Conf.univ.dr. Ana-Maria IUGA

COMUNICARE ÎN AFACERI

LIMBA ENGLEZĂ

NOTE DE CURS

Pentru uz intern

Editura „ALMA MATER”

Sibiu, 2010

3

CUPRINS

SEMESTRUL I

Nr.crt. Tema Pag.

1 1.Introducere / Introduction:

1.1.Procesul de comunicare / The Communication

Process

5

8

2 1.2.Registru, funcţii, structuri / Register, functions,

structures

17

3 2.Comunicarea interpersonală / Interpersonal

communication:

2.1. Stiluri şi modalităţi de comunicare / Ways and

styles of communication

31

40

4 2.2.Abordări culturale (timp, contact

vizual,tăcere...) / Cultural approaches (time, visual

contact, silence...)

43

5 3.Individ / Naţionalitate (Stereotipuri) / Individual

– Nationality (Stereotypes)

59

6 4.Stat şi Guvern / State and Government 65

7 5.Uniunea Europeană / The European Union 78

8 6.Economie / Economics

6.1.Relaţii economice internaţionale / International

Business Relations

86

94

9 6.2.Criteriul de eficienţă economică / The Criterion

of Economic Efficiency

111

4

10 7.Industrie, bunuri, servicii / Industry, Goods and

Services

116

11 8.Mărfuri şi Producţie / Goods and Production 131

12 9.Cumpărători şi Vânzători / Buyers and Sellers 138

13 10.Criteriul de suveranitate a consumatorului /

Consumer Sovereignity

148

14 11.Comportamentul consumatorilor / Consumer

Behavior

161

SEMESTRUL II

1 12.Organizare economică / Economic Organization

12.1.Intreprinderea (Firma) / The Firm

177

177

2 12.2.Antreprenor, profit, agent principal /

Entrepreneur, Profit, Principal-Agent

195

3 13.Decizii economice / Economic Decisions 202

4 13.1.Portofoliu, schimb, speculaţii / Portfolio,

Exchange, Speculations

208

5 14.Sectorul Financiar / The Financial Sector 217

6 15.Campanii de marketing / Marketing Campaigns 236

7 16.Stil în documentele de afaceri / Style in

Business Document

249

8 16.1.Planul de afaceri / The Business Plan 257

9 17.Contractul / The Contract

17.1.Tipuri/ Types

268

268

10 17.2.Conţinut, clauze / Content and Stipulations 276

11 18. Negocierea / Negotiation 284

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SEMESTRUL I

1. Introduction

Everyone communicates. Some communicate better than others.

Understanding the communication process can help improve

communication at home, at work and with friends.

Communication seems so natural and one generally assumes that there is

no need of working on it. It is so untrue. Most fights or arguments with

spouses, children or friends are the result of bad communication. How

much of an argument is caused by ineffective communication? How

much of what is said is taken in the wrong context? How much of the

meaning was changed or lost? How much was totally misunderstood or

came out wrong? All of those are examples of broken communication.

Communication is a complex, ongoing process that brings us into

contact with the people in our world. Often communication is viewed as

a straightforward exchange of messages between a speaker and a

listener, but this is a naïve view. Communication is a symbolic process

of sharing meanings. A key to interpreting communication is to find the

meanings of messages, and those meanings are found in people, not in

words. Your friend’s meaning of trust or happiness may be quite

different than yours. Even a presumably simple, concrete word can

cause misunderstandings. You may think of vacation as personal time

spent away from the workplace with no thought of your job. Your boss

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may think vacation implies that employees will be away from the office

but continuously available to discuss work-related problems via cell

phone or e-mail. The closer both meanings are, the easier it is for you to

communicate effectively. Communication is a continuous process that

begins with a first encounter between people and does not end until the

last encounter in their lives. These encounters may involve functional

messages that serve practical purposes, or, in cases of close ties, the

encounters may also involve nurturing messages that convey a sense of

caring and personal connection. Over time, members of a relationship

develop increasingly predictable communication patterns and, if they

become close, create a relational culture or similar worldview.

Whenever we ask workshop participants how they would define

communication, we hear responses such as “transmitting ideas,” “talking

and listening,” or “sending messages using words and movements.”

Each person has some notion of what it means to communicate with

another and knows how it feels when communication attempts are

successful or unsuccessful, yet they have not thought deeply about the

communication process itself. People seem to assume that

communication works or it does not work, more as a matter of fate than

as a process that can be changed or improved.

Effective communicators are those who are able to select the most

appropriate symbols or messages for specific other persons and who are

able to interpret the intended message symbols of other speakers. As a

child you learned to encode one type of message to ask your father for

money and another to request a loan from your best friend. You learned

to interpret your brother’s gestures indicating if he is feeling sad,

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worried, or exhausted. You have learned who will be enraged if you roll

your eyes at them, and who will decode your nonverbal cue as

humorous. For effective communication to occur, the speaker and

listener must share the same meanings for the symbolic messages they

exchange.

It is difficult to come to an understanding unless one has a grasp of

the full complexity of language, and hence of language learning.

Language is multifaceted to the extent that human activity is various.

Business English serves the role of a medium for a corporate

communication; it is used and influenced by different cultures.

Therefore, by raising cultural awareness we help improve both the

language and the working relationships.

Communication can best be summarized as the transmission of a

message from a sender to a receiver in an understandable manner. The

importance of effective communication is immeasurable in the world of

business and in personal life. From a business perspective, effective

communication is an absolute must, because it commonly accounts for

the difference between success and failure or profit and loss. It has

become clear that effective business communication is critical to the

successful operation of modern enterprise. Every business person needs

to understand the fundamentals of effective communication.

Currently, companies in the United States and abroad are working

toward the realization of total quality management. Effective

communication is the most critical component of total quality

management. The manner in which individuals perceive and talk to each

other at work about different issues is a major determinant of the

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business success. It has proven been proven that poor communication

reduces quality, weakens productivity, and eventually leads to anger and

a lack of trust among individuals within the organization.

What Is Communication? - Communication is defined as a

process by which we assign and convey meaning in an attempt to create

shared understanding. This process requires a vast repertoire of skills in

intrapersonal and interpersonal processing, listening, observing,

speaking, questioning, analyzing, and evaluating. Use of these processes

is developmental and transfers to all areas of life: home, school,

community, work, and beyond. It is through communication that

collaboration and cooperation occur.

1.1. The communication process

The communication process is the guide toward realizing effective

communication. It is through the communication process that the sharing

of a common meaning between the sender and the receiver takes place.

Individuals that follow the communication process will have the

opportunity to become more productive in every aspect of their

profession. Effective communication leads to understanding.

To communicate effectively you need to be familiar with the

process and the variables involved. The basic communication process

includes a source, a message, a channel and a receiver. The source is

you, including your communication skills, your attitudes and your

purpose, as well as your knowledge of the subject, your audience, and

the context in which you are communicating.

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The message includes the code or language you are using as well

as the message’s treatment, that is, what content is selected and how it is

organized. You can think of the channel as both the senses and the

medium of communication used. For instance, seeing and hearing, are

the senses variously involved in reading the printed page, listening to a

tape, or speaker, watching TV, video. Generally, the more channels we

use, that is, the more senses we stimulate, the more effective the

communication. Keep Marshall McLuhan’s aphorism "the medium is

the message" in mind. McLuhan overstates his point but, by affecting

different senses and thus our perception of reality, the media or

technology used can itself influence the message we receive and how we

respond to it. Recall that radio and print reports of the Ethiopian drought

and famine a few years ago were largely ignored. We really did not

receive the message until it was conveyed through photos and TV video

footage.

Receivers are the final link in the communication process. They

must accurately receive and decipher your message. How well your

audience understands the message you intend will depend on not only

the previous factors, but also their own knowledge, attitudes and context.

The process of communication is on going and dynamic, is

irreversible, requires perception of meaning, and occurs in a situational

context. There are many barriers to effective, accurate communication.

These can be mechanical, involve differing perceptions or values (not

having the same understandings), or be a matter of semantics, that is, the

use of words, images, or examples that are beyond the receiver’s

intellectual or cultural ability to understand.

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Non-communication is not possible. Every word, every gesture

communicates something to the receivers, to your audience. In addition,

once communicated, they cannot be retracted. You want to communicate

your intended message and enhance your professional reputation. You

do not want to be remembered for a lackluster presentation and a garbled

message. First impressions are difficult to overcome!

Communicating well benefits you, your audience, and society as a

whole. Thinking about communication as a process is useful because it

helps explain why we must establish the purpose and goals of our

message, why we need to know our audience, what media we select,

what meaning is perceived, and more.

There is an enormous variety of walks of

life/occupations/lifestyles, each of which has its own language and

cultural setting. We may divide the walks of life/occupations/lifestyles

into two categories: those that are common to everybody and those that

are concerned with specialized topics familiar only to a few.

Obviously, those walks of life/occupations/lifestyles that are

common to many people are concerned with everyday existence.

Examples of these universal topics are socializing, shopping, traveling,

eating out, telephoning friends, greetings and introductions, and reading

newspapers. So, when one learns a language, one must be exposed to

linguistic items relating to these universal topics.

Yet in addition to such topics, there is an enormous range of

specialized topics that are of significant importance only to sections of

the population. Examples of these are as follows: sports, hobbies and

interests, business, banking and finance, medicine, academics, literary

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criticism, travel and tourism, biology, chemistry, physics, agriculture

and law or military matters. The list is endless. The extent to which an

individual will need language pertaining to any of these specific topics

depends upon how important the topic is to him in his everyday life. If

the topic is not at all important for him, there is no need for him to know

any of the linguistic items pertaining to it. At the other end of the scale,

when we reach the stage at which any topic constitutes an individual's

profession, it becomes crucial that he have a mastery of the specialized

language pertaining to it.

Each topic will contain certain tasks, specific to it, which an

individual will need to accomplish and which require him to use

language. Here are some examples taken from different fields:

- University Professor: - Giving lectures, participating in

seminars, reading and writing papers for publication, reading and writing

books, discussing academic topics with students and conducting

examinations, oral and written.

- Businessman/businessperson/executive: -Giving presentations,

negotiating, participating in meetings, writing reports, press releases,

letters, faxes and memos, telephoning, note taking, socializing and

entertaining.

- Research Scientist: - Writing the results of experiments, writing

reports on the significance of the results, giving presentations,

participating in seminars, reading recent research.

- Army Professional: Training soldiers, discussing strategies and

tactics, giving instructions, writing reports, giving interviews to the press

…

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These lists are quite general in scope. It is possible, and desirable,

to define the fields of expertise more specifically so that the

accompanying tasks can be defined precisely. In addition, each defined

task should be divided into its various subtasks, so that the linguistic

items to be learned may be identified more easily. In general, we may

state the situation as follows. Human life, and hence human language, is

concerned with many and various topics. Each topic requires certain

communicative tasks to be performed, and these tasks require mastery of

certain task-based skills. Such skills are: reading and writing texts of

various styles, register and lengths, listening in various styles, accents

and registers, speaking appropriately in a variety of contexts including

socializing, negotiating, interviewing, presenting information and

pronouncing material in a clear and culturally acceptable way. People

who are engaged in different activities need to master different skills.

The communication process is the perfect guide toward achieving

effective communication. When followed properly, the process can

usually assure that the sender's message will be understood by the

receiver. Although the communication process seems simple, it in

essence is not. Certain barriers present themselves throughout the

process. Those barriers are factors that have a negative impact on the

communication process. Some common barriers include the use of an

inappropriate medium (channel), incorrect grammar, inflammatory

words, words that conflict with body language, and technical jargon.

Noise is also another common barrier. Noise can occur during any stage

of the process. Noise essentially is anything that distorts a message by

interfering with the communication process. Noise can take many forms,

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including a radio playing in the background, another person trying to

enter your conversation, and any other distractions that prevent the

receiver from paying attention.

Successful and effective communication within an organization

stems from the implementation of the communication process. All

members within an organization will improve their communication skills

if they follow the communication process, and stay away from the

different barriers. It has been proven that individuals that understand the

communication process will blossom into more effective

communicators, and effective communicators have a greater opportunity

for becoming a success.

The communication process can be much more difficult than a

person thinks. Unfortunately, many times a presenter does not realize

that their message is being lost until it is too late and they have gone

through an entire meeting/lecture talking away about something that

their colleagues/audience thinks is absolutely meaningless. Here are

some helpful questions to ask yourself before attempting to relay a

message to a large audience.

Communication barriers may be categorized as follows:

Assumptions about yourself -- Do I really have something to offer? Is it

safe for me to offer suggestions? Do I really want to share the

information? Will others really understand? How will the

communication affect my self-esteem? Attitudes about the message

itself -- Is the information valuable? Do I see the information correctly

or understand it well enough to describe it to others? Is it organized? Am

I comfortable with what I am saying? Can I maintain eye contact?

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Sensing the receiver's reaction -- Do I become aware of whether or not

the receiver actually understands? Or, in other words, can I "sense" from

certain cues or reactions by the receiver, whether or not we are

communicating? Am I aware of the receiver's needs? interests?

Communication can easily be simplified. All you have to do is

know the major causes of communication failures and detect them as

they occur. Typically, people involved in communication breakdowns

are either (a) utterly unaware that the communication has failed and that

misunderstanding has resulted; or (b) painfully aware of a

communication blockage -- or complete breakdown -- and frustrated by

not knowing the reasons why. In either case, people are powerless to

handle or remedy the problem. Remember, the expert communicator not

only learns to detect communication barriers but also to anticipate them

and use an appropriate remedy to overcome them.

Written communication involves any type of interaction that

makes use of the written word. It is one of the two main types of

communication, along with oral/spoken communication. Written

communication is very common in business situations, so it is important

for small business owners and managers to develop effective written

communication skills. Some of the various forms of written

communication that are used internally for business operations include

memos, reports, bulletins, job descriptions, employee manuals, and

electronic mail. Examples of written communication avenues typically

pursued with clients, vendors, and other members of the business

community, meanwhile, include electronic mail, Internet Web sites,

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letters, proposals, telegrams, faxes, postcards, contracts, advertisements,

brochures, and news releases.

Ironically, the importance of good writing skills in the business

world has become more evident even as companies rely increasingly on

computers and other new technologies to meet their obligations. Indeed,

business experts warn that any business's positive qualities—from

dedication to customer service to high-tech expertise—will be blunted to

some degree if they are unable to transfer that dedication and knowledge

to the printed page. "Whether you are pitching a business case or

justifying a budget, the quality of your writing can determine success or

failure," wrote Paula Jacobs in InfoWorld. "Writing ability is especially

important in customer communication. Business proposals, status

reports, customer documentation, technical support, or even e-mail

replies all depend on clear written communication."

In their book Management: Function and Strategy, Thomas S.

Bateman and Carl P. Zeithaml described several advantages and

disadvantages of using written forms of communication. One advantage

is that written messages do not have to be delivered on the spur of the

moment; instead, they can be edited and revised several times before

they are sent so that the content can be shaped to maximum effect.

Another advantage is that written communication provides a permanent

record of the messages that have been sent and can be saved for later

study. Since they are permanent, written forms of communication also

enable recipients to take more time in reviewing the message and

providing appropriate feedback. For these reasons, written forms of

communication are often considered more appropriate for complex

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business messages that include important facts and figures. Other

benefits commonly associated with good writing skills include increased

customer/client satisfaction; improved inter-organizational efficiency;

and enhanced image in the community and industry.

There are also several potential pitfalls associated with written

communication, however. For instance, unlike oral communication,

wherein impressions and reactions are exchanged instantaneously, the

sender of written communication does not generally receive immediate

feedback to his or her message. This can be a source of frustration and

uncertainty in business situations in which a swift response is desired. In

addition, written messages often take more time to compose, both

because of their information-packed nature and the difficulty that many

individuals have in composing such correspondence. Many companies,

however, have taken a proactive stance in addressing the latter issue.

Mindful of the large number of workers who struggle with their writing

abilities, some firms have begun to offer on-site writing courses or

enrolled employees in business writing workshops offered by

professional training organizations, colleges, and community education

programs.

Electronic mail has emerged as a highly popular business

communication tool in recent years. Indeed, its capacity to convey

important corporate communications swiftly and easily has transformed

it into a communications workhorse for business enterprises of all sizes

and orientations. But many users of e-mail technology pay little attention

to basic rules of grammar and format when composing their letters, even

when they are penning business correspondence addressed to clients,

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customers, vendors, business partners, or internal colleagues. This

sloppy correspondence reflects an "astonishing" lack of professionalism,

wrote Sana Reynolds in Communication World: "We seem to have been

seduced by the ease and informality of the medium to produce messages

that ignore the rules and conventions usually in place when producing

hard copy. We send out messages with grammar, usage or spelling

errors…. In the name of speed, we throw caution to the winds and forget

sentence patterning, paragraphing, and other conventions that make

messages intelligible, creating unattractive and impenetrable data

dumps."

Given this unfortunate trend, many business experts counsel

companies to install firm guidelines on tone, content, and shape of e-

mail correspondence. These guidelines should make it clear that all

employees are expected to adhere to the same standards of

professionalism that (presumably) remain in place for traditional postal

correspondence. Proper spelling and grammar and the ability to frame

correspondence in suitably diplomatic language should be hallmarks of

electronic mail as well as regular mail, especially if the communication

is directed at a person or persons outside the company.

1.2. Register, functions, structures

Participating effectively in a Business English environment not

only requires a solid grasp of English grammar, but also an

understanding of key communication factors. This feature focuses on

key points to take into consideration each time you are using English.

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Function: What is the main purpose of the conversation?

Domain: What is my position in this conversation? What is my role?

Register Use: Who am I speaking with?

Urgency: How important is what I have to say?

Function

Function refers to the purpose of the conversation. Is the

conversation about making a serious decision? Is the conversation

entertaining?

Take the following statement for example:

You've got to be joking!

In a serious conversation this statement would mean that the

person does not take you, or what you have to say, seriously. This is

obviously a bad sign and calls for you to explain your position in more

detail.

However, if this comment was made during a lunch while you

were telling a funny story, the statement means that the person finds

what you have to say amusing. You may want to even continue telling

more of the story.

Obviously, this is a simple example. However, taking into

consideration the language function being employed helps you decide

which forms and expressions to use. Generally, language functions

which include negotiations, interviews, presentations, etc. call for more

formal language structures. Informal occasions call for more informal

language; in fact, informal occasions allow you the possibility to show

off your knowledge of idiomatic language. It's best to not use colloquial

or idiomatic language when using formal language functions.

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In order to acquire the desired skills, a range of linguistic items

specific to each skill must be mastered.

- Specialized vocabulary: Each field will have vocabulary, which

is special to it. Some of the words may have meanings specific to the

field, different from their meanings in everyday life.

- Register: Basically, register is concerned with the levels of

politeness and formality to be found in language and the attitudes or

values conveyed by certain words and phrases. Within each field, there

will be specific registers to be learned. Speaking and writing in different

social and cultural contexts require language with different levels of

formality and politeness. Register is very complex and highly developed

in English and includes not only certain forms of grammatical structure,

but specific kinds of vocabulary. Using even a single word

inappropriately can have disastrous consequences.

- Functions: Each field will have different linguistic functions,

which need to be performed, such as apologizing, complaining,

introducing, requesting, refusing requests and making suggestions. Each

function may be performed in different registers.

- Structures: Certain tasks require certain structures much more

than others. For example, a mastery of the various forms of conditional

sentence is essential for writing philosophy, but is hardly needed at all

for writing personal letters.

Different human activities require different communication skills,

which in turn require mastery of specific linguistic items. Within this

broad definition, we may identify two central areas: content and

methodology.

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So, for instance, a course in English for Business Purposes will be

concerned with developing all of the linguistic skills, which are required

in order to function at a professional level in the world of international

business. For some people, even a course entitled "English for Business

Purposes" will prove to have too broad a scope and for them, a course

designed for their specialization within the field of business will be

appropriate, for instance in Advertising, Accounting, Marketing or

Human Resources.

In general, we may say that learning should take place in contexts

that are as authentic as possible and content-based. The requirement of

authenticity means that learning materials should use actual texts

produced by people working in the field under consideration. For

instance, a class on how to write business reports should use good

examples of reports produced by actual

businessmen/businesspersons/executives. A class devoted to the oral

skills needed to function in the currency exchange market should use, as

listening materials, recordings of conversations carried out on the

telephone by actual dealers. The requirement that the learning materials

be content-based means that they should focus on specific problems that

people are likely to encounter in their everyday working lives. For

instance, to develop fluency in a course on negotiating, a case study,

which presents a real negotiating situation-, faced by actual companies

or in specific military, police or community departments- could be used.

Research in business settings has revealed that more employees are

now required to perform a larger share of correspondence themselves

using the fax and the email (Louhiala-Salminen, 1996; Gains, 1999;

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Gimenez, 2000). It is therefore evident that knowledge and application

of the relevant conventions of text processing and production in the

context of the given business reality be given greater attention. In this

context, studies on written genres in professional and academic settings

as initiated by Swales (1990) are of practical importance. Based on his

seminal work on genre analysis of moves in authentic research article

introductions, we are informed that genre analysis serves to highlight the

purpose of using specific linguistic structures, specify their conditions of

use and explain the rationale for use in the given context, and not merely

to describe them. A genre-based approach can therefore offer us a way

of looking at how a written product is used to accomplish its purpose in

a social context the business community.

A genre is chiefly identified by the communicative purpose for

which it is created in a particular social context (Swales, 1990). In the

case of a written text or written discourse, various factors impinge upon

its production and processing. These include the relationships and roles

of the writer and the reader, the degree of formality and even the

ideological principles held by both participants in the community. It is to

be noted that most writing tasks in the field of business are

conventionalized regularities in the organization of various

communicative events (Bhatia, 1993:10). A business letter has to show

certain conventions in writing opening or closing remarks to be accepted

by the business community as such. Certain form-function correlations

exist within the text too and learners need to be made aware of their

usage if effective business purposes are to be achieved through it.

Therefore, an informed study of the text according to genre analysis is

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useful, subsequently preparing learners for writing tasks at future

professional workplace situations.

There seems to be a widely held belief that English, in common

with the British who speak it, is a very formal language. In my

experience, English does not seem any more or less formal than other

languages.

All cultures seem to have concepts of formality, what can be

confusing is that these concepts differ from culture to culture.

What is appropriacy and how is it shown in English?

Why is appropriacy important?

What problems do learners have with appropriacy?

How can we help learners develop sensitivity to

appropriacy?

What is appropriacy and how is it shown in English?

Perhaps the first thing to clarify is that I prefer the word

appropriacy to register. This is because the term register is used to

describe lexis that is exclusive to a particular area of use, often

professional, such as medicine. I will, therefore, to avoid confusion,

refer to whether language is appropriate. I also prefer this term since so

much depends upon context and whether language is appropriate to that

context. So what makes language appropriate for a context?

Basically appropriacy depends upon what you say and how you

say it. In other words upon your choice of words and the way you then

produce those words, which in spoken language is largely dependent on

pronunciation and paralinguistics (body language).

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What you say and how you say it will in turn be governed by the

situation and who you are talking to. Bygate (1987) used the term

'reciprocity conditions' to describe how these features affect language

production. An example might be the use of the exclamation "Shut up!".

Most of us might tell a friend to "Shut up!" in a friendly informal way

when chatting in a pub. We could mean "I don't believe you." and would

probably be laughing and use high pitched falling intonation. If we were

not smiling and used rising intonation the message would be very

different and inappropriate. We would be less likely to use the same

words in a friendly way to the same person at a formal dinner because

the other people present might misinterpret our meaning and think we

were being rude. We would not tell a stranger or someone we are not on

very familiar terms with to "Shut up!" under any normal circumstances

(we would of course if we positively wanted to be rude or perhaps if we

thought their talking was rude).

This consideration for the listener is reflected in the three maxims

Robin Lakoff (1973) put forward:

Don't impose

Give options

Make your receiver feel good

Why is appropriacy important?

Brown and Yule (1983) suggested that much language use aims at

'interaction', by which they mean using language to create, preserve and

develop social relationships. If the speaker is not appropriate this aim

will not be achieved. Rudeness, deliberate or not, causes social

relationships to break down.

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What problems do learners have with appropriacy?

What makes this so difficult for a learner of English is that so much

of the necessary sensitivity to appropriacy is culturally specific and

acquired in childhood. It is also always changing - some examples of

what is considered appropriate language now (for example the use of

"Shut up!" explored above) would have been thought completely

inappropriate as little as 40 years ago, perhaps even more recently.

In addition, due to the subconscious manner in which this

awareness of appropriacy is acquired, native speakers may not make

allowances for its absence when non-native speakers speak or write. A

good example is the case of intonation where a speaker may be

misinterpreted as being rude or bored completely unfairly because their

intonation is too flat.

Another cause of problems here can be employing what is

acceptable in your L1 when speaking another language. In Spain it is

uncommon to say "por favor" (please) when ordering a drink in a bar; so

long as you smile, it is unnecessary. This is not the casein the UK.

Similarly in Czech I could ask "Nemate chleb?" in a shop but if I

directly translated this into "Don't you have bread?" in Britain, I could

be in trouble.

Finally to make things more complex there is the difference

between appropriacy in spoken and written language. This distinction

exists in most languages as far as I am aware but nevertheless adds

further complications. The arrival of texting and email has blurred this

distinction to some extent but at the same time has increased the amount

of awareness necessary.

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Most of the distinctions between what is and isn't appropriate can

be most easily demonstrated through teaching functional 'social'

language (e.g. making requests). When teaching functions be sure to

focus on the context in which you would use particular functions and

with whom you would use them.

Most learners will be safe and able to function if they can use

neutral language appropriately, so I teach this first. For example, "Can

you tell me the time, please?" is more generally applicable than "Would

you mind telling me the time, please?" or "What's the time?”

Practise transforming language from formal to neutral to informal etc.

My students find this fun and interesting and it is a good way of raising

awareness of different possibilities within the same context.

I often ask students to listen and decide "What is the relationship

between the speakers?" or "Where are they speaking?" etc. as a first

listening task as it makes them aware of the importance of these

considerations.

Pronunciation is central to appropriacy and so I try to drill good

models with differing intonation and stress.

Very little language is context specific (we don't only use the 2nd

conditional to talk about winning the lottery - when we use it at all) so I

give my learners practice using structures / functions / lexis in lots of

different situations.

For a variety of reasons I often ask students to write spoken

language. One task I use is to ask groups to write the same dialogue (e.g.

asking for directions) but assign a different degree of appropriacy to

26

each group. The groups then perform their dialogues for the class and

the listeners have to guess how appropriate they are being.

Being appropriate, of which politeness is an important but not the

only aspect, is central to use of any language. Gaining an understanding

of this feature of language use, both as a receiver of and producer of

language, is fundamental to success. However, as I have tried to show,

acquiring this understanding is demanding because this aspect of

language is extremely complex, partly because it is so culture and

context specific.

As teachers the best we can do is to expose learners to a wide

variety of language and contexts within which that language can be

used.

Domain includes knowing your rights and responsibilities in any

discussion in which you may be participating. Is the discussion of a

personal nature? Are you being interviewed for a job?

In each of these instances personal questions need to be answered

in different manners. If the conversation is of a personal nature you can

feel free to answer any question you want. On the other hand, if you are

interviewing for a job, personal questions concerning your family,

personal preferences, etc. might well be out of place.

The same is also true for the workplace. Certain questions may be

asked and answered depending on the relationship between the speakers.

Register use refers to the type of language you should use

depending on the relationship between you and the speaker.

27

Is the person you are speaking with a subordinate, or is he / she

your boss? Do you have a friendly relationship with this person? Is

joking allowed?

In general, the more informal the situation the more informal the

language can be. Generally, colleagues in the US go by a first name

basis and also use more colloquial language with each other. If, on the

other hand, you are speaking with a supervisor you will probably use

more formal language for example: Ms. Smith

Urgency concerns the importance of your message. This urgency

will also be reflected in the language you choose to use. If the message

is extremely important, and you are speaking with a subordinate (register

use) the imperative form (i.e. Call Mr Jackson!) might be appropriate.

On the other hand, if your message is not so important and you are

speaking with a supervisor, you would use more formal forms to get that

person's attention (i.e. Excuse the interruption Mr. Brown, but would

you mind taking a look at this report when you have the time?).

Once again, the tendency in the American workplace is for more

important (urgent) messages to be expressed in simple direct language.

The less important message is often softened with more formal

language.

Useful Meeting Phrases

Interrupting

May I have a word?

If I may, I think...

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Excuse me for interrupting.

May I come in here?

Giving Opinions

I (really) feel that...

In my opinion ...

The way I see things...

If you ask me ... I tend to think that...

Asking for Opinions

Do you (really) think that ...

(name of participant) can we get your input?

How do you feel about...?

Commenting on Other Opinions

I never thought about it that way before.

Good point!

I get your point.

I see what you mean.

Agreeing with Other Opinions

Exactly!

That's (exactly) the way I feel.

I have to agree with (name of participant).

Disagreeing with Other Opinions

Up to a point I agree with you, but...

(I'm afraid) I can't agree

Advising and Suggesting

We should...

Why don't you....

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How/What about ...

I suggest/recommend that...

Clarifying

Have I made that clear?

Do you see what I'm getting at?

Let me put this another way...

I'd just like to repeat that...

Requesting Information

I'd like you to...

Would you mind ... I wonder if you could...

Asking for Repetition

I didn't catch that. Could you repeat that, please?

I missed that. Could you say it again, please?

Could you run that by me one more time?

Asking for Clarification

I'm afraid I don't quite understand what your are getting at.

Could you explain to me how that is going to work?

I don't see what you mean. Could we have some more details, please?

Asking for Verification

Do you mean that...?

Is it true that...?

Asking for Spelling

Would you mind spelling that for me, please?

Asking for Contributions for Other Participants

What do you think about this proposal?

Would you like to add anything, (name of participant)?

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Has anyone else got anything to contribute?

Are there any more comments?

Correcting Information

Sorry, that's not quite right.

I'm afraid you don't understand what I'm saying.

That's not quite what I had in mind.

That's not what I meant.

Keeping the Meeting on Time

Well, that seems to be all the time we have today.

Please be brief.

I'm afraid we've run out of time.

I'm afraid that's outside the scope of this meeting.

Let's get back on track, why don't we?

That's not really why we're here today.

Why don't we return to the main focus of today's meeting?

We'll have to leave that to another time.

We're beginning to lose sight of the main point.

Keep to the point, please.

I think we'd better leave that for another meeting.

Are we ready to make a decision?

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2. Interpersonal communication

What do we mean when we talk about interpersonal

communication?

One way of defining interpersonal communication is to compare it

to other forms of communication. In so doing, we would examine how

many people are involved, how physically close they are to one another,

how many sensory channels are used, and the feedback provided.

Interpersonal communication differs from other forms of communication

in that there are few participants involved; the interactants are in close

physical proximity to each other.

We have many different relationships with people. Some

researchers say that our definition of interpersonal communication must

account for these differences. These researchers say that interacting with

a sales clerk in a store is different than the relationship we have with our

friends and family members. Thus, some researchers have proposed an

alternative way of defining interpersonal communication. This is called

the developmental view. From this view, interpersonal communication is

defined as communication that occurs between people who have known

each other for some time.

Interpersonal communication is important because of the functions

it achieves. Whenever we engage in communication with another

person, we seek to gain information about them. We also give off

information through a wide variety of verbal and nonverbal cues.

32

One reason we engage in interpersonal communication is so that

we can gain knowledge about another individual. Social Penetration

Theory says that we attempt to gain information about others so that we

can interact with them more effectively. We can better predict how they

will think, feel, and act if we know who they are. We gain this

information passively, by observing them; actively, by having others

engage them; or interactively, by engaging them ourselves.

We also engage in interpersonal communication to help us better

understand what someone says in a given context. The words we say can

mean very different things depending on how they are said or in what

context. Content Messages refer to the surface level meaning of a

message. Relationship Messages refer to how a message is said. The

two are sent simultaneously, but each affects the meaning assigned to

the communication. Interpersonal communication helps us understand

each other better.

Another reason we engage in interpersonal communication is to

establish an identity. The roles we play in our relationships help us

establish identity. So too does the face, the public self-image we present

to others. Both roles and face are constructed based on how we interact

with others.

Finally, we engage in interpersonal communication because we

need to express and receive interpersonal needs.

As relationships progresses, patterns of interactions take shape that

we may not recognize.

There are two basic types of behaviors in relationships: dominance

and submissiveness. Dominance is often referred to as one-up, while

33

submissiveness, one-down. In some relationships, the two are

complementary--one individual is one-up, the other one-down--and the

relationship is rewarding. Other relationships are symmetrical, where

both parties are one-up or both are one-down. Problems can result when

individuals feel trapped by their role as the dominant or submissive

member of the relationship. Flexibility can help both partners enjoy the

relationship.

Whenever we communicate with someone else, we open ourselves

up for rejection.

• Impervious: Failing to acknowledge the other person.

• Interrupting: Cutting the other's message short.

• Irrelevant: Giving a response that is unrelated to what the other

has said.

• Tangential: Briefly responding to the other's message.

• Impersonal: Responding by using formal, jargon-laden

language.

• Incoherent: Responding with a rambling, difficult to understand

message.

• Incongruous: Giving contradictory verbal and nonverbal

messages.

A final type of relational pattern is dependencies and counter

dependencies. In a dependency relationship, one individual sees himself

or herself relying on another person for something. Soon, he or she

agrees with whatever the other says or does. In a counter dependency,

one individual sees himself or herself as not being dependent on the

other. Thus, he or she disagrees with the other quite frequently.

34

Conflict is a part of most every interpersonal relationship.

Managing conflict, then, is important if the relationship is to be long-

lasting and rewarding.

The climate in which conflict is managed is important.

One should avoid a defensive climate, which is characterized by

these qualities:

• Evaluation: judging and criticizing other group members.

• Control: imposing the will of one group member on the others.

• Strategy: using hidden agendas.

• Neutrality: demonstrating indifference and lack of

commitment.

• Superiority: expressing dominance.

• Certainty: being rigid in one's willingness to listen to others.

Instead, individuals should foster a supportive climate, marked by

these traits:

• Description: presenting ideas or opinions.

• Problem orientation: focusing attention on the task.

• Spontaneity: communicating openly and honestly.

• Empathy: understanding another person's thoughts.

• Equality: asking for opinions.

• Provisionalism: expressing a willingness to listen other the

ideas of others.

Additional Tips

• Conflict Can Be Constructive. Recognize that conflict can

strengthen your relationships.

35

• Be Prepared. Plan how you will communicate about conflict in

order to create a supportive climate.

• Be Involved. Do not withdraw from the conflict or avoid

conflict situations.

• Withhold Quick Retorts. Be careful about what you say and

how you say it.

• Review. Summarize what you have discussed and make plans

to continue the discussion if time permits immediate resolution.

Interpersonal communication is inescapable.

The very attempt not to communicate communicates something.

Through not only words, but through tone of voice and through gesture,

posture, facial expression, etc., we constantly communicate to those

around us. Through these channels, we constantly receive

communication from others. Even when you sleep, you communicate.

Remember a basic principle of communication in general: people are not

mind readers. Another way to put this is: people judge you by your

behavior, not your intent.

Interpersonal communication is irreversible

You can't really take back something once it has been said. The

effect must inevitably remain. Despite the instructions from a judge to a

jury to "disregard that last statement the witness made," the lawyer

knows that it can't help but make an impression on the jury. A Russian

proverb says, "Once a word goes out of your mouth, you can never

swallow it again."

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Interpersonal communication is complicated

No form of communication is simple. Because of the number of

variables involved, even simple requests are extremely complex.

Theorists note that whenever we communicate there are really at least

six "people" involved: 1) who you think you are; 2) who you think the

other person is; 30 who you think the other person thinks you are; 4)

who the other person thinks /she is; 5) who the other person thinks you

are; and 6) who the other person thinks you think s/he is.

We don't actually swap ideas; we swap symbols that stand for

ideas. This also complicates communication. Words (symbols) do not

have inherent meaning; we simply use them in certain ways, and no two

people use the same word exactly alike.

Osmo Wiio gives us some communication maxims similar to

Murphy's law (Osmo Wiio, Wiio's Laws--and Some Others (Espoo,

Finland: Welin-Goos, 1978) :

• If communication can fail, it will.

• If a message can be understood in different ways, it will be

understood in just that way which does the most harm.

• There is always somebody who knows better than you what you

meant by your message.

• The more communication there is, the more difficult it is for

communication to succeed.

Interpersonal communication is contextual

In other words, communication does not happen in isolation. There

is:

37

• Psychological context, which is who you are and what you

bring to the interaction. Your needs, desires, values, personality, etc., all

form the psychological context. ("You" here refers to both participants

in the interaction.)

• Relational context, which concerns your reactions to the other

person--the "mix."

• Situational context deals with the psycho-social "where" you

are communicating. An interaction that takes place in a classroom will

be very different from one that takes place in a bar.

• Environmental context deals with the physical "where" you

are communicating. Furniture, location, noise level, temperature, season,

time of day, all are examples of factors in the environmental context.

• Cultural context includes all the learned behaviors and rules

that affect the interaction. If you come from a culture (foreign or within

your own country) where it is considered rude to make long, direct eye

contact, you will out of politeness avoid eye contact. If the other person

comes from a culture where long, direct eye contact signals

trustworthiness, then we have in the cultural context a basis for

misunderstanding.

The extent of the authenticity of the learning materials will vary

depending upon two related factors: the language level of the trainees

and the degree of linguistic complexity of the skills presented and

practiced. If the language level is low, then perforce the degree of

authenticity will be compromised. As the language level increases, the

degree of authenticity becomes greater.

38

Informal communication is vital for achieving certain types of

work-related tasks. Research on scientific collaboration has shown that

physical distance is the strongest predictor of collaboration between

researchers. Physical proximity promotes frequent, impromptu face-to-

face communications, which are crucial for the planning and negotiation

phases of projects. Work on software development also has

demonstrated that the degree to which project workers engage in

interpersonal communication strongly predicts project success.

Furthermore, other work has shown negative impacts on teamwork when

opportunities for ad hoc communication are reduced, as in remote

collaboration. Work becomes more difficult to coordinate and advance

despite the use of longer and more task-focused meetings in remote

settings. Sociological studies of organizational life stress the primary

role of mundane office conversations in helping workers learn,

understand, adapt, and apply formal procedures and processes.[…]

Despite research from various disciplines showing the value of

informal interactions, evidence indicates that people in the workplace do

not recognize its value. Kraut & Streeter (1995) found impromptu

communication is under-utilized compared with its value, whereas

formal communication techniques are overused relative to their value.

Our own preliminary evidence supports this result. In a series of

interviews with a dozen employees in a Fortune 500 U.S. corporation,

we found that although people reported gaining most of their work-

related news and information from informal interactions, those same

people said they used almost exclusively formal approaches to convey

information to other parts of the company. Most commonly, they

39

reported their information to a high-level management group and asked

that they pass the information down the hierarchy in their staff meetings.

In many cases, they wrote a document to convey information and either

gave it to managers to give to their employees, or made it available to

employees directly (in email, mailings to the home, or by publishing it

on the company's internal World Wide Web pages). Some also gave

formal presentations to supplement the document. When we asked

information disseminators if they had considered spreading their

information through word of mouth, they either had not thought of it or

did not trust it. They were concerned that information passed informally

would be distorted and misinterpreted and might not become available to

all the intended recipients.

Say whether the statements below it are true (T) or false (F). Read

the part that has helped you choose your answer:

• The farther they are from each other, the more effectively

scientists can cooperate.

• Sometimes interpersonal communication makes it difficult for

the team to concentrate on their specific tasks.

• Corporate workers should be discouraged from engaging in

routine conversation during office hours.

• Unfortunately, only sociologists recognize the value of

interpersonal communication.

• Researchers interviewed dozens of employees in 500 U.S.

corporations.

40

• The employees used to find out about the latest projects and

developments within the firm most of the time by talking to their

colleagues.

2.1. Ways and styles of communication

Romanian people have a very specific way of discussing things. If

you are brought up with it, you see no problem. However, in terms of

strategies for communication in Business English, the Romanian way

may be ineffective.

It is over direct and often could be received as an abusive one.

Therefore, I decided to investigate the case and find some solution.

Unfortunately, there was absolutely no data and no descriptive

evaluation of Romanian strategies for communication.

Searching libraries, I came across” Intercultural Communication -

a Discourse Approach” by Scollon and Scollon. It focuses on

professional communication in a cross-cultural context and emphasises

the importance of proper meaning interpretation. Briefly, Scollon and

Scollon suggest that in most cases, a sudden breach of any kind of

professional communication could be owed to the misinterpretation of

signals, verbal messages and gestures particular to a given culture.

Therefore, they believe that to eliminate or lower the risk of a breach,

professional students should be informed about potential problems and

sensitized to peculiarities of an alien code of practice. Nevertheless, it is

virtually impossible to predict every professional problem, one might

say. To solve this problem, the authors suggest a skeleton for situation-

context analysis – Grammar of Context.

41

The main purpose of Grammar of Context is to analyze and

describe the environment in which a communicative situation occurs. It

takes into consideration the following factors:

1. Scene - participants’ expectations in terms of location and

communication content ( what information should be used and how)

2. Key - participants’ expectations of the communication tone

(formal / informal)

3. Participants - their status; relationship with each other

4. Message Form - whether it is speaking, writing, or other media

5. Manifestation - deals with the way members of a particular

group find out about a code of practice; whether it is explicit – a

company’s statute // regulation, or tacit – common knowledge,

traditional behavior.

It is important to understand how your communication style is

interpreted by others to avoid miscommunication and

misunderstandings. The goal is communicate with assertion and avoid

an aggressive, passive-aggressive or passive style of communication.

Different Styles of Communication

Assertive Communication

The assertive style is believed to be the most effective and

healthiest style of communication. It is the way humans express

themselves naturally, when their self-esteem gives them the confidence

to communicate without using manipulation and games. When we use an

assertive style of communication, our objective is to work out mutually

42

satisfying solutions and as such, we communicate our needs clearly and

in a forthright manner. In this case, we know our limits and reject any

attempts to be pushed beyond, just because others want something else

from us. However, it is surprising to note that assertive style is the least

used style of communication.

