Business Fundamentals: A Chapter-by-Chapter Study Guide

Introduction to Business and Core Concepts

The opening chapter addresses why one should study business in the first place. The authors make clear that they do not intend a narrow study focused solely on particular examples of successful and failed businesses — though case studies are included. The major purpose of studying business is to provide a broader sense of what is needed to succeed in today's working world. Unlike previous generations of workers, who could succeed by mastering a few specific skills, today's workers must be broadly educated and able to exhibit "honesty and integrity, willingness to work hard, dependability, time management skills, self-confidence, motivation, willingness to learn, communication skills, [and] professionalism."

The chapter also supplies basic definitions used throughout the text, including "business" — the organized work of individuals coming together — and provides a brief overview of how capitalism works. The authors also explain communism, fiscal and monetary policy, the concept of productivity, and the business cycle. They briefly address the ways in which the American legal system both supports and restrains business activity, and the chapter closes with an introduction to green business.

These are all foundational concepts necessary for understanding today's competitive business climate and how it will evolve over the coming decades.

This chapter addresses the complexities of business ethics, a branch of the broader category of ethics, which the authors define as "the study of right and wrong and of the morality of the choices individuals make." Business ethics is "the application of moral standards to business situations." The authors stress that individuals and businesses can hold different standards of ethical behavior — and that multiple standards can be acceptable, provided they are grounded in fairness and honesty.

Among the key ethical challenges businesses face are conflicts of interest and greenwashing, which is the practice of pretending to be more environmentally conscientious than one actually is. This practice falls under the broader concept of social responsibility, defined as "the recognition that business activities have an impact on society and the consideration of that impact in business decision making."

Business Ethics and Social Responsibility

Businesses are more heavily regulated today than they were a century ago. Regulations that have been added include worker safety protections, the abolition of child labor, fairer wages, protection of consumer rights, and requirements that companies demonstrate at least some measure of environmental care.

Government regulation and public pressure are the two most important external forces pushing businesses toward ethical behavior. However, there is also a key internal mechanism: the attitude of the company's management. When managers act ethically, their employees follow their example.

This chapter takes up the issue of international trade, which is increasingly important in a globalized world. A number of legal issues arise in international trade that do not apply to domestic business, and the chapter touches on these as well.

International trade, the authors argue, can be understood as an extreme form of specialization, in which different countries contribute what they can produce most cheaply — whether raw materials, intellectual capital, or labor. While nations must trade in the modern era, each government must also protect its own industries.

Nations restrict trade through tariffs, which are essentially taxes on goods produced in another country. Tariffs benefit domestic businesses by allowing them to earn more and employ more workers. However, they can prompt retaliatory measures from trading partners, which is problematic given that all countries depend on trade to some degree.

International Trade and Market Entry

The chapter also addresses trade imbalances, which occur when one country imports more from another than it exports, or vice versa. A country that consistently imports more faces several disadvantages. One mechanism for managing trade imbalances is through large trade coalitions such as NAFTA. The chapter concludes by examining the various ways businesses can enter international markets.

This chapter defines a number of different forms of business that exist primarily in the domestic context but can also operate internationally. Among the structures described are a range of partnership arrangements. Partnerships allow both risk and responsibility to be shared, along with ambitions and concerns.

General partners "are responsible for running the business and for all business debts," while limited partners "receive a share of the profit in return for investing in the business."

The most important definition introduced in this chapter is that of a corporation, which is "an artificial person created by law." As the Supreme Court has recently reaffirmed, corporations possess nearly all the legal rights of an actual person, including the "right to start and operate a business, and to own property."

While partnerships are the most common structure for small businesses and corporations dominate among large businesses, the chapter also describes several other important structures. A cooperative is simply "an association of individuals or firms whose purpose is to perform some business function for its members." Cooperatives can be highly specialized or quite general and can be formed for any period of time. By contrast, a joint venture is formed to fulfill a specific purpose for a limited period of time. Each of these structures meets different business needs.

This chapter focuses on the nature of small businesses and examines the fields and functions for which small businesses represent the optimal structure. A small business is simply one that is "independently owned" — as opposed to a franchise, for example. Small businesses are never the dominant player in their field, yet operate on a for-profit basis. Although they are small — often employing just a few people — small businesses constitute over 90% of the country's 23 million businesses and employ more than half of all American workers.

Business Structures and Organizational Forms

Most small businesses operate in retail and services and are started by people characterized by "independence, desire to create a new enterprise, and willingness to accept a challenge." Many specific factors can compel an individual to start her or his own business. Because many small-business owners have little or no business or management experience and may also be undercapitalized, many new small businesses fail.

Nevertheless, small businesses — often supported by the federal government through the Small Business Administration — are launched constantly. With the advantages of personalized customer relationships and the ability to change and adapt quickly, small companies can compete effectively with large firms by providing "things that society needs, act[ing] as suppliers to larger firms, and serv[ing] as customers of other businesses, both large and small."

This chapter examines the structure and role of management, which is defined as "the process of coordinating people and other resources to achieve the goals of an organization." While management is generally thought of as the oversight of people, managers are also responsible for ensuring that a company's material, financial, and informational resources are carefully considered and allocated in the most effective and profitable ways.

Key characteristics of a good manager include the ability to plan for both the short term and the long term. Many businesses fail because managers excel at one but not the other. A critical element of good management is the ability to create a sound contingency plan — one that tries to anticipate the unpredictable, such as a supplier going bankrupt, bad weather disrupting transportation, or a new competitor entering the market.

In addition to planning well, the successful manager must be able to motivate and inspire workers. Managers at different levels of authority face different demands, but in general they must possess strong conceptual and creative skills, solid analytic and technical capabilities, and excellent interpersonal and communication skills. Managers can deploy these skills through both formal and informal styles of leadership depending on the specific situation.

This chapter focuses on the concept of an organization and the various possible organizational structures, since all businesses — regardless of size — are organizations. The authors define the basic organization as "a group of two or more people working together to achieve a common set of goals." It is worth noting that this holds true only when organizations function well; many organizations, including many businesses, fail precisely because they do not share a common set of goals.