CHAPTER 1

NATURE AND SCOPE OF BUSINESS

THE STUDY OF BUSINESS

There are merits in studying business because it affects everybody in our society.
Institutions both public and private established for the people depend upon business for
their operation and maintenance.

The study of business is important because it helps us to prepare the task of make
a living. Business is commonly studied in order to become acquainted with effective
business practices and to gain knowledge and develop wisdom about business matters.

There are questions about business which challenges us. These are:

1. How can we maintain our present business and achievements and win greater
comforts of life?
2. In what directions shall we maximize our contributions to business to meet
our needs?

WHAT IS BUSINESS?

Business is the sum total of all the enterprises that play as part in the
manufacturing and marketing of goods and services to consumers. For practical purpose
denotes just three things:

1. production
2. distribution
3. business services

It is also defined as any lawful economic activity concerning with producing goods
and making them available and rendition of services to people who need them.

AIM AND PURPOSE OF BUSINESS

The satisfaction of human wants through producing, manufacturing, and

marketing of every possible article and services and to produce and distribute these in
sufficient quantities and in the most convenient and reasonable manner.

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 There are incidental effects from the operation of business. These are:

1. Services which are useful and being rendered to the society.

2. Employment is being provided to people thereby increasing their standard of
living.

Aside from these, they are also aims of business such as growth, expansion, profit
and sustainability.

FUNDAMENTAL ASPECTS OF BUSINESS

As may be clear observed, there are incident but nevertheless salutary result from
the existence and operation of business from which the community may profit, such as:

a. the rendering of worthwhile service through the sale of goods and service needed
by the community, whether on local or national scale;
b. the establishment of a permanent organization anchored on a sound foundation;
and
c. the continued employment of dedicated and competent worker at wages
commensurate to their contribution to the company.

BENEFITS FROM THE STUDY OF BUSINESS

1. it helps the student appreciate the key position of people in all activities in
business.
2. it helps also the student acquire the picture of business in its totality.
3. another benefit in studying business is obtain help in selecting a career.
4. we get from the study of business is that we gain truth about business, that is,
to dispel erroneous concepts about it.

FRAMEWORK AND PHILOSOPHY OF BUSINESS

Framework and philosophy of business and its operation have developed and
business today is conducted within a certain framework and in keeping with certain
philosophies or beliefs. Among the basic statements which express the basic mode of
operation and system of thought applicable to business are the following:

1. Each person is important and has value as an individual. As longer as there is no

conflict with public interest, he has the right to live his own life, to speak for
himself, and enjoy freedom of action.

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2. Each person has the right to security of person and property. There will be no loss of life,
liberty and property without “due process of law.”

3. Each person is free to start an enterprise or become a part of an existing one, to buy and
sell in markets of his own choice so long as such actions are in keeping with the prevailing
laws of the land.

4. Each person is provided protection against the basic hazards of existence over which he
may have little or no control.

5. Everything in our material life has a source and a destination. Nothing comes from
nowhere or goes nowhere.

6. To have greater abundance of material things, it is mandatory to produce greater

abundance of material things. One of the big challenges of business is that as we produce
more products and services, more and more people enjoy what we produce.

7. Competition should characterize business and be considered with the public welfare.
There must be no uncontrollable monopolies of any kind.

8. Labor has the right to organize and to bargain collectively with employers.

9. Recognition of human values is a prerequisite to better living. Unemployment brought

about by business dynamics should be viewed not only from the economic, but also the
psychological and social viewpoints.

10. Each person has the right to good education, to live where he wishes, and to work where
he wants, provided these privileges do not conflict with the public interest.

KINDS OF BUSINESS

A. COMMERCE

Commerce, from Latin word, ‘commercix’ comes from two root word. Com
meaning ‘together’ and merx signifying ‘wares’ or merchandise. Thus, commerce refers
to the transfer or exchange of goods and services with the movement of goods from point
of production to point of consumption. It covers buying, selling, marketing and
merchandising, which are directly involved in the transfer of goods. Under commerce are
also other activities which indirectly concern the transfer of goods like collecting of goods,
grading, warehousing, transportation, insurance and the financing of transfer.

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B. INDUSTRY

Is primarily concerned with the creation of form utility or the production of goods
that are used either by the consumer and are, therefore, called consumer’s goods or by
other industries in the further production of other goods and, therefore, called producer’s
goods.

The broad grouping of industry is further subdivided into genetic, extractive,

manufacturing, and construction industries.

a. Genetic industries, derived from the word” genesis” or beginning, include

agriculture, forestry and fish culture.

b. Extractive industries include mining, lumbering, hunting and fishing. They are
characterized by the extraction of goods from natural resources.

c. Manufacturing industries are involved in the changing of raw materials or

d. secondary products into a more useful forms. The change from a basic to a
more advanced form maybe physical or it may be chemical.

e. Manufacturing industries include food, beverage, tobacco and wearing

apparel.

f. Construction industries may range from the building of multi million peso
highways and airports.

C. SERVICE

Not all goods that are provided by business enterprise consist of material goods,
that is, those that have physical appearance. Some intangible goods also satisfy the wants
and needs of the consumers. They are better known as service. These enterprises cater
also the personal needs of people, or with the rendering of a personal service.

1. Recreation services include motion picture production and distribution, theaters

for drama and stage presentation.

2. Personal services include such businesses as restaurant, hotels and laundry shops.

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BUSINESS AND THE BUSINESS CYCLE

No business is totally immune from the oscillating forces of the business which is
defined as the “rhythmic changes which take place in the business condition over a period
of time.” The phases of the cycle are called prosperity (peak, upswing, expansion), crisis
(downturn), depression (through downswing, contraction), and recovery (upturn, revival).

During the period of depression, a number of business enterprises collapse and

fail incurring heavy losses which un able them to continue operating. Even those business
enterprises manned by competent manager sometimes succumb to the heavy onslaughts
of a serious, profound and prolonged phase of depression.

Development of Our Business Culture

People have engaged in business activities since the earliest beginnings of

community existence. When early man produced more of a crop or caught more game
animals or fish than he could consume and bartered the excess for something produced
or caught by a neighbor, he was engaged in business activities.

Business was already highly developed in the ancient world. Recent excavations
have unearthed business transaction written on clay tablets which are six thousand years
old. The Code of Hammurabi promulgated around 2,000 B.C. had provision governing
commercial transactions. The Roma Empire had a clearly defined wage system. Devices
of business control like accounting and business functions like insurance and banking date
back to the Middle Ages.

Business is equally ancient in the Philippines. It also reaches back into pre historic
times. Historians have shown that the Philippines lies at crossroads of ancient trade and
migration. As early as the ninth century, Arab traders were already visiting the islands.
By the twelfth century, Chinese traders took over most of the Philippine trade and even
established trading communities in the Philippines.

The Galleon Trade was the trade between Manila and \Acapulco in Mexico which
was carried on mostly during the 18th Century. The Spanish community in Manila tried to
accumulate fortunes by speculating on the annual trip of the galleon to Acapulco and
back.

However, the famous trade did very little for the development of the Philippines
and contributed practically nothing to the fortunes of the Spaniards. The ones who
obtained the profit bonanza were the Chinese. Philippine products were an insignificant
portion of this trade. When the galleon returned from Mexico, most of the profits were
immediately claimed by the Chinese and other Asian traders.

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 Thus was shaped the pattern of specialization of the three people in the colonial
economy. The Filipinos were the menials and the tillers of the soil, the Spaniards were
the governors and the Chinese and Sangley mestizos were the distributors, tradesmen,
capitalists, and the entrepreneurs. This pattern, to a large extent, persisted throughout
the colonial period until 1898, and traces of it survive even today.

Our national economy is composed of business enterprises, households and the

government. These are the major sector of the economy. The strength of weakness of
one sector affected the other sector because of their interdependence. However, it is the
government, which provide the leadership in improving the economy.

Business in the Philippines and in other countries of the free world is basically
capitalistic in nature. This means that society entrusts the workings of the business
process to the guidance of the private businessman. Business is capitalistic if we have:

1. private ownership of non-personal means of production.

2. profit motive
3. free competition
4. price system

In a capitalist economy, otherwise known as the market economy, prices serve as

indictors between the consumers and the producers. The market evolved as a result of
the exchange between buyers and sellers which consequently led to the establishment of
prices.

The private owner’s objective in engaging in business activities is the earnings of

a handsome profit as a result of the use of his productive assets.

Unfortunately, our economy has not improved much in terms of the interest of
the masses, because of our colonial and primitive agricultural economy. Foreigners
control our economy from production to marketing. Our agricultural outputs are not even
sufficient to feed our growing population. Hence grinding poverty has not left us. Such
situation has been aggravated by our population explosion.

A deeper analysis of the economics of rich countries reveals that most of them are
not endowed with abundant natural resources. Japan is a very good example. The country
imports about 90 percent of raw materials for its industries. Yet Japan has excelled,
without equal, in trade and industry.

In economic development, the bottom line is the quality of the people of a given
country. Knowledge, skills and value are the main determinants of economic growth.
Needless to say, values constitute the key to economic success of the nation. The
Japanese are risk taker, hardworking and self-reliant. Such entrepreneurial qualities have

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made Japan a prosperous nation. But above all, the Japanese love their country-including
its culture, traditions, institutions and products.

FUNDAMENTAL ECONOMIC PROBLEMS

All countries have economic problems because our resources –money, materials
and machines – are limited while our human needs are unlimited. The unfair distributions
of productive resources and population explosion have created more economic problems.
Most people are poor because they depend only on their labor resources. In less
developed countries like the Philippines, the price of labor is very low. In other word,
salaries for employees are generally low. In more ways than one, salaries are not sufficient
to satisfy the basic human needs.

The biggest economic problem of our country is unemployment. Those who are
willing and able to work cannot find jobs. In industrial countries like Japan, Germany, Italy
and United States, they even import workers for their factories. Hundreds of thousands
Filipinos like to work in other countries for lack of job opportunities in our own country.

Unemployment creates social problems such as housing, health and sanitation,

prostitution, robbery and other related crimes. Jobless people go to the cities to search
for jobs. Most of them cannot get jobs. They become squatters. Such sudden influx of
people in the cities possesses tremendous social liabilities. They compete with already
scarce social service of the government. To survive, they are most likely to commit social
crimes.

The Entrepreneurial Economy

A free enterprise or market economy is an entrepreneurial economy. This is an

economy dominated by entrepreneurs. Such individual are risk takers. They organize and
manage their own business.

One of the main thrusts of the national government is the creative of the spirit of
entrepreneurship among the poor. In this connection, the government extends financial
and technical assistance to small-scale industries, especially micro-business enterprise.
Such type of enterprise requires small capital, low technology and local materials. More
importantly, it is easy to manage and it is labor intensive. Small business is exactly the
need of our developing economy. It is within the competence and resources of the masses.

Many are looking for job. A much better alternative is to create jobs for others.
This is only possible is small businesses are put up. Many claim that they have no money
and skills to start their business. This is not really a problem. They government and some
non-governmental organizations (NGOs) provide financial and technical support to

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livelihood projects. For example, the making of toys, Christmas decors, tocino, patis,
vinegar ballot or any other ventures that are incoming producing are worthy micro-
businesses.

FORTUNE FAVORS THE ENTREPRENEURS

Not a few giant businesses came from micro-business. In our country, we have
National Book Store, Saraojeepney and RufinaPatis. Jack Simplot,one of the riches
persons in the United States, started his business by selling two copies of newspapers a
day. The one who invented the paper clip became wealthy. Likewise, the one who
introduce the chewing gum become prosperous. Such simple and practical creativity can
also be done by others.

Evidently, entrepreneurs like Soccoro of National Book Store get all the rewards
of their efforts. Moreover, they create for people, and they help the government through
tax payments. On the other hand, employees get only low salaries, and they are not the
boss. Employees do not become rich. It is in business where there is money and economic
fortune. In fact, market vendors have more income than office clerks.

Many Filipinos are poor and jobless. Yet our country is rich in natural resources.
The government should train the poor to be entrepreneurs. Then give them the
opportunities to transform our idle natural resources into useful product. Thus, the
problem of unemployment is reduced, and our idle natural resources are utilized.

The real and enduring wealth of any country is its people. Their values, skills and
knowledge make the difference. The United States is a great country because the value
of the people, not to mention their skills and knowledge, contribute to its greatness. The
same is true in the case of Japan. It is sad to state that in our country we do not only have
colonial mentality, but also crab mentality. We pull down our neighbors so that no one
succeeds in reaching the top. There should be group cooperative and social responsibility
among us. The individual aspiration to be successful should be admired and encouraged.

ENTREPRENEURSHIP

Entrepreneurship is to be defined as the capacity for innovation, investment and

expansion in new market, product and techniques. It has extraordinary features, such as,
the creation of something new or different. In short, it is innovation which distinguishes
entrepreneurship from other activities.

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Contribution of Entrepreneurs

1. Develop new markets. Under the modern concept of marketing. Markets are
people who are willing and able to satisfy their needs. In economics, this is called
effective demand. Entrepreneurs are resourceful and creative. They can create
customers or buyers. This makes entrepreneurs different from ordinary
businessmen.

2. Discover new source of materials. Entrepreneurs are never satisfied with

traditional or existing source of materials. Due to their innovative nature, they
persist on discovering new source of materials to improve their enterprises. In
business, those who can develop new sources of materials enjoy a comparative
advantage of supply, cost and quality.

3. Mobilized capital resources. Entrepreneurs are the organizers and coordinator of

production, such as land, labor and capital. They properly mix these factors of
production to create goods and services. Capital resources, from a layman’s view,
refer to money. However, in economics, capital resources represent machines,
buildings and other physical productive resources. Entrepreneurs have initiative
and self-confidence in accumulating and mobilizing capital resources for new
business and business expansion.

4. Introduce new techniques, new industries a new product. Aside from being
innovators and reasonable risk-taker, entrepreneurs take advantage of business
opportunities, and transform these into profits. So, they introduce something new
or something different. Such entrepreneurial spirit has greatly contributed to the
modernization of our economy.

5. Create employment. The biggest employer is the private business sector. Millions
of jobs are provided by factories, service industries, agricultural enterprises, and
the numerous small-scale businesses. Such massive employment has multiplier
and accelerator effects on the whole economy. More jobs mean more income.
This increases demand for goods and services. This stimulates the production.
Again, more production requires more employment.

Filipino Entrepreneurial Economy

One of the top programs of government is the development and the promotion of
Filipino entrepreneurship. There are many government and the private organization
which extend financial and techniques assistance to micro and small-scale enterprises.
Many are not aware of such assistance, especially the poor and unschooled rural folks.
Those who know are not enthusiastic about the program due to numerous condition and

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paperwork, not to mention red tape. For the same reason the rural poor prefer to depend
on usurers for their credit needs, rather than borrow from lending institutions.

Claro M. Recto, considered the father of modern Filipino nationalism, said that we
need economic nationalism to attain real economic growth. He defines economic
nationalism as the control of economic resources of the county by its own people, and
their use of such resources for their own benefit and enjoyment. Recto also claimed that
the cause of our poverty is that we allow foreigners to dominate our economy.

Our educational system should also emphasize in its curriculum the importance of
local entrepreneurship. By and large, Filipinos are employee-oriented, especially for
white-collar jobs. We are not risk – takers. Many of us are afraid to put up our own
business because of the possibility of bankruptcy. Such lack of entrepreneurial spirit,
particularly among professionals, has encouraged foreigner to take advantage our own
cheap labor and rich natural resources. They are the one who are rich now. And they are
our masters in our own country.

Entrepreneur

Cantillon defines an entrepreneur as one who bears uncertainty, buys labor and
materials, and sells product at uncertain prices.

To Schumpeter, an entrepreneur is an innovator, he does new things or does

things in a new way. He supplies new product, makes new techniques of production,
discovers new markets, and develop new sources of raw materials.

Characteristics of Entrepreneurs

1. Reasonable risk-takers. Entrepreneurs enjoy challenges. But they are careful and
calculating. They shy away from high – risk situations because they may not be
attainable. However, entrepreneurs also avoid low-risk situations, because there are
no challenges.

2. Self-confident. Entrepreneurs have strong faith in their abilities. They believe they can
be the best in their field. They do not accept things as they are, because they believe
they can do things better.

3. Hardworking. Successful people always attribute their success to hard work. Thomas
A. Edison said that success is 99 percent perspiration and 1 percent inspiration. We
can easily confirm this by observing top executive in government and non-
government organizations. They work far beyond the 8-hour schedule.

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4. Innovative. Entrepreneurs are creative. They do things in new and different ways. For
example, they create new product or services, new method of production, new
markets and new sources of raw materials. They love to explore the unknown, and to
blasé new paths of progress.

Innovations are introduced to benefit both the economy and society. Changes are
made in response to the needs of people. For instance, the high costs of production
serve as an opportunity for entrepreneurs to introduce a technology that can reduce
costs of production. Much better, they should introduce an innovation which creates
jobs for the jobless masses. According to the legendary Mohandas Gandhi, the
progress of a country depends not on mass production, but on production of the
masses.

5. Leadership. Entrepreneurs are by the very nature of their functions. They are people
who are task-oriented. They are effective planners, organizers and implementers.
They are achievers. Here are the essential leadership qualities:

 Selfless dedication
 Purpose and vision
 Courage
 Conviction
 Enthusiasm
 Integrity
 Tact
 Hard Work

6. Positive thinkers. Entrepreneurs are positive thinkers. They think success and bright
sides. Such success consciousness leads entrepreneurs to success.

7. Decision-makers. Entrepreneurs make decisions. They cannot avoid this. Being

creative or innovative, they always make decisions on how to improve their product,
how to create new market. How to increase consumers’ satisfaction, or how to
maximize profits. the success of their business depends on their ability to make the
right decision.

Determinants of Successful Entrepreneurship

Business enterprises fail due to poor management. Being industrious is not

enough. It is efficient that counts most in business success. The entrepreneur must
possess the following managerial skills:

1. Ability to conceptualize and plan. The entrepreneur must view all the aspects of the
business, such as product, price, cost, inventory, etc., in a related and coordinated

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 manner. He must be able to plan for the total operation of the business. His ability to
foresee future problems of his business is an excellent asset.

2. Ability to manage others. Management is getting things done by others. As the

business grows more people are needed. The entrepreneur must be able to organize
work properly so that his employee can perform their jobs efficiently.

3. Ability to manage time and to learn. The entrepreneur is a generalist. Especially when
the business is still small, the owner does everything: clerk, salesman and manager.
In view of the various function of the entrepreneur, he should be an expert on time
management. He should also acquire basic training in small management and
specialized course in accounting, finance, marketing and personnel relation. A real
entrepreneur does not actually stop learning. He can do this by reading, attending
seminars, or enrolling in college.

4. Ability to adopt to change. Not a few individuals resist change they’d rather stick to
traditional or established practices. This is culture of many Filipinos, particularly the
unschooled. A businessman who refuses to adopt his operation to changing needs and
taste of customers is most likely to fail. Entrepreneurs, being innovative or creative,
quickly respond to change for comparative advantage.

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 Chapter 1
STUDENT ACTIVITIES

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

Test I. Fill in the blank.

1. Commerce from _______ word, ‘commercix’ comes from two root word.
2. ______________ are introduces to benefit both the economy and society
3._____________________ said that success is 99 percent perspiration and percent
inspiration.
4. The Code of Hammurabi promulgated around ________ had provision governing
commercial transactions.
5. The Galleon Trade was the trade between ________ and \Acapulco in Mexico which
was carried on mostly during the 18th Century.
6. By the ____________century, Chinese traders took over most of the Philippine trade.
7-8. During colonial economy, Filipinos were the _____________ and ___________of the
soil.
9. __________serve as indicators between the consumers and the producers.
10. ______________capacity for innovation, investment and expansion in new markets,
products and techniques.