Aggressive Communication

The aggressive style of communication always involves

manipulation techniques. Aggressive communication intends to

manipulate people into making them do what we want, by using tactics

such as, inducing guilt (hurt), intimidation and controlling the other

person (by showing anger). This style of communication may be covert

or overt, though the intention is always to get our needs met. There are a

few arenas where aggressive behavior is demanded, including sports and

war. However, aggressive communication doesn’t work in a relationship

for a long time. Interestingly enough, aggressive sports also rely heavily

on team coordination and rational coaching strategies.

Passive Communication

The passive style of communication is based on compliance and is

aimed to avoid confrontation at any cost. In the passive communication

mode, the communicator talks very less, questions even less and actually

does very little. Passive communicators just don’t want to rock the boat

for the fear of having to sail through rough waters. They believe that it is

rather safe not to react and better to disappear from the scene than to

43

stand up and get noticed. They hate being involved in a war of words or

a heated argument.

Passive-Aggressive Communication

The passive-aggressive communication style involves a lot of

strategizing and intends to avoid direct confrontation. Passive-aggressive

communicators believe in getting their way through manipulation

(aggressive). This style is rather sneaky and devious, where the intention

is to make the other person suffer without any direct attack. It includes

politics and rumor-mongering. Passive-aggressive communicators are

self enhancing, though they are not very straight forward about it.

Though such people may appear honest, the underlying comments are

sure to confuse the people around. This style is definitely not considered

one of the best ways to communicate.

2.2. Cultural approaches

A training session for Business English Teachers led by Marie

Delaney offered – a cross-cultural awareness questionnaire, which is

presented below:

What is your cultural approach to the following aspects?

Answer the following questions:

1. Time – Do you tolerate being late - If yes, how much?

2. Eye contact – Is it important for a communicative event? Do

you need to maintain it? If yes, for how long?

44

3. Small Talk – Do you use it? Do you think it is important? What

is your personal attitude to it?

4. Silence – How do you understand silence? Is it meaningful?

5. Teams – Is it natural for you to work in teams?

6. Difficult people & situations –

- What is your way of dealing with interruptions and difficult

people?

When we discuss communication and culture, we should be aware

of the total spectrum of communication including language, non-verbal

communication, customs, perceived values, and concepts of time and

space. Do all tourists identify with Canadian traditions and values?

Likely not. But the more interesting question is: Why not? The answer

lies in the simple fact that most tourists come from different cultures:

some vastly different like those from Japan and China, others less

different, such as tourists from Eastern Canada or the United States.

Even if tourists share the same language, they may have much different

customs and values.

What happens when people from different cultures interact face-to-

face? One way to appreciate the impact of cultural differences is to look

in the mirror. When Americans and Canadians travel to other countries,

they look for Cokes, steaks and hamburgers and the same amenities in

hotels and other accommodations that they are used to at home. While

the host country may offer an authentically different culture, which is

one of the reasons people travel, North Americans tourists are notorious

for wanting the comforts of home wherever they may be. In many third

45

world countries, North Americans seek out joint venture hotels to enjoy

North American food and lodging and to be served by people who speak

English. Strangely, what we expect for ourselves in travel is not deemed

to be reasonable when we're the hosts dealing with tourists from other

countries.

THE GERMANS:

Germany is not a melting pot society and Germans are not mobile.

Many stay in their geographic region and even the same house for

generations. The scale of everything is smaller in Germany than in the

Western countries. They love the outdoors, open spaces and treasure

forests. Hiking is a popular sport (Hall: 1990:38).

To the German space is sacred. Homes are protected by a variety

of barriers, fences, walls, hedges solid doors, shutters and screening to

prevent visual or auditory intrusion (Hall: 1990:38).

Germans seldom invite anyone who is not a close friend to their

home. To be invited is considered an honor. When you arrive bring a

small bouquet for the hostess (not red roses which convey romantic

attachment). Flowers should be unwrapped before being presented (Hall:

1990:39).

Positions in things are also important - for example, the right side

represents a place of respect (Hall: 1990:42). So, in seating

arrangements or just walking from one place to another, the senior

person or the group leader should be placed on the right.

The German sense of privacy is very strong. Learn what is

considered personal and do not ask questions that may be offensive.

Americans feel that Germans do not interact with neighbors and

46

perceive German behavior as unfriendly. German friends of many years

continue to address each other by their last names: "Herr Schmidt" not

"Walter". Germans are careful not to touch accidentally or to encourage

signs of intimacy. On the other hand, they do maintain direct eye contact

in conversations to show they are paying attention. However, the

German who speaks most softly and to whom others defer is the one to

pay attention to, not the one who makes the most noise.

Order is a dominant theme in German culture. There is order in all

things, including space--they are very sensitive to spatial intrusions. One

exception to orderliness is behavior in lines for service, in stores, at

ticket counters, or in boarding planes, especially where there is no seat

assignment. Germans do not form queues but instead crowd and push

and can be very rough. They do not yield when someone says "Excuse

me". Their determination to be served overrides their usual need to avoid

physical contact. However, these are exceptions. Generally, Germans

expect organization and order in all things-- everything should be

carefully planned, researched thoroughly and carried out in an orderly

manner (Hall: 1990:39-42).

They have a strong drive for conformity and object strenuously

when people fail to obey signs and directions. Westerners feel that

things are meant to be used; and if they serve no useful purpose, we

dispose of them. The German attitude is that things have great intrinsic

value. We feel remiss if we buy books and don't read them. But a

German will feel that it is important to own a book even if one can't read

it immediately. Sales of hard-cover books exceed sales of paperback

books in Germany (Hall: 1990:46).

47

Associated with their demand for high-quality, long-lasting goods

are the German abhorrence of waste. Waste is a sin, such as heating,

cooling and lighting buildings when it is not necessary (Hall: 1990:46).

Germans are value- conscious and always insist on getting their money's

worth. Don't ever try to sell them goods that are less than high quality.

They appreciate, in fact demand, fine workmanship, and design and

high-quality material.

A television ad that is effective in the U.S. will have to be

translated into print media to reach Germans. Germans are print-

oriented, which explains in part why there is so little advertising on

German TV (Hall: 1990:30). Also, Germans are always looking for what

is "true" and to them numbers are ways of signaling that a product is

exactly as it has been represented. Germans demand facts, facts and

more facts.

THE FRENCH:

It is not uncommon for Americans to experience difficulty getting

the French - even those whom they know and have done business with-

to reply to inquiries, even urgent ones. This can be exasperating. The

reasons are many, but most have to do with the importance of immediate

human contacts to the French. A solution that succeeds when other

methods fail is to use a surrogate to relay messages, rather than relying

on a letter or a phone call. Why? Because letters and phone calls are not

personal enough. If you send a properly placed emissary, one whom the

individual you are trying to reach likes and trusts and considers

48

important, you add the necessary personal touch to your message and

will thereby release the right response.

The French also stress the importance of observing the many

rituals of form. If you don't use the right form, the message conveyed is

that you are ignorant or ill-mannered or don't care. In any event, the

response that is provoked is almost certain to be negative. Remember

that the French deplore casualness and informality. Paying attention to

the details and being correct in everything you do is the only tactic that

releases the right response from the French (Hall: 1990:30).

CONTEXT:

Another important aspect of communication is the level of context

in which the message is passed. Linguists and anthropologists use the

terms 'high' and 'low' context to indicate how much information is

required for successful communication. High-context communication is

one in which most of the information is either in the physical context or

internalized in the person, while very little of the message is actually in

words (Hall: 1976:79).

Couples often can communicate with a look or a nod of the head

at most. Low-context communication is just the opposite: most of the

information is verbalized. Twins who have grown up together can and

do communicate more economically (high context) than can opposing

lawyers in a courtroom during a trial (low-context) (Hall: 1976:79).

In the Far East, high-context communication is much more

common than in North America. This can lead to serious

misunderstanding. A businessman was invited to lunch with a Japanese

49

friend atop one of Tokyo's new skyscrapers with the entire city spread

out below them. The Japanese host chose the occasion to give an

overview of some of the sticky points in US- Japanese relations. In his

own way, indirect but very clear, he said there were certain things that

the Americans had missed in Japanese culture (Hall: 1976:141). For the

Japanese to show anger is tantamount to admitting loss of control (and

face), unless, of course, things have gone too far. No warning signs are

given and Westerners as well as Europeans will unconsciously push and

push - looking for structure, pattern, and limits. Because they are

unfamiliar with the system, they will go too far. With the Japanese

culture, one must make haste slowly and engage the most skilful, subtle

interpreter of the culture you can find (Hall: 1976:142).

The greater the cultural distance is, the more difficult the interface.

An example of easy-to-interface communication would be Germany and

Switzerland. The cultural distance in this case is not great since both

cultures are low context as well as monochronic, a concept discussed in

the following section (Hall: 1990:27). A difficult-to-interface

communication would be France and the United States. If you're

communicating with a German, remember they are low-context and will

need lots of information and details. If you're communicating with

someone from France, they are high-context and won't require as much

information (Hall: 1990:28).

Context is the information that surrounds an event; it is

inextricably bound up with the meaning of that event. The elements that

50

combine to produce a given meaning -- events and context -- are in

different proportions depending on the culture. The cultures of the

worlds can be compared on a scale from high to low context (Hall:

1990:27).

Japanese, Arabs and Mediterranean peoples, who have extensive

information networks among family, friends, colleagues and clients and

who are involved in close personal relations are high-context. As a

result, for most normal transactions in family life they do not require,

nor do they expect, much in- depth background information. This is

because they keep themselves informed about everything having to do

with the people who are important in their lives.

Low-context people include Americans, Germans, Swiss,

Scandinavians and other northern Europeans. They compartmentalize

their personal relationships, their work, and many aspects of day-to-day

life. Consequently, each time they interact with others they need detailed

background information. The French are much higher on the context

scale than either the Germans or the Americans. This difference can

affect virtually every situation and every relationship in which the

members of these two opposite traditions find themselves.

"Contexting" performs multiple functions. For example, any shift

in the level of context is a communication. The shift can be up the scale,

indicating a warming of the relationship, or down the scale

51

communicating coolness or displeasure--signaling something has gone

wrong with a relationship.

High context people are apt to become impatient and irritated

when low- context people insist on giving them information they don't

need (Hall: 1990:10). Conversely, low-context people are at a loss when

high- context people do not provide enough information. One of the

great communication challenges in life is to find the appropriate level of

contexting needed in each situation. Too much information leads people

to feel they are being talked down to; too little information can mystify

them or make them feel left out. Ordinarily, people make these

adjustments automatically in their own country, but in other countries

their messages frequently miss the target (Hall:1990:9).

Americans, to some extent, and Germans, to a greater extent, rely

heavily on auditory screening, particularly when they want to

concentrate. High-context people reject auditory screening and thrive on

being open to interruptions and in tune with what goes on around them.

French and Italian cities periodically bombard you with noise.

DIFFERENT CONCEPTS OF TIME:

Another important factor in cross-cultural communication is the

concept of time. For example, in Germany if you arrive late by even a

few minutes, no one will be impressed by your sales presentation, no

matter how good it is. Indeed, they may not even wait around to hear it

(Hall: 1990:28).

52

We can divide people into two rough categories with respect to

time: monochronic and polychronic people. Monochronic people tend to

do one thing at a time, concentrate on the job at hand, take time

commitments seriously and are concerned not to disturb others. They

also tend to be rule followers, show great respect for private property,

seldom borrow or lend and emphasize promptness. In addition, they are

low-context in terms of the category discussed earlier. Polychronic

people are almost opposites in all of the above. They are high-context

types, who do many things at once, are highly distractible and subject to

interruptions. While they consider time commitments objectives to be

met if possible, they are more concerned with relationships, especially

family and friends (Hall: 1990:15).

As mentioned above, promptness is taken for granted in Germany.

In fact, it's almost an obsession. If there is a chance you'll be late for an

appointment, phone ahead. The Germans want to know where people are

at all times; not knowing violates their sense of order (Hall: 1990:36).

It is always important to know which segment of the time frame is

emphasized. Eastern peoples tend to be past-oriented. Others, such as

those in the urban United States, are oriented to the present and short-

term future. Still others, such as Latin Americans, are both past and

present oriented.

In Germany, where historical background is very important, every

talk, book, or article begins with background information giving an

historical perspective. This irritates many foreigners who keep

wondering "why don't they get on with it? After all, I am educated. Don't

the Germans know that?"

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The Japanese and the French are also steeped in history, but

because they are high-context cultures, historical facts are alluded to

obliquely. At present, there is no satisfactory explanation for why and

how differences of this sort came about (Hall: 1990:17).

The key to understanding Japanese time is to know that the

Japanese have two modes: a monochronic mode for foreigners and

technology and a polychronic mode for virtually everything else. The

Japanese switch from an open system for those in their inner circle to a

more closed and tightly scheduled system for outsiders. To an outsider

everything in Japan is rigidly scheduled. They organize a visitor's time

and present him with a full schedule upon arrival. However, as one

comes to know the Japanese, one discovers another aspect of their time

system-- flexibility (Hall: 1990:114).

Historical past is important to Japanese and they take it for granted

that the visitor will be familiar with the main points of Japanese history.

When dealing with the Japanese one must keep in mind that many

important things are frequently left unsaid. When the Japanese meet with

foreigners, the most important thing on their agenda is to get to know

them. They are quite expert at determining what tactics are effective

with foreigners and will try various strategies to see what works. They

also ask many probing questions, testing your knowledge and your

sincerity and conviction. Japanese admire people who are serious about

their work, well informed, sincere and honest. They want to have some

understanding of and feeling for the people involved. Do not be

impatient. If you deny the Japanese this opportunity to become

54

acquainted, you will not succeed in matters. Do not mistake hospitality

for friendship (Hall: 1987:114).

SPACE:

In humans, territoriality is highly developed and strongly

influenced by culture. It is particularly well developed in the Germans

and the Americans. Americans tend to establish places that they label

"mine" - a cook's feeling about a kitchen or a child's view of her or her

bedroom. In Germany, this same feeling of territoriality is commonly

extended to all possessions, including the automobile. If a German's car

is touched, it is as though the individuals himself has been touched.

Space also communicates power. In German and Americans the top

floor is more important than others, while for the French middle floors

are more important (Hall: 1990:11).

Personal Space: This is another form of territory. Each person has

around him an invisible bubble of space which expands and contracts

depending on a number of things: the relationship to the people nearby,

the person's emotional state, cultural background, and the activity being

performed. Few people are allowed to penetrate this bit of mobile

territory and then only for short periods of time. Changes in the bubble

brought about by cramped quarters or crowding cause people to feel

uncomfortable or aggressive. In northern Europe, the bubbles are quite

large and people keep their distance. In southern France, Italy, Greece,

and Spain, the bubbles get smaller and smaller so that the distance that is

perceived as intimate in the north overlaps normal conversational

distance in the south. This means that Mediterranean Europeans "get too

55

close" to the Germans, the Scandinavians, the English and those

Americans of Northern European ancestry. In northern Europe, one does

not touch others. Even the brushing of the overcoat sleeve used to elicit

an apology (Hall: 1990:11).

MEMORY:

In addition to the talents that people are born with, culture has

always exerted a dominant influence on memory and thinking. In Iran,

for example, schools emphasize verbal memory. Iranian educators do

not care how students store and retrieve information just as long as they

remember. In earning their living in later life, they must continue to be

able to recall blocks of material even at relatively low organizational

levels in government.

The verbal memory system, like many cultural systems, is

integrated into the rest of the culture and is felt in all areas of life (Hall:

1976:160).

CONCLUSION:

Insensitivity to customs of "guests" in Western countries will not

only result in misinformed decisions, but may also precipitate

resentment. When we experience a form of cultural shock (something

outside our normal experience), we have to remember a simple maxim:

"What they are doing makes sense to them."

It's no secret that today's workplace is rapidly becoming vast, as

the business environment expands to include various geographic

56

locations and span numerous cultures. What can be difficult, however, is

understanding how to communicate effectively with individuals who

speak another language or who rely on different means to reach a

common goal..

The term “culture” refers to the complex collection of knowledge,

folklore, language, rules, rituals, habits, lifestyles, attitudes, beliefs, and

customs that link and give a common identity to a particular group of

people at a specific point in time.

All social units develop a culture. Even in two-person

relationships, a culture develops over time. In friendship and romantic

relationships, for example, partners develop their own history, shared

experiences, language patterns, rituals, habits, and customs that give that

relationship a special character—a character that differentiates it in

various ways from other relationships. Examples might include special

dates, places, songs, or events that come to have a unique and important

symbolic meaning for two individuals.

Groups also develop cultures, composed of the collection of rules,

rituals, customs, and other characteristics that give an identity to the

social unit. Where a group traditionally meets, whether meetings begin

on time or not, what topics are discussed, how decisions are made, and

how the group socializes are all elements of what, over time, become

defining and differentiating elements of its culture.

Organizations also have cultures, often apparent in particular

patterns of dress, layout of workspaces, meeting styles and functions,

ways of thinking about and talking about the nature and directions of the

organization, leadership styles, and so on.

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The most rich and complex cultures are those that are associated

with a society or a nation, and the term “culture” is most commonly used

to refer to these characteristics, including language and language-usage

patterns, rituals, rules, and customs. A societal or national culture also

includes such elements as significant historical events and characters,

philosophies of government, social customs, family practices, religion,

economic philosophies and practices, belief and value systems, and

concepts and systems of law.

Any social unit (whether a relationship, a group, an organization,

or society) develops a culture over time. While the defining

characteristics—or combination of characteristics—of each culture are

unique, all cultures share certain common functions. Three such

functions that are particularly important from a communication

perspective are (1) linking individuals to one another, (2) providing the

basis for a common identity, and (3) creating a context for interaction

and negotiation among members.

The relationship between communication and culture is a very

complex and intimate one. First, cultures are created through

communication; that is, communication is the means of human

interaction through which cultural characteristics— whether customs,

roles, rules, rituals, laws, or other patterns—are created and shared. It is

not so much that individuals set out to create a culture when they interact

in relationships, groups, organizations, or societies, but rather that

cultures are a natural by-product of social interaction. In a sense,

cultures are the “residue” of social communication. Without

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communication and communication media, it would be impossible to

preserve and pass along cultural characteristics from one place and time

to another. One can say, therefore, that culture is created, shaped,

transmitted, and learned through communication. The reverse is also the

case; that is, communication practices are largely created, shaped, and

transmitted by culture.

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3. Individual / Nationality (Stereotypes)

“He would like to believe there is enough pity in the air for black

people and their lot, enough of a desire to deal honorably with them, to

make up for the cruelty of the laws. However, he knows it is not so.

Between black and white there is a gulf fixed. Deeper than pity, deeper

than honorable feelings, deeper even than goodwill, lies an awareness on

both sides that people like Paul and himself, with their pianos and

violins, are here on this earth, the earth of South Africa, on the shakiest

of pretexts. This very milkman must know it. A year ago, he must have

been just a boy herding cattle in the deepest Transkei. In fact, from

Africans - in general from Color people - he feels a curious, amused

tenderness emanating. A sense that he must be a simpleton in need of

protection if he imagines he can get by on the basis of straight looks and

honorable dealings when the ground beneath his feet is soaked with

blood and the vast backward depth of history rings with shouts of anger.

Why else would this young man, with the first stirrings of the day’s

wind fingering his horse’s mane, smile so gently as he watches the two

of them drink the milk he has given them?

………………………

Downstairs he has tea with her and her employer, an

Englishwoman whose cool eyes takes his measure and finds him

wanting. This is a European house - her eyes say, we do not need a

graceless colonial here, and a Boer to boot.

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It is not a good time to be a South African in England. With great

show of self-righteousness, South Africa has declared itself a republic

and promptly been expelled from the British Commonwealth. The

message contained in that expulsion has been unmistakable. The British

have had enough of the Boers and of the Boer-led South Africa, a colony

that has always been more trouble than it has been worth. They would be

content if South Africa would quietly vanish over the horizon. They

certainly do not want forlorn South African whites cluttering their

doorstep like orphans in search of parents. He has no doubt that Astrid

will be obliquely informed by this suave Englishwoman that he is not a

desirable”.

(From J.M. Coetzee, Youth, Secker&Warburg, London, 2002,

p.17, 86-87)

Is there any harm in national stereotypes?

Key Points:

• Stereotypes can be defined in a number of ways:

• A simplified and fixed image of all members of a culture or

group; the group is typically based on race, religion, ethnicity, age,

gender or national origins.

• Generalizations about people that are based on limited,

sometimes inaccurate, but often easily available information, and are

characterized by no or minimal contact with members of the stereotyped

group and on second-hand information rather than first-hand experience.

• A single statement or attitude about a group of people that does

not recognize the complex, multi-dimensional nature of individual

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human beings irrespective of race, religion, ethnicity, age, gender or

nationality.

• Stereotypes can be positive, negative or mixed, but they are

usually unfair and misleading.

• In general, stereotypes reduce individuals to a rigid, inflexible

image.

• Stereotypes do not account for the fact that human beings are

individually complex, each person possessing a unique constellation of

personal attributes.

• Instead, stereotypes suggest that everyone within a group is the

same.

• An especially worrying aspect of stereotypes in a geopolitical

context is that they tend to dehumanize people, placing all members of a

group into one homogeneous category.

• The basis for stereotyping lies in the nature of human cognition.

• When we stereotype people, we pre-judge them; we assume that

all people in a group have the same traits.

• The use of stereotypes leads to false assumptions about people

and can lead to misunderstandings, hostile and abusive behaviors,

conflicts, discrimination, and prejudice.

• Stereotypes may have their roots in experiences we have had

ourselves, read about in books and magazines, seen in films or

television, or have had related to us by friends and family.

• In some cases, stereotypes may be reasonably accurate.

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• In virtually every case where we stereotype, we are resorting to

prejudice by inferring characteristics of an individual person based on a

group characteristic, without knowledge of all the facts.

• Stereotypes are sometimes hard to recognize because they are

fixed beliefs.

• When stereotypical judgments are reduced, it is easier to

acknowledge and appreciate individual differences and cultural

diversity.

Discussion points:

How many nationalities are there in your country - what languages

do they speak?

• What is the difference between “nation”, “nationality” and

“nationalism”?

• People of the same nationality should all live in the same

country. Do you agree with this statement - Why (not)?

• What does a term such as “the European nation” refer to? In

what context do you think it may be used?

• One cannot choose one’s parents, one’s race, one’s mother

tongue or one’s nationality. How far do you agree?

• What could be, in your opinion, the global language of the

future?

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• Are stereotypes simply examples of prejudice or the

embodiment of identifiable social trends and cultural traditions? Are

they subjective, objective or somewhere in-between? - Overly

generalized, nationally specific or both?

• Do you think Brits are reserved, inhibited or distant? Do you

consider that a negative trait? I know many Brits who are proud of just

such a trait. However, perhaps Brazilians would consider such a trait

negative.

• Are the French the most romantic?

• Are men really better drivers than women are?

• Are women really more sensitive than men, or are women

simply sociologically programmed to display more emotion than men?

- Why do we continue using stereotypes? There must be a reason

other than primitive instinct.

- Is nationality now becoming a branded good?

- Do governments actually support stereotypes, seeking to

associate certain positive values with their industries, companies and

goods? Of course they do. Cultural propaganda is the name of the game.

There will not be physical conflicts in the future, only the struggle of

cultures.

(Viewing the Viewer: Stereotypical Stereotypes by Adam Dalton)

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Discussion Points:

Have you ever been the subject for stereotypes? What kind (related

to age, sex, race, religion, vocation)? How did you react?

Do you use stereotypes yourselves - Under what circumstances?

Let us look at some concrete examples. Many countries make

jokes about a particular group or nationality being stupid. The Brits

make jokes about the Irish. The Poles make jokes about the police. The

French make jokes about the Belgians … and so it goes on.

In addition, other core character traits are identified in the humor

of prejudice and stereotype. The Irish make jokes about the Scots being

tight-fisted. … I am sure you know other examples that I do not need to

repeat here. …

(Adapted from the Internet page of the British Council Warsaw,

2001)

Stereotypes are often associated with clichés. The word cliché

comes from French and both terms were originally used in the print

industry, to designate a solid printing mould which, once cast, was

difficult to change.

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4. State and governmet

(Adapted from: Principles of Democracy; published online by the

U.S. Department of State's Bureau of International Information

Programs.)

What do we understand by Democracy today? What are the

fundamentals of Democracy?

Democracy comes from the Greek word, "demos," meaning

people. In democracies, the people hold sovereign power over legislator

and government.

Although nuances apply to the world's various democracies,

certain principles and practices distinguish democratic government from

other forms of government.

• Democracy is government in which power and civic

responsibility are exercised by all citizens, directly or through their

freely elected representatives.

• Democracy is a set of principles and practices that protect

human freedom; it is the institutionalization of freedom.

• Democracy rests upon the principles of majority rule, coupled

with individual and minority rights. All democracies, while respecting

the will of the majority, zealously protect the fundamental rights of

individuals and minority groups.

• Democracies guard against all-powerful central governments

and decentralize government to regional and local levels, understanding

66

that local government must be as accessible and responsive to the people

as possible.

• Democracies understand that one of their prime functions is to

protect such basic human rights as freedom of speech and religion; the

right to equal protection under law; and the opportunity to organize and

participate fully in the political, economic, and cultural life of society.

• Democracies conduct regular free and fair elections open to all

citizens. Elections in a democracy cannot be facades that dictators or a

single party hide behind, but authentic competitions for the support of

the people.

• Democracy subjects governments to the rule of law and ensures

that all citizens receive equal protection under the law and that their

rights are protected by the legal system.

• Democracies are diverse, reflecting each nation's unique

political, social, and cultural life. Democracies rest upon fundamental

principles, not uniform practices.

• Citizens in a democracy not only have rights, they have the

responsibility to participate in the political system that, in turn, protects

their rights and freedoms.

• Democratic societies are committed to the values of tolerance,

cooperation, and compromise. Democracies recognize that reaching

consensus requires compromise and that it may not always be attainable.

In the words of Mahatma Gandhi, "intolerance is itself a form of

violence and an obstacle to the growth of a true democratic spirit."

67

On the surface, the principles of majority rule and the protection of

individual and minority rights would seem contradictory. In fact,

however, these principles are twin pillars holding up the very foundation

of what we mean by democratic government.

Majority rule is a means for organizing government and deciding

public issues; it is not another road to oppression. Just as no self-

appointed group has the right to oppress others, so no majority, even in a

democracy, should take away the basic rights and freedoms of a

minority group or individual.

• Minorities - whether because of ethnic background, religious

belief, geographic location, and income level, or simply as the losers in

elections or political debate - enjoy guaranteed basic human rights that

no government, and no majority, elected or not, should remove.

• Minorities need to trust that the government will protect their

rights and self-identity. Once this is accomplished, such groups can

participate in, and contribute to their country's democratic institutions.

Among the basic human rights that any democratic government

must protect are freedom of speech and expression; freedom of religion

and belief; due process and equal protection under the law; and freedom

to organize, speak out, dissent, and participate fully in the public life of

their society.

Democracies understand that protecting the rights of minorities to

uphold cultural identity, social practices, individual consciences, and

religious activities is one of their primary tasks.

Acceptance of ethnic and cultural groups that seem strange if not

alien to the majority can represent one of the greatest challenges that any

68

democratic government can face. Nevertheless, democracies recognize

that diversity can be an enormous asset. They treat these differences in

identity, culture, and values as a challenge that can strengthen and enrich

them, not as a threat.

There can be no single answer to how minority-group differences

in views and values are resolved - only the sure knowledge that only

through the democratic process of tolerance, debate, and willingness to

compromise can free societies reach agreements that embrace the twin

pillars of majority rule and minority rights.

Constitutionalism and Independent Judiciary1

A written constitution contains the most important laws by which a

nation's citizens agree to live, and it outlines the basic structure of their

government. Thus, democratic constitutionalism - based on ideals of

individual freedom, community rights, and limited government power -

creates the framework for governing a democracy.

Constitutionalism recognizes that democratic and accountable

government must be coupled with constitutional limits on the power of

government.

A constitution defines the basic purposes and aspirations of a

society, including the common welfare of the people.

All laws must be written in accordance with the constitution. In a

democracy, an independent judiciary allows citizens to challenge laws

they believe to be illegal or unconstitutional and to seek court-ordered

remedies for illegal actions by the government or its officials. 1 Web version created by David L. Heiserman Published by Sweet Haven Publishing Services

69

A constitution provides the framework for government power -- its

scope of authority, mechanisms for exercising that authority, and the

procedures for passage of future laws.

A constitution defines citizenship and establishes the basis for

deciding who shall have the right to vote.

A constitution establishes the political, administrative, and judicial

foundations of the state including the structure of the legislature and

courts, requirements for holding elected office, and terms of office for

elected officials.

A constitution lays out responsibilities of government ministries

and grants authority to collect taxes and create a national defence force.

In a federal system, the constitution divides power among the

various levels of government.

Since a constitution is written at a certain point in time, it must be

amendable so that it may adapt to the changing needs of the people in

the future. Since the flexibility to meet unpredictable and unforeseeable

challenges in the future is important, constitutions are usually written to

specify general principles of government.

Constitutions generally contain two different types of rights -

negative and affirmative rights.

o Negative rights tell the government what it cannot do. These

rights limit government and prevent it from affecting certain behaviors

of its citizens. For example, the government must refrain from limiting

free speech and the ability of citizens to peacefully assemble, and from

illegal imprisonment.

70

o Affirmative rights tell the government what it must do and

citizens what they are entitled to. Such "entitlements" may include

social, economic, and cultural rights in the form of government

guarantees of various social indicators. There may be guarantees of

primary and secondary education for all boys and girls, "well being"

after retirement, or jobs and health care for all citizens.

Independent and professional judges are the foundation of a fair,

impartial, and constitutionally guaranteed system of courts of law known

as the judiciary. This independence does not imply judges can make

decisions based on personal preferences but rather that they are free to

make lawful decisions -- even if those decisions contradict the

government or powerful parties involved in a case.

In democracies, independence from political pressures of elected

officials and legislatures guarantees the impartiality of judges. Judicial

rulings should be impartial, based on the facts of a case, individual

merits and legal arguments, and relevant laws, without any restrictions

or improper influence by interested parties. These principles ensure

equal legal protection for all.

• The power of judges to review public laws and declare them in

violation of the nation's constitution serves as a fundamental check on

potential government abuse of power - even if a popular majority elects

the government. This power, however, requires that the courts be seen as

independent and able to rest their decisions upon the law, not political

considerations.

71

• Whether elected or appointed, judges must have job security or

tenure, guaranteed by law, in order that they can make decisions without

concern for pressure or attack by those in positions of authority. A civil

society recognizes the importance of professional judges by providing

them with adequate training and remuneration.

• Trust in the court system's impartiality -- in its being seen as the

"non-political" branch of government -- is a principal source of its

strength and legitimacy.

• A nation's courts, however, are no more immune from public

commentary, scrutiny, and criticism than other institutions. Freedom of

speech belongs to all: judges and their critics alike.

• To ensure their impartiality, judicial ethics require judges to step

aside (or "recluse" themselves) from deciding cases in which they have a

conflict of interest.

• Judges in a democracy cannot be removed for minor complaints,

or in response to political criticism. Instead, they can be removed only

for serious crimes or infractions through the lengthy and difficult

procedure of impeachment (bringing charges) and trial -- either in the

legislature or before a separate court panel.

• An independent judiciary assures people that court decisions will

be based on the nation's laws and constitution, not on shifting political

power or the pressures of a temporary majority. Endowed with this

independence, the judicial system in a democracy serves as a safeguard

of the people's rights and freedoms.

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The Rule of Law and the Legislative Power

For much of human history, rulers and law were synonymous - law

was simply the will of the ruler. A first step away from such tyranny was

the notion of rule by law, including the notion that even a ruler is under

the law and should rule by virtue of legal means. Democracies went

further by establishing the rule of law. Although no society or

government system is problem-free, rule of law protects fundamental

political, social, and economic rights and reminds us that tyranny and

lawlessness are not the only alternatives.

Rule of law means that no individual, president or private citizen,

stands above law. Democratic governments exercise authority by way of

law and are themselves subject to law's constraints.

• Laws should express the will of the people, not the whims of

kings, dictators, military officials, religious leaders, or self-appointed

political parties.

• Citizens in democracies are willing to obey the laws of their

society, then, because they are submitting to their own rules and

regulations. Justice is best achieved when the very people who must

obey them establish the laws.

• Under the rule of law, a system of strong, independent courts

should have the power and authority, resources, and the prestige to hold

government officials, even top leaders, accountable to the nation's laws

and regulations.

• For this reason, judges should be well trained, professional,

independent, and impartial. To serve their necessary role in the legal and

73

political system, judges must be committed to the principles of

democracy.

• The laws of a democracy may have many sources: written

constitutions; statutes and regulations; religious and ethical teachings;

and cultural traditions and practices. Regardless of origin the law should

enshrine certain provisions to protect the rights and freedoms of citizens:

A. Under the requirement of equal protection under the law, the

law may not be uniquely applicable to any single individual or group.

B. Citizens must be secure from arbitrary arrest and unreasonable

search of their homes or the seizure of their personal property.

C. Citizens charged with crimes are entitled to a speedy and

public trial, along with the opportunity to confront and question their

accusers. If convicted, they may not be subjected to cruel or unusual

punishment.

D. Citizens cannot be forced to testify against themselves. This

principle protects citizens from coercion, abuse, or torture and greatly

reduces the temptation of police to employ such measures. 2

Elected representatives in a democracy; whether members of a

parliament, assembly, or congress; are there to serve the people. They

perform a number of roles essential to the functioning of a healthy

democracy.

Elected legislatures are the principal forum for deliberating,

debating, and passing laws in a representative democracy. They are not 2 Web version created by David L. Heiserman - Published by Sweet Haven Publishing Services

74

so-called rubber stamp parliaments merely approving the decisions of an

authoritarian leader.

• Oversight and investigation powers allow legislators to publicly

question government officials about their actions and decisions, and

otherwise serve as a check on the power of various government

ministries -- especially in the presidential system of governing where the

legislature is separate from the executive.

• Legislators may approve national budgets, conduct hearings on

pressing issues, and confirm executive appointees to courts and

ministries. In some democracies, legislative committees provide

lawmakers a forum for these public examinations of national issues.

• Legislators may support the government in power or they may

serve as a loyal political opposition that offers alternative policies and

programs.

• Legislators have a responsibility to articulate their views as

effectively as possible. However, they must work within the democratic

ethic of tolerance, respect, and compromise to reach agreements that will

benefit the general welfare of all the people -- not just their political

supporters. Each legislator must alone decide on how to balance the

general welfare with the needs of a local constituency.

• Legislators often provide constituents with a sympathetic

hearing for their individual complaints and problems -- along with help

in getting assistance from large government bureaucracies. To do this,

they often maintain a staff of trained aides.

• National legislators are usually elected in one of two ways. In

plurality elections, sometimes called "first past the post," the candidate

75

with the most votes wins. In the proportional system, often used in

parliamentary elections, voters usually cast ballots for parties, not

individuals, and representatives are chosen based on their party's

percentage of the vote.

• A proportional system tends to encourage multiple, tightly

organized smaller parties. Plurality elections encourage a looser, two-

party system. Under either system, representatives engage in the debate,

negotiation, coalition building, and compromise that are the hallmarks of

democratic legislatures.

• Legislatures are often bicameral, with two chambers, and new

laws generally require passage by both the upper and lower chambers.

Education and Democracy

Education is a universal human right. It also is a means of

achieving other human rights and it is an empowering social and

economic tool. Through the Universal Declaration of Human Rights, the

world's nations have agreed that everyone has the right to education.

Every society transmits its habits of mind, social norms, culture,

and ideals from one generation to the next. There is a direct connection

between education and democratic values: in democratic societies,

educational content and practice support habits of democratic

governance.

• This educational transmission process is vital in a democracy

because effective democracies are dynamic, evolving forms of

government that demand independent thinking by the citizenry. The

opportunity for positive social and political change rests in citizens'

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hands. Governments should not view the education system as a means to

control information and to indoctrinate students.

• Governments should value and devote resources to education

just as they strive to defend their citizens.

• Literacy enables people to stay informed through newspapers

and books. Informed citizens are in a better position to improve their

democracy.

• Education systems in democracies do not preclude study of other

political doctrines or systems of government. Democracies encourage

students to develop reasonable arguments based on careful research and

a clear understanding of history.

• Private and religious groups should be free to create schools or

parents may choose to teach their children at home.

• Government-run schooling must be equally accessible to all

citizens regardless of their ethnic or religious backgrounds, gender, or

physical disabilities.

• Democratic norms and practices should be taught in order for

people to understand and appreciate their opportunities and

responsibilities as free citizens.

• Education for democratic citizenship includes knowledge of

national and world history and of basic democratic principles.

• School curricula in democracies include history, geography,

economics, literature, philosophy, law, the arts, social studies,

mathematics, and science courses available to all students - girls and

boys.

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• Students should also be free to organize clubs and activities

where democratic norms can be put into practice. For example:

o Student government gives pupils experience in the democratic

process.

o Mock elections teach students about citizen participation and

encourage in them lifelong voting habits.

o School newspapers educate students about the role of a free

media and responsible journalism.

o Civic clubs promote a connection to the larger community

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5. The european union

A worldwide economic recession in the early 1980s brought with it

a wave of 'euro-pessimism'. Nevertheless, hope sprang anew in 1985

when the European Commission, under its President Jacques Delors,

published a 'white paper' setting out a timetable for completing the

European single market by 1 January 1993. The Communities adopted

this ambitious goal and enshrined it in the Single European Act, which

was signed in February 1986 and came into force on 1 July 1987.

The political shape of Europe was dramatically changed by the fall

of the Berlin wall in 1989. This led to the reunification of Germany on 3

October 1990 and the coming of democracy to the countries of central

and Eastern Europe as they broke away from Soviet control. The Soviet

Union itself ceased to exist in December 1991.

Meanwhile, the European Communities were changing too. The

member states were negotiating a new treaty that was adopted by the

European Council (i.e. their presidents and/or prime ministers) at

Maastricht in December 1991. This 'Treaty on European Union' came

into force on 1 November 1993. The EEC was renamed simply 'the

European Community' (EC). Moreover, by adding areas of

intergovernmental cooperation to the existing Community system, the

Treaty created the European Union (EU). It also set new ambitious goals

for the member states: monetary union by 1999, European citizenship,

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new common policies - including a common foreign and security policy

(CFSP) - and arrangements for internal security.

The new European dynamism and the continent's changing

geopolitics led three more countries - Austria, Finland and Sweden - to

join the EU on 1 January 1995. The Union now had 15 member states

and prepared for its most spectacular achievement - replacing its

national currencies with a single European currency, the euro.

On 1 January 2002, euro notes and coins came into circulation in

12 EU countries (the 'euro area'). The euro is now a major world

currency, having a similar status to the US dollar.

As the world moves forward into the 21st century, Europeans must

together face the challenges of globalization. Revolutionary new

technologies and the Internet explosion are transforming the world

economy. However, these profound economic changes bring with them

social disruption and culture shock.

Meeting in Lisbon in March 2000, the European Council adopted a

comprehensive strategy for modernizing the EU economy and enabling

it to compete on the world market with other major players such as the

United States and the newly industrialized countries. The 'Lisbon

strategy' includes opening up all sectors of the economy to competition,

encouraging innovation and business investment, and modernizing

Europe's education systems to meet the needs of the information society.

At the same time, unemployment and the rising cost of pensions

are both putting pressure on the member states' economies, and this

makes reform all the more necessary. Voters are increasingly calling on

their governments to find practical solutions to these issues.

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Scarcely had the European Union grown to encompass 15 member

states when another 12 began knocking at its door. In the mid 1990s, it

received membership applications from the former Soviet bloc countries

(Bulgaria, the Czech Republic, Hungary, Poland, Romania and

Slovakia), the three Baltic states that had once been part of the Soviet

Union (Estonia, Latvia and Lithuania), one of the republics of the former

Yugoslavia (Slovenia) and two Mediterranean countries (Cyprus and

Malta).

The EU welcomed this opportunity to help stabilize the European

continent and to extend the benefits of European unification to these

young democracies. Accession negotiations with the candidate countries

were launched in Luxembourg in December 1997 and in Helsinki in

December 1999. The Union was on the way to its biggest enlargement

ever. For ten of the candidate countries, negotiations were completed on

13 December 2002 in Copenhagen. The European Union had 25 member

states in 2004, and continued growing as more countries joined in the

years ahead.

More than half a century of integration has had an enormous

impact on the history of Europe and on the mentality of Europeans. The

member state governments, whatever their political color, know that the

age of absolute national sovereignty is over and that only by joining

forces and pursuing "a destiny henceforward shared" (to quote the ECSC

Treaty) can their ancient nations continue to make economic and social

progress and maintain their influence in the world.

Integration has succeeded in overcoming age-old enmity between

European countries. Attitudes of superiority and the use of force to

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resolve international differences have been replaced by the 'Community

method' of working together. This method, which balances national

interests with the common interest and respects national diversity while

creating a Union identity, is as valuable today as ever. Throughout the

Cold War period, it enabled Europe's democratic and freedom-loving

countries to stick together. The end of east-west antagonism and the

political and economic reunification of the continent are a victory for the

spirit of Europe - a spirit that European peoples need more than ever

today.

The European Union offers a response to the huge challenge of

globalization - a response that expresses the values Europeans believe in.

The EU offers, above all, the best possible 'insurance policy' for a free

and peaceful future.

Internally, the EU has abolished trade barriers, adopted a common

currency, and is striving toward convergence of living standards.

