit to goals that are not agreed on together but are instead set by top management.17 Victor Vroom identified the importance of employee expectations and developed a process called expectancy theory. Let’s examine this concept next.

Meeting Employee Expectations: Victor Vroom’s Expectancy Theory According to Victor Vroom’s expectancy theory, employee expectations can affect motivation. That is, the amount of effort employees exert on a specific task depends on their expectations of the outcome. Vroom contends that employees ask three questions before committing their maximum effort to a task: (1) Can I accomplish the task? (2) If I do accomplish it, what is my reward? (3) Is the reward worth the effort? See Figure 11.6 for a summary of this process. Think of the effort you might exert in your class under the following conditions. Suppose your instructor says that to earn an A in the course you must achieve an average of 90 percent on coursework plus jump two metres high. Would you exert maximum effort toward earning an A if you knew you could not possibly jump two metres high? Suppose your instructor said that any student can earn an A in the course but you know that this instructor has not awarded an A in 25 years of teaching. If the reward of an ■ FIGURE

expectancy theory

Victor Vroom’s theory that the amount of effort employees exert on a specific task depends on their expectations of the outcome.

11.6

EXPECTANCY THEORY Task: Can I accomplish the task?

Yes

Outcome: Is the reward worth it?

Not motivated

Yes

Motivated

The amount of effort employees exert on a task depends on their expectations of the outcome.

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Performance feedback is crucial for the motivation of employees. The feedback session is also ideal for setting goals. Have you experienced a feedback session?

A seems unattainable, would you exert significant effort in the course? Better yet, let’s say that you read online that businesses prefer hiring C-minus students to hiring A-plus students. Does the reward of an A seem worth it? Now think of similar situations that may occur on the job. Expectancy theory does note that expectations vary from individual to individual. Employees establish their own views of task difficulty and the value of the reward.18 Researchers David Nadler and Edward Lawler modified Vroom’s theory and suggested that managers follow five steps to improve employee performance:19 1. Determine what rewards employees value. 2. Determine each employee’s desired performance

standard. 3. Ensure that performance standards are attainable. 4. Guarantee rewards tied to performance. 5. Be certain that employees consider the rewards adequate.

Now that we have covered several theories, you may have realized that they try to explain all behaviour, by all people, all of the time. But this is impossible given the complexity of human behaviour. The value of being briefly introduced to different theories (you will discuss these theories in more detail in an Organizational Behaviour course) is that each theory offers some piece of the puzzle. No theory is complete, as people are very complex and our attempts to theorize about behaviour will never be complete. Successful leaders are sensitive to the differences between their employees and what motivates them. A starting point is understanding these theories.

Reinforcing Employee Performance: Reinforcement Theory reinforcement theory

The concept that positive and negative reinforcers motivate a person to behave in certain ways.

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According to reinforcement theory, positive reinforcers, negative reinforcers, and punishers motivate a person to behave in certain ways. In other words, motivation is the result of the carrot-and-stick approach whereby individuals act to receive rewards (i.e., the carrot) and avoid punishment (i.e., the stick). Positive reinforcements are rewards such as praise, recognition, and a pay raise. Punishment includes reprimands, reduced pay, and layoffs or firing. Negative reinforcement occurs when people work to escape the punishers (i.e., the punishment). Escaping the punishment reinforces or rewards the positive behaviour. A manager might also try to stop undesirable behaviour by not responding to it. This response is called extinction because managers hope the unwanted behaviour will become extinct. Figure 11.7 illustrates how a manager can use reinforcement theory to motivate workers.

CHAPTER 11 Motivating Employees

■ FIGURE

11.7

REINFORCEMENT THEORY Managers can either add or subtract stimuli (positive reinforcement, negative reinforcement, or punishers) to increase desired behaviour or decrease undesired behaviour.

ADD STIMULI

SUBTRACT STIMULI

Increase Behaviour

Positive Reinforcement: Jill gets praise (the reinforcement added) for turning in her reports on time (target behaviour to increase).

Negative Reinforcement: Jack is on probation (punishment that will be removed) until such time as he can turn in three reports on time (target behaviour to increase).

Decrease Behaviour

Punishment: Jack gets written up (the punisher) for turning in his reports late (target behaviour to decrease).

Extinction: Jill does not get praise (reinforcement is removed) when her reports are turned in late (target behaviour to decrease), no matter how well done they are.

Source: Casey Limmer, MSW, LCSW, Washington University.

Treating Employees Fairly: Equity Theory Equity theory looks at how employees’ perceptions of fairness affect their willingness to equity theory perform. It assumes employees ask, “If I do a good job, will it be worth it?” and “What’s The idea that employees try to fair?” Employees try to maintain equity between what they put into the job and what they maintain equity get out of it, comparing those inputs and outputs to those of others in similar positions. between inputs and Workers find comparative information through personal relationships, professional organi- outputs compared to others in similar zations, and other sources. positions. When workers perceive inequity, they will try to re-establish fairness in a number of ways. For example, suppose that you compare the grade you earned on a term paper with your classmates’ grades. If you think you received a lower grade compared to the students who put out the same effort as you, you may (1) reduce your effort on future class projects, or (2) rationalize the difference by saying, “Grades are overvalued anyway!” If you think that your paper received a higher grade than comparable papers, you will probably (1) increase your effort to justify the higher reward in the future, or (2) rationalize by saying, “I’m worth it!” In the workplace, perceived inequity may lead to © Hill Street Studios/Blend Images LLC lower productivity, reduced quality, increased absenIf you attend class regularly but do not do well on your teeism, and voluntary resignation. first midterm exam, how do you react? Do you stop going Remember that equity judgments are based on to class regularly as you do not think that it is worthwhile? perception and are therefore subject to error. When Or, do you go and speak with your instructor to find out workers overestimate their own contributions—as how to improve for the next exam? happens often—they feel any rewards given out for 413

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performance are inequitable.20 Sometimes organizations try to deal with this by keeping employee salaries secret, but secrecy may make things worse. Employees are likely to overestimate the salaries of others, in addition to overestimating their own contributions. A recent study showed workers often estimate their own productive hours as 11 percent higher than their average co-worker.21 The best remedy is generally clear and frequent communication. Managers must communicate as clearly as possible both the results they expect and the outcomes that will occur.22

PROGRESS ASSESSMENT

• Explain goal-setting theory. • Evaluate expectancy theory. When could expectancy theory apply to your efforts or lack of effort?

• Describe reinforcement theory. What are examples of positive and negative reinforcers?

• Explain the principles of equity theory.

LO5

Show how managers put motivation theories into action through such strategies as job enrichment, open communication, and job recognition. job enrichment

A motivational strategy that emphasizes motivating the worker through the job itself.

Putting Theory into Action Now that you know what a few theorists have to say about motivation, you might be asking yourself “So what? What do all of these theories have to do with what really goes on in the workplace today?” Let’s look at how companies put the theories into action through job enrichment, open communication, and job recognition.

Motivating Through Job Enrichment Managers have extended both Maslow’s and Herzberg’s theories through job enrichment, a strategy that motivates workers through the job itself. Work is assigned so that individuals can complete an identifiable task from beginning to end and are held responsible for successful achievement. Job enrichment is based on Herzberg’s higher motivators, such as responsibility, achievement, and recognition.23 It stands in contrast to job simplification, which produces task efficiency by breaking a job into simple steps and assigning people to each. Review Maslow’s and Herzberg’s work to see how job enrichment grew from those theories. J. Richard Hackman and Greg R. Oldham proposed the Job Characteristics Model, which defines core job characteristics that have a certain psychological impact on workers. In turn, the psychological states induced by the nature of the job lead to certain outcomes that are relevant to the worker and the organization.24 Put another way, when people are matched to a job that really “fits” them, most of the problems associated with “unmotivated” or “lazy” people disappear.25 Those who advocate job enrichment believe that five characteristics of work are important in motivation and performance: 1. Skill Variety. The extent to which a job demands different skills. 2. Task Identity. The degree to which the job requires doing a task with a visible outcome

from beginning to end. 414

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3. Task Significance. The degree to which the job has

a substantial impact on the lives or work of others in the company. 4. Autonomy. The degree of freedom, independence,

and discretion in scheduling work and determining procedures. 5. Feedback. The amount of direct and clear informa-

tion that is received about job performance. Variety, identity, and significance contribute to the meaningfulness of the job. Autonomy gives people a feeling of responsibility, and feedback contributes to a © Sipa/Newscom feeling of achievement and recognition.26 Here a worker in Baccarat’s factory puts the finishing touches on a crystal vase. One of the hallmarks of job One type of job enrichment is job enlargement, which combines a series of tasks into one challeng- enrichment is the worker’s ability to perform a complete ing and interesting assignment. Maytag, the home task from beginning to end. Why do you think this might be more motivating than simply adding a few parts to a appliance manufacturer, redesigned its washing product on an assembly line? machine production process so that employees could assemble an entire water pump instead of just adding a single part. Job rotation also makes work more interesting and motivating by job enlargement moving employees from one job to another. One problem, of course, is the need to A job-enrichment train employees to do several different operations. However, the resulting increase in strategy that involves combining a series employee motivation and the value of having flexible, cross-trained employees offsets of tasks into one the costs. challenging and Figure 11.8 summarizes the theories discussed throughout this chapter. Review the interesting assignment. motivation myths in Figure 11.1. Is it clearer now why these are myths? job rotation

Motivating Through Open Communication Communication and information must flow freely throughout the organization when employees are empowered to make decisions—they can’t make these decisions in a vacuum. It is crucial for people to be able to access the knowledge they need when they need it. The entire organization must be structured so that managers and employees can talk to one another. Procedures for encouraging open communication include the following:27

A job-enrichment strategy that involves moving employees from one job to another.

∙ Create an organizational culture that rewards listening. Top managers must create places to talk, and they must show employees that talking with superiors matters— by providing feedback, adopting employee suggestions, and rewarding upward communication—even if the discussion is negative. Employees must feel free to say anything they deem appropriate and believe their opinions are valued. ∙ Train supervisors and managers to listen. Most people receive no training in how to listen, in school or anywhere else, so organizations must do such training themselves or hire someone to do it. ∙ Use effective questioning techniques. We get information through questioning. Different kinds of questions yield different kinds of information. Closed questions that generate yes/no answers do not encourage the longer, more thoughtful responses that 415

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■ FIGURE

11.8

SUMMARY OF MOTIVATION THEORIES Theory Name

Description

Scientific Management

Studying workers to find the most efficient ways of doing things and then teaching workers those techniques.

The Hawthorne Effect

The tendency for people to behave differently when they know they are being studied.

Hierarchy of Needs

People are motivated to satisfy unmet needs. Needs are placed in order of importance, from basic physiological needs to safety, social, and esteem needs to self-actualization needs.

Theory of Motivating Factors

Motivators are job factors that cause employees to be productive and that give them satisfaction. Hygiene (maintenance) factors are job factors that can cause dissatisfaction if missing but that do not necessarily motivate employees if increased.

Theory X and Theory Y

Theory X managers believe workers dislike work and will avoid it. Theory Y managers believe people like working and will accept responsibility.

Goal-Setting Theory

Setting ambitious but attainable goals can motivate workers and improve performance if the goals are accepted, accompanied by feedback, and if conditions in the organization pave the way for achievement.

Management by Objectives

A system of goal setting and implementation that involves a cycle of discussion, review, and evaluation of objectives among top- and middle-level managers, supervisors, and employees.

Expectancy Theory

The amount of effort employees exert on a specific task depends on expectations of the outcome.

Reinforcement Theory

Positive and negative reinforcers motivate a person to behave in certain ways.

Equity Theory

Employees try to maintain equity between inputs and outputs compared to others in similar positions.

Job Enrichment

Emphasizes motivating the worker through the job itself by considering five characteristics (skill variety, task identity, task significance, autonomy, and feedback). Examples of job enrichment include job enlargement and job rotation.

open questions do. Appropriate personal questions can create a sense of camaraderie between employees and managers. ∙ Remove barriers to open communication. Separate offices, parking areas, bathrooms, and dining rooms for managers only set up barriers. Other barriers are different dress codes and different ways of addressing one another (like calling workers by their first names and managers by their last). Removing such barriers may require imagination and managers’ willingness to give up special privileges. 416

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∙ Avoid vague and ambiguous communication. Passive voice appears weak and tentative. Statements such as “Mistakes were made” leave you wondering who made the mistakes. Hedging is another way managers send garbled messages. Terms like possibly and perhaps sound wishy-washy to employees who need more definitive direction. ∙ Make it easy to communicate. Encouraging organization members to eat together at large lunch tables, allowing employees to gather in conference rooms, having organizational picnics and athletic teams, and so on can help workers at all levels mix with one another. ∙ Ask employees what is important to them. Managers should not wait until the exit interview to ask an employee, “What can I do to keep you?” At that point it is too late. Instead they should have frequent stay interviews to find out what matters to employees and what they can do to keep them on the job. The Adapting to Change box discusses how some organizations utilize “happiness meters” to learn how they can identify and address workplace issues in order to keep employees engaged.

Adapting to CHANGE Employee Engagement’s Mood Ring Have you ever wondered what was going on in someone else’s head? Managers always want to know. They need to know what keeps employees going, what causes them to disengage, and, ultimately, what makes workers happy. Though they may not be able to read exactly what is in their employees’ heads, they now have more tools to help track employee moods. Apps from companies like Culture Amp and Talmetrix allow managers to ask questions on the fly and employees can quickly give feedback through a mobile app. Although some managers may call them “happiness meters,” they are much more than that. They help managers monitor moods, yes, but they can also help discover what employees really want and what is important to the workplace culture as a whole. Some managers, who had previously assumed their employees wanted enhancements to the games in the break room, found their employees actually craved more responsibilities and greater roles in the strategic planning process. Not knowing what the employees were looking for almost led to another foosball table. Oops!

Managers won’t always know what motivates and engages their employees unless they ask. Apps like this are already helping to increase employee engagement. How’s that? Didier Elzinga, cofounder of Culture Amp, says, “Every person is important. People feel they can make a positive difference.” When employees feel important to the company, that gets the ball rolling. From there, they feel like they’re being listened to and will work harder to prove they are worthy of the attention.

Sources: “JumpStart Inc. Announces Investment in Talmetrix,” Yahoo! Finance, February 28, 2017; Megan Rose Dickey, “Culture Amp Launches Its Own Take on Performance Reviews,” TechCrunch, August 17, 2016; Kate Rockwood, “Tracking the Mood of Your Employees,” Inc., June 2016; “BlackbookHR Becomes Talmetrix,” Business Wire, September 20, 2016; Ian Davies, “Three Ways Technology is Transforming Talent Management in 2016,” Forbes, March 17, 2016; and Heather Clancy, “This Startup Helps Airbnb and Slack Measure What Employees Think,” Fortune, March 7, 2016.

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Applying Open Communication in Self-Managed Teams At Ford Motor Company, a group known as Team Mustang set the guidelines for how production teams should be formed. Given the challenge to create a car that would make people dust off their old “Mustang Sally” records and dance into showrooms, the 400-member team was also given the freedom to make decisions without waiting for approval from headquarters. Everyone worked under one roof in an old ware© Raymond Boyd/Getty Images house where drafting experts sat next to accountants, In the car business nothing works like the “wow” and engineers next to stylists. Budgetary walls between factor. At Ford, the 400-member Team Mustang group was empowered to create the “wow” response for the departments were knocked down as department mancompany’s sleek Mustang convertible. The work team, agers were persuaded to surrender some control over suppliers, company managers, and even customers their subordinates on the team. worked together to make the Mustang a winner in the very When the resulting Mustang convertible displayed competitive automobile market. shaking problems, engineers were so motivated to finish on time and under budget that they worked late into the night, sleeping on the floor when necessary. Senior Ford executives were tempted to intervene, but they stuck with their promise not to meddle. Working with suppliers, the team solved the shaking problem and still came in under budget and a couple of months early. The new car was a hit with drivers and sales soared.28 To implement such teams, managers at most companies must reinvent work. This means respecting workers, providing interesting work, developing workers’ skills, allowing autonomy, decentralizing authority, and rewarding good work. In the process of reinventing work, it is essential that managers behave ethically toward all employees. The Making Ethical Decisions box illustrates a problem managers may face when filling temporary positions.

Recognizing a Job Well Done A recent survey indicated that more than half of employees who voluntarily left their jobs did so because of lack of appreciation.29 Letting people know you appreciate their work

Making ETHICAL DECISIONS Motivating Temporary Employees Say that you work as a manager for Highbrow’s, a rather prestigious department store. Each year, to handle the large number of holiday shoppers, you must hire temporary employees. Because of store policy and budget constraints, all temporaries must be discharged on January 10. As you interview prospective employees, however, you give the impression that the store will hire at least two new full-time retail salespeople

418

for the coming year. You hope that this will serve to motivate the temporary workers and even foster some competition among them. You also instruct your permanent salespeople to reinforce the falsehood that good work during the holiday season is the path to fulltime employment. Is this an ethical way to try to motivate your employees? What are the dangers of using a tactic such as this?

CHAPTER 11 Motivating Employees

is usually more powerful than giving a raise or bonus alone.30 More and more recent graduates report salary is not their ultimate motivator. Yes, they needed enough money to cover their basic needs. However, the majority of participants rated career advancement opportunities as well as interesting and challenging work to be the most important things.31Clearly, providing advancement opportunities is important in attracting and retaining valuable and engaged employees. Promotions are not the only way to celebrate a job well done. Recognition can be as simple as noticing positive actions out loud, making employees feel their efforts are worthwhile and valued enough to be noticed. For example: “Sarina, you didn’t say much in the meeting today. Your ideas are usually so valuable; I missed hearing them.” This comment lets Sarina know her ideas are appreciated, and she will be more likely to participate fully in the next meeting. Here are just a few examples of ways managers have raised employee spirits without raising paycheques: ∙ FedEx Office sent high-achieving employees to Disneyland and put the company’s top executives in those employees’ places while they were gone.

Rather than giving out boring certificates or plaques to exceptional employees, Caribou Coffee uses watermelons to show appreciation. Employees can win one of these juicy prizes by hitting a personal goal, excelling on a company project, or simply by using their “melon.” What role do you think these awards play in motivating the winners to continue their outstanding performance?

∙ Walt Disney World offers more than 150 employee recognition programs. The Spirit of Fred Award is named after an employee named Fred, who makes each award (a certificate mounted and varnished on a plaque) himself. Fred’s name became an acronym for Friendly, Resourceful, Enthusiastic, and Dependable.

∙ Maritz Motivation Solutions has a Thanks a Bunch program that gives flowers to a selected employee in appreciation of a job well done. That employee passes the bouquet to someone else who helped. The idea is to see how many people are given the flowers throughout the day. The bouquet comes with thank-you cards that are entered into a draw for awards like binoculars and jackets. ∙ Hewlett-Packard (HP) bestows its Golden Banana Award for a job well done. The award started when an engineer burst into his manager’s office saying he had found the solution to a long-standing problem. In his haste to find something to give the employee to show his appreciation, the manager grabbed a banana from his lunch and said, “Well done! Congratulations!” The Golden Banana is now one of the most prestigious honours awarded to an inventive HP employee. Giving valued employees prime parking spots, more vacation days, or more flexible schedules may help them feel their work is appreciated, but sometimes nothing inspires workers like the prospect of a payout down the road. Companies that offer a small equity stake or stock options often have a good chance of developing loyal employees. The Spotlight on Small Business offers examples of what a number of small businesses have done to motivate employees. The same things do not motivate all employees. After the Progress Assessment, we’ll explore how employees from different cultures and generations are motivated. 419

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Spotlight On SMALL BUSINESS Motivators for Small Businesses The competition to attract and retain top-notch workers is “job one” for all businesses big or small. But how can small companies compete against the likes of Apple and Amazon? Wouldn’t any talented person choose to work for one of these big name employers that offer such perks as onsite gourmet meals, putting greens, gymnasiums, and massages? It’s true small businesses cannot offer the money, benefits, or glory of working for one of the corporate heavyweights. But they can offer more intangible benefits such as collaborative management, less bureaucracy, more work–life balance, a sense of independence, and sometimes even potential ownership. Many small businesses strive to create an upbeat, relaxed company culture that encourages employees to bond with one another rather than compete against each other for the next promotion. By instilling the idea that the business’ culture belongs to the employees, culture can equal perks, fun, and happiness. Small businesses also can take advantage of motivating employees with open communication and broad responsibility on the job. Individual workers can have more say in the company and not feel like just another drone in a giant corporate beehive. This doesn’t mean small businesses can’t also try their hand at the innovative perks department. Here are some examples: • Vigilant Global provides free breakfast and lunch to its staff, “smoothie stations,” and two games rooms. • Cisco Systems Canada Co. offers employees up to five paid personal days each year in addition to four weeks of starting vacation.

• Bigcommerce offers employees a weekly boot camp with a certified trainer. • Zoosk invites employees to bring their dogs to work. Not only do businesses hope these methods help employees bond with their colleagues, they also hope they become productive workers. Do you think such workplaces might appeal to you? Why?

Sources: “Canada’s Top 100 Employers (2018),”The Globe and Mail and Mediacorp Canada Inc.,2017, 7; “Canada’s 100 Best Small & Medium Employers - Eat well: Vigilant Global goes all-out on perks,” The Globe and Mail and Mediacorp Canada Inc., March 2015, 61; Michael Fertik, “How to Cultivate the Culture That Makes Your Company Succeed,” Inc., February 2014; Laura Garnett, “3 Questions That Will Motivate Your Employees,” Inc., February 2014; and Gene Marks, “Startup Perks Wal-Mart and Amazon Can Never Offer,” Entrepreneur, October 22, 2013.

PROGRESS ASSESSMENT

• Explain job-enrichment theory. • What procedures can firms implement to encourage open communication? • List examples of ways managers can improve motivation without raising paycheques. 420

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Personalizing Motivation

LO6

Managers cannot use one motivational formula for all employees. They have to get to know each worker personally and tailor the motivational effort to the individual. This is further complicated by the increase in global business and the fact that managers now work with employees from a variety of cultural backgrounds. Cultural differences also exist between generations raised in the same country. Let’s look at how managers personalize their strategies to appeal to employees around the globe and across generations.

Motivating Employees Around the Globe

Show how managers personalize motivation strategies to appeal to employees around the globe and across generations.

Different cultures experience motivational approaches differently; therefore, managers study and understand these cultural factors in designing a reward system. In a high-context culture, workers build personal relationships and develop group trust before focusing on tasks. In a low-context culture, workers often view relationship building as a waste of time that diverts attention from the task. Koreans, Thais, and Saudis tend to be high-context workers who may view their North American colleagues as insincere due to their need for data and quick decision making (low-context culture). Hershey solved a cross-cultural problem with a recognition program for its 21 000 employees in 17 countries, all of whom use a wide variety of languages and currencies. Globoforce Ltd. revamped and introduced a new rewards program for Hershey called SMILES that automatically adjusts for differences created by cultural preferences, tax laws, and even local standards of living. The points-based system allows for rewards to be redeemed for thousands of products and gift card options, depending on where the employee is based. The system allows for both managers and employees to send SMILES and in the program’s first week, almost 9 percent of the entire company was recognized for good work—some employees recognized for the very first time.32 Understanding motivation in global organizations and building effective global teams is still a new task for most companies. Developing group leaders who are culturally astute, flexible, and able to deal with ambiguity is a challenge businesses face in the twenty-first century. See the Reaching Beyond Our Borders box for more about managing culturally diverse employees.

Motivating Employees Across Generations33 Age is among the most frequently used demographic characteristic to determine the size and lifestyles of groups of individuals. The terms “cohort” and “generation” are often used interchangeably to refer to such groups. Determining the size of these groups is challenging as the year spans are widely debated.

There’s no magic formula to successfully motivating every worker. Each generation of employees has different attitudes about what is important to them in seeking a balance between a successful career and happy private life. What expectations do you have of your potential supervisor and company?

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Reaching Beyond OUR BORDERS Beyond Just Knowing Cross-Cultural Differences As companies today become more global and employees more diverse than ever before, managers are well aware of their need to develop cross-cultural competencies. This means not only understanding different languages, but also understanding different food choices, customs, how people want to be addressed, how much space should be between people, and particularly, how employees expect to be managed. Many companies do a respectable job in developing cultural intelligence in managers before they move to different global assignments. For example, IBM works closely with leaders in business, government, academia, and community organizations before entering a new market. Why then do seasoned managers, who appreciate diversity and are schooled in cross- cultural differences, often have problems motivating employees in their new global environment? According to Professor Andrew Molinsky of Brandeis University’s International Business School, the problems occur because of what he refers to as “cultural code-switching.” This problem appears when managers are aware of how they should approach and deal with global employees, but deep down they lack the ability to adapt their behaviour to the situation. When this happens, their behaviour seems inauthentic

to global employees, and therefore not effective. An example would be an American executive giving feedback to Japanese employees. The American’s natural style is to “tell-it-like-it-is,” but Japanese workers expect a much more indirect approach. That may be difficult for the American to do. What managers need to develop is “global dexterity,” the ability to shift one’s own cultural behaviour in a way that’s effective and appropriate in the global setting. It always helps to know what to do, but it’s even more important to know how to do it.

Sources: Samuel J. Palmisano, “The Former CEO of IBM on Working at a Global Scale,” Fast Company, April 10, 2014; Dan Schawbel, “Andy Molinsky: How to Adapt to Cultural Changes in Foreign Countries,” Forbes, April 10, 2013; and Andrew Molinsky, Thomas H. Davenport, Bala Iyer, and Cathy Davidson, “Three Skills Every 21st-Century Manager Needs,” Harvard Business Review, February 2012.

Figure 11.9, for example, contrasts two Canadian sources. Environics Research Group, co-founded by Michael Adams, is a leading public opinion and market research firm. David Foot, Professor Emeritus of Economics at the University of Toronto, and founder of Footwork Consulting Inc., is a demographics expert. Foot explores how changing demographics is redefining society’s needs. While Adams and Foot are best-selling authors, each has a different perspective on the impact of demographics. “Demography is not destiny,” writes Adams. Contrast this with “Demographics explains about two-thirds of everything,” according to Foot. For the purposes of this discussion, the Environics terms will be used Members in each generation are linked through shared life experiences in their formative years—usually the first 10 years of life. The beliefs that you accept as a child affect how you view risk and challenge, authority, technology, relationships, and economics. Companies need to understand each generational cohort because they have unique workplace expectations, needs, and goals and as a result, the management styles and recruiting techniques required to successfully engage with them will vary.34 422

CHAPTER 11 Motivating Employees

■ FIGURE

11.9

TWO EXAMPLES OF GENERATIONAL COHORT TERMS Year Born (Environics Research Group)

Term

1946 to 1964

Baby Boomers Baby Boomers

1965 to 1976

1977 to 1994

1947 to 1966

Generation X Generation X (subset of Baby Boomers)

1961 to 1966

Baby Bust

1967 to 1979

Generation Y/ Millennials / Echo Boomers The Baby-Boom Echo

1995 to Present

Year Born (Footwork Consulting Inc.)

1980 to 1995

Generation Z The Millennium Busters

1996 to 2010

Sources: Based on “Generations Variables - 2013,” Environics Analytics, 2012, http://www.environicsanalytics.ca/docs/default-source/2014-variables/ generations-variables---2013.pdf; and Colonel James C. Taylor, “Whither march the cohorts: The validity of generation theory as a determinant of the sociocultural values of Canadian Forces personnel,” Canadian Forces College, June 2008, http://www.cfc.forces.gc.ca/259/281/280/taylor.pdf, 6.

Some generalities apply to these different groups. Baby Boomers were raised in families that experienced unprecedented economic prosperity, secure jobs, and optimism about the future. Gen Xers were raised in dual-career families with parents who focused on work. As children, some attended day care or became latchkey kids. (Latchkey kids are schoolaged children of working parents who must spend part of the day unsupervised at home.35) Their parents’ layoffs added to their insecurity about a lifelong job. Across Canada, there are 10 million Millennials (also known as Gen Y), and they are forecasted to represent 75 percent of the Canadian workforce by the year 2028.36 Millennials were raised by indulgent parents, and most do not remember a time without cell phones, computers, and electronic entertainment. Gen Z is also a big group; there are 2 billion worldwide, 7 million in Canada and 20 million in the United States.37 They are growing up in an era of global economic turmoil and climate change. According to social researcher Mark McCrindle, “They are the most connected, educated, and sophisticated generation in history. They don’t just represent the future, they are creating it.”38 The main constant in the lives of Gen Xers, Millennials, and Gen Zers is inconstancy. Consider the unprecedented change in the past 20 years in every area (i.e., economic, technological, scientific, social, and political). Gen Xers, Millennials, and Gen Zers expect change. It is the absence of change that they find questionable. How do generational differences among these groups affect motivation in the workplace? Boomer managers need to be flexible with their Gen X and Millennial employees, or they will lose them. Gen X employees need to use their enthusiasm for change and 423

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streamlining to their advantage. Although many are unwilling to pay the same price for success their parents and grandparents did, their concern about undue stress and long hours does not mean they lack ambition. They want economic security as much as older workers, but they have a different approach to achieving it. Rather than focusing on job security, Gen Xers tend to focus on career security instead and are willing to change jobs to find it. Many Gen Xers are now managers themselves, responsible for motivating other employees. In general, they are well equipped to motivate people. They © Pressmaster/Shutterstock usually understand that there is more to life than work, Future managers are influenced by their experiences as children. When in a management position, these and they think a big part of motivating is letting people experiences can even affect who they hire, fire, or promote. know you recognize that fact. Gen X managers tend to focus more on results than on hours in the workplace. They tend to be flexible and good at collaboration and consensus building. They often think in broader terms than their predecessors because the media has exposed them to problems around the world. They also have a big impact on their team members. They are more likely to give them the goals and outlines of the project and leave them alone to do their work. Perhaps the best asset of Gen X managers is their ability to give employees feedback, especially positive feedback. One reason might be that they expect more of it themselves. One new employee was frustrated because he had not received feedback from his boss since he was hired—two weeks earlier. In short, managers need to realize that young workers demand performance reviews and other forms of feedback more than the traditional one or two times a year. As Millennials entered the job market, they created a workplace very generationally diverse. As a group, Millennials tend to share a number of characteristics: they’re often impatient, skeptical, blunt, expressive, and image-driven. Like any other generation, they can transform their characteristics into unique skills. For example, Millennials tend to be adaptable, tech-savvy, able to grasp new concepts, practised at multitasking, efficient, and tolerant.39 They tend to place a higher value on work–life balance, expect their employers to adapt to them (not the other way around), and are more likely to rank fun and stimulation in their top-five ideal job requirements.40 Many Millennials are not rushing to find lifetime careers after graduation. They tend to “job surf” and aren’t opposed to living with their parents while they test out jobs. Some of this career postponement isn’t by choice as much as a result of the state of the economy. The recession hurt younger workers more deeply than other workers. Today, Millennials are less likely to be employed than Gen Xers or Boomers were at the same age. Downturns in the economy have increased competition for jobs as younger workers struggle to enter the job market, Boomers try to make up lost retirement savings, and Gen Xers fight to pay mortgages and raise families. The Gen Z and Gen Y Workplace Expectations Study, counter to previous research, found that Millennials now prioritize money over meaningful work because the economy and student loans have forced them to do so.41 424

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As Millennials assume more responsibility in the workplace, they sometimes must manage and lead others far older than themselves. How can young managers lead others who may have more experience than they do? Perhaps the three most important things to keep in mind are to be confident, to be open-minded, and to solicit feedback regularly.42 Just remember that asking for input and advice is different from asking for permission or guidance.43 As Gen Zers enter the workplace, they are likely © Cultura Limited/Getty Images RF to be more cautious and s ecurity-minded, but inspired to improve the world. Since they’ve seen the effects Each generation is motivated by different things. Companies need to provide mentoring, feedback, and of an economic downturn first-hand, they are more meaningful projects if they want to reach Gen Zers aware of troubling times. Given the young nature of and retain them.46 What does effective mentoring and this cohort (between 0 to 23 years of age when this feedback look like to you? chapter was written), research is not conclusive as Gen Zers are still developing. A study titled, Meet Generation Z: Forget everything you learned about Millennials, reported that 60 percent of Gen Zers want jobs that have a social impact, compared with 31 percent of Millennials. It called Gen Zers entrepreneurial (72 percent want to start their own businesses), community-oriented (26 percent already volunteer), and prudent (56 percent said they were savers, not spenders). Gen Z is also seen to be more tolerant than Millennials of racial, sexual, and generational diversity, and less likely to subscribe to traditional gender roles.44 The Gen Z and Gen Y Workplace Expectations Study found that Gen Z appears to be more entrepreneurial, loyal, open-minded, and less motivated by money than M illennials. (The latter could be that Gen Z has not experienced workforce challenges to the extent of the earlier cohort.) The study confirms that Canadian Gen Zers want their managers to engage them to do their best work by assigning meaningful projects, while secondly serving as mentors and providing regular feedback so that they have a better transition into the work force. Gen Z can also be defined by its potential loyalty to future employers. While Millennials expect to work for five companies in their lifetime, Gen Zers expect to work for fewer than four. In response, companies should stress the benefits of loyalty and longevity and reward those who serve longer and accomplish more.45 It is important for managers of all ages to be aware that employees of different generations communicate differently. The Traditionalists, the generation that © theartofphoto/123RF lived through the Great Depression and World War Gen Zers may be more entrepreneurial than Millennials II, prefer to communicate face-to-face. Their second due to the amount of information and people accessible at choice is by phone, but recordings often frustrate a younger age. Is there more pressure on this generation them. Boomers generally prefer to communicate in to succeed? What might success mean for Gen Zers? meetings or conference calls. Gen Xers generally 425

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prefer e-mail and will choose meetings only if there are no other options. Millennials most often use technology to communicate, particularly through social media.47 Gen Zers are starting to trend back toward face-to-face meetings and shy away from phonecalls.48 In every generational shift, the older generation tends to say the same thing about the new: “They break the rules.” The Traditionalists said it of the Baby Boomers. Boomers look at Gen Xers and say, “Why are they breaking the rules?” And now Gen Xers are looking at Millennials and Gen Zers and saying, “What’s wrong with these kids?” And you know that this will be the same for the next generation someday. One thing in business is likely to remain constant: much motivation will come from the job itself rather than from external punishments or rewards. Managers need to give workers what they require in order to do a good job: the right tools, the right information, and the right amount of co-operation. Motivation does not have to be difficult. It begins with acknowledging a job well done—and especially doing so in front of others. After all, as we said earlier, the best motivator is frequently a sincere “Thanks, I really appreciate what you’re doing.”

PROGRESS ASSESSMENT

• What is the difference between a high-context culture and a low-context culture? • Compare how motivation strategies may differ for Millennials versus Gen Zers. • Why is it important to adjust motivational styles to individual employees? • Are there any general principles of motivation that today’s managers should follow?

SUMMARY LO1

Explain Taylor’s theory of scientific management, and describe the Hawthorne studies and their significance to management. Human efficiency engineer Frederick Taylor was one of the first people to study management and has been called the father of scientific management. He conducted time-motion studies to learn the most efficient way of doing a job and then trained workers in those procedures. What led to the more human-based managerial styles? The greatest impact on motivation theory was generated by the Hawthorne studies in the late 1920s and early 1930s. In these studies, Elton Mayo found that human factors such as feelings of involvement and participation led to greater productivity gains than did physical changes in the workplace.

LO2

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Identify the levels of Maslow’s hierarchy of needs and apply them to employee motivation. Contrast this with the motivators and hygiene factors identified by Herzberg. Abraham Maslow studied basic human motivation and found that motivation was based on needs. He said that a person with an unfilled need would be motivated to satisfy it and that a satisfied need no longer served as motivation.

CHAPTER 11 Motivating Employees

What levels of need did Maslow identify? Starting at the bottom of Maslow’s hierarchy of needs and going to the top, the levels of need are physiological, safety, social, esteem, and self-actualization. How can managers use Maslow’s theory? Managers can recognize what unmet needs a person has and design work so that it satisfies those needs. What is the difference between Frederick Herzberg’s motivators and hygiene factors? Herzberg found that while some factors motivate workers (motivators), others cause job dissatisfaction if missing but are not motivators if present (hygiene or maintenance factors). What are the factors called motivators? The work itself, achievement, recognition, responsibility, growth, and advancement are motivators. What are the hygiene (maintenance) factors? Company policies, supervision, working conditions, interpersonal relations, and salary are examples of hygiene factors. LO3

Differentiate between McGregor’s Theory X and Theory Y. Douglas McGregor held that managers will have one of two opposing attitudes toward employees. They are called Theory X and Theory Y. What is Theory X? Theory X assumes that the average person dislikes work and will avoid it if possible. Therefore, people must be forced, controlled, and threatened with punishment to accomplish organizational goals. What is Theory Y? Theory Y makes entirely different assumptions about people. It assumes that people like working and will accept responsibility for achieving goals if rewarded for doing so.

LO4

Explain the key principles of goal-setting, expectancy, reinforcement, and equity theories. More modern motivation theories include goal-setting, expectancy, reinforcement, and equity theories. What is goal-setting theory? Goal-setting theory is based on the notion that setting ambitious but attainable goals will lead to high levels of motivation and performance if the goals are accepted, accompanied by feedback, and facilitated by organizational conditions. Management by objectives (MBO) is a system of goal setting and implementation. It includes a cycle of discussion, review, and evaluation by objectives among top and middle-level managers, supervisors, and employees. What are the key elements involved in expectancy theory? According to Victor Vroom’s expectancy theory, employee expectations can affect an individual’s motivation. Expectancy theory centres on three questions employees often ask about performance on the job: (1) Can I accomplish the task? (2) If I do accomplish it, what is my reward? and (3) Is the reward worth the effort? What are the variables in reinforcement theory? Positive reinforcers are rewards like praise, recognition, or pay raises that a worker might strive to receive after performing well. Negative reinforcers are punishments such as reprimands, pay cuts, layoffs, or firing that a worker might be expected to try to avoid.

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According to equity theory, employees try to maintain equity between inputs and outputs compared to other employees in similar positions. What happens when employees perceive that their rewards are not equitable? If employees perceive that they are under-rewarded, they will either reduce their effort or rationalize that it is not important. If they perceive that they are over-rewarded, they will either increase their effort to justify the higher reward in the future or rationalize by saying, “I’m worth it!” Inequity leads to lower productivity, reduced quality, increased absenteeism, and voluntary resignation. LO5

Show how managers put motivation theories into action through such strategies as job enrichment, open communication, and job recognition. Job enrichment describes efforts to make jobs more interesting. What characteristics of work affect motivation and performance? The job characteristics that influence motivation are skill variety, task identity, task significance, autonomy, and feedback. Name two forms of job enrichment that increase motivation. Job-enrichment strategies include job enlargement and job rotation. How does open communication improve employee motivation? Open communication helps both managers and employees understand the objectives and work together to achieve them. How can managers encourage open communication? Top managers can create an organizational culture that rewards listening, train supervisors and managers to listen, use effective questioning techniques, remove barriers to open communication, avoid vague and ambiguous communication, and actively make it easier for all to communicate. What are some job recognition techniques that managers can consider? Letting people know you appreciate their work is usually more powerful than giving a raise or bonus alone. Job recognition techniques can include noticing positive actions out loud, offering perks like Netflix memberships, and bestowing awards.

LO6

Show how managers personalize motivation strategies to appeal to employees around the globe and across generations. Managers cannot use one motivational formula for all employees. What is the difference between high-context and low-context cultures? In high-context cultures people build personal relationships and develop group trust before focusing on tasks. In low-context cultures, people often view relationship building as a waste of time that diverts attention from the task. How are Generation X managers likely to be different from their Baby Boomer predecessors? Baby Boomers tend to be willing to work long hours to build their careers and often expect their subordinates to do likewise. Gen Xers may strive for a more balanced lifestyle and are likely to focus on results rather than on how many hours their teams work. Gen Xers tend to be better than previous generations at working in teams and providing frequent feedback. They are not bound by traditions that may constrain those who have been with an organization for a long time and are willing to try new approaches to solving problems.

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What are some common characteristics of Millennials? Millennials tend to be adaptable, tech-savvy, able to grasp new concepts, practised at multi-tasking, efficient, and tolerant. They often place a higher value on work–life balance, expect their employers to adapt to them, and are more likely to rank fun and stimulation in their top five ideal job requirements. What will employers need to do to hire or engage with Gen Z? Employers will need to emphasize incentives for loyalty and training and development over money. Companies need to provide mentoring, feedback, and meaningful projects if they want to reach Gen Z and retain these employees.

KEY TERMS equity theory 413 expectancy theory 411 extrinsic reward 399 goal-setting theory 410 Hawthorne effect 403 hygiene (maintenance) factors 405

intrinsic reward 399 job enlargement 415 job enrichment 414 job rotation 415 management by objectives (MBO) 410 Maslow’s hierarchy of needs 403

motivation 398 motivators 405 principle of motion economy 401 reinforcement theory 412 scientific management 401 time-motion studies 401

CAREER EXPLORATION If you are interested in pursuing a career that involves motivating others, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Coach—teaches amateur or professional athletes the skills they need to succeed at their sport.

∙ Elementary, middle, and high school principal— manages all school operations, including daily school activities; coordinates curricula; oversees teachers and other school staff; and provides a safe and productive learning environment for students. ∙ Sales manager—directs organizations’ sales teams, sets sales goals, analyzes data, and develops training programs for organizations’ sales representatives.

CRITICAL THINKING 1. This text introduced you to the theory of scien-

tific management. What do you think are problems that would arise as a result of breaking jobs into a series of discrete steps and treating people as cogs in a wheel? How can you motivate employees if this is how they are managed? 2. Your job right now is to finish reading this

chapter. How strongly would you be motivated

to do that if you were sweating in a room at 40 degrees Celsius? Imagine your roommate has turned on the air-conditioning. Once you are more comfortable, are you more likely to read? Look at Maslow’s hierarchy of needs to see what need would be motivating you at both times. Now recall a situation in your home, school, or work life in which you were

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human needs and human values.49 Further investigate this theory. How does this contrast with scientific management? What are advantages and disadvantages for employers and employees?

feeling particularly motivated to do something. Which of the needs identified by Maslow motivated you then? 3. Humanistic management is an approach

to management theory based on the idea of

DEVELOPING CAREER SKILLS Key: Team

Analytic

Communication

pay was not a motivator. If you were paid to get better grades, would you be motivated to study harder? In your employment experiences, have you ever worked harder to obtain a raise or as a result of receiving a raise? Do you agree with Herzberg?

1. Talk with several of your friends about the sub-

ject of motivation. What motivates them to work hard or not work hard on projects in teams? How important is self-motivation to them? 2. Speak to a manager in the workplace. Find

out what this manager does to motivate his or her direct reports. 3. Think of all of the groups with which you

have been associated over the years—sports groups, friendship groups, and so on—and try to recall how the leaders of those groups motivated the group to action. What motivational tools were used and to what effect? Discuss your answers in class.

4. Partner with two of your classmates and dis-

Technology

5. Partner with two of your classmates and

discuss the recent managerial idea to let employees work in self-managed teams. There is no reason why such teams could not be formed in schools as well as businesses. Discuss the benefits and drawbacks of dividing your class into self-managed teams for the purpose of studying, completing assignments, and so forth.

cuss motivation. Herzberg concluded that

ANALYZING MANAGEMENT DECISIONS Motivation Tips for Tough Times With company cutbacks, layoffs, and economic uncertainty weighing heavily on everybody, it is no wonder some employees are dragging their feet into work. But according to Steven Stein, Toronto-based psychologist and entrepreneur, there are ways to lift and maintain motivation, even in tough times. In Make Your Workplace Great: The 7 Keys to an Emotionally Intelligent Organization, he offers these valuable tips for motivating employees.

∙ Offer ongoing feedback. No time is better than now to open up lines of communication with your employees, if you have not already. Whether you offer feedback formally or informally, it is important to regularly let your staff know how they are doing, where they are performing well, and where there is room for improvement.

∙ What motivates your workers. You may be surprised to discover how small changes, such as those in job design or reporting systems, can motivate certain people. It might not take much,

∙ Emphasize personal accountability. Self- management can be highly motivating, and if you are short-staffed, it can make a lot of sense, too. Most people will work much harder for their own

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but the only way to discover what your employees want, and how they react to change, is to ask them.

CHAPTER 11 Motivating Employees

sense of accomplishment than they will because they were told to do something. ∙ Involve everyone in decision making. By involving workers in certain company decisions, especially those that involve them directly, you are much more likely to get support for your initiatives. And you may even get some creative input along the way as your front-line staff might have knowledge about the impact of certain decisions that you may not be aware of.

∙ Be flexible. Time is an important commodity for people today, especially if they are taking on more work than usual. By giving your employees the opportunity to juggle their time around critical personal or family events and responsibilities, you will increase their motivation. ∙ Celebrate employee and company success. It is important to stop and recognize successes, whether individual, team, or organizational. Let everybody see that hard work is recognized and worth carrying out.

Source: “Business Owners Try to Motivate Employees,”The Wall Street Journal, January 14, 2012, http://online.wsj.com/article/SB100014240527487043620 04575000911063526360.html; and“Great Ideas: Motivation Tips for Tough Times,”PROFIT, June 4, 2009, www.canadianbusiness.com/entrepreneur/human_ resources/article.jsp?content=20090603_115416_7820.

Discussion Questions 1. What other suggestions might you add to

this list? 2. If you are employed now (or have been in

the past), how has your supervisor motivated you? If you have never been employed before, how might a supervisor motivate you?

3. Apply each one of these tips to group work.

How might you implement these suggestions so that group members, including yourself, are motivated to do well in the assigned work?

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Human Resource Management: Finding and Keeping the Best Employees LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Explain the importance of human resource management as a strategic contributor to organizational success, and summarize the five steps in human resource planning.

LO2 Describe methods that companies use to recruit new employees, and explain some of the issues that make recruitment challenging.

LO3 Outline the six steps in selecting employees, and illustrate the use of various types of employee training and development methods.

LO4 Trace the six steps in appraising employee performance, and summarize the objectives of employee compensation programs.

LO5 Describe the ways in which employees can move through a company: promotion, reassignment, termination, and retirement.

LO6 Illustrate the effects of legislation on human resource management.

P R O F I L E GETTING TO KNOW: LINDA HASENFRATZ, CEO, Linamar Corporation

432

In today’s business world, the prospect of lifetime

to require a skilled and flexible workforce of people.

employment at a single company is becoming

Workers in turn may require specialized training and

increasingly unlikely. Thanks to a sluggish economy

flexible schedules to help balance work and life.

and never-ending technological innovation, workers

Linamar Corporation, Canada’s second-largest

no longer have much of a chance to stay in one place

auto-parts maker, is a diversified global manufac-

until their retirement. As staff sizes rise and fall with

turing company of highly engineered products.

the global marketplace, many companies continue

With more than 25 700 employees in 17 countries,

CHAPTER 12 Human Resource Management: Finding and Keeping the Best Employees

company’s 59 manufacturing locations, 6 R&D centres, and 21 sales offices around the world. Linamar’s human resource practices include a company goal to have equivalent representation to its overall demographic at every level. With this in mind, the percentage of women in the company should be reflected by the same percentage at every level of management. In another example, a five-year management-training program develops promising employees to become plant general managers. After a rigorous screening process, trainees spend two years rotating through different departments, then another three years in mid-level management positions that expose them to materials, accounting, and quality management. The program aims to mirror an entrepreneur’s experience. Says Hasenfratz, “As an entrepreneur, you initially have to do everything: You are the salesperson, the person running the machine, the delivery person. As a consequence, you become very familiar with the company.” Courtesy Linamar Corporation. Used with permission.

Hasenfratz’s focus on innovation, financial performance, and her ability to find opportunities

Linamar generated sales of $6 billion in 2016 with a

during a recession contributed to her recognition

goal to grow to $20 billion by 2030.

as the first female EY Entrepreneur of the Year.

Founded by Frank Hasenfratz in the 1960s,

“I’m a big believer in the competitiveness of our

daughter Linda Hasenfratz became the CEO in

manufacturers,” says Hasenfratz. “I think we have

2002 after rotating through various positions

an incredible employee base in Canada—skilled

throughout the company. She started on the shop

trades, engineers, machinists, metallurgists, tech-

floor running a machine and learning the business

nologists, quality assurance—great technical peo-

from the bottom up. Hasenfratz then worked in dif-

ple who have the ability to innovate, which is the

ferent plants and in different areas, such as engi-

key to competitiveness.”

neering, accounting, estimating, quality assurance,

In this chapter, you will learn how businesses

and factory management. This was followed by five

of all sizes recruit, manage, and make the most of

years as an executive. Under her leadership, the

their employees. Training and development pro-

company has recorded double-digit annual growth.

grams like the ones at Linamar are just one import-

Such growth requires skilled workers to run the

ant area of human resource management.

Sources: Greg Keenan, “Linamar Corp. to create 1,500 jobs at new innovation, research centre,” The Globe and Mail, August 21, 2018, sec. B, p. 1; “Linamar to Acquire the MacDon Group of Companies, a Global Harvesting Specialist, to Further Diversity & Grow,” Linamar Corp., December 14, 2017, http://www.linamar.com/sites/default/files/press/MacDon%20-%20Press%20Release%20-%2014dec17.pdf; Trevor Cole, “Auto-parts magnate Linda Hasenfratz on NAFTA, Trump and sexism in the boardroom,” ROB Magazine, July 6, 2017, https://www.theglobeandmail.com/report-on-business/ rob-magazine/auto-parts-magnate-linda-hasenfratz-on-nafta-trump-and-sexism-in-theboardroom/article35509156/; “Linamar Delivers Record 2014 Sales & Earnings on Nearly 50% Earnings Growth,” Linamar Corp., 4 March 2015, http://www.linamar.com/sites/default/files/q4_2014_press_release. pdf; Joanna Pachner, “A Second-Generation Success Story: Linda Hasenfratz at Linamar,” PROFITguide.com, January 15, 2015, http://www.profitguide. com/manage-grow/leadership/a-second-generation-success-story-linda-hasenfratz-at-linamar-73054/3; Mary Teresa Bitti, “Linamar chief Linda Hasenfratz continues to prove she belongs at the top,” Financial Post, December 15, 2014, http://business.financialpost.com/2014/12/15/linamar-chief-lindahasenfratz-continues-to-prove-she-belongs-at-the-top/; and Joanna Pachner, “Linda Hasenfratz’s bet on auto manufacturing is paying off—big time,” Canadian Business, November 27, 2014, http://www.canadianbusiness.com/lists-and-rankings/richest-people/linda-hasenfratz-linamar-ceo/.

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LO1

Explain the importance of human resource management as a strategic contributor to organizational success, and summarize the five steps in human resource planning. human resource management (HRM) The process of determining human resource needs and then recruiting, selecting, developing, motivating, evaluating, compensating, and scheduling employees to achieve organizational goals.

Working with People Is Just the Beginning Students often say they want to go into human resource management because they want to “work with people.” Human resource managers do work with people, but they are also deeply involved in planning, record keeping, and other administrative duties. This chapter will discuss what else human resource management is all about. Human resource management (HRM) is the process of determining human resource needs and then recruiting, selecting, developing, motivating, evaluating, compensating, and scheduling employees to achieve organizational goals (see Figure 12.1). For many years, human resource management was called “personnel” and involved clerical functions such as screening applications, keeping records, processing the payroll, and finding new employees when necessary. The roles and responsibilities of HRM have evolved primarily because of two key factors: (1) organizations’ recognition of employees as their ultimate resource and (2) changes in laws that rewrote many traditional practices. Let’s explore both.

Developing the Ultimate Resource One reason the role of human resource management has grown is that the shift from traditional manufacturing industries to service and high-tech manufacturing industries requires businesses to hire workers with highly technical job skills. This shift means that many workers must be retrained for new, more challenging jobs. People truly are the ultimate resource. They develop the ideas that eventually become the products that satisfy consumers’ wants and needs. Take away their creative minds and leading firms such as Linamar, Cirque du Soleil, Apple, Google, and Disney would be nothing. In the past, human resources were plentiful, so there was little need to nurture and develop them. If you needed qualified people, you simply hired them. If they did not work out, you fired them and found others. Most firms assigned the job of recruiting, selecting, training, evaluating, compensating, motivating, and, yes, firing people to the functional departments that employed them, like accounting and marketing. Today, the job of human resource management has taken on an increased role in the firm since qualified employees are much scarcer due to an increase in the number of jobs that require advanced or specialized training. This shortage of qualified workers makes recruiting and retaining people more important and more difficult.1 In fact, the human resource function has become so important that it is no longer the responsibility of just one department; it is a responsibility of all managers. What are some human resource challenges all managers face? We’ll outline a few next.

Human Resource Challenges Many of the changes that have had the most dramatic impact on business are the changes in the labour force. The ability to compete in global markets depends on new ideas, new products and services, and new levels of productivity—in other words, on people with good ideas. These are some of the challenges and opportunities in human resources (HR):2 ∙ Uncertainty in global politics and increased attention on hiring immigrants. ∙ Technology, such as talent networks, crowdsourcing, and internal social networks. 434

CHAPTER 12 Human Resource Management: Finding and Keeping the Best Employees

■ FIGURE

12.1

HUMAN RESOURCE MANAGEMENT (HRM) As this figure shows, HRM is more than hiring and firing personnel. All activities are designed to achieve organizational goals within the laws that affect human resource management. (Note that human resource management includes motivation, as discussed in Chapter 11, and employee–management relations, which will be discussed in Chapter 13.)

Legal Environment

Career management

Human resource management (HRM) Recruitment

Employee – management relations (Chapter 13)

Selection Organizational Goals Training and development

Scheduling

Compensation and benefits

Motivation (Chapter 11) Evaluation

∙ Multigenerational workforce where older Millennials and Gen Xers hold management positions, while Gen Zers are entering the workforce and many Baby Boomers are delaying retirement (discussed in more detail later in the chapter). ∙ Shortages of trained workers in growth areas such as computer technology, biotechnology, robotics, green technology, and the sciences. ∙ Large numbers of skilled and unskilled workers from declining industries, such as steel and automobiles, who are unemployed or underemployed and need retraining. Underemployed workers are those who have more skills or knowledge than their current jobs require or those with part-time jobs who want to work full-time. 435

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∙ A growing percentage of new workers who are undereducated and unprepared for jobs in the contemporary business environment. ∙ A shortage of workers in skilled trades due to the retirement of aging Baby Boomers. ∙ An increasing number of both single-parent and two-income families, resulting in a demand for job sharing, parental leave, and special career advancement programs for women. © Pedro Castellano/Getty Images RF

Firms face a shortage of workers skilled in areas such as sustainable engineering and the development of clean energy sources like these solar panels. What other job markets do you think will grow as companies focus more on environmentally friendly policies? Which ones appeal to you?

∙ A shift in employee attitudes toward work. Leisure time has become a much higher priority, as have flextime and a shorter workweek. ∙ An increased demand for temporary and part-time workers. ∙ A challenge from overseas labour pools whose members work for lower wages and are subject to fewer laws and regulations than Canadian workers. This results in many jobs being outsourced overseas.

∙ An increased demand for benefits tailored to the individual yet cost-effective to the company. ∙ Growing concerns over health care, elder care, child care, workplace harassment, and opportunities for people with disabilities. ∙ A decreased sense of employee loyalty, which increases employee turnover and the cost of replacing lost workers. ∙ Implementing human resource information systems (e.g., technology that helps manage HR activities such as payroll, benefits, training, recruiting, and so forth). Given the issues mentioned, you can see why HRM has taken a central place in management thinking. However, significant changes in laws covering areas such as hiring, safety, unionization, and equal pay have also had a major influence. We will consider laws affecting HRM near the end of this chapter.

Determining a Firm’s Human Resource Needs All management, including HRM, begins with planning. The five steps in the human resource planning process are: 1. Preparing a human resource inventory of the organization’s employees. This inven-

job analysis

A study of what is done by employees who hold various job titles. 436

tory should include ages, names, education, capabilities, training, specialized skills, and other relevant information (e.g., such as languages spoken). It reveals whether the labour force is technically up to date and thoroughly trained. 2. Preparing a job analysis. A job analysis is a study of what is done by employees who

hold various job titles. It is necessary to recruit and train employees with the necessary

CHAPTER 12 Human Resource Management: Finding and Keeping the Best Employees

■ FIGURE

12.2

JOB ANALYSIS A job analysis yields two important statements: job descriptions and job specifications. Here you have a job description and job specifications for a sales representative position.

Job Analysis Observe current sales representatives doing the job. Discuss job with sales managers. Have current sales representatives keep a diary of their activities.

Job Description

Job Specifications

(about the job)

Primary objective is to sell the company’s products to stores in Territory D. Duties include servicing accounts and maintaining positive relationships with clients. Responsibilities include: • introducing the new products to store managers in the area • helping the store managers estimate the volume to order

(about the person)

Characteristics of the ideal person qualifying for this job include: • bilingual • self-motivated • positive attitude • strong written and communication skills • have a valid driver’s licence

• negotiating prime shelf space

• two years of sales experience

• explaining sales promotion activities to store managers

• a diploma or degree in Business

• stocking and maintaining shelves in stores that wish such service

skills to do the job. The results of job analysis are two written statements: job descriptions and job specifications. A job description specifies the objectives of the job, the type of work to be done, the responsibilities and duties, the working conditions, and the relationship of the job to other functions. Job specifications are a written summary of the minimum qualifications (e.g., education and skills) required of workers to do a particular job. In short, job descriptions are statements about the job, whereas job specifications are statements about the person who does the job. A PWC report highlights that the hardest skills to find are those that can’t be performed by machines. Ranked in order of importance of skill, they are problem solving, adaptability, leadership, creativity and innovation, and emotional intelligence.3 If you do not have these skills, how can you develop them and demonstrate them in the next few years? See Figure 12.2 for a hypothetical job description and job specifications. 3. Assessing future human resource demand. Because technology changes rapidly, effec-

tive human resource managers are proactive; that is, they forecast the organization’s requirements and train people ahead of time or ensure trained people are available when needed.4

job description

A summary of the objectives of a job, the type of work to be done, the responsibilities and duties, the working conditions, and the relationship of the job to other functions.

job specifications

A written summary of the minimum qualifications required of workers to do a particular job.

4. Assessing future human resource supply. The labour force is constantly shifting: get-

ting older, becoming more technically oriented, and becoming more diverse. Some workers will be scarcer in the future, like biomedical engineers and robotic repair workers, and others will be oversupplied, like assembly-line workers. 437

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5. Establishing a strategic plan. The plan must address recruiting, selecting, training,

developing, appraising, compensating, and scheduling the labour force.5 Because the first four steps lead up to this one, we’ll focus on them in the rest of the chapter.

Some companies use advanced technology to perform the human resource planning process more efficiently. HRIS (Human Resource Information System) is software that uses multiple tools and processes to manage an organization’s employees and databases. HRIS (such as Salesforce, IBM Kenexa, and Sage People) helps businesses of all sizes perform basic HR functions ranging from recruitment to retirement, For example, IBM manages its global workforce of about 100 000 employees and 100 000 subcontractors with a database that matches employee skills, experiences, schedules, and references with jobs available. If a client in Nova Scotia has a month-long project requiring a consultant who can speak English and French, has an advanced degree in engineering, and has experience with Linux programming, IBM can find the best-suited consultant available and put him or her in touch with the client.

LO2

Describe methods that companies use to recruit new employees, and explain some of the issues that make recruitment challenging. recruitment

The set of activities used to obtain a sufficient number of the right people at the right time.

Recruiting Employees from a Diverse Population Recruitment is the set of activities for obtaining the right number of qualified people at the right time. Its purpose is to select those who best meet the needs of the organization. You might think a continuous flow of new people into the workforce makes recruiting easy. On the contrary, it has become very challenging. In fact, 45 percent of CEOs surveyed say that attracting and retaining talent is their biggest challenge.6 Here are several reasons why: ∙ Some organizations have policies that demand promotions from within, operate under collective labour agreements (to be discussed in Chapter 13), or offer low wages, which makes recruiting and keeping employees difficult or subject to outside influence and restrictions.7 ∙ There are legal guidelines that surround hiring practices. The Canadian Human Rights Act requires that employers provide equal employment opportunities. For example, a human rights complaint could be made if an employer said that he would not hire a woman or a visible minority for a particular job, regardless of that person’s competency. The Canadian Human Rights Act protects those who work for federally regulated organizations or service providers (e.g., chartered banks and airlines). Other employees are protected by provincial or territorial jurisdiction. ∙ An emphasis on corporate culture, teamwork, and participative management makes it important to hire people who not only are skilled but also fit in with the culture and leadership style of the organization. For example, in order to find out if its new hires fit the company culture, VinoPRO has its newbies play a game to see who makes the most sales. How the employees react (e.g., excitement, fear, or all-out aggression) will determine whether their new bosses believe they will thrive or not.8 ∙ Sometimes people with the necessary skills are not available; consequently, workers must be hired and then trained internally.

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Human resource managers turn to many sources for assistance (see Figure 12.3). Internal sources include employees who are already within the firm (and may be transferred or promoted) and employees who can recommend others to hire. For example, Montreal, Quebec-based accounting firm Richter LLP offers referral bonuses up to $4,000 to employees when they successfully recruit a new candidate.9 Using internal sources is less expensive than recruiting from outside the company and it helps maintain employee morale. Review the Making Ethical Decisions box for a dilemma that can apply to hiring from within. Using internal sources is less expensive than recruiting from outside and helps maintain employee morale. Managers in the Government of Canada start the recruiting process by looking inside the federal

■ FIGURE

Human resource managers today have the opportunity to recruit people from a wide range of cultural and ethnic backgrounds. What are some of the advantages of a diverse workforce?

12.3

SOURCES OF RECRUITMENT Internal sources are often given first consideration. So it is useful to get a recommendation from a current employee of the firm for which you want to work. School placement offices are also an important source. Be sure to learn about these services early so that you can plan an employment strategy throughout your academic career. External Sources Private employment agencies Public employment agencies Personal applications Management consultants New graduates Former employees Part-time applicants Competing organizations Union organizations Advertisem*nts Temporary help services Trade schools School placement offices Newspaper ads Trade associations Business associates School professors Internet Job fairs Co-operative education internships Social media

Human Resource Department

Internal Sources Transfers Promotions Employee recommendations Retrained employees Department reorganizations

Selection

Hiring

Orientation and Training

439

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Making ETHICAL DECISIONS Recruiting Employees from Competitors As the human resource director for Technocrat, Inc., it is your job to recruit the best employees. Your most recent human resource inventory indicates that Technocrat currently has an abundance of qualified designers and that several lower-level workers will soon be eligible for promotions to designer positions. Despite the surplus of qualified designers within the firm, you are considering recruiting a designer who is now

with a major competitor. Your thinking is that the new employee will be a source of information about the competition’s new products. What are your ethical considerations in this case? Will you lure the employee away from the competition even though you have no need for a designer? What will be the consequences of your decision?

service to find individuals with the skill set and experience that they need. (An exception is for Post Secondary Recruitment.) It is easier to hire within because most federal public servants understand the culture, the environment, and the expectations of departments.10 However, it isn’t always possible to find qualified workers within the company, so human resource managers also use external sources. Examples include advertisem*nts, public and private employment agencies, college placement bureaus, management consultants, online sites, professional organizations, referrals, online and walk-in applications, and social media. Rohit Gupta, president of Edmonton, Alberta-based Rohit Group of Companies says the key to the company’s success is the talented people it has managed to attract by utilizing a wide range of recruitment sources that include post-secondary institutions, industry associations, and online tools. “We know talented people like to be around other talented people,” he says. “So retention is quite easy when you make sure you are bringing in the best people.”11 Popular recruiting Internet sites include Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed. Passion Inc. was founded by brothers Mark and Nathan Laurie from their student residence with $500 in savings and the dream of graduating from Dalhousie University debt free.12 Have you visited Jobpostings.ca, one of Passion’s divisions? Resources include Career Guides and Career Planning. You can also find information on companies and salaries. At L’Oréal Canada, social media has been particularly successful when it comes to attracting students. “Everyone is digital nowadays,” says VP Catherine Bédard, “but at L’Oréal we’re going much further © Universum than just using LinkedIn—many of our employees are There are seven career types. To learn which one you are attracted from YouTube or Instagram. When we’re and suggested employers based on career type, complete at job fairs on campus, you have so many students the From Learning to Work Survey at careertest. coming to you with a C.V. and asking you to employ universumglobal.com. them. Instead of taking their résumé, we ask them to 440

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Spotlight On SMALL BUSINESS Competing Through Social Media Most small business owners would agree that attracting top-quality employees is one of their major challenges. Unfortunately, competing for the cream of the crop is difficult when you can’t afford expensive recruiters or pay gold-plated benefits to lure qualified workers. Despite these hurdles, small businesses can compete through social media. Social media play a crucial role in the hiring process today. More than 94 percent of recruiters say they use LinkedIn to recruit new candidates and 70 percent of job seekers say they use social media to find jobs. Talented Millennials usually value professional development more than employer loyalty, so it is important that businesses make their hiring policies and work culture attractive to draw the best talents. For example, Google makes its workplace culture known by talking about its fun atmosphere and its interesting perks such

as free gourmet food, sports complexes, on-site laundry, and so on. Of course, it’s always better to have someone else sing your praises. Businesses should encourage their current employees to talk on social media about why they love working for the company. It helps give employees an incentive to bring in new talent. Some companies, such as the Business Development Bank of Canada, offer employees a referral fee for recommendations. Here’s how managers can use social media networks to target potential hires: • LinkedIn—It can be expensive to post jobs on LinkedIn. If cost is a problem, there is a cheaper solution. Join groups that have potential candidates and be active in group discussions. Once you build a goodsized network, post your openings on the status box. • Facebook—Use Facebook Directory to search for relevant users, pages, groups, and applications. You can post jobs for free in Facebook Marketplace. Obviously, make sure your business has an active Facebook page. • Twitter—Tweet about your job opening. Expand your network by building relationships with candidates and clients on the site. Make sure your tweet can be found by using the most relevant hashtags. Many recruiters use #NAJ (need a job?). Look at the posts, tweets, or recommendations of candidates to get an idea of how well they might fit your organization. Using social media in the hiring process is one of the most cost-effective ways of attracting talent to a company. Have you found a job through social media?

Sources: “Canada’s Top Employers (2017),” The Globe and Mail and Mediacorp Canada Inc., Special Annual Edition insert, p. 6; Whitney Headen, “Social Recruiting: How I Used Social Media To Build A Business From Scratch,” Forbes, July 24, 2017; Monty Majeed, “How to Use Social Media for Hiring,” Your Story, September 2016; and David Port, “Staffing Made Easy (or Easier),” Entrepreneur, February 2016.

go on YouTube and post a clip explaining why they’re such a good fit for L’Oréal and why they’re interested in working for us.” It’s a win–win strategy—not only do the videos let the L’Oréal team see the creativity and eligibility of a student in a short clip, but as more videos make it online, the company’s employer branding improves.13 Recruiting qualified workers may be particularly difficult for small businesses with few staff members and less-than-competitive compensation to attract external sources. 441

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Online sites like LinkedIn have helped firms by attracting millions of visitors per day. The Spotlight on Small Business box offers suggestions for how businesses can use social media for hiring.

PROGRESS ASSESSMENT

• What is human resource management? • What are the five steps in human resource planning? • What factors make it difficult to recruit qualified employees? • State five sources of internal and external recruitment. LO3

Outline the six steps in selecting employees, and illustrate the use of various types of employee training and development methods. selection

The process of gathering information and deciding who should be hired, under legal guidelines, to serve the best interests of the individual and the organization.

Selecting Employees Who Will Be Productive Selection is the process of gathering information and deciding who should be hired, under legal guidelines, to serve the best interests of the individual and the organization. Selecting and training employees are extremely expensive processes in some firms. Just think of what is involved: advertising or recruiting agency fees, interview time, medical exams, training costs, unproductive time spent learning the job, possible travel and moving expenses, and more. It can cost 75 percent of the employee’s annual salary to recruit, process, and train even an entry-level worker, and more than 200 percent a year’s salary for a top manager.14 A typical selection process involves six steps: 1. Obtaining complete application forms. Although employment laws limit the kinds of

questions that can appear, applications help reveal the applicant’s educational background, work experience, career objectives, and other qualifications directly related to the job. 2. Conducting initial and follow-up interviews. A staff member from the human resource

department often screens applicants in a first interview. If the interviewer considers the applicant a potential employee, the manager who will supervise the new employee may interview the applicant as well. It is important that managers prepare adequately for the interview to avoid selection decisions they may regret. No matter how innocent the intention, missteps such as asking about pregnancy or child care could later be evidence if that applicant files discrimination charges. In the past, an employer might have asked if the applicant had children to determine whether the applicant could work shift work or on week© Wavebreakmedia Ltd/Thinkstock ends. Today, the applicant would be asked if workDepending on the job, it is not uncommon to be involved ing shift work or on weekends would be a problem in several interviews, one or more of which may be a panel (without asking about children), as this is a relevant interview. How would you prepare differently if this was the case? job-related question. 442

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Adapting to CHANGE Let’s Face It What you say online goes into the virtual world and stays there. Your social media and digital footprint is a critical part of your public identity. The online personality you project reflects to potential employers who you really are. Sixty percent of employers say they use

social media to screen prospective hires and evaluate a person’s fit with a company’s culture. What this means to you is that your social media footprint could be a selling tool in your job search—or could end up costing you a job. The growing use of social media background checks has created a new set of candidate disqualifiers. Forty-six percent of employers say they’ve eliminated candidates because of provocative or inappropriate photographs, video, or information; 43 percent because of information about drinking or drug use; and 33 percent because of discriminatory comments about race, religion, and gender. Do you think that it is unethical that potential employers access your social media? It’s best to use social media to your advantage. Many companies admit to hiring a candidate because of the professional image they conveyed on social media. If you have reservations about posting something, the best advice is, don’t.

Sources: Roy Maurer, “Know before You Hire,” Society for Human Resource Management, January 25, 2017; and “How to Use Social Media for Applicant Screening,” Society for Human Resource Management, August 16, 2016.

3. Giving employment tests. Organizations often use tests to measure basic competency

in specific job skills like welding or firefighting, and to help evaluate applicants’ personalities and interests. There are many employment test software options available, such as Wonscore and Pairin Pre-employment Test Selection. The tests should always be directly related to the job. Employment tests have been legally challenged as potential means of discrimination. Some companies test potential employees in assessment centres where they perform actual job tasks. Such testing can make the selection process more efficient and will generally satisfy legal requirements. 4. Conducting background investigations. Most organizations now investigate a candi-

date’s work record, school record, credit history, and references more carefully than in the past to help identify those most likely to succeed. It is simply too costly to hire, train, and motivate people only to lose them and have to start the process over. Services such as BackCheck allow prospective employers to not only conduct speedy background checks of criminal records, driving records, and credit histories, but also to verify work experience and professional and educational credentials.15 Statistics reveal that up to 50 percent of resumés contain one or more major misrepresentations so this is a critical step in the selection process.16 The Adapting to Change box discusses how companies use social media to screen job applicants and weed out those with undesirable traits. 443

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5. Obtaining results from physical exams.17 There are obvious benefits to hiring peo-

ple who are physically and mentally healthy. Testing is sometimes requested from job applicants. An estimated 10 percent of Canadian worksites having drug testing programs where drug testing is primarily conducted to ensure a safe work environment. Yet, drug and alcohol testing is controversial. According to Ryan Anderson, an employment lawyer with Mathews Dinsdale & Clark LLP, “Testing for drug and alcohol use in the workplace may reduce risks in some circ*mstances, it also raises concerns regarding privacy, unlawful discrimination and the reasonable exercise of management rights.” 6. Establishing trial (probationary) periods. Often, an organization will hire an employee

conditionally to let the person prove his or her value on the job. After a specified probationary period (perhaps three months or a year), the firm can either permanently hire or discharge that employee on the basis of supervisors’ evaluations.18 Some businesses include co-workers’ evaluations as well. Whole Foods’ new store employees must win the approval of two-thirds of their departmental co-workers in order to stay on past their 90-day trial period.19 Although such systems make it easier to fire inefficient or problem employees, they do not eliminate the high cost of turnover. The selection process is often long and difficult, but it is worth the effort to select new employees carefully because of the high cost of replacing them. Care helps ensure that new employees meet all requirements, including communication skills, education, technical skills, experience, personality, and health. Finally, where a company has a collective labour agreement (a union contract with its employees) the selection process must also follow the provisions of that agreement. This is discussed in more detail in the next chapter. contingent workers Workers who do not have regular, full-time employment.

Hiring Contingent Workers

A company with employment needs that vary—from hour to hour, day to day, week to week, and season to season, or project to project—may find it cost-effective to hire contingent workers. Contingent workers are workers who do not have regular, full-time employment. Such workers include part-time workers (according to Statistics Canada, this includes “employed persons who usually work less than 30 hours per week, at their main or only job”), temporary workers (workers paid by temporary employment agencies), seasonal workers, independent contractors, interns, co-op students, and freelancers. Clear Stream Energy Services in Sherwood Park, Alberta, relies heavily on contract workers, who make up 35 percent of its workforce, due to the nature of its projectbased work, said JoAnne Mather, Vice-President © Ken Gillespie Photography/Alamy of HR, Health and Safety and Environment. The Seasonal businesses depend on hiring contingent 2000-employee oilfields services company doesn’t workers to help them through the limited time they are know what projects it will be awarded from year to operational. What are the advantages and disadvantages year, so it has many contractors in its database it can of hiring contingent workers for employers? What are the call upon. “Some of the work is 20 days, some can be advantages and disadvantages for contingent workers? two months . . . and the only way to get those folks 444

CHAPTER 12 Human Resource Management: Finding and Keeping the Best Employees

is to engage them in a contract because you can’t offer them the traditional, long-term employment relationship,” she said. “The work is so variable so a contract situation is what works.”20 According to staffing company Randstad Canada, if you add up all the contingent workers, freelancers, independent contractors and consultants, you are talking about 20 to 30 percent of the Canadian workforce being “non-traditional workers” already.21 That percentage is only going higher as 85 percent of the companies surveyed by Randstad figure that they will increasingly move to an “agile workforce” over the next few years.22 Hiring contingent workers is so common today that some have called this a gig economy. A gig describes a single project or task for which a worker is hired, often through a digital marketplace, to work on demand. Some gigs are types of short-term jobs, and some workers look at gigs as self-employment options. When one gig is over, workers who need to earn a steady income must find another. Sometimes, that means juggling multiple jobs at once. There are two key reasons for the rise of the gig economy: (1) workers want diversity and flexibility in their roles and the ability to showcase their skills, and (2) employers have shifted from “I need to hire a person” to “I need to complete a task.” Companies may hire contingent workers when full-timers are on some type of leave (such as parental leave), when there is a peak demand for labour or products (like the holiday shopping season), or when quick service to customers is a priority. Companies also tend to hire more contingent workers in an uncertain economy, particularly when they are available and qualified, and when the jobs require minimal training. Contingent workers receive few benefits; they are rarely offered health insurance, vacation time, or company pensions. They also tend to earn less than permanent workers do. On the positive side, some on temporary assignments may be offered full-time employment. Managers see using temporary workers as a way of weeding out poor workers and finding good hires. Experts say temps are filling openings in an increasingly broad range of jobs, from unskilled manufacturing and distribution positions to middle management. Increasing numbers of contingent workers are educated professionals such as accountants, attorneys, and engineers. © Ian Allenden/Alamy RF Many companies include college and university Traditionally, unpaid internships have been a great way students in their contingent workforce plan. Working for young people to gain work experience. What are the with temporary staffing agencies, companies have easadvantages and disadvantages for both employees and employers? Under what conditions are unpaid internships ier access to workers who have already been screened. illegal in Canada? Is it ethical for companies to use unpaid Of course, temp agencies benefit students as well. Once interns if they know they will not have any jobs to offer the agencies have assessed the workers, their informaat the end of the internships or if the unpaid internships tion is entered into their databases. Then when students replace paid jobs? Why or why not? are coming back in town for vacations or whatever, 445

PART 4 Management of Human Resources

they can call the agency and ask them to put their names into the system for work assignments. There is no need to spend time searching for openings or running around town for interviews. In an era of rapid change and economic uncertainty, some contingent workers have even found that temping can be more secure than full-time employment.

PROGRESS ASSESSMENT

training and development

All attempts to improve productivity by increasing an employee’s ability to perform. Training focuses on shortterm skills, whereas development focuses on long-term abilities.

• What are the six steps in the selection process? • How can you use social media to your best advantage when searching for a job? • Who is considered a contingent worker, and why do companies hire such workers?

Training and Developing Employees for Optimum Performance

The term training and development includes all attempts to improve productivity by increasing an employee’s ability to perform. A well-designed training program often leads orientation to higher retention rates, increased productivity, and greater job satisfaction. Employers The activity that find that spending money on training is usually money well spent. Training focuses on introduces new employees to the short-term skills, whereas development focuses on long-term abilities. Both include three organization; to fellow steps: (1) assessing organization needs and employee skills to determine training needs; employees; to their (2) designing training activities to meet identified needs; and (3) evaluating the training’s immediate supervisors; and to the policies, effectiveness. As technology and other innovations change the workplace, companies must practices, values, and offer training programs that often are quite sophisticated. Some common training activities objectives of the firm. are employee orientation, on-the-job training, apprenticeships, off-the-job training, online training, vestibule training, and job simulation. Management development will be discussed in a separate section. Orientation is the activity that initiates new employees to the organization; to fellow employees; to their immediate supervisors; and to the policies, practices, values, and objectives of the firm. Orientation programs range from informal talks to formal activities that last a day or more and often include scheduled activities to various departments © M. Spencer Green/AP Images and required reading of company handbooks. At FedEx, time is money. That’s why the company spends six times For example, at online retailer Zappos, every more on employee training than the average firm. Does the added new employee must spend two weeks answerexpense pay off? You bet. FedEx enjoys a remarkably low 4 percent ing customer calls, two weeks learning in a employee turnover rate. Should other companies follow FedEx’s classroom, and a week shipping boxes in the financial commitment to training? Explain. company’s fulfillment centre.23 446

CHAPTER 12 Human Resource Management: Finding and Keeping the Best Employees

On-the-job training lets the employee learn by doing, or by watching others for a while and then imitating them, right at the workplace. Salespeople, for example, are often trained by watching experienced salespeople perform (often called shadowing). Naturally, this can be either quite effective or disastrous, depending on the skills and habits of the person being watched. On-the-job training is the easiest kind of training to implement when the job is relatively simple (such as clerking in a store) or repetitive (such as collecting refuse, cleaning carpets, or mowing lawns). More demanding or intricate jobs require a more Courtesy of LiUNA. Used with permission intense training effort. Technology makes cost-effective The Labourers’ International Union of North America (LiUNA) is the most progressive, aggressive, and fastest on-the-job training programs available 24 hours a day. growing union representing construction workers in all Online systems can monitor workers’ input and give sectors of construction, waste management workers, them instructions if they become confused about what show service workers, health-care workers, and to do next. manufacturing and building supply workers in Canada. In apprentice programs, a trainee works alongHere at the LiUNA Local 183 Training Centre, Asphalt side an experienced employee to master the skills Program, the class is building additional parking spaces at the Vaughan, Ontario training site. Have you considered and procedures of a craft. Some apprentice programs involve classroom training. Labour unions in skilled an apprentice program? crafts, such as bricklaying and plumbing, require a new worker to serve as an apprentice for several years to ensure excellence among their on-the-job training members as well as to limit entry to the union. Workers who successfully complete Training at the an apprenticeship earn the classification journeyman. As Baby Boomers retire from workplace that lets skilled trades such as pipefitting, welding, and carpentry, shortages of trained work- the employee learn by doing or by watching ers are developing. Skills Canada, a group that promotes careers in skilled trades and others for a while and technologies, estimates almost half of new jobs created in the next decade will be in then imitating them. skilled trades, but only 26 percent of young people are considering that type of career.24 apprentice Apprentice programs may be shortened to prepare people for skilled jobs in changing programs industries, such as auto repair and aircraft maintenance, that require increased knowl- Training programs during which a learner edge of computer technology. works alongside an Off-the-job training occurs away from the workplace and consists of internal or experienced employee external programs to develop any of a variety of skills or to foster personal development. to master the skills and Training is becoming more sophisticated as jobs become more sophisticated. Furthermore, procedures of a craft. training is expanding to include education (e.g., through a PhD, a postgraduate doctoral off-the-job training degree) and personal development. Subjects may include time management, stress man- Internal or external training programs away agement, health and wellness, physical education, nutrition, and even art and languages. from the workplace Online training demonstrates how technology is improving the efficiency of many that develop any off-the-job training programs. Online training’s key advantage is the ability to provide a of a variety of skills large number of employees with consistent content tailored to specific training needs at or foster personal convenient times. Both non-profit and profit-seeking businesses make extensive use of development. online training. Most colleges and universities offer a wide variety of online classes, some- online training times called distance learning. Technology giants like EMC and large manufacturers like Training programs in which employees Timken use the online training tool GlobeSmart to teach employees how to operate in complete classes via different cultures.25 the Internet. 447

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vestibule training

Training done in schools where employees are taught on equipment similar to that used on the job.

job simulation

The use of equipment that duplicates job conditions and tasks so that trainees can learn skills before attempting them on the job.

management development

The process of training and educating employees to become good managers, and then monitoring the progress of their managerial skills over time.

Vestibule training (or near-the-job training) is done in classrooms with equipment similar to that used on the job so that employees learn proper methods and safety procedures before assuming a specific job assignment. Computer and robotics training is often completed in a vestibule classroom. Job simulation is the use of equipment that duplicates job conditions and tasks so that trainees can learn skills before attempting them on the job. It differs from vestibule training in that it duplicates the exact combination of conditions that occur on the job. This is the kind of training given to astronauts, airline pilots, army tank operators, ship captains, and others who must learn difficult procedures off the job. Virtual reality devices are used in medical facilities where doctors in training practice their skills before working with real life patients.26

Management Development Managers often need special training. To be good communicators, they need to learn listening skills and empathy. They also need time management, planning, and human relations skills. Management development, then, is the process of training and educating employees to become good managers and then monitoring the progress of their managerial skills over time. Management development programs are widespread, especially at colleges, universities, and private management development firms. Managers participate in role-playing exercises, solve various management cases, and attend films and lectures to improve their skills. Management development is increasingly being used as a tool to accomplish business objectives. General Electric’s and Procter & Gamble’s management teams were built with significant investment in their development.27 Most management training programs include several of the following:28 ∙ On-the-job coaching. A senior manager assists a lower-level manager by teaching needed skills and providing direction, advice, and helpful feedback. ∙ Understudy positions. Job titles such as undersecretary and assistant are part of a relatively successful way of developing managers. Selected employees work as assistants to higher-level managers and participate in planning and other managerial functions until they are ready to assume such positions themselves.

On simulated training courses like this one, firefighters learn how to deal with the dangers of a burning building while remaining out of harm’s way. This allows firefighters to learn all the fine details about their jobs so they’ll be ready when the real thing happens. What other professions do you think could benefit from simulation training? 448

∙ Job rotation. Managers are often given assignments in a variety of departments so that they can learn about different functions of the organization. Such job rotation gives them the broad picture of the organization they need to succeed. The chapter profile highlights Linamar’s program. Job rotation is also valuable when starting out. For example, Loblaw Companies Limited created Grad@Loblaw, a rotational program for new graduates that covers multiple streams including store

CHAPTER 12 Human Resource Management: Finding and Keeping the Best Employees

management, supply chain, merchandising, marketing, IT, finance, and HR.29 ∙ Off-the-job courses and training. Managers periodically go to classes or seminars off-site to hone technical and human relations skills. McDonald’s Corporation has its own Hamburger University. Managers and potential franchisees attend six days of classes and complete a course of study equivalent to 36 hours of business-school credit.30 © Wavebreakmedia Ltd/Thinkstock

EMPOWERING WORKERS

Management development can include on-the-job and offthe-job training. The activities will vary depending on the person being developed and the purpose of the program.

Historically, many managers gave explicit instructions to workers, telling them what to do to meet the goals and objectives of the organization. The term for such an approach is directing. In traditional organizations, directing involves giving assignments, explaining routines, clarifying policies, and providing feedback on performance. Many organizations still follow this model, especially in firms such as fast-food restaurants and small retail establishments where the employees do not have the skills and experience needed to work on their own, at least at first. Progressive managers, such as those in many high-tech firms and Internet companies, are less likely than traditional managers to give specific instructions to employees. Rather, they are more likely to empower employees to make decisions on their own. Empowerment means giving employees the authority (the right to make a decision without consulting the manager) and responsibility (the requirement to accept the consequences of one’s actions) to respond quickly to customer requests. Managers are often reluctant to give up the power they have to make such decisions; thus, empowerment is often resisted. In those firms that are able to implement the concept, the manager’s role is becoming less that of a boss and director and more that of a coach, assistant, counsellor, or team member. Cisco Canada has been listed on Aon Hewitt’s Best Employers in Canada study. “Cisco has a culture of improvement,” says David Clarkson, Director of Human Resources. He attributes the company’s success to employee engagement, where hiring those with the right approach to life is essential. “We’re looking for candidates with enthusiasm—they need to be passionate about something in their lives,” says Clarkson. “We find that same passion often carries over into their work.” Willa Black, Cisco Canada’s Vice-President, states that employees are self-starters who don’t need to be micromanaged: “We communi© Stuart Miles/Shutterstock cate from the top down—as well as from the bottom Have you worked for a manager that acted less like a up and the middle out. But employees control their boss and more like a coach? Looking ahead, will you ask own destiny. They know what they need to do to sucabout the level of empowerment in any future jobs? Is this ceed as individuals as well as how to help the comautonomy important to you? pany succeed.”31

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Networking Networking is the process of establishing and maintaining contacts with key managers in your own organization and other organizations, and using those contacts to weave strong relationships that serve as informal development systems. Of equal or greater importance may be a mentor, a corporate manager who supervises, coaches, and guides selected lowerlevel employees by introducing them to the right people and generally acting as their organizational sponsor. In most organizations, informal mentoring occurs as experienced © Caiaimage/Sam Edwards/Getty Images employees assist less experienced workers. Networking provides you with an array of personal contacts on However, many organizations formally assign whom you can call for career advice and help. Have you begun mentors to employees considered to have creating your network yet? Are you part of someone else’s network? strong potential.32 Some companies, such as Sodexo Canada, also think globally. It organizes an international mentorship program that pairs new graduates with overseas mentors networking 33 The process of for a week in that country. establishing and Companies have found that mentoring programs provide a number of benefits: (1) maintaining contacts improved recruiting and retention, (2) more engaged employees, (3) cost savings, and (4) with key managers increased skills and better attitudes.34 Randstad Canada’s survey, From Y to Z – A Guide to within and outside the organization, the Next Generation of Employees, reports that Gen Y (also known as Millennials) and Gen Z and using those not only welcome a mentoring approach to support their advancement, it’s one of their highest contacts to weave priorities.35 As a result, managers should keep the communication lines open so employees strong relationships can ask questions and receive constructive advice. As well, employees should be encouraged that serve as informal development systems. to attend webinars, take part in industry networking activities, and do some job shadowing. Finally, managers should show these younger generations how their work fits into the big mentor picture and brings value to the team and to the organization.36 As discussed in Chapter 11, An experienced employee who each generation is motivated by different approaches. A targeted training and development supervises, coaches, program is one way to communicate that these employees are valuable resources. and guides lowerIt’s also important to remember that networking and mentoring go beyond the busilevel employees by ness environment. For example, school is a perfect place to begin networking. Associations introducing them to the right people and you nurture with instructors, with local business people through internships, and especially generally being their with your classmates might provide you with a valuable network you can turn to for the organizational sponsor. rest of your career.

Diversity in Management Development As women moved into management, they also learned the importance of networking and of having mentors. Unfortunately, women often have more difficulty than men in networking or finding mentors, since most senior managers are male. More women are now entering established networking systems or, in some instances, creating their own. Some examples of organizations include the Canadian Women’s Business Network, Women’s Enterprise Centre, and Canadian Association of Women Executives & Entrepreneurs. 450

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Selected as one of Canada’s Best Diversity Employers, TD Bank has a formal diversity strategy targeted to women, those with disabilities, visible minorities, Aboriginal people, and the lesbian, gay, bisexual and transgender (LGBT) peoples. Specific initiatives include the following:37 ∙ TD employs a Manager of Aboriginal Talent Acquisition that is responsible for establishing relationships with schools, student centres, and Aboriginal community organizations, as well as working with its Bank’s Aboriginal Circle and Aboriginal Banking Unit to support recruitment and employee referrals; ∙ As a result of employee and customer feedback, TD Bank works to further incorporate diverse groups in advertising materials; and ∙ Maintaining 11 regional LGBT employee resource groups across Canada and the enterprise-wide LGBTA Pride Network with nearly 3000 members.

Courtesy of CIBC. Used with permission

One of Canada’s Best Diversity Employers, CIBC has a diversity and inclusion program with a focus on attracting, motivating, and retaining a qualified workforce that represents the diversity of its clients and communities. Would you seek out a company that has been recognized for its diversity initiatives?

Companies that take the initiative to develop female and minority managers understand three crucial principles: (1) grooming women and minorities for management positions is not about legality, morality, or even morale but rather about bringing more talent in the door—the key to long-term profitability; (2) the best women and minorities will become harder to attract and retain, so the companies that commit to development early have an edge; and (3) having more women and minorities at all levels lets businesses serve their female and minority customers better. If you do not have a diversity of people working in the back room, how are you going to satisfy the diversity of people coming in the front door?

PROGRESS ASSESSMENT

• What are the five steps in the selection process? • List four benefits to companies that provide mentoring programs. • Can you name and describe four training and four development techniques?

Appraising Employee Performance to Get Optimum Results Managers must be able to determine whether their workers are doing an effective and efficient job, with a minimum of errors and disruptions. They do this by using a performance appraisal, an evaluation that measures employee performance against

performance appraisal

An evaluation that measures employee performance against established standards in order to make decisions about promotions, compensation, training, or termination.

LO4

Trace the six steps in appraising employee performance, and summarize the objectives of employee compensation programs. 451

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established standards in order to make decisions about promotions, compensation, training, or termination. Performance appraisals have six steps: 1. Establishing performance standards. This is a crucial step. Standards must be under-

standable, subject to measurement, and reasonable. Both managers and subordinates must accept them. 2. Communicating standards. It’s dangerous to assume that employees know what is

expected of them. They must be told clearly and precisely what the standards and expectations are and how to meet them. 3. Evaluating performance. If the first two steps are done correctly, performance eval-

uation is relatively easy. It is a matter of evaluating the employee’s behaviour to see whether it matches standards. 4. Discussing results. Employees often make mistakes and fail to meet expectations at

first. It takes time to learn a job and do it well. Discussing an employee’s successes and areas that need improvement can provide managers an opportunity to be understanding and helpful and guide the employee to better performance. The performance appraisal can also allow employees to suggest how a task could be done better. Figure 12.4 illustrates how managers can make performance appraisals more meaningful. 5. Taking corrective action. As part of the performance appraisal, a manager can take

corrective action or provide corrective feedback to help the employee perform better. The key word is perform. The primary purpose of an appraisal is to improve employee performance, if possible. 6. Using the results to make decisions. Decisions about promotions, compensation, additional

training, or firing are all based on performance evaluations. (Be aware that sometimes new hires and promotions are also influenced by other factors such as a family connection or whether the employee is particularly liked by his or her supervisor. Make sure that decisions are based on the performance evaluation.) An effective performance-appraisal system is also a way of satisfying legal requirements about such decisions. ■ FIGURE

12.4

CONDUCTING EFFECTIVE APPRAISALS AND REVIEWS DOs

DON’Ts

• DO allow sufficient time, without distractions, (e.g., close the office door), for the appraisal.

• DON’T attack the employee personally. Critically evaluate his or her work.

• DO end the appraisal with positive suggestions for employee improvement.

• DON’T make the employee feel uncomfortable or uneasy. Never conduct an appraisal where other employees are present.

• DO include the employee in the process as much aspossible. (For example and if applicable, let the employee prepare a self-improvement program.)

• DON’T wait until the appraisal to address problems withthe employee’s work that have been developing forsometime.

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Managing effectively means getting results through top performance. That’s what performance appraisals are for all levels of the organization, including at the top, where managers benefit from performance reviews by their subordinates and peers. In the 360-degree review, for example, management gathers opinions from those around the employee, including those under, above, and on the same level, to get an accurate, comprehensive idea of the worker’s abilities. Many companies such as General Electric, Kimberly-Clark, and Coca-Cola are moving away from formal annual reviews toward continuous performance reviews. This performance management strategy allows workers to receive and give continuous, real-time feedback via mobile apps that are focused on helping employees meet goals—or leave the company faster. These strategies are particularly welcomed by Millennial workers who demand more feedback, more coaching, and a better idea of their career paths.38

PROGRESS ASSESSMENT

• What is the primary purpose of a performance appraisal? • What are the six steps in a performance appraisal? • Why can employers and employees find the appraisal process so difficult?

Compensating Employees: Attracting and Keeping the Best Companies do not just compete for customers; they also compete for employees. Compensation is one of the main tools companies use to attract (and retain) qualified employees, and one of their largest operating costs. The long-term success of a firm—perhaps even its survival—may depend on how well it can control employee costs and optimize employee efficiency. Service organizations like hospitals, hotels, and airlines struggle with high employee costs since these firms are labour intensive (the primary cost of operations is the cost of labour). Manufacturing firms in the auto and steel industries have asked employees to take reductions in wages (called givebacks) to make the firms more competitive. (We discuss this in Chapter 13.) Those are just a few reasons compensation and benefit packages require special attention. In fact, some experts believe that determining how best to compensate employees is today’s greatest human resource challenge. A carefully managed and competitive compensation and benefits program can accomplish several objectives: ∙ Attract the kinds of people the organization needs, and in sufficient numbers. ∙ Provide employees with the incentive to work efficiently and productively. ∙ Keep valued employees from going to competitors or starting competing firms. ∙ Maintain a competitive position in the marketplace by keeping costs low through high productivity from a satisfied workforce. ∙ Provide employees with some sense of financial security through fringe benefits (to be discussed soon) such as insurance and retirement benefits. 453

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Pay Systems Many companies still use the pay system known as the Hay system, devised by Edward Hay. This compensation plan is based on job grades, each of which has a strict pay range. The system is set up on a point basis with three key factors considered: knowledge, problem solving, and accountability. The most commonly used pay structure today is market-based.39 Companies that use market-based pay structures compensate people relative to the mar© Mayuree Moonhirum/Shutterstock RF ket value of their job, regardless of their level in the Competitive compensation and benefit programs can organization. Companies research what other firms have a tremendous impact on employee efficiency are paying and decide to pay either the same, more, or and productivity. Sometimes businesses reward less. The market may suggest, for example, that certain exceptional performance by handing out bonuses. Does your instructor ever award bonuses for exceptional information technology workers should be paid more performance in class? than their managers because there is a high demand and short supply of skilled tech workers.40 The way an organization chooses to pay its employees can have a dramatic effect on efficiency and productivity. Managers therefore look for a system that compensates employees fairly. Figure 12.5 outlines some of the most common pay systems. Which do you think is the fairest?

Compensating Teams Thus far we have talked about compensating individuals. What about teams? Since you want your teams to be more than simply a group of individuals, would you still compensate them like individuals? Measuring and rewarding individual performance on teams, while at the same time rewarding team performance, is tricky—but it can be done. Professional football players, for example, are rewarded as a team when they go to the playoffs and to the Super Bowl, but they are paid individually as well. Companies are now experimenting with and developing similar incentive systems. Jay Schuster, coauthor of a study of team pay, found that when pay is based strictly on individual performance, it erodes team cohesiveness and makes the team less likely to meet its goals as a collaborative effort. Skill-based pay and gain-sharing systems are the two most common compensation methods for teams. Skill-based pay rewards the growth of both the individual and the team. Base pay is raised when team members learn and apply new skills. Baldrige Award winner Eastman Chemical Company rewards its teams for proficiency in technical, social, and business knowledge skills. A cross-functional compensation policy team defines the skills. The drawbacks of skill-based pay are twofold: the system is complex, and it is difficult to relate the acquisition of skills directly to profit gains. The advantages of skill-based pay include improved employee skills and job satisfaction.41 Most gain-sharing systems base bonuses on improvements over previous performance. Nucor Steel, one of the largest U.S. steel producers, calculates bonuses on quality—tonnes of steel that go out the door with no defects. There are no limits on bonuses a team can earn. One of the drawbacks of basing bonuses on improving previous performance is that 454

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■ FIGURE

12.5

PAY SYSTEMS Salary

Fixed compensation computed on weekly, bi-weekly, or monthly pay periods (e.g., $400 per week or $1500 per month). Salaried employees do not receive additional pay for any extra hours worked.

Hourly wage or daywork

Wage based on number of hours or days worked. Used for most blue-collar and clerical workers. Often employees must punch a time clock when they arrive at work and when they leave. Hourly wages vary greatly. This does not include benefits such as retirement systems, which may add 30 percent or more to the total package.

Piecework system

Wage based on the number of items produced rather than by the hour or day. This type of system creates powerful incentives to work efficiently and productively.

Commission plans

Pay based on some percentage of sales. Often used to compensate salespeople, commission plans resemble piecework systems.

Bonus plans

Extra pay for accomplishing or surpassing certain objectives. There are two types of bonuses: monetary and cashless. Money is always a welcome bonus. Cashless rewards include written thank-you notes, appreciation notes sent to the employee’s family, movie tickets, flowers, time off, gift certificates, shopping sprees, and other types of recognition.

Profit-sharing plans

Annual bonuses paid to employees based on the company’s profits. The amount paid to each employee is based on a predetermined percentage. Profit-sharing is one of the most common forms of performance-based pay.

Gain-sharing plans

Annual bonuses paid to employees based on achieving specific goals such as quality measures, customer satisfaction measures, and production targets.

Cost-of-living allowances (COLAs)

Annual increase in wages based on increases in the Consumer Price Index. This is usually found in union contacts.

Stock options

Right to purchase shares in the company at a specific price over a specific period of time. Often this gives employees the right to buy shares cheaply despite huge increases in the price of the share. For example, if over the course of his employment a worker received options to buy 10 000 shares of the company stock at $10 each and the price of the share eventually grows to $100, he can use those options to buy the 10 000 shares (now worth $1 million) for $100,000.

workers may improve just enough to meet the target, but not by much. Since their target for the next year will be to beat this year’s performance, they don’t want to risk setting a new goal they won’t be able to reach.42 It is important to reward individual team players also. Outstanding team players— those who go beyond what is required and make an outstanding individual contribution— should be separately recognized with cash or non-cash rewards. A good way to compensate for uneven team participation is to let the team decide which members get what type of individual award. After all, if you really support the team process, you need to give teams the freedom to reward themselves. 455

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Fringe Benefits Fringe benefits include sick-leave pay, vacation pay, pension plans, and health plans that represent additional compensation to employees beyond base wages. They may be divided into three categories. Federal and provincial legislation (which varies somewhat from province to province) require compulsory deductions from employees’ pay cheques, employer contributions, or both. These statutory benefits include the Canada/Quebec Pension Plan, employment insurance, and workers’ compensation. The second category consists of legally © Fredrick Kippe/Alamy required benefits, including vacation pay, holiday pay, According to a Randstad Canada study on Gen Y and overtime pay, and unpaid maternity leave with job Gen Z, one in three (32 percent) say health insurance is the most important employee benefit they expect. Other protection. The third category includes all other benbenefits include work flexibility (29 percent), training efits and stems from voluntary employer programs and and development (17 percent), individual performance from collective labour agreements. Some are paid by bonuses (10 percent), a stock purchase plan and profitthe employer alone and others are jointly paid by the sharing program (4 percent), and tuition reimbursem*nt employer and employee. Among the most common are (4 percent).48 Do you agree with this order? What are bonuses, company pension plans, and group insurance. ways that companies can highlight their benefit plans when recruiting? Benefits in recent years have grown faster than wages and can’t really be considered fringe anymore. According to the Conference Board of Canada, the average cost of providing benefits for employees is $8,330 per full-time equivalent.43 fringe benefits Benefits such as sickFarrah Press, VP of Sales and Marketing at Executive Link, states that companies can be leave pay, vacation widely different in the scope of the plans they can offer. “A large, publicly traded company pay, pension plans, can offer a more competitive plan than a small private company because the former can and health plans that represent additional afford to and because it has a larger base of employees.”44 “How much you spend depends compensation to on the demographics of your company,” says Chris Gory, the president of Insurance Portemployees beyond folio Financial Services Inc., a Toronto-based independent insurance brokerage specializbase wages. ing in employee benefits coverage. “I work with a lot of startups where the average age is between 25 and 32. These employees tend to use a lot of paramedical treatments (massage, chiropractic, and acupuncture treatments, for example) and not as much prescription drug or disability coverage.”45 Benefits policies can have a significant impact on attracting and retaining highperforming employees.46 Benefits will not replace performance incentives as motivators, but especially for older generations, health and pension benefits can make a great difference in corporate loyalty.47 Health-care costs—particularly drug and dental-care costs—are expected to continue to rise as people spend more on health care as they age. The government, which already spends a large percentage of its revenue on health care, will likely continue to shift costs to private plans by limiting and eliminating health services. As a result, employers are trying to control costs in various ways and are making cuts where possible. For example, two Coburg, Ontario, Tim Hortons franchisees faced public, government, and head office outrage when they cut workers’ benefits to offset higher wage costs

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in response to an increase in the province’s minimum wage.49 In reaction, there were boycotts and protests across the province.50 Why do you think there was backlash when the franchisees had the legal right to make these changes? Were people outraged because this was undermining the philosophy behind an increase in minimum wage (e.g., supporting minimum-wage workers in Ontario that were struggling to make ends meet)? Do you think the fact that the franchisees were the children of the company’s billionaire co-founders contributed to this reaction?51 Are you surprised to learn that the negative reaction, coupled with franchisee dissatisfaction with Tim Hortons’ management and hefty cost-cutting measures, contributed to a drop from 4th place to 50th in an annual ranking of the most-admired companies in Canada?52 © DreamWorks Animation/Album/Newscom “In the traditional media era the crisis could have been limited The workers at DreamWorks Studios who geographically,” says Christian Bourque, the executive vice presihelped create Kung Fu Panda enjoy perks dent of Leger, the producer of this survey, “but these are different like free breakfast and lunch, afternoon yoga times. At the pace at which bad news hits social media, is then classes, free movie screenings, on-campus reinterpreted by the masses through the endless game of shares, art classes, and monthly parties. How might fringe benefits like these affect employee reputation volatility is clearly upon us.”53 Fringe benefits can include recreation facilities, company performance? cars, country club memberships, discounted massages, special home-mortgage rates, paid and unpaid sabbaticals, day care services, and executive dining rooms. Increasingly, employees want dental care, mental health care, wellness programs, elder care, legal counselling, eye care, and even short workweeks.54 Two newer employee benefits are aimed at Millennials: help paying off student loan debt and low-cost loans.55 Understanding that it takes many incentives to attract and retain the best employees, companies offer soft benefits. Soft benefits help workers maintain the balance between work and family life that is often as important to hardworking employees as the nature of the job itself. These perks include on-site haircuts and shoe repair, concierge services, and free breakfasts. Freeing employees from errands and chores gives them more time for family—and work. Biotechnology firm, Genentech, offers free car washes, Facebook offers free housing for interns, © 2010 Mediacorp Canada Inc. Canada’s Top 100 Employers logo, and American Express gives five months of paid parental used with permission leave.56 Varafin Inc., based in St. John’s, Newfoundland, Published annually, Canada’s Top 100 Employers highlights employers that lead their industries in offers employees a flexible “no limit” vacation policy.57 providing the best benefits and working conditions. Would you value such benefits? You can also read about Canada’s top employers for At one time, most employees sought benefits that young people. Would you consider these resources were similar. Today, however, some may seek child care when looking for a job? benefits while others prefer attractive pension plans. To

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Reaching Beyond OUR BORDERS Cultural Challenges Working Worldwide Human resource management of a global workforce begins with understanding the customs, laws, and local business needs of every country in which the organization operates. Country-specific cultural and legal standards can affect a variety of human resource functions: • Compensation. Salaries must be converted to and from foreign currencies. Often employees with international assignments receive special allowances for relocation, children’s education, housing, travel, or other business-related expenses.

• Health and pension standards. There are different social contexts for benefits in other countries. In the Netherlands, for example, the government provides retirement income and health care. • Paid time off. Four weeks of paid vacation is the standard of many European employers. But many other countries lack the short-term and long-term absence policies offered in Canada, including sick leave, personal leave, family leave, and medical leave. Global companies need a standard definition of time off. • Taxation. Each country has different taxation rules, and the payroll department must work within each country’s regulations. • Communication. When employees leave to work in another country, they often feel disconnected from their home country. Technology helps keep these faraway employees in direct contact. Human resource policies at home are influenced more and more by conditions and practices in other countries and cultures. Human resource managers need to sensitize themselves and their organizations to the cultural and business practices.

Sources: Diana co*ker, “Efficient Millennial Employees: Crucial Part of Global Workforce,” The HR Digest, February 12, 2017; and Elaine Varelas, “Tomorrow’s Leadership Trends: Bridging the Global Generation Gap in Human Resources,” Human Resources Today, January 5, 2017.

cafeteria-style fringe benefits

Fringe benefits plan that allows employees to choose which benefits they want up to a certain dollar amount.

address such growing demands, over half of all firms offer cafeteria-style fringe benefits, in which employees can choose the benefits they want up to a certain dollar amount. Such plans let human resource managers equitably and cost-effectively meet employees’ individual needs by allowing them choice.58 As the cost of administering benefits programs has increased, many companies have outsourced this function. Managing benefits can be complicated when employees are located in other countries. HR challenges faced by global businesses are discussed in the Reaching Beyond Our Borders box. To put it simply, benefits are often as important to recruiting top talent as salary and may even become more important in the future.

Scheduling Employees to Meet Organizational and Employee Needs Workplace trends and the increasing costs of transportation have led employees to look for scheduling flexibility. Flextime, telecommuting, and job sharing are important benefits employees seek with choice being influenced by the type of job, employers’ needs, and 458

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■ FIGURE

12.6

A FLEX-TIME EXAMPLE At this company, employees can start work anytime between 6:30 and 9:30 a.m. They take a half hour for lunch anytime between 11:00 a.m. and 2:00 p.m., and can leave between 3:00 and 6:30 p.m. Everyone works an eight-hour day. The blue arrows show a typical employee’s flextime day.

Flexible hours

Core time

Core time Lunch period

6:30 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 1:00 1:30 2:00 2:30 3:00 3:30 4:00 4:30 5:00 5:30 6:00 6:30

Sarah’s starting time

Sarah’s lunch period

Sarah’s quitting time

each individual’s needs. In fact, 76 percent of Gen Xers surveyed say they look for jobs that allow flexible work schedules and 66 percent of Millennials say they left jobs that didn’t support flexible schedules.59

Flex-Time Plans A flex-time plan gives employees some freedom to choose which hours to work as long as they work the required number of hours or complete their assigned tasks. The most popular plans allow employees to come to work between 7:00 and 9:00 a.m. and leave between 4:00 and 6:00 p.m. Flex-time plans generally incorporate core time. Core time refers to the period when all employees are expected to be at their job stations. For example, an organization may designate core time as 9:00 and 11:00 a.m. and 2:00 and 4:00 p.m. During these hours, all employees are required to be at work, as highlighted in Figure 12.6. Flextime allows employees to adjust to work–life demands. Two-income families find them especially helpful. Companies that use flex-time say it boosts employee productivity and morale. Flex-time is not for all organizations, however. It doesn’t suit shift work, like fast-food or assembly-line processes in manufacturing, where everyone on a given shift must be at work at the same time. Another disadvantage is that managers often have to work longer hours to assist and supervise in organizations that may operate from 6:00 a.m. to 6:00 p.m. Flex-time also makes communication more difficult since certain employees may not be there when others need to talk to them. Furthermore, if not carefully supervised, some employees could abuse the system, causing resentment among others. Another option is a compressed workweek. An employee works the full number of hours, but in fewer than the standard number of days. For example, an employee may work four 10-hour days and then enjoy a long weekend instead of working five 8-hour days

flex-time plan

Work schedule that gives employees some freedom to choose when to work, as long as they work the required number of hours.

core time

In a flex-time plan, the period when all employees are expected to be at their job stations.

compressed workweek

Work schedule that allows an employee to work a full number of hours per week but in fewer days. 459

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with a traditional weekend. There are obvious advantages of compressed workweeks, but some employees get tired working such long hours, and productivity can decline. Others find the system of great benefit, however, and are enthusiastic about it. Nurses often work compressed weeks. Flexible scheduling isn’t always a benefit to employees. Under increasing scrutiny in Canada is a flexible scheduling strategy used by some retailers called on-call scheduling or in-demand scheduling. Using software that determines hourly staffing needs based on sales and traffic information, employers can © georgerudy/123RF call in or cancel workers with little notice. Based on Do you know of any retailers that use on-call scheduling? Would this practice discourage you from working for an this technology, chain retailers can adjust the number employer that employs it? of workers on the floor quickly during slow or busy times. This flexibility is great for the company but can cause stress on the lives and pay of the workers. On-call scheduling makes it a struggle for workers to arrange their lives or supplement their incomes with second jobs.60

Telecommuting Providing employees with the ability to choose their work location is another opportunity for organizations to demonstrate flexibility. This can include home-based work or working from a client’s site. Telecommuting (also known as telework), can save employers money as the company can get by with less office space. One study also found workers were more productive, got more done, worked longer hours, took fewer breaks, and used less sick time than in-office workers. Home-based workers were also happier and quit less than those who went into the office regularly.61 More than 1.7 million paid Canadians employees work from home at least once a week.62 Home-based workers can choose their own hours, interrupt work for child care or other tasks, and take time out for personal reasons. Working at home isn’t for everyone. It requires discipline to stay focused on the job and not be easily distracted. Many large companies offer “hotelling” (being assigned to a desk through a reservation system) or “hot-desking” (sharing a desk with other employees who work at different times) as alternatives. Hot-desking can lead to more collaboration since workers get to know more people throughout the organization than they would © stockbroker/123RF have at a fixed desk.63 American Express Canada has Rising gas prices, technology, and the push for work– moved to a hotelling-style environment where employlife flexibility have all contributed to an increase in ees are assigned one of four work styles. The majority telecommuting. What do you think would be your biggest reserve desks online or work at one of the building’s challenge if you worked from home? many informal work spaces.64

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Seeking SUSTAINABILITY How Employers Can Support Work–Life Balance Do you find it difficult to balance the different roles in your life? If so, you’re not alone as 58 percent of Canadians report “overload” as a result of the pressures associated with work, home and family, friends, physical health, and volunteer and community service. Kevin O’Leary, Chairman of O’Leary Financial Group, agrees that finding the right balance between work and living a life outside of work can be difficult, especially for entrepreneurs. “Unfortunately, this is one of the great sacrifices entrepreneurs have to make because if you’re not spending 25 hours a day on your business, your competitor is. And it’s not just the Canadian competitor, it’s a global competitor,” said O’Leary. He says that finding the right partner in life who is willing to ride the journey with you is also important. Not all employees will have the same work–life balance issues. Baby Boomers will most likely have different issues than Millennials. Age, culture, gender, family and marital status, caregiver demands, socio-economic status, and other factors affect an employee’s work– life balance. Those same factors can also influence how individuals are affected by demands. Everyone responds differently to stress. What creates a serious problem for one employee may not be felt in the same way by colleagues.

To help employees achieve/maintain a sense of work–life balance, Health Canada suggests that employers: • Identify ways of reducing employee workloads. Employees should be asked for suggestions as they often are in the best position to identify ways of streamlining work. • Reduce reliance on both paid and unpaid overtime by employees. • Recognize and reward overtime work. • Reduce job-related travel time for employees. • Make alternative work arrangements more widely available within the organization. These might include flextime or the opportunity to work at home for part of the work week. • Give employees the opportunity to say “no” when asked to work overtime. Saying “no” should not be a career-limiting move. Employees should not have to choose between having a family and career advancement. More organizations are creating health and welfare committees that are responsible for recognizing health and safety concerns and identifying solutions. Wellness program options include flexible work arrangements such as those discussed in this chapter, leaves of absence and vacation, education and training opportunities, encouraging fitness and healthy living, providing supportive managers, and incorporating other management approaches. There are many benefits for companies that invest in work–life balance initiatives. These include a reduction in absenteeism, an increase in productivity, decreased stress, and stronger working relationships. In addition, such initiatives help to attract new employees and retain current ones as employees are drawn to organizations that help them find balance and personal satisfaction.

Sources: William Kee, “For entrepreneurs there is no work–life balance: Kevin O’Leary,” BNN.ca, March 27, 2015, http://www.bnn.ca/ News/2015/3/27/Life-is-very-Darwinian-OLeary.aspx; “Work–Life Balance,” Workplace Mental Health Promotion, February 15, 2015, http:// wmhp.cmhaontario.ca/workplace-mental-health-core-concepts-issues/issues-in-the-workplace-that-affect-employee-mental-health/worklife-balance; Canadian Mental Health Association, 2015, http://www.cmha.ca/mental-health/your-mental-health/worklife-balance/; and “Workplaces that Work,” HRCouncil.ca, [n.d.], http://hrcouncil.ca/hr-toolkit/workplaces-health-safety.cfm.

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Job-Sharing Plans job sharing

An arrangement whereby two part-time employees share one full-time job.

Job sharing lets two or more part-time employees share one full-time job. For instance, students may work only after school hours and parents with small children may work only during school hours, and older workers can work part-time before fully retiring or after retiring. Benefits of job sharing include: ∙ Employment opportunities for those who cannot or prefer not to work full-time. ∙ An enthusiastic and productive workforce. ∙ Reduced absenteeism and tardiness. ∙ The ability to schedule part-time workers into peak demand periods (e.g., financial institutions on payday). ∙ Retention of experienced employees who might otherwise have retired. Disadvantages include having to hire, train, motivate, and supervise at least twice as many people and perhaps prorate some fringe benefits. But firms are finding that the benefits outweigh the disadvantages. Implementing workplace alternative work arrangements, such as flextime, telecommuting, and job sharing, more widely and where appropriate, would contribute to a better work–life balance. The Seeking Sustainability box offers additional suggestions for employers.

PROGRESS ASSESSMENT

• Can you name and describe four alternative compensation systems? • What advantages do compensation plans such as profit-sharing offer an organization?

• What are the benefits and challenges of flextime? Telecommuting? Job sharing?

LO5

Describe the ways in which employees can move through a company: promotion, reassignment, termination, and retirement.

Career Management: Up, Over, and Out Employees do not always stay in the position they were hired to fill. They may excel and move up the corporate ladder or fail and move out the front door. Employees can also be reassigned or retire. Of course, some choose to move themselves by going to another company.

Promoting and Reassigning Employees Many companies find that promotion from within the company improves employee morale. It is also cost-effective in that the promoted employees are already familiar with the corporate culture and procedures and don’t need to spend valuable time on basic orientation.

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In the new, flatter corporate structures identified in Chapter 9, there are fewer levels for employees to reach than in the past. Thus they often move over to a new position rather than up to a new one. Such lateral transfers allow employees to develop and display new skills and to learn more about the company overall. Reassignment is one way of motivating experienced employees to remain in a company that offers limited upward advancement opportunities.

Terminating Employees We have seen that the relentless pressure of global competition, shifts in technology, increasing customer demands for greater value, and uncertain economic conditions have human resource managers struggling to manage layoffs and firings. For terminated senior managers, companies usually pay for private-agency career © Steve Cole/Getty Images counselling. Even if the economy is booming, many companies are hesitant When there is a downturn in the economy, to hire or rehire workers full-time. Why is that the case? One rea- managers sometimes terminate employees. Do you think they will rehire full-time son is that the cost of terminating employees is prohibitively high employees when the economy recovers? in terms of lost training costs and possible damages and legal fees Why or why not? What alternatives do for wrongful discharge suits. (This is also why it is critical to have employers have? a good system of verbal and written notices and record keeping to deal with poorly performing employees.) As a result, many companies are either using temporary employees or outsourcing certain functions.

Retiring Employees Companies looking to downsize sometimes offer early retirement benefits to entice older (and more expensive) workers to retire. Such benefits can include one-time cash payments, known in some companies as golden handshakes. The advantage early retirement benefits have over layoffs or firing is the increased morale of remaining employees. Retiring senior workers earlier also increases promotion opportunities for younger employees.

Losing Valued Employees In spite of a company’s efforts to retain them, some talented employees will choose to pursue opportunities elsewhere. Knowing their reasons for leaving can be invaluable in preventing the loss of other good people in the future. One way to learn the reasons is to have an outside expert conduct an exit interview. Outsiders can provide confidentiality and anonymity that earns more honest feedback than employees are comfortable giving in face-to-face interviews with their supervisors. Online systems can capture, track, and statistically analyze employee exit interview data to generate reports that identify trouble areas. Such programs can also coordinate exit interview data with employee satisfaction surveys to predict which departments should expect turnover to occur. Offboarding is the process surrounding employee exits. Whether employees are fired, resigning or retiring, there are things that need to be done before they leave. This includes

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managing payments, insurance, and benefits; conducting exit interviews; collecting work and documents; and returning anything owned by the company. Attracting and retaining the best employees is the key to success in the competitive global business environment. Changes in laws have also had a major influence. Let’s look at this next.

LO6

Illustrate the effects of legislation on human resource management.

Laws Affecting Human Resource Management65

The Charter of Rights and Freedoms, which is part of the Constitution of Canada, guarantees equality before the law for every Canadian. The Human Rights Act seeks to provide equal employment opportunities without regard to race and colour, national or ethnic origin, religion, age, sex, sexual orientation, marital status, family status, disability, or pardoned convictions. Human rights legislation requires that every employer ensure equal opportunities and that there is no discrimination. This legislation affects nearly every human resource function (which includes planning, recruiting, selection, training, and compensation) and it has made managing these activities more complicated. This is true in both a non-union environment, which is governed by these laws and regulations, and a union environment, which must also reflect the conditions outlined in the labour contract (to be discussed in Chapter 13). Since Canada is a confederation of provinces and territories, jurisdiction over many aspects of our lives is divided between the federal and provincial governments. The federal government legislates on national issues (e.g., employment insurance) and it has jurisdiction over certain types of businesses that are deemed to be of a national nature. Federally regulated businesses and industries are defined by the Canada Labour Code. The Canada Labour Code applies to approximately 18 000 employers and 900 000 of their employees, accounting for 6 percent of all Canadian workers. Examples of organizations that are regulated under federal jurisdiction include banks, insurance companies, communications companies, interprovincial transportation companies (e.g., airlines, rail, and trucking companies), many First Nation activities, and most federal Crown corporations. Provincial or territorial labour laws outline employment standards that apply to the majority (94 percent) of employees. This includes employment standards in areas such as minimum wage, hours of work, overtime, statutory holidays, parental leave, employ© Khakimullin Aleksandr/Shutterstock ment of people under 18 years of age, and discriminaOlder employees are guaranteed protection against tion in the workplace. age discrimination in the workplace. Coupled with What all of this means is that there are hundreds the elimination of a mandatory retirement age, these of laws and regulations at different levels of governemployees have more opportunities to retire later. What ment that apply to all aspects of human resource are workplace benefits in keeping these workers? management. Furthermore, these laws are constantly

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being revised because of the changing social and political environments, as well as rulings by human rights commissions and courts. One of the most regulated areas involves discrimination.

Pay Equity66 Pay equity refers to equal pay for work of equal value. It compares the value of male and female jobs by objectively evaluating the jobs in terms of four neutral factors: skill, effort, responsibility, and working conditions. If a female job is approximately equal in value to a higher-paying job done mainly by men, the female job gets the same wages as the male job. The gender wage gap is the difference between wages earned by men and wages earned by women. On average, Canadian women earn less than men. The persistent wage gap that women face, combined with fewer hours of work (women are more likely to work part-time then men), make for a significant earnings gap. In Canada, estimates for the pay equity gap vary from 8 to 50 percent, and it depends on what is being measured.67 For example, Statistics Canada states that women continue to earn on average 74 cents for every dollar men earn.68 Historical factors that have contributed to the gender wage gap include the following:

pay equity

Equal pay for work of equal value.

gender wage gap The difference between wages earned by men and wages earned by women.