Test II. Enumeration. Give what is asked in each letter.

A. Contributions of entrepreneurs
1.
2.
3.
4.
5.

B. Leadership qualities
6.
7.
8.
9.
10.
11.
12.
13.

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 C. Determinants of successful entrepreneurship
14.
15.
16.
17.

D. Determinants of economic growth

18.
19.
20.

Test III. Review Question

1. Why should an entrepreneur have the ability to think intelligently?

2. Describe the different cycle of business.

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 CHAPTER 2

MEETING ECONOMIC NEEDS AND WANTS

Needs and Wants

We never stop needing and wanting things. Needs are those things we must have
to stay alive. Food, clothing, and housing are usually thought of as our three basic needs.
Wants are those things which we could live without, but which could add much pleasure
and control to our lives.

Often it is hard to tell the difference between needs and wants. A car may be a
need for you to get to your job. And it also may be thought as wants – or even a luxury –
if you used it for visiting a friends or just riding around. A TV set would generally be
considered as a want, but some people might call it a need in order to keep up with local,
national, and world events. All of us need clothing to help keep us with protected, and
clean. But most of us also want – but do not ready need – additional or special clothing
for appearance, style, and variety.

Every nation has a general plan for deciding what to produce, how to produce,
and how to distribute goods and services. Each nation’s plan is known as its economic
system or economy. We satisfy most of our needs and wants by buying goods and services
from stores, offices, factories and other places of business. A business is an establishment
or “enterprise” that supplies us with goods services in exchange for payment in some
form. Business varies in nature and size from the small neighborhood stores to giant
automotive companies.

Goods and Services

“Goods” and “services” are key words in your study of business and economic.
Goods are tangible (can be touched) things we use in our everyday lives. Some goods, like
soft drinks or pizza, are used up in a short time. Other goods, such car or typewriter or
waterbed, can be used over a much longer time period.

Serve are those things we pay others to do for us or to show us how to do. When
you ride a bus, call a plumber, go to hair stylist, or take karate lessons, you are using
services.

As buyer and user of goods and services, you are a consumer. So is every person
you know. But schools, government agencies, and other organization can also be
consumer. Your school buys and uses paper, chair, lab equipment and many other
products. Your local government buys many things, including fire engines and the services
of fire-fighting crews.

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 Business which supplies goods and services to us are also consumers. The owner
of a service station, for example, buys and uses goods supplied by other businesses – a
cash register, display cases, gasoline pumps, and other items.

Three Economic Resources

Natural resources are materials supplied directly by nature. Natural resources, or

raw materials, include all mineral, animal, and plant products that come from soil, sea
and air. None of the goods we use today could be made without originally starting with
one more raw materials.

Capital resources include tools, machinery, and other equipment use to change
natural resources into goods and services. Factory buildings, power plants, tractors,
computers, and typewriters and examples of capital resources.

The world capital is often in place of capital resources, especially when referred
to as one of the factors of production. Capital is also thought of as money that is needed
to run a business. Capital has a variety of meanings, but here we are using the word in its
economic sense to include equipment and other man-made facilities needed to produce
goods and services.

Human resources are the people who work to produce goods and services. Labor
is another name for human resources. Human resources include the men and women
who run our farms, mines and factories, who transport products to places where they are
needed. Who perform business and government services for other people, and who
manage businesses? Natural and capital resources would have little value without human
resources to use them in producing goods and services.

Unlimited Wants and Limited Resources

For most of us is no limit to our wants. Satisfying one want usually brings up new
ones. Buy a camera, and you want firm, flashcubes, maybe a tripod, perhaps a developing
outfit. There is a limit, though, to economic resources.

Because our economic resources are limited, we need to be `economical’ in using

them. We must use these resources as wisely as we can if our unlimited wants are to be
satisfied a fully as possible. All counties have a shortage of economic resources. Some
have fewer economic resources than others. A major problem facing every nation is how
best to use its unlimited economic resources so that it satisfies as many as possible of its
people’s needs and wants.

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Extracting Products from Nature

Businesses that grow products or take raw material from nature are called
extractors: farmers and fisherman are two important extractors. So are those who dig
copper in Toledo, pump oil in Palawan, and run lumber camps in Mindanao. Sometimes
the extractor’s products are ready to be sold just as they come from earth or the sea.
Most food product and raw materials needs some processing or change in form before
the consumer can use them.

Manufacturing New Products

The manufacturer takes the extractor’s products or raw material and changes
them into a form that consumers can use. The manufacturer might make a product, such
as a toaster, or process a product, such as packaging and freezing vegetables. Some
manufactures are only a part of total activity of producing goods from extractor’s
products.

Moving Goods from Product to Consumer

Most producers are too busy growing or making their products to have time to
supply consumers directly. And most consumers are too busy at their own jobs or too far
away from producers to go directly to them. Bridging the gap between producers and
consumers can be very complicated. The services of many businesses are often needed
before goods actually reach consumers. All the activities that are involved in moving
goods from producers to consumers are performed by marketers; the activities
themselves are called marketing or distribution.

Our advance technology and our skilled labor force enable producers to make
thousands of different products at a reasonable cost. If these products are not available
when and where consumers want to buy them, they are of no use to consumer. So
marketing adds value to products by bringing them where the consumer is, at time they
wanted, in the assortment wanted, and at the prices the consumer is willing to pay.

Rapid Growth in Service Businesses

Firm that does things for you instead of making products are called service
businesses. These businesses are perhaps the fastest growing part of our business world.
As people come to have more leisure time and more money to spend, they want more
and more businesses. Some serve both individual consumers and other businesses.

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What Most Business Do

There are many different types and size of businesses. A business may be as small
as newspaper stand on a neighborhood corner, or as large and complex as an oil company
which has wells, refineries, and service station in many different countries. Although
individual businesses may be different in the way they operate, most of them perform
basically the same kind of activities. Some of these important activities are:

 buying goods services

 selling goods and services
 storing goods
 handling money and keeping records
 extending credits to costumers
 providing services to customers
 packaging and dividing goods

1. Businesses buy goods and services both for sale and for their own use. The owner of
men’s clothing store, for instance, must buy slacks, jackets, suits, coats, and other
items for his stock. The store owner also need sales tickets, ac cash register, display
cases, and other supplies. He needs services offered by other businesses, such as
advertising space in a newspaper or a window cleaner to wash his display windows.

2. Businesses must sell goods and services if they expect to stay in operation. Some
businesses – groceries store, hardware store, jewelry stores, and other sells goods.
Other businesses – telephone companies, airlines, and so on – sell services. Doctors,
dentist, lawyers, and architects all offer professional service.

3. Goods must be stored until they are sold or until the costumers wants them delivered.
For example, toys are produced the year around but most of them are stored until
merchant order for Christmas. Manufacturer needs storage yards and warehouse to
store material, supplies, and finished pans.

4. All businesses must handle money and keep record. Business owners need to know
how much their sales have been, how much of what they sold was returned by
costumers, and how much they owe to others. They need to know how much they are
spending for building repairs, rent, salaries and other expenses. They need record of
property they use in their business, such as display cases, adding machines, and
delivery trucks. Their records show whether their business making or losing money
and give them information they need for government reports.

5. Most businesses extend credit to their customers. Many businesses would not be able
to operate if manufacturers and other businesses did not allow them to buy on credit.
Merchants find that most costumers today expect credit at store where they shop.

18
6. Almost all businesses give certain services with the goods they sell to costumers.
Often a costumer will buy from the business that offers the most service. A store may
provide a parking space, lounges, a coffee shop, telephones, and delivery service.

7. Many businesses package and divide goods to most costumers need. For example,
manufacturers design packages to protect goods and makes then more attractive.
Marketers package goods to protect them while they are being delivered or to make
them attractive as gifts.

Rewarding Business owners with Profits

All business owners take risk. When a person decides to starts a business, he or
she plans to spend a lot of time and energy in running it. Business owners also decide to
put into the business money they have saved and the savings of others who have
confidence that the business will be a success.

Business owners are entitled to profits because of the risk they take in investing
their money and because of the extra work and responsibilities that go with ownership
and management. Most businesses do not make huge profits that some people suppose.
Competition with other business helps keep prices and profits down to reasonable
figures. Then, too, some people don’t understand between gross and net profit. Gross
profit or margin is the difference between the selling price and the cost price of an article.
Net profit is what is left after all expenses have been paid.

How Businesses Helps Communities

Almost everyone is pleased when a new business opens in a community. Why?

Because a new business benefits a community in many ways. Perhaps the most important
benefit is that a new business creates job. This means that the people who work directly
for it have incomes to support themselves and their families. As they spend their incomes
for goods and services, there is multiplier effect.

Another benefit from a new expanded business is that it pays taxes to the
community. This means that the community has more has more money to build new
schools, repair the streets, provide better police and fire protection, and improved other
services such as parks.

When a new business comes to a community, it buys things as electricity, office

furniture and supplies, equipment, and tools. Some of these things will be bought from
firm in other towns, but much will be bought locally. These gives income to local
businesses and, in turn, paychecks to their employees.

19
 Businesses also tend to attract other businesses. When one business settles in a
community, other businesses often to come supply it. For example, small business may
spring up to supply a large company with such thing as small parts, office supplies,
cleaning service, and advertising services. Each of these smaller firm firms hires people
and buys goods and services. So more jobs and more income are created in the
community.

Besides the economic benefits, businesses also contribute to the improvement of

the community in other ways. Many firms participate in training programs for unskilled
workers. The firms provide advice and managerial assistance to members of minority
groups in setting up and operating their own businesses. They cooperate with schools in
many ways – by providing speakers, employing student in part-time jobs, and sponsoring
such programs as Junior Achievement. Many business firm contribute generously to
charities and to civic and cultural projects. In fact, leaders from business are often also
the leaders of these projects.

The social responsibility of business is also seen in the efforts of many firms to
avoid polluting the air, the water, or the natural beauty of the countryside. Helping to
keep a clean environment is an important part of business planning today. Before they
allow anew business to locate in their areas, most communities require the firm to show
that its operation will not cause pollution.

20
 Chapter 2
STUDENT ACTIVITIES

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

Test I. Identification. Tell what is being referred to in each description/definition.

1. The study of producing and distributing goods and services to help satisfy our
needs and wants.
2. Those things we most have to satisfy to stay alive, such as food, clothing, and
housing.
3. Those things which we can live without, but which can add pleasure and comfort
to living.
4. The plan that a nation has for making decisions on what to produce, how to
produce, and how to distribute goods and services.
5. As establishment that supplies us with goods and services in exchange for a
payment of some form.
6. The tangible things that we use in our everyday lives.
7. Those things that we pay others to do show us how to do.
8. One who buys and uses goods and services.
9. The means or sources of help through which we produce the things we need and
want.
10. Materials supplied directly by nature and that are used in product goods and
services.
11. Tools, machinery, and other equipment used to change natural resources into
goods and services.
12. The people who work to produce goods and services.

Test II. The following terms should become part of your business vocabulary. For each
numbered statement, find the term that has the same meaning.

Extractor Manufacturer Gross profit or margin

Net profit Service business Marketing or distribution

__________1. A business that grows product or takes raw materials from nature.
__________2. A business that takes an extractor’s products or raw materials and
changes them into a form that consumer can use.
__________3. The activities that are involve in moving goods from producer to
consumers.
__________4. A business that does things for you instead of providing products.
__________5. The difference between the selling price and the cost price of an article.
__________6. The amount left over after the cost price and all expenses are deducted
from the selling price of an article.

21
Test III. Review Questions

1. How are businesses alike?

2. How does a manufacturer differ from an extractor?
3. What similar activities are performed by most businesses? Give at least six.

22
 CHAPTER 3

ORIGANIZING THE ENTERPRISE

When one starts to organize a business enterprise, it is presumed that he has

conducted a feasibility or market sturdy. That is, he knows his resources, the needs of the
community, the strengths of his competitors, and so forth.

However, what counts most is the personal characteristics of the entrepreneur.

Handwork, determination, creativity, enthusiasm and human relations can make the
difference between success and failure. Many successful businessmen started from
scratch. Now, they are millionaires. Some of them have not even acquired education. We
have this kind of entrepreneurs in our own communities.

In organizing an enterprise, there are several types of business organizations to

choose from. These are the sole or single proprietorship, partnership and corporation.
The cooperative is also considered a business organization, although its basic motive is
serves to the members and the community.

In view of the importance of cooperative to the poor, this chapter has allocated a
substantial portion to such topic. This is also in line with the policy of the government of
promoting the organization of cooperatives as a means of reducing poverty. This chapter
explains the reasons for going to business, types of business organizations, organizational
structure, and how to reduce the risks of starting a business, among others.

The Levi’s Story

More than one hundred years ago, a young man from Bavaria went the United
States as an immigrant. His objective was to seek his fortune. Little success at first
encouraged him to return to his country. But he decided to try prospecting for gold in
California. At that time all the roads led to California. Likewise, luck was not for him as a
gold prospector.

However, the young man recognized the needs of his fellow gold prospectors for
study and durable work plants. Exploiting for his talent for tailoring and using his last
money, he out up his tailoring shop. Over the years his business prospected. Until it
become transnational in operations. The name of the young immigrant is Levi Strauss.

He did not discover gold in California. But just the same he acquired something
worth more than gold. The Levi Strauss and company has become the largest apparel
company in the word. Famous chain stores throughout the world sell Levi’s jeans. Annual
sales have been recorded at $3 billion.

23
WHY PEOPLE GO INTO BUSINESS

People go into business for a variety of reasons. They may go into business as
owners and employers or as employee.

These reasons are:

a. Social approval. The business man has a high social standing in the community.

b. Profit. The major factor of motivation for going into business. Individuals enter
into these activities because of the anticipation of a “reward” for their toiling in
the form of monetary benefits.

c. Service to the community and to employees. Many business men render service
to the community in donating money, sponsoring civic activities and providing
opportunities for employment.

d. Personal satisfaction. It comes about from the social status conferred on those
engaged in business.

e. Livelihood. People go into business to earn a living.

f. Power. Some people enter business because they expect to rise up to positions of
prestige, power, and leadership.

g. Protection. Individuals inherit a business, and rather than suffer a loss through
selling it decide to run the business themselves.
.
The reason why people go into business are as infinite as the choices that are open
to individuals and the motivations thus it is also important why we should have a
knowledge of Statistics, Economics, Sociology and Psychology.

a. Statistics deals with mathematical tools, trends and decision theories.

Management can be seen a logical process which can be expressed in terms of
mathematical symbols and relationships.

b. Economics it deals with the study of the collection of scarce resources for the
satisfaction of human wants. It is necessary in business since the producer has
scarce or limited resources, so he has to know the different combinations he can
arrive at with his given amount of resources.

c. Sociology deals the individuals relationship to society as a whole. Knowledge of

sociological factors which can motivate the members of the organization towards
the achievement of business goals.

24
 d. Psychology is a science which deals with the study of the mind. A working
knowledge of concepts which motivates individuals towards the performance of
their tasks and their attitudes, and reactions to various situations can greatly help
the businessmen in their implementation of different personnel policies.

THE CHOICE OF A PARTICULAR BUSINESS

For those who are free to choose, the following factors may control:

a. available funds
b. special aptitude and interest
c. training, education and experience
d. social status of a business
e. competitive situation

What is an Organization?

An organization is a group of two or more persons who work together to attain a

common set of goals. A sari-sari store owned and managed by a family is organization. In
the same manner, san Miguel Corporation is an organization. A credit cooperative is also
an organization.

Organizing is a process of combining and coordinating resources and activities in

order to accomplish efficiently and effectively certain objectives. However, organizing has
a more important role. This is the proper development of human resources. The best
resources of the organization are its employees – not money, not machine, not material,
or buildings. Hence, the entrepreneur must hire the best and brightest, and then further
develop them in line with the philosophy of the organization.

Organizational Structure

Every organization has a structure which indicates and relationships. These are
shown by an organization chart. Of course in micro business like sari-sari store or a
backyard piggery and poultry, position and relationships are very few. In small business
enterprises, we have only the owner-manager, supervisor, bookkeeper and sales staff or
workers. In the case of big corporations, they have several layers of management. For
instance, they have the board of directors, president, executive vice president, several
vice presidents, assistant vice president, and many managers and supervisors.

25
Forms of business Organization

There are three most common forms of business organization in a capitalist

economy. These are the sole or single proprietorship and corporation. However, there
are other forms of business organizations, such as the cooperative, joint venture and
syndicate. This chapter presents only the three most common forms, together with
cooperatives. Many successful firms started from single proprietorship until they become
corporations.

Single Proprietorship. This form of business organization that is owned and

usually managed by one person. It is the oldest and simplest form of business ownership.
It is also the easiest to start. Most of our businesses are in the form of single
proprietorship. They dominate the retailing, agriculture and service industries.

The advantages of a single proprietorship are:

1. Ease and low cost of formation and dissolution. It is easy and cheap to start, and
it is also easy and cheap to dissolve. It requires small capital and there are no legal papers
needed. Usually, only a license from the department of trade industry and a business
permit from the city/municipal government are required. On the other hand, if such form
of business organization decided to close its operations, there are no legal procedures to
comply with. The owner has of course the obligation to pay his creditors.

2. Retention of all profits. All profits belong to the owner of the business. This is
the greatest incentive or reward to the entrepreneur. This is the reasons why many
entrepreneurs prefer the sole proprietorship.

3. Independence and flexibility. The owner is the boss. He makes his own decisions
and implements then in accordance with his will or wish. For instance, the owner can
change his business hour, his products or prices. He can also change his style of
management.

4. Tax advantages and less government regulation. The owner does not pay
several kinds of taxed. Usually earnings are taxed as personal income tax. Likewise, the
government has very minimal regulation and supervision over a single proprietorship. The
owners deal with the government when they pay their business license, permits and
taxes.

The Disadvantages are:

1. Unlimited liability. This is the other side of profit. In case the business fails, the
owner assumes all the financial obligations. All his personal properties, including savings,
could be seized and sold pay creditors.

26
 2. Lack of stability. If the owner dies, it is the end of the business. However,
members of the family or close relatives can continue the business. This happens only if
such relatives are interested and the business is profitable.

3. Limited access to credit. Credit. Banks and other financial institutions are usually
not willing to lend large amount of money to single proprietorship. Assets of owners are
generally small to be used as security or collateral. Such disadvantage prevents owners
from expanding their business operations.

4. Limited business skills and knowledge. In many cases the owner is the manager,
salesman, bookkeeper, messenger and janitor. There is no specialization.

Partnership. It is an association to two or more persons who set as co-owners a

business. Each partner contributes money, property or service to their organization. Most
partnership have two partners. They are usually engaged in accounting, law, advertising,
real estate and retailing. There are two types of partners: general partners and limited
partners. The liability of general partners extends up to his personal properties while a
limited partner is only liable to extend of his contribution to the business. In our country,
we have also the capitalist partner and the industrial partner. The former contributes
money while the latter provides service or management skills. Capitalist partner and the
Industrial partner. The former contributes money while the latter provides service or
management skills.

The advantages of partnership are:

1. Easy to organize. Like single proprietorship, a partnership is relatively easy to

form, much easier than a corporation. The legal requirements include articles and by-laws
of partnership to be submitted to the Security and Exchange Commission, verification of
business name with SEC, registration of business name with the Bureau of Commerce
registration with the bureau of Internal Revenue for TIN (tax information number),
business permit from the city/municipality hall, and registration of employees with SSS.

