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The Free Enterprise System

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1 The Free Enterprise System
Market-Oriented Economic Systems Ask student to share ways that they have earned money. List responses as they are offered. Point out that all are examples of free enterprise. The free enterprise system is the economic system of the US and many other countries. It underlies many businesses and business ventures. Knowledge of the free enterprise system is essential to any study of marketing.

2 Objectives Explain the characteristics of a free enterprise system
Distinguish between price and non-price competition Distinguish between the public and private sectors Explain the role of the government in a free enterprise system Discuss the importance of international trade and government methods to encourage or discourage it Explain how businesses can get involved in international trade, and what factors they should consider before doing so. Tell what a business is, and explain its basic functions Identify and classify different types of businesses

3 Analyze the Ad Is the ad promoting a football game or an insurance company? Why would State Farm Sponsor this annual matchup between two Louisiana football teams? Research 3 large insurance companies and note their slogans and messages to consumers. List 2 ways the companies you selected try to set themselves apart. Interpretations of the State Farm ad will vary; brainstorm about other slogans or concepts that might be used to market insurance policies. With such slogans as “We live where you live” and “Like a good neighbor, State Farm is there,” the company claims it knows its customers as people, rather than just customers. It takes the personal approach to marketing an intangible service. What are the challenges of marketing a intangible service, such as insurance, with a tangible item like clothing? Advertising for intangible services often focus on the value offered to the customer, where tangible items usually focus on the product itself. At this time either have the students research 3 large insurance companies themselves, or do it as a class.

4 Free Enterprise System
Basic Principles Free Enterprise System In the US, we have the freedom to elect the people who represent us in our government. We have the freedom to make decisions about where we work and how we spend our money. Workers have the freedom to organize and negotiate with business, as part of a labor union. Consumers have the freedom to purchase goods and services and to invest money in banks or businesses. The basis of the free enterprise system is the freedom to own personal property, to compete, to take risks, and to make a profit. A free enterprise system encourages individuals to start and operate their own businesses in a competitive system, without government involvement. The marketplace determines prices through the interaction of supply and demand. The free enterprise system in the US is modified because the government does intervene in business on a limited basis. It does this to protect citizens, while supporting principles of free enterprise.

5 Basic Principles Freedom of Ownership Business Ownership
Intellectual Property Rights Patent Trademark Copyright Trade Secret The free enterprise system encourages individuals to own businesses. There are all types of business. You may have heard of people who have started and run their own business. These individuals are called entrepreneurs. Others may not want to be involved in running a business, but they support business by investing their money in parts or shares of business. These shares of business are called stocks, and the investors are called stockholders. Company stocks are bought and sold daily. When a company is doing well, stock prices generally increase because more people want to buy that stock. There are however, some restriction on how and where businesses may operate. Businesses may be restricted in where they can locate. Most kinds of businesses are zoned out of areas intended for private housing. Manufacturers may be forced to comply with certain environmental and safety measures. Intellectual property rights are protected in a free enterprise system. Patents, trademarks, copyrights, and trade secrets are intellectual property rights. If you get a patent on an invention, you alone own the rights to that item or idea. To ensure that protection, you would apply for a patent in the U.S. Patent and Trademark Office. If granted, you would have the exclusive rights to make, use, or sell that invention for up to 20 years. During this time, anyone who wanted to manufacture your product would have to pay you for its use through a licensing agreement. A trademark is a work, name , symbol, sound, or color that identifies a good or service and that cannot be used by anyone but the owner Unlike a patent, a trademark can be renewed forever, if it is being used by a business. A copyright involves anything that is authored by an individual, such as writings (books, magazine articles, etc.), music, and artwork. It gives the author the exclusive right to reproduce or sell the work. A copyright is usually valid for the life of the author plus 70 years. A trade secret is information that a company keeps and protects for its use only, but it is not patented. For example, Coca-Cola’s formula for Coke is a trade secret that is not protected by a patent, but the company guards the information.