Internationally, the EU aims to bolster Europe's trade position and its

political and economic power. Because of the great differences in per

capita income among member states (from $7,000 to $78,000) and

historic national animosities, the EU faces difficulties in devising and

enforcing common policies. In the wake of the global economic crisis,

the European Commission projected that the EU's economy will shrink

by 4% in 2009. In September 2009, the Commission reported that the

EU was recovering from the crisis faster than it had projected, however,

significant risks to sustainable growth remain, including, deteriorating

fiscal positions, rising unemployment, tight bank lending, and a strong

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euro. Even prior to the global economic crisis Germany and France

flouted the member states' treaty obligation to prevent their national

budgets from running more than a 3% deficit, and now many more

member states are running substantial deficits. Between 2004 and 2007,

the EU admitted 12 countries that are, in general, less advanced

economically than the other 15. Eleven established EU member states

introduced the euro as their common currency on 1 January 1999

(Greece did so two years later), but the UK, Sweden, and Denmark

chose not to participate. Of the 12 most recent member states, only

Slovenia (1 January 2007), Cyprus and Malta (1 January 2008), and

Slovakia (1 January 2009) have adopted the euro; the remaining eight

are legally required to adopt the currency upon meeting EU's fiscal and

monetary convergence criteria.

From the 1990s, citizenship has become one of the key issues of

the political debate. The notion of citizenship is changing at a great pace

because of the great economic, social and political changes occurred

while the 20th century moved into the 21st.

The classical concept of Citizenship

We can define citizenship as a legal and political status which

allows the citizen to acquire some rights (civil, political, social...) as an

individual and some duties (taxes, military service, loyalty...) in relation

to a political community, as well as the ability of intervening in the

collective life of a state. The latter right arises from the democratic

principle of sovereignty of people.

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Citizens -of Spain, United Kingdom, France, Portugal, United

States...- have a series of rights, granted by their constitutions, but also

have obligations, with regard to their national community. In a

democratic state, the citizen must fulfill those obligations since they

were passed by the representatives they have voted in, using one of the

main citizen's political rights, the suffrage.

Citizenship is restricted to people who have that condition. People

that live in a territory but lack the status of citizen are deprived of the

rights and duties that citizenship involves. Every state has laws to

regulate the way an individual can acquire its nationality, that is to say,

the citizenship.

This concept of citizenship dates back to a historical period

initiated with the great liberal revolutions in the late 18th century. It is a

notion characterized by the pre-eminence of the state-nation as the

political community that comprises the individuals. Citizenship is

tantamount to nationality.

• The European Union is a group of countries whose governments

work together.

• It's a bit like a club. To join you have to agree to follow the rules

and in return you get certain benefits.

• Each country has to pay money to be a member. They mostly do

this through taxes.

• The EU uses the money to change the way people live and do

business in Europe.

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• Countries join because they think that they will benefit from the

changes the EU makes.

What does the EU do?

• A lot of what the EU does is about bringing people in Europe

closer together.

• It tries to make it easier for Europeans to buy and sell things to

each other. This is done by changing the rules that control trade.

• It is also getting rid of controls that stop people from EU

countries moving around freely inside the Union.

• The changes have not always been popular in the UK.

• The EU backs things like exchange visits that help ordinary

Europeans to understand what they all have in common.

These are the five big things the EU has set out to do.

1. Promote economic and social progress.

Help people earn enough money and get treated fairly.

2. Speak for the European Union on the international scene.

By working as a group the EU hopes that Europe will be listened to

more by other countries.

3. Introduce European citizenship. Anyone from a member state is

a citizen of the EU and gets four special rights.

4. Develop Europe as an area of freedom, security and justice.

Help Europeans to live in safety, without the threat of war.

5. Maintain and build on established EU law.

Make laws that protect people’s rights in the member countries.

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Your EU rights

Anyone from a member state is a citizen of the EU and gets these

special rights.

• Freedom to move between countries of the EU and to live in any

nation in the Union

• The right to vote and stand in local government and European

Parliament elections in the country you live in

• If you are traveling outside the EU, and your own country does

not have an embassy, you can go to the embassy of any other EU

country

• The right to put your side of the story to the European

Ombudsman if you think the EU has not acted fairly

The European Union considers conflict resolution as a cardinal

objective of its foreign policy. It makes use of a number of policy

instruments to promote conflict transformation through ‘constructive

engagement’, which covers a range of sectors affecting conditions and

incentives at the micro level. The EU has recognized the importance of

engaging with civil society in situations of violent conflict, but needs to

engage more with local civil society to make its policies more effective.

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6. Economics3- overview

Economics has been recognized as a special area of study for over

a century. Economics and economists are words that almost everyone

has heard of and uses. But what exactly is economics?

In recent years, the subject matter that economists have studied has

expanded, making its boundaries less defined.

A good definition must explain what it is that makes economics a

distinct subject, different from physics or psychology. Many good

definitions are possible, and each will focus on some important aspect of

the subject.

Philosopher Karl Popper's widely accepted definition of science

says that a statement is scientific only if it is open to the logical

possibility of being found false. This definition means that we evaluate

scientific statements by testing them, by comparing them to the world

about us. A statement is non-scientific if it takes no risk of being found

false; that is, if there can be no way to test the statement against

observable facts or events. Popper called this distinction the "line of

demarcation."

Most economists see their discipline as scientific in Popper's sense

of the word. Economic theory makes statements about how facts fit

together, and there are constantly new sets of facts arising that allow one

to test the theory to see whether the facts are as theory predicts.

3 Adapted from: Robert Schenk – internet pages 1997-2002 and earlier dates

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However, this process is more difficult for economists than it is for

physical scientists.

There is a minority of economists, however, who do not see

economics as scientific in Popper's sense. A group of economists called

the Austrian school, for example, has argued that economics starts with

assumptions and that economic theory is the logically deduced results of

those assumptions. If the theory does not fit the facts, one cannot

conclude that the theory is wrong, but only that it is inappropriate to

apply the theory in that particular situation because the initial conditions

do not agree with the assumptions of the theory.

Economists make a distinction between positive and normative

that closely parallels Popper's line of demarcation, but which is far older.

David Hume explained it well in 1739, and Machiavelli used it two

centuries earlier, in 1515. A positive statement is a statement about what

is and that contains no indication of approval or disapproval. Notice that

a positive statement can be wrong. "The moon is made of green cheese"

is incorrect, but it is a positive statement because it is a statement about

what exists.

A normative statement expresses a judgment about whether a

situation is desirable or undesirable. "The world would be a better place

if the moon were made of green cheese" is a normative statement

because it expresses a judgment about what ought to be. Notice that

there is no way of disproving this statement. If you disagree with it, you

have no sure way of convincing someone who believes the statement

that he is wrong.

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Economists have found the positive-normative distinction useful

because it helps people with very different views about what is desirable

to communicate with each other. Libertarians and socialists, Christians

and atheists may have very different ideas about what is desirable. When

they disagree, they can try to learn whether their disagreement stems

from different normative views or from different positive views. If their

disagreement is on normative grounds, they know that their

disagreement lies outside the realm of economics, so economic theory

and evidence will not bring them together. However, if their

disagreement is on positive grounds, then further discussion, study, and

testing may bring them closer together.

If economists limit themselves to evaluating whether or not

proposed actions will achieve intended results, they confine themselves

to positive analysis. However, most economists prefer a wider role in

policy analysis, and include normative judgments as well.

Most statements are not easily categorized as purely positive or

purely normative. Suppose, for example, someone says, "The minimum

wage is a bad law." Behind that simple statement are assumptions about

how to judge whether a law is good or bad (or normative statements) and

beliefs about what the actual effects of the minimum wage law are (or

positive statements).

In a market economy, the ability of people to obtain goods and

services depends, with some exceptions, on the marginal productivity of

the resources they hold. The most important resource is a person's ability

to work (human capital) but others are ownership of natural resources

and capital. Those who hold resources that are highly valued will earn

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large incomes, whereas those who hold no valuable resources earn little

or no income. This unequal distribution of income that a market system

produces raises questions of whether or not a market system is fair.

Fairness is a normative issue. It involves judgments about what is

good and what is bad. As a result, economists cannot claim special

expertise on this issue. They often rely on arguments from philosophers

when they discuss fairness, and they hold widely diverse beliefs. There

are, however, some insights from economics that can be useful when one

discusses issues of fairness.

Because people have different goals, unequal incomes do not

necessarily mean that the mechanism for producing those incomes is

unfair. Some people have goals that can be met only if they earn high

incomes, whereas others have goals that require less income but more

leisure. A fundamental trade-off that people face is a leisure-income

trade-off. If Mike Fleming wants more income, he must work more,

which means he sacrifices leisure. People who value their leisure time

highly will earn less income than people who put little value on leisure,

all things being equal. In a world in which everyone had equal abilities

but different goals, people will earn unequal incomes.

Of course, we do not live in a world of equal abilities. Some

people are smarter, more athletic, more social, or in some other way

more talented than others. Some people--whether through bad genes, bad

nutrition, or bad cultural environment--cannot cope by themselves in a

complex world. Hence, even if everyone had the same goals, people

would earn unequal incomes.

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If you look at a situation and decide that it is unfair because one

person has too much and another has too little, you probably are making

a judgment that compares goals. The judgment says that the person with

too much is satisfying goals that are less worthy than those of the person

with too little are. We commonly make this sort of normative judgment;

our decision to give money to one charity rather than another indicates

that we find some goals more deserving than others do. Our decision to

give at all suggests that we decide that the goals of someone else are

more worthy than our own "selfish" goals.

Economic analysis suggests that people earn different amounts of

income both because they have different goals and different abilities (or

resource endowments, to use a more comprehensive but also more

abstract term). From this starting point, we can examine a few common

judgments on fairness.

One view is that fairness means everyone should have an equal

opportunity to succeed. In this view, process matters--not results. This

position sees economic life as a race. In any race, some people are faster

than others are. As long as all contestants face the same rules, the race is

fair even though some win and others lose. In the economic game, some

people fail and have low incomes because they made mistakes or were

unlucky or did not have enough ability. Yet their failure does not mean

that the system is unfair, if no one erected obstacles in their path. This

view is sympathetic to a market system

A completely different view is the egalitarian position, which

judges: results--not process. It argues that more equality of income is

always better than less, and that the best of all possible worlds is one of

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complete equality. John Rawls has developed an influential justification

of egalitarian positions using the notion of the social contract, an idea

that Thomas Hobbes and John Locke made famous in the 17th century.

Rawls asks what rules we would agree on if we were designing a society

that we then had to join, assuming that we had no knowledge of how

successful we would be in that society. He argues that most of us would

want to join a society that ensures a great deal of income equality

because we are afraid of risk. The egalitarian view tends to be

unsympathetic to market systems because they generate very unequal

incomes.

Both these views have internal inconsistencies. Obtaining equal

results requires the use of government power, and only some will be able

to wield this power. Those who have the jobs of equalizing incomes will

have more power than those who do not; equal income results in unequal

political power. Obtaining a system of completely equal opportunity is

impossible because the results that one generation obtains help

determine the starting points of their offspring. People who do well in

the economic game will try to help their children succeed by giving

them a good childhood environment, a good education, and inherited

wealth.

A third viewpoint suggests that income should be determined

based on need. Though this view is often associated with socialism, it

has a very long tradition in Christian thought, which is where the

socialists, a product of the 19th century, found it. A position that equal

work deserves equal pay, which is a position consistent with the

opportunity approach, is inconsistent with the need approach.

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To implement the need approach there must be some way of

measuring need. This measurement is most practical in small-group

situations, that is, within groups where members know each other well

and where members have the same goals. It is hard to implement in large

groups of strangers who do not know each other well and who may

disagree radically about which goals are worth attaining. One escape

from this problem has been to assume that everyone's needs are

identical, which collapses this point of view into egalitarianism.

An economy consists of the specific economic system of a country

or other area, the labor, capital and land resources, and the economic

agents that socially participate in the production, exchange, distribution,

and consumption of goods and services of that area. A given economy is

the end result of a process that involves its technological evolution,

history and social organization, as well as its geography, natural

resource endowment, and ecology, as main factors. These factors give

context, content, and set the conditions and parameters in which an

economy functions.

Today the range of fields of study exploring, registering and

describing the economy or a part of it, include social sciences such as

economics, as well as branches of history (economic history) or

geography (economic geography). Practical fields directly related to the

human activities involving production, distribution, exchange, and

consumption of goods and services as a whole, range from engineering

to management and business administration to applied science to

finance. All kind of professions, occupations, economic agents or

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economic activities, contribute to the economy. Consumption, saving

and investment are core variable components in the economy and

determine market equilibrium. There are three main sectors of economic

activity: primary, secondary and tertiary.

Economics is the study of how individuals and societies choose to

employ those resources: what goods and services will be produced, how

they will be produced, and how they will be distributed among the

members of society. Economics is customarily divided into

microeconomics and macroeconomics. Of major concern to

macroeconomists are the rate of economic growth, the inflation rate, and

the rate of unemployment. Specialized areas of economic investigation

attempt to answer questions on a variety of economic activity; they

include agricultural economics, economic development, economic

history, environmental economics, industrial organization, international

trade, labor economics, money supply and banking, public finance,

urban economics, and welfare economics. Specialists in mathematical

economics and econometrics provide tools used by all economists. The

areas of investigation in economics overlap with many other disciplines,

notably history, mathematics, political science, and sociology.

Classic economics concentrates on how the forces of supply and

demand allocate scarce product and service resources. Macroeconomics

studies a nation or the world's economy as a whole, using data about

inflation, unemployment and industrial production to understand the past

and predict the future. Microeconomics studies the behavior of specific

sectors of the economy, such as companies, industries, or households.

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Over the years, various schools of economic thought have gained

prominence, including Keynesian Economics, Monetarism and Supply-

Side Economics.

Economics is often described as a body of knowledge or study that

discusses how a society tries to solve the human problems of unlimited

wants and scarce resources. Because economics is associated with

human behavior, the study of economics is classified as a social science.

Because economics deals with human problems, it cannot be an exact

science and one can easily find differing views and descriptions of

economics. In this discussion, the focus is an overview of the elements

that constitute the study of economics, that is, wants, needs, scarcity,

resources, goods and services, economic choice, and the laws of supply

and demand.

Every person is involved with making economic decisions

every day of his or her life. This occurs when one decides whether to

cook a meal at home or go to a restaurant to eat, or when one decides

between purchasing a new luxury car or a low-priced pickup truck.

People make economic decisions when they decide whether to rent or

purchase housing or where they should attend college.

6.1. International business relations

Modern societies have taken aspects of all three viewpoints and

established them as public policy. Income taxes are progressive; that is,

they take greater percentages of income from those with big incomes

than from those with small incomes. This policy can be justified from an

equal results point of view. Employment laws require equal pay for

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equal work. The employer is prohibited from taking factors such as

personal need of an employee into account in establishing pay. These

laws make sense from an equal opportunity point of view. Finally, tax

laws and some transfer payments favor families with more children and

higher medical bills. The need viewpoint can justify this aspect of taxes.

In addition to income distribution, social mobility and status may

shape views on fairness. For example, would you rather live in a society

with a great deal of inequality but with a lot of social mobility, or in one

with less inequality but also less mobility? As for status, would you

rather have an income of $30,000 and live in a society in which this

income put you at the top of the social pyramid, or would you prefer

another society in which you would be in the middle and earn $45,000?

Economics cannot tell you what view of fairness are correct; you

must make up your own mind about how important various

characteristics are.

Facts in economics need to be organized in some way before they

can tell one anything. By themselves, they are meaningless. Thus, the

study of economics involves more than a memorization of facts.

Economics tries to organize facts with its theory. Good theory tells us

which facts are important and which are not, and what is cause and what

is effect. The study of economics involves learning how to organize

facts the way economists do.

People who do not understand economics still try to make sense of

the world around them by trying to see pattern in the facts they observe.

Sometimes they use a simplistic "good-versus-bad" model. In a good-

versus-bad model, two conflicting groups are classified as good people

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and bad people. These groups are usually involved in a zero-sum game:

one person's gain is another's loss. Further, evil motives, possessed by

the bad people, lead to bad results unless these people are in some way

controlled. Good motives lead to good results.

An economic model suggests that, in cases of shortages, one

should search for government regulation of prices. The good-versus-bad

model does not suggest that such regulation is something one should

look for. In fact, there were price restrictions in place at the time, and

such restrictions can lead to shortages. The good-versus-bad view of the

world is attractive because we are able to understand the model at a very

young age and because we see the model used so often: in fairy tales, in

comic books, in movies, and in television shows, among other places.

Because we know how to use this model, and because our culture

discourages use of alternative explanations such as fate or mystery, it is

easy to fall back to this model if we do not have a more sophisticated

model to explain our world.

Economic issues affect us all and most people have opinions about

them. These opinions may be based on a good-versus-bad view, some

other non-economic framework, or simply slogans that are often

repeated. Often the hardest problem students have in learning about how

economists interpret the world is to unlearn their old, non-economic

views.

Economic education involves learning to see reality from new

perspectives. Sometimes these new perspectives may surprise you. They

may even shock you. However, if you take the time to look at the

reasoning behind these economic ways of looking at things, you will

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find that they consist of carefully-thought-out-and-applied common

sense.

A central question in economics is the relationship between an

individual's interests and the interests of the group. An examination

requires the analytical tools of microeconomics. Once one understands

the economic theory of consumer behavior and the theory of the firm,

one can come back to the invisible-hand question--the question of

whether individual action serves the good of the group--using the

concept of economic efficiency.

A prime purpose of microeconomics is to ask what sort of

economic system, if any, brings harmony rather than conflict between

the individual and the group. For economists, the concept of economic

efficiency is a key to discussing this question.

Working with individuals and ideas from cultures different from

our own is complex, and filled with opportunities to misunderstand and

offend everyone involved. It requires time to develop trust and

understanding for all the players involved.

Take the time to learn how and why business is done in the

country. Don’t judge the results based upon your culture and your

country’s standards.

There is nothing more damaging to an international relationship

than criticism based upon a lack of understanding. You must learn

before you attempt to teach new ideas, strategies and procedures.

When doing business in Mexico remember that no matter what you

feel or believe about your company’s products or procedures, Mexicans

know their market and people better than you do. They know the correct

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business etiquette and the “invisible” cultural nuances that are required

in order to do business in Mexico.

If you enter into business in Mexico with the idea that you are

going to “teach the Mexicans how business is really done” I am

confident you will suffer some serious problems.

Pushing procedures and business strategies into Mexico will surely

cause divisions; it can turn into an “us versus them” situation for

employees and customers.

I recommend that your focus be on learning and understanding

how business in currently done in Mexico, and why. Once you have this

knowledge, teach and explore your cultures and organizations solutions

and strategies with your Mexican collaborators. I’ll bet the ideas will get

modified if necessary, implemented and embraced quickly.

The creation of hybrid strategies, using elements from both

cultures, will guarantee unification and understanding for everyone

involved.

With international, multinational, and regional business continuing

to expand, one of the most important elements of successful business

outcomes is respect and appreciation for cultural diversity. Today,

international business etiquette, good manners, and intercultural

communication are considered critical elements required for global

business managers, employees, and executives and are believed to

contribute essentially to success of your business.

As multinational and global business shows significant signs of

growth, bringing people closer, business colleagues, and clients visiting

another country should be treated with an awareness of their culture.

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There exists no standard set of rules applying to all international visitors,

so that you have to do some research for each country represented by

your business colleagues. Always keeping in mind that there exist as

many ways of doing business as a number of countries to do business

with, will contribute to your business' prosperity. Listed below are some

useful tips concerning international business etiquette essential for

developing good business relations.

One of the major considerations before you start business with

overseas partners is building relationships. In fact, there aren't many

people eager to get down to business at once, which means you should

take time to get to know better your international clients before rushing

to business. Business relations should be built on respect and trust,

especially with people from Latin America and Asia.

Another important element of the international business etiquette is

business attire. While Americans like to dress for comfort and fashion,

business people from other parts of the world are regarded as more

conservative. Choosing your business clothes, you should always keep

in mind that it shows your respect for other business-persons and

organizations.

It is generally advisable to leave trendy clothes for some other

occasions. Observing the hierarchy is another vital aspect in business

relations, which, however, may bring about many problems. Sometimes

it is quite difficult to know who the highest-ranking business-person is,

when you are dealing with a group. For example, Japanese business

etiquette implies making decisions by consensus, while starting with the

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youngest member of the group. Latin business people have a hierarchy,

which defers to age.

Using correct forms of address and titles is part of international

business etiquette as well, and can cause misunderstanding if ignored.

Thus, you should use last names and titles until you are invited to use the

first name of a business-person. In some cultures, use of the first names

is strictly reserved for family members and close friends.

Any business relations imply exchanging business cards, which is

one more aspect of international business etiquette. The key to

exchanging business cards in any culture is to demonstrate respect for

each other. You should present your business card in such a way that

your business partner does not have to turn it over to read information.

Both hands should be used while presenting your card to visitors from

China, Japan, Hong Kong, and Singapore. When you are presented with

your partner's business card, always acknowledge it. Before giving

someone your business card, wait until you have been introduced.

While planning your business meeting, stick to the rules of

punctuality, yet show understanding in case your business partner from

another country is unconcerned.

Germany is a major trading partner for many countries throughout

the world, not to mention the most important single market in the

European Union. Almost everyone wants to be active in this market, and

for the most part, almost everyone already is. For this reason, stiff

competition exists among many almost identical products and services.

This fact not only leads to increased pressure to differentiate

product quality and characteristics, but it also increases the importance

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of how a business presents itself to the German market. Of course, a

company's products play a large roll in its performance, but, more

subtly, so do its employees.

Most of us know just how important social behavior are when

doing business in our own cultures, and this holds true when working

abroad as well. Whether one is taking part in trade fairs, carrying out

price negotiations with partners or colleagues, talking with end-

customers, or applying for a job abroad, appropriate business conduct

helps create mutual trust and understanding and is, therefore, often the

key to business cooperation and success.

But what behavior are expected in Germany, a country where the

people are known for their guttural language, their obsession with

"Ordnung", their square-jawed seriousness, and other habits and

sensitivities?

You can help ensure the achievement of business success with the

Germans when you are informed about the cultural differences and

expectations in Germany and the situations in which they are important.

It is then possible to act appropriately when the time comes and improve

your chances of closing that "big deal" or establishing respectful

working relationships thus setting yourself and your organization ahead

of the competition.

The globetrotting executive can expect to deal with numerous

problems and difficulties. Unfamiliar languages, customs, food, and

behavior combine to make travel challenging and enervating. But which

of the annoyances bother international travelers the most?

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As mentioned previously in this column, we recently conducted a

survey of business travelers in American Way, the airline magazine of

American Airlines. Those participants who did business outside their

native country were asked if they experienced any awkward or

embarrassing moments in 10 different areas. The area's were ranked

from 1-10, most frequent to least frequent:

• Translation blunders or difficulties (or working with translators).

• Hygiene.

• Titles, name order, and informal terms of address (for example,

using first names instead of last names, or using the informal pronoun

"tœ" instead of the formal "usted" in Spanish).

• Introductions and first impressions

• Clothing and dress.

• Gestures.

• Proxemics (the distance people stand apart).

• Written communications.

• Giving or receiving gifts (for example, presenting the wrong

gift).

• Eye contact (for example, being made uncomfortable by stares).

We have dealt with some of these issues in previous classes.

However, we have not discussed hygiene, which is obviously high on

the list of travelers' concerns. The most common problem mentioned had

to do with encounters with people who, simply put, smelled bad.

Because this was a survey of passengers on American Airlines, it

was not surprising that most of the anecdotes were about countries

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serviced by that carrier. Europe was mentioned most frequently. Here is

a sampling of the comments, as well as the gender and country of origin

of each commentator:

"I was interviewing a fellow for the position of managing director

of our subsidiary in France, and the candidate arrived smelling of body

odor and bad breath." -- Male, Canada

"I have experienced physical discomfort (stinging eyes!) in the

presence of some Europeans (Belgian and French) due to body odor!" --

Male, USA

"Don't go clothes shopping in Germany on Saturday morning.

Saturday night is bath night!" -- Male, USA

"When traveling on a train in Italy overnight, people took off their

shoes, and our cabin became unbearable with the foot odor. I tried to

open the window but the other passengers would close it claiming they

would catch cold. I gave up and slept holding a bottle of Guerlain

cologne to my nose all night!" -- Female, USA

However, complaints also were directed toward citizens of the

U.S., such as this note from Central America:

"Americans are not as clean as they think!" -- Female, Honduras

Is there a lesson in all of this?

There's not much you can do about the hygiene of others, except to

recognize that different cultures have different attitudes toward odors. In

the U.S. we have been taught that the natural smell of our bodies is

unpleasant. Our advertising industry has relentlessly hammered us with

this message to sell us soap, deodorant, perfume, air fresheners, and

other hygiene products. This, quite simply, isn't the case in all countries.

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Unfortunately, it can be very difficult to change our attitudes

toward odors when we go abroad. The olfactory centers of our brain are

older and more primitive (in evolutionary terms) than, for example, the

areas that control our vision. When we look at something, we tend to

interpret the data intellectually. But smell is more likely to evoke a

primitive, emotional response. Nevertheless, the polite businessperson

would never comment on the scent of another executive or anyone else

in a public setting. Perhaps it would be easier to tolerate the odor of

others if you realize you, too, might be offending noses.

Obviously you should tend to your own personal cleanliness as

best you can. But realize that as soon as you step out of the shower, your

body begins to emit odors. These odors depend upon several factors not

exclusive to how often you wash or change your socks.

For instance, diet can affect odor. The average U.S. executive may

be perfectly groomed, but smell "differently" abroad because Americans

consume so much red meat. Many Asians, who traditionally eat little red

meat, have commented on the smell of North Americans. Also, using

cologne or strong-smelling grooming products (popular in the U.S.) can

make you stand out. Be careful not to use too much scent; it can be

objectionable to others (including people with multiple chemical

sensitivities).

Perhaps we should remember while traveling that others don't

necessarily share our visceral revulsion toward specific odors. After all...

Si fueris Romae, Romano vivito more Si fueris alibi, vivito sicut

ibi.

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When you are at Rome live in the Roman style; When you are

elsewhere live as they live elsewhere.

- St. Ambrose (c. 340-397)

Even the smallest of US businesses competes in a shrinking global

village, where understanding subtle cultural contexts can make or break

sales and marketing efforts. This excerpt from the book Kiss, Bow, or

Shake Hands: How to Do Business in Sixty Countries, offers insight into

doing business in Japan.

Language

Japanese is the official language of Japan. It is a complex and

subtle language, and is spoken nowhere else in the world as a primary

tongue. Most sentences in Japanese can be expressed in at least four

different levels of politeness.

Appointments

Be punctual at all times. During three weeks of the year (New

Year's holidays, December 28 to January 3; Golden Week, April 29 to

May 5; and Obon, in mid-August), many people visit the graves of their

ancestors. Conducting business and traveling are difficult during these

periods.

Negotiating

A Japanese response "I'll consider it" may actually mean "no."

Negatively phrased questions will get a "yes" if the Japanese speaker

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agrees. Negotiations are begun at the executive level and continued at

the middle level (working level).

Business Entertaining

Business entertaining usually occurs after business hours, and very

rarely in the home. Allow your host to order for you (this will be easier,

too, since the menus are in Japanese). Be enthusiastic while eating, and

show great thanks afterwards.

Protocol

The Japanese are very aware of Western habits, and will often

greet you with a handshake. The bow is their traditional greeting. If

someone bows to greet you, observe carefully. Bow to the same depth as

you have been bowed to, because the depth of the bow indicates the

status relationship between you. As you bow, lower your eyes. Keep

your palms flat against your thighs.

The business card is extremely important for establishing

credentials. Present your card with the Japanese side facing your

colleague, in such a manner that it can be read immediately. Do not put

the cards in your pocket or in your wallet if you plan to put it in your

back pocket. Never write on a person's business card.

Gestures

Japan is a high-context culture; even the smallest gesture carries

great meaning. Therefore, avoid expansive arm and hand movements,

unusual facial expressions, or dramatic gestures of any kind. Nose

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blowing in public is not acceptable. When you must blow your nose, use

a disposable tissue and then throw it out.

Gifts

Gift giving is very common in Japan. Business gifts absolutely

must be given at midyear (July 15) and at year end (January 1). They are

often given at first business meetings. Good gifts are imported scotch,

cognac, or frozen steaks; electronic toys for children of associates; or

items made by well-known manufacturers, preferably foreign name

brands.

Dress

Men should wear conservative suits, and never appear casual. Slip-

on shoes are best, as you will remove them frequently. Women should

dress conservatively, keeping jewelry, perfume, and makeup to a

minimum. Pants are not appropriate. High heels are to be avoided if you

risk towering over your Japanese counterparts. If you wear a kimono,

wrap it left over right! Only corpses wear them wrapped right over left.

This excerpt from the book Kiss, Bow, or Shake Hands: How to

Do Business in Sixty Countries, offers insight into doing business in

France.

Language

French is the official language. If you do not speak French, the

international language of diplomacy for centuries, it is advisable to

apologize. Most in business speak English.

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Appointments

Be as punctual as you would be in the United States, although in

the south, the French are more relaxed about time.

Most French get four or five weeks of summer vacation, and take

it in July and August. Indeed, except for the tourist industry, France

virtually shuts down in August.

Negotiating

France has a civil-law system, rather than the common-law system

of the United States. Commercial agreements are short because they

refer to the legal code. Many business people have studied law and can

draw up their own contracts. Parties to an international contract may

choose which country's laws will govern it.

Eye contact among the French is frequent and intense, so much so

that North Americans may be intimidated. Hierarchies are strict. Try to

cultivate high-level personal contacts. The top executive is known as the

PDG (pronounced pay-day-ahjay), or president-directeur-general.

Business Entertaining

Business can be conducted during any meal, but lunch is best.

Whoever initiates the meal or drink is expected to pay. When eating,

keep both hands on the table at all times. When finished, place your fork

and knife parallel across your plate. Cheese is served at the end of the

meal; do not put it directly on your bread, and do not serve yourself

twice. Don't drink hard liquor before meals or smoke between courses.

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The French believe this deadens the taste buds. Wine is customary with

meals. If you do not want any, turn your glass upside down before the

meal.

Protocol

Always shake hands when being introduced or when meeting

someone, as well as when leaving. In general, the woman offers her

hand first. French handshakes are not as firm as in the United States.

Gestures

The "thumbs up" sign means "O.K."; the US "O.K." sign (forming

a circle with thumb and forefinger) means "zero" in France. Slapping the

open palm over a closed fist is vulgar.

Gifts

Good gifts include books or music, as they show interest in the

intellect. Bring American bestsellers, especially biographies. The thicker

and more complex the book, the better; simplicity is not a virtue in

France. Bring flowers (not roses or chrysanthemums) or fine chocolates

or liqueur to the host, and present them before, not after, the party. Do

not bring wine, as it has probably already been carefully selected for the

occasion by the host.

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Dress

The French are very aware of dress. Be conservative and invest in

well-made clothes. In the north and in the winter, men should wear dark

suits.

In a global economy, it is crucial for business people to be

sensitive to cultural differences. And although the best reason for doing

so may be ethical, it's great for business as well! This is an invaluable

book for "doing well while doing good" in your intercultural relations,

covering the protocols of appointments, business entertaining, greetings,

forms of address, gestures, dress, and gifts in 60 of the nations you're

most likely to be doing business. Some interesting excerpts:

Australia: The "thumbs-up" sign, which in the U.S. indicates

"O.K.”, is considered rude.

Brazil: The colors of the Brazilian flag are green and yellow, so

avoid wearing this combination in any fashion.

China: Avoid making exaggerated gestures or using dramatic

facial expressions. The Chinese do not generally use their hands when

speaking, and become distracted by a speaker who does.

Indonesia: Since it is impolite to disagree with someone,

Indonesians rarely say "no"...a clear way to indicate "no" is to suck in air

through the teeth.

For many manufacturers, success in the international marketplace

depends largely on how well they manage their relationships with

retailers, distributors, and agents in foreign cultures.

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Today's competitive global business environment demands that all

companies, large and small, new and old, give consideration to the

strategic option of expanding their markets to other nations. This option

can hold the potential for increased competitiveness and step-change

increases in revenue and therefore cannot be ignored.

Those companies that have a well-established international

presence are able to use their in-house resources, developed from many

years of experience, to generate revenue from international markets.

However, other, often smaller and more recently formed companies may

lack this history and experience. As important, they may also lack

resources such as international branch offices, ex-patriot personnel or in-

house experts with an understanding of markets and business practices

in specific countries.

6.2. The criterion of economic efficiency

Efficiency is a relative term. It is vital that this point be understood.

Efficiency is never absolute; it is always relative to some criterion. This

can be seen when one asks if farms are more efficient in the United

States or China. The farming techniques in China are more efficient than

those in the United States when measured in terms of output per unit of

land, output per unit of fossil fuel, or output per unit of machinery. The

farms in the United States are far more efficient in terms of output per

man-hour/person-hour.

The criterion for economic efficiency is value. A change that

increases value is an efficient change and any change that decreases

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value is an inefficient change. A situation, which is economically

efficient, may be inefficient when judged on different criteria.

Value is subjective. A thing has value only if someone wants it.

How then can we know if value is maximized? If there is some change

that makes someone feel better off, but making this change does not

make anyone feel worse off, then the original situation was not one of

highest value. Improvement was possible. When the highest value is

reached, then any possible change that helps anyone must harm someone

else. This way of defining economic efficiency, Pareto optimality, is

named after Vilfredo Pareto, an early mathematical economist.

Economists are interested in economic efficiency for two reasons,

one positive and the other normative. The positive reason is based on the

observation that people search for value. Given enough money, any

occupation, no matter how immoral or risky, will attract people. The

normative reason stems from a desire to make policy recommendations.

It is possible to discuss some aspects of policy without normative

assumptions. An economist can predict, for example, whether a policy

will or will not achieve the goals set for it. However, economists often

want to do more. They often want to compare two policies or two

situations and decide which is better. To decide which is better requires

some sort of basis for ranking situations. Thus, if they want to ask

whether government regulation of utility prices, a tariff on steel, or a

program to train unskilled workers helps society, economists need a

criterion on which to base their answer. Economists generally use the

criterion of economic efficiency to evaluate situations, though they often

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supplement it with other considerations because economic efficiency is

not the only way to judge the relative merits of two situations.

The value maximized in the notion of economic efficiency reflects

the goals people have. Not all goals are equal in determining value. The

goals of some are given more emphasis than the goals of others. In a

market economy, the goals of the rich are given more weight than the

goals of the poor.

Economic efficiency is a term typically used in microeconomics

when discussing product. Production of a unit of good is considered to

be economically efficient when that unit of good is produced at the

lowest possible cost. Economics by Parkin and Bade give a useful

introduction to the difference between economic efficiency and

technological efficiency:

There are two concepts of efficiency: Technological efficiency

occurs when it is not possible to increase output without increasing

inputs. Economic efficiency occurs when the cost of producing a given

output is as low as possible.

Technological efficiency is an engineering matter. Given what is

technologically feasible, something can or cannot be done. Economic

efficiency depends on the prices of the factors of production. Something

that is technologically efficient may not be economically efficient. But

something that is economically efficient is always technologically

efficient.

A key point to understand is the idea that economic efficiency

occurs "when the cost of producing a given output is as low as possible".

There's a hidden assumption here, and that is the assumption that all else

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being equal. A change that lowers the quality of the good while at the

same time lowers the cost of production does not increase economic

efficiency. The concept of economic efficiency is only relevant when the

quality of goods being produced is unchanged.

The concept of economic efficiency is only relevant when the

quality of goods being produced is unchanged.

Economic efficiency means that the "correct people" (those who

can afford it) will get the "correct goods and services" (whatever they

want). Economic efficiency allocates resources to people who are the

most successful at gaining social power. In the economist's ideal world,

the rich get richer and the poor get poorer.

It is a broad term that implies an economic state in which every

resource is optimally allocated to serve each person in the best way

while minimizing waste and inefficiency. When an economy is

economically efficient, any changes made to assist one person would

harm another. In terms of production, goods are produced at their lowest

possible cost, as are the variable inputs of production.

Some terms that encompass phases of economic efficiency

include allocation efficiency, production efficiency and Pareto

efficiency.

A state of economic efficiency is essentially just a theoretical one;

a limit that can be approached but never reached. Instead, economists

look at the amount of waste (or loss) between pure efficiency and reality

to see how efficiently an economy is functioning.

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Measuring economic efficiency is often subjective, relying on

assumptions about the social good created and how well that serves

consumers. Basic market forces like the level of prices, employment

rates and interest rates can be analyzed to determine the relative

improvements made toward economic efficiency from one point in time

to another.

A state of economic efficiency is utilizing resources in a manner

that results in the greatest value of output. A system is characterized by

economic efficiency if goods, services, and resources flow to those who

will pay the highest prices. Taxes, subsidies, quotas, and regulations

result in reduced economic efficiency.

In absolute terms, a system can be called economically efficient if:

• No one can be made better off without making someone else

worse off.

• More output cannot be obtained without increasing the amount

of inputs.

• Production proceeds at the lowest possible per-unit cost.

These definitions of absolute efficiency are not equivalent, but

they are all encompassed by the idea that nothing more can be achieved

given the resources available.

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7. Industry, goods & services

An exchange is a voluntary agreement between two people, in

which each gives something to the other and gets in return something

that he considers of greater value. Economics focuses almost exclusively

on interactions based on exchange.

People engage in exchange to attain goals. Exchange is not just

taking; in order to get, one must give. People must do things that they do

not want to do in order to get things that they desire. The unpleasant part

of this process is work and production, and the pleasant part is

consumption. Work and production are not pursued for their own sakes,

but only because without them we cannot consume.

Thus, the economy is divided into two sectors: one concerned with

producing goods and services, and the other with consuming them.

Resources are converted into goods and services by business, and in this

transformed state travel back to consumers. Money flows in the opposite

direction. These flows involve two markets in which exchange takes

place: the resource or factor market in which business buys resources,

and the goods and services market in which business sells goods.

The word "firm" takes on two meanings in economics. Sometimes,

the word refers to an agent that produces something. Other times, it

refers to a business organization. The second meaning of the word is

more restrictive than the first. A self-employed farmer is not a firm in

the second meaning because he is not an organization, nor is a non-profit

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organization because it is not a business. Yet both are firms in the first

meaning.

The word "industry" cannot be used interchangeably with "firm."

An industry is defined as all firms producing similar products. It can

contain one firm or millions of firms. In practice, there are two

complications with this definition. First, there is no clear rule for

deciding how similar products must be before they belong in the same

industry. For example, what other products belong in the industry that

Coca Cola is in? Does Pepsi Cola, or Seven Up, or orange juice, or milk,

or beer belong in the same industry? There is no clearly correct answer.

Second, the number of firms in an industry depends on the price of the

product. Firms enter as price rises and exit as price falls.

A firm must obtain inputs. Inputs include raw materials, energy,

machinery, office space, workers, and anything else needed to produce

output. Output may either be a tangible good such as a pair of shoes or

an automobile, or a service such as a haircut or a medical check-up. The

firm must sell its output to someone else. The economic theory of the

firm is an analysis of the way the firm must perform to make a profit.

What determines the amount of a good or service that people are

willing and ready to sell during some period of time?

Sellers intend to make a profit from their sales, and economists

assume that they want their profits to be as large as possible. Because

profit is the difference between benefits in the form of revenues and

costs, anything that influences revenues or costs can influence the

amounts sellers want to sell. Revenue is found by multiplying the price

of the product by the amount sold.

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Because a higher price leads to higher profit, and a higher profit

leads to a larger amount that sellers will want to sell, one expects that a

greater quantity should be supplied when the price is higher. Thus, the

relationship between quantity that sellers will sell and price should be

direct or positive.

Though the positive relationship is usually the case, there are a few

exceptions. An example is labor - as wages go up, people may decide to

enjoy their higher wages and work less.

Industry refers to the production of an economic good (either

material or a service) within an economy. There are four key industrial

economic sectors:

• the primary sector, largely raw material extraction industries

such as mining and farming;

• the secondary sector, involving refining, construction, and

manufacturing;

• the tertiary sector, which deals with services (such as law and

medicine) and distribution of manufactured goods;

• the quaternary sector, a relatively new type of knowledge

industry focusing on technological research, design and development

such as computer programming, and biochemistry.

• A fifth sector has been proposed encompassing nonprofit

activities. The economy is also broadly separated into public sector and

private sector, with industry generally categorized as private. Industries

are also any business or manufacturing.

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Industry in the sense of manufacturing became a key sector of

production and labor in European and North American countries during

the Industrial Revolution, which upset previous mercantile and feudal

economies through many successive rapid advances in technology, such

as the steel and coal production. It is aided by technological advances,

and has continued to develop into new types and sectors to this day.

Industrial countries then assumed a capitalist economic policy. Railroads

and steam-powered ships began speedily establishing links with

previously unreachable world markets, enabling private companies to

develop to then-unheard of size and wealth. Following the Industrial

Revolution, perhaps a third of the world's economic output is derived

from manufacturing industries—more than agriculture's share.

Many developed countries (for example the UK, the U.S., and

Canada) and many developing/semi-developed countries (People's

Republic of China, India etc.) depend significantly on industry.

Industries, the countries they reside in, and the economies of those

countries are interlinked in a complex web of interdependence.

Early industries involved manufacturing goods for trade. In

medieval Europe, industry became dominated by the guilds in cities and

towns, who offered mutual support for the member's interests, and

maintained standards industry workmanship and ethical conduct.

The industrial revolution led to the development of factories for

large-scale production, with consequent changes in society.

Originally the factories were steam-powered, but later transitioned

to electricity once an electrical grid was developed. The mechanized

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assembly line was introduced to assemble parts in a repeatable fashion,

with individual workers performing specific steps during the process.

This led to significant increases in efficiency, lowering the cost of the

end process. Later automation was increasingly used to replace human

operators. This process has accelerated with the development of the

computer and the robot.

Historically certain manufacturing industries have gone into a

decline due to various economic factors, including the development of

replacement technology or the loss of competitive advantage. An

example of the former is the decline in carriage manufacturing when the

automobile was mass-produced.

A recent trend has been the migration of prosperous, industrialized

nations toward a post-industrial society. This is manifested by an

increase in the service sector at the expense of manufacturing, and the

development of an information-based economy, the so-called

informational revolution. In a post-industrial society, manufacturing is

relocated to more economically-favorable locations through a process of

off-shoring.