2. Availability of more capital and credit. Partners can pool their resources –
properties, equipment and others – can also these for security in obtaining bank loans,
Suppliers are willing to extend credit to a partnership than to a singles proprietorship.

3. Retention of Profit. Just in the sole proprietorship, the partners get all the
profits of their business. This stimulates the partners to improve their operations.

4. Better business skills and knowledge. Each contributes his skill and knowledge
to the organization. Such combination provides better management in terms of planning,
decision-making and implementation, compared with single proprietorship.

27
 The disadvantages:

1. Unlimited liability. Each general partner is personally responsible for all the
debts of the business. Even the personal property of a general partner can be
taken pay creditors. However, in the case of a limited partner, only his
investment is subject to risk.

2. Lack of stability. A partnership is terminated in case of the death, withdrawal

or legally declared insanity of any of the general partners.

3. Management disagreement. It is true that two or more heads are better than
one but if they do not work in unity, conflicts arise. Suspicion or distrust may
crop up among the partners. Such negative attitudes and unfair practices are
happening among Filipino partners. It is a common knowledge that capitalist
get experience partners. However, as soon as the capitalist learn how to
operate the business, they kick out their industrial partners.

4. The idle investment. It is quite easy to invest money in partnership. But

sometimes it is difficult to get it out. For example, when a partner decides to
leave the organization, his remaining partners may not buy his share. Such
problem can be eliminated if it provided for in the articles of partnership that
the remaining partners buy the shares of partners who are leaving the
enterprise. Another is for the leaving partner to look for an outside to buy his
share. This possible if the business is lucrative.

Corporation. It is an artificial being created by operation of law, having the right

of succession, and the powers, attributes and properties expressly authorized by law or
incident to its existence. United States Chief Justice John Marshall defines corporation in
his famous 1819 decision as an artificial being invisible, tangible, and existing only in
contemplation of the law.

The share or certificates of ownership of a corporation are called stocks. The

owners of stocks are called stockholder or shareholders. There are two types of
corporation; private or close corporation and Open Corporation. A few individual own the
first one, usually relatives and friends. Any individual who buys shares of stock, which are
openly traded in the stock markets owns the other one.

The advantage of a corporation are:

1. Limited liability. The liability of a stockholder is only up to his shares stock. In

case the corporation becomes a failure, creditors can only lay their claims in
the assets of the corporation, not in the personal assets of the stockholders.

28
 2. Easy to raise capital. A corporation can sell shares of stocks to the public for
additional funds. Individuals are more willing to invest in a corporation due to
limited liability, and they can sell their shares of stock.

3. Perpetual life. The life of the corporation does not end with the withdrawal or
death o key owners. It can exist for 50 years and is subject to renewal.

4. Specialized management. A corporation can hire professional manager and

specialist. It has the fund to develop its human resources.

The disadvantages of the corporation are:

1. Difficulty to organize. It is difficult and quite expensive to organize a

corporation. Sometimes, it requires the service of a lawyer and an accountant
to prepare the legal forms and financial documents. The legal requirements
include submission of articles of incorporation and by-laws to SEC, registration
with SSS, BIR and DOLE, and acquisition of a business permit from the
city/municipal hall and a license from the DTI. Depending on the products on
the corporation, it also has to get approval from other agencies like the Central
Bank, Bureau of fisheries and Aquatic Resources, Food and Drug
Administration, or bureau of Animal Industry.

2. Strictly regulated and supervised by the government. Government regulation

and supervision on corporation are closest compared with the other forms of
business organization. Corporations have to comply with government laws,
policies and regulations. They have to submit their financial reports every year
to concerned government agencies.

3. Some corporations are socially irresponsible. They sell worthless securities

(stocks and bounce), they pollute the environment, and sell substandard
goods.

4. Formal and impersonal employer-employee relationship. A corporation has

several layers of management. The president and board of directors seldom
or do not associate with the workers or clerks of the corporation.
Nevertheless, there are few corporations, which strive to maintain a small
business atmosphere in order to sustain camaraderie in the organization.

The Cooperative: An Enterprise for the Poor

The Cooperative Code defines a cooperative as duly registered association of a

persons, with a common bond of interest, who have voluntarily joined together to achieve
a lawful common social or economic end, making equitable contributions to the capital

29
required and accepting a fair share of the risks and benefits of the undertaking in
accordance with the universally accepted principles of corporation, which include the
following:

1. Open and voluntary membership

2. Democratic control.
3. Limited interest on capital.
4. Division of net surplus
5. Cooperative education
6. Cooperation with other cooperatives.

Objectives of Cooperative:

1. To encourage thrift and savings among the members;

2. To generate funds and extend credit to the members for productive and
provident purposes;
3. To encourage among members’ systematic production and marketing;
4. To provide goods and service and other requirements to the members;
5. To develop expertise and skill among its members;
6. To acquire lands and provide housing benefits for the members;
7. To promote and advance the economic, social and educational status of the
members; and
8. To establish, own, lease or operate cooperative banks, cooperative
wholesale and retail complexes, insurance and agricultural/industrial
processing enterprises, and public markets.

Types of Cooperatives

1. Credit cooperative. Promotes thrift among its members and create fund in
order to grant loans for productive and provident purposes.
2. Consumers cooperative. Procures and distributes commodities its members
and non-members.
3. Producers cooperative. Undertakes joint production in agriculture and
industry.
4. Marketing cooperative. Engages in the supply of production inputs to
members and markets their products.
5. Service cooperative. Undertakes medical and dental care, hospitalization,
transportation, insurance, housing, labor, electric light and power,
communication and other services.
6. Multipurpose cooperative. Combines two or more of the business activities
of the different types of cooperative.

30
Requirements for Registration

The board of directors with the assistance of the members of the Documents
committee shall prepare all the documents necessary for the registration of the
cooperative. Such documents shall be submitted to the Cooperative Development
Authority:

 Four copies of economic survey with a general statement describing the:

a. Structure
b. Purpose
c. Economic feasibility
d. Area of operation
e. Size of membership
f. Other pertinent data

 Four copies of Articles of cooperation, together with bond of accountable

officers
 Four copies of By-laws
 Registration fee payable to Cooperative Development Authority

31
32
 Chapter 3
STUDENTS ACTIVITY

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

Test I. Tell what is being referred to in each description/definition.

__________________ 1. A group of two or more persons who work together to attain a

common set of goals.
__________________ 2. A process of combining and coordinating resources and
activities in order to accomplish efficiently certain objectives.
__________________ 3. A form of business organization that is owned and managed by
one person.
__________________ 4. An artificial being created by operation of law having the rights
of succession, etc.
__________________ 5. Share of certificates of ownership of a corporation.
__________________ 6. An association of two or more persons who set as co-owners
of a business.
__________________ 7. A partner whose liability extends up to his personal
properties.
__________________ 8. A partner whose liability is up to his investment in the
business.
__________________ 9. These are owners of corporations.
__________________10. A duly registered association of person with a common bond of
interest, etc.

Test II. Enumeration. Give what is asked in each letter.

A. What are the five reasons why people go into business?

1.
2.
3.
4.
5.

B. Give the three most common forms of business organizations:

6.
7.
8.

C. Name the three other forms of business organization.

9.
10.
11.

33
D. Give four advantages of single proprietorship.
12.
13.
14.
15.

E. Enumerate four disadvantaged of single proprietorship.

16.
17.
18.
19.

F. Give four advantages of partnership.

20.
21.
22.
23.

G. Give four disadvantages of partnership

24.
25.
26.
27.

H. Give four advantages of corporation.

28.
29.
30.
31.

I. Give for disadvantages of corporation.

32.
33.
34.
35.

Test III. Review Questions

1. What are the factors to be considered when choosing a type of business?

2. Why is it complicated to form a corporation?
3. Differentiate between general and limited partners.

34
 CHAPTER 4

FINANCE

Without money your business cannot survive but money alone cannot you’re your
business survive. There should be careful financial planning. First you make an estimate
of the amount needed in the early days which include your opening requirements, initial
stock in trade; your operating needs for that period after launching your business but
before your income can support your expenses; and some reserves for unexpected
expenses.

Then make estimates of future needs whether it can be supportedby the

ownership money. In case it can’t be, loan money may be acquired.

Short term Versus Long term Financing

Financing a business are of short term and long-term because some assets of the business
are subject to constant turnover while others are fixed in nature. The constant movement
of current assets explain why cash, receivables, and inventories are called circulating
capital or working capital. These need short-term financing which deals with securing
funds that must be repaid within a relatively short period of time, usually a year because
their turnover is fast.

The purchase of some items like land, or building needs a permanent supply of
working capital therefore it needs long-term financing which is concerned with securing
funds for the acquisition of fixed capital items and includes both the investment made by
the owners and loans that mature in several years, usually ten or more.

Major Sources of Financing

1. Operations of the business

2. Credit extended the business by its supplies (referred to as creditor’s capital)
3. Borrowed funds or borrowed capital
4. Owners of the enterprise (known as invested or equity capital)

Sources of Short-term Financing

1. Trade credit or “open account.”

This comes from the heading account payable in accounting.

2. Intermediate Credit.
This is trade credit extended for a maximum of 180 days.

35
3. Promissory Note.
It is a credit financial instrument, without collateral, and ordinarily runs for 30, 60,
90 days. Legally it is a binding promise.

4. Commercial draft/managers draft.

Similar to a promissory note with the exception that the commercial draft comes
into being upon the initiative of the recipient of the money. The originator, usually the
company, called the drawer, sends the draft to the drawee, the person obligated to the
drawer, or to his bank. If the person obligated, or drawee, accept the draft, he writes
his name across the face of the instruments. There are two kinds of draft:

a). sight drafts which calls for payment immediately when presented.
b). time drafts extend payment to a specified future time or date (post-dated check).

5. Bill of Lading
This is a receipt gives by a carrier like a railroad or a boat to a shipper for goods in
transit. It becomes a security for a loan when it is sent to the buyer’s bank with a draft
attached to it.

6. Warehouse receipts
This is a written document certifying that commodities of a special kind, quantity
and value are stored in an authorized place can be used for an inventory loan.

7. Trust receipts
Agreement between a bank and a borrower.

8. Assigning receivables
Business obtains loan by pledging as security the money due them as represented by
the accounts oftheir customers.

9. Marketable securities and mortgages

Marketable securitiesmean stocks and bonds that can be turned into cash readily in the
financial market.

10. Government loans

Sources of Long-term Financing

1. Stocks – issuance of shares of stocks to meet the capital stock requirements.

2. Bonds- certificate of indebtedness
3. Borrowed long –term financing

36
What Is the Difference Between Stocks and Bonds?

When it comes to investing, few topics are more confusing to the majority of
investors and the general populace than the difference between stocks and bonds.
Fortunately, the answer to this question is not as complicated as it might seem.

What Is a Stock?
A stock, simply, is a share of a company that:

a. represents partial ownership of the corporation and

b. can be bought and sold

Technically, stocks refer to the equity (the value of ownership interest in a

corporation), and pieces of stock are called shares. It is not uncommon, though, for the
“stocks” to be used in exchange for shares.Stocks are originally issued as a way for a
corporation to finance itself by raising money and avoiding taking on debt. This is called
equity financing. A corporation could issue stock, for example, to raise money for more
employees so that it can expand and generate more revenue. The main reason why
investors become involved with stocks these days is to turn a profit by purchasing the
stock at a certain price and selling it at another price. This is done because the investor
believes the value of a stock will rise because the corporation is profitable (or will be in
the future) and has upside growth potential.

What is a Bond?

A bond is another tradable security that is built on debt instead of equity. A bond:
a. represents an obligation to repay borrowed money, and b. makes the owner a lender
instead of an owner.

Bonds are essentially loans. When a corporation or a government entity (like a

city) issues a bond, it raises money from investors, who then become lenders. In exchange
for giving the corporation money, investors receive a promise that they will receive their
initial investment at a certain time in the future, plus any interest that has accumulated
on the bond. Bonds are a form of debt financing, which raises money for a corporation
or public entity by creating liabilities. This is different from equity financing because debt
must be repaid. The value of a bond, or its yield, is determined by how likely it is to be
rapid and the coupon, which is the interest rate that the bondholder will be paid over the
life of the bond.

37
How Are They Different?

A stock and a bond have several practical differences.

 Ownership versus creditorship

The first involves the notion of ownership versus creditorship. When someone buys
shares of stock, he or she is a partial owner of a corporation and may or may not have
the voting rights. When someone buys a bond, he or she becomes a creditor of the
corporation.

 Fluctuations in Value
Another crucial difference is how stocks and bonds fluctuate in value. A stock’s value,
or stock price, is determined by a mixture of fundamental factors, like earnings per
share (revenues divided by the number of outstanding shares) and a valuation
multiple, like the price-earning (P/E) ratio. Supply and demand and other
financial/economic factorsalso play major role so assessing stock price doesn’t follow
a clear-cut formula. Bonds on the other hand, fluctuate in value primarily on the
market interest rate, the length of maturity, the investor’s discount rate(a rate that
determines how much a certain amount in the future is worth to you now) and the
par value of face value of the bond. Investors can look to interest rates as a key
indicator of how much a bond will be worth in thefuture.

 Risk versus reward

Generally speaking, stocks carry more risk than bonds. This is because stocks can
fluctuate dramatically for a wide variety of reasons, many of which may not be clear
at all to the investor.Bonds on the other hand are priced partially based on risk, so an
investor can find bonds that suit their tolerance for risk. Buying a bond that has been
rated as investment grade means you are more than likely to receive your investment
back at maturity, plus interest unless the corporation or public entity fails. Stocks may
have a greater risk, but they also offer greater rewards.

Where and How they are Traded?

Finally, stocks and bonds are traded differently. Stocks are originally issued by
corporations in initial public offering (IPOs) in what are called primary exchanges. They
are then sold and re-sold in secondary changes like the ones mention above.Bonds by
contrast, are usually offered at public auctions for government bonds and over-the-
counter(OIC) markets that are decentralized for corporate bonds. Investors wishing to
buy and sell bonds typically do so through brokers. Or those authorized and licensed to
trade on an investor’s behalf.

38
 Chapter 4
STUDENTS ACTIVITIES

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

Test I. Essay. Answer briefly.

1. Why is financing important to a business?

2. Which is preferred stocks or bond financing?

Test II. Differentiate Stock from Bonds. Explain briefly.

39
40
 CHAPTER 5

PHYSICAL FACILITIES AND THE BUSINESS ENVIRONMENT

One major problem faced by the businessmen is with respect to physical facilities.
Physical facilities refer to the physical equipment utilized by the business enterprises in
its operation. As it includes not only building and land, but also such other thing as office
equipment, fixtures, furniture, machinery, tools, etc.

Location of Business or industries

Good location is a factor in profit making. Regardless of the type of business

location is very important because it contributes towards a favorable position while a
poor location may have the reversed effect. There is no specific rule that can be
followed and is applicable to all types of business. Every type of business has its own
location problems.

Some of the factors of location which effect both the volume and economy of doing
business are as allow:

1. Nearness to market. In the particular case of retail like “sari-sari” stores,

hardware, grocery, book stores and other, where costumers come to make their
purchases, the nearness f the store to a market is indeed very important. In fact,
oftentimes the success of a store may be attributed less to its good management
than to its ideal location, in location in or close to a market or business district
where many people habitually go to shop for their needs.
On the part of manufacturing plants, the location problem involves several
aspects the must be properly considered, such as raw material; transportation;
labor, power, water, and even climate.

2. Nearness to source of Raw materials. This is of great importance particularly to

manufacturing industries. Such industries in the first place, need an adequate
and continuous supply of the raw materials. Needles to state, any disruption in
the supply could mean a slowing down a production or temporary shutting dawn
of the plant. But the availability of the raw material is not enough. The
procurement cost of such materials, which includes the cost of transportation is
another factor to be reckoned with. All production costs must be kept at the
lowest possible level in the face of competition that characterizes almost every
line of business today.

3. Nearness to labor supply in manufacturing industries, the two major cost of

production are the cost of the raw materials and the cost of labor. As in case of
raw materials the cost of labor largely depends on its availability. Obviously,

41
 labor is chapter where it is more plentiful. Hence, the business should be located
where the labor supply is available in sufficient quantity and at reasonable cost.

In connection with labor supply, it might be added that the supply tends to be
concentrated in the cities and the centers of population. Hence, if a new industry is
established in a remote place close to the sources of its raw materials, it may be unable
to hire enough workers unless it offers benefits aside from attractive wages.

4. Nearness to means to transportation. Transportation facilities are essential to

any business or industry, whether in marketing finished product, in serving
customers, securing raw materials or serving labor.

If the business is one that requires continued cheap transportation of either raw
material or finished product, as in the particular case of manufacturing industries the
transportation factor becomes a major key to the success of the business. This is most
factories are located along navigable rivers and harbors, railroads, and highways.
If the cost of transportation is a major item in the cost of operation, it may well determine
whether a new industry proposed to be established to be profitable or not.

5. Power. As important to the manufacturing industries as adequate and speedy

transportation facilities are available and cheap sources of power. Workers are
necessary to msn the machines, but most heavy machineries can be operated
only with electric power.

The industrialization program of the county can be expanded only if the supply of
power is increased. More industries obviously would mean more employment
opportunities for our labor force, increased income and consequently higher standards
of living of the people and incidentally more taxes for government.

6. Water. Water is used for many purposes. A breakdown of its uses shows that
10% of the water is used for domestic needs, 40% for manufacturing, 50% for
agriculture. Certain types of manufacturing industries require enormous
quantities of water in production.

Industries which require large quantities of water in production should be located

where a sufficient water supply is available. It may be mentioned that the recurring water
shortage in manila and its suburbs is due not only to the increase in population but also
to the multiplication in that city of industries which use much water in their operations.

7. Climate. To a certain extent, certain industries are affected by climate. For

instance, salt by manufacturing by sun drying of salt water from the sea cannot
be done in areas where there is frequent rainfall throughout the year. So it is
manufacture of `bihon’.

42
 8. Nearness to cheap fuel. In those industries where fuel is a major item of
expense, proximity to low cost sources may be one of the determining factors in
the choice of a factory location. Regions than can provide large resources of
natural gas, or coal are in a position to offer important advantages to these
industries.

9. Room for expansion. Plants are good would be those that could expand
sidewise. Room for expansion calls for wide vacant lot with in the immediate
neighborhood of the plant.

10. Good climate. In certain industries the nature of the climate temperature and
humidity- is a factor that assumes considerable importance.

Arrangement of Equipment

The arrangement of equipment, oftentimes termed as layout, depends upon the

nature of the work to be done. Layout refers to the detailed arrangement of equipment
for the purpose of operation. It goes without saying that once the proper equipment has
been selected, it is necessary that the various items thereof, such as machines, work
tables conveyors, and other apparatus, be systematically arranged in relation to one
another.

There are several essentials of good layout no matter what the industry is. The essential
of a good layout are as follow:
a. Economy of Movement of Materials. This is indispensable to efficiency of
operation. Hence, the amount of time and motion involved in each phase of
production or operation process should be reduced to the minimum without
impairing the results of the process.
b. Economy of space. In planning the construction of a new building intended for
the factory, bank, professional firm, department store, or retail establishment,
economy of space for each phase of the operation concerned.
c. Storage space and service facilities must be conveniently located. This is also
conducive to economy of the time and motion for the workers. No movement
will be wasted which could be put to good use in production.
d. Allowance for Flexibility and Expansion. At the start of operation of the business,
the space for equipment should not be limited to those at hands. As the business
begins to expand, it may be necessary to have more space for additional
equipment for increased operation. Hence when a new building is to be
constructed, provision for possible expansion of the business should be made.
e. Facility of Supervision. Where several operations are under the supervision of
single individual, it may necessary to have such operation performed on the
same floor of the building. At any rate, a foreman should supervise a few
operations that are successive and should be performed in adjacent spaces.