6 Licensing Agreements When a company wants to use another's name, symbol, creative work, or product, it must get permission to do so and pay a fee for the use. When a company wants to use another’s name, symbol, creative work, or product, it must get permission to do so and pay a fee for the use. A licensing agreement protects the originator's name and products. A T-shirt manufacturer might be granted a licensing agreement with the National Football League (NFL) so that it can produce T-shirts with NFL logos on them. The company will have to pay NFL Properties a fee for this privilege. It will also have to agree to certain standards to protect the NFL’s reputation. In addition, the NFL has control over all team logos and how the teams can use them.

7 Basic Principles Competition
Price Competition: focuses on the sale price of a product. Nonprice Competition: businesses choose to compete on the basis of factors not related to price. Monopolies: exclusive control over a product or the means of producing it. Businesses that operate in a free enterprise system try to attract new customers and keep old ones. Other businesses try to take those same customers away. This struggle for customers is called competition. Competition is an essential part of a free enterprise system. It is one of the means by which the free enterprise system functions to benefit consumers. Competition forces businesses to produce better-quality goods and services at reasonable prices. Businesses constantly look for ways to develop new products and improve old ones to attract new customers. Competition results in a wider selection of products from which to choose. The results of these efforts is an increase in the nation’s output of goods and services, as well as in its standard of living. There are two basic strategies that businesses use to compete: Price competition and nonprice competition. Price competition focuses on the sale price of a product. The assumption is that, all other things being equal, consumers will buy the products that are the lowest in price. The marketing strategies used by Wal-Mart and Southwest Airlines are examples of price competition. Wal-Mart’s “Always Low Prices. Always.” slogan stresses price as the primary focus of its competitive advantage, as does Southwest’s focus on low fares. Companies that run sales and offer rebates also use price competition. A $5,000 rebate offer by an auto manufacture and a retailer’s one-day sale offering a 15% discount storewide are examples of price competition. In nonprice competition, businesses chose to compete on the basis of factors that are not related to price. These factors include the quality of the products, service, financing, business location, and reputation. Some nonprice competitors also stress the qualifications or expertise of their personnel. Businesses that use nonpirce competition may charge more for products than their competitors do. Examples of nonprice competition in advertising stress a company’s reliability, tradition, superior know-how, and special services. An example of nonprice competition among dot-com companies are offers of free shipping and same-day delivery. These examples of price and nonprice competition suggest that businesses adopt one strtegy or the other. In our value-oreintated society, however, it is not uncommon for businesses to try to do both. As competition increases, you may see more price-orientated competitors offering services they never offered in the past. When there is no competition and one firm controls the market for a given product, a monopoly exists. A monopoly is exclusive control over a product or the means of producing it. Monopolies are not permitted in a free enterprise system because they prevent competition. A company can charge whatever it wants without competition. It can also control the quality of a product and who gets it. Without competition, there is nothing to stop a company from acting without regard to customer wants and needs. One of the most publicized monopoly cases in recent history involved Microsoft, the computer software company. A federal judge declared Microsoft’s Windows operating system was a monopoly. Its technology dominance was said to have stifled innovation and hurt typical customers. The U.S. government has allowed a few monopolies to exist, mainly in industries where it would be wasteful to have more than one firm. These regulated monopolies, however, are on the decline. Currently, utility companies are being deregulated. This will allow customers to choose their own electric and natural gas suppliers. In order for this deregulation to work, the government wills till control natural gas and electric companies by imposing price restrictions, preventing the formerly regulated monopolies from charging excessive prices.