∙ Women choosing or needing to leave and re-enter the workforce to meet family caregiving responsibilities, resulting in a loss of seniority, advancement opportunities, and wages. ∙ Occupational segregation in historically undervalued and low-paying jobs, such as child care and clerical work. ∙ Women are overrepresented in low-paying occupations and underrepresented in high-paying ones. ∙ Traditionally lower levels of education (although this is becoming less of a factor as more women graduate from all levels of education). ∙ Less unionization among female workers. ∙ Discrimination in hiring, promotion, and compensation practices in the workplace. Today, women are more educated, they are working in greater numbers and for longer hours, they are having fewer children, and they are taking less time away from work. Despite these changes, women’s hourly wages continue to fall below men’s wages at all levels of education. Generally speaking, the wage gap between men and women has been narrowing as education level rises. Canada has a variety of pay equity laws and policies that differ depending on where one works. For some organizations,

Studies have shown that women’s jobs with the same value as men’s work are underpaid. What actions can you take once you are in the workforce to close this gap?

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legislation has been difficult to implement. How do you define equal (or comparable) value? For example, which job has more value, that of a nurse or that of a trash collector? As well, officials cite budget cutbacks and the huge costs of making up for past inequitable compensation to female employees as the reasons for delaying the implementation of this legislation. As you can imagine, this is not an issue that can easily be resolved.

Employment Equity69 A well-known 1980s case of discrimination highlights a major problem and how it was solved. A group of women accused Canadian National Railway Company (CNR) of not hiring them because they were women. CNR, like many other companies, did not hire women for jobs that were thought to be traditional men’s jobs, those for which heavy physical labour was required. In this case, the jobs involved maintenance and repairs of the tracks. The Canadian Human Rights Commission ruled in favour of the women. CNR appealed the decision and the courts ruled against CNR all the way to the Supreme Court of Canada. © michaeljung/Shutterstock Employment equity refers to employment activities designed to The Employment Equity Act promotes equitable representation for women, increase employment opportunities for four groups given past discrimiAboriginal peoples, persons with nation toward the designated groups. These four groups are (1) women; disabilities, and visible minorities (2)Aboriginal peoples (people who are Indian, Inuit, or Métis); (3) perwho work in federally regulated sons with disabilities; and (4) members of visible minorities (people, other workplaces. If you belong to one of than Aboriginal peoples, who are non-Caucasian in race or non-white in these groups, would you consider colour). Employment equity programs are developed by employers to rememployment in these workplaces? If you do not belong to one of these edy past discrimination or to prevent discrimination in the future. Employgroups, would employment equity ment equity “encourages the establishment of working conditions that are programs discourage you from free of barriers, corrects the conditions of disadvantage in employment, applying to these workplaces? and promotes the principle that employment equity requires special measures and the accommodation of differences for the four designated groups employment equity in Canada.” Introduced in 1986, the Employment Equity Act applies to federally regulated Employment industries, Crown corporations, and other federal organizations with 100 employees or activities designed to more, as well as portions of the federal public administration. At the provincial level, these increase employment programs are implemented almost exclusively on a voluntary basis. opportunities for four groups How did this apply in the CNR example? The Canadian Human Rights Commission (women, Aboriginal ordered CNR to develop a plan that would result in more women than men being hired for such people, persons jobs until the balance was more even. Specifically, women had to be hired for one in four nonwith disabilities, and traditional or blue-collar jobs in its St. Lawrence region until women held 13 percent of members of visible minorities) given past such jobs. When a man and a woman were equally qualified, the woman was expected to discrimination. be selected until the balance was achieved. Interpretation of the employment equity law eventually led employers to actively recruit and give preference to women and minority group members. Employment equity, for many employers, has become mostly a reporting function. They keep track of the numbers of employees that belong to these groups, and they try to remove any discrimination from hiring procedures, including trying to advertise positions more widely. As you might

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expect, interpretation of the law is often controversial and enforcement is difficult. Questions persist about the effect the program could have in creating a sort of reverse discrimination in the workplace. Reverse discrimination has been defined as discriminating against members of a dominant or majority group (say, whites or males) usually as a result of policies designed to correct previous discrimination against minorities or disadvantaged groups. Charges of reverse discrimination have occurred when companies have been perceived as unfairly giving preference to women or minority group members, for example, in hiring and promoting. The Canadian Charter of Rights and Freedoms specifically allows for employment equity as a method to overcome long-standing discrimination against specific groups. Although preferential treatment will always raise questions of fairness, the Canadian Human Rights Act declares employment equity programs non-discriminatory if they fulfill the spirit of the law. This continues to be a controversial issue today.

reverse discrimination

Discriminating against members of a dominant or majority group (say, whites or males) usually as a result of policies designed to correct previous discrimination against minority or disadvantaged groups.

Laws that Protect the Disabled Legislation protects people with disabilities. Businesses cannot discriminate against people on the basis of any physical or mental disability. Employers are required to give disabled applicants the same consideration for employment as people without disabilities. Employers used to think that being fair meant treating everyone the same, but accommodation means treating people according to their specific needs. That can include putting up barriers to isolate people readily distracted by noise, reassigning workers to new tasks, and making changes to supervisors’ management styles. Accommodations are not always expensive; for example, an inexpensive headset can allow someone with cerebral palsy to talk on the phone.

Effects of Legislation Clearly, laws and regulations affect all areas of human resource management. It should be apparent that a career in this field offers a challenge to anyone willing to put forth the effort. Figure 12.7 lists some sites that you may consult to learn about some of the topics discussed in this chapter. In summary: ∙ Employers must know and act in accordance with the legal rights of their employees or risk costly court cases. ∙ Legislation affects all areas of human resource management, from hiring and training to compensation. ∙ Managers must be sensitive not only to legal requirements, but also to union contracts and social standards and expectations, which can be even more demanding. ∙ Court cases demonstrate that it is sometimes legal to implement special employment policies (e.g., employment equity) and training to correct past discrimination. ∙ New court cases and legislation change human resource management almost daily. The only way to keep current is to read business literature and stay familiar with emerging issues.

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■ FIGURE

12.7

HUMAN RESOURCE INFORMATION SITES Human Resource Sites

URL

Benefits Canada

www.benefitscanada.com

Chartered Professionals in Human Resources

www.chrp.ca

Canadian HR Reporter

www.hrreporter.com

Canadian Human Rights Reporter

www.cdn-hr-reporter.ca

The Conference Board of Canada

www.conferenceboard.ca

Human Resources Professionals Association

www.hrpa.ca

Society for Human Resource Management

www.shrm.org

Government Sites

URL

Canadian Human Rights Commission

www.chrc-ccdp.ca

Government of Canada

www.canada.gc.ca

Statistics Canada

www.statcan.gc.ca

PROGRESS ASSESSMENT

• Name three areas of human resource management responsibility that are affected by government legislation.

• Explain what employment equity is and give one example of it. • What are ways employers can accommodate people with disabilities?

SUMMARY LO1

Explain the importance of human resource management as a strategic contributor to organizational success, and summarize the five steps in human resource planning. Human resource management is the process of evaluating human resource needs, finding people to fill those needs, and getting the best work from each employee by providing the right incentives and job environment, all with the goal of meeting organizational objectives. What are current challenges and opportunities in human resource management? Many current challenges and opportunities arise from changing demographics: more women, minorities, immigrants, and older workers in the workforce. Others include a shortage of trained workers and an abundance of unskilled workers, skilled workers in declining industries requiring retraining, changing employee work attitudes, and complex laws and regulations.

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What are the five steps in human resource planning? The five steps are (1) preparing a human resource inventory of the organization’s employees; (2) preparing a job analysis; (3) assessing future demand; (4) assessing future supply; and (5) establishing a strategic plan. LO2

Describe methods that companies use to recruit new employees, and explain some of the issues that make recruitment challenging. Recruitment is the set of activities used to obtain a sufficient number of the right people at the right time. What methods do companies use to recruit new employees? Recruiting sources are classified as either internal or external. Internal sources include hiring from within the firm (e.g., transfers and promotions) and employees who recommend others to hire. External recruitment sources include advertisem*nts, public and private employment agencies, school placement offices, management consultants, professional organizations, referrals, walk-in applications, and the Internet. Why has recruitment become more challenging? Legal restrictions complicate hiring practices. Finding suitable employees can also be made more difficult if companies are considered unattractive workplaces.

LO3

Outline the six steps in selecting employees, and illustrate the use of various types of employee training and development methods. Selection is the process of gathering and interpreting information to decide which applicants should be hired. What are the six steps in the selection process? The steps are (1) obtaining complete application forms; (2) conducting initial and follow-up interviews; (3) giving employment tests; (4) conducting background investigations; (5) obtaining results from physical exams; and (6) establishing a trial period of employment. What are some employee training methods? After assessing the needs of the organization and the skills of the employees, training programs are designed that may include the following activities: orientation, on-the-job training, apprentice programs, off-the-job training, online training, vestibule training, and job simulation. What methods are used to develop managerial skills? Management development methods include on-the-job coaching, understudy positions, job rotation, and off-the-job courses and training. How does networking fit in this process? Networking is the process of establishing contacts with key managers within and outside the organization to get additional development assistance.

LO4

Trace the six steps in appraising employee performance, and summarize the objectives of employee compensation programs. A performance appraisal is an evaluation of the performance level of employees against established standards to make decisions about promotions, compensation, training, or termination. What are the six steps in appraising employee performance? The six steps are (1) establish performance standards; (2) communicate those standards; (3) evaluate performance; (4) discuss results; (5) take corrective action when needed; and (6) use the results for decisions about promotions, compensation, training, or termination. 469

PART 4 Management of Human Resources

What are examples of compensation systems? Compensation systems include salary systems, hourly wages, piecework, commission plans, bonus plans, profit-sharing plans, and stock options. The most common compensation systems appropriate for teams are skill-based and gain-sharing compensation programs. Managers also reward outstanding individual performance within teams. What are objectives of employee compensation programs? Compensation is one of the main tools that companies use to attract and retain qualified employees. These programs can attract the right kinds of people the organization needs and in sufficient numbers. They provide employees with the incentive to work efficiently and productively. They also provide employees with some sense of financial security through fringe benefits. What are fringe benefits? Fringe benefits include such items as sick leave, vacation pay, pension plans, and health plans that provide additional compensation to employees beyond base wages. Cafeteria-style fringe benefits plans let employees choose the benefits they want, up to a certain dollar amount. LO5

Describe the ways in which employees can move through a company: promotion, reassignment, termination, and retirement. Employees do not always stay in the position they were hired to fill. How can employees move within a company? Employees can be moved up (promotion), over (reassignment), or out (termination or retirement) of a company. Employees can also choose to leave a company to pursue opportunities elsewhere.

LO6

Illustrate the effects of legislation on human resource management. There are many laws that affect human resource management. What do the Charter of Rights and Freedoms and the Human Rights Act guarantee? The Charter of Rights and Freedoms guarantees equality before the law for all Canadians. The Human Rights Act seeks to provide equal employment opportunities without regard to race and colour, national or ethnic origin, religion, age, sex, sexual orientation, marital status, family status, disability, or pardoned convictions. What areas does the federal government legislate? The federal government legislates on national issues and it has jurisdiction over certain types of businesses that are deemed to be of a national nature (e.g., banking, air transportation, and many First Nation activities). Federal labour laws apply to 6 percent of all Canadian employees. What are some examples of employment laws? Pay equity, employment equity, and laws that protect the disabled are highlighted in this chapter.

KEY TERMS apprentice programs 447 cafeteria-style fringe benefits 458 compressed workweek 459 contingent workers 444 core time 459 employment equity 466 470

flex-time plan 459 fringe benefits 456 gender wage gap 465 human resource management (HRM) 434 job analysis 436

job description 437 job sharing 462 job simulation 448 job specifications 437 management development 448 mentor 450

CHAPTER 12 Human Resource Management: Finding and Keeping the Best Employees

networking 450 off-the-job training 447 online training 447 on-the-job training 447

orientation 446 pay equity 465 performance appraisal 451 recruitment 438

reverse discrimination 467 selection 442 training and development 446 vestibule training 448

CAREER EXPLORATION If you are interested in pursuing a career in the field of human resource management, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Training and development manager—plans, directs, and coordinates programs to enhance the knowledge and skills of an organization’s employees; oversees a staff of training and development specialists.

∙ Compensation manager—plans, develops, and oversees programs to determine how much an organization pays its employees and how employees are paid. ∙ Benefits manager—plans, directs, and coordinates retirement plans, health insurance, and other benefits that an organization offers its employees. ∙ Human resource manager—plans, directs, and coordinates the administrative functions of an organization; oversees the recruiting, interviewing, and hiring of new staff; consults with top executives on strategic planning; and serves as a link between an organization’s management and its employees.

CRITICAL THINKING 1. Does human resource management interest

5. Imagine that you must delete a position due to

budgetary (not performance) reasons. What effect might the dismissal have on remaining employees? Explain how you would tell the affected employee and your remaining subordinates.

you as a career? What are your experiences working with human resource professionals? 2. If you were a human resource manager, how

would you address the brain drain that occurs as knowledgeable workers retire? 3. What effects have dual-career families had on

6. What are some implications for employers as

a result of legalized recreational marijuana? What changes should employers be making to their alcohol and drug policies?

the human resource function? How about singleparent families? Are there any similarities? 4. What problems can arise when family mem-

bers work together in the same firm?

DEVELOPING CAREER SKILLS Key: Team

Analytic

Communication

1. Look for job listings online and find at least

two positions that you might like to have when you graduate. List the qualifications specified in each of the ads and identify methods the

Technology

companies might use to determine how well applicants meet each of those qualifications.

2. Choose one of these positions: a human

resource manager notifying employees of 471

PART 4 Management of Human Resources

mandatory drug testing or an employee representative protesting such testing. Write a memorandum supporting your position.

3. Consider the following occupations: doctor,

car salesperson, computer software developer, teacher, and assembly worker. In a team of three students, identify the method of compensation you think is appropriate for each. Explain your answer.

4. Recall any on-the-job and off-the-job training

sessions you’ve experienced. Write a brief critique of each. How would you improve each? Share your ideas with the class.

5. The federal government’s Temporary Foreign

Worker Program touches on both immigration and employment as it permits Canadian employers to hire foreign nationals to fill temporary labour and skill shortages when qualified Canadian citizens or permanent residents are not available.70 In a group, investigate program advantages and disadvantages to the Canadian economy. Which industries employ these temporary foreign workers? Where in Canada do they work? What are some recent program changes as a result of abuse allegations? Share your information with the class.

ANALYZING MANAGEMENT DECISIONS Dual-Career Planning Carey Moler is a 32-year-old account executive for a communications company. She is married to Mitchell Moler, a lawyer. Carey and Mitchell did not make any definite plans about how to juggle their careers and family life until Carey reached age 30. Then they decided to have a baby, and career planning took on a whole new dimension. A company named Catalyst talked to 815 dual-career couples and found that most of them, like the Molers, had not made any long-range career decisions regarding family lifestyle. From the business perspective, such dual-career families create real concerns. There are problems with relocation, with child care, and so on that affect recruiting, productivity, morale, and promotion policies. For a couple such as the Molers, having both career and family responsibilities is exhausting. But that is just one problem. If Carey is moving up in her firm, what

happens if Mitchell gets a terrific job offer a thousand kilometres away? What if Carey gets such an offer? Who is going to care for the baby? What happens if the baby becomes ill? How do they plan their vacations when there are three schedules to balance? Who will do the housework? Dual careers require careful planning and discussion, and those plans need to be reviewed over time. A couple that decides at age 22 to do certain things may change their minds at age 30. Whether or not to have children, where to locate, how to manage the household—all such issues and more can become major problems if not carefully planned. The same is true for corporations. They too must plan for dual-career families as well as single-parent families. They must give attention to job sharing, flextime, parental leave policies, transfer policies, nepotism rules (i.e., rules about hiring family members), and more.

Discussion Questions 1. In addition to the examples stated above, what

3. What are the advantages of dual careers?

other issues can you see developing because of dual-career families? How is this affecting children in such families?

What are the disadvantages? What can couples do to minimize the problems of dual careers? How can a couple reap the rewards?

2. What kind of corporate policies need chang-

ing to adapt to these new realities? 472

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Dealing with Employee–Management Issues

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Trace the history of organized labour in Canada. LO2 Discuss the major legislation affecting labour unions. LO3 Describe the collective bargaining process. LO4 Outline the objectives of labour unions. LO5 Describe the negotiation tactics used by labour and management during conflicts. LO6 Explain some of today’s employee–management issues.

P R O F I L E GETTING TO KNOW: GERALD (GERRY) VARRICCHIO, REGIONAL ORGANIZING DIRECTOR FOR CENTRAL AND EASTERN CANADA, LABOURERS’ INTERNATIONAL UNION OF NORTH AMERICA (LIUNA)

474

The Labourers’ International Union of North America

in Canada and the United States, LiUNA has over

(LiUNA) is the most progressive, aggressive, and

half a million members. In Canada it represents

fastest growing union of construction workers,

110 000 members and retirees with affiliates from

waste management workers, show service workers,

coast to coast, and the Canadian arm of LiUNA is

and health-care workers in Canada. Although LiUNA

proud to be a part of one of North America’s oldest

began in 1903 as a construction union, its members

and most powerful unions.

now work in many types of factories and processing

Gerry Varricchio is an International Represen-

plants. They also work in stores, hotels, restaurants,

tative with LiUNA and a labour organizer. He spe-

banquet centres, hospitals, long-care facilities, and

cializes in the construction industry in the province

offices. An international union with members both

of Ontario, though he regularly runs campaigns in

CHAPTER 13 Dealing with Employee–Management Issues

was personally aware of the difficulties faced in the work environment, including health and safety issues. He recognized early on that some of the major protections for workers are accessible only through unionization. Consequently, when offered a job in 1987 by the LiUNA Ontario Provincial District Council as an organizer, Varricchio jumped at the chance. In addition to his organizing duties on behalf of LiUNA, Varricchio also serves as a Trustee on the Source: Courtesy of LiUNA. Used with permission.

Local 1089 Training and Rehabilitation Trust Fund and on the Benefits Trust Fund. One accomplish-

the industrial sector. As the Regional Organizing

ment is that he pioneered the first union benefit

Director for the LiUNA Central and Eastern Canada

plan that integrates a registered educational schol-

Region, Varricchio works with LiUNA’s District Coun-

arship plan for members and their children into a

cils and Local Unions across Ontario and the Atlantic

union benefit trust plan as part of the standard ben-

Provinces. Together, they develop and implement

efit package.

LiUNA’s regional and local union organizing plans.

Throughout the past 31 years, Varricchio

This includes training and hiring union organizers as

has adapted to the demands of the workplace. He

required to meet the needs of each of the organiz-

was at the forefront in introducing the process of

ing plans across the region.

“top-down” organizing, a system of engaging the

As Regional Organizing Director for CECOF

employer in the initial stages of organizing, with

(the Central and Eastern Canada Organizing Fund),

the intent of levelling the playing field for all of the

Varricchio has 85 regional organizers reporting to

employers in the industry. This reassures individual

him. Contrast this to 1993 when he was the sole

employers who believe that the presence of a union

regional organizer employed. LiUNA is a highly

in the workplace will lead to inequalities in terms of

motivated and powerful unit dedicated to organizing

bid power and limit their access to future contracts.

the unorganized and to preserving work for its mem-

Varricchio has expressed this as follows: “Unions

bers, while keeping management competitive. To

have a dual responsibility—to ensure that their mem-

achieve this goal, Varricchio’s vision encompasses

bers are getting the best wage and benefit packages

a joint, co-operative effort between labour and man-

and working conditions available in the marketplace,

agement. As a result of LiUNA’s organizing initiatives

and equally as important, to ensure that their con-

through CECOF, and the efforts of Varricchio and

tractual employers not only remain competitive,

the affiliates, LiUNA has the distinct honour of being

but have a labour partner that can assist them in

the most prolific union organizer in Canada.

expanding their business and market share.”

Varricchio started his working life on the tools,

Managers in both profit-seeking and non-

first as a carpenter, and then as a member of LiUNA

profit organizations address labour-relations chal-

Local 1089 in his hometown of Sarnia, Ontario,

lenges every day. This chapter discusses some of

working in “Chemical Valley.” He was elected to the

these employee–management relations and issues.

LiUNA Local 1089 executive board and as a dele-

When asked what his thoughts are for the future

gate to the LiUNA Ontario Provincial District Council

of labour–management relations, Varricchio points

in 1985, and re-elected every four years subse-

out that the labour–management community is at

quently. Experiencing his own health issues as a

the mercy of the political climate, both federally

result of chemical spills in the workplace, Varricchio

and provincially as well as to evolving social and

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PART 4 Management of Human Resources

cultural influences across the country. It is important

beginnings between unions and employers and the

for labour and management to partner together to

prejudices that have evolved over time,” says Var-

achieve common goals and look out for each oth-

ricchio, “the true business value of unions will be

er’s interests. “Perhaps in spite of the adversarial

recognized and utilized when it is most needed.”

Source: Gerry Varricchio, Regional Organizing Director for the Central and Eastern Canada Organizing Fund, The Labourers’ International Union of North America, interview, January 15, 2018, Hamilton.

Employee–Management Issues Unfortunately, the relationship between managers and employees isn’t always trouble-free. Management’s responsibility to produce a profit by maximizing productivity sometimes means making hard decisions, which aren’t always popular with employees. Employees have long been concerned about fairness, income equality, and workplace security. Like other managerial challenges, employee–management issues require open discussion, goodwill, and compromise. In this chapter, we will look at several key workplace issues that impact the manager’s job and workplace environment. This includes unions, harassment, executive compensation, child care, and elder care. One of the major issues in employee– management relations involves labour unions. Labour (the collective term for non-management workers) is interested in fair and competent management, human dignity, and a reasonable share of the wealth its work generates. (One could argue that management is also interested in these same ideals.) A labour union is an employee organization whose main goal is representing its members in employee– management negotiations of job-related issues. According to Statistics Canada, private-sector employees include those who work as employees of a private firm or business.1 Public sector employees are those who work for a local, provincial, or federal government; for a © UFCW government service or agency; for a Crown corpoThe United Food and Commercial Workers (UFCW) union ration; or for a government funded establishment offers a Young-Workers Internship Program to young such as a school (including universities) or hospimembers interested in becoming more involved in their tal.2 We often think of union members as workers union, organizing, labour history, globalization, and more.4 in the private sector. In fact, union membership in Would you consider applying for this program? How could the the private sector stands at 16.4 percent compared knowledge gained help you during your working career? to 75.5 percent in the public sector.3 476

CHAPTER 13 Dealing with Employee–Management Issues

Workers originally formed unions to protect themselves from intolerable work conditions and unfair treatment, and also to secure some say in the operation of their jobs. As the number of private-sector union members grew, workers gained more negotiating power with managers and more political power. For example, labour unions were largely responsible for the establishment of minimum-wage laws, overtime rules, workers’ compensation, severance pay, child-labour laws, job safety regulations, and more. Although labour unions have lost a great deal of the economic and political power they once had, and membership has declined, they still play a significant role in many sectors in some parts of the country.5

labour union

An employee organization whose main goal is representing its members in employee– management negotiation of jobrelated issues.

Labour Unions Yesterday and Today Are labour unions essential today? This is a very political subject with strongly-held opposing positions. An electrician carrying a picket sign in Sudbury, Ontario, would say yes and elaborate on the dangers to a free society if employers continue to try to bust or break apart unions. A small manufacturer would disagree then complain about being restricted by union wage and benefit obligations in an increasingly competitive global economy. Historians generally agree that today’s unions are an outgrowth of the economic transition caused by the Industrial Revolution of the 19th and early 20th centuries. Workers who once toiled in the fields, dependent on the mercies of nature for survival, found themselves relying on the continuous roll of factory presses and assembly lines for their living. Making the transition from an agricultural economy to an industrial economy was quite difficult. Over time, workers in businesses learned that strength through unity (unions) could lead to improved job conditions, better wages, and job security. These improvements did not come easily or quickly. Even today, while both sides have a vested interest in seeing their organizations thrive, the needs and desires of both sides can sometimes be wholly different. Today’s critics of organized labour maintain that few of the inhuman conditions once dominant in Canada exist in the modern workplace. They argue that organized labour is an industry in itself, and protecting workers has become secondary. Some workplace analysts maintain that the current legal system and changing management philosophies minimize the possibility that sweatshops (workplaces of the late 19th and early 20th centuries with unsatisfactory, unsafe, or oppressive labour conditions) could reappear in Canada. “In a perfect world,” states Gerry Varric- © Lewis W. Hine/Buyenlarge/Getty Images While the technological achievements of the Industrial Revolution chio, Regional Organizing Director for Central and Eastern Canada for the Labourers’ Inter- brought countless new products to market and reduced the need for national Union of North America (LiUNA), physical labour in many industries, they also put pressure on workers to achieve higher productivity in factory jobs that called for long hours “labour and management partner together to and low pay. Can you see how these conditions made it possible for achieve common goals and look out for each labour unions to take hold by the turn of the 20th century? other’s interests. Unfortunately, human nature 477

PART 4 Management of Human Resources

being what it is, greed, incompetence, and self-serving interests of players from one side or the other, or both, can supersede the common good thereby creating conflict and negative perceptions about unions. In any market, competing on a level playing field is extremely important to the success and future growth of a business. The most effective vehicle available to business to create and sustain such a level playing field, is a union. Through the unionized collective bargaining process, competing firms are obligated to follow the same standards and rules.”6 Let’s look at the history of labour unions to see how we got to where we are today. LO1

The Early History of Organized Labour

The presence of formal labour organizations in Canada dates back to the 1800s. Early unions on the wharves of Halifax, St. John’s, and Quebec during the War of 1812 existed to profit from labour scarcity. Others, such as the Montreal shoemakers or the Toronto printers of the 1830s, were craft unions. A craft union is an organization of skilled specraft union cialists in a particular craft or trade, typically local or regional. These unions were formed An organization of to address fundamental work issues of pay, hours, conditions, and job security—many of skilled specialists in the same issues that dominate labour negotiations today. By forming a union, these skilled a particular craft or trade; typically local or workers hoped to protect their craft and status from being undermined. regional. Many of the early labour organizations were local or regional in membership. Also, most were established to achieve some short-range goal (e.g., a pay increase) and disbanded after attaining a specific objective. This situation changed dramatically in the late nineteenth century with the expansion of the Industrial Revolution and the emergence of modern industrial capitalism. The system of producing the necessities of society in small, home-based workplaces gave way to production in large factories driven by steam and later electricity. Enormous productivity increases were gained through mass production and job specialization. However, this brought problems for workers in terms of productivity expectations, long hours of work, low wages, and unemployment. Workers were faced with the reality that production was vital. Those who failed to produce, or stayed home because they were ill or had family problems, lost their jobs. Over time, the increased emphasis on production led firms to expand the hours of work. The length of the average workweek in 1900 was 60 hours, compared to 40 hours today, but an 80-hour workweek was not uncommon for some industries. Wages were low and child labour was widespread. Minimum-wage laws and unemployment benefits were non-existent, which meant that © TorontoPlaques.com periods of unemployment were hard on families who earned Workers’ protests were recorded as early as the subsistence wages. As you can imagine, these were not short1850s, but it was the need for a shorter work term issues that would easily go away. The workplace was ripe week that sparked Toronto, Ontario printers to walk off the job on March 25, 1872. A crowd of for the emergence of labour organizations. 10 000 supporters rallied at Queen’s Park even The struggle for more humane working conditions and though union activity was illegal. Prime Minister wages was not an easy one because before 1872, it was illeJohn A. Macdonald introduced the Trade Union gal to attempt to form a union in Canada. The pioneers in the Act on April 18, 1872, legalizing and protecting early struggles were treated as common criminals. They were unions.7 arrested, beaten, and often shot. The Winnipeg General Strike Trace the history of organized labour in Canada.

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CHAPTER 13 Dealing with Employee–Management Issues

of 1919 is Canada’s best known general strike, where almost 30 000 workers left their jobs. A charge by police into a crowd of protesters resulted in 30 casualties, including one death.8 As the years progressed, more unions were formed and more employees joined them. Other types of unions—such as industrial unions—were created to represent certain workers. An industrial union is one that consists of unskilled and semiskilled workers in mass-production industries such as automobile manufacturing and mining. Long after it was no longer illegal, the idea of workers forming unions to protect their interests was still regarded with suspicion by employers and governments in Canada. Democratic rights for all was still a weak concept, and the idea of people getting together to fight for their rights was not accepted as it is today. The union movement was greatly influenced by immigrants from Europe (especially Britain), who brought with them the ideas and experiences of a more advanced and often more radical background. The growing union movement in the United States also influenced Canada. Many Canadian unions started as locals of American unions, and this relationship continues today. As democracy gradually gained strength, the union movement grew with it. Its participation, in turn, helped democracy sink deeper, wider roots in Canada.

The Structure of Labour Unions in Canada9

A legal holiday since 1894, Labour Day is a celebration of workers and their families. (Here you see workers participating in a Labour Day parade.) It was inspired by the first significant workers’ demonstration in 1872 where, accompanied by four bands, unionists marched through the streets of Toronto. Leaders demanded better conditions for all workers, as well as the release of 24 union members who were imprisoned for going on strike. About 10000 Torontonians turned out that day to see the parade and listen to the speeches.

The organizational structure of unions in Canada is quite complex. There are 776 unions in Canada. The four types of unions and the percentage of workers they represent are as follows: national (69.7 percent), international, (24.9 percent), independent local (3.9 percent), and directly chartered (1.5 percent). Let’s consider these four types next. The most basic unit is an independent local organization (also called the union local, local, or local union), which is a union that is not formally connected or affiliated with any other labour organization. One local usually represents one school, government office, or a specific factory or office of a company. However, that local can also cover several small companies or other work units. Contrast this with a directly chartered union, which is a union that is directly affiliated to a labour congress. A directly chartered union pays per capita dues directly to the congress and it receives services from the congress. Examples of labour congresses include the Canadian Labour Congress (CLC) and the Confédération des syndicats nationaux (CSN). Labour congresses are also known as union centrals. While directly chartered unions are represented by labour congresses, unions in general can also affiliate with labour congresses for assistance at national and international levels. The main functions of these

industrial union

Consists of unskilled and semi-skilled workers in massproduction industries such as automobile manufacturing and mining.

independent local organization

A union that is not formally connected or affiliated with any other labour organization; also called the union local, local, or local union. 479

PART 4 Management of Human Resources

labour congresses has been to coordinate the activities of member unions when representing the interests of labour to local, provincial, and federal governments as well as to organized labour on the world scene. For example, the CLC is Canada’s largest labour organization. It brings together dozens of national and international unions, provincial and territorial federations of labour, and community-based labour councils to represent 3.3 million workers. It lobbies the different levels of government on social and economic issues, human rights and equality, workplace issues, international issues, and environmental issues. While a local can be an independent organization within a specific geographic area, it is usually part of a larger structure, namely one that is provincial or © Denphumi/Shutterstock regional in focus, or a national union, which is a union The CLC and its affiliated unions have been promoting the that only represents workers in Canada. Two examples creation of green jobs for decades. This requires a change that will be discussed shortly include the Canadian in how we produce, transport, and consume goods.10 Union of Public Employees and Unifor. Consider how it proposes to do this by reading, “Making An international union has its headquarters outthe Shift to a Green Economy” at canadianlabour.ca. Does this issue resonate with you? side of Canada (usually the United States). For example, Teamsters Canada represents more than 125 000 members in Canada and it is affiliated with the Washington, D.C.-based International directly chartered Brotherhood of Teamsters. union A union that is directly LiUNA’s International Office is headquartered in Washington, D.C. In Canada, it is affiliated to a labour represented by Regional Offices in the Pacific Northwest and Central and Eastern Canada. congress to whom it Consider LiUNA Local 1089, based in Sarnia, Ontario. Local 1089 is affiliated with pays per capita dues LiUNA by charter with its International through the LiUNA Central and Eastern Canada and receives services. regional office, located in Hamilton, Ontario. It is also affiliated to LiUNA’s provincial national union council, the LiUNA Ontario Provincial District Council. You can read more about LiUNA A union that only represents workers in in the chapter profile and throughout this chapter. Canada. Figure 13.1 charts the structure of the international union of LiUNA. Based in the United States, it is structured under a governing constitution, which is reviewed and international union amended every five years at a constitutional convention. This convention brings together A union that has its headquarters outside elected delegates from every local union and district council in North America. Along with of Canada (usually the constitutional resolutions, the convention also elects the General Executive Board, which United States). is composed of the general president, general secretary treasurer, and fourteen regional vice presidents. The international union issues and holds the charters of all local unions and district councils that operate under the rule of the LiUNA Constitution. District councils are composed of elected delegates from local unions within a state, states, province, or provinces. These councils are responsible for collective bargaining and are the holders of “bargaining rights” on behalf of their members. LiUNA also has established national labour–management funds that are directed toward training, health and safety, and the promotion of unionized construction and positive labour–management relations. The funds are referred to as the Tri-Funds. These unique funds, which are supported by joint contributions, provide a broad range of services to both labour and management. 480

CHAPTER 13 Dealing with Employee–Management Issues

■ FIGURE

13.1

THE STRUCTURE OF THE LABOURERS’ INTERNATIONAL UNION OF NORTH AMERICA (LiUNA) Elections are democratic at LiUNA as LiUNA members vote for representation at each level of the union’s structure. At the local union level, members of the local union elect their local union Executive Board and Officers. Each local then elects district council delegates. These delegates elect the District Council Executive Board. At the local union level, members also elect convention delegates, who in turn attend the union’s General Convention, which is held every five years. At the general convention, each delegate votes to elect the General President (equivalent of a CEO) and the General Secretary Treasurer (equivalent of a CFO) and their International Vice Presidents. At this convention, the delegates also vote on constitutional changes and amendments.

INTERNATIONAL UNION Elected General Executive Board Constitutional Convention

REGIONAL OFFICES Elected Vice-Presidents and Regional Managers International Staff

DISTRICT COUNCILS Elected Executive Boards and Delegates District Council Staff

LOCAL UNIONS Elected Executive Boards Local Field Representatives Local Union Membership

LIUNA TRI-FUNDS International Board of Directors Labour and Management Representatives

STRATEGIC REGIONAL DEPARTMENTS Government Relations, Public Relations and Communications Indigenous Affairs, and Organizing

LIUNA CANADAIN TRI-FUNDS Labourers-Employers Cooperation and Education Trust (LECET), Labourers’ Health and Safety, and Labourers’ Training and Education Trust

LOCAL TRAINING CENTRES Labour and Management Trustees Skills Development Delivery of Training Programs

Union Coverage Union activity can be measured in two ways: the unionization rate and the coverage rate. The unionization rate, also known as union density, refers to the number of employed individuals who are union members as a proportion of the total number of employed individuals.11

unionization rate (union density)

A number of employed individuals who are union members as a proportion of the total number of employed individuals. 481

PART 4 Management of Human Resources

The coverage rate refers to the proportion of employed individuals, both union members and non-unionized employees, who are covered by a collective agreement, as a percentage of all employees.12 While Canada’s unionization rate is 28.8 percent, its coverage rate is 30.4 p ercent (approximately 4.7million workers).13 According to Statistics Canada, “a union member today is slightly more likely to be a woman, and working in an office, school or hospital, while factory workers, miners and other blue collar trades have seen their union membership fall over the past quarter © Christopher Futcher/Getty Images century.”14 Union members can include bricklayers, teachers, journalists, Full-time employment, longer job tenure, professional athletes, retail store clerks, and airline pilots. Can larger firms, higher educational attainment, you think of a profession that would not benefit from union and better wages are associated with higher representation? unionization rates. Figure 13.2 summarizes union coverage by selected characteristics. Before we discuss labour legislation, let us consider two unions that are often in the news.

■ FIGURE

13.2

UNION COVERAGE BY SELECTED CHARACTERISTICS, 2017 Union coverage measures union members and persons who are not union members but are covered by collective agreements as a percentage of all employees. For example, full-time employees (31.8 percent) are more likely to be covered by a collective agreement than are part-time employees (24.0 percent). Full-time employees have a higher average hourly wage ($30.69) than do part-time employees ($24.63).

Characteristic

Percentage

Characteristics

Percentage

Public sector

75.5

No degree, certificate, or diploma

20.0

Private sector

16.4

University degree

34.3

Age 15 to 24

15.6

Workplace size: less than 20 employees

13.7

Age 45 to 54

37.8

Workplace size: more than 500 employees

55.8

Men

28.7

Least unionized industry—agriculture

Women

32.2

Most unionized industry—educational services

72.7

Goods-producing sector

27.4

Most unionized province—Newfoundland and Labrador

38.7

Services-producing sector

31.2

Least unionized province—Alberta

25.0

Source: Compiled from CANSIM tables 282-0220 to 282-0225, Statistics Canada, January 5, 2018.

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CHAPTER 13 Dealing with Employee–Management Issues

Canada’s Largest Unions Canada’s largest union is the Canadian Union of Public Employees (CUPE). Unifor is Canada’s largest private-sector union. Let’s briefly look at each next.

CUPE15 Formed in 1963, CUPE has over 650 000 members and more than 70 offices across Canada. It represents workers in health care, emergency services, education, early learning and child care, municipalities, social services, libraries, utilities, transportation and airlines. Collectively, the payroll for CUPE members is over $21.8 billion. CUPE has more than 2636 locals and chartered organizations across the country ranging in size from 20 to 20 000 members. More than 70 percent of CUPE’s 3946 collective agreements are with locals of 100 members or less.

coverage rate

Ameasure of the proportion of employed individuals,both union members and nonunionized employees, who are covered by a collective agreement.

UNIFOR16 Unifor represents more than 315 000 workers. It was formed during the 2013 Labour Day weekend when the Canadian Auto Workers (CAW) and the Communications, Energy, and Paperworkers (CEP) unions merged. Like its name, it is a union for everyone—workers, the unemployed, and those that are self-employed. Its diverse membership includes workers in nearly every industry including communications, resources, manufacturing, and services. There are 750 local unions of all sizes operating under the Unifor banner.

PROGRESS ASSESSMENT

• Why were unions originally formed? • What are the four types of labour organizations? Describe each one. • Summarize union coverage by selected characteristics. • Name Canada’s two largest unions.

Labour Legislation The growth and influence of organized labour in Canada have depended primarily on two major factors: the law and public opinion. As with other movements that promoted greater fairness and equity in our society—such as women’s right to vote, equal rights for minorities and women, and protection for children—when support for employees’ rights became widespread in Canada, laws were passed to enforce them. Today we have laws establishing minimum wage, paid minimum holidays and vacation, maximum hours, overtime pay, health and safety conditions, workers’ compensation, employment insurance, the Canada/ Quebec Pension Plan, and a host of other rights. It is strange to realize that at one time or another, these were all on the agenda of unions and were opposed by employers and governments for many years. They often denounced these demands as radical notions. The effect of unions goes far beyond their numbers. Companies that want to keep unions out often provide compensation, benefits, and working conditions that match or exceed those found in union plants or offices. Thus, the levels established by unions spill over to non-union companies.

LO2

Discuss the major legislation affecting labour unions.

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Unions are regulated by federal and provincial legislation, and they are required by law to be democratic and financially accountable to their members. In addition, all unions have constitutions that must be registered with government labour boards.17 The federal government has control over specified fields of activity that are national in nature. As stated in Chapter 12, such activities apply to approximately 6 percent of Canadian workers.18 The major legislation that governs labour–management relations for these employees is the Canada Labour Code, which © Finnbarr Webster/Alamy is administered by Employment and Social DevelopThe Supreme Court of Canada struck down a federal law ment Canada. It is also responsible for the Employment that forbade the Royal Mounted Police from unionizing, Equity Act as well as other legislation on wages and saying it violated the Canadian Charter of Rights and working conditions. Freedom. The Court suggested forming a traditional union Provincial or territorial laws apply to the rest of the as one option that would restore the employees’ collective 21 Canadian workforce. As you can imagine, these laws bargaining rights. Do you think that all workers should have the right to unionize? vary and it is the responsibility of businesses to know the rights of their workers and vice versa. For example, Bill 148, the Ontario Government’s Fair Workplaces, Better Jobs Act, 2017 incorporated a number of changes to the Employment Standards Act, the Labour Relations Act, and the Occupational Health and Safety Act. These changes impacted minimum wage, overtime, vacation pay, public holiday pay, leave of absences, personal emergency leaves, temporary agency help and difference in pay based on employment status.19 Keep in mind, the Supreme Court of Canada can still intervene in provincial jurisdictions. For example:20 Saying it was unconstitutional, the Supreme Court of Canada struck down a controversial Saskatchewan law that prevented public-sector employees from striking. In the absence of employer and union agreements, the law had permitted the provincial government to decide which workers were considered essential and therefore could not strike. The Supreme Court affirmed the principle that any labour-relations scheme that gives management a final authoritative say over the conditions of its workers was not appropriate. The ruling will affect public service unions in provinces across the country that have essential services laws for health-care workers.

Workplace Laws22 Legislation protects workers against health and safety hazards in the workplace. According to CCOHS (Canadian Centre for Occupational Health and Safety), employees have the following three basic rights: (1) the right to refuse unsafe work; (2) the right to participate in the workplace health and safety activities through the Health and Safety Committee or as a worker health and safety representative; and (3) the right to know, or the right to be informed about, actual and potential dangers in the workplace. For example, the right to refuse unsafe work entitles a worker to step away from work that he or she believes is unsafe. This right allows the worker to have the refused work 484

CHAPTER 13 Dealing with Employee–Management Issues

investigated, and repaired if it is dangerous. During this time, the worker receives pay and is protected from an employer’s possible reprisal, since it is illegal for an employer to fire or discipline a worker who refuses work that he or she believes is unsafe. By knowing about workplace hazards, workers can ensure that employers make work safer, provide protection to workers, and give training so that workers can work with the smallest possibility of injury or illness. Accidents at work are caused by a complex combination of unsafe employee behaviour and unsafe working conditions. It is estimated that about three Canadian workers die every working day from an occupational injury or disease. There is growing emphasis on the health and safety of young workers as about one in seven young workers is injured on the job. Canada’s unions are calling on the federal government to do more to address workplace harassment and violence as these can also lead to worker deaths, as well as significant mental and physical injuries. “Workplace harassment and violence are often overlooked hazards of the job,” said Hassan Yussuff, President of the CLC. “In the era of #metoo and #timesup, we need to talk about the negative, even deadly, impacts these hazards can have in the workplace.” These topics are discussed in more detail next.

Sexual Harassment The Supreme Court of Canada defines sexual harassment as unwelcome conduct of a sexual nature that detrimentally affects the work environment or leads to adverse job-related consequences for the victims of the harassment.23 Managers and workers are now much more sensitive to sexual comments and behaviour than they were in the past. Conduct on the job can be considered illegal under specific conditions:24

Recognizing that new and young workers are particularly vulnerable in the workplace, UFCW Canada representatives and member activists run Know Your Rights Workshops. Topics covered include human rights, employment standards, labour rights, and health and safety. Would you be interested in attending such a workshop?

∙ An employee’s submission to such conduct is explicitly or implicitly made a term or condition of employment, or an employee’s submission to or rejection of such conduct is used as the basis for employment decisions affecting the worker’s status. A threat like “Go out with me or you’re fired” or “Go out with me or you’ll never be promoted here” constitutesquid pro quo sexual harassment. ∙ The conduct unreasonably interferes with a worker’s job performance or creates an intimidating, hostile, or offensive work environment. This hostile work environment is the more common type of sexual harassment in the workplace.

According to Daniel Lublin, Partner at Whitten & Lublin, Employment & Labour Lawyers, “Once an employer is made aware of a complaint, it is required to investigate and ensure that the workplace, broadly defined, is free from harassment.”25 Many companies

sexual harassment

Unwelcome conduct of a sexual nature that detrimentally affects the work environment or leads to adverse job-related consequences for the victims of the harassment.

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have set up rapid, effective grievance procedures and react promptly to allegations of harassment. Such efforts may save businesses millions of dollars in lawsuits and make the workplace more productive and harmonious.

Violence and Bullying in the Workplace26 Employers and managers must be vigilant about potential violence in the workplace. April 28 is Canada’s national Day of Mourning. Over 900 Canadian CCOHS defines workplace violence as any workers die each year due to an unsafe workplace, and more than 240 000 workers experience lost time due to workplace injuries or act in which a person is abused, threatened, disease. How can workers and employers work together to ensure intimidated or assaulted in his or her employthey do not become statistics on this day? ment. Violence can occur within a traditional workplace, at off-site, business-related funcworkplace violence tions (e.g., conferences), at social events, etc. Rumours, swearing, verbal abuse, pranks, Any act in which a arguments, property damage, vandalism, sabotage, pushing, theft, physical assaults, psyperson is abused, threatened, intimidated, chological trauma, anger-related incidents, rape, arson, and murder are all examples of or assaulted in his or workplace violence. her employment. Certain work factors, processes, and interactions can put people at increased risk from workplace violence. Examples include working with the public; handling money, valuables, or prescription drugs (e.g. cashiers); carrying out inspection or enforcement duties (e.g. government employees); providing service, care, advice, or education (e.g. health-care providers); and working in premises where alcohol is served. Risk of violence may be greater at certain times of the day or night (e.g., late hours of the night or early hours of the morning) or year (e.g., during the holidays and during performance appraisals). Workplace design (e.g., positioning office furniture so that the employee is closer to a door or exit than the client and so that the employee cannot be cornered), administrative practices (e.g., keeping cash register funds to a minimum), and work practices (e.g., do not enter any situation or location where you feel threatened or unsafe) are preventative measures that have helped curtail workplace violence. Other exam© jayfish/Alamy ples include holding focus groups that invite employee Unwelcome sexual advances, requests for sexual favours, and other verbal or physical conduct are illegal. Although input, hiring managers with strong interpersonal skills, most employees are aware of sexual harassment policies and employing skilled consultants to deal with any in the workplace, they are often not certain what sexual potential for workplace violence. harassment actually means. Should companies train The Spotlight on Small Business shares suggesemployees about the dos and don’ts of acceptable sexual tions on what employers can do to limit potential liabilconduct on the job? ity in the areas of workplace harassment and violence. © Canadian Labour Congress (CLC)

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Spotlight On SMALL BUSINESS Helping Reduce Harassment and Violence in the Workplace

Robinson Heeney LLP, a Toronto-based employment law firm, was founded in 2011 by lawyers Kevin Robinson and James Heeney. The firm provides advice to both employers and employees on all aspects of employment law. The firm also provides third-party workplace investigations and training services. Partner James Heeney has been named by Canadian HR Reporter as a leading employment lawyer in Toronto. His employer-side practice focuses on providing strategic advice and litigation support in the areas of employment agreements, policy manuals, terminations, and human rights issues. On the employee side of his practice, Heeney routinely advises clients on both unionized and non-unionized issues relating to executive compensation, employment contracts, terminations, and human rights. Why take on the challenge of starting your own business? Heeney was motivated to create a firm focused on integrity and exceptional legal advice, while still ensuring it was provided in a manner that was cost effective, timely, and practical. He wanted to influence an organization that ranked a good work environment as one of its top priorities. While he admits that running a business is not easy, there is certainly more satisfaction out of its successes. “No one wants to work long hours, but it is easier when it happens and you know it’s to build your own business,” says Heeney. “Many of my clients are long standing and I am so proud to be able to say that.” One area in which Heeney advises his clients is anti-harassment legislation. The courts provide anti-harassment protections throughout Canada for both complainants and respondents. Whether a province has harassment legislation or not, the courts will

find employers liable where an inappropriate workplace investigation occurs or where harassment isn’t addressed. An employee found to have been terminated for requesting that an employer comply with the harassment and violence provisions, for example, may be entitled to back wages and to being reinstated in his or her job. These are significant remedies which can be costly to businesses. In Ontario, the Occupational Health and Safety Act provides protections to employees regarding workplace violence and harassment. (Similar legislation exists in Quebec, Manitoba, and Saskatchewan.) All employers, regardless of size, are required to actively adopt policies and training designed to prevent workplace harassment and violence. Employees who feel there has been a breach of the harassment and violence provisions in their workplace can file a complaint with the Ontario Labour Relations Board, and the Board has extraordinary powers when it feels a breach has occurred. New legislation under Bill 132 not only requires the above protections, but it also puts an obligation on employers to conduct an investigation that is appropriate in the circ*mstances. It also allows the Ministry of Labour to order the employer to retain an independent investigator at its own expense. Heeney recommends the following tips on what businesses can do to limit an employer’s potential liability: 1. Take complaints seriously. When complaints are filed by an employee, ensure that they are given serious consideration. 2. Acknowledge receipt of the complaint. Make sure that when complaints are filed you acknowledge to the employee that the complaint has been received and will be investigated. 3. Perform an unbiased investigation. Advise the employee alleged to have committed wrongdoing that there is a complaint. Conduct an unbiased investigation and then make the decision. 4. Report back with your findings. Advise both sides of the findings, and in writing. 5. Avoid retaliation. Always advise all parties that they will not be subjected to retaliation for participating in the investigation.

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“Preparing for changes in legislation can be a lengthy and detailed process for employers,” counsels Heeney, “particularly for smaller businesses with limited resources. However, the changes to the legislation

are an essential step in ensuring that employers are doing their part in reducing the risk of violence and harassment in their workplaces and to avoiding possible fines and liability.”

Sources: James Heeney, Partner, Robinson Heeney LLP, interview, January 9, 2018, 416-646-5169; “James Heeney, Partner,” Robinson Heeney LLP, 2018, http://www.robinsonheeney.com/toronto-employment-lawyers/lawyers_jheeney/; James Heeney, “Don’t get blindsided by workplace harassment, violence laws,” CBC News, September 30, 2011, www.cbc.ca/news/business/smallbusiness/story/2011/09/30/ f-smallbiz-james-heeney.html; and James Heeney, “Is your business ready for new harassment and violence legislation?,” CBC News, May 28, 2010, www.cbc.ca/money/smallbusiness/story/2010/05/28/f-james-heeney-workplace-harassment.html.

bullying

Acts or verbal comments that could mentally hurt or isolate a person in the workplace.

labour relations board (LRB)

An organization created by the federal or provincial government to administer labour relations legislation.

WORKPLACE BULLYING CCOHS defines bullying as acts or verbal comments that could “mentally” hurt or isolate a person in the workplace. The Workplace Bullying Institute maintains that bullying is four times more common than sexual harassment on the job.27 Zogby International research estimates that 35 percent of workers have been bullied at work.28 Unfortunately, employers and managers often discount or deny bullying, and often refer to it simply as personality conflicts or management styles. By trivializing bullying, an organization can suffer reduced employee morale and productivity, increased turnover, and in some cases, even legal problems. Although “schoolyard” bullying tends to be physical in nature, workplace bullying involves more psychological and verbal abuse. Also, the targets of workplace bullying are often the strongest employees (who are considered threats to the bully), not the weakest. The majority of bullies are supervisors or managers but can also be fellow workers.29 Men far outnumber women as workplace bullies, but women tend to bully other women more frequently than men. Bullying is increasingly becoming a major problem in the workplace and can be directed at employees at all levels of the organization.30 To be an effective leader, a manager must be aware of what bullying is, learn the signs of bullying, and most importantly take corrective action to end it. By ignoring workplace bullying, companies may lose their most productive or promising employees.

Examples of bullying include spreading malicious rumours, gossip, or innuendo; excluding or isolating someone socially; intimidating a person; undermining or deliberately impeding a person’s work; constantly changing work guidelines; establishing impossible deadlines that will set up the individual to fail; yelling or using profanity; and criticizing a person persistently or constantly. What can an employee do if he or she is being bullied?

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Labour Relations Boards31 To enforce labour legislation, the federal and provincial governments have created labour relations boards (LRBs). These agencies investigate violations of the law and have the power to determine: (1) whether a person is an employee for the purposes of the law;

CHAPTER 13 Dealing with Employee–Management Issues

(2) whether an employee is a member of a trade union; (3) whether an organization is an appropriate bargaining agent for bargaining purposes; (4) whether a collective agreement is in force; and (5) whether any given party is bound by it. An LRB functions more informally than a court but it has the full authority of the law. In all jurisdictions, the LRB’s decision is final and binding and cannot be appealed except on procedural matters.

PROGRESS ASSESSMENT

• What two major factors have contributed to the growth and influence of organized labour in Canada?

• What three basic rights do employees have in the workplace? • What are examples of sexual harassment,workplace violence, and bullying? • How do LRBs regulate labour–management relations?

The Collective Bargaining Process The LRB oversees collective bargaining, which is the entire process whereby union and management representatives negotiate a contract for workers. Collective bargaining includes more than the contract itself. Collective bargaining determines how unions are selected, actions that are allowed during the period prior to certification, certification, and ongoing contract negotiations. Collective bargaining also determines behaviour while a contract is in force and during a breakdown in negotiations for a contract renewal, as well as decertification. Certification is a formal process whereby a union is recognized by the LRB as the bargaining agent for a group of employees. Decertification is the process by which workers can take away a union’s right to represent them. The whole bargaining process and the important certification procedure are shown in Figure 13.3. As you can see, the process is regulated. This process is also democratic and, as in any election, the minority has to accept the majority’s decision. All parties involved have to follow a strict procedure to ensure that everybody is playing by the rules. For example, did you know that it is illegal for employers to fire employees for union activities?

Objectives of Organized Labour The objectives of labour unions shift with social and economic trends. For example, in the 1970s the primary objective of unions was to obtain additional pay and benefits for their members. Throughout the 1980s, objectives shifted toward issues related to job security and union recognition. Today, we are seeing increasing emphasis on skills upgrading as the basis of job security. In some industries, union jobs have been declining due to outsourcing and offshoring. Unions recognize that they must work closely with management if jobs are going to be kept within Canada. Having a skilled and productive workforce is one major way to do this. “Unions have a dual responsibility—to ensure that their members are getting the best wage and benefit packages and working conditions available in the marketplace, and equally

LO3

Describe the collective bargaining process. collective bargaining

The process whereby union and management representatives negotiate a contract for workers.

certification

Formal process whereby a union is recognized by the Labour Relations Board (LRB) as the bargaining agent for a group of employees.

decertification

Process by which workers can take away a union’s right to represent them.

LO4

Outline the objectives of labour unions. 489

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■ FIGURE

13.3

STEPS IN COLLECTIVE BARGAINING Employees interested in joining a union contact a union representative.

The union campaigns for employees to sign union membership cards.

When enough cards are signed (each province/territory and the federal government has laws outlining the exact percentage of workers who must sign), an application to represent the employees is made by the union to the LRB.

The LRB reviews the application and will either order a vote or certify the union automatically, depending on the province/territory.

If the majority votes against the union, it is not certified and workers cannot reapply for another vote for six months or a year.

If employees vote for the union (each province/territory and the federal government has laws outlining the exact percentage of workers who must accept), it becomes the sole bargaining agent for that group of employees. This is known as certification.

A large company may have several locations and the union local may be part of a larger unit that bargains with the employer on behalf of all employees, negotiating a master contract.

A union local is established and members elect officers who appoint a negotiating committee to negotiate a contract with the employer.

If rejected, the negotiating committee must try to renegotiate and come up with a contract that a majority of members will accept.

Members vote to accept or reject the negotiated contract.

If an acceptable contract is not negotiated and the LRB conciliation procedures fail, then a strike or lockout may take place.

If accepted by the majority, the contract governs all of the working conditions during the contract. Strikes or lockouts are illegal while the contract is in force.

A grievance committee is set up with members from both sides to handle any contract violation complaints.

If a new contract is not negotiated before existing one expires, it still remains in force until various LRB conciliation procedures have been followed.

If disagreement persists, a strike or lockout is then legal; should either occur, the contract then lapses.

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as important, to ensure that their contractual employers not only remain competitive, but have a labour partner that can assist them in expanding their businesses and market share,” says Varricchio. “Through the union structure and the collective bargaining process, employers can level off labour costs across entire markets and create optimum standards in training and health and safety practices that can be properly enforced through their collective agreements.”32 The negotiated labour–management agreement, informally referred to as the labour contract, sets the tone and clarifies the terms and conditions under which management and the union will function over a specific period. However, it doesn’t necessarily end © Shutterstock/AlexLMX negotiations between them because there are someIn the 1990s and 2000s, unions focused on job security, but the issue of global competition and its effects often times differences concerning interpretations of the took centre stage. Unions were a major opponent of agreement. “Common sense and good business pracNAFTA as they feared that this would lead to job losses. tice dictates the importance of having a binding writFast forward 20 years to the renegotiation of NAFTA. ten contract between parties engaged in any business Representatives from public- and private-sector unions transaction, thereby protecting the interests of all parurged the federal government to ensure that any new ties involved,” says Varricchio. “Such a contract spells trade deals were fair and would protect workers’ rights, public services, the government’s right to regulate in the out the responsibilities and obligations of both parties, public’s interest, and the environment.34 What was the itemizes the compensation package agreed to for seroutcome of this renegotiation? vices rendered or products purchased, and identifies a mechanism to be employed to settle differences in the event either party violates the terms of the mutually agreed-to contract. How much more labour contract important is it to have such a contract between an employer and his/her employees protect- (negotiated labour– management ing the interests of everyone, especially in an environment where the dynamics between agreement) many different personalities could adversely impact the productivity of the workforce and Informal name for negotiated labourthe business?”33 Figure 13.4 lists topics commonly negotiated by management and labour. Unions management agreement, which is attempt to address their most pressing concerns in the labour contract, such as job security an agreement that and outsourcing. Negotiations can cover a wide range of work topics, and it can take a long sets the tone and time to reach an agreement. To save jobs, for example, some unions have granted manage- clarifies the terms and conditions under ment concessions, or givebacks, of previous gains. (Review the Analyzing Management which management Decisions discussion near the end of the chapter for more on this topic.) Both public- and and labour agree to private-sector unions face challenges as they try to maintain remaining wage and fringe function over a period of time. benefits achieved in past negotiations. Labour unions generally insist that contracts contain a union security clause stipulat- givebacks ing that employees who benefit from a union must either officially join or at least pay dues Concessions made by union members to to the union. There are basically four types of agreements: 1. A closed shop agreement specifies that workers have to be members of a union before

being hired for a job. In effect, hiring is done through the union. 2. In a union shop agreement, the employer is free to hire anybody but the recruit must

then join the union within a prescribed period (usually 30, 60, or 90 days).

management; gains from previous labour negotiations are given back to management to help employers remain competitive and thereby save jobs. 491

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union security clause

Provision in a negotiated labour– management agreement that stipulates that employees who benefit from a union must either officially join or at least pay dues to the union.

closed shop agreement

Clause in a negotiated labour–management agreement that specifies workers need to be members of a union before being hired.

union shop agreement

Clause in a negotiated labour–management agreement that says workers do not have to be members of a union to be hired, but must agree to join the union within a prescribed period.

agency shop (Rand formula) agreement

Clause in a negotiated labour–management agreement that says employers may hire non-union workers; employees are not required to join the union but must pay union dues.

open shop agreement

Clause in a negotiated labour–management agreement that says employees are free to join or not join the union and to pay or not pay union dues.

checkoff

A contract clause requiring the employer to deduct union dues from employees’ pay and remit them to a union.

492

■ FIGURE

13.4

ISSUES IN A NEGOTIATED LABOUR–MANAGEMENT AGREEMENT Labour and management often meet to discuss and clarify the terms that specify employees’ functions within the company. The topics listed in this figure are typically discussed during these meetings.

1. Management rights 2. Union recognition 3. Union security clause 4. Strikes and lockouts 5. Union activities and responsibilities a. Dues checkoff b. Union bulletin boards c. Work slowdowns 6. Wages a. Wage structure b. Shift differentials c. Wage incentives d. Bonuses e. Piecework conditions f. Tiered wage structures 7. Hours of work and time-off policies a. Regular hours of work b. Holidays c. Vacation policies d. Overtime regulations e. Leaves of absence f. Break periods g. Flextime h. Mealtime allotments

8. Job rights and seniority principles a. Seniority regulations b. Transfer policies and bumping c. Promotions d. Layoffs and recall procedures e. Job bidding and posting 9. Discharge and discipline a. Suspension b. Conditions for discharge 10. Grievance procedures a. Arbitration agreement b. Mediation procedures 11. Employee benefits, health, and welfare

3. The agency shop agreement states that employers may hire workers who are not

required to join the union but the workers must pay a special union fee or regular union dues. Based on the Rand formula devised by Supreme Court Justice Rand in 1946, employees in a unionized environment have to fund the bargaining and administration of the collective agreement.35Labour leaders believe that such fees or dues are justified because the union represents all workers in collective bargaining, not just its members. 4. An open shop agreement gives workers the option to join or not join the union if one

exists. A worker who does not join cannot be forced to pay a fee or dues.36

Regardless of which hiring condition prevails, the labour contract usually contains checkoff as a standard clause. Checkoff requires the employer to deduct union dues from employees and to pay and remit them to the union (except for non-members in an open shop). Otherwise, it would be harder to collect union dues individually. “A collective agreement provides protection if an employer wishes to discharge an employee,” states employment lawyer, Aaron Rousseau, Partner of Rousseau Mazzuca LLP. “In the absence of a collective agreement, employers can fire non-union employees for almost any reason so long as the employees are given reasonable notice, or payment

CHAPTER 13 Dealing with Employee–Management Issues

in lieu of notice. In a union environment, the employer needs to prove misconduct on the part of the employee before he or she can be fired.”37 Review Figure 13.5 for some additional advantages of joining a union. Note the disadvantages as well.

Resolving Labour– Management Disputes The negotiated labour–management agreement becomes a guide to work relations between management and the union. However, it does not necessarily end negotiations © Mike Kemp/Blend Images between them because sometimes there are Future contract negotiations will likely focus on evolving workplace differences concerning interpretations of the issues such as child and elder care, worker retraining, two-tiered wage agreement. For example, managers may inter- plans, drug testing, and other such work-related issues. Job security will remain a top union priority due to job losses from outsourcing, pret a certain clause in the agreement to mean that they are free to select who works over- offshoring, and free trade agreements. Can you think of other issues? time. Union members may interpret the same clause to mean that managers must select employees for overtime on the basis of employee grievance A charge by seniority. If the parties can’t resolve such disagreements, grievances may be filed. employees that A grievance is a charge by employees that management is not abiding by or fulfill- management is ing the terms of a negotiated labour–management agreement as they perceive it. Over- not abiding by or time rules, promotions, layoffs, transfers, and job assignments are generally sources of fulfilling the terms of the negotiated employee grievances. Handling grievances demands a good deal of contact between union labour–management officials and managers. Grievances, however, do not imply that the company has broken agreement. the law or the labour agreement. In fact, the vast majority of grievances are negotiated and shop stewards resolved by shop stewards (union officials who work permanently in an organization and Union officials who represent employee interests on a daily basis) and supervisory-level managers. However, if work permanently in a grievance is not settled at this level, formal grievance procedures will begin. Figure 13.6 an organization and represent employee illustrates the steps a formal grievance could follow. interests on a daily basis.

■ FIGURE

13.5

SOME ADVANTAGES AND DISADVANTAGES OF JOINING A UNION Union Advantages

Union Disadvantages

Members are generally better protected when disputes arise

Promotion and pay may be determined by seniority

Usually receive higher wages and better benefit coverage

Negotiated compensation usually leads to higher production costs

Better negotiating power as a group rather than as an individual

You may not be agree with all of the union’s decisions (e.g., to go on strike)

Source:“Joining a union in Canada,” Working in Canada, accessed April 29, 2018, www.workingin-canada.com/jobs/job-tools/joining-a-union.

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■ FIGURE

13.6

GRIEVANCE RESOLUTION PROCESS The grievance process may move through several steps before the issue is resolved. At each step, the issue is negotiated between union officials and managers. If no resolution is achieved, an outside arbitrator may be mutually agreed on. If so, the decision by the arbitrator is binding (legally enforceable).

Arbitrator or arbitration panel

National union officer

Union grievance committee

Local union Union business manager

No resolution Negotiation

Corporate officer

No resolution Negotiation

Plant manager

Labour relations manager Higher-level manager

No resolution Union shop steward

Negotiation

Supervisory manager

Employee grievance

bargaining zone

Range of options between the initial and final offer that each party will consider before negotiations dissolve or reach an impasse.

494

Conciliation, Mediation, and Arbitration During the contract negotiation process, there is generally a bargaining zone, which is the range of options between the initial and final offers that each party will consider before negotiations dissolve or reach an impasse. If labour and management negotiators aren’t able to agree on alternatives within this bargaining zone, conciliation is the next necessary step. In their legislation, all jurisdictions provide for conciliation and mediation services.38

CHAPTER 13 Dealing with Employee–Management Issues

Conciliation is the use of a government-appointed third party (usually through the Ministry of Labour) to explore solutions to a labour–management dispute.39 If conciliation fails, the union is then in a legal position to strike and the employer is also in a legal position to declare a lockout. Mediation is the use of a third party, called a mediator, who encourages both sides in a dispute to consider negotiating and often makes suggestions for resolving the matter. Keep in mind that mediators evaluate facts in the dispute and then make suggestions, not decisions. Elected officials (current and past), attorneys, and professors often serve as mediators in labour disputes. In 2011, the National Football League and the Players Association asked for the assistance of a federal mediator in their attempt to forge a new contract. The National Hockey League made the same request during the labour dispute in 2012.40 A more extreme approach used to resolve conflicts is arbitration, which is an agreement to bring in an impartial third party (a single arbitrator or arbitration panel) to render a binding decision in a labour dispute. Arbitration may be voluntary, where both sides decide to submit their case to an arbitrator. Arbitration may also be compulsory, where a decision is imposed by the government (e.g., by Parliament or a provincial legislature). Compulsory arbitration usually occurs in a major or prolonged strike with serious consequences for the public. Usually, non-grievance arbitration (say, for contract disputes) is voluntary and grievance arbitration is compulsory. Employees who are designated as providing essential services (e.g., police, firefighters, and hospital employees) usually do not have the right to strike as stated in their collective agreements, and their disputes must be settled through binding arbitration.41 While binding arbitration may result in a new collective agreement, it can leave contentious issues unresolved. Both mediation and arbitration can be difficult, lengthy, and costly procedures, especially when both sides are locked into rigid positions. That is why negotiators from both sides usually try to settle their differences before resorting to these steps.

Do you recall when the 12 000 Ontario colleges’ professors, instructors, counsellors and librarians were on strike for five weeks? They were legislated back to work and outstanding issues were sent to binding arbitration. About 27 500 of the roughly 250 000 full-time students withdrew and received a tuition refund rather than finish their semester on a condensed timeline.42 Should educational-services employees be designated as essential services?

With changes to collective bargaining laws, the federal government now has the right to decide whether labour disputes are solved by conciliation, arbitration, or strike. Smaller unions that have picked arbitration in the past could be forced to go on strike in the event of an impasse.43 What can these smaller unions do to strengthen their positions in such negotiations?

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conciliation

The use of a government-appointed third part to explore solutions to a labour– management dispute.

mediation

The use of a third party, called a mediator, who encourages both sides in a dispute to continue negotiating and often makes suggestions for resolving the dispute.

arbitration

An agreement to bring in an impartial third party (a single arbitrator or a panel of arbitrators) to render a binding decision in a labour dispute.

PROGRESS ASSESSMENT

• In the collective bargaining process, what happens after certification? • What issues are included in a negotiated labour-management agreement? • What are the differences between conciliation, mediation, and arbitration?

Negotiation Tactics If labour and management cannot reach an agreement through collective bargaining and negotiations break down, either side, or both, may use specific tactics to enhance their negotiating position and perhaps sway public opinion. Be aware that the great majority of labour negotiations end successfully without the disruption of a strike or lockout. Remember that mediation and arbitration are always available to the parties in dispute. They may take advantage of these procedures before, during, or after any of these tactics are exercised. Let us look at some examples next.

Union Tactics

Unions primarily use strikes and boycotts to get desired changes. A strike occurs when workers collectively refuse to go to work. Strikes have been the most potent union tactic. LO5 They attract public attention to a labour dispute and can cause operations in a company to Describe the slow down or totally cease. Besides refusing to work, strikers may also picket the company, negotiation tactics walking around carrying signs and talking with the public and the media about the issues in used by labour the dispute. Unions also use picketing as an informational tool before going on strike. Strikes and management sometimes lead to the resolution of a labour dispute; however, they also have generated vioduring conflicts. lence and extended bitterness. Often after a strike is finally settled, labour and management remain openly hostile toward each other and mutual complaints of violations of the negotiated labour–management agreement continue. Prior to the actual strike, union leaders call for a strike vote, which is a secret ballot authorizing the union leadership to call a strike. This democratic vote is necessary if a potential strike is to be considered legal. If the union gets a strong mandate—say, more than 80 percent in favour of a strike—it can use this as a lever to convince management to accept its demands without actually going on strike. © The Canadian Press/Dave Chidley Union tactics include rotating strikes—on For one month, GM CAMI’s 2800 assembly factory workers in and off or alternating among different plants Ingersoll, Ontario, went on strike largely over job security issues. The or cities—rather than a full-fledged strike in strike was costing GM $5 million a day and had the strike continued which all employees are off the job for the much longer, the plant would have been closed.44 If you were an duration. With rotating strikes, employees employee, would you be willing to take such a risk? What can other still get some pay, which is not the case in an unions learn from this strike? all-out strike. Many unions build up a strike 496

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fund from union dues and use it to give their members strike pay, but that is usually a fraction of their normal wages. Sometimes, in important or long-lasting strikes, other unions will give moral or financial aid. Unions also attempt boycotts as a means to obtain their objectives in a labour dispute. Boycotts can be classified as primary or secondary. A primary boycott occurs when organized labour encourages both its members and the general public not to buy the products or services of a firm engaged in a labour dispute. A secondary boycott is an attempt by labour to convince others to stop doing business with a firm that is © Keith Dunne the subject of a primary boycott. For example, a union Striking Labatt’s brewery workers in St. John’s, can initiate a secondary boycott against a supermarket Newfoundland, launched a boycott campaign asking the public to stop buying products produced at the site.45 chain because the chain carries goods produced by a Would striking employees influence your purchasing company that is the target of a primary boycott. decisions? Sabotage (where workers damage machines), sitins (where workers occupy the workplace and refuse to move), or work-to-rule (where workers follow the operating rules of the workplace in every strike A union strategy in detail to slow down the work) are other tactics that have been used by unions. Why might which workers refuse unions prefer these tactics to going on strike? to go to work.

Management Tactics

primary boycott When a union

Like labour unions, management also uses specific tactics to achieve its workplace goals. encourages both its A lockout is an attempt by management to put pressure on union workers by temporarily members and the general public not to closing the business. When workers don’t work, they don’t get paid; however, without buy the products of products and services, there are no profits. Management most often uses injunctions and a firm involved in a labour dispute. strikebreakers to counter labour demands it sees as excessive. An injunction is a court order directing someone to do something or to refrain from doing something. Management has sought injunctions to order striking workers back to work, limit the number of pickets that can be used during a strike, or otherwise deal with actions that could be detrimental to the public welfare. For a court to issue an injunction, management must show just cause, such as the possibility of violence or the destruction of property. Sometimes, a company may try to bring in replacement workers. Known as strikebreakers (called scabs by unions), they are workers who are hired to do the © Allison Joyce/Getty Images Were you impacted by the 2012–2013 National Hockey jobs of striking employees until the labour dispute is resolved. Why do you think strikebreakers have been League (NHL) lockout that lasted almost four months? Here you see fans protesting the lockout outside of the a particular source of hostility and violence in labour NHL offices. What were the starting and ending positions relations? Read the Making Ethical Decisions box on of the NHL and the NHL Players Association? this issue for further insight. 497

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Making ETHICAL DECISIONS Walking a Fine Line Your wallet is almost empty, and bills for school expenses, food, and other expenses keep piling up. You read last weekend that Shop-Till-You-Drop, a local grocery chain in your town, is looking for workers to replace striking members of United Food and Commercial Workers (UFCW). The workers are striking because of a reduction in health insurance benefits and reduced payment to their pensions.

secondary boycott An attempt by labour to convince others to stop doing business with a firm that is the subject of a primary boycott.

lockout

An attempt by management to put pressure on unions by temporarily closing the business.

injunction

A court order directing someone to do something or to refrain from doing something.

strikebreakers

Replacement workers hired to do the jobs of striking employees until the labour dispute is resolved. 498

Several classmates at your school are UFCW members employed at Shop-Till-You-Drop stores, and many other students at your school are supporting the strike. The stores also employ many people from your neighbourhood whose families depend on the income and benefits. Shop-Till-YouDrop argues that the company has made a fair offer to the union workers, but with the increasing cost of health care and other benefits, the workers’ demands are excessive and could force the company into bankruptcy. Shop-Till-You-Drop is offering replacement workers an attractive wage rate and flexible schedules to cross the picket line and work during the strike. The company has even suggested the possibility of permanent employment, depending on the results of the strike. As a struggling student, you could use the job and the money for tuition and expenses. Will you cross the picket line and apply? What could be the consequences of your decision? Is your choice ethical?

Legislation Under the Labour Relations Code, essential services legislation restricts the right to strike for various levels of civil servants and quasi-government employees such as hospital workers and electric and telephone utility workers. The provinces and the federal government forbid some employees under their jurisdiction from striking. In other cases, certain minimum levels of service must be provided. For example, the Ontario government designated the Toronto Transit Commission as an essential service based on the argument that the city could not afford another transit strike or lockout. The last one cost Toronto’s economy an estimated $50 million a day.46 Essential services designation means that in the event that a new agreement cannot be reached, unresolved issues will go to arbitration unless the government imposes a new contract unilaterally. Federal or provincial governments have the power to end a particular strike or lockout by passing back-to-work legislation. Back-to-work legislation is a special law passed by the federal or provincial government that orders an end to a labour– management dispute in an industry the government decides is essential to the operation of the economy. Such legislation has been used to end strikes by teachers, nurses, postal workers, bus drivers, and others. Typically, back-to-work legislation is imposed only after some time has passed, further efforts at reaching a settlement have failed, there is considerable public pressure to end the dispute, or the service provided by striking

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workers is deemed essential to the economy or public safety. On some occasions, it has been introduced as a pressure tactic to get negotiations to move faster. Union supporters believe that back-towork legislation is a denial of the legal right to strike; therefore, to a certain extent it is a restriction of the democratic rights of individuals. Consequently, there is often much controversy about such legislation. It is rarely used to deal with strikes against private businesses. If union members remain on strike after they have been legislated back to work, they are engaging in an illegal strike and are subject to punishment (e.g., substantial fines), as are all lawbreakers.

Here Air Canada workers demonstrate against back-to-work legislation in 2011.47 Under what circ*mstances do you feel the government should impose back-to-work legislation?

back-to-work legislation

PROGRESS ASSESSMENT

• How have union objectives changed over time?

• What are the major tactics used by unions and by management to assert their power in contract negotiations?

• When is back-to-work legislation used?

The Future of Unions and Labour– Management Relations Unions in the future will be quite different from those in the past. To grow, unions will have to include more white-collar, female, and foreign-born workers. The traditional manufacturing base that unions depended on for growth needs to give way to organizing efforts in industries like health care, information technology, agriculture, and financial services.48 Perhaps what’s even more concerning to labour unions is that union membership is highest among workers 45–54 years old and lowest among workers 15–24 years old.49 Many unions have taken on a new role in assisting management in training workers, redesigning jobs, and assimilating the changing workforce. They help recruit and train foreign workers, unskilled workers, and others who need special help in adapting to the job requirements of the service and knowledge-work economy.

A special law passed by the federal or provincial government that orders an end to a labour–management dispute in an industry the government decides is essential to the operation of the economy.

Students are a source of membership for unions. What does a union need to do to gain your support? What messages would resonate with you?

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According to The Conference Board of Canada, “Wages continue to be the top bargaining issue for both management and unions. After this, top priorities for unions include a reduction of precarious employment and improved health and safety provisions for their members. Top priorities for employers include flexible work practices, and improving productivity and business competitiveness.”50 Joseph S. Mancinelli, LiUNA International Vice President and Regional Manager for Central and Eastern Canada, understands these challenges and opportunities. According to Mancinelli, to meet such challenges, “Pensions, level of skills, quality of work, productivity, © Liuna! and safety in the workplace are our priority. Meeting these challenges LiUNA members live in every community cannot be addressed through adversarial conflict, but rather in a new across Canada. They build highways era of unionism, through good relations with our employer partners. and bridges, waterways and dams, hospitals, schools and government Good relations are paramount in ensuring such progress and evolution. institutions. They make streets, Working closely with our employer partners can produce more benefits communities, cities and provinces work. for our members, our employers, and the entire construction industry. From low rise to high rise construction, LiUNA has an established labour–employer co-operation trust specifpouring concrete to landscaping homes, ically set up for both parties to work together, outside of the bargainLiUNA members literally and figuratively ing table, to find creative and innovative solutions and initiatives that build Canada. Do you see any signs of LiUNA’s work in your community? result in positive outcomes for both labour and management. LiUNA is proud of this strong partnership which we have developed and honed over the years to procure work opportunities. Concurrently, LiUNA has actively pursued public–private partnerships (P3s). Through the successful $7 billion Labourers’ Pension Fund of Central and Eastern Canada, sound, financially viable partnerships have evolved resulting in excellent returns on pension fund dollars and employment opportunities for our members. LiUNA partners with numerous construction companies to fund and build projects across the country also furthering strong labour–management relations while procuring work for our members, and the growth of our pension fund. LiUNA has built a legacy of meeting its challenges head on, always putting the best interests of our members first.”51 Both public- and private-sector union members face challenges as they try to maintain remaining wage and fringe benefit gains achieved in past negotiations. With provinces and cities facing serious debt problems, government officials are trying to cut costs, particularly labour costs. However, provinces with public-sector unions face limitations in cutting labour costs because of prior agreements with the unions. How organized labour and management handle challenges identified throughout this textbook may well define the future of labour unions. After the Progress Assessment, we will look at other issues facing employees and managers in the 21st century.

PROGRESS ASSESSMENT

• What types of workers should unions target in order to grow? • What are future priorities for unions and for employers? • What behaviour should be evident in a new era of unionism? 500

CHAPTER 13 Dealing with Employee–Management Issues

Controversial Employee– Management Topics Today, the government is taking a more active role in requiring businesses to provide workers with certain benefits and assurances. Employees are raising questions of fairness, income inequality, and workplace security. Let’s look at several key workplace issues, starting with executive compensation.

Executive Compensation Cristiano Ronaldo kicks and dribbles his way to $88 million a year, Dwayne Johnson “rocks” his way to $64 million a year, Taylor Swift sings her way to $170 million a year, and Dr. Phil counsels his way to over $88 million a year.52 Is it out of line, then, for some of Canada’s top executives to make millions of dollars in annual compensation (e.g., salary, bonuses, and incentives)? Chapter 2 explained that the free-market system is built on incentives that allow top executives to make large amounts of money. Today, however, the government, shareholders, unions, and employees are challenging this principle and arguing that executive compensation has gotten out of line. In theory, CEO compensation and bonuses are determined by the © Frederick M. Brown/Getty Images firm’s profitability or an increase in its share price. The logic of this USA Today listed Disney as one of the assumption was that as the fortunes of a company and its shareholders eight U.S. companies that most owed grew, so would the rewards of the CEO. Today, however, executives their employees a raise. The average generally receive stock options (the ability to buy company stock at a Disney World cast member earned $9.48 set price at a later date) and restricted stock (stock issued directly to an hour in 2017. Meanwhile Disney’s the CEO that cannot be sold for usually three or four years) as part of chair and CEO Robert Iger enjoyed a total compensation package of approximately their compensation.53 Today, stock and stock options account for over 54 $44 million. Corporate boards of directors 50 percent of a CEO’s compensation. The Adapting to Change box determine executive compensation. Do you discusses questions about the value of using performance-based pay think this is a fair system of compensation for executives. for CEOs? Do you think workers should What is even more frustrating to those who question how much have input? chief executives are paid is that the CEOs are often rewarded richly if their company does not meet expectations, or they leave under presLO6 sure.55 Target Canada’s failed expansion into Canada, in addition to the company’s credit card data breach, contributed to Gregg Steinhafel’s exit as Target Corporation’s CEO. Esti- Explain some of mated by Fortune Magazine to be $61 million, his overall severance package included today’s employee– severance pay of $15.9 million, stock options, and pension and deferred compensation. management Contrast this to the $70 million Target made available for designated employee trust funds issues. offered to the 17 600 workers that were laid off due to the closure of its 133 Canadian stores.56 Some CEOs are also awarded fat retainers, consulting contracts, and lavish perks when they retire. The late management consultant Peter Drucker criticized executive pay levels and he suggested that CEOs should not earn more than 20 times the salary of the company’s lowest-paid employee.57 Noted economist Thomas Piketty agrees and believes this income 501

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Adapting to CHANGE Paying for Underperforming When it comes to paying CEOs, it’s not unusual for companies to tie 60–80 percent of their compensation to performance. The idea sounds logical and simple. Companies set a target for profits and if the firm beats the target, the CEO gets a bigger payout. If he or she falls short, the CEO gets less or maybe nothing. The message is concise and direct: the boss makes money only if the company does well. Unfortunately, recent research on executive compensation has found that the nature of CEOs’ work is not really suited to performance-based pay. In fact, performance-based pay can actually have dangerous outcomes for companies that implement it. The suggestion offered is not to pay CEOs less (even though many argue that should

be the case); the argument is that CEOs are better compensated using a fixed salary system. Researchers sifting through pay data from 750 companies found that when a company sets a profit target, firms tend to either hit the target exactly or beat it by just a penny per share. As they dug deeper into the data, they found that firms that just barely beat the profit target were more likely to have cut research spending, cut overhead expenses and jobs, cut advertising, and/or used accrual accounting to boost revenues to hit the target number. They also found evidence that when a firm had a strong year, a lower profit was often reported by charging expenses against this year’s profit or using accounting tactics to lower the company’s profit. Why? Because the current year’s results become the baseline for next year’s bonus plan, and the idea is to keep the profit target low making it easier to achieve next year’s goal. Additional research suggests that performancebased pay is best suited for jobs with routine tasks; the job of a top manager is certainly not a routine one. Top managers need to be innovative and creative, open to learning about workplace changes, and able to develop new solutions for the many challenges they regularly face. If CEOs’ financial rewards are linked to particular performance measures, it can draw their attention away from long-term results that would benefit the company more.

Sources: Peter Coy, “Heresy! Stop Paying CEOs Performance Bonuses,” Bloomberg Businessweek, February 26, 2016; David Nicklaus, “Professors Explore Dark Side of Performance-Based Pay,” St. Louis Post-Dispatch, April 5, 2016; Dan Cable and Freek Vermeulen, “Stop Paying Executives for Performance,” Harvard Business Review, February 2016; Theo Francis and Joann S. Lublin, “Should Bar Be Lifted on CEO Bonuses?” The Wall Street Journal, June 2, 2017.

inequality is harmful and unnecessary, “When you pay $10 million instead of $1 [million], you don’t have necessarily better performance or much higher productivity.... So I think there is really very little evidence that we need to pay people 100 times or 200 times the average wage to get them to work.” Unfortunately, not many companies agree and few have placed such limits on executive compensation.58 According to the Canadian Centre for Policy Alternatives (CCPA), the average Canadian CEO salary among the top 100 highest-paid executives on the S&P/TSX Composite Index topped $10.4 million, which is 209 times the annual wage of an average Canadian at $49,738.59 (Valeant Pharmaceuticals International’s CEO, Joseph Papa, ranked number one with a total pay package of $83 million.60) Compare this to the average CEO of a Fortune 500 company that makes over 344 times the average salary of workers in his or her company.61 Another area that concerns the CCPA is Canada’s low-wage problem. Read the Seeking Sustainability box for a discussion on the living wage. 502

CHAPTER 13 Dealing with Employee–Management Issues

Seeking SUSTAINABILITY The Living Wage: Why Minimum Wage Is Not Enough The minimum (hourly) wage refers to the legal minimum all employers must pay their workers. It varies across Canada and even within some provinces, depending on the job. For example, in Quebec, the minimum wage is $12.00 but if gratuities apply to the role, the wage is $9.80. In recent years, there has been a rise in the living wage movement due to a recognition of Canada’s low-wage problem. A significant proportion of fulltime workers earn significantly less than a middle-class wage, and struggle to make ends meet. With a higher standard than the minimum wage, a living wage is calculated as the hourly rate at which a household (e.g., a family of four with two parents working full-time at this hourly rate) can pay for necessities, support the healthy development of their children, escape severe financial stress, and participate in the social, civic, and cultural lives of their communities. The living wage varies across communities. For example, in 2018 the living wage in metro Vancouver

Yukon

$11.51

was $20.91, in contrast to British Columbia’s minimum wage of $11.35. The Community Social Planning Council of British Columbia believes that the difference between the minimum and the living wage is the result of public policy failure to provide inputs such as universal affordable child care, affordable rental and social housing, affordable enrolment in health care, and affordable transportation. If there were adequate universal supports for low-income families in these areas, their struggles to make ends meet would be significantly reduced, which would be reflected in a lower living wage. Do you agree with this assessment? According to a Canadian Centre for Policy Alternatives (CCPA) report, many workers do not earn a living wage because of discrimination. Female workers and those who are not Caucasian, immigrants, Aboriginal people, those living with disabilities, or similarly disadvantaged people are all segregated into low-wage

Nunavut

$13.00

Northwest Territories

Newfoundland and Labrador

$11.15

$13.46

hewan

Alberta

$15.00

Manitoba

$11.35

Saskatc

$12.65

$10.96

British Columbia

Quebec

$12.00

Prince Edward Island

$11.55

Ontario

$14.00

New Brunswick

Nova Scotia

$11.00

$11.25 Minimum hourly wages as of October 1, 2018 Source: Data based on: “Payroll Legislation,” Payworks Inc., accessed May 1, 2018, http://www.payworks.ca/payrolllegislation/MinimumWage.asp.

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jobs. As a result, the CCPA calls on governments and employers to deliver more equitable compensation incomes for vulnerable workers. Economists who support higher minimum wages believe that increases can be positive for both workers and employers in reducing turnover and raising productivity. For example, two-thirds of U.K. living-wage employers report significant positive impacts on recruitment, retention, and absenteeism.

Living wages are adopted voluntarily by employers and some examples include Vancity, the Canadian Cancer Society, and the Hamilton-Wentworth District School Board. What are employer reservations for a living wage policy? How can employees influence a living wage policy in their place of employment? What is the government’s role, if any, in influencing living wage policies?

Sources:“Canadian Living Wage Framework,” Living Wage Canada, accessed May 2, 2018, http://www.livingwagecanada.ca/index. php/about-living-wage/about-canadian-living-wage-framework/; “Minimum Wage by Province,” Retail Council of Canada, accessed May 2, 2018, http://www.retailcouncil.org/quickfacts/minimum-wage; “Payroll Legislation,” Payworks Inc., accessed May 2, 2018, http:// www.payworks.ca/payroll-legislation/MinimumWage.asp; Iglika Ivanova, Seth Klein and Tess Raithby, “Working for a Living Wage: Making Paid Work Meet Basic Family Needs in Metro Vancouver,” Canadian Centre for Policy Alternatives, April 25, 2018, https://www .policyalternatives.ca/sites/default/files/uploads/publications/BC%20Office/2018/04/BC_LivingWage2018_final.pdf; Andrew Jackson, “Why paying a living wage makes good business sense,” The Globe and Mail, March 26, 2017, https://www.theglobeandmail.com/reporton-business/economy/economy-lab/why-paying-a-living-wage-makes-good-business-sense/article5152175/; and Mary Cornish, “A Living Wage As a Human Right,” Canadian Centre for Policy Alternatives, October 5, 2012, https://www.policyalternatives.ca/publications/reports/ living-wage-human-right.

Still, it’s important to remember that some executives are responsible for multibilliondollar corporations, work 70-plus hours a week, and often travel excessively. Many have turned potential problems at companies into successes and reaped huge benefits for employees and shareholders as well as themselves. Furthermore, there are few seasoned, skilled professionals who can manage large companies, especially troubled companies looking for the right CEO to accomplish a turnaround. There’s no easy answer to the question of what is fair compensation for executives, but it’s a safe bet the controversy will not go away.

Child Care

On-site day care is not a common employee benefit. Although it is often expensive to operate, it can contribute to greater employee satisfaction and productivity. Who should pay for employee benefits like child care and elder care? Should it be the employee or the company or both?

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Today women make up almost half (47.7 percent) of the workforce in Canada.62 Child care is an increasingly important workplace issue as absences related to child care cost Canadian businesses millions of dollars annually and the issue of who should pay for employee child care raises a question that often divides employees. Many coworkers oppose child care benefits for parents or single parents, arguing that single workers and single-income families should not subsidize child care. Others contend that employers and the government have the responsibility to create child care systems to assist employees. Some large firms, such as IBM and Johnson & Johnson, offer child care as an employee benefit. Some additional child-care benefits provided by employers include:

CHAPTER 13 Dealing with Employee–Management Issues

∙ Discount arrangements with national child-care chains. ∙ Vouchers that offer payments toward child care the employee selects. ∙ Referral services that help identify high-quality child-care facilities to employees. ∙ On-site child-care centres where parents can visit children at lunch or during lag times throughout the workday. ∙ Sick-child centres to care for moderately ill children. Increasing numbers of single-parent and two-income households ensure that child care will remain a key employee–management issue even as businesses face the growing challenge of elder care.63

Elder Care Nearly one in six Canadians (16.1 percent of the population at approximately 5.8 million) is at least 65 years old with Canada now having more seniors than children aged 1 to 14 years (16 percent).64 The likelihood that a Canadian aged 65 will live to 90 has also increased significantly. While Baby Boomers will not have to concern themselves with finding child care for their children, they will confront another problem: how to care for older parents and other relatives. In the future, more workers are expected to be involved in the time-consuming and stressful task of caring for an aging relative. Companies are seeing reduced productivity, and increased absenteeism and turnover from employees who are responsible for aging relatives.65 Employees with elder-care responsibilities need information on medical, legal, and insurance issues, as well as the full support of their supervisors and company. Such caregivers may require flextime, telecommuting, part-time employment, or job sharing. Some firms offer employee assistance programs. Such elder-care management services can include a needs assessment program for the employee, and health-spending accounts in which employees can put aside pre-tax income for elder-care expenses. However, the number of companies offering elder care benefits still lags behind the number offering child care benefits and small businesses lag considerably behind large companies in providing elder care benefits. Unfortunately, the government does not provide much relief as heavy financial burdens for care are placed on family caregivers. As more experienced and high-ranking employees begin caring for older parents and relatives, the costs to companies will rise even higher. This argument © Radius Images/Alamy makes sense, since older, more experienced workers (who are most affected by elder care issues) often hold Canadians are living longer which means that they will likely require elder care in addition to providing elder jobs more critical to the company than those held by younger workers (who are most affected by child-care care for older parents or relatives. Do you have a relative that requires elder care? What support is available for the problems). Firms now face the fact that transfers and person receiving care as well as for the care provider? Is promotions are often out of the question for employees this level of care sustainable? whose elderly parents or relatives need ongoing care. 505

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Unfortunately, as Canadians age, the elder-care situation will grow considerably worse, meaning this employee–management issue will persist well into the future.

PROGRESS ASSESSMENT

• How does top-executive pay in Canada compare with the pay of average workers? • How does the living wage compare to the minimum wage? • What are some of the issues related to child care and elder care, and how are companies addressing these issues?

You and Unions Do you think that unions are still necessary? We are fortunate to be living in a democratic country where free and private enterprise is the vital feature of our economic system. We believe that all citizens have the right to do what they can, within legal and ethical limits, to better themselves. Improving your financial situation is an admired goal, and those who do so are usually seen as good examples. If you select the entrepreneurial route, you will try to build a successful company by providing a necessary service or product in a manner that your customers appreciate. If you are successful, you will ultimately accumulate profits, personal wealth, and financial security for yourself and your family. One of the costs of doing business that you will be keeping an eye on is wages, salaries, and benefits paid to employees. Will you consider unions nothing but a hindrance? Suppose that you do not see yourself as an entrepreneur and instead go the employee route. Imagine yourself ten years down the road: you have a partner and two children and are now working for a large company in a non-managerial role. Will you seek the best salary you can possibly get? How about working hours? Your partner also works and you need flexible arrangements to be able to spend time with your children and deliver them to school and various other activities. How about overtime demands on the job that cut into time with your family? Will you have adequate, affordable child care? Firms that have healthy employee–management relations have a better chance to prosper than those that don’t. Taking a proactive approach is the best way to ensure positive employee–management work environments. The proactive manager anticipates potential sensitive issues and works toward resolving them before they get out of hand—a good lesson for any manager.

SUMMARY LO1

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Trace the history of organized labour in Canada. Organized labour in Canada dates back to the 1800s. Early unions on the wharves of Halifax, St. John’s, and Quebec existed during the War of 1812 to profit from labour scarcity. Craft unions represented shoemakers and printers. Many of the early labour organizations were local or regional in nature.

CHAPTER 13 Dealing with Employee–Management Issues

Describe some of the main objectives of labour and whether they were achieved. Unions hoped to improve workers’ poor conditions and wages by forming unions that would fight for workers’ rights. This has largely been achieved, and many early demands are now entrenched in law. Describe some of the unions in existence today. CUPE and Unifor are two of the largest unions in Canada. They represent workers from different industries in the economy. Many unions in Canada are national in nature. Many also belong to international organizations. The Canadian Labour Congress, which represents 3.3 million unionized workers, is the largest labour congress in Canada. LO2

Discuss the major legislation affecting labour unions. Much labour legislation has been passed by federal and provincial governments. What is the major piece of labour legislation? The Canada Labour Code outlines labour legislation as it applies to federal government employees, who represent approximately 6 percent of all workers in Canada. Each provincial jurisdiction in Canada has its own labour legislation and employment standards that apply to workers within its borders. What are workplace rights? All workers in Canada have the right to work in a safe and healthy environment. Workplace laws include the right to participate in the workplace health and safety activities, and the right to know about actual and potential dangers in the workplace. A safe and healthy workplace environment also includes one that is free of sexual harassment, violence, and bullying.

LO3

Describe the collective bargaining process. Collective bargaining is the process by which a union represents employees in relations with their employer. What is included in collective bargaining? Collective bargaining includes how unions are selected, the period prior to a vote, certification, ongoing contract negotiations, and behaviour while a contract is in force. What are the steps in the collective bargaining process? Refer to Figure 13.3 for the steps in the collective bargaining process.

LO4

Outline the objectives of labour unions. The objectives of labour unions shift in response to changes in social and economic trends. What is the purpose of the negotiated labour–management agreement? Informally referred to as the labour contract, the labour–management agreement sets the tone and clarifies the terms and conditions under which management and the union will function over a specific period. What topics typically appear in labour–management agreements? Labour–management agreements may include issues such as management rights, union security clauses, hours of work, vacation policies, job rights and seniority principles, and employee benefits. See Figure 13.4 for a more detailed list.

LO5

Describe the negotiation tactics used by labour and management during conflicts. If negotiations between labour and management break down, either or both sides may use certain tactics to enhance their positions or sway public opinion.

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What are the tactics used by unions in conflicts? Unions primarily use strikes and boycotts. What are the tactics used by management in conflicts? Management can use lockouts, injunctions, and strikebreakers. LO6

Explain some of today’s employee–management issues. Some employee–management issues are executive compensation, child care, and elder care. What is a fair wage for executives? The market and the businesses in it set executives’ salaries. What is fair is open to debate. How are some companies addressing the child-care issue? Responsive companies are providing child care on their premises, discounts with child-care chains, vouchers to be used at the employee’s chosen care centre, and referral services. What problems do companies face with regard to elder care? Companies are seeing reduced productivity and increased absenteeism and turnover from employees who are responsible for aging relatives. As more experienced and high- ranking employees begin caring for elders, the costs to companies will rise even higher since older workers often hold jobs more critical to the company than those held by younger workers.

KEY TERMS agency shop (Rand formula) agreement 492 arbitration 495 back-to-work legislation 498 bargaining zone 494 bullying 488 certification 489 checkoff 492 closed shop agreement 491 collective bargaining 489 conciliation 495 coverage rate 482 craft union 478 decertification 489

directly chartered union 479 givebacks 491 grievance 493 independent local organization 479 industrial union 479 injunction 497 international union 480 labour relations board 488 labour union 476 lockout 497 mediation 495 national union 480 negotiated labour–management agreement (labour contract) 491

open shop agreement 492 primary boycott 497 Rand formula (agency shop agreement) 492 secondary boycott 497 sexual harassment 485 shop stewards 493 strike 496 strikebreakers 497 union security clause 491 union shop agreement 491 unionization rate (union density) 481 workplace violence 486

and Indeed, as well as through the Career Centre at your school. ∙ Labour relations specialist—interprets and administers labour contracts regarding issues such as wages and salaries, health care, pensions, and union and management practices.

CHAPTER 13 Dealing with Employee–Management Issues

∙ Human resource specialist—recruits, screens, interviews, and places workers; handles other human resource work, such as those related to employee relations, compensation and benefits, and training.

∙ Arbitrator and mediator—facilitates negotiation and dialogue between disputing parties to help resolve conflicts outside of court.

CRITICAL THINKING 1. Do you believe that union shop agreements

are violations of a worker’s freedom of choice in the workplace? Do you think open shop agreements unfairly penalize workers who pay dues to unions they have elected to represent them in the workplace? 2. Why are unionization rates much higher in

the public sector than in the private sector? Are you more or less attracted to the public sector as a result of this coverage?

3. Do you agree that back-to-work legislation

is a denial of the legal right to strike; therefore, to a certain extent it is a restriction of the democratic rights of individuals? Factor in the rights of employers in your answer. 4. If a company provides employer-paid child

care services to workers with children, should those who don’t have children or don’t need child care services be paid extra?

DEVELOPING CAREER SKILLS Key: Team

Analytic

1. With several classmates, investigate the

emerging role of employee associations and professional associations as replacements for labour unions. What are the advantages and disadvantages of each of these three models? Which model provides the greatest legal protection in case of a disagreement between labour and management? Share your findings with the class. 2. Do businesses and government agencies

have a duty to provide additional benefits to employees beyond fair pay and good working conditions? Propose a benefits system that you consider fair and workable for employees and employers. 3. Debate the following statement with sev-

eral classmates: “Non-union firms are better managed (or perform better) than unionized

Communication

Technology

firms.” To get a better feeling for the other side’s point of view, take the opposite side of this issue from the one you normally would. Consider such questions as: Do unions serve a purpose in some industries? Do unions make Canada less competitive in global markets? 4. Compile a list of two or three employee–

management issues not covered in the chapter. Compare your list with those of several classmates and see which issues you selected in common and which are unique to each individual. Pick an issue you all agree will be important in the future and discuss its likely effects and outcomes. 5. With a classmate, investigate which unions

have been in the news over the past six months. What were the issues? Were these issues resolved? Share this information with the class.

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ANALYZING MANAGEMENT DECISIONS Plant Closings, Unions, and Concessions Over the past decade, the Canadian economy has witnessed a series of plant closing or lockout actions taken by foreign companies against employees in Canada. Plants and offices have laid off thousands of people or closed because of bankruptcy, consolidation, or transfer of operations to other lower-wage countries. In some cases, management advised unions that the only way that they could avoid closing would be substantial concessions in wages and other changes in existing contracts. American-based heavy equipment maker Caterpillar Inc. ended a one-month standoff with locked-out workers by closing its 62-year-old Electro-Motive plant in London, Ontario, eliminating about 450 manufacturing jobs that mostly paid twice the rate of a U.S. counterpart. Caterpillar spokesman Rusty Dunn summed up the reasoning as follows: “All facilities must achieve competitive costs, quality, and operating flexibility to remain viable in the global marketplace. Expectations at the London plant were no different.” The closing angered former CAW president Ken Lewenza. Caterpillar had demanded pay cuts of 50 percent in many job categories, elimination of a defined-benefit pension plan, reductions in dental and other benefits, and the end of a cost-of-living adjustment. “I’ve never had a situation where I’ve dealt with such an unethical, immoral, disrespectful, highly profitable company like Caterpillar,” said Lewenza. During bargaining he told the company’s negotiators: “If it’s in your business plan to close us, don’t punish us, let’s work out a closure agreement. They said, ‘We have no intention of closing the facility.’” In another industry, negotiations were long and hard won. Workers at international mining giant Vale in Ontario approved a new labour agreement, ending a year-long strike in 2010. Vale said it needed to cut labour costs to keep its operations competitive, but workers argued the Brazilian company made billions of dollars a year and did not need concessions from workers. The strike was bitter at times, with the union accusing Vale of bad faith bargaining and the company

510

taking the union to court over a variety of alleged incidents on the picket lines. The output from the Canadian operations—which account for more than 10 percent of the world’s nickel supply—was significantly decreased during the strike. The agreement resulted in more than 3000 workers receiving a raise and a big signing bonus. However, it also saw new employees placed on a defined-contribution pension plan as opposed to the existing defined-benefit plan. Defined-contribution plans depend on market returns and do not guarantee a steady income, unlike defined-benefit plans. Givebacks are not being asked just by foreignowned companies. For example, since Air Canada came out of bankruptcy protection in 2004, it received concessions in the areas of wages, jobs, and pensions from its unions as part of its restructuring conditions. Eight years later, union members grew tired of givebacks and voted to go on strike. The federal government stepped in and threatened the unions with back-to-work legislation before imposing binding arbitration in some instances. Keep in mind that non-unionized employees also saw tens of thousands of jobs eliminated. For example, in 2001 Nortel Networks Corporation had more than 90 000 employees worldwide. Ten years later, and after a couple of rounds of bankruptcy, no one had a job. Nortel’s union and former employees failed to persuade an Ontario appeals court they were entitled to retirement and severance payments. No employees are safe as companies try to remain competitive in the marketplace. Union leaders and their members are in a quandary when faced with such decisions. Sometimes they think management is bluffing. Sometimes they are reluctant to give up contract conditions they fought long and hard for. Accepting wage cuts or benefit reductions when the cost of living continues to rise is not easy. Agreeing to staff reductions to save other jobs is also a tough decision. Unions worry about where these concessions will end. Will there be another round of layoffs or even worse in a few months?

CHAPTER 13 Dealing with Employee–Management Issues

These examples highlight some of the dilemmas facing unions and employers. The business environment demands that companies become more efficient

and productive. However, this will not happen unless there is mutual respect between management and labour.

Sources: James R. Hagerty, “Caterpillar Closes Plant in Canada After Lockout,” The Wall Street Journal, 4 February 4, 2012, http://online.wsj.com/article/ SB10001424052970203889904577200953014575964.html; Greg Keenan, “Caterpillar pulls plug on London plant,” The Globe and Mail, February 3, 2012, www .theglobeandmail.com/globe-investor/caterpillar-pulls-plug-on-london-plant/article544321/; “Timeline: Nortel—The rise and fall of a telecom giant,” Global News, January 18, 2012, www.globalnews.ca/timeline+nortel+-+the+rise-+and+fall+of+a+telecom+giant/6442560329/story.html; “Ont. Vale workers vote to approve new contract,” The Canadian Press, January 13, 2010, www.ctvnews.ca/ont-vale-workers-vote-to-approve-new-contract-1.530694; Brent Jang, “Air Canada, Union at Odds Over Proposed Moratorium on Pension Payments,” The Globe and Mail, May 5, 2009, www.theglobeandmail.com/servlet/story/LAC.20090505. RAIRCANADA05ART1908/TPStory/Business; “Study: The Year in Review in Manufacturing,” Statistics Canada, April 29, 2009, www.statcan.gc.ca/dailyquotidien/090429/dq090429b-eng.htm; Paul Kunert, “Nortel Networks Lays off 3,200 Staff,” Computer Weekly, February 26, 2009, www.computerweekly.com/ Articles/2009/02/26/235029/nortel-networks-lays-off-3200-staff.htm; “Air Canada: Fly it Right!” Canadian Auto Workers Union, 2009, www.caw.ca/en/7423.htm; and “Nortel Rebuilding and Hiring Again: CEO,” CBC News, September 29, 2006, www.cbc.ca/money/story/2006/09/29/zafirovski-nortel.html.

Discussion Questions 1. What would you recommend to union work-

ers whose employer is threatening to close down unless they agree to wage decreases or other concessions? 2. Is there some alternative to cutting wages or

closing down? What is it?

can such doubts be settled so that more open negotiations can take place? 4. Does government have a right to interfere with

organizations (i.e., union and employer) that have already negotiated a collective agreement and force them to renegotiate? Explain.

3. Union workers often feel that the company

is bluffing when it threatens to close. How

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RUNNING CASE Human Resources at Fox 40 International Inc. For successful Canadian entrepreneur and inventor Ron Foxcroft, it all started in 1982 when he purchased Fluke Transport, a Southern Ontario trucking business. The company slogan—If It’s On Time ... It’s A “FLUKE”— was soon recognized throughout North America. Over the years, Foxcroft diversified into new ventures and the Foxcroft Group of Companies now includes Fluke Transportation Group, Fluke Warehousing Inc., Foxcroft Capital Group, Fox 40 International Inc., and Fox 40 USA Inc. The formation of Fox 40 International Inc. (Fox 40) is the result of a dream for a pealess whistle. When developing his first whistle, Ron was motivated by his knowledge and experience as an international basketball referee. Frustrated with faulty pea whistles, he spent three years of development with design consultant Chuck Shepherd, resulting in the creation of the Fox 40® Classic Whistle. Fast forward 25 years and Fox 40 dominates the global whistle industry. Fox 40 is a privately held, family-run organization with Ron as the Chief Executive Officer and son, Dave, as the President and Chief Operating Officer. The company employs 35 individuals, and as many as 45 during peak seasons. You may be surprised to learn that there is no formal human resource department in this company. In fact, there are no layers of management. Among other reasons, this is to empower employees, regardless of position, to develop solutions to problems, with the goal of satisfying customers. It is important to create a good working environment. Open communication is encouraged throughout the organization. There is an open-door policy within the three teams—Corporate, Product and Marketing, and Sales and Customer Service—and across the teams. Senior management is directly accessible by both employees and customers. The lack of internal titles is another signal that the owners do not stand on ceremony. Outside of the organization, however, employees have titles as this is expected by external stakeholders. Hiring the right people is critical. According to Ron, “Managers hire people that are dumber than them,

but owners hire people that are smarter than them.” With this in mind, new hires are expected to contribute to the organization. There is a focus on hiring self-starters who require minimum supervision. Chemistry with current employees (i.e., organizational fit), strong communication skills, a customer-focus, enthusiasm, and honesty are required qualities. Initiative is expected and employees should have the courage to go to Ron or Dave with suggestions on how to make the company better. Examples can include improving processes, developing new products, or improving the customer experience. For example, Dave and his team approached Ron with the idea to develop a new variation of the Fox 40 Classic. Ron struggled with this as the Fox 40 Classic was his first whistle and he was not convinced that this was the right direction. The team believed that there were some untapped opportunities. One advantage would be that a new whistle could be registered for an 18-year patent and trademark. Ron agreed and the Fox 40 Classic Eclipse was created. This whistle was re-engineered for maximum performance and style. The Fox 40 Classic Eclipse was also the first whistle to be developed using exclusive SpectraBurst™ glow-in-the dark colours that would last up to ten hours. Since its introduction in the marketplace, feedback has been tremendous. At Fox 40, new hires start in entry-level positions. They should be prepared to do any job (except take out the garbage; this is the CEO’s job). Orientation includes on-the-job training. As Dave says, “The best way to learn is by doing.” Employees are assigned tasks with a timeline and their performance is monitored. During a performance review, discussions centre on finding opportunities that will tap into each employee’s strengths while also discussing how to improve on any weaknesses. Fox 40 is a non-unionized work environment. “We pay our employees fairly,” says Ron. For the production staff, manufacturing output is tracked. Those that exceed their targets are also compensated with money and gift certificates that can be redeemed at local retailers.

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CHAPTER 13 Dealing with Employee–Management Issues

Discussion Questions 1. Considering Douglas McGregor’s research

3. What are some company advantages in not

on managers’ attitudes toward their workers. How would you categorize the management style described at Fox 40?

having a unionized workforce? What are some employee advantages in not belonging to a labour union?

2. What pay systems does Fox 40 use for its pro-

duction staff? (Hint: Review Figure 12.5 for some examples.)

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Marketing: Helping Buyers Buy

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Define marketing and explain how the marketing concept applies to both for-profit and non-profit organizations.

LO2 Describe the four Ps of marketing. LO3 Identify the steps in the marketing research process, and explain how marketers use environmental scanning to learn about the changing marketing environment.

LO4 Compare the consumer market to the business-to-business market. LO5 Describe the market segmentation process, and the role of relationship marketing. LO6 Explain how marketers meet the needs of the consumer market through the study of consumer behaviour.

P R O F I L E GETTING TO KNOW: MICHELLE PHAN, FOUNDER, IPSY

514

When Michelle Phan began uploading makeup

thanks to its squad of social media influencers who

tutorials on YouTube in 2007, she never thought

shine spotlights on the latest products.

her videos would someday be the foundation of a

Phan and her more than 8 million YouTube

multimillion-dollar business. But thanks to her deter-

subscribers form the core of this operation. She

mination and unique sense of style, Phan was able

joined the video-sharing site at age 19 and mostly

to transform her hobby into a successful company

uploaded videos of dogs because they cheered her

named ipsy. Valued at more than $500 million, the

up. As time went by, though, she noticed that some

beauty start-up has become a marketing juggernaut

of her videos about beauty tips were racking up

CHAPTER 14 Marketing: Helping Buyers Buy

that had it all. “I depicted myself as the girl I wanted to be, with money and a great family,” said Phan. “Ialways had that yearning, that hunger, to one day be independent and be my own person and build my own world.” This world grew rapidly as her videos started bringing in millions of viewers. In 2011 she and a partner used this exposure to start ipsy, a beauty product subscription service. For $10 a month, subscribers receive a “Glam Bag” full of an ever-changing array of makeup and other beauty Source: © Katie Falkenberg/Los Angeles Times/Getty Images

products. What’s more, Phan developed an ingenious business model that allowed her to keep costs low. Rather than pay companies to stock

tens of thousands of views. So along with producing

its products, ipsy instead receives items for free

more makeup-centric clips, Phan also applied for a

in exchange for marketing exposure. Along with

new program that allowed YouTube creators to col-

Phan, the company employs a staff of beauty vlog-

lect ad revenue from their videos. Although rejected

gers (video bloggers) who feature the products in

at first, she eventually made it into the program and

demonstration videos. These employees are then

started earning 5 cents a day from ads. Of course,

aided by thousands of independent vloggers who

the laughable payday didn’t faze Phan. She recog-

create content under the ipsy brand in exchange

nized that YouTube had the potential to be an enor-

for mentoring and networking opportunities.

mously influential platform and wanted to get in on

Thanks to this army of influencers, the company

the ground floor. “I thought, if [YouTube] is going to

has amassed 1.5 million subscribers and brought

be the global television of the future, I need to build

in hundreds of millions of dollars in venture capital

my brand here,” said Phan.

investment.

Plus, Phan gained immense personal sat-

For Phan, this is just the start of her story.

isfaction from making videos that allowed her to

As she maintains this growing beauty empire, she

broadcast a different version of herself to the world.

also plans to start a music label and a premium

Whereas her on-screen persona seemed to have a

video company, and publish a comic book. The

perfect life, the off-screen reality was much differ-

one component that will likely unite these vary-

ent. Phan is the daughter of Vietnamese immigrants.

ing ventures will be Phan’s widespread marketing

Her father dropped out of her life for 10 years as he

influence. As she once said: “Influence is the new

ran from debts brought on by his gambling problem.

power—if you have influence you can create a

Her mother supported the family as a beautician,

brand.”

but they had little extra money to spend. So Phan

In this chapter you’ll learn how master mar-

learned from an early age how to make things hap-

keters like Michelle Phan identify their audience and

pen for herself. For instance, when she needed a

figure out how to reach them. Whether through dis-

computer, she raised the cash by selling candy to

tribution, advertising, or publicity, successful mar-

her classmates. Then when she began making vid-

keting makes a connection with customers that they

eos, she created a glamorous, confident persona

won’t soon forget.

Sources: Michelle Phan, “Michelle Phan Relaunches Em Cosmetics and Explains Her Social Media Detox,” Teen Vogue, April 11, 2017; Gillian Fuller, “Michelle Phan Returns To YouTube After A Yearlong Hiatus To Explain Why She Left,” Allure, June 2, 2017.

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LO1

Define marketing and explain how the marketing concept applies to both for-profit and non-profit organizations.

What is Marketing?

The term marketing means different things to different people. Many think of marketing as simply “selling” or “advertising.” Yes, selling and advertising are part of marketing, but it is much more. The Canadian Marketing Association defines marketing as a set of business practices designed to plan for and present an organization’s products or services in ways that build effective customer relationships.1 We can also think of marketing, more simply, as the activities buyers and sellers perform to facilitate mutually satisfying exchanges. A market (note that this is the core word in marketing) is defined as a group of people with unsatisfied wants and needs who have the marketing resources and the willingness to buy. A market is, therefore, created as a result of this A set of business demand for goods and services. What marketers do at any particular time will depend practices designed to plan for and present an on what needs to be done to fill customers’ needs. This “find a need and fill it” concept organization’s products is core to marketing. or services in ways In the past marketing focused almost entirely on helping the seller sell. That is why that build effective many people still think of it as mostly selling, advertising, and distribution from the seller customer relationships. to the buyer. Today, much of marketing is instead about helping the buyer buy.2 Let’s examine a couple of examples. Today, when people want to buy a new or used car, they often go online first. They go to a website like Cars.ca to search for the vehicle they want. At other websites they compare prices and features. By the time they go to the dealer, they may know exactly which car they want and the best prices available. The websites have helped the buyer buy. Not only are customers spared searching one dealership after another to find the best price, but manufacturers and dealers are eager to participate so that they do not lose customers. The future of marketing is doing everything one can to help the buyer buy. The easier a marketer makes the purchase decision process, the more that marketer will sell.3 Let’s look at another example. In the past, one of the few ways students and parents could find the school with the right “fit” was to travel from campus to campus, a gruelling and expensive process. Today, schools use podcasts, virtual tours, live chats, and other interactive technologies to make on-campus visits less necessary. Such virtual tours help students and their parents buy. Of course, helping the buyer buy also helps the seller sell. Think about that for a minute. In the vacation market, many people find the trip they want themselves. They go online to find the right spot, and then make choices, sometimes questioning potential sellers. In industries like this, the role of marketers is to make sure that a company’s products © Shutterstock/Zapp2Photo or services are easily found online, and that the comShoppers use different sources of information when making pany responds effectively to potential customers. purchasing decisions. Would you use your smart phone with Websites like Expedia, Travelocity, and Priceline an augmented reality app to check the number of social allow customers to find the best prices or set their media likes and sale prices when shopping for clothes? own prices. 516

CHAPTER 14 Marketing: Helping Buyers Buy

These are only a few examples of the marketing trend toward helping buyers buy. Consumers today spend hours searching the Internet for good deals. Wise marketers provide a wealth of information online and even cultivate customer relationships using blogs and social networking sites such as Facebook and Twitter.4 Online communities provide an opportunity to observe people (customers and others) interacting with one another, expressing their own opinions, forming relationships, and commenting on various goods and services. It is important for marketers to track what relevant bloggers are writing by doing blog searches using key terms that define their markets. Vendors who have text-mining tools can help companies measure conversations about their products and their personnel. Much of the future of marketing lies in mining such online conversations and responding appropriately. For example, marketers are learning why people shop online, put the goods into a shopping cart, but then end the sale before they give their credit card information.5

The Evolution of Marketing What marketers do at any particular time depends on what they need to do to fill customers’ needs and wants, which are continually changing. Let’s take a brief look at how those changes have influenced the evolution of marketing. The evolution of marketing includes five eras, also known as orientations: (1) production, (2) sales, (3) marketing concept, (4) market orientation, and (5) social media marketing. Figure 14.1 highlights the timeline for these eras.

THE PRODUCTION ERA From the time the first European settlers arrived in Canada until the start of the 1900s, the general philosophy of business was, “Produce as much as you can because there is a limitless market for it.” Given the limited production capability and the vast demand for products in those days, that production philosophy was both logical and profitable, as demand exceeded supply. Business owners were mostly farmers, carpenters, and trade workers. They needed to produce more and more, so their goals centred on production. ■ FIGURE

14.1

MARKETING ERAS There are five different marketing eras in the history of North American business.

Production Era Sales Era Marketing Concept Era Market Orientation Era Social Media Marketing Era 1860 1880 1900 1920 1940 1960 1980 2000 2020

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THE SALES ERA By the 1920s, businesses had developed mass production techniques (such as automobile assembly lines), and production capacity often exceeded the immediate market demand. Therefore, the business philosophy turned from producing to selling. Most companies emphasized selling and advertising in an effort to persuade customers to buy existing products. Few offered extensive service after the sale.

THE MARKETING CONCEPT ERA

During the Sales Era, the focus of marketing was on selling, with little service afterward and less customization. What economic and social factors made this approach appropriate for the time?

marketing concept A three-part business philosophy: (1) a customer orientation, (2) a service orientation, and (3) a profit orientation.

After World War II ended in 1945, returning soldiers started new careers and began families, sparking a tremendous demand for goods and services. The postwar years launched the sudden increase in the birth rate that we now call the baby boom, and also a boom in consumer spending. Competition for the customer’s dollar was fierce. Businesses recognized that they needed to be responsive to customers if they wanted to get their business, and a philosophy called the marketing concept emerged in the 1950s. The marketing concept had three parts: 1. A customer orientation. Find out what consumers want

and provide it for them. (Note the emphasis on meeting consumer needs rather than on promotion or sales.) That is exactly what Cassandra Rush, founder of Sassy Cassy’s Boots Inc. did when she started her company, which specialized in boots with varying calf sizes; “Every other boot company only does standard sizing for calves, which is about 15 inches around the calf of the leg,” she said. “The market calls for bigger sizes because a lot of women can’t zip up regular boots. My product is different because I offer different calf sizing so the boots are better customized to the woman’s leg.”6

2. A service orientation. Make sure everyone in the organization has the same objective:

customer satisfaction. This should be a total and integrated organizational effort. That is, everyone from the president of the company to the delivery people should be customer oriented. Does that seem to be the norm today? 3. A profit orientation. Focus on those goods and services that will earn the most profit

and enable the organization to survive and expand to serve more customers’ wants and needs. It took a while for businesses to implement the marketing concept. That process went slowly during the 1960s and 1970s. During the 1980s, businesses began to apply the marketing concept more aggressively than they had done over the preceding 30 years. That led to a focus on customer-relationship management (CRM) that has become very important today. We explore that concept next.

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THE MARKET ORIENTATION ERA7 Many organizations transitioned from the marketing concept era to the market orientation era. Firms with a market orientation focus their efforts on (1) continuously collecting information about customers’ needs and competitors’ capabilities, (2) sharing this information throughout the organization, and (3) using the information to create value, ensure customer satisfaction, and develop customer relationships. It is not surprising that organizations with a market orientation actually engage in customer-relationship management (CRM)—the process of building longterm relationships with customers by delivering customer value and satisfaction. Retaining customers over time, or managing the entire customer life cycle, is a cost-effective way for firms to grow in competitive markets. The idea is to enhance customer satisfaction and stimulate long-term customer loyalty. For example, most airlines offer frequent-flyer programs that reward loyal customers with free flights.

WildPlay Element Parks is an aerial adventure company with locations in British Columbia, Ontario, and New York. The outdoor recreation company offers ways for people to have fun and challenge their self-perceived boundaries. WildPlay’s nature-based activities for adults, teens, and kids include Bungy Jump, Primal Swings, tree-top Monkido Aerial Adventure courses, What’s To Fear Jumps, and long Zip Line rides. Would you be interested in this experience? How would you share it with your friends via social media?