There are several branches of technology and engineering

specialized for industrial application. This includes mathematical

models, patented inventions and craft skills. See automation, industrial

architecture, industrial design, industrial process, industrial arts and

industrial applicability.

An industrial society can be defined in many ways. Today,

industry is an important part of most societies and nations. A

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government must have some kind of industrial policy, regulating

industrial placement, industrial pollution, financing and industrial labor.

Industry classification systems used by the government commonly

divide industry into three sectors: agriculture, manufacturing, and

services. The primary sector of industry is agriculture, mining and raw

material extraction. The secondary sector of industry is manufacturing.

The tertiary sector of industry is service production. Sometimes, one

talks about a quaternary sector of industry, consisting of intellectual

services such as research and development (R&D).

Market-based classification systems such as the Global Industry

Classification Standard and the Industry Classification Benchmark are

used in finance and market research. These classification systems

commonly divide industries according to similar functions and markets

and identify businesses producing related products.

Industries can also be identified by product: chemical industry,

petroleum industry, automotive industry, meatpacking industry,

hospitality industry, food industry, fish industry, software industry,

paper industry, entertainment industry, semiconductor industry, cultural

industry, poverty industry

• labor-intensive industry - capital-intensive industry

• light industry - heavy industry

Firm or The Firm may refer to:

• Any business entity such as a corporation, partnership, sole

proprietorship, or "private equity" "investment (firm) organization"

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• Economic entities which substantially lack internal markets.

Their structure and behavior are described by the theory of the firm.

• British slang phrase for a criminal gang or football hooligans.

Organizations called The Firm:

• The Firm, a criminal gang active in the East End of London,

once run by the Kray twins

• The Firm, a Scottish magazine for law students, trainees and

practitioners

• The British Royal Family, allegedly referred to as "the Firm" by

family members

• Secret Intelligence Service (SIS or MI6), one of the United

Kingdom intelligence agencies

• McKinsey & Company, a large multinational management

consulting firm

• Firmaet, an anti-communist private intelligence agency in

Denmark run by former Danish resistance movement leader Arne Sejr

• Goldman Sachs investment bank called "the Firm" by

employees.

A business firm - the members of a business organization that

owns or operates one or more establishments; "he worked for a

brokerage house"

• firm, house

• corp., corporation - a business firm whose articles of

incorporation have been approved in some state

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• business, business concern, business organization, business

organization, concern - a commercial or industrial enterprise and the

people who constitute it; "he bought his brother's business"; "a small

mom-and-pop business"; "a racially integrated business concern"

• accounting firm - a firm of accountants who provide accounting

and auditing services for a fee

• consulting company, consulting firm - a firm of experts

providing professional advice to an organization for a fee

• publisher, publishing company, publishing firm, publishing

house - a firm in the publishing business

• dealer - a firm engaged in trading

law firm - a firm of lawyers

auction house - a firm that conducts auctions

"The theory of the firm" is the name given to the contentious set of

questions about why business firms exist in the first place, what their

boundaries are, and why they tend to be structured as they are. Most

people don't give the question much thought, but stop and think for a

minute about why companies exist, and why so many of them exist in

roughly the form they do. From the point of view of ideal market theory,

the fact that firms exist at all needs explaining: they're lumps,

aggregations of people working together within what would otherwise

be a homogenous field of buyers and sellers of goods and services.

During the last two decades, economic theories of the firm have

become increasingly influential in a number of disciplines in business

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administration, notably in strategic management, organization theory,

corporate governance, and marketing.

In economics, economic output is divided into physical goods and

intangible services. Consumption of goods and services is assumed to

produce utility. It is often used when referring to a Goods and Services

Tax.

We satisfy our needs and wants by buying goods and services.

Goods are items you can see and touch, such as a book, a pen, salt,

shoes, hats, a folder etc. Services are provided for you by other people,

such as; doctor, a lawn mower worker, a dentist, haircut and eating in

restaurants.

The dichotomy between physical goods and intangible services

should not be given too much credence; these are not discrete categories.

Most business theorists see a continuum with pure service on one

terminal point and pure commodity good on the other terminal point.

Most products fall between these two extremes. For example, a

restaurant provides a physical good (prepared food), but also provides

services in the form of ambiance, the setting and clearing of the table,

etc. And although some utilities actually deliver physical goods &

services; like water utilities which actually deliver water — utilities are

usually treated as services.

In business, people sometimes talk about the marketing of

products and services. This is clear - services are products. Marketers

must draw on the same set of principles and skills to market all products,

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whether they are apples, oranges or haircuts. Like economists, marketers

too view goods and services as two ends of a continuum.

Economics is concerned with the production and distribution of

goods and services. Goods would be defined as anything that anyone

wants or needs. Services would be the performance of any duties or

work for another; helpful or professional activity. The distribution of

goods and services is referred to as marketing. The marketing of goods

and services can add almost as much to the cost as the actual

manufacturing of the goods. Marketing a product refers to the

advertising, and other efforts to promote a products sale.

There are many different kinds of goods. Consumer goods are

those such as food and clothing, which satisfy human wants or needs.

Producer goods are those such as raw materials and tools, used to make

consumer goods. Capital goods are such machinery, used in the

production of commodities or producer goods.

There are untold numbers of services. A short list would include

educational, health, communication, transportation, social services.

One of the most basic ideas in economics is goods and services.

More than anything else, money is spent on goods and services. It helps

to know the difference between two.

A good is something that you can use or consume, like food or

CDs or books or a car or clothes. You buy a good with the idea that you

will use it, either just once or over and over again.

A service is something that someone does for you, like give you a

haircut or fix you dinner or even teach you social studies. You don't

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really get something solid, like a book or a CD, but you do get

something that you need.

Goods and services are the outputs offered by businesses to satisfy

the demands of consumer and industrial markets. They are differentiated

on the basis of four characteristics:

Tangibility: Goods are tangible products such as cars, clothing,

and machinery. They have shape and can be seen and touched. Services

are intangible. Hair styling, pest control, and equipment repair, for

example, do not have a physical presence.

Perishability: All goods have some degree of durability beyond the

time of purchase. Services do not; they perish as they are delivered.

Separability: Goods can be stored for later use. Thus, production

and consumption are typically separate. Because the production and

consumption of services are simultaneous, services and the service

provider cannot be separated.

Standardization: The quality of goods can be controlled through

standardization and grading in the production process. The quality of

services, however, is different each time they are delivered.

For the purpose of developing marketing strategies, particularly

product planning and promotion, goods and services are categorized in

127

two ways. One is to designate their position on a goods and services

continuum. The second is to place them into a classification system.

The goods and services continuum enables marketers to see the

relative goods/services composition of total products. A product's

position on the continuum, in turn, enables marketers to spot

opportunities. At the pure goods end of the continuum, goods that have

no related services are positioned. At the pure services end are services

that are not associated with physical products. Products that are a

combination of goods and services fall between the two ends. For

example, goods such as furnaces, which require accompanying services

such as delivery and installation, are situated toward the pure goods end.

Products that involve the sale of both goods and services, such as auto

repair, are near the center. Products that are primarily services but rely

on physical equipment such as taxis are located toward the pure services

end.

The second approach to categorizing products is to classify them

on the basis of their uses. This organization facilitates the identification

of prospective users and the design of strategies to reach them. The

major distinction in this system is between consumer and industrial

products. Consumer goods and services are those that are purchased for

personal, family, or household use. Industrial goods and services are

products that companies buy to make the products they sell.

Two major changes have affected the marketing and production of

goods and services since about 1950. The first was a shift in marketing

philosophy from the belief that consumers could be convinced to buy

whatever was produced to the marketing concept, in which consumer

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expectations became the driving force in deter mining what was to be

produced and marketed. This change in orientation has resulted in

increases in both lines of products and choices within the lines.

The second change was an increased demand for services. The

growth in demand for ser vices—and resulting production—continues to

increase at a faster rate than the demand for manufactured goods.

Goods and services are tangible and intangible goods that are

produced and purchased in order to fulfill the needs and desires of

consumers. Most countries base their economy on the production and

consumption of both physical goods and intangible services that people

at home and abroad are willing to purchase. In many cases, both the

services and the goods are offered simultaneously.

Goods are simply any physical or tangible products that can be

seen and touched. Some goods are quickly consumed and must be

replaced by like or similar products on a regular basis. Food is one

example of goods that are quickly consumed and must be acquired

repeatedly. Other forms of goods are more long-term in nature, and may

last for years or even decades. Furniture, cutlery, and houses are

examples of durable goods that are intended to satisfy consumers for

extended periods of time.

Services are intangible support that is provided to the consumer in

some manner. A physician provides healthcare support or services.

Telephone companies provide communications services such as local

calling ability, long distance calling, and other features that enhance the

electronic communication process. Banks provide a range of financial

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services to customers, ranging from basic and checking accounts to

investment opportunities.

Often, goods and services are presented as a unified package,

providing a well-rounded and attractive option for the consumer. For

example, a restaurant offers food, which is easily identified as goods. At

the same time, the food is prepared for the consumer, and brought to the

table by a server; thus, the goods are complemented with service.

Communication companies may offer some type of equipment at no

extra charge, provided the customer commits to using their services for a

certain period of time, clearly another marriage of goods and services.

Most countries around the world depend on the production of

goods and services to stimulate the economy. It is not unusual for

nations to impose some type of goods and service tax on these products,

which helps to create a steady stream of revenue for the operation of the

central government. While the specifics of a goods and services act will

vary somewhat from one country to another, most will address the

production and consumption of goods and services that are meant for

export as well as those that are consumed domestically. In addition to

federal taxation on products that are manufactured within the country,

there is often some type of tax structure applied to any goods and

services that are brought into the nation from other sources.

Goods are tangible objects used by consumers and producers. They

may be used for a specific task or simply used as a decoration. By

comparison, services are tasks performed by producers in the tertiary

sector for other producers and consumers, with money value but no real

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physical value. Both goods and services are called commodities and

exchanged for money in the commodities market.

Commodities can be classed in several ways. Common

classifications of commodities include:

• Needs essential to survive and live at a basic standard, basic

wants to have a reasonable quality of life and luxuries which are not

needed.

• Free goods of which there is an abundance of and economic

goods and services that are scarce enough that consumers are willing to

pay for them.

• Capital goods used to produce other goods and services and

consumer goods or final goods ready to be used by consumers for

themselves.

• Durable goods that last a long time and can be reused and non-

durable goods that can only be used once and are perishable.

• Merit goods and positive goods that are considered beneficial to

society and demerit goods and negative goods that have a negative social

impact.

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8. Goods and production

Economics is concerned with the production and distribution of

goods and services. Goods would be defined as anything that anyone

wants or needs. Services would be the performance of any duties or

work for another; helpful or professional activity. The distribution of

goods and services is referred to as marketing. The marketing of goods

and services can add almost as much to the cost as the actual

manufacturing of the goods. Marketing a product refers to the

advertising, and other efforts to promote a products sale.

There are many different kinds of goods. Consumer goods are

those such as food and clothing that satisfy human wants or needs.

Producer goods are those such as raw materials and tools, used to make

consumer goods. Capital goods are such machinery, used in the

production of commodities or producer goods.

There are untold numbers of services. A short list would include

educational, health, communication, transportation, social services.

Goods and services are the outputs offered by businesses to satisfy

the demands of consumer and industrial markets. They are differentiated

on the basis of four characteristics:

1. Tangibility: Goods are tangible products such as cars, clothing,

and machinery. They have shape and can be seen and touched. Services

are intangible. Hair styling, pest control, and equipment repair, for

example, do not have a physical presence.

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2. Perishability: All goods have some degree of durability beyond

the time of purchase. Services do not; they perish as they are delivered.

3. Separability: Goods can be stored for later use. Thus,

production and consumption are typically separate. Because the

production and consumption of services are simultaneous, services and

the service provider cannot be separated.

4. Standardization: The quality of goods can be controlled

through standardization and grading in the production process. The

quality of services, however, is different each time they are delivered.

For the purpose of developing marketing strategies, particularly

product planning and promotion, goods and services are categorized in

two ways. One is to designate their position on a goods and services

continuum. The second is to place them into a classification system.

The goods and services continuum enables marketers to see the

relative goods/services composition of total products. A product's

position on the continuum, in turn, enables marketers to spot

opportunities. At the pure goods end of the continuum, goods that have

no related services are positioned. At the pure services end are services

that are not associated with physical products. Products that are a

combination of goods and services fall between the two ends. For

example, goods such as furnaces, which require accompanying services

such as delivery and installation, are situated toward the pure goods end.

Products that involve the sale of both goods and services, such as auto

repair, are near the center. Products that are primarily services but rely

on physical equipment such as taxis are located toward the pure services

end.

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The second approach to categorizing products is to classify them

on the basis of their uses. This organization facilitates the identification

of prospective users and the design of strategies to reach them. The

major distinction in this system is between consumer and industrial

products. Consumer goods and services are those that are purchased for

personal, family, or household use. Industrial goods and services are

products that companies buy to make the products they sell.

Two major changes have affected the marketing and production of

goods and services since about 1950. The first was a shift in marketing

philosophy from the belief that consumers could be convinced to buy

whatever was produced to the marketing concept, in which consumer

expectations became the driving force in determining what was to be

produced and marketed. This change in orientation has resulted in

increases in both lines of products and choices within the lines.

The second change was an increased demand for services. The

growth in demand for ser vices—and resulting production—continues to

increase at a faster rate than the demand for manufactured goods.

The cost of something is what must be given up in order to get it.

When costs are only monetary, they are easy to see. Production costs are

determined not only by the prices of inputs, but also by technology.

Technology represents the knowledge of how inputs (such as labor, raw

materials, energy, and machinery) can be combined to produce the

product.

Costs may be non-monetary as well as monetary. For example, a

farmer takes the expected price of soybeans into account in deciding

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how much corn to plant. If soybeans are expected to sell for a high price,

then the farmer may find that shifting some of his land from corn

production to soybean production will increase profit. The decision to

plant corn means that the farmer gives up the opportunity to plant

soybeans (as well as giving up the money for seed, fuel, equipment, and

labor). Because we have defined cost as what must be given up to get

something, the prices of other goods that sellers could otherwise produce

and sell must be part of the calculation of the cost of production.

There are other factors that can influence the amount of a product

that sellers will sell, such as the number of sellers, expectations about

the future, and whether or not there are by-products in production that

are valuable.

Production is converting raw materials to finished products. It

involves a number of factors to be able to produce the goods and

services that cater to our needs.

Production means the development and creation of goods and

services using resources to stimulate exchange. It is the physical output

of a manufacturing or service company. Production involves three

processes – raw materials, work in process and finished goods.

Means of production refer to the concept which combines the

means of labor and the subject of labor. Means of labor simply means all

the things which require labor to transform it. Subject of labor means the

material to work on. Production, therefore, is the combined resources

and equipment needed to come up with goods or services.

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Resources of Production

First, it is important to delve on the resources of production.

Agrarian industries require soil and shovel to produce, while industrial

companies require factories. The resources of production pertain to the

things used to create commodities.

Therefore, it talks about the different factors of production used to

be able to come up with the finished goods which include labor, land

and capital as the basic. Additionally, technology and entrepreneurship

are also playing essential roles in production. These five factors are

needed to come up with products or services.

Labor pertains to the human resources of the business. The people

are the company’s greatest resource because they look after the other

components of production. Human labor could either be technical or

marketing expertise.

Land pertains to the natural resources used in production such as

water, soil for farming, minerals, air, flora and fauna. Shell craft

industries make use of shells to create wonderful accessories. Meat

shops sell pork, chicken and beef. These industries make use of the

natural resources around them.

Capital refers to human-made goods that are to be used in

production. Machinery, building, shares of stocks, equipment and others

all fall under this category. Originally, capital only pertains to money or

gold.

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Entrepreneurship is a fourth factor in production because of their

coordinating function. They are the ones who look after the other factors

of production: land, labor, capital and technology in such a way that it

can generate profit. Entrepreneurs invest the other factors in order to

come up with products and services that would entice customers to buy.

Technology or information technology forms part of intellectual

capital. It is fast becoming a huge factor for all kinds of businesses are

they manufacturing, retail, agricultural or service industries. The

advances in our technology enable the production of goods and services

faster and easier. Computers are doing the jobs that people needed to do

before.

The intangible economy defines 21st century businesses.

Production factors in the intangible economy consist of knowledge,

collaboration, process engagement and time quality. Since the four

modern-day production factors are all abstract, that’s how the term

intangible economy came about. All of these factors are needed to come

up with the goods and services offered by the business.

Product is the focal point of marketing because without a product

there will be nothing to market. It is the focal point around which all

marketing activities revolve. Products or services have to cater to the

customers’ needs. These things should satisfy the customer or serve as

aids to attain a fulfilling end.

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In economics, a public good is a good that is non-rivalrous and

non-excludable. Non-rivalry means that consumption of the good by one

individual does not reduce availability of the good for consumption by

others; and non-excludability that no one can be effectively excluded

from using the good.] In the real world, there may be no such thing as an

absolutely non-rivaled and non-excludable good; but economists think

that some goods approximate the concept closely enough for the analysis

to be economically useful.

For example, if one individual visits a doctor there is one less

doctor's visit for everyone else, and it is possible to exclude others from

visiting the doctor. This makes doctor visits a rivaled and excludable

private good. Conversely, breathing air does not significantly reduce the

amount of air available to others, and people cannot be effectively

excluded from using the air. This makes air a public good, albeit one that

is economically trivial, since air is a free good. A less straight-forward

example is the exchange of MP3 music files on the internet: the use of

these files by any one person does not restrict the use by anyone else and

there is little effective control over the exchange of these music files and

photo files.

A capital good, or simply capital, is saved up wealth that enables

enterprise by allowing start-up companies to enjoy an initial period

where they consume more than they produce. For start-ups to be able to

do this, others (savers) must either currently be saving or must have

saved in the past. It is simply not possible to have some people

consuming more than they produce without having others who are either

currently producing more than they consume or who did so in the past.

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9. Buyers and sellers

A market exists when buyers and sellers interact to exchange

products.

What determines the amount of a product that people are willing

and ready to buy during some period of time? For example, what

determines the amount of hamburger purchased in Chicago during a

week? Economists answer such questions by examining the costs and

benefits of buying the product. When any of the costs or benefits

changes, the amount of the product, which people will buy, should also

change.

The benefits a person gets from a product depend on his goals.

These goals are referred to in many ways. The words "tastes," "wants,"

"needs," "preferences," and "usefulness" all refer to goals. When

people's goals change, the amount of benefit they get from the good

changes, and this will cause them to change the amount of the good they

want to buy.

Goals (or preferences or tastes) depend on many factors, such as

the age of people and the amount of education they have. Social custom

is an important determinant of preferences and can account for many

differences in demand among groups.

There is too much diversity in the ways buyers and sellers interact

to explain everything.

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The ordinary consumer when he goes to the store, he can buy one

or twenty gallons of milk with no effect on price.

In the list of factors that affected buyers and sellers, the only

common factor is price. Few people who buy hamburger know or care

about the price of cattle feed or the details of cattle breeding. Cattle

raisers do not care what the income of the buyers is or what the prices of

related goods are unless they affect the price of cattle.

If information is not good, the same product may sell for a variety

of prices. Often, however, what seems to be the same product at

different prices can be considered a variety of products. A pound of

hamburger for which one has to wait 15 minutes in a checkout line can

be considered a different product from identical meat that one can buy

without waiting.

A task of the firm is to obtain resources needed to produce a

product. For each resource, the firm faces limitations based on the

preferences of sellers and on the actions of other firms that use the

resource.

In the world we live in, greater amounts of income must be

purchased with more work - which means less leisure.

Higher wages have two effects on the leisure-work decision, and

these two effects pull in opposite directions. A higher wage rate

increases the benefits of working, causing people to substitute work for

leisure. Higher wages also increase income, and people want more

leisure with a higher income.

If a firm hires two clerks who do exactly the same work, and pays

one $4.00 per hour and the other $6.00 per hour, the lower-paid one will

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be unhappy and may refuse to work for the lower pay. On the other

hand, many firms do not publicly disclose what they pay various people,

and discourage employees from discussing salaries. To the extent that

people are unaware of what others are earning, the firm may be able to

pay different prices for the same resource, or in economists' jargon, to

price discriminate.

Buyers demand goods and services; sellers supply goods and

services. Markets exist when buyers and sellers interact. This interaction

determines market prices and thereby allocates goods and services. The

price is what people pay when they buy a good or service, and what they

receive when they sell a good or service. In market economies there is

no central planning agency that decides how many different kinds of

sandwiches are provided for lunch everyday at restaurants and stores,

how many loaves of bread are baked, how many toys are produced

before the holidays, or what the prices will be for the sandwiches, bread,

and toys. Businesses want to sell the goods and services consumers will

buy. A market exists when buyers and sellers exchange goods and

services. People’s choices about what goods and services to buy

ultimately determine what producers produce.

Every company is at some time both a buyer and seller of goods

and services. Negotiating and signing clear and balanced purchase

contracts is the most effective way to protect your company's reputation,

revenues, markets and customer relationships. The market is the most

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effective teacher of "best practices", and if you learn from the mistakes

of others, you will be wiser and wealthier.

Preparing a good purchase contract should embody that old saying

of "an ounce of prevention is worth a pound of cure." Investing time and

expertise in a good purchase contract is one of the most important

revenue-generating tools to avoid liabilities, future trade disputes,

uncollected accounts receivables, reputation-damaging publicity, and

claims of breach of contract and poor quality control. These can be

easily avoided with a small dose of preventive attention in advance.

Whether acting as a buyer or a seller, the same basic common

sense rules apply to protect your business. They boil down to a few basic

principles:

• Ensure that the purchase/sale contract is clear about ALL the

major terms and conditions without any room for different

interpretations

• Ensure that the purchase/sale contract is clear about the

responsibilities and obligations of ALL the parties without any room for

different interpretations

• Ensure that the purchase/sale contract reflects the realities as

understood by ALL parties without any room for different

interpretations

• Ensure that ALL payment, legal title and delivery terms are

reasonable and stated clearly

• Ensure that the purchase/sale contract is enforceable against ALL

the real parties in interest and provides for dispute resolution

mechanisms that practically work

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• Build in practical communication and resolution mechanisms to

solve problems before costly litigation/arbitration

Below we share some of the "best practices" that should be

included in the basic form agreements for every company, even before

specific "tailoring" to special needs. These should be useful to help

navigate an increasingly complicated and competitive trade, investment

and business environment.

1. Sign a Non-Disclosure Agreement (NDA) Before Discussions

Sign an NDA at the beginning of discussions to prevent unlawful

use of trade secrets and/or confidential information (e.g. sales, design, or

customer information) by other parties

2. Sign with the Legal Representative.

Request that the purchase agreement be signed by the person listed

as the legal representative in the company's incorporation documents. If

the person signing the agreement is not the legal representative, the other

party may claim to not to be bound by the agreement and refuse to abide

by some or all of its terms.

3. Discuss Demand Forecasts

Demand forecasts will often be mentioned in the agreement but are

not binding unless stated explicitly. Ensure that forecasts are binding

only for a short-term and retain explicit rights to modify the forecasts to

allow future flexibility.

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4. Determine Whether Orders Can be Cancelled, Re-

scheduled, or Modified

By default, orders are binding and cannot be modified or cancelled

without liability unless explicitly stated. To allow flexibility and fairness

to both parties, set specific bounds (dates and volumes) for when orders

can be cancelled, re-scheduled, or modified.

5. State Explicit Payment Terms and Penalties for Delayed

Payment

The agreement must clearly state the payment terms. For example,

it is better to ask for payment "10 days after shipment," instead of "on

receipt of products." The agreement should clearly define a lump sum, a

daily/weekly/monthly penalty, and/or an interest charge in the event of

delayed payment. As with other penalties, a fixed figure must be agreed

on in advance.

6. Determine When to Transfer Title of the Goods

As a buyer, make sure that title to the goods is transferred upon

shipment. If the seller transfers goods to you, but files for bankruptcy

before you pay for them, the goods will be considered part of the seller's

assets and liquidated.

As a seller, title to goods should be transferred upon payment. If

you transfer title to the goods before payment and the buyer then files

for bankruptcy protection, the goods will be considered part of the

buyer's assets, and will consequently be liquidated.

7. Payment after Acceptance

The agreement should ask for payment to be made within a

reasonable period of time after the products have passed acceptance

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tests. This ensures that defective products are not bought and safeguards

against later refund disputes.

8. Have the Right to Audit

As a buyer, incorporate a clause that permits audits of the seller's

financial data and visits to the seller's factory (with prior notice) to

guarantee that the seller is not unlawfully manufacturing the same

products for other uses.

9. Most Favorable Price

A most favorable price term should be incorporated into the

agreement to ensure that other buyers will not be able to make an

equivalent purchase for the same goods for a lower price in the future.

10. Define Clear Quality Control Mechanisms and

Specifications

Ensure the agreement provides clear, detailed, and previously

agreed upon quality specifications, as well as a description of the

inspection process (i.e. who will inspect the product, when, and how).

The seller should provide sample products for reference and records.

Make sure an independent and local third party conducts quality control

inspections during production or before shipping the goods to the buyer.

State that the results of these inspections are binding. It is common

practice for the buyer to select and pay for this service provider.

11. Clearly State Warranties

The objective of spending time and energy drafting a purchase

agreement is to minimize your liability in all transactions. Reasonably

state everything you need in the warranty clause, and do not simply rely

on your insurance policies.

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12. Sufficient Indemnifications

Claim sufficient indemnifications in order to cover your potential

losses in any future disputes, including the attorney fees you may be

required to spend.

13. Define Clear Mechanisms to Handle Returns

Specify deadlines to report product defects and returns (e.g. 10

days after shipping). Make sure the term "defect" is clearly defined and

understood by both parties. Document customer complaints and require

products to be inspected by you or a mutually agreed upon third party to

be deemed defective. Have clear deadlines and procedures to reduce

misunderstandings and pass liability to the other party if they fail to

adhere to the established system.

14. Right to Offset

As a buyer, make sure you have the right to offset any amount

owed by the seller against the product payments. This must be clearly

stated as the right is not usually granted.

15. No Right to Outsource

As a buyer, make sure the seller is forbidden from outsourcing the

function of manufacturing and/or supplying to a third party to ensure the

quality of the products unless prior written consent is given.

16. State Termination Rights

State very clearly the circumstances under which the agreement

can be terminated. These usually include mutual consent and breach of

specific clauses by one of the parties.

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17. Select the Governing Law That Better Protects Your

Rights

Remember that any jurisdiction can be used as long as both parties

agree. Even though your first impulse may be to use the jurisdiction

where your company is located, you should check with your lawyer to

explore other options on a case-by-case basis. In some cases, choosing

the other party's jurisdiction may better facilitate seizure of assets in case

of a dispute.

18. Prepare a Standard Agreement in Advance

As Louis Pasteur once said, "Chance favors the prepared mind."

The best way to ensure your interests are protected in every transaction

is to develop your own template agreement with the assistance of an

experienced commercial lawyer and use it as a baseline during

negotiations.

19. Sign with a Real Party of Interest, Not a Paper Company

Ensure the other party has assets for future enforcement if a

dispute arises. Remember that purchase agreements are only binding for

the entities that sign it, regardless of who actually receives the product.

If the agreement is signed with a "paper company" that holds no assets,

you are left with little or no legal recourse in case of a dispute.

Always request that the agreement be signed by the global or

regional headquarters, and be very suspicious if one party suggests using

an offshore entity. Whenever possible, conduct a background check to

make sure the signing entity has a previous track record of successful

sales and assets (real estate, production facilities, bank accounts, etc.)

that can be seized in case of dispute.

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In the case of a representative office, obtain an authorization letter

from the real party of interest, naming the office as its representative.

The authorization letter should state that the real party of interest is

responsible for payment of orders placed in their name by the

representative office.

20. State Explicitly Any Geographic Limitations for

Distribution

If product distribution is to be limited to a specific geographic

area, this should be negotiated beforehand and stated clearly in the

agreement. Any penalties for breaching this restriction must also be

stated as a fixed amount, which should also be negotiated in advance.

21. State Explicitly When Prices Can Be Negotiated

This is particularly important in industries where prices for key

components or commodities increase/fluctuate seasonally, or depend on

global/local supplies.

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10. Consumer sovereignity

For economic agents to act means that prices are important in

deciding what goods are produced, or, in the jargon of economists, they

help allocate resources. Consumer preferences, the relative availability

of resources, and technology determine how much of each good and

service will be produced in a market system.

Citizens, as consumers, vote in the marketplace. The marketplace

offers consumers a variety of products, and each producer tries to

convince consumers that his product is best. Consumers vote for

products by spending their money. Products receiving many votes will

be profitable and will continue being produced. Products that do not

receive enough votes will die. Voting provides feedback to producers. It

tells them whether their performance is acceptable or not. Voting

implies that consumers, not producers, ultimately decide what will be

produced in a market economy. This power of consumers is often called

"consumer sovereignty."

There are times in which a society may not want the consumer to

be sovereign. It may decide that there is some social goal more

important than individual goals. When nations are at war, for example,

they usually want to lessen consumer sovereignty. As a result, most

nations reduce the importance of market decisions and increase the

importance of allocation by government direction and regulation in

times of war.

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Consumer sovereignty is a term which is used in economics to

refer to the rule or sovereignty of consumers in markets as to production

of goods. It is the power of consumers to decide what gets produced.

People use the this term to describe the consumer as the "king," or ruler,

of the market, the one who determines what products will be produced. [1] Also, this term denotes the way in which a consumer ideologically

chooses to buy a good or service. Furthermore, the term can be used as

either a norm (as to what consumers should be permitted) or a

description (as to what consumers are permitted).

In unrestricted markets, those with income or wealth are able to

use their purchasing power to motivate producers as what to produce

(and how much). Customers do not necessarily have to buy and, if

dissatisfied, can take their business elsewhere, while the profit-seeking

sellers find that they can make the greatest profit by trying to provide the

best possible products for the price (or the lowest possible price for a

given product). In the language of cliché, "The one with the gold makes

the rules."

To most neoclassical economists, complete consumer sovereignty

is an ideal rather than a reality because of the existence -- or even the

ubiquity -- of market failure. Some economists of the Chicago school

and the Austrian school see consumer sovereignty as a reality in a free

market economy without interference from government or other non-

market institutions, or anti-market institutions such as monopolies or

cartels. That is, alleged market failures are seen as being a result of non-

market forces.

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The term "consumer sovereignty" was coined by William Hutt

who firstly used it in his 1936 book "Economists and the Public".

“Capitalism means free enterprise, sovereignty of the consumers in

economic matters, and sovereignty of the voters in political matters.

Socialism means full government control of every sphere of the

individuals life and the unrestricted supremacy of the government in its

capacity as central board of production management.”

~Ludwig von Mises, Bureaucracy, page 10

“Capitalism is essentially a system of mass production for the

satisfaction of the needs of the masses. It pours a horn of plenty upon the

common man. It has raised the average standard of living to a height

never dreamed of in earlier ages. It has made accessible to millions of

people enjoyments which a few generations ago were only within the

reach of a small elite.”

~Ludwig von Mises, The Anti-Capitalistic Mentality, page 49

The notion that consumers ultimately determine what goods and

services are produced and how the economy's limited resources are used

based on the purchases they make. Consumers thus reign over the

economy as sovereign rulers.

Like most notions this one captures an essential dimension of

economic behavior, but it also has a notable qualification.

Consumers are King

Consumer sovereignty means that buyers ultimately determine

which goods and services remain in production. While businesses can

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produce and attempt to sell whatever goods they choose, if the goods fail

to satisfy the wants and needs, consumers decide not to buy. If the

consumers do not buy, the businesses do not sell and the goods are not

produced.

Suppose, for example, that Manny Mustard's House of Sandwich

introduces a new menu item--a sandwich made with fried squash, sweet

pickle relish, blue cheese dressing, sliced cabbage, and pumpernickel

bread. Manny, the proprietor of this establishment, thoroughly enjoys

this sandwich and thinks his patrons will as well. If they do, then

business increases, profits are higher, overdue business loans can be paid

off, and he can finally send his unruly step-son away to military school.

Manny's business success, however, depends on his patrons. Will

they like his new fried squash, sweet pickle relish, blue cheese dressing,

sliced cabbage, pumpernickel bread sandwich? If they do not, then his

step-son will continue his unruly behavior. The consumers are king!

They ultimately decide Manny's business fate.

What we call "consumer choice" is really just a choice among

available market based alternatives, and it is not even true that

corporations respond to what consumers want by developing new

products accordingly. Instead, all of the evidence seems to indicate that

corporations spend minimal amounts on research and development, and

most of their money on "market research," which means finding the best

way to convince customers to buy what's available, and marketing,

which puts the market research into practice. That people still continue

to buy things they don't need and probably would be happier without is

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more of an indication that people are susceptible to advertising than that

people are necessarily happy with what's on the market.

Significance

• The theory of consumer sovereignty says that, while businesses

and companies can produce anything they choose, if consumers do not

want or need a product, it will not sell. If a product is not sold, it will not

continue to be produced. Therefore, buyers ultimately decide what is

produced.

History

• Adam Smith discussed the concept in "The Wealth of Nations,"

but the term "consumer sovereignty" was not coined until 1940, when

William Hutt defined it in an article for Economic Journal. The theory

was further explored by the Australian economist Ludwig von Mises.

Benefits

• A major argument for consumer sovereignty is thus: When

consumers have access to goods and services that benefit them, they will

continue to purchase and stimulate the economy. In this way, active

consumption and responsible, beneficial production go hand in hand.

Considerations

• Consumers can be misled by marketing, fads and other

influences. This can affect their consumption, causing production of

consumables that have no direct benefit to buyers.

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Expert Insight

• In 1990, scholar Bettina Biean Greaves wrote that the lack of

soap available to citizens of the USSR was due to a failure in the model

of consumer sovereignty.

Consumer sovereignty is an important concept for classical

economics. This assumes that consumers have the freedom and ability to

choose between different suppliers and firms. In theory, consumers will

use their discretion to choose the cheapest and / or best quality goods. In

theory this consumer sovereignty ensures the effective functioning of

free markets. It rewards efficient firms and encourages firms to provide

goods consumers want.

Thus consumer sovereignty forms an important aspect of free

market economics, it is a function developed by the economist Ludwig

Van Mises.

There is a concept that the Customer is always King, is this still

relevant in today's demanding trading environment?4

Consider that customers are no longer the unthinking pawns who

are easily manipulated by a marketer. Far from it. Generally consumers

are more educated and sophisticated, they look for options and

alternatives to best serve their needs.

Consider globalization, the consumer's world and buying options

are getting so much bigger, with more choices than ever before. In fact,

4 This information is taken from The Institute of Bankers in South Africa's Consumer Behaviour module. This module forms part of various professional qualifications, such as the Diploma in Marketing.

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the consumer's main problem is that there are possibly too many

choices!

This means that marketers had better know what they are doing in

order to capture the consumer's attention and of course their loyalty.

Another principle is that consumer behavior and motivation for

buying can be understood through research. Consumer behavior is a

process – and the actual purchase of the good or service is only one

stage of the process.

The essential point is that understanding and adapting to consumer

motivations and behavior is not an option of the marketer – it is a matter

of survival in an increasingly tough and competitive world.

Consumer behavior can be influenced by the third principle. Even

though consumer sovereignty (the customer is king) presents a

formidable challenge, skilful marketing can affect both motivation and

behavior if the product or service offered is designed to meet consumer

needs. A successful sale occurs because demand for the product or

service either exists already or is latent and awaiting activation by the

right marketing offering.

For instance, a consumer needs a microwave oven; however, on

seeing the benefits of the oven, the consumer suddenly wants one, a

specific brand or make and model.

Humans have existed without Gladwrap for millions of years,

however, what would households across the globe do today without it?

One never needed post-it pads at the office, but aren't they handy?

The fourth and last principle is that consumer influence is socially

acceptable. Consumers' needs are real and there is undeniable benefit

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from products and services that offer genuine utility. The consumer

benefits, while at the same time the economy is energized and

modernized.

Advertising is a constant reminder to consumer benefits, while at

the same time the economy is energized and modernized.

Advertising is a constant reminder to consumers of material goods

and services not yet possessed!

The effect at the level of individual motivation is felt as a constant

impetus toward more consumption, toward acquisition, toward upward

mobility. At the level, it is the economic drive to produce and to

innovate, which fuels our economic system.

Consumer resources generally have two restraints – a money

budget and a time budget. Income is a crucial variable and one has to

understand consumer behavior fully to examine how consumers spend

their money and how much they have to spend and the time in which

they have to do it.

The answer is an affirmative yes! The customer is king!

Why treat a customer as a king?

Gaining the consumer's attention represents one of the most

formidable challenges a marketer must face. Consumers are bombarded

continually with many stimuli that compete for limited capacity.

Gaining attention at a point of purchase is also important. Cognitive

capacity is a major type of consumer resource.

Because this capacity is limited, people must be selective in what

they pay attention to and how much attention is allocated during

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information processing. Then, of course, the focus shifts to retention,

gaining customer loyalty and cross-sell.

Consumers in both market and command economies make many

of the same kinds of decisions: they buy food, clothing, housing,

transportation, and entertainment up to the limits of their budgets, and

wish they could afford to buy more. But consumers play a much more

important role in the overall working of a market economy than they do

in a command economy. In fact, market economies are sometimes

described as systems of consumer sovereignty, because the day-to-day

spending decisions by consumers determine, to a very large extent, what

goods and services are produced in the economy. How does that

happen?

Buying Oranges and Computer Chips

Suppose a family -- Robert, Maria, and their two children -- go

shopping to buy food for a family dinner. They may originally be

planning to buy a chicken, tomatoes, and oranges; but their plans will be

strongly influenced by the market prices of those goods.

They may discover, for example, that the price of oranges has

increased. There are several things that might cause those higher prices,

such as freezing weather in areas where oranges are grown, which

destroys a large part of the crop. The effect of the freeze is to leave the

same number of consumers trying to buy a smaller number of oranges.

At the old -- lower -- price, therefore, sellers would soon run out of

oranges until the next harvest. Instead, by raising the price, all

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consumers are encouraged to cut back on the number of oranges they

buy, and producers are encouraged to grow more oranges as fast as they

can.

There is another possibility: suppliers could choose to import a

larger number of oranges from other countries. International trade, when

it is permitted to operate with relatively few barriers or import taxes

(called tariffs), can give consumers wider choice and allow producers to

offer more competitive prices for a wide range of products, from oranges

to automobiles.

On the other hand, the orange crop might be spared freezing

weather, but instead consumers decide to start buying more oranges and

fewer apples. In other words, instead of the orange supply shrinking,

demand increases. This, too, will drive up the price of oranges for a

time, at least until growers have time to bring more oranges to market.

Whatever the reason for the higher price, Robert and Maria will

probably respond in a predictable way once they discover that the price

is higher than they anticipated. They may well decide to buy fewer

oranges than they had planned, or to buy apples or some other fruit

instead. Because many other consumers make the same choices, oranges

won't disappear from store shelves entirely. But they will be more

expensive, so only the people who are willing and able to pay more for

them will continue to buy them. Shortly, as more people start buying

apples and other fruits as substitutes for oranges, the prices of those

fruits will rise as well.

But the response of consumers is only one side, the demand side,

of the equation that determines the price of oranges. What happens on

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the other side, the supply side? A price increase for oranges sends out a

signal to all fruit growers -- people are paying more for fruit -- which

tells the growers it will pay to use more resources to grow fruit now than

they did in the past. It will also pay the fruit growers to look for new

locations for orchards where fruit isn't as likely to be damaged by bad

weather. They may also pay biologists to look for new varieties of fruit

that are more resistant to cold weather, insects, and various plant

diseases. Over time, all of these actions will increase the production of

fruit and bring prices back down. But this whole process depends first

and foremost on the basic decision by consumers to spend some part of

their income on oranges and other fruits.

If consumers stop buying, or if they decide to spend less on a

product -- for whatever reason -- prices will drop. If they buy more,

increasing demand, the price will rise.

Keep in mind that this interaction of supply, demand, and price

takes place at every level of the economy, not just with consumer goods

sold to the public. Consumption refers to intermediate goods as well -- to

the inputs that companies must purchase to provide their goods and

services. The cost of these intermediate, or investment, goods will ripple

throughout a market economy, changing the supply-and-demand

equations at every level.

Let's take the example of the semiconductor chip that is at the

heart of the modern computer revolution. As the case with oranges,

higher prices will tend to reduce the demand for computer chips and,

consequently, for computers themselves. Over time, however, the higher

price will signal manufacturers of computer chips that it may be

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profitable to increase their production, or for new suppliers of chips to

consider entering the market. As chip prices come down, so eventually

will the cost of computers (assuming that the cost of other inputs

remains unchanged), and demand for computers will grow.

That demand for computers will do more than simply spur

suppliers to increase their output. It will also encourage innovation,

which will result in computer chips, and computers that are more

powerful and efficient than earlier models -- a competition of progress

and price that occurs in virtually all genuinely free markets.

Prices and Consumer Incomes

The other economic factor that consumers must consider carefully

in making their purchases of goods and services is their own level of

income. Most people earn their income from the work they perform,

whether as physicians, carpenters, teachers, plumbers, assembly line

workers, or clerks in retail stores. Some people also receive income by

renting or selling land and other natural resources they own, as profit

from a business or entrepreneurial venture, or from interest paid on their

savings accounts or other investments.

We later describe how the prices for those kinds of payments are

determined; but the important points here are that: 1) in a market

economy the basic resources used to make the goods and services that

satisfy consumer demands are owned by private consumers and

households; and 2) the payments, or incomes, that households receive

for these productive resources rise and fall -- and that fluctuation has a

direct influence on the amount consumers are willing to spend for the

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goods and services they want and, in turn, on the output levels of the

firms that sell those products.