43
 General Types of layout. There is no single arrangement of equipment that would
prove satisfactory for even related types of industries. As already indicated, the layout
would depend upon the nature of work to be done. However, there are least two general
types of layout that are commonly used.

First is the consecutive layout. This involves an arrangement of machines in orders

of operation, the work coming off one machine being put directly on the next. Hence, the
descriptive name of the plan.

Another arrangement is to have all machine of the same class or kind placed
together in particular section. The choice may be to have all operations on a piece work
done by one group, or to have a perform only one operation, the second group the next
operation and so on this arrangement is called functional.

Business and the environment

Organization exist in a particular setting or what is termed as environment. The

environment of which the business enterprises must take into account are two: physical
and conceptual. The physical environment relates to the actual conditioning existing in a
plant where words must be performed or done. Thus the physical environment refers to
all physical aspects of which it is composed, such as: temperature, light, ventilation, noise,
the size of plant, location and others.

A physical environment in which there is not enough light or ventilation can easily
tire workers and thus contribute to their poor production. The conceptual ormental
environment has to do with the conceptual aspect of the climate. Thus, it specifically
relates to the attitude of workers – how he perceives the work environment. The
conceptual environment should be one that makes for the worker’ satisfaction – an
environment which will make the employee feels he is not only a mere worker of the
organization but doubtless an important one.

Working Environment

When a building is to be constructed which will house the industrial plant, its
layout is not the only the only consideration but also the condition affect health,
convenience and human comfort.

The building promises shall have adequate or emergency exits, and the danger
signs of standard colors and sizes must be visible at all times. Other visible signs needed
to direct the driver of a motorized vehicles such as STOP, YIELD and DO NOT ENTER, which
should be properly positions within the compound of the establishment shall be used to
increase safety especially during the night.

44
 Handicapped employees should be restricted only to designated workplaces. As
far as practicable and feasible they should be provided with facilities for sale and
convenient movement within the establishment.

Lighting. The best way to grasp the importance of lighting in a workplace is to

remember that virtually every task performed at the workplace is a seeing task

Good lighting is important in an office where employees deal largely with assorted
documents and papers. The same could be said with the manufacturing business and
service-oriented industries. The presence of good lighting does not only help prevent
eyestrain but, moreover, is a prevention measure against accident. Expressed in another
way, poor lighting is oftentimes the cause of accidents.

Specific benefits arising from the presence of good lighting whether in an office or
industrial plant are:

a. Increase productivity, doubtless, it goes without saying that a change from poor
lighting to good lighting condition is well appreciated by workers and employees
and in a very precise way increase their productivity.
Poor lighting condition makes it difficult to work efficiently while good lighting, on
the other hand, motivates better performance.

b. Improved quality of work. Hand in hand with the increase in productivity which
good lighting conditions bring about is the attendant improvement in the quality
of work. This is quite obvious. Under poor lighting conditions, worker and
employees are continually subjected to eyestrain and mental fatigue limiting
increase productivity and better quality of work.

c. Better employee morale. Good lightning at the workplace is easily perceived as

management’s concern for the plight of its workers and employees.
temperature and Ventilation. Just as important to morale and efficiency as light
and are temperature and ventilation. These two are likely to be neglected, but
both are essential to the health and comfort of employees.

Noise. – Based on research studies more energy is actually required and spent
when working under noisy conditions, also it should be noted that some people have
more difficult. Also, it should be noted that some people have more difficult than
others in adapting to noisy environment.

Sanitary Facilities – Clean, sanitary running water should be available at all times
in the workplace, in its absences, the building, room and premises cannot be
maintained in clean and condition, a condition which could affect the effect the health

45
 of the workers and employees. Water is especially essentially in rest rooms – that is,
toilets and lavatories.

The same thing may be said about the presence of pure drinking water. Number
of offices and workshops provide fountains for that purpose. Fountains particulars the jet
type, which propels a small at an angel, is more sanitary than the bubbler type. Individual
paper drinking cups are to be desired. Employees and workers should be encouraged to
drink water freely ease the function of sweat glands and kidneys.

Lavatories should be provided with cake soap although some companies that do
not suffer from budgetary constraints prefer the use of liquid soap. In the same manner,
paper or linen towels should always be made available for use by employees and workers,
if this could be done.

Lunch Room. A separate area should be made available to office personnel. The
same applies to workers in the shops. However, the upkeep is not sole responsibility of
the company which enjoys janitorial services but also that of the employees and workers.
Smoking Regulation. Smoking is generally verboten in jobs where employees meet
the public. This receptionist, information clerks, ticket sellers, tellers, cashiers and
interviewers are expected to not smoke on the job it is also ‘off limits’ in departments
with sensitive electronic instrumentation.

In factories, plants or shop the regulations must, of necessity, be more stringent.

Smoking is forbidden in manufacturing areas as a safeguard to people and property. If the
hazard is great, the insurance carriers will insist on the ban being enforced. Production
worker have an area of the plant designated for smoking, with safety ashtrays and other
precautions in effect.

Arguments against smoking are:

1. Offends customers.
2. Annoys nonsmokers.
3. Creates a non-business atmosphere.
4. Gives conference room a pool hall air.
5. Increase the fire safety hazard.

46
 Chapter 5
STUDENTS ACTIVITIES

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

Test I. Identification. Tell what is being referred to in each description/definition.

___________________1. The physical equipment utilized by the business enterprise in its

operation.
___________________2. This refers to the detailed arrangement of equipment for
purposes of operation.
___________________3. An arrangement of machines in the order of operation.
___________________4. An arrangement which places all machines of the same class
placed together in a particular section.

Test II. Enumeration. Give what is asked in each letter.

A. Give the seven factors affecting the choice of location.

1.
2.
3.
4.
5.
6.
7.

B. What are two kinds of layout?

8.
9.

C. Give the five essentials of layout?

10.
11.
12.
13.
14.

D. Name the three specific benefits of good lighting.

15.
16.
17.

47
 E. Give the five arguments against smoking
18.
19.
20.
21.
22.

Test III. Review Questions

1. Why should the businessman be careful on choosing location for his business?
2. Differentiate between consecutive and functional layout?
3. How does the choice of supplies of raw materials affect the business?

48
 CHAPTER 6

HUMAN RESOURCES MANAGEMENT

The team ‘personnel’ refers to the human factor in an organization. Workers

work toward the fulfillment of business goals. They are the backbone of the enterprise.
Hence, hiring the right workers is vital.

Importance of Good Selection Procedure

Having a good selection procedure is both important and imperative inasmuch as

members of an organization are not ordinarily selected for some specified period as three
months or so but doubtless a longer period which spans through the years. In fact, its
influence may leave its imprint for as much as several decades. If employees are not
properly selected and placed on the right jobs to which their talent is well suited, it is
logical to expect a marked decline in the rate of turnover.

With respect to the staff, the office manager should have a major hand in its
selection and therefore, staffing should be done after the manager has been appointed,
assuming that the office is just being organized. In order to discharge his responsibilities
properly, the office manager should have authority to decide on the detailed schedule of
work to be done in the office.

Bases of Selection

Progressive management has laid down certain essential characteristics which

form important bases for selection. They are indicated and briefly discussed hereunder.

1. Experience. There is no substitute for experience. Even a summa cum laude

graduate cannot compare during his first years on the job with those who have
gained experience through the years of exposure to the jobs they hold. This is
to say, that it takes time before one is able to acquire the necessary and
desirable experience.

However, a person with high aptitude, though without experience, may at times
prove to be a better worker than an experienced worker of mediocre or inferior
aptitude and ability.

2. Physical characteristics. This is important for certain kinds of work especially

those requiring the use of stamina or physically strong workers carrying heavy
loads.

49
In the particular case of office workers, like those of their counterparts in factories,
good health means resistance to disease and therefore less absence that are the
bane of any management in that they could result to a slow pace in production
and as a consequence a reduction in output.

3. Mental Alertness. This is known under the popular term in intelligence.

Those possessing a high degree of intelligence generally proved to be an asset to
the organization for the simple reason that they could use their mental faculties
and make individual decisions without always necessary relying on their superiors.
Those who possess intelligence generally have initiative and make fast decisions.

4. Attitude toward Employment. If an employee considers his work nothing more

than a job, he is not bound to accomplish much. In many instances, he is
perennial clock-watcher always waiting for the time to go home. His job is
merely a means to an end, that is, earn income and nothing else. As such, this
type of employee earns no less whether he produces more or just enough to
be on the company payroll.

5. Adaptability. A rational individual must be able to adapt to changing conditions

that is he must be flexible. Individuals, who expect the environment to adapt
to them are generally, if not always, total failures.

6. Age. Most companies are reluctant to hire people in their forties, if not to say,
even those in their late thirties. More particularly, those who are nearing their
retirement age. This is doubtless true for almost all types of workers.
Unfortunately, physical and mental health should not always be measured in
terms of years. Some people look old even if they are actually younger in years.

7. Sex. Like age, the question of sex is an important factor that is considered in
the selection of workers. For office work, preference is generally made in favor
of women employees. The same is true for those who work in cigarette
factories, textile mills, drug manufacturing firms and others on account of their
known dexterity.
However, there are companies which prefer men against women for
employment purposes for a number of reasons. One is with respect to
maternity benefits which are accorded to the latter. Moreover, when children
are sick, many women employees absent themselves from work.

8. Personality. Where the nature of business requires constant exposure to the

public undoubtedly those possessing a strong and pleasing personality are
preferred over the other applicants. This may be observed in the case of tellers
in banking institutions, to mention one example.
9. Educational Background. Those who have pursued and finished college work
are generally preferred over those who were not able to.

50
 In fact, literacy does not merely mean ability to read and write. Rather, if
means being able to understand what he has read and putting to good use
what he has learned.

Job Requirements

To avoid the spectacle of placing square pegs in round holes, it is necessary that
management should be conversant with the various jobs in the organization and their
specific requirements. As such, there is need for job description, job analysis and job
specifications.

While the data recorded in job description relate to work essential features of
each position as (a) the nature of the work involved, and (b) the type of work that appears
best suited for the position, every adequate description must contain the following:
1. The exact title of the job, as for instance, chief controller.
2. The classification number, if any. This is intended among others for purpose of
comparison and identification of job.
3. A general description of the job, that is, what the job calls for.
4. A brief statement indicating the kinds of tools, machinery and/or special
equipment that are essential to the performance of the job, as for instance,
calculators or computers.
5. The position of the worker that is, whether standing, sitting or walking about.
6. A description of materials that are used in production, as the use of films in
the work involving microfilming of records.
7. A summary statement with respect to the relationship of the job to those with
which it is most closely associated.
8. A notation as to jobs from which workers are promoted and others to which
the operator may be promoted from those particular jobs.
9. Training required, if any. Methods of providing such training, including
apprenticeships are also indicated.
10. Usual working hours.

Recruitment and Hiring

Employers do not look at the physical appearance only and hire the person. They
would like to know a lot of information about the applicant, hence the many tools used
in the process of recruitment and hiring. Some of these tools are:

Job Analysis. Job analysis is the primary step and beginning function in a
comprehensive program designed to maintain satisfactory industrial relations. Through
its use, responsibility throughout all phases of the productive organization are placed on
the shoulders of workers. It moreover helps make a critical evaluation of personnel
requirements form the highest to the lowest ranks of employees.

51
 Job Description. This pertains to the list of functions that the worker is expected
to perform. It includes the position title, the supervisor to whom he shall report, salary
range and other information about the job.

Job Specifications. This refers to the qualifications, traits and skills needed to
perform the job. Physical attributes, like height, may also be included.

Application Form. This form asks about some personal details about the applicant,
his educational qualifications, traits, skills, experience, training, former employers and
other information which the employer feels are important.

Interview questions. A list of interview questions is prepared prior to the

interview. Sometimes these questions are already answered in the application form. But
is it asked just the same, for verification purposes.

Testing. This can be either a written test or a performance test depending on the
position applied for. A performance test is an actual test.

RECRUITMENT AND HIRING PROCESS

Preliminary Interview
52

Filling up of Application form

Picking Key Subordinates

It has been said with increasing frequency and rightly so that the success of a
leader is in large measure due to intelligence and ability always has his mind set in picking
key subordinates who can assist him in his duties. While such a task is not altogether easy,
nevertheless, there are a number of traits that are desired to be present in subordinates.
They are:

a. The ability to think and think intelligently. No individual is able to achieve a

commendable degree of success is any worthwhile undertaking unless he is
able to think and think well. The ability to think has become a common by-
word which international Business Machines has chosen to use as its business:
THINK.

b. Courage. Out of courage comes stamina and perseverance – essential qualities

to any sound and good management. Intelligence without courage is not
enough. Courage consists not in blindly overlooking danger, but in seeing and
conquering it. The truest courage is always mixed with circumspection, this
being the quality which distinguishes the courage of the wise and the
hardiness of the rash and foolish.
c. Ideas. Good ideas come from creative thinking. While not everyone is gifted
with inventive prowess, the door to innovation is however open to all. As has
been said correctly, the ideas that are put to work help the success of any

53
 worthwhile undertaking. Good ideas of subordinates are not only welcome
but help the supervisors in that what might have escaped their minds could be
brought to their attention and given due consideration. Said one “I owe my
success to the ideas contributed by people around me.”

d. Loyalty. It has been rightly said that gratitude is the only thing that separates
a man from beast, so can it be said that an employee who has no loyalty to the
organization of which he is a member and to the supervisor who has
responsibility over his performance represents a big risk to any company
which employs him. In fact, he can sell whatever trade secret the company has
to its competitors for a price.

Orientation

The importance of getting an employee off to a good start cannot be overstressed.

In fact, getting him off to good start means doing for him what is necessary in order that
he may perform his job in accordance with an adequate and acceptable standard as soon
as possible under the circumstances. As a means of achieving this objective, many
progressive companies have set up a project invariably termed as indoctrination program.
Doubtless, the objectives of this program may be easily appreciated when one has taken
into account the fact that it will help acquaint the employee with the terms of his
employment and provide him with information on the details of the job which he is to
perform that are essential to his success as a member of the organization.

Probationary Period

As a general practice, most companies put new employees on a probationary

period - a period when he is placed under close watch and supervision to determine his
worth to the company. The length of the probationary period, which may be described as
a period when the employee is placed on trial to determine his worth to the organization
- may vary from one company to another. Some companies require only a short period,
that is, three months from the date of his employment.

Salary Matters. Salary matters are confidential and shall not be discussed among
employees. No employee is authorized to divulge salary information over the telephone
to third parties. These callers are to be instructed to submit a request on their company
letterhead. Upon receipt, the office manager or administrative assistant will determine
whether this information sought is to be given or not.

Supervisors are to review performance with personnel under their supervision.

Every effort will be made to compensate employees fairly based on a combination of
factors including performance, attitude, market conditions, and contribution to company
growth.

54
 Penalties. Different offenses call for different disciplinary actions. For instance,
extremely serious offenses like immorality or sabotage usually call for immediate
dismissal. They do not warranty any previous warning or notice. The thinking of
authorities in this matter is that the erring employee is incapable of reform.

Training

In spite of their background, employees still need to be trained. The first training
that they received upon joining the company is orientation.

Training could be in the form of meetings, keeping employees informed about

changes in the company, like new policy, new rules, salary increase, new benefits or even
a change in their uniform, will motivate them. It will give them the feeling that they
belong.

Employees may also be sent to attend seminars or conferences outside the

company or trainers may be asked to conduct a seminar for the employees. For a growing
business, loyal employees may be sent to take a formal training and in a certain field
where the business plans to expand, on company expense.

Wage and Salary

Wage is the price for services rendered. It is a determinant whether the applicant
will accept the job offer or not whether the entrepreneur will accept the applicant or not,
especially if his asking price is too much. In all cases, the minimum wage law is the basis
for remuneration. Different positions require different wages. Clerical positions are paid
within the minimum wage, while supervisory or managerial positions are paid more.

Employee Benefits

Benefits are classified as monetary and non-monetary. The former refers to

bonuses, 13th month pay, allowances and SSS employer’s contributions, while the latter
comes in the form of free uniform, free accommodation, free food, free medical/dental
assistance, free use of company facilities like the library and others.

Reward System

Part of managing human resources is motivation and to motivate the personnel

to give their best job performance, a reward system is organized. This is made known to
everybody so that everybody is a candidate for the reward.

55
 Sales personnel, for example, are given rewards based on amount of sales or sales
above targets. Non-sales personnel are rewarded based on punctuality, high rating on
performance evaluation, distinctive contributions or company operation, loyalty or
number of years in service and so on.

Separation from the Company

Every effort shall be made for the continued employment of company personnel.
However, it does occur that some employees become dissatisfied with working conditions
that cannot be corrected or, on the other hand, the company is dissatisfied with the
performance of the employee that cannot be improved. In these cases, an amicable
separation is usually the best solution with reasonable notice from one party to the other
to effect a smooth transition of company business and personal needs.

Separation. The severance of a person from active employment, whether at the

instance of the employee himself or the employer is termed as separation. Separation is
of various types.

Type of separations:

1. When an employee on his volition decides to quit his job, such separation is termed
resignation.

2. Those which are on the initiative of the employer owing to certain fundamental reasons
such as decrease in the volume of production; separation may be termed as layoffs. Thus,
when production improves, those laid off are usually recalled back to work.

3. Separation from active employment may be due to the employee’s having reached the
age of compulsory retirement. In such case, a separation is deemed to be a policy of the
company or by provision of law.

Discharged. When periodic evaluation of employee performance shows a

particular employee could not cope with responsibilities of the job assigned to him in spite
of the many grace periods given him, it is doubtless necessary to terminate his services
for his own good and that of the company which employs him.

Chapter 6
STUDENT ACTIVITIES

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

56
Test I.Identification. Tell what is being referred to in each description/definition.

_________________1.Refers to the human factor in an organization.

_________________2.The primary step and beginning unction in comprehensive.
_________________3.A period when an employee is placed under close watch and
supervision.
_________________4. What type of separation is this when an employee on his volition
decides to quit his job?
_________________5.Those which are on the initiative of the employer as a result of
decrease in the volume of production.
_________________6.Severance of a person from active employment.
_________________7. Separation from active employment due to the employee’s
having reached the age of retirement.
_________________8. When the employee is being separated from active employment
due to his inability to cope withhold duties and responsibilities.

Test II. Enumeration. Give what is asked in each letter.

A. What are the nine bases of selection?

1.
2.
3.
4.
5.
6.
7.
8.
9.

B. What are the four desirable traits of subordinates?

10.
11.
12.
13.

C. Give the two types of separation.

14.
15.

Test III. Activity

57
1. Plan a reward system for factory workers producing shoes.

58
 CHAPTER 7

PRODUCTION

The creation of goods and services appear to favor the big business. They have
adequate funds, machines, materials, modern technology and management specialties to
produce goods and services at a lower average cost. Examples are the multi-national
corporations which dominate the global market.

However, there are some market situations where a small or even micro business,
have the comparative advantage in the production of goods and services. For instance, in
the field of cottage industries, like toy making, basket weaving or in personalized services,
the big businesses are at a disadvantage. In the rural areas of Japan, most cottage
industries are being done in the houses of farmers and fishermen.

The Nature of Production

Production is the creation of goods and services. Or, it is the creation of utility.
Utility means satisfaction. Goods and services are produced to satisfy human wants and
needs. Others define production as the process of converting resources into goods and
services.