THE SOCIAL MEDIA MARKETING ERA8 Social media is the term commonly given to websites and online tools that allow users to interact with each other in some way—by sharing information, opinions, knowledge, and interests. As the name implies, social media involves the building of communities or networks, encouraging participation and engagement. There are two distinct dimensions to the social media marketing era: 1. Social media marketing is about consumer-generated online-marketing efforts to

p romote brands and companies for which they are fans (or conversely, negatively promoting brands and companies for which they are non-fans). 2. Social media marketing is the use by marketers of online tools and platforms to pro-

mote their brands or organizations. The most common tools or platforms used by both consumers and organizations are social networking sites (e.g., Facebook, LinkedIn, Instagram, and Twitter), blogs, wikis, podcasts, and other shared media sites such as YouTube. It is the first dimension of social media marketing that is changing the rules of marketing and ushering in a new era of business. Social media creates a platform that empowers customers and provides them with an opportunity to communicate with an organization and with other customers. In fact, one author, Erik Qualman, suggests social media marketing is creating a new form of economy called socialnomics, where consumers will no longer search for products or services, but rather will find them via social media. He suggests that social media is transforming the way we live and the way organizations do business.

market orientation

Focusing efforts on (1) continuously collecting information about customers’ needs and competitors’ capabilities, (2) sharing this information throughout the organization, and (3) using the information to create value, ensure customer satisfaction, and develop customer relationships.

customer- relationship management (CRM)

The process of building long-term relationships with customers by delivering customer value and satisfaction.

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Increased exposure Increased traffic Developed loyal fans Provided marketplace insight Generated leads Increased thought leadership Grew business partnerships Improved sales 0

100

2017 Social Media Marketing Industry Report, SocialMediaExaminer.com

There are many benefits to social media marketing. Were you surprised by any of these statistics?

social media

The term commonly given to websites and online tools that allow users to interact with each other in some way—by sharing information, opinions, knowledge, and interests.

social media marketing

Consumer-generated online-marketing efforts to promote brands and companies for which they are fans (or conversely, negatively promoting brands and companies for which they are nonfans), and the use by marketers of online tools and platforms to promote their brands or organizations.

EMERGING: THE MOBILE/ON-DEMAND MARKETING ERA The digital age is increasing consumers’ power and pushing marketing toward being on demand, not just always “on.” Consumers are demanding relevant information exactly when they want it, without all the noise of unwanted messages. Search technologies have made product information pervasive. Consumers share, compare, and rate experiences through social media and mobile devices make it all available 24/7.9 Developments such as inexpensive microtransmitters embedded in products will allow consumers to search by image, voice, or gestures. For example, if your friend has a product you like, you will be able to just tap it with your phone and instantly get product reviews, prices, and so on. If you can’t decide what colour to buy, you can just send the photo to your Facebook friends who can vote for their favourite. After you buy it, you will get special offers from the manufacturer or its partners for similar products or services. As digital technology continues to grow, consumer demands are likely to rise in four areas:10 1. Now. Consumers want to interact anywhere and anytime. 2. Can I? They want to do new things with different kinds of information in ways that

create value for them. For example, a couple wanting to know if they can afford to buy a house for sale as they walk by could simply snap a photo and instantly see the sale price and other property information, while at the same time the device automatically accesses their financial information, contacts mortgage companies, and obtains mortgage pre-approvals. 3. For me. Consumers expect all data stored about them to be used to personalize what

they experience. 4. Simple. Consumers expect all interactions to be easy.

Companies will be looking for employees who can improve the business’ handling of social media and customer experiences. Maybe you will be one of them. The Adapting to Change box discusses a few of the challenges marketers face while using Snapchat. 520

CHAPTER 14 Marketing: Helping Buyers Buy

Adapting to CHANGE Snapping Up a Customer Base Snapchat, one of the fastest-growing social networks, can be an extremely effective marketing tool. Millennials flock to the platform in droves, and it seems everyone loves the crazy filters the app offers—even celebrities. When Ariana Grande or Kylie Jenner use a sponsored filter, marketers have the opportunity to reach over 150 million users a day in a fun way that doesn’t look like a sponsored advertisem*nt. Using Snapchat is quite the endeavour for a marketing team. When snaps expire and disappear quickly, how do you create a lasting memory? Some companies drop big money and create a really funny filter. Snapchat users are far more likely to use a filter that has a level of silliness than one that is plain and an obvious advertisem*nt. Companies then can engage with their customers by creating a compilation video of people using the filter. Users love seeing themselves featured in the company’s public feed and will work hard to find a way to be a part of it. This level of interaction doesn’t come cheap, though. Before you start coming up with a killer campaign for your business, know that you could be dropping $500,000 for a weekday or $750,000 for a holiday! Not all companies have embraced Snapchat yet and they could be missing out. Marketers may think

Snapchat’s user base is a younger demographic than their target markets. However, savvy marketing teams like L’Oréal, Burger King, and Amazon, are reaching audiences far and wide 24/7.

Sources: Jillian Hausmann, “Millennials to Marketers: Some Advice on Using Snapchat,” Advertising Age, April 4, 2016; Sujan Patel, “7Brands That Are Killing It on Snapchat,” Entrepreneur, February 6, 2017; Rachel Gee, “Snapchat Must Prove to Marketers It Has Mass Appeal,” Marketing Week, February 6, 2017; “L’Oréal Is Benefitting from Higher Digital Spending,” Forbes, February 8, 2017.

Non-Profit Organizations Prosper from Marketing Even though the marketing concept emphasizes a profit orientation, marketing is a critical part of all organizations, including non-profits. Charities use marketing to raise funds for combating world hunger, for instance, or to obtain other resources. Canadian Blood S ervices uses promotion to encourage people to donate blood when local or national supplies run low. Greenpeace uses marketing to promote ecologically safe technologies. Environmental groups use marketing to try to cut carbon emissions. Churches use marketing to attract new members and to raise funds. Politicians use marketing to get votes. Provinces and territories use marketing to attract new businesses and tourists. Some provinces, for example,

Advertising Standards Canada (ASC), a non-profit organization, is committed to ensuring the integrity and viability of advertising in Canada through responsible industry self-regulation. Would you complain to ASC if you saw an ad that you thought was untrue?

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have competed to get automobile companies from other countries to locate plants in their areas. Schools use marketing to attract new students. Other organizations, such as arts groups, unions, and social groups, also use marketing. Organizations use marketing, in fact, to promote everything from environmentalism and crime prevention (“Take A Bite Out of Crime”) to social issues (“Don’t Drink and Drive”).

The Marketing Mix © Nikki Wesley Pembleton | Photographer | Metroland Media Group, Halton

Members of the animal rights groups, Toronto Pig Save and Golden Horseshoe Farmed Animal Save, protest outside of a Fearman’s pork plant. They wish to draw attention to the 10 000 pigs a day that are killed at the Burlington, Ontario, plant to produce meat products for consumers.11 Is it ethical to buy a product when you do not know if the animal has been humanely treated? Would protests like the one above impact your food choices?

LO2

Describe the four Ps of marketing.

■ FIGURE

We can divide much of what marketers do into four factors called the four Ps to make them easy to remember. They are: 1. Product 2. Price 3. Place 4. Promotion

Managing the controllable parts of the marketing process, then, involves (1) designing a want-satisfying product, (2) setting a price for the product, (3) getting the product in a place where people will buy it, and (4) promoting the product. These four factors, highlighted in Figure 14.2, are called the marketing mix because businesses blend them in a well-designed marketing program.

14.2

MARKETING MANAGERS AND THE MARKETING MIX Marketing managers must choose how to implement the four Ps of the marketing mix: product, price, place, and promotion. The goals are to please customers and make a profit.

Marketing Manager

Marketing mix Product

522

Price

Place

Promotion

CHAPTER 14 Marketing: Helping Buyers Buy

The customer drives the marketing mix. The features and benefits of the product should meet, if not exceed, customer expectations. The price, place, and promotion is also driven by a desire to communicate with the customer in such a meaningful way that he or she seeks out the product (i.e., place) and is willing to purchase the product at the set price. These marketing decisions also need to achieve the organization’s goals and objectives.

marketing mix

The ingredients that go into a marketing program: product, price, place, and promotion.

Applying the Marketing Process The four Ps are a convenient way to remember the basics of marketing, but they do not include everything that goes into the marketing process for all products. One of the best ways to understand the entire marketing process is to take a product and follow the process that led to its development and sale. Figure 14.3 outlines some of these steps. Imagine, for example, that you and your friends want to start a money-making business near your school. You noticed a lot of vegetarians among your friends. You do a quick survey in a couple of dorms and other campus clubs and find many v egetarians— and other students who like to eat vegetarian meals once in a while. Your preliminary research indicates some demand for fast, fresh, flavourful food that is preservative-free, chemical-free, cage-free, and antibiotic-free. You check the fast-food stores in the area and find that they offer little to no information about the meats and vegetables they use other than proclaiming them to be “fresh.” And the vegetables are available only as salads. You note the farm-to-table trend (documenting the food’s path from its start at the farm to your plate on the table) has been growing nationwide. However, it appears in higher-level restaurants and some grocery stores in your area, but not in fast-food restaurants. You’ve just performed the first few steps in the marketing process. You noticed an opportunity (a need for healthy, fresh, fast food near campus). You conducted some preliminary research to see whether your idea had any merit. And then you identified groups of people who might be interested in your product. They will be your target market (the people you will try to persuade to come to your restaurant).

Designing a Product to Meet Customer Needs Once you have researched customer needs and found a target market (which we will discuss in more detail later) for your product, the four Ps of marketing come into play. You start by developing a product or products. A product is any physical good, service, or idea that satisfies a want or need plus anything that would enhance the product in the eyes of consumers, such as the brand name. In this case, your proposed product is a restaurant that would serve different kinds of fresh, fast, healthy meals at affordable prices, with the potential for providing these same foods online. Many products today are not pure goods or pure services. Figure 14.4 illustrates the service continuum, which is a range from the tangible to the intangible or good- dominant to service-dominant offerings.12 The service sector employs almost 79 percent of all working Canadians so there is a strong possibility that you will be employed in this sector.13 While this text briefly introduces you to the concepts of marketing,

product

Any physical good, service, or idea that satisfies a want or need.

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PART 5 Marketing: Developing and Implementing Customer-Oriented Marketing Plans

■ FIGURE

14.3

THE MARKETING PROCESS WITH THE FOUR PS

Find opportunities

Conduct research

Identify a target market

Product

Design a product to meet the need based on research

Do concept testing that includes determining a brand name, design, and package Price Set a price

Place

Promotion

Select a distribution system

Design a promotional program

Build a relationship with customers

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CHAPTER 14 Marketing: Helping Buyers Buy

■ FIGURE

14.4

THE SERVICE CONTINUUM Servicedominated offering (intangible)

Teaching Nursing Theatre Advertising agency Air travel Television

Products and services range from the tangible to the intangible.

Balanced

Gooddominated offering (tangible)

Fast-food restaurant Tailored suit Automobile Balanced item House equally weighted Dog food between goods Necktie Salt and services

services marketing is an area that warrants more attention as you pursue your studies in this discipline. It is a good idea at this point to do concept testing. That is, you develop an accurate description of your restaurant and ask people, in person or online, whether the idea of the restaurant and the kind of meals you intend to appeal to them. If it does, you might go to a local farm that offers chemical-free produce to get the ingredients to prepare samples of salads, wraps, and bowls that you can take to consumers to test their reactions. The process of testing products among potential users is called test marketing. For example, you can test market your preservative-free dishes and learn how best to prepare them.14 If customers like the products and agree that they would buy them, you have the information you need to find investors and a convenient location to open a restaurant. You’ll have to think of a catchy name. (For practice, stop for a minute and try to think of one.) We’ll use Harvest Gold with the tagline “Fresh from the Farm” in this text, although we’re sure you can think of a better name. Meanwhile, let’s continue with the discussion of product development. You may want to offer some well-known brand names to attract people right away. Abrand name is a word, letter, or group of words or letters that differentiates one seller’s goods or services from those of competitors. Brand names of clean, organic juice products include Odwalla, Suja, and Naked. We’ll discuss the product development process in detail in Chapter 15, in addition to the other Ps, and follow the Harvest Gold case to show you how all marketing and other business decisions tie together. For now, we’re simply sketching the whole marketing process to give you an overall picture. So far, we’ve covered the first P of the marketing mix: product. After you read the Reaching

test marketing

The process of testing products among potential users.

brand name

A word, letter, or group of words or letters that differentiates one seller’s goods or services from those of competitors.

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Reaching Beyond OUR BORDERS Oreo: World’s Favourite Cookie? So, you’ve developed a product and you’re ready to take it to the market. What should you call it? America’s favourite cookie, Oreo, is said to be a great name because the two Os nicely mirror the shape of the cookie itself. Could the name be part of the charm? Think of other names that come to mind when you think of American products: co*ke, Nike, and Häagen-Dazs. For over 100 years, to Americans an Oreo was just an Oreo: two layers of crunchy cookie sandwiching a creamy vanilla centre. For many years, Nabisco, the maker of Oreos, followed the old adage “If it ain’t broke, don’t fix it.” Today, however, if you visit the cookie aisle in your local supermarket, you may find tons of variations of Oreos such as red velvet, chocolate berry, and even Swedish Fish. If that isn’t enough, you can also buy them in mini, double stuffed, or even super thin. Keep your eyes open for a candy bar next! Nabisco knew that to keep the brand vibrant and to reach different segments of the market, expanding its offerings was a good option. It also knew it was a good decision to expand Oreos into global markets. Today, you can find Oreos in more than 100 countries across the globe. However, Nabisco understood that globally consumer tastes vary just like at home. What some people consider mouth-watering in one country will be frowned upon somewhere else. So with Oreos spanning the globe, additional variations

on the original cookie-and-creme formula became even more extreme. China, for instance, prefers double fruit blueberry and strawberry-flavoured Oreos. In Indonesia, consumers prefer chocolate-and-peanut–flavoured soft Oreos. Argentines like their Oreos stuffed with banana and dulce de leche, a type of candied milk. What works overseas can even make its way back to North America. For example, new-product Oreo Thins was first introduced in China.

Sources: Don Gil Carreon, “Mondelez Looks to Replicate China Success of Slim Oreos in U.S.,” Franchise Herald, July 7, 2015; John Bruno Turiano, “Taste Test Tuesday: International Oreos and Kit Kats,” Westchester Magazine, January 26, 2016; John Kell, “Mondelez Leans on Alibaba for E-Commerce Push in China,” Fortune, April 7, 2016; Bonnie Burton, “Yes, Swedish Fish Oreo Cookies are Real and ‘Potent’,” CNET, August 11, 2016; Maya Salam, “When Just Vanilla Won’t Do, How About a Blueberry Pie Oreo?” The New York Times, July 3, 2017.

Beyond Our Borders box that discusses how a well-known company promotes products in foreign markets, we’ll consider price.

Setting an Appropriate Price price

The money or other consideration (including other goods and services) exchanged for the ownership or use of a good or service.

526

After you’ve decided what products and services you want to offer consumers, you have to set appropriate prices. From a marketing viewpoint, price is the money or other consideration (including other goods and services) exchanged for the ownership or use of a good or service.15 The price depends on a number of factors. In the restaurant business, the price could be close to what other restaurants charge to stay competitive. Or you might charge less to bring new customers in, especially at the beginning. Or you may offer high-quality products for which customers are willing to pay a little more

CHAPTER 14 Marketing: Helping Buyers Buy

(as Starbucks does). You also have to consider the costs of producing, distributing, and promoting the product, which all influence your price. We’ll discuss pricing issues in more detail in Chapter 15.

Getting the Product to the Right Place There are several ways you can serve the market for vegetarian meals. You can have people come in, sit down, and eat at the restaurant, but that’s not the only alternative. Think of pizza. You could deliver the food to customers’ dorms, apartments, and student unions. You may want to sell your products in supermarkets or health-food stores, or through organizations that specialize in distributing food products. Such intermediaries are the middle links in a series of organizations that distribute goods from producers to consumers. (The more traditional word for them is middlemen.) Getting the product to customers when and where they want it is critical to market success. We’ll discuss the importance of marketing intermediaries and distribution in detail in Chapter 15.

A vegetarian restaurant might fill a popular need in the neighbourhood of many school campuses today. Is there one near your school? What can you tell about its application of the four Ps of marketing—product, price, place, and promotion?

Developing an Effective Promotional Strategy The last of the four Ps of marketing is promotion. Promotion consists of all of the techniques sellers use to inform people and motivate them to buy their goods or services. They include advertising, personal selling, public relations, direct marketing, and sales promotion (such as coupons, rebates, and samples). We’ll discuss promotion in detail in Chapter 15. Promotion often includes relationship building with customers. Among other activities, that means responding to suggestions consumers make to improve the products or their marketing, including price and packaging. For Harvest Gold, postpurchase, or aftersale, service may include refusing payment for meals that weren’t satisfactory and stocking additional healthy products customers say they would like. Listening to customers and responding to their needs is the key to the ongoing process that is marketing.

promotion

All of the techniques sellers use to motivate customers to buy their products.

PROGRESS ASSESSMENT

• What does it mean to “help the buyer buy”? • State each marketing era and the emphasis for each. • What are the three parts of the marketing concept? • Describe each of the four Ps of the marketing mix.

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LO3

Identify the steps in the marketing research process, and explain how marketers use environmental scanning to learn about the changing marketing environment. marketing research

The analysis of markets to determine opportunities and challenges, and to find the information needed to make good decisions.

Providing Marketers with Information Every decision in the marketing process depends on information. When they conduct marketing research, marketers analyze markets to determine opportunities and challenges, and to find information they need to make good decisions. Marketing research helps identify what products customers have purchased in the past, and what changes have occurred to alter what they want now and what they’re likely to want in the future. Marketers also conduct research on business trends, the ecological impact of their decisions, global trends, and more. Businesses need information to compete effectively, and marketing research is the activity that gathers it. You have learned, for example, how important research is when thinking of starting a healthy fast-food restaurant. Besides listening to customers, marketing researchers also pay attention to what employees, shareholders, dealers, consumer advocates, media representatives, and other stakeholders have to say. As noted earlier, much of that research is now being gathered online through social media. Despite all that research, however, marketers still have difficulty understanding their customers as well as they should.16

The Marketing Research Process A simplified marketing research process consists of at least four key steps: 1. Defining the question (the problem or opportunity) and determining the present situation 2. Collecting research data. 3. Analyzing the research data.

secondary data

Information that has already been compiled by others and published in journals and books or made available online.

4. Choosing the best solution and implementing it.

The following sections look at each of these steps.

STEP 1: DEFINING THE QUESTION AND DETERMINING THE PRESENT SITUATION Marketing researchers need the freedom to discover what the present situation is, what the problems or opportunities are, what the alternatives are, what information they need, and how to go about gathering and analyzing data.

STEP 2: COLLECTING DATA

Primary research can be used to collect information about customers’ needs, wants, and buying habits. Which primary data source do you prefer when asked to answer questions about a product or product category you use? 528

Usable information is vital to the marketing research process. Research can become quite expensive, however, so marketers must often make a trade-off between the need for information and the cost of obtaining it. Normally the least expensive method is to gather information that has already been compiled by others and published in journals and books or made available online. Such existing data are called secondary data since you aren’t the first one to gather them. Figure 14.5 lists the principal sources of secondary marketing research

CHAPTER 14 Marketing: Helping Buyers Buy

■ FIGURE

14.5

SELECTED SOURCES OF PRIMARY AND SECONDARY INFORMATION Primary Sources Survey (e.g., phone, online, and mail) Personal interview

Focus group Observation

Secondary Sources Newspapers The Globe and Mail The National Post Local newspapers (e.g., The Chronicle Herald) Internal Sources Company records Balance sheets Income statements Prior research reports Company Directories and Information Canadian Business Database Mergent Online Business Source Complete Hoovers Infomart SEDAR Passport General Sources Internet searches Google-type searches Market news, company sites, etc.

Trade Sources Nielsen Canada Conference Board of Canada Dun & Bradstreet Canada Canadian Marketing Association Retail Council of Canada Advertising Standards Canada Periodicals Journal of Marketing Journal of Consumer Research Journal of Small Business Management Marketing Magazine Advertising Age Maclean’s Canadian Business PROFIT Databases CANSIM (Statistics Canada) Canadian Business & Current Affairs Factiva LexisNexis Academic

information. Despite its name, secondary data is what marketers should gather first to avoid incurring unnecessary expense. To start your secondary data search about vegetarians, consider going online to learn about the farm-to-table movement and Canada’s farm-to-table food scene. Often, secondary data don’t provide all the information managers need for important business decisions. To gather additional, in-depth information, marketers must do their own research. The results of such new studies are called primary data. Primary data are facts, figures, and opinions that you have gathered yourself (not from secondary sources such as books, journals, and newspapers). Four sources of primary data are surveys (also known as questionnaires), personal interviews, focus groups, and observation. Primary data can be gathered by developing a list of questions and conducting a survey. Surveys (telephone, online, and mail) and personal interviews are the most common forms of primary data collection. Surveys are best carried out by independent third parties so that the information gathered and the results reported can be as objective as possible. You can use the information to understand behaviours, perceptions, preferences, and opinions. While the information gathered is useful, there are some disadvantages to this method. Not everyone who is approached may be willing to answer your questions, respondents may not be truthful, and (for written surveys) not everyone can read and write.

primary data

Data that you gather yourself (not from secondary sources such as books, journals, and newspapers).

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PART 5 Marketing: Developing and Implementing Customer-Oriented Marketing Plans

To increase the response and accuracy rate, marketers use personal interviews. P ersonal interviews are a face-to-face opportunity to ask individuals prepared questions. While this research method can be more expensive than surveys, the interviewer has the opportunity to observe reactions and to dig a little deeper with the questions if the respondent wishes to add more information. A focus group is a group of people who meet under the direction of a discussion leader to communicate their opinions about an organization, its products, or other given issues. These questions should be free of bias and participants should be encouraged to answer questions honestly without being influenced by © klenger/Getty Images the responses of others in the focus group. This text is What do you think would be the best way to survey updated periodically using many focus groups made up students about your potential new restaurant? Would of faculty and students. They tell us, the authors, what you do a different survey after it had been open a few subjects and examples they like and dislike, and the months? How could you help people find your restaurant? authors consider their suggestions for changes. That is, how could you help your buyers buy? One question researchers pay close attention to is, “Would you Observation involves watching how people behave, recommend this product to a friend?” either mechanically (e.g., Nielsen Media Research’s people meter, which is a box attached to television sets, cable boxes, and satellite dishes in selected households in Canada and the United States in order to determine the size of audiences watching television programs delivered by the networks) or in person.17 Observation may provide insight into behaviours that consumers do not even know they exhibit while shopping by watching them in person or by videotaping them. For example, companies follow customers into supermarkets to record their purchasing behaviours for products such as meat, bread, and laundry detergent. These marketers may observe that consumers do not bend to look at products, that they compare prices, and that they handle products to assess their weight. In some circ*mstances, the speed of events or the number of events being observed make mechanical or electronic observation more appropriate than personal observation; retailers, for example, can use © Christopher Weddle/Centre Daily Times/TNS/Getty Images electronic cameras to count the number of customers The authors of this text, for example, do much research entering or leaving a store.18 online as well as gather data from books, articles, Social media is playing an important role in data databases, and other sources. Through focus groups, faculty and students tell us how to improve this book mining as there is a lot of free and available inforand its support materials. We listen carefully and make mation on Facebook, Twitter, blogs, and other social as many changes as we can in response. Suggestions platforms.19 It is now common for marketers such as have included adding more descriptive captions to the Coca-Cola and WestJet Airlines to scan the web for photos in the text and making the text as user-friendly as posts that offer positive and negative comments on possible. How are we doing so far? their companies and their products.20 What are the 530

CHAPTER 14 Marketing: Helping Buyers Buy

advantages and disadvantages of this research? Do you agree that social media should complement traditional marketing research methods?

STEP 3: ANALYZING THE RESEARCH DATA Marketers must turn the data collected in the research process into useful information. Careful, honest interpretation of the data collected can help a company find useful alternatives to specific marketing challenges. For example, by conducting primary research, Fresh Italy, a small Italian pizzeria, found that its pizza’s taste was rated superior to that of the larger pizza chains. However, the company’s sales lagged behind the competition. Secondary research on the industry revealed that free delivery (which Fresh Italy did not offer) was more important to customers than taste. Fresh Italy now delivers—and has increased its market share.

focus group

A small group of people who meet under the direction of a discussion leader to communicate their opinions about an organization, its products, or other issues.

observation

Involves watching, either mechanically or in person, how people behave.

Big Data, Data Analytics, and Data Mining21 Big data is a vague term generally used to describe large amounts of data collected from a variety of sources and analyzed with an big data increasingly sophisticated set of technologies. The challenge facing managers is not data col- Large amounts of data collected from lection or even storage but how to efficiently transform the huge amount of data into useful a variety of sources information. This transformation is accomplished through the use of data analytics. (Recall and analyzed with from Appendix A that data analytics is the process of collecting, organizing, storing, and ana- an increasingly lyzing large sets of data in order to identify patterns and other information that helps business sophisticated set of technologies. people make effective decisions now and in the future.22) Using specialized computer systems, meaning is extracted from raw data with conclusions drawn and patterns identified.23 In Appendix A, you were also introduced to data mining, as a component of data analytics. (Recall that data mining is a technique to find hidden patterns and previously unknown relationships among the data.) By extracting large amounts of hidden predictive information from large databases, one can find statistical links between consumer purchasing patterns and marketing actions. For example, companies put this new science into action by tracking what is selling where and who is buying the good or service. Would you have expected that men buying diapers in the evening sometimes buy a six-pack of beer as well? Supermarkets discovered this when they mined checkout data from scanners. So they placed diapers and beer near each other, then placed potato chips between them. This resulted in increased sales on all three items. Still, data mining ultimately depends on humans— the marketing managers and researchers—and their judgements on how to select, analyze, and interpret the information. Additionally, new techniques and methods are always emerging and marketing researchers need to keep abreast of such developments. For exam© Monty Rakusen/Image Source ple, the Internet and social media is exploding as information obtained via cookies, Facebook pages, Twitter A wide variety of analytical tools is available for data scientists. Their work is also creating a new field of accounts, and Google Ad Preferences is leading to onemarketing research that focuses on data visualization, or to-one personalization and consumer targeting. the presentation of the results of the analysis. Are there You may wish to consider a career in big data. any courses that you could take in your program that Canada’s Big Data Consortium estimates that Canada’s would support a career as a data scientist? big data talent gap is between 10 500 and 19 000

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professionals with deep data and analytical skills, such as those required for roles like Chief Data Officer, Data Scientist, and Data Solutions Architect. The gap for professionals with solid data and analytical literacy to make better decisions is estimated at a further 150 000, such as those required for roles like Business Manager and Business Analyst.24 What courses can you take in the next few years that would position you for such opportunities?

STEP 4: CHOOSING THE BEST SOLUTION AND IMPLEMENTING IT After collecting and analyzing data, marketing researchers determine alternative strategies and make recommendations about which may be best and why. This final step in a research effort also includes following up on actions taken to see whether the results were what was expected. If not, the company can take corrective action and conduct new studies in its ongoing attempt to provide consumer satisfaction at the lowest cost. You can see, then, that marketing research is a continuous process of responding to changes in the marketplace and in consumer preferences. In today’s customer-driven market, ethics is important in every aspect of marketing. Ideally, companies should therefore do what is right as well as what is profitable. This step could add greatly to the social benefits of marketing decisions. See the Making Ethical Decisions box for such an example.

Making ETHICAL DECISIONS No Kidding Marketers have long recognized that children can be an important influence on their parents’ buying decisions. In fact, many direct appeals for products are focused on children. Let’s say that you have experienced a great response to a new high-fibre, high-protein cereal among health-conscious consumers. The one important group you have not been able to attract is children. Therefore, the product development team is considering introducing a child-oriented brand to expand the product line. The new children’s cereal may have strong market potential if you follow two recommendations of the research department. First, coat the flakes generously with sugar (significantly changing the cereal’s nutritional benefits). Second, promote the product exclusively on children’s TV programs. Such a promotional strategy should create a strong demand for the product, especially if you offer a premium (a toy or other “surprise”) in each box. The consensus among the research department is that kids will love the new taste and parents will agree to buy the product because of their positive impression of your best-selling brand. The research director commented, “The chance of a parent actually reading our label and noting the addition of sugar is nil.”

532

Would you introduce the children’s cereal following the recommendations of your research department? What are the benefits of doing so? What are the risks involved in following these recommendations? What would you do if you were the marketing manager for this product?

CHAPTER 14 Marketing: Helping Buyers Buy

The Marketing Environment Marketing managers must be aware of the surrounding environment when making marketing mix decisions. Environmental scanning is the process of identifying the factors that can affect marketing success. Figure 14.6 should look familiar; it is a duplication of Figure 1.5. As introduced in Chapter 1, the business environment consists of six elements—global, technological, social, competitive, economic, and legal—that either help or hinder the development of businesses. It is helpful to review them strictly from a marketing perspective.

environmental scanning

The process of identifying the factors that can affect marketing success.

GLOBAL ENVIRONMENT By going online, businesses can reach many of the world’s consumers relatively easily and carry on a dialogue with them about the goods and services they want. The globalization process puts more pressure on those whose responsibility it is to deliver products to these global customers.

TECHNOLOGICAL ENVIRONMENT The most important technological changes also relate to the Internet. Using customer databases, blogs, social networking sites, and the like, firms can develop products and ■ FIGURE

14.6

ENVIRONMENTAL SCANNING OF THE DYNAMIC BUSINESS ENVIRONMENT

NESS ENVIRO BUSI NM L A B EN O T GL The Economic Environment 1. Income and expenditures 2. Currency shifts 3. Economic systems

The Social Environment 1. Diversity 2. Demographic changes 3. Family changes

FRE E TR A DE

PER ATIVE

ice

LI TY

The Technological Environment 1. Information and technology 2. Databases 3. The Internet

TI TI PE

M CO

CUSTOMER Pro

GLOBAL

The Competitive Environment 1. Components of competition 2. Customer-driven 3. Organization structure

Pro

on oti m

Pla c

The Legal Environment 1. Tax laws 2. Contract laws 3. Elimination of corruption

EQ H T

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Internet of Things (IoT)

services that closely match customers’ needs. As you read in Chapter 10, firms can now produce customized goods and services for about the same price as mass-produced goods. Thus, flexible manufacturing and mass customization are also major influences on marketers. Check out the Spotlight on Small Business box for an example. You can imagine, for example, using databases to help you devise custom-made salads and various dishes for your customers at Harvest Gold. The Internet of Things (IoT)25 One growing area in technology is the Internet of Things (IoT), globally projected to grow to $457 billion by 2020 in comparison to $157 billion in 2016. The Internet of Things (IoT) is a system of machines or objects outfitted with data-collecting technologies so that those objects can communicate with one another. Businesses in the manufacturing, logistics and transportation, and utilities industries in particular are heavily investing in the IoT. Are you surprised to learn that improving customer experiences and safety are the two areas businesses are using data generated from IoT solutions most often today? Sensor applications of IoT include a smart home (e.g., a smart thermostat or fridge), wearables (e.g., an activity tracker such as a Fitbit), and a smart city (e.g., monitoring availability of parking spaces). Can you think of other applications?

Spotlight On SMALL BUSINESS Creating Mass Appeal for a Custom Product One item almost every person needs is footwear. Whether we’re walking around the house, running to the store, or hitting the gym, having a little cushion under your feet is essential. ISlide founder, Justin Kittredge, knew just about all anyone could know when it came to footwear. He worked for Reebok for a decade and noticed a growth in the sandal market. Kittredge broke out on his own in 2013 and revolutionized the custom footwear business. Interested customers can log onto the ISlide website and create their own design or choose from others’ creations. Like what DJ Khaled is wearing? You can find his “Bless Up” sandals on the website. Or design your own, and who knows, you may find Ellen DeGeneres or Chelsea Handler wearing your creation. Professional teams are also cashing in on ISlide—all 30 NBA teams reached a licensing agreement allowing ISlide rights to team logos. Small businesses can design their own promotional slides and have the products for sale on their site hours later. That sort of speed in the custom market was unheard of until ISlide came on the scene. Each pair is printed and shipped from a warehouse near Boston almost as fast as you

Courtesy of Islide

can order it. As technological factors evolve, we may see even more mass customization available affordably in an increasing number of industries.

Sources: Ben Osborne, “NBA Grants Licensing Rights for All Teams to ISlide,” SLAM, June 2, 2015; Melissa Malamut, “How DJ Khaled and Snapchat Made This Norwood Company Famous,” Boston.com, June 18, 2016; Emily Sweeney, “Celebrity Sandals and Socks from New Kids, Aly Raisman,” Boston Globe, October 16, 2016; Gayle Fee, “Norwood Sandal Maker Says ‘No Thanks’ to $500k from ‘Shark Tank’,” Boston Herald, October 18, 2016; Ky Trang Ho, “Major Brands, Celebrities Jump On ISlide After ‘Shark Tank’ Gave It The Boot,” Forbes, March 5, 2017.

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SOCIAL ENVIRONMENT Marketers must monitor social trends to maintain their close relationship with customers since population growth and changing demographics can have an effect on sales. The fastest-growing segment of the Canadian population is the Baby Boomers who are approaching retirement. Looking ahead, the increase in the number of older adults creates growing demand for retirement communities, health care, prescription drugs, recreation, continuing education, and more. Do you see any evidence that older people would enjoy having more locally sourced, farm-fresh meals? Other shifts in the Canadian population are creating new challenges for marketers as they adjust their products to meet the tastes and preferences of growing ethnicities. To appeal to diverse groups, marketers must listen better and be more responsive to unique ethnic needs. What might you do to appeal to specific ethnic groups with Harvest Gold?

COMPETITIVE ENVIRONMENT

Shifts in the Canadian population are creating new opportunities for marketers as they adjust their products to meet the tastes and preferences of growing ethnic groups. To appeal to diverse groups, marketers must listen better and be more responsive to unique needs. What might you do to appeal to specific ethnic groups with Harvest Gold?

Of course, marketers must pay attention to the dynamic competitive environment. Brick-and-mortar companies must stay aware of online competition. For example, in the book business, Indigo Books & Music Inc. had to adjust to the reality of Amazon’s huge selection of books at good prices. They are competing not only with Amazon.ca’s huge selection of books at good prices in Canada but also with its U.S. counterpart, A mazon.com. Since consumers can literally search the world for the best buys online, marketers must continuously adjust their pricing, delivery, and services accordingly. What opportunities do you see for Harvest Gold to make use of the Internet and social media?

ECONOMIC ENVIRONMENT When Canada experiences economic growth, customers are eager to buy expensive automobiles, watches, and vacations. But when the economy experiences slow growth, marketers have to adapt by offering products that are less expensive and more tailored to customers with modest incomes. You can see, therefore, that environmental scanning is critical to a company’s success during rapidly changing economic times. What economic changes are occurring around your school that might affect a new restaurant? How would an economic crisis or natural disaster, such as flood or drought, affect your area?

LEGAL ENVIRONMENT Governments enact laws to protect consumers and businesses. Businesses must be aware of how these laws may impact their practices. For example, the Canadian Radio-television and Telecommunications Commission (CRTC) ruled that telecommunications provider, Northwestel, had to lower its rates for certain residential Internet services in the Yukon and the Northwest Territories. “Although we recognize the exceptional situation that exists in 535

PART 5 Marketing: Developing and Implementing Customer-Oriented Marketing Plans

Northwestel’s territory, we must not let these challenges hinder the development and affordability of telecommunications services in the North,” said Jean-Pierre Blais, the CRTC’s chairman. As part of this decision, Northwestel needed to have the CRTC’s permission before any price hikes.26 A change in one environment can have an impact on another environment, or more. This is why marketers continuously scan the business environment to understand the impact of changes on their businesses. For example, a change in legislation that decreases barriers to entry will contribute to a more competitive marketplace as reflected in the increased number of competitors. Due to increased competition, prices could be lowered, and this could then be reflected in lower expenses as reflected in economic indicators.

After more than 35 years of a strict one-child policy, China agreed to change the infamous regulation. The new law allows married couples to have two children if one of the spouses is an only child. This promises to have a big impact on businesses as the policy switch could mean 9.5 million additional babies coming into the Chinese market in five years.27 What businesses would benefit from this law?

LO4

Compare the consumer market to the business-to-business market. consumer market

All individuals or households that want goods and services for personal consumption or use.

business-to-business (B2B) market All individuals and organizations that want goods and services to use in producing other goods and services or to sell, rent, or supply goods to others. 536

PROGRESS ASSESSMENT

• What are the four steps in the marketing research process?

• What is environmental scanning? How often do marketers scan the business environment?

• What factors do you consider in environmental scanning?

Two Different Markets: Consumer andBusiness-to-Business Marketers must know as much as possible about the market they wish to serve. As we defined it in Chapter 7, a market consists of people with unsatisfied wants and needs who have both the resources and the willingness to buy. There are two major markets in business: the consumer market and the business-to-business market.

The Consumer Market The consumer market consists of all individuals or households that want goods and services for personal consumption or use and have the resources to buy them. The total potential global consumer market consists of the b illions of people in global markets. Because consumer groups differ greatly in age, education level, income, and taste, a business usually cannot fill the needs of every group. It must decide which groups to serve, and then develop products and services specially tailored to their needs.

The Business-to-Business (B2B) Market The business-to-business (B2B) market consists of all individuals and organizations that want goods and services to use in producing other goods and services or to sell, rent,

CHAPTER 14 Marketing: Helping Buyers Buy

or supply goods to others. So, businesses selling to other businesses. Oil-drilling bits, cash registers, display cases, office desks, public accounting audits, and business software are B2B goods and services. Traditionally, they have been known as industrial goods and services because they are used in industry.28 B2B marketers include manufacturers; intermediaries such as wholesalers; institutions like hospitals, schools, and charities; and the government. The B2B market is larger than the consumer market because items are often sold and resold several times in the B2B process before they are sold to the final consumer. B2B marketing strategies also differ from consumer marketing because business buyers have their own decision-making process. Consider factors that make B2B marketing different from consumer marketing:

Consumers purchase for personal use. When you go shopping for yourself, such purchases are captured under the consumer market. Are you planning on purchasing something soon for yourself?

1. Customers in the B2B market are relatively few.

There are far fewer B2B firms (e.g., construction or mining operations) compared to the almost 37 million potential customers in the Canadian consumer market. 2. Business customers are relatively large. Big organizations account for most of the

employment, production of various goods and services, and purchases. Nonetheless, there are many small to medium-sized firms in Canada that together make an attractive market. 3. B2B markets tend to be geographically concentrated. Companies tend to locate close

to their suppliers and customers. For example, diamond mines tend to be concentrated in Canada’s Northwest Territories. Consequently, firms selling mining equipment may be concentrated close to these customers (or at least, within a reasonable distance). 4. Business buyers are generally more rational and

less emotional than ultimate consumers. They use product specifications to guide buying choices and often more carefully weigh the total product offer, including quality, price, and service. 5. B2B sales tend to be direct, but not always. Tire

manufacturers. for example, sell directly to auto manufacturers but use intermediaries, such as retailers, to sell to ultimate consumers. 6. There is much more emphasis on personal selling

in B2B markets. Whereas consumer promotions are based on advertising, B2B sales are based on selling. There are fewer customers and they usually demand more personal service. As well, the quantities being purchased justify the expense of a sales force.

Business customers, such as Ford Motor Company of Canada, are relatively large compared to consumer purchasers. Just think of the number of tires that are purchased by the company compared to your consumer tire purchase order. There are many job opportunities in the B2B market. Have you considered a career in this area of marketing? 537

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■ FIGURE

14.7

COMPARING BUSINESS-TO-BUSINESS AND CONSUMER BUYING BEHAVIOUR Business-to-Business Market

Consumer Market

Market structure

Relatively few potential customers Larger purchases Geographically concentrated

Many potential customers Smaller purchases Geographically dispersed

Products

Require technical, complex products Frequently require customization Frequently require technical advice, delivery, and after-sale service

Require fewer technical products Sometimes require customization Sometimes require technical advice, delivery, and after-sale service

Buying procedures

Buyers are trained Negotiate details of most purchases Follow objective standards Formal process involving specific employees Closer relationships between marketers and buyers Buy from pre-approved suppliers

No special training Accept standard terms for most purchases Use personal judgment Informal process involving household members Impersonal relationships between marketers and consumers Buy from multiple sources

Figure 14.7 shows some of the differences between buying behaviour in the B2B market and the consumer market. B2B buyers also use the Internet to make purchases. You’ll learn more about the business market in advanced marketing courses. The important thing to remember is that the buyer’s reason for buying—that is, the end use of the product—determines whether a product is a consumer product or a B2B product. A cup of yogourt that a student buys for breakfast is a consumer product. However,

Many goods could be classified as consumer goods or business-to-business (B2B) goods, based on their uses. For example, a computer that a person uses at home for personal use would be a consumer good. But that same computer used in a business setting, such as a manufacturing plant or an accounting firm, would be classified as a B2B good. Can you think of other examples?

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CHAPTER 14 Marketing: Helping Buyers Buy

when Harvest Gold purchases the same cup of yogurt to sell to its breakfast customers, it has purchased a B2B product. This transaction between the yogourt manufacturer and the restaurant is considered a B2B transaction.

PROGRESS ASSESSMENT

• Define the terms consumer market and business-to-business (B2B) market. • What are examples of B2B marketers? • How does B2B marketing differ from consumer marketing?

Defining Your Market Before marketers develop a 4P marketing mix for each product, they need to know the details of their customers and how the product being sold will meet these customers’ needs.

Market Segmentation: Segmenting the Consumer Market You can appreciate the challenge a marketer may have in creating a product that will appeal to every Canadian. The starting point is market segmentation, which means dividing the total market into groups with similar characteristics. There are several ways a firm can segment the consumer market, as outlined in Figure 14.8. For example, rather than trying to sell a product throughout Canada, you might try to focus on just one or two regions of the country where you might be most successful. Dividing the market by geographic area (i.e., cities, counties, provinces, etc.) is called geographic segmentation. Alternatively, you could aim your product’s promotions toward people aged 25 to 45 who have some post-secondary training and have above-average incomes. Automobiles such as Lexus are often targeted to this audience. Segmentation by age, income, and education level are criteria for demographic segmentation. So are religion, ethnic origin, and occupation. Demographics are the most widely used segmentation variable, but not necessarily the best.29 You may want your ads to portray a target group’s lifestyle. To do that, you would study the group’s values, attitudes, and interests in a strategy called psychographic segmentation. If you decide to target Generation Z, you would do an in-depth study of their values and interests, like which TV shows they watch and which personalities they like the best. With that information you would develop advertisem*nts for those shows using those stars. Some marketers prefer ethnographic segmentation. Basically, using such segmentation resembles using psychographic segmentation in that marketers talk with consumers and learn about the product from their perspective. Often customers have an entirely different view of your product than you do.30 When marketers use a consumer’s behaviour with or toward a product to segment the market, they are using behavioural segmentation.31 Let us examine questions that

LO5

Describe the market segmentation process, and the role of relationship marketing.

market segmentation

The process of dividing the total market into groups with similar characteristics.

geographic segmentation

Dividing the market by geographic area.

demographic segmentation

Dividing the market by age, income, and education level.

psychographic segmentation

Dividing the market using the group’s values, attitudes, and interests.

behavioural segmentation

Dividing the market based on behaviour with or toward a product.

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■ FIGURE

14.8

CONSUMER MARKET SEGMENTATION This table shows some of the consumer dimensions and variables that marketers use to select their markets. The aim of segmentation is to divide the market into smaller units.

Segmentation Base

Sample Variables

Geographic Segmentation

Region

British Columbia, Prairies, Nunavut, Eastern Quebec, Prince Edward Island; Sydney, St. John’s

City or Area Size

Under 5000 5000–20 000 20 001–50 000 50 001–100 000 100 001–250 000 250 001–500 000 500 001–1 000 000 1 000 000+

Density

Urban; suburban; rural

Age

Under 6; 6–11; 12–17; 18–24; 25–34; 35–49; 50–64; 65+

Gender

Male; female

Generational Cohort

Baby Boomer (1946 to 1964); Generation X (1965 to 1976); Generation Y/Millennials/Echo Boomers (1977 to 1994); Generation Z (1995 to present)

Marital Status

Never married; married; separated; divorced; widowed

Family Size

1–2; 3–4; 5+

Education Attainment

0 to 8 years; some high school; high school graduate; some post-secondary; postsecondary certificate or diploma; bachelor’s degree; above bachelor’s degree

Ethnic Origin

Canadian; English; French; Scottish; Irish; German; Italian; Chinese; First Nations; South Asian; Ukrainian; East Indian; Dutch; Polish; Jewish; Russian; Vietnamese

Occupation

Professional; managerial; technical; clerical; labourer; sales; farmer; homemaker; self-employed; student; unemployed; retired; other

Religion

Christian; Muslim; Hindu; Sikh; Buddhist; Jewish; no affiliation

Personality

Gregarious; compulsive; extroverted; ambitious

Social Class

Upper class; middle class; working class

Lifestyle

Actualizers; Fulfillers; Achievers; Experiencers; Believers; Strivers; Makers; Survivors

Benefits Sought

Convenience; quality; service; economy; luxury; safety; prestige; environmental impact

Usage Rate

Light user; medium user; heavy user

User Status

Non-user; ex-user; prospect; first-time user; regular user

Loyalty Status

None; medium; strong

Demographic Segmentation

Psychographic Segmentation

Behavioural Segmentation

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Possible Segments

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you might ask while considering a few variables of this segmentation strategy as it applies to Harvest Gold: ∙ Benefits Sought—What benefits of fresh, organic food might you talk about? Should you emphasize health benefits, taste, or something else? ∙ Usage Rate—In marketing, the 80/20 rule says that 80 percent of your business is likely to come from 20 percent of your customers. Determine who the heavy users are of healthy food. Does your restaurant attract more men or more women? More students or more faculty and staff members? Are your repeat customers from the local community or are they commuters? Once you know your customer base, you can design your promotions to better appeal to that specific group or groups.

On HGTV, you can watch Hilary Farr (interior designer on the left) and David Visentin (real estate agent on the right) compete on Love It or List It. She renovates the home so homeowners will “love it” and stay, while he tries to find these same homeowners a new home they love more than their renovated home. If he is successful, he will hear “list it” from them. When considering viewers for this show, what segmentation variables can you apply?

The best segmentation strategy is to use all the variables to come up with a consumer profile that represents a sizable, reachable, and profitable target market. That may mean not segmenting the market at all and instead going after the total market (everyone). Or it may mean going after eversmaller segments. We’ll discuss that strategy next.

Target Marketing and Reaching Smaller Market Segments Once one applies the consumer market segmentation bases to the total market, a marketer may end up with a number of potential market segments to consider. Due to limited resources, it is not feasible to consider all of them so a business goes to the trouble and expense of segmenting its markets when it expects that this will increase its sales, profit, and return on investment.32 As a result, target marketing is the next step as it allows marketers to select which segment(s) an organization can serve profitably. For example, a shoe store may choose to sell only women’s shoes, only children’s shoes, or only athletic shoes. The issue is finding the right target market—the most profitable segment—to serve. In the world of mass production following the Industrial Revolution, marketers responded by practising mass marketing. Mass marketing means developing products and promotions to please large

80/20 rule

The axiom that 80percent of your business is likely to come from 20 percent of your customers.

Dangerous Lagoon is the largest exhibit at Ripley’s Aquarium of Canada, and home to the longest moving sidewalk in North America. As you journey under the sea, you will see a wide array of species. Does the company have only one target market?

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groups of people resulting in little market segmentation. The mass marketer tries to sell products to as many people as possible using mass media, such as TV, radio, and newspapers to reach them.33 Although mass marketing led many firms to success, marketing managers often got so caught up with their products and competition that they became less responsive to the market. Airlines, for example, are so intent on meeting competition that they often annoy their customers. Niche marketing is identifying small but profitable market segments and designing or finding products for them. Because it so easily offers an © Pat’s Party Rental unlimited choice of goods, online retail transformed Pat’s Party Rentals provides everything one needs to a consumer culture once based on big hits and ensure a successful event. Does this company practice best-sellers into one that supports more specialized mass marketing, niche marketing, or one-to-one marketing? niche products. Historically, Canadian Tire tried to sell everything to everybody (mass marketing). As part of a three-year growth plan, Canadian Tire decided to target 30- to 49-year-olds with a focus on target marketing young families and products that appeal to them (niche marketing). For example, instead Marketing directed toward those groups of ads featuring dad painting the deck, ads featured a father and his young son building a (market segments) an tree house.34 With only 7.1 percent of Canadians identifying themselves as vegetarians, organization decides it what types of vegetarian options do you think Harvest Gold might sell in its restaurants can serve profitably. and online to this niche market?35 mass marketing One-to-one marketing (also known as micromarketing) means developing a Developing products unique mix of goods and services for each individual customer. Travel agencies often and promotions to please large groups of develop such packages for individual customers, including airline reservations, hotel people. reservations, rental cars, restaurants, and admission to museums and other attractions. This is relatively easy to do in B2B markets where each customer may buy in huge niche marketing The process of finding volume. But one-to-one marketing is possible in consumer markets as well. Computer small but profitable companies like HP and Apple can produce a unique computer system for each cusmarket segments and tomer. Can you envision designing special Harvest Gold menu items for individual designing or finding products for them. customers? one-to-one marketing (micromarketing)

Developing a unique mix of goods and services for each individual customer.

micromarketing (one-to-one marketing)

Developing a unique mix of goods and services for each individual customer. 542

Positioning36 Next, product positioning, which refers to the place an offering occupies in customers’ minds on important attributes relative to competitive products, is applied for each product. A positioning statement, which expresses how a company wants to be perceived by customers, can be useful with establishing a product’s position relative to that of its competitors. For example, a positioning statement for 7-Up is as follows: “for non-cola consumers, 7-Up is a non-caffeinated soft drink that is light, refreshing, lemon-lime flavoured and, unlike colas, it has a crisp, bubbly, and clean taste.” The topics of market segmentation, target marketing, and positioning will be discussed in greater detail when you take a Marketing course. In the meantime, recognize that a product cannot usually be all things to all people. As a result, this process of

CHAPTER 14 Marketing: Helping Buyers Buy

(1) applying market segmentation bases to arrive at potential market segments, (2) selecting the most profitable target market(s), and (3) developing the product positioning for each target market, is necessary before marketers can create a 4P marketing mix that will meet the wants and needs of each target market.

Building Marketing Relationships

product positioning

The place an offering occupies in customers’ minds on important attributes relative to competitive products.

positioning

Relationship marketing tends to lead away from mass production and toward custom-made statement goods and services. The goal is to keep individual customers over time by offering them Expresses how a company wants to new products that exactly meet their requirements. Technology and social media enable be perceived by sellers to work with individual buyers to determine their wants and needs and to develop customers. goods and services specifically designed for them, like hand-tailored shirts and unique relationship vacations. marketing To build strong relationships, many firms undertake active CRM programs that Marketing strategy with identify and focus on building loyalty with the firm’s most valued customers. CRM sys- the goal of keeping individual customers tems include a customer database or data warehouse where customer information (e.g., over time by offering transaction, contact, preferences, and market segment) is input. Data are then analyzed them products that and CRM programs are developed.37 For example, a customer can deal with a sales- exactly meet their requirements. person in a store, online, or in a call centre. A customer’s information can be quickly accessed via the CRM system that provides the information needed to address the purpose of the point of contact. Firms sometimes reward dedicated customers with loyalty or CRM programs, such as points that customers can redeem for extra discounts or free services, advance notice of sale items, and invitations to special events sponsored by the company.38 Loyalty programs include PC Optimum and SCENE, a partnership between Scotiabank and Cineplex Entertainment. What loyalty program cards do you have in your wallet? Social media is a way that businesses can engage with their customers. G Adventures, a leading small-group adventure tour operator, has been chosen as Canada’s favourite adventure tour operator in B axter Travel Media’s Agents’ Choice Awards.39 “Twitter has revolutionized our business,” says founder Bruce Poon Tip. “Facebook has done the same thing. We have the ability to deliver our culture anywhere in the world now.”40 Courtesy of Fox 40 International Inc. Used with permission Understanding consumers is so important There is a running case at the end of each text part and the focus to marketing that a whole area of marketing is Fox 40 International Inc. What is the company’s positioning emerged called consumer behaviour. We explore statement in this ad? that area next. 543

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PROGRESS ASSESSMENT

• Define market segmentation, target marketing, and positioning.

• Name and describe four ways to segment the consumer market.

• What are different target marketing approaches? • What might be the product positioning for your

favourite pair of shoes? What about one of your electronic items (e.g., computer, tablet, or phone)?

G Adventures offers small-group experiences. As the world’s largest independent adventure travel company, it offers tours, safaris, and expeditions. Start with your travel style and then take it from there when targeting a location. Would you consider booking through this company?

LO6

Explain how marketers meet the needs of the consumer market through the study of consumer behaviour. consumer behaviour When marketing researchers investigate consumer thought processes and behaviour at each stage in a purchase to determine the best way to help the buyer buy.

Consumer Behaviour

Marketing researchers investigate consumer-thought processes and behaviour at each stage in a purchase to determine the best way to help the buyer buy. This area of study in marketing is called consumer behaviour. Central to studying consumer behaviour is understanding the five steps of the decision-making process. The first step is problem recognition, which may occur when your computer breaks down and you realize you need a new one or it needs to be repaired. Let’s assume you decide that you will purchase a new one. This leads to an information search—you look for ads about computers. You may consult secondary data sources like Consumer Reports, CNET or other online reviews from both experts and customers. And you’ll likely seek advice from other people you know who have purchased computers. After compiling all this information, you evaluate alternatives and make a purchase decision. But your buying process doesn’t end there. After the purchase, you may be asked to complete a postpurchase evaluation where you are asked to assess your satisfaction (or dissatisfaction) with your purchase. Cognitive dissonance is a type of psychological conflict that can occur after a purchase. Consumers who make a major purchase (e.g., computer) may have doubts (i.e., cognitive dissonance) about whether they got the best product at the best price. Marketers must reassure such consumers after the sale that they made a good decision. An auto dealer, for example, may send positive press articles about the particular car purchased, offer product guarantees, and provide certain free services. Consumer behaviour researchers also study the various influences that affect consumer behaviour. In addition to the five steps of the decision-making process, Figure 14.9 shows several such influences: marketing mix variables (the four Ps); psychological influences, such as perception and attitudes; situational influences, such as the type of purchase and the physical surroundings; and sociocultural influences, such as reference groups and culture. Consider some of these factors:41 ∙ Learning creates changes in an individual’s behaviour resulting from previous experiences and information. If you’ve tried a particular brand of shampoo and you don’t like it, you’ve learned not to buy it again.

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■ FIGURE

14.9

THE CONSUMER DECISION-MAKING PROCESS AND OUTSIDE INFLUENCES Marketing Mix Influences Product Price Place Promotion

Sociocultural Influences Reference groups Family Social class Culture Subculture

Psychological Influences Perception Attitudes Learning Motivation

Situational Influences Type of purchase Social surroundings Physical surroundings Previous experience

Decision-Making Process

There are many influences on consumers as they decide which goods and services to buy. Marketers have some influence, but it is not usually as strong as sociocultural influences. Helping consumers in their information search and their evaluation of alternatives is a major function of marketing.

1. 2. 3. 4.

Problem recognition Information search Alternative evaluation Purchase decision/or no purchase 5. Postpurchase evaluation (cognitive dissonance)

∙ Reference group is the group an individual uses as a reference point in forming beliefs, attitudes, values, or behaviour. A student who carries a briefcase instead of a backpack may see business people as his or her reference group. ∙ Culture is the set of values, attitudes, and ways of doing things transmitted from one generation to another in a given society. Attitudes toward work, lifestyles, and consumption are evolving. For example, there is a trend toward value- consciousness (the concern for obtaining the best quality, features, and performance of a product or service for a given price). Another trend is eco-consciousness or going green. Canadians are more sensitive about the impact their consumption has on their natural environment, and they make their buying decisions accordingly. This may mean buying more environmentally safe or more environmentally friendly products, buying products that can be reused or recycled, or actually

Canadians are becoming increasingly health-conscious, creating opportunities for marketers that can develop products to address this change in buying behaviour. Do you think that Baby Boomers are driving this demand, or is it being driven by people of all ages? Do you see how Harvest Gold could profit from healthy takeout food that is quickly prepared? 545

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green marketing

The process of selling products and/or services based on their environmental benefits.

greenwashing

When businesses try to make themselves or their products or services look green or socially responsible without the action to back it up.

reducing consumption altogether. The Seeking Sustainability box highlights some concerns that consumers have raised about “green” advertising claims. In the box, you will be introduced to the terms green marketing—the process of selling products and/or services based on their environmental benefits, and greenwashing—when businesses try to make themselves or their products or services look green or socially responsible without the action to back it up. ∙ Subculture is the set of values, attitudes, and ways of doing things that results from belonging to a certain ethnic group, religious group, or other group with which one closely identifies (e.g., teenagers). More than 100 different ethnic groups are represented in Canada with visible minorities projected to represent almost 30 percent of the Canadian population by 2031. The two largest groups will be the Chinese

Seeking SUSTAINABILITY When Green Is Not Really Green Companies are responding to concerns about the environment and global warming through a variety of ways. Green marketing refers to the process of selling products and/or services based on their environmental benefits. Such a product or service may be environmentally friendly in itself or produced and/or packaged in an environmentally friendly way. Green advertising is a useful way to communicate important information to consumers who want to make responsible and environmentally conscious choices between competing products that claim to respect the environment. The green marketing assumption is that potential consumers will view a product or service’s “greenness” as a benefit and base their buying decisions accordingly. The not-so-obvious assumption of green marketing is that consumers will be willing to pay more for green products than they would for a less-green comparable alternatives. Businesses are sometimes accused of greenwashing when they try to make themselves or their products or services look green or socially responsible without the action to back it up. An example of this is when a company spends more resources on advertising its sustainability attributes than resources spent on its sustainability programs. Other examples include vague and meaningless product claims like “environmentally friendly” that are not explained, or claims that are not backed up, such as shampoos and conditioners advertised as not having been tested on animals while offering no evidence or certification of such claims.

There are no laws specifically governing green claims. While CSA Group developed green guidelines, compliance is voluntary. Studies confirm that job seekers are attracted to organizations with sustainable practices. Other studies show the same in relation to social practices more generally (e.g., community involvement and ethical governance). Not only may greenwashing hurt the company’s image and bottom line, but if new employees find that the messages about sustainable practices that initially attracted them are really just a green veneer, many will become resentful and some will leave. Have you been attracted to companies with sustainable practices? Would you be turned off by companies that have been accused of greenwashing?

Sources: Susan Ward, “Green Marketing,” About.com, http://sbinfocanada.about.com/od/marketing/g/greenmarketing, accessed April 5, 2015; “Three Reasons Job Seekers Prefer Sustainable Companies,” Network for Business Sustainability, June 7, 2013, http://nbs.net/ knowledge/three-reasons-job-seekers-prefer-sustainable-companies/; Rebecca Harris, “Greenwashing: Cleaning Up By ‘saving the World’,” Marketing, April 25, 2013, http://www.marketingmag.ca/brands/greenwashing-cleaning-up-by-saving-the-world-77259; and “SME Sustainability Roadmap,” Industry Canada, September 30, 2011, https://www.ic.gc.ca/eic/site/csr-rse.nsf/eng/rs00182.html.

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(from Hong Kong, mainland China, and Taiwan) and South Asians (from India, Pakistan, Sri Lanka, and Bangladesh). Canadian companies engage in ethnic marketing—combinations of the marketing mix that reflect the unique attitudes, race or ancestry, communication preferences, and lifestyles of ethnic Canadians. Through its store concept, FreshCo, Sobeys has targeted the unique needs of the ethnic consumer. FreshCo is a value-driven concept with low prices, like No Frills or Food Basics, but with a focus on fresh produce, halal meats, and freshly baked breads. The international food aisles highlight Asian, West Indian, Middle Eastern, and Eastern European food products. Similar to courses in business marketing, consumer behaviour is a long-standing part of a marketing curriculum. Do you think you will take this course in the future?

ethnic marketing Combinations of the marketing mix that reflect the unique attitudes, race or ancestry, communication preferences, and lifestyles of ethnic Canadians.

PROGRESS ASSESSMENT

• List the five steps in the decision-making process. • Describe each of the four major influencers on the decision-making process. • How is green marketing different from greenwashing? • Why is ethnic marketing an important focus for companies?

Your Prospects in Marketing There is a wider variety of careers in marketing than in most business disciplines. If you major in marketing, an array of career options will be available to you. You could conduct marketing research or get involved in product management. You could become a manager in a retail store. You could do marketing research or work in product management. You could go into selling, advertising, sales promotion, or public relations. You could work in transportation, storage, or international distribution. You could design websites. Think, for example, of the many ways to use social media and other technologies in marketing. These are just a few of the possibilities. As you read further into this topic in Chapter 15, consider whether a marketing career would interest you.

SUMMARY LO1

Define marketing and explain how the marketing concept applies to both for-profit and nonprofit organizations. Marketing is the process of determining customer wants and needs and then providing customers with goods and services that meet or exceed these expectations. How has marketing changed over time? What marketers do at any particular time depends on what they need to do to fill customers’ needs and wants, which continually change. The evolution of marketing includes five eras, also known as orientations: (1) production, (2) sales, (3) marketing concept, (4) market orientation, and (5) social media marketing. 547

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What are the three parts of the marketing concept? The three parts of the marketing concept are (1) a customer orientation, (2) a service orientation, and (3) a profit orientation (that is, market goods and services that will earn the firm a profit and enable it to survive and expand to serve more customers’ wants and needs). What kinds of organizations are involved in marketing? All kinds of organizations use marketing, both for-profit and non-profit organizations. Examples of nonprofit organizations include the provinces and other government agencies, charities (e.g., churches), politicians, and schools. LO2

Describe the four Ps of marketing. The marketing mix consists of the four Ps of marketing: product, price, place, and promotion. What is required before marketers develop a product? Once marketers have researched customer needs and found a target market, the four Ps come into play, starting with the development of a product. Recall that a product is any physical good, service, or idea which falls somewhere on the service continuum which is highlighted in Figure 14.4. How do marketers implement the four Ps? The idea is to design a product that people want, price it competitively, get it in a location where customers can find it easily, and promote it—considering advertising, personal selling, public relations, direct marketing, and sales promotion—so that customers know it exists. While this chapter briefly outlined these four Ps, they will be discussed in more detail in Chapter 15.

LO3

Identify the steps in the marketing research process, and explain how marketers use environmental scanning to learn about the changing marketing environment. Marketing research is the analysis of markets to determine opportunities and challenges and to find the information needed to make good decisions. What are the steps to follow when conducting marketing research? The four steps are (1) define the problem or opportunity and determine the present situation, (2) collect data, (3) analyze the research data, and (4) choose the best solution and implement it. What are different methods used to gather research? Research can be gathered through secondary data (information that has already be compiled by others) and published in sources such as journals, newspapers, directories, databases, and internal sources. Primary data (data that you gather yourself) includes observation, surveys, interviews, and focus groups. What is environmental scanning? Environmental scanning is the process of identifying the trends that can affect marketing success. Marketers pay attention to all environmental trends that create opportunities and threats. Figure 14.6 shares the six environments—global, technological, social, competitive, economic, and legal—that are considered in environmental scanning. What are some of the more important environmental trends in marketing? The most important global and technological change is probably the Internet. Another is the growth of customer databases, with which companies can develop products and services that closely match the needs of customers. Marketers must also monitor social trends like population growth and shifts to maintain their close relationship with customers. Of course, marketers must also monitor the dynamic

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competitive environment and pay attention to the economic environment. Changes in laws can create opportunities and threats for business activities; thus, this is another important environment to scan. LO4

Compare the consumer market to the business-to-business market. The consumer market consists of all individuals or households that want goods and services for personal consumption or use and have the resources to buy them. The total potential global consumer market consists of the billions of people in global markets. What types of businesses operate in the business-to-business (B2B) market? The B2B market consists of manufacturers, intermediaries such as wholesalers, institutions (e.g., hospitals, schools, and charities), and the government. What makes the business-to-business market different from the consumer market? The number of customers in the B2B market is relatively small, and the size of business customers is relatively large. B2B markets tend to be geographically concentrated, and industrial buyers generally are more rational than ultimate consumers in their selection of goods and services. B2B sales tend to be direct, and there is much more emphasis on personal selling in B2B markets than in consumer markets.

LO5

Describe the market segmentation process, and the role of relationship marketing. The process of dividing the total market into several groups whose members have similar characteristics is called market segmentation. What are some of the ways that marketers segment the consumer market? See Figure 14.8 for a summary of consumer segmentation variables. Geographic segmentation means dividing the market into different regions. Segmentation by age, income, and education level are methods of demographic segmentation. We study a group’s values, attitudes, and interests using psychographic segmentation. Behavioural segmentation divides the market based on behaviour with or toward a product. Different variables of behavioural segmentation include benefits sought, usage rate, and user status. The best segmentation strategy is to use as many of these segmentation bases as possible to come up with a target market that is sizeable, reachable, and profitable. What is the relationship between target marketing and product positioning? Following market segmentation, marketers need to select the segment(s) that is (are) the most profitable. This is known as target marketing. Product positioning, which refers to the place an offering occupies in customers’ minds on important attributes relative to competitive products, is then applied for each product. Market segmentation, target marketing, and positioning are necessary before marketers can create a 4P marketing mix for each target market that will meet their wants and needs. What is the difference between mass marketing and relationship marketing? Mass marketing means developing products and promotions to please large groups of people. Relationship marketing tends to lead away from mass production and toward custom-made goods and services. Its goal is to keep individual customers over time by offering them goods or services that meet their needs.

LO6

Explain how marketers meet the needs of the consumer market through the study of consumer behaviour. Marketing researchers investigate consumer-thought processes and behaviour at each stage in a purchase to determine the best way to help the buyer buy. This area of study is called consumer behaviour.

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What are the five steps of the decision-making process? As listed on Figure 14.9, the five steps of the decision-making process are (1) problem recognition, (2) information search, (3) evaluate alternatives, (4) purchase decision, and (5) postpurchase evaluation. What is cognitive dissonance? Cognitive dissonance may occur in the postpurchase evaluation step. It is a type of psychological conflict that can occur after a purchase. If customers are satisfied with their purchases, they will not regret their purchases (i.e., experience cognitive dissonance). What are some of the factors that influence the consumer decision-making process? See Figure 14.9 for the four major influences on consumer decision making. Some specific factors include learning, reference group, culture, and subculture.

KEY TERMS 80/20 rule 541 behavioural segmentation 539 big data 531 brand name 525 business-to-business (B2B) market 536 consumer behaviour 544 consumer market 536 customer-relationship management (CRM) 519 demographic segmentation 539 environmental scanning 533 ethnic marketing 547 focus group 530

geographic segmentation 539 green marketing 546 greenwashing 546 Internet of Things (IoT) 534 market orientation 519 market segmentation 539 marketing 516 marketing concept 518 marketing mix 522 marketing research 528 mass marketing 541 micromarketing (one-to-one marketing) 542 niche marketing 542 observation 530

one-to-one marketing (micromarketing) 542 positioning statement 542 price 526 primary data 529 product 523 product positioning 542 promotion 527 psychographic segmentation 539 relationship marketing 543 secondary data 528 social media 519 social media marketing 519 target marketing 541 test marketing 525

CAREER EXPLORATION If you are interested in pursuing a career in marketing, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Marketing research analyst—studies market conditions to examine potential sales of a product or service; identifies what products people want, who will buy them, and at what price.

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∙ Graphic designer—creates visual concepts, using computer software or by hand, to communicate ideas that inspire, inform, and captivate consumers; develops visuals for advertisem*nts, brochures, magazines, and corporate reports. ∙ Copywriter—develops written content for advertisem*nts, blogs, or other types of marketing media. ∙ Sales manager—directs sales teams, sets sales goals, analyzes data, and develops training programs for sales representatives.

CHAPTER 14 Marketing: Helping Buyers Buy

CRITICAL THINKING 1. Which of your needs are not being met by

their credit cards. For example, you may get 10 percent off your purchase if you open an HBC credit card account. Do you feel that companies are trying to bribe you to support their businesses, or do you think that these are good business practices? How effective is social networking in building loyalty? Explain.

businesses and/or non-profit organizations in your area? Are there enough people with similar needs to attract an organization that would meet those needs? How would you find out? 2. When businesses buy goods and services from

other businesses, they usually buy in large volume. Salespeople in the business-to-business market usually are paid on a commission basis; that is, they earn a certain percentage of each sale they make. Why might B2B sales be a more financially rewarding career area than consumer sales?

4. Marketers must adapt as new technologies

emerge. For example, younger consumers watch programs on the Internet and/or PVR, rather than during the scheduled television slots. Services such as Netflix, Crave TV, and Shomi also offer another programming alternative. What does this mean for traditional television advertisem*nts (i.e., commercials)? How should marketers evaluate and plan a move to marketing through these newer alternatives as compared to scheduled television programming?

3. Retailers such as the Hudson’s Bay Company

(HBC Rewards) and Shoppers Drug Mart (PC Optimum) offer loyalty programs. Are you encouraged to visit these retailers more often as a result of such programs? Do you buy more products as a result of such programs? Retailers also offer incentives to use

DEVELOPING CAREER SKILLS Key: Team

Analytic

1. Think of an effective marketing mix for a new

Communication

electric car or a brushless car wash for your neighbourhood. Be prepared to discuss your ideas in class.

3. Business has fallen off greatly in your upscale

restaurant due to the slow economy. List four things you can do to win back the loyalty of your past customers. Be prepared to discuss this in class.

4. Working in teams of four or five, list as many

brand names of pizza as you can from pizza shops, restaurants, supermarkets, and so on. Merge your list with the lists from other groups or classmates. Then try to identify the target market for each brand. Do they all seem to be after the same market, or are there different brands for different markets? What are the separate appeals?

2. Working in teams of five, think of a prod-

uct your friends want but cannot get on or near campus. You might ask your friends at other schools what is available there. What kind of product would fill that need? Discuss your results in class and determine how you might go about marketing that new product.

Technology

5. Take a little time to review the concepts in

this chapter as they apply to Harvest Gold, the restaurant we introduced in this chapter. Have an open discussion in class about (a) a different name for the restaurant, (b) a location for the restaurant, (c) a promotional program, and (d) a way to establish a long-term relationship with customers.

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ANALYZING MANAGEMENT DECISIONS Applying Customer-Oriented Marketing Concepts at Thermos Thermos is the company made famous by its Thermos bottles and lunch boxes. Thermos also manufactures cookout grills. Its competitors include Sunbeam and Weber. To become a world-class competitor, Thermos completely reinvented the way it conducted its marketing operations. By reviewing what Thermos did, you can see how new marketing concepts affect organizations. First, Thermos modified its corporate culture. It had become a bureaucratic firm organized by function: design, engineering, manufacturing, marketing, and so on. That organizational structure was replaced by f lexible, cross-functional, self-managed teams. The idea was to focus on a customer group—for example, buyers of outdoor grills—and build a product development team to create a product for that market. The product development team for grills consisted of six middle managers from various disciplines, including engineering, manufacturing, finance, and marketing. They called themselves the Lifestyle Team because their job was to study grill users to see how they lived and what they were looking for in an outdoor grill. To get a fresh perspective, the company hired Fitch, Inc., an outside consulting firm, to help with design and marketing research. Team leadership was rotated based on needs of the moment. For example, the marketing person took the lead in doing field research, but the R&D person took over when technical developments became the issue. The team’s first step was to analyze the market. Together, team members spent about a month on the

road talking with people, videotaping barbecues, conducting focus groups, and learning what people wanted in an outdoor grill. The company found that people wanted a nice-looking grill that did not pollute the air and was easy to use. It also had to be safe enough for apartment dwellers, which meant that it had to be electric. As the research results came in, engineering began playing with ways to improve electric grills. Manufacturing kept in touch to ensure that any new ideas could be produced economically. Design people were already building models of the new product. R&D people relied heavily on Thermos’ strengths. The company’s core strength was the vacuum technology it had developed to keep hot things hot and cold things cold in Thermos bottles. Drawing on that strength, the engineers developed a domed lid that contained the heat inside the grill. Once a prototype was developed, the company showed the model to potential customers, who suggested several changes. Employees also took sample grills home and tried to find weaknesses. Using the input from potential customers and employees, the company used continuous improvement to manufacture what became a world-class outdoor grill. No product can become a success without communicating with the market. The team took the grill on the road, showing it at trade shows and in retail stores. The product was such a success that Thermos is now using self-managed, customer-oriented teams to develop all of its product lines.

Discussion Questions 1. How could the growth of self-managed, cross-

3. What other products might Thermos develop

functional teams affect marketing departments in other companies? Do you believe that would be a good change or not? Explain.

that would appeal to the same market segment that uses outdoor grills?

2. How can Thermos now build a closer rela-

tionship with its customers using the Internet?

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CHAPTER 15

Managing the Marketing Mix: Product, Price, Place, and Promotion LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Explain the concept of a total product offer, and summarize the functions of packaging. LO2 Describe the product life cycle. LO3 Identify various pricing objectives and strategies, and explain why non-pricing strategies are growing in importance.

LO4 Explain the concept of marketing channels, and the importance of retailing. LO5 Define promotion, and list the five traditional tools that make up the promotion mix.

P R O F I L E GETTING TO KNOW: MICHAEL DUBIN, CEO/CO-FOUNDER, DOLLAR SHAVE CLUB

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There is no better way to get the attention of more

company into the second-largest razor seller in the

and more people than to go viral on social media.

United States.

That’s not easy, though. With thousands of hours of

Dubin honed his business and comedy skills

content uploaded daily to YouTube alone, standing

in New York. Arriving in the city after graduating from

out in this vast crowd takes creativity and a unique

Emory University, he first worked as a page at NBC

message. It also helps to be funny. That’s the strat-

and then moved on to news writing and production.

egy that Michael Dubin used when he launched

He shifted focus to marketing and digital media a

Dollar Shave Club in 2012 with a short video he

couple of years later, creating content and videos

wrote, produced, and starred in. Millions of views

for brands like Gatorade, Nintendo, and Ford. All

later, he credits the clip with transforming his upstart

the while Dubin took improv comedy classes in his

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

the razor fortress and have it unlocked. That whole thing is very unnecessary.” They developed a concept and called it Dollar Shave Club, a service that sends razors straight to customers’ homes each month. Knowing that the company would need clear messaging and a reliable purchasing platform, Dubin withdrew $35,000 from his life savings to build the website. Along with this major investment, he also spent $4,500 to shoot an ad driven by his deadpan sense of humor. During the clip’s one and a half minutes Dubin swears, rides a forklift, and whacks a length of packing tape with a machete as he explains Dollar Shave Club’s business model. Before going online, Dubin used the video in meetings to win over investors. He also built relationships with bloggers and other online influencers so they would share the video when it hit the Internet. And share they did: as of this writSource: Courtesy of Dollar Shave Club.

ing the company’s first commercial has more than 25 million views on YouTube. As the video went viral, DollarShaveClub.

spare time at the famed Upright Citizens Brigade

com crashed under the weight of all the new vis-

Theatre. He noticed how both businesspeople and

itors. Since then, millions more have visited the

improvisers worked together by identifying the best

site not only for the monthly razor service but also

qualities of each individual in a group. “Whether it’s

for other items like shaving cream, shampoo, and

an executive team or an improv comedy team, you

moist towelettes. But the company’s biggest payday

need to know what you can expect from the other

came in 2016 when Unilever bought the brand for

players or partners,” said Dubin.

$1 billion. Michael Dubin remains in charge and

One thing he did not expect, however, was to receive a life-changing business offer at a holiday

hopes one day that Dollar Shave Club will “own the entire bathroom.”

party. He had been talking with Mark Levine, the

Marketing begins with watching people to

father of a friend’s fiancee, about the downsides of

understand their needs. It then involves develop-

buying razors. “I don’t know how we got on the sub-

ing products that customers might want. One must

ject of shaving, but we started talking about what a

develop a marketing mix that will resonate with the

rip-off it is,” said Dubin. “For years, guys have been

target market. Making such decisions is challenging,

frustrated with the price of razors in the store and

but if you are successful, you can make a lot of cus-

the experience of having to go to the store and find

tomers very happy. This is what marketing is all about.

Sources: Paul Ziobro, “How Michael Dubin Turned a Funny Video into $1 Billion,” The Wall Street Journal, July 20, 2016; Jessica Naziri, “Dollar Shave Club Co-Founder Michael Dubin Had a Smooth Transition,” Los Angeles Times, August 16, 2013; Mike Isaac and Michael J. De La Merced, “Dollar Shave Club Sells to Unilever for $1 Billion,” The New York Times, July 20, 2016; Kris Frieswick, “The Serious Guy behind Dollar Shave Club’s Crazy Viral Videos,” Inc., April 2016; Lucy Handley, “Michael Dubin: Shaving America,” CNBC, June 21, 2017.

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LO1

Explain the concept of a total product offer, and summarize the functions of packaging. value

Good quality at a fair price.

Product Development and the Total Product Offer Global managers continue to challenge Canadian managers with new products at low prices.1 The best way to compete is to design and promote better products, meaning products that customers perceive to have the best value—good quality at a fair price. When customers calculate the value of a product, they look at the benefits and then subtract the cost (price) to see whether the benefits exceed the cost, including the cost of driving to the store (or shipping fees if they buy the product online). You may have noticed many restaurants pushed value and dollar menus when the economy slowed. Whether customers perceive a product as the best value depends on many factors, including the benefits they seek and the service they receive. To satisfy customers, marketers must learn to listen better and constantly adapt to changing market demands.2 Marketers have learned that adapting products to new competition and new markets is an ongoing need. We’re sure you’ve noticed menu changes at your local fast-food restaurants over time. An organization can’t do a one-time survey of consumer wants and needs, design a group of products to meet those needs, put them in the stores, and then just relax. It must constantly monitor changing consumer wants and needs, and adapt products, policies, and services accordingly. For example, consumers are looking for healthier food choices today compared to in the past. Did you know that McDonald’s now sells as much chicken as beef? It even incorporates chicken into its popular breakfast menu.3 Following customer requests for smaller portions, McDonald’s now offers value meals with a choice of sandwich size. It also transitioned some popular morning items into an all-day breakfast menu. McDonald’s and other restaurants are constantly trying new ideas. Whopperito or Mac n’ Cheetos, anyone?4 Taco Bell has gotten into the breakfast game. It rolled out a higher protein breakfast menu to compete with the current high-carbohydrate breakfast menus.5 Have you noticed any other fast-food restaurants starting to create breakfast menus? Recall

(left) © Jeff Greenberg 2 of 6/Alamy; (right) The McGraw-Hill Companies, Inc./Christopher Kerrigan, photographer

How would you like a beer or glass of wine with your Big Mac? You can get both at this McDonald’s in Paris (shown left). On the right, you see a McDonald’s in Indonesia. Around the world, McDonald’s adapts its architectural scheme, menus, and interior design to fit the tastes and cultural demands of each country.

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Reaching Beyond OUR BORDERS Playing with the Social Gaming Stars Did you know that Ellen DeGeneres, Kim Kardashian, Nicki Minaj, and at least 30 other celebrities are competing in a new $200 million a year industry? They have created a new genre of gaming: social celebritydriven mobile games. Involving celebrities in our video game culture is nothing new. Michael Jackson had a partnership with

Sega in 1990 in which players moonwalked through the levels. Many other celebrities lent their voices and likenesses to a multitude of games. But now, gaming is transitioning from our consoles to our phones. We’re free to play wherever and whenever we want, and it’s a big money business. Today, popular app developers use tried and proven games as the base, and then “turbocharge” them by inserting a popular celebrity with a massive social following. Take Kim Kardashian’s app, for example. Titled Kim Kardashian: Hollywood and created by app developer Glu, the app actually had two previous lives (called Stardom: The A List and Stardom: Hollywood). Both were popular before Kardashian, bringing in about $2.5 million each through downloads and in-app purchases. However, they didn’t have enough daily players. When Kardashian came in, she attracted a massive number of daily players—and more money. So far Kim Kardashian: Hollywood has brought in $160 million! It’s not just the app developers making all the money in these deals. Forbes estimated Kim Kardashian herself earned $45 million from her game. That has more celebrities wanting a piece of the action. Glu recently launched the app named Nicki Minaj: The Empire and is working on a game for Taylor Swift. Who do you think the next celebrity game star will be?

Sources: Natalie Robehmed, “Game Changers,” Forbes, July 26, 2016; Michael Sylvain, “Why PewDiePie’s New Game Is Proof We’re All Doomed,” Rolling Stone, October 7, 2016; Patrick Sietz, “Nicki Minaj No Match for Mario in Mobile Games,” Investor’s Business Daily, December 23, 2016; Chris Morrison, “Celebrity Branding: The Ultimate Built-In Marketing Tactic for a Mobile Game,” Chartboost, accessed September 2017.

the Reaching Beyond Our Borders box about rolling out Oreo cookies in foreign markets in Chapter 14. But it isn’t only food companies who must be creative. Every business must continually develop new offerings. Read the Reaching Beyond Our Borders box to discover more. You can imagine what can happen when your product loses some of its appeal.6 Zippo lighters, for example, lost market strength as people turn away from smoking cigarettes to using e-cigarettes.7 Zippo then tried offering items such as knives, leather products, and even perfume.8 They are no longer being sold. Zippo also introduced a clothing line that includes hoodies, ball caps, and jeans. Product development, then, is a key activity in any modern business, anywhere in the world. There’s a lot more to new-product development than merely introducing goods and services, however. What marketers do to create excitement for those products is as important as the products themselves. 557

PART 5 Marketing: Developing and Implementing Customer-Oriented Marketing Plans

Developing a Total Product Offer total product offer (value package)

Everything that customers evaluate when deciding whether to buy something; also called a value package.

value package (total product offer)

Another name for total product offer, which is everything that customers evaluate when deciding whether to buy something.

■ FIGURE

From a strategic marketing viewpoint, a total product offer is more than just the physical good or service. A total product offer, also called a value package, consists of everything that customers evaluate when deciding whether to buy something. Thus, the basic good or service may be a washing machine, an insurance policy, or a beer, but the total product offer includes some or all of the value enhancers in Figure 15.1. You may hear some people call the basic product the “core product” and the total product offer the “augmented product.” Can you see how sustainability can be part of the augmented product?9 When people buy a product, they may evaluate and compare total product offers on many dimensions. Some are tangible (the product itself and its package) while others are intangible (the producer’s reputation and the image created by advertising). A successful marketer must think like a customer and evaluate the total product offer as a collection of impressions created by all of the factors listed in Figure 15.1. It is wise to talk with customers to learn which features and benefits are most important to them and which value enhancers they want or don’t want in the final offering.10 Frito-Lay, for example, had to drop biodegradable bags because they were too noisy. Marketers had not considered this dimension. What questions might you ask customers when developing the total product offer for Harvest Gold? (Recall the business idea introduced in Chapter 14.) Remember,

15.1

POTENTIAL COMPONENTS OF A TOTAL PRODUCT OFFER

Brand name

Price Store surroundings

Buyer’s past experience Package

558

Service

Guarantee

Speed of delivery

Reputation of producer

Image created by advertising

Internet access Convenience

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

store surroundings are important in the restaurant business, as are the parking lot and the condition of the bathrooms. Sometimes an organization can use low prices to create an attractive total product offer. For example, outlet stores offer brand-name goods for less. Shoppers like getting high-quality goods and low prices, but they must be careful. Outlets also carry lower-quality products with similar but not exactly the same features as goods carried in regular stores. Different consumers may want different total product offers, so a company must develop a variety of offerings.

Product Lines and the Product Mix

Apple, Samsung, and other smartphone makers are fighting for a greater share of the huge mobile market. Each continues to improve and add features hoping to win customers. What features would a smartphone company have to add to its product offer in order to convince you to switch phones?

Companies usually don’t sell just one product. A product line is a group of products that are physically similar or are intended for a similar market. They usually face similar competition. In one product line, there may be several competing brands. Notice, for example, Diet co*ke, Diet co*ke with Splenda, Diet co*ke with Lemon, Diet Vanilla co*ke, and Diet Cherry co*ke. Now Coca-Cola is creating even more flavour options through its co*ke Freestyle machines.11 Makes it kind of hard to choose, doesn’t it? Both co*ke and Pepsi have added water and sports drinks to their product lines to meet new consumer tastes. Procter & Gamble’s (P&G) product lines include hair care, oral care, and household cleaners. In one product line, there may be several competing brands. For example, P&G has many brands in its laundry detergent product line, including Tide, Era, Downy, and Bold. All of P&G’s product lines make up its product mix, the combination of product lines offered by an organization. The Spotlight on Small Business box shares how one product led to new product lines. Service providers have product lines and product mixes as well. Financial services firms, such as banks and credit unions, may offer a variety of services such as savings products (including chequing accounts and term deposits), credit products (including loans, mortgages, and credit cards), and a variety of other services (such as safety deposit boxes). TELUS combines services (plans) with goods (phones and accessories) in its product mix, with special emphasis on deals.12

product line

A group of products that are physically similar or are intended for a similar market.

product mix

The combination of product lines offered by an organization.

Product Differentiation Product differentiation is the creation of real or perceived product differences. Actual product differences are sometimes quite small, so marketers must use a creative mix of branding, pricing, advertising, and packaging (value enhancers) to create a unique, attractive image. Note the positive effect of developing brands like Uber, YETI, and Netflix.13 Various bottled water companies, for example, have successfully achieved product differentiation. These companies made their bottled waters so attractive through pricing and promotion that some restaurant customers order water by brand name (e.g., Perrier).

product differentiation

The creation of real or perceived product differences.

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PART 5 Marketing: Developing and Implementing Customer-Oriented Marketing Plans

Spotlight On SMALL BUSINESS Made by Mommy Imagine you’re holding your 10-month-old baby and she will not stop grabbing at your necklace. Big and shiny, it’s like you’re wearing a baby magnet around your neck. But as much as she may love looking, grabbing, and chewing on it, metal and stones are not baby-friendly.

Photography by Raquel Langworthy, Courtesy of Chewbeads

Lisa Greenwald had the same issue. Her baby magnet was a brightly coloured necklace that her son, and all babies for that matter, just had to get in their mouths. She had her “aha” moment and Chewbeads were born. Developed in 2009, Lisa and her husband, Eric, went through many trials before creating their final product. Lisa wanted her necklaces to be gentle on babies’ teeth and free of toxic chemicals. That turned out to be a more difficult task than they had originally thought. They found manufacturers who could make parts of Chewbeads, but never the whole product. After hiring a consultant, they were able to teach factory workers how to make the entire necklace. Since its inception, Chewbeads has sold over 140 000 necklaces, keeping moms fashionable and babies happy for about $25. After a year of selling necklaces, Chewbeads started to branch out. The company now makes baby toys and stroller accessories and is working on a new bib. It looks like babies will have a lot to chew on for years to come.

Sources: Paula Andruss, “For the Mouths of Babes,” Entrepreneur, April 2016; Adam Toren, “In Honor of Mother’s Day Here Are 7 Mompreneurs Who Founded Million Dollar Businesses,” Fox Business, May 6, 2016; Annie Pilon, “21 Successful Mom Entrepreneurs to Inspire You,” Small Business Trends, May 5, 2016; Jo Piazza, “How Being A Mom Can Make You A Better Entrepreneur,” Forbes, June 1, 2017.

There’s no reason why you couldn’t create a similar attractive image for Harvest Gold, your farm-to-table restaurant. Small businesses can often win market share with creative product differentiation. One yearbook entrepreneur competes by offering multiple clothing changes, backgrounds, and poses along with special allowances, discounts, and guarantees. His small business has the advantage of being more flexible in adapting to customer needs and wants, and he’s able to offer attractive product options. He has been so successful that companies use him as a speaker at photography conventions. How could you respond creatively to the consumer wants of your Harvest Gold customers? Note the success that companies have had using the term organic or natural in their promotions.14

Packaging Changes the Product We’ve said that consumers evaluate many aspects of the total product offer, including the brand. It’s surprising how important packaging can be in such evaluations of various goods. Many companies have used packaging to change and improve their basic product. We have squeezable ketchup bottles that stand upside down; square paint cans with screw tops and integrated handles; plastic bottles for motor oil that eliminate the need for funnels; single-use packets of spices; and so forth. Another trend is packaging designed 560

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

to evoke emotions by prompting customers to think of homemade treats. The goal is to have the customers’ warm feelings about the homemade product transfer to the commercial product. For example, Peggy Jean’s Pies uses jelly jars to ship its ready-to-eat pies and the package opened large markets.15 Packaging must perform the following functions:16 1. Attract the buyer’s attention. 2. Protect the goods inside, stand up under handling

and storage, be tamperproof, and deter theft. 3. Be easy to open and use. 4. Describe and give information about the contents. 5. Explain the benefits of the core product inside. 6. Provide information on warranties, warnings, and

other customer matters. 7. Give some indication of price, value, and uses.

Courtesy of Thelma’s Treats

Innovative packaging can make a great product look even better. Just ask the owners of Thelma’s Treats, a bakery that packs all its delicious cookies into boxes resembling old-fashioned ovens. Can you think of any other food brands that use interesting packaging?

Packaging can also make a product more attractive to retailers. The Universal Product Codes (UPCs) on many packages help stores control inventory. They combine a bar code (black and white lines) and a preset number that gives the retailer information about the product’s price, size, colour, and other attributes. Packaging changes the product by changing its visibility, usefulness, or attractiveness. One relatively new packaging technology for tracking products is the radio frequency identification (RFID) chip, especially the ones made with nanoparticle powder. When attached to a product, the chip sends out signals telling a company where the product is at all times. RFID chips carry more information than bar codes, do not have to be read one at a time (whole pallets can be read in an instant), and can be read at a distance.17

bundling

Grouping two or more products together and pricing them as a unit.

THE GROWING IMPORTANCE OF PACKAGING Today, packaging carries more of the promotional burden than in the past. Many products once sold by salespeople are now being sold in self-service outlets, and the package has acquired more sales responsibility. Packaging may make use of a strategy called bundling, which combines goods and/or services for a single price. IcelandAir has bundled layover tours with an IcelandAir employee “stopover buddy” in its total product offer. Transatlantic passengers can opt to spend their layover seeing the sights of Reykjavik instead of just the airport.18 Financial institutions are offering everything from financial advice to help in purchasing insurance, stocks, bonds, mutual funds, and

The Heinz Dip & Squeeze® ketchup package allows customers a choice of peeling off the lid for dipping or tearing off the top for squeezing. It contains three times as much ketchup as traditional sachets and uses less packaging. Shaped like the iconic Heinz tomato ketchup glass bottles, the packets reinforce the Heinz Ketchup brand.

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more. When combining goods or services into one package, marketers must not include so much that the price gets too high. It’s best to work with customers to develop value enhancers that meet their individual needs.

PROGRESS ASSESSMENT brand

A name, symbol, or design (or combination thereof) that identifies the goods or services of one seller or group of sellers, and distinguishes them from the goods and services of competitors.

brand equity

The value of the brand name and associated symbols.

brand loyalty

The degree to which customers are satisfied, enjoy the brand, and are committed to further purchases.

• What are some examples of value enhancers in a value package? • What’s the difference between a product line and a product mix? • What functions does packaging perform?

Branding A brand is a name, symbol, or design (or combination thereof) that identifies the goods or services of one seller or group of sellers, and distinguishes them from the goods and services of competitors. The word brand includes practically all means of identifying a product. Brand names you may be familiar with include Air Canada, Roots, President’s Choice, Red Bull, Campbell Soup, Disney, and of course many more. Brand names give products a distinction that tends to make them attractive to consumers. Apple and Google now reign as brand champions—we’re sure you understand why.19 Brand names give products a distinction that tends to make them attractive to customers. For the buyer, a brand name assures quality, reduces search time, and adds prestige to purchases. For the seller, brand names facilitate new-product introductions, support promotional efforts, add to repeat purchases, and differentiate products so that prices can be set higher.20 Companies sue other companies for too closely matching brand names.

Generating Brand Equity and Loyalty

Athleisure powerhouse lululemon athletica got its name when its founder was looking for a unique name that couldn’t be easily replicated in foreign markets. By creating a name that could be difficult to say in some countries, potential knockoffs could be avoided. For example, there is no Japanese phonetic sound for l, so the three ls in lululemon make it sound North American and authentic to Japanese consumers. Are there brand names that resonate with you?

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A major goal of marketers in the future will be to reestablish the notion of brand equity. Brand equity is the value of the brand name and associated symbols. Usually the company cannot know the value of its brand until it sells it to another company. Canada’s most valuable brands are RBC, TD, Bell, and Scotiabank.21 Compare these to the world’s most valuable brands of Amazon, Apple, Google, and Samsung.22 Are you surprised by any of these results? The core of brand equity is brand loyalty. Brand loyalty is the degree to which customers are satisfied, enjoy the brand, and are committed to further purchases. A loyal group of customers represents substantial value to a firm, and that value can be calculated. One way manufacturers are trying to create more brand loyalty is by focusing on sustainability.23

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

In the past, companies tried to boost their shortterm performance by offering coupons and price discounts to move goods quickly. This eroded customers’ commitment to brand names, especially of grocery products. Many consumers complain when companies drop brand names like Astro Pops or Flex shampoo. Such complaints show the power of brand names. Now companies realize the value of brand equity, and are trying harder to measure the earning power of strong brand names.24 Perceived quality is an important part of brand equity. A product that’s perceived as having better quality than its competitors can be priced accordingly. The key to creating a perception of quality is to identify what consumers look for in a high-quality product, and then to use that information in every message the company sends out. Factors influencing the perception of quality include price, appearance, and reputation.

Trademarks of Canadian Tire Corporation, Limited use under licence

By creating the Canadian Tire Drivers Academy, Canadian Tire Corp., Ltd. hopes to strengthen its presence in the automotive market by fighting off competition and improving customer loyalty.25 Would taking a course, such as beginner driver education or the car maintenance program, influence your loyalty? If one was available in your area, would you register for a course?

brand manager

Brand Management A brand manager (known as a product manager in some firms) has direct responsibility for one brand or product line. This individual also manages all the elements of the marketing mix: product, price, place, and promotion—throughout the life cycle of each product and service. Thus, you might think of the brand manager as the president of a one-product firm. One reason many large consumer product companies created this position was to have greater control over new-product development and product promotion. Some companies have brand management teams to bolster the overall effort. In B2B companies, brand managers are often known as product managers.

The person in the company who has direct responsibility for one brand or one product line; called a product manager in some firms.

LO2

Describe the product life cycle.

The Product Life Cycle Once a product has been developed and tested, it goes to market. There it may pass through a product life cycle of four stages: introduction, growth, maturity, and decline as noted in Figure 15.2. This cycle is a theoretical model of what happens to sales and profits for a product class over time. However, not all individual products follow this life-cycle shape, and particular brands may act differently. For example, while frozen foods as a product class may go through the entire cycle, one brand may never get beyond the introduction stage. Some product classes,

Courtesy of Greenpeace. Used with permission

Greenpeace alleged that clothing from top brands such as Calvin Klein, H&M, Abercrombie & Fitch, and Ralph Lauren were tainted with hazardous chemicals.26 As part of Greenpeace’s Detox Campaign, Puma promised a toxin-free product and to eliminate toxins from its entire supply chain and life cycle by 2020; Nike and Adidas followed with their own initiatives.27 What role do brand managers have in developing such programs? Do you seek out products that are sold by companies that support CSR initiatives?

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product life cycle

A theoretical model of what happens to sales and profits for a product class over time; the four stages of the cycle are introduction, growth, maturity, and decline.

such as microwave ovens, stay in the introductory stage for years. Other products, like ketchup, become classics and never experience decline. Fad products (think Beanie Babies and mood rings) may go through the entire cycle in a few months. Still others may be withdrawn from the market altogether. Nonetheless, the product life cycle may provide some basis for anticipating future market developments and for planning marketing strategies.

Example of the Product Life Cycle The product life cycle can give marketers valuable clues to successfully promoting a product over time. Some products, like crayons and sidewalk chalk, have very long product life cycles, change very little, and never seem to go into decline. Crayola’s crayons have been popular for over 130 years! Mattel’s Barbie is nearly 60 years old and is gearing up for another makeover.28 How long do you think the new virtual video games will last? As an example, let’s consider the product life cycle of instant coffee. When it was introduced, most people did not like it as well as “regular” coffee, and it took several years for instant coffee to gain general acceptance (introduction stage). At one point, instant coffee became more popular, and new brands were introduced (growth stage). After a while, people became attached to one brand and sales levelled off (maturity stage). Sales then went into a slight decline when freeze-dried coffees were introduced (decline stage). Now freeze-dried coffee is, in turn, in the decline stage as consumers are buying fresh specialty beans from companies such as Second Cup and Starbucks and brewing them at home. It’s extremely important for marketers to recognize what stage a product is in so that they can make intelligent and efficient marketing decisions about it.

Using the Product Life Cycle Different stages in the product life cycle call for different marketing strategies. Figure 15.2 outlines some marketing mix decisions you might make. As you go through the figure, you will see that each stage calls for multiple marketing mix changes. Remember, these concepts are largely theoretical and you should use them only as guidelines. (We’ll discuss the price strategies mentioned in the figure later in this chapter.) Note that at the maturity stage, the product may reach the top in sales growth while profit is decreasing. At that stage, a marketing manager may decide to create a new image for the product to start a new growth cycle. For example, you may have noticed how Arm & Ham© filadendron/Getty Images mer baking soda gets a new image every few years to It was not until YouTube videos of people spinning them generate new sales. One year it’s positioned as a deodoron their noses, foreheads and shoes that fidget spinners ant for refrigerators and the next as a substitute for harsh really took off.29 Did you own this product? Can you think chemicals in swimming pools. Knowing what stage in of other fad products that went viral quickly because of the cycle a product has reached helps marketing managthe Internet? ers decide when such strategic changes are needed. 564

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

■ FIGURE

15.2

STAGES OF THE PRODUCT LIFE CYCLE Profit levels start to fall before sales reach their peak. This is due to increasing price competition. When profits and sales start to decline, it is time to come out with a new product or to remodel the old one to maintain interest and profits. Note how stages of the product life cycle relate to a firm’s marketing objectives and marketing mix actions.

Total industry sales

Hybrid cars Sales

Smartphones

Total industry profit

All-electric cars

Introduction

Videocassette recorders

Growth

Maturity

Decline

Time MARKETING OBJECTIVE Competition

Product

Price

Place (distribution)

Promotion

GAIN AWARENESS

STRESS DIFFERENTIATION

MAINTAIN BRAND LOYALTY

HARVESTING, DELETION

Few

Many

Reduced

One

More versions

Full product line

Best sellers

Skimming or penetration

Gain market share, deal

Defend market share, profit

Stay profitable

Limited

More outlets

Maximum outlets

Fewer outlets

Inform, educate

Stress points of difference

Reminderoriented

Minimal promotion

Source: Frederick G. Crane et al., Marketing, 9th Canadian ed. (Toronto: McGrawHill Ryerson, 2014), p. 285 with ISBN 9780070878693

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PROGRESS ASSESSMENT

• What is a brand? What are the benefits of branding? • What are the key components of brand equity? • Explain the role of brand managers. • What is the theory of the product life cycle? State the four stages. LO3

Identify various pricing objectives and strategies, and explain why nonpricing strategies are growing in importance.

Competitive Pricing Pricing is so important to marketing and the development of total product offers that it has been singled out as one of the four Ps in the marketing mix, along with product, place, and promotion. It’s one of the most difficult of the four Ps for a manager to control, however, because price is such a critical ingredient in customer evaluations of the product. In this section, we’ll explore price both as an ingredient of the total product offer and as a strategic marketing tool.

Pricing Objectives A firm may have several objectives in mind when setting a pricing strategy. When pricing a healthy meal offering for Harvest Gold, we may want to promote the product’s image. If we price it high and use the right promotion, maybe we can make it the BMW of farm-totable meals. We also might price it high to achieve a certain profit objective or return on investment. We could also price our product lower than its competitors, because we want lower-income customers (like students) to afford this healthy meal. That is, we could have some social or ethical goal in mind. Low pricing may also discourage competition because it reduces the profit potential, but it may help us capture a larger share of the market. A firm may have several pricing objectives over time, and it must formulate these objectives clearly before developing an overall pricing strategy. Popular objectives include the following: 1. Achieving a target return on investment or profit. Ultimately, the goal of marketing

for profit-oriented firms is to make a profit by providing goods and services to others. Naturally, one long-run pricing objective of almost all firms is to optimize profit. target costing

Designing a product so that it satisfies customers and meets the profit margins desired by the firm.

competition-based pricing

A pricing strategy based on what all the other competitors are doing. The price can be set at, above, or below competitors’ prices. 566

2. Building traffic. Supermarkets often advertise certain products at or below cost to

attract people to the store. These products are called loss leaders. The long-run objective is to make profits by following the short-run objective of building a customer base. 3. Achieving greater market share. One way to capture a larger part of the market is to

offer lower prices, low finance rates (like 0-percent financing), low lease rates, or rebates. 4. Creating an image. Certain watches (e.g., Rolex), perfumes, and other socially visible

products are priced high to give them an image of exclusivity and status. 5. Furthering social objectives. A firm may want to price a product low so that people

with little money can afford it. The government often subsidizes the price of farm products to keep basic necessities, like milk, affordable.

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

A firm may have short-run objectives that differ greatly from its long-run objectives. Managers should understand both types at the beginning and put both into their strategic marketing plan. They should also set pricing objectives in the context of other marketing decisions about product design, packaging, branding, distribution, and promotion. All these marketing decisions are interrelated. Intuition tells us the price charged for a product must bear some relationship to the cost of producing it. Prices usually are set somewhere above cost.30 But as we’ll see, price and cost are not always related. In fact, there are three major approaches to pricing strategy: cost-based, demand-based (target costing), and competition-based.

COST-BASED PRICING

One way companies have tried to increase profit is by reducing the amount provided to customers. Thus, cereal companies have cut the amount of cereal in a box, toilet paper companies are making their products smaller, and so on. Have you noticed this happening to products you buy?

Producers often use cost as a primary basis for setting the price. They develop elaborate cost accounting systems to measure production costs (including materials, labour, and overhead), add in a margin of profit, and come up with a price. Picture the process in terms of producing a car. You add up all the various components (e.g., engine parts, body, tires, radio, windows, paint, and labour), add a profit margin, and come up with a price. The question is whether the price will be satisfactory to the market as well.31 In the long run the market—not the producer— determines what the price will be (see Chapter 2). Pricing should take into account costs, but it should also include the expected costs of product updates, the marketing objectives for each product, and competitors’ prices.32

DEMAND-BASED PRICING

Unlike cost-based pricing, target costing is demand-based.33 That means we design a product so it not only satisfies customers but also meets profit margins we’ve set. Target costing makes the final price an input to the product development process, not an outcome of it. You first estimate the selling price people would be willing to pay for a product and then subtract your desired profit margin. The result is your target cost of production, or what you can spend to profitably produce the item.

COMPETITION-BASED PRICING Competition-based pricing is a strategy based on what all the other competitors are doing. The price can be at, above, or below competitors’ prices. Pricing depends on customer loyalty, perceived differences, and the competitive climate.34

Shoppers around the world look for bargains, as these consumers in Austria are doing. How many different ways can marketers appeal to shoppers’ desires to find the lowest price? Do online retailers adopt different pricing strategies?

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Price leadership is the strategy by which one or more dominant firms set pricing practices that all competitors in an industry then follow. Examples include oil and gas companies, and some fast-food companies.35

Break-Even Analysis

Imagine how demand-based pricing is used for custommade jewellery. Can you think of any other products where this approach is used?

price leadership

The strategy by which one or more dominant firms set the pricing practices that all competitors in an industry then follow.

break-even analysis The process used to determine profitability at various levels of sales.

total fixed costs

All expenses that remain the same no matter how many products are made or sold.

variable costs

Costs that change according to the level of production.

Before you begin selling a new sandwich at Harvest Gold, it may be wise to determine how many sandwiches you would have to sell before making a profit. You’d then determine whether you could reach such a sales goal. Break-even analysis is the process used to determine profitability at various levels of sales. The break-even point is the point where revenue from sales equals all costs. The formula for calculating the breakeven point is as follows:

Totalfixedcost(FC) _____________________________________ Break-evenpoint (BEP) =                Priceofoneunit(P) − Variablecost(VC)ofoneunit Total fixed costs are all expenses that remain the same no matter how many products are made or sold. Among the expenses that make up fixed costs are the amount paid to own or rent a factory or warehouse and the amount paid for business insurance. Variable costs change according to the level of production. Included are the expenses for the materials used in making products and the direct costs of labour used to make those products. For producing a specific product, let’s say you have a fixed cost of $200,000 (for mortgage interest, real estate taxes, equipment, and so on). Your variable cost (e.g., labour and materials) per item is $2. If you sold the products for $4 each, the break-even point would be 100 000 items. In other words, you would not make any money selling this product unless you sold more than 100 000 of them: FC $200, 000 $200, 000 BEP = ______         = ____________         = _______         = 100 000items (P − VC) ($4.00 − $2.00) ($2.00)

Pricing Strategies for New Products Let’s say that a firm has just developed a new line of products, such as VR headsets. The firm has to decide how to price these units at the introductory stage of the product life cycle. A skimming price strategy prices a new product high, to recover research and development costs and to make as much profit as possible while there’s little competition. Of course, those large profits will eventually attract competitors. A second strategy would be to price new products low. Low prices will attract more buyers and discourage other companies from making these headsets because profits are slim. This penetration price strategy enables the firm to penetrate or capture a large share of the market quickly.

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Retailer Pricing Strategies Retailers use several pricing strategies. Everyday low pricing (EDLP) is the choice of Walmart. It sets prices lower than competitors and does not usually have special sales. The idea is to bring customers to the store whenever they want a bargain rather than waiting until there is a sale. Department stores and some other retailers most often use a high–low pricing strategy. Regular prices are higher than at stores using EDLP, but during special sales they’re lower. The problem with such pricing is that it encourages customers to wait for sales, thus cutting into profits. As online shopping continues to grow, you may see fewer stores with a high–low strategy because customers will be able to find better prices on the Internet. Retailers can use price as a major determinant of the goods they carry. Some promote goods that sell for only $1 (e.g., Dollarama), or another amount (e.g., $10). Dollar stores have raised some of their prices to over one dollar because of rising costs. Psychological pricing means pricing goods and services at price points that make the product appear less expensive than it is. A house might be priced at $299,000 because that sounds like a lot less than $300,000. Gas stations almost always use psychological pricing.

How Market Forces Affect Pricing Recognizing that different customers may be willing to pay different prices, marketers sometimes price on the basis of customer demand rather than cost or some other calculation. That’s called demand-oriented pricing and it is reflected by movie theatres that charge lower prices on certain days (e.g., Cineplex on Tuesdays), and by retailers that offer discounts to seniors if they shop on certain days (e.g., Shoppers Drug Mart on the last Thursday of the month). Today, marketers are facing a new pricing problem: customers comparing prices of products online. Priceline.com introduced customers to a “demand collection system,” in which buyers post the price they are willing to pay and invite sellers to either accept or decline the price. Customers can get great prices on airlines, hotels, and other products by naming their price. They can also buy used goods online at sites such as eBay, Kijiji, or Craigslist. Clearly, price competition is going to heat up as customers have more access to price information from around the world. As a result, non-price competition is likely to increase.

Non-Price Competition Marketers often compete on product attributes other than price. You may have noted that price differences are small with products like gasoline, candy bars, and even major products such as compact cars.

skimming price strategy

A strategy in which a new product is priced high to make optimum profit while there’s little competition.

penetration price strategy

A strategy in which the product is priced low to attract many customers and discourage competitors.

everyday low pricing (EDLP)

Setting prices lower than competitors and then not having any special sales.

high–low pricing strategy

Set prices that are higher than EDLP stores, but have many special sales where the prices are lower than competitors.

Some products are priced high to create a high-status image of exclusivity and desirability. Jimmy Choo shoes fall into this category. What is the total product offer for a product like this?

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psychological pricing

Pricing goods and services at price points that make the product appear less expensive than it is.

LO4

Explain the concept of marketing channels, and the importance of retailing. marketing intermediaries

Organizations that assist in moving goods and services from producers to business and consumer users.

channel of distribution

A set of marketing intermediaries, such as agents, brokers, wholesalers, and retailers, that join together to transport and store goods in their path (or channel) from producers to consumers.

agents/brokers

Marketing intermediaries who bring buyers and sellers together and assist in negotiating an exchange but do not take title to the goods.

wholesaler

A marketing intermediary that sells to other organizations.

retailer

An organization that sells to ultimate consumers. 570

You will not typically see price as a major promotional appeal on television. Instead, marketers tend to stress product images and customer benefits such as comfort, style, convenience, and durability. Often marketers emphasize non-price differences because prices are so easy to match. In order to compete with bigger firms, many small organizations promote the services that accompany basic products rather than prices. Good service will enhance a relatively hom*ogeneous product. Danny O’Neill, for example, is a small wholesaler who sells gourmet coffee to upscale restaurants. He has to watch competitors’ prices and the services they offer so that he can charge the premium prices he wants. To charge high prices, he has to offer and then provide superior service. Larger companies often do the same thing. Other strategies to avoid price wars include adding value (e.g., home delivery from a drugstore), educating customers on how to use the product, and establishing relationships. Customers will pay extra for goods and services when they have a friendly relationship with the seller. The services are not always less expensive, but they offer more value. Some airlines stress friendliness, large “sleeping” seats, promptness, abundant flights, and other such services. Many hotels stress “no surprises,” business services, health clubs, and other extras.

PROGRESS ASSESSMENT

• Can you list four pricing objectives? • What’s a disadvantage of using a cost-based pricing strategy? • How do you calculate a product’s break-even point? • Why is increasing focus being placed on non-price competition?

The Importance of Channels of Distribution It’s easy to overlook distribution and storage in marketing, where the focus is often on advertising, selling, marketing research, and other functions. But it doesn’t take much to realize how important distribution is. Imagine the challenge Adidas faces of getting raw materials together, making millions of pairs of shoes, and then distributing those shoes to stores throughout the world. That’s what thousands of manufacturing firms— making everything from automobiles to furniture and toys—have to deal with every day.36 Imagine further that there has been a major volcano eruption or tsunami that has caused a disruption in the supply of goods. Distribution managers would need to deal with such issues.37 Managing the flow of goods has become one of the most important managerial functions for many organizations. Marketing intermediaries (once called middlemen) are organizations that assist in moving goods and services from producers to businesses (B2B) and from businesses to consumers (B2C). They’re are called intermediaries because they’re in the middle of a series of organizations that join together to

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

push products through the channel of distribution. A channel of distribution consists of a whole set of marketing intermediaries (such as agents, brokers, wholesalers, and retailers) that join together to transport and store goods in their path (or channel) from producers to consumers. Agents/brokers are marketing intermediaries who bring buyers and sellers together and assist in negotiating an exchange, but do not take title to the goods. That is, at no point do they own the goods (e.g, real estate agents) A wholesaler is a marketing intermediary that sells to other organizations, such as retailers, manufacturers, and institutions (e.g., hospitals). Wholesalers are part of the B2B system. Because of high distribution costs, Walmart has been trying to eliminate independent wholesalers from its system and do the job itself. That is, Walmart provides its own warehouses and has its own trucks. It has over 150 distribution centres and 61 000 trailers to distribute goods to its stores.38 A retailer is an organization that sells to ultimate consumers (people like you and me) who buy for their own use. For consumers to receive the maximum benefit from marketing intermediaries, the various organizations must work together to ensure a smooth flow of goods and services to the customer. Channels of distribution help ensure communication flows and the flow of money and title to goods. They also help ensure that the right quantity and assortment of goods will be available when and where needed. Figure 15.3 shows selected channels of distribution for both consumer and industrial goods.

Distribution warehouses, such as Amazon’s distribution centre, store goods until they are needed. Have you ever thought about the benefits of having food, furniture, clothing, and other needed goods close at hand?

How Intermediaries Create Exchange Efficiency When you consider that some manufacturers sell directly to customers, known as a direct channel, you may wonder why have intermediaries at all? The answer is that intermediaries perform certain marketing tasks—such as transporting, storing, selling, advertising, and relationship building—faster and more cheaply than most manufacturers could. Here’s a simple analogy: You could personally deliver packages to people anywhere in the world, but usually you don’t. Why not? Because it’s generally cheaper and faster to

Courtesy of Dougie Dog Diner Truck. Used with permission

Are food trucks a direct channel or an indirect channel? Some vendors use Twitter and other social media to reveal their current locations and build customer relationships. You might find cuisine such as specialty crepes, kimchi pork fries, osso bucco, banh mi, and Gruyère grilled cheese. Would a Harvest Gold truck make sense?

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■ FIGURE

15.3

SELECTED CHANNELS OF DISTRIBUTION FOR CONSUMER AND INDUSTRIAL (B2B) GOODS AND SERVICES Channels for consumer goods

Channels for industrial goods

This channel is used by craftspeople and small farmers Known as a direct channel.

This channel is used for cars, furniture, and clothing.

This channel is the most common channel for consumer goods such as groceries, drugs, and cosmetics.

This is a common channel for food items such as produce.

This is a common channel for consumer services such as real estate, stocks and bonds, insurance, and non-profit theatre groups.

This is a common channel for non-profit organizations that want to raise funds. Included are museums, government services, and zoos.

This is the common channel for industrial products such as glass, tires, and paint for automobiles Known as a direct channel.

This is the way that lower-cost items, such as supplies, are distributed. The wholesaler is called an industrial distributor.

Manufacturer

Farmer

Service organization

Non-profit organization

Manufacturer

Wholesaler

Broker

Retailer

Wholesaler

Broker Store Wholesaler

Retailer

Consumers

Retailer

Industrial users

have them delivered by Canada Post or a private firm such as Purolator. If there is a channel member between the manufacturer and the customer, one has an indirect channel. While marketing intermediaries can be eliminated, their activities can’t if customers are to have access to products and services. Intermediary organizations have survived because they have performed marketing functions faster and cheaper than others could. 572

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PROGRESS ASSESSMENT

• What is a channel of distribution? • What intermediaries are involved in a direct and indirect channel of distribution? • Why do we need intermediaries? What are some examples?

Retail Intermediaries Perhaps the most useful marketing intermediaries, as far as you are concerned, are retailers. Remember that retailers sell to ultimate consumers. They are the ones who bring goods and services to your neighbourhood and make them available day and night. Retailing is important to our economy. In 2017, retail trade generated over $588.8 billion and employed more than 2.1 million Canadians.39 Internet-based sales from both store and non-store retailers was $15.7 billion.40 A CIBC report predicted that by 2020, the Canadian legal market for adult-use cannabis will approach $6.5 billion in retail sales, which would approach the wine market in scale and would be more than the amount of spirits sold.41 Was this report accurate? What other retail businesses have been impacted by the growth in cannabis sales? Figure 15.4 lists, describes, and gives examples of various kinds of retailers. For example, some retailers compete mostly on price while others, such as category killers, use variety as a competitive tool.

Retail Distribution Strategy A major decision that marketers must make is selecting the right retailers to sell their products. Different products call for different retail distribution strategies. Intensive distribution puts products into as many retail outlets as possible, including vending machines. Products that need intensive distribution include candy, gum, and popular magazines. Selective distribution uses only a preferred group of the available retailers in an area. Such selection helps assure producers of quality sales and service. Manufacturers of appliances, furniture, and clothing use selective distribution. Exclusive distribution is the use of only one retail outlet in a given geographic area. The retailer has exclusive rights to sell the product and is therefore likely to carry a large inventory, give exceptional service, and pay more attention to this brand than to others. Auto manufacturers usually use exclusive distribution, as do producers of specialty goods such as skydiving equipment.

Non-Store Retailing

Nothing else in retailing has received more attention than online retailing. Online retailing (e.g., Amazon) is just one form of non-store retailing. Other categories include telemarketing; vending machines, kiosks, carts, and pop-ups; direct selling; and multilevel marketing. Small businesses can use non-store retailing to open up new channels of distribution for their products.

intensive distribution

Distribution that puts products into as many retail outlets as possible.

selective distribution

Distribution that sends products to only a preferred group of retailers in an area.

exclusive distribution

Distribution that sends products to only one retail outlet in a given geographic area.

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■ FIGURE

15.4

TYPES OF RETAIL STORES Type

Description

Example

Category killer

Sells a huge variety of one type of product to dominate that category of goods

Indigo Books & Music, Sleep Country Canada, Staples, Best Buy

Convenience store

Sells food and other often-needed items at convenient locations; may stay open all night

Circle K, 7-Eleven, Couche-Tard, On the Run

Department store

Sells a wide variety of products (clothes, furniture, and housewares) in separate departments

Hudson’s Bay, Holt Renfrew Ogilvy

Discount store

Sells many different products at prices generally below those of department stores

Giant Tiger, Great Canadian Dollar Store

Off-price retailer (Outlet store)

Sells general merchandise directly from the manufacturer at a discount; items may be discontinued or have flaws (“seconds”)

Marshalls, Winners, HomeSense, Saks OFF 5TH

Supercentre

Sells food and general merchandise at discount prices; no membership required

Real Canadian Superstore, Walmart Supercentre

Supermarket

Sells mostly food with other non-food products such as detergent and paper products

Loblaws, Metro, Sobeys

Warehouse club

Sells food and general merchandise in facilities that are usually larger than supermarkets and offers discount prices; membership may be required

Costco Wholesale, Wholesale Club

ELECTRONIC RETAILING

For grocery shopping, what if we just make a list and click? Easy for customers, but a tall task for companies like Amazon and Walmart. To deliver fresh food directly to customers, these companies have to figure out how to keep food cold continuously, manage large orders, and deliver at the right times. Non-perishable foods, on the other hand, would be much the same as shipping an average package.44 Would you use this service if it were available in your area? How might this impact competitors that did not offer this service?

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Online retailing consists of selling products to ultimate consumers online. Social commerce is a form of electronic commerce that involves using social media and user contributions to assist in the online buying and selling of products and services. Figure 15.5 shares a list of different types of social commerce. Thanks to website improvements and discounting, online retail sales have risen dramatically over the last few years.43 But getting customers is only half the battle. The other half is delivering the goods, providing helpful service, and keeping your customers. When electronic retailers fail to have sufficient inventory or fail to deliver goods on time (especially during holidays and other busy periods), customers give up and go back to brick-and-mortar stores. Most online retailers offer e-mail order confirmation. But sometimes they are not as good as stores at handling complaints, accepting returns, and providing personal help. Some online sellers are improving customer service by adding help buttons and

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

■ FIGURE

15.5

TYPES OF SOCIAL MEDIA COMMERCE Social commerce denotes a wide range of shopping, recommending, and selling behaviours. As these models are tested and proven to increase sales and customer satisfaction, more will be introduced. 1. Peer-to-peer sales platforms (eBay, Etsy, Amazon Marketplace, Getaround): Community-based marketplaces where individuals communicate and sell directly to other individuals. 2. Social network-driven sales (Facebook Marketplace, Twitter, Instagram, Pinterest): Sales driven by referrals from established social networks. 3. Group buying (Groupon, WagJag, LivingSocial): Products and services offered at a reduced rate if enough people agree to buy. 4. Peer recommendations (Amazon, Yelp): Sites that aggregate product or service reviews, recommend products based on others’ purchasing history. 5. User-curated shopping (Fancy, Lyst, Styloko): Shopping-focused sites where users create and share lists of products and services that others can shop from. 6. Crowdfunding/crowdsourcing (Threadless, Kickstarter, Cut On Your Bias, Indiegogo): Consumers become involved directly in the production process through voting, funding, and collaboratively designing products. 7. Social shopping (ModCloth, Fab, Fancy): Shopping sites that includes chat and forum features for people to discuss and exchange advice and opinions. Sources: “The 7 Types of Social Commerce,” Conversity, accessed February 2017, conversity.com; Daniel Nations, “6 Social Shopping Websites You Need to Check Out,” Lifewire, accessed February 2017, https://www.lifewire.com/top-social-shopping-websites-3486565.

monitoring their social media accounts to give customers real-time online assistance from a human employee. Brick-and-mortar stores that add online outlets are called brick-and-click stores. They allow customers to choose which shopping technique suits them best. Most companies that want to compete in the future will likely need both a real store and an online presence to provide consumers with the options they want.45

TELEMARKETING Telemarketing is the sale of goods and services by telephone. Many companies use it to supplement or replace in-store selling and complement online selling. Many send a catalogue to consumers, who order by calling a toll-free number. Many electronic retailers provide a help feature online that serves the same function.

online retailing

Selling products to ultimate consumers online.

social commerce

Using social media and user contributions to assist in the online buying and selling of products and services.

telemarketing

The sale of goods and services by telephone.