Consider, for example, a worker who has just retired, and as a

result earns only about 60 percent of what she did while she was

working. She will cut back on her purchases of many goods and

services, especially those that were related to her job, such as

transportation to and from work, and work clothes -- but may increase

spending on a few other kinds of products, such as books and

recreational goods that require more leisure time to use, perhaps

including travel to see new places and old friends.

If, as in many countries today, there are rapidly growing numbers

of people reaching retirement age, those changing spending patterns will

affect the overall market prices and output levels for these products and

for many others that retirees tend to use more than most people, such as

health care services. In response, some businesses will decide to make

more products and services geared toward the particular interests and

concerns of retirees -- as long as it is profitable for firms to produce

them.

To summarize: whether consumers are young or old, male or

female, rich, poor, or middle class, every dollar, peso, pound, franc,

rupee, mark, or yen they spend is a signal -- a kind of economic vote

telling producers what goods and services they want to see produced.

Consumer spending represents the basic source of demand for

products sold in the marketplace, which is half of what determines the

market prices for goods and services. The other half is based on

decisions businesses make about what to produce and how to produce it.

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11. Consumer behavior

People are not rational calculating machines. The economists and

psychologists studying consumer behavior have suggested that our

mental abilities cannot process the economic information in our lives

and in order to deal with it, we develop mental accounting systems.

Sometimes, these systems are more than mental, as when families have

separate savings accounts for various items. They will often borrow

money rather than dip into one of these special accounts, though a

calculating-machine mind would never do that.

If we can be fooled by the way situations are framed, people

selling things to us should be smart enough to take advantage of this

computational defect. There are a number of situations in which this

seems to happen.

We are more pleased with many small gains than one big gain of

equal magnitude--we would rather get our Christmas presents in lots of

boxes rather than one big one. There are innumerable sales pitches that

promise something free if and only if we buy a product. If we think

about this, we realize that nothing is free--we are paying for the

complete package. Yet, the popularity of this type of sales pitch suggests

that it works.

Alternatively, we are less affected by one big loss than a number

of small ones of equal value. One of the appeals of credit cards is that

they give us the bad news as one number. In addition, sellers know that

when we make a large purchase, they have an opportunity to sell us even

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more. If we are paying $100,000 for a house, an extra $1000 does not

seem to be much to add on some conveniences. However, if we see the

extra $1000 as a completely separate transaction, we may react in a very

different way.

Though the free trial with money-back guarantee is a way to signal

quality, it also takes advantage of our mental accounting. Once we have

an item at home and in use, it becomes part of the status quo.

Intelligent health consumers have the following characteristics:

1. They seek reliable sources of information. They are

appropriately skeptical about advertising claims, statements made by

talk-show guests, and "breakthroughs" reported in the news media. New

information, even when accurate, may be difficult to place in perspective

without expert guidance.

2. They maintain a healthy lifestyle. This reduces the odds of

becoming seriously ill and lowers the cost of health care. Prudent

consumers avoid tobacco products, eat a balanced diet, exercise

appropriately, maintain a reasonable weight, use alcohol moderately or

not at all, and take appropriate safety precautions (such as wearing a seat

belt when driving).

3. They select practitioners with great care. It has been said that

primary-care physicians typically know a little about a lot and specialists

typically know a lot about a little. The majority of people would do best

to begin with a generalist and consult a specialist if a problem needs

more complex management.

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4. They undergo appropriate screening tests and, when illness

strikes, use self-care and professional care as needed. Excellent

guidebooks are available to help decide when professional care is

needed.

5. They communicate effectively. They present their problems in

an organized way, ask appropriate questions, and tactfully assert

themselves when necessary.

6. When a health problem arises, they take an active role in its

management. This entails understanding the nature of the problem and

how to do their part in dealing with it. People with chronic illnesses,

such as diabetes or high blood pressure, should strive to become

"experts" in their own care and use their physicians as "consultants."

7. They understand the logic of science and why scientific

testing is needed to test and to determine which theories and

practices are valid.

8. They are wary of treatments that lack scientific support and

a plausible rationale. Most treatments described as "alternative" fit this

description.

9. They are familiar with the economic aspects of health care.

They obtain appropriate insurance coverage, inquire in advance about

professional fees, and shop comparatively for medications and other

products.

10. They report frauds, quackery and other wrongdoing to the

appropriate agencies and law enforcement officials; Consumer

vigilance is an essential ingredient of a healthy society.

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The new millennium is not just a new beginning; it is a

continuation of trends in human behavior that have been following

cyclical patterns throughout our country's history. Just because we have

entered a new era does not mean we have to start from scratch when it

comes to interpreting why certain consumers are loyal to certain brands,

and what type of factors influence these allegiances.

Brand Loyalty is the consumer's conscious or unconscious

decision, expressed through intention or behavior, to repurchase a brand

continually. It occurs because the consumer perceives that the brand

offers the right product features, image, or level of quality at the right

price. Consumer behavior is habitual because habits are safe and

familiar.

In order to create brand loyalty, advertisers must break consumer

habits, help them acquire new habits, and reinforce those habits by

reminding consumers of the value of their purchase and encourage them

to continue purchasing those products in the future.

The image surrounding a company's brand is the principal source

of its competitive advantage and is therefore a valuable strategic asset.

Unfortunately, many companies are not adept at disseminating a strong,

clear message that not only distinguishes their brand from the

competitors', but distinguishes it in a memorable and positive manner.

The challenge for all brands is to avoid the pitfalls of portraying a

muddled or negative image, and instead, create a broad brand vision or

identity that recognizes a brand as something greater than a set of

attributes that can be imitated or surpassed.

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In fact, a company should view its brand to be not just a product or

service, but as an overall brand image that defines a company’s

philosophies. A brand needs more than identity; it needs a personality.

Just like a person without attention-grabbing characteristics, a brand

with no personality can easily be passed right over. A strong symbol or

company logo can also help to generate brand loyalty by making it

quickly identifiable.

A consumer is the ultimate user of a product or service. The

overall consumer market consists of all buyers of goods and services for

personal or family use, more than 270 million people (including

children) spending trillions of dollars in the United States as of the late

1990s.

Consumer behavior essentially refers to how and why people make

the purchase decisions they do. Marketers strive to understand this

behavior so they can better formulate appropriate marketing stimuli that

will result in increased sales and brand loyalty.

There are a vast number of goods available for purchase, but

consumers tend to attribute this volume to the industrial world's massive

production capacity. Rather, the giant known as the marketing

profession is responsible for the variety of goods on the market. The

science of evaluating and influencing consumer behavior is foremost in

determining which marketing efforts will be used and when.

To understand consumer behavior, experts examine purchase

decision processes, especially any particular triggers that compel

consumers to buy a certain product. For example, one study revealed

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that the average shopper took less than 21 minutes to purchase groceries

and covered only 23 percent of the store, giving marketers a very limited

amount of time to influence consumers. And 59 percent of all

supermarket purchases were unplanned. Marketers spend a great deal of

time and money discovering what compels consumers to make such on-

the-spot purchases.

Market researchers obtain some of the best information through in-

store research, and will often launch new products only in select small

venues where they expect a reasonable test of the product's success can

be executed. In this manner, they can determine whether a product's

success is likely before investing excessive company resources to

introduce that product nationally or even internationally.

CONSUMER NEEDS

Consumers adjust purchasing behavior based on their individual

needs and interpersonal factors. In order to understand these influences,

researchers try to ascertain what happens inside consumers' minds and to

identify physical and social exterior influences on purchase decisions.

On some levels, consumer choice can appear to be quite random.

However, each decision that is made has some meaning behind it, even

if that choice does not always appear to be rational. Purchase decisions

depend on personal emotions, social situations, goals, and values.

People buy to satisfy all types of needs, not just for utilitarian

purposes. These needs, as identified by Abraham Maslow in the early

1940s, may be physical or biological, for safety and security, for love

and affiliation, to obtain prestige and esteem, or for self-fulfillment. For

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example, connecting products with love or belonging has been a success

for several wildly popular campaigns such as "Reach Out and Touch

Someone," "Fly the Friendly Skies," and "Gentlemen Prefer Hanes."

This type of focus might link products either to the attainment of love

and belonging, or by linking those products with people similar to those

with whom people would like to associate.

Prestige is another intangible need, and those concerned with

status will pay for it. However, goods appealing to this type of need

must be viewed as high-profile products that others will see in use. One

benefit of targeting this type of market is that the demand curve for

luxury products is typically the reverse of the standard; high-status

products sell better with higher prices.

Some equate the type of need to be met with certain classes of

goods. For instance, a need for achievement might drive people to

perform difficult tasks, to exercise skills and talents, and to invest in

products such as tools, do-it-yourself materials, and self-improvement

programs, among others. The need to nurture or for nurturing leads

consumers to buy products associated with things such as parenthood,

cooking, pets, houseplants, and charitable service appeals.

Personality traits and characteristics are also important to establish

how consumers meet their needs. Pragmatists will buy what is practical

or useful, and they make purchases based more on quality and durability

than on physical beauty. The aesthetically inclined consumer, on the

other hand, is drawn to objects that project symmetry, harmony, and

beauty. Intellectuals are more interested in obtaining knowledge and

truth and tend to be more critical.

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They also like to compare and contrast similar products before

making the decision to buy. Politically motivated people seek out

products and services that will give them an "edge," enhancing power

and social position. And people who are more social can best be

motivated by appealing to their fondness for humanity with advertising

that suggests empathy, kindness, and nurturing behavior. One successful

way an insurance company targeted this market was through its "You're

in good hands with Allstate" campaign.

Consumers also vary in how they determine whose needs they

want to satisfy when purchasing products and services. Are they more

concerned with meeting their own needs and buying what they want to,

for their own happiness? Or do they rely on the opinions of others to

determine what products and services they should be using?

This determines, for example, whether or not they will make a

purchase just because it's the newest, most popular item available or

because it is truly what they need and/or want.

This also influences the way marketers will advertise products. For

example, a wine distributor trying to appeal to people looking to satisfy

their personal taste will emphasize its superior vintage and fine bouquet;

that same distributor, marketing to those who want to please others, will

emphasize how sharing the wine can improve gatherings with friends

and family.

Cultural and social values also play large roles in determining what

products will be successful in a given market. If great value is placed on

characteristics such as activity, hard work, and materialism, then

companies who suggest their products represent those values are more

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likely to be successful. Social values are equally important. If a

manufacturer suggests their product will make the consumer appear

more romantic or competitive in a place where those values are highly

regarded, it is more likely consumers will respond.

PURCHASE PATTERNS

While all of this information might be helpful to marketers, it is

equally important to understand what compels the consumer to actually

make a purchase, as opposed to just generating interest.

For example, some consumers respond based on how they are

feeling, or more emotionally, while some are focused on making the

wisest economic decision. Knowing the different elements that stimulate

consumer purchase activity can help marketers design appropriate sales

techniques and responses.

A study conducted by Susan Powell Mantel focused on analyzing

the roles of "attribute-based processing" and "attitude-based processing"

when analyzing consumer preference.

According to the study, product attributes (qualities such as price,

size, nutritional value, durability, etc.) are often compared

disproportionately, i.e., one is the more focal subject of comparison, thus

eliciting more consideration when the consumer decides which brand is

the "best."

The order of brand presentation in these cases is particularly

important.

Adding to the complexity of the issue is the fact that purchase

decisions are not always made on the basis of an "attribute-by-attribute"

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comparison (attribute-based processing). Consumers also make

decisions based on an overall evaluation of their impressions, intuition,

and knowledge based on past experience, or attitude-based processing.

Learned attitudes also influence these decisions.

For example, parents who drank Kool-Aid as children often buy it

for their kids, either because they associate it with fond memories or just

because of brand familiarity or loyalty.

There is time and effort associated with each of these strategies,

though attribute-based processing requires significantly more effort on

the consumer's part. To dedicate the time required for an attribute-by-

attribute comparison, consumers need the combination of motivation and

the time or opportunity to use such a strategy.

Other contributing factors were discussed in Mantel's study, such

as personality differences and each individual's "need for cognition."

Need for cognition reflects to what extent individuals "engage in and

enjoy thinking." People with a high need for cognition tend to evaluate

more and make more optimal in-store purchase decisions.

This is in part because they do not react to displays and in-store

promotions unless significant price reductions are offered. Low-need

cognition people react easily when a product is put on promotion

regardless of the discount offered.

Consumers are also affected by their perceived roles, which are

acquired through social processes. These roles create individuals' needs

for things that will enable them to perform those roles, improve their

performance in those roles, facilitate reaching their goals, or symbolize a

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role/relationship, much in the way a woman's engagement ring

symbolizes her taking on the role of a wife.

Other factors that influence purchase decisions include the

importance attributed to the decision. People are not likely to take as

much time doing brand comparisons of mouthwash as they are a new

car.

The importance of the purchase, as well as the risk involved, adds

to how much time and effort will be spent evaluating the merits of each

product or service under consideration. In cases of importance such as

the purchase of a car or home appliance, consumers are more likely to

use rational, attribute-based comparisons, in order to make the most

informed decision possible.

In some cases, consumers make very little effort to evaluate

product choices. "Habitual evaluation" refers to a state in which the

consumer disregards marketing materials placed in a store, whether

because of brand loyalty, lack of time, or some other reason. Indeed,

evaluating all relevant marketing information can become time

consuming if it is done every time a person shops.

On the opposite side of the coin, "extensive evaluation" is the state

in which consumers consider the prices and promotions of all brands

before making a choice. There are also in-between states of evaluation,

depending again on the importance of the purchase and the time

available to make a decision (some consumers, usually those who earn

higher incomes, value their time more than the cost savings they would

incur). Decisions on whether to compare various products at any given

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time may be a factor of the anticipated economic returns, search costs or

time constraints, and individual household purchasing patterns.

When it comes time to actually make purchases, however, one

person in the family often acts as an "information filter" for the family,

depending on what type of purchase is being made and that person's

expertise and interest.

The information filter passes along information he or she considers

most relevant when making a purchase decision, filtering out what is

considered unimportant and regulating the flow of information. For

example, men are more often the family members who evaluate which

tools to purchase, while children pass along what they consider to be

seminal information about toys.

At times, family members may take on additional roles such as an

"influencer," contributing to the overall evaluation of goods being

considered for purchase. Or one person may act as the "decider," or the

final decision-maker. Ultimately, purchase decisions are not made until

consumers feel they know enough about the product, they feel good

about what they're buying, and they want it enough to act on the

decision.

INTERPRETING CONSUMER BEHAVIOR

When market researchers begin evaluating the behavior of

consumers, it is a mistake to rely on conventional wisdom, especially

when it is possible to study the actual activity in which consumers are

engaged when using a product or service. Where are they when they buy

certain items? When do they use it? Who is with them when they make

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the purchase? Why do they buy under certain circumstances and not

others? Researchers need to determine the major needs being satisfied

by that good or service in order to effectively sell it.

There are two principal ways to evaluate the motivation behind

consumer purchases. These are by direction (what they want) and

intensity (how much they want it).

Direction refers to what the customer wants from a product. For

example, if a customer is selecting pain reliever, they may like the idea

is one pain reliever is cheaper than another, but what they really want is

fast pain relief, and will probably pay more if they think the more

expensive brand can do that more effectively. Marketers need to

understand the principal motivation behind each type of product to

correctly target potential customers.

The other way to evaluate consumer behavior, intensity, refers to

whether a customer's interest in a product is compelling enough that they

will go out and make the purchase. Good marketing can create that kind

of intensity. A successful example of such a campaign was Burger

King's "Aren't You Hungry?" campaign, which aired on late-night

television and was compelling enough for people to leave their homes

late at night to go out and buy hamburgers.

Understanding consumer motivation is the best way to learn how

to increase buyer incentive, as well as a better alternative to the easy

incentive-decreasing the price.

While it is easy to speculate on all these elements of consumer

motivation, it is much harder to actively research motivating factors for

any given product. It is rare that a consumer's reasons for buying a

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product or service can be accurately determined through direct

questioning. Researchers have had to develop other ways to get real

responses. These include asking consumers "How do you think a friend

of yours would react to this marketing material?"

While consumers do not like to admit that marketing affects them

at all, they are often willing to speculate on how it would affect someone

else. And most often they answer with what would be their own

responses.

Another tactic that has proven successful is to ask consumers

"What kind of person would use this type of product?" By asking this

question, market researchers can determine what the consumer believes

buying the product would say about them, as well as whether or not they

would want to be seen as that type of person.

INFLUENCING CONSUMER BEHAVIOR

One of the best ways to influence consumer behavior is to give

buyers an acceptable motive. This is somewhat related to the idea of

asking what type of person would buy a certain product in evaluating

consumer behavior.

Consumers want to feel they're doing something good, being a

good person, eating healthy, making contacts, keeping up appearances,

or that they just deserve to be spoiled a little bit.

If marketers can convince consumers that they need a product or

service for some "legitimate" reason, customers will be more likely to

make a purchase.

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In addition, sensory stimuli are important to marketing. When food

packages are appealing or associated with other positive qualities,

people often find that they "taste" better. For example, people often

"taste" with their eyes, discerning differences in products where they do

not see any difference during a blind taste test.

One of the best examples of this was a test of loyal Coca-Cola

customers who were totally unwilling to concede that any other soda

was its equal. While able to see what they were drinking, they

maintained this position. But during blind testing, some were unable to

tell the difference between Coke and root beer.

Finally, another alternative for influencing customer behavior is by

offering specialized goods. While commonality was once popular, more

and more people are seeking diversity in taste, personal preferences, and

lifestyle.

Some successful campaigns touting the way their products stand

out from the crowd include Dodge's "The Rules Have Changed" and

Arby's "This is different. Different is good."

In fact, marketers are quite successful at targeting "rebels" and the

"counterculture," as it is referred to in Commodify Your Dissent.

As Thomas Frank writes, "Consumerism is no longer about

'conformity' but about difference. It counsels not rigid adherence to the

taste of the herd but vigilant and constantly updated individualism.

We consume not to fit in, but to prove, on the surface at least, that

we are rock 'n' roll rebels, each one of use as rule-breaking and

hierarchy-defying as our heroes of the 60s, who now pitch cars, shoes,

and beer. This imperative of endless difference is today the genius at the

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heart of American capitalism, an eternal fleeing from 'sameness' that

satiates our thirst for the New with such achievements of civilization as

the infinite brands of identical cola, the myriad colors and irrepressible

variety of the cigarette rack at 7-Eleven."

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SEMESTRUL II

12. Economic organization

12.1. The Business Firm

The business firm is the productive unit in an exchange economy.

In order to survive, a firm must deal with three constraints: the demand

for its product, the production function, and the supply of its inputs.

When the firm successfully deals with these constraints, it makes a

profit.

When most people think of a firm, they think first of production.

Economists describe this task with the production function, an abstract

way of discussing how the firm gets output from its inputs. There is one

rule that seems to hold for all production functions, and because it

always seems to hold, it is called a law. The law of diminishing returns

says that adding more of one input while holding other inputs constant

results eventually in smaller and smaller increases in added output. What

the law of diminishing returns says is that as one continues to add

workers; eventually one will reach a point where increasing returns stop

and decreasing returns set in.

The law of diminishing returns is not caused because the first

worker has more ability than the second worker, and the second is more

able than the third. By assumption, all workers are the same. It is not

ability that changes, but rather the environment into which workers (or

any other variable input) are placed. As additional workers are added to

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a firm with a fixed amount of equipment, the equipment must be

stretched over more and more workers. Eventually, the environment

becomes less and less favorable to the additional worker. People's

productivity depends not only on their skills and on abilities, but also on

the work environment they are in.

If one increases all inputs in equal proportions, there is no law to

predict what will happen to output in this case and leads to returns to

scale. It is important for determining how many firms will populate an

industry. When increasing returns to scale exist, one large firm will

produce more cheaply than two small firms will. Small firms will thus

have a tendency to merge to increase profits, and those that do not merge

will eventually fail. On the other hand, if an industry has decreasing

returns to scale, a merger of two small firms to create a large firm will

cut output, raise average costs, and lower profits. In such industries,

many small firms exist rather than a few large firms.

Products require various types of labor and capital, energy of

various sorts, and raw materials. One of the key inputs, especially in

larger firms, is managerial ability. Inputs do not combine by themselves

to produce output. Someone must have knowledge of how to combine

inputs and to coordinate the production process.

If business decision-makers lack information or are incompetent,

the firm will not make the best use of available resources. Alternatively,

if morale is bad in a firm, people may work poorly and produce less than

they could.

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Creativity in the form of new technology or new management

techniques may loosen the boundary that the production functions

represents and may make possible greater profit.

For a firm to be economically efficient is that it be on its

production-possibilities frontier. If it is not on the production-

possibilities frontier, more could be produced with the given resources

and technology. Because greater production would increase value, any

position below the production-possibilities frontier is inefficient.

To be on the production-possibilities frontier, all resources must be

used. Unemployed resources indicate that more goods and services

could be produced. In addition, resources must be used properly. If

society randomly assigns people to jobs or if it assigns jobs on the basis

of political reliability, it will not produce as much as it could.

Economists conventionally assume that firms attempt to maximize

profit. This assumption has been a source of controversy, in part simply

because the word profit is a bit nebulous. One might think that it is well

defined because each year thousands of firms announce to the public

exactly what their profits are. Profit emerges as a residual; something

left over after costs have been paid.

The grocery or restaurant may seem to have a profit when costs are

subtracted from revenues, but this may be only because the owners do

not pay themselves a wage. When their time is valued at even low levels,

the "profit" may disappear. On the other hand, the family farm may have

a profit, but only because it neglects to take into account a return on the

land. If this return is computed on the basis of what rent could be

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obtained on the land, and if an allowance is made for the value of the

farmer's labor, there may be little or no profit.

Much of corporate profit can reflect an implicit return on

investment. If the corporation has a large investment in capital and this

entire investment was financed by borrowing, then the return on capital

is captured in the interest payments the firm makes. But if the

investment is not financed by borrowing, then the return on it will be

reported as profit in the income statement.

The economic definition of profit is the difference between

revenue and the opportunity cost of all resources used to produce the

items sold. This definition includes implicit returns as costs. Because

profit is a surplus in this definition, it should not exist in industries in

which entry is easy. Whenever a surplus exists, new firms should flow

into an industry, bidding up the price of resources and bidding down the

price of output until profit in the economic definition is eliminated.

Profit should not exist in long-run equilibrium.

Ronald Schaffer in America in the Great War describes the system

of economic organization devised to mobilize the economy during

World War I. The need for this was evident as America faced an

economic crisis. The government was using an antiquated supply system

that would clearly hinder the necessary mobilization of millions of men

for the war effort. Money was poured into the economy by the War

Department, but the manufacturing sector could not keep up with the

demand. Prices were rising, and no one could be sure what the costs

might be in the future. What followed were strikes, inflation, and a

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snarled army procurement system. By the summer of 1917, it was

evident that food shortages would soon result. Schaffer notes that the

administration had to solve a number of problems. It had to mobilize

men for the war effort both in the armed forces and at home, keeping a

work force on the job, preventing strikes to keep from disrupting

production, and at the same time working to prevent inflationary wage

increases.

The way the various problems were addressed was through the

creation of a number of organizations given responsibility for coping

with these issues. Bureaus were created to handle labor issues. An

employment service helped unskilled workers find jobs in war

industries. The Selective Service System directed men into essential

occupations by offering draft exemptions.

The identification of distinctive and effective forms of economic

organization in East Asia has emphasized the close connections between

dominant social institutions and ways of coordinating economic

activities as well as the interrelations between firm and market

characteristics in separate business systems. Differences in major

institutions thus generate significant variations in how firms and markets

are structured and operate. These variations suggest that an important

element in the analysis of market economies is the comparison of firm-

market relations across institutional contexts. This requires their key

characteristics to be identified. These can be summarized under three

main headings which constitute the components of business systems: the

nature of firms as economic actors, the nature of inter-firm relations in

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markets and the nature of authoritative co ordination and control systems

within firms. Thirteen major characteristics form the basic dimensions of

business systems, which vary as the result of differences in state

structures, financial systems, cultural conventions and other key

institutional features. Interdependences between these characteristics

restrict the variety of business systems that become established in market

economies and suggest that five major kinds can be identified on the

basis of institutionalized patterns of risk-sharing and firm self-

sufficiency: centrifugal, partitioned, collaborative, coordinated and state-

dependent. These types of business system highlight the different

patterns of economic organization, and some of their institutional

connections, which have developed in Europe and other industrialized

societies.

As far as I know no research has dealt with the implications of

“multi-culturality” within a given territory for economic organization.

Perhaps this is because the notion is a relatively recent one; one

that perhaps primarily belongs to the realm of politically correct

discourse, and because we don’t have really convincing economics-

based conceptualizations of culture, not to mention what it means to

have multiple cultures inside a given geographical territorium.

Nevertheless, this is a potentially rich research subject. It may also

become a pressing one, as the US and the Europe (and other regions in

the World) become increasingly multi-cultural. Here is some extremely

prelim speculation.

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Cultures may be thought of, in a very crude characterization, in

terms of focal points that pick out solutions to underlying games, some

more like coordination games and some more like PD games. Although

we know very little about how players reason when they are placed in

new games, there are some indications that they rely on precedents and

analogies. To put it crudely, immigrants may play games in their new

country the way they used to play them in the old country. Some of this

may be dys-functional as when players from low-trust cultures play

defect strategies in high-trust cultures. Players from high-trust cultures

may become suckers in low-trust cultures. Also, cultural mix may

increase information and communication costs for obvious reasons.

A likely result is that market transaction costs increase. (In turn

this may give rise to increased intra-culture trade and decreased inter-

culture trade). What will happen to internal transaction costs? To the

extent that people self-select into firms based on culture, internal

transaction costs may not increase. The net effect is that firms would

expand their boundaries.

A business (also called a company, enterprise or firm) is a legally

recognized organization designed to provide goods and/or services to

consumers.[1] Businesses are predominant in capitalist economies, most

being privately owned and formed to earn profit that will increase the

wealth of its owners and grow the business itself. The owners and

operators of a business have as one of their main objectives the receipt

or generation of a financial returns in exchange for work and acceptance

of risk. Notable exceptions include cooperative enterprises and state-

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owned enterprises. Businesses can also be formed not-for-profit or be

state-owned.

The etymology of "business" relates to the state of being busy

either as an individual or society as a whole, doing commercially viable

and profitable work. The term "business" has at least three usages,

depending on the scope — the singular usage (above) to mean a

particular company or corporation, the generalized usage to refer to a

particular market sector, such as "the music business" and compound

forms such as agribusiness, or the broadest meaning to include all

activity by the community of suppliers of goods and services. However,

the exact definition of business, like much else in the philosophy of

business, is a matter of debate and complexity of meanings

Basic forms of ownership

Although forms of business ownership vary by jurisdiction, there

are several common forms:

Sole proprietorship: A sole proprietorship is a business owned by

one person. The owner may operate on his or her own or may employ

others. The owner of the business has personal liability of the debts

incurred by the business.

Partnership: A partnership is a form of business in which two or

more people operate for the common goal which is often making profit.

In most forms of partnerships, each partner has personal liability of the

debts incurred by the business. There are three typical classifications of

partnerships: general partnerships, limited partnerships, and limited

liability partnerships.

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Corporation: A corporation is either a limited or unlimited liability

entity that has a separate legal personality from its members. A

corporation can be organized for-profit or not-for-profit. A corporation

is owned by multiple shareholders and is overseen by a board of

directors, which hires the business's managerial staff. In addition to

privately-owned corporate models, there are state-owned corporate

models.

Cooperative: Often referred to as a "co-op", a cooperative is a

limited liability entity that can organize for-profit or not-for-profit. A

cooperative differs from a corporation in that it has members, as

opposed to shareholders, who share decision-making authority.

Cooperatives are typically classified as either consumer

cooperatives or worker cooperatives. Cooperatives are fundamental to

the ideology of economic democracy.

For a country-by-country listing of legally recognized business

forms, see Types of business entity.

Classifications

There are many types of businesses, and because of this,

businesses are classified in many ways. One of the most common

focuses on the primary profit-generating activities of a business:

• Agriculture and mining businesses are concerned with the

production of raw material, such as plants or minerals.

• Financial businesses include banks and other companies that

generate profit through investment and management of capital.

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• Information businesses generate profits primarily from the resale

of intellectual property and include movie studios, publishers and

packaged software companies.

• Manufacturers produce products, from raw materials or

component parts, which they then sell at a profit. Companies that make

physical goods, such as cars or pipes, are considered manufacturers.

• Real estate businesses generate profit from the selling, renting,

and development of properties, homes, and buildings.

• Retailers and Distributors act as middle-men in getting goods

produced by manufacturers to the intended consumer, generating a profit

as a result of providing sales or distribution services. Most consumer-

oriented stores and catalogue companies are distributors or retailers. See

also: Franchising

• Service businesses offer intangible goods or services and

typically generate a profit by charging for labor or other services

provided to government, other businesses, or consumers. Organizations

ranging from house decorators to consulting firms, restaurants, and even

entertainers are types of service businesses.

• Transportation businesses deliver goods and individuals from

location to location, generating a profit on the transportation costs

• Utilities produce public services, such as heat, electricity, or

sewage treatment, and are usually government chartered.

There are many other divisions and subdivisions of businesses.

The authoritative list of business types for North America is generally

considered to be the North American Industry Classification System, or

NAICS. The equivalent European Union list is the NACE.

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Management

The efficient and effective operation of a business, and study of

this subject, is called management. The main branches of management

are financial management, marketing management, human resource

management, strategic management, production management, service

management, information technology management, and business

intelligence.

Reforming State Enterprises

In recent decades, assets and enterprises that were run by various

states have been modeled after business enterprises. In 2003, the

People's Republic of China reformed 80% of its state-owned enterprises

and modeled them on a company-type management system. Many state

institutions and enterprises in China and Russia have been transformed

into joint-stock companies, with part of their shares being listed on

public stock markets.

Organizing

The major factors affecting how a business is organized are

usually:

• The size and scope of the business, and its anticipated

management and ownership

Generally a smaller business is more flexible, while larger

businesses, or those with wider ownership or more formal structures,

will usually tend to be organized as partnerships or (more commonly)

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corporations. In addition a business that wishes to raise money on a

stock market or to be owned by a wide range of people will often be

required to adopt a specific legal form to do so.

• The sector and country

Private profit making businesses are different from government

owned bodies. In some countries, certain businesses are legally obliged

to be organized in certain ways.

• Limited liability

Corporations, limited liability partnerships, and other specific

types of business organizations protect their owners or shareholders

from business failure by doing business under a separate legal entity

with certain legal protections. In contrast, unincorporated businesses or

persons working on their own are usually not so protected.

• Tax advantages

Different structures are treated differently in tax law, and may

have advantages for this reason.

• Disclosure and compliance requirements

Different business structures may be required to make more or less

information public (or reported to relevant authorities), and may be

bound to comply with different rules and regulations.

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Many businesses are operated through a separate entity such as a

corporation or a partnership (either formed with or without limited

liability). Most legal jurisdictions allow people to organize such an

entity by filing certain charter documents with the relevant Secretary of

State or equivalent and complying with certain other ongoing

obligations. The relationships and legal rights of shareholders, limited

partners, or members are governed partly by the charter documents and

partly by the law of the jurisdiction where the entity is organized.

Generally speaking, shareholders in a corporation, limited partners in a

limited partnership, and members in a limited liability company are

shielded from personal liability for the debts and obligations of the

entity, which is legally treated as a separate "person." This means that

unless there is misconduct, the owner's own possessions are strongly

protected in law, if the business does not succeed.

Where two or more individuals own a business together but have

failed to organize a more specialized form of vehicle, they will be

treated as a general partnership. The terms of a partnership are partly

governed by a partnership agreement if one is created and partly by the

law of the jurisdiction where the partnership is located. No paperwork or

filing is necessary to create a partnership, and without an agreement, the

relationships and legal rights of the partners will be entirely governed by

the law of the jurisdiction where the partnership is located.

A single person who owns and runs a business is commonly

known as a sole proprietor, whether he or she owns it directly or through

a formally organized entity.

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A few relevant factors to consider in deciding how to operate a

business include:

General partners in a partnership (other than a limited liability

partnership), plus anyone who personally owns and operates a business

without creating a separate legal entity, are personally liable for the

debts and obligations of the business.

Generally, corporations are required to pay tax just like "real"

people. In some tax systems, this can give rise to so-called double

taxation, because first the corporation pays tax on the profit, and then

when the corporation distributes its profits to its owners, individuals

have to include dividends in their income when they complete their

personal tax returns, at which point a second layer of income tax is

imposed.

In most countries, there are laws which treat small corporations

differently than large ones. They may be exempt from certain legal filing

requirements or labor laws, have simplified procedures in specialized

areas, and have simplified, advantageous, or slightly different tax

treatment.

To "go public" (sometimes called IPO) -- which basically means to

allow a part of the business to be owned by a wider range of investors or

the public in general—you must organize a separate entity, which is

usually required to comply with a tighter set of laws and procedures.

Most public entities are corporations that have sold shares, but

increasingly there are also public LLCs that sell units (sometimes also

called shares), and other more exotic entities as well (for example,

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REITs in the USA, Unit Trusts in the UK). However, you cannot take a

general partnership "public."

Commercial law

Most commercial transactions are governed by a very detailed and

well-established body of rules that have evolved over a very long period

of time, it being the case that governing trade and commerce was a

strong driving force in the creation of law and courts in Western

civilization.

As for other laws that regulate or impact businesses, in many

countries it is all but impossible to chronicle them all in a single

reference source. There are laws governing treatment of labor and

generally relations with employees, safety and protection issues (Health

and Safety), anti-discrimination laws (age, gender, disabilities, race, and

in some jurisdictions, sexual orientation), minimum wage laws, union

laws, workers compensation laws, and annual vacation or working hours

time.

In some specialized businesses, there may also be licenses

required, either due to special laws that govern entry into certain trades,

occupations or professions, which may require special education, or by

local governments. Professions that require special licenses range from

law and medicine to flying airplanes to selling liquor to radio

broadcasting to selling investment securities to selling used cars to

roofing. Local jurisdictions may also require special licenses and taxes

just to operate a business without regard to the type of business

involved.

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Some businesses are subject to ongoing special regulation. These

industries include, for example, public utilities, investment securities,

banking, insurance, broadcasting, aviation, and health care providers.

Environmental regulations are also very complex and can impact many

kinds of businesses in unexpected ways.

Capital

When businesses need to raise money (called 'capital'), more laws

come into play. A highly complex set of laws and regulations govern the

offer and sale of investment securities (the means of raising money) in

most Western countries. These regulations can require disclosure of a lot

of specific financial and other information about the business and give

buyers certain remedies. Because "securities" is a very broad term, most

investment transactions will be potentially subject to these laws, unless a

special exemption is available.

Capital may be raised through private means, by public offer (IPO)

on a stock exchange, or in many other ways. Major stock exchanges

include the Shanghai Stock Exchange, Singapore Exchange, Hong Kong

Stock Exchange, New York Stock Exchange and Nasdaq (USA), the

London Stock Exchange (UK), the Tokyo Stock Exchange (Japan), and

so on. Most countries with capital markets have at least one.

Businesses that have gone "public" are subject to extremely

detailed and complicated regulation about their internal governance

(such as how executive officers' compensation is determined) and when

and how information is disclosed to the public and their shareholders. In

the United States, these regulations are primarily implemented and

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enforced by the United States Securities and Exchange Commission

(SEC). Other Western nations have comparable regulatory bodies. The

regulations are implemented and enforced by the China Securities

Regulation Commission (CSRC), in China. In Singapore, the regulation

authority is Monetary Authority of Singapore (MAS), and in Hong

Kong, it is Securities and Futures Commission (SFC).

As noted at the beginning, it is impossible to enumerate all of the

types of laws and regulations that impact on business today. In fact,

these laws have become so numerous and complex, that no business

lawyer can learn them all, forcing increasing specialization among

corporate attorneys. It is not unheard of for teams of 5 to 10 attorneys to

be required to handle certain kinds of corporate transactions, due to the

sprawling nature of modern regulation.

Commercial law spans general corporate law, employment and

labor law, healthcare law, securities law, M&A law (who specialize in

acquisitions), tax law, ERISA law (ERISA in the United States governs

employee benefit plans), food and drug regulatory law, intellectual

property law (specializing in copyrights, patents, trademarks and such),

telecommunications law, and more.

In Thailand, for example, it is necessary to register a particular

amount of capital for each employee, and pay a fee to the government

for the amount of capital registered. There is no legal requirement to

prove that this capital actually exists, the only requirement is to pay the

fee. Overall, processes like this are detrimental to the development and

GDP of a country, but often exist in "feudal" developing countries.

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Intellectual property

Businesses often have important "intellectual property" that needs

protection from competitors for the company to stay profitable. This

could require patents or copyrights or preservation of trade secrets. Most

businesses have names, logos and similar branding techniques that could

benefit from trade marking. Patents and copyrights in the United States

are largely governed by federal law, while trade secrets and trade

marking are mostly a matter of state law. Because of the nature of

intellectual property, a business needs protection in every jurisdiction in

which they are concerned about competitors. Many countries are

signatories to international treaties concerning intellectual property, and

thus companies registered in these countries are subject to national laws

bound by these treaties.

Exit plans

Businesses can be bought and sold. Business owners often refer to

their plan of disposing of the business as an "exit plan." Common exit

plans include IPOs, MBOs and mergers with other businesses.

Businesses are rarely liquidated, as it is often very unprofitable to do so.

The modern business firm is an organization for making and

implementing decisions within a market economy. In most major

industries of well-developed economies, most firms are large, complex

organizations. These organizations render a set of key decisions for the

economy. They establish prices, determine outputs, make investments,

and allocate resources. These decisions and the consequences ensuing

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from them are the focus for the economic study of the firm. The

economic theory of the firm attempts (1) to specify the decisions that

business firms will make (as a basis for more aggregate predictions of

the economy) and (2) to prescribe appropriate decision rules for a

rational firm operating in a market economy.

12.2. Entrepreneur, profit, principal agent

Profit does exist in the real world, and there are several

explanations that economists have for it. Some economists simply

consider it as an indication that the economic system is in perpetual

disequilibrium. Joseph Schumpeter, for example, saw profit as a return

to a successful entrepreneur. The entrepreneur, who finds an opportunity

where no one before him saw one, and takes advantage of this

opportunity, will make a profit. However, this profit will be temporary

because as time goes on, others will follow him and erode his profit.

Others see profit as an indication that forces of competition may not be

strong, and that in some industries barriers to entry exist. Still other

economists have argued that profit is a special sort of implicit return, a

return for bearing risk. Those who are willing to take more risk will, on

the average, earn higher returns.

After one includes implicit costs as part of costs, an accurate

measurement of profit is impossible, which is a major reason why

accountants do not try to measure the economic concept of profit. This

obviously causes problems if one wants to test whether or not firms try

to maximize profits. An alternative way to approach the measurement

problem begins with the Schumpeterian notion of profit, which is that it

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comes from the discovery of opportunity. A discovery of an opportunity

should increase the discoverer’s wealth. Thus, a way to measure profit is

to try to measure unexpected changes in wealth - wealth increasing

faster than a normal rate of return. If one sees people whose wealth is

increasing more rapidly than it would if their assets were entirely in the

form of high-grade, short-term bonds, one could conclude that they had

found a profitable opportunity. There are measurement problems here as

well, however. Much of people's assets is in the form of investment in

them - human capital - and is not easily measured.

Do firms try to maximize profits? For example, suppose a

humanitarian opened a business with a goal of helping the poor. He

might keep prices below a level at which accounting profits are

maximized. Yet one can argue that if the humanitarian raises prices, his

(opportunity) costs increase because he must partially forgo the goal of

helping the poor.

Most firms do not have a single decision-maker. Instead, they are

made up of an assortment of individuals, each using the firm to attain his

own goals. Managers pursue goals; stockholders pursue goals; blue and

white-collar workers pursue goals; but the firm does not.

The assumption that firms attempt to maximize profits is

inconsistent with the underlying methodology of microeconomics,

which assumes that all decision-makers are individuals.

One attempt to ground the assumption of profit maximization on

individual behavior appeals to the principal-agent problem. An agent

acts on behalf of another person, called a principal. How can the

principal be sure that the agent acts in the principal's interest? The

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principal must restrict the agent in some way so that it is in the agent's

interest to act in the interest of the principal. The most common way to

do this is to tie rewards with performance.

Payment on a commission basis is an important way to solve the

principal-agent problem. When one hires a lawyer to sue on a civil

matter, an auctioneer to sell one's belongings, or a real-estate agent to

sell one's house; or when a movie star hires an agent to seek

employment, payment is done with commissions. When the agent does a

good job, he or she is paid a lot. When the agent does a poor job, he or

she is paid little or nothing.

Sometimes, the principal can protect himself with a contract that

specifies how the task is to be performed and what the price will be. The

ability to use the courts to enforce the contract protects the principal.

The principal-agent problem is one of control: how does the principal

control those working on his behalf? Once one starts looking for cases of

this problem, one finds them everywhere. How do shareholders control

management, citizens control government, or management control

employees? The principal-agent problem is everywhere because we live

in a world of interdependence and specialization.

The principal-agent problem occurs in several places in the firm,

including in the relationship between legal owners and hired managers.

Stockholders own shares because they believe that this ownership will

increase their wealth. Managers work for the firm primarily because it

provides them with income needed to buy goods and services, and

because their positions provide them with prestige and authority. The

threat of a takeover or hostile merger provides stockholders with their

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most effective constraint on managerial action. If managers perform

poorly at making profits, shareholders will sell their shares because they

will not achieve their goal of increasing wealth. The lower value of the

company is an inducement for other management groups to buy out the

company and replace management. If the new managers can improve

performance, they can capture at least some of the increased value of the

firm.

Some economists have tried to construct a theory of the firm in

which the firm decides prices by a mark-up over costs. Grocery stores,

for example, mark up different products by different percentages, and

they have a much smaller average mark-up than furniture stores have.

If a firm marks up a product by 50% and finds that it does not

make a profit at that price, it tries another percentage. When it finally

finds a mark-up, which generates a profit, it will stick with it. Real

businesses rely much more on trial and error than on sophisticated,

mathematical analysis.