In transforming resources into products, the principal actor is the entrepreneur.

He decides the proper combination of resources, such as the application of more labor
and fewer machines, or the reverse. He also decides what to produce, how to produce,
when to produce and where to produce. Obviously, the ultimate consideration in such
management decisions is profit. And this is only attainable if buyers are satisfied with
goods and services for sale.

Producing a product or service which is new in the market comes from an idea.
Then the idea is planned and developed into a product or service. For true entrepreneurs,
this is not difficult because they are creative or innovative. In the case of giant business
enterprises, they have R and D (research and development) departments. Their job is to
create new products or innovative existing products.

Factors of Production

In economics the major factors of production are land, labor, capital and
entrepreneurial ability. The following are their definitions:

1. Land- includes natural resources such as forests, mountains, and bodies of

water like rivers, lakes and seas.

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 2. Labor- refers to both physical and mental efforts like the works of farmers,
fishermen, workers, clerks, lawyers, teachers, doctors, etc.

3. Capital- pertains to machines, equipment, buildings and other physical

resources which are used in the production of goods and services. This is an
economic definition. In other concepts, capital refers to seed money which is
utilized for starting a business.

4. Entrepreneurial ability-coordinates the other factors of production such as

land, labor and capital. It is the spirit of the enterprise. Without such ability,
the other productive resources tend to be inefficient.

Costs of Production

Costs of production represent the payments for the factors of production. These
affect the ability and willingness of entrepreneurs to produce. When production costs are
high, prices go up. This decreases the purchasing power of the consumers. This result to
lower quantity demanded for goods and services. In other words, there is a decrease in
sales which is not favorable to producers or sellers.

Producers must choose productive resources which are abundant in supply,

because these are much cheaper than scarce resources. Cheaper inputs mean lower costs
of production. In terms of profits, lower costs of production favor the producers. In the
rural areas, there are many raw materials that can be used for the creation of products.
Their use should be maximized not only to produce goods, but also to create jobs for the
rural poor.

The total costs of production is the sum total of expenses in producing a product
or service. It is also equivalent to the sum of fixed cost and variable cost. The former
remains constant regardless to the volume of production while the latter changes in
proportion to the volume of production. Rents are fixed cost while expenses on raw
materials are variable cost. If there is no production, there is no variable cost, but there
is a fixed cost. Total costs divided by the number of goods produced equals average cost
or unit cost.

Rules of Production

TR-Total Revenue (income)

TC-Total Cost (expense)

When TR is great than TC, produce more.

When TR is less than TC, stop producing.
When TR is equal to TC, maintain production.

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 The above rules apply in a long-run period. TR being more than TC means profit.
The opposite is business loss. When TR=TC, it is breakeven. This means no profit, no loss.
But there is payment for the entrepreneur. Thus, it is still good to maintain production.
Here is an illustration of the components of TC:

Factors Payments

Land Rent
Labor Wage

Capital Interest
Entrepreneur Normal profit

Total factors Total cost of production

So, the entrepreneur still enjoys a financial reward in the form of normal profit.
When TR is above TC, there is pure profit. Such profit is the difference between market
and cost of production.

Under the short run period, the rules of production are:

When TR is greater than VC, operate.

When TR is lesser than VC, shut down.

Variable cost (VC) refers to the operating expenses like salaries, cost of raw
materials, office supplies and bills like water, telephone and electric. If TR is more than
VC, it is still good to continue business; assuming TR is less than TC.

The fixed cost (FC), which is part of TC, can be recovered in the long-run period of
business operations. For instance, the case of SM Mega Mall. The fixed costs amount to
hundreds of million pesos representing the expenses on the land, building, machines and
other expensive equipment like escalators. Such huge expenses cannot be recovered in a
few years’ time. However, it the TR of SM is more than its VC, the enterprise is already
lucky.

Relevant Technology

Technology refers to the process of transforming resources into goods and

services. Clearly, big enterprises are capable of using high technology which requires
modern machines and less number of workers. However, in our country such technology
in not relevant considering our depressed socio-economic conditions.

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 Based on the book Small is Beautiful by Schumacher, less developed countries like
the Philippines should adopt “intermediate technology.” It is more efficient than primitive
technology and cheaper than modern technology intermediate technology requires local
and material, resources and simple management.

Produce or Purchase

In producing certain products, there are pads of components that are needed. Is
it better to product or purchase such components? Not a few small businessmen just buy
components for economy. Producing components require the use of resources, such as
machines, money, equipment, materials and technology. Most business enterprises do
not have these productive resources. So, they prefer to purchase. However, the decision
to produce or purchase components does not only involve economics, but also other
factors which are essential in the production process such as:

1. The quality needed. If the components are of poor quality, then the entrepreneur has
good reasons to produce them rather than purchase them. However, there are many
firms which specialize in the production of components. These can offer better quality
components.

2. The quality demanded. If few units are needed, it is better to buy the components.
Specialized firms can produce components at a lower price and better quality. On the
other hand, a demand for large quantities on a continuous basis favors the entrepreneur
to produce such components.

3. Availability of supply. If supply of components is sure and dependable, the

entrepreneur can rely on suppliers for his production needs. On the other hand,
unreliable supply causes delay in production. These results to lost sales and possible layoff
of workers. Such situation requires the entrepreneur to produce the components.

4. Production requirements. This is the most important determinant whether to produce

or purchase the components in the production of a product. Producing a component
requires machine, space, money and materials. If the entrepreneur does not have money
for these, then it is better for him to purchase. In case he has money, he has to consider
is such money could be used better elsewhere. Ultimately, the entrepreneur has to
evaluate the unit cost or average cost in producing the component. More often than not,
it is better for small businessmen to purchase their components for production.

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How to Purchase

An entrepreneur has to buy his inputs for production. This is not as simple as it
appears. The needed inputs must be available at the right time, proper quantities, and at
minimum costs. To ensure the above requirements, the entrepreneur must select his
suppliers and must have purchase planning.

It is always advisable to get backup suppliers even if current suppliers are efficient.
Strikes or breakdowns of equipment of regular suppliers certainly stop their flow of
supplies. If these happen, then the entrepreneur has an alternative supply of materials
from backup suppliers.

Criteria for Selecting Good Suppliers:

Price. A small difference in price, say 5 centavos, is a big amount of money it large
quantities are purchased in one year. Some suppliers offer free delivery and big discounts
for large purchases. These are advantageous to the entrepreneur.

Quantity. Price and quality should be evaluated. Usually, high quality materials
have higher prices. What is necessary is minimum quality as long as the materials are
suitable for their intended uses.

Reliability. Suppliers who cannot deliver their materials on time can ruin the
business of an entrepreneur. Even if their suppliers are of high quality and at low price, if
they cannot meet their delivery schedule they are still not good suppliers.

In the case of purchase planning, its objective is to balance two opposing forces:
absence or lack of materials for production and over supply of materials. If there are no
materials for production, work is temporarily stopped. Clearly, this is not good business
for the entrepreneur and his workers. On the other hand, a large stockpile of materials is
also not good. It constitutes idle money.

An important factor in purchase planning is lead-time. This is the time that elapses
between placement of an order and receipt of such order. The entrepreneur can depend
on various mathematical models on how to optimize the timing of orders and to manage
ordering costs. A good model is the EOQ (economic order quantity). It determines when
order should be placed.

EOQ=2 x S x O
C
S = usage units per period
O= order cost per period
C = carrying cost per units

63
 Example:

S=160, 0=P 5, C=P 1

EOQ =2 x 160 x P 5
P1
=1,600 =40 units

Inventory Control

Inventories are stocks of goods and materials. There are three types of
inventories:

1. Raw materials inventory. These are stockpiles of material for inputs of

production.

2. Work-in-process inventory. These are partially completed products that require

further processing.

3. Finished-goods inventory. These are completed goods for delivery to

customers.

Each of the said inventories has storage cost and stock out cost. The latters refer
to the cost of running out of an inventory. For finished products the stock-out cost is loss
of sales. There are no products to sell. To minimize such costs, there must be an inventory
control. Computers are useful in inventory control. Small businessman can avail of micro-
computers or personal computers to keep track of inventories.

Scheduling

Scheduling is the process of ensuring the delivery of materials at the right place
and right time. Such materials can be raw materials, semi-finished goods or finished
goods. Raw materials may be moved from the storage facility to the work station. The
semi-finished products may be moved from one work station to another work station.
The finished products may be transported from the warehouse to the stores or
customers. The movement of such materials or products require specific time to avoid
delays.

The PERT (Program Evaluation and Review Technique) is used to monitor and
control scheduling of activities. Under PERT, all the major activities of the project are first
identified. The completion of each activity is called event.

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 The events are sequenced and are given numbers representing hours, days or
months for their completion. The activities are represented by arrows. The path requires
that require the longest along this path should be scheduled and controlled. A delay in
just one activity causes in the completion of the whole project.

Quality Control

Quality control is a process of insuring that goods and services are produced in
accordance with their designs and specifications. Enterprises which have established their
reputations for quality are very strict on quality control. Quality has become the central
point of their business. In every competitive market, quality is a sure winner.

There are two ways to ensure the quality of products. One is the formation of
quality circle. A group of employees officially meet to study and solve problems of quality.
Another is through inspection. This is being done at various times during production.
However, for other products like part of airplanes and nuclear reactors, an X-ray
inspection may be needed.

Clearly, the principal objective of quality control is to sustain the standard or

reputation of the enterprise. Such objective is in line with the goal of the enterprise to
maximize customer satisfaction. High quality attracts more customers, which results to
more profits. Besides, without quality control, more rejects or factory defects are
produced. This is additional cost of production.

Productivity

Productivity is the efficient creation of goods and services. If worker A can

finish10 dolls a day while worker B can finish 8 dolls a day, then the former is certainly
more efficient, quality being the same. Productivity is measured by the number of
products produced.

Productivity is a product of various factors. It can be the work place, such as

lighting, ventilation and sanitation. If these are not favorable, like salary, overtime pay
and other monetary incentives productivity decreases. If these are fair or generous, they
increase productivity. Human relations can likewise affect productivity. If management
treats its employees with dignity, respect and justice, productivity is improved.

Employees are the most important productive resource of any organization. If

they are trained and treated properly, they are capable of attaining peak performance.
For this reason, progressive business enterprises never stop developing their employees
through education and training. Japanese firms are successful because they love their
employees. They consider them as members of their families. Whatever financial needs
their employees have, they get their company’s assistance.

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Distribution of Goods /Channels of Distribution

The various routes taken by goods in getting from the producer to the consumer
are called channels of distribution.

Important role of Middlemen

In modern marketing, the services of middlemen have become quite
indispensable. This is so since it is to the benefit of producers to concentrate their
attention on production and leave the work of distribution to middlemen. Thus, today,
the greater bulk of farm produce and manufactured articles are bought and sold through
the assistance of the middlemen.

Messrs. Maynard and Beckman define middlemen as ‘individuals’ firms of

corporations that stand between prime producers and ultimate consumers. They assume
title or assist directly in the transfer of goods and receive a profit for the risks they assume
in addition to being paid for the cost of their services, or take whatever losses are incident
to the assumption of an entrepreneur’s function. Middlemen, therefore, shoulder the
function of distributing goods and help both the producer and the consumer.

Middlemen may be classified ad merchant and functional middlemen. The

merchant, as a middleman, buys the goods outright and obtains title to the goods. He is
either a wholesaler or retailer. Thus, wholesaler and retailers are merchant middlemen.
On the other hand, the functional middlemen are those who directly assist in effecting a
change in ownership of the goods but do not take title to them. Examples of functional
middlemen are brokers, commission houses, and selling agents.

Merchants sell or purchase goods either by wholesale or retail. A clear distinction

should be made, lest the reader may be thrown into a maze of confusion. It is perhaps
important at the outset to have a clear understanding of the essence of wholesaling
before we turn out attention to its counterpart in the distributive system, which is
retailing.

Bases for Defining Wholesale Transactions

Indeed, it goes without saying that before any correct definition of wholesaling
can be formulated it is essential to have a proper understanding of the elements that
make up such type of transaction which are:

1. Quantity of the Transaction. While doubtless a wholesaler is one who buys and
sells in large quantities while retail store is characterized by small transactions,
nevertheless, such in not absolutely correct. Small sales may have been made by
merchant but if the goods are intended not for the ultimate consumer but rather for the

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middlemen like retailers, then the transaction partakes of wholesale transaction. It is not
the character of his buying but the character of his selling which marks him as a
wholesaler.

2. Method of Operation of the Vendor. As may be noted, there are certain

principal attributes of a wholesale just as there are also such attributes that are
characteristic of a retail store. First, a wholesale establishment usually employs outside
salesmen. Second, its transactions are not generally offered to the general public.

Retail stores, on the other hand, do not employ outside salesmen. At most, they
employ salesladies and salesmen at the point of sale. And their transactions are directed
to the needs of the general public.

3. Status or Motive of the Purchaser. All sales made to the ultimate or individual
consumers who buy the goods for their own use or for the use of their family constitute
retail sales.

In as much as the retailer serves as a connecting link between producer and

consumer, it follows that retailing as a marketing institution occupies a very important
place in our economic society. Certain forces and conditions contribute to its growing
importance. The increasing growth and development of specialized production, which
accounts for the almost unlimited number of goods that enter into the channels of
distribution, accounts for the need of the retailing business. Another factor is the desire
of the consumers to obtain goods at their convenience and in the amount that they want
them.

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68
 Chapter 7
STUDENT ACTIVITIES

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

Test I. Identification. Tell what is being referred to in each description/definition.

_____________________1. This is the creation of goods and services.

_____________________2. This includes natural resources such as forest, mountain and
bodies of water.
_____________________3. This refers to both physical and mental efforts like the
works of farmer, clerks, lawyers, and teachers.
_____________________4. This term pertains to machines, equipment, building and
other physical resources used in the production of goods and services.
_____________________5. The process involved in transforming resources into goods
like shoes, appliances, etc., and services.
_____________________6.The sum total of expenses in producing a product or service.
_____________________7. This refers to the operating costs like salaries, raw materials
expenses, etc.
_____________________8.The process of ensuring the delivery of material at the right
place and time.
_____________________9. A device used to monitor and control scheduling of
activities.
____________________10.The process of ensuring that goods and services are
produced in accordance with their designs and specifications.

Test II. Enumeration. Give what is asked in each letter.

A. Give the four factors in production.

1.
2.
3.
4.

B. Give the three criteria for selecting good suppliers.

5.
6.
7.

C. What are the three types of inventory?

8.
9.
10.

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Test III. Review Questions

1. Why is it important to provide for a buffer stock?

2. Is it necessary to properly select a channel of distribution? Why?
3. Why should management conduct a periodic evaluation of their operation?

70
 CHAPTER 8

BUSINESS FORECASTING AND RISK MANAGEMENT

Forecasting, defined. Forecasting may be defined simply as ‘the calculation of

reasonable probabilities about the business future.’ It is thus based upon an analysis of
all the latest relevant information by tested statistical techniques, modified, revised, and
applied in terms of the businessman’s personal judgment and special knowledge of his
own business.

Importance of Forecasting. Forecasting is important because it lessens risks

involved in producing in advance manufactured goods and the risk of buying and carrying
stocks by the wholesalers or retailers to meet the anticipated buyer’s demands. Most
businessmen are confronted with this problem of placing their orders prior to sales. The
practice of ‘hand-to-mouth buying.’ However, reduces the risk but such practice cannot
be used extensively particularly by the manufacturer who must purchase and produce in
bulk.

Sales Forecast

A key factor to a company’s success, sometimes to its survival, is how well the
business entrepreneur forecasts the company’s future sales.

A sales forecast is very important because of its impact upon the following
business functions:

1. Manufacturing. The sales forecast becomes a basis for setting and maintaining
a production schedule.
2. Purchasing and personnel. It determines the quantity and timing of need for
labor, equipment, tools, parts and raw materials.
3. Controller. It influences the amount of capital needed and secured through
borrowing to finance the production of the business.
4. Sales manager. It provides a basis for sales quota assignment to various
segments of the sales force.
5. Marketing officer. It is the overall basis which determines the company’s
business and marketing plans, which are further broken down into specific goals.

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Uses of Forecasts

Sound forecasting can be extremely useful in every department of almost every

kind of business. Forecasts can be used:

1. To keep production geared to current and expected demand.

2. To aid in buying raw materials and components at the right time and at the best
prices.
3. To help determine the most profitable prices for finished goods or services.
4. To direct the most effective distribution of selling effort and advertising
expenditures.
5. To stabilize and improve personnel practices and labor relations.
6. To make budgeting simpler, sounder and more accurate.
7. To expedite necessary financing and borrowing.
8. To provide a firm basis of maximum business growth, diversification.

Factors Affecting the Sales Forecast

Very few products are easy to forecast, especially in these times of change and
uncertainty. Furthermore, there are many internal and external factors which affect the
accuracy of the forecast period.

a. Internal Factors. What will be done differently in regard to the product, the
pricing, and the promotional methods and programs during the forecast period? Will
there be any changes, additions, or deletions to the product or the line to make it more
desirable or more in demand? Will the pricing remain the same, go up or down? Will
advertising and sales promotion in dollars or pesos be increased, decreased or remain the
same?

b. External Factors. A quick environmental analysis will help the company to be

more responsive to change, allowing for a better forecast in the future. The following are
almost always relevant to an analysis:

1. Competitor behavior. Who are the competitors of the company? What are their
strengths and weaknesses? Where are they selling in relation to the company’s existing
base of customers? Are there any imminent competitors or dropouts? What is their
pricing on existing products? Is there any lowering or rising of prices? Any new products?
What is their push and/or pull in relation to the company undertaking a forecast study?

2. The economy. Which way is the economic wind blowing? How are these forces
affecting the various pans of the country and the overall economy? What effect will a
recession, inflation, unemployment, higher interest rates have on sales? Are any of these
economic conditions changing for better or worse?

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3. Government regulation. What changes are expected which will influence the way the
company or its customers run their business? Will there be price control, tax cuts,
investment incentives, and so forth, which will affect future sales?

4. Growth in Population.

5. Technological developments

The Need for Risk Management

Any business enterprise is faced with several risk possibilities. To sustain its
business viability or success, an enterprise should eliminate or minimize business risks
such a fire, natural calamities, pilferage, robbery, strikes, accidents and so forth.

In rich countries, most enterprises insure their products and properties against the
risks of doing business in the form of damage, theft, injury and others. Likewise,
individuals insure their families, properties and themselves. Entrepreneurs adopt risk
management programs to eliminate or reduce risks.

Risk is the possibility that a loss or injury will take place. In a modern world, risks
are all around us. For instance, a car accident, destruction of properties by flood or fire,
physical injury or even death. In business there is always risk, such as wrong business
decisions, poor management or negative business environment.

However, if risks cannot be avoided, at least these can be reduced by the use of
the following:

1. Employee safety programs

2. Proper safety equipment
3. Burglar alarms, security guards and guard dogs
4. Fire alarms, sprinkler system and similar safety measure
5. Accurate accounting and financial controls.

Risk and Insurance Management

Risk is part of business. It can be both within the control and beyond the control
of the entrepreneur. To eliminate or minimize such risks, the entrepreneur must have a
risk and insurance program. The common types of non-criminal business risk age:
1. Fire. This is the first fear of any business owner. So, they eliminate their risk
through fire insurance. Which such insurance, owners can recover their financial losses.
However, there are things which fire insurance cannot protect, like lost customers,

73
records and other valuable assets. A mush better risk protection program is fire
prevention measures.

2. Natural calamities. These can ruin business. Floods, typhoon and earthquake
are in most cases not included in the insurance coverage. Entrepreneurs can only
minimize risks from natural calamities by proper choice of locations which are free from
such disasters.