VENDING MACHINES, KIOSKS, CARTS, AND POP-UPS Vending machines dispense convenience goods when customers deposit sufficient money in the machine. They carry the benefit of location—they’re found in airports, schools, office buildings, service stations, and other areas where people want convenience items. In Japan, they sell everything from bandages and face cloths to salads and spiced seafood. North American vending machines are selling iPods, Bose headphones, sneakers, digital 575

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cameras, and DVD movies. You can even find cars and trucks in some vending machines.47 An ATM in Abu Dhabi dispenses gold. Carts and kiosks have lower overhead costs than stores do, so they can offer lower prices on items such as T-shirts, purses, watches, and cell phones. You often see vending carts outside stores or along walkways in malls. Some mall owners love them because they’re colourful and create a marketplace atmosphere. Kiosk workers often dispense coupons and helpful product information. You may have noticed airlines are using kiosks to speed the process of getting you on the plane. Most pro© leaf/123RF vide a boarding pass and allow you to change your seat. To reduce telemarketing calls, register your telephone number(s) on the National Do Not Call List. Examples Pop-up stores are quickly gaining in popularity of exemptions from this list include calls on behalf of around the country. Pop-ups are temporary outlets that Canadian registered charities, political parties, and calls remain open for a short amount of time in small spaces from companies with whom you have an existing business and offer items not found in traditional stores. For relationship.46 Do you dislike such calls? online business owners they can drum up new business, allow customers to see their goods in person, save on shipping expenses, and even “test drive” operating a brick-and-mortar store. Building owners also benefit from pop-ups because they can generate rent on a currently empty space.48

direct selling

Selling to customers in their homes or where they work.

DIRECT SELLING Direct selling reaches consumers in their homes or workplaces. Businesses use direct selling to sell cosmetics, household goods, lingerie, clothes, and candles at house parties they sponsor. Because so many people work outside the home and aren’t in during the day, companies that use direct selling are sponsoring parties at workplaces or at home on evenings and weekends. Some firms have dropped most of their direct selling efforts in favour of online selling.

MULTILEVEL MARKETING Many companies have had success using multilevel marketing (MLM) and salespeople who work as independent contractors. Some of the best-known MLM companies include Avon and Thirty-One.49 Salespeople earn commissions on their own sales, create commissions for the “upliners” who recruited them, and receive commissions from any “downliners” they recruit to sell. When you have hundreds of downliners—people recruited by the people you recruit—your commissions can be sizeable. Some people make tens of thousands of dollars a month this way. The main attraction of multilevel marketing for employees, other than the potential for making money, is the low cost of entry.50 For a small investment, the average person can get started and begin recruiting others. That doesn’t mean you should get involved with such schemes. People question MLM because some companies using it have acted unethically. More often than not, people at the bottom buy the products themselves and sell a bare minimum, if anything, to others. In other words, be careful of multilevel schemes as a seller and as a buyer. But do not dismiss them out of hand, because some are successful. Potential employees must be very careful to examine the practices of such firms. 576

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Choosing the Right Distribution Mode As discussed in Chapter 10, a supply chain is a sequence of firms that perform activities required to create and deliver a good or service to consumers or industrial users. The supply chain is longer than a channel of distribution because it includes links from suppliers that provide raw materials to manufacturers, whereas the channel of distribution begins with manufacturers. Included in the supply chain are farmers, miners, suppliers of all kinds (e.g., parts, equipment, and supplies), manufacturers, wholesalers, and retailers. As shown in Figure 15.6, channels of distribution are part of the overall supply chain. A key issue today is making the supply chain sustainable because so much of what affects the environment is caused by distribution.51 A primary concern of supply-chain managers is selecting a transportation mode that will minimize costs and ensure a certain level of service. (Modes, in the language of distribution, are the various means used to transport goods, such as by truck, train, plane, ship, and pipeline.) Generally speaking, the faster the mode of transportation, the higher the cost. The job of the supply-chain manager is to find the most efficient combination of these forms of transportation. Figure 15.7 shows the advantages and disadvantages of each mode. ■ FIGURE

15.6

THE SUPPLY CHAIN AND THE CHANNEL OF DISTRIBUTION

Suppliers ’ plant s

Manufacturers

Wholesalers

Retailers

Consumers

Channel of Distribution Supply Chain

■ FIGURE

15.7

COMPARING TRANSPORTATION MODES Combining trucks with railroads lowers cost and increases the number of locations reached. The same is true when combining trucks with ships. Combining trucks with airlines speeds goods long distances and gets them to almost any location.

Flexibility Handling Products

Frequency of Shipments

Reach

Mode

Cost

Speed

On-Time Dependability

Railroad

Medium

Slow

Medium

High

Low

High

Trucks

High

Fast

High

Medium

High

Highest

Pipeline

Low

Medium

Highest

Lowest

Highest

Lowest

Ships (water)

Lowest

Slowest

Lowest

Highest

Lowest

Low

Airplane

Highest

Fastest

Low

Medium

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Today, supply chains involve more than simply moving products from place to place; they involve all kinds of activities such as processing orders and taking inventory of products. In other words, logistics systems involve whatever it takes to see that the right products are sent to the right place quickly and efficiently.

PROGRESS ASSESSMENT

• What are some of the ways in which retailers compete? • What kinds of products would call for each of the different distribution strategies: intensive, selective, and exclusive?

• Give examples of non-store retailing and describe each. • Which transportation mode is fastest, which is cheapest, and which is most flexible?

Promotion and the Promotion Mix LO5

Define promotion, and list the five traditional tools that make up the promotion mix.

■ FIGURE

Recall from Chapter 14 that promotion consists of all techniques that sellers use to motivate people to buy their products and services. Both profit-making and non-profit organizations use promotional techniques to communicate with people in their target markets about goods and services, and to persuade them to participate in a marketing exchange.52 Marketers use many different tools to promote their products and services. Traditionally, as shown in Figure 15.8, those tools include advertising, personal selling, public relations, sales promotion, and direct marketing. Today they also include e-mail promotions, mobile promotions, social network promotion and advertising, blogging, podcasting, tweets, and

15.8

THE TRADITIONAL PROMOTION MIX

Personal selling

Advertising

Public relations

Product

Sales promotion

578

Direct marketing

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

more.53 The combination of promotional tools an organization uses is called its promotion mix. The product is shown in the middle of Figure 15.8 to illustrate that the product itself can also be a promotional tool, such as when marketers give away free samples. Each target group calls for a separate promotion mix. For example, large hom*ogeneous groups of customers (i.e., groups whose members share specific similar traits) are usually most efficiently reached through advertising. Large organizations are best reached through personal selling. Integrated marketing communication (IMC) combines all of the promotional tools into one comprehensive and unified promotional strategy.54 With IMC, marketers can create a positive brand image, meet the needs of customers, and meet the strategic marketing and promotional goals of the firm. Digital marketing is the promotion of products or brands via one or more forms of electronic media.55 Emphasis today is on integrating traditional media like TV with social media or integrating print media with websites.56 Let us briefly explore each of the promotional tools.

promotion mix

Advertising: Informing, Persuading, and Reminding

advertising

The combination of promotional tools an organization uses.

integrated marketing communication (IMC) A technique that combines all of the promotional tools into one comprehensive and unified promotional strategy.

digital marketing

The promotion of products or brands via one or more forms of electronic media. Paid, non-personal

Advertising is paid, non-personal communication through various media by organizations communication and individuals who are in some way identified in the message. Identification of the sender through various media separates advertising from propaganda, which is nonpersonal communication that does by organizations and individuals who are in not have an identified sponsor. some way identified Ads are informative. Direct mail is full of information about products, prices, features, in the advertising store policies, and more; so is newspaper advertising.57 Newspaper advertising is down message. because fewer people are buying newspapers.58 Instead, they’re choosing to get their news on mobile devices. As a result, mobile advertising is growing very fast.59 The number of people who don’t have a TV subscription with a cable, satellite, or telecommunications company is growing in Canada with more Canadians opting to consume content through online-streaming platforms such as Netflix or even from illegal downloads.60 Can you see how this is a challenge for TV advertisers? Despite what you may read about the growth of alternative promotional tools, TV advertising is still a dominant medium.61 Of course, TV is helped by the fact that many people post about what they have recently watched, making social media a “force multiplier” for TV.62 Figure 15.9 discusses the advantages and disadvantages of various advertising media. Note that newspapers, radio, and directories are usually attractive to local advertisers. The trend for local advertisem*nts is moving more toward digital outlets. Some marketers even believe © Rita Newman/Anzenberger/Redux that digital advertisem*nts will overtake the more tradi63 Advertising seems to be everywhere as we go about our tional outlets for local markets in the near future. daily lives. How many advertisem*nts, both digital and Marketers must choose which media can best be non-digital, can you spot in this photo? Can the noise used to reach the audience they desire. Radio advercreated by so many ads interfere with the messages the tising, for example, is less expensive than TV adveradvertisers are trying to communicate? tising and often reaches people when they have few 579

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■ FIGURE

15.9

ADVANTAGES AND DISADVANTAGES OF VARIOUS ADVERTISING MEDIA TO THE ADVERTISER The most effective media are often very expensive. The inexpensive media may not reach your target market. The goal is to use the media that can reach your desired target market most efficiently.

Medium

Advantages

Disadvantages

Newspapers

Good coverage of local markets; ads can be placed quickly; high customer acceptance; ads can be clipped and saved

Ads compete with other features in paper; poor colour; ads get thrown away with paper (short lifespan)

Television

Uses sight, sound, and motion; reaches all audiences; high attention with no competition from other material

High cost; short exposure time; takes time to prepare ads; digital video recorders skip over ads

Radio

Low cost; can target specific audiences; very flexible; good for local marketing

People may not listen to ad; depends on one sense (hearing); short exposure time; audience can’t keep ad

Magazines

Can target specific audiences; good use of colour; long life of ad; ads can be clipped and saved

Inflexible; ads often must be placed weeks before publication; cost is relatively high

Outdoor

High visibility and repeat exposures; low cost; local market focus

Limited message; low selectivity of audience

Direct mail

Best for targeting specific markets; very flexible; ad can be saved

High cost; customers may reject ad as junk mail; must conform to post office regulations

Directories (Yellow Pages–type print and online advertising)

Great coverage of local markets; widely used by customers

Competition with other ads; cost may be too high for very small businesses

Internet

Inexpensive global coverage; available at any time; interactive

Customers may leave the site before buying

Mobile advertising

Great reach among younger shoppers

Easy to ignore and avoid

Social media

Wonderful communication tools

Time drain

other distractions, such as while they’re driving. Radio is especially effective at selling services people don’t usually read about in print media—banking, mortgages, continuing education, and brokerage services, to name a few. On the other hand, radio has become so commercial-ridden that many people pay to switch to commercial-free premium services. Mobile marketing via smartphones started out mostly as text messages, but now stores like Starbucks can send signals to your phone as you approach the store, reminding you to stop in for a latte. Kraft Foods developed iFood Assistant, an app that serves up recipes for users—recipes made with Kraft products. Other retailers use e-mail advertisem*nts to build brand awareness and drive people to their stores or websites. Social media sites in general are growing so fast that some marketers can hardly keep up. 580

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

Adapting to CHANGE Outdoor “Eyes” Are Watching You Have you ever felt that an ad was meant just for you? Drivers in Chicago, Dallas, and New Jersey certainly had that feeling—and for good reason. Billboard messages were tailored directly to them, simply because of the car they were driving. GM had cameras installed on billboards that were able to recognize passing vehicles’ grilles. From there, the billboard displayed a message telling drivers why the Chevy Malibu was better than their own car. If there were no competitor cars on the road at that time, the digital screen would switch to a generic Malibu advertisem*nt. About 6400 traditional billboards have been converted into video screens and that number could be growing. Targeted billboards are not just tracking cars; some cities are involved in Clear Channel Outdoor’s Radar program. Using data collected from nearby smartphones, digital billboards are prompted to show a message that’s most appropriate for the current audience. Then the viewers could be tracked to see if they visit the store whose message was pushed to them. Not all campaigns involve prying eyes, though;

interactive outdoor displays can be fun for people too. When a Harry Houdini television special was set to air, select bus shelters challenged folks to hold their breath for three minutes. Out-of-home advertising and promotion is growing rapidly thanks to these technological innovations. It may still be low on advertising and promotional budgets, but creative minds are coming up with great ideas to make the messages more memorable than traditional media.

Sources: E.J. Schultz, “Technology Fuels Renaissance in Out-of-Home Advertising,” Advertising Age, April 4, 2016; Robert Channick, “Hey, You in the Altima! Chevy Billboard Spots Rival Cars, Makes Targeted Pitch,” Chicago Tribune, April 15, 2016; Sanjay Saloman, “Smartphone Tracking Could Let Highway Billboards Show You Personalized Ads,” Boston.com, May 19, 2016; “LAMAR Deploys ‘Smart’ Digital Billboards Using Milestone IP Video,” Digital Signage Connection, January 17, 2017.

Marketers also search for other places to put advertising, such as on video screens mounted on gas pumps. Have you noticed ads on park benches and grocery carts? You’ve certainly seen them on your favourite websites. The Adapting to Change box shows how companies are using technology in their outdoor advertisem*nts. Another way to get more impact from advertising is to appeal to the interest in green marketing among consumers and businesses. Review the Seeking Sustainability box for one such example.

GLOBAL ADVERTISING Global advertising involves developing a product and promotional strategy that can be implemented worldwide. Global advertising that is the same everywhere can save companies money in research and design. In some cases, however, promotions tailored to specific countries or regions may be much more successful since each country or region has its own culture, language, and buying habits. Problems can arise when marketers use one campaign in all countries. When a Japanese company named a popular drink, it came up with Pocari Sweat, not a good image for most English-speaking people. Canadians may have difficulty with Krapp toilet paper from Sweden. Clairol introduced its curling iron, the Mist Stick, to the German 581

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Seeking SUSTAINABILITY Corporate Knights and Sustainability Corporate Knights has one of the world’s largest circulation (125K+) magazines focused on the intersection of business and society. It claims to be the most prominent brand in the clean capitalism media space. “Clean capitalism” is defined as an economic system in which prices incorporate social, economic, and ecological benefits and costs, and companies know the full impacts of their actions. The vision is to provide information empowering markets to foster a better world. Rankings include the Best 50 Corporate Citizens in Canada and the Global 100 Most Sustainable Corporations.

Courtesy of Corporate Knights Magazine. Used with permission.

Recently, Larry Fink, CEO of BlackRock, the world’s largest investment firm, sent a letter addressed to the CEOs of each corporation BlackRock invests in, encouraging them to make smarter business decisions. “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.” This includes everything from rising CEO pay to water scarcity to the careful reconsideration of corporate supply chains. The Top 30 under 30 Sustainability Leaders ranking is a collection of young entrepreneurs, activists, corporate professionals, and students eager to make the world a better place. The Millennial generation makes up an estimated 2.5 billion global citizens. The economic and political influence of Millennials is growing as they enter or move through the workforce toward their peak spending years. Following closely is Generation Z. The United Nations says youth from around the world must be an active part of all levels of decision making related to sustainable development as “it affects their lives today and has implications for their futures.” Do any of the CK initiatives interest you? Are you inspired by the actions of these individuals? What can you do to make a difference, small or big?

Sources: “About Us,” Corporate Knights Inc., accessed May 6, 2018, http://www.corporateknights.com/us/about-us/; “Just right,” Corporate Knights, Spring 2018 Issue, April 19, 2018, http://www.corporateknights.com/magazines/2018-future-40-issue/justright-15241107/; and CK Staff, “2015 Global 100 Results,” Corporate Knights Inc., January 21, 2015, http://www.corporateknights.com/ magazines/2015-global-100-issue/2015-global-100-results-14218559/.

market, not realizing that mist in German can mean “manure.” Getting the words right in international advertising is tricky and critical, which calls for researching each country, designing appropriate ads, and testing them. In Canada we have regional differences (think differences between Montreal and Vancouver, for example) that are important enough to constitute separate market segments and may require their own promotions and advertising. Many marketers today are moving from globalism (one ad for everyone in the world) to regionalism (specific ads for each country or for specific groups within a country). In the future, marketers will prepare more custom-designed promotions to reach smaller audiences—audiences as small as one person. 582

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Personal Selling: Providing Personal Attention Personal selling is the face-to-face presentation and promotion of goods and services, including the salesperson’s search for new prospects and follow-up service after the sale. Effective selling isn’t simply a matter of persuading others to buy. In fact, it’s more accurately described today as helping others satisfy their wants and needs (again, helping the buyer buy). It’s costly for firms to provide customers with personal attention, so those companies that retain salespeople must train them to be especially effective, efficient, and helpful.64 Given that perspective, you can see why salespeople use smartphones, tablets, and other technology to help customers search for information, design custom-made products, look over prices, and generally do what it takes to complete the order. The benefit of personal selling is having a person help you complete a transaction. The salesperson should listen to your needs, help you reach a solution, and do everything possible to make accomplishing it smoother and easier.

You’re familiar with all kinds of situations in which people apply personal selling. They sell all kinds of goods and services like food, clothing, automobiles, insurance, and real estate. What could they do to be more helpful to you, the customer?

THE BUSINESS-TO-CONSUMER (B2C) SALES PROCESS

Most sales to consumers take place in retail stores where knowing the product comes first. personal selling The face-to-face It is also important to understand as much as possible about the type of people who shop presentation and at a given store. Often the people who come to a store have already done some research promotion of goods online and know what they want.65 The salesperson does need to focus on the customer and services. and refrain from talking to fellow salespeople—or, worse, to friends on the phone. Have you ever experienced such rude behaviour from salespeople? What did you think? Did you complete the sale? The first formal step in the B2C sales process, then, is the approach. Sometimes, the second step of ask questions is also added to this first step. For example, many salespeople approach customers with an opening line like “May I help you?” but the answer too often is “No.” A better approach is “How may I help you?” or simply “Welcome to our store.” The idea is to show the customer that you are there to help and that you are friendly and knowledgeable. Discover what the customer wants first, and then make a presentation. Show customers how your products meet their needs and answer questions that help them choose the right products for them. © 4x6/Getty Images Next comes the close, which can include a trial The B2C sales process has five steps. Which step are you close. “Would you like me to put that on hold?” observing above? or “How will you be paying for that?” are two such 583

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■ FIGURE

15.10

STEPS IN THE BUSINESS-TO-CONSUMER (B2C) SELLING PROCESS Follow up Close sale Make presentation Ask questions Start

Approach

efforts. Selling is an art, and a salesperson must learn how to walk the fine line between being helpful and being pushy. Often individual buyers need some time alone to think about the purchase. The salesperson must respect that need but still be clearly available when needed. After-sale follow up is an important but often neglected step. If the product is to be delivered, the salesperson should follow up to be sure it is delivered on time. The same is true if the product has to be installed. There is often a chance to sell more merchandise when a salesperson follows up on a sale. Figure 15.10 shows the B2C selling process.

PROGRESS ASSESSMENT

• What are the five traditional elements of the promotion mix? • List examples of advertising medium. • What are the five steps in the B2C selling process?

Public Relations: Building Relationships public relations (PR) The function that evaluates public attitudes, changes policies and procedures in response to the public’s requests, and executes a program of action and information to earn public understanding and acceptance.

584

Public relations (PR) is the function that evaluates public attitudes, changes policies and procedures in response to the public’s requests, and executes a program of action and information to earn public understanding and acceptance. Recent events have emphasized the need for good public relations. Such events include Volkswagen’s diesel emissions scandal, Samsung Galaxy 7 Note’s battery problems, and the issues surrounding some politicians, key actors, and sports personalities.66 The PR department maintains close ties with company stakeholders (customers, media, community leaders, government officials, and other corporate stakeholders). Marketers are looking for alternatives to advertising. Public relations is a good alternative. As newspapers cut back on their reporting staff, people are looking for other sources of news information, including publicity releases. Linking up with bloggers has become an important way to keep company names in the news.

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

PUBLICITY: THE TALKING ARM OF PR Publicity is the talking arm of PR and one of the major functions of almost all organizations. Suppose you want to introduce your restaurant, Harvest Gold, to consumers, but you have little money to promote it. You need to get some initial sales to generate funds. One effective way to reach the public is through publicity. Publicity is any information about an individual, product, or organization that is distributed to the public through the media and that is not paid for, or controlled, by the seller. It takes skill to write interesting or newsworthy press releases that the media will want to publish. You may need to write different stories for different media.67 One story may introduce the new owners. Another may describe unusual product offerings. If the stories are published, news about your restaurant will reach many potential consumers (and investors, distributors, and dealers) and you may be on your way to becoming a successful marketer. John D. Rockefeller (wealthy industrialist and philanthropist) once remarked, “Next to doing the right thing, the most important thing is to let people know that you are © Jason Dawson/Rex/Shutterstock doing the right thing.” What might Harvest Gold do to help the Tens of thousands of people soaked themselves in freezing water to promote awareness for the community and thus create more publicity? disease ALS. From athletes and actors to ordinary Besides being free, publicity has several further advanpeople, videos of the Ice Bucket Challenge tages over other promotional tools like advertising. It may reach went viral for months and led to $115 million in people who wouldn’t read an ad. It may appear on the front donations to ALS research. What do you think page of a newspaper or in some other prominent position, or be made this promotion so successful? given air time on a television news show. Perhaps the greatest advantage of publicity is its believability. When a newspaper or magazine publishes a story as news, the reader treats that story as news—and news is more publicity believable than advertising. Review the Making Ethical Decisions box for a dilemma that Any information about an individual, product, you might face as a marketer when you consider publicity. or organization that Publicity has several disadvantages. Marketers have no control over whether, how, and is distributed to the when the media will use the story. The media aren’t obligated to use a publicity release, public through the most of which are thrown away. Furthermore, the media may alter the story so that it’s not media and that is not paid for or controlled positive. There’s good publicity (customers camp out all night to buy your products) and by the seller. bad publicity (defective products are recalled). Also, once a story has run, it’s not likely to be repeated. Advertising, in contrast, can be repeated as often as needed. One way to see that the media handle your publicity well is to establish a friendly relationship with media representatives and be open with them.

Sales Promotion: Giving Buyers Incentives Sales promotion is the promotional tool that stimulates consumer purchasing and dealer interest by means of short-term activities See Figure 15.11 for business-to-consumer sales promotion examples. Sales promotion programs are designed to supplement personal selling, advertising, PR, and other promotional efforts by creating enthusiasm for the overall promotional

sales promotion

The promotional tool that stimulates consumer purchasing and dealer interest by means of short-term activities. 585

PART 5 Marketing: Developing and Implementing Customer-Oriented Marketing Plans

Making ETHICAL DECISIONS Is the Ad as Honest as the Product? You are producing a high-fibre, nutritious cereal called Fiberrific and are having a modest degree of success. Research shows that your number of customers, or market segment, is growing but is still a relatively small percentage of breakfast cereal buyers. Generally, Fiberrific appeals mostly to health-conscious people aged 25 to 60. You are trying to broaden the appeal of your cereal to the under-25 and over-60 age groups. You know that Fiberrific is a tasty and healthy product that is good

Product placement is often subtle, like this out-of-focus 7-Eleven logo located just behind Superman. The goal is to influence the viewer to want that product. What product placements have you noticed in your favourite TV shows and movies? 586

for customers. Joan, one of your managers, suggests that you stretch the truth a bit in your advertising and publicity material so that it will attract more consumers in the age groups you are targeting. After all, your product can’t hurt anybody and is actually good for them. Joan’s idea is to develop two ads, each with two segments. The first segment of one ad would show two senior citizens. A woman is on a tennis court holding a racquet and talking across the net to a man. She is complaining that she seems to tire easily. The next segment would show the same two people, with the woman looking lively and saying that she tried this new breakfast cereal, Fiberrific, for two weeks and feels so energized, like a new person. A similar ad would be used to show two young men walking uphill and talking. The first segment would show the man wondering why he tires so easily and the second one would show the same scene, with one man now a little ahead of the other, looking lively and stating that he is amazed at the improvement in his energy and endurance after eating Fiberrific for only two weeks. Would you go along with Joan’s suggestion? What is your decision based on? Explain.

program. Sales promotion can take place both within and outside the company. The most important internal sales promotion efforts are directed at salespeople and other customer-contact people, such as customerservice representatives and clerks. Internal sales promotion efforts include (1) sales training, (2) the development of sales aids such as audiovisual presentations and videos, and (3) participation in trade shows where salespeople can get leads. Other employees who deal with the public may also receive special training to improve their awareness of the company’s offerings and make them an integral part of the total promotional effort. After generating enthusiasm internally, marketers want to make distributors and dealers eager to help promote the product. Trade shows allow marketing intermediaries to see products from many different sellers and make comparisons among them. Today, virtual trade shows online (called webinars) enable buyers to see many products without leaving the office. Such promotions are usually interactive, so buyers can ask questions, and the information is available 24/7.

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

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15.11

BUSINESS-TO-CONSUMER SALES PROMOTION TECHNIQUES There are many kinds of business-to-consumer sales promotion techniques. Compare these with business-to-business sales promotion techniques such as trade shows, portfolios for salespeople, deals (e.g., price reductions), catalogues, and conventions.

Kind of Sales Promotion

Objectives

Advantages

Disadvantages

Coupons

Stimulate demand

Encourage retailer support

Consumers delay purchases

Deals

Increase trial; retaliate against competitor’s actions

Reduce consumer risk

Consumers delay purchases; reduce perceived product value

Premiums

Build goodwill

Consumers like free or reduced-price merchandise

Consumers buy for premium, not product

Contests

Increase consumer purchases; build business inventory

Encourage consumer involvement with product

Require creative or analytical thinking

Sweepstakes

Encourage present customers to buy more; minimize brand switching

Get customer to use product and store more often

Sales drop after sweepstakes

Samples

Encourage new product trial

Low risk for consumer

High cost for company

Loyalty programs

Encourage repeat purchases

Help create loyalty

High cost for company

Point-of-purchase displays

Increase product trial; provide in-store support for other promotions

Provide good product visibility

Hard to get retailer to allocate high-traffic space

Rebates

Encourage customers to purchase; stop sales decline

Effective at stimulating demand

Easily copied; steal sales from future; reduce perceived product value

Product placements

Introduce new products; demonstrate product use

Positive message in a non-commercial setting

Little control over presentation of product

Source: Frederick G. Crane et al., Marketing, 9th Canadian ed. (Toronto: McGrawHill Ryerson, 2014), p. 477 with ISBN 9780070878693

After the company’s employees and intermediaries have been motivated with sales promotion efforts, the next step is to promote to final consumers using samples, coupons, store demonstrations, rebates, displays, and so on. Sales promotion is an ongoing effort to maintain enthusiasm, so sellers use different strategies over time to keep the ideas fresh. For example, you can stimulate sales at Harvest Gold by putting coupons in the school paper and home mailers. Consider putting food displays in your Harvest Gold restaurant to show customers how attractive the products look. Sponsor in-store cooking demonstrations to attract new customers. Do you have any suggestions? 587

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Direct Marketing direct marketing

Any activity that directly links manufacturers or intermediaries with the ultimate customer.

Direct marketing includes any activity that directly links manufacturers or intermediaries with the ultimate consumer. It includes direct mail, catalogue sales, and telemarketing as well as online marketing. It uses direct communication with customers to generate a response in the form of an order, a request for further information, or a visit to a retail outlet. Direct marketing has become popular because shopping from home or work is more convenient for consumers than going to stores. Instead of driving to a mall, people can shop online. Or they can browse catalogues and advertising supplements in the newspaper and magazines and then buy by phone, mail, or online. Interactive online selling provides increasing competition for retail stores. For example, clothing company L.L. Bean put pressure on rivals by eliminating shipping charges. That made the company even more attractive for people who like to shop by catalogue or online. Direct marketing took on a new dimension with interactive video. Companies that use interactive video have become major competitors for those who market through static paper catalogues. For example, customers watching a video of a model moving and turning around in a dress get a much better idea of the look and feel of the outfit than simply seeing it in a printed photo.

PROGRESS ASSESSMENT

• What are the advantages and disadvantages of publicity versus advertising? • What are the sales promotion techniques used to reach consumers? How do they differ when targeting businesses?

• Why has direct marketing become popular? word-of-mouth promotion

A promotional tool that involves people telling other people about products they have purchased or services they have used.

viral marketing

Any strategy that encourages people to pass on a marketing message to others, creating exponential growth in the message’s influence as the message reaches thousands to millions of potential customers.

588

Word of Mouth and Other Promotional Tools Although word of mouth was not traditionally listed as one of the major promotional efforts (it was not considered to be manageable), it is now one of the most effective, especially online.68 In word-of-mouth promotion, people tell other people about products they’ve purchased or services they’ve used. We’ve already discussed the role of social media in spreading word of mouth. Beyond word of mouth is customer participation, that is, getting customers to provide constructive suggestions and share their ideas on how to shape product and service offerings.69 Anything that encourages people to talk favourably about an organization can be effective word of mouth. Notice, for example, how stores use entertainers, banners, and other attention-getting devices to create word of mouth. Clever commercials can also generate

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

word of mouth. The more that people talk about your products and your brand name, the more easily customers remember them when they shop, vote for you, etc. One especially effective strategy for spreading positive word of mouth is to send testimonials to current customers. Most companies use these only in promoting to new customers, but testimonials are also effective in confirming customers’ belief that they chose the right company. Therefore, some companies make it a habit to ask their satisfied customers for referrals. Word of mouth is so powerful that negative word of mouth can hurt a firm badly. Criticism of a product or company can spread through online forums, social media, and websites. Addressing consumer complaints quickly and effectively is one of the best ways to reduce the effects of negative word of mouth. What are some strategies for creating positive word of mouth about Harvest Gold? If your efforts are successful, your message may “go viral” and be seen by millions of consumers.70 Viral marketing includes any strategy that encourages people to pass on a marketing message to others, creating exponential growth in the message’s influence as the message can reach thousands, or even millions of potential customers.71 Many viral marketing programs give away free products or services, often in exchange for valuable e-mail addresses. Free attracts attention; once you have consumers’ attention they can see other products or services you offer and buy those.

“Fake news” is media that has been custom-made to fool you.73 It’s difficult to assess if the information is accurate or not when you see it in different media channels as it appears credible. What can you do to spot fake news? Are you more likely to believe something if you see it on social media?

Social Networking We briefly touched on the importance of social media and advertising in the chapter. However, social media have a much greater role in promotion than just advertising. Marketers have quickly noticed how social media are changing the business environment. Companies utilize these tools to increase exposure for products or services, create loyalty among customers, drive traffic to the company website, and even to come up with new ideas.72

Most Canadians are active on at least one social media platform, whether it be Snapchat, Twitter, Instagram, Facebook or any of the many sites adding users daily. How many platforms do you use? Would you want companies to engage with you on your platforms?

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blog

An online diary (web log) that looks like a web page but is easier to create and update by posting text, photos, or links to other sites.

podcasting

A means of distributing multimedia digital files on the Internet for downloading to a portable media player.

One of the greatest advantages of social media platforms is that they offer easier two-way communication between businesses and customers. For example, companies like Nabisco and Travelocity can be in constant contact with customers and entertain them along the way. Nabisco is using celebrities to demonstrate the perfect way to dunk a cookie, which leads to Oreo fans creating their own dunk videos, and then posting them to the company’s Facebook page.74 Travelocity started #iWannaGo and many wannabe travellers tweeted to the company’s @RoamingGnome handle their photos and their dreams of where they want to go and why. When people participate in these social media activities, they frequently continue interacting with the company and, more importantly, are likely to share branded content.75

Blogging A blog—short for web log—is an online diary that looks like a web page but is easier to create and update by posting text, photos, or links to other sites. There are hundreds of millions of blogs online. How do blogs affect marketing? Running a blog is great way to interact with customers. Businesses can attract new customers when they coordinate their social media profiles with their blogs. As people click to a company’s blog through the social media profile, it helps improve the company’s website ranking. People love to share content they find relevant. In order for a blog to succeed, a business must take time to post and respond to the customers that leave comments. They can use some of the comments to help create new posts. They have to post consistently in order to be recognized by the search engines, and to keep customers coming back to the blog for new information. If the blog isn’t kept updated, it will lose traffic and, therefore, its power as a promotional tool.

Podcasting Podcasting is a means of distributing multimedia digital files on the Internet for downloading to a portable media player. Podcasts are a great way to capture your existing and prospective customers’ attention for an extended period of time by giving them something of value that is easy for them to understand. Companies have also found success in creating videos for YouTube. © monkeybusinessimages/iStock

Mobile marketing allows marketers to reach customers through text messaging. Have you received such promotional messages? For which products are they most effective? Would this be a good strategy for Harvest Gold?

590

Mobile Marketing Most marketers make sure their media are viewable on mobile devices like tablets and smartphones. One key to success, therefore, is to keep the message brief because mobile users do not want to read through too much text. With mobile media, marketers can use text messaging to promote sweepstakes, send customers news or sports alerts, and give them company information. Companies can determine where

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

you are and send you messages about restaurants and other services in your vicinity.

Managing the Promotion Mix: Putting it all Together Each target group calls for a separate promotion mix. Advertising is most efficient for reaching large groups of customers whose members share similar traits. Personal selling is best for selling to organizations. To motivate people to buy now rather than later, marketers use sales promotions like sampling, coupons, discounts, special displays, and premiums. Publicity supports other efforts and can create a good impression among all customers. Word of mouth is often the most powerful promotional tool. Generate it by listening, being responsive, and creating an impression worth passing on to others that you spread through blogging, podcasting, and social media posting.

Courtesy of Outdoor Advertising Association of America

While most bus shelter ads aren’t too special, Caribou Coffee designed its shelters in way that left commuters feeling all warm inside. The company installed heated bus shelters to promote a line of breakfast sandwiches. Do you think giving consumers experiences (like warmth on a cold day) is an effective way to remind them of a product?

Push and Pull Strategies How do producers move products to consumers? In a push strategy, the producer uses advertising, personal selling, sales promotion, and all other promotional tools to convince channel members (e.g., wholesalers and retailers) to stock and sell merchandise, pushing products through the distribution system to the stores. If the push strategy works, consumers will walk into a store, see the product, and buy it. A pull strategy directs heavy advertising and sales promotion efforts toward consumers. If the pull strategy works, consumers will go to the store and ask for the products. The store owner will order them from the wholesaler, who in turn will order them from the producer. Products are thus pulled through the distribution system. Of course, a company could use both strategies in a major promotional effort. Re-read the Adapting to Change box to see how companies are using technology in their pull strategy.

MARS Apprentice

MARS Apprentice is an annual undergraduate experiential learning program at the DeGroote School of Business, McMaster University. It centres around weekly case challenges in the fields of Marketing, Advertising, Retail, and Sales (MARS). Through program partners, student teams are introduced to real business challenges and each challenge week culminates in a boardroom assessment by senior industry professionals. Topperforming Apprentices are rewarded with cash prizes and internships. Here, teams had to design an incentive and rewards program to engage the field marketing representatives for Canadian Tire Bank. Do you have similar programs at your school?

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push strategy

Promotional strategy in which the producer uses advertising, personal selling, sales promotion, and all other promotional tools to convince wholesalers and retailers to stock and sell merchandise.

pull strategy

Promotional strategy in which heavy advertising and sales promotion efforts are directed toward consumers so that they will request the products from retailers.

It has been important to make promotion part of a total systems approach to marketing. That is, promotion is part of supply-chain management. In such cases, retailers would work with producers and distributors to make the supply chain as efficient as possible. Then a promotional plan would be developed for the whole system. The idea would be to develop a total product offer that would appeal to everyone: manufacturers, distributors, retailers, and consumers.

PROGRESS ASSESSMENT

• What is viral marketing? • Describe word-of-mouth promotion and list three other promotional tools. • How does a push strategy differ from a pull strategy?

SUMMARY LO1

Explain the concept of a total product offer, and summarize the functions of packaging. A total product offer consists of everything that customers evaluate when deciding whether to buy something. What’s included in a total product offer? A total product offer includes price, brand name, satisfaction in use, and more. What are the functions of packaging? The functions of packaging include the following: (1) attract the buyer’s attention; (2) protect the goods inside, stand up under handling and storage, be tamperproof, and deter theft; (3) be easy to open and use; (4) describe the contents; (5) explain the benefits of the core product inside; (6) provide information about warranties, warnings, and other customer matters; and (7) indicate price, value, and uses.

LO2

Describe the product life cycle. The product life cycle is a theoretical model of what happens to sales and profits for a product class over time. What are the four stages in the product life cycle? The four product life cycle stages are introduction, growth, maturity, and decline. Review Figure 15.2 for a discussion on how the stages of the product life cycle relate to a firm’s marketing objectives and marketing mix actions.

LO3

Identify various pricing objectives and strategies, and explain why non-pricing strategies are growing in importance. Pricing is one of the four Ps of marketing. What are pricing objectives? Pricing objectives include achieving a target profit, building traffic, increasing market share, creating an image, and meeting social goals.

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CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

What’s the break-even point? At the break-even point, total cost equals total revenue. Sales beyond that point are profitable. What strategies can marketers use to determine a product’s price? For new products, a skimming price or a penetration price strategy is considered. Other strategies include cost-oriented pricing, demand-oriented pricing, and competition-oriented pricing. Why do companies use non-price strategies? Pricing is one of the easiest marketing strategies to copy. Therefore, often it is not a good long-run competitive tool. Instead, marketers may compete using non-price strategies that are harder to copy, including offering great service, educating customers, and establishing long-term relationships with customers. LO4

Explain the concept of marketing channels, and the importance of retailing. A channel of distribution consists of a set of marketing intermediaries, such as agents, brokers, wholesalers, and retailers, that join together to transport and store goods in their path (or channel) from producers to customers. How do marketing intermediaries add value? Intermediaries perform certain marketing tasks—such as transporting, storing, selling, advertising, and relationship building—faster and cheaper than most manufacturers could. Channels of distribution ensure communication flows and the flow of money and title to goods. They also help ensure that the right quantity and assortment of goods will be available when and where needed. Why is retailing important? A retailer is an organization that sells to ultimate consumers. Retailing is important to our economy. In 2017, retail trade generated over $588.8 billion and employed more than 2.1 million Canadians. What is non-store retailing? Non-store retailing is retailing done outside a traditional store. Non-store retailing includes electronic retailing; telemarketing; vending machines, kiosks, and carts; and direct selling. Telemarketing can also be used as part of direct marketing, which is a promotional tool.

LO5

Define promotion, and list the five traditional tools that make up the promotion mix. Promotion is an effort by marketers to inform and remind people in the target market about products and to persuade them to participate in an exchange. What are the five traditional promotional tools that make up the promotional mix? The five traditional promotional tools are advertising, personal selling, public relations, sales promotion, and direct marketing. The product can also be a promotional tool which is why it’s shown in the middle of Figure 15.8. What are examples of other promotional tools? In word-of-mouth promotion, people tell other people about products they have purchased. Other promotional tools include blogging, podcasting, and mobile marketing.

KEY TERMS advertising 579 agents/brokers 571 blog 590

brand 562 brand equity 562 brand loyalty 562

brand manager 563 break-even analysis 568 bundling 561 593

PART 5 Marketing: Developing and Implementing Customer-Oriented Marketing Plans

channel of distribution 571 competition-based pricing 567 digital marketing 579 direct marketing 588 direct selling 576 everyday low pricing (EDLP) 569 exclusive distribution 573 high–low pricing strategy 569 integrated marketing communication (IMC) 579 intensive distribution 573 marketing intermediaries 570 online retailing 574 penetration price strategy 568 personal selling 583

podcasting 590 price leadership 568 product differentiation 559 product life cycle 563 product line 559 product mix 559 promotion mix 579 psychological pricing 569 public relations (PR) 584 publicity 585 pull strategy 591 push strategy 591 retailer 571 sales promotion 585 selective distribution 573

skimming price strategy 568 social commerce 574 target costing 567 telemarketing 575 total fixed costs 568 total product offer (value package) 558 value 556 value package 558 variable costs 568 viral marketing 589 wholesaler 571 word-of-mouth promotion 588

CAREER EXPLORATION If you are interested in pursuing a career in employee– management relations, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Marketing manager—estimates the demand for a product and identifies markets, as well as develops pricing strategies. ∙ Brand manager—creates and directs brand assets for a company or product. ∙ Industrial designer—develops the concepts for manufactured products for everyday use. ∙ Cost estimator—collects and analyzes data in order to estimate the time, money, materials, and labour required to manufacture a product. ∙ Purchasing manager—plans, directs, and coordinates the buying of materials, products, or services for wholesalers, retailers, or organizations. ∙ Logistician—analyzes and coordinates an organization’s supply chain including how a product is acquired, distributed, allocated, and delivered.

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∙ Wholesale and manufacturing sales representative—sells goods for wholesalers or manufacturers to businesses, government agencies, and other organizations. ∙ Railroad worker—ensures that passenger and freight trains run on time and travel safely. ∙ Advertising sales agent—sells advertising space to businesses and individuals; contacts potential clients, makes sales presentations, and maintains client accounts. ∙ Public relations specialist—creates and maintains a favourable public image for the organization they represent; designs media releases to shape public perception of the organization and to increase awareness of its work and goals. ∙ Fundraising manager—designs and coordinates campaigns that attract donations for the organizations. ∙ Web developer—designs and creates websites.

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

CRITICAL THINKING 1. What value enhancers affected your choice of

school to attend? Did you consider size, location, price, reputation, library and research services, sports, courses offered, job placement opportunities (e.g., internship), and exchange opportunities? What factors were most important? Why? What schools were your alternatives? Why didn’t you choose them?

it by train or truck? Could you use ships to tow icebergs to warmer climates? What other means of transporting water might there be? 4. What kinds of problems can emerge if a firm

doesn’t communicate with environmentalists, the news media, and the local community? Do you know of any firms that aren’t responsive to your community? What are the consequences?

2. What could you do to enhance the product

offer of Harvest Gold, other than changing the menu from time to time? How could you use psychological pricing when making up the menu at Harvest Gold? Are you impressed by the use of celebrities in product advertisem*nts? What celebrity could you use to promote Harvest Gold?

5. As interactive communications between com-

3. Many suggest that a scarce item in the future

media affected other media you use, like newspapers or television? Do you read print newspapers now or do you get your news some other way? Do you watch programs on TV or on other devices? How has the move away from print and network television affected advertising?

panies and customers grow, do you think traditional advertising will grow or decline? What will be the effect of this growth or decline on the price we pay for TV programs, newspapers, and magazines? 6. How have blogging, podcasting, and social

will be water. If you could think of an inexpensive way to get water from places of abundance to places where it is needed for drinking, farming, and other uses, such as fracking, you could become a wealthy marketing intermediary. Pipelines are an alternative, but could you also freeze the water and ship

DEVELOPING CAREER SKILLS Key: Team

Analytic

1. Look around your classroom and notice the

different types of shoes students are wearing. What product qualities do you think they considered when they chose to purchase the shoes they’re wearing? Then, ask them this question: How important were price, style, brand name, and colour? Describe the product offerings you would feature in a new shoe store designed to appeal to students.

Communication

2. In small groups, discuss the importance of

price when buying the following products:

Technology

clothes, milk, computers, haircuts, and rental cars. What non-price factors, if any, are more important than price? How much time did you spend evaluating factors other than price when making such purchases?

3. In class, discuss the differences between

wholesaling and retailing and why retailing has more appeal for students considering jobs. Since fewer students seek jobs in wholesaling than in retailing, do you think wholesaling jobs may be easier to get?

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PART 5 Marketing: Developing and Implementing Customer-Oriented Marketing Plans

4. Scan your local newspaper or search online

for examples of publicity (e.g, stories of new products) and sales promotion (e.g., coupons, contests, and sweepstakes). Share your examples and discuss the effectiveness of such promotional efforts with the class.

5. In small groups, list six goods and services most stu-

dents own or use and discuss promotional techniques that prompt you to buy them: advertising, personal selling, PR, sales promotions, direct marketing, social media, or word of mouth. Which seems most effective for your group? Why?

ANALYZING MANAGEMENT DECISIONS Measuring Marketing Effectiveness One of the major issues facing marketers today is measuring the effectiveness of various marketing campaigns. In the past, marketers set a budget for advertising, personal selling, and the like based on past sales or the need to push future sales. Measuring results has always been difficult and was given less attention. Now, however, marketers are demanding more accountability from their advertising agencies, their sales forces, and their website activities. They want to know who is receiving their messages and what the results are. Many companies do not know how to establish such metrics, or measures of effectiveness. Digital

media have more accurate metrics, and these are forcing marketers to find more reliable statistics for traditional marketing methods like TV advertising. Some companies have turned to the finance department to help develop metrics. The question often comes down to whether the measure should be of sales or of customer attitudes. Some 60 percent of marketers measure customer attitudes as a result of marketing campaigns, but fewer than 40 percent use the data for preparing their marketing budgets, preferring instead to rely on their own instincts.

Discussion Questions 1. You are planning a marketing campaign for

3. Using your own reactions, discuss what mar-

Harvest Gold. How might you go about measuring the effectiveness of your advertising?

keting tools are most effective in reaching students and others. Talk with fellow students from different ethnic and age groups to determine whether their answers are different from yours and how.

2. What would your reaction be if you found

potential customers had heard about your restaurant but had not yet acted on that information and come in to buy?

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CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

RUNNING CASE Marketing the Fox 40® Sonik Blast Whistle: Breaking the Sound Barrier! For successful Canadian entrepreneur and inventor Ron Foxcroft, it all started in 1982 when he purchased Fluke Transport, a Southern Ontario trucking business. The company slogan—If It’s On Time ... It’s A “FLUKE”— was soon recognized throughout North America. Over the years, Foxcroft diversified into new ventures and the Foxcroft Group of Companies now includes Fluke Transportation Group, Fluke Warehousing Inc., Foxcroft Capital Corp., Fox 40 International Inc., and Fox 40 USA Inc. The formation of Fox 40 International Inc. (Fox 40) is the result of a dream for a pealess whistle. When developing his first whistle, Ron was motivated by his knowledge and experience as an international basketball referee. Frustrated with faulty pea whistles, he spent three years of development with design consultant Chuck Shepherd. They had about 25 prototypes but narrowed them down after two years to 14 prototypes, and then down to 2 prototype whistles that worked. This resulted in the Fox 40® Classic Whistle. (The Whistle was named for Ron and that he was 40 when he applied for the patent.) Introduced in 1987, this finely tuned precision instrument does not use a pea to generate sound. In fact, there are no moving parts. The patented design moves the air blast through three tuned chambers. This whistle, and all the subsequent whistles that have been introduced, is 100 percent constructed of high-impact ABS plastic so it is impervious to moisture. Wet or dry, Fox 40 Pealess Whistles cannot be overblown and never fail—the harder you blow, the louder the sound! They can be heard for miles and work in all conditions. They are faultless, reliable, and trusted. Fox 40, a proudly Canadian company, dominates the global whistle industry. Tens of thousands of Fox 40 Whistles are produced monthly for shipment to 140 countries. A mould may be made offshore due to the cost savings (at least $100,000); however, Fox 40 owns all of its moulds. Approximately 90 percent of the company’s products are made in Canada with select components coming from overseas markets. Final assembly occurs in Canada. While the first product was the Fox 40® Classic Whistle, the company now has over 900 active stock-keeping units (SKUs). Its product

mix includes 19 Fox 40 Whistles styles (e.g., Fox 40 electronic whistle); Lanyards & Attachments (e.g., flex coils); additional brands that include Fox 40 Gear; SmartCoach Coaching Boards; SICK Self Impression Custom Kit, and Heat Alert Mouthguards; Marine & Outdoor Products (e.g., Xplorer LED Light); Pink Products; and Logo Imprinted Products. How did Ron tackle the $150,000 debt that he had incurred in developing the Fox 40® Classic Whistle? The answer is marketing. “I took the two whistles to the Pan Am Games in August 1987. I went upstairs in the dorm where the referees were living, and at 2 a.m., I blew the Whistle. Hundreds of referees opened the doors, standing there in their underwear, wondering what kind of whistle they heard. The next day, I got orders for 20 000 Whistles at $6.00 each in U.S. funds. That was $8.00 per Whistle in Canadian funds. My $150,000 debt was covered.” Over the years, Fox 40® has continued to introduce new whistles in its whistle product line. One example is the Fox 40® Sonik Blast. This whistle was in response to referee requests for a louder whistle in large stadiums. Let us consider how the four Ps of marketing were applied to this product. Product: Introduced in 2010, the Fox 40® Sonik Blast is a two-chamber whistle that exceeds 120 decibels of sound. (This is louder than the Fox 40® Classic Whistle’s 115 decibels of power.) It also has no down side, which means that it does not matter which side you put in your mouth as both sides are up. As a result, a referee (or anyone else that uses the whistle) does not have to think about which side of the whistle needs to go “up” before blowing it. To slow down counterfeiters, the cushioned mouth guard (CMG) feature became available at the same time. The CMG is a cushioned mouthgrip for better grip, better control, and a softer feel on one’s teeth. In support of its GREEN PLAN the company has changed its packaging. The packaging is made from recycled water and pop bottles that use virgin polyethylene terephthalate (PET). The switch to PET plastic for the blister is more environmentally friendly. There has also been a movement away from clam packaging. 597

PART 5 Marketing: Developing and Implementing Customer-Oriented Marketing Plans

This has been replaced with a packaging system that uses radio frequency (RF) and heat, known as RF/heat packaging, to seal the blister within two cards. The blister and cards can be separated and added to Blue Box recycling. An added benefit is that the packaging is tamper proof. Included in each package is print material that contains recyclable and/or recycled postconsumer waste material. This colourful cardboard communicates the product’s brand name and benefits, head office location, and contact information. According to Dave Foxcroft, President and COO, one advantage that the company has in manufacturing the whistles in Canada is that they can build to order products and different packages, given the market. Since different markets require different packages, the actual package will vary depending on the marketing channel. For example, the package and label for a Fox 40® Whistle sold in a Canadian Tire store may be different for a whistle that is targeted to referees in the sports aisle versus a whistle that is placed in the marine area. Lately, Dave has noticed that more distributors are moving away from these private labels (whereby Fox 40® manufactures the product with the distributor’s name on it) and requesting that the whistles focus on the Fox 40® brand. These distributors were noticing that they were losing sales as customers were looking specifically for the Fox 40 brand and did not realize that the private labels were also Fox 40® Whistles. The total product offer also includes the high level of service that employees provide to customers. “We stand out,” states Ron. “When you call the company, you get a live person. You don’t need to go through layers of management to get an answer. The employee can answer a question or find someone right away to answer the question. Customers will not get unanswered questions.” Price: Similar to the other whistles, the Fox 40® Sonik Blast is a premium-priced whistle. This is justified by the product’s features, benefits, and high quality. When the Whistle was first introduced, an introductory promotional price was offered to the company’s distributors, including trade show specials. The price Fox 40® charges to its distributors varies depending on several factors: the target market (e.g., sports or marine); the geographic market; and the volume purchased. For example, some global markets are driven by price versus quality. While the suggested retail price is $8.95, it is the distributors that ultimately set the price in their 598

markets. According to Dave, “These distributors own their markets and they know the best price to charge in their specific area. Fox 40® provides its customers with the best products and the goal is that all of the channel members in the distribution channel are financially successful along the way.” Pricing decisions are influenced by many factors that impact costs. For example, Dave cites the ever-changing government regulations around the world in reference to colour, plastics, chemicals, etc. As a result, the Whistle is not the same today as it was 20 years ago due to product restrictions. According to Juliana Child, Manager, Marketing & Events, the company also considers the cost of new imprinting techniques that produce better quality logos. Given such changes, the costs and price are revised annually for imprinted products. Place: The majority of sales are generated through an indirect channel of distribution. Fox 40® follows a B2B marketing channel structure that incorporates distributors between the company and its ultimate users. These distributors perform a variety of marketing channel functions including selling, stocking, and delivering the Fox 40® products. Customers interested in buying Fox 40® products can do so directly from established distributors and retail partners or through online marketing channels such as Fox 40 Shop (fox40shop.com). If a customer chooses to purchase a product through this direct online site, a commission is paid to the local distributor or retail partner. The commission can be used toward future purchases. This unique arrangement is in recognition of the importance of this business-to-business relationship and the company’s commitment to support its channel members. For those channel members that choose to join the site, Fox 40 communicates their information (e.g., name and location) in the package that includes the ordered product. This way, customers are made aware of local channel members for future purchases. Information is also sent to channel members about products that are being ordered by customers in their local area so that they can review products that they carry. Promotion: The overall promotion budget is 12 percent of the previous year’s sales. Money is directed primarily in the areas of advertising and sales. This budget is broken down as follows: ∙ 65 percent is allocated to direct sales (45 percent is for awareness and 25 percent includes online

CHAPTER 15 Managing the Marketing Mix: Product, Price, Place, and Promotion

social media activities, support of the online site, fox40shop.com, etc.) ∙ 9 percent is allocated to research and development ∙ 6 percent is allocated to public relations (which includes community social responsibility initiatives) ∙ 20 percent is allocated to trade shows and customer visits When the Fox 40® Sonik Blast was introduced, public relations activities included media releases that highlighted the features and benefits of the new product. Web blasts were sent to channel members in the different segments (i.e., marine, safety, etc.) via e-mail marketing tool, Constant Contact. Fox 40 also has a B2B online site where channel members can access information such as catalogues, product images, etc. While the paper catalogue continues to be available as it remains the company’s best sales tool, the online site supports channel members. Advertising is a large part of the promotional budget. While on occasion there may be ads that highlight only one whistle, the majority of ads highlight the family of Fox 40® Whistles. Advertising in trade magazines that target the company’s different markets, such as REFEREE Magazine, occurred to promote the Fox 40® Sonik Blast. Social media initiatives were also created to introduce the new product. This included banner ads and Facebook advertising. Product seeding was a trade sales promotion strategy that was targeted to channel members. This form of sampling meant getting the product into the hands of those that would actually use the whistle. For example, free Fox 40® Sonik Blast Whistles, with the distributor’s contact information printed on them, were sent to approved distributors. These distributors were then encouraged to hand out the free whistles to users in their markets.

When you consider personal selling efforts, company representatives attend approximately 20 trade shows per year. The product was promoted at trade shows that target the sport, safety, outdoor, pet, and marine markets. Occasionally, a show promotion was offered but it was primarily the distributor that would offer the promotion. Distributor site visits around the world are also an ongoing aspect of the personal selling element of the promotion mix. These efforts are used to maintain and build longterm and profitable relationships with global distributors. Increasingly, company attention is focusing on direct marketing. Information from current customers and prospects that is generated at trade shows is updated in the company’s database. Personalized communications (i.e., e-blasts, letters, etc.) are created and sent out. This is followed by personal communication to confirm if a sale could be generated. There is a particular focus on current customers. As Ron states, “The best increase in sales is from within the company.” Fox 40 also runs a promotional products division. Approximately 65 percent of all whistles sold have another organization’s logo on them. According to Juliana, since the Fox 40® brand is so well established, it can effectively be directed to promotional sales. This co-branding is another opportunity to link the Fox 40® brand with a company brand that is meaningful to the receiver of the whistle. Given the different package and imprint capabilities, the company can quickly fill personalized orders. Dave believes that this number will increase to 70 percent by mid-2013 as safety awareness is growing. “Organizations recognize the increasing importance of safety,” says Dave. “These organizations want to associate themselves with a superior performing safety brand like Fox 40®.”

Sources: Ron Foxcroft, CEO of Fox 40 International Inc. and Chairman and CEO of Fluke Transportation, in-person interview, September 22, 2017, Hamilton; Dave Foxcroft, President and COO, Fox 40 International Inc., in-person interview, June 25, 2012, Hamilton; “The Fox 40 pea-less whistle story,” Canada.com, April 4, 2012, www.canada.com/sports/football/less+whistle+story/6410154/story.html; Kelley Horton, Vice President Sales, Fox 40 International Inc., interview, June 24, 2008; Juliana Child, Manager, Marketing & Events, Fox 40 International Inc., interview, June 24, 2008; and “Not An Inadvertent Whistle,” Referee, July 2007, 45–47.

Discussion Questions 1. What new-product pricing strategy did Fox 40 ®

International Inc. use for the Fox 40 Sonik Blast? 2. What retail distribution strategy do you think is used for the Fox 40® Sonik Blast? Justify your answer.

3. Which promotional strategy is the most effective

when selling the Fox 40® Sonik Blast? Explain.

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PART 6 CHAPTER 16

Understanding Accounting and Financial Information LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Describe the role that accounting and financial information play for a business and for its stakeholders.

LO2 Identify the different disciplines within the accounting profession. LO3 List the steps in the accounting cycle, distinguish between accounting and bookkeeping, and explain how computers are used in accounting.

LO4 Explain how the major financial statements differ. LO5 Demonstrate the application of ratio analysis in reporting financial information.

P R O F I L E GETTING TO KNOW: SHELLY SUN, CEO, BRIGHTSTAR CARE

600

Shelly Sun never expected to start her own com-

became evident they had come upon a major gap in

pany. As a CPA (certified public accountant) with a

the health care sector: the need for better in-home

master’s degree in accounting from the University

health care. It was then she decided to take the

of Colorado, she was doing quite well in the pri-

plunge and start her own business, BrightStar Care.

vate sector. In fact, at age 29 she was already a

Through her many years working in the corpo-

vice president at CNA Insurance. Her life changed

rate world as a CPA, Sun had the needed skills to focus

when her family was trying with little success to

on the essential financial aspects of her new business.

find quality in-home care for an ailing grandmother.

The hours were long, but she knew if they offered

They tried a series of in-home care agencies, but

other families the service they once sought, the pay-

none of them lived up to the quality and standards

off would be worth it. After three years, BrightStar

the family was seeking. As their quest continued, it

Care had three successful company-owned locations.

CHAPTER 16 Understanding Accounting and Financial Information

BrightStar’s success has not caused Sun to slow down. She earned distinction as a Certified Franchise Executive and was named by the International Franchise Association (IFA) as Entrepreneur of the Year in 2009. In 2017, she was chairperson of the IFA’s board of directors. She was featured on the CBS program Undercover Boss and published her first book Grow Smart, Risk Less, in which she shares her lessons and experiences of building a successful franchise. Shelly Sun credits her knowledge of accounting for helping BrightStar Care survive during the tough times of the recession. By personally tackling her company’s financial issues and working closely with franchisees to implement efficiencies and controls, the company survived the difficult times when franchise financing dried up. Sun strongly believes that developing a core competency such as accounting is a key to business or franchise suc-

Courtesy of BrightStar Care and Shelly Sun

cess. As she readily admits, “Not a day goes by in running my company that I don’t leverage some part

Sun, however, believed the company’s long-term success would come through franchising. Her accounting

and

numbers-oriented

of my accounting knowledge.” Controlling costs, managing cash flows, under-

background

standing profit margins and taxes, and reporting

helped her choose and mentor franchisees that

finances accurately are keys to survival for successful

would thrive in BrightStar’s system. Today, Bright-

organizations like BrightStar Care. This chapter will

Star has over 300 locations that serve more than

introduce you to the accounting fundamentals and

15 000 families and that generate $400 million in

financial information critical to business success. The

systemwide revenue. The company remains on

chapter also briefly explores the financial ratios that

Forbes magazine’s top-10 list of franchise opportuni-

are essential in measuring business performance in

ties under a $150,000 investment.

businesses of all sizes.

Sources: BrightStar Care, www.brightstarcare.com, accessed October 2017; “BrightStar Founder Shelly Sun Lobbies Congress to Overturn NLRB’s Joint-Employer Ruling,” Business Wire, September 16, 2015; Kerry Pipes, “BrightStar Care’s CEO Shelly Sun on Building and Leading a Growing Brand,”Franchising Update, accessed October 2017.

The Role of Accounting Information Small and large businesses often survive or fail according to how well they handle financial procedures. Financial management is the heartbeat of competitive businesses, and accounting information helps keep the heartbeat stable. Accounting reports and financial statements reveal as much about a business’ health as pulse and blood pressure readings tell us about a person’s health.

LO1

Describe the role that accounting and financial information play for a business and for its stakeholders. 601

PART 6 Accounting Information and Financial Activities

You may think accounting is only for profit-seeking businesses. Nothing could be further from the truth. Accounting, often called the language of business, allows us to report financial information about non-profit organizations such as churches, schools, hospitals, and government agencies. Thus, you have to know something about accounting if you want to succeed in any type of business. It’s almost impossible to understand business operations without being able to read, understand, and analyze accounting reports and financial statements. By the end of this chapter, you should have a good idea of what accounting is, how it works, and the value it offers businesses. You should also know some accounting terms and understand the purpose of accounting statements. Your new understanding will pay off as you become more active in business, or will help you in simply understanding what is going on in the world of business and finance.

What Is Accounting? accounting

The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions.

■ FIGURE

Accounting is the recording, classifying, summarizing, and interpreting of financial events and transactions in an organization to provide management and other interested parties the financial information they need to make good decisions about its operation. Financial transactions include buying and selling goods and services, acquiring insurance, paying employees, and using supplies. Once the business’ transactions have been recorded, they are usually classified into groups that have common characteristics. For example, all purchases are grouped together, as are all sales transactions. The method used to record and summarize accounting data into reports is an accounting system (see Figure 16.1). A major purpose of accounting is to help managers make well-informed decisions. Another is to report financial information about the firm to interested stakeholders, such as employees, owners, creditors, suppliers, unions, community activists, investors, and the government (for tax purposes). Review Figure 16.2 for an overview. Accounting is divided into five key areas. Let’s look at those areas next.

16.1

THE ACCOUNTING SYSTEM The inputs to an accounting system include sales documents and other records. The data are recorded, classified, and summarized. They are then put into summary financial statements, such as the income statement and balance sheet.

Inputs Accounting Documents Sales documents Purchasing documents Shipping documents Payroll records Bank records Travel records Entertainment records

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Processing 1. Entries are made into journals: recording 2. The effects of these journal entries are transferred or posted into ledgers: classifying 3. All accounts are summarized

Outputs Financial Statements Balance sheet Income statement Statement of cash flows Other reports (e.g., annual reports)

CHAPTER 16 Understanding Accounting and Financial Information

■ FIGURE

16.2

USERS OF ACCOUNTING INFORMATION AND THE REQUIRED REPORTS Many types of organizations use accounting information to make business decisions. The reports needed vary according to the information each user requires. An accountant must prepare the appropriate reports.

Users

Type of Report

Government taxing authorities (e.g., Canada Revenue Agency)

Tax returns

Government regulatory agencies

Required reports

People interested in the organization’s income and financial Financial statements found in annual reports (e.g., income position (e.g., owners, creditors, financial analysts, and statement, balance sheet, and statement of cash flows) suppliers) Managers of the firm

Financial statements and various internally distributed financial reports

Accounting Disciplines As mentioned earlier, accounting allows us to report financial information about profit seeking as well as non-profit organizations, such as churches, schools, hospitals, and government agencies.1 The accounting profession is divided into five key working areas: (1) managerial accounting, (2) financial accounting, (3) auditing, (4) tax accounting, and (5) government and not-for-profit accounting. All five areas are important, and all create career opportunities. Let’s explore each in the following pages.

LO2

Identify the different disciplines within the accounting profession.

Managerial Accounting Managerial accounting provides information and analyses to managers inside the organization to assist them in decision making. Managerial accounting is concerned with measuring and reporting costs of production, marketing, and other functions; preparing budgets (planning); checking whether or not business units are staying within their budgets (controlling); and designing strategies to minimize taxes. If you are a business major, you’ll likely take a course in managerial accounting. Data within a company is often compared over a period of time to identify trends, or it is compared to other companies operating in the same industry when benchmarking a company’s performance. For example, analysis of the accounts receivable (money that is owed to the company) will help in evaluating the credit policies of a company. Monitoring profit margins, unit sales, travel expenses, cash flow, inventory turnover, and other such data is critical to the success of a firm. Management decision making is based on such data. Some of the questions managerial accounting reports are designed to answer include:

managerial accounting

Accounting used to provide information and analyses to managers inside the organization to assist them in decision making.

∙ What goods and services are selling the most and what promotional tools are working best? ∙ How quickly is the firm selling what it buys? 603

PART 6 Accounting Information and Financial Activities

∙ What is the appropriate allocation of expenses between products? ∙ Which expenses change with changes in revenue? ∙ How much tax is the firm paying and how can it minimize that amount? ∙ Will the firm have enough cash to pay its bills? If not, has it made arrangements to borrow that money? Another aspect of managerial accounting concerns sustainability practices employed by business © Bill Pugliano/Getty Images organizations. At the age of 23, CEO Anshula ChowAssembling a truck engine requires many tools, parts, raw dhury founded Social Asset Measurements Inc.2 This materials, and other components as well as labour costs. business evolved into SAMETRICA whereby its Keeping these costs at a minimum and setting realistic Software-as-a-Service (SaaS) product helps organi production schedules is critical to a business’ survival. What zations demonstrate their social value and supports other internal departments must management accountants informed decisions on how to invest and maximize the team with to ensure the company’s competitiveness? effects of their work.3 See the Seeking Sustainability box for a discussion on what one company includes in its annual accountability report. With the growing emphasis on global competition, outsourcing, and organizational cost-cutting, managerial accounting is an area of importance in terms of anyone’s career.

Financial Accounting financial accounting

Accounting information and analyses prepared for people outside the organization.

Financial accounting differs from managerial accounting in that the information and analyses it generates are for people primarily outside the organization. The information goes not only to company owners, managers, and employees but also to creditors and lenders, unions, customers, suppliers, government agencies, and the general public. External users are interested in questions like: ∙ Is the organization profitable? Should we invest in this company?

annual report

A yearly statement of the financial condition, progress, and expectations of an organization.

private accountant

An accountant who works for a single firm, government agency, or not-for-profit organization.

public accountant An accountant who provides his or her accounting services to individuals or businesses on a fee basis. 604

∙ Is it able to pay its bills? ∙ How much debt does it owe? ∙ If we lend money to this company, will it be able to pay it back? These questions and others are often answered in the company’s annual report, a yearly statement of the financial condition, progress, and expectations of an organization. The annual reports of publicly traded companies are significantly more elaborate than for privately held companies for several reasons. First of all, securities commissions impose additional reporting requirements on publicly traded companies than for privately held companies. For publicly traded companies, many use their annual reports as public relations tools to communicate non-accounting information to stakeholders, such as shareholders, customers, the press, and others.4 See Figure 16.3 for what can be found in an annual report. It’s critical for firms to keep accurate financial information. Some organizations employ a private accountant who works for a single firm, government agency, or nonprofit organization. For those firms that do not need a full-time accountant, independent accounting firms provide the services needed, for a fee. These public accountants provide

CHAPTER 16 Understanding Accounting and Financial Information

Seeking SUSTAINABILITY Sustainability Reports A sustainability report is a report published by a company or organization about the economic, environmental, and social impacts caused by its everyday activities. It also presents the organization’s values and governance model, and demonstrates the link between its strategy and its commitment to a sustainable global economy. An increasing number of companies and organizations want to make their operations sustainable (i.e., last for a long time or indefinitely) and contribute to sustainable development. Sustainability reporting can help organizations to measure, understand, and communicate their economic, environmental, social, and governance performance. More companies are committing to reporting their “green” initiatives via sustainability reports. For example, Mountain Equipment Co-op’s (MEC) has a scorecard whereby it measures its performance in six key areas: products; responsible sourcing; operations; member experience and engagement; working at MEC; and financials. Members are surveyed on issues such as product quality, functionality, and form; satisfaction; and product availability and advice provided. MEC reports on its promotion of recreation and leisure activity in Canada and its multi-million dollar contributions supporting community-based conservation ($3.66 million). There

is also some comment on its own economic viability using accounting data (e.g., $465 million in annual sales), which we will talk about in this chapter. MEC takes issues surrounding sustainability very seriously. Why do you think companies like MEC are committing significant time and resources to these types of activities?

Source:“MEC at a Glance: Highlights of 2016−2017,” Mountain Equipment Co-Op, accessed May 9, 2018,http://meccms.wpengine.com/ wp-content/uploads/2017/06/MEC_2016-17_Annual-Report_Poster_Online_EN.pdf.

accounting services to individuals or businesses, such as designing an accounting system and analyzing the financial strength of an organization. Large accounting and auditing firms operate internationally to serve large, transnational companies. Accountants know it’s vital for users of a firm’s accounting information to be assured the information is accurate. In Canada, the Accounting Standards Board (AcSB) has the authority to develop and establish accounting standards for use by all Canadian entities outside the public sector.5 For example, it develops and maintains Canadian accounting standards to support the international financial reporting standards (IFRS), which are the common set of accounting principles, standards and procedures that accountants and companies use to compile financial statements.6 Publicly traded companies are required to follow IFRS, while private companies can follow IFRS or another set of standards called ASPE (accounting standard for private enterprises).7 If accounting reports are prepared in accordance with IFRS or ASPE, users can expect the information to meet standards upon which accounting professionals have agreed. This chapter focuses on the accounting and financial reporting standards used by publicly accountable enterprises; the accounting and financial reporting used by other types of organizations are covered in advanced accounting courses.8

international financial reporting standards (IFRS)

The common set of accounting principles, standards, and procedures that accountants and companies use to compile financial statements. 605

PART 6 Accounting Information and Financial Activities

■ FIGURE

16.3

ANNUAL REPORT INFORMATION The annual reports of public companies are normally split into two sections. You may see photos of products, facilities, and personnel in the first section. Section 1 (Non-Financial)

Section 2 (Financial)

A letter to shareholders from the chairperson and CEO

Summarized financial data

Descriptions of the company’s management philosophy Products, successes, and occasionally failures Exciting prospects and challenges for the future

Management’s discussion and analysis, covering financial condition and results of operations The basic financial statements Notes to the financial statements Report of independent accountants (auditor’s opinion) and the management report

Source: Based on Robert Libby et al., Financial Accounting, 5th Canadian ed. (Canada: McGraw-Hill Ryerson Ltd., 2014), 301.

Unfortunately, the accounting profession suffered a dark period in the early 2000s when accounting scandals at WorldCom, Enron, and Tyco raised public suspicions about the profession and corporate integrity in general. Arthur Andersen, a leading accounting firm, was forced out of business after being convicted of obstruction of justice for shredding records in the Enron case (the conviction was later overturned by the U.S. Supreme Court). Canadian companies are not immune either; Nortel (no longer in business) was investigated for its accounting practices related to large bonuses paid to senior management. © Asia Images/Getty Images Scrutiny of the accounting industry intensified, Every public company is required to provide financial information. Users can access this information either from however, and resulted in the U.S. Congress’ passage the company’s website (e.g., Investor Relations) or from of the Sarbanes-Oxley Act (referred to as Sarbox). sites like SEDAR. This information varies from a quarterly Figure16.4 lists some of the major provisions of Sarset of financial statements with accompanying notes to box. This legislation created new government reportannual reports with a breadth of financial information. Have ing standards for publicly traded companies. This Act you analyzed a company’s annual report as an assignment? also applies to any Canadian publicly traded company wishing to have its shares traded on an American stock exchange. In Canada, the Ontario Securities Commission introduced Bill 198. CEOs and CFOs of public companies are now required to certify reports. Auditors are now also required to be part of the Canadian Public Accountability Board Oversight Program, which reviews the audited financial statements of public companies. In addition, standards for the independence and education experience of Audit Committees were defined. 606

CHAPTER 16 Understanding Accounting and Financial Information

■ FIGURE

16.4

KEY PROVISIONS OF THE SARBANES-OXLEY ACT • Prohibits accounting firms from providing certain non-auditing work (such as consulting services) to companies they audit. • Strengthens the protection for whistleblowers who report wrongful actions of company officers. • Requires company CEOs and CFOs to certify the accuracy of financial reports and imparts strict penalties for any violation of securities reporting (e.g., earnings misstatements). • Prohibits corporate loans to directors and executives of the company. • Establishes the five-member Public Company Accounting Oversight Board under the Securities and Exchange Commission (SEC) to oversee the accounting industry. • Stipulates that altering or destroying key audit documents will result in felony charges and significant criminal penalties.

Like other business disciplines, accounting is subject to change. The accounting profession is feeling the impact of the global market. Reaching Beyond Our Borders box discusses a movement to globalize accounting procedures.

Reaching Beyond OUR BORDERS Speaking a Universal Accounting Language Throughout this text you’ve read about the tremendous impact of the global market. Companies like BlackBerry and Coca-Cola, for example, earn the majority of their revenues from global markets. Unfortunately, they face considerable accounting headaches since no global accounting system exists. This means they must

adapt their accounting procedures to different countries’ rules. Fortunately, a solution might be at hand. The Financial Accounting Standards Board (FASB) in the United States and the London-based International Accounting Standards Board (IASB) want that situation to change. With over 120 countries permitting or requiring International Financial Reporting Standards (IFRS), the governing bodies of the accounting profession in the United States has proposed the integration of the U.S. accounting code with the IFRS used around the world. Many accountants support the shift to global standards for accounting and support the efforts of the FASB and IASB to work at convergence between the two systems. In Canada, the AcSB has adopted the mandatory use of IFRS by all publicly accountable enterprises (PAEs). IFRS replaces previous Canadian generally accepted accounting principles as the acceptable set of accounting standards for PAEs. Canada Revenue Agency does not specify that financial statements must be prepared following any particular type of accounting principles or standards; however, the AcSB requires PAEs to use IFRS in the preparation of all interim and annual financial statements. Most private companies also have the option to adopt IFRS for financial statement preparation.

Sources: U.S. Securities and Exchange Commission, www.sec.gov, accessed October 2017;“International Financial Reporting Standards (IFRS),” Canada Revenue Agency, February 21, 2017,https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/ international-financial-reporting-standards-ifrs.html;Michael Cohn, “Outgoing SEC Chair White, Keep on Converging Accounting Standards,”Accounting Today, January 6, 2017; and Erich Knachel, “Revenue Recognition: The Clock Is Ticking,”CFO, December 21, 2016.

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Auditing Reviewing and evaluating the records used to prepare a company’s financial statements is referred to as auditing. Private accountants within the organization often perform internal audits to guarantee that the organization is carrying out proper accounting procedures and financial reporting. Public accountants also conduct independent audits of accounting information and related records. An independent audit is an evaluation and unbiased opinion about the accuracy of a company’s financial statements. You may recall from © The Canadian Press/Christopher Katsarov Figure 16.3 that annual reports often include an audiAuditor General Bonnie Lysyk warns about the Ontario tor’s unbiased written opinion. Liberal government’s projected deficit in her pre-election All stakeholders, including the public, governreport on government finances; she believes that the ments, financial institutions, and shareholders (owners) projected deficit of $6.7 billion for 2018−2019 should 12 actually be $11.7 billion. The Premier called it a longare interested in the results of these audits. Audits are standing accounting dispute between her government required for all public corporations in Canada whose and the auditor general.13 What is the risk of understated shares are traded in a public stock exchange. deficits when government spends on new initiatives? How After the accounting scandals of the early 2000s, can a dispute like this be resolved? the Sarbanes-Oxley Act put in place new rules around auditing and consulting to ensure the integrity of the auditing process. Auditing procedures, however, again came under fire in 2011, causing many to call for stricter controls over auditing proceauditing The job of reviewing dures after analyzing the failure of Lehman Brothers in 2008 and the financial crisis and evaluating the that followed.9 records used to In doing their job, auditors not only examine the financial health of an organization prepare a company’s but also its operational efficiencies and effectiveness.10 A relatively new area of accountfinancial statements. ing that focuses its attention on fraudulent activity is forensic accounting. This field of independent audit accounting gathers evidence for presentation in a court of law. This evidence comes from a An evaluation and unbiased opinion review of financial and other records. Review Adapting to Change for a further discussion. about the accuracy of a company’s financial statements.

forensic accounting

A relatively new area of accounting that focuses its attention on fraudulent activity.

tax accountant

An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies.

Tax Accounting Taxes enable governments to fund roads, parks, schools, social services, police protection, and other functions. Federal and provincial governments require individuals and organizations to file tax returns at specific times and in precise formats. A tax accountant is trained in tax law and is responsible for preparing tax returns or developing tax strategies. Since governments often change tax policies according to specific needs or objectives, the job of the tax accountant is certainly challenging.11 As the burden of taxes grows in the economy, the role of the tax accountant becomes increasingly valuable to the organization, individual, or entrepreneur.

Government and Not-for-Profit Accounting Government and not-for-profit (non-profit) accounting supports organizations whose purpose is not generating a profit but rather serving ratepayers, taxpayers, and others according to a duly approved budget. The different levels of government require an accounting

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CHAPTER 16 Understanding Accounting and Financial Information

Adapting to CHANGE Accounting: CSI Unfortunately, many companies lose money in the worst possible way—through fraud. Fraud is a major problem that impacts businesses both large and small. According to the Association of Certified Fraud Examiners, many large corporations lose almost 5 percent of their revenue each year due to fraud, and nearly half of all small businesses deal with financial fraud at some time in their business lives, often with very dire results.

While SEC remains committed to fighting financial fraud and laws such as Sarbox promise stiff penalties, financial fraud marches on. The problem is, government and company auditors are not specifically trained in uncovering financial fraud. Their expertise is primarily to make sure accounting standards are being applied correctly and company financial statements are fairly stated. So, if auditors and chartered professional accountants (CPAs) are not prepared to search for and identify signs of financial fraud, “Who you gonna call?” The answer is elementary. Meet the forensic accountant, the Sherlock Holmes of the accounting industry. While auditors search for accounting errors, forensic accountants search for crime-scene evidence. Forensic accountants sift through mountains of company information, trying to put together a paper trail to identify company rogues responsible for fraud. Their work is often long and arduous and can involve investigating inflated sales figures, money laundering, and inventory fraud. Jack Damico, founding partner of MDD Forensic Accountants, described his colleagues as “investigative accountants who look below the surface and read between the lines.” If forensic accounting interests you, many schools offer advanced degrees and specialties in forensic accounting.

Sources:Bill Albert, “Alibaba: Digging into the Numbers,”Barron’s, February 20, 2016; Howard Scheck, “Risky Business: SEC Focuses on Internal Controls,”CFO, November 16, 2016;The Association of Fraud Examiners, www.acfe.com, accessed October 2017.

system that helps taxpayers, special interest groups, legislative bodies, and creditors ensure that each level of government is fulfilling its obligations and making proper use of the funding with which it has been provided. Canada’s auditor general regularly audits the federal government. CRA administers tax laws for the Government of Canada and for most provinces and territories, and it also administers various social and economic benefit and incentive programs delivered through the tax system.14 Not-for-profit organizations often require accounting professionals. Charities like the Canadian Cancer Society and the United Way of Canada, museums, universities and colleges, and hospitals all hire accountants to show contributors how their money is spent. During the recent recession, many businesses and individuals cut back on donations, making it more important than ever to account for every dollar contributed.15 As you can see, financial and managerial accounting, auditing, tax accounting, and government and not-for-profit accounting each require specific training and skill. They also offer solid career opportunities. Looking ahead, the accounting profession is feeling the impact and challenge of the global market. Before we leave this section, let’s look at Canada’s accounting designations.

government and not-for-profit (nonprofit) accounting

Accounting system for organizations whose purpose is not generating a profit but rather serving ratepayers, taxpayers, and others according to a duly approved budget. 609

PART 6 Accounting Information and Financial Activities

The Chartered Professional Accountant (CPA) Designation16 Canada has three legacy professional accounting designations. Accountants with any of these designations work in all areas of business. Each designation is as follows: 1. A chartered accountant (CA) has met the examina-

Did you know that 1 in 15 Aboriginal people in Canada is homeless, compared to around 1 in 128 of the general population? Bissell Centre advocates for Edmonton’s Aboriginal community because this population disproportionately struggles with homelessness and poverty due to a history of systematic marginalization and discrimination.17 Here you see some individuals celebrating National Aboriginal Day on June 21, the summer solstice. Have you considered working for a not-for-profit or government organization?

What role can accountants play to help organizations adapt to climate change? A new strategic initiative— sponsored by CPA Canada and Natural Resources Canada, and managed by the Network for Business Sustainability—says accountants are ideally positioned to be key contributors. As creators, enablers, preservers, and reporters of sustainable value, accountants can make their organizations’ adaptation efforts more effective. Would working in this area of accounting interest you?

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tion, education, and experience requirements of the Canadian Institute of Chartered Accountants (CICA). This includes passing the Uniform Final Evaluation (UFE), widely recognized as one of the most rigorous professional examinations in the world. 2. A certified management accountant (CMA) has

met certain educational and experience requirements, passed a qualifying exam in the field, participated in a two-year professional development program, and was certified by the Management Accountants of Canada (CMA Canada). 3. Certified general accountants (CGAs) have met

the examination, education, and experience requirements of the Certified General Accountants Association of Canada (CGA-Canada). Chartered Professional Accountants of Canada (CPA Canada) was formed by the integration of the three organizations mentioned above, namely CICA, CMA Canada, and CGA-Canada. CPA Canada was created to unify Canadian provincial accounting bodies at the national level. All 40 of the accounting bodies in Canada have now either unified or are participating in discussions to unite under the CPA banner. The timing for integration and use of the CPA designation will vary from province to province because the profession is provincially regulated and mergers will occur at different times. As such, some of the provinces and regions will be represented by a merged CPA body, while others will be represented by the legacy bodies until an integrated CPA organization is in place. Once unification is completed the profession will move to 14 governing bodies and represent more than 200 000 members. The Chartered Professional Accountant (CPA) designation is the internationally recognized Canadian accounting designation. One needs to have both an undergraduate degree and specific subject area

CHAPTER 16 Understanding Accounting and Financial Information

coverage to be admitted to the new CPA Professional Education Program (CPA PEP). There is a different path for those who do not have an undergraduate degree. This designation emerged from the belief that Canada needed a single, unified accounting profession. A combined Canadian accounting profession built on the strengths of the three legacy designations would be better positioned to represent its interests in Canada and abroad. “With unification, operations and governance will be simplified, efficiencies found, and the profession will speak with a stronger voice,” explains Kevin Dancey, president and CEO of CPA Canada. A unified profession will best serve the public interest by establishing common codes of professional conduct, disciplinary systems, and licensing regimes. Dancey adds that with unification will come a nationally consistent regulatory framework that will facilitate labour mobility and the integration of foreign-trained professionals. “Unification will ease confusion about the legacy designations for employers,” notes Dancey. “Soon, everyone will be operating under the CPA banner.”

chartered professional accountant (CPA) designation

The internationally recognized Canadian accounting designation.

LO3

PROGRESS ASSESSMENT

• What are the five key working areas of the accounting profession? • What is the key difference between managerial and financial accounting? • How is the job of a private accountant different from that of a public accountant? • What ideas contributed to the creation of the CPA designation?

The Accounting Cycle

accounting cycle

The accounting cycle is a six-step procedure (see Figure 16.5) that results in the preparation and analysis of the major financial statements. It relies on the work of both the bookkeeper and an accountant. Bookkeeping, the recording of business transactions, is a basic part of financial reporting. Accounting, however, goes far beyond the mere recording of financial information. Accountants classify and summarize financial data provided by bookkeepers, interpret the data, and then report the information to management. They also ■ FIGURE

List the steps in the accounting cycle, distinguish between accounting and bookkeeping, and explain how computers are used in accounting. A six-step procedure that results in the preparation and analysis of the major financial statements.

bookkeeping

The recording of business transactions.

16.5

STEPS IN THE ACCOUNTING CYCLE 1 Analyze source documents (sales slips, travel records, etc.)

2 Record transactions in journals

3 Transfer (post) journal entries to ledger

4 Take a trial balance

Balance sheet

5 Prepare financial statements

Income statement

6 Analyze financial statements

Statement of cash flows

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journal

The record book where accounting data are first entered.

double-entry bookkeeping

The concept of every business transaction affecting at least two accounts.

ledger

A specialized accounting book in which information from accounting journals is accumulated into accounts and posted so that managers can find all of the information about a specific account in one place.

trial balance

A summary of all of the data in the account ledgers to show whether the figures are correct and balanced.

612

suggest strategies for improving the financial condition and prepare financial analyses and income tax returns. A bookkeeper’s first task is to divide all of the firm’s transactions into meaningful categories, such as sales documents, purchasing receipts, and shipping documents, being very careful to keep the information organized and manageable. Bookkeepers then record financial data from the original transaction documents (sales slips and so forth) into a record book or computer program called a journal. The word journal comes from the French word jour, which means “day.” Therefore, a journal is where the day’s transactions are kept. It’s quite possible to make a mistake when recording financial transactions, like entering $10.98 as $10.89. That’s why bookkeepers record all transactions in two places, so they can check one list of transactions against the other to make sure both add up to the same amount. If the amounts are not equal, the bookkeeper knows there is a mistake. The practice of writing every transaction in two places is called double-entry bookkeeping. It requires two entries in the journal and in the ledgers (discussed next) for each transaction. Suppose a business wanted to determine how much it paid for office supplies in the first quarter of the year. Without a specific bookkeeping tool, that would be difficult—even with accurate accounting journals. Therefore, bookkeepers use a specialized accounting book or computer program called a ledger. In the ledger, they transfer (or post) information from accounting journals into specific categories so managers can find all the information about a single account, like office supplies or cash, in one place. The next step in the accounting cycle is to prepare a trial balance, a summary of all the financial data in the account ledgers that ensures the figures are correct and balanced. If the information in the account ledgers is not accurate, the accountant must correct it before preparing the firm’s financial statements. Using the correct information, the accountant then prepares the firm’s financial statements—including a balance sheet, an income statement, and a statement of cash flows—according to IFRS.

Using Technology in Accounting A long while ago, accountants and bookkeepers needed to enter all of a firm’s financial information by hand. The advent of adding machines and calculators made the job a bit simpler, but still generally required a paper entry. Toward the end of the 20th century, technology simplified the accounting process. Today, computerized accounting programs can post information from journals instantaneously, from remote locations to encrypted laptops or cell phones, making financial information available whenever the organization needs it. The company’s sensitive financial information is safe and secure, but is in the accountant’s hands when needed. Such assistance frees accountants’ time for more important tasks such as financial analysis and financial forecasting. Computerized accounting programs are also particularly helpful to small-business owners, who don’t often have the variety of accounting personnel within their companies that larger firms enjoy. Accounting software—such as Intuit’s QuickBooks—addresses the specific needs of small businesses that are often significantly different from the needs of a major corporation.18 Small-business owners, however, need to understand exactly which programs are best suited for their particular company needs.19 That’s one reason why entrepreneurs planning to start a company should hire or consult with an accountant to identify the particular needs of the firm. They can then develop a specific accounting system that works with the accounting software they’ve chosen.

CHAPTER 16 Understanding Accounting and Financial Information

With sophisticated accounting software available and technology capabilities growing, you might wonder why you need to study and understand accounting. Without question, technology has greatly assisted business people and certainly eased the monotony of bookkeeping and accounting work. Unfortunately the work of an accountant requires training and very specific competencies that computers are not programmed to handle. It’s the partnership of technology and an accountant’s knowledge that helps a firm make the right financial decisions. After the Progress Assessment, we’ll explore the balance sheet, income statement, and statement of cash flows. It’s from the information contained in these financial statements that the accountant analyzes and evaluates the financial condition of the firm.

PROGRESS ASSESSMENT

• How is the job of the bookkeeper different from that of an accountant? • What is the purpose of accounting journals and ledgers? • Why does a bookkeeper prepare a trial balance? • How has computer software helped businesses maintain and compile accounting information?

Understanding Key Financial Statements An accounting year is either a calendar or fiscal year. A calendar year begins January 1 and ends December 31. A fiscal year can begin at any date designated by the business. A financial statement is a summary of all the transactions that have occurred over a particular period. Financial statements indicate a firm’s financial health and stability and are key factors in management decision making.20 That is why shareholders, bondholders and financial services providers (people and institutions that lend money to the firm), unions, employees, and the CRA are all interested in a firm’s financial statements. There are three key business financial statements:

LO4

Explain how the major financial statements differ. financial statement A summary of all of the transactions that have occurred over a particular period.

1. The balance sheet reports the firm’s financial

position on a specific date. 2. The income statementsummarizes revenues, cost

of goods, and expenses (including taxes) for a specific period, and it highlights the total profit or loss the firm experienced during that period. 3. The statement of cash flows provides a summary

of money coming into and going out of the firm. It tracks a company’s cash receipts and cash payments. The differences among the financial statements can best be summarized this way: The balance sheet details what the company owns and owes on a certain

Financial health and stability is important not only for businesses but also for your own life. Do you regularly assess your financial health? To learn more about managing personal finances, review Appendix B.

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day; the income statement shows the revenue a firm earned selling its products compared to its selling costs (profit or loss) over a specific period of time; and the statement of cash flows highlights the difference between cash coming in and cash going out of a business. To fully understand this important financial information, you need to know the purpose of an organization’s financial statements. To help you with this task, we’ll explain each statement in more detail. Before this, consider the fundamental accounting equation.

The Fundamental Accounting Equation

fundamental accounting equation

Assets = Liabilities + Owners’ Equity; this is the basis for the balance sheet.

accounts

Different types of assets, liabilities, and owners’ equity.

Imagine you don’t owe anybody any money. That is, you have no liabilities (debts). In this case, your assets (cash and so forth) are equal to what you own (your equity). However, if you borrow some money from a friend, you have incurred a liability. Your assets are now equal to what you owe plus what you own. Translated into business terms, Assets = Liabilities + Owners’ equity, which is the fundamental accounting equation. Different types of assets, liabilities, and owners’ equity (which will be discussed later), are accounts. In accounting, this equation must always be balanced. For example, suppose that you have $50,000 in cash and decide to use that money to open a small coffee shop. Your business has assets of $50,000 and no debts. The accounting equation would look like this: Assets = Liabilities + Owners’ equity                      $50,000 = $0 + $50,000 Each business transaction impacts at least two accounts. Each entry has at least one debit and one credit. Debits or credits on their own are neither good nor bad, simply a mechanism for maintaining the balance of the accounting equation. Referring back to our example, your business has $50,000 cash and $50,000 owners’ equity (the amount of your investment in the business—sometimes referred to as net worth). However, before opening the business, you borrow $30,000 from a local bank. As a result, the accounting equation now changes. You have $30,000 of additional cash, but you also have a debt (liability) of $30,000. (Remember, in double-entry bookkeeping we record each business transaction in two places.) Your financial position within the business has changed. The equation is still balanced but is changed to reflect the borrowing transaction:

balance sheet (statement of financial position) The financial statement that reports a firm’s financial condition at a specific time and is composed of three major types of accounts: assets, liabilities, and owners’ (shareholders’ or stockholders’) equity. 614

Assets = Liabilities + Owners’ equity                      $80,000 = $30,000 + $50,000 This fundamental accounting equation is the basis for the balance sheet.

The Balance Sheet A balance sheet (also known as the statement of financial position) is the financial statement that reports a firm’s financial condition at a specific time. As highlighted in the sample balance sheet in Figure 16.6 (for our hypothetical restaurant, Harvest Gold, introduced in Chapter 14), assets are listed in a separate column from liabilities and owners’

CHAPTER 16 Understanding Accounting and Financial Information

■ FIGURE

16.6

SAMPLE HARVEST GOLD BALANCE SHEET 1. Current assets: Items that can be converted to cash within one year. 2. Fixed assets: Items such as land, buildings, and equipment that are relatively permanent. 3. Intangible assets: Items of value such as patents and copyrights that don’t have a physical form. 4. Current liabilities: Payments that are due in one year or less. 5. Long-term liabilities: Payments that are not due for one year or longer. 6. Owners’ equity: The value of what shareholders own in a firm (also called shareholders’ equity).

HARVEST GOLD Balance Sheet December 31, 2018 Assets 1. Current assets Cash

$15,000

Accounts receivable

200,000

Notes receivable

50,000

Inventory

335,000

Total current assets

$600,000

2. Fixed assets Land

$40,000

Building and improvements

$200,000

Less: Accumulated depreciation

−90,000

Equipment and vehicles

$120,000

Less: Accumulated depreciation

−80,000

Furniture and fixtures

$26,000

Less: Accumulated depreciation

−10,000

110,000

40,000

16,000 Total fixed assets

206,000

3. Intangible assets Goodwill

$20,000

Total intangible assets

20,000

Total assets

$826,000

Liabilities and Owners’ Equity 4. Current liabilities Accounts payable

$40,000

Notes payable (due June 2019)

8,000

Accrued taxes

150,000

Accrued salaries

90,000

Total current liabilities

$288,000

5. Long-term liabilities Notes payable (due Mar. 2023)

$35,000

Bonds payable (due Dec. 2028)

290,000

Total long-term liabilities

325,000

Total liabilities

$613,000

6. Owners’ equity Common stock (1 000 000 shares)

$100,000

Retained earnings

113,000

Total owners’ equity

213,000

Total liabilities & Owners’ equity

$826,000

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(or shareholders’ or stockholders’) equity. The assets are equal to or balanced with the liabilities and owners’ equity.21 The balance is that simple. Let’s say that you want to know what your financial condition is at a given time. Maybe you want to buy a house or car and therefore need to calculate your available resources. One of the best measuring sticks is your balance sheet. First, add up everything you own—cash, property, and money owed you. These are your assets. Subtract from that the money you owe others—credit card debt, IOUs, car loan, student loans, and the like. These are your liabilities. The resulting figure is your net worth, or equity. This is fundamentally what companies do in preparing a balance sheet: they follow the procedures set in the fundamental accounting equation. In that preparation, any company that is publicly traded is required to follow IFRS.22 Since it’s critical that you understand the financial information on the balance sheet, let’s take a closer look at what is in a business’ asset account and what is in its liabilities and owners’ equity accounts.

Service businesses, like dog groomers, rely on the same sets of financial statements as manufacturers like Ford and retailers like Best Buy. What are some of the assets and liabilities a typical service business like this one would carry on its balance sheet?

CLASSIFYING ASSETS

Items that can or will be converted into cash within one year.

Assets are economic resources (things of value) owned by a firm. Assets include productive, tangible items, such as equipment, buildings, land, furniture, and motor vehicles, that help generate income, as well as intangible items with value, like patents, trademarks, copyrights, and goodwill. Goodwill represents the value attached to factors such as a firm’s reputation, location, and superior products. Goodwill is included on the balance sheet when one firm acquires another firm and pays more for it than the value of its tangible assets. Even though intangible assets such as brand names (e.g., Roots, WestJet, and Via Rail) can be among the firm’s most valuable resources, they are not listed on a company’s balance sheet if they were developed within the company.23 Accountants list assets on the firm’s balance sheet in order of their liquidity, or ease with which they can convert them to cash. Speedier conversion means higher liquidity. For example, an account receivable is an amount of money owed to the firm that it expects to receive within one year. It is considered a liquid asset because it can be quickly converted to cash. Land, however, is not considered a liquid asset because it takes time, effort, and paperwork to convert it to cash. It is considered a fixed or long-term asset. Assets are thus divided into three categories according to how quickly they can be turned into cash:

fixed assets

1. Current assets are items that can or will be converted into cash within one year. Cur-

assets

Economic resources (things of value) owned by a firm.

liquidity

The ease with which an asset can be converted into cash.

current assets

Assets that are relatively permanent, such as land, buildings, and equipment.

616

rent assets include cash, accounts receivable, and inventory. 2. Fixed assets are long-term assets that are relatively permanent, such as land, build-

ings, and equipment. They are acquired to produce products for a business. They

CHAPTER 16 Understanding Accounting and Financial Information

are not bought to be sold but to generate revenue. (On a balance sheet they are also referred to as capital assets or property, plant, and equipment.) 3. Intangible assets are long-term assets that have no physical form but do have value.24

Patents, trademarks, copyrights, and goodwill are intangible assets.

LIABILITIES AND OWNERS’ EQUITY ACCOUNTS Liabilities are what the business owes to others—its debts. Current liabilities are debts due in one year or less. Long-term liabilities (also called non-current liabilities) are debts due in over one year. The following are common liability accounts recorded on a balance sheet. Look at Figure 16.6 again for these accounts: 1. Accounts payable are current liabilities or bills a company owes others for merchan-

dise or services it purchased on credit but have not yet paid for. The longer you take to pay, the greater the risk that a supplier will no longer grant you credit. 2. Notes payable can be short-term or long-term liabilities (like loans from banks) that a

business promises to repay by a certain date. 3. Bonds payable are long-term liabilities. This is money lent to the firm that must be

paid back. (We will discuss bonds in Chapters 17.) As you saw in the fundamental accounting equation, the value of things you own (assets) minus the amount of money you owe others (liabilities) is called equity. The value of what shareholders own in a firm, minus liabilities, is called shareholders’ equity (or stockholders’ equity). Because shareholders are the owners of a firm, we call shareholders’ equity owners’ equity, or that amount of the business that belongs to the owners, minus any liabilities the business owes. This consists of all that the owners have invested in the company plus all profits that have accumulated since the business commenced but that have not yet been paid out to them. This figure always equals the book value of the assets minus the liabilities of the company. The owners’ equity account will differ according to the type of organization. For sole proprietors and partners, owners’ equity means the value of everything owned by the business minus any liabilities of the owner(s), such as bank loans. Owners’ equity in these firms is called the capital account. In a sole proprietorship, it is called owner’s or proprietor’s equity or capital. In a partnership, owners’ equity is called partners’ equity or capital. For corporations, it’s called shareholders’ equity and is divided in two separate accounts. The amount the owners (shareholders) invest is shown in one account, called common stock. The second account is retained earnings, which are accumulated earnings from the firm’s profitable operations that remain in the business and are not paid out to shareholders in distributions of company profits. (Distributions of profits, called dividends, are discussed in Chapter 17). Take a few moments to review Figure 16.6 and see what facts you can determine about Harvest Gold from its balance sheet. Have some fun and estimate your own personal net worth, following the directions in Figure 16.7.

intangible assets

Long-term assets (e.g., patents, trademarks, and copyrights) that have no physical form but do have value.

liabilities

What the business owes to others (debts).

accounts payable

Current liabilities or bills a company owes others for merchandise or services purchased on credit but not yet paid for.

notes payable

Short-term or longterm liabilities that a business promises to repay by a certain date.

bonds payable

Long-term liabilities that represent money lent to a firm that must be paid back.

owners’ equity

The amount of the business that belongs to the owners minus any liabilities owed by the business.

retained earnings

The accumulated earnings from a firm’s profitable operations that remains in the business and are not paid out to shareholders as dividends.

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■ FIGURE

16.7

YOU INCORPORATED How does You Inc. stack up financially? Take a little time to find out. You may be pleasantly surprised, or you may realize that you need to think hard about planning your financial future. Remember, your net worth is nothing more than the difference between what you own (assets) and what you owe (liabilities). Be honest, and do your best to give a fair evaluation of your private property’s value.

ASSETS

LIABILITIES

Cash

$ _________

Installment loans & interest

$ _________

Savings account

_________

Other loans & interest

_________

Chequing account

_________

Credit card accounts

_________

Home

_________

Mortgage

_________

Stocks & bonds

_________

Taxes

_________

Automobile

_________

Cell phone service

_________

TFSA & RRSP

_________

Other liabilities

_________

Personal property

_________

Other assets

_________

Total assets

$ _________

Total liabilities

$ _________

Determine your net worth: Total assets Total liabilities Net worth

$ _________ _________ $ _________

PROGRESS ASSESSMENT

income statement (statement of earnings)

The financial statement that shows a firm’s profit after costs, expenses, and taxes.

net income (or net loss)

Revenue left over (or depleted if a net loss) after all costs and expenses, including taxes, are paid. 618

• What do we call the formula for the balance sheet? What three accounts does it hold? • What does it mean to list assets according to liquidity? • What is included in the liabilities section in the balance sheet? • What is owners’ equity, and how is it determined?

The Income Statement The financial statement that shows a firm’s bottom line—that is its profit (or loss) after costs, expenses, and taxes—is the income statement (also known as the statement of earnings). The income statement summarizes all the resources, called revenue, that have come into the firm from operating activities, money resources the firm used up, expenses it incurred in doing business, and resources it has left after paying all costs and expenses, including taxes. See Figure 16.8 for an example. The resources (revenue) left over or depleted are referred to as net income or net loss.

CHAPTER 16 Understanding Accounting and Financial Information

■ FIGURE

16.8

SAMPLE HARVEST GOLD INCOME STATEMENT 1. Revenues: Value of what’s received from goods sold, services rendered, and other financial sources. 2. Cost of goods sold: Cost of merchandise sold or cost of raw materials or parts used for producing items for resale. 3. Gross profit: How much the firm earned by buying or selling merchandise. 4. Operating expenses: Cost incurred in operating a business. 5. Net income after taxes: Profit or loss over a specific period after subtracting all costs and expenses, including taxes.

HARVEST GOLD Income Statement For the Year Ended December 31, 2018 1. Revenues Gross sales

$720,000

Less: Sales returns and allowances

$12,000

Sales discounts

8,000

−20,000

Net sales

$700,000

2. Cost of goods sold Beginning inventory, Jan. 1

$200,000

Merchandise purchases

$400,000

Freight

40,000

Net purchases Cost of goods available for sale

440,000 $640,000

Less ending inventory, Dec. 31

−230,000

Cost of goods sold

410,000

3. Gross profit

$290,000

4.Operating expenses Selling expenses Salaries for salespeople

$90,000

Advertising

18,000

Supplies

2,000

Total selling expenses

$110,000

General expenses Office salaries

$67,000

Depreciation

1,500

Insurance

1,500

Rent

28,000

Light, heat, and power

12,000

Miscellaneous

2,000

112,000

Total operating expenses

222,000

Net income before taxes

$68,000

Less: Income tax expense

19,000

5. Net income after taxes

$49,000

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cost of goods sold (cost of goods manufactured)

A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale.

The income statement reports the firm’s financial operations over a particular period of time, usually a year, a quarter of a year, or a month. It’s the financial statement that reveals whether the business is actually earning a profit or losing money. The income statement includes valuable financial information for shareholders, lenders, potential investors, employees, and the government. Let’s take a quick look at how to compile the income statement. Then we will discuss what each element in it means.

gross profit (gross margin)

How much a firm earned by buying (or making) and selling merchandise.

Revenue − Cost of goods sold = Gross profit (grossmargin) − Operating expenses = Net income before taxes − Taxes = Net income or loss

REVENUE Revenue is the monetary value of what a firm received for goods sold, services rendered, and other payments (such as rents received, money paid to the firm for use of its patents, interest earned, etc.). Be sure not to confuse the terms revenue and sales; they are not the same thing.25 True, most revenue a business earns does come from sales, but companies can also have other sources of revenue. Also, a quick glance at the income statement shows you that gross sales refers to the total of all sales the firm completed. Net sales are gross sales minus returns, discounts, and allowances.

COST OF GOODS SOLD

Lonnie McQuirter owns a gas station that works with local suppliers to provide customers with healthy, organic food instead of the typical convenience store fare. In 2007 he took out an $875,000 loan to purchase the property and gas pumps from BP. His business now brings in $11 million annually in gross revenue. What’s the difference between revenue and profit?

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The cost of goods sold (also known as cost of goods manufactured) measures the cost of merchandise the firm sells or the cost of raw materials and supplies it used in producing items for resale. It makes sense to compare how much a business earned by selling merchandise and how much it spent to make or produce the merchandise. The cost of goods sold includes the purchase price plus any freight charges paid to transport goods, plus any costs associated with storing the goods. In financial reporting, it doesn’t matter when a firm places a particular item in its inventory, but it does matter how an accountant records the cost of the item when the firm sells it. Why? To understand, read the Spotlight on Small Business about two different inventory valuation methods, LIFO and FIFO. When we subtract the cost of goods sold from net sales, we get the firm’s gross profit or gross margin. Gross profit (or gross margin) is how much a firm earned by buying

CHAPTER 16 Understanding Accounting and Financial Information

Spotlight On SMALL BUSINESS Out with the Old, In with the New IFRS sometimes permit an accountant to use different methods of accounting for a firm’s inventory. Two of the most popular methods are called FIFO and LIFO. Let’s look at a simple example. Say your bookstore buys 100 copies of a particular textbook in July at $150 a copy. When classes begin in September, the bookstore sells 50 copies of the text to students at $175 each. Since instructors intend to use the same book again next term, the bookstore places the 50 copies it did not sell in its inventory until then. In late December, the bookstore orders 50 additional copies of the text to sell for the coming term.

However, the publisher’s price of the book to the bookstore has increased to $175 a copy due to inflation and other increased production and distribution costs. The bookstore now has in its inventory 100 copies of the same textbook, purchased during two different buying cycles. If it sells 50 copies to students at $200 each at the beginning of the new term in January, what is the bookstore’s cost of the book for accounting purposes? Actually, it depends. The books sold are identical, but the accounting treatment could be different. If the bookstore uses a method called first in, first out (FIFO), the cost of goods sold is $150 for each textbook, because the textbook the store bought first—the first in—cost $150. The bookstore could use another method, however. Under last in, first out (LIFO), its last purchase of the textbooks, at $175 each, determines the cost of each of the 50 textbooks sold. If the book sells for $200, what is the difference in gross profit (margin) between using FIFO and using LIFO? As you can see, the inventory valuation method used makes a difference in the profit margin. Eventually, when all 100 copies are sold the cumulative net income will be the same regardless of whether FIFO or LIFO is used. The choice between the two methods solely affects the timing of when the net income is realized.

(or making) and selling merchandise. In a service firm, there may be no cost of goods sold; therefore, gross profit could equal net sales. Gross profit, however, does not tell you everything you need to know about the firm’s financial performance. To get that, you must also subtract the business’ expenses.

OPERATING EXPENSES In selling goods or services, a business incurs certain operating expenses, such as rent, salaries, supplies, utilities, and insurance. Other operating expenses that appear on an income statement, like depreciation, are a bit more complex. For example, have you ever heard that a new car depreciates in market value as soon as you drive it off the dealer’s lot? The same principle holds true for assets such as equipment and machinery. Depreciation is the systematic write-off of the cost of a tangible asset over its estimated useful life. Under accounting rules set by IFRS and CRA (which are beyond the scope of this chapter), companies are permitted to recapture the cost of these assets (i.e., cars, computers, office and electronic equipment) over time by using depreciation as an operating expense.

operating expenses Costs involved in operating a business, such as rent, utilities, and salaries.

depreciation

The systematic writeoff of the cost of a tangible asset over its estimated useful life.

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We can classify operating expenses as either selling or general expenses. Selling expenses are expenses related to the marketing and distribution of the firm’s goods or services (such as advertising, salespeople’s salaries, and supplies). General expenses are administrative expenses of the firm (such as office salaries, insurance, and rent). Accountants are trained to help you record all applicable expenses and find other relevant expenses you can deduct from your taxable income as a part of doing business.

NET PROFIT OR NET LOSS After deducting all expenses, we can determine the firm’s net income before taxes, also referred to as net earnings or net profit (refer to Figure 16.8). After deducting taxes, we get to the bottom line, which is the net income (or perhaps net loss) the firm incurred from revenue minus sales returns, costs, expenses, and taxes over a period of time. We can now answer the question “Did the business earn or lose money in the specific reporting period?” As you can see, the basic principles of the balance sheet and income statement are already familiar to you. You know how to keep track of costs and expenses when you prepare your own budget. If your rent and utilities exceed your earnings, you know you’re in trouble. If you need more money, you may need to sell some of the things you own to meet your expenses. The same is true in business. Companies need to keep track of how much money they earn and spend and how much cash they have on hand. The only difference is that companies tend to have more complex problems and a good deal more information to record than you do.

Most businesses incur operating expenses that include rent, salaries, utilities, supplies, and insurance. What are some of the likely operating expenses for companies like Starbucks?

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CHAPTER 16 Understanding Accounting and Financial Information

Users of financial statements are interested in how a firm handles the flow of cash coming into a business and the cash flowing out of the business. Cash flow problems can plague both businesses and individuals. Keep this in mind as we look at the statement of cash flows next.

The Statement of Cash Flows The statement of cash flows (also known as the cash flow statement) reports cash receipts and cash disbursem*nts related to the three major activities of a firm: ∙ Operations are cash transactions associated with running the business. ∙ Investments are cash used in or provided by the firm’s investment activities. ∙ Financing is cash raised from taking on new debt or equity capital, or cash used to pay business expenses, past debts, or company dividends. We will discuss equity capital and dividends in Chapter 17. Accountants analyze all changes in the firm’s cash that have occurred from operating, investing, and financing in order to determine the firm’s net cash position.26 The statement of cash flows also gives the firm some insight into how to handle cash better so that no cash flow problems occur—such as having no cash on hand for immediate expenses. Figure 16.9 shows a sample statement of cash flows, again using the example of Harvest Gold. As you can see, the statement of cash flows answers such questions as: How much cash came into the business from current operations, such as buying and selling goods and services? Did the firm use cash to buy stocks, bonds, or other investments (e.g., capital assets)? Did it sell some investments that brought in cash? How much money did the firm take in from issuing shares? We analyze these and other financial transactions to see their effect on the firm’s cash position. Managing cash flow can mean the success or failure of any business, which is why we analyze it in more depth in the next section.

statement of cash flows (cash flow statement)

A financial statement that reports cash receipts and cash disbursem*nts related to a firm’s three major activities: operations, investing, and financing.

THE NEED FOR CASH FLOW ANALYSIS Cash flow, if not properly managed, can cause a business much concern. Understanding cash flow analysis is important and not difficult to understand. Let’s say you borrow $100 from a friend to buy a used bike and agree to pay her back at the end of the week. You then sell the bike for $150 to someone else, who also agrees to pay you by the end of the week. Unfortunately, by the weekend, your buyer does not have the money as promised and says he will have to pay you next month. Meanwhile, your friend wants the $100 you agreed to pay her by the end of the week! What seemed a great opportunity to make an easy $50 profit is now a cause for concern. You owe $100 and have no cash. What do you do? If you were a business, you might default on the loan and possibly go bankrupt, even though you had the potential for profits. It’s possible for a business to increase its sales and profits yet still suffer cash flow problems. Cash flow is simply the difference between cash coming in and cash going out of a business. Poor cash flow constitutes a major operating problem that many companies face. For example, Tesla is a fast-growing, innovative car manufacturer that has experienced much hype and growth over the past several years. Unfortunately, it also has faced some formidable cash flow problems that have raised eyebrows in the investment

cash flow

The difference between cash coming in and cash going out of a business.

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■ FIGURE

16.9

SAMPLE HARVEST GOLD STATEMENT OF CASH FLOWS 1. Cash receipts from sales, commissions, fees, interest, and dividends. Cash payments for salaries, inventories, operating expenses, interest, and taxes. 2. Includes cash flows that are generated through a company’s purchase or sale of long-term operational assets, investments in other companies, and its lending activities. 3. Cash inflows and outflows associated with the company’s own equity transactions or its borrowing activities.

HARVEST GOLD Statement of Cash Flows For the Year Ended December 31, 2018 1. Cash flows from operating activities Cash received from customers

$700,000

Cash paid to suppliers and employees

(567,000)

Interest paid

(64,000)

Income tax paid

(19,000)

Interest and dividends received

2,000

Net cash provided by operating activities

$52,000

2. Cash flows from investing activities Proceeds from sale of plant assets

$4,000

Payments for purchase of equipment

(23,000)

Net cash provided by investing activities

(19,000)

3. Cash flows from financing activities Proceeds from issuance of short-term debt

$2,000

Payment of long-term debt

(8,000)

Payment of dividends

(15,000)

Net cash inflow from financing activities

(21,000)

Net change in cash and equivalents

$12,000

Cash balance (beginning of year)

(3,000)

Cash balance (end of year)

$15,000

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CHAPTER 16 Understanding Accounting and Financial Information

Making ETHICAL DECISIONS Would You Cook the Books? You are the lone accountant employed by Fido’s Feast, a small producer of premium dog food that sells directly online. The effects of the last recession are still plaguing the company. During that time, many of the company’s customers became cost-conscious and switched to lower-cost brands. Fortunately, as the economy has improved many of the firm’s long-standing customers are returning and things are looking up.

community.27 Cash flow problems are particularly difficult for small and seasonal businesses.28 Accountants sometimes face tough ethical challenges in reporting the flow of funds into a business. Read the Making Ethical Decisions box to see how such an ethical dilemma can arise. How do cash flow problems start? Often in order to meet the growing demands of customers, a business buys goods on credit (using no cash). If it then sells a large number of goods on credit (getting no cash), the company needs more credit from a lender (usually a bank) to pay its immediate bills. If a firm has reached its credit limit and can borrow no more, it has a severe cash flow problem. It has cash coming in at a later date, but no cash to pay current expenses. That problem could, unfortunately, force the firm into bankruptcy, even though sales may be strong—all because no cash was available when it was most needed. Cash flow analysis shows that a business’ relationship with its lenders is critical to prevent cash flow problems.

The problem is the company’s cash flow has suffered severely during the past few years, and the firm needs immediate funding to continue to pay its bills. The CEO has prepared a proposal to a local bank asking for a loan to keep the company afloat. Unfortunately, you know that Fido’s financial statements for the past year will not show good results and expect the bank will not approve the loan on current financial information, even though the firm seems to be doing better. Before you close the books for the end of the year, the CEO suggests you might “improve” the company’s financial statements by treating the sales that were made at the beginning of January of the current year as if they were made in December of the past year. You know that this is against the rules of the AcSB, and refuse to alter the information. The CEO warns that without the bank loan, the business is likely to close, and everyone will be out of a job. You know he’s right, and also know that with the current economic downturn, finding a job will be tough for you and for others in the company. What are your alternatives? What are the likely consequences of each? What will you do?

Cash flow is the difference between money coming into and going out of a business. Careful cash flow management is a must for a business of any size, but it’s particularly important for small businesses and for seasonal businesses like ski resorts. Have you read of any firms that were forced into bankruptcy because of cash flow problems?

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Accountants can provide valuable insight and advice to businesses in managing cash flow, suggesting whether they need cash and how much. After the Progress Assessment, we’ll see how accountants advise companies by analyzing the financial statements using ratios.

PROGRESS ASSESSMENT

• What are the key steps in preparing an income statement? • What is the difference between revenue and income on the income statement?

• What is the connection between the income statement and the balance sheet? • Why is the statement of cash flows important in evaluating a firm’s operations? LO5

Demonstrate the application of ratio analysis in reporting financial information. ratio analysis

The assessment of a firm’s financial condition using calculations and interpretations of financial ratios developed from the firm’s financial statements.

Analyzing Financial Performance Using Ratios The firm’s financial statements—its balance sheet, income statement, and statement of cash flows—form the basis for financial analyses performed by accountants inside and outside the firm. Ratio analysis is the assessment of a firm’s financial condition, using calculations and financial ratios developed from the firm’s financial statements. Financial ratios are especially useful in comparing the company’s performance to its financial objectives and to the performance of other firms in the industry.29 You probably are already familiar with the use of ratios in sports. For example, in basketball we express the number of shots made from the foul line with a ratio: shots made to shots attempted. In baseball we use the ratio number of hits to the number of at bats. You don’t want to foul a player who shoots 85 percent from the foul line or pitch to a .375 hitter in a close game. Whether ratios measure an athlete’s performance or the financial health of a business, they provide valuable information. Financial ratios provide key insights into how a firm compares to other firms in its industry on liquidity, amount of debt, profitability, and overall business activity. Understanding and interpreting business ratios is important to sound financial analysis. Let’s look briefly at four key types of ratios businesses use to measure financial performance.

Liquidity Ratios As discussed earlier, liquidity refers to how fast an asset can be converted to cash. Liquidity ratios measure a company’s ability to turn assets into cash to pay its short-term debts (liabilities that must be repaid within one year). These short-term debts are of particular importance to the firm’s lenders who expect to be paid on time. Two key liquidity ratios are the current ratio and the acid-test ratio. The current ratio is the ratio of a firm’s current assets to its current liabilities. This information appears on the firm’s balance sheet. Look back at Figure 16.6, Harvest Gold’s

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CHAPTER 16 Understanding Accounting and Financial Information

balance sheet. The company lists current assets of $600,000 and current liabilities of $288,000, yielding a current ratio of 2.08. This means that Harvest Gold has $2.08 of current assets for every $1 of current liabilities. See the following calculation: Current assets $600,000 _______________ Current ratio =        = ________      = $2.08 Current liabilities $288,000 The question the current ratio attempts to answer is: “Is Harvest Gold financially secure for the short term (less than one year)?” It depends! Usually a company with a current ratio of 2 or better is considered a safe risk for lenders granting short-term credit, since it appears to be performing in line with market expectations. However, lenders will also compare Harvest Gold’s current ratio to that of competing firms in its industry and to its current ratio from the previous year or so to note any significant changes. Another key liquidity ratio, called the acid-test or quick ratio, measures the cash, marketable securities (such as stocks and bonds), and receivables of a firm, compared to its current liabilities. Again, this information is on a firm’s balance sheet. See the following calculation: Cash + Accounts Receivable + Marketable securities Acid-test ratio = __________________________________________                Current liabilities            $265,000 = ________      = 0.92 $288,000 This ratio is particularly important to firms with relatively large inventory, which can take longer than other current assets to convert into cash. It helps answer such questions as: “What if sales drop off and we can’t sell our inventory? Can we still pay our short-term debt?” Though ratios vary among industries, an acid-test ratio between 0.5 and 1.0 is usually considered satisfactory, but bordering on cash flow problems. Therefore, Harvest Gold’s acid-test ratio of 0.92 could raise concerns that perhaps the firm may not meet its short-term debt obligations and may have to go to a high-cost lender for financial assistance.

Leverage (Debt) Ratios Leverage (debt) ratios measure the degree to which a firm relies on borrowed funds in its operations. A firm that takes on too much debt could experience problems repaying lenders or meeting promises made to shareholders. The debt to owners’ equity ratio measures the degree to which the company is financed by borrowed funds that it must repay. Again, we can use data from Figure 16.6 to measure Harvest Gold’s level of debt: Total liabilities $613,000 _____________ Debt to owners’ equity ratio =        = ________      = 288% Owners’ equity $213,000 Anything above 100 percent shows that a firm has more debt than equity. With a ratio of 288 percent, Harvest Gold has a rather high degree of debt compared to its equity, which implies that lenders and investors may perceive the firm to be quite risky. However, it is

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important to compare a firm’s debt ratios to those of other firms in its industry because debt financing is more acceptable in some industries than in others. Comparisons with the same firm’s past debt ratios can also identify possible trends within the firm or industry.

Profitability (Performance) Ratios Profitability (performance) ratios measure how effectively a firm’s managers are using its resources to achieve profits. © ac productions/Blend Images LLC Three of the more important ratios are Building luxury hotels, such as Chateau Frontenac in Quebec City, earnings per share (EPS), return on sales, Quebec generally requires taking on a high degree of debt before the hotel ever earns its first dollar. Once opened, companies incur and return on equity. high daily expenses just to keep the business functioning efficiently. EPS is a revealing ratio because earnDo you see how monitoring the four key accounting ratios could be ings help stimulate the firm’s growth a major part of the accountants’ jobs at hotels? and provide for shareholders’ dividends. Companies report their quarterly EPS in two ways: basic and diluted. The basic earnings per share (basic EPS) ratio helps determine the amount of profit a company earned for each share of outstanding common stock. The diluted earnings per share (diluted EPS) ratio measures the amount of profit earned for each share of outstanding common stock, but also considers stock options, warrants, preferred stock, and convertible debt securities the firm can convert into common stock. For simplicity’s sake, we will compute only the basic EPS for Harvest Gold: Net income after taxes Basic earnings per share = _____________________________________            Number of common stock shares outstanding            $49,000 _______________ =        = $0.049 per share $1,000,000 shares Another reliable indicator of performance is return on sales, which tells us whether the firm is doing as well as its competitors in generating income from sales. We calculate it by comparing net income to total sales. Harvest Gold’s return on sales is 7 percent, a figure we must measure against similar numbers for competing firms to judge Harvest Gold’s performance. Net income after tax ________ $49,000 Return on sales = _________________          =        = 7% Net sales $700,000 The higher the risk of failure or loss in an industry, the higher the return investors expect on their investment as they expect to be well compensated for shouldering such odds. Return on equity indirectly measures risk by telling us how much a firm earned for

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CHAPTER 16 Understanding Accounting and Financial Information

each dollar invested by its owners. We calculate it by comparing a company’s net income to its total owners’ equity. Harvest Gold’s return on equity looks reasonably sound since some believe anything over 15 percent is considered a reasonable return: Net income after tax ________ $49,000 _________________ Return on equity =       =        = 23% Total owners’ equity $213,000 Remember that profits help companies like Harvest Gold grow. That is why profitability ratios are such closely watched measurements of company growth and management performance.