In a competition for profit, those firms that do maximize, whether

intentionally or by accident, stand the best chance of survival and

growth. Setting up a goal such as "quality at a reasonable price" may be

better for both employee morale and consumer reception than a more

straightforward "profit-first" goal.

Consider, for example, rent controls, a popular form of a price

ceiling. If the demand curve and the short-run supply curves are

inelastic, then a sizable drop in rents may result in a very small shortage.

The benefits to consumers will, in the judgment of most, clearly

outweigh the costs to the consumers. Further, the short-run supply of

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housing should be quite inelastic because apartment buildings take time

to build and even longer to wear out.

But apartment buildings do wear out, and they wear out much

faster when they are not properly maintained. Effective rent controls

discourage the construction of new buildings and encourage the

retirement of old buildings. Though the long-run costs to consumers may

outweigh the benefits, the program may remain politically popular

because those who benefit by living in rent-controlled apartments can

vote, whereas those harmed cannot vote since the shortage of housing

forces them to live in other political jurisdictions.

The most visible price floor in the United States is the minimum

wage. The U.S. Congress passed a minimum wage law in 1938 and has

raised its level and extended its coverage several times since then. The

stated goal of the minimum wage is to help the poor. It will not directly

affect most workers because they have wages that are above the

minimum. Only those workers who are earning less than the minimum

will be directly affected.

Economists have done numerous studies to try to discover the

effects of the minimum wage. Most studies suggest that the minimum

wage does have some adverse employment results. They find that the

minimum wage results in unemployment for some, especially those

whose skills and abilities are very low and higher wages for others.

Mainstream macroeconomists view recessions as a case of market

failure. There are workers who would like to work but cannot because

no one is willing to hire them. Their lack of income creates consumers

who would like to spend but who cannot because they do not have the

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funds to do so. As a result, there are businesses that would like to

produce and hire more workers, but cannot because there is not enough

demand for final output. The circle is complete, and there is something

not working properly.

The traditional explanation for this situation was a failure of wages

and prices to adjust quickly enough. A change in spending drives the

economy away from equilibrium, but sticky wages and/or prices prevent

rapid adjustment to a new equilibrium. Because wages and prices do not

adjust, output does.

If markets are always in equilibrium, then how do we explain the

fluctuations in business activities that have been obvious for over two

centuries? An important cause is fluctuation in the rate of technology

change.

When there is a technological shock raising real wage, people will

work more causing output to surge, and when there is a technological

shock lowering real wage, people will withdraw from work, causing

output to fall. This pattern is what we observe as booms and recessions.

The patterns we observe are possible and are a reminder of how little we

know for certain in macroeconomics.

There are three sets of principal/agent problems which are

inherent in the structure of large companies:

Those arising between management and the shareholders as a

class;

Between majority shareholders and minority shareholders;

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Between the controllers of the company (whether managers or

majority shareholders) and non-shareholder stakeholders.

Formation of Board of Directors is a mechanism to solve them, if

they are well chosen and work effectively.

Type of Board Compositions by popularity:

Majority Outsiders and CEO as Chairman

Majority Outsiders & Independent / Non-Executive Chairman -

Leads to Board Leadership

Majority Insiders and CEO as Chairman

Majority Insiders and Independent / Non-Executive Chairman

Just formation of the Board is not enough; we have to align their

interests with shareholders. Also, the management should also be

aligned with shareholders interest. There are two methods to do it:

Requiring officers and directors to own substantial blocks of the

corporation’s stock;

Increasing the extent to which officer and director compensation is

contingent upon performance measures that reflect increased shareholder

value.

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13. Economic decisions

If people act based on self-interest and there are no restrictions on

their behavior, the results will not be in the interests of the group.

Ownership encourages decision-makers to consider all the costs

and benefits of their decision. A more direct way is to have a strong

central authority that regulates people's behavior and punishes

deviations. Hunting regulations, for example: Wild ducks are owned by

no one. As a result, the problem of the commons should apply, and

ducks should be hunted to extinction. They are not because governments

set limits on when and where ducks may be hunted, and on how many

ducks each hunter may kill. To the individual hunter, these restrictions

may seem as irritating limitations on his freedom, but without them,

hunters as a group would be much worse off.

The use of central authority as a way of coordinating behavior is

widespread. It is the method that allows large business firms to exist.

The boss coordinates his subordinates, directing them to actions that are

in the interest of the all those who make up the firm. This solution was

used in an extreme form in the socialist economies of Eastern Europe

and Asia. These economies were designed as if they were one giant firm.

Government bureaucracies made the bulk of economic decisions, such

as what to produce and how to produce it.

Which method, the market or central direction, is better? Evidence

suggests that sometimes the first is and sometimes the second is. There

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are costs to using either and, as a result, no country totally relies on

either.

Those who designed the Soviet economic system began with a

belief that "the problem with capitalism is that it produces for profit

instead of for people's needs". They set out to build a system that

produced directly for people's needs and not at all for profit A system of

central planning evolved; a system in which all decisions about what

people needed were decided from the top.

To see how this system worked, consider how the operator of a

shoe factory in the United States would make decisions. His major

concern would be whether he could sell at a profit the shoes he made. In

the Soviet Union, however, profit was of no concern to the manager of

the state-owned shoe factory. Neither did he worry about selling the

shoes. His only concern was to produce what he was told to produce,

and if he could do that, both he and the workers of the plant received

sizable bonuses. The problem the Soviet Union had was that it is very

difficult to specify in physical terms what a manager should do. (If you

do not believe this, try to write down a set of instructions specifying

what sort of shoes should be produced. Remember, instructions to

produce "good shoes" or "attractive shoes" involve instructions that are

not measurable.) The Soviet Union produced huge numbers of shoes that

no one would buy because they were of such low quality.

A reason that designing effectively is so difficult is that

information and knowledge are scarce.

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Every day, individuals make decisions, big and little, that affect

how our economy functions and grows. Important decisions are made by

entrepreneurs who establish and run all kinds of businesses — from a

dog-walking service to a corner grocery store to a small manufacturing

facility to a multi-plant corporation. Entrepreneurs make decisions about

• what service or product to produce;

• what method to use to produce the product or service;

• how to finance production; and

• how to market or sell the product or service.

Over time, as a result of these decisions, we are able to produce

more and better goods and services, and produce these goods and

services more efficiently. Here are the profiles of three entrepreneurs

who made just these kinds of decisions.

According to Mankiw, the four principles of individual decision-

making are: “People Face Trade-offs, The Cost of Something Is What

You Give Up to Get It, Rational People Think at the Margin, and People

Respond to Incentives:”

People face trade-offs by having to give up something to get what

they want or need. This is no surprise for most people who learn early

in life that few things are free. As an example of a trade-off, many

times college students give up spending time with their families in order

to do homework and accomplish their long-term goal of earning a

degree. Because of “trade-offs, making decisions requires comparing

the costs and benefits of alternative courses of action” (Mankiw, 2007,

p. 6).

Next, rational people think at margin. A rational decision maker

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“takes an action if and only if the marginal benefit of the action exceeds

the marginal cost” (Mankiw, 2007, p. 7). An example of a decision

comparing the marginal benefit and the marginal cost associated with

that decision occurred when I decided to purchase a marked-up, last

minute airline ticket to pick-up my granddaughter. My other choices

were to either drive my car or wait 7 days to pay a much lower airline

fee. The marginal benefits of less travel time, decreased days off work,

our comfort and having my granddaughter home immediately all

outweighed the marginal cost of the increased airline fee. Therefore, I

based my decision on these personal incentives.

Of course, if the airline fee had been significantly higher than

traveling by car, I had more vacation time at work and someone to assist

me while traveling with my 4 month old granddaughter; I would have

chosen to drive my car to reduce the cost.

Finally, the principles of economics affect decision-making,

interaction, and the workings of the economy as a whole because all

people make decisions based on what they want and is best for them

personally.

• Why do some women marry at a young age and others continue

their education?

• Why are only 6 percent of tenured full professors of economics

women?

• Why does 2 percent of venture capital go to women-owned

firms—when women own about 38 percent of U.S. businesses?

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The Minneapolis Fed, with its ongoing interest in economic

literacy, was one of the sponsors of a May symposium that attempted to

answer—or at least explore—these questions and others related to

economic decision making by, and on behalf of, women.

Critical Junctures in Women's Economic Lives drew speakers

from around the country versed in subjects that included financing

women's business endeavors, women in poverty, financial planning and

investment decisions, gender and racial discrimination, child care and

family leave—and public policies that would effect change.

The notion of making economic and financial matters relevant to

women's daily lives isn't new—similar topics were covered by

participants at a women's caucus during the Minneapolis Fed's economic

literacy seminar just two years earlier.

However, a number of these issues remain under debate and

reappeared at the May symposium. Heidi Hartmann, director and

president of the Washington, D.C., Institute for Women's Policy

Research and symposium keynote speaker, made the point that most

women college graduates start at the same salary as their male

counterparts, but studies done over time show that men's salaries peak at

a far higher point on the scale than do women's. Women with low-wage

earning jobs don't fare much better. Hartmann said that men in similar

low-wage earning jobs tend to earn about $3 more per hour than women.

"Women as Professional Economists: How Are We Doing?" was

the topic of a presentation by Robin Bartlett, professor of economics at

Denison University and past chair of the American Economic

Association's Committee on the Status of Women in the Economics

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Profession (CSWEP). Her answer: Not very well. Despite assurances

from the AEA in 1971 that "economics is not exclusively a man's field,"

Bartlett said, since the formation of CSWEP that same year, the data

show that few women are tenured full professors of economics at the top

10 Ph.D.-granting universities. While the number of women in the

profession continues to grow, they are not equally represented on faculty

at these schools, Bartlett said. "The higher the prestige of the school, the

fewer women you find [in tenured positions]."

Partly in light of these data, Larry Singell, department of

economics at the University of Oregon, tracked the careers of AEA

members from 1960 to 1989 and found that women's opportunities in

economics have improved over time. Women entering the job market

were placed in lower-ranked schools than comparable males; however,

this placement differential disappeared by the mid-1980s. Moreover, in

the last 40 years, he said, "the proportion of female economists has

increased from 3 percent to 25 percent. In 1999, women comprised 34

percent of new Ph. D economists."

Regardless, as the Minneapolis Fed raised at its 1999 conference,

relatively fewer women are entering graduate programs in economics

than law and medicine. A study by Betsy Jensen and Ann Owen

indicates that women might be better represented in the field if they

went into their first college economics course with stronger math skills

or had more confidence. The Hamilton College professors surveyed

1,776 students and 67 instructors in introductory economics courses at

34 coed liberal arts colleges, seeking an explanation of why women are

under-represented in economics. Other factors that might deter women

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from continuing in economics include: different interests and career

aspirations already in place; a lack of female role models; and teaching

techniques and methods of evaluation that are less suited to women's

learning styles. For example, women generally respond better to group

problem-solving activities rather than the lecture style of teaching that is

typical of an introductory economics course.

At the end of the two days, the 80 or so attendees proposed ideas

for further research and action, and they all dovetailed to the original

question:

(Discussion point)

• How can women make better economic decisions in their lives?

13.1. Portfolio, exchange, speculations

People have a limited capacity to know. In small groups, people

know a great deal about others simply from day-to-day interaction. But

in large groups, knowledge about others requires expenditure of time

and effort. For a modern, complex economy to function well, people

must coordinate their actions with the actions of many people, but all of

these people have very limited knowledge of how their actions fit into

the big picture.

Portfolio choice involves decisions about the way we want to hold

our assets (or to structure our liabilities). It is a fancy term for something

we do all the time. For example, a yard sale is an example of portfolio

adjustment. People holding yard sales are attempting to convert assets in

the form clothing and household items into cash. They are not changing

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the amount of assets they have, but rather the form in which they hold

them.

From a macroeconomic perspective, most important cases of

portfolio adjustment involve financial assets. When we look at financial

assets, there are three characteristics that most people want to have.

First, they like assets with low risk. Second, they want assets that are

liquid, that can be converted to money and spent easily. Third, they like

assets that give them a high rate of return. Because no assets combine

all three characteristics, people face tradeoffs. If they want a higher

return, they usually have to accept more risk or less liquidity. For

example, investment in stocks can be quite risky.

With a system of central planning, the government decides what

the priorities of the society will be and implements these priorities

through a central planning agency. However, central planners cannot

simply issue orders and expect them to be obeyed. They must first obtain

information about what the factories, mines, and farms in the nation are

capable of producing. The central planning agency could send out

questionnaires, but there is no assurance that the answers that would

come back would be truthful because, despite the socialist dream that

men should act in total selflessness--for the good of the society as a

whole--this does not seem to be the way that people actually act in the

real world. It certainly has not been the way that men have acted in

nations that adopted socialism.

The central planning agency wants the factories, mines, and farms

to produce as much as possible. It must reward those who produce up to

their potential and penalize those who do not. Rewards and penalties

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introduce an incentive to lie when the central planning agency tries to

determine potential. If the plant, mine, or farm manager underestimates

potential and the central planners believe this estimate, the chances that

the production unit will appear to be a good performer are enhanced.

In a modern economy, there are a tremendous number of linkages

and interdependencies. Thus, any change in production of one-product

sets off a cascade of other changes needed to support the first change.

Between 1920 and 1940, a number of economists debated about

whether a centrally planned economy could match the performance of a

decentralized market economy. One of the most insightful of these

economists was Friedrich Hayek, who argued that information is widely

scattered in society and cannot be effectively collected for use by a

central authority making production decisions for the entire economy.

Rather, the existence of market-determined prices communicates vital

information that encourages individuals not only to use whatever

information they have about production of goods, availability of

resources, and how to satisfy consumers' desires, but also to actively

search for more information. The market, said Hayek, was a way a

society minimized the effort needed to discover and communicate

information.

Economists have little to say about small-group situations. The

realm of the economist has been large-group situations, in which

individuals interact with others who they do not know well or at all. In

these situations, the assumption of self-interest seems to serve quite well

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even if it is not literally true. The area in which the analytical tools of

economics have been most useful has been the area of exchange.

In small groups, the role of exchange is replaced with gift giving.

A member of a family who has no food will be given food by those who

do. However, gift giving usually has strings attached. People who

receive gifts are expected to reciprocate, to give back something in the

future. This reciprocity helps bind small groups together.

Exchange does not bind people together in the same way. Two

people exchange only when both benefit. Neither incurs a social

obligation as a result. In fact, where social obligations exist, exchange

may not work well. Most people are uncomfortable negotiating a

purchase from or sale to a close friend.

Exchange allows for extremely complex interactions among

strangers. When you use a pencil, for example, you benefit from efforts

of hundreds of people who in some way contributed to getting that

pencil to you. Wood had to be grown, cut, and shaped. Graphite had to

be mined, transported, and processed. Iron had to be mined, refined, and

molded. The paint and eraser each required their own processes. All of

the many people involved are probably total strangers to you.

Most of economics is devoted to discussing exchange, but

economists also spend time examining other topics. Of those other

topics, the one that has drawn the most research is the study of

government. However, the economic theory of government is less

advanced than the theory of exchange for at least three reasons. First,

specific individuals are often very important in government, and

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economics does not deal well with specific individuals. In monarchies

and dictatorships, for example, the decisions of one individual may

outweigh the decisions of all others. Economics seeks regularities in

social life, and those regularities are more likely to occur when no one

individual has appreciable effects on the group.

Economists usually assume that people are motivated by self-

interest, but for many years, they implicitly assumed that once the

government employed a person, his motivations changed to unselfish

and his knowledge became infinite. This assumption allowed economists

to treat the government as a solution to problems. If, for example, the

private market did not perform well, the government could remedy the

problem. It was only in the 1960s and 1970s that economists fully

realized that they had made what was for them a most unusual

assumption about behavior. Some of the most interesting and

informative research undertaken in the 1970s was that which asked what

would one expect if one assumes that those who work for the

government are in fact no different from the rest of us, and that they seek

only their own self-interest. This research suggested that the government

might often make a bad situation worse.

Self-interest may not work as well in politics as in exchange.

Politicians can and do make use of people's small-group responses. For

example, many people feel loyalty to nation, party, or political

personality. This loyalty can alter behavior from what it would be if

based only on self-interest.

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The future always brings surprises. Sometimes, the surprises are

nice, but often they are unpleasant. Many people want ways to protect

themselves from the unpleasant surprises. They are willing to pay for

protection against risk and uncertainty.

Where some people consider risk a problem, others see it as an

opportunity. A speculator is one who takes risks in the hope of making a

profit, usually by trying to forecast future prices and betting his money

that he is correct. If a speculator expects the price of gold to be higher in

a year than it is now, he can buy gold and wait. If he is right, he will

make a profit on his action, while if he is wrong, he will lose.

The speculator is widely regarded as someone who contributes

nothing positive to the economy because he produces nothing. However,

by buying when prices are low and selling when they are high, the

successful speculator transfers goods from low-valued uses to high-

valued ones, which is a useful task. He also smoothes price fluctuations

because his purchases increases prices when they are low, and his sales

when prices are high helps keep prices from going even higher.

The development of futures markets allows anyone who wants to

be a speculator to become one. In a futures market, agreements to buy

and sell at a future date are made, with the price set when the agreement

is made. There are futures markets for most major agricultural

commodities. Farmers use them to fix the price of their crop long before

harvest and millers and owners of feedlots use them to lock in the price

they will pay for grain in the coming year. In fixing these prices with a

futures contract, farmers and buyers of grain reduce the risk they take by

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hedging. They are able to reduce their risk because speculators are

willing to take risk. Without speculators, a futures market could not

function properly. The benefits that speculators provide others are not

part of their intentions.

A person involved in speculation is not engaged in arbitrage, he is

not a middleman/an intermediary, nor is he an entrepreneur. Arbitrage is

buying in a market where prices are low and simultaneously selling in a

market in which they are high. There is no risk involved in pure

arbitrage. Arbitrage tends to equalize prices in various markets.

A middleman is part of a distribution or marketing network.

Though frequently disparaged, the fact that sellers are willing to use

middlemen indicates that they do perform a useful service. Middlemen

generally try to keep risk to a minimum.

The entrepreneur deals in risk, but unlike the speculator who

reduces the risk of those who do not want to bear it, the entrepreneur's

risk is of his own making. The entrepreneur is the creative element in a

market economy. His presence makes the system dynamic and ever

changing. He creates new products, develops new managerial

techniques, introduces new ways of producing products, and finds new

resources. The entrepreneur is searching for unoccupied economic

niches, opportunities to make a profit. The search is risky. Most large

corporations are the results of entrepreneurial effort.

Speculation refers to making financial decisions by assuming the

risk of loss for the potential for increased returns. There is really a very

thin line of difference between speculation and investment and between

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a speculator and an investor. While all investors must speculate (albeit at

different degrees), all speculators must invest in order to make profits.

The Difference between Investment and Speculation

The difference between an investor and a speculator can be seen

vis-à-vis the following parameters:

• Holding period: While an investor usually has a longer planning

horizon and holds the investment for at least a year, a speculator holds

the investment for a few days or months.

• Risk disposition: While an investor takes on moderate risks, a

speculator assumes significantly higher risk.

• Expectation of returns: An investor expects moderate returns,

while a speculator makes investments that promise high returns.

• Decision making: An investor would carefully evaluate the

factors impacting the investment. A speculator would depend more on

tips and market sentiments.

How Speculation Yields Returns

The degree of speculation tends to rise when the economy is

bullish and the markets are buoyant. This is how bubbles are created. A

bubble is a phenomenon during which the value of an investment (such

as real estate, stock, foreign exchange and petroleum futures) rises

substantially. Most of the investments are overpriced in such a scenario,

yielding high returns.

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Speculation: Dangers

A speculative buying spree, devoid of analytical calculation,

aggravates the element of risk. Any downturn in prices can cause panic

and excessive selling, resulting in a dramatic plummeting of prices and

eventually a market crash. The stock market crisis of 2008 can be

attributed to consecutive periods of speculative buying, followed by

panic and speculative selling.

How Speculation Helps the Market

Speculation can be a blessing for the economy. This is because

speculators inject capital in the market, thereby increasing liquidity.

Speculative investments also minimize the risk for arbitrageurs and

hedgers.

Benjamin Graham (author of the classic books Security Analysis

and The Intelligent Investor and mentor to Warren Buffett) urged people

to ignore the market as a whole and focus on the true “value”

represented by an investment.

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14. The financial sector

A well-functioning financial sector increases economic growth. If

an economy does not allocate savings to the most productive uses, it will

grow more slowly than it can grow.

From a microeconomic point of view, the primary purpose of

financial markets is to allocate available savings to the most productive

use.

Markets are interrelated, and a problem in one market can have its

source in a different market. This finding is a starting point for

macroeconomics.

Macroeconomists ask two central questions: "Is this market a

likely source of instability that shows up as inflation or recession," and

"Will the adjustment process in this market cause problems for the

overall adjustment of the economy."

Changes in one part of the economy are rapidly transmitted to

other parts through financial markets. Such transmission is not limited to

questions of tariffs or to the market for foreign exchange; all financial

markets transmit.

When most people think of financial markets, they think of the

stock market. A stock is a share in the ownership of a corporation, and

through the stock market, one can buy and sell. The stock market has

high visibility because it is open to anyone who can collect several

hundred dollars together. However, the stock market is only a very small

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part of the total financial market and plays only a minor role in

macroeconomic theory.

Markets for debt are much larger than the stock market in terms of

their daily transactions. These markets have less visibility because many

require hundreds of thousands or even millions of dollars to enter

directly. Some of these markets for debt do play an important role in

macroeconomic theory. Whenever economists include an interest rate in

their discussion, a market for debt is playing a role in their thinking.

There are many kinds of transactions that take place in the market

for debt. Some transactions are highly publicized: when a big

corporation issues marketable bonds with the aid of a brokerage house,

the brokerage house advertises the event to attract buyers. Transactions

on the New York Bond Exchange are also very visible--they are reported

in the financial section of major newspapers. Many more transactions

involve financial intermediaries and less publicity. Eventually most

people visit a bank (or a savings and loan association, which has become

almost identical) to arrange a loan. Large corporations, small businesses,

non-profit groups, and individuals all use banks to obtain funds.

In addition to lending money to individuals and groups, banks are

part of financial markets in other ways. Banks borrow and lend funds

among themselves in the funds market. They buy and sell foreign

exchange. They buy and sell government and commercial debt. Finally,

one form of bank debt serves as money in modern economies, and banks

create this debt because of their financial transactions.

Prices in the debt market are interest rates, what one pays (or

receives) for the use of funds for some period of time. Because they

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aggregate financial markets, economists often talk about "the interest

rate." In fact, there are many interest rates. Rates differ depending on

factors such as the risk of default, the liquidity and time to maturity of

the debt, and the tax status of the interest payments.

The press commonly reports several interest rates. The prime rate

was once the interest rate that large commercial banks charged their

most credit-worthy customers for short-term loans. In recent years,

banks have usually given their best customers discounts from the prime,

so this definition is no longer accurate. A good definition of the prime is

hard to give other than - it is the rate that banks publicize.

The funds rate is the rate that banks charge one another for funds

they borrow on an overnight basis. The discount rate is the rate at which

banks may be permitted to borrow from a Central/Federal Reserve bank.

Finally, the interest rate on 13 and 26 week Treasury Bills is used by

many banks to determine rates that they pay on some of their accounts.

This interest rate is probably the one most economists have in mind

when they talk about "the interest rate." In practice, all these rates tend

to fluctuate together.

Though many of us hold savings bonds, very little of the debt is

financed with them. More of the debt is in the form of long-term debt

(bonds), medium-term debt (notes), and short-term treasury bills, or T-

bills for short.

Financial intermediaries, large companies, and governmental units

buy T-bills. Organizations find them a safe and profitable way to invest

funds available for short periods of time. The attractiveness of T-bills is

enhanced by the secondary market that has developed. A secondary

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market does not sell newly-issued securities, but previously issued - or

"used" - securities. (The stock and bond exchanges are examples of

secondary markets.) The existence of this secondary market has made T-

bills very liquid, that is, T-bills can be converted into cash quickly and

cheaply. However, because it does not deal in small transactions of

$50000 or $100000, it is not visible. It is an over-the-counter market,

which means transactions are done by computer or telephone.

T-Bills are now sold as book-entry security, which means they are

in the form of a paper certificate, but are only entries in the books of the

Treasury.

Most people do not enter financial markets directly but use

intermediaries or middlemen. Commercial banks are the financial

intermediary we meet most often in macroeconomics, but mutual funds,

pension funds, credit unions, savings and loan associations, and to some

extent insurance companies are important financial intermediaries.

When people deposit money in a bank, the bank uses the funds to make

loans to homebuyers for mortgages, to students so they can pay for their

education, to business to finance inventories, and to anyone else who

needs to borrow. A person who has extra money could, of course, seek

out borrowers himself and bypass the intermediary. By eliminating the

middleman (intermediary), the saver could get a higher return.

Financial intermediaries provide two important advantages to

savers. First, lending through an intermediary is usually less risky than

lending directly. The major reason for reduced risk is that a financial

intermediary can diversify. It makes a great many loans, and even

though some of those loans will be mistakes, the losses will be largely

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offset by loans that are sound. In contrast, an average saver could

directly make only a few loans, and any bad loans would substantially

affect his wealth. Because an intermediary can put its "eggs" in many

"baskets," it insures its depositors from substantial losses.

A second advantage financial intermediaries give savers is

liquidity. Liquidity is the ability to convert assets into an able form to

spend – money - quickly. A house is an illiquid asset; selling one can

take a great deal of time. If an individual saver has lent money directly

to another person, the loan can also be an illiquid asset. If the lender

suddenly needs cash, he must either persuade the borrower to repay

quickly, which may not be possible, or he must find someone else who

will buy the loan from him, which may be very difficult. Though the

intermediary may use its funds to make illiquid loans, its size allows it to

hold some funds idle as cash to provide liquidity to individual

depositors. Only when a great many depositors want to withdraw

deposits at the same time, which happens when there is a "run" on the

institution, will the financial intermediary be unable to provide liquidity.

Unless it can obtain help from the government or other institutions, it

will be forced to suspend payments to depositors.

Financial intermediaries help large numbers of people to use,

though indirectly, financial markets. Although these intermediaries are

important in the macroeconomic functioning of the economy, they are

usually stable and change only slowly. With the exception of those

intermediaries that issue deposits against which checks may be written,

economists do not expect disturbances to arise in financial

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intermediaries. As a result, macroeconomic theory does not pay much

attention to them.

A financial market is an "efficient market" if its prices take into

accounts all knowledge that people have about that market. If there is

knowledge, which is not being used, unexploited profit opportunities

exist, and in financial markets, these opportunities should be quickly

taken. If one knows that a stock or bond is undervalued and that it will

rise in value, one will make a large amount of money by buying until it

does rise. Because profit opportunities are quickly exploited once they

become known, one cannot "beat" an efficient market unless one has

special information that is unavailable to others.

The idea of efficient markets suggests that one should not place a

great deal of faith in any forecasts about interest rates or stock prices,

because if the person making the forecast really does know what will

happen, he could keep quiet and get rich.

The speculators play a useful role in an efficient market where

prices adjust very quickly to new information. They are coolly rational

individuals looking at the fundamental values of items, buying when

prices are too low and helping lift these prices, and selling when prices

are too high and helping to lower these prices. As a result, prices

correctly transmit information about values, which people can then use

to make decisions. An efficient market will not be the source of

economic disturbances. However, it can transmit disturbances, and this

alone would be enough to interest economists.

An important reason people buy items in financial markets is in the

hope of selling them at a profit. Thus trading in these markets involves

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not only an analysis of the fundamental value of an asset, but also an

analysis of how other people will react. If people are confident that

others will buy the item for more than they paid for it, then they will buy

it even if it has little value to them.

The idea described above has been called the "greater-fool"

theory. It implies that although one may be a fool for buying an asset

that is overpriced, one can profit if there are still greater fools who will

pay even more for it.

Markets based on the "greater-fool" theory always collapse.

Eventually the greatest fool is found, and once he is found, the process

cannot continue. It can affect the production of an economy if the

speculations cause enough financial disruption. They will cause

bankruptcies, reduce people's trust in others, and cause unemployment

for the people who became speculators.

A speculative crash in financial markets is not enough, by itself, to

trigger a recession.

The federal government not only regulates financial markets and

intermediaries, it is also a major financial intermediary itself. Two

agencies with important regulatory functions are the Securities

Exchange Commission (SEC), the Federal Deposit Insurance

Corporation (FDIC). The SEC regulates behavior in stock and bond

markets, and also specifies which information a publicly-traded

company must provide to shareholders. The FDIC insures deposits at

commercial banks and, with the demise of the Federal Savings and Loan

Insurance Corporation in the 1980s deposits at savings and loan

associations.

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The U.S. government makes extensive loans for agriculture and

housing. Because the government can borrow at a lower interest rate

than most private borrowers can, and because it does not need to make a

profit, it can lend at lower interest rates than private intermediaries can.

The government also subsidizes borrowers by guaranteeing loans that

private lenders make. However, the issues that these actions of the

government raise are primarily microeconomic in nature.

From a macroeconomic perspective, by far the most important

government institution involved in financial markets is the Federal

Reserve System. The Federal Reserve System (often referred to as the

"Fed" by economists and bankers) is the central bank of the United

States. A central bank functions as a banker's bank. Just as individuals

and businesses have deposits at a regular bank and can write checks on

these deposits, banks have deposits at a central bank and can write

checks on these deposits.

The Federal Reserve System is a rather strange "central" bank

because it is composed of 12 separate banks. When you examine your

paper currency, you will see the district number and letter of one of

these 12 banks on the left side of the portrait. This strange structure

exists because of the political realities that faced Congress when it

established the system in 1913. In 1935, Congress reduced the

independent authority of these 12 banks and centralized policy-making

authority in a group called the Federal Open Market Committee

(FOMC) which decides monetary policy. Though today the individual

Reserve banks retain little independent power, the president of each can

serve as a voting member of the FOMC.

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In the market for foreign exchange, people trade one country's

money for another's. If, for example, you decide to travel to Thailand,

you will need to buy some bahts, the currency of Thailand, either before

you go or once you get there. In your transaction, you will supply dollars

to the foreign exchange market and demand bahts.

The foreign exchange market provides an excellent illustration of

how financial markets can transmit disturbances. The market is usually

considered to be an efficient market, not subject to runaway speculative

binges. The heart of the market is the trading by a number of very large

banks. A trade worth a million dollars is very small in this market, but it

is the prices of these very large bank transactions that newspapers report

when they publish exchange rates. When you deal in smaller amounts

when you travel to Thailand, you will get less favorable prices.

The market for foreign exchange can be analyzed in terms of

supply and demand. Americans demand foreign money (and supply

dollars) when they buy things abroad, such as vacations, goods, services,

factories, and financial assets. Foreigners supply foreign currency (and

demand dollars) when they buy things here, such as vacations, goods,

services, factories, and financial assets. Though when you buy a

Japanese camera, you do not deal in the foreign exchange market,

someone did in the process of bringing the camera to you. It may have

been the American importer, who would have sold dollars to buy yen,

and then used the yen to buy the camera. On the other hand, it may have

been the Japanese exporter, who sold cameras for dollars and then sold

the dollars for yen. In either case, dollars were supplied to the foreign

exchange market and yen were demanded.

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The exchange rate, or the price of foreign money, is an important

price when we buy things made in other countries.

Two things affect the price of the Japanese camera as seen from

America. The first is the yen price of the camera, and the second is the

dollar price of the yen. If either one increase: Japanese cameras will

become more expensive and Americans will want fewer of them. The

exchange rate also affects the price of American goods as seen in Japan.

When foreign currency is cheap, foreign products are cheap in

dollars, and Americans will want a lot of them. To buy these foreign

products, Americans must buy a lot of foreign exchange. When the price

of foreign exchange is expensive, so also are foreign products and

Americans will not want many. Hence, they will not need as much

foreign exchange.

Let us consider what will happen if the United States increased its

tariffs. Because tariffs are taxes on imports, foreign products will

become more expensive for Americans. As a result, Americans will

want to buy fewer imports, which is usually the desired result of tariffs.

However, if the exchange rate is: a floating rate, that is, one that can

take whatever value supply and demand dictate, the story has not ended.

Because of the tariff and the resulting decrease in imports, foreign

money becomes cheaper for Americans and American dollars become

more expensive for foreigners. If dollars become more expensive,

foreigners will find American goods more expensive. The end effect of a

tariff with floating exchange rates, then, is to cut not just imports, but to

cut exports as well.

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If a country treats the foreign exchange market as any other

market, allowing the marketplace determine the price of foreign money,

it has a system of floating exchange rates. This is what most of the

Western world has had since the 1970s. However, governments have

often fixed prices in this market. In doing so they simultaneously

establish price floors and price ceilings--they will neither let the price

rise nor fall (except within a small range).

There are two ways a government can keep exchange rates fixed.

One method, which has been common in less-developed nations, is

called a fixed and unconvertible exchange rate because the exchange

rate is fixed, but domestic currency cannot be freely converted into

foreign money. Governments using it almost always set the price of

foreign exchange below the market-clearing price (which means that

they price their own currency too high), and thereby cause a shortage of

foreign money. The government prevents the market-increasing price to

eliminate this shortage by outlawing private transactions in foreign

exchange and requiring citizens who obtain foreign exchange to sell it to

the government. Because the government becomes the only legal source

of foreign money, those who want to buy products from abroad must

obtain those funds from the government, which rations these funds to

those purposes it deems most worthy. Though this system is hard to

justify on economic grounds, and is often evaded with extensive black-

marketing, the system gives rulers a powerful tool to reward friends and

punish enemies.

The second method is a fixed and convertible exchange rate. With

this method a government does not abolish the private market for foreign

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exchange, but fixes exchange rates by standing ready to absorb any

surpluses or to fill any shortages.

If the price of foreign exchange is set above the market-clearing

price, there will be a surplus of foreign exchange (and a shortage of the

domestic currency). At this price, people will want to sell more foreign

exchange than they want to buy. The government can prevent this

surplus from lowering price by stepping into the market and buying the

excess foreign exchange. On the other hand, if the price that the

government sets is below the market-clearing price, there will be a

shortage of foreign exchange called a balance of payments deficit. The

government can prevent the shortage from raising price by selling

foreign exchange into the market. The government can obtain this

foreign exchange from reserves it stored up when there was a surplus, or

by borrowing from other countries, or by selling assets such as gold. It

should be obvious that a government can only fill a balance of payments

shortage temporarily and that if it runs for too long; the country will run

out of foreign exchange to provide to the market.

Now most of the industrial world has floating exchange rates.

A "commercial bank" is what is commonly referred to as simply a

"bank". The term "commercial" is used to distinguish it from an

"investment bank", a type of financial services entity which, instead of

lending money directly to a business, helps businesses raise money from

other firms in the form of bonds (debt) or stock (equity).

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Banking services

The primary operations of banks include:

Keeping money safe while also allowing withdrawals when needed

Issuance of checkbooks so that bills can be paid and other kinds of

payments can be delivered by post

Provide personal loans, commercial loans, and mortgage loans

(typically loans to purchase a home, property or business)

Issuance of credit cards and processing of credit card transactions

and billing

Issuance of debit cards for use as a substitute for checks

Allow financial transactions at branches or by using Automatic

Teller Machines (ATMs)

Provide wire transfers of funds and Electronic fund transfers

between banks

Facilitation of standing orders and direct debits, so payments for

bills can be made automatically

Provide overdraft agreements for the temporary advancement of

the Bank's own money to meet monthly spending commitments of a

customer in their current account.

Provide Charge card advances of the Bank's own money for

customers wishing to settle credit advances monthly.

Provide a check guaranteed by the Bank itself and prepaid by the

customer, such as a cashier's check or certified check.

Notary service for financial and other documents

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Other types of bank services

Private banking - Private banks provide banking services

exclusively to high net worth individuals. Many financial services firms

require a person or family to have a certain minimum net worth to

qualify for private banking services. Private banks often provide more

personal services, such as wealth management and tax planning, than

normal retail banks.

Capital market bank - bank that underwrite debt and equity, assist

company deals (advisory services, underwriting and advisory fees), and

restructure debt into structured finance products.

Bank cards - include both credit cards and debit cards. Bank of

America is the largest issuer of bank cards.

Credit card machine services and networks - Companies which

provide credit card machine and payment networks call themselves

"merchant card providers".

Foreign exchange services

Foreign exchange services are provided by many banks around the

world. Foreign exchange services include:

Currency Exchange - where clients can purchase and sell foreign

currency banknotes

Wire transfer - where clients can send funds to international banks

abroad

Foreign Currency Banking - banking transactions are done in

foreign currency

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Investment services

Asset management - the term usually given to describe companies

which run collective investment funds.

Hedge fund management - Hedge funds often employ the services

of "prime brokerage" divisions at major investment banks to execute

their trades.

Custody services - the safe-keeping and processing of the world's

securities trades and servicing the associated portfolios. Assets under

custody in the world are approximately $100 trillion.

Insurance

Insurance brokerage - Insurance brokers shop for insurance

(generally corporate property and casualty insurance) on behalf of

customers. Recently a number of websites have been created to give

consumers basic price comparisons for services such as insurance,

causing controversy within the industry.

Insurance underwriting - Personal lines insurance underwriters

actually underwrite insurance for individuals, a service still offered

primarily through agents, insurance brokers, and stock brokers.

Underwriters may also offer similar commercial lines of coverage for

businesses. Activities include insurance and annuities, life insurance,

retirement insurance, health insurance, and property & casualty

insurance.

Reinsurance - Reinsurance is insurance sold to insurers

themselves, to protect them from catastrophic losses.

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Other financial services

Intermediation or advisory services - These services involve stock

brokers (private client services) and discount brokers. Stock brokers

assist investors in buying or selling shares. Primarily internet-based

companies are often referred to as discount brokerages, although many

now have branch offices to assist clients. These brokerages primarily

target individual investors. Full service and private client firms primarily

assist and execute trades for clients with large amounts of capital to

invest, such as large companies, wealthy individuals, and investment

management funds.

Private equity - Private equity funds are typically closed-end

funds, which usually take controlling equity stakes in businesses that are

either private, or taken private once acquired. Private equity funds often

use leveraged buyouts (LBOs) to acquire the firms in which they invest.

The most successful private equity funds can generate returns

significantly higher than provided by the equity markets

Venture capital is a type of private equity capital typically

provided by professional, outside investors to new, high-potential-

growth companies in the interest of taking the company to an IPO or

trade sale of the business.

Angel investment - An angel investor or angel (known as a

business angel or informal investor in Europe), is an affluent individual

who provides capital for a business start-up, usually in exchange for

convertible debt or ownership equity. A small but increasing number of

angel investors organize themselves into angel groups or angel networks

to share research and pool their investment capital.

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Conglomerates - A financial services conglomerate is a financial

services firm that is active in more than one sector of the financial

services market e.g. life insurance, general insurance, health insurance,

asset management, retail banking, wholesale banking, investment

banking, etc. A key rationale for the existence of such businesses is the

existence of diversification benefits that are present when different types

of businesses are aggregated i.e. bad things don't always happen at the

same time. As a consequence, economic capital for a conglomerate is

usually substantially less than economic capital is for the sum of its

parts.

Financial crime

Fraud within the financial industry costs the UK an estimated

£14bn a year and it is believed a further £25bn is laundered by British

institutions.

Market share

The financial services industry constitutes the largest group of

companies in the world in terms of earnings and equity market cap.

However it is not the largest category in terms of revenue or number of

employees. It is also a slow growing and extremely fragmented industry,

with the largest company (Citigroup), only having a 3 % US market

share. In contrast, the largest home improvement store in the US, Home

Depot, has a 30 % market share, and the largest coffee house Starbucks

has a 32 % market share.

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The financial industry, or financial services industry, includes a

wide range of companies and institutions involved with money,

including businesses providing money management, lending, investing,

insuring and securities issuance and trading services. The following

institutions are a part of the financial industry:

• Banks

• Credit card issuers

• Insurance companies

• Investment bankers

• Securities traders

• Financial planners

• Security exchanges

In the period following the introduction of the euro developments

following the introduction of the euro do not imply that the euro area is

set to become a financial fortress whose financial markets and

institutions would be cut off from the rest of the world. In fact, market

participants residing outside the euro area seem to be taking a keen

interest in the financial markets of the euro area. "Core Europe", so to

speak, has become more interesting to outsiders as the breadth and

liquidity of its financial markets has increased.

The second observation is that the euro can be expected to have a

significant influence on the structure of the financial system by bringing

about more securitization. A traditional feature of the financial system of

continental Europe has been a marked dependency on the funds

intermediated by banks. This feature contrasts with the financial system

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of the United States which is much more securitized. For instance,

corporate bonds have not been very widely issued in the euro area, and

stock market capitalization - relative to the size of the economy - is

much lower in the euro area than in the United States. There are good

reasons to believe that a process of securitization will gather pace in the

euro area now that the single currency is in use.

The Euro system contributes to developments in the financial

sector by providing it with a stable and credible monetary policy. With a

strong and credible commitment to its primary objective, price stability,

the Euro system has created a situation in which the financial sector can

concentrate on those issues that are of the greatest relevance to its

activities.

The Euro system does not play a direct role in structural

developments in the financial sector. With its single monetary policy

framework and TARGET in particular, the Euro system has created an

infrastructure that has proved to be useful for the establishment of an

integrated money market in the euro area.

In addition, the Euro system carefully monitors structural

developments in the financial sector to the extent that they might have

an impact on the conduct of monetary policy. To make a final point, in

observing developments in the financial sector, the Euro system

constantly takes account of the fact that one of its tasks, laid down in the

Treaty establishing the European Community, is to "contribute to the

smooth conduct of policies pursued by the competent authorities relating

to the stability of the financial system"

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15. Marketing campaigns

The chapter is dedicated to a description (case studies) of three

marketing companies: - Verity, Impact Ads and Transworld.

CASE STUDY: I.

This is a conversation between the managing director Andrew

Hodge to Stephen Johnson, the assistant sales director who will choose

who will manage his company's marketing campaign:

Andrew Hodge: Well, have you decided which one it is going to

be?