3. Personal liabilities. These are business-connected risks. For instance, a customer

is injured inside the store. A customer got sick in eating the product of the entrepreneur.
Such incidents may resort to law suits. Such risks can be prevented or minimized by
proper facilities or quality control programs.

4. Economic problems. These have direct effects on the profitability of the

enterprise. Recessions, depressions, inflation and massive unemployment can reduce
sales of goods and services. Such economic problems lead to a sharp fall in demand or
purchasing power of consumers. The ability to adjust such changing economic conditions
is a plus factor. Another, adequate financial resources during bad times for business can
be a good protection from business losses.

5. Business interruptions. Strikes of employees and suppliers pose a great business

risk. Awareness of such problems can help the entrepreneur prepare for the unexpected.
The entrepreneur must have god stockpiling strategy. However, a strong financial position
greatly helps the enterprise survive during such business interruptions.

6. Loss of key personnel. The resignation of important employees is a big blow to

the business enterprise. For example, the resignation of an export or technical specialist
can cause work stoppage. It is not easy to get replacement immediately.

Other Business Risks

There are business risks which are criminal in nature. Such risks are personally
planned or intended. These are:

1. Burglary. There is a need to protect inventories, supplies, equipment, etc., by

providing safety facilities. Others use dogs, guards and alarm system.

2. Robbery. Installation of proper alarm devices, lighting facilities and other

preventive measures can eliminate robbery.
3. Shoplifting. Aside from professional shoplifters, other customers are possible
threats. Children pick goods without knowing they are committing a crime. Even in rich
countries, there are shoplifters. Mirrors and store layout can deter shoplifting.

74
 4. Employee theft. Avoid temptations for employees, such as open storage rooms,
desks, cash registers and the like. There should be a strict hiring policy for personnel
involved in the handling of money and products.

Risks that must be Assumed

1. changes in the price level

2. changes in desirability of business locations
3. changes in distribution methods
4. changes in public opinion or desire
5. changes in laws
6. changes arising from fortuitous events and the works of nature

Methods of Meeting Risks

1. remove the risk of its cause

a. install safety devices
b. fireproof structures
c. safety campaigns
d. develop new products to replace the old
e. change distribution method
f. improve facilities, location

2. establish a reserve fund in anticipation of loss

a. self-insurance

3. practice good management to prevent causes of risks

a. sound business judgement
b. good records and facts as basis for decision-makers

4. hedging

5. speculation

6. insurance

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76
 Chapter 8
STUDENT ACTIVITIES

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

Test I. Definition of terms: Define the following terms.

1. Forecasting

2. Risk

Test II. Enumeration. Give what is asked in each letter.

A. What are the five business functions affected by a sales forecast?

1.
2.
3.
4.
5.

B. Give the five external factors affecting the sales forecast?

6.
7.
8.
9.
10.

C. What are the six common types of non-criminal business risks?

11.
12.
13.
14.
15.

77
Test III. Review Questions

1. Why should management take up an effective risk management program?

2. What is the importance of business forecasting?
3. Explain the benefits of insurance.

78
 CHAPTER 9

BUSINESS FRANCHISE

Historical Background of Franchising

Franchising, one of the several systems of distribution by which a producer may

bring products or services to the consumer, performs a major and growing distribution
function. Today franchised enterprises number about half a million and account for about
one-third of all retail sales.

The term franchise comes from the old French word 1) “franchir”, which originally
meant to free from servitude. “The term gradually came to mean a right granted to an
individual by a sovereign. Nowadays franchise means the granting of a positive right to
use of do something 2) commercially. Most often the right involves use of a recognized
name or method of operation belonging to someone else.

Franchising in one form or another has existed since the Middle Ages as a method
of establishing 3) outlets for selling a manufacturer’s products. In modern times, shortly
after the Civil War, the Singer Sewing Machine Company seems to have been the first to
introduce an extensive franchising system. The system gradually declined and franchising
did not become an important part of the country’s distribution system until the
automobile and soft drinks industries adopted it early in this century. Growth in the
franchising was spurred during the 1930’s when oil companies adopted it as a major
system of distribution.

The franchise form that’s shown the most spectacular growth during the past
twenty years has been the service-firm-retailer-sponsored system. Several well-known
examples include McDonald’s, Hertz, Howard Johnson’s Kentucky Fried Chicken, Mister
Donut, Holiday Inns, Pizza Hut, and Weight Watchers. In this system the franchisor offers
a recognized trade name and a system of doing business, which are granted to the
franchisee. The franchisee or dealer typically receives a variety of marketing,
management, financial, and technical services in exchange for a specified fee. The growth
economy of the 1960’s and early 70’s created an environment in which franchising
flourished. The number of organizations relying on this kind of franchised distribution
increased more than 300 percent.

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Franchise Opportunities
Franchise opportunities touch every
type of business: motels, fast foods, drugstores,
variety stores, repair shops, dry-cleaning
services, Laundromats, employment agencies,
car rental services, pet shops, duplicating
services, diet programs, home-cleaning
services, and training programs. This list in no
way exhausts all the possible areas of franchise
opportunities.
Obvious signs of franchising’s popularity
are the numerous fast-food outlets lining the
highways and littering shopping malls. Today
there are over 75,000 fast-food restaurant in
the United States, many of them franchise
operations. They serve everything from special
flavors of ice cream to hot dogs. McDonald’s has
an international network of 11,000 restaurants
that sell a billion worlds, with sales of about $
6.1 billion in 1989.
Cancellation Provision
The contract provision giving a franchisor
the power to cancel an arrangement with a
franchise
Exclusive Handling
A form of control the franchises to purchase
only supplies approved by the franchiser.
Franchisingsystem for selective
distribution of goods and/or services A
under a brand name through outlets owned
by independent business owners.
Franchisee
The independent owner of a franchise
outlets who enter into an agreement with a
franchisor.
FranchisorThe licensing company in the
franchise arrangement.
Franchise
The right to use a specific business name
(Pizza Hut, Subway, H&R Block,
Blockbuster, Masterworks International)
and sell its goods or services in a specific
city, regionor country.

Kentucky Fried Chicken (KFC, a subsidiary of Pepsi-Cola) has over 8,000 outlets,
which have total worldwide sales of about $5.4 billion. It serves about 2.7 trillion pieces
of chicken a year-enough to provide 11 pieces for every man, woman and child in the
United State.

Pepsi-Cola for years sold franchises throughout the United States. However, for
the last 20 years, no Pepsi franchises were made available. Earl Graves (Black Enterprise
Publisher) and Earvin Johnson (“Magic” Johnson of the Los Angeles Lakers basketball
team) purchased the first available Pepsi Cola franchise in 1990 in Washington D. C. It
covers 400 square miles of the District of Columbia and Prince George Country. It is said
to be worth $ 60 million.

The Franchising Agreement

Each franchise organization enters into a contractual agreement with each of its
franchises. These contracts may differ in a number of areas, such as capital needed,
training provided, managerial assistance available and size of the franchise territory. But
most franchise contracts have points in common. The franchise buyer normally pays an
initial fee to the company and agrees to pay the franchisor a monthly percentage of sales.
In exchange, the franchisee has the right to sell a standard product or service.

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 A McDonald franchise can cost as much as $575,000. Although most of the fee can
be borrowed from a bank, $66,000 would be the minimum cash down payment required.
This money covers landscaping and opening costs, license fee, site development fee, signs
and security deposit. McDonald’s Corporation does not lend money or guarantee loans.
The company will provide a site, build the restaurant and develop the parking lot. In
return, the franchisee must pay 12 percent of gross sales to McDonald’s and put at least
4 percent of gross sales annually into marketing and advertising.

Most franchise purchasers enter the business to earn money; in fact, the owner
and the company both want to earn money. Earnings are a measure of the franchise’s
success. To succeed, it must be well managed, provide good products or service, and
obtain repeat customers.

The franchisor begins to earn money when the cash down payment is made. In
some cases, a franchise fee must be paid before certain right of operation is granted. The
franchisor also requires some type of royalty payment on gross sales (the 12 percent
franchisees pay to McDonald’s, for example). The amount of royalty or share of the
proceeds, paid to the franchisor differs from company to company. Typically, a franchisee
pays a royalty between 3 and 15 percent on gross sales (total sales revenue).
No matter what the percentage of royalty, franchisees often dislike paying profits to
someoneelse.

Being involved and working hard to make theFranchise a success and then being
required to share. The earnings deflate the ego of some franchises. If franchisees believe
the sharing of profits is unfair, this perceived inequityis also a problem. The franchisee
many believe the he or shedoes all the work and the franchisor take too big a share ofthe
earnings.

Many people who consider entering into a franchise contract assume they will be
their own boss. This assumption is only partially accurate. The franchisor exercises a
significant amount of control over the franchisee in such areas as (1) real state ownership.

TYPES OF FRANCHISING ORGANIZATIONS

Franchises range from marketing products such as fast food, ice cream, and candy
to marketing services such as motels, dry cleaning and establishments, and coin operated
laundries. We’ll identify four basic types of franchises, each of which have distinguishing
economic and legal characteristics.

1. Manufacturer-Retailer Franchiser

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 System: In most cases the manufacturer franchises an entire retail outlet to stock
and market its product line; Examples include manufacturers of automobiles and trucks,
farm equipment, petroleum products, shoes and paint.

In this system the major role of the franchisee is to establish an outlet in a defined
market where the consumer may readily obtain the manufacturer’s product. The
franchisee has very little say about what products are to be marketed.

2. Manufacturer-Wholesaler Franchise System: Beverage companies, soft drink

and beer primarily, dominate this form of franchising. In soft drink franchising the
manufacturer supplies the syrup of concentrate to the franchised wholesaler who adds
ingredients, packages the product, and distributes to local retailers. In this system the
franchisee performs some of the production activities and distributes the product to the
retail levels. As in manufacturer-retailer franchise system, the franchisee has little control
over the products to be distributed or their characteristics.

3. Wholesaler-Retailer Franchise Systems: In this system the wholesaler sponsors

retail franchises; the franchisor recruits independent retailers to become contract
franchisees. Western Auto Supply, Inc. is good examples.

4. Trade Name Franchises: This is the system that has enjoyed the most rapid
growth in the past two decades. In this arrangement the franchisor possesses a known
trade name and proven methods for profitable operation of retail outlets. Well known
examples can be found in motel chains (Holiday Inn, Best Western, Sheraton Inn),
restaurant chains (Howard Johnson’s, McDonald’s, Kentucky Fried Chicken, Burger King,
Baskin-Robins), and auto rental firms (Hertz, Avis, National, Budget Rent-A-Car).

The franchise may manufacture or modify the product (depending on product or

service) but, as in other types of franchises, must follow strict operating and marketing
procedures.

In the first three franchise systems the franchisor is the producer and the
franchisee the distributor. In the fourth, the franchisee can be either a producer or a
service supplier. All types involve trademarked or nationally branded products.
Franchisors usually emphasize the quality control imposed on products made or services
offered by their franchisees.

Growth in all four systems of franchising, especially in trade name franchising, has
been influenced by trends toward national branding and increased mobility of consumers.
Consumers seek the reputation of a national brand that results from mass advertising. As
recreation and business travel have increased, so too have consumers’ preferences for
consistent standards of service and known costs of accommodation. In case like these,
franchising offers unique opportunities where local ownership and operation are
advantageous.

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 National reputation, image, and promotion are of overriding importance and
influence economic and contractual obligations between franchisor and franchisee. These
vary widely among the four types and within each type. The particular franchise
relationship specifies the amount of entry capital required and degree of control held by
the franchisor over the franchisee.

Nature of the Franchise Relationship

The heart of the franchise relationship is a contractual agreement governing the

freedom of the franchisee to do or use something that is the property or right of the
franchisor. This binding agreement establishes your relationship and controls your
distribution of products or services. You, the entrepreneur/investor, pay an agreed-upon
sum for the right to sell a certain product or service, use a certain brand name, trademark,
technique of operation, or technical process owned by the franchisor.

But a franchise relationship involves more than granting license to use certain
trademarks or business techniques in return for a specified consideration. Two additional
features are present: first, the success of the franchise venture calls for a continuing
relationship between the franchisor and you; and second, you agree to maintain certain
standards of operation specified by the franchisor.

Most forms of the franchise relationship involve the sharing of decision-making

and management control, the transfer of specific management or technical expertise,
and, in many case, the advantage of unique products or services developed by the
franchisor.

The International Franchise Association defines franchising in these terms:

A franchise is a continuing relationship between the franchisor and the franchisee

in which the sum total of the franchisor’s knowledge, image, success, manufacturing and
marketing techniques are supplied to the franchisee for a consideration.

In short, when you purchase a franchise you buy a prepackaged business. But you
operate the venture under contact and in cooperation with the franchising company.
Thus, careful evaluation of the particular franchise relationship will be crucial to your
success.

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Evaluating the Franchise Relationship

 The Franchisor. Knowing the motives of the franchisor- “what’s in it for them”-will
help you to objectively evaluate your prospects as member of their distribution
system.

 Capital Acquisition. In recent years the most important reason for firms to adopt
franchised distribution has been to acquire or conserve capital. Several well-
known fast food companies use the initial fees paid by the franchisees as a major
source or working capital. This is obviously an attractive funding technique since
in many cases fees are collected long before the actual opening of an outlet. In
effect, the franchisor receives hundreds of thousands of dollars in interest-free
loans from franchisees.

 Reduce Marketing Costs. Franchising can reduce marketing costs. If the company
owned its stores, it would have to pay all the costs of doing business in many
different locations-costs such as labor, overhead, insurance, personnel
administration, employee, training-expenses that continue regardless of sales
volume.

 Entrepreneurship. Successful franchisors believe that the local entrepreneur-

manager is a crucial factor in the performance of the franchise system. For many
franchisors, the best type of franchise is someone who can conform to an
established way of doing business without being driven to try to improve it. Often
franchisors seek a “sergeant type,” a person who can operate well at a rank
between an officer who gives orders and a private who follows them. Franchisors
have found that franchisees are more likely to work hard in marketing and in
controlling operating costs than are salaried employees in company owned
outlets. The large financial stake the franchisee has in the business includes
intense commitment.

Our experience shows that success of a most any franchise system and its
franchisees in linked directly to how effectively the franchisor has created and maintained
favorable conditions for entrepreneurship among the franchise owner-managers.

The Franchisee

Many people know that they want to go into business for themselves, but are
hesitant to take the drastic step in starting a wholly independent business venture. As
we’ve said, it is a risky endeavor and the failure rate is high. Lack of seasoned business
experience quite approximately makes would be entrepreneurs uneasy about going it
alone. Although many people know that operating a small business is what they want to
do, they lack a specified idea, product, service, or business location.

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 Franchising has very special appeals for such individuals, and perhaps for you.
Buying a franchise means that you would not be venturing into completely uncharted
waters. Buying a franchise appropriate to your capabilities could gain you the following
advantages:
 The business and its methods would have been thoroughly tested
 You would begin with a known product or service that has already
achieved customer approval and acceptance.
 There would be a proven track record of financial and marketing success
that can be transferred to the specific franchise you’ll purchase.
 Expert help would be available to you in launching and operating the
business- in such areas as site selection, store layout, merchandising,
inventory control, and accounting.
 For many franchised operations, and perhaps yours also, significant
benefits would be found in group purchasing and national brand
advertising.

Many franchisees welcome group identity and participation in a franchise system.

Observers have noted that many franchisees really don’t want to be totally independent,
but rather seek to be part of a large successful organization and yet maintain their
individual identity. The right franchise would offer you the opportunity to enter field of
business that might be prohibitively expensive to enter on your own.

Important trade-offs occur in choosing a franchised business. Even with the best
franchise operations the franchisor tends to hold the advantage, especially in operation
practices and purchasing materials and supplies.

If you want to escape taking orders by operating a franchise business you may be
frustrated by you lack of autonomy. You’ll have to prepare and submit detailed reports.
You may have to set inventory levels and mix inventory items by rules, regardless of local
customer preferences. You may have no say in your store location. You may be limited to
prescribed sources from which you buy supplies. And, although you may disagree with
the franchisor’s advertising program, you will probably not have any say in it.

The franchise you should look for should combine the proven expertise and
marketing sophistication of the franchisor with your need to exercise your
entrepreneurial drive and your ability to manage the required capital investment. In
evaluating a specific franchising operation, you should determine whether the
combination results in mutual value and benefits. To do so, you’ll need some guidelines
on what to expect in acquiring and operating the franchise. You’ll also want to know what
the franchisor’s obligations are.

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Evaluating the Franchise Agreement

The franchise will usually require a franchise fee. This fee can run anywhere from
hundreds to hundreds of thousands of dollars. The purpose of the fee is to obtain working
capital for the franchisor, and to cover the expense of site location (sometimes charged
as separate fee), training, and other services necessary to create prosperous franchise
outlet. Also the fee is supposed to assure the franchisee’s personal involvement in
running the business.

Some retail and service station chains do not charge any initial fee. Franchisee
pays rent for use of the franchisor’s facilities and franchisor realizes most profits by selling
products to the franchisee. In some instances, such as muffler shops and the like, the
franchisee acts as volume purchaser and profits by this advantage. In others, soft drink
manufacturers for instances, franchisors derive most of their revenue from the sale of
syrup to franchised bottlers who convert the syrup into a marketable product. In still
others, such as “instant” printing franchises, the franchisor sells the franchisee all the
equipment for operating the business, plus supplies used and products offered.

In a franchised service business, such as accounting, travel and employment

agencies, an initial fee may be the only financial charge made. Seldom are those monthly
or percentage of sales charges. This is because the franchise fee covers the use of
franchisor’s name operating methods, and business forms, but there is no continuing
relationship. In instances where continuing services are supplied, such as national
promotion, the franchisee usually pays the franchisor a set percentage of sales.

In addition to initial fees, rent and charges for supplies and products, royalty fees
may be charged. In the typical case the franchisor charges an initial fee, plus a set royalty
fee that is usually levied regardless of the profits earned by the franchise.

The amount you invest to obtain the franchise and nay continuing charges you pay
the franchisor should depend on the value you receive. The central question is: What can
the franchisor do for me that I can’t do for myself?

The Business Location

The success of most franchised ventures depends heavily on the location of the
business. In the past, franchisors would recruit the franchisee and then acquire the
location for the outlet. This practice has now been reversed. The franchisor identifies and
purchases the site for the outlet and then recruits the franchisee. Three major factors
have caused this reversal of procedure. First, the growth of franchising has caused the
number of desirable locations to decline sharply. Second, the price of land tends to
escalate when it’s known that a national franchisor is interested in a particular site. And

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third, local zoning restrictions contribute to the increasingly limited supply of attractive
locations.

Franchisors often deal through intermediaries in purchasing business property.

But more important, franchisors are becoming more thorough in researching and
selecting potential sites for their outlets. Often several thousand dollars may be spent on
the marketing research and feasibility studies necessary to evaluate a specific store
location.

In most cases the franchisor will define territorial boundaries for the franchised
outlet, taking into account the size of the market or population. Franchisors increasingly
stipulate in the franchise agreements that, if population grows, the franchisee’s territorial
boundaries may be adjusted or that additional outlet may be located in the original
territory.

Franchisors typically follow one of two location strategies. They may, for example,
deliberately choose to locate their retail outlets close to directly competitive units. These
franchisors usually cater to a largely undifferentiated mass market. This practice is no
doubt influenced by local zoning restrictions, but it follows from the belief that increased
customer traffic that results from a cluster of competitive outlets will more than offset
the impact of competition.