8 Basic Principles Risk: the potential for loss or failure
Profit: money earned from conducting business after all costs and expenses have been paid Economic Cost of Unprofitable Firms Economic Benefits of Successful Firms Supply & Demand Surpluses Shortages Equilibrium Along with the benefits that come from competition and private ownership of property, businesses also face risk. Business risk is the potential for loss or failure. As the potential for earnings gets greater, so does the risk. For example, putting money in the back with guaranteed interest rates is less risky than investing in the stock market where the value of shares of stocks fluctuates. Simply starting a company is a risk. If you wanted to open your own business, you would probably put your savings into the enterprise. You make money if the business is successful; but if the business fails, you lose all your savings. One out of every three businesses in the United States fails after one year of operation. Businesses also run the risk of being sued or having their name tarnished by bad publicity (warranted or not). Natural disasters could also ruin a business. When an industry develops and profits are great, more people enter that industry. This increases competition and the risk of failure for individual firms. You may have read of businesses closing operations in an effort to reduce losses and become more competitive. For example, Levi Strauss & Co. closed its manufacturing plants in North America and now contracts with foreign manufacturers to make its garments. Risk is also involved in the development of new products. Product introductions are costly and risky; up to 85% of new products fail in the first year. Profit is the money earned from conducting business after all costs and expenses have been paid. Profit is often misunderstood. Some people think the money a business earns from sales is its profit. That is not true. The range of profit for most businesses is one percent to five percent of sales; the remaining 95 to 99 percent goes to pay costs, expenses, and business taxes. Profit is the motivation for taking the risk of starting a business. It is the potential reward for taking that risk. It is also the reward for satisfying the needs and wants of customers and consumers. Businesses may use their profits to pay owners or stockholders, or they may elect to reinvest those profits in their businesses. Profits are good for our economy in many ways. The concept of profit is the driving force in our free enterprise system. It encourages people to develop new products and services in the hope of making a profit. Without profit, few new products would be introduced. profit remains high when sales are high and costs are kept low. This encourages companies to work in an efficient way that helps to conserve precious human and natural resources. Profits provide money for a company to keep its facilities and machinery up-to-date. Then the businesses can produce its goods and services more efficiently. An unprofitable business faces many problems. One of the first things businesses do when their profits decline is lay off employees. Investors in publicly traded companies can lose money it the stock value falls below what they paid for it. Government also suffers when business profits decline. Poorly performing businesses pay less money to the government in taxes. When businesses lay off workers, there is a rise in unemployment. This causes an increase in the cost of social services and puts more stress on such agencies. Profitable businesses hire more people. Employees may have higher incomes, better benefits and higher morale. Investors earn money from their investments, which they spend or reinvest. Vendors and suppliers make more money too. As employment and profits climb, the government makes more money from taxation of individuals and businesses. Companies and individuals are also more likely to donate to charities when they are doing well. Remember that profitable companies attract competition, which is beneficial to the consumer. To satisfy consumer wants and needs, they try to offer new products, the lowest prices, the highest quality, and the best service. When people earn higher incomes, they have more money to spend. There is increased demand not only for expensive products such as cars and homes, but also for services provided by a variety of businesses, from hair salons to travel agencies.

9 Each of you have $100 to invest or keep
Risk & Profit T-shirt business Each of you have $100 to invest or keep How much would you invest? To emphasize the concepts of risk and profit, tell students to imagine they will start a new business: making and selling T-shirts to other students in school. Each student has $100 of imaginary money to invest or keep. Ask them how much of their $100 they are willing to invest in this venture, stressing that if the business is a success, those who invested the most will receive the greatest profit. Start off by asking for $100 investments. If there are few or none of these, being to lower the price until you reach $5 and, if necessary, $1. You may find that many students are unwilling to invest any money while others pledge to invest high amounts. Ask the class what they observed during this activity, leading them to see that the whole concept of risk and profit takes on a different meaning when it is one’s own money on the line.

10 Size & Scope Purpose Industry & Markets Types of Business
In a free enterprise system, there are many opportunities to invest or work in many different types of businesses. In order to view those opportunities, it is a good idea to start by classifying businesses. To understand their differences, you will need to know the terminology associated with business classification. Keep in mind that a business may be classified in more than one category. A business can be classified by its size and scope, by its purpose, and by its place within the industry.

11 Size & Scope Types of Businesses Large VS. Small Businesses
Domestic VS. Global One of the easiest ways to describe a business is by its size. It is large or small? The scope of a business refers to the extent of its business operation. Some businesses serve a small neighborhood, while others do business globally. A small business is one that is operated by only one or a few individuals. It generally has fewer than 100 employees. A large business is usually one that employs more than 1,000 people. Nationwide, there are millions of small businesses, or “mom-and-pop” operations. They include neighborhood grocery stores, florists, gift shops, photo-copy and print shops, and secretarial services. This category also contains many Internet start-up companies and dot-com businesses that often start off with small budgets and staffs. About 95 percent of all US businesses are classified as small businesses. These types of businesses employ more than half of the private-sector (non-government) workforce. A business that sells its products only in its won country is considered a domestic business. Because a domestic business limits its scope of operation to one country, its opportunities for growth are limited to customers within that country. A global business sells its products in more than one country. The advent of the Internet, along with faster transportation and financial transfers, makes it easier to do business globally. Products produced in one country are now finding greater acceptance around the world. The trend among large and small businesses is toward a more global market.