Activity Ratios Converting the firm’s inventory to profits is a key function of management. Activity ratios tell us how effectively management is turning over inventory. The inventory turnover ratio measures the speed with which inventory moves through a firm and gets converted into sales. Idle inventory sitting in a warehouse earns nothing and costs money. The more efficiently a firm sells or turns its inventory, the higher its revenue. Harvest Gold’s inventory turnover ratio is: Costs of goods sold ________ $410,000 Inventory turnover = ________________        =      = 1.9 times Average inventory $215,000 The average inventory is calculated by adding the beginning and ending inventories and dividing by two. A lower-than-average inventory turnover ratio often indicates obsolete merchandise on hand or poor buying practices. A higher-than-average ratio may signal lost sales because of inadequate stock. Of course, like other ratios, rates of inventory turnover vary from industry to industry. Managers need to be aware of proper inventory control and anticipate inventory turnover to ensure proper performance. For example, have you ever worked as a food server in a restaurant? How many times did your employer expect you to turn over a table (keep changing customers at the table) in an evening? The more times a table turns, the higher the return to the owner. Accountants and other finance professionals © Carl D. Walsh/Getty Images consider other ratios in addition to the ones we have Inventory turnover is critical to just about any business, particularly restaurants that serve perishable items and discussed to learn more about a firm’s financial condition. To review where the accounting information in that must turn over tables to keep the flow of food moving and profits up. (They are limited in their earnings potential ratio analysis comes from, see Figure 16.10 for a quick by the number of seats they have.) Can you think of other reference of the ratios we have discussed. Remember, businesses that need to watch their inventory turnover financial analysis begins where the accounting stateclosely? ments end.

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PART 6 Accounting Information and Financial Activities

■ FIGURE

16.10

ACCOUNTS IN THE BALANCE SHEET AND INCOME STATEMENT BALANCE SHEET ACCOUNTS Revenues

Cost of Goods Sold

Capital stock

Sales revenue

Cost of buying goods

Wages

Interest

Notes payable

Retained earnings

Rental revenue

Cost of storing goods

Rent

Donations

Inventory

Bonds payable

Common stock

Commissions revenue

Repairs

Licences

Investments

Taxes payable

Treasury stock

Commissions revenue

Repairs

Licences

Royalty revenue

Travel

Fees

Land

Insurance

Supplies

Buildings

Utilities

Advertising

Motor vehicles

Entertainment

Taxes

Goodwill

Storage

Assets

Liabilities

Cash

Accounts payable

Accounts receivable

Owners’ Equity

INCOME STATEMENT ACCOUNTS

Equipment

Expenses

We hope that you can see from this chapter that there is more to accounting than meets the eye. It can be fascinating and it is critical to the firm’s operations. It is worth saying once more that, as the language of business, accounting is a worthwhile language to learn.

PROGRESS ASSESSMENT

• What is the primary purpose of performing ratio analysis using a firm’s financial statements?

• Describe the four main categories of financial ratios. • Why is EPS a revealing ratio?

SUMMARY LO1

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Describe the role that accounting and financial information play for a business and for its stakeholders. Financial information is critical to the growth and development of an organization.

CHAPTER 16 Understanding Accounting and Financial Information

What is accounting? Accounting is the recording, classifying, summarizing, and interpreting of financial events that affect an organization. The methods used to record and summarize accounting data into reports are called an accounting system. What role does accounting play? Accounting provides the information to measure a firm’s financial condition in support of managing a business. LO2

Identify the different disciplines within the accounting profession. The accounting profession covers five major areas: managerial accounting, financial accounting, auditing, tax accounting, and governmental and not-for-profit accounting. How does managerial accounting differ from financial accounting? Managerial accounting provides information (often of segments of a business) for planning and control purposes to managers within the firm to assist them in decision making. Financial accounting provides information in the form of the three basic financial statements to managers and external users of data such as creditors and lenders. What is the difference between a private accountant and a public accountant? A public accountant provides services for a fee to a variety of companies, whereas a private accountant works for a single company. Private and public accountants do essentially the same things, with the exception of independent audits. Private accountants do perform internal audits, but only public accountants supply independent audits.

LO3

List the steps in the accounting cycle, distinguish between accounting and bookkeeping, and explain how computers are used in accounting. Many people confuse bookkeeping and accounting. What are the six steps of the accounting cycle? As illustrated in Figure 16.5, the six steps of the accounting cycle are (1) analyzing documents, (2) recording information into journals, (3) posting that information into ledgers, (4) developing a trial balance, (5) preparing financial statements (the balance sheet, income statement, and statement of cash flows), and (6) analyzing financial statements. What is the difference between bookkeeping and accounting? Bookkeeping is part of accounting and includes the mechanical part of recording data. Accounting also includes classifying, summarizing, interpreting, and reporting data to management. How can computers help accountants? Computers can record and analyze data and provide financial reports. Software can continuously analyze and test accounting systems to be sure they are functioning properly (e.g., the accounting equation is always in balance when recording each transaction). Computers can help decision making by providing appropriate information, but they cannot themselves make good financial decisions independently. Accounting applications and creativity are still human traits.

LO4

Explain how the major financial statements differ. The major financial statements provide different information. What is a balance sheet? A balance sheet reports the financial position of a firm on a particular day. The fundamental accounting equation used to prepare the balance sheet is Assets = Liabilities + Owners’ equity. 631

PART 6 Accounting Information and Financial Activities

Explain how the major financial statements differ. What is an income statement? An income statement reports revenues, costs, and expenses for a specific period of time (e.g., for the year ended December 31, 2019). The formulas used in preparing the income statement are: Revenue − Cost of goods sold = Gross margin Gross margin − Operating expenses = Net income before taxes Net income before taxes − Taxes = Net income (or Net loss) What is a statement of cash flows? Cash flow is the difference between cash receipts (money coming in) and cash disbursem*nts (money going out). The statement of cash flows reports cash receipts and disbursem*nts related to the firm’s major activities: operations, investing, and financing. What are LIFO and FIFO? LIFO and FIFO are methods of transferring a cost of inventory sold to the income statement. FIFO means first in, first out; LIFO means last in, first out. The method an accountant uses to value the transfer, FIFO or LIFO, can affect a firm’s net income. LO5

Demonstrate the application of ratio analysis in reporting financial information. Financial ratios are a key part of analyzing financial information. What are the four key categories of ratios? There are four key categories of ratios: liquidity ratios, leverage (debt) ratios, profitability (performance) ratios, and activity ratios. What is the major value of ratio analysis to the firm? Ratio analysis provides the firm with information about its financial position in key areas for comparison to similar firms in its industry and to its own past performance.

KEY TERMS accounting 602 accounting cycle 611 accounts 614 accounts payable 617 annual report 604 assets 616 auditing 608 balance sheet (statement of financial position) 614 bonds payable 617 bookkeeping 611 cash flow 623 cash flow statement (statement of cash flows) 623

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chartered professional accountant (CPA) designation 610 cost of goods sold (cost of goods manufactured) 620 current assets 616 depreciation 621 double-entry bookkeeping 612 financial accounting 604 financial statement 613 fixed assets 616 forensic accounting 608 fundamental accounting equation 614 government and not-for-profit (non-profit) accounting 608

gross profit (gross margin) 620 income statement (statement of earnings) 618 independent audit 608 intangible assets 617 international financial reporting standards (IFRS) 605 journal 612 ledger 612 liabilities 617 liquidity 616 managerial accounting 603 net income or net loss 618 notes payable 617 operating expenses 621

CHAPTER 16 Understanding Accounting and Financial Information

owners’ equity (shareholders’ or stockholders’ equity) 617 private accountant 604 public accountant 604

ratio analysis 626 retained earnings 617 statement of cash flows (cash flow statement) 623

statement of earnings (or income statement) 618 tax accountant 608 trial balance 612

CAREER EXPLORATION If you are interested in pursuing a career in finance, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Auditor—an accountant who is responsible for evaluating the validity and reliability of a company’s financial statements.30 ∙ Bookkeeper—an individual who records business transactions.

∙ Chartered Professional Accountant (CPA)—an accountant who has met education and work experience requirements, and has been certified by the Chartered Professional Accountants of Canada. ∙ Forensic accountant—an accountant who focuses on fraudulent activity. ∙ Tax examiner—an account who ensures that federal, provincial, and municipal governments get tax money due from businesses and citizens by reviewing tax returns, conducting audits, and identifying taxes owed.

CRITICAL THINKING 1. In business, hundreds of documents are

received or created every day, so you can appreciate the valuable role an accountant plays. Can you see why most businesses hire people to do this work? Would it be worth the owner’s time to do all the paperwork? Can you understand why most accountants find it easier to do this work on a computer? 2. As a potential investor in a firm or perhaps

information would you seek from a firm’s financial statements? 3. Why must accounting reports be prepared

according to specific procedures (e.g., IFRS)? Should we allow businesses some flexibility or creativity in preparing financial statements? Why or why not? 4. What value do financial ratios offer investors

in reviewing the financial performance of a firm? Why is it important to remember financial ratios can differ from industry to industry?

the buyer of a business, would it be advisable for you to evaluate the company’s financial statements? Why or why not? What key

DEVELOPING CAREER SKILLS Key: Team

Analytic

Communication

compare them with the information gathered by your classmates.

1. Contact an accountant at a firm in your area,

or talk with one in your school’s accounting department. Ask what challenges, changes, and opportunities he or she foresees in the accounting profession in the next five years. List the forecasts on a sheet of paper and then

Technology

2. Place yourself in the role of a small-business

consultant. One of your clients, Be Pretty Fashions, is considering opening two new stores. The fashion industry experiences 633

PART 6 Accounting Information and Financial Activities

continuous style changes. Prepare a formal draft memo to Be Pretty Fashions explaining the difficulties a firm experiences when it encounters the cash flow problems that typically occur in this industry. Think of a business option that Be Pretty Fashions could try to avoid cash flow problems.

licly traded Canadian company of your choice. (Hint: You can visit the company’s website or SEDAR.) Using data from the annual report, try your hand at computing financial ratios, such as the current ratio, debt to owners’ equity ratio, and return on sales for the firm. Next, obtain an annual report of one of the company’s competitors and compute the same ratios for that company. What did you find?

3. You are a new board member for an emerg-

ing not-for-profit organization hoping to attract new donors. Contributors want to know how efficiently not-for-profit organizations use their donations. Unfortunately, your fellow board members see little value in financial reporting and analysis and believe the good works of the organization speak for themselves. Prepare a fact sheet convincing the board of the need for effective financial reporting with arguments about why it would help the organization’s fundraising goals.

4. Obtain the most recent annual report for a pub-

5. Obtain the most recent annual report for a

publicly traded Canadian company of your choice. (Hint: You can visit the company’s website or SEDAR.) Look over the firm’s financial statements and see how they match the information in this chapter. Read the auditor’s opinion (usually at the end of the report) and evaluate what you think are the most important conclusions of the auditors.

ANALYZING MANAGEMENT DECISIONS Getting Through the Hard Times at Hard Rock In the mid-1990s, the theme-dining business seemed like a path lined with gold. With regularity, celebrity stargazers, enthusiastic press from around the globe, and hungry customers gathered at the openings of theme restaurants such as Planet Hollywood and Motown Cafe. Unfortunately, the situation changed. In the late 1990s and early 2000s, Planet Hollywood filed for bankruptcy protection and Motown Cafe closed units across the country. Consumer boredom, a slowing economy, and a saturated market were blamed. The changing “entertainment” market raised eyebrows at the granddaddy of theme restaurants, the Hard Rock Cafe (HRC). HRC knew that its market position was shaky due to increased competition and shifting consumer attitudes. The company also felt growing financial pressures and speculated that a change in financial management might be needed. HRC had operated with a traditional, competent accounting department that ensured that the company paid its bills, had money left at the end of the day, and could state how much it was earning. The problem was that HRC lacked 634

the ability to analyze its financial information fully and use it to improve operations. To address these concerns, the company recruited a new CFO and dedicated itself to changing the financial reporting and information structure at the company. Management believed that it had a tremendous undervalued asset—a premium global brand. The company dedicated itself to protecting and expanding that asset. However, it was evident that without revenue, brand loyalty did not matter. The company’s CFO was astonished to find that HRC sold $180 million per year in merchandise (primarily its well-known T-shirts) in addition to food. Yet, there was no exact explanation how individual items contributed to the firm’s profit. As a result, the decision was made to change the company’s accounting and financial management systems. To begin, the company piloted a food and beverage management system to track usage and item profitability. This system included information such as daily and seasonal buying patterns, profitability of one menu versus another, average weekly guest counts per

CHAPTER 16 Understanding Accounting and Financial Information

restaurant, and specific cost of sales and profit margins per item. The company then shifted the responsibility of the firm’s accountants. Instead of being responsible for profit-and-loss statements for a certain number of restaurants, company accountants now were responsible for one major financial category only, such as cost of goods sold, for all of the company’s operations. The objective was to compile companywide information for sound financial decision making.

Hard Rock Cafe also broke down the barriers that existed between the finance and accounting departments as well as operations, merchandising, and marketing. Today, financial information is shared directly with managers who can execute the recommendations at the restaurant level. There are now over 192 locations, which include restaurants, hotels, casinos, and live music venues, in 60 countries around the world. It’s hard to believe that it all started with the search for a good burger.

Sources: “Hard Rock History,” Hard Rock Cafe International, Inc., accessed April 15, 2015, http://www.hardrock.com/corporate/history.aspx; “Rank Is Betting on Another Good Year,” Birmingham (UK) Post, March 1, 2003, 15; Jon Griffin, “Rank Is Backing a Winner,” Evening Mail (UK), February 28, 2003, 26; and Larry Bleiberg, “Cafe Quest Has Retiree on a Roll,” Dallas Morning News, March 15, 2000, 12G.

Discussion Questions 1. Why is it important for Hard Rock Cafe

3. In terms of accounting principles, what would

to know how different products contribute financially to overall company profits?

you need to remember when analyzing the financial performance of the Hard Rock Cafe, a U.S. business, to the Keg Steakhouse and Bar, a Canadian business?

2. Do you think that Hard Rock Cafe’s focus on

improved financial reporting helped its company planning capabilities? How?

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CHAPTER 17

Financial Management

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Explain the role and responsibilities of financial managers. LO2 Outline the financial planning process, and explain the three key budgets in the financial plan. LO3 Explain why firms need operating funds. LO4 Identify and describe different sources of short-term financing. LO5 Identify and describe different sources of long-term financing.

P R O F I L E GETTING TO KNOW: KATHY WALLER, EXECUTIVE VICE PRESIDENT/CFO, COCA-COLA

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As executive vice president, chief financial officer

retail customer outlets. While these statistics are

(CFO), and president, Enabling Services, of The

impressive, think of the complications of dealing

Coca-Cola Company, Kathy Waller knows a thing

in a market this size where different countries’ cur-

or two about the challenges of the beverage indus-

rencies, tax laws, economic trends, and consumer

try. Coca-Cola is the world’s largest beverage com-

incomes vary significantly. Financial management

pany, with operations in over 200 countries where

is extremely challenging for even the smallest busi-

it produces more than 500 different brands. The

ness let alone a company the size of Coca-Cola that

company employs 39 000 people worldwide (if you

has such a wide range of consumers, customers,

include bottling operations, the Coca-Cola system

and products. Well, welcome to her world.

employs almost 700 000). This makes Coca-Cola

Waller is responsible for leading Coca-Cola’s

one of the top 10 employers globally. Throughout

Global Finance organization. She also is the key

the world, co*ke products are sold at 24 million

company representative dealing with co*ke’s

CHAPTER 17 Financial Management

Waller has a degree in history and an MBA concentrating in accounting and finance. After achieving her MBA, she worked for Deloitte, Haskins and Sells, a major public accounting firm, until deciding to transfer home to Atlanta. Shortly after transferring home, she joined Coca-Cola in 1987 as a senior accountant in the company’s accounting research department. Over her 30 years at co*ke, Waller has worked in several different positions including as principal accountant for the Northeast Europe/Africa Group, financial services manager for the Africa group, chief of internal audit, and controller. In 2009, her training as a CPA came in handy. In 2014, she was promoted to executive vice president and CFO. And in 2017, she also became president of Enabling Services. In addition to her CFO duties, Waller serves Courtesy of Kathy Waller and The Coca-Cola Company

on the board of directors of Delta Air Lines and Monster Energy Company and is a member of the board of trustees of Spelman College, the University of

investors, lenders, and financial rating agencies.

Rochester (her alma mater), and the Woodruff Arts

But her job doesn’t stop there. As CFO she over-

Center. She’s also committed to using her 30-plus

sees co*ke’s tax, audit, mergers and acquisitions,

years of experience in business to assist women

accounting and financial controls, reporting and

to advance in their careers. For example, she for-

financial analysis, real estate, and risk manage-

merly served as the founding chair of Coca-Cola’s

ment. As president of Enabling Services, she has

Women’s Leadership Council and was instrumen-

responsibility for other key governance areas, spe-

tal in developing co*ke’s highly successful Women

cifically Global Technical and Integrated Services

in Leadership Global Program. She also serves on

(co*ke’s global shared services operations), which

the board of Catalyst, a leading not-for-profit orga-

includes procurement as well as employee ser-

nization whose mission is to expand opportunities

vices. Her job is to take all the varied and compli-

for women. Kathy Waller’s advice to both women

cated pieces of co*ke’s financial puzzle and create

and men is to “dream, and dream big. There are no

a budget and financial plan that puts the company

obstacles in your dreams so everything is possible

on the right financial path for the current year and

and one day, you may find your dreams are within

the foreseeable future. She must also ensure the

your reach. You never know what can happen until

business has sufficient funds to invest in capital

you try.” She certainly can attest to what can happen.

assets, brands, and/or other businesses to deliver

Risk and uncertainty clearly define the role of

the company’s long-term growth targets. Waller’s

financial management. In this chapter, you’ll explore

role is varied, but she would say she loves the

the role of finance in business. We’ll discuss the

challenge of putting all the pieces of the puzzle

challenges and the tools top managers like Kathy

together.

Waller use to attain financial stability and growth.

Sources: “Our Company: Kathy N. Waller,” The Coca-Cola Company, accessed May 14, 2018, https://www.coca-colacompany.com/our-company/seniorfunctional-leadership-kathy-n-waller; Monica Watrous, “Coca-Cola Transforms Leadership Team,” Food Business News, March 23, 2017; and Christopher Seward, “Coca-Cola Names Kathy Waller as CFO,” Atlanta Journal Constitution, April 24, 2014.

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PART 6 Accounting Information and Financial Activities

LO1

Explain the role and responsibilities of financial managers. finance

The function in a business that acquires funds for the firm and manages them within the firm.

financial management

The job of managing a firm’s resources to meet its goals and objectives.

financial managers

Managers who examine the financial data prepared by accountants and recommend strategies for improving the financial performance of the firm.

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The Role of Finance and FinancialManagers The goal of this chapter is to answer two major questions: “What is finance?” and “What do financial managers do?” Finance is the function in a business that acquires funds for the firm and manages them within the firm. Finance activities include preparing budgets; completing cash flow analysis; and planning for the expenditure of funds on assets such as plant, equipment, and machinery. Financial management is the job of managing a firm’s resources to meet its goals and objectives. Without a carefully calculated financial plan and sound financial management, a firm has little chance for survival, regardless of its products or marketing effectiveness. Let’s briefly review the roles of accountants and financial managers. We can compare an accountant to a skilled laboratory technician who takes blood samples and other measures of a person’s health and writes the findings on a health report (in business, this process is the preparation of financial statements). A financial manager is like the doctor who interprets the report and makes recommendations that will improve the patient’s health. In short, financial managers examine the financial data prepared by accountants and recommend strategies for improving the financial performance of the firm. Clearly, financial managers can make sound financial decisions only if they understand accounting information. Think of Kathy Waller of Coca-Cola whom we met in the chapter opener and how she used her accounting background to grow in her career at CocaCola. That’s why we examined accounting in Chapter 16. Similarly, since accounting and finance go together like a peanut butter and jelly sandwich, a good accountant needs to understand finance. In large and medium-sized organizations, both the accounting and finance functions are generally under the control of a chief financial officer (CFO). A CFO is generally the second-highest paid person in an organization and CFOs often advance to the top job of CEO.1 However, financial management could also be in the hands of a person who serves as company treasurer or vice president of finance.2 A comptroller is the chief accounting officer. Figure 17.1 highlights a financial manager’s tasks. As you can see, two key responsibilities are to obtain funds and to effectively control the use of those funds. Controlling funds includes managing the firm’s cash, credit accounts (accounts receivable), and inventory. Finance is a critical activity in both profit-seeking and non-profit organizations.3 The role of advising top management on financial matters has become even more important in recent years as risk has increased. Online Supplement 2, an online supplement to this text, is devoted to the subject of financial risk. Visit Connect to learn more about managing risk. Finance is important no matter what the firm’s size. As you remember from Chapter 7, financing a small business is essential if a firm expects to survive its important first five years. But the need for careful financial management remains a challenge that a business, large or small, private or public, must face throughout its existence.4 For example, the Canadian divisions of General Motors and Chrysler received $13.7billion in loans from the federal and Ontario governments because of severe financial problems.5

CHAPTER 17 Financial Management

■ FIGURE

17.1

WHAT FINANCIAL MANAGERS DO Auditing Managing taxes

Planning

Advising top management on financial matters

Budgeting

Obtaining funds

Cash

Collecting funds (credit management)

Controlling funds (funds management)

The Value of Understanding Finance Three of the most common reasons a firm fails financially are: 1. Undercapitalization (insufficient funds to run a business) 2. Poor control over cash flow 3. Inadequate expense control

You can see all three in the following story. Two friends, Elizabeth Bertani and Pat Sherwood, started a company called Parsley Patch on what can best be described as a shoestring budget. It began when Bertani prepared salt-free seasonings for her husband, who was on a no-salt diet. Her friend Sherwood thought the seasonings were good enough to sell. Bertani agreed, and Parsley Patch Inc. was born. The business began with an investment of $5000 that was rapidly depleted on a logo and label design. Bertani and Sherwood quickly learned the need for capital in getting a business going. Eventually, they invested more than $100,000 of their own money to keep the business from being undercapitalized. Everything started well, and hundreds of gourmet shops adopted the product line. But when sales failed to meet expectations, the women decided the health-food market offered more potential because salt-free seasonings were a natural for people with restricted diets. The choice was a good one. Sales soared, approaching $30,000 a month. Still, the company earned no profits.

Michael Miller overhauled the underperforming Goodwill Industries operation in his area by treating the non-profit like a for-profit business. He trimmed operating expenses; compared sales by store, closing weak outlets and opening new ones in better locations; and cut distribution costs. Sales soared from $4 million to over $135 million, eliminating the need for outside funding.

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PART 6 Accounting Information and Financial Activities

Bertani and Sherwood weren’t trained in monitoring cash flow or in controlling expenses. In fact, they had been told not to worry about costs, and they hadn’t. They eventually hired a certified public accountant and an experienced financial manager, who taught them how to compute the costs of their products, and how to control expenses as well as cash moving in and out of the company (cash flow). Soon Parsley Patch was earning a comfortable margin on operations that ran close to $1 million a year. Luckily, the two owners were able to turn things around before it was too late. Eventu© Shutterstock / Tyler Olson ally, they sold the firm to spice and seasonings giant McCormick.6 Most businesses have predictable day-to-day needs, like the need to buy supplies, pay for utilities, and pay If Bertani and Sherwood had understood finance employees. Financial management is the function that before starting their business, they might have been helps ensure firms have the funds they need when able to avoid the problems they encountered. The they need them. What would happen to the company key word here is understood. Financial understandproviding the work in this photo if it couldn’t pay its ing is crucial to anyone who wants to start a busiemployees? ness, invest in stocks and bonds, or plan a retirement plan. To put it simply, finance and accounting are two areas everyone in business needs to study and understand. Since we discussed accounting in Chapter 16, let’s look more closely at what financial management is allabout.

What is Financial Management? Financial managers are responsible for paying a company’s bills at the appropriate time and for collecting overdue payments to make sure the company does not lose too much money to bad debts (people or firms that do not pay their bills). Therefore, finance functions, such as buying merchandise on credit (accounts payable) and collecting payments from customers (accounts receivable), are key components of the financial manager’s job (see Figure 17.1). While these functions are vital to all types of businesses, they are particularly critical to small and medium-sized businesses, which typically have smaller cash or credit cushions than large corporations. It’s also essential that financial managers stay abreast of changes or opportunities in finance, such as changes in tax laws, since taxes represent an outflow of cash from the business. Financial managers must also analyze the tax implications of managerial decisions to minimize the taxes the business must pay. Usually a member of a firm’s finance department, the internal auditor, also checks the journals, ledgers, and financial statements the accounting department prepares, to make sure all transactions are in accordance with the international financial reporting standards (IFRS).7 (Recall the brief discussion on IFRS in Chapter 16.) Without such audits, accounting statements would be less reliable. Therefore, it’s important that internal auditors be objective and critical of any improprieties or deficiencies noted in their evaluations. Thorough internal audits assist the firm in financial planning, which we’ll look at next.8

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CHAPTER 17 Financial Management

Financial Planning Financial planning means analyzing short-term and long-term money flows to and from a firm. One of the basic problems that financial managers face is how to determine the value today of cash flows that are expected in the future. This requires assessing the time value of money, which refers to the fact that a dollar in hand today is worth more than a dollar promised at some time in the future.9 This is because you could earn interest on the dollar, for example, while you wait for a future dollar. Financial managers must evaluate this trade off between dollars today and dollars at some future time. When considering money flows, financial managers also assess the costs and risks of accessing money whether it is from creditors (e.g., a loan through a financial institution) or from selling investors financial instruments, such as bonds and stocks (to be discussed later in this chapter.) This assessment includes understanding the risk-return tradeoff, which states that the level of return to be earned from an investment should increase as the level of risk increases and vice versa.10 Understanding the risk-return tradeoff of all stakeholders contributes to stronger short-term and long-term finance decision making. The overall objective of financial planning is to optimize the firm’s profitability and make the best use of its money. Financial planning has three steps: (1) forecasting a firm’s short-term and long-term financial needs; (2) developing budgets to meet those needs; and (3) establishing financial control to see whether the company is achieving its goals (see Figure 17.2). Let’s look at each step and the role it plays in improving the organization’s financial health.

LO2

Outline the financial planning process, and explain the three key budgets in the financial plan. time value of money A dollar in hand today is worth more than a dollar promised at some time in the future.

risk-return tradeoff

The principle that the level of return to be earned from an investment should increase as the level of risk increases and vice versa.

Forecasting Financial Needs Forecasting is an important part of any firm’s financial plan. A short-term forecast predicts revenues, costs, and expenses for a period of one year or less. Part of the shortterm forecast may be a cash flow forecast, which predicts the cash inflows and outflows in future periods, usually months or quarters. The inflows and outflows of cash recorded in the cash flow forecast are based on expected sales revenues and on various costs and expenses incurred, as well as when they are due for payment. The company’s sales forecast estimates projected sales for a particular period. A business often uses its past financial statements as a basis for projecting expected sales and various costs and expenses. A long-term forecast predicts revenues, costs, and expenses for a period longer than one year, and sometimes as long as 5 or 10 years. This forecast plays a crucial part in the company’s long-term strategic plan, which asks questions such as these: “What business are we in? Should we be in it five years from now? How much money should we invest in technology and new plant and equipment over the next decade? Will we have cash available to meet long-term obligations?” Innovations in web-based software help financial managers address these long-term forecasting questions.11 The long-term financial forecast gives top management, as well as operations managers, some sense of the income or profit of different strategic plans.12 It also helps in preparing company budgets.

short-term forecast Forecast that predicts revenues, costs, and expenses for a period of one year or less.

cash flow forecast

Forecast that predicts the cash inflows and outflows in future periods, usually months or quarters.

long-term forecast

Forecast that predicts revenues, costs, and expenses for a period longer than one year, and sometimes as far as five or ten years into the future.

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PART 6 Accounting Information and Financial Activities

■ FIGURE

17.2

FINANCIAL PLANNING Financial plan Short-term forecasting

Long-term forecasting

Operating (master) budget Capital budget

Feedback

Cash budget

Financial controls

Feedback

Working with the Budget Process

Special processing equipment turns an average potato into the chips and fries we consume. The firm’s capital budget is the financial tool that controls business spending for expensive assets such as this processing equipment. Such major assets are referred to as capital assets or property, plant, and equipment. What items would be in your school’s capital budget?

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A budget sets forth management’s expectations for revenues and, on the basis of those expectations, allocates the use of specific resources throughout the firm. As a financial plan, it depends heavily on the accuracy of a firm’s balance sheet, income statement, statement of cash flows, and short-term and long-term financial forecasts. These all need to be as accurate as possible. To effectively prepare budgets, financial managers must take their forecasting responsibilities seriously. A budget becomes the primary guide for the firm’s financial operations and expected financial needs. There are usually several types of budgets established in a firm’s financial plan. Three of the most common are: ∙ A capital budget. ∙ A cash budget. ∙ An operating or master budget.

CHAPTER 17 Financial Management

A capital budget forecasts a firm’s spending plans for major asset purchases that often require large sums of money, like property, buildings, and equipment. A cash budget estimates cash inflows and outflows during a particular period, like a month or a quarter. It helps managers anticipate borrowing needs, debt repayment, operating expenses, and short-term investments, and is often the last budget prepared.13 A sample cash budget for our restaurant example, Harvest Gold, is provided in Figure 17.3. The operating (master) budget ties together the firm’s other budgets and summarizes the business’ proposed financial activities. More formally, it is presented to all the company’s managers and estimates the costs and expenses needed to run the business, given all projected revenues. The firm’s spending on supplies, travel, rent, technology, advertising, and salaries is determined in the operating budget, generally the most detailed budget a firm prepares. Financial planning obviously plays an important role in the firm’s operations and often determines what long-term investments it makes, when it will need specific funds, and how it will generate them. Once a company forecasts its short-term and long-term ■ FIGURE

budget

A financial plan that sets forth management’s expectations, and, on the basis of those expectations, allocates the use of specific resources throughout the firm.

capital budget

A budget that forecasts a firm’s spending plans for major asset purchases that often require large sums of money, like property, buildings, and equipment.

17.3

A SAMPLE CASH BUDGET FOR HARVEST GOLD HARVEST GOLD Monthly Cash Budget January

February

$50,000

$45,000

$40,000

Cash sales (20%)

$ 9,000

$8,000

Credit sales (80% of past month)

$40,000

$36,000

Monthly cash collection

$49,000

$44,000

$11,000

$10,000

12,000

Direct labour

9,000

Taxes

3,000

Other expenses

7,000

5,000

Monthly cash payments

$42,000

$39,000

$7,000

$5,000

Beginning cash

−1,000

6,000

Total cash

$6,000

$11,000

Less minimum cash balance

−6,000

Excess cash to market securities

$5,000

Sales forecast

March

Collections

Payments schedule Supplies and material Salaries

Cash budget Cash flow

Loans needed for minimum balance

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cash budget

A budget that estimates a firm’s cash inflows and outflows during a particular period (e.g. monthly or quarterly). ■ FIGURE

financial needs (Step 1) and compiles budgets to show how it will allocate funds (Step 2), the final step in financial planning is to establish financial controls (Step 3). Before we talk about those, however, Figure 17.4 challenges you to check your personal financial planning skill by developing a monthly budget for You Incorporated. In addition, you can review Appendix B—Managing Personal Finances—to learn more about financial planning.

17.4

YOU INCORPORATED MONTHLY BUDGET In Chapter 16 you compiled a sample balance sheet for You Inc. Now, let’s develop a monthly budget for You Inc. Be honest and think of everything that needs to be included for an accurate monthly budget for You! Much like a small business, when putting the monthly budget together, remember that the norm is to overestimate income and underestimate expenses. Often you need to revisit the budget a number of times before finalizing the numbers as you try to balance the income with the expenses.

Expected Monthly income Wages (net pay after taxes) Savings account withdrawals Family support Loans Other sources Total monthly income Monthly expenses Fixed expenses Rent or mortgage Car payment Life insurance Tuition or fees Other fixed expenses Subtotal of fixed expenses Variable expenses Food Clothing Entertainment Transportation Cell phone Utilities Publications Internet connection Cable television Other expenses Subtotal of variable expenses Total expenses Total monthly income − Total expenses = Cash on hand or Cash deficit

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Actual

Difference

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Establishing Financial Controls Financial control is a process in which a firm periodically compares its actual revenues, costs, and expenses with its budget. Most companies hold at least monthly financial reviews as a way to ensure financial control. Such control procedures help managers identify variances to the financial plan and allow them to take corrective action if necessary. Financial controls also help reveal which accounts, which departments, and which people are varying from the financial plan. Finance managers can judge whether these variances are legitimate and thereby merit adjustments to the plan. Shifts in the economy or unexpected global events can also alter financial plans. For example, a slowdown in the housing market or a slowdown in the global economy can cause many companies to consider adjusting their financial plans.14

operating (master) budget The budget that ties together all of a firm’s other budgets and summarizes the business’ proposed financial activities.

financial control

A process in which a firm periodically compares its actual revenues, costs, and expenses with its projected ones.

PROGRESS ASSESSMENT

• Name three finance functions important to the firm’s overall operations and performance.

• What are the three primary financial problems that cause firms to fail? • How do short-term and long-term financial forecasts differ? • What is the purpose of preparing budgets in an organization? • Identify three different types of budgets and state the purpose of each budget.

The Need for Operating Funds In business, the need for funds never seems to end. That is why sound financial management is essential to all businesses. And like our personal financial needs, the capital needs of a business change over time. Remember the example of Parsley Patch to see why a small business’ financial requirements can shift considerably. The same is true for large corporations such as The Bank of Nova Scotia, Apple, and Nike when they venture into new-product areas or new markets. Virtually all organizations have operational needs for which they need funds. Key areas include:

LO3

Explain why firms need operating funds

∙ Managing day-to-day needs of the business. ∙ Controlling credit operations. ∙ Acquiring needed inventory. ∙ Making capital expenditures. Let’s look carefully at the financial needs of these key areas, which affect both the smallest and the largest of businesses.

Managing Day-to-Day Needs of the Business If workers expect to be paid on Friday, they do not want to wait until Monday for their paycheques. If tax payments are due on the 15th of the month, the government expects 645

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the money on time. If the payment on a business loan is due on the 30th of this month, the lender doesn’t mean the 1st of next month. As you can see, funds have to be available to meet the daily operational costs of a business. Financial managers must ensure that funds are available to meet daily cash needs without compromising the firm’s opportunities to invest money for its future. As mentioned earlier, money has time value.15 In other words, if someone offered to give you $200 today or one year from today, you would benefit by taking the $200 today. Why? It’s very simple. You could invest the $200 you receive today and over a year’s time it would grow. The same is true in business; the interest a firm gains on its investments is important in maximizing the profit it will gain. That’s why financial managers often try to minimize cash expenditures to free up funds for investment in interest-bearing accounts. They suggest the company pay its bills as late as possible (unless a cash discount is available for early payment). They also advise companies to try to collect what’s owed them as fast as possible, to maximize the investment potential of the firm’s funds.16 Unfortunately, collecting funds as fast as possible can be particularly challenging especially during times when the economy slows down. Efficient cash management is particularly important to small firms since their access to capital is much more limited than larger businesses.

Controlling Credit Operations Financial managers know that in today’s highly competitive business environment, making credit available helps keep current customers happy and attracts new ones. Credit for customers can be especially important during tough financial times, like a recession, as lenders are more hesitant to approve loans. The problem with selling on credit is that as much as 25 percent of the business’ assets could be tied up in its credit accounts (accounts receivable). This forces the firm to use its own funds to pay for goods or services sold to customers who bought on credit. Financial managers in such firms often develop efficient collection procedures like offering cash or quantity discounts to buyers who pay their accounts by a certain (usually earlier) date. They also scrutinize old and new credit customers to see whether they have a history of meeting their credit obligations on time. One convenient way to decrease the time and expense of collecting accounts receivable is to accept bank credit cards such as MasterCard or Visa. The banks that issue these cards have already established the customer’s creditworthiness, which reduces the business’ risk. Businesses must pay a fee to accept credit cards, but the fees are usually offset by the bene© ICP/age fotostock fits. In an effort to reduce those credit card costs as well It’s difficult to think of a business that doesn’t make as speed up the transaction process, many businesses credit available to its customers. However, collecting accounts receivable from some customers can be timetoday accept mobile payments like ApplePay and consuming and costly. Accepting credit cards, such as Android Pay.17 For example, restaurants, supermarkets, Visa, MasterCard, and American Express, can simplify and hotels have invested in mobile payment systems.18 transactions for sellers and guarantee payment. What Mobile payment systems not only make transactions types of products do you regularly purchase with a credit quick and simple, the processors usually charge lower card? fees than traditional credit card companies. 646

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Acquiring Needed Inventory As you read in Chapter 14, effective marketing requires focusing on the customer and providing high-quality service and readily available goods. A carefully constructed inventory policy helps manage the firm’s available funds and maximize profitability.19 For example, Dozzle’s, an ice cream parlour, deliberately ties up fewer funds in its inventory of ice cream in the winter. It is obvious why; demand for ice cream is lower in the winter. Just-in-time inventory control (see Chapter 10) and other such methods can reduce the funds a firm must tie up in inventory. Carefully evaluating its inventory turnover ratio (see Chapter 16) can also help a firm control the outflow of cash for inventory. A business of any size must understand that poorly managed inventory can seriously affect cash flow and drain its finances. The Making Ethical Decisions box raises an interesting question about sound financial management and inventory control in a critical industry.

Making Capital Expenditures Capital expenditures are major investments in either tangible long-term assets such as land, buildings, and equipment, or intangible assets, such as patents, trademarks, and copyrights. In many organizations the purchase of major assets—such as land for future expansion, manufacturing plants to increase production capabilities, research to develop new product ideas, and equipment to maintain or exceed current levels of output—is essential. Expanding, however, into new markets can be expensive with no guarantee of success. Therefore, it’s critical that companies weigh all possible options before committing a large portion of available resources.

capital expenditures

Major investments in either tangible longterm assets, such as land, buildings, and equipment, or intangible assets, such as patents, trademarks, and copyrights.

Making ETHICAL DECISIONS Not What the Doctor Ordered! After earning your business degree, you are hired as a hospital administrator at a small hospital. Having studied finance, you know that efficient cash management is important to all firms in all industries to meet their day-to-day operations. One way to ensure such efficiency is to use a carefully planned and managed inventory control system that reduces the amount of cash an organization has tied up in inventory. You know that just-in-time inventory is a proven system that helps reduce the costs of managing inventory. At a meeting of the hospital’s executive committee, you recommend the hospital save money by using a just-in-time inventory system to manage its drug supply. You suggest discontinuing the hospital’s large stockpile of expensive cancer treatment drugs that tie up a great deal of the hospital’s cash, and order them only when they are needed. Several board members like the idea, but the doctors in charge of the hospital’s

cancer centre are outraged, claiming you are sacrificing patients’ well-being for cash flow. After debate, the committee says the decision is up to you. What will you do? What could result from your decision?

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debt financing

Funds raised through various forms of borrowing that must be repaid.

equity financing

Money raised from within the firm, from operations or through the sale of ownership in the firm.

short-term financing Borrowed funds that are needed for one year or less.

long-term financing Borrowed funds that are needed for a period more than one year.

■ FIGURE

Consider a firm that needs to expand its production capabilities due to increased customer demand. It could buy land and build a new plant, purchase an existing plant, or rent space. Can you think of financial and accounting considerations at play in this decision? The need for operating funds raises several questions for financial managers: “How does the firm obtain funds to finance operations and other business needs? Will it require specific funds in the long or the short term? How much will it cost (i.e., interest) to obtain these funds? Will they come from internal or external sources?” We address these questions next.

Alternative Sources of Funds We described finance earlier as the function in a business responsible for acquiring and managing funds. Sound financial management determines the amount of money needed and the most appropriate sources from which to obtain it. While in Chapter 7 you were introduced to financing sources, such as angel investors and crowdfunding, in this chapter we will highlight how a firm can raise needed capital by borrowing money (debt), selling ownership (equity), or earning profits (retained earnings). Debt financing refers to funds raised through various forms of borrowing that must be repaid. Equity financing is money raised from within the firm, from operations or through the sale of ownership in the firm (stock). Firms can borrow funds either short-term or long-term. Short-term financing refers to funds needed for one year or less. Long-term financing refers to funds needed for more than one year (usually 2 to 10 years). Figure 17.5 highlights why firms may need short-term and long-term funds. We’ll explore the different sources of short-term and long-term financing next. Let’s first pause to check your understanding by completing the Progress Assessment.

17.5

WHY FIRMS NEED FUNDS Short-Term Funds

Long-Term Funds

Monthly expenses

New-product development

Unanticipated emergencies

Replacement of capital equipment

Cash flow problems

Mergers or acquisitions

Expansion of current inventory

Expansion into new markets (domestic or global)

Temporary promotional programs

New facilities

PROGRESS ASSESSMENT

• Money has time value. What does this mean? • Why is accounts receivable a financial concern to a firm? • What’s the primary reason an organization spends a good deal of its available funds on inventory and capital expenditures?

• What is the difference between debt and equity financing? 648

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Obtaining Short-Term Financing

LO4

The bulk of a finance manager’s job does not relate to obtaining long-term funds. In small businesses, for example, long-term financing is often out of the question. Instead, day-today operations call for the careful management of short-term financial needs. Firms may need to borrow short-term funds for purchasing additional inventory or for meeting bills that come due unexpectedly. Like an individual, a business, especially a small business, sometimes needs to secure short-term funds when its cash reserves are low. Let’s consider how it does so.

Identify and describe different sources of shortterm financing.

Trade Credit Trade credit is the practice of buying goods or services now and paying for them later. It is the most widely used source of short-term funding, the least expensive, and the most convenient. Small businesses rely heavily on trade credit from firms such as Purolator, just as do large firms such as the Hudson’s Bay Company. When a firm buys merchandise, it receives an invoice (a bill) much like the one you receive when you buy something with a credit card. As you’ll see, however, the terms businesses receive are often different than those on your monthly statement. Business invoices usually contain terms such as 2/10, net 30. This means the buyer can take a 2 percent discount for paying the invoice within 10 days. Otherwise the total bill (net) is due in 30 days. Financial managers pay close attention to such discounts because they create opportunities to reduce the firm’s costs. Think about it for a moment: If terms are 2/10, net 30, the customer will pay 2 percent more by waiting an extra 20 days to pay the invoice. If the firm can pay its bill within 10 days, it is needlessly increasing its costs by not doing so. Some suppliers hesitate to give trade credit to an organization with a poor credit rating, no credit history, or a history of late payments. They may insist the customer sign a promissory note, a written contract with a promise to pay a supplier a specific sum of money at a definite time. Promissory notes are not as rigid as formal loan contracts and are negotiable. The supplier can sell them to a bank at a discount (the amount of the promissory note less a fee for the bank’s services in collecting the amount due), and the business is then responsible for paying the bank.

trade credit

The practice of buying goods and services now and paying for them later.

promissory note

A written contract with a promise to pay.

Family and Friends Firms often have several bills coming due at the same time with no sources of funds to pay them. Many small firms obtain short-term funds by borrowing money from family and friends. Such loans can create problems, however, if all parties do not understand cash flow. That’s why it’s sometimes better to go to a commercial bank that fully understands the business’ risk and can help analyze its future financial needs rather than to borrow from friends or relatives.20 Entrepreneurs appear to be listening to this advice. According to the National Federation of Independent Business, entrepreneurs today are

One thing you can never have too much of is cash. Financial managers must make certain there is enough cash available to meet daily financial needs and still have funds to invest in its future. What does it mean when we say cash has a time value? 649

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relying less on family and friends as a source of borrowed funds than they have in the past.21 If an entrepreneur decides to ask family or friends for financial assistance, it’s important that both parties (1) agree to specific loan terms, (2) put the agreement in writing, and (3) arrange for repayment in the same way they would for a bank loan. Such actions help keep family relationships and friendships intact.

Commercial Banks Banks, being sensitive to risk, generally prefer to lend short-term funds to larger, established businesses. Did you ever wonder how retailers get the money to Imagine the different types of business people who buy all of the items available during the holiday season? go to banks for a loan, and you’ll get a better idea of Department stores and other large retailers make extensive use of commercial banks and other lenders to the requests bankers evaluate. Picture, for example, a borrow the money needed to buy merchandise to stock farmer going to the bank in the spring to borrow funds their shelves. How do stores benefit from using this type for seed, fertilizer, supplies, and other needs that will of financing? be repaid after the fall harvest. Or consider a local toy store buying merchandise for holiday sales. The store borrows the money for such purchases in the summer and plans to pay it back after the holidays. Restaurants often borrow funds at the beginning of the month and then repay the funds at the end of the month. How much a business borrows and for how long depends on the kind of business it is and how quickly it can resell the merchandise it purchases with a bank loan or use it to generate funds. In a large business, specialists in a company’s finance and accounting departments do a cash flow forecast. Small-business owners generally lack such specialists and monitor cash flow themselves. During difficult economic times, such as a recession, bank loans can virtually disappear, even for well-organized small businesses. What’s important for a small firm to remember is if it gets a bank loan, the owner or person in charge of finance should keep in close touch with the bank and send regular financial statements to keep the bank up-to-date on its operations. The bank may spot cash flow problems early or be more willing to lend money in a crisis if the business has established a strong relationship built on trust and sound management. © Peter Foley/EPA/Redux

Different Forms of Short-Term Loans secured loan

A loan backed by collateral, something valuable such as property.

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Banks and other financial institutions offer different forms of short-term loans. A secured loan is backed by collateral, something valuable such as property. If the borrower fails to pay the loan, the lender may take possession of the collateral. An automobile loan is a secured loan. If the borrower doesn’t repay it, the lender will repossess the car. Inventory of raw materials, like coal, copper, and steel, often serve as collateral for business loans. Collateral removes some of the bank’s risk in lending the money. Accounts receivable are company assets often used as collateral for a loan. The process is called pledging and it works as follows: A percentage of the value of a firm’s accounts receivable pledged (usually about 75 percent) is advanced to the borrowing firm.

CHAPTER 17 Financial Management

As customers pay off their accounts, the funds received are forwarded to the lender in repayment of the funds that were advanced. An unsecured loan is more difficult to obtain because it does not require any collateral. Normally, lenders give unsecured loans only to highly regarded customers— long-standing businesses considered financially stable. If a business develops a good relationship with a bank, the bank may open a line of credit for the firm. This is a given amount of unsecured short-term funds a bank will lend © benedek/iStock/360/Getty Images RF to a business, provided the funds are readily A secured loan is backed by collateral, a tangible item of value. A available. A line of credit is not guaranteed to a business. However it speeds up the borrowing car loan, for instance, is a secured loan in which the car itself is the collateral. What is the collateral in a mortgage loan? process since a firm does not have to apply for a new loan every time it needs funds.22 As a business matures and becomes more financially secure, banks will often increase the line of credit. unsecured loan If a business is unable to secure a short-term loan from a bank, the financial manager A loan that does not require any collateral. may seek short-term funds from commercial finance companies. These non-deposit-type organizations make short-term loans to borrowers who offer tangible assets like property, line of credit A given amount of plant, and equipment as collateral. Commercial finance companies will often make loans unsecured funds a to businesses that cannot get short-term funds elsewhere. Since commercial finance com- bank will lend to a panies assume higher degrees of risk than commercial banks, they usually charge higher business. interest rates. The Adapting to Change box highlights online lenders, another high-cost commercial finance option of securing short-term financing. companies

EVALUATING CREDITWORTHINESS23 Whether you are a business or a consumer, each time you apply to borrow money, you build a credit history. When you apply for credit, lenders consider your financial track record, along with information about your employment and other debts and assets you have. This information is captured in your credit profile, which is your financial reputation. It reflects your financial track record based on your borrowing history (e.g., applications for credit as well as credit repayment). When considering a credit application (e.g., a loan or revolving credit agreement), a lender will consider creditworthiness. Creditworthiness is determined by the 4 Cs of credit— character, capacity, capital, and conditions. (These 4Cs can also apply to you.) Let’s briefly consider each next. Character includes factors such as business size, location, number of years in business, business structure, number of employees, history of principals, appetite for sharing information about itself, media coverage, liens, judgements or pending lawsuits, stock performance, and comments from references. Capacity considers the ability of the business to pay its bills (i.e., its cash flow). It also includes the structure of the company’s debt—whether secured or unsecured—and the existence of any unused lines of credit. Any defaults must also be identified.

Organizations that make short-term loans to borrowers who offer tangible assets as collateral.

credit profile

A borrower’s financial track record in the form of borrowing history.

4 Cs of credit

A business’ creditworthiness is determined by its character, capacity, capital, and conditions.

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Adapting to CHANGE Financing Just a Click Away Coming up with a great idea is only the first step in getting a business off the ground. Entrepreneurs need money to turn their ideas into reality. Unfortunately, most traditional lenders (banks) are not very receptive to new businesses. Online business lenders in the financial technology (fintech) world are filling a major gap for small businesses often overlooked by the major banks. Small business owners, however, should take the time to research these various platforms to ensure they fit the company’s needs. One of the biggest attractions of online lenders is the speed in which they can process an application. While banks can take weeks to process a business loan application, most online providers can process in one to two days of the application. Sound good? In fact, it’s probably too good. Before entering into any loan agreement with an online lender, it’s vital to do research into the lender’s reputation and the loan’s fine print. If you find a barrage of critical reviews online or evidence of negative press about the company, it’s best to seek out other lending options. The loan’s fine print also deserves a thorough evaluation (if possible with the help of an attorney). For example, with many online loans you can expect a high interest rate that will accrue daily the minute you take out the loan.

It’slikelyrates could be as high as 300 percent. It’s also important to remember the loan is generally linked to your bank account through a direct deposit. This permits the lender to collect payments via automatic withdrawal from your account. If you fail to keep a constant balance in your bank account, you run the risk of being assessed possible overdraft penalties. If you do experience problems paying off the loan, online lenders are not as co-operative or flexible in setting up affordable repayment plans. The best advice is be careful and be wise of online lenders bearing gifts.

Sources: “Geoff Williams, “What You Should Know about Online Lending Services,” U.S. New & World Report, July 26, 2016; James Rufus Koren, “As Troubles Pile Up, Online Lenders Pull Back,” Los Angeles Times, May 9, 2016; “This Is the Latest Threat to Online Lenders,” Reuters, June 10, 2016; Michael Corkery, “As Lending Club Stumbles, Its Entire Industry Faces Skepticism,” The New York Times, May 9, 2016; Peter Rudegeair, “On Deck Capital, a Fallen Fintech Star, to Focus on Turning a Profit,” The Wall Street Journal, May 8, 2017; Clare O’Hara, “New online lenders make it easier to get small business loans,” The Globe and Mail, May 15, 2018, https://www.theglobeandmail. com/report-on-business/small-business/sb-money/new-online-lenders-make-it-easier-to-get-small-businesses-loans/article26092911/; and Patricia Meredith and James Darroch, “The forces of change are trumping banks and regulators,” The Globe and Mail, May 15, 2018, https://www.theglobeandmail.com/business/commentary/article-the-forces-of-change-are-trumping-banks-and-regulators/.

Capital assesses whether a company has the financial resources to repay its creditors. This information is obtained from financial records. In general, this portion of the credit report is the one most closely reviewed by the credit analyst. Heavy weighting is given to such balance sheet items as working capital, net worth, and cash flow. Conditions includes the external factors surrounding the business under consideration, including influences such as market fluctuations, industry growth rate, legal factors (e.g., political and legislative), and currency rates. A credit bureau agency takes several elements of your credit profile and identifies a score that rates your creditworthiness on a scale. Your credit score may influence the interest rate that you pay and help determine whether lenders approve you for credit (e.g., a credit card or a car loan). 652

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The 4Cs are also taken into consideration by other service providers, such as insurance companies, to set premiums. More than ever, lenders input scores and ratings that summarize the 4 Cs into a financial model to determine the risk of doing business with organizations and consumers.

Factoring Accounts Receivable One relatively expensive source of short-term funds for a firm is factoring, the process of selling accounts receivable (a firm’s asset) for cash. Here is how it © ximagination/123RF works: Let’s say a firm sells many of its products on credit to customers, creating a number of accounts To build a positive credit history, consider these dos and don’ts. Do pay your bills on time, pay at least the minimum receivable. Some of these buyers may be slow in payamount, and check your credit profile for errors. Don’t use ing their bills, so a large amount of money is due the credit you don’t understand, wait to report problems, pay firm. A factor is a market intermediary (usually a bills late, or exceed your credit limit. Request a free copy financial institution such as a commercial bank) that of your credit profile from a credit bureau agency, such as TransUnion or Equifax. Were you surprised by what was agrees to buy the firm’s accounts receivable, at a discount, for cash. The discount depends on the age of the captured in your profile? accounts receivable, the nature of the business, and the condition of the economy. When it collects the accounts receivable that were originally factoring owed to the firm, the factor keeps them. Even though factoring is an expensive way of The process of selling accounts receivable for raising short-term funds, it is popular among small businesses as some cannot qualify for cash. a loan.

Commercial Paper Often a corporation needs funds for just a few months and prefers not to have to negotiate with a commercial bank. One strategy available to larger firms is to sell commercial paper. Commercial paper consists of unsecured promissory notes, in amounts of $100,000 and up, that mature (come due) in a period of one month up to one year.24 Commercial paper states a fixed amount of money the business agrees to repay to the lender (investor) on a specific date at a specified rate of interest. Because commercial paper is unsecured, only financially stable firms (mainly large corporations with excellent credit reputations) are able to sell it. Commercial paper can be a quick path to short-term funds at lower interest than charged by commercial banks. Since most commercial paper matures in 30 to 90 days, it can be an investment opportunity for lenders who can afford to put up cash for short periods to earn some interest on their money.

commercial paper

Unsecured promissory notes of $100,000 and up that mature (come due) in one month up to one year.

Credit Cards Credit cards provide a business with ready access to money that can save time and the likely embarrassment of being rejected for a bank loan.25 Of course, in contrast to the convenience that credit cards offer, they can be costly. Interest rates can be exorbitant, and there can be penalties if users fail to make their payments on time. That’s why it’s important to understand the penalties and perks that come with different credit cards.26 653

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Some credit card perks can help keep a small business afloat. For example, Joe Speiser found a cash-back card that helped put dollars back into his e-commerce company Petflow when it needed funds back in 2010. Today, he runs a $50 million business named Little Things. Still, when dealing with credit cards, remember it’s an expensive way to borrow money and credit cards are probably best used as a last resort. After checking your progress, we’ll look into long-term financing options.

PROGRESS ASSESSMENT

• What does an invoice containing the terms “2/10, net 30” mean? • What’s the difference between trade credit and a line of credit? • What’s the key difference between a secured loan and an unsecured loan? • What is factoring? What are some of the considerations involved in establishing the discount rate?

Obtaining Long-Term Financing LO5

Identify and describe different sources of longterm financing.

In a financial plan, forecasting determines the amount of funding the firm will need over various periods and the most appropriate sources for obtaining those funds. In setting longterm financing objectives, financial managers generally ask three questions: 1. What are the organization’s long-term goals and objectives? 2. What funds do we need to achieve the firm’s long-term goals and objectives? 3. What sources of long-term funding (capital) are available, and which will best fit

our needs?

Firms of all sizes, whether private or public, regardless of industry, require long-term financing. Here you see a tractor seeding a field. What other equipment do you think a farm may require?

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Firms need long-term capital to purchase expensive assets such as plant and equipment, to develop new products, and perhaps finance their expansion. In major corporations, the board of directors and top management usually make decisions about long-term financing, along with finance and accounting executives. Pfizer, one of the world’s largest research-based biomedical and pharmaceutical companies, spends over $8 billion a year researching and developing new products. The development of a single new drug could take 10 years and cost the firm over $1 billion before it brings in any profit.27 Plus, the company loses its patent protection on a drug after 20 years. It’s easy to see why high-level managers make the long-term financing decisions at Pfizer. Owners of small and medium-sized businesses are almost always actively engaged in analyzing their long-term financing decisions. As we

CHAPTER 17 Financial Management

noted earlier, long-term funding comes from two major sources: debt financing and equity financing. Let’s look at these sources next.

Debt Financing Debt financing is borrowing money a company has a legal obligation to repay. Firms can borrow either by getting a loan from a lending institution or by issuing bonds.

DEBT FINANCING BY BORROWING MONEY FROM LENDINGINSTITUTIONS Long-term loans are usually due within 3 to 7 years but may extend to 15 or 20 years. A term-loan agreement is a promissory note that requires the borrower to repay the loan, with interest, in specified monthly or annual instalments. A major advantage is that the loan interest is tax deductible. Long-term loans are both larger and more expensive to the firm than short-term loans. Since the repayment period can be quite long, lenders assume more risk and usually require collateral, which may be real estate, machinery, equipment, company shares, or other items of value. Lenders may also require certain restrictions to force the firm to act responsibly. The interest rate is based on the adequacy of collateral, the firm’s credit rating, and the general level of market interest rates. The greater the risk the lender takes in making a loan, the higher the rate of interest (recall the risk-return tradeoff).

term-loan agreement

A promissory note that requires the borrower to repay the loan in specified instalments.

DEBT FINANCING BY ISSUING BONDS If an organization is unable to obtain its long-term financing needs by getting a loan from a lending institution, such as a bank, it may try to issue bonds. A bond is a corporate certificate indicating that an investor has lent money to a firm or a government. An organization that issues bonds, such as different levels of governments and corporations, has the legal obligation to make regular interest payments during the term of the bond and to repay the entire bond principal amount at a prescribed time. Bonds are usually issued in units of $1000. The principal is the face value (dollar value) of a bond, which the issuing company is legally bound to repay in full to the bondholder on the maturity date. Interest is the payment the bond issuer makes to the bondholders to compensate them for the use of their money. If Harvest Gold issues a $1000 bond with an interest rate of 5 percent and a maturity date of 2025, the company is agreeing to pay a bondholder a total of $50 in interest each year until a specified date in 2025, when the full $1000 must be repaid. Maturity dates for bonds can vary. For example, in 2014 the federal government raised $2.5 billion worth of 50-year bonds in two rounds. The second round of bonds, with an interest rate of 2.76 percent, mature on December 1, 2064.28 Firms such as Disney, IBM, and Coca-Cola have issued century bonds with 100-year maturity dates. Review the Seeking Sustainability box to learn more about the Ontario Government’s Green Bonds. Bond interest is sometimes called the coupon rate, a term that dates back to when bonds were issued as bearer bonds. The holder, or bearer, was considered the bond’s owner. Back then, the company issuing the bond kept no record of changes in ownership. Bond interest was paid to whoever clipped the coupons attached to the bond and sent them to the issuing company for payment. Today, bonds are registered to specific owners and changes in ownership are recorded electronically.

bond

A corporate certificate indicating that an investor has lent money to a firm or a government.

maturity date

The exact date the issuer of a bond must pay the principal to the bondholder.

interest

The payment the bond issuer makes to the bondholders for use of the borrowed money.

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Seeking SUSTAINABILITY Buying Green Bonds You may already be familiar with bonds. Maybe your community is building a new stadium or cultural centre and is selling bonds to finance the project. Businesses and governments compete when issuing bonds. Potential investors (individuals and institutions) measure the risk of purchasing a bond against the return the bond promises to pay—the interest—and the issuer’s ability to repay when promised. On October 2, 2014, Ontario became the first province to launch Green Bonds through its $500 million bond sale. Since then, it has issued three more rounds of bonds totalling $2.55 billion. Ontario’s Green Bonds are standard debt obligations of the Province and rank equally with Ontario’s other bonds. The size of each Green Bond issue is determined by market demand and Ontario’s availability of suitable green projects in any given fiscal year. Categories of eligible projects that have environmental benefits include the following: clean transportation; energy efficiency and conservation; clean energy and technology; forestry, agriculture and land management; and climate adaptation and resilience. Canadian green bond issuers include one federal agency (Export Development Canada); two provinces (Ontario and Quebec); and one city (Ottawa), with the City of Toronto planning one. Among corporations, TD

Bank and Manulife Financial Corporation have issued green bonds. Why do you think other provinces and corporations have not followed with their own green bonds? If you were investing in bonds, would you find green bonds to be more attractive than standard bonds?

Sources: Mike Cherney, “$100 Billion in Bids for $46 Billion in Bonds,” The Wall Street Journal, January 14, 2016; Christopher Whittall and Emese Bartha, “Italy Debuts 50-Year Bond to Strong Demand,” The Wall Street Journal, October 5, 2016; Cordell Eddings, “Corporate Bond Sales Surge above $23 Billion as Apple Sells Debt,” Bloomberg, February 16, 2016; Simon Constable, “The Case for Treasury Bonds,” U.S. News and World Report, June 6, 2017; Barry Critchley, “$1 billion green bond offering Ontario’s largest to date,” Financial Post, January 30, 2018, http://business.financialpost.com/news/fp-street/1-billion-green-bond-offering-ontarios-largest-to-date; Barry Critchley, “Canada slow to embrace green bond market, even though investors are eager to buy,” Financial Post, May 7, 2018, http:// business.financialpost.com/news/fp-street/canada-slow-to-embrace-green-bond-market-even-though-investors-are-eager-to-buy-them; “Province of Ontario Green Bonds,” Ontario Financing Authority, accessed May 23, 2018, https://www.ofina.on.ca/greenbonds/; and “Ontario Green Bond Q&A’s,” Ontario Financing Authority, accessed May 23, 2018, https://www.ofina.on.ca/pdf/green_bond_qa.pdf.

Like other forms of long-term debt, the interest rate paid on a bond varies according to factors such as the general level of market rates, the reputation of the company issuing the bond, and the going interest rate for government bonds or bonds of similar companies. Once an interest rate is set for a corporate bond issue (except in the case of what is called a floating-rate bond), it cannot be changed. Though bond interest is quoted for an entire year, it is usually paid in two instalments. Bond-rating organizations assess the creditworthiness of a corporation’s bond issue. Independent rating firms, such as Dominion Bond Rating Service and Standard & Poor’s Rating Services, rate bonds according to their degree of risk.29 Bond ratings can range 656

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from the highest quality to junk bonds. Naturally, the higher the risk associated with the bond issue, the higher the interest rate the organization must offer investors. Investors should not assume high levels of risk if they do not feel that the potential return is worth it. Advantages and Disadvantages of Issuing Bonds Bonds offer long-term financing advantages to an organization: ∙ Bondholders are creditors of the firm, not owners. They seldom vote on corporate matters; thus, management maintains control over the firm’s operations. ∙ Bond interest is a business expense and as a result, it is tax-deductible for the firm. ∙ Bonds are a temporary source of funding. They are eventually repaid and the debt obligation is eliminated.

Major League Baseball is a big business, and building a new stadium requires big dollars. When the Minnesota Vikings needed financing to replace its old stadium with a new state-of-the-art facility, the city of Minneapolis and the state issued bonds that helped finance the construction of the Vikings’ new home. What organizations in your community have issued bonds, and for what purpose?

∙ Bonds can be repaid before the maturity date if they are callable, which permits the bond issuer to pay off the bond’s principal before its maturity. Bonds also have financing drawbacks: ∙ Bonds increase debt (long-term liabilities) and may adversely affect the market’s perception of the firm.

unsecured bonds (debenture bonds) Bonds that are unsecured (i.e., not backed by any collateral such as equipment).

∙ Paying interest on bonds is a legal obligation. If interest is not paid, bondholders can take legal action to force payment. ∙ The face value of the bond must be repaid on the maturity date. Without careful planning, this obligation can cause cash flow problems when the repayment comes due. Different Classes of Bonds Corporations can issue two different classes of corporate bonds. Unsecured bonds, usually called debenture bonds, are not backed by any specific collateral (such as land or equipment). Only firms with excellent reputations and credit ratings can issue debenture bonds, due to the lack of security they provide investors. Secured bonds, sometimes called mortgage bonds, are backed by collateral, such as land or buildings, that is pledged to bondholders if interest or principal is not paid when promised. A corporate bond issuer can choose to include different bond features. For example, convertible bonds may be converted to common shares.

To make bonds more attractive, decisions are made on the best combination of features before new bonds are issued. After all, new bonds will be competing against not only other new bond issues, but also against current bonds in the marketplace, both domestically and internationally. What special bond features would make a bond more attractive to a potential investor?

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secured bonds (mortgage bonds)

Bonds that are secured (i.e., backed by collateral such as land).

sinking fund

A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond.

Now you understand that bonds are issued with an interest rate, are unsecured or secured by some type of collateral, and must be repaid at their maturity dates. This repayment requirement often leads companies (or governments) to establish a reserve account called a sinking fund. Its primary purpose is to ensure that enough money will be available to repay bondholders on the bond’s maturity date. Firms issuing sinking-fund bonds periodically retire (set aside) some part of the principal prior to maturity so that enough funds will accumulate by the maturity date to pay off the bond. Sinking funds are generally attractive to both issuing firms and investors for several reasons: ∙ They provide for an orderly retirement (repayment) of a bond issue. ∙ They reduce the risk the bond will not be repaid. ∙ They support the market price of the bond because they reduce the risk the bond will not be repaid.

PROGRESS ASSESSMENT

• What are the major forms of debt financing available to a firm? • What does it mean when a firm states that it is issuing a 9 percent debenture bond due in 2030?

• What are advantages and disadvantages of bonds?

Equity Financing Rather than obtaining a long-term loan from a lending institution or selling bonds to investors, a firm may look at equity financing. Equity financing makes funds available when the owners of the firm sell shares of ownership (including selling shares to venture capitalists) or when they reinvest earnings. Let’s look more closely at each of these options.

stocks (shares)

Shares of ownership in a company.

initial public offering (IPO) The first public offering of a corporation’s stock.

stock certificate

Evidence of stock ownership that specifies the name of the company, the number of shares it represents, and the type of stock being issued. 658

EQUITY FINANCING BY SELLING STOCK (SHARES) Stock (shares) represent ownership in a company. Both common and preferred shares (to be discussed soon) form the company’s capital stock, also known as the company’s equity capital. The key thing to remember about stocks is that stockholders (also known as shareholders) become owners in the organization. Generally, the corporation’s board of directors decides the number of shares of stock that will be offered to investors for purchase. An initial public offering (IPO) occurs the first time a corporation offers to sell new stock to the general public. After this initial sale, the secondary market handles the trading of these securities between investors, with the proceeds of the sale going to the investor selling the stock, not to the corporation whose stock is sold. For example, Cara Operations Ltd. raised $200 million through its IPO in 2015 with a share price of $23. The share price went as high as $33 in its first day of trading on the Toronto Stock Exchange (secondary market), benefitting investors who may have chosen to sell their shares for a profit.30 What is the share price now? Are investors happy with their return to date? A stock certificate represents stock ownership. It specifies the name of the company, the number of shares owned, and the type of stock it represents. Companies, however, are

CHAPTER 17 Financial Management

not required to issue paper stock certificates to owners since stock is generally held electronically. Stock certificates sometimes indicate a stock’s par value, which is a dollar amount assigned to each share of stock by the corporation’s charter. Today, since par values do not reflect the market value of the stock (what the stock is actually worth), most companies issue stock with a very low par value or no par value. Dividends are part of a firm’s profits that may be (but is not required to be) distributed to shareholders as either cash payments or additional shares of stock.31 Dividends are declared by a corporation’s board of directors and are generally paid quarterly.32 For example, the Board of Directors of Sun Life Financial Inc. approved a common-share dividend increase of 4 percent (or 2 cents per share), resulting in a dividend of $0.475 cents per common share.33

When Canada Goose issued its IPO in 2017, the company raised more than $340 million by selling 20 million shares.35 The day was not without controversy as PETA protested outside of the New York Stock Exchange. Would such protests discourage you from buying the company’s products? Can you see why issuing stock can be an appealing option for financing a company’s growth?

Advantages and Disadvantages of Issuing Stock Some advantages to a firm of issuing stock include: ∙ As owners of the business, shareholders never have to be repaid. ∙ There is usually no legal obligation to pay dividends to stockholders; therefore, the firm can reinvest income (retained earnings) to finance future needs. ∙ Selling stock can improve the condition of a firm’s balance sheet since issuing stock creates no debt. (A corporation may also buy back its stock to improve its balance sheet and make the company appear stronger financially.34)

dividends

Part of a firm’s profits that may be distributed to shareholders as either cash payments or additional shares of stock.

Disadvantages of issuing stock include: ∙ As owners, stockholders (usually only common shareholders) have the right to vote for the company’s board of directors. (Typically one vote is granted for each share of stock.) Issuing new shares of stock can thus alter the control of the firm. ∙ Dividends are paid from profit after taxes and thus are not tax deductible. ∙ The need to keep stockholders happy can affect managers’ decisions. Companies can issue two classes of stock: common and preferred. Let’s see how these two forms of equity financing differ. Issuing Shares of Common Stock Common stock is the most basic form of ownership in a firm. In fact, if a company issues only one type of stock, by law it must be common stock. Holders of common stock have the right to (1) elect members of the company’s board directors, and vote on important issues affecting the company, and (2) share in the firm’s profits through dividends, if approved by the firm’s board of directors. Having voting rights in a corporation allows common stockholders to influence corporate policy because the board members they elect both choose the firm’s top management as well as make major policy decisions.

common stock

The most basic form of ownership in a firm; it confers voting rights and the right to share in the firm’s profits through dividends, if offered by the firm’s board of directors.

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Common stockholders also have a pre-emptive right to purchase new shares of common stock that may be issued via an IPO before anyone else. This allows common stockholders to maintain their proportional share of ownership in the company. preferred stock

Stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common shareholders if the company is forced out of business and its assets are sold.

■ FIGURE

Issuing Shares of Preferred Stock Owners of preferred stock enjoy a preference in the payment of company dividends and must be paid their dividends in full before any common stock dividends can be distributed; hence, the term preferred. They also have a prior claim on company assets—before common shareholders—if the firm is forced out of business and its assets sold. Normally, however, preferred shareholders do not get voting rights in the firm. Preferred stock may be issued with a par value that becomes the base for a fixed dividend the firm is willing to pay. For example, if a preferred share’s par value is $50 a share and its dividend rate is 4 percent, the dividend is $2 a share ($50 times 4 percent = $2). An owner of 100 shares would receive a fixed yearly dividend of $200 if dividends are declared by the board of directors. Preferred stock are therefore quite similar to bonds; both have a face (or par) value and both have a fixed rate of return. Also, like bonds, rating services assess preferred shares according to risk. So how do bonds and preferred shares differ? Remember that companies are legally bound to pay bond interest and to repay the face value (denomination) of the bond on its maturity date. In contrast, even though preferred share dividends are generally fixed, they do not legally have to be paid. Also, shares (preferred or common) never have to be repurchased by the issuing company. Though both bonds and stock can increase in market value, the price of stock generally increases at a higher percentage than bonds. Of course, the market value of both could also go down. Figure 17.6 compares features of bonds and stock.

17.6

COMPARISON OF BONDS AND STOCK OF PUBLIC COMPANIES The different features help both the issuer and the investor decide which vehicle is right for each of them at a particular time.

Bonds

Common Stock

Preferred Stock

Must be paid

Yes

Depends

Pays a fixed rate

Yes

Usually

Deductible from issuer’s income tax

Yes

Interest (Bonds) or Dividends (Stock)

Canadian investor pays reduced tax rate

(if issuing company is Canadian) Yes Yes

Bond or Stock Has voting rights

Yes

Not normally

May be traded on the stock exchange

Yes

Can be held indefinitely

Yes

Depends

Maybe

Is convertible to common shares

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EQUITY FINANCING FROM VENTURE CAPITAL The hardest time for a business to raise money is when it is just starting up or just beginning to expand. A start-up business typically has few assets and no market track record, so the chances of borrowing significant amounts of money from a bank are slim. Recall from Chapter 7 that venture capitalists are a potential source of funds. Venture capital is money that is invested in new or emerging companies that some investors—venture capitalists—believe have great profit potential. Venture capital helped firms like Intel and Apple get started, and it helped Facebook and Google expand and grow. Venture capitalists invest in a company in return for part ownership of the business. They expect h igher-than-average returns and competent management performance for their investment. See the Spotlight on Small Business about a recent venture capital firm that hopes to “court” new investments.

venture capital

Money that is invested in new or emerging companies that are perceived as having great profit potential.

EQUITY FINANCING FROM RETAINED EARNINGS You probably remember from Chapter 16 that the profits the company keeps and reinvests in the firm are called retained earnings. Retained earnings are often a major source

Spotlight On SMALL BUSINESS Looking for a Slam Dunk After being drafted to the NBA directly from high school, Kobe Bryant spent the next two decades perfecting his skills on the hardcourt with the Los Angeles Lakers. In his 20-year career, he was an 18-time all-star and a key part of the Lakers’ five NBA championships. Unfortunately, not even a player of Kobe’s ability could play basketball forever. He hung up his number 24 Lakers jersey at the end of the 2016 season. However, he is far from pulling up a rocking chair and relaxing. Six-foot-six Bryant teamed up with five-foot-seven entrepreneur, scientist, and investor Jeff Stibel to start a $100 million venture capital fund, Bryant Stibel. The fund intends to invest primarily in technology, media, and data companies with a focus on those in the sports and wellness fields. Since meeting in 2013, the partners have invested in 15 companies including the legal service website, LegalZoom, and sports website, The Players Tribune. Now that the new partnership has officially jumped into the competitive world of venture capital, the partners expect to become much more active. The former Lakers star promises to bring his intensely competitive work ethic to the world of venture

capital. He vows to devote the same obsession he displayed on the basketball court to learning about potential start-ups seeking funding. Billionaire investor Chris Sacca believes Kobe has a very unique personality similar to successful entrepreneurs like Uber founder Travis Kalanick. Whether Kobe Bryant will pivot and become a venture capital all-star remains to be seen. Keep your eyes on the scoreboard for his future three-pointers.

Sources: Danielle Wiener-Bronner, “Kobe Bryant Reveals His $100 Million Venture Capital Fund,” CNNMoney, August 26, 2016; Emily Jane Fox, “Kobe Bryant Launches $100 Million Venture-Capital Fund,” Vanity Fair, August 22, 2016; Lucinda Stern, “Kobe Bryant Just Started a Venture Capital Fund,” Fortune, August 22, 2016; Dennis Berman, “Kobe Bryant and Jeff Stibel Unveil $100 Million Venture Capital Fund,” The Wall Street Journal, August 22, 2016; Katilin Ugolik, “Kobe Bryant Reinvents Himself as a Venture Capitalist,” Institutional Investor, September 17, 2016; Kathleen Elkins, “Kobe Bryant and Ex-NFL Player Agree on What Pro Athletes Should Do after Retiring,” CNBC, August 24, 2017.

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of long-term funds, especially for small businesses since they often have fewer financing alternatives, such as selling bonds or stock, than large businesses do. However, large corporations also depend on retained earnings for long-term funding. In fact, retained earnings are usually the most favoured source of meeting long-term capital needs. A company that uses them saves interest payments, dividends (payments for investing in stock), and any possible underwriting fees for issuing bonds or stock. Retained earnings also create no new ownership in the firm, as stock does. Suppose you want to buy an expensive personal asset such as a new car. Ideally you would go to your personal savings account and take out the necessary cash. No hassle! No interest! Unfortunately, few people have such large amounts of cash available. Most businesses are no different. Even though they would like to finance long-term needs from operations (retained earnings), few have the resources available to accomplish this.

Comparing Debt and Equity Financing leverage

Raising needed funds through borrowing to increase a firm’s rate of return.

cost of capital

The rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders.

■ FIGURE

Figure 17.7 compares debt and equity financing options. Raising funds through borrowing to increase the firm’s rate of return is referred to as leverage. Though debt increases risk because it creates a financial obligation that must be repaid, it also enhances a firm’s ability to increase profits. Debt can be good; leverage is favourable when the uses to which debt can be put generate returns greater than the interest expense associated with the debt.36 Recall that two key jobs of the financial manager or CFO are forecasting the firm’s need for borrowed funds and planning how to manage these funds once they are obtained. Firms are concerned with the cost of capital. Cost of capital is the rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders (shareholders or venture capitalists). If the firm’s earning are greater than the interest payments on borrowed funds, business owners can realize a higher

17.7

DIFFERENCES BETWEEN DEBT AND EQUITY FINANCING Type of Financing Debt

Equity

Management influence

There’s usually none unless special conditions have been agreed on.

Common shareholders have voting rights.

Repayment

Debt has a maturity date.

Stock has no maturity date.

Principal must be repaid.

The company is never required to repay equity.

Yearly obligations

Payment of interest is a contractual obligation.

The firm is not usually legally liable to pay dividends.

Tax benefits

Interest is tax deductible.

Dividends are paid from after-tax income and aren’t deductible.

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■ FIGURE

17.8

USING LEVERAGE (DEBT) VERSUS EQUITY FINANCING Harvest Gold wants to raise $200,000 in new capital. Compare the firm’s debt and equity options. Return on equity is calculated by dividing operating profit by total shareholders’ equity.

Additional Debt Shareholders’ equity Additional equity

Additional Equity $500,000 −

Shareholders’ equity

$500,000

Additional equity

$200,000 $700,000

Total equity

$500,000

Total equity

Bond @ 8% interest

$200,000

Bond interest

Total shareholders’ equity

$500,000

Total shareholders’ equity

− $700,000

Year-End Earnings Gross Profit

$100,000

Gross Profit

Less bond interest ($200,000 times 8%)

−$16,000

Less interest

Operating Profit Return on equity ($84,000 ÷ $500,000)

$84,000 16.8%

Operating Profit Return on equity ($100,000 ÷ $700,000)

$100,000 − $100,000 14.3%

rate of return than if they had used equity financing. Figure 17.8 shows an example, again involving our restaurant example, Harvest Gold (introduced in Chapter 14). If Harvest Gold needed $200,000 in new financing, it could consider debt by selling bonds or equity through offering stock. Comparing the two options in this situation, you can see that Harvest Gold would benefit by selling bonds since the company’s earnings are greater than the interest paid on borrowed funds (bonds). However, if the firm’s earnings were less than the interest paid on borrowed funds (bonds), Harvest Gold could lose money. It’s also important to remember that bonds, like all debt, have to be repaid at a specific date. Individual firms must determine exactly how to balance debt and equity financing by comparing the costs and benefits of each. Leverage ratios (discussed in Chapter 16) can also give companies an industry standard for this balance, to which they can compare themselves. Still, debt varies considerably among major companies and industries. Social media leader Facebook, for example, has no long-term debt and more than $20 billion in cash available. Similarly, tech companies Microsoft, Apple, and Alphabet have very little debt and huge piles of cash.37 On the other hand, oil companies Exxon, BP, and Shell together have over $184 billion of debt on their balance sheets.38 According to Standard & Poor’s and Moody’s Investors Service (firms that provide corporate and financial research), the debt of large industrial corporations and utilities typically ranges between 30 and 35 percent of the companies’ total assets. The amount of debt obviously varies considerably from firm to firm. 663

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Your Prospects in Finance39 A career in finance can include analyst positions (e.g., research and corporate finance), management positions (e.g., relationship, portfolio, and risk), financial consultants, investment bankers, chief information officer (CIO) positions, and more. This chapter’s Career Exploration highlights a few more examples. Are any of these of interest to you? In Chapter 16, you were introduced to the chartered professional accountant (CPA) designation. Another well-known finance designation is the chartered finan© Shutterstock / Monkey Business Images cial analyst (CFA) designation. Administered through CFA candidates report dedicating in excess of 300 hours the CFA Institute, it has become the most respected and of study to prepare for each exam. Are there any courses recognized investment designation in the world. Graduathat you can take at your school that will help you when it tion requires successful completion of three levels. Level is time to study for a CFA exam? I focuses on a basic knowledge of the topic areas and simple analysis using investment tools. Level II emphasizes the application of investment tools and concepts with a focus on the valuation of all types of assets. Level III focuses on synthesizing all of the concepts and analytical methods in a variety of applications for effective portfolio management and wealth planning. Would you consider this designation as a way to round out your studies and experience? Regardless of your career choice, an understanding of finance will support sound decision making.

PROGRESS ASSESSMENT

• What are the major forms of equity financing available to a firm? • Name at least two advantages and two disadvantages of issuing stock as a form of equity financing.

• What are the major differences between common shares and preferred shares? • In what ways are preferred shares similar to bonds? How are they different?

SUMMARY LO1

Explain the role and responsibilities of financial managers. Finance comprises those functions in a business responsible for acquiring funds for the firm, managing funds within the firm (e.g., preparing budgets and doing cash flow analysis), and planning for the expenditure of funds on various assets. What are the most common ways in which firms fail financially? The most common financial problems are (1) undercapitalization, (2) poor control over cash flow, and (3) inadequate expense control.

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What do financial managers do? Financial managers plan, budget, control funds, obtain funds, collect funds, conduct audits, manage taxes, and advise top management on financial matters. LO2

Outline the financial planning process, and explain the three key budgets in the financial plan. Financial planning involves forecasting short-term and long-term needs, budgeting, and establishing financial controls. What are the three budgets in a financial plan? The capital budget is the spending plan for expensive assets, such as property, plant, and equipment. The cash budget is the projected cash inflows and outflows for a period and the balance at the end of a given period. The operating (master) budget summarizes the information in the other two budgets. It projects dollar allocations to various costs and expenses given various revenues.

LO3

Explain why firms need operating funds. During the course of a business’ life, its financial needs shift considerably. What are firms’ major financial needs? Businesses need financing for four major tasks: (1) managing day-to-day needs of the business, (2) controlling credit operations, (3) acquiring needed inventory, and (4) making capital expenditures. How can a firm access operating funds? A firm can raise needed capital by borrowing money (debt), selling ownership (equity), or earning profits (retained earnings).

LO4

Identify and describe different sources of short-term financing. Short-term financing raises funds to be repaid in less than one year. What are major forms of short-term financing? Sources of short-term financing include trade credit, family and friends, commercial banks and other financial institutions, short-term loans, factoring accounts receivable, commercial paper, and credit cards. Why should businesses use trade credit? Trade credit is the least expensive and most convenient form of short-term financing. Businesses can buy goods today and pay for them sometime in the future. What is a line of credit and a revolving credit agreement? A line of credit is an agreement by a bank to lend a specified amount of money to the business at any time, as long as certain conditions are met. A revolving credit agreement is a line of credit that guarantees a loan will be available—for a fee. What is the difference between a secured loan and an unsecured loan? An unsecured loan has no collateral backing it. Secured loans have collateral backed by assets, such as accounts receivable, inventory, or other property of value. Is factoring a form of secured loan? No, it is not. Factoring means selling accounts receivable at a discounted rate to a factor (an intermediary that pays cash for those accounts and keeps the funds it collects on them). What is commercial paper? Commercial paper is a corporation’s unsecured promissory note maturing in 270 days or less. 665

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LO5

Identify and describe different sources of long-term financing. Long-term financing raises funds that will be repaid over a period greater than one year. What are the major sources of long-term financing? Debt financing involves borrowing from lending institutions, and the issuance of bonds to investors. Equity financing is obtained through the sale of company stock, which includes selling to venture capitalists, and taking funds from the firm’s retained earnings. What is leverage and how do firms use it? Leverage is borrowing funds to invest in expansion, major asset purchases, or research and development. Firms measure the risk of borrowing against the potential for higher profits.

KEY TERMS 4 Cs of credit 651 bond 655 budget 642 capital budget 643 capital expenditures 647 cash budget 643 cash flow forecast 641 commercial finance companies 651 commercial paper 653 common stock 659 cost of capital 662 credit profile 651 debenture bonds (unsecured bonds) 657 debt financing 648 dividends 659

equity financing 648 factoring 653 finance 638 financial control 645 financial management 638 financial managers 638 initial public offering (IPO) 658 interest 655 leverage 662 line of credit 651 long-term financing 648 long-term forecast 641 maturity date 655 mortgage bonds (secured bonds) 657 operating (master) budget 643 preferred stock 660

promissory note 649 risk-return tradeoff 641 secured bonds (mortgage bonds) 657 secured loan 650 short-term financing 648 short-term forecast 641 sinking fund 658 stock certificate 658 stocks (shares) 658 term-loan agreement 655 time value of money 641 trade credit 649 unsecured bonds (debenture bonds) 657 unsecured loan 651 venture capital 661

∙ Tax preparer—helps individual and s mall-business clients complete and file their tax returns; assists with tax planning.

∙ Financial examiner—ensures compliance with laws governing financial institutions and transactions; reviews balance sheets, evaluates the risk level of loans, and assesses bank management.

∙ Cost estimator—collects and analyzes data in order to estimate the time, money, materials, and labour required to manufacture a product, construct a building, or provide a service.

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∙ Financial manager—produces financial reports, directs investment activities, and develops strategies and plans for the long-term financial goals of the organization.

CHAPTER 17 Financial Management

∙ Personal financial planner—provides advice on investments, insurance, mortgages, savings, estate planning, taxes, and retirement to help others manage their finances. ∙ Appraiser and assessor of real estate—provide an estimate of the value of land and the buildings

on the land usually before it is sold, mortgaged, taxed, insured, or developed. ∙ Financial analyst—provides guidance to individuals making investment decisions and assesses the performance of stocks, bonds, and other types of investments.

CRITICAL THINKING 1. Budgets are designed to keep decision makers

2. What are the primary sources of short-term

informed of progress compared to company plans. An important theme of this book is the need for managers to be flexible so that they can adapt quickly to rapidly changing conditions. This often means modifying previous plans. How do managers stay within the confines of budgets when they must shift gears to accommodate a rapidly changing world?

funds for new business owners? What are the major sources of long-term funds? 3. Why does a financial manager need to under-

stand the accounting information if the firm has a trained accountant on its staff? 4. Why do firms generally prefer to borrow

funds to obtain long-term financing rather than issue shares of stock?

DEVELOPING CAREER SKILLS Key: Team

Analytic

1. Contact a lending officer at a local bank in

your community or visit the bank’s website to review the bank’s policies on providing a business line of credit and a revolving line of credit. Under what circ*mstances would a business qualify for either form of short-term financing?

3. Go online and check the capitalization

required to open a franchise of your choice, like Subway or McDonald’s. Does the franchisor offer financial assistance to prospective

Technology

franchisees? Evaluate the cost of the franchise versus its business potential using the risk/return trade-off discussed in this chapter.

4. Factoring accounts receivable is a form of

financing used since the days of Babylonian King Hammurabi approximately 4000 years ago. Today it is still a source of short-term funds used by small businesses. Visit 21stfinancialsolutions.com to get more in-depth information about factoring and be prepared to discuss the pros and cons of factoring to the class.

2. One of the most difficult concepts to get

across to small-business owners is the need to take all the trade credit they can get. For example, the credit terms 2/10, net 30 can save businesses money if they pay their bills in the first 10 days. Work with a group of classmates to build a convincing financial argument for using trade credit.

Communication

5. Go to your school’s website and see whether

its operating budget is online. If not, go to the campus library and see if the reference librarian can help you access this information. Try to identify major capital expenditures your school has planned for the future. 667

PART 6 Accounting Information and Financial Activities

ANALYZING MANAGEMENT DECISIONS Making Dreams Come True Carlos Galendez had big dreams but very little money. He worked more than 10 years washing dishes and then as a cook for two major restaurants, all the while saving enough money to start his own Mexican restaurant. Finally, his dream came true. Galendez opened his restaurant, Casa de Carlos, with a guaranteed loan. His old family recipes and appealing Hispanic decor helped the business gain immediate success. He repaid his small-business loan within 14 months and immediately opened a second location, and then a third. Casa de Carlos became one of the largest Mexican restaurant chains in the area. Galendez decided that the company needed to go public to help finance expansion. He believed that continued growth was beneficial to the company, and that offering ownership was the way to bring in loyal investors. Nevertheless, he wanted to make certain that his family maintained a controlling interest in the firm’s stock. Therefore, in its IPO, Casa de Carlos offered to sell only 40 percent of the company’s available shares to investors. The Galendez family kept control of the remaining 60 percent. As the public’s craving for Mexican food grew, so did the fortunes of Casa de Carlos. By early 2007, the company enjoyed the enviable position of being light on debt and heavy on cash. But the firm’s debt

position changed dramatically when it bought out Captain Ahab’s Seafood Restaurants. Two years later, it expanded into the full-service wholesale distribution of seafood products with the purchase of Ancient Mariner Wholesalers. The firm’s debt increased, but the price of its stock was up and all of its business operations were booming. Then tragedy struck the firm when Carlos Galendez died suddenly from a heart attack. His oldest child, Maria, was selected to take control as CEO. Maria Galendez had learned the business from her father, who had taught her to keep an eye out for opportunities that seemed fiscally responsible. Even so, the fortunes of the firm began to shift. Two major competitors were taking market share from Casa de Carlos, and the seafood venture began to flounder (pun intended). Also, consumer shifts in eating habits and the recession encouraged consumers to spend less, causing the company some severe cash flow problems. It was up to Maria Galendez as CEO to decide how to get the funds the firm needed for improvements and other expenses. Unfortunately, several local banks would not expand the firm’s credit line, so she considered the possibility of a bond or stock offering to raise capital for the business. Her decision could be crucial to the future of the firm.

Discussion Questions

1. What advantages do bonds offer a company

such as Casa de Carlos? What disadvantages do bonds impose?

2. What would be the advantages and disad-

vantages if the company sold new stock to investors?

668

3. Are any other options available to Maria

Galendez? 4. What choice would you make and why?

CHAPTER 18

The Canadian Financial System

LEARNING OBJECTIVES After you have read and studied this chapter, you should be able to:

LO1 Explain what money is and what makes it useful. LO2 List the three components of the Canadian financial system, and explain how it is regulated. LO3 Discuss the role that financial institutions play in providing services. LO4 Describe the role of the financial markets. LO5 Outline the role of the clearing and settlement systems.

P R O F I L E GETTING TO KNOW: JIM CRAMER, HOST, CNBC’S MAD MONEY

670

You probably wouldn’t say that listening to finan-

Cramer’s path to Mad Money was as wild

cial experts drone on about the economy and

and chaotic as his actions on his TV show. He

stock market is entertaining. Many expert com-

earned a BA magna cum laude from Harvard and

mentators, while qualified and credible, have a

began working as a reporter for several different

style that could best be described as dry or flat-out

newspapers. After his home was burglarized and

boring. Well, if dry or boring is not your style, check

his bank account wiped out, he hit a financial

out Mad Money hosted by Jim Cramer. C ramer

low and even lived in his car for several months.

could never be accused of droning; instead he

Thanks to friends and family, he sprung back from

rants, yells, and screams as he recommends cer-

this setback and entered Harvard Law School.

tain investments and disses others. Since 2005,

It was during law school that Cramer revived his

he has been on a mission to educate investors

love for stock trading. As a child he memorized

about the investments they own or perhaps plan

stock symbols and had a fantasy stock portfolio.

to buy.

At Harvard he began trading for real using money

CHAPTER 18 The Canadian Financial System

investors, and Cramer routinely made $10 million or more a year. Unfortunately, the rigors and pressures of the hedge fund business took their toll on Cramer and his family. After 14 years he retired from the fund. His partner Jeff Berkowitz took over the firm and renamed it Cramer, Berkowitz, and Co. But don’t get the impression Cramer slowed down. For starters, he wrote three books and became more active on the online investment site TheStreet.com which he cofounded. In 2005, CNBC approached him about hosting Mad Money, a program that would focus on stocks and investing. The show’s primary objective was to educate and entertain investors about the market. After a very short time, CNBC knew it had chosen the right person for the job. Despite the frenetic pace of Mad Money, Cramer’s intentions are serious. His objective is to educate investors about the stocks they own, the © Gregg DeGuire/FilmMagic/Getty Images

importance of dividends, and other key elements of successful investing. He knows if you don’t make the presentation interesting, no one will listen. He has

he earned working as a researcher for a law profes-

never been accused of not being interesting. To fully

sor. He became a “go-to” guy for stock tips, often

understand finance, you need to know the basics of

leaving them on his phone’s answering machine.

securities markets, how they help businesses gain

A friend asked him to manage a $500,000 portfo-

needed funding, and how investors can build their

lio. Within two years, his friend’s investments were

financial future. In this chapter you’ll learn about how

worth $650,000.

securities markets achieve both objectives.

After law school, Cramer spent a brief time

The Canadian financial system includes

working as a lawyer, but his passion was finance.

financial institutions, the financial markets, and

He became a stockbroker at Goldman Sachs Pri-

clearing and settlement systems. Professionals like

vate Wealth Management where he worked for

Jim Cramer have played a role in the dollar value

three years until he left to start his own hedge

growth of investments in the financial markets. It’s

fund Cramer & Co. (A hedge fund is an alternative

through the financial system that most commercial

investment option available only to sophisticated

activity (e.g., saving; borrowing; investing; and buy-

investors such as institutions and high-wealth indi-

ing and selling by means of debit and credit cards,

viduals.) His tremendous personal drive and count-

cheques, and e-money) is carried out. Read further

less hours spent researching led to enormous

to learn how governments, corporations, and indi-

rewards for Cramer and his clients. Cramer & Co.

viduals benefit from the stability of the Canadian

regularly boasted annual returns of 24 percent for

financial system.

Sources: “Jim Cramer Host of Mad Money,” CNBC, accessed October 2017; Jim Cramer, TheStreet.com, accessed October 2017.

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PART 6 Accounting Information and Financial Activities

Why Money is Important You may recall from Chapter 4 that the Bank of Canada’s (BoC) role is to promote the economic and financial well-being of Canada. It does this by administering Canada’s monetary policy, bank notes, financial system, funds management, and retail debt.1 In this chapter, you will learn more about some of these topics. Two of the most critical issues in Canada today, economic growth and the creation of jobs, depend on © Shutterstock/Paisit Teeraphatsakool the ready availability of money. Money is so important Arguments for moving away from cash include combating to the economy that many institutions have evolved to illegal activity and the underground economy, creating more efficient monetary policy, and reducing transaction manage it and make it available when needed. Today, costs.5 What other benefits come to mind? you can get cash from an automated teller machine (ATM) almost anywhere in the world, and most organizations will accept a cheque, credit card, debit card, LO1 or smart card for purchases. Some businesses will even accept digital currencies, an Explain what online version of money. Behind the scenes is a complex system of banking that makes money is and what the free flow of money possible. Each day, over $5 trillion is exchanged in the world’s makes it useful. currency markets.2 Therefore, what happens to any major country’s economy has an effect on the Canadian economy and vice versa. Some countries like Sweden are moving toward a cashless economy; however, this is unlikely to be the case in Canada. While BoC data shows Canadians are using cash less often to actually pay for things—down to roughly 44 percent of all transactions— there’s currently $80 billion worth of Canadian coins and bank notes in circulation, and the amount of cash is growing at a pace of between four and seven percent per year.3 Let’s start at the beginning by discussing exactly what the word money means.

What is Money? money

Anything that people generally accept as payment for goods and services.

barter

The direct trading of goods and services for other goods and services.

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Money is anything that people generally accept as payment for goods and services. In the past, objects as diverse as salt, feathers, fur pelts, stones, rare shells, tea, and horses have served as money. In fact, until the 1880s, cowrie shells were one of the world’s most popular currencies. Barter is the direct trading of goods or services for other goods and services. Strict laws in Europe limited the number of coins people could bring to the colonies in the New World. Thus, colonists were forced to barter for goods. For example, they might trade cotton and tobacco for shoes and lumber. Though barter may sound like something from the past, many people have discovered the benefits of bartering online.4 One entrepreneur describes his bartering experience as follows: “Last year we bartered the creation of a full-colour graphic novel in exchange for a new website design. ... The value of the trade was $50,000. We provided three months of writing services to provide the graphic novel story line ... and then five months of illustration. In exchange, they helped us to define, design, and then program our new website.”

CHAPTER 18 The Canadian Financial System

Today, some people barter goods and services the old-fashioned way.6 In Siberia, for example, people have bought movie tickets with two eggs, and in Ukraine people have paid their energy bills with sausages and milk. Today you can go to a barter exchange where you can put goods or services into the system and get trade credits for other goods and services that you need.7 The barter exchange makes it easier to barter because you do not have to find people with whom to barter. The exchange does that for you. The problem with traditional barter is that eggs and milk are difficult to carry around. Most people need some object that’s portable, divisible, durable, and stable so that they can trade goods and services without carrying the actual goods around with them. One solution is coins and paper bills. The five standards for a useful form of money are:

Although people have long used barter to exchange goods without money, one problem is that objects like chickens and eggs are harder to carry around than a $10 bill. What other drawbacks does bartering have?

∙ Portability. Coins and paper money are a lot easier to take to market than pigs, eggs, milk, or other heavy products. While it is portable, Desjardins’ senior economist Hendrix Vachon recommends that Canada eliminate the nickel and move to 10-, 20-, and 50-cent coins. “Due to the gradual increase in the cost of living and decreased buying power of small coins, the time will come when the nickel will have to be taken out of circulation,” he says.8Do you agree with him? ∙ Divisibility. Different-sized coins and bills can represent different values. Because silver is now too expensive, today’s coins are made of other metals, but the accepted face values remain. ∙ Stability. When everybody agrees on the value of coins, the value of money is relatively stable. Due to its stability, much of the world has used the U.S. dollar as the measure of value. If the value of the dollar fluctuates too rapidly, the world may turn to some other form of money, such as the euro, for the measure of value. ∙ Durability. Coins last for thousands of years, even when they’ve sunk to the bottom of the ocean, as you’ve seen when divers find old coins in sunken ships. ∙ Uniqueness. It’s hard to counterfeit, or copy, elaborately designed and minted coins. With the latest colour copiers, people are able to duplicate the look of paper money relatively easily. Thus, the government has gone to extra lengths to ensure that Canadian dollars are readily identifiable. Security features include raised ink, transparent text, metallic portraits, a transparent window, the display of small numbers, use of hidden numbers, and a maple leaf border.9

Canada’s Frontiers series banknotes are printed on polymer, which lasts at least 2.5 times longer than paper notes, reducing processing, replacement costs, and environmental impact.10 How do these banknotes reflect the five standards of money?

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PART 6 Accounting Information and Financial Activities

Coins and paper money simplify exchanges. Most countries have their own currencies, and they are all about equally portable, divisible, and durable. However, they are not always equally stable.

Electronic Money

digital currency

Electronic money that is not available as bills or coins.

cryptocurrencies

A type of digital currency created using computer algorithms.

Electronic money (e-money) is a newer form of money. You can make online payments using PayPal, Google Wallet, or your bank’s website or app. You can use Apple Pay on your smartphone to pay in brick-and-mortar stores. Digital currency is electronic money. It’s not available as bills or coins. Cryptocurrencies are a type of digital currency created using computer algorithms. They use cryptography for security, making it tougher to forge, easier to cut across international boundaries, and able to be stored on your hard drive instead of in a bank. See the Adapting to Change box for more about digital currencies.

PROGRESS ASSESSMENT

• Explain why money is important to the economy. • List the five characteristics of useful money. • What are advantages and disadvantages of cryptocurrencies? LO2

List the three components of the Canadian financial system, and explain how it is regulated.

The Canadian Financial System11

The financial system makes a vital contribution to the welfare of Canadians. The system includes (1) financial institutions, (2) the financial markets, and (3) clearing and settlement systems. It is through the financial system that most commercial activity (e.g., saving, borrowing, investing, and buying and selling by means of debit and credit cards, cheques, and e-money) is carried out. With a focus on promoting a stable and efficient financial system in Canada, the BoC provides liquidity to the financial system, gives policy advice to the federal government on the design and development of the system, oversees major clearing and settlement systems, and provides banking services to these systems and their participants. It also contributes to international discussions on important financial system issues. The International Monetary Fund has con© Bank of Canada cluded that the system “is mature, sophisticated, and At the Bank of Canada Museum, you can learn about your well-managed,” that “financial stability is underpinned role in the economy as well as Canada’s role in the world by sound macroeconomic policies and strong prueconomy and how the BoC helps it all run smoothly. At the dential regulation and supervision,” and that “deposit liquidity exhibit, one can place liquidity where it’s needed insurance and arrangements for crisis management and by routing money from the BoC to commercial banks. Do failure resolution are well-designed.” Let’s consider hands-on exhibits interest you as a learning tool? how the financial system is regulated. 674

CHAPTER 18 The Canadian Financial System

Adapting to CHANGE What’s in Your Wallet? No single organization, such as a central bank, creates digital currencies. Digital currencies are based on a decentralized, peer-to-peer (P2P) network. The “peers” in this network are the people who take part in digital currency transactions, and their computers make up the network. To use digital currencies, you need to create a digital currency wallet to store and transfer digital currencies. You can store your wallet yourself or have a wallet provider manage your digital currency for you. You need a “public key” and a “private key” to use your wallet. Keys are made up of a random sequence of numbers and letters. Public keys are used to identify your wallet. Private keys are used to unlock your wallet and access your money. Private keys should be kept secret. All transactions are recorded to a public ledger or “blockchain.” The blockchain may include information such as transaction amounts, wallet addresses, and the public keys of the sender and recipient. Digital currencies have some notable disadvantages: • Digital currencies are not legal tender in Canada as only the Canadian banknotes and coins are considered official currency in Canada. • Digital currencies are not supported by any government or central authority, such as the BoC. • Financial institutions (e.g., banks and credit unions) don’t manage or oversee digital currency. • Digital currencies can be difficult to buy and use as you may not be able to exchange them easily for cash or to purchase goods and services. • Merchants don’t have to accept digital currencies as payment, and they don’t have to exchange digital currencies for traditional currencies, such as the Canadian dollar. • Digital currencies may be vulnerable to fraud, theft, and hackers.

• Transactions aren’t reversible. • Digital currencies can be risky investments because their value can change quickly and can be difficult to predict. Cryptocurrencies like Bitcoin, Ethereum, Ripple, and EOS are attractive to users because there’s no central authority that regulates the currency (recall that the BoC regulates currency in Canada, for example). Transactions involve two people anywhere in the world with no middlemen (e.g., a financial institution), government regulations, or transaction fees involved. In fact, you do not even have to give your name. Launched in 2009, Bitcoin remains the most popular cryptocurrency today. Yet, it is not yet generally accepted and has been the subject of over 40 thefts already (some for over a million dollars). Whether cryptocurrencies achieve a level of stability or just become interesting financial case studies for the digital age remains to be seen. Efforts will continue to be made to create a cashless society using some form of currency other than the bills and coins we use now.

Sources: “All CryptoCurrencies,” Investing.com, accessed June 4, 2018, https://ca.investing.com/crypto/currencies; “Digital currency,” Government of Canada, January 19, 2018, https://www.canada.ca/en/financial-consumer-agency/services/payment/digital-currency.html; Nathaniel Popper, “Identity Thieves Hijack Cellphone Accounts to Go After Virtual Currency,”The New York Times, August 21, 2017; and Sunny Freeman, “What Is Bitcoin? 11 Things You Need to Know About the Digital Currency,” Huffington Post, January 26, 2014.

Regulating the Financial System12 Regulating the Canadian financial system is a systemwide approach that is the shared responsibility of the Department of Finance, the BoC, and other federal financial regulatory authorities (to be discussed shortly). Ultimately, it is the Minister of Finance who is responsible for the financial system. 675

PART 6 Accounting Information and Financial Activities

Due to its important role in the economy, the financial system is heavily regulated. Regulation is designed to ensure the integrity, safety, and soundness of financial institutions and markets. In addition, they protect investors, depositors, and policyholders. Keep in mind, though, that these compliance requirements require a lot of time and money for companies in this industry to complete. In Canada, there is no single body that regulates the financial system. It is a responsibility shared among different organizations and levels of government. As highlighted in Figure 18.1, financial institutions may be regulated at either the federal or the provincial level, or jointly, and in some instances may depend on the jurisdiction under which the company is incorporated or registered. For institutions under provincial jurisdiction, the province(s) in which a company is incorporated or registered is (are) responsible for regulating the company’s overall powers. As at the federal level, provinces are supported by agencies and organizations that supervise the ongoing operations of these institutions. For institutions under federal responsibility, the Department of Finance is charged with overseeing their overall powers—in other words, what they can and cannot do. The Department of Finance relies on three federal agencies to supervise the ongoing operations of these institutions and their compliance with legislation. Let us briefly consider each agency.

OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS (OSFI)13 OSFI, whose purpose is “to contribute to public confidence in the Canadian financial system,” regulates and supervises more than 400 federally regulated banks and insurance companies and 1200 pension plans. It monitors the day-to-day operations of financial institutions with respect to their financial soundness. ■ FIGURE

18.1

REGULATORY RESPONSIBILITY FOR FINANCIAL INSTITUTIONS Financial Institution Banks

Federal

Provincial

Depends on Jurisdiction

✓

Securities Commissions

✓

Credit Unions

✓

Caisses Populaires

✓

Insurance Providers

✓

Trust and Loan Companies

✓

Cooperative Credit Associations

✓

Source: Based on data “Regulation of the Canadian Financial System,” Bank of Canada, April 2012, http://www.bankofcanada.ca/wp-content/uploads/2010/11/ regulation_canadian_financial.pdf.

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CHAPTER 18 The Canadian Financial System

CANADA DEPOSIT INSURANCE CORPORATION (CDIC)14 CDIC oversees the deposit insurance system, which protects deposits that Canadians have in their federal financial institutions. Since it was created in 1967, CDIC has dealt with 43 member failures affecting some 2 million Canadians. No one has lost a dollar of deposits under CDIC protection. Courtesy of Canada Deposit Insurance Corporation CDIC guarantees deposits up to $100,000 (prinCDIC is funded primarily by premiums paid by banks and cipal and interest), in Canadian dollars, in each trust companies that belong to this program. Membership member institution; however, it does not cover all sign decals must be displayed prominently at a member deposits. For example, foreign-currency accounts, institution’s entrance. Have you seen this sign in your local or online financial institution? stocks, bonds, and mutual funds are not covered. (Look for a further discussion later on in this chapter.) If you own digital currency, it’s your responsibility to protect your digital currency wallet. Federal or provincial deposit insurance plans don’t cover digital currency. If the currency exchange or wallet provider that has your digital currency fails or goes bankrupt, your funds won’t be protected. Some CDIC members have subsidiaries that are CDIC members in their own right. As a result, depending on how deposits are registered, you can be protected for more than $100,000.

FINANCIAL CONSUMER AGENCY OF CANADA (FCAC)15 FCAC monitors financial institutions to ensure that they comply with federal consumer protection measures, which range from disclosure requirements to complaint-handling procedures. FCAC also provides information, and in some cases, online tools to support Canadians. In a recent report, FCAC published its review of domestic banks’ retail sales practices. The report found that bank cultures strongly anchored in sales can increase the risks of mis-selling to consumers and of bank employees breaching market conduct obligations. It proposed a number of measures banks can take to reduce these risks. Do you have more confidence in the Canadian financial system now knowing a little more of the purpose of these three agencies? After the Progress Assessment, let’s consider financial institutions, one area of Canada’s financial system. This will be followed by a discussion on the financial markets, and then the clearing and settlement systems.

Stressed About Money?, canada.ca/it-pays-to-know, Financial Consumer Agency of Canada, 2018. Reproduced with the permission of the Minister of Public Services and Procurement Canada 2018.

Do you see how these FCAC tools may help you throughout your life? Which tools are most relevant to you now?

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Canada Deposit Insurance Corporation (CDIC) Oversees the deposit insurance system, which protects deposits that Canadians have in their federal financial institutions.

LO3

Discuss the role that financial institutions play in providing services.

commercial bank

A profit-seeking organization that receives deposits from individuals and corporations in the form of chequing and savings accounts and then uses some of these funds to make loans.

spread

The difference between the interest a bank earns on loans extended to customers and the interest paid to depositors and other creditors for the use of their money. 678

PROGRESS ASSESSMENT

• What three areas does the Canadian financial system oversee? • Give three examples of financial institutions. Include which level of government regulates each example.

• Describe the roles of three federal agencies: OSFI, CDIC, and FCAC.

The Canadian Financial System: Financial Institutions Until the middle of the 1980s, Canada had a “four-pillar system” that included (1) banks, (2) trust companies, (3) insurance companies, and (4) securities dealers. Regulation was designed to foster competition within each pillar, but not among them. Changes in regulations have eliminated many of the old barriers that prohibited financial institutions from competing in each other’s business, and consequently, the four pillars. As a result of legislative changes in 1992, the banks were allowed to own insurance, trust, and securities subsidiaries and vice versa. Today, most of Canada’s large banks have subsidiaries in these areas16 Financial institutions include commercial banks, credit unions, trust and loan companies, insurance companies, and non-banks.17 These financial institutions support both businesses and consumers. Today, it is increasingly difficult to distinguish firms by type of function, as financial institutions have become highly competitive. For example, we see non-traditional financial services providers—such as Canadian Tire Bank and Walmart Canada Bank—taking advantage of changes in the regulatory environment to offer financial services to their customer base. Next, consider some of the competitors in this business.

Commercial Banks The banks that are probably the most familiar to you are commercial banks. A commercial bank is a profit-seeking organization that receives deposits from individuals and corporations in the form of chequing and savings accounts, and uses these funds to make loans. It has two types of customers, depositors and borrowers, and is equally responsible to both. Figure 18.2 highlights how banks make money, how revenues are utilized, and the distribution of net income. Net interest income is generated from what is known as the spread. The spread is simply the difference between the interest a bank earns on loans extended to customers and the interest paid to depositors and other creditors for the use of their money.18 Are you surprised to learn that 45 percent of bank revenue earned is net interest income while only 5 percent is generated from service charges?19 According to the Canadian Bankers Association (CBA), the major domestic banks offer a full range of banking, investment, and financial services. They have extensive, nationwide distribution networks and also are active in the United States, Latin America, the Caribbean, Asia, and other parts of the world. Many large international banks have a

CHAPTER 18 The Canadian Financial System

■ FIGURE

18.2

HOW BANKS MAKE MONEY AND DISTRIBUTE NET INCOME The majority of Canadians are shareholders in Canadian banks either directly through share ownership or indirectly through pension and mutual funds, including the Canada Pension Plan. Do you own such investments? How do banks make money?* Net interest income 45%

Service charges 5%

How revenues are utilized Other expenses 16% Provision for credit losses 5%

Other income 50%

Salaries & benefits 33%

Premises & equipment 10%

Distribution of net income* Reinvested in business 39%

Income before taxes 36%

* Gross revenues before taxes (2015)

Taxes 26%

Shareholders 35% * Net income before all taxes (2015)

presence in Canada—through a subsidiary, representative office, or branch of the parent bank. Most specialize in corporate and investment banking (e.g., niche financing) and have only one or two offices/branches.20 Review Figure 18.3 for a list of Canada’s top five banks. The domestic operations of these five banks accounts for more than half of the industry’s revenues with the four largest banks deriving a third or more of their revenues from outside Canada.21

■ FIGURE

18.3

CANADA’S BIG FIVE BANKS IN 2017 Ranking

Bank Name

Total Assets (C$ billions)

Toronto-Dominion Bank (TD)

1,279.0

Royal Bank of Canada (RBC)

1,212.9

Bank of Nova Scotia (Scotiabank)

915.3

Bank of Montreal (BMO)

709.6

Canadian Imperial Bank of Commerce (CIBC)

565.3

Source: Based on data from “Top 10 Banks in Canada,” Banks around the World, accessed June 4, 2018, http://www.relbanks.com/north-america/canada.

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PART 6 Accounting Information and Financial Activities

SOME SERVICES PROVIDED BY COMMERCIAL BANKS

demand deposit

The technical name for a chequing account; the money in a demand deposit can be withdrawn anytime on demand from the depositor.

time deposit

The technical name for a savings account; the bank can require prior notice before the owner withdraws money from a time deposit.

certificate of deposit A time-deposit (savings) account that earns interest to be delivered at the end of the certificate’s maturity date; also called a Guaranteed Investment Certificate (GIC).

Individuals and corporations that deposit money in a chequing account can write personal cheques to pay for almost any purchase or transaction. The technical name for a chequing account is a demand deposit because the money is available on demand from the depositor. Some banks impose a service charge for cheque-writing privileges or demand a minimum deposit. They might also charge a small handling fee for each cheque written. For corporate depositors, the amount of the service charge often depends on the average daily balance in the chequing account, the number of cheques written, and the firm’s credit rating and credit history. In the past, chequing accounts paid no interest to depositors, but interest-bearing chequing accounts have experienced solid growth in recent years. Commercial banks also offer a variety of savings account options. A savings account is technically a time deposit because the bank can require notice before you make a withdrawal. It would be wise for you to compare online and neighbourhood banks to find where your money can earn the most interest. The Making Ethical Decisions box explores an issue that you could face. A certificate of deposit is a time-deposit (savings) account that earns interest, to be delivered on the certificate’s maturity date. Some financial institutions refer to certificates of deposit as Guaranteed Investment Certificates or GICs. The depositor agrees not to withdraw any of the funds in the account until then. The longer the term deposit is to be held by the bank, the higher the interest rate. The interest rates also depend on economic conditions. Banks offer a variety of products and services. Examples include credit cards and loans for creditworthy customers, life insurance, brokerage services, financial counselling, automatic bill payments, safe-deposit boxes, registered retirement savings accounts, traveller’s cheques, automated teller machines (ATMs), and overdraft protection. The latter means preferred customers can automatically get loans when they’ve written cheques exceeding their account balance.

Making ETHICAL DECISIONS An Open and Shut Option? You work at a large bank in the new accounts department where you open accounts for new customers. The bank has a policy that pays bonuses related to the number of new accounts opened. Your manager tells you that many of the accounts are for small depositors. He suggests that when opening a new savings account for customers, you can add another account, such as a credit card, without them being aware of it. You know that opening an account without the approval of the customer is not proper, but you also know the person may never know who opened it. Anyway, your manager suggested it and bonus money sounds good. What are your alternatives? What would you do? Is that the ethical thing to do?

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Today, banks are continually trying to improve services to mobile users, especially Millennials. Having been in an Internet and personal computer world their entire lives, Millennials are very adept at mobile banking. They use technology to deposit cheques, pay bills, track expenses, and transfer money.22

MANAGING YOUR PERSONAL FINANCES Studying business prepares you for finding and keeping a good job. You already know that one of the secrets to finding a well-paying job is to have a good © SOPA Images Limited/Alamy Stock Photo This is not your traditional ATM. When this chapter was education. With your earnings, you can take vacawritten, Canada had 540 crypto ATMs.25 How many are tions, raise a family, make investments, buy the prodthere in Canada now? If you have seen a crypto ATM, have ucts you want, and give generously to others. Money you used it? management, however, is not easy. You have to earn the money in the first place. Then you have to learn credit union how to save money, spend money wisely, and insure A non-profit, memberyourself against any financial and health risks. Review Appendix B at the end of this owned financial co-operative that chapter for a discussion on managing your personal finances.

Credit Unions and Trust Companies

offers a full variety of banking services to its members.

There are over 300 credit unions serving over 5.5 million Canadians.23 A credit union is trust company a non-profit, member-owned financial co-operative that offers a full variety of banking A financial institution that can administer services to its members. They include interest-bearing chequing accounts at relatively estates, pension plans, high rates, short-term loans at relatively low rates, financial counselling, life insurance and agency contracts, policies, and a limited number of home mortgage loans. (Recall some of the key dif- in addition to other ferences between co-operatives and for-profit organizations from our Chapter 6 discus- activities conducted by banks. sion.) They are organized by government agencies, corporations, unions, and professional associations. Caisses populaires, one example, are located predominantly in Quebec. Today, credit unions are growing in popularity. You might want to visit a local credit union to see whether you are eligible to belong, and then compare the rates to those at local banks. Credit unions often have fewer branches than banks and less access to ATMs. It is best to determine what services you need and then compare those services to the same services offered by banks.24 © Lee Brown/Alamy Stock Photo A trust company is a financial institution that over the years conducted activities similar to those of Credit unions are member-owned financial co-operatives that offer their members a wide range of banking services. banks. How they differ is that trust companies have If you do not belong to a credit union, what would a credit a fiduciary role. Due to this role, trust companies union need to offer you to get you to switch? can administer estates, pension plans, and agency 681

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contracts, which banks cannot do as it was originally considered a conflict of interest for banks. Changes in regulations over the years have seen trust companies expand their quasi-banking operations—designed originally to attract savings and term deposits to fund mortgage lending—into complete banking facilities for both individuals and businesses.26

Other Financial Institutions: Non-Banks non-banks

Financial organizations that accept no deposits but offer many services provided by regular banks.

pension funds

Amounts of money put aside by corporations, nonprofit organizations, or unions to cover part of the financial needs of their members when they retire.

There are also a variety of other institutions called non-banks. Non-banks are financial organizations that accept no deposits but offer many services provided by regular banks. Non-banks include life insurance companies, pension funds, brokerage firms, commercial finance companies, and corporate financial services. Life insurance companies provide financial protection for policyholders, who periodically pay premiums. In addition, insurers invest the funds they receive from policyholders in corporate and government bonds. Today, insurance companies often provide long-term financing for real estate development projects. Pension funds are amounts of money put aside by corporations, non-profit organizations, or unions to help fund their members’ financial needs when they retire. Contributions to pension funds are made by employees, employers, or both. To generate additional income, pension funds typically invest in low-return, but safe, corporate stocks or other conservative investments, such as government securities and corporate bonds. As competition between banks and non-banks has increased, the differences between them have become less apparent. The diversity of financial services and investment alternatives non-banks offer has led banks to expand their own services. Some banks acquired brokerage firms to offer full-service financial assistance, such as when CIBC acquired Merrill Lynch Canada’s retail brokerage firm in 2001. In addition, CIBC also bought Merrill’s Canadian mutual fund and securities services businesses, beating out rivals reported to have included TD, Scotiabank, National Bank, and a group of Merrill insiders backed by the Caisse de dépôt et placement du Québec.27 Commercial and consumer finance companies offer short-term loans to businesses or individuals who cannot meet the credit requirements of regular banks, such as new businesses, or those who have exceeded their credit limit and need more funds. Be careful when borrowing from such institutions as their interest rates can be quite high. Financial institutions are facing increased competition from financial technology or “fintech” firms. In addition to partnering with these companies, financial institutions have ramped up their hiring of in-house IT workers to upgrade their own technological infrastructure.28 The Spotlight on Small Business highlights a fintech that hopes to become the Millennials’ lender of choice.

Using Technology to Improve Efficiency Imagine the cost to a financial institution of approving a written cheque, physically processing it, and mailing it back to you. Such transactions are processed by the third component of the financial system, the clearing and settlement systems. This can all be expensive, so it should not be a surprise that financial institutions continue to look for ways to make the system more efficient. 682

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Spotlight On SMALL BUSINESS Becoming Your Best Friend in Banking The willingness of Millennials to embrace banking alternatives led to the development of SoFi, a fintech firm. Started in 2011, SoFi originally provided student loan refinancing. Today, the company boasts 225 000 members with roughly $15 billion in loans. SoFi hopes to become the bank of choice to Millennials and do to banks what Amazon has done to bookstores and Uber has done to taxi service. After experiencing rapid growth with student loan refinancing, SoFi moved into mortgages and personal loans after members requested help with other aspects of their financial lives. In addition to providing personal loans and mortgages, SoFi distinguishes itself by offering its members social events, job placement, wealth management, and the ability to pause loan payments if they lose their jobs. A borrower who wants to start a new business can even apply to have loan payments suspended for 6 months (with a possible extension to 12 months) to devote his or her time and energy to the business. SoFi believes that traditional banks have lost sight of building professional and personal relationships with their customers. It believes that financial services and transactions should go beyond a pure transactional relationship and work to improve the lives of customers. According to SoFi, “It’s all about money, career, and relationships.” SoFi has excelled at developing new products by carefully listening to its customers and adapting its

services to their needs. The company generates its fees by selling loans to third-party investors (mainly hedge funds) and sales of loans to banks. At present, despite providing traditional banking functions, the company is not subject to many of the strict banking rules traditional banks must follow. However, expectations are SoFi and other fintech lenders will face increased regulatory scrutiny in the future.

