Description
ENTREPRENEURSHIP AND WEALTH BUILDING
One thing you can learn from the chapter-opening Getting to Know feature is that success in business is based on constantly adapting to the market. A business is any activity that seeks to provide goods and services to others while operating at a profit. To earn that profit, you provide desired goods, jobs, and services to people in the area. Goods are tangible products such as computers, food, clothing, cars, and appliances. Services are intangible prod-ucts (i.e., products that can’t be held in your hand) such as education, health care, insurance, recreation, and travel and tourism. 1 Once you have devel-oped the right goods and services, based on consumer wants and needs, you need to reach those consumers using whatever media they prefer, including blogs, tweets, Facebook, TV advertising, and more. 2
Although you don’t need to have wealth as a primary goal, one result of successfully filling a market need is that you can make money for yourself, sometimes a great deal, by giving customers what they want. Sam Walton of Walmart began by opening one store in Arkansas and, over time, became one of the richest people in the United States. Now his heirs are some of the rich-est people in the United States. 3
There are about 9 million millionaires in the United States. 4 Maybe you will be one of them someday if you start your own business. An entrepreneur is a person who risks time and money to start and manage a business.
Revenues, Profits, and Losses
Revenue is the total amount of money a business takes in during a given period by selling goods and services. Profit is the amount of money a business earns above and beyond what it spends for salaries and other expenses needed to run the operation. A loss occurs when a business’s expenses are more than its revenues. If a business loses money over time, it will likely have to close, putting its employees out of work. About 80,000 businesses in the United States close each year. Even more close during a recession like the recession of 2007–2009. 5
As noted above, the business environment is constantly changing. What seems like a great opportunity one day may become a huge failure when the economy changes. Starting a business may thus come with huge risks. 6 But huge risks often result in huge profits. We’ll explore that concept next.
Matching Risk with Profit
Risk is the chance an entrepreneur takes of losing time and money on a busi-ness that may not prove profitable. Profit, remember, is the amount of money a business earns above and beyond what it pays out for salaries and other expenses. For example, if you were to start a business selling hot dogs from a cart in the summer, you would have to pay for the cart rental. You would also have to pay for the hot dogs and other materials, and for someone to run the cart while you were away. After you paid your employee and yourself, paid for the food and materials you used, paid the rent on the cart, and paid your taxes, any money left over would be profit.
Keep in mind that profit is over and above the money you pay yourself in salary. You could use any profit to rent or buy a second cart and hire other employees. After a few summers, you might have a dozen carts employing dozens of workers.
Not all enterprises make the same amount of profit. Those that take the most risk may make the most profit. There is high risk, for example, in making a new kind of automobile. 7 It’s also risky to open a business in an inner city, because insurance and rent are usually higher than in suburban areas, but reduced competition makes substantial profit possible. Irish entrepreneur Denis O’Brien, of Digicel, made billions of dollars selling cell phones in the poorest, most violent countries in the world. Big risk can mean big profits.
Standard of Living and Quality of Life
Entrepreneurs such as Sam Walton (Walmart) and Bill Gates (Microsoft) not only became wealthy themselves; they also provided employment for many other people. Walmart is currently the nation’s largest private employer.
Businesses and their employees pay taxes that the federal government and local communities use to build hospitals, schools, libraries, playgrounds, roads, and other public facilities. Taxes also help to keep the environment clean, support people in need, and provide police and fire protection. Thus, the wealth businesses generate, and the taxes they pay, help everyone in their communities. A nation’s businesses are part of an economic system that con-tributes to the standard of living and quality of life for everyone in the country (and, potentially, the world). How has the recent economic slowdown affected the standard of living and quality of life in your part of the world?
The term standard of living refers to the amount of goods and services peo-ple can buy with the money they have. For example, the United States has one of the highest standards of living in the world, even though workers in some other countries, such as Germany and Japan, may on average make more money per hour. How can that be? Prices for goods and services in Germany and Japan are higher than in the United States, so a person in those countries can buy less than what a person in the United States can buy with the same amount of money. For example, a bottle of beer may cost $7 in Japan and $3 in the United States.
Often, goods cost more in one country than in another because of higher taxes and stricter gov-ernment regulations. Finding the right level of taxes and regulation is important in making a country or city prosperous. 8 We’ll explore those issues in more depth in Chapter 2. At this point, it is enough to understand that the United States enjoys a high standard of living largely because of the wealth created by its businesses.
The term quality of life refers to the general well-being of a society in terms of its political freedom, natural environment, education, health care, safety, amount of leisure, and rewards that add to the satisfaction and joy that other goods and services provide. Maintaining a high quality of life requires the combined efforts of businesses, nonprofit organizations, and government agencies. Remember, there is more to quality of life than simply making money.
Responding to the Various Business Stakeholders
Stakeholders are all the people who stand to gain or lose by the policies and activities of a business and whose concerns the business needs to address. They include customers, employees, stockholders, suppliers, dealers (retail-ers), bankers, people in the surrounding community, the media, environmen-talists, competitors, unions, critics, and elected government leaders (see Figure 1.1 ). 9
A primary challenge for organizations of the 21st century will be to recog-nize and respond to the needs of their stakeholders. For example, the need for the business to make profits may be balanced against the needs of employees to earn sufficient income or the need to protect the environment. 10 Ignore the media, and they might attack your business with articles that hurt sales. Oppose the local community, and it may stop you from expanding.
Staying competitive may call for outsourcing. Outsourcing means contracting with other companies (often in other countries) to do some or all of the functions of a firm, like its production or accounting tasks. Out-sourcing has had serious consequences in some states where jobs have been lost to overseas competitors. We discuss outsourcing in more detail in Chapter 3.