Stephen Johnson: Well, its tough - but I think it is between Impact

Ads and Verity.

Andrew Hodge: What is wrong with Transworld?

Stephen Johnson: Well, they are a little low on substance. They

keep saying they are a 'top' company, but they do not say what they are

top of! They say they have original designs, and ideas, but they do not

give any examples. I would like to know more about their campaigns

and their clients. The only thing they do say is that they are cheaper than

the others - but do they give value for money? I could find more about

them, but if a marketing company can't sell itself, can it sell for us?

I like Verity's idea; of working closely with us at every stage of the

process … I think we need something like that. They seem to me to be a

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good company, and all the people who have worked with them tell me

that they do exactly as they say - they work with you, and they don't

mess you around.

Andrew Hodge: And Impact?

Stephen Johnson: That's the problem. They are good, very good.

They are very expensive, but they do a fantastic job. If you look at their

list of satisfied customers, it is as long as your arm. They are a young

team, very professional, very innovative … but they are a bit light on

their management consultancy side - they know it too, so they have

brought in an outside partner. They will do a very good campaign, but

we will have to organize it a lot more for them - their service is less

complete.

Andrew Hodge: So they do less, but do it well?

Stephen Johnson: Very well. And they are cheaper than they look.

Andrew Hodge: So it's going to be Impact then?

Stephen Johnson: Well, if we end up with Impact, it will be no bad

thing. But I have been talking to George Halds at Verity - they have a

new young employee, Sandra Sean. She's got some original ideas, and

they want to give her a try on a big project. And she is almost as good as

Impact in one way - they tried to poach her from Verity earlier this year!

CASE STUDY: II

Who we are: When John Weznik lost his job in 1935, he started an

advertising company from his own kitchen at home. Verity advertising

was born. Now Verity has 85 employees and offices in London, Paris

and New York. Still today, we keep to our founder's principles of

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integrity, customer service, and dynamic advertising campaigns tailored

in close consultation with our clients.

What we do: Verity advertising makes you, the client, an active

partner in our advertising campaigns, combining our knowledge of the

advertising market with your knowledge of your product to make an

unbeatable partnership.

How we do it: Verity has an intimate knowledge of the markets,

and our skilled analysts will work with your managers and designers,

bringing marketing into every aspect of design, production and sales,

optimizing them to meet what you are seeking. Market share, and all the

rest are all very well, but what you really, really want, is customers

buying your product in large amounts, and at good margins. That is what

it is all about. And that's what Impact Ads will get you.

You have seen our award-winning marketing campaigns; you

know our clients are some of the top companies in the Fortune 500. We

have come from nowhere to the top in 10 years, because we are good,

we hire the best, we have one of the most creative and innovative teams

in the business.

We are not just a talented team. We work closely with Valerie

Maxim management consultants guaranteeing that our campaigns do not

just grab the attention of the public, but make good business sense too.

We are not the cheapest in the business, but the ROI we generate speaks

for itself!

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CASE STUDY: III

Your campaign needs a company that is top for quality top for

price and top for performance. You need Transworld - the advertising

company with the ideas and results that are changing the industry.

Contact us today, to find how we can turn your campaign into a

dynamic, powerful monster that leaves your competition stopped dead in

their tracks!

For the past two decades, we have combined innovation, high-

quality concept designs and strategic vision, to make ourselves the first

choice to help you meet the challenge of successfully reaching your

target audience. From concept to completion, Transworld supplies the

experience and the support that gives your message maximum impact.

No other advertising agency supplies the value for money that

Transworld can bring to your campaign. With our slim, flat management

structure, helped by the latest in IT, we put more of your expenses back

into your campaign than any other agency in the business.

Questions concerning the three case studies:

1. Which company emphasizes that it costs less?

2. Which company stresses its relationship with clients?

3. Which company puts most weight on the quality of its product?

4. Which is the oldest company?

5. Which company has the least aggressive sales pitch?

6. Which company tells you least about itself?

7. Which company offers the least complete service?

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8. Which company stresses it will generate income?

Definition: A specific, defined series of activities used in

marketing a new or changed product or service, or in using new

marketing channels and methods

Effective marketing is often what separates rapidly growing

companies from slow-growing or stalled companies that started at the

same time, serve the same market and offer similar merchandise.

Companies such as Gillette, Frito-Lay and Coca-Cola have succeeded in

highly competitive mass markets for consumer goods because, while

they certainly produce competitive products, they out-market their

rivals. If you expect your business to grow to any size, you'll have to

become an effective marketer, advertiser and promoter of your business.

In fact, you're likely to grow to the extent that you master marketing, and

no more

A marketing campaign isn't something that comes to you while

you're taking a shower. Successful campaigns tend to be carefully

researched, well thought-out and focused on details and execution, rather

than resting on a single, grand idea. Planning a marketing campaign

starts with understanding your position in the marketplace and ends with

details such as the wording of an advertisement.

Keep in mind that your plan for a marketing campaign is not

supposed to be a prison. You have to leave room to make changes as you

go along because no plan can perfectly capture reality. But you should

also be able to commit fully to implementing your plan--or some future

version of it--if you want to take a strong step toward growth.

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Here are some ways to launch your campaign:

Speak at community events. Offering your expertise at public

occasions is an easy way to get the word out about your business. You'll

maximize your impact and lend credibility to your product or service.

Ask customers for referrals. Generating referrals from current

customers is one of the best ways to market your business. Don't forget

to query your vendors (they're likely to have many contacts) and explain

to your customers exactly what kinds of referrals you're looking for and

how they can help.

Spend two days in your customers' shoes. To find out what your

customers really want, visit a wide range of businesses they're likely to

frequent. Observe how customers are treated, as well as the kinds of

services that appear important to them; then adapt your business

accordingly.

Offer free samples. If you can get someone to try your product or

service, chances are they'll buy it later. Have employees pass out product

samples in front of your business; if you provide a service, offer free

services on a trial basis.

Marketers are constantly searching for ways to increase customer

value. They also continually strive to better position their product or

service in the market place while creating a worthwhile experience for

the customer. Successful brand building takes concerted effort and a

keenly focused approach to achieve desired results. This is where direct

marketing comes in to play.

Unlike other methods of advertising and promotion, direct

marketing is highly cost-effective. Instead of blasting emails or paying

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for airtime on commercial broadcasts – efforts which have a greater

chance of missing the intended audience and wasting dollars – direct

marketing is differentiated and targeted to specific individuals and

populations. As such, it is an extremely precise element of integrated

marketing communications.

Direct marketing is more precise and more targeted than mass

advertising. DM emphasizes customer experience and enhances

customer value to achieve marketing success.

How Direct Marketing Works

Direct marketing, or DM, is best utilized as part of a complete,

multi-faceted marketing program. It is best used to reinforce existing

advertising efforts, but can be equally effective when used alone.

Direct marketing efficiently targets customers by coming into

contact with them in their mailbox and in their homes. Periodic

communications and direct mailings maintain relationships with specific

prospects who have expressed interest in a product or service. Within a

fully integrated marketing campaign, direct marketing can strengthen

and add value to vital business strategies by creating a foundation of hot

leads for sales conversion. Such strategies include public relations, lead

generation, and brand awareness.

Direct marketing proves its value in three primary ways.

• DM is focused on the customer.

• DM is focused on relevance.

• DM is focused on a tested database.

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Customer- Centric Marketing

Though customer acquisition is vital for the success of any

business, the existing customer base makes a comparatively larger

contribution in the long run. This is especially true of loyal, repeat

customers. In most cases, it costs less to retain customers than it does to

acquire new ones.

When companies focus on the customer, lasting relationships are

built. This enhances sales efforts and fosters customer loyalty. Customer

needs are attended to and a steady stream of useful communication is

maintained between the marketer and the market, helping companies

retain customers.

Industry wide experience suggests the smallest degree of customer

retention can increase profits two-fold. But beware: Companies should

be careful about which customers they seek to retain. Spending too

much time or allocating too much of the advertising budget on retaining

the wrong customers would be a mistake. The proper decision about

which customers are worth the time and effort should be based on

previous behaviors. Businesses should focus only on those customers

who have demonstrated a propensity for the highest returns over time.

Relevance is Key in Direct Marketing

Direct marketing works because it is highly targeted and precise. A

tailored, customized message with content that is relevant to the

recipient has been proven to garner the best response rates. Direct

marketing messages fail when the communication is irrelevant and

generic. Companies that succeed with DM do so by researching their

target market and creating effective and personalized mailings.

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Relevant and effective direct mail campaigns should include the

following elements:

• Communications that reflect the individuality and uniqueness of

the recipient

• Mailings that build and nurture a relationship with little

immediate pressure to buy

• Messages that offer direct reward and valuable benefits through

samples or physical evidence

• Mailings that contain stimulating creative and materials that

maintain interest in the message

• Communications with call-to-action incentives and easy-to-use

customer response mechanisms

Testing Databases through Direct Mail

A direct mailer’s database is essential for successful direct

marketing. Within that database dwell the values, expectations,

preferences and historical purchasing behavior of consumers and

potential customers. These details are virtual gold for any business

seeking to maximize opportunities.

While it may begin with just names and addresses, a database can

be an ever-expanding source of knowledge and customer insight. By

building on bare data, adding income information, household breakdown

and purchasing trends, marketers can create a functional, low-risk, and

productive marketing program with which to test their program.

Companies can test the strength of their database by issuing

communications to small, niche segments. The degree to which these

test markets respond provides marketers with invaluable intelligence.

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Marketing communication programs that generate responses and

sales leads are programs worth expanding.

Marketing Communications through Direct Mail

Direct mail is an effective and precise medium for communicating

value propositions. Large segments of targeted consumers prefer to

receive marketing communications through regular mail. Marketing is

about perceptions. Direct marketing campaigns that integrate attention

grabbing copy, quality layout and relevant product offerings will be

viewed favorably by recipients. Keep the mailings interesting and

personalized, and customers will keep coming back.

Once the target market has been clearly identified and the direct

marketing campaign has been carefully planned, companies can

implement a well-thought out DM program with cost effective and

lucrative results. This translates into higher returns on customer

retention, new customer acquisition and improved response rates.

In the end, a well-developed marketing campaign that includes

direct marketing is likely to result in increased brand awareness and

increased future revenue for any company.

Developing a Marketing Campaign

Most internet companies do not know this, but there is a difference

between marketing and advertising. Marketing is a strategy. It is

defining how your customers will perceive your company. An effective

marketing campaign will shape your customers image of your company

in a positive manner.

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In order to have a good marketing campaign, you must first define

the image you want to portray. Some of the most successful companies

have chosen this wisely. Your image is defined by color choices, font

choices, and other factors. It is important that when you decide upon

your final strategy, that it be implemented across the board in a

consistent manner. Every promotional piece your produce should have

the same color scheme, same font choice and convey the same message.

As an example of this, let’s look at a McDonalds, a very successful

offline company. Wherever you go in the world, you will find the same

look. Red and Yellow is their chosen color scheme. They have chosen to

market their company as a fun place to eat. Their characters (Ronald

McDonald et al.) are designed to speak to children. They have found that

by speaking to children, they can reach parents. In designing your own

marketing campaign, be sure to find a way to speak to your customers.

Do your research well. A marketing campaign is not something that can

be rushed.

Find out what your customers want from your product or service.

Use their ‘hot buttons’ to trigger the response you want from them. It is

important to know who your customers are and what makes them buy.

Do your research and you will find that consumers will buy from you

based on their perception of you. If your marketing materials are sloppy,

they are likely to presume that you do poor quality work.

Consider developing a company mission statement that guides you

and tells your customers about your company. This statement should be

no more than 2-3 sentences long. It should convey a positive message

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about your company. It should portray your company in the manner in

which you want it portrayed.

Be sure to test your image. Try three or four different strategies

and pick the best one. When you finally decide on the marketing image

you want to portray, go for it! Be consistent in your marketing approach

and build your name.

Before you launch a marketing campaign, answer the following

questions about your business and your product or service.

Have you analyzed the market for your product or service? Do you

know which features of your product or service will appeal to different

market segments?

In forming your marketing message, have you described how your

product or service will benefit your clients?

Have you prepared a pricing schedule? What kinds of discounts do

you offer, and to whom do you offer them?

Have you prepared a sales forecast?

What type of media will you use in your marketing campaign?

Have you planned any sales promotions?

Have you planned a publicity campaign?

Do your marketing materials mention any optional accessories or

added services that consumers might want to purchase?

If you offer a product, have you prepared clear operating and

assembly instructions? What kind of warranty do you provide? What

type of customer service or support do you offer after the sale?

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Do you have product liability insurance?

Is your style of packaging likely to appeal to your target market?

If your product is one you can patent, have you done so?

How will you distribute your product?

Have you prepared job descriptions for all of the employees

needed to carry out your marketing plans?

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16. Style in Business Correspondence5

First Impressions

Oftentimes, the first impression an employer has of a prospective

employee is in writing, in the form of a cover letter or letter of

application and resume.

Opinions are formed and conclusions are drawn from the

appearance and content of any correspondence you send.

It is important to make the best possible impression so that an

interview will follow. When sending a resume, never send it without a

cover letter.

Usually, when the reader gets your cover letter and resume he/she

will immediately flip the cover letter over and glance at the resume first.

This is so that a few facts about you are easily obtained. (i.e. name,

objective, education, extend of experience and skills). If the resume

interests the reader, he/she will then flip back to the cover letter and read

it in detail. In fact, the letter may get more attention than the resume

because, although the resume is about you, it is assumed that you had

help putting it together. But the cover letter is generally written by the

individual and the reader can assess your writing style, communication

style and how well you put your thoughts and ideas together.

The intent of the cover letter is to introduce yourself to the

potential employer, highlight the information given on the resume and 5 From the internet: site maintained by Patrick Burne, a retired business communication consultant

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convince the reader to grant you an interview. But an employer could

receive hundreds of letters and resumes every day. It would be like

receiving hundreds of pieces of junk mail. How much of it can you read

and which ones do you even care to read? An employer may compare

your correspondence with other candidates and determine which appears

better. To increase your chances of being selected, your letter must spark

the interest of the reader, create a favorable impression and look inviting

to read.

The myth about business correspondence is that it must be formal,

standardized and often terse. The writer seems to transform him/herself

from the personal to the institutional. Letters appear to be written from

one “institution” to another rather than from person to person. This does

nothing more than create ineffective communication. It is important to

develop a good writing style that not only reflects good grammar and

sentence structure, but also gives the reader some insight into the

personality of the writer. It is just as important, however, to be able to

express your self in clear, concise language so the reader knows exactly

why you are writing.

There are lots of examples of cover letters out there. Many use

gimmicks and advertising lingo to attract the readers’ attention. While

all letters of application should be personalized to be effective, the best

letters follow certain basic principles. Many letters are disqualified or

discarded because of minor details. Please note the following points:

• Type all letters on good quality business stationery, preferably

matching your resume paper

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• Use either block style or modified block style; do not use a memo

format

• Use black ink only

• Limit your letter to one page, usually three or four paragraphs

• Write in your own words, using your own style

• Do not rehash the entire resume; instead, elaborate on specific

points of particular interest to the employer; refer the reader to your

resume for additional information

• Make it easy to read; use spell check and grammar check

• Make the format and layout attractive; center the letter on the

page; allow ample margins; make it appealing to look at and inviting to

the reader

• Watch your sentence structure; proof read the letter several times

to be sure you are saying what you want to say

• Do not send photocopies or generic letters; you can create a

model letter which can be used many times with slight revisions

• Do not e-mail or fax any business correspondence (resumes,

applications, letters, etc) unless you are specifically asked to do so. Even

then, follow it up with a hard copy in the mail

• Be sure to sign the letter before you mail it

• The recommendation is for buying large envelopes (9x12)

instead of matching business envelopes. That way you can mail your

resume and cover letter without having to fold or crease them in any

way. Be sure to add the extra postage for a large envelope.

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Writing business letters and memos differs in certain important

ways from writing reports. Keep the following advice in mind when you

write and especially when you revise your business letters or memos.

State the main business, purpose, or subject matter right away.

Let the reader know from the very first sentence what your letter is

about. Remember that when business people open a letter, their first

concern is to know what the letter is about, what its purpose is, and why

they must spend their time reading it. Therefore, avoid roundabout

beginnings. If you are writing to apply for a job, begin with something

like this: "I am writing to apply for the position you currently have

open...." If you have bad news for someone, you need not spill all of it in

the first sentence. Here is an example of how to avoid negative phrasing:

"I am writing in response to your letter of July 24, 1997 in which you

discuss problems you have had with an electronic spreadsheet purchased

from our company."

If you are responding to a letter, identify that letter by its subject

and date in the first paragraph or sentence. Busy recipients who write

many letters themselves may not remember their letters to you. To avoid

problems, identify the date and subject of the letter to which you

respond:

Keep the paragraphs of most business letters short. The paragraphs

of business letters tend to be short, some only a sentence long. Business

letters are not read the same way as articles, reports, or books. Usually,

they are read rapidly. Big, thick, dense paragraphs over ten lines, which

require much concentration, may not be read carefully - or read at all.

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To enable the recipient to read your letters more rapidly and to

comprehend and remember the important facts or ideas, create relatively

short paragraphs of between three and eight lines long. In business

letters, paragraphs that are made up of only a single sentence are

common and perfectly acceptable.

"Compartmentalize" the contents of your letter.

When you "compartmentalize" the contents of a business letter,

you place each different segment of the discussion - each different topic

of the letter - in its own paragraph. If you were writing a complaint letter

concerning problems with the system unit of your personal computer,

you might have these paragraphs:

• A description of the problems you've had with it

• The ineffective repair jobs you've had

• The compensation you think you deserve and why

Study each paragraph of your letters for its purpose, content, or

function. When you locate a paragraph that does more than one thing,

consider splitting it into two paragraphs. If you discover two short

separate paragraphs that do the same thing, consider joining them into

one.

Provide topic indicators at the beginning of paragraphs.

In the first sentence of any body paragraph of a business letter, try

to locate a word or phrase that indicates the topic of that paragraph. If a

paragraph discusses your problems with a personal computer, work the

word "problems" or the phrase "problems with my personal computer"

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into the first sentence. Doing this gives recipients a clear sense of the

content and purpose of each paragraph.

Place important information strategically in business letters.

Information in the first and last lines of paragraphs tends to be read

and remembered better. Information buried in the middle of long

paragraphs is easily overlooked or forgotten. Therefore, place important

information in high-visibility points. For example, in application letters

that must convince potential employers that you are right for a job,

locate information on appealing qualities at the beginning or end of

paragraphs for greater emphasis. Place less positive or detrimental

information in less highly visible points in your business letters. If you

have some difficult things to say, a good (and honest) strategy is to de-

emphasize by placing them in areas of less emphasis. If a job requires

three years of experience and you only have one, bury this fact in the

middle or the lower half of a body paragraph of the application letter.

The resulting letter will be honest and complete; it just will not

emphasize however weak points unnecessarily.

Find positive ways to express bad news in your business letters.

Often, business letters must convey bad news: a broken computer

keyboard cannot be replaced, or an individual cannot be hired. Such bad

news can be conveyed in a tactful way. Doing so reduces the chances

that business relations with the recipient of the bad news will end. To

convey bad news positively, avoid such words as "cannot," "forbid,"

"fail," "impossible," "refuse," "prohibit," "restrict," and "deny" as much

as possible.

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Focus on the recipient's needs, purposes, or interests instead of

your own.

Avoid a self-centered focusing on your own concerns rather than

those of the recipient. Even if you must talk about yourself in a business

letter a great deal, do so in a way that relates your concerns to those of

the recipient. This recipient-oriented style is often called the "you-

attitude," which does not mean using more you but making the recipient

the focus of the letter.

Avoid pompous, inflated, legal-sounding phrasing.

Watch out for puffed-up, important-sounding language. This kind

of language may seem business-like at first; it is actually ridiculous. Of

course, such phrasing is apparently necessary in legal documents; but

why should we use it in other writing situations? When you write a

business letter, picture yourself as a plain-talking, common sense, down-

to-earth person (but avoid slang).

Give your business letter an "action ending" whenever appropriate.

An "action-ending" makes clear what the writer of the letter

expects the recipient to do and when. Ineffective conclusions to business

letters often end with rather limp, noncommittal statements such as

"Hope to hear from you soon" or "Let me know if I can be of any further

assistance." Instead, or in addition, specify the action the recipient

should take and the schedule for that action. If, for example, you are

writing a query letter, ask the editor politely to let you know of his

decision if possible in a month. If you are writing an application letter,

try to set up a date and time for an interview.

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TYPES OF BUSINESS DOCUMENTS

We will discuss some basic guidelines for writing style for some of

the types of business documents including business letters.

To begin with, we will briefly define different types of report:

• Organizational policies and procedures

These are the operating documents for organizations; they contain

rules and regulations on how the organization and its members are

expected to perform. Policies and procedures are like instructions, but

they go much further.

• Feasibility, evaluation, recommendation reports

This group of similar reports does things like compare several

options against a set of requirements and recommends one. It considers

an idea (plan, project) in terms of its "feasibility," in terms of some

combination of its technical, economical, social practicality or

possibility. It passes judgment on the worth or value of a thing by

comparing it to a set of requirements, or criteria.

• Technical background reports

This type is the hardest one to define but the one that most people

write. It focuses on a technical topic, provides a certain background on

that topic for a specific set of readers who have specific needs for it.

This report does not supply instructions, nor does it supply

recommendations in any systematic way, nor does it report new and

original data.

• Primary research reports

This type presents findings and interpretation from laboratory or

field research.

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• Business plans

This type is a proposal to start a new business.

• Technical specifications

This type presents descriptive and operational details on a new

product.

16.1. Business plans and technical specifications6

A business plan is a document used to start a new business or get

funding for a business that is changing in some significant way.

Business plans are important documents for business partners who need

to agree upon and document their plans, government officials who may

need to approve aspects of the plan, and of course, potential investors

such as banks or private individuals who may decide to fund the

business or its expansion.

A business plan is very much like a proposal, except for at least

one big difference. The prospectus seeks to start a new business or

significantly expand an existing business. A proposal, on the other hand,

seeks approval to do a specific project. For example, a business plan

might seek funding and other support to start a software company to

create computer games. A proposal, on the other hand, might bid to do

the development work for some specific computer game.

Common sections in business plans:

Many of the elements of the plans are only typical and not

necessarily in any required order. For your plan, you will need to think

6 From: Online technical writing resources

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about the best sequencing of the sections and about other sections that

might also be necessary.

• Product or service to be offered - One of the most important

sections of the business plan is the description of the actual product or

service to be offered by your company. If it is a description of a product-

-a physical object - you need to use the techniques for description. If

you are going to offer a service, explain it, and take readers on a step-by-

step tour of how the service will be handled.

• Technical background on the product or service - If your product

or service involves technologies or technical processes potentially

unfamiliar to your readers, explain these. Remember that business plans

often go to non-specialists who, despite their lack of technical expertise,

have the investment funds or the legal understanding to get your

business going.

• Market for the product or service - Critical also to any business

plan is the exploration of the existing marketplace into which your

product or service fits. What other companies offer the same thing you

plan to offer? How much business do they do? How are they different

from each other? How will your business differ from them?

• Process by which the product or service is produced - If

applicable, explain how the product or service will be produced. Explain

how the proposed business will operate on a day-to-day basis.

• Facilities and personnel needed for the operation - Plan to

discuss the facilities (storefronts, warehouses, production facilities,

vehicles) your business will require as well as the personnel that will be

needed.

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• Projected revenues from the operation - Of obvious importance

in any business plan is the discussion of the revenues you project for

your business. If you know the estimate of total revenues for the market

area in which you plan to operate, what percentage do you explain to

win? Obviously, in your first few years, you may operate at a loss - at

what point in time do you project to break even?

• Funding necessary for start up and operation - The plan should

also discuss the funding you'll need to get the business started as well as

the operating costs - the funding needed to run the business on a daily

basis.

• Legal issues related to the proposed business - Your business

plan may also need to discuss your business, its products, or its services

in relation to government regulations - for example, environmental

restrictions.

• Qualifications and background of the personnel - Important too

is the section that presents your qualifications to start and operate the

business you are proposing. Of course, "you" can mean a number of

people with whom you are working to start the business. This section

can be very much like a collection of resumes, although you want to

write an introduction in which you describe your group's qualifications

as a whole.

• Discussion of feasibility and investment potential - You will

want to include in your plan a discussion of the likelihood of the success

of your business. Obviously, you believe that it will be a success, but

you must find a way to support this belief with facts and conclusions in

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order to convince your readers. In addition, you must discuss what sort

of return on investment readers can expect.

• Investment offering - And finally, you may need to present what

kinds of investment apparatus you are actually offering.

In planning your business plan, remember that you try to provide

whatever information the audience may need to consider your idea. Your

goal is to convince them you have a good idea and to encourage them to

invest in it (or to approve it in some way). It is okay to provide marginal

information - information you are not quite sure that readers will want.

After all, you section off the parts of a business plan with headings;

readers can skip over sections they are not interested in.

Format for business plans:

Business plans, even those for small operations, can run well over

15 pages - in which case you will want to bind the plan. As you plan the

format of your business plan, you will want to think about designing it

so that readers can find and read essential information quickly. This

means setting up an abstract, but calling it "Executive Summary" or

"Prospectus Overview."

Try to group similar sections. In the preceding section that lists the

various kinds of information to include in a plan, some of the

suggestions should be combined - for example, the sections on financial

aspects of the proposed business.

Finally, make use of appendixes for unwieldy, bulky information.

Enable readers to quickly find the main sections of the plan, without

having to wade through tables and charts that go on for pages and pages.

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Business planning is about results. You need to make the contents

of your plan match your purpose. Don’t accept a standard outline just

because it’s there.7

What is a business plan?

A business plan is any plan that works for a business to look

ahead, allocate resources, focus on key points, and prepare for problems

and opportunities.

Unfortunately, many people think of business plans only for

starting a new business or applying for business loans. But they are also

vital for running a business, whether or not the business needs new loans

or new investments. Businesses need plans to optimize growth and

development according to priorities.

What’s a startup plan?

A simple startup plan includes a summary, mission statement, keys

to success, market analysis, and break-even analysis. This kind of plan is

good for deciding whether or not to proceed with a plan, to tell if there is

a business worth pursuing, but it is not enough to run a business with.

Is there a standard business plan?

A normal business plan (one that follows the advice of business

experts) includes a standard set of elements, as shown below. Plan

formats and outlines vary, but generally a plan will include components

7 Read more: http://articles.bplans.com/writing-a-business-plan/what-is-a-business-plan/33#ixzz0jqRBRzx6

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such as descriptions of the company, product or service, market,

forecasts, management team, and financial analysis.

Your plan will depend on your specific situation. For example,

description of the management team is very important for investors

while financial history is most important for banks. However, if you’re

developing a plan for internal use only, you may not need to include all

the background details that you already know. Make your plan match its

purpose.

What is most important in a plan?

It depends on the case, but usually it’s the cash flow analysis and

specific implementation details.

Cash flow is both vital to a company and hard to follow. Cash is

usually misunderstood as profits, and they are different. Profits don’t

guarantee cash in the bank. Lots of profitable companies go under

because of cash flow problems. It just isn’t intuitive.

Implementation details are what make things happen. Your

brilliant strategies and beautifully formatted planning documents are just

theory unless you assign responsibilities, with dates and budgets, follow

up with those responsible, and track results. Business plans are really

about getting results and improving your company.

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Can you suggest a standard outline?

If you have the main components, the order doesn’t matter that

much, but here’s the outline order we suggest in Business Plan Pro

software:

Executive Summary: Write this last. It’s just a page or two of

highlights.

Company Description: Legal establishment, history, start-up plans,

etc.

Product or Service: Describe what you’re selling. Focus on

customer benefits.

Market Analysis: You need to know your market, customer needs,

where they are, how to reach them, etc.

Strategy and Implementation: Be specific. Include management

responsibilities with dates and budget.

Management Team: Include backgrounds of key members of the

team, personnel strategy, and details.

Financial Plan: Include profit and loss, cash flow, balance sheet,

break-even analysis, assumptions, business ratios, etc.

View an expanded business plan outline

We don’t recommend developing the plan in the same order you

present it as a finished document. For example, although the Executive

Summary comes as the first section of a business plan, we recommend

writing it after everything else is done.

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What can help me write a business plan?

It can be helpful to view real sample business plans to get ideas for

your own business plan.

This free fill-in-the-blanks business plan template follows the

format that is preferred by the SBA and lenders and can be a useful

guide when writing your plan.

As mentioned before, reviewing a standard business plan outline

can also be a good starting point.

Technical Specifications are descriptions of products or product

requirements. More broadly, they can provide details for the design,

manufacture, testing, installation, and use of a product. You typically see

specifications in the documentation that comes in the package with

certain kinds of products, for example, CD players or computers. These

describe the key technical characteristics of the item. However,

specifications are also written as a way of "specifying" the construction

and operational characteristics of a thing. People who actually construct

the thing or go out and attempt to purchase it then use them.

When you write specifications, accuracy, precision of detail, and

clarity are critical. Poorly written specifications can cause a range of

problems and lead to lawsuits.

Graphics, tables, and lists are heavily used, but some details can

only be provided through sentences and paragraphs.

For these reasons then, specifications have a particular style,

format, and organization.

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Make every effort to find out what the specific requirements are

for format, style, contents, and organization. If they are not documented,

collect a big pile of specifications written by or for your company, and

study them for characteristics like those described in the following.

• Use two-column lists or tables to lists specific details. If the

purpose is to indicate details such as dimensions, materials, weight,

tolerances, and frequencies, regular paragraph-style writing may be

unnecessary.

• Make sure that each specification receives its own number-letter

designation. In sentence-style specifications, make sure each specific

requirement has its own separate sentence.

• Use the decimal numbering system for each individual

specification. This facilitates cross-referencing.

Graphics and tables used to present information in specifications:

• Use either the open (performance) style or the closed restrictive

style, depending on the requirements of the job. In the open or

performance style, you can specify what the product or component

should do, that is, its performance capabilities. In the closed style, you

specify exactly what it should be or consist of.

• Cross-reference existing specifications whenever possible.

Various government agencies as well as trade and professional

associations publish specifications standards. You can refer to these

standards rather than include the actual specifications details.

• Use specific, concrete language that identifies as precisely as

possible what the product or component should be or do. Avoid words

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that are ambiguous - words that can be interpreted in more than one way.

Use technical jargon the way it is used in the trade or profession.

• Test your specifications by putting yourself in the role of a

bumbling contractor--or even an unscrupulous one. What are the ways a

careless or incompetent individual could misread your specifications?

Could someone willfully misread your specifications in order to cut cost,

time, and quality? Obviously, no set of specifications can ultimately be

"foolproof" or "shark-proof," but you must try to make them as clear and

unambiguous as possible.

• For specifications to be used in design, manufacturing,

construction, or procurement, use "shall" to indicate requirements. In

specifications writing, "shall" is understood as indicating a requirement.

Provide numerical specifications in both words and symbols: for

example, "the distance between the two components shall be three

centimeters (3 cm)."

• Writing style in specifications can be very terse: incomplete

sentences are acceptable as well as the omission of functions words such

as articles and conjunctions that are understood.

• Exercise great caution with pronouns and relational or qualifying

phrases. Make sure there is no doubt about words such as "it," "they,"

"which," and "that" refer to. Watch out for sentences containing a list of

two or more items followed by some descriptive phrase - does the

descriptive phrase refer to all the list items or just one? In cases like

these, you may have to take a wordier approach for the sake of clarity.

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• Use words and phrasing that have become standard in similar

specifications over the years. Past usage has proven them reliable. Avoid

words and phrases that are known not to hold up in lawsuits.

• Make sure your specifications are complete - put yourself in the

place of those who need your specifications; make sure you cover

everything they will need.

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17. The contract

What is a Business Contract?

A business contract is a legally binding agreement between two

parties for an exchange of services that are of value. For a contract to be

valid, an offer must be made and accepted. Using a contract in business

dealings helps ensure an agreement is acted on, insofar as a broken

contract could result in a lawsuit or out-of-court settlement and the

payment of damages caused by the breach. The best way to avoid a

dispute or potential litigation, however, is to craft a solid agreement in

which you’re confident you’ve negotiated the best terms for your

business.

17.1. Types

When to Use Business Contracts

A business contract is often used for:

• Hiring or being employed as an independent contractor

• Buying or providing services or goods

• Leases and real estate

• Selling your business

• Partnerships and joint ventures

• Franchising

• Confidentiality agreements

A contract often involves paying for services, but non-monetary

contracts are just as valid.

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Oral Business Contracts

An oral contract is a spoken agreement that is as valid as a written

contract. For example, if you have a promise that a job will be complete

for monetary or other compensation, you have created an oral contract.

Oral contracts are legally enforceable, although they are frequently

subject to misinterpretation and they can be difficult to prove in court

because they often come down to one person's word against the other.

Moreover, some types of contracts must be in writing, for example,

contracts for the purchase or sale of any interest in real property.

Written Business Contracts

Written contracts are produced on paper or electronically. Legally,

a written business contract is easier to uphold than an oral contract

because there is a reference for the agreement.

With a written contract, it's "easier to prove … the terms between

the parties and eliminate arguments over who said what," says Jack

Cummins of Chicago-based Cummins & Associates, which represents

small businesses. He adds that it's often easier for businesses to

recognize potential points of contention in the language because the

agreement is detailed in writing.

Whether your small business is providing or offering services, you

should consider using a written business contract and including specific

details about the agreement.

A contract execution period starts after contract terms are agreed

and the contract is signed by signatories to the contract, and finishes at

the specified point in time stated in the contract or as a result of various

other termination conditions such as contract violation. Real-time

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monitoring of activities of the roles involved in business processes

governed by contracts is a key aspect of enterprise contract management.

The aim is to check whether these activities signify fulfillment policies

agreed in the contract or their existing or possibly forthcoming

violations. A special case of policy violation refers to situations in which

a required activity of a role stated in a contract (directly or indirectly)

has not been carried out. This means that the monitoring also needs to

detect cases of the non-execution of activities emanating from contracts.

One of the best ways to avoid business dispute is to draft a

comprehensive and well-written commercial transaction that will define

all the responsibilities and rights of the involved parties.

While some states recognize oral contracts, a written version is

better and easier to prove and enforce. Most jurisdictions also require

people to have a written agreement if this will be used for at least a year.

To become legally enforceable, a contract should have these

following entries:

• Parties

A contract has no purpose if it does not bind at least two people.

Meanwhile, anyone can enter into a contract, except people who are

mentally incapable, individuals with certain criminal records, illiterate,

and minors.

• Consent of each party

Involved parties should mutually consent to a contract to make this

valid and legally enforceable. This means that if a transaction is signed

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“under duress”, or one party has pressured or threatened the other

person, the agreement will be considered void.

• Exchange of anything with value

The main purpose of a contract is to allow the involved parties to

exchange anything with value that will give them both benefits.

However, this “object” should be legal, definite, and possible. For

example, a court will not enforce a contract that has provisions that are

considered unlawful such as trade of illegal drugs, smuggling, and any

fraudulent activity.

• Obligations and conditions

A contract should state and define all the terms and conditions of

an agreement which include obligations and duties of each party.

• Breach of contract

This is probably one of the most important entries in most business

contracts as it will allow one party to know what recourse he can do in

case the other person does not fulfill his promise.

For example, a seller promised that he will deliver the goods three

days after the order has been made. However, the goods have not arrived

within the deadline. With a provision that allows one party to back-out

from an agreement if the other person did not fulfill his duties, the buyer

can withdraw his order without having to worry that he will be sued with

breach of contract.

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Contract vocabulary

1 agreement n.: an arrangement between two or more people,

countries etc; contract

2 appendix n.: additional or supplementary material at end of

contract, book etc

3 arbitration n.: settlement of a dispute by a person chosen by

both parties - to arbitrate v.

4 article n.: a particular statement or stipulation in a contract etc;

clause

5 clause n.: a particular statement or stipulation in a contract etc;

article

6 condition n.: anything necessary before the performance of

something else

7 force majeure n. : superior, power; unforeseeable event

excusing one party from fulfilling contract

8 fulfill v: to satisfy a condition; to complete the required task;

9 herein adv: in here; in this (document etc)

10 hereinafter adv: in the following part (of this document etc)

11 hereto adv: to this (document etc) [eg: attached hereto]

12 heretofore adv: up until now; until the present; before this

13 in behalf of : in the interests of (person etc); for (person etc);

on behalf of UK

14 null and void : invalid; without legal force; not binding

15 on the one hand : on one side - on the other hand on the other

side

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16 party n.: the person or persons forming one side of an

agreement

17 stipulate v.: to specify as an essential condition - stipulation n.

18 terms n.: conditions or stipulations19warrantv. to give formal

assurance; to guarantee

20 whereas conj: it being the case that; in view of the fact that [in

introduction to contracts]

How to Read a Business Contract

By Jean Murray, About.com Guide to Business Law / Taxes: U.S.

A former student told me a story of how he was taken advantage of

by a doctor for whom he was working as an independent contractor.

The problem was how his contractor income was determined, and it

related to "overhead" and when it was calculated.

I have read many contracts, both for myself over my long business

life, and for students and clients. I always tell people I am not reading

them as an attorney, but as a lay person who wants to have as complete

an understanding of the contract as possible. Over the years, I have

developed some guidelines for reading business contracts; to protect

both parties and to avoid the difficulties that come with poorly worded

contracts.

First, Agree on Definitions

In the case above, a lot of the difficulty came from an unclear

definition of "overhead." What does it include? How is it calculated? If

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the parties had agreed on this definition from the start, they could have

made some changes to make the payments more equitable, or given my

friend a better picture of how his income would be calculated.

Don't assume - Ask for Clarification

Assumptions are really the most difficult part of any contract. You

read a contract that includes a section on how the value of property is

determined. Even if you think you know what has been written, ask for

an example, or ask a question like, "Just to clarify, I think this means X.

What do you think it means?" Don't worry about appearing dumb or

difficult; better to clarify now than find out later you and the other party

were thinking of two different meanings.

Ask "What is Missing?"

This part is tricky; it is difficult to know what should be in a

contract but isn't. In employment contracts, I usually see a section about

how the employer can terminate the contract and what notice must be

given. But sometimes there is no language about how the employee can

terminate the contract and what notice must be given. In one case, I was

told, 'the employee can't terminate the contract." Really?!?

I have also seen some contracts that had no effective date or which

did not completely identify the parties. Take a look at my Employment

Contract Terms article for an example of the sections in a typical

contract. If you don't see something that should be in the contract, make

sure it gets in.

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Read "Boilerplate" Carefully and Don't Be Afraid to Change

It

Boilerplate is standard language that is usually prepared by an

attorney to protect a client and which is usually difficult to read. I have

been told many times, "This is our standard language. It cannot be

changed." Not true. In a contract, everything is negotiable, even

"standard" language, whatever that means. Read those long boilerplate

sections, even if your eyes cross and you start to nod off.

Ask that the section be simplified or that it be shortened, if you

feel it is possible. Don't hesitate to make changes that clarify or to your

advantage. I have known some business owners to completely re-write

boilerplate sections; it makes the lawyers crazy, but it clarifies, and that

is more important.

Finally, Get a Second Opinion

If you are reading a contract prepared by the other party, don't rely

on yourself or other non-attorneys to read the contract. Take it to an

attorney who knows the law in your state. Don't let the attorney re-write

it (they love to do that!), just to give you an opinion on what needs to be

changed. Then take the list of changes back to the table and negotiate;

let the other party pay for the changes.

Reading contracts carefully is one of those things you may do a lot

or seldom, but if you get into the habit of reading with these tips in

mind, it may save you costly legal battles and sleepless nights.

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17.2. Content and stipulations

Business Contract Items

A business contract should be labeled "contract" or "agreement" at

the top. These are some items it can include:

• Date of contract

• Names of parties involved

• Details of services that your company will provide or receive

• Payment amounts

• Payment due dates. Note that payments do not need to be made

in a lump sum at the end of the project. You can make or receive

incremental payments for specific services rendered once they are

completed.

• Interest on late payments

• Deadlines for services due. This is also called a "time is of the

essence" clause. You will probably want to use this phrase in your

contract if you have a timeline for a project.

• Expiration dates for the contract, such as a lease expiry

• Renewal terms, if applicable

• Damages for breach of contract. Also called "liquidated

damages," this clause can specify amounts to be paid if services are

incomplete or deadlines are missed. A court can also award damages if a

contract is breached, even if damages and amounts were not included in

the agreement.

• Termination conditions

• Signatures

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E-Contracts and Signatures

Electronic contracts and signatures are valid under the Electronic

Signatures in Global and International Commerce Act, which was signed

into law in 2000.

There is e-contract software that provides an "I agree" check box,

or you can send and receive written contracts online and have the parties

sign electronically. If you make an agreement over e-mail by simply

writing "sounds good," there could be a question as to whether the

agreement is legally binding, Cummins says.

While e-contracts and e-signatures are valid, many businesses

prefer to have written signatures on contracts because e-signatures can

be subject to legal challenge, he adds.

Business Contract Tips

Here are some hints to make your contract as clear, concise and

thorough as possible:

Be Specific

Contracts don't require legal jargon. The best contracts are clear,

specific and focused, with wording that is simple and concise to avoid

any confusion. For example, if you're planning an event and you need

150 tables delivered by a certain date, you may want to specify not only

the date but the time of delivery.

It's better to specify the hour rather than using a more general time

frame, such as "in the morning." That way, all parties are clear on what

is to be done and by when.

"By forcing the parties to get more specific at the beginning of the

relationship, it helps avoid arguments later on," Cummins says.

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Clarify Questions

Never assume that the party you're doing business with knows

your conditions. Always make your requirements clear. If you're not

drafting the contract, outline your conditions for your business before

you begin negotiating.

Know the Laws

State and local regulations as well as federal laws may be relevant

to your contract. Be sure to check the codes and regulations that apply to

your agreement to ensure that your contract complies with the law. For

example, if you are leasing a property your city may have rental codes

that you'll need to follow. Research laws online, check with your local

chamber of commerce and consider consulting a lawyer.