Sources: Andy Kessler, “The Uberization of Banking,” The Wall Street Journal, May 1, 2016; Leena Rao, “This Bank Wants to Be Your Best Friend,” Fortune, March 15, 2016; Ainsley O’Connell, “Club SoFi,” Fast Company, August 2016; Murray Newlands, “SoFi Is Dominating the Finance Space: Here’s What They Are Planning Next,” Forbes, November 23, 2016;Peter Rudegeair, “Online Lender SoFi Takes Step Toward Becoming a Bank,” The Wall Street Journal, June 12, 2017.

One solution was to issue credit cards to reduce the flow of cheques, but they too have their costs: there’s still paper to process. Accepting credit cards costs retailers a bit over 2 percent of the amount charged. In the future we’ll see much more electronic rather than physical exchange of money, because it is the most efficient way to transfer funds. If you must use a credit card, be sure to search for one that offers the best deal for you. Some offer cash back, others offer free travel, and so forth. Don’t just sign up for whatever card is offering free T-shirts on campus. Do your research. In an electronic funds transfer (EFT) system, messages about a transaction are sent from one computer to another. Thus, organizations can transfer funds more quickly and economically than with paper cheques. EFT tools include electronic cheque conversion, debit cards, smart cards, direct deposits, and direct payments.

electronic funds transfer (EFT) system A computerized system that electronically performs financial transactions such as making purchases, paying bills, and receiving paycheques.

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A debit card serves the same function as a cheque—it withdraws funds from a chequing account. When the sale is recorded, the debit card sends an electronic signal to the financial institution, automatically transferring funds from your account to the seller’s. A record of transactions immediately appears online. Debit transactions surpassed credit years ago and continue to grow. Debit cards may not offer the same protection as credit cards. If someone steals your credit card, for example, Visa markets a zero liability policy. (Be aware that the financial institution that approved the credit card may still hold you liable if it is proven that you did not maintain the confidentiality and safekeeping of your credit card and electronic signature.29) The same holds for debit card losses; the Canadian Code of Practice for Consumer Debit Card Services maintains that you will be responsible if you have contributed to the unauthorized use of your debit card (e.g., writing your Personal Identification Number [PIN] on or near your card or choosing an unacceptable PIN selected from your name, telephone number, date of birth, address, or social insurance number).30 You should review the Cardholder Agreement for details. Payroll debit cards are an efficient way for some firms to pay their workers, and are an alternative to cash for those who don’t qualify for a Courtesy of Pacsafe, www.pacsafe.com credit or debit card—the so-called unbanked. Employees can access funds RFID chips in credit cards allow in their accounts immediately after they are posted, withdraw them from an consumers to pay for products with ATM, pay bills online, or transfer funds to another cardholder. The system is just a wave of a hand. But they’re much cheaper for companies than issuing cheques, and more convenient for also easier for hackers to access, leading some people to keep their employees.31 cards in RFID-blocking holders like A smart card is an electronic funds transfer tool that combines a this one. How do you make sure credit card, debit card, phone card, driver’s licence card, and more. Smart that your identity and finances are cards replace the typical magnetic strip on a credit or debit card with a secure? microprocessor. The card can then store a variety of information, including the holder’s bank balance. Merchants can use this information to verify the card’s validity and spending limits, and transactions can debit up to the amount on the debit card card. An electronic funds transfer tool that Some smart cards have embedded radio frequency identification (RFID) chips that serves the same make it possible to enter buildings and secure areas and to buy gas and other items with function as cheques: it withdraws funds from a a swipe of the card. A biometric function lets you use your fingerprint to boot up your computer. Students are using smart cards to open locked doors to dorms and identify themchequing account. selves to retailers near campus and online. The cards also serve as ATM cards. smart card For many, the ultimate convenience in banking is automatic transactions such as direct An electronic funds deposit and direct payments. A direct deposit is a credit made directly to a chequing or savtransfer tool that is ings account in place of a paycheque. The employer contacts the financial institution and a combination credit card, debit card, phone orders it to transfer funds from the employer’s account to the worker’s account. Individuals card, driver’s licence can use direct deposits to transfer funds to other accounts, such as from a chequing account card, and more. to a savings or retirement account. A direct payment is a preauthorized electronic payment. Customers sign a separate form for each company whose bill they would like to automatically pay from their chequing or savings account on a specified date. The customer’s financial institution 684

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completes each transaction and records it on the customer’s monthly statement.

ONLINE BANKING Financial institutions allow customers to access their accounts online, and most have bill-paying capacity. Thus, you can complete your financial transactions from home using your telephone, computer, or mobile device to transfer funds from one account to another, pay your bills, and check the balance in each of your accounts. You can apply for a car loan or mortgage and get a response while you wait. Buying and selling stocks and bonds is also easy. Internet banks, such as Scotiabank-owned Tangerine and CIBC-owned Simplii Financial offer online banking only. They can offer customers slightly higher interest rates and lower fees because they do not have the overhead costs traditional financial institutions have with branches. While many consumers are pleased with the savings and convenience, not all are happy with the service. Why? Some are nervous about security. People fear putting their financial information into cyberspace, where others may see it despite all the assurances of privacy.

The Bank of Montreal became the first bank to offer a biometric identification program for corporate credit card users (Selfie Pay). Tangerine offers the first banking app using eye verification (Eye Verify).35 Would you be comfortable using a biometric identification program? Would the availability of one encourage you to switch financial institutions?

LOOKING AHEAD Canadians are embracing new technologies in their daily lives, and value innovative ways to make their banking more accessible and convenient. Examples include the increasing use of online and mobile banking, with payments quickly evolving as mobile wallets and “tap and go” contactless payments become more widely available.32 Results from a Payments Pulse Survey shares that although users of electronic payment tools, such as e-wallets, almost unanimously applaud their convenience, few Canadians (13 percent) have adopted such innovations to date. Approximately 50 percent of respondents were willing to let go of cash and even more were willing to let go of cheques (66 percent).33 What is your position on e-wallets, cash, and cheques? Neil Parmenter, president and CEO of the CBA, recognizes that the CBA’s immediate challenge will be managing the digital transformation: “Among other challenges, customers are being tempted away by new and nimble digital competitors with low overhead and sometimes lighter regulatory burdens. Consequently, banks are scrambling to adopt new technologies and ways of doing business to avoid the fate of slow-footed incumbents in other, already disrupted industries.”34 With this in mind, the CBA is advocating for a digital ID in Canada. A federated digital ID framework—one interconnected network—would need to be developed in collaboration with Canada’s banks, telecommunications companies, law enforcement, and government. With a digital ID, Canadians could identify themselves to government, businesses and each other electronically, with ease and security, and without the need to 685

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CBA believes that collaboration is crucial to enable Canada’s participation in a digital economy as a way to improve innovation and growth while creating a stronger and safer way to manage Canadians’ identities.37 Do you have any concerns about having a digital ID? Can you think of any immediate benefits?

present physical documents when doing business with the public and private sectors.36 What are your thoughts on this? After the Progress Assessment, let’s learn about financial markets, another area of Canada’s financial system.

PROGRESS ASSESSMENT

• What components of the financial services industry were known as the four pillars?

• Contrast credit unions and caisses populaires, and list some non-bank competitors.

• How does a debit card differ from a smart card? • Describe a digital ID. What would be benefits of a digital ID?

LO4

Describe the role of the financial markets.

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The Canadian Financial System: Financial Markets38 Financial markets consist of markets for money, bonds, equities, derivatives, and foreign exchange. It is mainly through the financial markets that the BoC’s key policy rate influences interest rates and the exchange rate. This, in turn, helps the BoC achieve its monetary policy objectives. The BoC is also involved in financial markets through auctions of government securities. On rare occasions, the BoC may also intervene in the foreign exchange market on behalf of the government to promote orderly markets for the Canadian dollar.

CHAPTER 18 The Canadian Financial System

A security is a negotiable financial instrument that represents some type of financial value. It is a transferable certificate of ownership of an investment product such as a note, bond, stock, futures contract, or option. You will learn about futures contracts and options in a financial management course. The Canadian government closely regulates who can sell securities, including stocks and bonds. If you wish to engage in such transactions, look for a registered securities dealer. A securities dealer or investment dealer is a firm that trades securities for its clients and offers investment services. These dealers have passed background checks and a series of extremely challenging examinations. You can verify an individual’s credentials by going to the Investment Industry Regulatory Organization of Canada, which is also the licensing authority for securities dealers. Linking back to a discussion earlier in this chapter, the BoC Governor Stephen Poloz objects to the term cryptocurrencies. “They are crypto but they aren’t currencies ... they aren’t assets for the most part ... I suppose they are securities technically ... There is no intrinsic value for something like bitcoin so it’s not really an asset one can analyze. It’s just essentially speculative or gambling.” Do you agree?

security

A negotiable financial instrument that represents some type of financial value.

securities dealer or investment dealer

A firm that trades securities for its clients and offers investment services; also known as an investment dealer.

The Function of Securities Markets Financial markets include securities markets. Securities markets—financial marketplaces for stocks, bonds, and other investments—serve two major functions. First, they assist businesses in finding long-term funding to finance capital needs, such as expanding operations, developing new products, or buying major goods and services. (Recall this discussion in Chapter 17.) Second, they provide private investors a place to buy and sell securities (investments), such as stocks and bonds, that can help them build their financial future. Securities markets are divided into primary and secondary markets. Primary markets handle the sale of new securities. This is an important point to understand. Corporations make money on the sale of their securities (stock) only once—when they sell it on the primary market.39 As introduced in Chapter 17, the first public offering of a corporation’s stock is called an initial public offering (IPO). After the IPO, the secondary market handles the trading of these securities between investors, with the proceeds of the sale going to the investor selling the stock, not to the corporation whose stock is sold. For example, imagine your restaurant, Harvest Gold, has grown into a chain and your products are available in many retail stores throughout the country. © Carrie Devorah/WENN.com/Newscom You want to raise additional funds to expand further. If you offer 1 million shares of stock in your company David and Tom Gardner, the Motley Fools, are passionate at $10 a share, you can raise $10 million at this initial about spreading the message that securities markets can offering. However, after the initial sale, if Shareholder provide opportunities for all. The brothers have built their careers on providing high-quality financial information to Jones decides to sell 100 shares of her Harvest Gold investors regardless of education or income. Would you stock to Investor Liu, Harvest Gold collects nothing consider them as a source of information? from that transaction. Liu buys the stock from Jones, 687

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investment bankers

Specialists who assist in the issue and sale of new securities.

institutional investors

Large organizations— such as pension funds, mutual funds, and insurance companies— that invest their own funds or the funds of others.

stock exchange

An organization whose members can buy and sell (exchange) securities for companies and investors.

not from Harvest Gold. It is possible, however, for companies like Harvest Gold to offer (new) additional shares of stock for sale to raise additional capital. As mentioned in Chapter 17, we can’t overemphasize the importance of longterm funding to businesses. Given a choice, businesses normally prefer to meet their long-term financial needs by using retained earnings or borrowing funds either from a lending institution (e.g., bank or credit union) or corporate bond issue. However, if longterm funds are not available from retained earnings or lenders, a company may be able to raise capital by issuing corporate stock. (Recall that selling stock in the corporation is a form of equity financing and issuing corporate bonds is a form of debt financing.) These sources of equity and bond financing are not available to all companies, especially small businesses. Let’s imagine you need further long-term financing to expand operations at Harvest Gold. Your chief financial officer (CFO) says the company lacks sufficient retained earnings and she doesn’t think it can secure the needed funds from a lending institution. She suggests that you offer shares of stock or issue corporate bonds to private investors to secure the funding. She warns, however, that issuing shares of stock or corporate bonds is not simple or automatic. To get approval for stock or bond issues you must make extensive financial disclosures and undergo detailed scrutiny by a securities exchange. Because of these requirements, your CFO recommends that the company turn to an investment banker for assistance. Let’s see why.

The Role of Investment Bankers Investment bankers are specialists who assist in the issue and sale of new securities. These large financial firms can help companies like Harvest Gold prepare the extensive financial analyses necessary to gain securities commission approval for bond or stock issues. Investment bankers can also underwrite new issues of stocks or bonds.40 That is, the investment banking firm buys the entire stock or bond issue at an agreed-on discount, which can be quite sizeable, and then sells the issue to private or institutional investors at full price. Institutional investors are large organizations— such as pension funds, mutual funds, and insurance companies—that invest their own funds or the funds of others. Because of their vast buying power, institutional investors are a powerful force in securities markets. Before we look at how investors buy securities, it’s important to understand stock exchanges—the places where stocks and bonds are traded.

The TSX and the MX are not the only fish in the stock exchange sea. Exchanges like the New York Stock Exchange (NYSE), pictured here, are located throughout the world. Today, stocks are bought and sold primarily through electronic networks.

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Stock Exchanges A stock exchange is an organization whose members can buy and sell (exchange) securities for companies and investors. The Toronto Stock Exchange (TSX) and the Montréal Exchange (MX) are just two examples of

CHAPTER 18 The Canadian Financial System

securities markets in Canada. Most trading today takes place on computers that can transact thousands of stock trades within seconds. Thanks to expanded communications and the relaxation of many legal barriers, investors can buy securities from companies almost anywhere in the world. If you uncover a foreign company you feel has great potential for growth, you can purchase shares of its stock with little difficulty from Canadian brokers who have access to foreign stock exchanges. Foreign investors can also invest in Canadian securities, and large foreign stock exchanges, like those in New York, London, and Tokyo. Other major stock exchanges are located in Shanghai, Sydney, Hong Kong, and São Paolo. As global markets continue to expand, stock exchanges have become active in Africa.41 Not all securities are traded on registered stock exchanges. The over-the-counter (OTC) market provides companies and investors with a means to trade stocks not listed on the large securities exchanges. The OTC market is a network of several thousand brokers who maintain contact with one another and buy and sell securities through a nationwide electronic system. Trading is conducted between two parties directly, instead of through an exchange like the TSX. In addition to the OTC market, stocks can be traded through alternative trading systems (ATSs) —automated trading systems that bring together dealers and institutional investors who trade large quantities of stocks.42

Securities Regulations As mentioned earlier in the text, one of the reasons why private corporations become public corporations is to raise capital to expand their existing operations. Companies seeking public financing must issue a prospectus. A prospectus is a condensed version of economic and financial information that a company must make available to investors before they purchase the security. The prospectus must be approved by the securities commission in the province or territory where the public funding is being sought. A securities commission is a provincial or territorial government agency, such as the Ontario Securities Commission, that administers and enforces rules around how securities are issued, bought, and sold.43 The Canadian Securities Administrators (CSA) is an umbrella organization of Canada’s ten provincial and three territorial securities regulators whose objective is to improve, coordinate, and harmonize regulation of the Canadian capital markets.44 For years, the federal government has been working toward the creation of a national securities regulator. Citing that Canada is the only industrialized country without a national regulator, it believes that “by pooling provincial, territorial and federal jurisdiction and expertise, Canada could have a world-leading securities regulatory regime that contributes to a stronger national economy and allows Canada to better compete in global capital markets. Businesses would be able to raise funds throughout Canada more quickly and at lower cost, which would stimulate investment. Businesses would also benefit from more expedited regulatory decisions.”45 Not all of the provinces and territories agree as to date, only six governments—Yukon, British Columbia, Saskatchewan, Ontario, New Brunswick, and Prince Edward Island—have joined the federal government in this Cooperative System.46 Have more provinces and territories joined since this text was published?

over-the-counter (OTC) market

An exchange that provides companies and investors with a means to trade stocks not listed on the national exchanges.

alternative trading systems (ATSs)

Automated trading systems that bring together dealers and institutional investors who trade large quantities of stocks.

prospectus

A condensed version of economic and financial information that a company must make available to investors before they purchase a security.

securities commission

A provincial or territorial government agency that administers and enforces rules around how securities are issued, bought and sold.

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PROGRESS ASSESSMENT

• Describe the financial markets in Canada. • What are two main functions of securities markets? • Compare primary and secondary markets. • What is the purpose of a stock exchange? Name a Canadian stock exchange. • Describe the role of securities commissions.

How Investors Buy Securities stockbroker

A registered representative who works as a market intermediary to buy and sell securities for clients.

Investing in bonds, stocks, or other securities is not difficult. First, you decide what bond or stock you want to buy. After that, you find a registered brokerage firm authorized to trade securities to execute your order. A stockbroker is a registered representative who works as a market intermediary to buy and sell securities for clients. Stockbrokers place an order and negotiate a price. After the transaction is completed, the trade is reported to your broker, who notifies you. Today, large brokerage firms maintain automated order systems that allow brokers to enter your order the instant you make it. The order can be confirmed in seconds. A broker can also be a source of information about what stocks or bonds would best meet your financial objectives, but it’s still important to learn about stocks and bonds on your own since investment analysts’ advice may not always meet your specific expectations and needs.47

Investing Through Online Brokers Investors can also choose from multiple online trading services to buy and sell stocks and bonds. BMO InvestorLine, TD Direct Investing, and Scotia iTRADE are some examples. Investors who trade online are willing to do their own research and make investment decisions without the direct assistance of a broker. This allows online brokers to charge much lower trading fees than traditional stockbrokers. The leading online services do provide important market information, such as company financial data, price histories of a stock, and analysts’ reports. Often the level of information services you can get depends on the size of your account and your level of trading. Whether you decide to use an online broker or to invest through a traditional stockbroker, remember that © Shutterstock/Matej Kastelic investing means committing your money with the hope Based on your knowledge level now, would you prefer of making a profit. The dot-com bubble in the early to work with a stockbroker or invest through an online 2000s and the financial crisis that began in 2008 proved broker? What services would you value the most in order again that investing is a risky business. Therefore, the to trade securities? first step in any investment program is to analyze your 690

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level of risk tolerance. Other factors to consider include your desired income, cash requirements, and need to hedge against inflation, along with the investment’s growth prospects. You are never too young or too old to invest, but you should first ask questions and consider investment alternatives. Let’s take a look at several strategies.

Choosing the Right Investment Strategy Investment objectives change over the course of a person’s life. A young person can better afford to invest in high-risk investment options such as stocks than can a person nearing retirement. Younger investors generally look for significant growth in the value of their investments over time. If stocks go into a tailspin and decrease in value, a younger person has time to wait for stocks to rise again. Older people, perhaps on a fixed income, lack the luxury of waiting, and may be more inclined to invest in bonds that offer a steady return as a protection against inflation. Consider five key criteria when selecting investment options: 1. Investment risk. The chance that an investment will be worth less at some future time

than it’s worth now. 2. Yield. The expected rate of return on an investment, such as interest (bonds) or divi-

dends (stocks), usually over a period of one year. 3. Duration. The length of time your money is committed to an investment. 4. Liquidity. How quickly you can get back your invested funds in cash if you want them. 5. Tax consequences. How the investment will affect your tax situation.

What is important in any investment strategy is the risk-return tradeoff, a concept introduced in Chapter 17. Setting investment objectives such as growth (choosing stocks you believe will increase in price) or income (choosing bonds that pay interest and/or stocks that pay consistent dividends) should set the tone for your investment strategy.

Reducing Risk by Diversifying Investments Diversification involves buying several different types of investments to spread the risk of investing. For example, an investor may put 25 percent of his or her money into Canadian stocks that have relatively high risk but strong growth potential, another 25 percent in conservative government bonds, 25 percent in dividend-paying stocks that provide income, 10 percent in an international mutual fund (mutual funds will be discussed later), and the rest in the bank for emergencies and other possible investment opportunities. By diversifying with such a portfolio strategy or allocation model, investors decrease the chance of losing everything they have invested.48 Both stockbrokers and certified financial planners are trained to give advice about the investment portfolio that would best fit each client’s financial objectives. However, the more investors themselves read and study the market, the higher their potential for gain. A short course in investments can also be useful. Stocks and bonds are investment opportunities individuals can use to enhance their financial future. The Reaching Beyond Our Borders box discusses growing opportunities investors can find in global stocks. After the Progress Assessment, we will consider investing in stocks, bonds, mutual funds, and exchange-traded funds.

diversification

Buying several different investment alternatives to spread the risk of investing.

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Reaching Beyond OUR BORDERS Global Stocks: Love Them or Leave Them Concerns about the ups and downs of Canadian stocks may keep you from even thinking about investing in global stocks. If you also read the news about conflicts in Eastern Europe and the Middle East, and natural disasters in Japan and Indonesia, the thought of investing globally may grow even less attractive. Your inclination may be to forget about global stocks and play it safe with what may seem to be relatively secure Canadian securities. However, financial analysts generally recommend investing in some global stocks in order to diversify your investments. Let’s consider market facts that support their recommendation. If you research respected blue-chip stocks, like Scotiabank and Coca Cola, you will find they earn a large portion of their revenue from global markets. Economists also project developing economies in areas such as Asia and Africa will grow at a much faster pace than Canada. Given the potential return, you would be remiss to not at least explore the opportunities that exist in global markets. However, like any investments, set your long-term financial goals and stay abreast of the daily news. Keep the following suggestions in mind as you consider global investments: • Invest in familiar global companies with a solid reputation and record of performance. Companies like Honda (Japan), Nestlé (Switzerland), Samsung (South Korea), and Siemens (Germany) come to mind.

• Invest in only global stocks listed on Canadian or U.S. exchanges. These companies must comply with Canadian and U.S. accounting standards, and rules of the securities exchanges such as the TSX and the U.S. Securities Exchange Commission (SEC). • Investing in mutual funds and exchange-traded funds (ETFs) offers a wide range of global opportunities. Many funds and ETFs have a mix of Canadian and foreign stocks. Others may focus strictly on specific countries, such as China, on entire regions, such as Africa, Asia, Europe, or Latin America, or on the entire world. Mutual funds and ETFs will be discussed shortly. • Investing in stocks from countries with a history of currency problems or political instability might be investments you want to avoid.

Sources: Selena Maranjian, “Foreign Stocks with Dividends,” The Motley Fool, January 2, 2014; Robert Schmansky, “How Much Should You Invest in International Stock Mutual Funds?” Forbes, August 8, 2013; and John Waggoner, “Investing: Simplify Life, Go Global, with Funds,” USA Today, March 14, 2013.

PROGRESS ASSESSMENT

• What is a key advantage and disadvantage of investing through a stock broker?

• What is a key advantage and disadvantage of investing through an online broker?

• List the five key criteria when selecting investment options. • What is the benefit of diversifying investments? 692

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Investing in Stocks and Bonds Buying stocks make investors part owners of a company who participate in its success. Shareholders can also lose money if a company doesn’t do well or the overall stock market declines. Investors looking for guaranteed income and limited risk often turn to government bonds for a secure investment. These bonds have the financial backing and full faith and credit of the government. Corporate bonds are a bit riskier and challenging. Taxes are another consideration when evaluating bonds and stocks. Bond interest is fully taxable in the hands of the bond holder, while dividend income qualifies for tax credits.

Investing in Stocks Stock investors are often called bulls or bears according to their perceptions of the market. Bulls believe that stock prices are going to rise; they buy stock in anticipation of the increase. A bull market is when overall stock prices are rising. Bears expect stock prices to decline and sell their stocks in anticipation of falling prices. That’s why when stock prices are declining, the market is called a bear market. The market price and growth potential of most stocks depend heavily on how well the corporation is meeting its business objectives. A company that achieves its objectives offers great potential for capital gains, the positive difference between the price at which you bought a stock and what you sell it for. For example, an investment of $2250 in 100 shares of McDonald’s when the company first offered its stock to the public in 1965 would

capital gains

The positive difference between the purchase price of a stock and its sale price.

Investing in the stock market has never been for the faint of heart. The market seems to have continuous steep climbs and sharp falls. Do you have the risk tolerance to survive the market swings?

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have grown to 74 360 shares (after the company’s 12 stock splits) and be worth approximately $10.6 million as of the market close on May 3, 2017. Now that’s a lot of Big Macs! Investors often select stocks depending on their investment strategy. Stocks issued by higher-quality companies, such as BCE Inc. and the Canadian National Railway Company, are referred to as blue-chip stocks (a term derived from poker where the highest-value chip is the blue chip). These stocks generally pay regular dividends and experience consistent stock price appreciation. Stocks in corporations in emerging fields such as technology, biotechnology, or Internet-related firms, whose earnings are expected to grow at a faster rate than other stocks, are referred to as growth stocks. While riskier, growth stocks may offer the potential for high returns. Stocks of public utilities are considered income stocks because they usually offer investors a higher dividend yield that generally keeps pace with inflation. There are even penny stocks, representing ownership in companies that compete in highrisk industries like oil exploration. Penny stocks sell for less that $2 (some analysts say less than $5) and are considered very risky investments.49 When purchasing stock, investors have choices when placing orders to buy. A market order tells a broker to buy or sell a stock immediately at the best price available. A limit order tells the broker to buy or sell a stock at a specific price, if that price becomes available. Let’s say a stock is selling for $40 a share. You believe the price will eventually go higher but could drop to $36 first. You can place a limit order at $36, so your broker will buy the stock at $36 if it drops to that price. If the stock never falls to $36, the broker will not purchase it for you.

STOCK SPLITS

stock splits

An action by a company that gives shareholders two or more shares of stock for each one they own.

Brokers prefer to make stock purchases in round lots of 100 shares at a time. Investors, however, usually cannot afford to buy 100 shares, and therefore often buy in odd lots, or fewer than 100 shares at a time. High per-share prices often induce companies to declare stock splits, in which they issue two or more shares for every one that is outstanding. If Harvest Gold stock were selling for $100 a share, the firm could declare a two-for-one stock split. Investors who owned one share of Harvest Gold would now own two, each worth only $50 (half as much as before the split). Stock splits cause no change in the firm’s ownership structure and no immediate change in the investment’s value. Investors generally approve of stock splits, however, because they believe demand for a stock may be greater at $50 than at $100, and the price may then go up in the near future. A company cannot be forced to split its stock, and today stock splits are becoming less common.50 Legendary investor Warren Buffett’s firm, Berkshire Hathaway, has never split its class A stock even when its per-share price surpassed $218,000.51

STOCK INDEXES Stock indexes measure the trend of different stock exchanges. Every country with a stock exchange has such indexes. The prices of company shares fluctuate constantly. Some may be rising over a certain period and others may be falling. Various indexes have been developed to give interested parties useful information about significant trends, and more indexes are being developed. Another use of an index is as an investment vehicle. Investors who do not have the time or expertise to actively manage their investments are choosing to be passive investors by investing in index funds. 694

CHAPTER 18 The Canadian Financial System

S&P/TSX Composite Index52 The largest Canadian index is the S&P/TSX Composite Index. Reviewed quarterly, the Index is the principal market measure for the Canadian equities market as it contains both common stocks and income trust units of the largest companies on the TSX. The Index represents 11 categories of securities: financial, energy, materials, industrial, consumer discretionary, telecommunication services, health care, consumer staples, utilities, information technology and real estate. Since the Index has many financial and energy constituents, its performance heavily reflects how those industries are doing, and disturbances in the economy or oil price dips can have a big impact. “Our energy sector has been, and still is, one of our more important natural resources exports,” Bipan Rai, executive director of foreign exchange at CIBC Capital Markets, said. “As a result, our currency trades according to how well that export is doing.” Staying abreast of what is happening in the market will help you decide what investments seem most appropriate to your needs and objectives. Remember two key investment realities: your personal financial objectives will change over time, and markets can be volatile.

UNDERSTANDING STOCK QUOTATIONS

Over one hundred products can be manufactured from one oil barrel. Oil provides fuel for our cars, trucks, planes, and heating oil. Crude oil is also used in plastic, clothing, furniture, insulation, kitchen items, cars, and food (e.g., fertilizers). This means that the world’s dependence on oil is expected to continue into the near future. Do you see why the price of oil is followed closely?

Publications like the Globe and Mail, the Financial Post, and possibly your local newspaper carry information concerning stocks and other investments. Financial websites like Yahoo! Finance Canada carry up-to-the-minute information about companies that is much more detailed and only a click away. Look at Figure 18.4 to see an example of a stock quote from MSN Money for Microsoft. Microsoft trades on the NASDAQ exchange under the symbol MSFT. Preferred stock is identified by the letters pf following the company symbol. Corporations can have several different preferred stock issues. Information provided in the quote includes the highest and lowest price the stock traded for that day, the stock’s high and low over the past 52 weeks, the dividend paid (if any), the stock’s dividend yield (annual dividend as a percentage of the stock’s price per share), important ratios like the price/earnings (P/E) ratio (the price of the stock divided by the firm’s per-share earnings), and the earnings per share.53 Investors can also see the number of shares traded (volume) and the total market capitalization of the firm. More technical features, such as the stock’s beta (which measures the degree of the stock’s risk), may also appear. Figure 18.4 illustrates the stock’s intraday trading (trading throughout the current day), but you can also click to see charts for different time periods. Similar information about bonds, mutual funds, and other investments is also available online.

Investing in Bonds Investors looking for guaranteed income and limited risk often turn to government bonds for a secure investment. These bonds have the financial backing and full faith and credit of 695

PART 6 Accounting Information and Financial Activities

■ FIGURE

18.4

UNDERSTANDING STOCK QUOTATIONS

Microsoft Corporation (MSFT)

NasdaqGS - NasdaqGS Real Time Price. Currency in USD

71.74 −0.74 (−1.01%) As of 3:24PM EDT. Market open.

Previous Close Open

72.4700 71.90

Market Cap Beta

Bid

71.94 × 100

Ask

71.94 × 3900

EPS (TTM)

Day’s Range

71.56 - 72.19

Earnings Date

52 Week Range

55.6100 74.4200

PE Ratio (TTM)

552.559B 1.44 31.66 2.27 Oct 30, 2017

Dividend & Yield

1.56 (2.14%) 2017-08-15

Volume

15,191,793

Ex-Dividend Date

Avg. Volume

25,006,690

1y Target Est

80.19

Trade prices are not sourced from all markets.

the government. Corporate bonds are a bit riskier and challenging. Taxes are another consideration when evaluating bonds and stocks. Again, bond interest is fully taxable in the hands of the bond holder, while dividend income qualifies for tax credits. First-time corporate bond investors often ask two questions. The first is, “If I purchase a corporate bond, do I have to hold it until the maturity date?” No, you do not. Bonds are bought and sold daily on major securities exchanges (the secondary market we discussed earlier). However, if you decide to sell your bond to another investor before its maturity date, you may not get its face value. If your bond does not have features that make it attractive to other investors, like a high interest rate or early maturity, you may have to sell at a discount, which is a price less than the bond’s face value. But if other investors do highly value it, you may be able to sell your bond at a premium, which is a price above its face value. Bond prices generally fluctuate inversely with current market interest rates. This means as interest rates go up, bond prices fall, and vice versa. Like all investments, however, bonds have a degree of risk. The second question is, “How can I assess the investment risk of a particular bond issue?”54 Standard & Poor’s and Moody’s Investors Service rate the risk of many corporate and government bonds. In evaluating the ratings, recall the risk-return tradeoff: The higher the risk of a bond, the higher the interest rate the issuer must offer. Investors will consider a bond that is considered risky only if the potential return (interest) is high enough. Remember that investors have many investment options besides stocks and bonds. Let’s consider mutual funds next. 696

CHAPTER 18 The Canadian Financial System

PROGRESS ASSESSMENT

• What is a bull market? What is a bear market? • Compare blue-chip stocks to penny stocks. • Why do companies sometimes split their stock? • What do stock indexes measure? • Under what conditions would a bond be sold for a discount? mutual fund

Investing in Mutual Funds and Exchange-Traded Funds A mutual fund buys stocks, bonds, and other investments, and then sells shares in those securities to the public. A mutual fund is like an investment company that pools investors’ money and then buys stocks or bonds, for example, in many companies in accordance with the fund’s specific purpose. Mutual fund managers are specialists who pick what they consider to be the best securities available and help investors diversify their investments. Mutual fund companies such as Mackenzie Financial Ltd., AGF Management Ltd., and Manulife Financial Corp. are regulated by provincial securities commissions. According to the Investment Funds Institute of Canada, assets under management are over $1.4 trillion.55 Mutual funds account for 31 percent of Canadians’ financial wealth with research showing that to meet their financial goals, Canadians have greater confidence in mutual funds (86 percent) than other financial products such as GICs (59 percent), bonds (51 percent) and stocks (64 percent).56 Mutual funds provide professional investment management and help investors diversify their investments in exchange for fees. One fee is the Management Expense Ratio (MER) and it represents the costs associated with owning a mutual fund. It reflects how much a fund pays in management fees and operating expenses (including taxes) on an annual basis.57 Stated as a percentage per year, it is calculated and charged

A organization that buys stocks and bonds and other investments, then sells shares in those securities to the public.

Mutual funds range from very conservative funds that invest only in government securities to others that specialize in emerging biotechnology firms, Internet companies, foreign companies, precious metals, and other investments with greater risk. Some funds will have a mix of investments like stocks and bonds. Are you surprised by this fund’s portfolio details? What is the MER for this fund?

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PART 6 Accounting Information and Financial Activities

■ FIGURE

18.5

HOW THE MER MAY AFFECT THE RETURN ON YOUR INVESTMENT Set at a percentage of the fund’s value, the MER is paid even if the fund does not make money (i.e., does not have a positive annual return). It is deducted before calculating the investor’s return.

Your Total Investment ($1,000 a year for 10 years) Target Annual Return

Fund A

Fund B

Fund C

$10,000

5.0%

MER

Investor’s Return (after MER)

Fund Value after 10 Years (assume achieved the target annual return of 5%) Difference (due to cost of MER)

index funds

Specialized mutual funds that are constructed to aim to equal the performance of a market index.

698

$13,207

$12,486

$11,169

N/A

−$721

−$2,038

daily, and it is deducted from the fund’s assets before returns are calculated.58 Review Figure 18.5 to learn how the MER may affect the return on your investment. At one time, young or new investors were advised to buy a type of mutual fund called an index fund.59 Index funds are specialized mutual funds that are constructed with the aim to equal the performance of a market index, such as the S&P/TSX Composite Index (discussed earlier) or the S&P 500.60 The S&P 500, for example, includes 500 leading companies and is considered the best market gauge of large-cap stocks in the United States. Index funds are very low cost, easy to obtain, and can be held by investors for a long period of time. Index funds have also matched or beat the performance of higher-priced funds managed by professional money managers. Today, index funds are recommended for all levels of investors. An index fund may focus on large companies, small companies, emerging countries, or real estate (real estate investment trusts or REITs). One way to diversify your investments is by investing in a variety of index funds. A stockbroker, certified financial planner, or banker can help you find the option that best fits your investment objectives. With mutual funds it’s simple to change your investment objectives if your financial objectives change. For example, moving your money from a bond fund to a stock fund is no more difficult than making a phone call, clicking a mouse, or tapping your cell phone. Another advantage of mutual funds is that you can generally buy directly from the fund and avoid broker fees or commissions. It’s important to check the long-term performance of the fund’s managers; the more consistent the performance of the fund’s management, the better. Also, check for fees and charges of the mutual fund because they can differ significantly. A load fund, for example, charges investors a commission to buy or sell its shares; a no-load fund charges no commission.61 Mutual funds called open-end funds will accept the investments of any interested investors. Closed-end funds, however, limit the number of shares; once the fund reaches its target number, no new investors can buy into the fund. A growth area for mutual funds is socially responsible investing (SRI). To learn more, review the Seeking Sustainability box.

CHAPTER 18 The Canadian Financial System

Seeking SUSTAINABILITY Socially Responsible Investing (SRI) Socially responsible investing (SRI) is the integration of environmental, social and governance (ESG) factors into the selection and management of investments. There is a growing body of evidence that responsible investments (RIs) meet, and often exceed, the performance of traditional investments and have a positive societal impact; thus, buyers don’t have to choose one over the other and can therefore choose investments that are consistent with both their financial goals and personal values. Common themes for SRIs include avoiding investment in companies that produce or sell addictive substances (like alcohol, gambling, and tobacco), and seeking out companies engaged in environmental sustainability and alternative energy/clean technology efforts. Eighty-two percent of Canadian investors say they have some understanding of what sustainable investing (SI) is, but that level of understanding varies. S ixty-eight percent of Canadians say that SI has become more important to them in the past five years with Millennials having the strongest feelings about SI. Although younger investors typically do not have significant wealth, they are having a growing influence over household investment decisions. This younger generation of investors will be an increasingly important demographic for the investment industry going forward, as they are set to inherit billions over the next few decades. Consider that SRI assets total over $1.5 trillion, representing 38 percent of the Canadian investment industry. In two years, SRI mutual funds grew by 24 percent, reaching over $8 billion in assets. SRIs can be made in individual companies or through socially conscious mutual funds or ETFs (e.g., iShares Jantzi Social Index Fund). Newer SRI mutual funds, products, and strategies include: • Fossil-fuel−free and low carbon funds. • Green funds that focus on solutions.

• Green bonds (discussed in Chapter 17). • Impact funds. • ESG funds that incorporate engagement with companies about environmental, social, and governance issues. Resources and investment products that cater to SRI for Canadian investors include: • Sustainalytics, a leading global provider of ESG research, ratings, and analytics serving asset managers, asset owners, and other institutional investors. • Corporate Knights, which covers the best and worst ideas in SRI, and produces special reports on corporate citizens. • Some mutual fund companies (e.g., Ethical Funds) which offer specific products that might interest you. Investments are available for purchase through a discount broker or a financial adviser. Is this an area of investing that interests you? Would you seek out RI if you had money to invest?

Sources: “Responsible Investment: Growing Market, Growing Opportunities,” Responsible Investment Association, accessed June 6, 2018, https://www.riacanada.ca/wp-content/uploads/2012/08/Advisor-Handout-v2.pdf; “Canadian RI Assets Surpass $1.5 Trillion: Canadian RI Trends Report,” Responsible Investment Association, accessed June 6, 2018, https://www.riacanada.ca/trendsreport/; “Socially Responsible Investment (SRI),” Investing Answers, accessed June 6, 2018, http://www.investinganswers.com/financialdictionary/stock-market/socially-responsible-investment-sri-2578; “National leader in responsible investment Michael Jantzi joins Tides Canada Board of Directors,” Sustainalytics, May 2, 2018, https://www.sustainalytics.com/press-release/national-leader-inresponsible-investment-michael-jantzi-joins-tides-canada-board-of-directors/; Doug Watt, “Invest your conscience,”MoneySense, October 2, 2017, http://www.moneysense.ca/save/investing/sustainability-no-longer-an-obscure-investment-consideration-study/; and Bruce Sellery, “Guide to socially responsible investing,” MoneySense, August 27, 2012, http://www.moneysense.ca/columns/ guide-to-socially-responsible-investing.

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PART 6 Accounting Information and Financial Activities

■ FIGURE

18.6

COMPARING INVESTMENTS Investment

Degree of risk

Expected income

Possible growth (capital gain)

Bonds

Low

Secure

Little

Preferred Stock

Medium

Steady

Little

Common Stock

High

Variable

Good

Mutual Funds

Medium

Variable

Good

ETFs

Medium

Variable

Good

exchange-traded funds (ETFs)

Collections of stocks that are traded on exchanges but are traded more like individual stocks than like mutual funds.

financial market infrastructure (FMI)

A system that facilitates the clearing, settling, or recording of payments, securities, derivatives, or other financial transactions among participating entities; also called a clearing and settlement system.

LO5

Outline the role of the clearing and settlement systems.

700

Exchange-traded funds (ETFs) resemble both stocks and mutual funds. They are collections of stocks, bonds, and other investments that are traded on securities exchanges, but are traded more like individual stocks than like mutual funds.62 Mutual funds, for example, permit investors to buy and sell shares only at the close of the trading day. ETFs can be purchased or sold at any time during the trading day just like individual stocks. There are over $151 billion in ETF assets under management in Canada.63 The key points to remember about mutual funds and ETFs is that they offer small investors a way to spread the risk of owning stock, bonds, and other securities while having their investments managed by a financial specialist for a fee. Financial advisors put mutual funds and ETFs high on the list of recommended investments, particularly for small or first-time investors. Consider Figure 18.6 as it evaluates bonds, stocks, mutual funds, and ETFs according to risk, income, and possible investment growth (capital gain). After the Progress Assessment, consider the third component of Canada’s financial system, the clearing and settlement systems.

PROGRESS ASSESSMENT

• What are advantages and disadvantages of mutual funds? • Describe socially responsible investing. • What are ETFs? How do they differ from mutual funds?

The Canadian Financial System: Clearing and Settlement Systems64 A financial market infrastructure (FMI) is a system that facilitates the clearing, settling, or recording of payments, securities, derivatives, or other financial transactions among participating entities. It is also called a “clearing and settlement system.” FMIs play an

CHAPTER 18 The Canadian Financial System

important role in enhancing financial stability by enabling consumers and firms to safely and efficiently purchase goods and services, make financial investments, and transfer funds. Under the Payment Clearing and Settlement Act, the BoC is responsible for the oversight of FMIs that have the potential to pose systemic or payments system risk. It is therefore essential that FMIs incorporate appropriate risk-control mechanisms so that systemic risk is adequately controlled. There are three types of FMIs: 1. Payment systems that facilitate the transfer of funds. 2. Central counterparties (CCPs) become the buyer to every seller and the seller to every

buyer of a financial contract to ensure that, even if a buyer or a seller fails to meet its obligation to the CCP, obligations will be met on all contracts. 3. Securities settlement systems facilitate the transfer of securities and other financial

assets. These systems often operate in conjunction with central securities depositories which provide securities accounts, central safekeeping, and asset services. Securities settlement systems may provide additional securities clearing and settlement services, such as CCP clearing services. In summary, economic growth and the creation of jobs depend on the ready availability of money. Given this importance, the BoC plays a pivotal role in overseeing the Canadian financial system. The three components—financial institutions, the financial markets, and clearing and settlement systems—are connected and they work together to support the welfare of Canadians.

PROGRESS ASSESSMENT

• What is the third component to the Canadian financial system? • What is the BoC’s responsibility under the Payment Clearing and Settlement Act? • List three types of FMIs.

SUMMARY LO1

Explain what money is and what makes it useful. Money is anything that people generally accept as payment for goods and services. What are the five standards for a useful form of money? The five standards are portability, divisibility, stability, durability, and uniqueness. What are cryptocurrencies? Digital currency is electronic money. It’s not available as bills or coins. Cryptocurrencies are a type of digital currency created using computer algorithms.

LO2

List the three components of the Canadian financial system, and explain how it is regulated. The financial system makes a vital contribution to the welfare of Canadians. 701

PART 6 Accounting Information and Financial Activities

What are the three components of the Canadian financial system? The financial system includes financial institutions, the financial markets, and clearing and settlement systems. It is through the financial system that most commercial activity is carried out. How is the financial system regulated? Due to its important role in the economy, the financial system is heavily regulated by different organizations and levels of government. Organizations include the Bank of Canada (BoC), OSFI, and CDIC. Ultimately, it is the Minister of Finance who is responsible for the financial system. Review Figure 18.1 for some examples of regulatory responsibility. LO3

Discuss the role that financial institutions play in providing services. Financial institutions include commercial banks, credit unions, trust and loan companies, insurance companies, and non-banks. How are commercial banks important players in the financial system? Commercial banks serve millions of customers that include individuals, small and medium-sized businesses, large corporations, governments, institutional investors, and non-profit organizations. Based on assets, the five largest Canadian banks represent upwards of 80 percent of the national financial institution market. How do credit unions differ from commercial banks? A credit union is a non-profit, member-owned financial co-operative that offers a full variety of banking services to its members. Credit unions often have fewer branches than banks and less access to ATMs. What are some non-banks? Non-banks include life insurance companies that lend out their funds, pension funds that invest in stocks and bonds and make loans, brokerage firms that offer investment services, and commercial finance companies that offer short-term loans to those who do not meet the credit requirements of banks.

LO4

Describe the role of the financial markets. Financial markets consist of markets for money, bonds, equities, derivatives, and foreign exchange. What is the link between the BoC and financial markets? It is mainly through the financial markets that the BoC’s key policy rate influences interest rates and the exchange rate. This, in turn, helps the BoC achieve its monetary policy objectives. The BoC is also involved in financial markets through auctions of government securities. On rare occasions, the BoC may also intervene in the foreign exchange market on behalf of the government to promote orderly markets for the Canadian dollar. Explain the different options discussed in this chapter for investing in securities. The options include stocks, bonds, mutual funds, and ETFs. Review Figure 18.6 as it evaluates these options according to risk, income, and possible investment growth (capital gain).

LO5

Outline the role of the clearing and settlement systems. A clearing and settlement system, also called a financial market infrastructure (FMI), plays an important role in enhancing financial stability by enabling consumers and firms to safely and efficiently purchase goods and services, make financial investments, and transfer funds. Who is responsible for FMIs? The BoC is responsible for the oversight of FMIs that have the potential to pose systemic or payments system risk. List three examples of FMIs. Three examples of FMIs are payment systems, central counterparties, and securities settlement systems.

702

CHAPTER 18 The Canadian Financial System

KEY TERMS alternative trading systems (ATSs) 689 barter 672 capital gains 693 Canada Deposit Insurance Corporation (CDIC) 677 certificate of deposit 680 commercial bank 678 credit union 681 cryptocurrencies 674 debit card 684 demand deposit 680 digital currency 674

diversification 691 electronic funds transfer (EFT) system 683 exchange-traded funds (ETFs) 700 financial market infrastructure (FMI) 700 index funds 698 institutional investors 688 investment bankers 688 money 672 mutual fund 697 non-banks 682 over-the-counter (OTC) market 689

pension funds 682 prospectus 689 securities commission 689 securities dealer or investment dealer 687 security 687 smart card 684 spread 678 stock exchange 688 stock splits 694 stockbroker 690 time deposit 680 trust company 681

CAREER EXPLORATION If you are interested in pursuing a career in finance, here are a few to consider. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields through Internet sites that include the Government of Canada Job Bank, Workopolis, Monster, CareerBuilder, Glassdoor, and Indeed, as well as through the Career Centre at your school. ∙ Personal financial advisor—provides investment advice on investments, mortgages, insurance, registered educational savings plans (RESPs), estate planning, taxes, and retirement to help individuals manage their finances.

∙ Investment banker—connects businesses that need money to finance their operations with investors who are interested in providing that funding; assists with company mergers and acquisitions. ∙ Stockbroker—sells securities and commodities directly to individual clients; advises clients on appropriate investments based on their needs and financial understanding. ∙ Financial analyst—provides guidance to businesses and individuals making investment decisions; assesses the performance of stocks, bonds, and other types of investments.

CRITICAL THINKING 1. Imagine that you have just inherited $50,000

and you want to invest it to meet two financial goals: (a) to save for your wedding, which you plan to have in two years, and (b) to save for your retirement several decades from now. How would you invest the money? Explain your answer. 2. The overnight bank rate, set by the Bank

of Canada, is currently very low. What

circ*mstance(s) would cause the Governor of the Bank of Canada to raise this rate? What impact would this increase have on individuals and businesses with debt? 3. Do you keep your savings in a bank, a credit

union, a caisse populaire, or some combination? Have you compared the benefits you could receive from each? Where would you expect to find the best loan rates? 703

PART 6 Accounting Information and Financial Activities

4. If you were thinking of investing in the secu-

choice by comparing the advantages and disadvantages of each.

rities market, would you prefer individual stocks, mutual funds, or ETFs? Explain your

DEVELOPING CAREER SKILLS Key: Team

Analytic

Communication

1. In a small group, discuss the following: What

services do you use from financial institutions? Does anyone use online or mobile banking? What seem to be the pros and cons of online banking? What about mobile banking? Use this opportunity to compare the rates and services of various local banks and credit unions.

how much it costs to process each cheque? Have you switched to using your debit card as a result? Discuss your findings with the class.

3. In small groups discuss when and where you

use cheques, credit cards, debit cards, and cash. Do you often write cheques for small amounts? Would you stop if you calculated

4. See whether others in the class are interested

in forming an investment group. If so, each member should choose one stock and one mutual fund or ETF. Record each student’s selections and the corresponding prices. In two weeks, measure the percentage of change in the investments and discuss the results.

2. Poll the class to see who uses a bank, a credit

union, a caisse populaire, or a combination of these. Have class members compare the services at each (e.g., interest rates on savings accounts, the services available, and loan rates). If anyone uses an online service, see how those rates compare. If no one uses a credit union, a caisse populaire, or an online bank, discuss the reasons.

Technology

5. Write a one-page paper on the role of the

World Bank and the International Monetary Fund in providing loans to countries. (Recall that you were introduced to these institutions in Chapter 3.) Is it important for Canadian citizens to lend money to people in other countries through such organizations? Why or why not? Be prepared to debate the value of these organizations in class.

ANALYZING MANAGEMENT DECISIONS Financial Crisis—Banking Disaster The year 2011 was characterized by a sluggish economy and high unemployment, when millions of Americans lost their homes and businesses closed. How did this happen? Back in 2008, there was a global banking crisis that was the worst since the Great Depression of the 1930s. Several major American investment banks went bankrupt, markets plummeted around the world, and there was a global recession. The causes of the crisis included failures in financial regulations in some countries, such as the United States, reckless behaviour by financial firms, excessive borrowing by households and investment banks, and a lack of accountability and ethics at many levels. 704

Back even further, in 2000, the tech bubble burst. Share prices in high-tech companies fell dramatically and major financial frauds were discovered, including Worldcom, Enron, and Global Crossings. Governments wanted to keep consumers spending to head off an economic slowdown, so they chose to dramatically cut interest rates by over 5 percent, down to near 1 percent. Given this historic low cost of credit, consumers borrowed money, lots of it. By far the most significant borrowing related to home loans, that is, mortgages. By 2007, household debt rose to 127 percent of disposable income in the United States and Canadian household debt was climbing also. Home

CHAPTER 18 The Canadian Financial System

mortgages resulting from the housing boom became the biggest financial bubble in history. As more and more homes were purchased, housing costs rose rapidly. While everyone wants a home, the reality is that not everyone can afford the cost of buying one. But with relatively cheap mortgage interest, many were buying homes, from first-time homeowners to long-time homeowners who wanted bigger and fancier houses. And banks were writing up mortgages for people who would not normally qualify. Banks typically look at the income of the borrower and assess the ability of the borrower to make the mortgage payments. But this criterion was overlooked more and more because the banks and everyone else believed that the prices of houses would continue to rise. These mortgages were called subprime mortgages. In 2004, subprime mortgages made up 10 percent of all mortgages. By 2006, this percentage doubled. These riskier mortgages became an international problem. After mortgages were written, the banks sold them to investment banks. The investment banks in turn bundled these mortgages into securities, selling them in the open market to investors. They were called mortgage-backed securities, or MBSs. MBSs have been traded since the 1980s as a safe investment, as only low-risk conventional mortgages were bundled. With the rapid increase in mortgages being written, more and more MBSs appeared. Investors liked the increasing return that was promised given the higher and higher percentage of sub-prime mortgages that made up the newer MBSs. And bank lenders wrote riskier and riskier mortgages because investment banks demanded them and the banks were passing on the risk to investment banks and investors. Given the involvement of banks, investment banks, and investors, it was very difficult to know where the risk was. Investors relied on ratings agencies, specifically Moody’s and Standard and Poor’s, for advice on safe investments. And these agencies were more than willing to oblige. Between 2000 and

2006 the number of AAA ratings exploded. MBSs were rated as AAA even though they consisted of a higher percentage of subprime mortgages. The potential return from MBSs convinced the investment banks to request that the limits on the amount of money they could borrow to buy these securities be raised. In 2004, the SEC relaxed limits on leverage and these banks were allowed to take on as much risk as they liked. By 2007, the five largest investment banks increased their leverage significantly; they believed that housing prices would continue to go up and that MBSs were a good source of income. In 2007, the real estate bubble burst and the growing recession left many homeowners unable to pay their mortgages, especially subprime mortgages. The number of foreclosures jumped 79 percent. As housing prices fell, many homeowners found themselves “underwater,” with mortgages higher than the value of their homes. The financial incentive to pay their mortgages was gone, so they defaulted. The value of MBSs plummeted, leaving both investment banks and investors with hundreds of billions of dollars of defaulted mortgages with little chance of recouping the value of the mortgages. All the major investment banks were impacted; some consolidated, while others failed. Many countries and international companies, including Canadian banks and investors, had invested in the U.S. housing market through MBSs. They were all affected. Foreign markets collapsed, and the crisis went global. As we look back on this time period, we realize that this financial crisis was the largest the world had ever experienced. Not since the Great Depression of the 1930s have we seen, on a global scale, rising unemployment, many failed businesses, plummeting consumer wealth, declining international trade, and the near- collapse of foreign governments, especially in Europe. At the writing of this text, we still do not fully comprehend the long-term impact of this crisis.

Discussion Questions 1. What does “household debt increasing to

127 percent of disposable income” mean, and what is the implication for homeowners? 2. How is a subprime mortgage different from

a conventional mortgage, and why were

banks so willing to approve this type of mortgage? 3. Why did the returns from MBSs continue to rise? 4. Why did the housing bubble burst?

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PART 6 Accounting Information and Financial Activities

RUNNING CASE Accounting, Financial Management, and Risk Management at Fox 40 International Inc. For successful Canadian entrepreneur and inventor Ron Foxcroft, it all started in 1982 when he purchased Fluke Transport, a Southern Ontario trucking business. The company slogan—If It’s On Time . . . It’s A “FLUKE”—was soon recognized throughout North America. Over the years, Foxcroft diversified into new ventures and the Foxcroft Group of Companies now includes Fluke Transportation Group, Fluke Warehousing Inc., Foxcroft Capital Corp., Fox 40 International Inc., and Fox 40 USA Inc. The formation of Fox 40 International Inc. (Fox 40) is the result of a dream for a pealess whistle. When developing his first whistle, Ron was motivated by his knowledge and experience as an international basketball referee. Frustrated with faulty pea whistles, he spent three years of development with design consultant Chuck Shepherd. They had about 25 prototypes but narrowed them down after two years to 14 prototypes, and then down to two prototype whistles that worked. This resulted in the Fox 40® Classic Whistle. (The whistle was named for Ron and that he was 40 when he applied for the patent.) Introduced in 1987, this finely tuned precision instrument does not use a pea to generate sound. In fact, there are no moving parts. The patented design moves the air blast through three tuned chambers. This whistle, and all the subsequent whistles that have been introduced, is 100 percent constructed of high-impact ABS plastic so it is impervious to moisture. Wet or dry, Fox 40 Pealess Whistles cannot be overblown and never fail—the harder you blow, the louder the sound! They can be heard for miles and work in all conditions. They are faultless, reliable, and trusted. Fox 40, a proudly Canadian company, dominates the global whistle industry. Tens of thousands of Fox 40 Whistles are produced monthly for shipment to 140 countries. A mould may be made offshore due to the cost savings (at least $100,000); however, Fox 40 owns all of its moulds. Approximately 90 percent of the company’s products are made in Canada with select 706

components coming from overseas markets. Final assembly occurs in Canada. While the first product was the Fox 40® Classic Whistle, the company now has over 900 active stock-keeping units (SKUs). Its product mix includes 19 whistles styles (e.g., Fox 40 electronic whistle); lanyards & attachments (e.g., flex coils); additional brands that include Fox 40 Gear; SmartCoach Coaching Boards; SICK Self Impression Custom Kit, and Heat Alert Mouthguards; marine and outdoor products (e.g., Xplorer LED Light); Pink products; and logo imprinted products. Let’s consider the nature of Fox 40’s financial statements and the scope of the business. The company has close to 200 accounts in its general ledger, of which 70 are expense accounts. There are over 3000 products grouped into 12 product lines. The product lines are then grouped in the income statement into three markets: Domestic, Export USA, and Export International. Expenses are grouped into three departments: sales and marketing, production and distribution, and general management administration. When comparing these statistics to the financial statements of Harvest Gold, you should appreciate the increased complexity of Fox 40’s operations. Even with this level of complexity, Fox 40 prepares monthly financial statements by the 12th to the 15th of the following month. For CEO Ron Foxcroft, with all the financial data available, he first looks at the bottom line—the net profit as reflected in the income statement. Foxcroft is also concerned with profitability by product, which is reflected in a product’s gross margin. There is an expected range in gross margins between 40 percent to 60 percent. He is also focused on how well receivables and inventory are managed. The expectation is that the accounts receivable turnover is 8, which translates into average days credit sales in receivables of 45. Meanwhile, inventory turnover will range from 1 to 12 depending on the product. This translates into average inventory by product being sold between 30 days to 1 year.

CHAPTER 18 The Canadian Financial System

The company’s lenders closely monitor the debtto-equity ratio and debt-service coverage ratio. The latter ratio compares the cash flow to the principal and interest payments on bank loans. Bank balances are managed daily, and transfers can be made between any of the associated company bank accounts to ensure that sufficient funds are available to cover operating requirements and to properly manage the various operating lines. Financial planning is managed through a set of monthly budgeted financial statements for their fiscal year, which starts July 1. When comparing actual to budgeted performance, any variance of more than 3 percent on a product line and any negative variance on expense items is investigated. Sales meetings are held every other week and current monthly sales are always discussed. The majority of Fox 40’s approximately 200 credit customers are Canadian businesses. Their terms range from 15 to 90 days. New international customers are required to pay in advance for their purchases until Fox 40 has experience in dealing with a particular customer. After a good relationship has been established, about 25 percent of these customers are given credit. Export Development Corporation (EDC), introduced in Chapter 4, insures these credit sales.

Operating lines are in place and inventory and receivables are pledged as collateral. These lines are set up with the bank, which the company has been with for 20 years. In fact, the company has worked with the same bank manager during this time. Longterm financing is arranged through the same bank for certain capital assets, such as moulds and dies used to manufacture many of the company’s products, and leasehold improvements for office and assembly space in the buildings. In addition, there is a relatively small amount of long-term leasing arrangement. In addition, the company’s financing needs are met in part through investments by the shareholders. Risks are twofold in nature. One risk relates to major receivables defaulting, which occurs when a credit customer goes bankrupt. The second risk relates to the economy in general, when a downturn occurs. The former is managed through the rigour employed from the decision to first grant a customer credit, to regularly reviewing each credit customer’s account. According to Foxcroft, since this last happened in 2008 and 2009, “our company has to be able to ‘turn-on-adime’.” In terms of the second risk, Fox 40 frequently monitors sales and quickly makes decisions on controlling costs when they see sales contracting.

Source: Ron Foxcroft, CEO of Fox 40 International Inc. and Chairman and CEO of Fluke Transportation, in-person interview, September 22, 2017, Hamilton.

Discussion Questions 1. A ratio mentioned above is the debt-service

3. When compared to domestic credit custom-

coverage, which is not covered in Chapter16. Based on the definition provided above in this case, why would a lender be interested in this ratio? Would the lender be looking for the cash flow to be more than, equal to, or less than interest payments?

ers, why are international credit customers less creditworthy? Consider that there are a limited number of international credit customers and the fact that EDC insures credit sales to international customers.

2. Why are the financial controls for expenses so

tight that every negative dollar variance needs to be investigated while on sales there is a leeway of 3 percent?

4. What does it mean for Fox40 to be able to

“turn-on-a-dime” if the economy experiences a downturn? What would be an example of a decision that could be made in such a situation?

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APPENDIX B

Managing Personal Finances

P R O F I L E GETTING TO KNOW: ALEXA VON TOBEL, FOUNDER/CEO, LEARNVEST Alexa von Tobel fully understands the importance of financial planning and wants to communicate its importance to the masses. von Tobel is a certified financial planner (CFP) and founder and CEO of LearnVest, a personal financial planning website. After graduating from Harvard College, she worked at Morgan Stanley before becoming head of business development at former file-sharing service Drop.io. From there, she attended Harvard Business School until she took a leave of absence to launch LearnVest with a vision of bringing financial planning to women. She eventually broadened her mission and expanded to other plan-needy consumers. von Tobel found money is a leading cause of stress. LearnVest offers financial planning services with reasonable flat rates that vary with the customer’s financial needs. The company also charges no percentage fees and does not require minimum balances. von Tobel proposes a simple 50/20/30 plan that anyone can follow to help build a firm financial future. The 50/20/30 formula suggests that 50 percent of your take-home pay goes to pay for essentials (rent/mortgage, utilities, groceries, trans-

708

portation); 20 percent goes to your future (savings

shopping, restaurants, etc.). She warns younger

for emergencies, debt repayment, retirement

people, particularly 20- and 30-somethings, to not

funds); and 30 percent goes to your lifestyle (travel,

make big mistakes like accumulating too much

APPENDIX B Managing Personal Finances

credit card debt and paying bills late. It helps to

important to remember that a good financial plan

remember her advice, “Money is a tool that allows

should encompass where you stand today, what

you to live your richest life. And remember, you can

you hope to accomplish this year and in the future.

take out a loan for college, but you can’t take out a

Evidently her planning skills did not go unnoticed.

loan for retirement.”

In 2015, von Tobel sold LearnVest to Northwestern

Alexa von Tobel doesn’t suggest how you

Mutual for $250 million. Her book Financially Fear-

should live and what you should buy; she only

less is a good investment to consider. In this appen-

wants to help you think about why you are buying

dix, we’ll take a look at ways that will help you keep

something and its financial ramifications. It’s also

your finances in order.

Sources: Leena Rao, “Northwestern Mutual Acquires LearnVest, the Financial Planning Startup,” Fortune, March 25, 2015; Alexa von Tobel, “6 of the Smartest Things You Can Do with Your Money in 2016,” Fortune, January 2, 2016; Adam Bryant, “Alexa von Tobel of LearnVest; What’s Your Weakness?” The New York Times, April 16, 2015; Alexandra Macon, “Meet the Woman Who Makes Financial Planning Refreshingly Easy,” Vogue, March 23, 2017; LearnVest, Inc., www.learnvest.com accessed October 2017.

The Need for Personal Financial Planning The secret to success is to have capital, or money. With capital, you can pay off loans, take nice vacations, raise a family, invest in stocks and bonds, buy the goods and services you want, give generously to others, and retire with enough money to see you through. Money management, however, is not easy. You have to earn the money in the first place. Your chances of becoming wealthy are much greater if you choose to become an entrepreneur. That is one of the reasons why we have put so much emphasis on entrepreneurship throughout the text, including a chapter on the subject. Of course, there are risks in starting a business, but the best time to take risks is when you are young. After you earn money, you have to learn how to spend it wisely, save some, and insure yourself against the risks of serious accidents, illness, or death. We shall discuss each of these issues in this appendix so that you can begin making financial plans for the rest of your life. You’ll likely need some help. Financial literacy is defined as having the knowledge, skills, and confidence to make responsible financial decisions. The Financial Consumer Agency of Canada (FCAC) has developed a national strategy for financial literacy with goals and priorities in working to strengthen the financial literacy of Canadians at different stages of their lives.1 Through the Canadian Financial Literacy Database, one can find resources, events, tools and information on budgeting, money management, insurance, saving, investing, and taxes that

financial literacy

Having the knowledge, skills, and confidence to make responsible financial decisions.

November is financial literacy month in Canada. With this in mind, what workshops are being offered on campus?

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PART 6 Accounting Information and Financial Activities

are offered by public, private, and non-profit providers of financial education.2 Take some time to review this tool as it can help you better understand financial matters and improve your money management skills. Since financial literacy is important to your fiscal health, you may even enjoy taking an entire class on it.3 Check your school to see what is available.

Financial Planning Begins with Making Money You already know that one of the secrets to finding a good-paying job is having a good education. This is still true, although what you major in does matter.4 Throughout history, an investment in business education has paid off regardless of the state of the economy or political ups and downs. Education has become even more important since we entered the information age. One way to become financially stable, therefore, is to finish school. Make sure you investigate all the financial help available to you. Making money is one thing; saving, investing, and spending it wisely is something else. Following the advice in the next section will help you become one of those with enough to live in comfort throughout your life.5

Six Steps to Controlling Your Assets The only way to save enough money to do all of the things you want to do in life is to spend less than you make. Although you may find it difficult to save today, it is both possible and imperative if you want to accumulate enough to be financially secure. The following are six steps you can take today to get control of your finances.

STEP 1: TAKE AN INVENTORY OF YOUR FINANCIAL ASSETS To take inventory, you need to develop a balance sheet for yourself, like the one in Chapter 16. Remember, a balance sheet starts with the fundamental accounting equation: Assets = Liabilities + Owners’ Equity. List your tangible assets (such as an iPad, TV, DVR player, computer, cell phone, car, jewellery, clothes, and savings account) on one side, and your liabilities (such as rent, credit card debt, auto and education debt, and any other debt) on the other side. Assign a dollar value to each of your assets, based on its current value, not what you originally paid for it. If you have debts (liabilities), subtract them from your assets to get your net worth. If you have no debts, your assets equal your net worth. If your liabilities exceed the value of your assets, you are not on the path to financial security. You may need more financial discipline in your life. Let’s also create an income statement for you. At the top of the statement is revenue (all the money you take in from your job, investments, and so on). Subtract all your costs and expenses to get net income or profit. Software programs like Quicken and websites like Dinkytown and NerdWallet have a variety of tools that can easily help you with these calculations. Now is an excellent time to think about how much money you will need to accomplish all your goals. The more clearly you can visualize your goals, the easier it is to begin saving for them.

STEP 2: KEEP TRACK OF ALL YOUR EXPENSES Do you occasionally find yourself running out of cash? If you experience a cash flow problem, the only way to trace where the money is going is to keep track of every cent you spend. Keeping records of your expenses can be tedious, but it’s a necessary step if you 710

APPENDIX B Managing Personal Finances

want to learn discipline. Actually, it could turn out to be enjoyable because it gives you such a feeling of control. Here’s what to do: List everything you spend as you go through the day. That list is your journal. At the end of the week, transfer your journal entries into a record book or computerized accounting program. The Royal Bank of Canada has developed the online Spend-o-meter tool as a way to highlight how some expenses can add up monthly and yearly. For example, if you buy two magazines a week, it is estimated that you will spend $624 per year. A tip to save money is to subscribe to your favourite magazine since it is less expensive than buying off the shelf each month. Alternatively, share a subscription with a friend to save even more. Going to two movies per month will cost you $360 per year. To cut down on this cost, you can stream directly to your device. To estimate some of your expenses, check out this tool. Were you surprised by some of the calculations? Develop spending categories (accounts) to make your task easier and more informative. You can have a category called “Food” for all of the food you bought from the grocery or convenience store during the week. You might want a separate © Purestock/SuperStock account for meals eaten away from home because you can dramatically cut these costs if you make your meals at home. Other Do you currently keep track of your expenses? If not, will you consider starting to do so now? You accounts could include rent, insurance, automobile repairs, gasmay be surprised to learn where you spend your oline, clothing, utilities, toiletries, entertainment, and donations money. to charity. Most people also like to have a category called “Miscellaneous” for impulse items like candy and lattes. You won’t believe how much you fritter away on miscellaneous items unless you keep a detailed record for at least a couple of months. Develop your accounts on the basis of what’s most important to you or where you spend the most money. Once you’ve recorded all of your expenses for a few months, you’ll easily see where you are spending too much and what you have to do to save more. You can even use an app, like Splurge Alert, that’s designed to help curb mindless spending behaviours.

STEP 3: PREPARE A BUDGET Once you know your financial situation and your sources of revenue and expenses, you’re prepared to make a personal budget. Remember, budgets are financial plans and a recent survey showed more than half of adults don’t keep track of theirs!6 A household budget includes rent or mortgage, utilities, food, clothing, vehicles, furniture, insurance, medical care, and taxes. You’ll need to choose how much to allow for expenses such as eating out, entertainment, cell phone use, and so on. Keep in mind that what you spend now reduces what you can save later. Choosing not to spend that $5 a day for coffee or cigarettes adds up to about $35 a week, $140 a month, and $1700 a year. Keep this up during four years of school and you’ll have about $7,000 by graduation. And that’s before adding any interest your money will earn. If you invest the savings in a mutual fund earning 6 percent 711

PART 6 Accounting Information and Financial Activities

Gail Vaz-Oxlade’s money jar system as a way to manage money. That is, you stop spending when there is no more money in the jar. This is especially helpful for those who need to see their money in order to understand how much they have to spend. Would this system work for you?

compounded annually, you would double your money every 12 years. The Rule of 72 says that your money doubles every 12 years at 6 percent. You do that calculation by dividing the percentage earned into 72 (72 divided by 6 = 12). Running a household is similar to running a small business. It takes the same careful record keeping, the same budget processes and forecasting, and the same control procedures. Sometimes it also creates the same need to borrow funds or rely on a credit card and become familiar with interest rates. The time you spend practising budgeting techniques will benefit you throughout your life. Gail Vaz-Oxlade, financial expert and TV host of Til Debt Do Us Part, Princess, and Money Moron, recommends the money jar system as a way to manage money. Of your total income, 35 percent should go to housing, 15 percent to transportation, 25 percent on “life” (everything from groceries, pets, kids, etc), 15 percent to debt and 10 percent to savings. If you walk most places or have no debt, obviously these will change—but savings in your budget should go to savings, not just be spent because you have it.7

STEP 4: PAY OFF YOUR DEBTS The first thing to do with the money remaining after you pay your monthly bills is to pay off your debts, starting with those carrying the highest interest rates. Credit card interest, for example, is calculated daily and charged monthly, at a yearly rate—typically 19.99 percent for most rewards credit cards in Canada.8 Check credit card statements and other mailings carefully to make certain the charges are accurate. Try to make more than the minimum payment as the longer you carry debt, the more interest you will pay. For example, assume the following conditions: your credit card debt is $9500; your credit card interest rate is 18 percent; and your monthly minimum payment (usually 3 percent of the balance) is $285. If you only made the minimum payment, it would take you 22 years and five months to pay off your debt completely, and you will have paid $9298 in interest, for a total debt repayment of $18,798.9

STEP 5: START A SAVINGS PLAN It’s important to save some money each month in a separate account for large purchases you’re likely to make (such as a car or house). Then, when it comes time to make that purchase, you’ll have the needed cash. Save at least enough for a significant down payment so that you can reduce the finance charges you’ll pay to borrow the rest. The best way to save money is to pay yourself first. David Chilton, Canadian author of The Wealthy Barber, has sold over 2 million copies of his self-published book reinforcing this advice. His key advice is to invest 10 percent of what you earn for long-term growth by 712

APPENDIX B Managing Personal Finances

■ FIGURE

B.1

ANNUAL RATE OF RETURN: HOW MONEY GROWS This chart illustrates how the $5,000 would grow at various rates of return. Recent savings account interest rates have been low (less than 2 percent), but in earlier years, they’ve been over 5 percent.

Time

11%

5 years

$5,520

$ 6,381

$ 7,347

$ 8,425

10 years

6,095

8,144

10,795

14,197

15 years

6,729

10,395

15,861

23,923

20 years

7,430

13,266

23,305

40,312

25 years

8,203

16,932

34,242

67,927

paying yourself first and live within your means.10 “It’s crucial to understand that wealth flows from savings, not from income,” says Chilton. He suggests that when you get an unexpected windfall or a raise at work, or you take on a part-time job to generate more income, it’s important to put away at least 10 to 15 percent of your income. Life happens, and money might not come as easily down the road. A divorce, a bad investment return, or an illness can leave you financially crippled if you haven’t planned ahead.11 You can arrange with your financial institution to deduct a certain amount every two weeks or once a month. You will be pleasantly surprised when the money starts accumulating and earning interest over time. This compound interest, which is “interest on the interest” is the reason many investors are so successful.12 With some discipline, you can eventually reach your goal of financial security. It is not as difficult as you may think. Figure B.1 illustrates how $5000 grows over various periods, and at different rates of return. For example, assuming a 2 percent rate of return and no taxes, you would see $5000 grow to $5520 in five years. The calculation is broken down as follows: Year 1: $5100 ($5000 × 1.02%); Year 2: $5202 ($5100 × 1.02%); Year 3: $5306.04 ($5202 × 1.02%); Year 4: $5412.16 ($5306.04 × 1.02%); and Year 5: $5520.04 ($5412.16 × 1.02%). The earlier you start to save, the bigger the impact of compound interest, resulting in higher savings.

compound interest Interest calculated on your interest.

STEP 6: BORROW ONLY TO BUY ASSETS THAT INCREASE IN VALUE OR GENERATE INCOME

Don’t borrow money for ordinary expenses; you’ll only get into more debt that way.13 If you have budgeted for emergencies, such as car repairs, you should be able to stay financially secure. In general, it’s recommended that you save the equivalent of 3 to 6 months of your regular expenses and once you reach this goal, consider saving 3 to 6 months of your income.14 Keep this money in highly liquid accounts, such as a bank account or a cashable term deposit. Only the most unexpected of expenses should cause you to borrow. It is hard to wait until you have enough money to buy what you want, but learning to wait is a critical part 713

PART 6 Accounting Information and Financial Activities

of self-discipline. Of course, you can always try to produce more income by working overtime or by taking on other jobs for extra income. If you follow these six steps, not only will you have money for investment, but you’ll have developed most of the financial techniques needed to become financially secure. If you find it hard to live within a budget at first, remember the payoff is well worth the effort.

Building Your Financial Base

Tax-Free Savings Account (TFSA)

An investment option into which Canadian residents 18 years of age or older who have a valid social insurance number can contribute up to $5,500 annually; the amount contributed as well as the income earned in the account is tax free, even when it is withdrawn.

The path to financial success is to have capital (money) to invest, yet many students today graduate with debt. As you’ve read, accumulating capital takes discipline and careful planning. With the money you save, however, you can become an entrepreneur, one of the fastest ways to wealth. Living frugally is extremely difficult for the average person. Most people are eager to spend their money on a new car, furniture, electronics, clothes, entertainment, and the like. They look for a fancy apartment with all the amenities. A capital-generating strategy may require foregoing most (though not all) of these purchases to accumulate investment money. It might mean living like a frugal student in a relatively inexpensive apartment furnished in hand-me-downs from parents, friends, Kijiji, resale shops, etc. For five or six years, you can manage with the old stereo, a used car, and a few nice clothes. The strategy is sacrifice, not luxury. It’s important not to feel burdened by this plan; instead, feel happy knowing your financial future will be more secure. That is the way the majority of millionaires got their money. If living frugally seems too restrictive for you, you can still save at least a little. It is better to save a smaller amount than none at all. A great strategy for couples is to try to live on one income and to save the other. The longer you wait to marry, the more likely it will be that one of you can be earning enough to do that, as a college or university graduate. If the second spouse makes $35,000 a year after taxes, saving that income for five years quickly adds up to $175,000 (plus interest).

Tax-Free Savings Account (TFSA)15

It’s wise to plan your financial future with the same excitement and dedication you bring to other aspects of your life. If you get married, for example, it’s important to discuss financial issues with your spouse. Conflicts over money are a major cause of divorce, so agreeing on a financial strategy before marriage is very important. Do you know people who fight over how money is spent?

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What do you do with the money you accumulate? Where do you invest this money? In Chapter 18, some options discussed included depositing money into a savings account or a term deposit (also known as a certificate of deposit). Also consider a Tax-Free Savings Account (TFSA), where Canadian residents who are 18 years of age or older and who have a valid social insurance number are eligible to contribute up to $5,500 annually. (This annual allowable contribution amount may change from year to year.) You can carry your unused contribution room forward. For example, the total contribution limit since the TFSA was launched in 2009 would be $57,500 in 2018. This is good news for the 90 percent of TFSA holders who don’t max out their TFSAs.

APPENDIX B Managing Personal Finances

The initial amount contributed as well as the income earned in the account (e.g., interest income) is tax free, even when it is withdrawn. Generally, the types of investments that will be permitted in a TFSA include cash, mutual funds, securities listed on a designated stock exchange, term deposits, bonds, and certain shares of small business corporations. One strategy is to save your money in a TFSA and when you accumulate enough to make a large purchase (e.g., home or a trip) you withdraw the money and pay for the purchase. Let us look at real estate next as an investment option.

Real Estate

One purpose of planning your personal finances is to have enough money for retirement. Before that time arrives, however, you will have other reasons to save, such as for a trip, car, or house purchase. The TFSA is an ideal savings vehicle to protect your investments until you need to cash them in. If you do not have a TFSA, do you plan to open one?

What do you do with the money you accumulate? According to a Royal LePage Peak Millennial survey, 86 percent of those between the ages of 25 and 30 still view real estate as a good investment.16 And for good reason. Real estate is likely to provide several investment benefits. First, a home is the one investment that you can live in. Second, once you buy a home, the payments are relatively fixed (though taxes and utilities may go up). As your income rises, mortgage payments get easier to make, but renters often find that rents go up at least as fast as income. On the other hand, the changes in home prices have made it more important than ever for you to check whether it is better to own or rent.17 Paying for a home has historically been a good way of forcing yourself to save.18 You must make the payments every month. Those payments are an investment that can prove to be very rewarding over time. A home is also a good asset to use when applying for a business loan. Many people take huge risks by buying too much home for their income. Furthermore, people sometimes take out interest-only (e.g., a secured line of credit where the minimum monthly payment is the interest) or other loans that are very risky. The suggestion, “Don’t buy a home that costs more than two and a half times your annual income,” still stands as a good strategy. Buy for the long term, and stay within your means. What has happened to housing prices in your area over the last couple of years? Lower prices may mean an opportunity if the market gains strength. Some couples have used the seed money accumulated from saving one income (in the strategy outlined earlier) to buy two attached homes (a duplex) so that they can live in one part and rent out the other. The rent they earn covers a good part of the payments for both homes so the couple can live comfortably, yet inexpensively, while their investment in a home appreciates.19 In this way, they accumulate capital, and as they grow older, they pull far ahead of their peers in terms of financial security. As capital accumulates and values rise, they can sell, and then buy an even larger apartment building or a single-family home. Many have made fortunes in real estate in just this way. Today, some people are making additional income by renting unused housing space on Airbnb.20 Of course, it all depends on how valuable your space is. An apartment in Toronto or Vancouver may bring in some real income if you rent it while away. Such rentals are part

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Buying a home has usually been a very good and safe investment. But sometimes housing prices can rise fast, especially in large metropolitan areas such as Vancouver, Toronto, and Montreal. What has contributed to this increase in prices? What has happened to housing prices in your area over the last few years?

of a “shared economy” that is emerging. That is, people are learning to share cars, homes, bicycles, driveways, and tools as a way of saving some money.21 Once you understand the benefits of home ownership versus renting, you can decide whether those same principles apply to owning the premises where you set up your own business—or owning your own equipment, vehicles, and the like. Furthermore, you may start thinking of real estate as a way to earn a living. You could, for example, buy older homes, fix them up, and sell them—a path many have taken to attain financial security. To find out more, look for mortgage affordability calculators online. Many financial institutions in Canada offer this free service on their websites. You may also consider using an online calculator to consider the cost differences between renting and buying a home.

The Stock Market You have learned that one place to invest the money you have saved is in a home. What are some other good places to save your money? For a young person, one of the worst places to keep long-term investments is a bank through a savings account or term deposit. (This is different for your emergency funds.) Online banks usually pay higher interest than your local bank, but even their rates are relatively low. One of the best places to invest over time has been the stock market. The stock market does tend to go up and down, but over a longer period of time it has proven to be one of the best investments. Remember, the greater the risk, usually the greater the return. When stock prices are low, that’s the time to buy. When stocks collapse, it’s an 716

APPENDIX B Managing Personal Finances

opportunity to get into the stock market—not avoid it. The average investor buys when the stock market is high and sells when it is low. Clearly, that’s not a good idea. It takes courage to buy when everyone else is selling. In the long run, however, this contrarian approach to investing is the way the rich get richer. (Of course, you’ll need to do your research to determine the health and potential of any companies or sectors in which you’re interested in investing.) A stockbroker can be a source of information about what investments would best meet your financial objectives. However, it’s still important to learn about stocks and bonds on your own since investment analysts’ advice may not always meet your specific expectations and needs.22 Today, some investors are taking advantage of having their investment decisions managed by robots. Read the Adapting to Change box for more about robo-advisors. Chapter 17 introduced you to stocks and bonds. There are tools that track the performance of such investments over time. For example, the Andex Chart summarizes the performance of some key indices such as the S&P/TSX Composite (the Canadian stock market), the S&P 500, U.S. small stocks, Canadian bonds, fixed-term investments, Canadian Treasury bills, and the cost of living.23 As you can see in Figure B.2, this chart captures historical performances that have been impacted by trends in the business environment. Bonds, for example, have traditionally lagged behind stocks as a long-term investment. No one knows what will happen in the future and this is where doing your homework and knowing your risk tolerance is very important when making financial investments.

contrarian approach

Buying stock when everyone else is selling or vice versa.

Learning to Manage Credit Credit cards are an important element in your personal financial system, even if you rarely use them. First, you may have to own a credit card to buy certain goods or even rent a car, because some businesses require one for identification and to ensure payment. Second, you can use a credit card to keep track of purchases. A credit card gives you records of purchases over time for your income tax returns (if you drive for work) and financial planning purposes. Third, a credit card is more convenient than cash or cheques. You can carry less cash and easily cancel a stolen card to protect your account. Most of our phones now have capabilities for managing data for your credit, debit, loyalty, membership, and gift cards through Apple Wallet and Android Pay.24 The most secure cards will be PIN and chip cards, since such cards are much less prone to identity theft.25 If you do use a credit card, you should pay the balance in full during the period when no interest is charged. Not having to pay 18 percent interest, as an example of the interest charged, is as good as earning 18 percent tax free. You may want to choose a card that pays you back in cash (e.g., Scotia Momentum® no-fee VISA credit card) or offers paybacks like credits toward the purchase of gas (e.g., Canadian Tire Financial Service’s Gas Advantage™ MasterCard ®), or frequent-flier air miles. The value of these givebacks can vary. Some cards have no annual fees while others offer lower interest rates. To learn more about credit cards that will best suit your needs, visit the Financial Consumer Agency of Canada’s website and look for the Credit Card Comparison Tool. The danger of a credit card is the flip side of its convenience. It’s too easy to buy things you wouldn’t buy if you had to pay cash, or to pile up debts you can’t repay. If you aren’t the type who can stick to a financial plan or household budget, it may be better not to have a credit card at all. Imagine a customer who has a $10,000 balance on his or her credit 717

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Adapting to CHANGE R2-D2 to the Investor’s Rescue Investors’ frustrations with the advice and financial results from traditional investment advisors have moved some people toward a new type of money manager—robots. To be honest, robo-advisors are not actual robots. Robo-advisors are automated online tools that use advanced algorithms that make investment suggestions, manage money, rebalance a client’s portfolio, and perhaps even shift investments to save taxes. Since hitting the money management scene in 2008, robo-advisors have attracted roughly $67 billion under management. Some analysts even suggest robo-advisors could displace traditional financial advisors in the future. Originally, robo-advisors’ target customers were Millennials, who were interested in saving money, and grew up on technology. Millennials were often overlooked by traditional financial advisors since they

lacked the minimum investment (usually $50,000) needed to interest the human financial advisors. In contrast, robo-advisors don’t require minimum amounts. Also their fees are significantly lower. At Wealthfront, robo-advisors charge nothing for the first $10,000 invested and then 0.25 percent on all investments after that. Traditional, human advisors often charge in excess of 1 percent annually. Today robo-advisors are reaching beyond Millennial investors. Older, higher-net-worth individuals are attracted to the bargain-basem*nt fees and the simplicity of opening robo-advisor accounts. With robo investing, you tell the robots what your risk tolerance is and what your financial goals are, and the rest is handled by the robo-advisor using its algorithms. In general, your account will be invested in conservative exchange-traded funds (ETFs) and high-rated bond issues. The robo-advisor will rebalance your account when it decides it’s appropriate, and some will make beneficial trades to minimize taxes. It’s fair to say that robo-advisors cannot do the same things that human financial professionals can do. Human financial managers, especially certified financial planners (CFPs), are schooled in estate planning, mortgage refinancing, and trust investments, as well as any personal issues you may have such as planning your children’s education. Yet old-school financial advisors realize robo-advisors are changing the money management landscape. Michael Spellacy, PwC Global wealth management leader, warns, “The traditional financial advisor model is under assault. Financial advisors have to ask themselves, what’s my differentiation and how will I be a better financial advisor to my customers?” It’s very possible the future of financial management will embrace a hybrid model: part robo-advisor, part human advisor.

Sources: Lisa Kramer and Scott Smith, “Can Robo Advisers Replace Human Advisers?” The Wall Street Journal, February 29, 2016; Larry Light, “Here’s Why the Most Talked-about Way to Invest Right Now Could Be a Huge Mistake,” Fortune, March 5, 2016; Tom Anderson, “Returns Vary Widely for Robo Advisors with Similar Risk,” Charles Schwab Personal Finance, September 2016; John Divine, “How Robo Advisors Will Impact the Future,” U.S. News & World Report, September 29, 2016; Richard Eisenberg, “Robo-Advisors: Not Just for Millennials Anymore?” Forbes, December 6, 2016; Katie Brockman, “Battle of the Robots: Which Robo-Advisor Is Right for You?” The Motley Fool, August 4, 2017.

card with a 16 percent interest rate and pays the minimum monthly payment established by the credit card company (e.g., 4 percent). How long will it take to pay off the debt, and what would the cost for interest be? The answers are 14 years and nearly $5000—and that’s without using the card again to purchase so much as a candy bar. 718

B.2

THE ANDEX CHART SUMMARIZES THE PERFORMANCE OF SOME KEY INDICES.

■ FIGURE

APPENDIX B Managing Personal Finances

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Another danger of credit cards is the issue of hacking. Stores like Wendy’s and Home Depot have had credit card numbers stolen.26 This identity theft results in people getting access to customers’ e-mail addresses, names, and account numbers. The newer credit cards use both a chip embedded in the card and a customer PIN. Though studies are showing fewer fraudulent activities with chip versus magnetic strip cards, not all problems have been solved. Since current chip-enabled cards contain a magnetic strip, they are still vulnerable. It may take up to 10 years to completely phase out © UpperCut Images/SuperStock the magnetic strip. Time will tell if these cards will cut down on the losses due to stolen credit card numbers.27 Credit card companies often encourage young people to apply for credit cards at student centres and sports Some people would be better off with a debit card events. Why are these companies so willing to qualify you only. Debit cards don’t allow you to spend more than for a credit card? what you have in your financial institution, a great benefit for those who are not as careful with their spending as they should be. Furthermore, there are no interest payments or annual fees, other than account-specific fees, if applicable. In a recent survey, 41 percent of adults believed a debit card could protect them from fraud better than a credit card.28 That’s not true. While debit cards can protect you from overspending, a credit card offers greater consumer protection as the holder would be liable for only up to $50 in fraudulent charges.29 If a federally regulated financial institution issued your credit card, then your credit card agreement must explain the maximum amount you’ll be responsible for—or your maximum liability—if your card is used without your permission.30 So there are no surprises, be sure to discuss what protections are in place for debit and credit cards with a knowledgeable person at your financial institution.

Protecting Your Financial Base: Buying Insurance

term insurance

Pure insurance protection for a given number of years.

720

One of the last things young people think about is the idea that they may become sick, get injured, or die. It is not a pleasant thought, but the unexpected happens every day. According to a study conducted by investment firm, Edward Jones, less than one-third of Canadians have insurance coverage for unexpected financial crises, whether they are caused by sudden illness or extended disability. Twenty-three percent of Canadians answered that they are not at all prepared financially if they pass away too soon, with only 16 percent admitting that they have purchased life insurance that would cover their remaining mortgage payments should they ever pass away.31 To protect your loved ones from the loss of your income, you should buy life insurance. An online supplement to this text is devoted to the subject of financial risk. Visit Connect to learn more about managing risk. The simplest and least expensive form of life insurance is term insurance. It is pure insurance protection for a given number of years that typically costs less the younger you are when you buy it. When your term expires, you would need to renew the policy, and the premium can then rise. Compare prices through a service like Insurance-Canada.ca.

APPENDIX B Managing Personal Finances

■ FIGURE

B.3

WHY BUY TERM INSURANCE? Insurance Needs in Early Years Are High

Insurance Needs Decline as You Grow Older

1. Children are young and need money for education.

1. Children are grown.

2. Mortgage is high relative to income.

2. Mortgage is low or completely paid off.

3. Often there are auto payments and other bills to pay.

3. Debts are paid off.

4. Loss of income would be disastrous.

4. Insurance needs are few. 5. Retirement income is needed

How much insurance do you need? The answer depends on the objectives that you have. For an idea, complete a life insurance needs calculator, such as the Kanetix.ca Life Insurance Needs Calculator. This tool is designed to give you an estimate of how much life insurance you’ll need to ensure that your family is covered in the event of your death. Keep in mind that this calculator should not be considered as a replacement for consultation with a qualified insurance professional.32 Figure B.3 summarizes why you should buy term insurance. Even stay-at-home parents should carry life insurance. It was recently reported that a stay-at-home parent’s work was equal to a $118,905 salary.33 How much insurance do you need? It depends on your age, income, number of dependents, savings, debts and how secure you want to leave your dependents. A suggestion is to apportion your coverage so that a spouse earning 60 percent of the income carries 60 percent of the insurance. Multi-year level-premium insurance guarantees that you’ll pay the same premium for the life of the policy. Recently, 40 percent of new term policies guaranteed a set rate for 20 years or more. Some companies allow you to switch your term policy for a more expensive whole or universal life policy. Whole life insurance combines pure insurance and savings so you are buying both insurance and a savings plan. This may be a good idea for those people who have trouble saving money. A universal life policy lets you choose how much of your payment should go to insurance and how much to investments. The investments in such plans traditionally are very conservative but pay a steady interest rate. Variable life insurance is a form of whole life insurance that invests the cash value of the policy in stocks or other high-yielding securities. Death benefits may thus vary, reflecting the performance of the investments. Life insurance companies recognized people’s desire to earn higher returns on their insurance (and to protect themselves against running out of money before they die) and began selling annuities. An annuity is a contract to make regular payments to a person for life or a fixed period. With an annuity, you are guaranteed to have an income until you die or for the agreed upon time. There are two kinds of annuities: fixed and variable. Fixed annuities are investments that pay the policyholder a specified interest rate. They are not as popular as variable

whole life insurance Life insurance that combines pure insurance and savings.

variable life insurance

A form of whole life insurance that invests the cash value of the policy in stocks or other high-yielding securities.

annuity

A contract to make regular payments to a person for life or a fixed period. 721

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annuities, which provide investment choices identical to mutual funds. Such annuities are becoming more popular than term or whole life insurance. But buyers must be careful in selecting an insurance company and choosing the investments made with their money. Before buying any insurance, it is wise to consult with both an insurance agent and a financial advisor. They can help you make the wisest decision about insurance based on your overall needs.

Disability Insurance Your chances of becoming disabled at an early age are much higher than your chances of dying from an accident. It’s a good idea to supplement Canada’s public health coverage with disability insurance that pays part of the cost of a long-term illness or an accident. Disability insurance replaces part of your lost income, and, in some cases, pays disability-related expenses not covered by health insurance. Call an insurance agent or check online for possible quotes for such insurance. The cost is relatively low to protect yourself from losing your income for an extended period of time.

Homeowner’s or Renter’s Insurance You may be surprised how much it would cost to replace all the things you own. As you begin to accumulate possessions, you may want to have apartment or homeowner’s insurance that covers any losses. Specify that you want guaranteed replacement cost. That means that the insurance company will give you whatever it costs to buy all Reproduced with permission of RBC Insurance Services Inc. of those things new. It costs a little bit more than In Canada, 65 percent of individuals end up with unexpected a policy without guaranteed replacement, but you and uncovered illnesses, and 47 percent of these individuals will get a lot more if you have a loss.34 do not have enough medical care insurances or savings to cover their expenditures.35 Does your school offer disability The other option is insurance that covers the insurance? Is this something that you will seek out once you depreciated cost of the items. For example, a sofa work full time? you bought five years ago for $600 may be worth $150 now. That current value is what you would get disability insurance from insurance, not the $700 or more you may need to buy a brand-new sofa. If your computer Insurance that pays is stolen, you might only get a couple hundred dollars for it rather than its replacement cost. part of the cost of a Most policies don’t cover expensive items like engagement and wedding rings. You long-term illness or an can buy a rider to your policy that will cover them at a reasonable cost. accident. 722

APPENDIX B Managing Personal Finances

Other Insurance: Car and Liability Insurance You should buy insurance for your car. Consider selecting a large deductible of $1000 or so to keep the premiums low, and pay for small damages on your own. Be sure to include insurance against losses from uninsured motorists. You will also need liability insurance to protect yourself against being sued by someone you accidentally injure. Often you can get a discount by buying all your insurance (e.g., life, disability, homeowners, automobile, etc.) with one company. This is called an umbrella policy. Look for other discounts such as for safe driving, good grades, using snow tires, and more.

Planning Your Retirement

umbrella policy

A broadly based insurance policy that saves you money because you buy all your insurance from one company.

It may seem a bit early to be planning your retirement; however, not doing so would be a big mistake. Successful financial planning means long-range planning, and retirement is a critical phase of life. What you do now could make a world of difference in your quality of life when you retire. If you think that it is too early, as a minimum you can start to gather information. How much do you need for retirement? The answer is that it depends on factors such as your age, your spending patterns, your health, if you have any debt, etc. For example, retirement length has a big impact on when you can retire. According to Statistics Canada, workers in economic regions that had a higher unemployment rate were expected to retire two years earlier (62.7 years), on average, than workers in economic regions with a lower unemployment rate (64.2 years).36 Canadians are living longer than past generations so it is wise budget for 30 years of retirement or more.37

The Three Pillars Approach38 Retirement income in Canada is shared among the government, individuals, and their employers. Income may come from what is commonly referred to as the three pillars approach. Pillar 1 consists of the federal Old Age Security (OAS) program. Retirement income from Pillar 2 consists of income from the Canada Pension Plan (CPP) and the Québec Pension Plan (QPP). Government pensions were designed to replace only 40 percent of preretirement income for individuals who were earning the average national wage. Pillar 1 represents 15 percent and Pillar 2 represents 25 percent of pre-retirement income. You can see how Pillar 3 at 60 percent, or more if one does not qualify for OAS or CPP/QPP, has some heavy lifting to do. It consists of income generated from private savings and retirement savings plans, with the most common being employer-sponsored, registered pension plans (RPPs) and registered retirement © Fuse/Getty Images RF savings plans (RRSPs). If you plan to relax and travel when you retire, you need The retirement income system in Canada is based to begin saving now. What are your retirement goals, and on both public (Pillars 1 and 2) and private (Pillar 3) what resources will you need to accomplish them? retirement savings plans. Almost all of today’s seniors 723

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receive income from Canada’s public pensions. Let’s briefly consider each of these three pillars next.

PILLAR 1: OAS PENSION PROGRAM39 The OAS program is one of the cornerstones of Canada’s retirement income system. Payment amounts for the OAS benefits (Guaranteed Income Supplement, Allowance and Allowance for the Survivor) are based on your marital status and level of income. This program is financed from general tax revenues collected by the Government of Canada. All benefits payable under the Old Age Security Act are adjusted four times a year if there are increases in the cost of living, as measured by the consumer price index (CPI). OAS generates a pension at age 65 if one has lived in Canada for at least 10 years since the age of 18. Between April to June 2018, the basic OAS pension benefit was $589.59 regardless of marital status. If the pensioner’s income, however, exceeds $123,019 in 2018, he or she will have to repay all of the OAS benefits received that year. This is commonly referred to as the “claw back” or the OAS “pension recovery tax.”

PILLAR 2: CPP/QPP40 The CPP operates throughout Canada, except in Quebec, where the Québec Pension Plan (QPP) provides similar benefits. Established in 1966, the CPP provides basic benefits when a contributor to the Plan becomes disabled or retires. At the contributor’s death, the Plan provides benefits to his or her survivors. The CPP is a “contributory” plan. This means that all its costs are covered by the financial contributions paid by employees, employers, and self-employed workers, and from revenue earned on CPP investments. Though the standard age is 65, one can take a reduced benefit as early as 60 or an enhanced benefit as late as 70. According to Doug Runchey of DR Pensions Consulting, “People who join the workforce late or drop out for a period of time, who retire early or who have low incomes, may not hit the maximum annual pensionable earnings level often enough over the years to get the highest possible CPP retirement benefit.” To be eligible for the maximum benefit, one must make 39 years of contributions to the CPP at the maximum level. In 2018, this maximum monthly benefit per retired recipient (age 65) was $1,134.17. Approximately 6 percent of recipients receive the maximum while on average, Canadians receive 56.6 percent of the maximum.

PILLAR 3: PRIVATE RETIREMENT PLANS Based on the values noted earlier, between OAS and the CPP/QPP, the government(s) will pay out a maximum of approximately $1,724 a month to an eligible 65-year-old. This is not a lot of money, which is why you need to take charge of saving for retirement. Financial experts recommend that we need 70 percent of our pre-retirement income in order to have a comfortable retirement.41 As a result, the third pillar must make up what is not covered by public pensions. This third pillar considers money that you have saved, a potential stream of income (e.g., from a part-time job or investment income), and private retirement plans. Private retirement plans include voluntary, employer, and unionsponsored pension and retirement plans, such as RPPs, and personal plans, such as RRSPs.42 Let’s consider each one next.

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APPENDIX B Managing Personal Finances

RPPs43 Registered pension plans (RPPs) are established by employers or unions for employees. These private pension plans are employer-specific and, if applicable, are introduced during an employee’s orientation period. With an RPP, both the employer and employee typically contribute to the plan. In Canada, RPPs cover just over 6.2 million workers, which is 37.8 percent of all employees. This means that there is a good chance that you may not have an RPP when you retire. RRSPs44 As you read above, a minority of working Canadians have access to a RPP. Consequently, the © kali9/E+/Getty Images majority of Canadians need to proactively consider You would agree that individuals who work for employers other personal investment strategies such as RRSPs. that offer RPPs have a financial advantage over those that A registered retirement savings plan (RRSP) is a do not have access to RPPs. What can individuals who do federally-regulated, tax-sheltered savings plan designed not have RPPs do to compensate for a weak Pillar 3? to encourage Canadians to save for their retirement. Any earnings from cash or investments held within an RRSP are not taxed until they are withdrawn. An RRSP lets you save for retirement and registered pension save taxes at the same time. Not only do you avoid paying income tax on the money you plans (RPPs) contribute, but you postpone paying tax on your investment earnings until you take the Pension plans established by money out of your plan later on. And because you’ll earn interest on the interest, the tax- employers or unions free compounding will make a huge difference in the amount of money you’ll be able to for employees. save for retirement. You, your spouse, or a common-law partner can establish and contribregistered ute to an RRSP. retirement savings The exact amount you’re entitled to contribute for the tax year is shown in a separate plan (RRSP) section of the Notice of Assessment you receive from Canada Revenue Agency after you A federally-regulated, file last year’s tax return. The amount you’re allowed to deduct for tax purposes is referred tax-sheltered savings plan designed to to as your contribution room or deduction room. The dollar limit (or maximum) that you encourage Canadians can contribute for any tax year is 18 percent of your earned income from the previous year to save for their (up to a certain limit), minus any “pension adjustment” (if applicable, this refers to the retirement. amount of a work pension that you may have built up in the pension plan during the year), plus any unused contributions from previous years. You may deduct the entire amount from your taxable income when you make the contribution. The amount of tax you save will depend on your marginal tax rate. For tax planning purposes, the marginal tax rate is defined as the rate of tax payable on the last dollar earned. The marginal tax rate varies from province to province, and it increases as your income rises. Your tax rate tells you how much money you get to keep if you make an extra dollar, or how much you save in taxes by reducing your taxable income by a dollar. The higher your income, the more tax you will save by contributing to your RRSP. Consider Figure B.4, which lists a snapshot of the combined federal and Ontario marginal tax rate marginal tax rates for our example. Your friend has earned $25,000 and you have earned The rate of tax payable on the last dollar $75,000. A $1000 investment into an RRSP would save your friend $200.50 ($1000 × earned. 20.05%) and would save you $296.50 ($1000 × 29.65%) in tax. Despite investing the same $1000, everyone derives different tax benefits depending on each person’s marginal tax rate.

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PART 6 Accounting Information and Financial Activities

■ FIGURE

B.4

SNAPSHOT OF COMBINED FEDERAL AND ONTARIO MARGINAL TAX RATESFOR 2018 Taxable Income

Marginal Tax Rates

first $42,960

20.05%

over $42,960 up to $46,605

24.15%

over $46,605 up to $75,657

29.65%

over $75,657 up to $85,923

31.48%

over $85,923 up to $89,131

33.89%

over $89,131 up to $93,208

37.91%

Source: “Ontario Personal Tax Rates,” TaxTips.ca, May 23, 2018, https://www.taxtips.ca/taxrates/on.htm.

The annual RRSP contribution deadline is 60 days after the end of the year (i.e., March 1). You can buy an RRSP at any financial institution or through a broker or financial advisor. When you start contributing to your RRSP earlier in life, you’ll allow more time for the income earned in your RRSP to compound. (Recall the compound interest discussion in Chapter 17.) You may also find that you can make a smaller total investment in your RRSP, and still be further ahead. While this sounds straightforward, 32 percent of Canadians between the ages of 45 and 64 have nothing saved for retirement.45 According to a CIBC report, the average amount of personal savings Canadians estimate they’ll need to retire comfortably is $756,000. Unfortunately, this estimation is not based on fundamentals, such as how much money one can expect from an employer and the government, as well as one’s various personal savings vehicles. One should consider this information first. Once those numbers are calculated, the next step should be to determine how they stack up against fixed costs, and then what’s left over can go toward other lifestyle choices.46 Like any savings program, retirement planning requires discipline. There are other uses for RRSP money, other than for retirement. Two plans allow you to withdraw money from your RRSP without penalty, assuming that you pay back these funds within a certain period of time. For example, the Home Buyers’ Plan allows you to withdraw up to $25,000 from your RRSP to buy or build a home for yourself or for a related person with a disability. The Lifelong Learning Plan allows you to withdraw up to $20,000 from your RRSP to finance training or education for you, your spouse, or common-law partner. Contributing to an RRSP is one of several strategies that Canadians can pursue when planning for retirement. There are free online programs that will help you determine how much you need to save in your RRSP to achieve your retirement goals. Figure B.5 summarizes Canada’s three pillar approach.

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APPENDIX B Managing Personal Finances

■ FIGURE

B.5

CANADA’S RETIREMENT INCOME SYSTEM: THE THREE PILLARS APPROACH Pillar 1 (15%) OAS Program

Pillar 2 (25%) CPP/QPP

Pillar 3 (60%) Private Retirement Plans

Payments are based on eligibility (lived in Canada for at least 10 years after the age of 18), marital status, and income level.

Compulsory, contributory public pension plans that provide benefits based on earnings for retirement.

Voluntary, private employer, and unionsponsored pension and retirement plans that include RPPs and RRSPs.

Financial Planners If the idea of developing a comprehensive financial plan seems overwhelming, relax. Help is available from financial planners. Financial planners assist in developing a comprehensive program that covers investments, taxes, insurance, and other financial matters. Be careful, though—anybody can claim to be a financial planner today as there isn’t one professional credential or one certification governing the industry of financial planners.47 It’s often best to find a person who has earned the distinction of being a Certified Financial Planner® (CFP) or a similar designation. Unfortunately, many so-called financial planners are simply insurance salespeople. For a list and description of financial designations, as well as advice on finding an advisor, visit Financial Advisors Association of Canada at www.advocis.ca. It pays to shop around for financial advice. Ask your friends and family. Find someone who understands your situation and is willing to spend some time with you. Financial planning covers all aspects of investing, all the way to retirement and death. Financial planners can advise you on the proper mix of investments, insurance, and retirement planning.

Estate Planning Your retirement may be far away, but it is never too early to begin thinking about estate planning, or making financial arrangements for those who will inherit from you. You may even help your parents or others to do such planning. An important first step is to select a guardian for your minor children. That person should have a genuine concern for your children as well as a parental style and moral beliefs you endorse. Also ensure that you leave sufficient resources to rear your children, not only for living expenses but also for school and other major expenses. Often life insurance is a good way to ensure such a fund. Be sure to discuss all these issues with the guardian, and choose a contingent guardian in case the first choice is unable to perform the needed functions.

You do not have to be working full time before you meet with a financial planner. If you do know where to start, ask your banker for a recommendation. Don’t be surprised if you learn that he or she may have some financial planner training .

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Making ETHICAL DECISIONS Money Going Up in Smoke You recently received news that your Uncle Alex passed away after a long battle with lung cancer. To your surprise, he left you $25,000 in his will, saying you were his favourite nephew. You remember your uncle as a hardworking man who loved baseball and liked nothing better than to watch you pitch for your school team. Unfortunately, he started smoking as a young man and became a heavy chain smoker. His doctors said that smoking was the primary cause of his lung cancer. After receiving the inheritance, you wonder where to invest the money. Your old teammate, Jack, a financial advisor, recommends that you buy stock in a wellknown multinational firm that offers a good dividend and has solid global growth potential. He tells you the firm’s major product is tobacco, but assures you it produces other products as well. You know Jack has your best interests at heart. You also believe Uncle Alex would like to see the money he left you grow. However, you wonder if a company that markets tobacco is an appropriate place to invest the inheritance from Uncle Alex. What are the ethical alternatives in this situation? What are the consequences of the alternatives? What will you do?

will

A document that names the guardian for your children, states how you want your assets distributed, and names the executor for your estate.

executor

An individual who assembles and values your estate, files income and other taxes, and distributes assets when you pass away. 728

It is never too early to begin thinking about estate planning, although this may be decades away. You may need to contact a lawyer or a financial planner, or both, to help you prepare the paperwork and do the planning necessary to preserve and protect your investments for your beneficiaries. Two important documents are a will and a power of attorney. A second step is to prepare a will, a document that names the guardian for your children, states how you want your assets distributed, and names the executor for your estate. An executor assembles and values your estate, files income and other taxes, and distributes assets. This document takes effect when you pass away. The Making Ethical Decisions box describes a personal stock investment decision. A third step is to prepare a durable power of attorney. This document gives an individual you name the power to take over your finances if you become incapacitated. A durable power of attorney for health care delegates power to a person you name to make health care decisions for you if you are unable to make such decisions yourself. A power of attorney, which can take effect when you are alive, is a written document in which you appoint someone else to act on your behalf on matters that you specify. This can be made to start immediately, or upon mental incapacity.48 Rules regulating powers of attorney tend to vary significantly from province to province.

APPENDIX B Managing Personal Finances

Other steps to follow are beyond the scope of this text. You may need to contact a financial planner/attorney to help you do the paperwork and planning to preserve and protect your investments for your children and spouse and others. But it all begins with a strong financial base.

power of attorney

A written document in which you appoint someone else to act on your behalf on matters that you specify; this can be made to start immediately, or upon mental incapacity.

KEY TERMS annuity 721 compound interest 713 contrarian approach 717 disability insurance 722 executor 728 financial literacy 709 marginal tax rate 725

power of attorney 728 registered pension plans (RPPs) 725 registered retirement savings plan (RRSP) 725 Tax-Free Savings Account (TFSA) 714

term insurance 720 umbrella policy 723 variable life insurance 721 whole life insurance 721 will 728

729

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Endnotes

41. “How to Get the Most from Kijiji and Craigslist,” Toronto Star, January 18, 2012, http://www.thestar.com/business/personal_ finance/spending_saving/2012/01/18/how_to_get_the_most_ from_kijiji_and_craigslist.html. 42. Hal Lawton. “Celebrating Small Businesses & Entrepreneurship on eBay,” eBay North America, May 1, 2017, https://www.ebayinc.com/stories/news/ celebrating-small-businesses-entrepreneurship-on-ebay/. 43. “Numbers,” Time, May 5, 2008. 44. Nicole LaMarco, “What is the Difference Between E-Business and E-Commerce?” Chron, June 29, 2018, https://smallbusiness.chron. com/difference-between-e-business-e-commerce-2639.html. 45. Robert Hackett, “Apple Responds to Hacker’s Threat to Wipe Hundreds of Millions of iPhones,” Fortune, March 22, 2017. 46. Martha C. White, “This Year’s Spike in Online Fraud,” Money, November 2016; Lo Bénichou, “How to Protect Your Digital Self,” Wired, July 6, 2017. 47. “Privacy Legislation in Canada,” Office of the Privacy Commissioner of Canada, December 5, 2008, www.priv.gc.ca/ fs-fi/02_05_d_15_e.cfm. 48. Lisa Gerstner, “What You Need to Know about Identity Theft,” Kiplinger’s Personal Finance, June 2013. 49. Crane et al., Marketing, 18. 50. “Use of Social Media Among Canada’s Small Business Owners Up 42 Percent from 2012,” BMO Financial Group, October 25, 2013, http://newsroom.bmo.com/press-releases/bmo-report-use-of-socialmedia-among-canada-s-sma-tsx-bmo-201310250906689001. 51. “Crowdsourcing to stand out from the masses,” Canada Business Network, March 9, 2015, http://www.canadabusiness.ca/eng/blog/ entry/5012/. 52. Ivor Tossel, “Don Tapscott: Let’s Crowdsource Canada,” The Globe and Mail, February 20, 2013, http://www.theglobeandmail. com/report-on-business/economy/canada-competes/ don-tapscott-lets-crowdsource-canada/article8897102/. 53. Crane et al., Marketing, 90. 54. For the Purpose of this discussion, Environics Analytics demographic terms and time periods are used. See Chapter 11, Figure 11.9 for more details. 55. Adapted from “Population Projections for Canada, Provinces and Territories 2009–2036,” Cat. No. 91-520-X, June 2010. 56. Boom, Bust & Echo: Profiting from the Demographic Shift in the 21st Century, Footwork Consulting Inc., 2008, www.footwork. com/21c.asp. 57. “Population projections,” The Daily, Statistics Canada, December 15, 2015, http://www.statcan.gc.ca/daily-quotidien/051215/ dq051215b-eng.htm. 58. “Global Talent Risks – Seven Responses,” World Economic Forum, 2011, http://www.bcg.com/documents/file69643.pdf, accessed June 18, 2018; http://www.bcg.com/media/PressReleaseDetails. aspx?id=tcm:12-69648. 59. “Facts and Figures 2010 – Immigration overview: Permanent and Temporary residents,” Citizenship and Immigration Canada, August 30, 2011, www.cic.gc/english/resources/statistics/ facts2010/permanent/01.asp; “Census Snapshot – Immigration in Canada: A portrait of the foreign-born population, 2006 Census,” Statistics Canada, November 21, 2008, www.statcan.gc.ca/ pub/11-008-x/2008001/article/10556-eng.htm#1. 60. “Backgrounder – 2014 Immigration Levels Planning: Public and Stakeholder Consultations,” Statistics Canada, June 21, 2013, http://www.cic.gc.ca/english/department/media/ backgrounders/2013/2013-06-21.asp#role. 61. Andrea Cooper, “The Influencers,” Entrepreneur, March 2008. 62. Charrnchai Athitchitskul, “Towards a Sustainable Society,” Global Management Review, 5, no. 4, August 2011, 1–28. 63. “Gross domestic product at basic prices, manufacturing and construction industries,” Statistics Canada, December 23, 2011, www40.statcan.gc.ca/l01/cst01/manuf10-eng.htm. 64. Manufacturing Our Future: A manufacturing action plan for Canada, Canadian Manufacturers and Exporters Association, March 2012, http://www.cme-mec.ca/download. php?file=h8q5gph6.pdf.

65. Ibid. 66. “Canadian Manufacturing Today: Cautiously Optimistic: BDOs perspective on CMEs 2014 Management Issues Survey,” BDO Canada LLP, http://www.cme-mec.ca/_uploads/_media/ 51wjbzblm.pdf. 67. Ibid. 68. Deborah Aarts. “Canada’s Fastest Growing Company is Built for Growth,” ProfitGuide.com, June 12, 2014, accessed June 24, 2018, http://www.profitguide.com/small-business/ canadas-fastest-growing-company-is-built-for-growth-66142. 69. International Humanistic Management Associations, accessed May 2018, http://humanisticmanagement.international.com. 70. Domenec Melé. “Understanding humanistic management,” Humanistic Management Journal, September 2016, pages 33–55. 71. Michael Pirson, Humanistic Management: Protecting Dignity and Promoting Well-Being, Cambridge University Press, 2017.

Appendix A 1. Kristina McElheran and Erik Brynjolfsson, “The Rise of Data-Driven Decision Making Is Real but Uneven,” Harvard Business Review, February 3, 2016; Gency Warren, “Why Data-Driven Decisions are Crucial to Your Performance,” Raving Consulting, September 17, 2017. 2. Ryan Mulcahy, “Business Intelligence Definition and Solutions,” CIO, September 1, 2017. 3. Scott Anthony, “Kodak’s Downfall Wasn’t about Technology,” Harvard Business Review, July 15, 2016; Tendayi Viki, “On the Fifth Anniversary Of Kodak’s Bankruptcy, How Can Large Companies Sustain Innovation?” Forbes, January 19, 2017. 4. Chad Quinn, “The New Value of CIOs in 2016,” CIO, 4 January 2016; Rob Preston, “Top 10 Strategic CIO Priorities For 2017,” Forbes, January 17, 2017. 5. Hamza Shaban, “An Amazon Echo recorded a family’s conversation, then sent it to a random person in their contacts, report says,” The Washington Post, May 24, 2018, accessed May 26, 2018, https://www.washingtonpost.com/news/ the-switch/wp/2018/05/24/an-amazon-echo-recorded-afamilys-conversation-then-sent-it-to-a-random-person-in-theircontacts-report-says/?noredirect=on&utm_term=.7ee1bc4e0c01. 6. “Are any Canadian companies using RFID?” November 20, 2013, RFID Journal, http://www.rfidjournal.com/blogs/experts/ entry?10828. 7. Ibid. 8. Michael Corkery, “Goodbye, Password: Banks Opt to Scan Fingers and Faces Instead,” The New York Times, June 21, 2016; Ben Dickson, “Unlocking the Potential of Eye Tracking Technology,” TechCrunch, February 19, 2017. 9. Jonathan Vanian, “Big Data and Data Analytics Are Becoming One in the Same,” Fortune, January 13, 2016; Michael S. Malone, “The Big Data Future Has Arrived,” The Wall Street Journal, February 22, 2016; Gil Press, “6 Predictions For The $203 Billion Big Data Analytics Market,” Forbes, January 20, 2017. 10. Mark Buchanan, “Battling the Tyranny of Big Data,” Bloomberg, January 13, 2017. 11. Ryan Kh, “How Does Big Data Change Social Media Marketing Strategies?” Social Media Today, February 29, 2016; Michael Schrage, “How the Big Data Explosion Has Changed Decision Making,” Harvard Business Review, August 25, 2016; Rob Marvin and Alyson Behr, “The Best Social Media Management & Analytics Tools of 2017,” PC Magazine, September 1, 2017. 12. Bernard Marr, “Big Data-Driven Decision-Making at Domino’s Pizza,” Forbes, April 6, 2016; Brian Barrett, “How Domino’s Put Automagic Pizza on Every Device. Like, Every Device,” Wired, April 29, 2016; Abigail Stevenson, “Domino’s CEO Reveals How It Smoked the Pizza Competition Last Quarter,” CNBC, March 6, 2017. 13. “A Guide for Intranet Managers: 5 Simple Tips for Reviving an Ailing Sharepoint Intranet,” Cambridge Network, February 28, 2017. 14. Max Eddy, “The Best VPN Services of 2017,” PC World, February 28, 2017.

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Endnotes

15. Eric Griffin, “The Fastest ISPs of 2017: Canada,” PC Magazine, June 19, 2017, accessed May 27, 2018, https://www.pcmag.com/ article/353971/the-fastest-isps-of-2017-canada. 16. Ibid. 17. SpeedTest Global Index, April 2018, accessed May 27, 2018, from http://www.speedtest.net/global-index/canada#mobile. 18. Ookla Net Index, accessed May 15, 2015, http://www.netindex. com/download/2,7/Canada/. 19. Mike Snider, “How Net Neutrality Could Get Reversed (and What That Means to You),” USA Today, February 7, 2017. 20. Tim Smart, “Protecting the Open Internet,” US News and World Report, February 25, 2016; Nikhil Reddy, “Net Neutrality in 2017— What You Should Know,” Huffington Post, August 28, 2017. 21. AJ Dellinger, “Is Net Neutrality Dead? What the Internet Will Look Like without Open Internet Rules, Title II,” International Business Times, February 9, 2017. 22. Libby Watson, “AT&T Charges Ahead with Fiber Internet While Google Languishes,” Gizmodo, March 24, 2017. 23. Vijay Prabhu, “Internet2 Is the Alternate Internet Which Gives a Speed of 10 to 100 Gigabits per Second,” TechWorm, February 7, 2016. 24. “The Internet2 Community: Enabling the Future,” Internet2, accessed June 2018, www.internet2.edu/about-us/. 25. “About Us,” Hootsuite, accessed May 27, 2018, https://hootsuite. com/about/#. 26. Chris O’Brien, “What Hootsuite founder Ryan Holmes learned from his own social media fail: ‘Own it. Apologize.’” Venture Beat, August 27, 2017, accessed May 27, 2018 https://venturebeat. com/2017/08/27/what-hootsuite-founder-ryan-holmes-learnedfrom-his-own-social-media-fail-own-it-apologize/. 27. “Enterprise,” Hootsuite, accessed 27 May 2018, https://hootsuite. com/plans/enterprise. 28. Julie Jargon, “McDonald’s Goes Digital to Draw Youth,” The Wall Street Journal, 14 October 2016; “McDonald’s Wins Back Millennials,” Warc, October 17, 2016; Mac Hogan, “McDonald’s Customers Are Fed Up with Not Being Able to Order McFlurries,” CNBC, January 19, 2017; Brian Sozzi, “Social Media Blows Up as McDonald’s Gives Away Iconic Big Mac Sauce in Bottles,” The Street, January 28, 2017. 29. Randy Hlavac, “Because We’re Happy: Using Social Media to Turn Audiences Around,” Forbes, June 3, 2014. 30. Amol Sharma and Jessica E. Vascellaro, “Companies Eye LocationServices Market,” The Wall Street Journal, November 28, 2009. 31. Shabana Arora, “Recommendation Engines: How Amazon and Netflix Are Winning the Personalization Battle,” MarTech Advisor, June 28, 2016; Klint Finley, “Amazon’s Giving Away the AI behind Its Product Recommendations,” Wired, May 16, 2016; Michael Schrage, “Great Digital Companies Build Great Recommendation Engines,” Harvard Business Review, August 1, 2017. 32. Tim Sandle, “Op-Ed: How Will Web 3.0 Turn Out?” Digital Journal, July 23, 2016; Vangie Beal, “Web 3.0,” Webopedia, accessed October 2017, https://www.webopedia.com/TERM/W/Web_3_point_0.html . 33. Martin Zwillig, “When Will Siri Be Able to Make That Romantic Dinner Reservation for You?” Entrepreneur, January 6, 2016; Daniel Nations, “What Is Web 3.0 and Is It Here Yet?” Lifewire, March 22, 2017. 34. “Fundamentals: What Is Semantic Technology?” Ontotext, accessed June 19, 2018, https://ontotext.com/knowledgehub/ fundamentals/semantic-web-technology/. 35. Global Newswire, “Introducing aia from Amdocs: Bringing RealTime Intelligence to the Heart of a Communications Business,” The New York Times, February 27, 2017. 36. Sheila Kloefkorn, “The Five Most Important Website Design Trends That Will Emerge in 2017,” Forbes, December 21, 2016; Brian Rashid, “5 Essential Reasons You Should Be Using A Responsive Website Design Now,” Forbes, June 13, 2017. 37. Elizabeth Reade, “When Virtual Reality Meets Education,” TechCrunch, January 23, 2016; Aaron Burch, “The Top 10 Companies Working on Education in Virtual Reality and Augmented Reality,” Touchstone Research, June 2, 2016; Brian Crecente, “The State of Virtual Reality,” Polygon, June 8, 2017.