12 Purpose Types of Businesses For-Profit VS. Nonprofit Organizations
Public VS. Private A business firm serves the needs of its customers in order to make a profit. However, there are other organizations that function like a business but have a different purpose. To understand this difference, we need to distinguish between for-profit and non profit organizations, and between public and private enterprise. A for-profit business seeks to make a profit from its operations. A non profit organization functions like a business but used the money it make s to fund the cause identified in its charter. Nonprofit organizations generate revenue through gifts and donations. Some even sell goods or services, which generate income. They usually do not have to pay taxes on their income. They also have expenses. They pay employees and rent for their office space. Other expenses may include supplies, printing and postage for letters sent requesting donations. The Red Cross, the Boy Scouts of America, DECA, and other nonprofit organizations strive to generate more income than expenses, just like a for-profit business. However, unlike profit-oriented businesses, nonprofit organizations use that extra money to fund their respective causes. Thus, their organizational goal is not to make a profit but rather to use that money for their cause. Many people who feel strongly about helping others seek to start or work for a nonprofit organization. Although there are many unpaid volunteers, a staff of paid workers is often also needed to manage the operation of a nonprofit organization. In addition to charitable institutions, other organizations operate like businesses but are not intended to earn a profit. Most local, state and federal government agencies and services, such as public schools and public libraries, fall into this category. Their main purpose is to provide service to the people in the country or community in which they operate. At the federal level, there are military agencies, like the Army and the Air Force; social agencies, like Social Security and Medicare; and regulatory agencies, like the Food and Drug Administration and the Environmental Protection Agency. Government-financed agencies like these are part of the public sector. Businesses not associate with government agencies are part of the private sector. Public-sector organizations purchase one-third of all goods and services sold in the United States each year. Just think about all the products and supplies purchased in the operation of your public school system and you will see why businesses see out customers in the public sector.

13 Industry & Markets Types of Businesses NAICS
Consumer, Industrial, and Service Markets Businesses are often classified according to the industry they represent, the products they sell, and the markets they target. The government provides a system for classifying types of business by industry and sector. Products and markets are classified according to intended use. All of these classifications are interrelated based on the customers served. According to the U.S. Department of Labor, an industry consists of a group of establishments primarily engaged in producing or handling the same product or group of products or in rendering the same services. For 60 years, the US government used the Standard Industrial Classification (SIC) system to collect data on businesses and analyze the US economy. However, rapid changes in services and technology made a new system necessary. The US, Canada, and Mexico jointly developed the North American Industry Classification System (NAICS). In a nutshell, it states that “establishments that do similar things in similar ways are classified together.” NAICS uses a six-digit hierarchical coding system to classify all economic activity into 20 industry sectors. For example, the information sector includes the industries involved in communications, publishing, and motion pictures, as well as Internet companies. Some of the sub-categories of the Internet industry are Web search portals, Internet publishing and broadcasting, electronic shopping, and electronic auctions. The information in the NAICS can be helpful to businesses looking for new marketing opportunities and to individuals who may want to find employment of invest in those sectors. The consumer market consists of customers who buy goods for personal use. The industrial market consists of business customers who buy goods for use in their operations. The two are interrelated because of the economic concepts of derived demand. For example. When consumers decide to buy more automobiles, dealers need more cars, so auto manufacturers will need an increases supply of auto components, such as tire, radios, batteries, and electronic parts. Companies that make such parts experience an increased demand as a result of consumer decisions to buy more cars. This is called derived demand. Derived demand in the industrial market is based on, or derived from, the demand for consumer goods and services. Because of this relationship between consumer and industrial demand, industrial companies look for opportunities to increase their business by studying consumer trends. Service-related businesses function in both consumer and industrial markets. Businesses that are involved in the industrial market include extractors, construction and manufacturing businesses, wholesalers, retailers, and service-related firms. Wholesalers obtain goods from manufacturers and resell them to industrial users, other wholesalers, and retailers. Wholesalers are also called distributors. Retailers buy goods from wholesalers or directly from manufacturers and resell them to the consumer. For the most part, retailers cater to the consumer market. Service-related businesses are companies that provide intangible products to satisfy needs and wants of consumers and/or businesses. Consumer services include such things as dry cleaning, hair styling, entertainment, transportation, insurance and personal needs, such as lawn-cutting, child care, and housekeeping. Business services follow the same concept. That is why you have firms that specialize in accounting, marketing, management, insurance, shipping and finance. There are also professional services—those provided by a variety of professionals such as doctor, dentists, and lawyers. Internet-related services, such as Web portals, Web casting, Web site design, and Web advertising have created opportunities that did not exist many years ago. For example, e-commerce is the buying and selling of products through the use of electronic networks, usually the Internet. Even traditional retailers are adapting their marketing strategies to e-commerce, resulting in e-tailing.