Training in the Business

Most reputable franchisors offer the franchisee thorough training in operating the
business. Often they require such training as a condition of obtaining the franchise. Many
actually prefer that the franchisee have no experience, nothing to “unlearn,” and
therefore can more easily be trained in the franchisor’s way of doing business.

Franchise training should not only cover policies, procedures, and methods, but
also should emphasize the entrepreneurial and management skills needed. The problems
in initiating and running a franchise business are no different from those encountered in
any other kind of small business. Training should also prepare franchise managers for long
working hours, stress, and frustration during the first several months of operation.

The best training programs are about equally divided between classroom
instruction and field experience gained through working in a franchise outlet. Programs
are usually four to six weeks in length. Often conducted in the franchisor’s special training
facilities. Your franchise fee usually covers training costs and any on-the-job or follow-up
training conducted by the franchisor.

One of the more common complaints of franchisees is that despite training that
features the technical, managerial, and emotional aspects of initiating a small business

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they still do not feel adequately prepared. We strongly recommend that before investing
you check out the franchisor’s training program thoroughly, especially if you lack specific
business experience. Before you start your own franchise business be sure that the
training offered by the franchisor is designed to update and expand your skills.

Franchise Operations

The franchise agreement often sets rigid standards and spells out specific
operating procedures the franchisee must follow. These controls on the business assure
consistent practices among franchised outlets and serve to enhance trademark
awareness, community identity, and consumer image. This means that the franchisor’s
operating requirements can affect every aspect of your business, including store layout
and design, equipment and furnishings to be used, products produced and their quality,
and promotional efforts.

The amount of control the franchisor exerts directly affects the amount of
discretion and entrepreneurial freedom you’ll have. You should check out the
mechanisms used to govern business operations. Five ways in which franchisors control
the franchise are:

1. The franchise agreement. Typically, the franchise contract will describe in

painstaking detail standards, rules, and procedures to be followed. The agreement will
also set the duration of the contract and the conditions under which the contract can be
terminated. As the franchisee you would be legally bound by the contract.

2. Franchisor policy. Most franchisors spell out additional rules and guidelines in
their official operating manual. These operating manuals cover required day-to-day
business practices such as hours of operation, employee hiring and firing, employee
qualifications, record-keeping systems, and product storage, preparation, and handling.

3. Franchisor approval. In some cases, franchisors require franchisees to obtain

approval for certain business decisions. For example, the franchisor’s approval might be
required before the franchisee could expand the business, or add new products or
services.

4. Franchisor recommendations. Franchisors sometimes simply recommend ways

to perform certain business tasks or kinds of business activities rather than impose
prescribed procedures.

5. Franchisee reports. Reports on unit sales, revenue, costs, and profit will be
required monthly or quarterly. The franchisor’s representative will probably discuss the
reports with the franchisee.

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Risk in Investing in a Franchise

Franchising involves in many risk that the entrepreneur should be aware of before
considering such an investment. Yet for ever one success there are many failures.
Franchising, like any other venture, is not for the passive person. It requires effort, as any
business would, since business decision such as hiring, scheduling, buying, accounting and
so on are still the franchisee’s responsibility.

Investigate the Franchise

Not every franchise is right for each entrepreneur. He or she must evaluate the
franchise alternatives (it is valuable to look at more than one) to decide which one is most
appropriate. The following are franchise alternatives:

1. Unproven versus proven franchise- there are some trade-offs when investing in
a proven or unproven franchise business. An unproven franchise will be less expensive as
an investment. However, the lower investment is offset by a substantial amount of risk.
In an unproven franchise, the franchisor is likely to make mistakes as the business grows.

2. Financial stability of franchise- The purchase of a franchise by an entrepreneur

should entail an assessment of the financial stability of the franchisor. The potential
franchisee should ask the franchisor the following question or should ascertain the
answer from alternative sources.

3. Potential market for the new franchise- it is important for the entrepreneur to
evaluate the market area from which customer will be attracted to the new franchise.

4. As any start-up business it is important to develop pro forma income, balance

sheets and cash flow statement. The franchisor should provide projection in order to
calculate the needed information.

Duration, Termination, and Transfers

Other aspects of the franchisor-franchisee relationship you should explore

concern the duration of the contract, the details of termination of the contract (whether
franchisor or you, the franchisee, wants to cancel,) and the conditions under which the
franchise may be sold of transferred.
Duration

The trend has been towards longer and longer franchise contract periods.
Contracts that now run 10 to 20 years or more are common. In most cases the length of
the franchise contract depends upon the duration of the lease on the property where the
outlet is located. The franchise agreement and the property lease agreement are often

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contained in one document because most franchise has no value without having a specific
business site.

Termination

The franchisor properly reserves the right to cancel, or refuse to renew, the
contract of a franchisee that does not cooperate, mismanages, or fails in the business.
But conditions for terminating the franchisee contract should be examined closely.
Franchisees are often at a disadvantage in influencing the franchisor’s right to cancel or
refuse to renew the contract. Franchisors have threatened franchisees with cancellation
to force them into accepting corporate decisions or unreasonable obligations. We urge
extreme caution if the franchisor requires high minimum purchase of inventory levels, or
unreasonably high sales quotas. You’re planning and decision making should be based on
careful analysis and strategy, not on fear of unreasonable demands from the franchisor.

Transfers

The franchise agreement will stipulate the conditions under which the franchise
may be sold or transferred. Generally, the franchisee does not have the right to sell the
business or bequeath it to heirs without formal approval of the franchisor.

The franchisor usually reserves the right to recover of buy back a franchised outlet
upon termination of franchise contract. If the franchisee has not reserved the right to
renew the contract, the franchisor can deal with others in negotiating the new contract.

The “guaranteed buy back” offer of franchisors- buy back a franchise business that
doesn’t make a go of it-was the bait that lured hundreds of franchisees. However, buy
back usually didn’t mean the franchisor would share in the franchisee’s financial losses.
Buy back clauses should be examined carefully.

Some major franchisors tend to repurchase franchise outlets and operate them
themselves or to sell some or all outlets to larger companies. That point is that since the
franchise agreement will favor the franchisor in some way, the franchisor can pressure
the franchisee to sell out. When the franchisee sells a successful business back to the
franchisor, there’s the problem of setting a value on the business. Our recommendation
is that your contract contains a provision for independent arbitration to evaluate the
business fairly in the event of termination. The value should include tangible assets such
as equipment and fixtures and intangible assets such as goodwill.

Special Problems to Watch for in the Franchise Agreement

Sharing advertising costs is the most common legal problem according to the
table. Franchisees who are required by contract to contribute money for national

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advertising indicated that in some cases they had not received their “fair share” of
advertising locally. The complaint is that the franchisor, which controls the scheduling and
placement of advertising, had not devoted enough attention to the franchisee’s market.
Thus, franchisees sue to reduce their assessment for advertising or to increase the
amount of advertising in their locality.

The second most common problem involves provisions for inspection or

evaluation by the franchisor. There are complaints that franchisors are not consistent in
enforcing strict adherence to standards among all members of the franchise chain. Failure
of the franchisor to insist that all franchisees meet standards damages the image and
reputation of those who do.

The third most prevalent source of disagreement is really the reverse of the
problem just described. Disputes arise about the interpretation of minimum performance
standards. As might be expected, this tends to occur among low-performing franchisees
who complain that they must comply with inflexible or arbitrary minimum performance
standards.

Franchisee Complaints

Although many franchisees have been very successful, some have quickly lost their
life savings. Of course, there are risks in any business; not all of McDonald’s franchises
have been profitable. However, some franchisors have grossly misrepresented the
opportunities for success of their franchisees and the assistance that the franchisor will
actually provide. Most franchise contracts are typical “contracts of adhesion”. Some
contain terms that may bring hardship to franchisees that are acting in good faith and
performing reasonably well under the contract. Termination clauses frequently give
broad discretion to the franchisor. The term of the contract may be short-only a year for
the typical service station contract-with no assurance of the right to renew or transfer a
going business to another person. Some contracts even prohibit franchisees from joining
franchisee associations.

Franchisor Problems

In an attempt to control distribution to maximize its profits and perhaps those of

its franchisees, the franchisor runs the risk of violating federal and state antitrust laws.
Attempts to require franchisees to buy products, equipment and supplies exclusively from
the franchisor may violate the prohibition in the Clayton Act against tie-in sales. Attempts
to required adherence to prices set by the franchisor and prohibitions against sales to
customers outside an assigned sales territory may violate the Sherman Act.

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 Franchise contracts usually declare that the franchisee is an independent
contractor and is not an agent or employee of the franchisor. However, in an effort to
maintain the quality of the product or service offered by the franchise, and thus the value
of its trademark, the franchisor often exerts considerable control over many aspects of
the franchisee’s operations. This control has been sufficient in many cases to cause courts
to hold that the franchisee is not an independent contractor. Thus, the franchisor
becomes liable for torts committed by the franchisee’s employees. Although insurance
can cover the risk in most cases, lawsuits against the franchisor can be damaging the
reputation as well as time-consuming for the franchisor’s executives.

Government Regulation

Many inexperienced people have been ruined financially be believing extravagant

claims of the wealth-building potential of franchises. Others have suffered unfair
terminations, causing them large losses. As a result, both the federal and state
governments now generally regulate the franchise relationship.

Advantages of Owning a Franchise

Although the franchise business has its problem, there are reasons why it appeals
to people. A person who has never owned or managed a business needs guidance to
operate successfully. This guidance can be provided by a well-run franchise organization.
Also, franchisors can provide a brand name, proven products or services, and financial
assistance. The Business Action illustrates how franchising benefits firms and owners.

Guidance. A glaring weakness in small businesses is lack of managerial ability. A

person with limited managerial skills may be able to get by in a large organization because
he or she is just one of the many managers. But no one can cover up for or “carry” a
franchise manager. Many franchisors try to overcome managerial deficiencies or
inexperience by providing some form of training. Kentucky Fried Chicken operates
Chicken University, a training school for improving managerial skills. A & W trainees study
goo logy (preparation for burger dressings), thermal mixology (coffee and hot chocolate),
and fryocracy (French frying).

Brand name. The investor who signs a franchise agreement acquires the right to
use a nationally or regionally promoted brand name. This identifies the local unit with a
recognized product or service. Travelers recognize the Holiday Inn sign, the colors of a
Pizza Hut building, and Century 21 real estate signs. National promotion brings these
features and characteristics to the attention of potential customers.

Proven product. The franchisor can offer the franchisee a proven product and
method of operating the business. The product or service is known and accepted by the

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public: customer will buy Baskin-Robbins ice cream, AAMCO transmissions, Athlete’s Foot
sneakers, and H &R Block income tax counseling.

Financial assistance. By joining a franchise company, the individual investor may

be able to secure financial assistance. Start-up costs of any business are often high, and
the prospective investor usually has limited funds. The sole owner generally has a limited
credit rating, making it difficult to borrow needed funds. In some cases, association with
a well-established franchisor-through its reputation and its financial controls-may
enhance the investor’s credit rating with local banks.

Disadvantages of Owning a Franchise

As does any business venture, franchising has some disadvantages. Many were
mentioned briefly earlier in this chapter. Some of the more pressing negative features
include costs, lack of control, and inadequate training programs offered by some
unscrupulous promoters.

Cost. As already mentioned, franchisees must pay franchise fees. In return, the
franchisor can provide training, guidance and other forms of support that would
otherwise cost money. Thus the franchisee pays for the opportunity to share these forms
of support. If it were possible to earn the same income independent of the franchisor, the
investor could save the amount of these fees.

External control. A person who signs a franchise agreement loses some

independence. The franchisor, in order to operate all the franchise outlets as business,
must exercise some control over promotional activities, financial records, hiring, service
procedures, and managerial development. Although useful, these controls are unpleasant
to the person who seeks independence. In the best of circumstances, the franchisee is
semi-independent. In a sole proprietorship, by contract, the owner is totally independent.

Weak training programs. Some franchisors have developed excellent training

programs. Even competitors concede the Kentucky Fried Chicken’s training is
outstanding. But some promoters promise sound training programs and never deliver. In
other cases, the training programs are weak- too brief and staffed by trainers who do not
have instructional skills. The facilities are sometimes unsuitable for proper learning and
development.

Some of the important trends that have contributed to the development of new
franchises are as follows:

1. Good health-today people are eating healthier foods and spending more time
keeping fit. Many new franchises have developed healthy products in response to this
trend. For example, Bassett’s Original Turkey was created in 1983 in response to

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consumer interest in eating foods lower in cholesterol. Frozen yoghurt franchises such as
TCBY in New England and Nibble-Lo’s in Florida have also been very successful. In Los
Angeles, a unique restaurant, the Health Express, offers its customers a 100 percent
vegetarian menu.

2. Time saving or convenience- More and more consumers are finding that they
prefer to have things brought to them rather than having to go out of their way to buy
them. In fact, many food stores now offer home delivery services. In 1990, Auto Critic of
America Inc. was started as a mobile care inspection service. At about the same time,
Ronald Tosh started Tubs to Go, which offers delivery of a Jacuzzi to almost any location
for an average of P100 to P200 per night.

3. Environmental consciousness- Radon testing service franchises have grown as

a response to the consumer need to protect themselves and their families from
dangerous radon gas. In 1987, Ecology House, a gift store, began to add more hands-on
consumer products such water-saving devices, rechargeable batteries, and energy-saving
light fixtures.

4. The second baby boom- Today’s baby boomers are having babies themselves,
which has resulted in a number of child-related service franchises. Child-care franchises
such as Kinder Care and Living and Learning are thriving. In 1989 two attorneys, David
Pickus and Lee Sandoloski, decided to open Jungle Jim’s Playland. This is an indoor
amusement park with small-scale rides.

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 Chapter 9
STUDENT ACTIVITIES

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

Test I. Identification. Tell what is being referred to in each description/definition.

___________________1. The term franchise comes from these old French word.
___________________2. Nowadays, franchise means the granting of a positive right to
use or do something.
___________________3. Franchising in one form or another has existed in the middle
ages as a method of establishing.
___________________4. Each franchise organization enters into what agreement with
each of its franchises?
___________________5. The franchise buyer normally pays this to the company.
___________________6.The contract provision giving a franchisor to power to cancel an
arrangement with the franchisee.
___________________7.A form of control in which a franchisor requires the franchisee
to purchase only supplies approved by the franchisor.
___________________8.A system for selective distribution of goods or services under a
brand name through outlets owned by independent business owners.
___________________9.The independent owner of a franchise outlet.
___________________10.The licensing company in the franchise arrangement.
___________________11. The right to use a specific business name.
___________________12. In this system the major role of the franchisee is to establish
an outlet in a defined market.
___________________13. In this system the franchisee performs some of the production
activities and distributes the product to the retail level.
___________________14. In this system the wholesaler sponsors retail franchises.
___________________15. In this arrangement the franchisor possesses a known trade
name and proven methods for profitable operation of retail outlets.

Test II. Enumeration. Give what is asked in each letter.

A. Five (5) ways in which franchisors controls the franchise are:

1.
2.
3.
4.
5.

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 B. What are the four (4) franchise alternatives?
6.
7.
8.
9.

C. Advantages of owning a franchise are:

10.
11.
12.
13.

D. Disadvantages of owning a franchise are:

14.
15.

Test III. Review Questions

1. Describe how a franchise agreement works?

2. Which is preferable open a new business or buy a franchise? Explain your answer?
3. What benefits can the franchisee derive from a franchise agreement?

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 CHAPTER 10

E-BUSINESS

Overview

One of the first to use the term E-business was IBM in 1997. At the time, they
launched their first thematic campaign built around the term. Until then e-commerce was
the buzzword used. The shift in terms also means a shift in paradigm. Until then selling
was the only experience that people could reproduce on the web. Broadening the
approach to allow more types of business on the web created the new e-business. E-
commerce is just one aspect of e-business like e-franchising, e-mailing, e-marketing. E-
business is about using the convenience, availability and world-wide reach to enhance
existing businesses or creating new virtual business. IBM defines e-business as “a secure,
flexible and integrated approach to delivering differentiated business value of combining
the systems and processes that run core business operations with the simplicity and read
made possible by internet technology.”

IBM’s E-business is what happens when you combine the resources of traditional
information systems with the vast reach of the Web and connect critical business systems
directly to critical business constituencies - customers, employees and suppliers via
Intranets, Extranets and via the Web. By connecting your traditional IT systems to the
Web you become an e-business. Most companies deploy applications on the Internet
making it easier to do things you already do.

Forward-thinking organizations are beginning to automate, organize, standardize

and stabilize the services offered in order to create and maintain sustainable computer-
mediated relationships throughout an e-business life cycle. At about the same time, other
companies like Hewlett-Packard also started to offer complete solutions for e-business,
including software and hardware bundles and e-business consulting. Hewlett-Packard
launched in April 1999 a new marketing campaign “Hewlett-Packard - The E-Service
Company.” more and more hardware companies move their business away from
hardware and start to offer consulting and software’s as well.

The concept of electronic business had been invented before the internet became
popular. In the 1970s E-business was already popular for financial networks, for example,
which used propriety hard-and software solutions. Electronic Data Interchange (EDI) was
also available long before the internet was used for it. But without the Internet E-business
would not have been possible on such a large scale. The private networks, which were
used in the seventies and eighties of the 20th century, cost too much for smaller
enterprises and were not accessible for private use.

The Internet is not just another application; it is neither software nor hardware. It
is the environment for the business and communication of the future. The Internet

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combines many existing technologies into one framework. Computer The Internet
combines many existing technologies into one framework. Computer networks and
communication networks, like fax, telephone and pager are already integrated into the
internet. Sending a fax via the internet is just as easy as receiving a voice mail. Not only
different types of communication are possible via the Internet, but also the conversion
between them is possible. It is for example, possible to convert a fax to an e-mail or an e-
mail to a message for the cellphone. This enables businesses that use different methods
of communication to come together more easily. In addition to this, it is also possible to
translate the communication text from one language to the other on the fly. Not only
between human languages like English and Russian, but also between programming and
database languages. Using these interfaces, it is possible to connect a wide range of
different types of hard-and software, which are the basis for very different businesses.

Communication Gateways

Hotels, for example, all over the world use the Internet without having a direct
link to it. The use e-mail to fax gateways. People may go to the web site of the hotel and
decide to send an e-mail to one of the hotels. The e-mails are collected at an Internet
provider where the web site is located and sent on via fax to the hotel. This is done all
automatically. The hotels can then either respond via traditional fax or telephone or can
respond via the fax to the e-mail gateway. Suddenly people from all over the world can
reach that particular hotel, book rooms there or ask for information at the cost of a local
phone call. This is traction of the costs it used to be. Instead of calling or sending a fax to
the hotel which may be located in another country, all you do is call your local Internet
provider to connect to the Internet and send of a request.

Although this is clearly not the best way to communicate with your clients over
the internet, it is probably the cheapest, as you do not have to invest in new equipment.
All you have to do is to Internet-enable your existing devices using gateways. For many
companies it is the first contact when they are unsure about an online venture.

E-business, the internet and the globalization all depend on each other. The more
global players exist the more e-business they want to do. The more e-business is online;
the more people will be attracted to get direct Internet access. And the more people are
online the more global players will arise.

E-business can be divided into three areas. It can be within the organization using
the so-called Intranet. The Intranet uses Internet standards for infrastructure for without
it the Intranet, Extranet or Internet is no help. You need to decide on your target group
and think about the processes, which could be done electronically.

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Defining E-business

People on the Intranet are able to see organizations-specific web site. These web
sites are separated from the rest of the world by firewalls and other security measures.
People from outside of the organization are not able to see these private pieces of
information.