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38. Andrew Meola, “What Is the Internet of Things (IoT)?” Business Insider, December 19, 2016; Matt Burgess, “What Is the Internet of Things? Wired Explains,” Wired UK, February 16, 2017. 39. Joanna Stern, “Google Home vs. Amazon Echo: Which Robot Do You Let into Your Life?” The Wall Street Journal, November 7, 2016; Lee Bell, “The Best Wearable Tech and Fitness Gadgets of 2017,” Forbes, April 3, 2017. 40. Tim Greene, “John Deere Is Plowing IoT into Its Farm Equipment,” Network World, May 17, 2016; Thor Olavsrud, “Teradata Accelerators Help Put IoT on the Fast Track,” CIO, August 24, 2016; John Carpenter, “‘The Old John Deere’ Makes Way for New Tech with Precision Farming Platforms,” Forbes, March 13, 2017. 41. Kate Gerwig, “IT Priorities 2017 Survey: Virtualization Gains in Networking Plans,” TechTarget, March 14, 2017. 42. Eric Griffith, “What Is Cloud Computing?” PC Magazine, May 3, 2016. 43. Quentin Hardy, “Why the Computing Cloud Will Keep Growing and Growing,” The New York Times, December 25, 2016. 44. Robert Kruk, “Public, Private and Hybrid Clouds: What’s the Difference?” Techopedia, February 22, 2017; Andy Patrizio, “Hybrid Cloud Computing,” Datamation, April 3, 2017. 45. Source: Irving Wladawsky-Berger, “The Transformative Power of Cloud Computing,” The Wall Street Journal, December 16, 2016; Lauren Fish, “Top 5 Benefits of Cloud Computing,” Microsoft UK Small and Medium Business Blog, July 18, 2016; Cynthia Harvey, “Cloud Computing,” Datamation, March 27, 2017. 46. Priya Viswanathan, “Cloud Computing and Is It Really All That Beneficial?” Lifewire, February 1, 2017. 47. Elizabeth Weise, “Amazon Makes It Easy to Order Automatically,” USA Today, January 20, 2016; Loretta Chao and Steven Norton, “Race for Web Sales Leaves Some in the Dust,” The Wall Street Journal, January 29, 2016; Daniel Newman, “Top Five Digital Transformation Trends in Retail,” Forbes, March 14, 2017. 48. Karen Turner, “Hacked Dropbox Login Data of 68 Million Users Is Now for Sale on the Dark Web,” The Washington Post, September 6, 2016. 49. Jaikumar Vijayan, “MSSPs Add Advanced Threats as Managed Security Services Gain Hold,” TechTarget, April 4, 2017; “2017 MSP 500: Managed Security 100,” CRN, February 14, 2017. 50. Kate Conger, “Yahoo Discloses Hack of 1 Billion Accounts,” TechCrunch, December 14, 2016; Brian Fung, “Why Verizon Is Still Buying Yahoo on Sale, Despite That Epic Security Breach,” The Washington Post, February 21, 2017. 51. Evan Koblentz, “Deceptive Networking Lures Hackers with Decoy Data,” TechRepublic, January 23, 2017. 52. “Cybercrime: an overview of incidents and issues in Canada,” 2014, Royal Canadian Mounted Police, accessed May 17, 2015, http://www.rcmp-grc.gc.ca/pubs/cc-report-rapport-cc-eng.pdf. 53. “Fraud Facts—Recognize, Reject, Report Fraud,” Competition Bureau Canada, February 22, 2018, accessed May 27, 2018, http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04334. html#sec02. 54. Armina Ligaya, “‘Grasping in the Dark’: How Canada’s ‘undercounting’ of cybercrime costs may be leaving us vulnerable,” June 9, 2014, The Financial Post, http://business. financialpost.com/fp-tech-desk/grasping-in-the-dark-howcanadas-undercounting-of-cybercrime-costs-may-be-leaving-usvulnerable?__lsa=89cc-2e21. 55. Luke Graham, “Cybercrime Costs the Global Economy $450 Billion: CEO,” CNBC, February 7, 2017. 56. Treena Hein, “Barbarians Inside the Gates,” tq Magazine, Summer 2006, 28. 57. Ibid. 58. Jason Markusoff, “How MacEwan University got duped out of $11.8 million by scammers,” Maclean’s, August 31, 2017, accessed May 27, 2018, https://www.macleans.ca/news/canada/ how-macewan-university-got-duped-out-of-11-8-million-byscammers/. 59. Lee Rainie, “The State of Privacy in Post-Snowden America,” Pew Research Center, September 21, 2016; Timothy H. Edgar, “Why the NSA Should Thank Edward Snowden,” Fortune, October 3, 2017.

Endnotes

60. Abby Ohlheiser, “Erasing Yourself from the Internet Is Nearly Impossible. But Here’s How You Can Try,” The Washington Post, February 10, 2017. 61. Shan Li, “Target Hires New Security Chief from General Motors after Security Breach,” Los Angeles Times, 11 June 2014. 62. “Platform for Privacy Preferences,” www.w3.org/P3P, accessed June 2014. 63. Donovan Vincent, “Ontario’s welfare computer glitches are not the first,” January 25, 2015, Toronto Star, http://www.thestar.com/ news/canada/2015/01/25/ontarios-welfare-computer-glitchesare-not-the-first.html. 64. Mallory Schlossberg, “This Model Who Couldn’t Get an Internship in Fashion Is Becoming an Icon for an Industry Most Retailers Ignore,” Business Insider, January 19, 2016; Chantal Fernandez, “Chiara Ferragni Opens Milan Boutique, Gabi Gregg and Nicolette Mason’s New Brand,” Business of Fashion, July 24, 2017.

Chapter 2 1. Jeff Gray, “Canadian Documentary Warns Tax Havens Threaten Democracy,” The Globe and Mail, March 11, 2015, http://www. theglobeandmail.com/report-on-business/industry-news/the-lawpage/canadian-documentary-warns-tax-havens-threaten-democracy/ article23409274/. 2. Romain Hatchuel, “The Coming Global Wealth Tax,” The Wall Street Journal, January 15, 2014. 3. Benjamin Auslin, "Economics Shouldn’t Be and Elective", The Wall Street Journal, March 3, 2017. 4. Richard Blackwell, “Green energy sector jobs surpass total oil sands employment,” The Globe and Mail, December 2, 2014, http://www.theglobeandmail.com/report-onbusiness/industry-news/energy-and-resources/greenenergy-sector-jobs-surpass-oil-sand-employment-total/ article21859169/. 5. “Ballard Closes Technology Solutions Transaction with Volkswagen Group,” Ballard Power Systems, February 23, 2015, http://www.ballard.com/about-ballard/newsroom/newsreleases/2015/02/23/ballard-closes-technology-solutionstransaction-with-volkswagen-group. 6. Roger Lowenstein, “Macro Master,” The Wall Street Journal, December 4, 2013. 7. Glen Hodgson, “Canada’s debt levels are relatively healthy, but some provinces are worrisome,” The Globe and Mail, May 17, 2017. 8. Andrea Gunn, “Canada to Double Protected Areas,” ChronicleHerald, November 7, 2017. 9. “The Canadian Aquaculture Industry—A success story,” Canadian Aquaculture Industry Alliance, http://www.aquaculture.ca/files/ CanAquacultureFacts-08.pdf. 10. Ed Feulner, “The Slow Fade of Economic Freedom,” The Washington Times, January 14, 2014. 11. Greg Ip, “For Economy Aging Population Poses Double Whammy,” The Wall Street Journal, August 3, 2016; John Authers, “Demographics and Market: The Effects of Aging,” Financial Times, October 15, 2016; Prashanth Perumal, “Robots Might Be Saving the World From a Demographic Disaster,” Business Insider, March 8, 2017. 12. Gordan Harris and Glen Miller, “How Aging Boomers Will Disrupt Canada’s Demographic ‘Crisis’,” The Globe and Mail, February 4, 2015, http://www.theglobeandmail.com/globe-debate/ how-aging-boomers-will-disrupt-canadas-demographic-crisis/ article22780291/. 13. Randall Stephenson, “A Business Shortlist for Growth,” The Wall Street Journal, January 15, 2015. 14. Ed Feulner, “The Slow Fade of Economic Freedom,” The Washington Times, January 14, 2014. 15. Dennis Rasmussen, “The Problem of Inequality, According to Adam Smith,” The Atlantic, June 9, 2016. 16. Ibid. 17. Sara Mojtehedzadeh, “Toronto now Canada’s inequality capital, United Way study shows,” The Toronto Star, February 27, 2015,

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46. 47. 48.

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Forbes, November 27, 2012, http://www.forbes.com/sites/ tanyaprive/2012/11/27/what-is-crowdfunding-and-how-doesit-benefit-the-economy/; Mark Quinlan, “The pros and cons of crowd funding,” CBC News, June 22, 2012, http://www.cbc.ca/ news/canada/the-pros-and-cons-of-crowd-funding-1.1136449; Ruth Simon and Angus Loten, “Crowdfunding Gets State-Level Test Run,” The Wall Street Journal, December 4, 2013; J. Craig Andersen, “Maine ‘Crowd Investing’ Bill Becomes Law,” Portland Press Herald, March 6, 2014; and Nicole Fallon, “Equity Crowdfunding: 3 Facts Entrepreneurs Should Know,” Business News Daily, March 21, 2014. Geoffrey James, “How to Land a Career-Changing Job in Sales,” Inc., February 2, 2017; and Joe Robinson, “You’re Going to Love Sales,” Entrepreneur, February 2016. Kate Ashford, “Why You Should Consider Working for A Small Company,” Forbes, May 28, 2017; and Bill Saporito, “Do Workers Love Small Companies More?” Inc., November 2015. “The PROFIT 500 Reveal Their Best Business Lessons,” PROFITguide.com, June 12, 2014, http:// www.profitguide.com/manage-grow/leadership/ the-profit-500-reveal-their-best-business-lessons-66171. John Prusak, “FXR Racing’s Milt Reimer Recognized as Powersports Industry Leader,” Snow Goer, May 25, 2016, http:// snowgoer.com/latest-news/fxr-racings-milt-reimer-recognized-aspowersports-industry-leader/; and John Lorinc, “A Global Business Built on Lateral Thinking,” PROFITguide.com, August 5, 2014, http://www.profitguide.com/manage-grow/international-trade/aglobal-business-built-on-lateral-thinking-68047.

Chapter 8 1. Christian Stadler and Davis Dyer, “Why Good Leaders Don’t Need Charisma,” Sloan Management Review, Spring 2013. 2. Rachel Feintzeig, “So Busy at Work, No Time to Do the Job,” The Wall Street Journal, June 28, 2016; Michael Mankins, “How to Manage a Team of All-Stars,” Harvard Business Review, June 6, 2017. 3. “The 23 Female CEOs Running Fortune 500 Companies,” San Jose Mercury News, December 10, 2013. 4. David Malpass, “Five Big Steps Toward Global Growth,” Forbes, February 10, 2014. 5. Katherine Duncan, “Command Performance,” Entrepreneur, March 2013. 6. Steven Overly, “Going Green, Bit by Bit,” The Washington Post, April 22, 2013. 7. Stephanie Marton, “The mysterious success of female-led firms,” February 20, 2013, Forbes, http://www.forbes.com/ sites/85broads/2013/02/20/the-mysterious-success-of-femaleled-firms/. 8. Daniel Goleman, “The Focused Leader,” Harvard Business Review, December 2013. 9. Lynda Gratton, “Rethinking the Manager’s Role,” Sloan Management Review, Fall, 2016; Brian Tracey, “Learning Leadership: Eight Key Skills that Make an Effective Manager,” Forbes, March 13, 2017. 10. Marcus Buckingham, “What Great Managers Do,” Harvard Business Review, March 2005, 70–79. 11. Elizabeth Fenner, “Happiness,” Fortune, February 21, 2005, 36. 12. Kenneth R. Brousseau, Michael J. Driver, Gary Hourihon, and Rikard Larsson, “The Seasoned Executive’s Decision-Making Style,” Harvard Business Review, February 2006, 111–121. 13. Leigh Buchanan, “The Essential Management Book You’re Not Reading,” Inc., December 2013–January 2014. 14. Lisa Baertlein, “Whole Foods’ New, Cheaper Chain Launches Today,” Fortune, May 25, 2016; Andrew Khouri, “Whole Foods to Open Lower-Priced 365 Store in Santa Monica,” Times, May 16, 2017. 15. Roger L. Martin, “Rethinking the Decision Factory,” Harvard Business Review, October 2013. 16. “What Is the Difference Between Management and Leadership?” The Wall Street Journal, accessed March 2014.

17. Interesting contrasts among purpose, mission, and vision can be found in: John Mackey and Raj Sisodia, Conscious Capitalism (Boston, MA: Harvard Business Review Press, 2013). 18. Eric Paley, “Go Beyond Visionary; Be a Leader,” Inc., February 2014. 19. “SWOT Analysis,” www.MindTools.com, accessed September 2016. 20. Roger L. Martin, “The Big Lie of Strategic Planning,” Harvard Business Review, February 2014. 21. Giovanni Gavetti and Jan W. Rivkin, “How Strategists Really Think,” Harvard Business Review, April 2005, 54–63. 22. Greg Bensinger, “Amazon Plans to Compete with Paypal and Square in Retail Stores,” The Wall Street Journal, January 30, 2014. 23. Teppo Felin, “When Strategy Walks Out the Door,” Sloan Management Review, Fall, 2016: Terry Flores, “Disney-Pixar’s John Lasseter to be Honored by Walt Disney Family Museum,” Variety, August 16, 2017. 24. Anne Nicoll, “Beyond SARS: Developing Health Related Emergency Policies,” Benefits and Pensions Online, June 2003, http://www.bpmmagazine.com/02_archives/2003/june/ beyond_sars.html; “The New Contingency Plan—Health-Related Emergencies,” May 27, 2003, www.morneausobeco.com/PDF/ SARSCommuniqué_E.pdf 25. Gregory J. Millman and Samuel Rubenfeld, “For Corporate America, Risk Is Big Business,” The Wall Street Journal, January 16, 2014. 26. Miriam Gottfried, “This Eagle Must Hunt Elsewhere,” The Wall Street Journal, January 24, 2014. 27. Paul Rogers and Marcia Blenko, “Who Has the D?” Harvard Business Review, January 2006, 53–61. 28. Ram Charan, “The Secrets of Great CEO Selection,” Harvard Business Review, December 2016; Mark Murphy, “CEOs Embarking on Change Management Know That Your Employees Don’t Like Taking Risks,” Forbes, March 26, 2017. 29. “Trends in Airline Governance, Management Structures and Mandates,” June 14, 2011, www.iaaia.com/PDF/ent_trends_in_ airline_governance_at_14-06-11.pdf. 30. Julia Hunter, “Loblaw Announces Leaner Head Office Structure,” Loblaw Companies Limited, http://www.loblaw.ca/English/ Media-Centre/news-releases/news-release-details/2012/LoblawAnnounces-Leaner-Head-Office-Structure1131481/default.aspx, accessed May 3, 2015; Sunny Freeman, “Loblaw Profits Jump 20 Per Cent But Still Hit by Infrastructure Overhaul,” November 16, 2011, www.canadianbusiness.com/article/57306-loblaw-profitsjump-20-per-cent-but-still-hit-by-infrastructure-overhaul. 31. Andreas Priestland and Robert Hanig, “Developing First-Level Leaders,” Harvard Business Review, June 2005, 113–120. 32. Robert Kutz, “Skills of an Effective Administrator,” Harvard Business Review, Sept–Oct 1974, 90–101. 33. Sydney Finklestein, “Why Great Leaders Want Their Superstars to Leave,” The Wall Street Journal, October 3, 2017; Mike Kappel, “Is it Really that Hard to Find Good Employees?” Entrepreneur, May 12, 2017. 34. “The 10 Best Companies to Work For in 2014,” www.forbes.com, accessed March 2014. 35. Adam Bornstein and Jordan Bornstein, “What Makes a Great Leader?” Entrepreneur, March, 2016; Tony Schwartz, “How to Become a More Well-Rounded Leader,” Harvard Business Review, July 21, 2017. 36. Amy C. Cooper, “Unite and Conquer,” Entrepreneur, March 2013. 37. Kerry Dolan, “Billionaires, Led by Zuckerberg, Dig a Bit Deeper with 10 Biggest Charitable Gifts of 2013,” www.forbes.com, 1 January 2014 38. Dorrie Clark, “How the Best Leaders Embrace Change,” www. forbes.com, November 5, 2013 39. Barry Glassman, “In Business, Transparency Wins,” Forbes, January 15, 2014. 40. Bertrand Marotte, “Management Guru Assails Excessive CEO Salaries,” The Globe and Mail, May 8, 2003, B7. 41. Jim Pawlak, “Treating Employees as Assets, Not Expenses Boosts Profits,” Hartford Business Journal, February 24, 2014.

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Endnotes

42. Laura Bogomolny, “Most Innovative Exec/Canadian Tire—Janice Wismer,” Canadian Business, 2004, www.canadianbusiness.com/ allstars/best_innovative_exec.html.

Chapter 9 1. John Jullens, “How Emerging Giants Can Take On the World,” Harvard Business Review, December 2013. 2. Jonathan House and Kathleen Madigan, “U.S. Factories Bounce Back in February,” The Wall Street Journal, March 2, 2014. 3. Ann Hadley, “What Not to Do,” Entrepreneur, September 2013. 4. Amol Sharma, Shalini Ramachandran, and Don Clark, “Amazon Joins the TV Crush,” The Wall Street Journal, January 22, 2014. 5. Natalie Kaddas, “Being Flexible,” www.huffingtonpost.com, November 23, 2013 6. Mary Jordan, “The Promise of a ‘Made in America’ Era,” The Washington Post, May 1, 2013. 7. Fredrik Eliasson, “Emphasizing the Management in ‘Change Management,’” The Wall Street Journal, January 24, 2014. 8. John Mackey and Raj Sisodia, Conscious Capitalism (Boston, MA: Harvard Business Review Press, 2013). 9. Austen Carr, David Lidsky, J.J. McCorvey, Harry McCraken and Harry Wilson, “Search for the Future,” Fast Company, April 2016; Mark Bergen, “Alphabet” Bloomberg, September 1, 2017. 10. Jeff Bennett and John Kell, “GM Restores Annual Dividend as Sales Shine,” The Wall Street Journal, January 15, 2014. 11. Rashik Parmar, Ian Mackenzie, David Cohn, and David Gann, “The New Patterns of Innovation,” Harvard Business Review, January– February 2014. 12. Raymond Fisman and Tim Sullivan, “The Unsung Beauty of Bureaucracy,” The Wall Street Journal, May16–17, 2014. 13. Sydney Hershman, “Nordstrom is Changing Its Popular Return Policy,” Essence, February 1, 2017. 14. Henry Mintzberg and James Brian Quinn, The Strategy Process: Concepts and Contexts (New Jersey: Prentice Hall Inc., 1992). 15. Henry Mintzberg, Managers not MBAs (San Francisco: BerrettKoehler Publishers, 2004). 16. Nathaniel Smithson, “Burger King’s Organizational Structure Analysis,” Panmore Institute, February 6, 2017. 17. mcdonalds.com, accessed September 2017. 18. Magna International, “2014 Annual Report to Shareholders,” 2014, http://www.magna.com/investors/ financial-reports-public-filings. 19. Gary L. Neilson and Julie Wulf, “How Many Direct Reports?” Harvard Business Review, April 2012. 20. David Gann, Ammon Salter, Mark Dodgson and Nelson Phillips, “Inside the World of the Project Baron,” Sloan Management Review, Spring 2012. 21. Jeff Weiss and Jonathan Hughes, “Want Collaboration?” Harvard Business Review, March 2005, 93–101. 22. Bill Fischer and Andy Boynton, “Virtuoso Teams,” Harvard Business Review, July–August 2005, 117–21. 23. Braden Kowitz, “Why You Should Listen to the Customer,” The Wall Street Journal, February 19, 2014. 24. Mary C. Lacity and Leslie P. Willco*cks, “Outsourcing Business Processes for Innovation,” Sloan Management Review, Spring 2013. 25. Rita Gunther McGrath, “Is Your Company Ready to Operate as a Market?” Sloan Management Review, Fall 2016; Josh Bersin, Tiffany McDowell, Amir Rahnema, Yves Van Durme, “The Organization of the Future: Arriving Now,” Deloitte University Press, February 28, 2017. 26. David Raths, “KM infrastructure for the life sciences virtual organization,” KKM World, March 1, 2015, http://www.kmworld. com/Articles/Editorial/Features/KM-infrastructure-for-the-lifesciences-virtual-organization-102166.aspx. 27. Suncor, Report on Sustainability 2014, http://sustainability.suncor. com/2014/en/goals/environment-and-social-progress-reports. aspx, accessed May 9, 2015. 28. Kasia Klimasinska, “Obama Budget Predicts Strongest U.S. Growth since 2005,” Bloomberg BusinessWeek, March 4, 2014.

EN-15

29. Dennis Green, “Trump’s Policies Have Nike Facing One of Its Biggest Threats in History,” Business Insider, January 26, 2017. 30. “Outsourcing bank jobs is common practice, say employees,” CBC News, April 9, 2013, http://www.cbc.ca/news/canada/outsourcingbank-jobs-is-common-practice-say-employees-1.1333814. 31. Robert I. Sutton and Huggy Rao, “Before You Make Any Changes, Ask These Questions,” Bloomberg BusinessWeek, March 4, 2014. 32. Angela Charlton and Tom Krishner, “GM Sheds Money Drain, Gains Cash With Sale of European Unit,” KWWL News, March 6, 2017 33. “How much did the GM Bailout Cost Taxpayers?” Bloomberg, September 20, 2016; Bill Vlasic & Neil E. Bodette, “Shell of Old GM Surfaces in Court Fight of Ignition Flaw,” The New York Times, August 17, 2017; “Ottawa doesn’t regret GM bailout,” April 21, 2010, www.cbc.ca/news/canada/windsor/story/2010/04/21/wdrdetroit-gm-government-loans-100421.html. 34. Why did Target fail in Canada? It wasn’t the U.S. Target,” CBC News, January 15, 2015, http://www.cbc.ca/news/canada/ manitoba/why-did-target-fail-in-canada-it-wasn-t-the-u-starget-1.2901676. 35. Darah Hansen, “How to fix Target Canada’s problems in six easy steps,” Canadian Business, July 28, 2014, http:// www.canadianbusiness.com/companies-and-industries/ how-to-fix-target-canada/. 36. Dan Lyons, “How to Master Change,” Fortune, December 1, 2016; Neale Godfrey, “Change or Be Left Behind: The Company of the Future,” Forbes, April 9, 2017. 37. “About,” Novocare Rehabilitation, accessed May 9, 2015, http:// www.novacare.com/about/; David Ernst and James Bamford, “Your Alliances Are Too Stable,” Harvard Business Review, June 2005, 133–141. 38. Michael E. Raynor and Mumtaz Ahmed, “Three Rules for Making a Company Truly Great,” Harvard Business Review, April 2013. 39. Deborah Aarts, “Innovate at any size: we fetishize tiny startups, but lots of companies get big and keep their disruptive streak intact,” Canadian Business, October 2014, 38. 40. Tracey Hilderley, “Keeping things comfortable for over 100 years,” Business in Focus, May 9, 2014, http://www. businessinfocusmagazine.com/2012/11/keeping-thingscomfortable-for-over-100-years/. 41. Henry Mintzberg and James Brian Quinn, The Strategy Process: Concepts and Contexts (New Jersey: Prentice Hall Inc., 1992). 42. www.td.com/careers 43. Alex (Sandy) Pentland, “The New Science of Building Great Teams,” Harvard Business Review, April 2012. 44. Jay Rao and Joseph Weintraub, “How Innovative Is Your Company’s Culture?” Sloan Management Review, Spring 2013.

Chapter 10 1. “Innovation in Canada,” Sackville: Centre for Canadian Studies at Mount Allison University, www.mta.ca/faculty/arts/ canadian_studies/english/about/innovation/. 2. Innovation Analysis Bulletin, Vol. 6, No. 1, March 2004, www. statcan.gc.ca/pub/88-003-x/88-003-x2004001-eng.pdf. 3. “Canada’s top 100 corporate R&D spenders,” Canada’s Innovation Leaders, Research Infosource Inc., November 17, 2016, https:// researchinfosource.com/pdf/CIL%20Top%20100%20R%20 and%20D%20Analysis.pdf. 4. Ibid. 5. Ibid. 6. “Spending on research and development, 2016,” June 23, 2017, http://www.statcan.gc.ca/daily-quotidien/170623/dq170623ceng.pdf. 7. “Canadian Manufacturing Today: Cautiously Optimistic,” Canadian Manufacturers & Exporters, 2014, http://www.cme-mec.ca/_ uploads/_media/51wjbzblm.pdf. 8. Andrea Petersen, “Checking In? Hidden Ways Hotels Court Guests Faster,” The Wall Street Journal, April 12, 2012. 9. Julie Weed, “Hoteliers Comb the Ranks of Tech Workers to Gain an Edge,” The New York Times, February 13, 2017.

Endnotes

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34. “ISO Standards,” International Organization for Standardization, https://www.iso.org/standards.html. 35. “Quality Policy,” SNC-Lavalin Group Inc., www.snclavalin.com/ en/6_0/6_10.aspx 36. “Extensive debate improves consensus on future ISO 26000 standard on social responsibility,” International Organization for Standardization, June 4, 2009, www.iso.org/iso/pressrelease. htm?refid=Ref1229. 37. William McDonough and Michael Baungart, Cradle to Cradle: Remaking the way we make things, (New York: North Point Press, 2002). 38. Matthew Wheeland, “Design and performance reconsidered,” GreenBiz, June 11, 2008, http://www.greenbiz.com/ news/2008/06/11/design-and-performance-reconsidered. 39. “2015 Nike Free Collection: Five reasons less is more,” Nike, http://news.nike.com/news/2015-nike-free-collection, accessed March 23, 2015. 40. “The future: closed-loop business model,” Corporate Responsibility Report, FY2007-FY2009 Nike Inc. http://www.nikebiz.com/ crreport/content/strategy/2-1-1-corporate-responsibility-strategyoverview.php?cat=cr-strategy, accessed May 17, 2015. 41. Robert Bowman, “The sign in the elevator banks at CocaCola Refreshments reads: ‘There is a person at the end of our supply chain.’ Well, that’s a start,” Supply Chain Brain, March 2, 2015, http://www.supplychainbrain.com/content/nc/generalscm/business-strategy-alignment/single-article-page/article/ demand-planning-at-coca-cola-whats-the-secret-formula/. 42. Alicia Fiorletta, “Source for Sports streamlines supply chain with Askuity,” Retail Touch Points, June 25, 2014, http://www. retailtouchpoints.com/features/retail-success-stories/sourceforsports-streamlines-supply-chain-with-askuity; “Source for Sports – We Know Our Stuff,” Source for Sports, 2015, accessed May 12, 2015 http://www.sourceforsports.com/AboutUs.aspx. 43. “Kodiak to close Terra Nova Shoes, move jobs to Ontario,” CBC News, July 8, 2014, accessed July 9, 2018, https://www.cbc.ca/ news/canada/newfoundland-labrador/kodiak-to-close-terra-novashoes-move-jobs-to-ontario-1.2699713. 44. “Three Cambridge Firms get $2 million in Provincial Funding,” Waterloo Region Record, November 17, 2015. 45. Ann C. Logue, “Trimming the Fat,” Entrepreneur, February 2014. 46. Steve Blank, “‘Lean’ Is Shaking Up the Entrepreneurial Landscape,” Harvard Business Review, July–August 2013. 47. Dennis Sowards, “Lean Construction,” Quality Digest, November 2007. 48. Max Berlinger, “A Custom Shirt is No Longer So Hard to Find,” The New York Times, December 7, 2016. 49. Sandra Zaragoza, “Boston Duo Starts Customized Guitar Shop in Austin,” Austin Business Journal, July 23, 2012; and Chris Raymond, “Design Your Own Guitar—This Startup Will Build It,” Popular Mechanics, February 7, 2014. 50. Binyamin Applebaum, “Why Are Politicians So Obsessed with Manufacturing?” The New York Times Magazine, October 4, 2016, https://www.nytimes.com/2016/10/09/magazine/why-arepoliticians-so-obsessed-with-manufacturing.html. 51. Emily Price, “You Rang? I Called the Hotel Room Service - And Got a Robot,” Fast Company, February 27, 2017. 52. Nathaniel Popper, “The Robots Are Coming for Wall Street,” The New York Times, February 25, 2016. 53. Jim Rock, “How Robots Will Reshape the U.S. Economy,” TechCrunch, March 21, 2016. 54. David. Z. Morris, “iPhone Manufacturer FoxConn Aims for Full Automation of Chinese Factories,” Fortune, December 31, 2016. 55. Tavia Grant, “Rise of machines: robots poised to transform global manufacturing,” The Globe and Mail, February 10, 2015, http:// www.theglobeandmail.com/report-on-business/rise-of-themachines-robots-poised-to-transform-global-manufacturing/ article22884032/. 56. Robb M. Stewart, “The Construction Business Goes Digital,” The Wall Street Journal, September 18, 2016. 57. Ted Mann, “3-D Printing Expands to Metals, Showing Industrial Promise,” The Wall Street Journal, November 11, 2016.

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Endnotes

Chapter 11 1. Gary J. Bissonette, Business, 1st ed. (Toronto: McGraw-Hill Ryerson, 2012), 441. 2. Gary Johns and Alan M. Saks, Organizational Behaviour, 8th ed. (Toronto: Pearson Canada, 2011), 146. 3. Jack Altman, “How Much Does Employee Turnover Really Cost?” Huffington Post, January 18, 2017; and Julie Kantor, “High Turnover Costs Way More Than You Think,” Huffington Post, February 11, 2016. 4. Marla Tabaka, “Want Smart, Happy, Loyal Employees? Give Them What They Crave,” Inc., October 11, 2016; Ryan Scott, “Employee Engagement Vs. Employee Experience,” Forbes, May 4, 2017. 5. “Best Places to Work in 2017,” Forbes, December 7, 2016; “The 100 Best Companies to Work for 2017,” Fortune, March 9, 2017. 6. “Beyond the Cash Bonus,” Inc., November 2016; Tomas Chamorro-Premuzic and Lewis Garrad, “If You Want to Motivate Employees, Stop Trusting Your Instincts,” Harvard Business Review, February 8, 2017. 7. “Canada’s 100 Best Small & Medium Employers - DAC Group values ‘geeks with personalities’,” The Globe and Mail and Mediacorp Canada Inc., March 2015, p. 24. 8. Timothy T. Baldwin, William H. Bommer, and Robert S. Rubin, Managing Organizational Behavior, What Great Managers Know and Do, 2nd ed. (New York: McGraw-Hill Irwin, 2013), 198. 9. Ibid., 197. 10. Jay Velury, “Empowerment to the People,” Industrial Engineer, May 1, 2005. 11. Ben Ames, “Technology Keeps UPS Drivers on Pace,” DC Velocity, September 30, 2016; Matt McFarland, “UPS Is Training Drivers with Virtual Reality,” CNN, August 15, 2017. 12. Peter High, “Standard International’s CEO on the Future of Hospitality,” Forbes, October 31, 2016; Joie de Vivre Hotels, accessed September 2017. 13. Victor Lipman, “Want to Develop Your Employees? A Simple Management Tool Can Help,” Forbes, March 9, 2017. 14. “Canada’s Top Employers (2018): Selection Process,” The Globe and Mail, November 7, 2017, http://www.canadastop100.com/ national/. 15. Ibid., 17. 16. Travis Bradberry, “Bad Manager Mistakes That Make Good People Quit,” LinkedIn, January 30, 2017. 17. Erin Reid and Lakshmi Ramarajan, “Managing the High-Intensity Workplace,” Harvard Business Review, June 2016; Dick Grote, “3 Popular Goal-Setting Techniques Managers Should Avoid,” Harvard Business Review, January 2, 2017. 18. Kate Rockwood, “Want to Make Your Team Feel Great? Shower Them with Appreciation,” Inc., June 2016; John Rampton, “The Neuroscience of Motivation,” Mashable, June 27, 2017. 19. David Nadler and Edward Lawler, “Motivation—a Diagnostic Approach,” Perspectives on Behavior in Organizations (New York: McGraw-Hill, 1977). 20. David Nicklaus, “What Price Awards?” St. Louis Post-Dispatch, April 19, 2013. 21. Jae Yang and Janet Loehrke, “Lake Wobegon Effect,” USA Today, May 12, 2016; Mark Murphy, “The Dunning-Kruger Effect Shows Why Some People Think They’re Great Even When Their Work Is Terrible,” Forbes, January 24, 2017. 22. Marcel Schwantes, “4 Communication Habits of Mentally Strong Leaders,” Inc., January 20, 2017. 23. Stephanie Vozza, “Surprising Work Tips,” Fast Company, April 2016; Chris Dessi, “4 Powerful Ways to Be Happy with Your Career,” Inc., December 27, 2016; Miranda Brookins, “The Advantages & Disadvantages of Job Enrichment,” Houston Chronicle, accessed September 2017. 24. Gary Johns and Alan M. Saks, Organizational Behaviour, 8th edition (Toronto: Pearson Canada, 2011), 194. 25. Baldwin, Bommer, and Rubin, Managing Organizational Behavior, What Great Managers Know and Do, 212. 26. Sheila Marikar, “Giving Employees the Tools to Excel Helps This Company Clean Up,” Inc., June 2016; John Brandon, “7 Ways to

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Motivate Your Team (Other Than Paying Them More),” Inc., March 23, 2017. Murray Newlands, “5 Proven Ways to Improve Your Company’s Communication,” Forbes, January 26, 2016; AJ Agrawal, “How to Perfect Communication in Your Company,” Inc., January 31, 2016; Catherine Ulrich, “The Easy Secret to Getting the Most Out of Your Team,” Fortune, October 14, 2016; Tom Salonek, “5 Tips for MoreEffective Business Communication,” The Business Journals, April 7, 2017. Richard Johnson, “Why Ford Stands By Its ‘One Ford’ Philosophy,” Automotive News, March 7, 2017; Kenny Kline, “How to Communicate with Your Team More Effectively,” Inc., March 21, 2017. Travis Bradberry, “9 Things That Make Good Employees Quit,” Huffington Post, January 2, 2016; Shannon Gausepohl, “Why Your Best Employees Are Quitting (and 3 Ways to Keep Them),” Business News Daily, January 26, 2017. Minda Zetlin, “Time Off Well Spent,” Inc., June 2016; Lolly Daskal, “9 Simple Ways You Can Make Your Employees Happy,” Inc., March 3, 2017; Jeff Haden, “To Be an Exceptional Boss, Here Are 11 Things You Must Give Your Employees,” Inc., March 27, 2017. Tanya Hall, “10 Cheap and Simple Steps to Happy Employees,” Inc., January 20, 2017; Karen Higginbottom, “Employee Appreciation Pays Off,” Forbes, March 3, 2017. Globoforce, www.globoforce.com, accessed September 2017. “Michael Adams,” Environics Research Group, 2015, http:// www.environics.ca/michael-adams; “Profile - David K. Foot,” Footwork Consulting Inc., [n.d.], http://www.footwork.com/ profile.asp; Colonel James C. Taylor, “Whither march the cohorts: The validity of generation theory as a determinant of the sociocultural values of Canadian Forces personnel,” Canadian Forces College, June 2008, http://www.cfc.forces. gc.ca/259/281/280/taylor.pdf; John Markert, “Demographics of Age: Generational and Cohort Confusion,” Journal of Current Issues and Research in Advertising, 26, no. 2 (Fall 2004), 1; and Dan Schawbel, “Employers, prepare to meet Gen Z,” The Globe and Mail, September 2, 2014, http://www. theglobeandmail.com/report-on-business/careers/leadership-lab/ employers-prepare-to-meet-gen-z/article20280755/. Dan Schawbel, “Employers, prepare to meet Gen Z,” The Globe and Mail, September 2, 2014. “Latchkey child,” Merriam-Webster, Inc., 2015, http://www. merriam-webster.com/dictionary/latchkey%20child. Lisa Rochon, “Why the cities of the future belong to the millennial generation,” The Globe and Mail, April 15, 2015, http://www.theglobeandmail.com/arts/why-thecities-of-the-future-belong-to-the-millennial-generation/ article11154532/; and Ray Williams, “Like it or not, Millennials will change the workplace,” Financial Post, September 16, 2013, http://business.financialpost.com/2013/09/16/ like-it-or-not-millennials-will-change-the-workplace/. Anne Kingston, “Get ready for Generation Z,” Maclean’s, July 15, 2014, http://www.macleans.ca/society/life/ get-ready-for-generation-z/. Ibid. Geoff Colvin, “Millennials Are Not Monolithic,” Fortune, November 2016; Ryan Jenkins, “Why Millennials Will Matter More in 2017,” Inc., January 3, 2017. Elizabeth Dukes, “3 Things Your Workplace Does That Millennials Hate,” Inc., March 7, 2017; Ayse Birsel, “What Millennials Want in a Workplace (Spoiler Alert: A Kitchen Is Involved),” Inc., March 23, 2017; Rich Bellis, “Four Workplace Stereotypes Millennials (Like Me) Thoroughly Resent),” Fast Company, March 24, 2017. Dan Schawbel, “Employers, prepare to meet Gen Z,” The Globe and Mail, September 2, 2014, updated May 12, 2018, accessed July 11, 2018, https://www.theglobeandmail. com/report-on-business/careers/leadership-lab/ employers-prepare-to-meet-gen-z/article20280755/. Ryan Inzana, “Your New Office BFFs,” Money, May 2013. Lindsay Gellman, “Bosses Try to Decode Millennials,” The Wall Street Journal, May 18, 2016; Shen Lu, “When Millennials Are the Boss,” CNN, August 11, 2017.

Endnotes

44. Anne Kingston, “Get ready for Generation Z,” Maclean’s, July 15, 2014, https://www.macleans.ca/society/life/ get-ready-for-generation-z/. 45. Dan Schawbel, “Employers, prepare to meet Gen Z.” 46. Ibid. 47. Marina Khidekel, “The Misery of Mentoring Millennials,” Bloomberg BusinessWeek, March 18–24, 2013. 48. Lisa Rabasco Roepe, “5 Ways Gen Z Can Ask Their Manager for Help with Communication Skills,” Forbes, March 28, 2017; Deep Patel, “10 Ways to Prepare for Gen Z in the Workplace,” Forbes, March 29, 2017. 49. Scott Thompson, “Challenges of Humanistic Management,” Houston Chronicle, accessed May 13, 2018, http://smallbusiness. chron.com/challenges-humanistic-management-64545.html.

Chapter 12 1. Eric Garton, “HR’s Vital Role in How Employees Spend Their Time, Talent, and Energy,” Harvard Business Review, January 30, 2017. 2. Karen Higgenbottom, “Top Challenges Facing HR Directors of Global Firms in 2017,” Forbes, December 28, 2016; Victoria Stilwell and Sarah McGregor, “On-Call, Temp Jobs Are the New Normal,” St. Louis Post-Dispatch, June 3, 2016; Karsten Strauss, “10 Great ‘Gig Economy’ Jobs in 2017,” Forbes, March 13, 2017. 3. “20th CEO Survey: 20 years inside the mind of the CEO . . . What’s next?” PWC, 2017, https://www.pwc.com/gx/en/ceo-survey/2017/ pwc-ceo-20th-survey-report-2017.pdf. 4. Peter Louch, “Workforce Planning Is Essential to High-Performing Organizations,” Society for Human Resource Planning, accessed September 2017. 5. “Strategic Planning: How Can a Skills Inventory Be Used for Strategic HR Planning?” Society for Human Resource Management, accessed September 2017. 6. “The Secrets of Successful, Fast-Growing Businesses Today—and Plans for Tomorrow,” Inc., September 2016; Ellen Huet and Gerrit De Vynck, “America’s Got No Talent,” Bloomberg Businessweek, November 21, 2016; Forbes Human Resources Council, “Six Key Factors That Will Help You Retain Top Talent,” Forbes, March 9, 2017. 7. Geoff Colvin, “Developing an Internal Market for Talent,” Fortune, March 1, 2016; “The Surprising Benefits of Hiring Internally,” TRC Staffing Services,” March 28, 2017. 8. Jeff Bercovici, “To Keep the Buzz Going, Be Sure to Hire People Who Fit In,” Inc., June 2016; Áine Cain, “An Ex-Apple Recruiter Says There’s an Unexpected Dark Side to Hiring for ‘Culture Fit’,” Business Insider, September 1, 2017. 9. “Canada’s 100 Best Small & Medium Employers—Richter LLP,” The Globe and Mail and Mediacorp Canada Inc., March 2015, 7. 10. “Insider’s Guide to Getting a Job in the Canadian Government,” Government of Canada, 2018, https://canadiangovernmentjobs. ca/the-hiring-process-in-the-government-of-canada/. 11. “Canada’s 100 Best Small & Medium Employers - Rohit Group’s winning ways: challenge and teamwork,” The Globe and Mail and Mediacorp Canada Inc., March 2015, 54. 12. “About Us,” Passion Inc., January 24, 2018, https://www. jobpostings.ca/about-us. 13. Nicola Middlemiss, “Leveraging technology: because it’s worth it,” HRM Online, March 23, 2015, http://www.hrmonline.ca/hr-news/ leveraging-technology-because-its-worth-it-189482.aspx. 14. Julie Kantor, “High Turnover Costs Way More Than You Think,” Huffington Post, February 11, 2016; Heather Boushey and Sarah Jane Glynn, “There Are Significant Business Costs to Replacing Employees,” Center for American Progress, accessed September 2017; Jack Altman, “How Much Does Employee Turnover Really Cost?” Huffington Post, January 18, 2017. 15. “Corporate Profile,” BackCheck, 2018, http://www.backcheck. net/about.htm; Chad Brook, “Best Background Check Services 2017,” Business News Daily, October 13, 2016; Antique Nguyen, “3 Background Check Compliance Tips for 2017,” PreCheck Blog, February 15, 2017.

16. Kim Isaacs, “Lying on your Resume,” Monster, accessed May 12, 2018, https://www.monster.ca/career-advice/article/ lying-on-your-resume-canada. 17. Brian Thiessen, Damian Rigolo, and Shaun Parker, “Employer learnings from Suncor v Unifor,” Osler, Hoskin & Harcourt LLP, 19 April 2017, https://www.osler.com/en/resources/ governance/2017/random-drug-and-alcohol-testingemployer-learnin; Ryan Anderson, “Can Employers Test for Drug & Alcohol Use in the Workplace?” go2HR, 2017, https://www.go2hr.ca/legal/can-employers-test-for-drugalcohol-use-in-the-workplace; and Scott MacDonald, “Drug Testing in the Canadian Workplace,” HeretoHelp, 2015, http://www.heretohelp.bc.ca/visions/workplaces-vol5/ drug-testing-in-the-canadian-workplace. 18. Jae Yang and Veronica Bravo, “Time Limit for New Hires,” USA Today, May 3, 2016; “Probationary Employment Periods,” Inc., accessed September 2017. 19. Rachel Emma Silverman, “Workplace Democracy Catches On,” The Wall Street Journal, March 28, 2016; Joshua Clark Davis, “So Much for ‘Conscious Capitalism’,” Slate, June 19, 2017. 20. Amanda Silliker, “More firms hiring contract workers,” Canadian HR Reporter, May 7, 2012, http://www.hrreporter.com/ articleview/13016-more-firms-hiring-contract-workers. 21. Linda Nazareth, “The gig economy is here – and we aren’t ready,” The Globe and Mail, October 20, 2017, https://www. theglobeandmail.com/report-on-business/rob-commentary/ the-gig-economy-is-here-and-we-arent-ready/article36678505/. 22. Ibid. 23. Susan M. Heathfield, “20 Ways Zappos Reinforces Its Company Culture,” The Balance, June 28, 2016; S. Chris Edmonds, “Are You Really Onboarding Your Employees the Best Way Possible?” Forbes, July 21, 2017. 24. “Mission Statement,” Skills Canada, 2018, http:// skillscompetencescanada.com/en/mission-statement/; “Skilled trades shortage costing Windsor-Essex $600M every year, says report,” CBC News, June 20, 2017, http://www.cbc.ca/news/ canada/windsor/skilled-trades-shortage-costing-windsor-essex600m-every-year-says-report-1.4168822; and Susan Mas, “Shortage of skilled workers could jeopardize the economy,” CBC News, June 25, 2014, http://www.cbc.ca/news/politics/shortageof-skilled-workers-could-jeopardize-the-economy-1.2687365. 25. GlobeSmart, www.aperianglobesmart.com, accessed September 2017. 26. Tess Taylor, “4 Learning and Development Trends for HR Leaders to Watch in 2017,” HR Dive, November 15, 2016; “6 Advantages of Training Simulations in the Workplace,” Designing Digitally, June 20, 2017. 27. Lauren Weber and Rachel Louise Ensign, “Promoting Women Is Crucial,” The Wall Street Journal, September 28, 2016; “How to Develop Future Leaders,” The Wall Street Journal, accessed September 2017. 28. Lauren Weber and Rachel Louise Ensign, “Promoting Women Is Crucial,” The Wall Street Journal, September 28, 2016; “Finding, and Keeping, the Right People,” Inc., September 2016; Eben Harrell, “Succession Planning: What the Research Says,” Harvard Business Review, December 2016; Michael Corkery, “At Walmart Academy, Training Better Managers. But With a Better Future?” The New York Times, August 8, 2017. 29. “Canada’s Top Employer for Young People,” Mediacorp Canada Inc., 2015, http://www.eluta.ca/jobs-at-loblaws#young:youngmore. 30. McDonald’s, www.mcdonalds.com, accessed September 2017. 31. “Best Employers in Canada,” Aon Hewitt, 2015, http://www. aon.com/canada/products-services/human-capital-consulting/ consulting/best_employers/documents/casestudy_cisco.pdf. 32. Jeffrey Dauksevich, “How to Be an Effective Mentor,” Entrepreneur, December 27, 2013; and John Brandon, “How to Maximize the Benefits of Mentoring,” Inc., January 2014. 33. “Creating Opportunity for Generation Next: This Year’s ‘Canada’s Top Employers for Young People’ are Announced,” CNW Group Inc., April 24, 2014, http://www.newswire.ca/en/story/1345087/

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creating-opportunity-for-generation-next-this-year-s-canada-s-topemployers-for-young-people-are-announced. Harvey Meyer, “The Merits of Mentoring,” The Costco Connection, July 2016; Anthony K. Tjan, “What the Best Mentors Do,” Harvard Business Review, February 27, 2017. “From Y to Z a guide to the next generation of employees,” Randstad, 2015, http://w.randstad.ca/y2z/. Ibid. Richard Yerema and Kristina Leung, “Recognized as One of Canada’s Top 100 Employers (2018),” Mediacorp Canada Inc., November 6, 2017, https://content.eluta.ca/top-employer-td-bank. Rachel Emma Silverman, “GE Tries to Reinvent the Employee Review, Encouraging Risks,” The Wall Street Journal, June 8, 2016; Lauren Weber, “Nowhere to Hide for ‘Dead Wood’ Workers,” The Wall Street Journal, August 16, 2016; Dan Schawbel, “10 Workplace Trends You’ll See in 2017,” Forbes, November 1, 2016; Jeff Kauflin, “Hate Performance Reviews? Good News: They’re Getting Shorter and Simpler,” Forbes, March 9, 2017. “More Organizations Shift to Market-Based Pay Structures,” Society for Human Resource Management, shrm.org, accessed March 2017. “Pay Structures,” salary.com, accessed September 2017; “Building a Market-Based Pay Structure from Scratch,” Society for Human Resource Management, October 27, 2016; Mykkah Herner, “Which Compensation Structure Is Right for Your Company?” PayScale, May 8, 2017. “Advantages of Skill-Based Pay,” Human Resource Management Practice, accessed September 2017. David Nicklaus, “Professors Explore Dark Side of PerformanceBased Pay,” St. Louis Post-Dispatch, April 5, 2016; Chidiebere Ogbonnaya, Kevin Daniels and Karina Nielsen, “Research: How Incentive Pay Affects Employee Engagement, Satisfaction, and Trust,” Harvard Business Review, March 15, 2017. “Providing Employee Benefits Continues To Be A Significant Cost For Employers,” The Conference Board of Canada, November 9, 2015, http://www.conferenceboard.ca/press/ newsrelease/15-11-09/Providing_Employee_Benefits_ Continues_To_Be_A_Significant_Cost_For_Employers. aspx?AspxAutoDetectCookieSupport=1. Amanda Frank, “Do You Know How Much You’re Paying for Health Benefits?” Monster.ca, accessed March 31, 2015, http://careeradvice.monster.ca/salary-benefits/benefits-information/how-muchare-health-benefits-canada/article.aspx. Catherine McIntyre, “How much should your company spend on employee benefits?” Canadian Business, November 8, 2016, http://www.canadianbusiness.com/innovation/ how-much-should-employee-benefits-cost/. Schwind et al., Canadian Human Resource Management—A Strategic Approach, 366. Ibid. “Younger Generations Expect Companies to Stimulate Economy and Close Gender Gap—But Don’t Expect Their Loyalty,” PRNewswire, February 26, 2015, http://www.prnewswire.com/ news-releases/younger-generations-expect-companies-tostimulate-economy-and-close-gender-gap—-but-dont-expecttheir-loyalty-294174141.html. Tara Deschamps and Shawn Jeffords, “‘Reckless’: Tim Hortons blasts franchisees’ cuts to paid breaks and benefits,” Financial Post, January 8, 2018, http://business.financialpost.com/news/ retail-marketing/tim-hortons-blasts-franchisees-cuts-to-paidbreaks-and-benefits-calling-them-reckless. Jackie Dunham, “‘They’re vulnerable right now’: Tim Hortons’ brand reputation plummets,” CTV News, April 5, 2018, https:// www.ctvnews.ca/business/they-re-vulnerable-right-now-timhortons-brand-reputation-plummets-1.3872508. Deschamps and Jeffords, Financial Post, January 8, 2018. Dunham, CTV News, April 5, 2018. Ibid. Susan Johnston Taylor, “5 Employee Benefits Trends to Watch in 2017,” US News & World Report, December 29, 2016; “2017 Compensation Best Practices Report,” PayScale Human Capital, February 15, 2017, accessed September 2017,

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https://www.payscale.com/compensation-today/2017/02/ payscales-2017-compensation-best-practices-report. Theresa W. Carey, “Two New Employee Benefits Aimed at Millennials,” Barron’s, May 23, 2016; Rachel Emma Silverman, “Bosses Turn to Loans to Help Employees,” The Wall Street Journal, June 1, 2016; Carla Fried, “Here’s Why Employers May Want to Help Out on the Mountain of Student Loan Debt,” CNBC, August 19, 2017. Jeff Kauflin, “The Top 20 Employee Perks and Benefits for 2017,” Forbes, February 9, 2017. “Canada’s 100 Best Small & Medium Employers,” Verafin Inc.,” 8. National Legal and Research Group, “Cafeteria Plans: An Employer’s Guide,” Willis Towers Watson, accessed September 2017. Kate Rockwood, “Blowing Up the Workweek,” Inc., December 2016–January 2017; Rachel Ritlop, “Millennials, Consider These 16 Companies If You’re Looking For Work-Life Balance,” Forbes, August 9, 2017. Lauren Weber, “Regulators Investigate Retailers’ Work Scheduling,” The Wall Street Journal, April 13, 3016; Henry Grabar, “Malls and Restaurants Schedule Workers at the Last Minute. Oregon Just Made That Illegal,” Slate, August 10, 2017; and Seres Lu, "On-call scheduling under increasing scrutiny in Canada,” The Globe and Mail, March 25, 2017, https://www.theglobeandmail.com/report-onbusiness/on-call-scheduling-under-increasing-scrutiny-in-canada/ article26240704/. Sarah White, “Working from Home Can Benefit Employers as Much as Employees,” monster.com, accessed September 2017. Ross Marowits, “Telecommuting growing as companies look to save money, respond to employees,” The Canadian Press, May 23, 2016, http://www.cbc.ca/news/business/telecommutinggrowing-as-companies-look-to-save-money-respond-toemployees-1.3596420. James Fettes, “Is Hot Desking Actually Any Good for Employee Productivity?” Australian Broadcasting Corporation, accessed March 2017. Kristen Quan, “Amex Canada’s Howard Grosfield,” Canadian Business, April 2015, 18. “Canadian pay equity requirements,” Hay Group, 2018, http:// www.haygroup.com/ca/services/index.aspx?id=43781; “Federally Regulated Businesses and Industries,” Government of Canada, July 14, 2016, https://www.canada.ca/en/employment-socialdevelopment/programs/employment-equity/regulated-industries. html; Schwind et al., Canadian Human Resource Management, 136–141; and “Federal Labour Standards,” Government of Canada, March 16, 2015, http://www.labour.gc.ca/eng/ standards_equity/st/. “Maclean’s is asking men to pay 26% more for our latest issue,” Maclean’s, February 8, 2018, http://www.macleans.ca/society/ why-macleans-is-asking-men-to-pay-26-more-for-our-latestissue/; Catherine McIntyre, “Why do men make more money than women?” Maclean’s, February 8, 2018, http://www.macleans. ca/society/why-do-men-make-more-money-than-women/; Catherine McIntyre, “These are the key numbers that explain the wage gap for women,” Maclean’s, February 28, 018, http:// www.macleans.ca/society/pay-equity-statistics-canada/; “Study: Women in Canada: Women and paid work,” Statistics Canada, March 8, 2017, http://www.statcan.gc.ca/daily-quotidien/170308/ dq170308b-eng.pdf; Solomon Israel, “StatsCan on gender pay gap: Women earn 87¢ to men’s $1,” CBC News, March 8, 2017, http://www.cbc.ca/news/business/statistics-canadagender-pay-gap-1.4014954; “What is the Gender Wage Gap?” Pay Equity Commission, 2018, http://www.payequity.gov.on.ca/ en/GWG/Pages/what_is_GWG.aspx; and “Closing the Gender Pay Gap,” Canadian Labour Congress, March 15, 2015, http:// canadianlabour.ca/issues-research/closing-gender-pay-gap. “Why Maclean’s is asking men to pay 26% more for our latest issue,” Maclean’s, February 8, 2018, https://www.macleans.ca/society/ why-macleans-is-asking-men-to-pay-26-more-for-our-latest-issue/. Ibid.

Endnotes

69. “Equality and Inclusion,” Government of Canada, October 18, 2016, https://www.canada.ca/en/services/jobs/workplace/humanrights.html; and Schwind et al., Canadian Human Resource Management, 147–151. 70. “Fact Sheet—Temporary Foreign Worker Program,” Government of Canada, February 19, 2015, http://www.cic.gc.ca/english/ resources/publications/employers/temp-foreign-workerprogram.asp; and Bill Curry, “Everything you need to know about temporary foreign workers,” The Globe and Mail, June 24, 2014, http://www.theglobeandmail.com/news/politics/ temporary-foreign-workers-everything-you-need-to-know/ article18363279/.

Chapter 13 1. “Table 282-0223 16: Labour Force Survey estimates (LFS), employees by union status, North American Industry Classification System (NAICS) and sex, Canada,” Statistics Canada, January 5, 2018, http://www5.statcan.gc.ca/cansim/ a26?lang=eng&id=2820223. 2. Ibid. 3. Ibid. 4. “Young Workers,” UFCW Canada, 2018, http://ufcw.ca/index. php?option=com_content&view=article&id=2000:youthhomepage&catid=57:youth&Itemid=189&lang=en. 5. Jeff Cox, “Disorganized: Union Membership Hit an All-Time Low in 2016,” CNBC, January 26, 2017. 6. Gerry Varricchio, Regional Organizing Director for the Central and Eastern Canada Organizing Fund, The Labourers’ International Union of North America, interview, February 8, 2018, Hamilton. 7. “History of Labour in Canada,” Canadian Labour Congress, accessed March 26, 2018, http://canadianlabour.ca/why-unions/ history-labour-canada#short-week. 8. “Winnipeg General Strike,” The Canadian Encyclopedia, accessed February 7, 2018, http://www.thecanadianencyclopedia.ca/en/ article/winnipeg-general-strike/. 9. “Labour Organizations in Canada 2015,” Government of Canada, August 19, 2016, https://www.canada.ca/en/employmentsocial-development/services/collective-bargaining-data/ reports/union-coverage.html; “National Union Centrals,” The Canadian Encyclopedia, accessed March 26, 2018, http://www. thecanadianencyclopedia.ca/en/article/union-centrals-national/; “What We Do,” The Canadian Labour Congress, accessed March 26, 2018, http://canadianlabour.ca/about-clc/what-we-do; “Making the Shift to a Green Economy: A Common Platform of the Green Economy Network,” The Canadian Labour Congress, May 2015, http://canadianlabour.ca/sites/default/files/media/GEN-CommonPlatform-EN.pdf; “CLC accuses Unifor of leaving lobby group to raid another union,” The Canadian Press, January 19, 2018, http:// www.cbc.ca/news/business/clc-union-unifor-workers-1.4495389; and Gerry Varricchio and Lucy Faiella, The Labourers’ International Union of North America, interview, February 8, 2018, Hamilton. 10. “Making the Shift to a Green Economy: A Common Platform of the Green Economy Network,” The Canadian Labour Congress, May 2015, http://canadianlabour.ca/sites/default/files/media/GENCommon-Platform-EN.pdf. 11. “Unionization rates falling,” Statistics Canada, March 3, 2017, http://www.statcan.gc.ca/pub/11-630-x/11-630-x2015005-eng. htm#def1. 12. Ibid. 13. “Unionization rates falling,” Statistics Canada, March 3, 2017, http://www.statcan.gc.ca/pub/11-630-x/11-630-x2015005-eng. htm#def1; and “Table 282-0078 4-Labour Force Survey estimates (LFS), employees by union coverage, North American Industry Classification System (NAICS), sex and age group,” Statistics Canada, January 5, 2018, http://www5.statcan.gc.ca/cansim/ a26?lang=eng&id=2820078. 14. Ibid. 15. “CUPE at a glance,” Canadian Union of Public Employees, accessed March 26, 2018, http://cupe.ca/cupe-glance.

16. “About Unifor,” Unifor, accessed March 26, 2018, https://www. unifor.org/en/about-unifor; and “FAQ,” Unifor, accessed March 26, 2018, https://www.unifor.org/en/why-unifor/faq. 17. “Facts about unions,” UFCW Canada, accessed March 26, 2018, http://www.ufcw.ca/index.php?option=com_content&view=article &id=29&Itemid=49&lang=en. 18. “Federally Regulated Businesses and Industries,” Government of Canada, July 14, 2016, https://www.canada.ca/en/employmentsocial-development/programs/employment-equity/regulatedindustries.html. 19. “A plan for fair workplaces and better jobs (Bill 148),” The Ontario Ministry of Labour, 2018, https://www.ontario.ca/page/ plan-fair-workplaces-and-better-jobs-bill-148. 20. Mike Blanchfield, “Public Sector Workers’ Right To Strike Protected By Constitution: Top Court,” The Canadian Press, January 30, 2015, http://www.huffingtonpost.ca/2015/01/30/public-sectorworkers-strike-supreme-court_n_6577280.html; and Mike Blanchfield, “Supreme Court strikes down law that prevents public sector strikes,” The Toronto Star, January 30, 2015, http://www. thestar.com/news/canada/2015/01/30/supreme-court-strikesdown-law-that-prevents-public-sector-strikes.html. 21. James Fiz-Morris, “Ruling says union is one option, as federal government given a year to amend law,” CBC News, January 16, 2015, http://www.cbc.ca/news/politics/rcmp-officers-have-right-tocollective-bargaining-supreme-court-rules-1.2912340. 22. “OH&S Legislation in Canada - Basic Responsibilities,” Canadian Centre for Occupational Health and Safety, 2018, April 12, 2018, https://www.ccohs.ca/oshanswers/legisl/responsi.html.; “Right to refuse or to stop work where health and safety in danger,” Ministry of Labour, 2018, https://www.ontario.ca/ document/guide-occupational-health-and-safety-act/part-v-rightrefuse-or-stop-work-where-health-and-safety-danger; Hermann Schwind et al., Canadian Human Resource Management, 11th ed. (Toronto: McGraw-Hill Ryerson, 2016), 551 and 555; “Statistics and Beyond,” Canadian Centre for Occupational Health and Safety, April 26, 2018, https://www.ccohs.ca/events/ mourning/; “Young Workers: Know Your Rights Workshop,” UFCW Canada, 2018, http://www.ufcw.ca/index.php?option=com_ content&view=article&id=2501:the-know-your-rightsworkshop&catid=57:youth&Itemid=338&lang=en; and “Canada’s unions call for better protections against workplace violence and harassment,” Canadian Labour Congress, April 23, 2018, http://canadianlabour.ca/news/news-archive/canadasunions-call-better-protections-against-workplace-violence-andharassment. 23. “Definition of Sexual Harassment,” Canadian Labour Relations, accessed May 2, 2018, http://www.canadianlabourrelations.com/ definition-of-sexual-harassment.html. 24. Ibid. 25. Daniel Lublin, “What counts as workplace sexual harassment in Canada?” The Globe and Mail, November 30, 2017, https://www. theglobeandmail.com/report-on-business/careers/leadershiplab/what-counts-as-workplace-sexual-harassment-in-canada/ article37137194/. 26. “Violence in the Workplace,” Canadian Centre for Occupational Health and Safety, accessed May 2, 2018, http://www.ccohs. ca/oshanswers/psychosocial/violence.html; and “Bullying in the Workplace,” Canadian Centre for Occupational Health and Safety, accessed May 2, 2018, https://www.ccohs.ca/oshanswers/ psychosocial/bullying.html. 27. Christine Comaford, “75% of Workers Are Affected by Bullying— Here’s What to Do about It,” Forbes, August 27, 2016; and Philip Landau, “Bullying at Work: Your Legal Rights,” The Guardian, March 29, 2017. 28. Margaret Jacoby, “8 Steps to Take to Stop Bullying in Your Workplace,” Huffington Post, November 3, 2016; Gary Namie, “2017 WBI U.S. Survey: Reactions to Workplace Bullying of Employers and Witnesses,” Workplace Bullying Institute, July 7, 2017. 29. Margaret Jacoby, “Workplace Bullying: Fact or Fiction?” Huffington Post, October 25, 2016; Pat McGonigle, “The 5 Kinds of Bullies at Work,” KSDK, April 28, 2017.

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Endnotes

30. Joyce E. A. Russell, “How to Recognize and Deal with Bullying at Work,” Los Angeles Times, April 3, 2016; and Dr. Mary Lamia, “The Psychology of a Workplace Bully,” The Guardian, March 28, 2017. 31. Hermann Schwind et al., Canadian Human Resource Management, 11th ed. (Toronto: McGraw-Hill Ryerson, 2016), 612. 32. Varricchio, interview, January 15, 2018. 33. Ibid. 34. “Canada’s unions say NAFTA renegotiation is an opportunity for more fairness,” Canadian Labour Congress, January 26, 2017, http://canadianlabour.ca/news/news-archive/ canada%E2%80%99s-unions-say-nafta-renegotiation-opportunitymore-fairness. 35. “Rand Formula,” The Canadian Encyclopedia, accessed April 28, 2018, http://www.thecanadianencyclopedia.ca/en/article/ rand-formula/. 36. Aaron Rousseau, Founder and Lawyer, Rousseau Mazzuca LLP, interview, January 11, 2018. 37. Ibid. 38. Schwind et al., Canadian Human Resource Management, 622. 39. Ibid. 40. Ira Podell, “NHL Lockout 2012: Mediator Gets League, Union Back Together,” Associated Press, January 5, 2013; and Mike Brehm and Kevin Allen, “NHL Lockout Ends at 113 Days: A Daily Look Back,” USA Today, January 6, 2013. 41. “Essential services - Frequently Asked Questions,” Government of Canada, March 3, 2015, https://www.canada.ca/en/treasuryboard-secretariat/services/labour-management/essential-services. html; and “Strike and Lock-out: FAQ,” Ontario Ministry of Labour, November 4, 2011, https://www.labour.gov.on.ca/english/lr/faqs/ lr_faq3.php#do. 42. Allison Jones, “Arbitrator sets new contract for Ontario college faculty following strike,” The Canadian Press, December 20, 2017, https://www.ctvnews.ca/canada/arbitrator-sets-new-contract-forontario-college-faculty-following-strike-1.3729643. 43. Steve Greenhouse, “Wage Strike Planned at Fast Food Outlets,” New York Times, December 1, 2013. 44. Norman De Bono, “GM was within days of shutting Ingersoll plant for good when strike ended, sources say,” Financial Post, October 18, 2017, http://business.financialpost.com/transportation/autos/ gm-strike. 45. Cory Collins, “Labatt brewery strike escalates as union launches boycott,” June 19, 2013, http://rabble.ca/news/2013/06/ labatt-brewery-strike-escalates-union-launches-boycott. 46. “Ont. introduces TTC essential service legislation,” CBC News, February 22, 2011, http://www.cbc.ca/news/canada/toronto/ ont-introduces-ttc-essential-service-legislation-1.1063794. 47. “Government Intervention in the Economy: The End of Canadian Steelmaking,” The Marxist-Leninist Daily, November 7, 2013, http://www.cpcml.ca/Tmld2013/D43127.htm. 48. Karla Thorpe, “The State of Canadian Unions—Down but Not Out,” The Conference Board of Canada, January 31, 2013, http://www.conferenceboard.ca/topics/humanresource/ commentaries/13-01-31/the_state_of_canadian_unions—down_ but_not_out.aspx. 49. “Table 282-0220: Labour Force Survey estimates (LFS), employees by union status, sex, and age group, Canada and provinces,” Statistics Canada, January 5, 2018, http://www5. statcan.gc.ca/cansim/a47. 50. “2018 To Be a Challenging Year for Both Sides of the Bargaining Table,” The Conference Board of Canada, January 16, 2018, http:// www.conferenceboard.ca/press/newsrelease/2018/01/16/2018to-be-a-challenging-year-for-both-sides-of-the-bargaining-table?As pxAutoDetectCookieSupport=1#. 51. Joseph S. Mancinelli, LiUNA International Vice-President and Regional Manager for Central and Eastern Canada, The Labourers’ International Union of North America, interview, February 8, 2018, Hamilton. 52. Zack O’Malley Greenberg, “Celeb 100: The Highest-Paid Celebrities of 2016,” Forbes, July 11, 2016; Zack O’Malley Greenburg, “Full List: The World’s Highest-Paid Celebrities 2017,” Forbes, June 12, 2017.

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53. Ian Salisbury, “The Completely Absurd and Infuriating Reason CEOs Get Paid So Much,” Time, February 22, 2016; F. John Reh, “What You Need to Know about Restricted Stock Grants,” The Balance, August 16, 2017. 54. Gretchen Morganstern, “Safety Suffers as Stock Options Propel Executive Pay Packages,” The New York Times, September 11, 2015; Tim Mullaney, “Why Corporate CEO Pay Is So High and Going Higher,” CNBC, accessed February 2017; Stephen Wilmot, “Better Ways to Measure Boss’s Pay,” The Wall Street Journal, July 4, 2017. 55. Jonathan R. Costa, “Target CEO’s severance payout causes online outrage,” The Toronto Observer, February 4, 2015, http://torontoobserver.ca/2015/02/04/ target-ceos-severance-pay-out-causes-online-outrage/. 56. Damian Paletta, “5 Takeaways on Wealth and Inequality from Picketty,” The Wall Street Journal, April 14, 2014. 57. Anders Melin and Caleb Melby, “Executive Pay,” Bloomberg, February 15, 2017. 58. “Executives Got Biggest Raise Since 2013,” St. Louis PostDispatch, May 24, 2017. 59. “Canada’s Top 100 highest-paid CEOs,” Canadian Business, January 2, 2018, http://www.canadianbusiness.com/lists-andrankings/richest-people/canada-100-highest-paid-ceos/; and David Macdonald, “Climbing Up and Kicking Down: Executive Pay in Canada,” Canadian Centre for Policy Alternatives, January 1, 2018, https://www.policyalternatives.ca/publications/reports/ climbing-and-kicking-down. 60. Ibid. 61. Matthew T. Tice, “My Antibusiness Business Education,” The Wall Street Journal, February 19, 2016; Ross Kerber and Peter Szekely, “CEO Pay Still Dwarfing Pay of U.S. Workers: Union Report,” U.S. News and World Report, May 9, 2017. 62. “Women In The Workforce: Canada,” Catalyst, September 7, 2017, http://www.catalyst.org/knowledge/women-workforce-canada. 63. U.S. Census Bureau, www.census.gov, accessed January 2017. 64. “Canada’s population estimates: Age and sex, July 1, 2015,” Statistics Canada, September 21, 2015, https://www.statcan. gc.ca/daily-quotidien/150929/dq150929b-eng.htm. 65. Lynn Feinberg and Rita Choula, “Understanding the Impact of Family Caregiving on Work,” AARP Public Policy Institute, accessed September 2017.

Chapter 14 1. “Code of Ethics and Standards of Practice,” Canadian Marketing Association, accessed May 2, 2018, www.the-cma.org/regulatory/ code-of-ethics. 2. Amy Webb, “Virtually Convincing,” Inc., November 2016; Martin Holland, “The Future Of Marketing: What Should You Be Focusing On?” Forbes, July 11, 2017. 3. Iris Kuo, “How to Keep Them Coming Back,” Inc., April 2016; Jimmy Rohampton, “How Does Social Media Influence Millennials’ Shopping Decisions?" Forbes, May 3, 2017. 4. Angela Ruth, “Six Social Media Marketing Trends to Stay on Top of in 2017,” Forbes, February 6, 2017. 5. Jason Hidalgo, “Millennials Want It Quick and Affordable,” USA Today, February 8, 2016; Rob Marvin, “The Best Social Listening and Influencer Identification Tools of 2017,” PC Magazine, July 19, 2017. 6. Ryan Charkow, “5 young Canadian entrepreneurs reveal secrets to success,” CBC News, October 6, 2011, www.cbc.ca/news/ business/smallbusiness/story/2011/09/28/f-smallbiz-youngentrepreneurs.html. 7. Frederick G. Crane et al., Marketing, 10th Canadian ed. (Toronto: McGraw-Hill Ryerson, 2017), 13–14. 8. Ibid., 16-18; “Social Media Marketing Quick-Start Guide,” Canadian Marketing Association, July 19, 2011, www. the-cma.org/Media/Default/Downloads/Library/2011/ SocialMediaQSG.pdf; “YOUR TAKE – Mobile spa relies 100% on social media,” CBC News, October 17, 2011, www. cbc.ca/news/business/smallbusiness/story/2011/10/17/

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28. Jennifer Hakim, “The Real Differences between B2C and B2B Marketing,” Chief Marketer, February 7, 2017. 29. Ernan Roman, “Stop (ONLY) Marketing to Millennials!” Customer Think, January 26, 2017; Charlotte Rogers, “The Shrinking and Emerging Demographics Marketers Need to Know,” Marketing Week, March 13, 2017. 30. “Why Study Culture,” Forbes, January 27, 2017. 31. Crane et al., Marketing, 226–227. 32. Crane et al., Marketing, 223. 33. Christina Binkley, “Fashion’s Big Turning Point,” The Wall Street Journal, February 11, 2016; Charlotte Rogers, “Is Digital an Effective Mass Market Medium?" Marketing Week, April 10, 2017. 34. Francine Kopun, “Canadian Tire announces ‘generational shift’ in new billion-dollar strategy,” The Toronto Star, October 9, 2014, http://www.thestar.com/business/2014/10/09/canadian_ tire_announces_ generational_shift_billiondollar_digital_and_ expansion.html. 35. Aly Thomson, “Most vegans, vegetarians in Canada are under 35: survey,” The Canadian Press, March 13, 2018, https://www.theglobeandmail.com/canada/ article-most-vegans-vegetarians-in-canada-are-under-35-survey/. 36. Crane et al, Marketing, 248; and Dhruv Grewal et al., Marketing, 3rd Canadian ed. (Toronto: McGraw-Hill Ryerson, 2014), 189. 37. Grewal et al., Marketing, 490. 38. Ibid., 288. 39. “G adventures named Canada’s favourite adventure travel tour operator,” G Adventures, June 28, 2012, www.gadventures.com/ press-releases/2012/Jun/28/g-adventures-named-canadasfavourite-adventure-travel-tour-operator/. 40. “Legends of the Small,” Report on Small Business, The Globe and Mail, June 2012, p. 17. 41. Crane et al., Marketing, 125–134; and Grewal et al., Marketing, 91–92.

Chapter 15 1. Martha E. Mangelsdorf, “Getting Product Development Right,” MIT Sloan Management Review, Spring 2016; Scott Roth, “The Challenges Of Product Development In A Connected World,” Forbes, May 25, 2017. 2. Anne Marie Chaker, “To Appeal to Girls and Boys, Changing Superheros,” The Wall Street Journal, June 22, 2016; Brent Lang, “The Reckoning: Why the Movie Business Is in Big Trouble,” Variety, March 27, 2017. 3. Brian Sozzi, “You’ll Never Believe McDonald’s Newest Sandwich,” The Street, January 8, 2017. 4. Hadley Malcolm, “Whopperito? Weird Food Gimmicks Draw New, Old Fans,” USA Today, August 11, 2016; Jennifer Calfas, “They’re Back: Mac N’ Cheetos Returning to Burger King For A Limited Time,” Fortune, May 11, 2017. 5. Julie Jargon, “Taco Bell Rolls Out New $1 Breakfast Menu as Battle for Breakfast Heats Up,” The Wall Street Journal, March 11, 2016; Zlati Meyer, “Chick-Fil-A, Taco Bell Boast New Breakfast Options,” USA Today, August 15, 2017. 6. Karen Kaplan, “As Popularity of E-Cigarette Rises, More People Are Able to Quit, Study Says,” LA Times, September 13, 2016; Ronald Holden, “Red Delicious Apple Losing Its Appeal In Favor Of Jazzy Newcomers Like Cosmic Crisp,” Forbes, August 27, 2017. 7. Ibid.; and Janet Morrissey, “Brands Expand Into New Niches With Care, but Not Without Risk,” The New York Times, May 28, 2017. 8. “Colgate Ready Meals and Zippo Perfume: The World’s Weirdest Off-Brand Products,” The Telegraph, January 14, 2016; “Accessories,” Zippo.com, accessed September 2017. 9. Andrew Winston, “How General Mills and Kellogg Are Tackling Greenhouse Gas Emissions,” Harvard Business Review, June 1, 2016; Andrew Winston, “An Inside View of How LVMH Makes Luxury More Sustainable,” Harvard Business Review, January 11, 2017. 10. Emma K. Macdonald, Hugh N. Wilson, and Umut Konus, “Better Customer Insight—In Real Time,” Harvard Business Review, March 2013.

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Endnotes

11. Mike Esterl, “Fast-Growing Diet Soda Taps into Cola Fatigue,” The Wall Street Journal, July 22, 2016; Carole Duran, “A co*ke Combo Takes New Meaning,” Reading Eagle, July 28, 2016; Venessa Wong, “co*ke Let People Make Any Flavor They Want, The People Demanded Cherry Sprite,” BuzzFeed News, February 13, 2017. 12. TELUS, accessed May 6, 2018, https://www.telus.com. 13. “The Most Innovative Companies of 2016,” Fast Company, March 2016; Ryan Caldbeck, “CircleUp25: The Most Innovative Consumer Brands of 2016,” Forbes, July 28, 2016; John Clarke, “Yeti Coolers Are Hot! No Really, People Are Stealing Them,” The Wall Street Journal, September 1, 2016; and Dan Solomon, “Instead of a Retail Flagship Store, Yeti Decided to Build A Brand Museum. Here’s Why,” Fast Company, February 20, 2017. 14. Anne Marie Chaker, “Packaged Foods’ New Selling Point: Fewer Ingredients,” The Wall Street Journal, August 10, 2016; Stephanie Schomer, “How a Packaging Overhaul Rescued This Protein Bar Company From Obscurity,” Inc., June 2017. 15. Lambeth Hochwald, “Play with Packaging,” Entrepreneur, July 2016; “Iowa Entrepreneur: Thelma’s Treats,” Iowa Public Television, June 2, 2017. 16. “School of Packaging,” Michigan State University, accessed September 2017. 17. Rick Lingle, “Packaging Machinery Attuned to the Functional Use of RFID,” Packaging Digest, December 13, 2016; Mufassira Fathima, “How Smart Packaging Sensors Safeguard Foods and Drugs,” Packaging Digest, April 13, 2017. 18. Anne Vandermey, “10-Hour Layover? Lucky You,” Fortune, November 1, 2016; Miquel Ros, “Stopover Buddy Can Show You Local Sites During Layover,” CNN, June 27, 2017. 19. Kurt Badenhausen, “The World’s Most Valuable Brands,” Forbes, May 11, 2016; Kurt Badenhausen, “Apple Heads The World’s Most Valuable Brands Of 2017 At $170 Billion,” Forbes, May 23, 2017. 20. Jessica Wohl, “How Marketers Can Win the Emoji Arms Race,” Advertising Age, April 7, 2016; Matthew Campbell and Corinne Gretler, “Take Two Butterfingers and Call ME in the Morning,” Bloomberg Businessweek, May 9, 2016; Sara Randazzo, “Craft Brewers Brawl over Catchy Labels as Puns Run Dry,” The Wall Street Journal, July 11, 2016; and Denise Lee Yohn, “Why Your Company Culture Should Match Your Brand,” Harvard Business Review, June 26, 2017. 21. “These are the most valuable brands in the world right now,” Daily Hive, February 1, 2018, http://dailyhive.com/toronto/ most-valuable-brands-in-world-2018. 22. Ibid. 23. Brian Hughes, “5 Reasons Why Sustainability and Social Issues Attract Customers,” Entrepreneur, January 6, 2017. 24. Sharon Terlep, “Millennials Give Beauty Business a Makeover,” The Wall Street Journal, May 4, 2016; Amanda Brinkman, “The Power Of Consistent Branding That Tells A Story,” Forbes, February 15, 2017. 25. Akhila Vijayaraghavan, “Puma, Nike and Adidas Run Towards Toxin-Free Products With Greenpeace,” Triple Pundit. com, September 7, 2011, www.triplepundit.com/2011/09/ puma-nike-adidas-greenpeace/. 26. Ibid. 27. Paul Resnikoff, “15 Reasons Why You Should Never, Ever Buy a Streaming Service . . . ,” Digital Music News, January 30, 2015, http://www.digitalmusicnews.com/permalink/2015/01/30/15reasons-never-ever-buy-streaming-service. 28. Joseph Pisani, “The New Barbie Bunch,” St. Louis Post-Dispatch, January 29, 2016; Paul Ziobro, “Mattel Reshapes Business; Barbie Gets New Chief,” The Wall Street Journal, February 13–14, 2016; “Barbies That Look More Like Real Girls,” Time, November 28– December 5, 2016; Paul Ziobro, “Mattel’s Ken Doll Follows Barbie With a Full Makeover,” The Wall Street Journal, June 20, 2017. 29. Joseph Pisani, “Fidget spinners: How they went from being a toy to help autistic kids to being a national phenomenon,” USA Today, May 16, 2017, https://www.usatoday.com/story/tech/2017/05/16/ fidget-spinners-how-they-went-being-toy-help-autistic-kids-beingnational-phenom/101742758/. 30. Julie Wernau, “Higher Costs Bite Chocolate Makers,” The Wall Street Journal, July 12, 2016; Jeff Daniels, “Global Food Prices

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Endnotes

49. Ashley Renders, “Multi-Level Marketing,” Vice, January 13, 2017. 50. Panos Mourdouktas, “How Many People Get Rich from Multilevel Marketing Networks?” Forbes, December 30, 2016; Michelle Celarier, “Trump’s Great Pyramid,” Slate, February 21, 2017. 51. Groupe Desgagnés Inc., “Another world first in sustainable transport: Desgagnés christens the M/T Mia Desgagnés First polar-class dual-fuel product/chemical tanker,” CISION, April 17, 2018, https://www.newswire.ca/news-releases/ another-world-first-in-sustainable-transport-desgagneschristens-the-mt-mia-desgagnes---first-polar-class-dual-fuelproductchemical-tanker-679996993.html; “Walmart Canada collaborates with Food-X to bring sustainable grocery delivery to Vancouver-area customers,” CISION, February 21, 2018, https:// www.newswire.ca/news-releases/walmart-canada-collaborateswith-food-x-to-bring-sustainable-grocery-delivery-to-vancouverarea-customers-674692763.html. 52. Suzanne Vranica, “Catch Me If You Can,” The Wall Street Journal, June 22, 2016; Carl Hose, “Top Ten Promotional Strategies,” Houston Chronicle, accessed September 2017. 53. E.J. Schultz, “Technology Fuels Renaissance in Out-of-Home Advertising,” Advertising Age, April 4, 2016; John Lincoln, “3 Digital Marketing Strategies That Will Rule 2017,” Inc., February 1, 2017. 54. Christopher P. Skroupa, “Why Company Success Relies on Integrated Thinking,” Forbes, January 18, 2017. 55. “Digital Marketing,” SAS, accessed May 13, 2018, https://www. sas.com/en_ca/insights/marketing/digital-marketing.html. 56. Jeanine Poggi, “The Future of TV Advertising,” Advertising Age, April 18, 2016; Amol Sharma, “Big Media Needs to Embrace Digital Shift—Not Fight It,” The Wall Street Journal, June 22, 2016; Ahmad Kareh, “Seven Steps To A Better Integrated Marketing Communications Strategy,” Forbes, March 16, 2017; and Christopher P. Skroupa, “Why Company Success Relies on Integrated Thinking,” Forbes, January 18, 2017. 57. Etelka Lehoczky, “From Mail to Sale,” Inc., November 2016; Summer Gould, “Five Ways To Spice Up Your Direct Mail Marketing In 2017,” Forbes, January 10, 2017. 58. Suzanne Vranica and Jack Marshall, “Newspaper Ad Woes Accelerate,” The Wall Street Journal, October 21, 2016; Michael Barthel, “Despite Subscription Surges for Largest U.S. Newspapers, Circulation and Revenue Fall for Industry Overall,” Pew Research Center, June 1, 2017. 59. Garett Sloane, “Are Snapchat Ads Worth the Effort?” Advertising Age, December 5, 2016; Sarah Frier, “Facebook Sales Top Estimates on Gains in Mobile Advertising,” Bloomberg, February 1, 2017. 60. Lena H. Sun, “Captivating an Audience,” The Washington Post, April 6, 2008. 61. Miriam Gottfried, “For Media Stocks, TV Advertising’s Death Is Exaggerated,” The Wall Street Journal, February 27, 2016; Davey Alba, “The TV Ad Isn’t Going Anywhere—It’s Going Everywhere,” Wired, January 1, 2017. 62. Wayne Friedman, “TV Dominates Twitter Trending Topics in Prime Time,” MediaPost, February 2, 2017. 63. Suman Bhattacharyya, “Digital Ads to Overtake Traditional Ads in U.S. Local Markets by 2018,” Advertising Age, October 26, 2016; Lauren Johnson, “U.S. Digital Advertising Will Make $83 Billion This Year, Says EMarketer,” Adweek, March 14, 2017. 64. Joe Robinson, “You’re Going to Love Sales,” Entrepreneur, February 2016. 65. Sharon Terlep, “P&G Seeks to Turn Tide by Direct Selling,” The Wall Street Journal, July 20, 2016; Shep Hyken, “Ten Customer Service And Customer Experience Trends For 2017,” Forbes, January 7, 2017. 66. Donovan Roche, “Lessons from Three of 2016’s Biggest PR Fails,” Fast Company, December 20, 2016; Lucy Handley, “United Airlines Isn’t Alone: Here Are Some of the Worst PR Disasters of All Time,” CNBC, April 12, 2017. 67. Robert Wynne, “How to Write a Press Release,” Forbes, June 13, 2016; Hannah Fleishman, “How to Write a Press Release,” HubSpot, August 10, 2017. 68. “Twitter Shows Influence of Word of Mouth on Movies,” PR Newswire, January 19, 2017; Dr. Benjamin Ola. Akande, “The Importance of Word-of-Mouth,” Ladue News, March 23, 2017.

69. Nathan Skid, “The Future of Customer Experience,” Advertising Age, August 2, 2016; Woojung Chang and Steven A. Taylor, “The Effectiveness of Customer Participation in New Product Development: A Meta-Analysis,” American Marketing Association, accessed September 2017. 70. Jack Neff, “The Big Agenda,” Advertising Age, January 11, 2016; Charlie Riley, “Brand Hacking: Leveraging The Power Of Other Companies’ Viral Marketing,” Forbes, September 6, 2017. 71. Kim Garst, “Social Media Marketing World 2014,” Huffington Post, April 9, 2014, http://www.huffingtonpost.com. 72. Ryan Holmes, “How Companies Will Use Social Media in 2017,” Fast Company, January 1, 2016; Jefferson Graham, “Are Geofilters the New Hashtag?” USA Today, August 2, 2016; Jack Neff, “Marketers Embrace Facebook, Google Missionaries,” Advertising Age, October 17, 2016; and Sophia Bernazzani, “7 Trends That Will Change Social Media in 2017,” HubSpot, January 13, 2017. 73. Evan Annett, “What is ‘fake news,’ and how can you spot it? Try our quiz,” The Globe and Mail, February 1, 2017, https://www.theglobeandmail.com/community/digital-lab/ fake-news-quiz-how-to-spot/article33821986/. 74. Jessica Wohl, “Oreo Enlists Celebs to Demonstrate the Perfect Dunk in Latest Global Push,” Advertising Age, February 8, 2017. 75. Josh Ames, “The Best—and Worst—Examples of Social Media Contests I’ve Seen,” Spark Reaction Marketing, accessed September 2017, https://www.sparkreaction.com/blog/ social-media-contests.

Chapter 16 1. Eric Sobota, “Doing Business with the Government: Administrative Challenges Faced by Nonprofits,” Nonprofit Quarterly, June 14, 2014; John A. Byrne, “The GMAT: An Exam with Greater Profit Margins Than Apple,” Fortune, February 17, 2014. 2. “Anshula Chowdhury,” Canadian Business, April 2015, p. 7. 3. “Meet Our Companies: Success Story Sametrica,” Ontario Centres of Excellence, 19 October 19, 2017, http://www.oce-ontario.org/ meet-our-companies/success-story/2017/10/19/sametrica. 4. Robert Libby et al., Financial Accounting, 5th Canadian edition, (Canada: McGraw-Hill Ryerson Ltd., 2014), 301. 5. “About the AcSB,” Financial Reporting & Assurance Standards Canada, http://www.frascanada.ca/accounting-standards-board/ what-we-do/about-the-acsb/index.aspx, accessed May 10, 2018. 6. “Who we are,” IFRS, accessed May 10, 2018, https://www.ifrs.org/ about-us/who-we-are/. 7. Libby et al., Financial Accounting, 24. 8. Ibid., 19. 9. Madeline Farber, “Ernst & Young Was Just Fined $9.3 Million for Inappropriate Client Relationships,” Fortune, September 20, 2016; Tatyana Shumsky, “Mistakes That Dog Financial Reporting,” The Wall Street Journal, April 12, 2016; and Tom Hals, “Nine Years On, Another Lehman Brothers Bankruptcy,” Reuters, September 1, 2017. 10. Michael Rapoport, “Auditors Count on Tech for Backup,” The Wall Street Journal, March 8, 2016; Vipal Monga, “56% Share of North American Companies That Used a Third Party for Internal Audits,” The Wall Street Journal, April 5, 2016; and Jason Zweig, “How a New Audit Rule Could Bring Sunshine to U.S. Markets,” The Wall Street Journal, August 18, 2017. 11. Amrick Randhawa, “Don’t Have a Tax Pro Yet? Time to Get Moving,” Entrepreneur, February 12, 2014; Pamela Yip, “Be Picky When Choosing a Tax Preparer,” Dallas Morning News, January 26, 2014. 12. “Ontario Liberals understating deficit by billions: auditor,” CBC, April 25, 2018, http://www.cbc.ca/news/canada/toronto/ ontario-pre-election-auditor-general-report-finances-1.4634542. 13. Matthew McClearn, “Ontario Liberals substantially understated deficits, province’s Auditor-General warns,” The Globe and Mail, April 25, 2018, https://www.theglobeandmail.com/canada/articleontario-auditor-general-says-province-substantially-understating/. 14. “About the Canada Revenue Agency (CRA),” Government of Canada, August 23, 2017, http://www.cra-arc.gc.ca/gncy/menueng.html. 15. Gary Weiss, “Spotting Nonprofit Accounting Tricks,” Barron’s Penta, June 20, 2016; Shelley Elmblad, “Free and Low Cost

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Chapter 17 1. Joann S. Lublin, “CFO Searches Drag On as Demand Takes Off,” The Wall Street Journal, February 9, 2016; Alix Stuart, “Quick CFO Exits Can Spell Trouble,” The Wall Street Journal, August 2, 2016; “Coca-Cola Co Says Kathy Waller’s Annual Base Salary for New Position to Be $850,000,” Reuters, March 24, 2017.

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2. Alix Stuart, “Finance Chiefs Collect Acronyms,” The Wall Street Journal, June 7, 2016; “The Evolution of the Corporate Treasurer,” Bloomberg Professional Services, March 15, 2017. 3. Alix Stuart, “Charities Exert Pull on CFOs,” The Wall Street Journal, October 4, 2016; Amy West and Ronald Ries, “10 Challenges Facing Not-for-Profit CFOs,” The CPA Journal, September 2017. 4. Warner Johnson, “How to Retain Young Finance Pros,” CFO, December 8, 2016; “Fourteen Financial Mistakes All Entrepreneurs Should Avoid,” Forbes, May 30, 2017. 5. Jason Fekete, “Auditor General: Multibillion-dollar auto sector bailout lacked proper oversight,” Ottawa Citizen, November 25, 2014, http://ottawacitizen.com/news/politics/ auditor-general-auto-sector-bailout-lacked-proper-oversight. 6. Robert Digitale, “Kelseyville company’s salt-free spices revival,” The Press Democrat, September 4, 2014, http://www.pressdemocrat. com/business/2669427-181/a-salt-free-spices-revival; McCormick, www.mccormick.com, accessed February 2014. 7. Justin Lahart, “Earnings: Not as Advertised,” The Wall Street Journal, February 25, 2016; Michael Rapoport, “Auditors Count On Tech for Backup,” The Wall Street Journal, March 8, 2016; Mike Hogan, “Defending the GAAP,” Barron’s, June 22, 2016; Terry Sheridan, “7 Top Priorities for Audit Committees in 2017,” AccountingWEB, January 12, 2017. 8. Michael Rapoport, “Big Four Accounting Firms Show Fewer Problem Audits,” The Wall Street Journal, December 12, 2016; Sean Allocca, “Audit Committees Face Expertise, Risk Management Challenges,” CFO, January 11, 2017. 9. Stephen A. Ross et al., Fundamentals of Corporate Finance, 9th Canadian ed. (Toronto: McGraw Hill Ryerson Ltd., 2016), 147. 10. “Risk-return trade-off,” Accounting Tools, May 13, 2017, https:// www.accountingtools.com/articles/2017/5/13/risk-return-trade-off. 11. Robert Reiss, “Industry Leading CFOs Share Insights on How Digital Is Opening New Opportunities,” Forbes, November 21, 2016; Heather Clancy, “CFOs Are Becoming Cloud Software Converts,” Fortune, June 20, 2016; and Jeff Thomson, “The Seismic Shift in Finance, and How Workday’s CFO is Capitalizing,” Forbes, August 4, 2017. 12. Bill Fotsch and John Case, “Forecasting—The Secret to Controlling Your Business (and Engaging Employees Too),” Forbes, August 23, 2016; Rheaa Rao, “Executives Tend to Offer Precise Forecasts to Reassure Investors,” The Wall Street Journal, May 31, 2017. 13. “Five of the Different Types of Budgets,” The Finance Base, accessed October 2017. 14. David Charron, “What to Expect in the Housing Market in 2017,” The Washington Post, December 27, 2016; John Minnich, “China’s Economic Problems Will Come to a Head in 2017,” MarketWatch, November 23, 2016; Gregor Stuart Hunter, “Why China’s Recent Market Plunge Didn’t Spark a Broader Selloff,” The Wall Street Journal, January 18, 2017. 15. “Time Value of Money,” Khan Academy, accessed October 2017; “What Is the Time Value of Money,” The Motley Fool, accessed October 2017. 16. David Finkel, “7 Tips to Lower Your Outstanding Receivables and Collect More of What You Are Owed,” Inc., October 19, 2016; Larry Alton, “6 Steps to Successfully Collect on a Small Business Debt,” Small Business Trends, May 24, 2017. 17. Elizabeth Weise, “Google Launches Android Pay,” USA Today, May 28, 2015; “The Ultimate Guide to How and Where to Use ApplePay,” MacWorld, April 29, 2016; Leena Rao, “ApplePay Now Accounts for Three-Fourths of Contactless Payments,” Fortune, July 26, 2016; Irving Wladawsky-Berger, “Mobile Payments: A Long, Relentless War of Attrition,” The Wall Street Journal, June 9, 2017. 18. Nancy Trejos, “Marriott to Let Guests Use ApplePay at Check-In,” USA Today, 2016; Ryan Mac, “Apple Gunning for PayPal as It Introduces Apple Pay for Web,” Forbes, June 16, 2016; “Mobile Payment Options Should Drive Growth For McDonald’s, Burger King,” Forbes, May 15, 2017. 19. Jason Kruger, “If You Don’t Know Your Company’s Inventory Turnover Ratio, You’re in Trouble,” Fortune, August 29, 2016; Ted

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38. Selena Williams and Bradley Olsen, “Big Oil Companies Binge on Debt,” The Wall Street Journal, August 26, 2016; Mark Fahey, “Corporate Debt Is at New Highs, and These Companies Owe the Most,” CNBC, April 11, 2017. 39. “CFA Program,” CFA Institute, accessed 22 May 2018, https:// www.cfainstitute.org/programs/cfa; “CFA Program Course of Study,” CFA Institute, accessed May 22, 2018, http://www. cfainstitute.org/programs/cfaprogram/courseofstudy/Pages/index. aspx; and “CFA Charter Factsheet,” CFA Institute, accessed May 22, 2018, cfa-charter-factsheet.pdf.

Chapter 18 1. “Bank of Canada,” Historica Canada, accessed May 31, 2018, http://www.thecanadianencyclopedia.ca/en/article/bank-ofcanada/; and “About the Bank,” Bank of Canada, accessed May 31, 2018, https://www.bankofcanada.ca/about/. 2. David Scott, “How Much Currency Is Traded Every Day,” Business Insider, September 2, 2016; Andrea Wong and Vincent Cignarella, “It’s 1980s All Over Again for FX Desks Looking at Trade Flow,” Bloomberg Businessweek, February 10, 2017. 3. “Canada’s nickel could soon be phased out like the penny, economist says,” Canadian Press, February 2, 2018, https:// globalnews.ca/news/4002870/canada-nickel-phased-out-penny/; and Andrew Russell, “Should Canada eliminate the nickel? New study says it will happen within 5 years,” Global News, May 3, 2016, https://globalnews.ca/news/2677782/should-canadaeliminate-the-nickel-new-study-says-it-could-within-5-years/. 4. Sandeep Soni, “Bartering Is Back in Style! These Startups Tell Us How,” Entrepreneur, December 16, 2016; “The Beauty of Bartering: A Smart Way to Start and Grow Your Business,” Entrepreneur, October 19, 2016; and Hannah Wallace, “How to Barter Anything,” Real Simple, accessed October 2017. 5. Russell, “Should Canada eliminate the nickel? New study says it will happen within 5 years.” 6. Neal Godfrey, “Millennials Show Boomers the Benefits of Barter: Pass It On,” Forbes, November 1, 2015; Natasha Burton, “Bartering in the Modern Day: How People Are Swapping Goods and Services ... for Free,” Forbes, July 20, 2015; Eli Newman, “Detroiters’ Barter System Isn’t Just About Kindness — It’s A Necessity,” NPR, July 29, 2017. 7. Jean Murry, “What is a Barter Exchange? How Does a Barter Exchange Work?” The Balance, June 16, 2016. 8. “Canada’s nickel could soon be phased out like the penny, economist says,” Canadian Press; and Russell, “Should Canada eliminate the nickel? New study says it will happen within 5 years.” 9. “$5 Polymer Note,” Bank of Canada, accessed June 3, 2018, https://www.bankofcanada.ca/banknotes/bank-note-series/ frontiers/5-polymer-note/; “Security,” Bank of Canada, accessed May 7, 2015, http://www.bankofcanada.ca/banknotes/ bank-note-series/polymer/security/. 10. “Life-Cycle Assessment (LCA),” Bank of Canada, accessed June 3, 2018, https://www.bankofcanada.ca/banknotes/bank-note-series/ frontiers/life-cycle-assessment-lca/. 11. “Laws, regulations and other obligations,” Government of Canada, April 6, 2018, https://www.canada.ca/en/financial-consumeragency/services/industry.html; and “Our History - Office of the Superintendent of Financial Institutions,” Government of Canada, July 26, 2017, http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/Pages/hst. aspx?pedisable=true; and “Regulation of the Canadian Financial System,” Bank of Canada, April 2012, http://www.bankofcanada.ca/ wp-content/uploads/2010/11/regulation_canadian_financial.pdf. 12. “The Scotiabank Story,” Scotiabank, 2015, http://www.scotiabank. com/ca/en/0,476,00.html. 13. “About Us,” Office of the Superintendent of Financial Institutions, April 20, 2017, http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/Pages/ default.aspx; Hamish Stewart, “The Bank of Canada could lead the way to a prosperous low-carbon economy,” National Observer, May 28, 2018, https://www.nationalobserver.com/2018/05/28/ opinion/bank-canada-could-lead-way-prosperous-low-carboneconomy.

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Appendix B 1. “Financial Consumer Agency of Canada,” Government of Canada, May 23, 2018, https://www.canada.ca/en/financial-consumeragency.html. 2. “Canadian Financial Literacy Database,” Government of Canada, May 10, 2017, https://www.canada.ca/en/financial-consumeragency/services/financial-literacy-database.html. 3. Jeff Charis-Carlson, “UI Students Help Local High Schools Think through Money Concerns,” Iowa City Press-Citizen, January 3, 2017. 4. Jeff Kauflin, “The 20 College Majors with the Highest Starting Salaries,” Forbes, October 17, 2016; Karsten Strauss, “College Degrees With the Highest (And Lowest) Starting Salaries In 2017,” Forbes, June 28, 2017.

5. Jill Cornfield, “New Year’s Resolutions That Help Your Retirement Savings,” Bankrate, December 15, 2016. 6. Jae Yang and Paul Trap, “Forever in Debt,” USA Today, January 20, 2016; Emmie Martin, “5 Things to Do in Your 20s to Get Out of Debt by 30,” CNBC, July 11, 2017. 7. “Cash Jar/Envelope Budget Method (Gail Vaz-Oxlade Style),” SmartCanucks, January 5, 2013, https://smartcanucks.ca/ gail-vaz-oxlade-cash-jar-envelope-budget-method/. 8. Alyssa Furtado, “Why Your Credit Card’s Grace Period Is Your Best Friend,” The HuffPost, May 10, 2017, https://www.huffingtonpost. ca/alyssa-furtado/credit-card-grace-period_b_16533976.html. 9. Scott Terrio, “Can it make sense to have savings as well as high-interest debt?” MoneySense, May 14, 2018, http://www. moneysense.ca/save/debt/pay-off-debt-quickly-savings/. 10. Ian McGugan, “David Chilton’s rise from The Wealthy Barber to The Wealthy Dragon,” The Globe and Mail, May 12, 2018, https://www.theglobeandmail.com/reporton-business/careers/careers-leadership/david-chiltonsrise-from-the-wealthy-barber-to-the-wealthy-dragon/ article22612138/. 11. Krystal Yee, “5 essential money lessons from The Wealthy Barber Returns,” Canadian Living, 2015, http://www.canadianliving.com/ life/money/5_essential_money_lessons_ from_the_wealthy_ barber_returns.php. 12. “What is Compound Interest?” The Motley Fool, accessed May 26, 2018, https://www.fool.com/knowledge-center/compoundinterest.aspx. 13. Jae Yang and Paul Trap, “False Financial Belief,” USA Today, May 9, 2016; Michelle Singletary, “The Debit Card Nightmare: a Number Is Stolen and Charges Pile Up,” The Washington Post, July 25, 2017. 14. “Setting up an emergency fund,” Government of Canada, November 21, 2017, https://www.canada.ca/en/financialconsumer-agency/services/savings-investments/setting-upemergency-funds.html. 15. Dale Jackson, “Personal Investor: TFSA total contribution room increases another $5,500 in 2018,” BNN Bloomberg, December 8, 2017, https://www.bnnbloomberg.ca/personal-investor-tfsacontribution-limit-remains-at-5-500-in-2018-1.938436; “The TaxFree Savings Account,” Canada Revenue Agency, November 24, 2016, https://www.canada.ca/en/revenue-agency/services/tax/ individuals/topics/tax-free-savings-account.html. 16. “Largest Cohort of Millennials Changing Canadian Real Estate, Despite Constraints of Affordability and Mortgage Regulation,” Brookfield Real Estate Services Manager Limited, August 17, 2017, https://www.royallepage.ca/en/realestate/news/largestcohort-of-millennials-changing-canadian-real-estate-despiteconstraints-of-affordability-and-mortgage-regulation/. 17. Tara Siegal Bernard, “To Buy or Rent a Home? Weighing Which is Better,” The New York Times, April 1, 2016; Ron Lieber, “All Our Best Advice on Deciding Whether to Rent or Buy a Home,” The New York Times, June 4, 2017. 18. Cathie Ericson, “5 Habits to Start Now If You Hope to Buy a Home in 2017,” Realtor.com, December 29, 2016; Wendy Connick, “How to Save Enough Money for a Down Payment on a Home,” CNN, August 11, 2017. 19. “5 Reasons Your First Home Should Be a Duplex,” Forbes, July 29, 2016; Steve Gillman, “We Invested in a Duplex. Here’s What We’ve Learned So Far,” The Penny Hoarder, July 10, 2017. 20. Dougal Shaw, “Could Your Unused Space Make You Money?” BBC News, December 16, 2016; James Dobbins, “Making a Living With Airbnb,” The New York Times, April 7, 2017. 21. David Schrieberg, “Uber for Your Laundry Could Be the Next Sharing Economy Frontier,” Forbes, December 18, 2016; Nathan Heller, “Is the Gig Economy Working?” The New Yorker, May 15, 2017. 22. Jason Zweig, “Don’t Let Others Sway You When Making Investment Decisions,” The Wall Street Journal, January 21, 2017. 23. “Detailed. Historical. Precise. Client conversation starters,” Morningstar Canada, 2015, http://corporate.morningstar.com/ca/ asp/subject.aspx?xmlfile=6775.xml. 24. David Nield, “Android Pay vs. Apple Pay: Who’s Winning the Mobile Payment Battle?” T3, December 21, 2016; Donald Bush,

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Online Supplement 1 1. “The Canadian Judicial System,” Supreme Court of Canada, 2015, accessed May 17, 2015, http://www.scc-csc.gc.ca/court-cour/syseng.aspx. 2. Henry C. Jackson, “House Votes to Increase Asbestos Claim Disclosure,” Bloomberg Businessweek, November 13, 2013; and “W.R. Grace Emerges from Bankruptcy,” Bloomberg Businessweek, February 3, 2014. 3. Mesothelioma Center, www.asbestos.com, accessed May 2014. 4. Joann Muller, “Toyota Halts Sales of Popular Models to Fix Seat Heaters,” Forbes, January 30, 2014; and Ben Klayman, “Toyota Tells U.S. Agency Seat Issue Could Lead to Recall,” Chicago Tribune, January 30, 2014. 5. Shaya Tayefe Mohajir, “Toyota Settlement: Orange County to Receive $16 Million over Acceleration, Braking Issues,” Huffington Post, April 5, 2013; Jerry Hirsch, “NHTSA Opens Probe into Brake Failures of Toyota Camry Hybrid Sedan,” Los Angeles Times, January 27, 2014; and Chris Woodward and Kevin Johnson, “Toyota to Pay $1.2 Billion to Settle Criminal Probe,” USA Today, March 20, 2014.

Endnotes

6. Jeff Plungis, “GM Investigated over Ignition Recall Linked to 13 Deaths,” Bloomberg Businessweek, February 27, 2014. 7. Larry Gordon, “Surgeon and Inventor Gives $50 Million for USC Building,” Los Angeles Times, January 13, 2014. 8. “Competition Bureau – Our Legislation,” Competition Bureau, 2015, accessed May 17, 2015, http://www.competitionbureau. gc.ca/eic/site/cb-bc.nsf/eng/h_00148.html. 9. “Competition Bureau – Canada’s Anti-Span Law,” Competition Bureau, 2015, accessed May 17, 2015, http://www. competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03390.html. 10. “Software updates, installations now require consent,” CBC News, January 15, 2015, http://www.cbc.ca/news/technology/ software-updates-installations-now-require-consent-1.2901868. 11. Sharon Gaudin, “Antitrust Deal Leaves Google Unscathed,” Computerworld, February 6, 2014. 12. “Global Banking Regulations and Banks in Canada,” Canadian Bankers Association, March 13, 2015, http://www.cba.ca/en/ media-room/50-backgrounders-on-banking-issues/667-globalbanking-regulations-and-banks-in-canada.

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August 31, 2015; “Enterprise Risk Management (ERM) Program Communication – Not an Optional Activity,” PwC, May 2017. Raphael Satter, “Yahoo Issues Another Warning in Fallout from Hacking Attacks,” Boston Globe, February 16, 2017. Ryan Bort, “How Climate Changes Effect on Agriculture Can Lead to War,” Newsweek, February 17, 2017. Maria Armental, “Starbucks Again Misses Sales Target,” The Wall Street Journal, July 22, 2016; “World Leaders Discuss Risks of Social Unrest from Advances in Technology,” Computer Weekly, January 24, 2017. Sy Mukherjee, “Employers Are Cutting Back on Some Wellness Programs,” Fortune, June 20, 2016; Erika Fry, “Corporate Wellness Programs: Healthy or Hokey?” Fortune, March 15, 2017. Patrick Morin, “A Tool to Build a Cyber Defense,” CFO, February 24, 2016; Jeff John Roberts and Adam Lashinsky, “Hacked: How Business Is Fighting Back Against the Explosion in Cybercrime,” Fortune, June 22, 2017. Lisa Wirthman, “What Type of Insurances Should Small Business Explore?” Forbes, January 13, 2017. “Johnson & Johnson Hopes to Reverse Baby Powder Lawsuits,” Reuters, November 7, 2016; Margaret Cronin Fisk and Tim Bross, “J&J Loses Third Trial over Cancer Link to Talcum Powder,” Bloomberg, October 27, 2016; Tiffany Hsu, “Risk on All Sides as 4,800 Women Sue Over Johnson’s Baby Powder and Cancer,” The New York Times, September 28, 2017. Kim Lindros and Ed Tittel, “What Is Cyber Insurance and Why You Need It,” CIO, May 4, 2016; Sonali Basak, “Is Equifax’s Cyber Insurance Enough to Cover Breach?” Insurance Journal, September 11, 2017. Matt Egan, “Fracking Fallout: 7.9 Million at Risk of Man-Made Earthquakes,” CNNMoney, March 29, 2016; Judy Stone, “Fracking Is Dangerous to Your Health—Here’s Why,” Forbes, February 23, 2017.

EN-30

Glossary 4 Cs of credit A business’ creditworthiness is determined by its character, capacity, capital, and conditions. 80/20 rule The axiom that 80 percent of your business is likely to come from 20 percent of your customers. absolute advantage The advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries. accounting The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions.

arbitration An agreement to bring in an impartial third party (a single arbitrator or a panel of arbitrators) to render a binding decision in a labour dispute. articles of incorporation A legal authorization from the federal or provincial/territorial government for a company to use the corporate format. assembly process That part of the production process that puts together components. assets Economic resources (things of value) owned by a firm. auditing The job of reviewing and evaluating the records used to prepare a company’s financial statements.

accounting cycle A six-step procedure that results in the preparation and analysis of the major financial statements.

autocratic leadership A style that involves making managerial decisions without consulting others.

accounts Different types of assets, liabilities, and owners’ equity.

Baby Boomers A demographic group of Canadians who were born in the period from 1946 to 1964.

accounts payable Current liabilities or bills a company owes others for merchandise or services purchased on credit but not yet paid for.

back-to-work legislation A special law passed by the federal or provincial government that orders an end to a labour–management dispute in an industry the government decides is essential to the operation of the economy.

administrative agencies Federal or provincial institutions and other government organizations created by Parliament or provincial legislatures with delegated power to pass rules and regulations within their mandated area of authority. advertising Paid, non-personal communication through various media by organizations and individuals who are in some way identified in the advertising message. agency shop (Rand formula) agreement Clause in a negotiated labour–management agreement that says employers may hire non-union workers; employees are not required to join the union but must pay union dues. agents/brokers Marketing intermediaries who bring buyers and sellers together and assist in negotiating an exchange but do not take title to the goods. alternative trading systems (ATSs) Automated trading systems that bring together dealers and institutional investors who trade large quantities of stocks. angel investors Private individuals, often successful business people, who invest their own money into a potentially rewarding private company.

balance of payments The difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment. balance of trade A nation’s ratio of exports to imports. balance sheet (statement of financial position) The financial statement that reports a firm’s financial condition at a specific time and is composed of three major types of accounts: assets, liabilities, and owners’ (shareholders’ or stockholders’) equity. bankruptcy The legal process by which a person, business, or government entity unable to meet financial obligations is relieved of those obligations by a court that divides debtor assets among creditors, allowing creditors to get at least part of their money and freeing the debtor to begin anew. bargaining zone Range of options between the initial and final offer that each party will consider before negotiations dissolve or reach an impasse. barter The direct trading of goods and services for other goods and services.

annual report A yearly statement of the financial condition, progress, and expectations of an organization.

behavioural segmentation Dividing the market based on behaviour with or toward a product.

annuity A contract to make regular payments to a person for life or a fixed period.

benchmarking Comparing an organization’s practices, processes, and products against the world’s best.

apprentice programs Training programs during which a learner works alongside an experienced employee to master the skills and procedures of a craft.

big data Large amounts of data collected from a variety of sources and analyzed with an increasingly sophisticated set of technologies.

GL-1

Glossary

blog An online diary (web log) that looks like a web page but is easier to create and update by posting text, photos, or links to other sites.

business incubators Centres that provide space, services, advice, and support to assist new and growing businesses to become established and successful.

bond A corporate certificate indicating that an investor has lent money to a firm or a government.

business intelligence (BI) (or analytics) The use of data analytic tools to analyze an organization’s raw data and derive useful insights.

bonds payable Long-term liabilities that represent money lent to a firm that must be paid back.

business law Rules, statutes, codes, and regulations that are established to provide a legal framework within which business must be conducted and that are enforceable by court action.

bookkeeping The recording of business transactions. boom A period that brings jobs, growth, and economic prosperity. brain drain The loss of educated people to other countries. brainstorming Generating as many solutions to a problem as possible in a short period of time with no censoring of ideas. brand A name, symbol, or design (or combination thereof) that identifies the goods or services of one seller or group of sellers, and distinguishes them from the goods and services of competitors. brand equity The value of the brand name and associated symbols. brand loyalty The degree to which customers are satisfied, enjoy the brand, and are committed to further purchases. brand manager The person in the company who has direct responsibility for one brand or one product line; called a product manager in some firms. brand name A word, letter, or group of words or letters that differentiates one seller’s goods or services from those of competitors. breach of contract When one party fails to follow the terms of a contract. break-even analysis The process used to determine profitability at various levels of sales. broadband technology Technology that offers users a continuous connection to the Internet and allows users to send and receive mammoth files that include voice, video, and data much faster than ever before. budget A financial plan that sets forth management’s expectations, and, on the basis of those expectations, allocates the use of specific resources throughout the firm. bullying Acts or verbal comments that could mentally hurt or isolate a person in the workplace. bundling Grouping two or more products together and pricing them as a unit. bureaucracy An organization with many layers of managers who set rules and regulations and oversee all decisions. business Any activity that seeks to provide goods and services to others while operating at a profit. business cycles (economic cycles) The periodic rises and falls that occur in economies over time. business environment The surrounding factors that either help or hinder the development of businesses.

business plan A detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to competition, and the resources and qualifications of the owner(s). business-to-business (B2B) market All individuals and organizations that want goods and services to use in producing other goods and services or to sell, rent, or supply goods to others. cafeteria-style fringe benefits Fringe benefits plan that allows employees to choose which benefits they want up to a certain dollar amount. Canada Deposit Insurance Corporation (CDIC) Oversees the deposit insurance system, which protects deposits that Canadians have in their federal financial institutions. capital budget A budget that forecasts a firm’s spending plans for major asset purchases that often require large sums of money, like property, buildings, and equipment. capital expenditures Major investments in either tangible longterm assets, such as land, buildings, and equipment, or intangible assets, such as patents, trademarks, and copyrights. capital gains The positive difference between the purchase price of a stock and its sale price. capitalism An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit. cash budget A budget that estimates a firm’s cash inflows and outflows during a particular period (e.g. monthly or quarterly). cash flow The difference between cash coming in and cash going out of a business. cash flow forecast Forecast that predicts the cash inflows and outflows in future periods, usually months or quarters. cash flow statement (statement of cash flows) A financial statement that reports cash receipts and cash disbursem*nts related to a firm’s three major activities: operations, investing, and financing. centralized authority An organization structure in which decision-making authority is maintained at the top level of management at the company’s headquarters. certificate of deposit A time-deposit (savings) account that earns interest to be delivered at the end of the certificate’s maturity date; also called a Guaranteed Investment Certificate (GIC). certification Formal process whereby a union is recognized by the Labour Relations Board (LRB) as the bargaining agent for a group of employees. GL-2

Glossary

chain of command The line of authority that moves from the top of a hierarchy to the lowest level. channel of distribution A set of marketing intermediaries, such as agents, brokers, wholesalers, and retailers, that join together to transport and store goods in their path (or channel) from producers to consumers. chartered professional accountant (CPA) designation The internationally recognized Canadian accounting designation. checkoff A contract clause requiring the employer to deduct union dues from employees’ pay and remit them to a union. civil law Legal proceedings that do not involve criminal acts. claim A statement of a loss that the insured sends to the insurance company to request payment. climate change The movement of the temperature of the planet up or down over time. closed shop agreement Clause in a negotiated labour–management agreement that specifies workers need to be members of a union before being hired. cloud computing A form of virtualization in which a company’s data and applications are stored at offsite data centres that are accessed over the Internet (the cloud). co-operative (co-op) An organization owned and controlled by people—producers, consumers, or workers—with similar needs who pool their resources for mutual gain.

comparative advantage theory A theory that states that a country should sell to other countries those products that it produces most effectively and efficiently, and buy from other countries those products that it cannot produce as effectively or efficiently trade. competition-based pricing A pricing strategy based on what all the other competitors are doing. The price can be set at, above, or below competitors’ prices. compliance-based ethics codes Ethical standards that emphasize preventing unlawful behaviour by increasing control and by penalizing wrongdoers. compound interest Interest calculated on your interest. compressed workweek Work schedule that allows an employee to work a full number of hours per week but in fewer days. computer-aided design (CAD) The use of computers in the design of products. computer-aided manufacturing (CAM) The use of computers in the manufacturing of products. computer-integrated manufacturing (CIM) The uniting of computer-aided design with computer-aided manufacturing. conceptual skills The ability to picture the organization as a whole and the relationships among its various parts. conciliation The use of a government-appointed third part to explore solutions to a labour–management dispute.

collective bargaining The process whereby union and management representatives negotiate a contract for workers.

consideration Something of value; it is one of the requirements of a legal contract.

command economy An economy in which the government largely decides what goods and services are produced, who gets them, and how the economy will grow.

consumer behaviour When marketing researchers investigate consumer thought processes and behaviour at each stage in a purchase to determine the best way to help the buyer buy.

commercial bank A profit-seeking organization that receives deposits from individuals and corporations in the form of chequing and savings accounts and then uses some of these funds to make loans.

consumer market All individuals or households that want goods and services for personal consumption or use.

commercial finance companies Organizations that make short-term loans to borrowers who offer tangible assets as collateral. commercial paper Unsecured promissory notes of $100,000 and up that mature (come due) in one month up to one year. common law The body of law that comes from decisions handed down by judges; also referred to as unwritten law. common market (trading bloc) A regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange; also called a trading bloc. An example is the European Union. common stock The most basic form of ownership in a firm; it confers voting rights and the right to share in the firm’s profits through dividends, if offered by the firm’s board of directors. communism An economic and political system in which the state (the government) makes all economic decisions and owns almost all of the major factors of production. GL-3

consumer price index (CPI) A monthly statistic that measures the pace of inflation or deflation. consumerism A social movement that seeks to increase and strengthen the rights and powers of buyers in relation to sellers. contingency planning The process of preparing alternative courses of action that may be used if the primary plans do not achieve the organization’s objectives. contingent workers Workers who do not have regular, full-time employment. continuous improvement (CI) Constantly improving the way the organization operates so that customer needs can be better satisfied. continuous process A production process in which long production runs turn out finished goods over time. contract A legally enforceable agreement between two or more parties. contract law Set of laws that specify what constitutes a legally enforceable agreement.