14 The Functions of Business
Production and Procurement Marketing Management Finance & Accounting Regardless of the type of business, these are four main functions involved in an organization’s operation. They are production or procurement, marketing, management, and finance. The way each business performs these activities may differ. However, all four are essential for running a business or organization. The success of a business is dependent on how well these activities are coordinated, managed, and performed.

15 Production and Procurement
Production: The process of creating, expanding, manufacturing, or improving on goods and services. Procurement: Involves buying and reselling goods that have already been produced. SWOT Analysis, Wholesalers, and Retailers The five “rights” of merchandising are having: The right goods At the right time In the right place At the right price In the right amount The process of creating, expanding, manufacturing, or improving on goods and services is called production. A songwriter creates a song. A farmer grows wheat. Ford Motor Company manufactures cars. Van conversion companies improve new vans to make them more suitable for a disable driver, or for camping and travel. Thus, production, as a function of business, is found in industries such as farming, mining, forestry, manufacturing, and service-related operations. When evaluating this function of business in a SWOT analysis, look for innovation, speed to market, efficiency, and level of success with products. Company leaders focus on efficient production and consider many situations that ma affect it, such as the law of diminishing returns. The principle states that if one factor of production is increased while the others remain the same, overall returns will decrease after a certain point. Companies that want to be leaders in an industry produce the most innovative products and do so before their competitors do. Efficiency helps keep prices down and sales up, which makes for a profitable company. Hewlett-Packard (HP) is a good example of an industry leader in printers. With 15,000 patents in the US and worldwide, this computer equipment maker adds about 2,000 new patents per year. Anything that is not patented is protected by trade secrets. Thus, it is the industry leader in printers. In 2004, the printer division accounted for 80% of HP’s earnings. Procurement involves buying and reselling goods that have already been produced. Retail and wholesale businesses function in this capacity. A supermarket (retailer) buys cans of soup, fresh produce, frozen foods, dairy products, and the other nonfood items for resale. Most of these products were purchased from manufacturers, while a few may have been purchased from wholesalers. Wholesalers buy goods from manufacturers for resale to other wholesalers and retailers. Even businesses that appear to manufacture their own products may actually be buying those products from other companies and putting their names on the labels. You may buy a Dell printer thinking that Dell manufactured that printer. However, another company like Lexmark may have made that printer with minor changes and re-branded it a Dell. In SWOT analysis, you would evaluate wholesalers and retailers on their merchandising ability. The five “rights” of merchandising are having: The right goods at the right time In the right place At the right price In the right amount. Predicting customer demand and product preferences is a difficult task, as is determining the price at which those products will sell.