Apple, for example, built an Intranet web site to sell older Apple systems and
accessories to its employees. Before that, apple e-mailed special promotion details to
employees who then ordered the products over the telephone. The Intranet web site now
allows employees to obtain current information and place orders online, eliminating
expensive and time-consuming phone calls.

IBM is using its “Refurbished Computer Warehouse Web” site to sell PCs coming
off leases. The site allows employees to view the machines’ specifications and then
purchase them online with credit cards or through traditional methods such as a
telephone. These offerings are restricted to employees and therefore should not be
accessible nor visible to the outside world

As employees get special prices, putting these prices into the public would put
pressure on the company to reduce the price for the rest of the world. Depending on the
security policies of the organization or company, people may be allowed to connect over
the Internet via virtual private networks (VPN) to the Intranet using encryption lines and
strong. Authentication for identification purposes.

The second area is the business-to business (B2B) deals that are done over the
Extranet. The Extranet consists of two intranets connected via the Internet, whereby two
organizations are allowed to see confidential data of the other. Normally only small parts
of information are made available to the partner, just enough to enable the business.
Business-to-Business networks have existed long before the Internet. Many organizations
have had private networks to talk to their partners and customers. But maintaining them
was very expensive. Through the usage of the Internet the costs have been cut
dramatically. In order to keep the business transactions private virtual private networks
(VPNs) are used in most cases.

Thirdly there is the business-to-consumer (B2C) area. This is the most prominent
one, which most people already have seen on the Internet. The web sites of Quelle, a
German Fashion retailer, Discolandia, an online compact disc shop, and Magazine offer
goods and service to anybody who comes to their web sites.

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Reasons for Going Online

Some of the most important reasons why a company needs to be on the Internet are the
following:

1. Expand market reach - Collect experience with a new customer segment.

2. Visibility - Generate more visibility in your target market and gain mind share.
3. Responsiveness - Increase responsiveness to customers and partners.
4. Strengthening Business Relationships - Real-time data increase the profit for
every partner involved.
5. Cost-reduction - Reduced cost of product, support, service and estate.
6. Channel Conflicts - Prevent and resolve channel conflicts.

Strengths and Advantages of E-business

The strength of e-business depends on the strengths of the Internet, which is the
preferred infrastructure today and in the future. The Internet is available all over the
world, twenty-four hours a day, seven days a week. It is simple to use and the transaction
costs for the end user are low.

Advantages of E-business

Getting into business has several advantages:

1. Global Accessibility and Sales Reach - Business can expand their customer base,
and even expand their product line.
2. Close Relationship - Business-to-business sellers can grow close relationships.
3. Free samples - Products can be sampled via the Web fast, easily and free of charge.
4. Reduced Costs - Businesses can reduce their costly production by dynamically
adjusting prices.
5. Media Breaks - The Internet reduces the number of media breaks that are
necessary to transport information.
6. Time to Market - Shorter time to market and faster response time to changing
market demands.
7. Customer Loyalty - Improved customer loyalty and service through easier access
to the latest information and a never closing site.

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Concerns on the Internet

When going online people have many concerns. If you want to provide a solution,
you need to take them into account.

1. Channel Conflict - Disintermediation may happen.

2. Competition - The competition is growing from a local competition to a world-
wide competition.
3. Copyright - Once information has been published on the Internet, it becomes easy
to copy it and use it for own business.
4. Customer Acceptance - Many companies are afraid that their customers won’t
accept the new channel.
5. Legal Issue - There is no legal framework for the Internet that is binding on a world-
wide basis.
6. Loyalty - The internet is less personal, so people are not bound to a certain vendor.
7. Pricing - The New Economy makes it easier to compare prices. Prices will drop, so
quality and add-on services become more important.
8. Security - Most companies are very concerned about security on the Internet.
9. Service - A customer can compare the offerings of a certain company much easier
with another one.
10. Viability - Many companies are unsure about the viability of their digital business
case.

Differentiating between E-business Categories

The following categories have been selected, because of their proven success on
the Internet. Many other categories exist and in order to make one of these categories
successful it needs to interact with the other categories. Commerce, for example, without
marketing and communication does not make a lot of sense. These categories need to
work together, both offline and online. The Internet offers huge possibilities to integrate
the categories and automate the interaction between the processes.

E-Auctioning
Auctioning on the Internet has become a new dimension. In traditional auctions a
number of people turned up the auction house and some people were allowed to bid over
the phone. Getting to the auction house or bidding over the phone did involve costs,
which may be higher than the value of the goods. Either auction was restricted to a
location or to a very exclusive circle of people.

E-Banking
Electronic banking is one of the most successful online businesses. E-banking
allows customers to access their accounts and execute orders through a simple-to-use
website. There is no special software to install other than a web browser and many banks

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do not charge for this service. Some banks even lower costs for online transactions versus
real life banking transactions. Electronic banking saves individuals and companies time
and money.

Online banking puts the power of banking into the hands of the customer and
allows the customers to self-service themselves with all their banking needs, just as
customers have become used to getting money from automated teller machine (ATM)
instead of walking up to the cash desk in the bank. With these online services, customers
can view their account details, review their accounts histories, transfer funds, order
checks, pay bills, reorder checks and get in touch with the customer care department of
the bank. The only transaction that currency can’t be done is withdrawals of cash, but
banks are working on resolving this problem.

E-Commerce

If we look back, commerce in the pro-Internet age was very restricted compared
to the possibilities the information technologies of the infrastructure (information
infrastructure) offers. The major limiting factors were time and space. Even if shops were
open twenty-four hours a day, only a limited amount of customers can come to the
location of the shop. The shop can also offer only a limited selection of goods, as space is
limited on the premises of the shop.

Online retailers (sometimes also called e-tailers) offer either more products than
traditional retailers do or more service for the same products. On the Internet books,
compact disks and tickets are outselling their traditional counterparts, as these products
are bought because of their content and not because of their design. The look and feel of
a flight ticket is not important, the price and the service are what really matters. New
technologies make the internet also attractive for goods and are bought on an emotional
basis, because of their design and not their content.

E-Directories

Directories have always played an important role in finding a particular service or

product. Telephone directories, the so-called white pages for private telephone numbers
and the yellow pages for business have been essential in locating a person or business. In
addition to the directories in book form, the telephone companies allowed people to call
in to ask for information.

These two functions have been migrated to the Internet. The database is located
in a single place, providing a centralized functionality, but offering it to anyone at any
time, making it a decentralized solution.

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E-Engineering

Engineering has also changed dramatically over the last few years. Just a few years
ago, engineers working on a draft needed to be all in the same office to work effectively.
If a design had to be sent out to another location, large prints had to be made, which were
sent via postal service to the other location. There the design was refined, check or
processed. All these processes involved a lot of manual work, making them slow and
error-prone.

E-Gambling
Although there are moral issues about gambling, it is one of the most profitable
businesses on the Internet. In the real world gambling is restricted by many laws, making
it difficult to access the casinos. The owners of the games often need to pay high taxes to
the state, which make it also difficult to create competition. Per state only a certain
amount of casinos is allowed.

Infomediaries and Business-to-Business Consortia

E-consortia: Swarming to the Net

An e-consortium is an online positioned within a market space through which a
group of organizations’ individual strengths can be combined and leveraged to create
future value.

B2C, B2B. B2G and G2B

Business-to-Consumer E-commerce

B2C can be considered an electronic-based marketplace through which a retail

customer wishing to make a transaction interacts with an organization. Examples of pure
online B2C-based organizations are Amazon.com, eBay, and Priceline.com. Traditional
bricks-and-mortar organizations that have gone online and sell directly to the retail
market are also in this B2C category and include Toys R Us, Wal-Mart, and Sony.

Business-to-Business E-commerce
The basis of this market place is the creation of transactions between commercial
entities. This can be, in its most basic form, a business-to-consumer (B2C) transaction
where a company purchases its computers one at a time.

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Vertical B2B Portals

A leading developer of vertical B2B portals is Vertical Net.com which created and
operates a portfolio of vertical trade communities in a variety of industries including:

 Advanced technologies
 Communications
 Environment
 Food service/hospitality
 Healthcare/science
 Manufacturing and metals
 Process
 Service

Horizontal or Functional B2B Portals

The goal of a functional or horizontal B2B portal is to provide a basis of expertise

that can be tapped into by organizations in multiple domains. An example of such a portal
is Grainger.com. Grainger.com is a B2B horizontal portal that both distributes
maintenance, repair, and operating (MRO) supplies to customers across multiple domains
and provides resource centers relating product information and solutions to those
customers.

BSB Does Not Necessarily Mean Born on the Net

William W. Grainger founded his company in Chicago in 1927. He wanted to

provide an efficient solution to the heed for a speedy and consistent supply of electric
motors, a need not then being met by the motor manufacturers. The Motor Book, as the
Grainger catalog was originally called, was an 8-page wholesale catalog that grew to
$250,000 in sales within 6 years.

Today Grainger’s has more than $3 billion in annual sales and is the nation’s
leading business-to-business distributor of maintenance, repair, and operating (MRO)
supplies and related information.

Business-to-Government E-commerce

As was the case with B2B, the B2G e-commerce can be subdivided into vertical
markets and horizontal markets. Grainger, for example, has created within its portal as
section specifically for the U.S. government and its agencies. Having secured contracts
with the General Services Administration and being a registered U.S. Government Javtis-

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Wagner-O’ Day (JWOD) program member, it is able to supply customers with goods as
mandated under the appropriate regulatory framework.

Government-to-Business E-commerce

Clearly governments worldwide spend an enormous amount of money each year

fulfilling requests for information from business in the form of reports, regulations, and
forms, and so on. The ability of governments to streamline the processes by providing
documentation online and making the task of searching for document easier will be an
enormous boost to business and a cost reduction for the government. This is the focus of
the G2B systems.

Interorganizational Systems: B2C, Consortia, B2B, B2G, G2B

The five different e-business models that developed above are all opportunities
that can be pursued by an organization wishing to undertake commerce on the Internet.
An organization born on the Internet can be positioned in any of these sectors and a
business plan developed accordingly.

Similarly, there is no reason why an organization cannot transition or reposition

itself to the Internet in any of these spaces and continue to flourish, as was demonstrated
by Grainger, originally founded in 1927 as a catalog company.

The key is to determine the core competencies of your organization, determine

the limitations in the new market space, and assess the mechanisms available to move
forward. This may mean that the business will change radically, moving from the retail
space to a governmental space or joining up with companies that were once competitors
to create a consortium. Throughout the book we will discuss these issues and look at how
a company can determine its technology, brand, service, and market strengths and then
lay out strategic options in each of these areas.

B2G & B2B Technology Leadership

An example of B2G-mandated technology change is that originating from the

regulatory conditions decreed by the U.S. Department of Energy, which, under the
auspice of the Federal Energy Regulatory Commission and the Open Access Same Time
Information Systems (OASIS), mandated that the Internet be used to buy and sell natural
gas, as well as to make nominations for gas and pipeline capacity.

The utilities, which through other deregulation have been forced to relinquish
monopoly power and become competitive, have been quick to recognize the potential
that a technology leadership position offers in the B2B and B2C markets. With the ability

105
to rapidly pass through the learning and experience curves, internalize the learning, and
create new infrastructures, utilities such as Florida Power & Light (FPL) have rapidly
moved to the front of the technology leadership arena. Utilities such as FPL aim through
the use of technology to increase the strength of their customer relationship by offering
more informational services and decreasing power costs, thus locking in market share for
both residential (B2C) and corporate (B2B) consumers.

Strategy through the years

Since the 1960s, a number of perspectives on business strategy have been developed by
academics. In brief these are:

 Classic approach, where formal structures for rational decision making are
developed for a profit maximizing outcome.
 Processualists, who concentrate on environmental fit and hope for the best, to
them long range planning is futile because of market imperfections.
 Evolutionist, who believes only the fittest, will survive and rational long term
planning is futile. To them, the dynamic and hostile markets ensures that only
companies who do hit upon profit maximizing strategies will survive and others
will learn from them.
 Systematic perspectives believe long term strategic planning can be effective
against market forces but focus more on the social environment.

Our perspective

We believe that in today’s complex environment, a mixture of the above

perspectives come into play. Formal rational decision making structures should be
adopted and supported by strong scientific decision making tools and timely information
sources regarding the environment, customers etc. Company failure is inevitable and
indeed healthy, however, not only can failure rates be minimized if the correct strategic
process is adopted but also business’s top prize-sustainable competitive advantage.

Customers (trading entities)

By trading entities, we mean groups like buyers and sellers that you would find in
electronic marketplace. Like customers in a B2C environment they still need to be
managed and identified as sustained sources of revenue. Defining these groups is
essential- how many potential customers will I have? If you’re an established traditional
business, what effect will be moving to an e-business model have on existing customers?
How can I segment my customer base- and do I want all of them? Do they actually want
what we are offering them- are they ready for the new model we are putting in place?
Dell announced early this year that it was closing its B2B exchange after three months-

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why? - It only managed to persuade a few entities to join it. Michael Dell put it down to a
lack of maturity in the market. Did Dell not know this before initiating the project?

Environment

What are the expected growth rates for the business you are in or want to be in?
How big your market is and what share can you expect? Who are your competitors now
and who will they are in the future? What legal or social issues will you face, if any? All of
these questions need timely and accurate data to start to develop e-business strategy. If
the data is not readily available, it must be gained through research. Cost and time spent
now will be nothing compared to the costs associated with a failed or limping business
model.

Economics

Why when some companies develop e-business models do they think economics
doesn’t matter anymore? What effect will be going on line have on margins? How price
sensitive are customers? What are the true costs of developing e-business models? How
much will your technology really cost- can you afford it and have you done a full analysis
of the alternative technologies? Will the average value of each customer be measured
differently than in more traditional businesses?

Delivery

How is this e-business model to be delivered? The structure of the organization is

critical to the success of any e-business strategy. By structure we mean not only technical
infrastructure but also business and people structure and processes, including financial
and operational. Also, structure may go beyond the corporate boundaries- is a joint
venture involved, will you use as ASP model? - All have major ramifications for e-business
strategy. Furthermore, how is this strategy to be communicated and how is it to be led?
Critically, what structure will be in place to ensure feedback and an improvement by
learning process?

Piecing it all together

We believe developing effective e-business strategy is more than building and

integrating smart technology. It means questioning a wide variety of business aspects as
noted above, finding true answers and then making rational decisions. Would you have
set up a free Internet service in New Zealand in 2000, entering a crowded ISP space whose
own competition is forcing them to cut charges? Taking into account all the aspects
above, would you carry on with the free service or offer something different to potential
customers?

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 If done correctly, e-business strategy can help mitigate some risk of an
organization wanting to capitalize on first mover advantage and help ensure the survival
of an organization moving into an already crowded e-business space.

Development of e-business strategy can be complex but the ultimate goal of

sustainable competitive advantage could be your reward. Done poorly and you can
become another statistic for the e-business graveyard.

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 Chapter 10
STUDENT ACTIVITIES

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

Test I. Identification. Tell what is being referred to in each description/definition.

___________________1.One of the first companies to use the term E-business.

___________________2. This company uses internet standards for infrastructure.
___________________3. This is an online entity positional within a market space
through which a group of organizations’ individual strengths can be combined and
leverage to create future value.
___________________4. It can be considered an electronic-based marketplace through
which a retail customer interacts with an organization.
___________________5.An approach where formal structures for rational decision
making are developed for a profit maximization outcome.
___________________6. Are those who concentrate on environmental fit and hope for
the best?
___________________7. One who believes only the fittest will survive and rational long
term planning is futile.
___________________8. Perspectives believe long term strategic planning can be
effective against market forces but focus more on the social environment.
___________________9. By these entities we mean groups like buyers and sellers that
you would find in an electronic marketplace.
__________________10. This organization is critical to the success of any e-business
strategy.

Test II. Enumeration. Give what is asked in each letter.

A. Give the six reasons why businesses go online

1.
2.
3.
4.
5.
6.

B. What are the seven advantages of E-business?

7.
8.
9.
10.
11.

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 12.
13.

C. Give the ten concerns of business in using the internet:

14.
15.
16.
17.
18.
19.
20.
21.
22.
23.

D. A number of strategies have been developed by businessmen, they are:

24.
25.

Test III. Review Questions.

1. Describe some benefits of doing business through the internet?

2. What precautionary actions must be taken by a company when using E-business?

110
 CHAPTER 11

BUSINESS PLAN

The primary value of your business plan will be to create a written outline that
evaluates all aspects of the economic viability of your business venture including a
description and analysis of your business prospects.A business plan is an essential step
for any prudent entrepreneur to take, regardless of the size of the business.

Business Plan is a written document describing all relevant internal and external
elements and strategies for starting a new venture or a new product or a business
expansion. It provides a guide and structure to management.

The business plan will detail the following:

1. product to be made or traded or service to be rendered.

2. marketing – when, where, to whom the product or service is to be sold.

3. management- organization, employees’ and officers’ positions and job assignments

4. finance – financial needs and where the money will come from and paid to

5. operations – how the product will be produced or how the service will be rendered or
how the merchandise is to be acquired.

A written business plan is like a game plan that is both for current and future years.
It is also called a road map. It may start as a preliminary plan and evolve to a final plan.
The business plan is prepared by the entrepreneur who may consult with accountants,
lawyers, engineers and marketers. They are called consultants.

Planning stage includes:

 Self-assessment – analyze environmental factors –determine your

product/service decide the form of business

 Actualizing stage includes: write a business plan – business registration-

hiring/training of personnel – start of business

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The business plan may be simple or complex depending upon the product or service. The
entrepreneur doing the “road map” gets to:

1. see the product and service in detail

2. do self-assessment

3. see obstacles

4. assess cash and other resource requirements

Usually, the business plan has the following parts:

 Executive Summary – highlights briefly and convincingly the different sections in

the business plan. It supports the conclusion that the business is profitable and
that it is worth pursuing.

 Description of the venture – provides a complete picture or description of the

product, services and their unique features.

 Operating plan- gives the detail of how product are to be manufactured. The
merchandising plan for a trading business shows in detail how the products are to
be acquired.

 Marketing plan – describes market conditions and strategy related to how

products and services will be priced, distributed and promoted.

 Organizational plan – describes the form of ownership and lines of authority and
responsibilities of the people in the organization

 Financial plan – projects financial data that show profitability, liquidity and
stability.

 Appendices or annexes – back up materials that support the text of the business
plan. They are mentioned in the text or references.

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Contents of a Business Plan

I. Cover Page
a. Name and address of business
b. Name (s) and address (es) of the owners
c. Contact persons
d. Date prepared
e. Statement of confidentiality of report

II. Executive Summary – Chapter 11 pages overview of total

one to four
STUDENT
business plan highlighting ACTIVITIES
significant point arousing interest
on the part of the reader.

III. Product – description of products or services and their

unique features.

IV. Marketing Plan – who the customers are, competition,

marketing strategy, competitive edge, pricing

V. Organizational Plan – states the form of business

organization. Identifies management team, investors, their
background, their duties and responsibilities. States the
plan for employee’s recruitment and training.

VI. Operating Plan – explains the process of acquiring and

processing products. Identifies equipment, physical plant,
machinery, materials.

VII. Financial Plan – specifies financial needs and sources of

financing and shows for a three-to-five –year period pro
forma income statement, cash flow projections, pro forma
balance sheet and break-even analysis.

VIII. Appendix – shows supplementary materials

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114
 Chapter 11
Students Exercise

Name: ______________________________________________ Score:_____________

Course & Yr. _____________________ Time/Days: _______________ Date: _________

A. Write a one-page essay about the businesses in your community. At the end of the
essay, list the “pluses” and “minuses.”

115