Glossary

contract manufacturing A foreign country’s production of private-label goods to which a domestic company then attaches its brand name or trademark; also called outsourcing. contrarian approach Buying stock when everyone else is selling or vice versa. controlling A management function that involves establishing clear standards to determine whether or not an organization is progressing toward its goals and objectives, rewarding people for doing a good job, and taking corrective action if they are not. cookies Pieces of information, such as registration data or user preferences, sent by a website over the Internet to a web browser that the browser software is expected to save and send back to the server whenever the user returns to that website. copyright A form of intellectual property that protects a creator’s rights to materials such as books, articles, photos, and cartoons. core competencies Those functions that an organization can do as well as or better than any other organization in the world. core time In a flex-time plan, the period when all employees are expected to be at their job stations. corporate governance The process and policies that determine how an organization interacts with its stakeholders, both internal and external. corporate philanthropy Dimension of social responsibility that includes charitable donations. corporate policy Dimension of social responsibility that refers to the position a firm takes on social and political issues. corporate responsibility Dimension of social responsibility that includes everything from hiring minority workers to making safe products. corporate social initiatives Dimension of social responsibility that includes enhanced forms of corporate philanthropy that are more directly related to the company’s competencies. corporate social responsibility (CSR) A business’ concern for the welfare of society. corporation A legal entity with authority to act and have liability separate from its owners. cost of capital The rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders. cost of goods sold (cost of goods manufactured) A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale. countertrading A complex form of bartering in which several countries may be involved, each trading goods for goods or services for services. coverage rate A measure of the proportion of employed individuals, both union members and non-unionized employees, who are covered by a collective agreement. craft union An organization of skilled specialists in a particular craft or trade; typically local or regional.

credit profile A borrower’s financial track record in the form of borrowing history. credit union A non-profit, member-owned financial co-operative that offers a full variety of banking services to its members. criminal law Defines crimes, establishes punishments, and regulates the investigation and prosecution of people accused of committing crimes. crisis planning Involves reacting to sudden changes in the environment. critical path In a PERT network, the sequence of tasks that takes the longest time to complete. cross-functional, self-managed teams Groups of employees from different departments who work together on a long-term basis. crowdfunding Raising funds through the collection of small contributions from the general public (known as the crowd) using the Internet and social media. crowdsourcing Using the expertise of a large group of people to solve a business problem. Crown corporations Companies that are owned by the federal or a provincial government. cryptocurrencies A type of digital currency created using computer algorithms. culture The set of values, beliefs, rules, and institutions held by a specific group of people. current assets Items that can or will be converted into cash within one year. customer-relationship management (CRM) The process of building long-term relationships with customers by delivering customer value and satisfaction. damages The monetary settlement awarded to a person who is injured by a breach of contract. data analytics The process of collecting, organizing, storing, and analyzing large sets of data (“big data”) in order to identify patterns and other information that is most useful to the business now and for making future decisions. data mining A technique to find hidden patterns and previously unknown relationships among the data. data processing (DP) Name for business technology in the 1970s; included technology that supported an existing business and was primarily used to improve the flow of financial information. database An electronic storage file for information. debenture bonds (unsecured bonds) Bonds that are unsecured (i.e., not backed by any collateral such as equipment). debit card An electronic funds transfer tool that serves the same function as cheques: it withdraws funds from a chequing account. debt financing Funds raised through various forms of borrowing that must be repaid. GL-4

Glossary

decentralized authority An organization structure in which decision-making authority is delegated to lower-level managers more familiar with local conditions compared to headquarters’ management. decertification Process by which workers can take away a union’s right to represent them. decision making Choosing among two or more alternatives. deficit Occurs when a government spends over and above the amount it gathers in taxes for a specific period of time (namely, a fiscal year). deflation A situation in which prices are declining. demand The quantity of products that people are willing to buy at different prices at a specific time. demand deposit The technical name for a chequing account; the money in a demand deposit can be withdrawn anytime on demand from the depositor. demographic segmentation Dividing the market by age, income, and education level. demography The statistical study of the human population with regard to its size, density, and other characteristics, such as age, race, gender, and income. departmentalization Dividing an organization into separate units. depreciation The systematic write-off of the cost of a tangible asset over its estimated useful life.

dividends Part of a firm’s profits that may be distributed to shareholders as either cash payments or additional shares of stock. double-entry bookkeeping The concept of every business transaction affecting at least two accounts. dumping Selling products in a foreign country at lower prices than those charged in the producing country. e-business Any information system or application that empowers business processes. e-commerce The buying and selling of goods and services over the Internet. economic cycles (business cycles) The periodic rises and falls that occur in economies over time. economics The study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. economies of scale The situation in which companies can reduce their production costs if they can purchase raw materials in bulk and develop specialized labour, resulting in the average cost of goods going down as production levels increase. electronic funds transfer (EFT) system A computerized system that electronically performs financial transactions such as making purchases, paying bills, and receiving paycheques. embargo A complete ban on the import or export of a certain product or the stopping of all trade with a particular country.

deregulation Government withdrawal of certain laws and regulations that seem to hinder competition.

employment equity Employment activities designed to increase employment opportunities for four groups (women, Aboriginal people, persons with disabilities, and members of visible minorities) given past discrimination.

devaluation Lowering the value of a nation’s currency relative to other currencies.

empowerment Giving front-line workers the responsibility, authority, and freedom to respond quickly to customer requests.

digital currency Electronic money that is not available as bills or coins.

enterprise portal A centralized and secure online network for information and transactions.

digital marketing The promotion of products or brands via one or more forms of electronic media.

enterprise resource planning (ERP) A computer application that enables a firm to manage all of its operations (finance, requirements planning, human resources, and order fulfillment) on the basis of a single, integrated set of corporate data.

depression A severe recession.

digital natives Young people who grew up using technology including the Internet and electronic devices such as cell phones. direct marketing Any activity that directly links manufacturers or intermediaries with the ultimate customer. direct selling Selling to customers in their homes or where they work. directly chartered union A union that is directly affiliated to a labour congress to whom it pays per capita dues and receives services.

entrepreneur A person who risks time and money to start and manage a business. entrepreneurial team A group of experienced people from different areas of business who join together to form a managerial team with the skills needed to develop, make, and market a new product. entrepreneurship Accepting the challenge of starting and running a business.

disability insurance Insurance that pays part of the cost of a long-term illness or an accident.

environmental scanning The process of identifying the factors that can affect marketing success.

disinflation A situation in which price increases are slowing (the inflation rate is declining).

equalization A federal government program for reducing fiscal disparities among provinces.

diversification Buying several different investment alternatives to spread the risk of investing.

equity financing Money raised from within the firm, from operations or through the sale of ownership in the firm.

GL-5

Glossary

equity theory The idea that employees try to maintain equity between inputs and outputs compared to others in similar positions.

financial accounting Accounting information and analyses prepared for people outside the organization.

ethical consumerism A strategy where companies provide products that appeal to people’s best selves.

financial control A process in which a firm periodically compares its actual revenues, costs, and expenses with its projected ones.

ethics Standards of moral behaviour; that is, behaviour that is accepted by society as right versus wrong.

financial literacy Having the knowledge, skills, and confidence to make responsible financial decisions.

ethnic marketing Combinations of the marketing mix that reflect the unique attitudes, race or ancestry, communication preferences, and lifestyles of ethnic Canadians.

financial management The job of managing a firm’s resources to meet its goals and objectives.

ethnocentricity An attitude that one’s own culture is superior to all others. everyday low pricing (EDLP) Setting prices lower than competitors and then not having any special sales. exchange rate The value of one nation’s currency relative to the currencies of other countries. exchange-traded funds (ETFs) Collections of stocks that are traded on exchanges but are traded more like individual stocks than like mutual funds. exclusive distribution Distribution that sends products to only one retail outlet in a given geographic area. executor An individual who assembles and values your estate, files income and other taxes, and distributes assets when you pass away. expectancy theory Victor Vroom’s theory that the amount of effort employees exert on a specific task depends on their expectations of the outcome.

financial managers Managers who examine the financial data prepared by accountants and recommend strategies for improving the financial performance of the firm. financial market infrastructure (FMI) A system that facilitates the clearing, settling, or recording of payments, securities, derivatives, or other financial transactions among participating entities; also called a clearing and settlement system. financial statement A summary of all of the transactions that have occurred over a particular period. fiscal policy The federal government’s effort to keep the economy stable by increasing or decreasing taxes or government spending. fixed assets Assets that are relatively permanent, such as land, buildings, and equipment. flat organization structure An organization structure that has few layers of management and a broad span of control.

exporting Selling products to another country.

flex-time plan Work schedule that gives employees some freedom to choose when to work, as long as they work the required number of hours.

express warranties Specific representations by the seller that buyers rely on regarding the goods they purchase.

flexible manufacturing Designing machines to do multiple tasks so that they can produce a variety of products.

external customers Dealers, who buy products to sell to others, and ultimate customers (or end users), who buy products for their own personal use.

focus group A small group of people who meet under the direction of a discussion leader to communicate their opinions about an organization, its products, or other issues.

extranet A semi-private network that uses Internet technology and allows more than one company to access the same information or allows people on different servers to collaborate.

foreign direct investment (FDI) The buying of permanent property and businesses in foreign nations.

extrinsic reward Something given to you by someone else as recognition for good work; extrinsic rewards include pay increases, praise, and promotions.

foreign subsidiary A company owned in a foreign country by the parent company. forensic accounting A relatively new area of accounting that focuses its attention on fraudulent activity.

facility layout The physical arrangement of resources (including people) in the production process.

form utility The value added by the creation of finished goods and services.

facility location The process of selecting a geographic location for a company’s operations. factoring The process of selling accounts receivable for cash.

formal organization The structure that details lines of responsibility, authority, and position; that is, the structure shown on organization charts.

factors of production The resources used to create wealth: land, labour, capital goods, entrepreneurship, and knowledge.

franchise The right to use a specific business’ name and sell its goods or services in a given territory.

federal budget A comprehensive report that reveals government financial policies for the coming year.

franchise agreement An arrangement whereby someone with a good idea for a business sells the rights to use the business name and sell its goods and services in a given territory.

finance The function in a business that acquires funds for the firm and manages them within the firm.

franchisee A person who buys a franchise. GL-6

Glossary

franchisor A company that develops a product concept and sells others the rights to make and sell the products.

green marketing The process of selling products and/or services based on their environmental benefits.

free trade The movement of goods and services among nations without political or economic barriers.

greening The trend toward saving energy and producing products that cause less harm to the environment.

free-market economy An economy in which the market largely determines what goods and services are produced, who gets them, and how the economy grows.

greenwashing When businesses try to make themselves or their products or services look green or socially responsible without the action to back it up.

free-rein leadership A style that involves managers setting objectives and employees being relatively free to do whatever it takes to accomplish those objectives.

grievance A charge by employees that management is not abiding by or fulfilling the terms of the negotiated labour–management agreement.

fringe benefits Benefits such as sick-leave pay, vacation pay, pension plans, and health plans that represent additional compensation to employees beyond base wages.

gross domestic product (GDP) The total value of goods and services produced in a country in a given year.

fundamental accounting equation Assets = Liabilities + Owners’ Equity; this is the basis for the balance sheet.

gross profit (gross margin) How much a firm earned by buying (or making) and selling merchandise. hackers People who illegally access online information.

Gantt chart Bar graph showing production managers what projects are underway and what stage they are in at any given time.

Hawthorne effect The tendency for people to behave differently when they know they are being studied.

gender wage gap The difference between wages earned by men and wages earned by women.

hierarchy A system in which one person is at the top of the organization and there is a ranked or sequential ordering from the top down of managers who are responsible to that person.

General Agreement on Tariffs and Trade (GATT) A 1948 agreement that established an international forum for negotiating mutual reductions in trade restrictions. general partner An owner (partner) who has unlimited liability and is active in managing the firm. general partnership A partnership in which all owners share in operating the business and in assuming liability for the business’ debts. Generation X A demographic group of Canadians who were born in the period from 1965 to 1976. Generation Y (Millennials) A demographic group of Canadians who were born in the period from 1977 to 1994; the children of the Baby Boomers. Generation Z A demographic group of Canadians who were born in the period from 1995 onward.

high–low pricing strategy Set prices that are higher than EDLP stores, but have many special sales where the prices are lower than competitors. human development index A measure of a country’s progress that includes wealth, health, and education. human relations skills The ability to communicate and motivate, enabling managers to work through and with people. human resource management (HRM) The process of determining human resource needs and then recruiting, selecting, developing, motivating, evaluating, compensating, and scheduling employees to achieve organizational goals. humanistic management A people-oriented management approach that emphasizes the dignity and well-being of employees.

geographic segmentation Dividing the market by geographic area.

hygiene (maintenance) factors In Herzberg’s theory of motivating factors, job factors that can cause dissatisfaction if missing but that do not necessarily motivate employees if increased.

givebacks Concessions made by union members to management; gains from previous labour negotiations are given back to management to help employers remain competitive and thereby save jobs.

identity theft Obtaining an individual’s personal information, such as Social Insurance Number and credit card numbers, for illegal purposes.

goal-setting theory The idea that setting ambitious but attainable goals can motivate workers and improve performance if the goals are accepted, accompanied by feedback, and facilitated by organizational conditions.

implied warranties Guarantees legally imposed on the seller.

goals The broad, long-term accomplishments an organization wishes to attain. goods Tangible products such as computers, food, clothing, cars, and appliances. government and not-for-profit (non-profit) accounting Accounting system for organizations whose purpose is not generating a profit but rather serving ratepayers, taxpayers, and others according to a duly approved budget. GL-7

import quota A limit on the number of products in certain categories that a nation can import. importing Buying products from another country. income statement (statement of earnings) The financial statement that shows a firm’s profit after costs, expenses, and taxes. independent audit An evaluation and unbiased opinion about the accuracy of a company’s financial statements. independent local organization A union that is not formally connected or affiliated with any other labour organization; also called the union local, local, or local union.

Glossary

index funds Specialized mutual funds that are constructed to aim to equal the performance of a market index.

interest The payment the bond issuer makes to the bondholders for use of the borrowed money.

industrial design A form of intellectual property that protects the owner’s exclusive right to use the visible features of a finished product that identify it.

intermittent process A production process in which the production run is short and the machines are changed frequently to make different products.

industrial policy A comprehensive, coordinated government plan to guide and revitalize the economy.

internal customers Individuals and units within the firm that receive services from other individuals or units.

industrial union Consists of unskilled and semi-skilled workers in mass-production industries such as automobile manufacturing and mining.

international financial reporting standards (IFRS) The common set of accounting principles, standards, and procedures that accountants and companies use to compile financial statements.

inflation A general rise in the prices of goods and services over time.

International Monetary Fund (IMF) An international bank that makes short-term loans to countries experiencing problems with their balance of trade.

informal organization The system of relationships and lines of authority that develops spontaneously as employees meet and form power centres; that is, the human side of the organization that does not appear on any organization chart. information systems (IS) Technology that helps companies do business; includes such tools as automated teller machines (ATMs) and voice mail. information technology (IT) Technology that helps companies change business by allowing them to use new methods. initial public offering (IPO) The first public offering of a corporation’s stock. injunction A court order directing someone to do something or to refrain from doing something. insider trading An unethical activity in which insiders use private company information to further their own fortunes or those of their family and friends. insourcing Assigning various functions that could go to an outside organization to employees in the company. institutional investors Large organizations—such as pension funds, mutual funds, and insurance companies—that invest their own funds or the funds of others. insurable interest The possibility of the policyholder to suffer a loss. insurable risk A risk that the typical insurance company will cover. insurance policy A written contract between the insured and an insurance company that promises to pay for all or part of a loss. intangible assets Long-term assets (e.g., patents, trademarks, and copyrights) that have no physical form but do have value. integrated marketing communication (IMC) A technique that combines all of the promotional tools into one comprehensive and unified promotional strategy. integrity-based ethics codes Ethical standards that define the organization’s guiding values, create an environment that supports ethically sound behaviour, and stress a shared accountability among employees. intensive distribution Distribution that puts products into as many retail outlets as possible.

international union A union that has its headquarters outside of Canada (usually the United States). Internet of Things (IoT) Refers to data-collecting technologies that connect ordinary objects to the Internet through sensors, cameras, software, databases, and massive data centres. Often, those technologies can communicate with one another. Internet2 The private Internet system that links government supercomputer centres and a select group of universities; it runs more than 22 000 times faster than today’s public infrastructure and supports heavy-duty applications. intranet A companywide network, closed to public access, that uses Internet-type technology. intrapreneurs Creative people who work as entrepreneurs within corporations. intrinsic reward The good feeling you have when you have done a job well. inverted organization An organization that has contact people at the top and the chief executive officer at the bottom of the organization chart. investment bankers Specialists who assist in the issue and sale of new securities. Investment Canada Act Legislation that provide rules to review significant investment in Canada by non-Canadians. invisible hand A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all. involuntary bankruptcy Bankruptcy procedures filed by a debtor’s creditors. ISO 14001 A collection of the best practices for managing an organization’s impact on the environment. ISO 9001 The common name given to quality management and assurance standards. job analysis A study of what is done by employees who hold various job titles. job description A summary of the objectives of a job, the type of work to be done, the responsibilities and duties, the working conditions, and the relationship of the job to other functions. GL-8

Glossary

job enlargement A job-enrichment strategy that involves combining a series of tasks into one challenging and interesting assignment. job enrichment A motivational strategy that emphasizes motivating the worker through the job itself. job rotation A job-enrichment strategy that involves moving employees from one job to another. job sharing An arrangement whereby two part-time employees share one full-time job. job simulation The use of equipment that duplicates job conditions and tasks so that trainees can learn skills before attempting them on the job. job specifications A written summary of the minimum qualifications required of workers to do a particular job. joint venture A partnership in which two or more companies (often from different countries) join to undertake a major project. journal The record book where accounting data are first entered. just-in-time (JIT) inventory control A production process in which a minimum of inventory is kept on the premises and parts, supplies, and other needs are delivered just in time for use on the assembly line. knowledge management Finding the right information, keeping the information in a readily accessible place, and making the information known to everyone in the firm. labour contract (negotiated labour–management agreement) Informal name for negotiated labour-management agreement, which is an agreement that sets the tone and clarifies the terms and conditions under which management and labour agree to function over a period of time. labour relations board (LRB) An organization created by the federal or provincial government to administer labour relations legislation. labour union An employee organization whose main goal is representing its members in employee–management negotiation of job-related issues. law of large numbers Principle that if a large number of people are exposed to the same risk, a predictable number of losses will occur during a given period of time. leading Creating a vision for the organization and guiding, training, coaching, and motivating others to work effectively to achieve the organization’s goals and objectives. lean manufacturing The production of goods using less of everything compared to mass production. ledger A specialized accounting book in which information from accounting journals is accumulated into accounts and posted so that managers can find all of the information about a specific account in one place. leverage Raising needed funds through borrowing to increase a firm’s rate of return. liabilities What the business owes to others (debts).

GL-9

licensing A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee (a royalty). limited liability The responsibility of a business’ owners for losses only up to the amount they invest; limited partners and shareholders have limited liability. limited liability partnership (LLP) A partnership that limits partners’ risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision. limited partner An owner (partner) who invests money in the business but does not have any management responsibility or liability for losses beyond the investment. limited partnership A partnership with one or more general partners and one or more limited partners. line of credit A given amount of unsecured funds a bank will lend to a business. line organization An organization that has direct two-way lines of responsibility, authority, and communication running from the top to the bottom of the organization, with all people reporting to only one supervisor. line personnel Employees who are part of the chain of command that is responsible for achieving organizational goals. liquidity The ease with which an asset can be converted into cash. lockout An attempt by management to put pressure on unions by temporarily closing the business. logistics Those activities that focus on getting the right amount of the right products or services to the right place at the right time at the lowest possible cost. long-term financing Borrowed funds that are needed for a period more than one year. long-term forecast Forecast that predicts revenues, costs, and expenses for a period longer than one year, and sometimes as far as five or ten years into the future. loss When a business’s expenses are more than its revenues. macroeconomics The part of economic study that looks at the operation of a nation’s economy as a whole. management The process used to accomplish organizational goals through planning, organizing, leading, and controlling people and other organizational resources. management by objectives (MBO) A system of goal setting and implementation that involves a cycle of discussion, review, and evaluation of objectives among top and middle-level managers, supervisors, and employees. management development The process of training and educating employees to become good managers, and then monitoring the progress of their managerial skills over time. managerial accounting Accounting used to provide information and analyses to managers inside the organization to assist them in decision making.

Glossary

marginal tax rate The rate of tax payable on the last dollar earned. market People with unsatisfied wants and needs who have both the resources and the willingness to buy. market orientation Focusing efforts on (1) continuously collecting information about customers’ needs and competitors’ capabilities, (2) sharing this information throughout the organization, and (3) using the information to create value, ensure customer satisfaction, and develop customer relationships. market price The price determined by supply and demand. market segmentation The process of dividing the total market into groups with similar characteristics. marketing A set of business practices designed to plan for and present an organization’s products or services in ways that build effective customer relationships. marketing boards Organizations that control the supply or pricing of certain agricultural products in Canada. marketing concept A three-part business philosophy: (1) a customer orientation, (2) a service orientation, and (3) a profit orientation. marketing intermediaries Organizations that assist in moving goods and services from producers to business and consumer users. marketing mix The ingredients that go into a marketing program: product, price, place, and promotion. marketing research The analysis of markets to determine opportunities and challenges, and to find the information needed to make good decisions. Maslow’s hierarchy of needs Theory of motivation that places different types of human needs in order of importance, from basic physiological needs to safety, social, and esteem needs to self-actualization needs. mass customization Tailoring products to meet the needs of individual customers. mass marketing Developing products and promotions to please large groups of people. materials requirement planning (MRP) A computer-based production management system that uses sales forecasts to make sure that needed parts and materials are available at the right time and place.

mentor An experienced employee who supervises, coaches, and guides lower-level employees by introducing them to the right people and generally being their organizational sponsor. micro-enterprise A small business defined as having one to four employees. microeconomics The part of economic study that looks at the behaviour of people and organizations in particular markets. micromarketing (one-to-one marketing) Developing a unique mix of goods and services for each individual customer. micropreneurs Small-business owners with fewer than five employees who are willing to accept the risk of starting and managing the type of business that remains small, lets them do the kind of work they want to do, and offers them a balanced lifestyle. middle management The level of management that includes general managers, division managers, and branch and plant managers, who are responsible for tactical planning and controlling. mission statement An outline of the fundamental purposes of an organization. mixed economies Economic systems in which some allocation of resources is made by the market and some by the government. monetary policy The management of the money supply and interest rates. money Anything that people generally accept as payment for goods and services. money supply The amount of money the Bank of Canada makes available for people to buy goods and services. monopolistic competition The market situation in which a large number of sellers produce very similar products that buyers nevertheless perceive as different. monopoly A market in which there is only one seller for a product or service. mortgage bonds (secured bonds) Bonds that are secured (i.e., backed by collateral such as land). motivation The overall desire to excel. motivators In Herzberg’s theory of motivating factors, job factors that cause employees to be productive and that give them satisfaction. multinational corporation An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management.

matrix organization A system in which specialists from different parts of the organization are brought together to work on specific projects but still remain part of a line-and-staff structure.

mutual fund A organization that buys stocks and bonds and other investments, then sells shares in those securities to the public.

maturity date The exact date the issuer of a bond must pay the principal to the bondholder.

national debt (also known as public debt) The accumulation of the federal government’s borrowing (deficits) over time.

mediation The use of a third party, called a mediator, who encourages both sides in a dispute to continue negotiating and often makes suggestions for resolving the dispute.

National Policy Government directive that placed high tariffs on imports from the United States to protect Canadian manufacturing, which had higher costs.

mutual insurance company A type of insurance company owned by its policyholders.

GL-10

Glossary

national union A union that only represents workers in Canada. negligence Part of tort law where behaviour does not meet the standard of care required and causes unintentional harm or injury. negotiable instruments Forms of commercial paper (such as cheques) that are transferable among businesses and individuals and represent a promise to pay a specified amount. net income (or net loss) Revenue left over (or depleted if a net loss) after all costs and expenses, including taxes, are paid. networking The process of establishing and maintaining contacts with key managers within and outside the organization, and using those contacts to weave strong relationships that serve as informal development systems. networking between firms Using communications technology and other means to link organizations and allow them to work together on common objectives. niche marketing The process of finding small but profitable market segments and designing or finding products for them. non-banks Financial organizations that accept no deposits but offer many services provided by regular banks. non-profit organization An organization whose goals do not include making a personal profit for its owners or organizers. notes payable Short-term or long-term liabilities that a business promises to repay by a certain date. objectives Specific, measurable, short-term statements detailing how to achieve the organization’s goals. observation Involves watching, either mechanically or in person, how people behave. off-the-job training Internal or external training programs away from the workplace that develop any of a variety of skills or foster personal development. offshoring Sourcing part of the purchased inputs outside of the country. oligopoly A form of competition in which just a few sellers dominate the market. on-the-job training Training at the workplace that lets the employee learn by doing or by watching others for a while and then imitating them.

operating expenses Costs involved in operating a business, such as rent, utilities, and salaries. operational planning The process of setting work standards and schedules necessary to implement the company’s tactical objectives. operations management A specialized area in management that converts or transforms resources (including human resources) into goods and services. organization chart A visual device that shows relationships among people and divides the organization’s work; it shows who is accountable for the completion of specific work and who reports to whom. organizational (or corporate) culture Widely shared values within an organization that provide coherence and co-operation to achieve common goals. organizing A management function that includes designing the structure of the organization and creating conditions and systems in which everyone and everything work together to achieve the organization’s goals and objectives. orientation The activity that introduces new employees to the organization; to fellow employees; to their immediate supervisors; and to the policies, practices, values, and objectives of the firm. outsourcing Assigning various functions, such as accounting, production, security, maintenance, and / or legal work, to outside organizations. over-the-counter (OTC) market An exchange that provides companies and investors with a means to trade stocks not listed on the national exchanges. overnight rate The interest rate at which major financial institutions borrow and lend one-day (or overnight) funds among themselves. owners’ equity The amount of the business that belongs to the owners minus any liabilities owed by the business. participative (democratic) leadership A style that consists of managers and employees working together to make decisions. partnership A legal form of business with two or more parties. partnership agreement Legal document that specifies the rights and responsibilities of each partner.

one-to-one marketing (micromarketing) Developing a unique mix of goods and services for each individual customer.

patent A form of intellectual property that gives inventors exclusive rights to their inventions for 20 years.

online retailing Selling products to ultimate consumers online.

pay equity Equal pay for work of equal value.

online training Training programs in which employees complete classes via the Internet.

penetration price strategy A strategy in which the product is priced low to attract many customers and discourage competitors.

open shop agreement Clause in a negotiated labour–management agreement that says employees are free to join or not join the union and to pay or not pay union dues.

pension funds Amounts of money put aside by corporations, non-profit organizations, or unions to cover part of the financial needs of their members when they retire.

operating (master) budget The budget that ties together all of a firm’s other budgets and summarizes the business’ proposed financial activities.

perfect competition The market situation in which there are many sellers in a market and no seller is large enough to dictate the price of a product.

GL-11

Glossary

performance appraisal An evaluation that measures employee performance against established standards in order to make decisions about promotions, compensation, training, or termination. personal selling The face-to-face presentation and promotion of goods and services. phishing E-mails embellished with a stolen logo from a wellknown enterprise (often from financial institutions) that makes the messages look authentic, but which are used to collect personal data and use it to commit fraud. planning A management function that includes anticipating trends and determining the best strategies and tactics to achieve organizational goals and objectives.

privatization The process of governments selling Crown corporations. problem solving The process of solving the everyday problems that occur. Problem solving is less formal than decision making and usually calls for quicker action. process manufacturing That part of the production process that physically or chemically changes materials. producers’ cartels Organizations of commodity-producing countries that are formed to stabilize or increase prices to optimize overall profits in the long run. product Any physical good, service, or idea that satisfies a want or need.

PMI A creative thinking strategy that lists all the pluses, minuses, and interesting points for a solution in separate columns.

product differentiation The creation of real or perceived product differences.

podcasting A means of distributing multimedia digital files on the Internet for downloading to a portable media player.

product liability Part of tort law that holds businesses liable for harm that results from the production, design, sale, or use of products they market.

positioning statement Expresses how a company wants to be perceived by customers. power of attorney A written document in which you appoint someone else to act on your behalf on matters that you specify; this can be made to start immediately, or upon mental incapacity. precedent Decisions judges have made in earlier cases that guide the handling of new cases. preferred stock Stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common shareholders if the company is forced out of business and its assets are sold. premium The fee charged by an insurance company for an insurance policy. price The money or other consideration (including other goods and services) exchanged for the ownership or use of a good or service. price leadership The strategy by which one or more dominant firms set the pricing practices that all competitors in an industry then follow. primary boycott When a union encourages both its members and the general public not to buy the products of a firm involved in a labour dispute. primary data Data that you gather yourself (not from secondary sources such as books, journals, and newspapers). prime rate The interest rate that banks charge their most creditworthy customers. principle of motion economy Theory developed by Frank and Lillian Gilbreth that every job can be broken down into a series of elementary motions. private accountant An accountant who works for a single firm, government agency, or not-for-profit organization. private corporation Corporation that is usually controlled by a small number of shareholders and its shares are not listed on a stock exchange.

product life cycle A theoretical model of what happens to sales and profits for a product class over time; the four stages of the cycle are introduction, growth, maturity, and decline. product line A group of products that are physically similar or are intended for a similar market. product mix The combination of product lines offered by an organization. product positioning The place an offering occupies in customers’ minds on important attributes relative to competitive products. production The creation of finished goods and services using the factors of production: land, labour, capital, entrepreneurship, and knowledge. production management The term used to describe all of the activities that managers do to help their firms create goods. productivity The amount of output that is generated given the amount of input (e.g., hours worked). profit The amount a business earns above and beyond what it spends for salaries and other expenses. program evaluation and review technique (PERT) A method for analyzing the tasks involved in completing a given project, estimating the time needed to complete each task, and identifying the minimum time needed to complete the total project. promissory note A written contract with a promise to pay. promotion All of the techniques sellers use to motivate customers to buy their products. promotion mix The combination of promotional tools an organization uses. prospectus A condensed version of economic and financial information that a company must make available to investors before they purchase a security. psychographic segmentation Dividing the market using the group’s values, attitudes, and interests. GL-12

Glossary

psychological pricing Pricing goods and services at price points that make the product appear less expensive than it is.

registered pension plans (RPPs) Pension plans established by employers or unions for employees.

public accountant An accountant who provides his or her accounting services to individuals or businesses on a fee basis.

registered retirement savings plan (RRSP) A federallyregulated, tax-sheltered savings plan designed to encourage Canadians to save for their retirement.

public corporation Corporation that has the right to issue shares to the public, so its shares may be listed on a stock exchange. public relations (PR) The function that evaluates public attitudes, changes policies and procedures in response to the public’s requests, and executes a program of action and information to earn public understanding and acceptance. public-private partnerships (P3s or PPPs) A method of privatizing public services or public infrastructure. publicity Any information about an individual, product, or organization that is distributed to the public through the media and that is not paid for or controlled by the seller. pull strategy Promotional strategy in which heavy advertising and sales promotion efforts are directed toward consumers so that they will request the products from retailers. purchasing The functional area in a firm that searches for quality material resources, finds the best suppliers, and negotiates the best price for goods and services.

regulations Restrictions that provincial and federal laws place on businesses with respect to the conduct of their activities. reinforcement theory The concept that positive and negative reinforcers motivate a person to behave in certain ways. relationship marketing Marketing strategy with the goal of keeping individual customers over time by offering them products that exactly meet their requirements. research and development (R&D) Work directed toward the innovation, introduction, and improvement of products and processes. resource development The study of how to increase resources and the creation of the conditions that will make better use of those resources (e.g., recycling). resources A general term that incorporates human resources, natural resources, and financial resources. restructuring Redesigning an organization so that it can more effectively and efficiently serve its customers.

pure risk The threat of loss with no chance for profit.

retailer An organization that sells to ultimate consumers.

push strategy Promotional strategy in which the producer uses advertising, personal selling, sales promotion, and all other promotional tools to convince wholesalers and retailers to stock and sell merchandise.

retained earnings The accumulated earnings from a firm’s profitable operations that remains in the business and are not paid out to shareholders as dividends.

quality Consistently producing what the customer wants while reducing errors before and after delivery to the customer.

revenue The total amount of money received during a given period for goods sold and services rendered, and from other financial sources.

quality of life The general well-being of a society in terms of its political freedom, natural environment, education, health care, safety, amount of leisure, and rewards that add to the satisfaction and joy that other goods and services provide.

reverse discrimination Discriminating against members of a dominant or majority group (say, whites or males) usually as a result of policies designed to correct previous discrimination against minority or disadvantaged groups.

Rand formula (agency shop agreement) Clause in a negotiated labour–management agreement that says employers may hire non-union workers; employees are not required to join the union but must pay union dues.

risk The chance of loss, the degree of probability of loss, and the amount of possible loss (i.e., time and money).

ratio analysis The assessment of a firm’s financial condition using calculations and interpretations of financial ratios developed from the firm’s financial statements. re-engineering The fundamental rethinking and radical redesign of organizational processes to achieve dramatic improvements in critical measures of performance. real time The present moment or the actual time in which something takes place; data sent over the Internet to various organizational partners as they are developed or collected are said to be available in real time. recession Two or more consecutive quarters of decline in the GDP. recovery When the economy stabilizes and starts to grow. recruitment The set of activities used to obtain a sufficient number of the right people at the right time. GL-13

risk management The process of understanding, costing, and efficiently managing unexpected levels of variability in the financial outcomes for a business. risk-return tradeoff The principle that the level of return to be earned from an investment should increase as the level of risk increases and vice versa. rule of indemnity Rule saying that an insured person or organization cannot collect more than the actual loss from an insurable risk. sales promotion The promotional tool that stimulates consumer purchasing and dealer interest by means of short-term activities. scientific management Studying workers to find the most efficient ways of doing things and then teaching people those techniques. secondary boycott An attempt by labour to convince others to stop doing business with a firm that is the subject of a primary boycott.

Glossary

secondary data Information that has already been compiled by others and published in journals and books or made available online.

SMEs (small and medium-sized enterprises) Refers to all businesses with fewer than 500 employees.

secured bonds (mortgage bonds) Bonds that are secured (i.e., backed by collateral such as land).

social audit A systematic evaluation of an organization’s progress toward implementing programs that are socially responsible and responsive.

secured loan A loan backed by collateral, something valuable such as property.

social commerce Using social media and user contributions to assist in the online buying and selling of products and services.

securities commission A provincial or territorial government agency that administers and enforces rules around how securities are issued, bought and sold.

social media The term commonly given to websites and online tools that allow users to interact with each other in some way— by sharing information, opinions, knowledge, and interests.

securities dealer or investment dealer A firm that trades securities for its clients and offers investment services; also known as an investment dealer.

social media marketing Consumer-generated online-marketing efforts to promote brands and companies for which they are fans (or conversely, negatively promoting brands and companies for which they are non-fans), and the use by marketers of online tools and platforms to promote their brands or organizations.

security A negotiable financial instrument that represents some type of financial value. selection The process of gathering information and deciding who should be hired, under legal guidelines, to serve the best interests of the individual and the organization. selective distribution Distribution that sends products to only a preferred group of retailers in an area. self-insurance The practice of setting aside money to cover routine claims and buying only “catastrophe” policies to cover big losses. services Intangible products (i.e., products that can’t be held in your hand) such as education, health care, insurance, recreation, and travel and tourism. sexual harassment Unwelcome conduct of a sexual nature that detrimentally affects the work environment or leads to adverse job-related consequences for the victims of the harassment. shop stewards Union officials who work permanently in an organization and represent employee interests on a daily basis. short-term financing Borrowed funds that are needed for one year or less. short-term forecast Forecast that predicts revenues, costs, and expenses for a period of one year or less. sinking fund A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond. Six Sigma quality A quality measure that allows only 3.4 defects per million events. skimming price strategy A strategy in which a new product is priced high to make optimum profit while there’s little competition. small business A business that is independently owned and operated, is not dominant in its field, and meets certain standards of size in terms of employees or annual revenues. smart card An electronic funds transfer tool that is a combination credit card, debit card, phone card, driver’s licence card, and more.

socialism An economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be evenly distributed among the people. sole proprietorship A business that is owned, and usually managed, by one person. span of control The optimum number of subordinates a manager supervises or should supervise. speculative risk A chance of either profit or loss. spread The difference between the interest a bank earns on loans extended to customers and the interest paid to depositors and other creditors for the use of their money. staff personnel Employees who advise and assist line personnel in meeting their goals. staffing A management function that includes hiring, motivating, and retaining the best people available to accomplish the company’s objectives. stagflation A situation in which the economy is slowing but prices are going up regardless. stakeholders All the people who stand to gain or lose by the policies and activities of a business. standard of living The amount of goods and services people can buy with the money they have. statement of cash flows (cash flow statement) A financial statement that reports cash receipts and cash disbursem*nts related to a firm’s three major activities: operations, investing, and financing. statement of earnings (income statement) The financial statement that shows a firm’s profit after costs, expenses, and taxes. statistical process control (SPC) The process of testing statistical samples of product components at each stage of the production process and plotting those results on a graph. Any variances from quality standards are recognized and can be corrected if beyond the set standards. statistical quality control (SQC) The process some managers use to continually monitor all phases of the production process to assure that quality is being built into the product from the beginning. GL-14

Glossary

statutory law Federal and provincial legislative enactments, treaties of the federal government, and bylaws and ordinances— in short, written law.

tall organization structure An organization structure in which the pyramidal organization chart would be quite tall because of the various levels of management.

stock certificate Evidence of stock ownership that specifies the name of the company, the number of shares it represents, and the type of stock being issued.

target costing Designing a product so that it satisfies customers and meets the profit margins desired by the firm.

stock exchange An organization whose members can buy and sell (exchange) securities for companies and investors. stock insurance company A type of insurance company owned by shareholders. stock splits An action by a company that gives shareholders two or more shares of stock for each one they own. stockbroker A registered representative who works as a market intermediary to buy and sell securities for clients. stocks (shares) Shares of ownership in a company. strategic alliance A long-term partnership between two or more companies established to help each company build competitive market advantages. strategic planning The process of determining the major goals of the organization and the policies and strategies for obtaining and using resources to achieve those goals. strict product liability Legal responsibility for harm or injury caused by a product regardless of fault. strike A union strategy in which workers refuse to go to work. strikebreakers Replacement workers hired to do the jobs of striking employees until the labour dispute is resolved. supervisory management Managers who are directly responsible for supervising workers and evaluating their daily performance. supply The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. supply chain The sequence of firms that perform activities required to create and deliver a good or service to consumers or industrial users. supply chain management The integration and organization of information and logistics activities across firms in a supply chain for the purpose of creating and delivering goods and services that provide value to customers. surplus An excess of revenues over expenditures. sustainability Social perspectives focus on quality of human life; economic views emphasize a steady-state economy. sustainable development Implementing a process that integrates environmental, economic, and social considerations into decision making. SWOT analysis A planning tool used to analyze an organization’s strengths, weaknesses, opportunities, and threats. tactical planning The process of developing detailed, shortterm statements about what is to be done, who is to do it, and how it is to be done. GL-15

target marketing Marketing directed toward those groups (market segments) an organization decides it can serve profitably. tariff A tax imposed on imports. tax accountant An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies. Tax-Free Savings Account (TFSA) An investment option into which Canadian residents 18 years of age or older who have a valid social insurance number can contribute up to $5,500 annually; the amount contributed as well as the income earned in the account is tax free, even when it is withdrawn. technical skills The ability to perform tasks in a specific discipline or department. technology Everything from phones and copiers to computers, mobile devices, medical imaging machines, and the various software programs and apps that make business processes more effective, efficient, and productive. telecommuting Working from home via computer. telemarketing The sale of goods and services by telephone. term insurance Pure insurance protection for a given number of years. term-loan agreement A promissory note that requires the borrower to repay the loan in specified instalments. test marketing The process of testing products among potential users. time deposit The technical name for a savings account; the bank can require prior notice before the owner withdraws money from a time deposit. time value of money A dollar in hand today is worth more than a dollar promised at some time in the future. time-motion studies Studies, begun by Frederick Taylor, of which tasks must be performed to complete a job and the time needed to do each task. top management Highest level of management, consisting of the president and other key company executives, who develop strategic plans. tort A wrongful act that causes injury to another person’s body, property, or reputation. total fixed costs All expenses that remain the same no matter how many products are made or sold. total product offer (value package) Everything that customers evaluate when deciding whether to buy something; also called a value package. total quality management (TQM) Striving for maximum customer satisfaction by ensuring quality from all departments.

Glossary

trade credit The practice of buying goods and services now and paying for them later.

unlimited liability The responsibility of business owners for all of the debts of the business.

trade deficit An unfavourable balance of trade; occurs when the value of a country’s imports exceeds that of its exports.

unsecured bonds (debenture bonds) Bonds that are unsecured (i.e., not backed by any collateral such as equipment).

trade protectionism The use of government regulations to limit the import of goods and services.

unsecured loan A loan that does not require any collateral.

trade surplus A favourable balance of trade; occurs when the value of a country’s exports exceeds that of its imports. trademark A brand that has been given legal protection for the brand name, symbol, or pictorial design (or combination of these). training and development All attempts to improve productivity by increasing an employee’s ability to perform. Training focuses on short-term skills, whereas development focuses on long-term abilities. transactional leadership Leadership style where the leader is given the power to assign tasks and their successful completion leads to rewards and reinforcement. transfer payments Direct payments from governments to other governments or to individuals. transformational leadership Leadership style that occurs when leaders can influence others to follow them in working to achieve a desired outcome or goal. transparency The presentation of a company’s facts and figures in a way that is clear, accessible, and apparent to all stakeholders. trial balance A summary of all of the data in the account ledgers to show whether the figures are correct and balanced. triple-bottom line (TBL, 3BL, or People, Planet, Profit) A framework for measuring and reporting corporate performance against economic, social, and environmental parameters. trust company A financial institution that can administer estates, pension plans, and agency contracts, in addition to other activities conducted by banks. umbrella policy A broadly based insurance policy that saves you money because you buy all your insurance from one company. unemployment rate The percentage of the labour force that actively seeks work but is unable to find work at a given time. uninsurable risk A risk that no insurance company will cover. union security clause Provision in a negotiated labour–management agreement that stipulates that employees who benefit from a union must either officially join or at least pay dues to the union. union shop agreement Clause in a negotiated labour–management agreement that says workers do not have to be members of a union to be hired, but must agree to join the union within a prescribed period.

value Good quality at a fair price. value package (total product offer) Another name for total product offer, which is everything that customers evaluate when deciding whether to buy something. values A set of fundamental beliefs that guide a business in the decisions it makes. variable costs Costs that change according to the level of production. variable life insurance A form of whole life insurance that invests the cash value of the policy in stocks or other high-yielding securities. venture capital Money that is invested in new or emerging companies that are perceived as having great profit potential. venture capitalists Individuals or companies that invest in new businesses in exchange for partial ownership of those businesses. vestibule training Training done in schools where employees are taught on equipment similar to that used on the job. viral marketing Any strategy that encourages people to pass on a marketing message to others, creating exponential growth in the message’s influence as the message reaches thousands to millions of potential customers. virtual corporation A temporary networked organization made up of replaceable firms that join and leave as needed. virtual networking A process that allows software-based, networked computers to run multiple operating systems and programs, and share storage. virtual private network (VPN) A private data network that creates secure connections, or “tunnels,” over regular Internet lines. virus A piece of programming code inserted into other programming to cause some unexpected and, for the victim, usually undesirable event. vision An encompassing explanation of why the organization exists and where it is trying to head. voluntary bankruptcy Legal procedures initiated by a debtor. Web 2.0 The set of tools that allow people to build social and business connections, share information, and collaborate on projects online (including blogs, wikis, social networking sites and other online communities, and virtual worlds).

unionization rate (union density) A number of employed individuals who are union members as a proportion of the total number of employed individuals.

Web 3.0 A combination of technologies that adds intelligence and changes how people interact with the web, and vice versa (consists of the semantic web, mobile web, and immersive Internet).

United States-Mexico-Canada Agreement (USMCA) The agreement among three member-countries that coordinates trade. Replaces the NAFTA agreement.

whole life insurance Life insurance that combines pure insurance and savings.

whistleblowers People who report illegal or unethical behaviour.

GL-16

Glossary

wholesaler A marketing intermediary that sells to other organizations.

workplace violence Any act in which a person is abused, threatened, intimidated, or assaulted in his or her employment.

will A document that names the guardian for your children, states how you want your assets distributed, and names the executor for your estate.

World Bank An autonomous United Nations agency that borrows money from the more prosperous countries and lends it to less-developed countries to develop their infrastructure.

word-of-mouth promotion A promotional tool that involves people telling other people about products they have purchased or services they have used.

World Trade Organization (WTO) The international organization that replaced the General Agreement on Tariffs and Trade, and was assigned the duty to mediate trade disputes among nations.

GL-17

Index A absolute advantage, 106–107 accommodation, 467 accountability, 305 accounting, 602 accounting cycle, 611–612 accounting information, role of, 601–602 auditing, 608 Chartered Professional Accountant (CPA) designation, 610–611 disciplines, 603–611 financial accounting, 604–606 financial statements, See financial statements forensic accounting, 608 government and not-for-profit (non-profit) accounting, 608–609 managerial accounting, 603–604 purpose of, 602 reports, 603 tax accounting, 608 technology, 612–613 universal accounting language, 607 users of accounting information, 603 accounting cycle, 611–612 accounting programs and software, 612–613 accounting scandals. See corporate and accounting scandals accounting standard for private enterprises (ASPE),605 Accounting Standards Board (AcSB), 605 accounting system, 276, 602 accounts, 614 accounts payable, 617 accounts receivable, 616, 646, 650–651, 653 acid-test ratio, 627 action-oriented, 252 activity ratios, 629 Acts. See laws; specific Acts Adams, Michael, 422 Adapting from Re-Think: A Path to the Future (Palmisano), 303 adapting to change, 343–349 additive manufacturing, 385 administrative practices, 486 advertising, 537, 579–582 advisers, 276–277 aerospace industry, 334 Africa, 72, 112 age, and motivation, 421–426 agency shop agreement, 492 agents, 571 aging population, 26–27 Agreement on Internal Trade. See Canadian Free Trade Agreement (CFTA) agricultural industry, 31, 378 Airbnb, 136 allocation model, 691 alternative trading systems (STSs), 689 alternatives, evaluation of, 544 ambiguous communication, 417 Andex Chart, 717, 719 angel investors, 271 annual report, 604, 605

annuity, 721–722 application forms, 442 apprentice programs, 447 approach, 583 arbitration, 495 articles of incorporation, 232–233 Asia, 134 Asia Pacific, 111 ASPE. See accounting standard for private enterprises (ASPE) assembly-line layout, 369, 371 assembly process, 380–381 assets, 616 classification of, 616–617 controlling personal assets, 710–714 current assets, 616 expropriation, 118 fixed asset, 616–617 intangible assets, 617 inventory of financial assets, 710 liquidity, 616 Association of Certified Fraud Examiners, 197, 609 auditing, 608 auditors, 606 augmented product, 558 authority, 323, 449 centralized authority, 326 decentralized authority, 326–327 hierarchy of authority, 323 autocratic leadership, 306 autonomy, 415

B Baby Boomers, 26, 423, 426, 435, 447, 461, 535 back-to-work legislation, 498–499 background checks, 443 balance of payments, 111 balance of trade, 109 balance sheet, 613, 614–618, 630, 710 Bank of Canada, 144, 155–158, 674 financial market infrastructure (FMI), 701 monetary policy, 156–158 money supply, 156–157 overnight rate, 157 policy interest rate, 157, 686 banking crisis, 704–705 bankruptcy, 8 banks. See commercial banks bargaining zone, 494 barriers to entry, 24 barriers to open communication, 416 barter exchange, 673 bartering, 123, 672–673 basic earnings per share (basic EPS), 628 bearer bonds, 655 bears, 693 behavioural segmentation, 539–541, 540 benchmarking, 341–342 benefit (B) corporation, 227, 273 benefits, 456–458, 463 benefits sought, 541 big data, 49, 50, 308, 531–532 Big Data Consortium, 531–532

Bight Games, 110 Bill 198, 606 billboards, 581 Billes, John W. and Alfred J., 248–249 binding arbitration, 495 biological data, 48 BlackRock, 582 Blanchard, Ken, 182 blockchain, 675 blog, 590 blue-chip stocks, 694 Bluetooth technology, 44 BNA Act. See British North America Act, 1867 (BNA Act) board of directors, 231 bond-rating organizations, 656–657 bonds, 655–658, 660, 688, 695–696 bonds payable, 617 bonus plans, 455 bookkeeping, 611 boom, 95 Boom Bust & Echo (Foot), 27 borrowing, 713–714 bossless organizations, 338 bottom line, 622 boycotts, 497 brain drain, 84 brainstorming, 298 branch plant economy, 118 brand equity, 562 brand loyalty, 562–563 brand management, 563 brand manager, 563 brand names, 115, 525 branding, 562–563 Brazil, 134 break-even analysis, 568 Brexit, 131 bribery, 124, 203 BRIC economies, 133–134 brick-and-click stores, 575 Brightstar Care, 600–601 British North America Act, 1867 (BNA Act), 148–149 broadband technology, 52–53 brokerage firms, 682 brokers, 571, 690–691 Bryant, Kobe, 661 Bryant Stibel, 661 budget, 642–644 federal budget, 163 personal budget, 711–712 bulls, 693 bullying, 488 bundling, 561–562 bureaucracy, 322, 324, 325 business, 7 business fundamentals, 7–12 and the community, 74–75 day-to-day needs, 645–646 e-business, 22 economic conditions, effect of, 70–75 evolution of Canadian business, 31–35 family businesses, 226

IN-1

Index

business—Cont. government, effect of, 143–146 and legislation, 17–18 non-profit organizations, and business principles, 11–12 small business. See small business stakeholders, 9–11 business cycles, 95–96 Business Development Bank of Canada (BDC),170 business environment, 16–17 competitive environment, 23–26 economic environment, 18–19 global environment, 28–30 legal environment, 17–18 social environment, 26–28 technological environment, 19–23 business failures, 226, 262–264, 276 business incubators, 259–260 business intelligence (BI), 44–45 business ownership. See forms of business ownership business plan, 268–269, 270 business process information, 47 business regulations, 231–233 business-to-business (B2B), 21 business-to-business (B2B) market, 536–539 business-to-consumer (B2C), 21 business-to-consumer (B2C) sales process, 583–584 business-to-consumer (B2C) sales promotion techniques, 587 buyers, 24 Byrne, John, 316

C cafeteria-style fringe benefits, 458 Campbell Soup Company, 318–319 Canada big five banks, 679 branch plant economy, 118 challenges facing, 356 co-operatives, 241 economic system, 87, 88–96 evolution of Canadian business, 31–35 fastest-growing companies, 39–40 global markets, trading in, 111–112 goods-producing sector, 32 import/export performance, 109 as international competitor, 362–363 largest corporations, 229 largest unions, 483 making Canada more competitive, 356 manufacturing industry, 31–32, 359 merchandise trade categories, 108 mixed economy, 87, 88–96 multiculturalism, 28 population projections, 26–27 priority markets, 111–112 productivity, 91 research and development (R&D), 357–358 service economy, 91 service sector, 360 service trade categories, 108 services-producing sector, 32 today, 356–358 trade agreements, 129–130, 131–133 trade by region, 112 unemployment rate, 93 United States, influence of, 88

IN-2

well-known entrepreneurs, 248–249 whistleblower legislation, 187–189 Canada Awards for Excellence, 375 Canada Border Services Agency, 107 Canada Business Network, 170, 259 Canada-Caribbean Community (CARICOM) agreement, 133 Canada Deposit Insurance Corporation (CDIC), 677 Canada-European Union Comprehensive Economic Trade Agreement (CETA), 131–133 Canada Health Transfer (CHT), 150, 165 Canada-Honduras FTA, 133 Canada-India FTA, 133 Canada-Korea FTA, 133 Canada Labour Code, 464, 484 Canada Pension Plan (CPP), 456, 723, 724 Canada Revenue Agency (CRA), 621 Canadian Bankers Association (CBA), 678,685 Canadian Centre for Policy Alternatives (CCPA), 502, 503 Canadian controlled private corporation (CCPC), 218, 225 Canadian dollar, 19 Canadian economy, 70 Canadian Export and Import Control Bureau,127 Canadian financial system, 674–677 clearing and settlement systems, 700–701 financial institutions, 678–686 financial markets, 686–689 four-pillar system, 678 regulation of, 675–677 securities, purchase of, 690–691 Canadian Free Trade Agreement (CFTA), 151, 154 Canadian government. See federal government; government activities; municipal government; provincial government Canadian Human Rights Act, 438 Canadian Human Rights Commission, 466 Canadian institute of Chartered Accountants(CICA), 610 Canadian Manufacturers & Exporters, 31–32 Canadian Manufacturing Coalition, 356 Canadian Marketing Association, 516 Canadian National Railway (CNR), 209–210,466 Canadian Public Accountability Board Oversight Program, 606 Canadian Radio-television and Telecommunication Commission (CRTC), 52–53, 535–536 Canadian Securities Administrators (CSA), 689 Canadian Social Entrepreneurship Foundation, 191 Canadian Subsidy Directory, 163–164 Canadian Tire Corporation, 248–249 Canadian Union of Public Employees (CUPE),483 Canadian Virtual Assistant Association, 340 capacity, 651 capital, 77, 652 capital account, 617 capital budget, 643 capital expenditures, 647–648 capital gains, 693–694 capital goods, 15 Capital in the Twenty-First Century (Piketty),68–69 capital stock, 658 capitalism, 17–18, 76, 85, 87 see also free-market capitalism car insurance, 723 carbon dioxide capture and storage, 361 carbon footprints, 198 career, 4–6 career management, 462–463

Caribbean, 112 Carlyle, Thomas, 72 cartels, 128 carts, 576 Carvalho, Jason, 191 cash budget, 643, 644 cash flow, 623 cash flow analysis, 623–626 cash flow forecast, 641 cash flow statement, 623–626 category killer, 574 CCOHS (Canadian Centre for Occupational Health and Safety), 484 CCPA. See Canadian Centre for Policy Alternatives (CCPA) CCPC. See taxation celebrities, 557 central banks, 157 see also Bank of Canada central counterparties, 7041 centralization, 323 centralized authority, 326 CEO. See chief executive officer (CEO) certificate of deposit, 680 certification, 489 certified financial planners (CFPs), 691, 718,727 Certified General Accountants Association of Canada (CGA-Canada), 610 certified general accountants (CGAs), 610 certified management accountant (CMA), 610 CFA Institute, 664 CFO. See chief financial officer (CFO) CFTA. See Canadian Free Trade Agreement (CFTA) chain of command, 325 challenge of entrepreneurship, 251 change, adapting to, 343–349 change management, 322 change-oriented organizational culture, 346–347 changing organization, 322 channel members, 591 channels of distribution, 570–572, 572, 577 character, 651 charities, 12, 609 Charter of Rights and Freedoms, 464, 467 chartered accountant (CA), 610 chartered financial analyst (CFA) designation,664 Chartered Professional Accountant (CPA) designation, 231, 610–611, 664 Chartered Professional Accountants of Canada (CPA Canada), 610, 611 checkoff, 492 Chemel, Suzie, 250 chequing accounts, 680 Chewbeads, 560 chief accounting officer, 638 chief data officer, 532 chief executive officer (CEO), 301, 303, 325, 501–504 chief financial officer (CFO), 301, 638 chief information officer (CIO), 52, 301 chief knowledge officer (CKO), 301 chief operating officer (COO), 301 child care, 504–505 child labour, 478 children, marketing to, 532 China, 29, 72, 104, 112, 118–119, 133–134,141 Chinook Helicopters, 25 chocolate conspiracy, 151 CIO. See chief information officer (CIO) circular economy, 30

Index

Citizenship and Immigration Canada, 28 CKO. See chief knowledge officer (CKO) clearing and settlement systems, 700–701 climate change, 30, 361 close, 583–584 closed corporation. See private corporation closed-end funds, 698 closed shop agreement, 491 cloud computing, 59–60 co-operatives (co-op), 239–241 coaching, 411 coattail effects, 237 Coca-Cola Company, 194, 378, 636–637, 638 codes of conduct, 185–187 cognitive dissonance, 544 collateral, 650 collective bargaining, 489 collective bargaining process, 489–495 command economy, 86 commercial banks, 650, 678–681 savings account, 716 term deposit, 716 commercial finance companies, 651, 682 commercial paper, 653 commission plans, 455 common markets, 128–133 common stock, 659–660 communication channels, 323 communism, 85, 86, 87 community, and businesses, 74–75 Community Social Planning Council of British Columbia, 503 comparative advantage theory, 106–107 compassionate capitalism, 76 compensation, 453–458, 464–466 competition and benchmarking, 342 business, changes in, 24 Canada as international competitor, 362–363 competitive environment, 23–26 components of, 24–25 and computer technology, 256 customer expectations, 25–26 empowerment, 26 within free markets, 81–82 global competition, 29 monopolistic competition, 81 monopoly, 82 non-price competition, 569–570 oligopoly, 81 perfect competition, 81 restructuring, 26 competition-based pricing, 567–568 Competition Bureau, 151 Competition Policy Review Panel, 88 The Competitive Advantage of nations (Porter), 120 competitive environment, 23–26, 535 competitive pricing, 566–569 competitors, 24–25 compliance-based ethics codes, 185, 186 compound interest, 713 compressed workweek, 459–460 comptroller, 638 computer-aided design (CAD), 384–385 computer-aided manufacturing (CAM), 384–385 computer-integrated manufacturing (CIM), 385 concept testing, 525 conceptual skills, 302 conciliation, 495 conditions, 652 Conference Board of Canada, 89, 90, 112, 456, 500

Constitution Act, 17 Constitution Act, 1867, 149 Constitution of Canada, 464 consumer behaviour, 544–547 consumer decision-making process, 545 consumer finance companies, 682 consumer goods, 572 consumer market, 536, 538 consumer market segmentation, 539–542 consumer price index (CPI), 94 consumer protection, 150, 155 consumer rights, 195 Contented Cows Give Better Milk (Catlette and Hadden), 196 contests, 587 contingency planning, 296 contingent workers, 444–446 continuous improvement (CI), 346 continuous process, 381 contract manufacturing, 115–117 contrarian approach, 717 contribution room, 725 control procedures, 386–387 control process, 310–312 controlling, 291, 310–312 convenience store, 574 convertible bonds, 657 COO. See chief operating officer (COO) cookies, 65 coordination, 328 core competencies, 342–343 core product, 558 core time, 459 corporate and accounting scandals, 178, 179, 187, 606, 608 corporate culture, 346–347 corporate downsizing, 256 corporate governance, 230 Corporate Knights, 582 corporate philanthropy, 190–191 corporate policy, 192 corporate responsibility, 191 corporate social initiatives, 191 corporate social responsibility (CSR), 189 concepts of, 192–194 corporate philanthropy, 190–191 corporate policy, 192 corporate responsibility, 191 corporate social initiatives, 191 customers, responsibility to, 195 employees, responsibility to, 196–197 environment, responsibility to, 199–201 examples of corporate responsibility efforts,194 international perspective, 203–205 investors, responsibility to, 195–196 pluralist approach, 193 social audit, 201–203 society, responsibility to, 197–199 strategic approach, 193 sustainable development, 202–203 corporations, 216, 224–225, 232 advantages, 226–230 articles of incorporation, 232–233 benefit (B) corporation, 227 board of directors, 231 Canada’s largest corporations, 229 corporate hierarchy, 230 Crown corporations, 144, 146–148, 227 disadvantages, 231 domestic corporation, 227 multinational corporations, 118, 119, 227

non-profit corporations, 227 owners’ effect on management, 230 private corporation, 225, 227, 232 professional corporation, 227 public corporation, 224, 227, 232 separate legal identity, 228 types of corporations, 227 virtual corporations, 339–341 corrective action, 452 corruption, 124 cost-based pricing, 567 cost-cutting, 380–385 cost of capital, 662 cost of goods manufactured, 620–621 cost of goods sold, 620–621 cost-of-living allowances (COLAs), 455 costs depreciated cost, 722 guaranteed replacement cost, 722 target costing, 567, 568 total fixed costs, 568 variable costs, 568 countertrading, 123 coupon rate, 655 coupons, 587 Coutu, Jean, 249 coverage rate, 482 CPI. See consumer price index (CPI) CPP. See Canada Pension Plan (CPP) Cradle to Cradle: Remaking the Way We Make Things (McDonough and Braungart), 377 Cradle to Cradle (C2C) certification, 377 craft union, 478 Cramer, Jim, 670–671 credit bureau agency, 652 credit cards, 653–654, 717–720 credit management, 717–720 credit operations, 646 credit profile, 651 credit score, 652 credit unions, 681–682 creditworthiness, 651–653, 656–657 crisis management, 309 crisis planning, 297 critical path, 386 CRM. See customer-relationship management(CRM) cross-functional, self-managed teams, 336–338,337 crowdfunding, 272, 575 crowdsourcing, 23, 272, 575 Crown corporations, 144, 146–148, 227 cryptocurrencies, 674, 675 CSA Group, 546 cultural code-switching, 422 culture, 120–121, 545 high-context culture, 421 and human resource management, 458 low-context culture, 421 and motivation, 421 organizational culture, 346–347 subculture, 546–547 CUPE, 483 currency cryptocurrencies, 674, 675 currency movements, 19 devaluation, 123 digital currency, 674, 675 exchange rate, 122–123, 158 valuation problems, 123 current assets, 616

IN-3

Index

current liabilities, 617 current ratio, 626–627 customer orientation, 518, 552 customer-relationship management (CRM), 518, 519, 543 customers consumer rights, 195 customer satisfaction, 311–312 expectations, 25–26, 322 external customers, 311, 312 internal customers, 312 know your customers, 273–275 responsibility to, 195 responsiveness to customers, 22–23 and social conscience, 202 social media, and partnering with customers, 56 cutbacks, 430–431 cybercrimes, 63 cyclical unemployment, 92

D data, 44 see also information big data, 49, 50, 308, 531–532 biological data, 48 infoglut, 48 personal preferences or intentions, 48 primary data, 529–531 public data, 48 secondary data, 528–529, 544 data analytics, 49, 50, 531 data collection, 528–531 data mining, 49, 530–531 data processing (DP), 44 data scientist, 532 data solutions architect, 532 database, 22 daywork, 455 deals, 587 Deans, Thomas William, 226 debenture bonds, 657, 658 debit cards, 684, 720 debt, personal, 712 debt financing, 648, 655–658, 662–663, 688 debt ratios, 627 debt to owners’ equity ratio, 627 decentralized authority, 326–327 decertification, 489 decision guidelines, 324 decision making, 297–299 decline stage, 563, 565 dedicated lines, 51 deduction room, 725 deficit, 161, 162 deflation, 94, 96, 156 degree of centralization, 323 demand, 79 demand-based pricing, 567 demand curve, 79 demand deposit, 680 demand-oriented pricing, 569 Deming, W. Edwards, 375 Deming cycle, 375 Democracy Watch, 188 democratic leadership, 306 demographic segmentation, 539, 540 demography, 26–28 department heads, 304 department store, 574 departmentalization, 321, 329–332

IN-4

deposit insurance, 677 depreciated cost, 722 depreciation, 621 depression, 85, 96 deregulation, 82, 88, 147, 148 devaluation, 123 development, 446–451 digital currency, 674, 675 digital ID, 685–686 digital marketing, 579 digital natives, 343 digital technology, 520 diluted earnings per share (diluted EPS), 628 Dimin, Michael, 227 direct channel, 571 direct deposit, 684 direct mail, 580 direct marketing, 588 direct payment, 685 direct selling, 576 directing, 291 see also leading directly chartered union, 479, 480 directories, 580 disabilities, 467 disability insurance, 722 discount store, 574 disengaged workers, 398 disinflation, 94 dispute resolution, 493–496 distance learning, 447 distribution channels of distribution, 570–572, 572, 577 choice of distribution mode, 577–578 exclusive distribution, 573 intensive distribution, 573 retail intermediaries, 573–576 selective distribution, 573 transportation modes, 577 diversification, 691 diversity in management development, 450–451 management of, 28 diversity management, 28 dividends, 231, 659 division of labour, 320, 321, 323 Dollar Shave Club, 554–555 domestic corporation, 227 double-entry bookkeeping, 612 double taxation, 231 downsizing, 256 dramatic improvements, 346 drones, 21 Drucker, Peter, 289, 410, 501 dual-career planning, 472 Dubin, Michael, 554–555 dumping, 125–126 durable power of attorney for health care, 728 duration, 691

E e-business, 22 e-commerce (electronic commerce), 21–22, 237–238, 365 e-mails, 344 earnings per share (EPS), 628 eco-consciousness, 545 ecological environment, 30 economic and financial forces, 122–123 economic cycles, 95–96

economic development, 72–74 economic environment, 18–19, 535 economic indicators, 89–95 economic systems capitalism, 17–18, 76, 85, 87 communism, 85, 86, 87 comparisons of, 87 mixed economies, 85–86, 87, 88–96 socialism, 84–85, 86, 87 economic uncertainty, 430–431 economics, 70 business, and economic conditions, 70–75 business cycles, 95–96 demand, 79 economic development, 72–74 economic systems. See economic systems equilibrium point, 79–81 free-market capitalism, 76–83 see also free-market capitalism growth economics, 74 key economic indicators, 89–95 macroeconomics, 70, 73 market price, 79–81 microeconomics, 70 supply, 78 wealthy economy, creation of, 72–74 economies of scale, 322 EDC. See Export Development Canada (EDC) effectiveness, 20 efficiency, 20 80/20 rule, 541 elder care, 505–506 electronic commerce. See e-commerce (electronic commerce) electronic communications, 46, 61 electronic data interchange (EDI), 51 electronic funds transfer (EFT) system, 683–684 electronic money, 674 electronic retailing, 574–575 embargo, 127 emerging economies, 111 Empire Company Limited, 249 employee-management issues, 476–477 see also labour-management relations; labour unions child care, 504–505 controversial topics, 501–504 elder care, 505–506 executive compensation, 501–504 employee scheduling, 458–462 employees see also human resource management (HRM) empowerment, 449 and equity theory, 413–414 managing, 275–276 mobile apps for feedback, 417 reassignment, 462–463 responsibility to, 196–197 small business, 275–276 stay interviews, 417 temporary employees, 418 termination, 463 work-life balance, 461 work-related emails, 344 employers businesses, 261 employment, vs. entrepreneurship, 13–15 Employment and Social Development Canada,484 employment equity, 466–467 Employment Equity Act, 484 employment tests, 443 empowerment, 26, 323, 449

Index

engagement, 274, 398 enterprise portal, 52 enterprise resource planning (ERP), 370–372 Entertainment Software Association, 110 entrepreneurial team, 255 entrepreneurs, 7, 8 see also entrepreneurship the age of the entrepreneur, 247–249 attributes, 252–253 female entrepreneurs, 254–255 social entrepreneurs, 12 and wealth creation, 14–15 well-known Canadian entrepreneurs, 248–249 entrepreneurship, 247 see also entrepreneurs; small business business incubators, 259–260 challenge, 251 as factor of production, 15 family pattern, 251–252 within firms, 258–259 and global trade, 135 government services, 259–260 independence, 251 and innovation, 248 new idea, process, or product, 251 and opportunity, 251, 253–254 passions and problems into opportunities, 253–254 profit, 251 reasons for taking the entrepreneurial challenge, 250–255 and risk, 248 social entrepreneurship, 191 vs. working for others, 13–15 and wealth creation, 15, 247–248 entry, 24 Environics Research Group, 422 environment carbon dioxide capture and storage, 361 eco-consciousness, 545 environmental concerns vs. profit, 321 environmental quality as public good, 201 environmentally friendly goods, 377 responsibility to, 199–201 environmental and physical forces, 124 environmental scanning, 533 environmentalists, 202 environmentally friendly goods, 377 equalization, 165–166 equity, 324, 617 equity capital, 658 equity financing, 648, 658–663, 688 equity theory, 413–414, 416 equilibrium point, 79–81 esprit de corps, 324 essential services legislation, 498 estate planning, 727–729 esteem needs, 404 ethical brands, 189–190 ethical consumerism, 189–190, 339 ethical dilemmas, 182–183 ethics, 180 communication of, 304 compliance-based ethics codes, 185, 186 corporate scandals, 178, 179 ethical consumerism, 189–190, 339 ethical culture clash, 205 ethical dilemmas, 182–183 ethics codes, 18, 185–187 fundamental standards, 180 importance of, 17

individual ethical behaviour, 180–183 integrity-based ethic codes, 185, 186 international perspective, 203–205 and management, 183–189 marketing to children, 532 moving operations, 366 Sarbanes-Oxley Act (SOX), 187 six-step process, 185–186 strategies for ethics management, 186 vs. legality, 178–183 whistleblower legislation, 187–189 Ethics Practitioners’ Association of Canada (EPAC), 187 ethnic marketing, 547 ethnocentricity, 120 ethnographic segmentation, 539 Europe, 112 European Union, 130–133, 146, 376 Every Family’s Business (Deans), 226 everyday low pricing (EDLP), 569 evolution of Canadian business, 31–35 exchange rate, 122–123, 158 exchange-traded funds (ETFs), 700 exclusive distribution, 573 executive compensation, 501–504 executor, 728 exit interview, 463 exits, 7–8 expectancy theory, 411–412, 416 expectations change in customer expectations, 322 competition, and customer expectations, 25–26 and interest rates, 158 expenses, 710–711 Export and Import Permits Act (EIPA), 127 Export Development Canada (EDC), 107, 170 exporting, 105, 108–109, 114 expropriation, 118 external customers, 311, 312 external networking, 59 extinction, 412 extranet, 51 extrinsic reward, 399

F face-to-face communication, 61 Facebook, 441 facility layout, 369–370, 371 facility location, 365–369 factor, 653 factoring, 653 factors of production, 14–15, 70 fair trade, 203–204 Fair Workplaces, Better Jobs Act, 2017, 484 Fairburn, Diane, 250 falling dollar value, 158 family dual-career planning, 472 and entrepreneurship, 251–252 family businesses, 226, 267, 276 short-term financing, source of, 649–650 family businesses, 226, 267, 276 farming. See agricultural industry fastest-growing companies in Canada, 39–40 Fayol, Henri, 323 Fayol’s principles of organization, 323–324 FCAC. See Financial Consumer Agency of Canada (FCAC) Federal Accountability Act (FAA), 188 federal budget, 163

federal debt, 161–162 Federal Express Canada (FedEx), 396–398 federal government see also government activities major federal programs, 165–166 privatization, 147–148 responsibilities, 149–151 sponsorship scandal, 179 FedEx Office, 419 feedback, 415, 417 finance, 638 careers in, 664 role of, 638 value of understanding finance, 639–640 financial accounting, 604–606 Financial Accounting Standards Board (FASB),607 financial aid, 164–165 financial and economic forces, 122–123 Financial Consumer Agency of Canada (FCAC), 677, 709–710 financial control, 645 financial crisis, 704–705 financial institutions, 269, 678–686 see also specific types of financial institutions commercial banks, 678–681 credit unions, 681–682 non-banks, 682 technology, and efficiency, 682–686 trust companies, 681–682 financial literacy, 709–710 financial management, 638, 640 financial planning, 641–645 financing. See financing operating funds, need for, 645–648 financial managers, 638 see also financial management financial market infrastructure (FMI), 700–701 financial markets, 686–689 financial planners, 727 financial planning, 641–645 budget, 642–644 financial control, 645 forecasting financial needs, 641 personal financial planning. See personal financial planning financial statements, 613 balance sheet, 613, 614–618, 630 fundamental accounting equation, 614 income statement, 613, 618–623, 630 statement of cash flows, 613, 623–626 financial system. See Canadian financialsystem financing alternative sources of funds, 648 angel investors, 271 crowdfunding, 272 debt financing, 648, 655–658, 662–663, 688 equity financing, 648, 658–663, 688 government sites, 272–273 long-term financing, 648, 654–664 online financing sources, 272–273 online lenders, 652 short-term financing, 648, 649–654 small business, 269–273 venture capitalists, 271–272 FINCA (Foundation for International Community Assistance), 77 Fink, Larry, 582 fintech firms, 682 firewalls, 46, 51 first in, last out (FIFO), 621

IN-5

Index

first-line managers, 304 fiscal policy, 160–163 fixed annuities, 721 fixed asset, 616–617 fixed-position layout, 369, 371 Flannery, Matthew, 176–178 flat organization structures, 328–329 Flex-N-Gate, 354–355 flex-time plan, 459–460 flexible manufacturing, 382 floating exchange rates, 123 floating-rate bond, 656 focus group, 530, 531 follow up, 584 Foot, David, 27, 422 Footwork Consulting Inc., 422 forecasting financial needs, 641 Foreign Affairs, Trade and Development Canada,133 Foreign Affairs and International Trade Canada,107 foreign direct investment (FDI), 119–120 foreign investment, 88 foreign subsidiary, 118 forensic accounting, 608, 609 form utility, 380 formal organization, 347–348 forms of business ownership, 241 co-operatives (co-op), 239–241 comparison, 232 corporations. See corporations franchising. See franchises partnerships. See partnership sole proprietorship. See sole proprietorship Forrester Research, 257 fossil fuel subsidies, 164–165 4 Cs of credit, 651–652 four Ps of marketing. See marketing mix Fox 40 International Inc., 2–4, 211, 283–284, 394–395, 512–513, 597–599, 706–707 Foxcroft, Ron, 2–4, 7, 14, 283, 394–395, 283–284, 512–513, 597–599, 706–707 franchise agreement, 233 franchisee, 233 franchises, 233 advantages of, 234–236 buying a franchise, 266–267 coattail effects, 237 disadvantages, 236–237 e-commerce in franchising, 237–238 evaluation checklist, 235 franchise agreement, 233 franchisee, 233 franchisor, 233 home-based franchises, 238 international markets, 238–239 franchising, 114–115 franchisor, 233 fraud, 182, 197, 237, 609 free-market capitalism, 76–83 benefits and limitations, 82–83 competition, 81–82 demand, 79 equilibrium point, 79–81 free markets, 76–77 market price, 79–81 number of sellers, 82 prices, determination of, 77–78 supply, 78 free-market economy, 85 free-rein leadership, 306–307

IN-6

free trade, 105, 106 free-trade agreements, 128–133 freedom, 74 freelancers, 20 Freight Farms, 378 frictional unemployment, 92 Fried, Ben, 42–43 Friedman, Jon, 378 Friedman, Milton, 190 friends, and financing, 649–650 fringe benefits, 218, 456–458 From Y to Z: A Guide to the Next Generation of Employees, 450 frugal living, 714 function, 329 functional complexity, 328 functional similarity, 327 fundamental accounting equation, 614 funding. See financing

G gain-sharing systems, 454–455 gambling, 175 Gantt, Henry L., 401 Gantt chart, 386–387 The Gen Z and Gen Y Workplace Expectations Study, 424, 425 gender wage gap, 465 General Agreement on Tariffs and Trade (GATT),127 General and Industrial Management (Fayol),323 General Electric, 194 general expenses, 622 general partner, 219 general partnership, 219, 232 Generation X, 26–27, 423–424, 426, 435 Generation Y (Millennials), 26–27, 423–424, 426, 435, 441, 450, 461, 681, 718 Generation Z, 26, 110, 425, 426, 435, 450 generational differences, 421–426 geographic segmentation, 539, 540 geographical closeness, 327 Ger, Jennifer, 250 Get Innovative or Get Dead (Kiernan), 393 gig economy, 445 Gilbreth, Frank, 401 Gilbreth, Lillian, 401 givebacks, 491, 510 GlaxoSmithKline, 194 global advertising, 581–582 Global Affairs Canada, 169 global competition, 29 Global Competitiveness Report, 362 global economics, 70 global environment, 28–30, 533 global markets, 104–105 see also global trade absolute advantage, 106–107 Canadian experience, 111–112 comparative advantage theory, 106–107 contract manufacturing, 115–117 economic and financial forces, 122–123 exporting, 114 forces affecting trading in, 120–124 foreign direct investment (FDI), 119–120 franchises, 238–239 franchising, 114–115 free trade, 105, 106 joint venture, 117 legal forces, 123–124

licensing, 113–114 physical and environmental forces, 124 reasons for trade with other nations, 105 small business, 277–278 sociocultural forces, 120–121 strategic alliance, 118 strategies, 113–120 technological constraints, 124 Global Markets Action Plan, 111 global money supply, 157 global outsourcing trends, 368 global politics, 70 global stocks, 692 global teams, 335–336 global trade see also global markets common markets, 128–133 exporting, 105, 108–109, 114 General Agreement on Tariffs and Trade (GATT), 127 getting involved in global trade, 107–111 importing, 105, 107–108 International Monetary Fund (IMF), 128 measurement of, 109–111 producers’ cartels, 128 trade protectionism, 125–133 World Bank, 128 World Trade Organization (WTO), 127–128 global wealth tax, 70 globalism, 582 globalization, 28–29, 133–136 goal-setting theory, 410, 416 goals, 292 going green, 545 going public, 245 golden handshakes, 463 goods, 7 goods-producing sector, 32 goodwill, 616 Google, 42–43 government activities Bank of Canada. See Bank of Canada business, effect on, 143–146 Crown corporations, 144, 146–148 and the economy, 145–146 entrepreneurship, encouragement of, 259–260 government expenditures, 144, 163–166 laws and regulations, 144, 148–155 purchasing policies, 144, 167 role of Canadian government, 170 services, 144, 167–170, 259–260 taxation. See taxation government and not-for-profit (non-profit) accounting, 608–609 government expenditures, 144, 163–166 government funding, 164–165 government grants, 272 government involvement. See government activities government purchasing policies, 144 government services, 144, 167–170, 259–260 green advertising, 546 Green Bonds, 656 green marketing, 546 green movement, 200 green procurement, 168 green products, 198 greenhouse gas (GHG) emissions, 361 greening, 30 Greenwald, Lisa, 560 greenwashing, 546 grievance, 493

Index

grievance resolution process, 494 gross domestic product (GDP), 89–90 gross margin, 620–621 gross profit, 620–621 gross sales, 620 group buying, 575 Growing City, 142–143 Growth Competitiveness Index, 362 growth economics, 74 growth stage, 563, 565 growth stocks, 694 Guaranteed Investment Certificates (GICs),680 guaranteed replacement cost, 722

H hackers, 22–23, 51, 62–63, 720 Hackman, J. Richard, 414 harassment sexual harassment, 485–486 workplace harassment, 485, 487 Hard Rock Cafe, 634–635 Harvard Business Review, 335 Hasenfratz, Linda, 432–433 Hawthorne effect, 403, 416 Hawthorne studies, 402–403 Hay, Edward, 454 Hay system, 454 health and safety committee, 484 Health Canada, 461 health care, 88 health care-related emergencies (HREs), 296 helping, 411 Herzberg, Frederick, 404–407 Hewlett-Packard, 419 hierarchy, 325 hierarchy of authority, 323 hierarchy of needs, 403–404, 406, 416 high-context culture, 421 high energy, 252 high-low pricing strategy, 569 high-tech firms, 288 high value of the dollar, 122–123 holacracy, 338 Hollinger International Inc., 179 Hollywood, 29 home-based businesses, 256–257 home-based franchises, 238 Home Buyers’ Plan, 726 home country, 118 homeowner’s insurance, 722 Honduras, 133 host country, 118 hostile work environment, 485 hot-desking, 460 hotelling, 460 hourly wage, 455 HRIS (Human Resource Information System),438 HRM. See human resource management (HRM) human development index (HDI), 95 human relations skills, 302 human resource management (HRM), 434, 435 application forms, 442 background checks, 443 career management, 462–463 challenges, 434–436 compensation and benefits, 453–458 contingent workers, 444–446 cultural challenges, 458 employee scheduling, 458–462 employment tests, 443

external sources, 440 future human resource demand and supply,437 HRIS (Human Resource Information System),438 human resource inventory, 436 human resource needs, 436–438 information sites, 468 and information technology, 60–61 internal sources, 439–440 interviews, 442 job analysis, 436–437 job descriptions, 324, 437 job specifications, 437 laws, 464–468 management development, 448–451 people, as ultimate resource, 434 performance appraisal, 451–453 physical exams, 444 promotion and reassignment, 462–463 recruitment, 438–442 retirement, 463 selection, 442–446 social media, 440–441 staffing, 303 strategic planning, 438 termination of employees, 463 training and development, 446–451 trial (probationary) periods, 444 Human Rights Act, 464 humanistic management, 35 hybrid clouds, 59 hybrid forms, 332 hygiene (maintenance) factors, 405 hyperinflation, 94

I IBM, 352–353 identity theft, 22–23 IFRS. See international financial reporting standards (IFRS) IMF. See International Monetary Fund (IMF) immersive Internet, 58 import quota, 127 importing, 105, 107–108 in-demand scheduling, 460 incentives, 585–586 income statement, 613, 618–623, 630, 710 income stocks, 694 incubators, 259–260 independence, 251 independent audit, 608 independent local organization, 479 index funds, 698 India, 72, 112, 133, 141 indirect channel, 572 industrial goods and services, 537, 572 industrial policy, 170 industrial union, 479 inequality, 75 inflation, 93–94, 156–157 influence-peddling, 203 infoglut, 48 informal organization, 348 information, 44 see also data business process information, 47 business regulations, 233 completeness of, 48 management of, 48–49 personal information, 22

physical-world observations, 47 quality of, 48 relevance of, 49 search, 544 from social media, 49–50 timeliness of, 48–49 types of, 47–50 information systems (IS), 44 information technology (IT), 44 see also technology and business changes, 45–46, 47 and facility location, 369 and human resources issues, 60–61 management, effects on, 60–65 privacy issues, 64–65 production process, impact on, 372 role of, 43–46 security issues, 62–64 stability issues, 65 technological environment, 19–23 workplace, changes in, 61 worst technology predictions, 46 initial public offering (IPO), 658 injunction, 497 innovation, 85, 135, 248, 253, 357, 393, 641 Innovation, Science and Economic Development Canada (ISEDC), 7–8, 17, 150, 168–169, 259, 261 input, 567 insider trading, 196 insourcing, 10, 11, 342 instability, 65 institutional investors, 688 insurance, 720–723 intangible assets, 617 integrated marketing communication (IMC), 579 integrity-based ethic codes, 185, 186 Intel, 194 intensive distribution, 573 inter-firm process, 368 interest, 655 bonds, 655 compound interest, 713 interest rate and bonds, 696 credit cards, 653, 717–718 expectations, 158 overnight rate, 157 policy interest rate, 157, 686 prime rate, 157 intermediaries, 527 intermittent process, 381 internal customers, 312 internal networking, 59 International Accounting Standards Board (IASB),607 International Association of Outsourcing Professionals, 368 international financial reporting standards (IFRS), 605, 607, 612, 616, 621, 640 International Humanistic Management Association,35 International Institute for Management Development (IMD), 362–363 international joint ventures, 117 international markets. See global markets International Monetary Fund (IMF), 70, 128,674 International Organization for Standardization (ISO), 375, 376–377 international trade. See global trade international union, 480

IN-7

Index

Internet advertising, 580 bartering, 672 broadband technology, 52–53 communications, 46 extranet, 51 financing sources, 272–273 human resource information sites, 468 immersive Internet, 58 Internet2, 53–54 Internet of Things (IoT), 30, 58–59 intranet, 46, 51 and knowledge management, 50–59 mobile web, 57–58 net neutrality, 52–53 online banking, 685 online brokers, 690–691 online businesses, 257–258 online communities, and marketing, 517 online lenders, 652 online streaming, 579 operations management, 368 plagiarizing material from, 180–181 and privacy, 64–65 semantic web, 56–57 social media. See social media virtual private networks (VPN), 51–52 Web 2.0, 55–56 Web 3.0, 56–59 Internet2, 53–54 Internet of Things (IoT), 30, 58–59, 534 Internet Service Providers (ISP), 53 interviews, 442 exit interview, 463 personal interviews, 530 stay interviews, 417 intranet, 46, 51 intrapreneurs, 258–259 intrinsic reward, 399 introduction phase, 563, 565 inventions, 71, 85 inventory, 647 inventory of financial assets, 710 inventory turnover ratio, 629 inverted organization, 344–345 investment bankers, 688 Investment Canada Act, 118–119 investment dealer, 687 Investment Industry Regulatory Organization of Canada, 687 investment risk, 691 investment strategy, 691 investments bonds, 695–696 comparison of, 700 exchange-traded funds (ETFs), 700 mutual funds, 697–698 socially responsible investing (SRI), 699 stocks, 693–695 investors institutional investors, 688 investment strategy, 691 responsibility to, 195–196 securities, purchase of, 690–691 socially conscious investors, 202 invisible hand, 74 invoice terms, 649 IoT. See Internet of Things (IoT) ipsy, 514–515 ISEDC. See Innovation, Science and Economic Development Canada (ISEDC)

IN-8

iSlide, 534 ISO. See International Organization for Standardization (ISO) ISO 9001, 376 ISO 14001, 376 ISO 9000 series and standards, 376–377 ISO 14000 series and standards, 376–377

J Jahshan, Tonia, 246–247 Jean Coutu Group, 249 job analysis, 436–437 Job Characteristics Model, 414–415 job descriptions, 324, 437 job enlargement, 415 job enrichment, 414–415 job rotation, 415, 448–449 job sharing, 462 job simplification, 414 job simulation, 448 job specialization, 320 job specifications, 437 joint venture, 117 journal, 612 journeyman, 447 just-in-time (JIT) inventory control, 372–373,647

K Katz, Robert, 301 key economic indicators, 89–95 Key Small Business Statistics, 261–262 Khan, Shahid, 354–355 Kickstarter, 273 Kiernan, Matthew, 393 kiosks, 576 Kittredge, Justin, 534 Kiva, 176–178 knowledge chief knowledge officer (CKO), 301 as factor of production, 15 know your customers, 273–275 and wealth creation, 15 knowledge management, 308–309 and the Internet, 50–59

L labour, 14 labour congresses, 479–480 labour contract, 491 Labour Force Survey, 254 labour intensive firms, 453 labour-management relations see also employee-management issues arbitration, 495 collective bargaining process, 489–495 conciliation, 495 dispute resolution, 493–496 future of, 499–500 grievance, 493 labour legislation, 483–489 mediation, 495 negotiated labour-management agreement, 491–492 negotiation tactics, 496–499 labour relations. See employee-management issues labour relations boards (LRBs), 488–489 labour relations legislation, 483–489

back-to-work legislation, 498–499 essential services legislation, 498 labour relations boards (LRBs), 488–489 sexual harassment, 485–486 workplace laws, 484–485 workplace violence, 486–487 labour unions, 476, 506 see also employee-management issues advantages and disadvantages of joining,493 apprentice programs, 447 boycotts, 497 Canada’s largest unions, 483 certification, 489 closed shop agreement, 491 coverage rate, 482 craft union, 478 decertification, 489 directly chartered union, 479, 480 future of, 499–500 history of, 477–479 independent local organization, 479 industrial union, 479 international union, 480 labour congresses, 479–480 national union, 480 negotiation tactics, 496–497 objectives, 489–493 plant closings, and concessions, 510–511 shop stewards, 493 strike, 496–497 structure of, 479–481 union coverage, 481–482 union security clause, 491–492 union shop agreement, 491 unionization rate, 481–482 Labourers’ International Union of North America (LiUNA), 474–476, 480–481,500 land, 14, 616 last in, first out (LIFO), 621 latchkey kids, 423 Latin America, 112, 121 Lawler, Edward, 412 laws, 17, 144, 148–155 see also specific Acts and business, 17–18 consumer protection laws, 150 financial system, regulation of, 674–677 human resource management, 464–468 labour relations legislation, 483–489, 498–499 people with disabilities, 467 phishing, 64 privacy legislation, 23 securities regulations, 689 whistleblower legislation, 187–189 workplace laws, 484–485 layoff, 92, 105, 430–431 leaderless company, 316 leadership styles, 306–308 leading, 290–291, 304–309 controlling, 310–312 knowledge management, 308–309 in a leaderless company, 316 leadership styles, 306–308 and sustainability, 3057 lean manufacturing, 382–383 learning, 544 Learnvest, 708–709 ledger, 612 legal environment, 17–18, 535–536 legal forces, 123–124 legally required benefits, 456

Index

legislation. See laws Lehy, Kathleen, 159 lenders, 269 lending institutions, 655 Leon, Ablan, 248 Leon’s Furniture Limited, 248 less-developed countries, 204 leverage (debt) ratios, 627, 662, 663 liabilities, 617 liability liability insurance, 723 limited liability, 219, 228 unlimited liability, 217, 219, 221 licensing, 113–114 life insurance, 720–722 life insurance companies, 682 Lifelong Learning Plan, 726 limit order, 694 limited liability, 219, 228 limited liability partnership (LLP), 219 limited partner, 219 limited partnership, 219, 232 Linamar Corporation, 432–433 line-and-staff organizations, 333, 337 line of credit, 651 line organization, 333, 337 line personnel, 333 LinkedIn, 441 liquidation, 8 liquidity, 616, 691 liquidity ratios, 626–627 Lisson, Lisa, 396–398 listening, 415 LiUNA. See Labourers’ International Union of North America (LiUNA) living wage, 503–504 load fund, 698 loans, 650–651 Loblaws, 339 local, 479 local markets, 303 local union, 479 location-based services, 55–56 lockout, 497 logistics, 377 long-term financing, 648, 654–664 long-term forecast, 641 long-term liabilities, 617 loss, 7, 8 lottery corporations, 179 low-context culture, 421 low value of the dollar, 123 loyalty, 324 loyalty programs, 587

M Macdonald, John A., 145 macroeconomics, 70, 73 Mad Money, 670–671 magazine advertising, 580 Make Your Workplace Great (Stein), 430–431 Malthus, Thomas, 72 management, 289 see also managers brand management, 563 controlling, 291 crisis management, 309 decision making, 297–299 and ethics, 183–189 Fayol’s management principles, 323–324

financial management. See financial management functions of, 289–291 human resources, 60–61 humanistic management, 35 information technology, effect of, 60–65 leading, 290–291, 304–309 levels of management, 300 middle management, 301 negotiation tactics, 497 organizing, 290, 299–303 owners’ effect on, 230 people-oriented management, 35 planning, 290, 291–297 poor management, 268 of small business, 268–277 staffing, 303 supervisory management, 301 tasks and skills, 301–302 top management, 299–301 Management Accountants of Canada (CMA Canada), 610 management by objectives (MBO), 410–411,416 management development, 448–451 Management Expense Ratio (MER), 697 managerial accounting, 603–604 managers see also management brand manager, 563 capabilities of, 327 conceptual skills, 302 evolving roles, 288–289 financial managers, 638 first-line managers, 304 high-tech firms, 288 human relations skills, 302 job rotation, 448–449 management development, 448–451 marketing managers, 522 product manager, 563 progressive managers, 449 social media managers, 54 strategy robots, 295 technical skills, 302 traditional managers, 449 Managers Not MBAs (Mintzberg), 326 manufacturing capacity, 118 manufacturing industry, 31–32, 359, 365–367 marginal tax rate, 725 market, 273, 516 business-to-business (B2B) market, 536–539 consumer market, 536, 538 defining your market, 539–544 financial markets, 686–689 over-the-counter (OTC) market, 689 securities markets, 687–688 market-based companies, 297 market-based pay structures, 454 market forces, and pricing, 569 market order, 694 market orientation, 519 market price, 79–81 market segmentation, 539–541 market share, 566 marketing, 516–517 careers in, 547 to children, 532 digital marketing, 579 ethnic marketing, 547 evolution of, 517–520 market segmentation, 539–541 marketing environment, 533–536

marketing eras, 517–520 marketing mix, 522–527 marketing research, 528–532 mass marketing, 541–542 measurement of marketing effectiveness,596 micromarketing, 542 mobile marketing, 590–591 multilevel marketing, 576 niche marketing, 542 non-profit organizations, 521–522 one-to-one marketing, 542 and online communities, 517 positioning, 542–543 relationship marketing, 543–544 subscribers, 274 target marketing, 541–542 test marketing, 525 marketing boards, 151–152 marketing concept, 518 marketing environment, 533–536 competitive environment, 535 economic environment, 535 global environment, 533 legal environment, 535–536 social environment, 535 technological environment, 533–534 marketing eras, 517–520 market orientation era, 519 marketing concept era, 518 mobile/on-demand marketing era, 520 production era, 517 sales era, 518 social media marketing era, 519 marketing intermediaries, 570–572, 573–576 marketing managers, 522 marketing mix, 522–527, 544 see also specific marketing mix elements applying the marketing process, 523 place, 527 price, 526–527 product, 523–526 promotion, 527 marketing research, 528–532 analysis of research data, 531–532 choosing the best solution, 532 data collection, 528–531 defining the question, 528 determining the present situation, 528 implementation of solution, 532 process, 528–532 Martiz Motivation Solutions, 419 Maslow, Abraham, 403–404 Maslow’s hierarchy of needs, 403–404, 406,416 mass customization, 383–384 mass marketing, 541–542 mass production, 322 master budget, 643 Mastercard, 194 materials requirement planning (MRP), 370–372 matrix organizations, 333–336, 337 maturity date, 655 maturity stage, 563, 564, 565 Mayo, Elton, 402–403 McCain, Wallace and Harrison, 249 McCain Foods Limited, 249 McCrindle, Mark, 423 McDonalds, 116, 194 McGregor, Douglas, 407–410 McNamara, Brad, 378 Meathead Movers, 184 mediation, 495

IN-9

Index

mediator, 495 Meet Generation Z, 425 mentor, 450 mercantilism, 126 MERX Canadian Public Tenders, 167 Mexico, 129–130 Michaud, Louis, 249 micro-enterprises, 256–257 microeconomics, 70 micromarketing, 542 micropreneurs, 256–257 Middle East, 112 middle management, 301, 325 middlemen, 527, 570 see also marketing intermediaries Millennials. See Generation Y (Millennials) minimum wage, 478, 503–504 Mintzberg, Henry, 306, 326, 347 mission statement, 292, 297 mixed economies, 85–86, 87, 88–96 mobile advertising, 579, 580 mobile banking, 685 mobile devices, 20 mobile marketing, 590–591 mobile/on-demand marketing era, 520 mobile payment systems, 646 mobile web, 57–58 modular layout, 369, 371 Molinsky, Andrew, 422 monetary policy, 156–158 money, 672 electronic money, 674 importance of, 672–674 and personal financial planning, 710 time value of money, 641, 646 useful forms of, 673–674 money jar system, 712 money supply, 156–157 monopolistic competition, 81 monopoly, 82 Montréal Exchange (MX), 688 Morrison, Denise, 318–319 mortgage-backed securities, 705 mortgage bonds, 657, 658 motivating factors, 404–407, 416 motivation, 398 cultural differences, 421 extrinsic reward, 399 generational differences, 421–426 intrinsic reward, 399 job enrichment, 414–415 motivation myths, 399 open communication, 415–418 personalizing motivation, 421–426 recognition of job well done, 418–419 scientific management, 416 small businesses, 420 temporary employees, 418 theories of. See motivation theories tips for tough times, 430–431 value of motivation, 398–400 motivation theories equity theory, 413–414, 416 expectancy theory, 411–412, 416 goal-setting theory, 410, 416 Hawthorne effect, 403, 416 Herzberg’s motivating factors, 404–407,416 management by objectives (MBO), 410–411,416 Maslow’s hierarchy of needs, 403–404, 406,416

IN-10

McGregor’s Theory X and Theory Y, 407–410,416 reinforcement theory, 412–413, 416 scientific management, 400–402 summary of, 416 motivators, 405 Mountain Equipment Co-op, 605 multiculturalism, 28 multigenerational workforce, 435 multilevel marketing, 576 multinational corporations, 118, 119, 227 municipal government home-based businesses, 257 privatization, 148 responsibilities, 154–155 sustainability plans, 168 mutual funds, 697–698

N Nadler, David, 412 narrow span of control, 328, 329 National Business Incubator Association, 259–260 national debt, 161–162 National Federation of Independent Business, 649–650 National Policy, 145 National Research Council (NRC), 169, 170 national securities regulator, 689 national union, 480 natural resources, 14, 356 near-the-job training, 448 negative reinforcements, 412 negotiated labour-management agreement, 491–492 negotiation tactics, 496–499 neo-Malthusians, 72 Nestlé, 194 net income, 618 net loss, 618, 622–623 net neutrality, 52–53 net profit, 622–623 net sales, 620 Network for Business Sustainability, 305 networked organization structures, 339–343 networking between firms, 339–343, 450 new idea, process, or product, 251 new products, 568 newspaper advertising, 579, 580 Nguyen, Nick, 250 niche marketing, 542 no-load fund, 698 non-banks, 682 non-current liabilities, 617 non-price competition, 569–570 non-profit corporations, 227 non-profit organizations, 11–12, 521–522 non-store retailing, 573–576 non-tariff barriers, 127 Nooyi, Indra Krishnamurthy, 102–103 North America, 112, 121 North American Free Trade Agreement (NAFTA), 129, 146 see also United States-Mexico-Canada Agreement (USMCA) North Korea, 87, 127 not-for-profit accounting, 608–609 not-for-profit corporations, 227 notes payable, 617 NRC. See National Research Council (NRC)

O OAS. See Old Age Security (OAS) objectives, 292 observation, 530, 531 occupational fraud, 197 Occupational Health and Safety Act, 487 odd lots, 694 O2E Brands, 215 off-price retailer, 574 off-the-job courses and training, 449 off-the-job training, 447 offboarding, 463 Office of the Privacy Commissioner of Canada, 23 Office of the Superintendent of Financial Institutions (OSFI), 676 offshoring, 10–11, 135, 141 oil, and politics, 132 oil pipelines, 132 Old Age Security (OAS), 723, 724 Oldham, Greg R., 414 oligopoly, 81 on-call scheduling, 460 on-the-job coaching, 448 on-the-job training, 447 1-800-GOT-JUNK?, 214–215 one-to-one marketing, 542 online banking, 685 online brokers, 690–691 online businesses, 257–258 online lenders, 652 online retailing, 574 online streaming, 579 online training, 447 Ontario Securities Commission, 606, 689 open communication, 344, 415–418 open corporation. See public corporation open-end funds, 698 open shop agreement, 492 operating expenses, 621–622 operating funds, 645–648 operating (master) budget, 643 operational planning, 296 operations management, 360–361 Internet, 368 operations management planning, 365–379 service sector, 363–365 operations management planning, 365–379 facility layout, 369–370 facility location, 365–369 just-in-time inventory control, 372–373 materials requirement planning (MRP), 370–372 purchasing, 372 quality control, 373–377 supply chain management, 377–379 opportunity, 251, 253–254 order, 323 Oreo cookies, 526 Organisation for Economic Co-operation and Development (OECD), 124 organization chart, 299, 300, 321 organization models, 332–338 cross-functional, self-managed teams, 336–338,337 line-and-staff organizations, 333, 337 line organization, 333, 337 matrix organizations, 333–336, 337 Organization of the Petroleum Exporting Countries (OPEC), 129 organizational boundaries, beyond, 337–338

Index

organizational culture, 346–347 organizational design building from the bottom up, 320–322 centralization vs. decentralization, 326–327 changing organization, 322 decisions to make in, 326–332 departmentalization, 329–332 development of, 322–325 Fayol’s principles of organization, 323–324 organization models, 332–338 span of control, 327–328 tall vs. flat organization structures, 328–329 turning principles into, 325 Weber, and organizational theory, 324–325 organizational structure, 299, 320 see also organizational design organizational theory, 324–325 organized labour. See labour unions organizing, 290, 299–303 orientation, 446 OSFI. See Office of the Superintendent of Financial Institutions (OSFI) Other Ocean Interactive1, 110 out-of-home advertising and promotion, 581 outdoor advertising, 580 outlet store, 574 outsourcing, 10–11, 115, 135, 141, 222, 352–353, 367–368 over-the-counter (OTC) market, 689 overnight rate, 157 owners’ equity, 617

P packaging, 560–562 Palmisano, Samuel, 303 Pan Am and Parapan Am Games, 73 Panera, 194 par value, 659 parent company, 118 participative (democratic) leadership, 306 partners’ equity or capital, 617 partnership, 216, 232 advantages, 219–221 choosing a business partner, 221 disadvantages, 221–222 general partnership, 219, 232 limited liability partnership (LLP), 219 limited partnership, 219, 232 partnership agreements, 222, 223 partnership agreements, 222, 223 passions, 253–254 pay equity, 464–466 pay systems, 454, 455 Payment Clearing and Settlement Act, 701 payment systems, 7041 Payments Pulse Survey, 685 payroll debit cards, 684 Peale, Norman Vincent, 182 peer recommendations, 575 peer-to-peer sales platforms, 575 penetration price strategy, 568, 569 penny stocks, 694 pension funds, 682 People, Planet, Profit. See triple bottom line (TBL, 3BL, or People, Planet, Profit) people meter, 530 people-oriented management, 35 people with disabilities, 467 PepsiCo, 102–103, 194 perfect competition, 81

performance appraisal, 451–453 performance ratios, 628–629 performance standards, 452 personal financial planning assets, control of, 710–714 borrowing, 713–714 budget, 711–712 building a financial base, 714–720 credit management, 717–720 debt payment, 712 expenses, 710–711 insurance, 720–723 inventory of financial assets, 710 making money, 710 managing personal finances, 681 need for, 709–714 real estate, 715–716 retirement planning, 723–729 savings plan, 712–713 stock market investments, 716–717 Tax-Free Savings Account (TFSA), 714–715 personal information, 22 Personal Information Protection and Electronic Documents Act (PIPEDA), 23 personal interviews, 530 personal selling, 583–584 PERT, 386, 387 Pham, Kyle, 250 Phan, Michelle, 514–515 phishing, 63–64 physical and environmental forces, 124 physical exams, 444 physical-world observations, 47 physiological needs, 403 piecework system, 455 Piketty, Thomas, 68–69 Pivot Power, 275 place, 527 see also distribution Plan, Do, Check, Act (PDCA), 375 Plank, Kevin, 286–288 planning, 290, 291–297 business plan, 268–269, 270 contingency planning, 296 crisis planning, 297 demands of, 328 financial planning, 641–645 functions, 294 goals, 292 mission statement, 292, 297 objectives, 292 operational planning, 296 small business, 268–269 SWOT analysis, 293–294, 297 tactical planning, 296 vision, 291 planning teams, 290 pledging accounts receivable, 650–651 PMI, 298–299 podcasting, 590 point-of-purchase displays, 587 policies, 294, 324 policy interest rate, 157, 686 political economy, 126 politics global politics, 70 of oil, 132 and trade-offs, 11 Ponzi schemes, 182 poor countries, 15 Pop-A-Lock, 236

pop-up stores, 576 population population projections, Canada, 26–27 world population, 72, 104 Porter, Michael, 120 portfolio strategy, 691 positioning, 542–543 positioning statement, 542, 544 positive reinforcements, 412 post-secondary education, 4–6 postpurchase evaluation, 544 power of attorney, 728, 729 preferred stock, 660 premiums, 587 presentation, 583 price, 79, 526–527 break-even analysis, 568 competition, 81 competition-based pricing, 567–568 competitive pricing, 566–569 cost-based pricing, 567 demand-based pricing, 567 demand-oriented pricing, 569 determination of, 77–78 equilibrium price, 79–81 everyday low pricing (EDLP), 569 high-low pricing strategy, 569 market forces, and pricing, 569 market price, 79–81 new products, pricing strategies for, 568 penetration price strategy, 568, 569 price signals, 81 pricing objectives, 566–568 psychological pricing, 569, 570 retailer pricing strategies, 569 skimming price strategy, 568, 569 and supply curve, 78 total fixed costs, 568 price indexes, 93–95 price leadership, 568 pride, 324 primary boycott, 497 primary data, 529–531 primary markets, 687 prime rate, 157 PRIMO-F, 293 principle of motion economy, 401, 402 The Principles of Scientific Management (Taylor), 400–401 privacy, 23, 64–65 privacy legislation, 23 private accountant, 604, 608 private clouds, 59 private corporation, 225, 227, 232 private key, 675 private-label goods, 115 private retirement plans, 723, 724–726 privatization, 147, 148 probationary periods, 444 problem recognition, 544 problem solving, 298 procedures, 324 process layout, 370, 371 process manufacturing, 380 producers’ cartels, 128 product, 523–526 augmented product, 558 branding, 562–563 core product, 558 packaging, 560–562 product class, 563

IN-11

Index

product—Cont. product development, 556–557 product differentiation, 559–560 product life cycle, 563–565 product lines, 559 product mix, 559 total product offer, 558–559 product-as-service model, 30 product development, 556–557 product differentiation, 81, 559–560 product life cycle, 563–565 product lines, 559 product manager, 563 product mix, 559 product placement, 586, 587 product positioning, 542–543, 544 production, 360, 517 cost-cutting, 380–385 production processes, 380–381 production techniques, improvement of, 381–385 production era, 517 production management, 360 production processes, 380–381 productivity, 20, 90, 91 professional corporation, 227 profit, 7, 8 and entrepreneurship, 251 environmental concerns vs. profit, 321 gross profit, 620–621 net profit, 622–623 and risk, 8 PROFIT magazine, 39–40 profit orientation, 518 profit-sharing plans, 455 profitability (performance) ratios, 628–629 program evaluation and review technique (PERT), 386, 387 progressive managers, 449 promissory note, 649 promotion (job), 324, 419, 462–463 promotion (marketing mix), 527, 578–579 see also promotion mix promotion mix, 579 advertising, 579–582 blogging, 590 direct marketing, 588 managing the promotion mix, 591–592 mobile marketing, 590–591 personal selling, 583–584 podcasting, 590 public relations (PR), 584–585 sales promotion, 585–587 social networking, 589–590 traditional promotion mix, 578 viral marketing, 588, 589 word-of-mouth promotion, 588–589 proprietor’s equity, 617 prospectus, 689 protectionism, 125–133 protective tariffs, 126 provincial government see also government activities free trade between provinces, 154 gambling, 175 privatization, 147–148 public-private partnerships (P3s or PPPs), 153–154 responsibilities, 152–154 psychographic segmentation, 539, 540 psychological pricing, 569, 570

IN-12

public accountant, 604–605 public clouds, 59 public corporation, 224, 227, 232 public data, 48 public debt, 161–162 public key, 675 public-private partnerships (P3s or PPPs), 153–154, 500 public relations (PR), 584–585 public sector employees, 476 publicity, 585 publicly accountable enterprises (PAEs), 607 pull strategy, 591, 592 punishment, 412 purchase decision, 544 purchasing, 372 purchasing policies, 167 push strategy, 591, 592

Q QPP. See Québec Pension Plan (QPP) qualifications, 324 quality, 373, 374 brand equity, and perceived quality, 562–563 Canada Awards for Excellence, 375 ISO 9000 series and standards, 376–377 ISO 14000 series and standards, 376–377 quality control, 373–377 in service sector, 364–365 Six Sigma quality, 374 statistical quality control (SQC), 374–375 total quality management (TQM), 346 quality control, 373–377 quality of life, 8–9, 366 Québec Pension Plan (QPP), 456, 723, 724 questioning techniques, 415–416 questions, 583 quick learning, 252–253 quick ratio, 627 quid pro quo harassment, 485

R radical redesign, 346 radio advertising, 580 radio frequency identification (RFID), 47, 48, 561, 684 Rand formula, 492 Randstad Canada, 450 rate of return, 662, 713 ratio analysis, 626 activity ratios, 629 leverage (debt) ratios, 627, 663 liquidity ratios, 626–627 profitability (performance) ratios, 628–629 rational decision-making model, 297 re-engineering, 346 real estate, 715–716 real time, 339, 340 reassignment, 462–463 rebates, 587 recalls, 309 recession, 95 recognition of job well done, 418–419 record keeping, 276 records, 324 recovery, 96 recruitment, 438–442 RE$EARCH Infosource Inc., 357–358 reference group, 545

regionalism, 582 registered pension plans (RPPs), 723, 725 registered retirement savings plans (RRSPs), 723, 725–726 registration, 231–233 regulations, 17, 144, 148–155, 217, 221, 231–233,324 see also laws reinforcement theory, 412–413, 416 relationship marketing, 543–544 religion, 121 Rendall, Matt, 250 renter’s insurance, 722 reorganization, 320 reporting, 233 research and development (R&D), 357–358 Research in Motion (RIM), 179 research organizations, socially conscious,202 resource development, 71 resources, 288 responsibility, 305, 323, 449 responsiveness to customers, 22–23 restricted stock, 501 restructuring, 26, 344–346 retail distribution strategy, 573 retail intermediaries, 573–576 retail stores, types of, 574 retailer, 571 retailer pricing strategies, 569 retained earnings, 617, 661–662 retirement, 463 retirement planning, 723–729 estate planning, 727–729 financial planners, 727 three pillars approach, 723–727 return on equity, 628, 629 return on sales, 628 revenue, 7, 8, 620 revenue tariffs, 126 reverse discrimination, 467 reverse royalties, 238 rewards, 412 Ricardo, David, 106 rich countries, 15 ride-sharing services, 30 rider (policy), 722 Right Management, 344 right to refuse unsafe work, 484–485 rising dollar value, 158 risk, 8 and diversification, 691 and entrepreneurs, 248 home-based businesses, 257 investment risk, 691 and profit, 8 risk-return tradeoff, 641 Robinson Heeney LLP, 487 robo-advisors, 718 robotics, 384 rotating strikes, 496–497 round lots, 694 royalty, 236–237 rule of 72, 99–100 Russia, 134

S sabotage, 497 safety, 321 safety needs, 403 salary, 455

Index

sales era, 518, 620 sales promotion, 585–587 samples, 587 Sarbanes-Oxley Act (SOX), 187, 188, 606, 607,608 savings account, 680, 716 savings plan, 712–713 scabs, 497 scandals. See corporate and accounting scandals scarce resources, 71 scheduling employees, 458–462 Schumpeter, Joseph, 95 Schuster, Jay, 454 Science, Innovation, and Electronic Information Division (SIEID), Statistics Canada, 357 scientific management, 35, 400–402, 416 Scudamore, Brian, 214–215 Sea to Table, 227 seasonal unemployment, 92 secondary boycott, 497, 498 secondary data, 528–529, 544 secondary market, 658, 687 secured bonds, 657, 658 secured loan, 650 securities commission, 689 securities dealer, 687 securities markets, 687–688 securities regulations, 689 securities settlement systems, 7041 security and cloud computing, 60 hackers, 22–23, 51, 62–63, 720 and information technology, 62–64 phishing, 63–64 virus, 62 security (financial instrument), 687, 690–691 selection, 442–446 selective distribution, 573 self-actualization needs, 404 self-direction, 252 self-managed teams, 418 self-nurturing, 252 selling, 518, 537, 583–584 selling expenses, 622 semantic web, 56–57 service continuum, 525 service economy, 91 service industries, 32–33 service orientation, 518 service sector, 34, 360 operations management, 363–365 quality, measurement of, 364–365 services, 7, 30 services-producing sector, 32, 91 sexual harassment, 485–486 Shack Shine, 215 shadowing, 447 shared economy, 716 shareholders’ equity, 617 shares. See stock (shares) Sheffield, Brett, 281–282 Shepherd, Chuck, 2–3 shop stewards, 493 short-term financing, 648, 649–654 short-term forecast, 641 short-term loans, 650–651 shortages, 81 sin tax, 159 sinking fund, 658 sit-ins, 497

Six Sigma quality, 374 skill-based pay, 454 skill variety, 414 skills, 301–302 Skills Canada, 447 skimming price strategy, 568, 569 small and medium-sized enterprises (SMEs),254 small business, 260–261 see also entrepreneurship advisers, 276–277 business plan, 268–269, 270 employees, managing, 275–276 employers businesses, 261 existing business, purchase of, 265–266 experience, 265 family businesses. See family businesses financing, 269–273 franchises. See franchises getting started in, 260–264 global markets, 277–278 importance of, 261–262 know your customers, 273–275 learning about small-business operations, 264–267 learning from others, 265 management of, 268–277 motivators for, 420 planning, 268–269 product differentiation, 560 record keeping, 276 and Six Sigma standard, 374 starting a small business, 215–216 statistics, 260–261 student startups, 250 success and failure, 262–264 vs. big business, 260 smart cards, 684 smartphones, 580 see also mobile devices SMEs (small and medium-sized enterprises),254 see also small business Smith, Adam, 74–75, 82, 190 Snapchat, 521 Sobey, J.W., 249 Sobeys Inc., 249 social attitudes, 256 social audit, 201–203 social commerce, 574 social enterprise, 143 social entrepreneurs, 12 social entrepreneurship, 191 social environment, 26–28, 535 social gaming stars, 557 social media, 54–56, 365, 519, 520 advertising, 580 background checks, 443 communication, effect on, 20 and crisis management, 309 and data mining, 530–531 and franchises, 238 marketing, 23 partnering with customers, 56 and recruitment, 440–441 and relationship marketing, 543–544 social media commerce, types of, 575 social media managers, 54 and television ratings, 57 use of information from, 49–50 social media marketing, 519, 520 social needs, 403

social network-driven sales, 575 social networking, 55, 589–590 social objectives, 566 social responsibility. See corporate social responsibility (CSR) social responsibility investing (SRI), 202 social shopping, 575 socialism, 84–85, 86, 87 socially responsible, 192 socially responsible investing (SRI), 699 society, responsibility to, 197–199 sociocultural forces, 120–121 soft benefits, 457 sole proprietorship, 216, 232 advantages, 216–217 disadvantages, 217–219 Source for Sports, 379 South Korea, 133 S&P 500 Index, 717 S&P/TSX Composite Index, 502, 695, 698,717 span of control, 327–328 sponsorship scandal, 179 spread, 678 stability issues, 65 stabilization of the economy, 160–163 staff personnel, 333 staffing, 303, 324 see also human resource management(HRM) stagflation, 94 stakeholders, 9–11 standard of living, 8–9 Starbucks, 194 statement of cash flows, 613, 623–626 statement of earnings, 618 see also income statement statement of financial position, 614 see also balance sheet statistical process control (SPC), 374–375 statistical quality control (SQC), 374–375 Statistics Canada, 27, 92, 233, 254, 357, 465 statutes. See laws; specific statutes statutory benefits, 456 stay interviews, 417 Steed, Aaron, 184 Steed, Evan, 184 Steeped Tea, 246–247 Stein, Steven, 430–431 Stibel, Jeff, 661 stock (shares), 658–660, 688, 693–695 stock certificate, 658–659 stock exchange, 688–689 stock indexes, 694–695 stock market investments, 716–717 stock options, 455, 501 stock quotations, 695 stock splits, 694 stockbroker, 690, 691, 717 strategic alliance, 118 strategic planning, 294, 438 strategy robots, 295 strike, 496–497 strike vote, 496 strikebreakers, 497 structural unemployment, 92 student startups, 250 subculture, 546–547 subordinates, 327 subordination of individual interests to the general interest, 323 subprime mortgage scandal, 17–18

IN-13

Index

subscribers, 274 substitutes, 24–25 Sun, Shelly, 600–601 supercentre, 574 supermarket, 574 supervisory management, 301 suppliers, 24, 366 supply, 78 supply chain, 377, 577 supply chain management, 368, 377–379 supply curve, 78 surplus, 162 sustainability, 30 B corporations, 227 carbon dioxide capture and storage, 361 clothing, 199 Corporate Knights, 582 ethical consumerism, 339 Green Bonds, 656 “Green is the New Black,” 199 green procurement, 168 greenwashing, 546 leadership, 3057 living wage, 503–504 socially responsible investing (SRI), 699 sustainability reports, 605 work-life balance, 461 sustainable development, 202–203 Sustainable Development Goals (SDGs), 18 Sustainable Development Technology Canada,166 sustainable investing (SI), 699 Sweden, 87 sweepstakes, 587 SWOT analysis, 293–294, 297

T tactical planning, 296 take-make-dispose economy, 30 tall organization structures, 328 target costing, 567, 568 target marketing, 541–542 tariffs, 126 task identity, 414 task significance, 415 tasks, 301–302 tax accountant, 608 tax accounting, 608 Tax-Free Savings Account (TFSA), 714–715 taxation, 144, 159–163 average Canadian family, 160 bond investments, 696 Canadian controlled private corporation (CCPC), 218, 225 corporations, 231 double taxation, 231 fiscal policy, 160–163 global differences, 458 global wealth tax, 70 and investment strategy, 691 marginal tax rate, 725 partnership, 220 and public debt, 162–163 sin tax, 159 sole proprietorship, 217, 218 stock investments, 696 use of, 8 Taylor, Frederick, 35, 400–402 TBL. See triple bottom line (TBL, 3BL, or People, Planet, Profit)

IN-14

teams, 323 compensation, 454–455 cross-functional, self-managed teams, 336–338 entrepreneurial team, 255 global teams, 335–336 planning teams, 290 self-managed teams, 418 technical skills, 302 technological changes adaptation to changing trends, 45 and global trade, 111 lean manufacturing, 382–383 technological environment, 19–23, 533–534 technology, 20 see also information technology (IT); technological changes in accounting, 612–613 benefits of, 20–21 Bluetooth technology, 44 broadband technology, 52–53 and competition, 256 digital technology, 520 and financial institutions, 682–686 and global markets, 124 Internet of Things (IoT), 58–59 responsiveness to customers, 22–23 and services, 30 technological environment, 19–23 telecommuting, 60, 369, 460 telemarketing, 575 telematics, 30 television advertising, 580 ratings, and social media, 57 telework, 60, 460 term deposit, 716 term insurance, 720–721 term-loan agreement, 655 termination of employees, 463 Territorial Formula Financing program, 166 territorial government. See provincial government test marketing, 525 The Theory of Social and Economic Organizations (Weber), 324 Theory X, 407–409, 416 Theory Y, 409–410, 416 Thermos, 552 three pillars approach, 723–727 3BL. See triple bottom line (TBL, 3BL, orPeople, Planet, Profit) 3D printing, 385 3M Company, 393 time deposit, 680 time-motion studies, 401 time-to-market, 366 time value of money, 641, 646 tolerance of uncertainty, 252 top management, 299–301 Toronto Stock Exchange (TSX), 688, 692 total fixed costs, 568 total product offer, 558–559 total quality management (TQM), 346 trade. See global markets; global trade trade agreements, 128–133 trade credit, 649 trade deficit, 109 trade protectionism, 125–133 trade surplus, 109 trade unions. See labour unions trademark, 115 trading bloc, 128–133

traditional managers, 449 traditional organization structure, 345 Traditionalists, 425–426 training and development, 446–451 transactional leadership, 307 transfer payments, 165–166 transformational change, 305 transformational leadership, 307 transparency, 305, 339 Transparency International, 124 transportation modes, 577 trial balance, 612 trial close, 583–584 trial (probationary) periods, 444 triple bottom line (TBL, 3BL, or People, Planet, Profit), 73, 201–202 trust companies, 681–682 Twitter, 441

U umbrella policy, 723 Under Armour, 286–288 underemployed workers, 435 understudy positions, 448 underwriting, 688 unemployment, 92 unemployment rate, 91–92 Unifor, 483 Uniform Final Evaluation (UFE), 610 union centrals, 479–480 union coverage, 481–482 union density, 481–482 union local, 479 union officials, 202 union security clause, 491–492 union shop agreement, 491 unionization rate, 481–482 unions. See labour unions United Kingdom, 131 United Nations, 18, 72, 95 United States Canada, influence on, 88 economic system, 87 Sarbanes-Oxley Act (SOX), 187, 188, 606, 607, 608 subprime mortgage scandal, 17–18 trading patterns, 145 union movement, 479 United States-Mexico-Canada Agreement (USMCA), 129–130 unity of command, 323 Universal Product Codes (UPCs), 561 unlimited liability, 217, 219, 221 unsecured bonds, 657 unsecured loans, 651 Uruguay Round, 127 U.S. Environmental Protection Agency, 132 U.S. Securities and Exchange Commission, 187, 609, 692 us-versus-them system, 348 usage rate, 541 user-curated shopping, 575 USMCA. See United States-Mexico-Canada Agreement (USMCA)

V vacation pay, 458 vague communication, 417 value, 556

Index

value-consciousness, 545 value enhancers, 558–559 value package, 558–559 values, 291, 304 Vancouver City Savings Credit Union (Vancity), 408 variable annuities, 721–722 variable costs, 568 variable life insurance, 721 Varricchio, Gerald, 474–476 Vaz-Oxlade, Gail, 712 vending machines, 575–576 venture capital, 661 venture capitalists, 271–272 vestibule training, 448 video games, 110, 557 video streaming services, 53 violence in the workplace. See workplace violence viral marketing, 588, 589 virtual assistants (VA), 340 virtual corporations, 339–341 virtual networking, 59–60 virtual private networks (VPN), 51–52 virus, 62 vision, 291, 304 von Sturmer, Lisa, 142–143 von Tobel, Alexa, 708–709 VPN. See virtual private networks (VPN) Vroom, Victor, 411–412

W Walkerton, Ontario, E. coli tragedy, 198–199 Waller, Kathy, 636–637, 638

Walt Disney World, 419 warehouse club, 574 waste, reduction of, 30 wealth creation, 14–15, 84, 247–248 The Wealth of Nations (Smith), 74 The Wealthy Barber (Chilton), 712–713 wealthy economy, 72–74 Web 2.0, 55–56 Web 3.0, 56–59 Web-based businesses, 257–258 Weber, Max, 324–325 whistleblower legislation, 187–189 whistleblowers, 186 whole life insurance, 721 wholesalers, 571 wide span of control, 327–328, 329 will, 728 Winnipeg General Strike, 478–479 women and child care, 504–505 employment equity, 466–467 entrepreneurs, 254–255 gender wage gap, 465 management development, 450–451 pay equity, 464–466 and self-employment, 254–255 Wong, Phil, 250 word-of-mouth promotion, 588–589 work-life balance, 461 work practices, 486 work-related emails, 344 work-to-rule, 497 worker exploitation, 204

worker shortages, 435 workers, 14 workforce trends, 27–28 Workplace Bullying Institute, 488 workplace design, 486 workplace harassment, 485, 487 workplace hazards, 485 workplace laws, 484–485 workplace violence, 485, 486–487 World Bank, 128 World Competitiveness Yearbook, 362–363 World Economic Forum, 362 world economy, 70 world population, 72, 104 world trade, 28–29 World Trade Organization (WTO), 126, 127–128 WOW 1 DAY PAINTING, 215 Wright, Marie, 250 written rules, 324

Y Yang, Ann, 250 yield, 691 You Move Me, 215

Z Zien, Jake, 275 Zipline International, 194 Zogby International, 488 zoning requirements, 155

IN-15

Understanding Canadian Business, 10th Canadian Edition by William Nickels - Compressed - PDFCOFFEE.COM (2024)