16 Marketing All activities from the time that a product leaves the producer or manufacturer until it reaches the final consumer. All related marketing activities support the buying and selling functions. Promotion helps to educate potential customers about a company’s products and is used to stimulate sales. All activities from the time that a product leaves the producer or manufacturer until it reaches the final consumer are considered marketing activities. All types of business, regardless of size, scope, intended purpose, and products sold use marketing activities in their operations. Manufacturers, service operations, wholesalers, and retailers buy goods for use in their operations and sell their finished products to customers. All related marketing activities support the buying and selling functions. For example, research helps to determine what products to make and/or purchase, as well as how to price and promote them. Promotion helps to educate potential customers about a company’s products and is used to stimulate sales.

17 Aeropostale Aeropostale, a New York-based chain of retail apparel stores, spends heavily for consumer research. Since it is a teen-orientated company, it must keep up with teens’ changing tastes in clothing. To do so, it runs high school focus groups, in-store product tests, and an online research program. The Internet-based research is conducted with 100,000 online shoppers who are asked for their input in creating new styles. It runs this program 20 times a year and averages 3,500 participants. In a SWOT analysis, you would evaluate the four P’s of the marketing mix and how well they focus on the intended market(s). They should also be reviewed in relation to the company’s objectives and sales performance.

18 Management The process of achieving company goals by effective use of resources through planning, organizing and controlling. Management is the process of achieving company goals by effective use of resources through planning, organizing and controlling. Planning involves establishing company objectives and forming strategies to meet objectives. Management determines corporate culture and the mission or vision for a firm. Organizing involves specific operations, such as scheduling, employees, delegating responsibilities, and maintaining records. Controlling has to do with overseeing and analyzing operating budgets to suggest the most cost-effective measures for a company to follow. Analysis of financial reports, such as cash flow and profit and loss statements, is part of its controlling function. A SWOT analysis would evaluate the personnel who run a company. The CEO or owner in a smaller operation, as well as the key managers and their expertise, are important indicators.

19 Finance & Accounting Finance is the function of business that involves money management. Accounting is the discipline tat keeps track of a company’s financial situation. Balance Sheet Profit and Loss Statements Cash Flow Statement Finance is the function of business that involves money management. Accounting is the discipline tat keeps track of a company’s financial situation. If you want to analyze a company’s finances, study its balance sheet, profit and loss statement, and its cash flow statement. A balance sheet reports a company’s assets, liabilities, and owner’s equity. Assets are the things a company owns. Liabilities represent money owned by a business to its creditors. If most of a company’s liabilities have not been paid for yet, a company's financial situation would not be positive. For example, if a company had assets of $100,000 and liabilities of $75,000, its owner’s equity would be only $25,000. In this case, creditors own more of the company than the owners. Profit and loss statements reflect the ongoing operations of a firm. They include income form sales revenue and investments, as well as costs and expenses of doing business. A profitable company generates more income than it pays out for its costs of goods and expenses to run the business. When a business suffers a loss, its costs and expenses exceed all of its revenue. In a SWOT analysis, both financial statements provide important information regarding how well a business is doing financially. A profitable business with high owner’s equity allows a company to grow. It can invest in more research and development. It can expand its operations by building new facilities or acquiring other business. Why? Because it has the money to do so.

20 What are the key characteristics of a free enterprise system?
REVIEW What are the key characteristics of a free enterprise system? The key characteristics are ownership of property (both business and intellectual), competition, risk and profit.

21 Provide examples of price and nonprice competition.
REVIEW Wal-Mart is one example of price competition with its slogan, “Save money. Live better.” Neiman Marcus, with high quality merchandise and excellent service, exemplifies nonprice competition. Provide examples of price and nonprice competition.

22 What are the three major categories for classifying businesses?
Review What are the three major categories for classifying businesses? The three major categories are size and scope, purpose, and industry and markets.

23 How do for- profit businesses and nonprofit organizations differ?
REVIEW For-profit businesses strive to make money; nonprofits use the money make to fund the causes listed in their charters. DECA’s money it makes is used to further the education of marketing students. How do for- profit businesses and nonprofit organizations differ?

24 What is the differences between the public and private sectors?
REVIEW The public sector includes all government agencies; the private sector includes all nongovernment al organizations and businesses. What is the differences between the public and private sectors?

25 The Free Enterprise System
Market-Oriented Economic Systems

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