Read the Fine Print

Review all contracts thoroughly so that you understand the

agreement. "I assumed" or "I didn't know" arguments may not hold up in

court, particularly if the points in question are clarified in a written

agreement.

Contents

• The identities of the parties.

Is it a person or a legal entity?

• The duration of the agreement.

• The geographical territory of the sales representative or a

distributor.

• The products to be sold.

If any portion of you product line is to be excluded, it must be

made clear.

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• Pricing.

Prices should be quoted in a strong and stable currency.

Give reasonable lead times for price changes by guaranteeing

prices for a certain period of time.

• Payment terms should be clear.

• Resellers should be prohibited from carrying competing

products.

• Amount of inventory and spare parts to be carried by the

distributor

• Set minimum orders

The reseller may request the right to return items that are

not selling.

STIPULATION

An agreement between attorneys that concerns business before a

court and is designed to simplify or shorten litigation and save costs.

During the course of a civil lawsuit, criminal proceeding, or any

other type of litigation, the opposing attorneys may come to an

agreement about certain facts and issues. Such an agreement is called a

stipulation. Courts look with favor on stipulations because they save

time and simplify the matters that must be resolved.

Stipulations are voluntary, however, and courts may not require

litigants to stipulate with the other side. A valid stipulation is binding

only on the parties who agree to it. Courts are usually bound by valid

stipulations and are required to enforce them.

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Parties may stipulate to any matter concerning the rights or

obligations of the parties. The litigants cannot, however, stipulate as to

the validity or constitutionality of a statute or as to what the law is,

because such issues must be determined by the court.

Stipulations may cover a variety of matters. Parties are permitted

to make stipulations to dismiss or discontinue an action, to prescribe the

issues to be tried, or to admit, exclude, or withdraw evidence. During a

court proceeding, attorneys often stipulate to allow copies of papers to

be admitted into evidence in lieu of originals or to agree to the

qualifications of a witness. The parties can also enter into agreements

concerning the testimony an absent witness would give if he were

present, and the stipulated facts can be used in evidence. Such

evidentiary devices are used to simplify and expedite trials by

dispensing with the need to prove uncontested factual issues.

Generally, parties to an action can stipulate as to an agreed

statement of facts on which to submit their case to the court. Stipulations

of this nature are encouraged by the courts. A number of other

stipulations have been held to be valid, including those that relate to

attorneys' fees and costs.

A stipulation does not need to be in a particular form, provided it is

definite and certain. A number of statutes and court rules provide that

stipulations reached out of court must be in writing to prevent fraudulent

claims of oral stipulation, circumvent disputes concerning the terms of

the stipulation, and relieve the court of the burden of resolving such

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disputes. Though an oral stipulation in open court is binding, a

stipulation made in the judge's chamber must be in writing.

Stipulation n. is an agreement, usually on a procedural matter,

between the attorneys for the two sides in a legal action. Some

stipulations are oral, but the courts often require that the stipulation be

put in writing, signed, and filed with the court.

Contents of the contract of employment

Each contract of employment contains terms and conditions by

which the parties regulate their relationship. Such terms may be oral or

written, or a combination of the two. Often, letters of appointment, job

descriptions, policy manuals, awards, collective agreements, workplace

practices and legislation will be sources of further terms of the contract.

The common law implies certain terms into every contract of

employment, imposing obligations on employees and employers.

Further, obligations in the relationship between employee and employer

arise in tort, equity and from fiduciary duties. An example of a common

law implied contractual term is the common law duty of fidelity and

confidentiality, which prevents employees from using or disclosing their

employer's trade secrets. Implied into every contract of employment is a

general duty to obey the employer's lawful and reasonable directions.

Further, all employees are obliged to exercise reasonable care and skill

in the performance of their duties.

Contracts of employment that do not include an express

termination provision will contain an implied term that the employer

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will give the employee "reasonable notice" before terminating

employment, unless the employer has summarily dismissed the

employee for "serious misconduct". The common law also implies a

term that the employer and employee will not, without reasonable cause,

conduct themselves in a manner likely to destroy the relationship of trust

and confidence existing between them.

Contracts; Requirements and Contents

1. Every contract between a consumer and a credit services

business shall be in writing, shall be dated, shall contain the street

address of the credit services business and the consumer, and shall be

signed by the consumer and credit services business. Each contract shall

contain the following:

(a) A complete and detailed statement of the services to be

performed and the results to be achieved by the credit services business

for or on behalf of the consumer, including a list of the adverse

information appearing on the consumer’s credit report that will be

modified, a description of the precise nature of each modification, and

the estimated date by which each modification will occur. A copy of the

consumer’s current credit report issued by a consumer credit reporting

agency shall be annexed to the contract with the adverse entries

proposed to be modified clearly marked.

(b) A statement in at least ten point type as follows: “Under New

York law no fee may be collected in advance of performance of the

services specified in this contract.”

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3. The contract shall be accompanied by a completed form in

duplicate, captioned “Notice of Cancellation,” which shall be attached to

the contract and easily detachable, and which shall contain in at least ten

point type the following: “Notice of Cancellation” “You may cancel this

contract, without any penalty or obligation, within three days from the

date the contract is signed. ”To cancel this contract, mail or deliver a

signed and dated copy of this cancellation notice, or any other written

notice,

to____________________ at (name of seller)

__________________________________________________________

____________ (address of seller) (Place of business) not later than

midnight____________________. (date) “I hereby cancel this

transaction.”

________________________________________________ (purchaser’s

signature) ________________________________________________

(date)

3. A copy of the fully completed contract and all other documents

shall be given to the buyer at the time the contract is signed.

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18. Negotiation

Negotiate and Consult an Attorney

Negotiating is a crucial skill for getting what you want out of a

contract. Know the points you are willing to be flexible on in a contract

before you begin negotiations. Cummins says that small businesses often

make the mistake of consulting their lawyers only after they've signed

the agreement and have problems with it.

"Get your lawyer's advice before you sign contracts," he advises.

"Over the course of the business, this practice will save you many

headaches and significant legal fees."

Knowing the key parts of a contract is the key to understanding the

negotiation process. These parts can be classified as the who, what,

when, for how long, for how much, and for what reason portions of the

contract.

Who: This section not only outlines who is entering into the

contract, but also may delineate personnel involved in the activity. This

is also an essential component of identifying responsibilities. For

instance you may be asking the other party to build you a new product

such as widgets, but you are responsible for approving all designs and

marketing the product. This moves us to the next part.

What: This component is essential in the contract. In fact, it is

probably in the top two things you should have in a contract. The “what”

outlines what is to be done. What is the deliverable or the thing for

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which you are in business? You will have the other person design and

produce 500 widgets and you will approve the design and market the

widgets after they are produced. The more specific you are on what is to

be done as a result of the contract, the better the contract. This is one of

the key areas you may find yourself negotiating around, trying to make

sure that the what is as clear as possible.

When: This component is also an essential part of the contract. The

when elements to consider are when the product or service is to be

completed. You may also want to put interim steps, called milestones,

into the contract. Milestones in a contract might be the dates that the

widgets are designed, that you will approve the designs and that the

widgets will be produced. You may also want to include the date that

payment will occur, if any.

For How Long: How long is this contract in place? Will it be over

once the widgets are all produced? Or will widgets continually be

produced? Will you review terms of the contract each year or every five

years? These are key questions to answer in a contract negotiation.

For How Much: This is another key element in the contract

negotiation process, and one that may take the most time. The

negotiations may involve many detailed questions. Are you paying for

personnel or merely for widgets? Are you going to pay per widget, per

500 widgets, or a set amount no matter what? Will the amount be able to

be changed if you approve a more expensive widget design? Will you

pay for each phase of the contract? Will there be payment after the

designs are approved, and then another set of payments after the widgets

are produced? Will you purchase the materials for manufacturing? What

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will you not pay for in this contract? The for how much should also

explicitly lay out what you are purchasing in terms of the widgets that

are being produced – in other words what will you own at the end of the

process. Can the other party sell widgets to anyone else or have you

bought rights to those widgets?

For What Reason: Beyond what is to be produced, why are you

entering into the contract? What is the reason for the widgets? While this

may seem to be irrelevant, you just need the widgets, knowing the why

for a product or service can keep both parties focused on a bigger picture

outside of the contract.

Contract negotiations can seem scary, but if you spend a little time

making sure you are familiar with the key elements of a contract, you

will know what questions to ask to make sure you have the best

agreement for both parties.

Western business people are often in too much of a hurry, and rush

into making a deal. In international partnerships, we should spend more

time thinking about how 'haste makes waste' rather than succumbing to

the belief that 'time is money'. We've all seen psycho-thrillers and what

happens when two strangers jump into bed before getting to know each

other. Usually, it doesn't end very well, and after watching the carnage

unfold on the screen, you swear you'll never do that again.

Any solid relationship should begin with a period of introduction,

or courtship. It's the same when we enter into the initial stages of a

global negotiation venture with a prospective foreign nation business

partner. We need to know something about their culture, and the

company's background, structure and goals. Likewise, they will want to

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know the same about us. If we don't have the expertise to investigate a

prospective partner, it might be wise to spend a little cash to hire an

experienced consultant or professional third party to carry out some

snooping and to initiate introductions. The phrase 'look before you leap'

has survived the test of time for a very good reason.

The time and money spent before the negotiation courtship even

begins is well spent. We need to prepare the groundwork to lessen the

possibility of unnecessary expenses being incurred later on. Remember,

when the fat hits the fire, you'll have to invest a lot more time and

money in putting it out.

1) The negotiation never really ends

Never stop conversing, even after the contract is signed. There are

very few seers who can accurately predict the future while gazing into

their crystal ball. Nothing remains static in this big wide-open world of

ours, as everything is constantly in a state of change. Prices rise and fall,

and governments with different ideologies come and go on an almost

weekly basis, like a game of global dominoes. Let's not even try to guess

what the weather is going to do tomorrow.

If we're naive enough to think we can toss the contract into the

filing cabinet, put our feet up and allow ourselves a nice little snooze,

think again! Put the coffee back on and stay vigilant. Be prepared to

renegotiate on a whole host of potential problems. Most of them will be

small, annoying problems that will spring up here and there along the

way throughout the life of the partnership. Don't ignore them. Deal with

them immediately, or risk the dire consequences of putting the

negotiated relationship on rocky footing.

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Because there is so much instability and uncertainty out there,

it would be prudent to make certain that one of the key clauses in the

contract specifically ensures that both parties revisit it periodically. By

controlling the process in the early stages, we can prevent our

arrangement from spinning wildly out of control later on. Keep the

dialogue rolling and prevent needless problems from festering due to

lack of attention.

2) What do we do when we still can't agree?

As in many relationships, sometimes the only thing that people can

agree on is the fact that they disagree. It's like being snookered or getting

caught behind the eight ball. Neither position is particularly desirable,

nor if not addressed early on, can both sides end up feeling dissatisfied.

We may not necessarily be thinking objectively, and if both parties

become ensnared in the mesh of their own self-serving interests, their

problem-solving is not likely to be very productive.

To guide us through what may otherwise be an unseen minefield

of potential disasters, we might be well-advised to use the expertise of

third parties to mediate our disputes. There are several possibilities to

choose from. Our own senior management could negotiate the minor

disputes at an operational level, or we could use the professional

services of legal advisers, specialized consultants or a neutral third-party

mediator to help resolve the issue.

A detailed dispute mechanism must be visibly in place if we want

our operations to run smoothly. If the operation shuts down because we

didn't bother to put an effective dispute resolution in the contract, and

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the CEO roars, 'Heads will roll for this!', you can guess whose neck is

going to be on the block.

3) Keep talking

Before we sign on the dotted line, we need to give thought to what

a successful and durable relationship really entails. It means that the

lines of communication have to be kept open. No! - this does not just

mean picking up the phone or sending an occasional email. A

relationship means that we have to sit down in the same room and talk

face-to-face, perhaps 'breaking bread' together. Communication at many

different levels is the only way to keep the relationship both productive

and vibrant. By agreeing to meet regularly to keep the lines of

communication open, we can prevent many hurdles from tripping us up

in the future.

4) Do it the right way

Anyone who has participated in a joint relationship based on

negotiation will tell you that we always need to go back to basics.

Whether our agreement is in the domestic market or the international

marketplace, we need to go beyond the simple scope of our limitations

and understand the real motivating factors that support our positions.

Remember, the main question we must try to answer is not 'What do

they want' but 'Why do they want it?'.

Now, you're probably asking why. The reason is simple but not

necessarily obvious. We might be able to reach an agreement based on

our relative positions, only to find out later that the other party's real

goals and, as a consequence, our own are actually in direct conflict with

each other.

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5) Who are they - really?

Each company has its own unique structure and way of doing

things. It's common for many small companies to be family owned, but

many medium- and large-sized companies also exist. Each company has

its own individual subculture, and depending on the business philosophy

of the owners, this can present a wide range of possible business

outlooks and differing organizational perspectives. One company can be

very informal, whilst another might be very structured or even

bureaucratic and formal in how it conducts business or interacts with its

personnel.

It would be very helpful to understand your prospective partner's

approach to business and how they function internally. Similarly, it's

equally sensible to let them know how your own company works. For

example, a larger corporation may have to make a decision by going

through several layers of management and departments, while their

medium-sized overseas partner might simply have to refer the matter to

the company president, who has the ability to make a decision on the

spot. We can alleviate a lot of frustration and potential misunderstanding

by knowing how our partner operates.

6) Understand how the deal will be put in place

Every partnership will require numerous and demanding decisions

to be made on both sides of the international equation on an ongoing

basis, despite all the exhaustive efforts that initially went into drawing

up the contract. Remember that the contract is only a part of the process,

and our interaction goes far beyond the contractual bonds. A contract

cannot foresee all eventualities and possibilities; so, if an issue that is not

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covered in the contract arises as the parties work out the minor technical

clauses, both parties should agree on how they will deal with this. It all

boils down to building a solid base to keep the communication lines

open.

Summary

The explosion in international business ventures dramatically

illustrates the challenges we face as a result of our many differences. It

is imperative that we learn how to do things the right way, as our

international partners are just as eager as we are to make our respective

businesses grow. Language, however, is not the only barrier we need to

overcome. We must also learn the many other facets that lie behind the

complex social and cultural fibers of our prospective international

business partners. Preparation is vital in laying a solid business

foundation. We would not want a contractor to skimp on a house they

are building for us, nor must we do so when constructing an

international business agreement. Always be thinking further down the

line.

1) Jeswald W. Salacuse, 'The Global Negotiator', Palgrave

MacMillan (2003).

The Negotiation Problem

The Negotiation Training Experts offers negotiation resources

on www.negotiations.com. You can find in-depth negotiation articles,

negotiation Q&A's, business cartoons, negotiation book reviews,

definitions and negotiation consulting.

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This case study shows how two parties can find a successful

negotiation resolution by tackling the issues in a creative and

mutually beneficial manner.

One of the biggest stumbling blocks encountered by a negotiator is

to clearly understand the real issues as the root cause and basis for the

negotiation in the first place. All too many times, negotiators take

insufficient time to clearly identify and frame the problem or issues to be

resolved and negotiated. This is the crucial first step to any negotiation.

If this first phase of the negotiation process is not addressed properly,

than it is quite likely that the rest the whole negotiation process will

unravel because the core issues were not properly understood at the

outset.

Let’s look at an example case study which emphasizes the need to

define and identify the problem. In this example, a substantial

electronics firm faces considerable difficulties in one of their

subassemblies. The root core of the problem revolved around certain

types of fittings and pins that were becoming bent and distorted by the

operation of the machinery. Units which were being produced were

damaged and had to be rejected because of imperfections. These rejected

components were put aside and then re-worked later on in the month.

This duplication of effort resulted in increased costs as workers

had to work overtime to meet their quotas. These extra costs for the

extra work performed had not been considered in the manufacturing

budget. The manager of this subassembly line did not want be charged

with these overhead expenses because he felt it was not their

responsibility. Likewise, the manager who was the overseer of the final

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assembly department also refused to accept the increased costs to his

budget. He argued that the extra costs were a direct result of the poor

work of the personnel in the subassembly department as this was where

the problem originated.

The subassembly department manager countered this argument by

claiming that the parts were in good condition before they left his

department and that the damage must have occurred in the final

assembly manager’s department instead. Both parties had reached am

impasse.

Some time passed before a resolution to the matter was worked out

that was agreeable to both parties. What both parties were really seeking

was to find a long term solution to this dilemma. It was only when they

truly understood the nature of the problem they were able to negotiate a

reasonable solution that was acceptable to both of them.

It was ascertained that the subassembly workers had some slack

time available during every working month. The damaged parts were

returned in small batches form the final assembly plant so that the

subassembly personnel could work on them during these slack periods.

Also, when they examined the problem in more minute detail, the

managers learned that some of the personnel in the final assembly plant

may not have been adequately trained and may have also been partially

responsible for the damaged incurred. These personnel were identified

and were sent to the subassembly plant to further their training and to

learn more about what transpired in that department.

The resulting solution addressed the increased cost concerns of

both departments on the one hand. On the other hand, overtime was

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reduced by allocating the personnel where and when they most needed

and finally, because of the enhanced training, the number of damaged

parts was considerably reduced.

The lesson to be drawn here is that the two managers were only

able to address the problem when they were able to understand the real

issues that lay beneath the problem as the cause for their cost overruns.

- Foreign currency agreement

When a negotiator embarks on an international agreement with a

foreign partner, they have to give serious consideration to which

currency is going to be used in their financial transactions. There is a

certain amount of risk that a company might have to assume as the

negotiators consider whether they are going to issue or receive payments

in a foreign denomination. It occasionally happens that between the time

when a contract is signed, and when payment begins to flow, the

currency of the foreign partner’s company could either increase or

decrease dramatically. Any company that handles foreign currency faces

the hazard of paying more or receiving less than it projected. The risk

increases proportionately in relation to the duration or longevity of the

contract agreement.

The value of any country’s currency typically depends on supply

and demand. Any currency is affected by various factors. This includes

the rate of inflation, economic growth, the internal political stability of

the country, and interest rates, just to name a few. Many newer countries

use their central banks to allow their currency to rise and fall within a

narrow band, and may peg their currency’s value to a leading

international currency such as the Euro, or British Pound.

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Back in the 1980’s a small U.S. company signed a long term

agreement with a Japanese manufacturer to purchase a brand of adhesive

that was much cheaper than could be obtained in the U.S. The Japanese

negotiating team was adamant that they were to be paid in Japanese yen.

The American company, eager to lock in this cheap supply of this

particular adhesive, agreed. This meant that the U.S. company would

now assume any risk in currency fluctuation for the Japanese yen.

At the time the agreement was signed the value ratio between the

yen and the U.S. greenback was 185 yen to $1.00 U.S. dollar. For awhile

the U.S. company prospered even more as the exchange rate fell from

250 yen to $1.00 U.S. It was looking like a really good bargain.

Unfortunately, the tide shifted the other way and by 1988, the yen was

valued at 140 yen to $1.00 U.S., much to the dismay of the U.S.

company.

Needless to say, the U.S. company began to lose money and this

jammed the company into being caught between the proverbial ‘rock

and the hard place’. The U.S. company faced the additional burden in

that they were facing such stiff competition from their competitors that

they had no latitude to increase their prices. The agreement did not

include any provisions to renegotiate the contract if faced with such a

dramatic shift in the value of the rate of currency either, which was

another serious drawback.

A negotiator who conducts an international negotiation has 4

choices to make regarding foreign currency when concluding an

international joint venture. 1) They can both share the risk. 2) The

foreign partner assumes the risk. 3) Your side assumes the risk. 4) One

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or both parties stipulate in the contract that the currency denomination is

an area open to renegotiation, allowing for a certain percentage of rate

fluctuation to occur.

Always remember that the longer the lifespan of the agreement -

the greater the risk.

SAMPLE CONTRACT

ATLANTIC BRIDGE PUBLISHING AUTHOR'S

CONTRACT

This contract is entered into on the__________ of ________,

_______, between Atlantic Bridge Publishing (hereinafter known as

"Publisher") located at 6280 N. Crittenden Ave., Indianapolis, Indiana

46226 and____________________(hereinafter known as "Author")of

_______________________________ concerning a work presently

known as ___________________________ (hereinafter known as

"Work").

The Contract is considered legal and binding in all countries. If

there should be any legal dispute, the laws of the state of Indiana shall

apply.

I. The Author hereby represents and warrants to the Publisher

that:

A. The Work is free and clear of any counts of libel, plagiarism,

breach of privacy or misrepresentation of facts.

B. The Work does not infringe upon any copyright or proprietary

right, common law or statutory law, and does not contain any material

of libelous nature.

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C. The Work is not in the public domain and the Author is the

sole owner and copyright holder of the work with full power to enter

into this contract.

D. If the Work has been previously published in whole or part, the

Author currently holds all copyrights to the Work and is legally

permitted to enter this agreement.

E. The Author releases Publisher from any responsibilities

relating to any legal actions incurred by the contents of the Work or the

Author.

This representations contained herein are true on the date of the

signing of this contract.

F. The Publisher will obtain appropriate ISBNs for the Work

under the name of Atlantic Bridge Publishing.

II. Grantor of Rights:

A. The Author, on behalf of himself/herself and his/her heirs,

executors, administrators, successors and assignees, agrees to grant the

Publisher exclusive rights to produce, publish and sell in electronic

format (including email, download, disk, CD, or any other digital

format known or to be invented),the Work. This contract does not

infringe on print rights. (Optional clause can be inserted here if author

desires POD (Print on Demand) as an option)

III Term of Contract:

A. Electronic rights will be exclusive for one year commencing on

the date the Work becomes available for sale on the Publisher's site.

After such time, the contract can continue if both parties agree.

Contract may be terminated after one year by either the author or

298

the publisher with a 90-day written, certified mail notice or other

receipted delivery service, and all rights granted the publisher will

revert to author at the time of such termination.

Upon breach of contract, the Contract may be terminated by either

party with a 30-day written notice. Notification of breach and intention

to terminate the contract is to be delivered by certified mail or other

receipted delivery service. If breaching party corrects breach within 30

days, the contract shall continue to remain in place until its natural

expiration. Upon expiration of the contract term, all rights granted the

Publisher will revert back to author.

B. During the term of the contract, the Work will not be said to be

out of print.

IV. Manuscript Preparation:

A. Author shall provide an acceptable, final revision of the

manuscript in either Microsoft Word or RTF within the time agreed

upon or this contract will be void. Publisher will not be held liable for

lost manuscripts or defective disks. Author should always keep a back

up copy.

V. Royalties and Statements

A. Publisher and Author will mutually set the retail price of the

Work based on length and comparable works. Publisher agrees to pay to

the Author, a royalty of 45% of the retail download price in United

States dollars (USD) on all sales of the Work sold through the

Publisher's website. If the Work is purchase on disk or CD, the royalty

will also be 45%. If the POD option is taken, royalty is 30% of net

proceeds.

299

B. The Publisher has the right to contract with distributors,

bookstores, vendors, organizations and or outlets of electronic books to

sell the Work in association with the Publisher's name. For all sales

through these outlets, the Author will be compensated 45% of the

download price less any handling costs or discounts charged by the

outlet.

C. In order to stimulate sales, the Publisher reserves the right to

lower the price of the Work after a reasonable amount of time if the

price appears to be too high (no sooner than three months).

D. Royalties shall be calculated and paid no later than forty-five

(45) days following the end of each calendar quarter for sales during

that quarter. Royalties shall be paid by check, unless previous

arrangements are made with the author. Payment arrangements,

mutually agreed upon by the Publisher and the Author, shall be made

for payment of royalties to Author if he/she resides outside the USA.

Royalties equaling less than $20 will be held until such a time as they

accrue to $20 or above. Any withheld royalties shall be made

immediately upon contract termination.

E. No royalty shall be paid on paper or digital copies distributed

for review, advertising, publicity, promotional purpose, samples, or

other similar purposes, or on copies sold below or at cost.

E. If Author has elected to grant Publisher the right to contract

with various distributors and outlets, royalties will be paid to Author

contingent on payment received from distributor. In most cases,

distributors pay Publishers every sixty to ninety days for sales through

their channels during those timeframes.

300

F. The Author is responsible for paying his/her own taxes on all

royalty payments received from Publisher and is advised to keep

accurate records for tax purposes. A 1099misc form will be sent to the

author if necessary.

VI. Marketing and Promotion

A. The Author shall provide the Publisher with biographical

information, a photo (if author desires), and a suggested blurb for use on

Publisher's website. Author agrees to give Publisher the right to use the

Author's name, likeness, title of work and biographical material for

publishing, advertising and promoting the Work. Publisher reserves the

right to edit or rewrite the blurb submitted by Author.

B. Cover art will be provided by Publisher. If the Author has

his/her own cover art, the Author must warrant that the provided art is

either owned by the Author or that it does not infringe on any copyright.

C. Publisher reserves final approval of art in consultation with

Author.

D. Author agrees to self-promote the Work to the best of his/her

ability. If Author has his/her own website, the Work must be linked to

the Publisher's website. With any promotional material the Author

generates, the Author will consult with Publisher to insure proper use of

Publisher's name and/or other information.

E. Author may use up to 3 chapters to post on his/her website or

to give away as "teasers" to promote the work provided it includes a

link to Atlantic Bridge Publishing.

F. Publisher will send out the work for review to no less than three

review sites. Author may request a review copy on CD for his/her

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promotional efforts. Author is encouraged to solicit reviews along with

the Publisher. For added promotional purposes, Publisher and Author

agree to notify each other as to what review sites submissions have been

made.

G. With enough advance notice, Publisher will provide Author

any needed book copies for Author appearances or signings. These

copies would be in the format of CD and can be purchased by the author

at a discount set by the Publisher.

VII Assignment

A."Atlantic Bridge Publishing" may at any time sell itself, or the

majority of itself, its holdings, or licenses. Current contracts would

transfer to the new owner.

B. Bankruptcy: If "Atlantic Bridge Publishing" is legally judged

bankrupt or liquidates its business, this Contract shall be terminated

effectively and all rights granted to "Atlantic Bridge Publishing" shall

be terminated.

C. Audit: The Author may, with reasonable notice, assign and

designate a representative to examine the Publisher's records as they

relate to the Work. Such examination shall be at the Author's expense

unless errors are found in excess of 5% of royalties in the Author's

favor; in which case, the Publisher shall then defray all usual,

customary, and reasonable charges for such audit. The Publisher shall

pay the Author any sums due within thirty (30) days.

VIII Entire Agreement:

This Contract hereby constitutes the entire agreement between

Author and Publisher and supersedes all previous agreements regarding

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the Work, whether oral or in writing. Modification of this contract may

only occur in writing, signed by both parties.

Author's Real Name: _______________________________________

Pseudonym (if any): _______________________________________

Street Address: __________________________________________

City, State, Zip: _________________________________________

Phone Number: ____________________________________________

Email Address: ____________________________________________

Website URL: _____________________________________________

Title of Work: ____________________________________________

Social Security Number:____________________________________

Author's Signature: _______________________________________

Date: _____________________________________________________

Atlantic Bridge Publishing Signature: ________________________

Date: ________________________

Although all contracts may--in fact should--vary in order

accurately to reflect the intent of the parties in particular circumstances,

the following sales contract is a sample of what such contracts may look

like. It is intended to be a starting point and a guide to help you and

your attorney create a contract that includes all of the terms relevant to

your business interactions.

303

CONTRACT FOR THE SALE OF GOODS

Paragraph 1. _______________________, hereinafter referred to as

Seller, and _____________________, hereinafter referred to as Buyer,

hereby agree on this ____ day of _______________, in the year

____________, to the following terms.

A. Identities of the Parties

Paragraph 2. Seller, whose business address is ____________________,

in the city of _______________, state of _________________________,

is in the business of ___________________________. Buyer, whose

business address is ____________________, in the city of

_________________, state of _________________________, is in the

business of ____________________________.

B. Description of the Goods

Paragraph 3. Seller agrees to transfer and deliver to Buyer, on or before

_____[date], the below-described goods:

__________________________________________________________

__________________________________________________________

__________________________________________________________

__________________________________________________________

C. Buyer's Rights and Obligations

Paragraph 4. Buyer agrees to accept the goods and pay for them

according to the terms further set out below.

Paragraph 5. Buyer agrees to pay for the goods:

• In full upon receipt

• In installments, as billed by Seller, and subject to the separate

installment sale contract of __________________[date] between

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Seller and Buyer.

• Half upon receipt, with the remainder due within 30 days of

delivery.

Paragraph 6. Goods are deemed received by Buyer upon delivery to

Buyer's address as set forth above.

Paragraph 7. Buyer has the right to examine the goods upon receipt and

has ____ days in which to notify seller of any claim for damages based

on the condition, grade, quality or quality of the goods. Such notice

must specify in detail the particulars of the claim. Failure to provide

such notice within the requisite time period constitutes irrevocable

acceptance of the goods.

D. Seller's Obligations

Paragraph 8. Until received by Buyer, all risk of loss to the above-

described goods is borne by Seller.

Paragraph 9. Seller warrants that the goods are free from any and all

security interests, liens, and encumbrances.

E. Attestation

Paragraph 10. Agreed to this _____ day of _____, in the year

____________.

By: ___________________________ Official Title:

____________________________

On behalf of ______________________________________, Seller

I certify that I am authorized to act and sign on behalf of Seller and that

Seller is bound by my actions. ______ [initial]

By: ___________________________ Official Title:

____________________________

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On behalf of _____________________________________, Buyer

I certify that I am authorized to act and sign on behalf of Buyer and that

Buyer is bound by my actions. ______ [initial]

[NOTARY STAMP HERE]

Purchase, Resale and Marketing Agreement

This Purchase, Resale and Marketing Agreement ("Agreement") is

executed this ___ day of _____________ 2000 by and between Genuity

Solutions Inc. with principal offices at 3 Van de Graaff Drive,

Burlington, MA 01083 ("Genuity") and Bell Atlantic Corporation with

its principal office at 1320 North Courthouse Road, 5/th/ Floor,

Arlington, VA 22201 ("Bell Atlantic")

WHEREAS, Genuity provides data and IP services;

WHEREAS, the parties estimate that there is a multi-billion dollar

market opportunity for such services during the next five years;

WHEREAS, where permitted by applicable federal law, Bell Atlantic

desires to market and resell Genuity's data and IP services to its

customers;

WHEREAS, Bell Atlantic estimates that it could achieve revenues in

excess of two billion dollars ($2,000,000,000.00) through the sale of

such services within the next five years;

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WHEREAS, Genuity desires to have Bell Atlantic market and resell, and

Bell Atlantic desires to market and resell Genuity's IP and data services

subject to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of good and valuable

consideration, the sufficiency of which is hereby acknowledged, the

parties hereto agree as follows:

1. SALE AND MARKETING OF GENUITY SERVICES

1.1 Appointment. Genuity hereby authorizes Bell Atlantic and

those Bell----------- Atlantic affiliates who place orders hereunder

("Authorized Affiliate(s)") during the term of this Agreement to

purchase either for their own use, to use in providing services to their

customers, and/or to market and resell those Genuity services defined in

the Service Schedules attached hereto (collectively, the "Genuity

Services") to end users ("End Users") located in all geographic areas

where Genuity offers the Genuity Services and where Bell Atlantic may

lawfully offer the Genuity Services ("Territory"). The Genuity Services

shall be provided by Genuity or a Genuity affiliate as identified in the

applicable Service Schedule. An order for and the provision of a Genuity

Service establishes a contract between the Bell Atlantic or the

Authorized Affiliate and the Genuity-designated service provider for the

Genuity Service under the terms and conditions of this Agreement and

the relevant Service Schedule. Bell Atlantic and/or an Authorized

Affiliate may designate another Bell Atlantic affiliate or third party to

307

act as a sales agent for such Authorized Affiliate. Bell Atlantic shall be

responsible for coordinating its program for such third party sales

agents, including providing necessary support and training. Bell Atlantic

shall indemnify Genuity for the actions of such third party agents as set

forth in Section 10. Bell Atlantic's right to distribute and market Genuity

Services shall be further defined in each Service Schedule. Such rights

may include the right to resell the Genuity Service as a standalone

service, as part of an integrated system or solution, or with value added

services. (For the purpose of this agreement, the term "affiliate" shall

mean, with respect to any person, any other person directly or indirectly

controlling or controlled by, or under direct or indirect common control

with, such person.)

1.2 Lead Referrals. Bell Atlantic may in its discretion refer to

Genuity any-----offers to purchase or orders for (i) Genuity Services, or

(ii) other services offered by Genuity. Genuity may in its discretion refer

to Bell Atlantic any offers or prospective offers to purchase the Genuity

Services. Any such referral shall be made in accordance with applicable

federal law and Section 2.4 of this Agreement. If either party makes

such a referral, the referring party shall not, without advance notice to

the other, independently pursue sale of the referred opportunity with the

potential customer unless the other fails to pursue such referral within a

reasonable time. Genuity and Bell Atlantic shall develop, no later than

sixty (60) days following the Effective Date (as defined in Section 6.1 of

this Agreement) a mutually agreed upon lead referral program that

includes a commission to be paid by the party that completes a sale

pursuant to a referral.

308

1.3 Non-Exclusivity. Genuity reserves the right to market,

distribute and sell--------------Genuity Services, directly or indirectly,

within and outside of the Territory, and nothing in this Agreement shall

limit in any manner Genuity's marketing or distribution activities, or its

right to sell directly or appoint other dealers, distributors, licensees or

agents within or outside the Territory to sell the Genuity Services.

Similarly, Bell Atlantic reserves the right to market, distribute and sell,

directly or indirectly, within or outside of the Territory, services that

compete with the Genuity Services.

1.4 Service Changes. Except as otherwise provided in a Service

Schedule,--------------- Genuity reserves the right to modify, change or

add to any of the Genuity Services at any time, upon forty-five (45)

days' notice to Bell Atlantic, and to remove or discontinue any of the

Genuity Services at any time, upon ninety (90) days' notice to Bell

Atlantic, provided that any such change, modification, addition, removal

or discontinuance shall be part of a general action by Genuity with

respect to the affected service and its retail and wholesale customers,

and shall not affect any Bell Atlantic End User contracts or valid

Genuity quotes in existence at the time of the Genuity notice. Genuity

specifically agrees to continue to provide any Genuity Service and all

related product support affected by such change or discontinuance in

accordance with the description of the service and other terms and

conditions in any Bell Atlantic End User contract (provided that the End

User contract is consistent with the Genuity Service Description and

other terms and conditions applicable at the time the contract was

309

signed) or valid Genuity quotes, for the duration of the term of such End

User contract or contract that results from such quote.

1.5 Service Schedules. Each Service Schedule shall, at a minimum,

include:----------------- (i) a description of the service, term, and pricing,

(ii) the obligations and responsibilities of each party related to the

Genuity Service offered under the Service Schedule; (iii) any required

End User contract terms (i.e., mandatory flowdown terms) that apply

when Bell Atlantic markets or resells the Genuity Service; and (iv)

applicable service level agreements.

2. RELATIONSHIP OF THE PARTIES

2.1 Independent Contractors. The relationship of Genuity and Bell

Atlantic is----------------------- that of independent contractors, and

nothing contained in this Agreement shall be construed to: (i) give either

party the power to direct and control the day- to-day activities of the

other, (ii) constitute the parties as partners, joint ventures, co-owners, or

otherwise as participants in a joint or common undertaking, (iii) create a

relationship of principal and agent, or (iv) allow either party to create or

assume any obligation on behalf of the other except for the obligations

that may be specified in this Agreement.

2.2 No Authority to Bind. Each party acknowledges and agrees

that it has-------------------- neither express nor implied authority to

accept orders or enter into or modify contracts, whether oral or written,

on behalf of the other party. Except for the Genuity Services or as may

be specifically set forth in other agreements between the parties, Bell

Atlantic shall not represent that any products and services marketed,

310

offered, or sold by Bell Atlantic are approved or endorsed by Genuity in

any way.

2.3 Actions by the Company, its Employees and Agents. Each

party shall be------------------------------------------------ solely responsible

for the acts and omissions of its employees, agents, and contractors,

including, without limitation, all labor costs and expenses.

2.4 InterLATA Services. Bell Atlantic shall not provide or jointly

market with------------------ Genuity a Genuity Service that is, or

includes as a necessary, bundled component, an interLATA service in a

state until Bell Atlantic has obtained any necessary authorizations or

approvals to do so.

3. GENUITY RESPONSIBILITIES

3.1 Provision of Services. Genuity shall provide the Genuity

Services to Bell--------------------- Atlantic and/or to End Users at the

rates and in accordance with the Service Descriptions and other

specifications set forth in this Agreement and the Service Schedules.

Genuity shall also provide to Bell Atlantic training, marketing

assistance, support, equipment and software and other ancillary services

and products as may be set forth in the Service Schedules and this

Agreement.

3.2 Operations.----------

(a) Genuity shall provide Bell Atlantic with mechanized, electronic

access and interfaces to those Genuity systems that support Bell

Atlantic's marketing, provisioning and support of the Genuity Services

to End Users. This access and interface capability shall apply to the

311

following information and functionality: (i) pre-sales information; (ii)

ordering and provisioning; (iii) new products literature; (iv) problem

identification and isolation to assist Bell Atlantic in its provision of level

one End User support; (v) repair/trouble ticketing; and (vi) billing feeds,

as appropriate, to the Genuity Services. Such access and interfaces shall

be provided in accordance with the implementation schedule set forth in

this Section 3.2. Genuity shall be solely responsible for the all costs

incurred for system development and implementation necessary to

comply with this Section 3.2. Genuity may recover the cost of such

development and implementation through the prices it charges all

customers for the Genuity Services, but shall not otherwise charge Bell

Atlantic any portion of such costs.

(b) Promptly following the Effective Date, Genuity and Bell

Atlantic shall each designate by written notice a senior operations point

of contact (O-POC) for developing, implementing and maintaining

business process interfaces throughout the areas of each party's business

affected by this Agreement. The parties shall oversee the rollout of

transaction processes for quotes, orders, provisioning, customer care and

billing across all Genuity Services. The shared design principles shall be

integration across all Genuity Services, customer responsive, web based,

scalable, and minimization of manual intervention. A written process

architecture shall be developed and maintained by both parties. The first

copy of this architecture shall be finalized within one hundred twenty

(120) days after the Effective Date. This shall be a dynamic document,

available online to both parties, that shall be the basis for identifying

improvement opportunities and for operations plans. The parties shall

312

perform quarterly reviews of these plans, with the O-POCs jointly

managing the agenda and attendees for such reviews. These reviews

shall be alternately hosted by each party at its facility of choice. Genuity

shall work with Bell Atlantic to develop and implement new support

tools and process improvements with respect to Bell Atlantic's purchase

and sale of the Genuity Services. Genuity shall retain all rights to tools

and processes it develops, and, at its option, may implement these tools

and processes for other customers and resellers.

(c) Bell Atlantic shall be responsible for the End User relationship.

Genuity shall provide access to documentation, training materials, and

on-line support tools that facilitate Bell Atlantic in providing level one

support services for its End Users. At Bell Atlantic's request and at

Genuity's expense, Genuity shall provide one time "train the trainer"

sessions for level one support for each product or service. These training

sessions shall be held at Genuity facilities for class sizes not to exceed

12 people, at mutually agreed times. Bell Atlantic shall pay travel and

living expenses for its attendees. At Bell Atlantic's request, Genuity shall

provide to Bell Atlantic quotes for fees on a daily basis (plus travel and

living expenses) for subsequent "train the trainer" sessions, which

sessions shall be held at Bell Atlantic facilities. Genuity shall provide

such subsequent sessions upon Bell Atlantic's acceptance of such

quote(s).

(d) Genuity shall provide at its expense level two and level three

support for the Genuity Services. Bell Atlantic shall provide at its

expense level one support for the Genuity Services it resells. For

maintenance of Genuity-supplied customer premises equipment, Genuity

313

shall act as service agent for Bell Atlantic on Level II and Level III

support situations. This service and support shall be Bell Atlantic

branded where practical. Genuity shall work cooperatively with Bell

Atlantic and/or Bell Atlantic customers for identification/isolation of

difficult end-to-end or otherwise elusive problems. Genuity shall assume

all escalation and interface responsibilities for its suppliers.

(e) The parties shall agree upon and publish written Bell Atlantic

and Genuity escalation and communication paths for the Genuity

Services. These documents shall be an addendum to the business process

architecture discussed above.

(f) Bell Atlantic and Genuity shall establish an operations review

process to review the performance measurements under the service level

agreements for each Genuity Service on a monthly basis, and establish

action plans and "next steps" as appropriate. These monthly reviews may

be conducted by telephone or in face- to-face meetings.

3.3 Business Practices. Genuity and Genuity's representatives and

employees------------------ shall at all times give prompt, courteous and

efficient service to End Users it has contact with pursuant to its

obligations under this Agreement, or otherwise on behalf of Bell

Atlantic. Both parties shall follow all End User interface procedures set

forth in a Service Schedule and/or developed and agreed upon by the

parties.

3.4 Training Support. Genuity shall specify the level of training

required to---------------- sell and support the Genuity Services. Genuity

shall make available, at its expense (other than travel and lodging

expenses for Bell Atlantic employees) training support materials and

314

training for the Genuity Services that is substantially equivalent to the

training Genuity provides to its internal sales force (excluding Genuity-

proprietary content such as strategic planning, internal sales discussions,

Genuity market focus, Genuity customer specific information, and

similar content) and is sufficient to qualify Bell Atlantic employees to

provide the necessary technical expertise to design where applicable (on

a pre-sale basis), sell and support the volume and type of Genuity

Services which Bell Atlantic has forecast. This training shall be made

available initially for a reasonable number of Bell Atlantic sales

personnel, as mutually determined by the parties. Genuity shall make

subsequent training available for new Genuity Services and significant

enhancements to the services, and periodically during the term of this

Agreement (no more frequently than once each calendar year) for a

reasonable number of new sales personnel. Additional training required

by Bell Atlantic shall be provided by Genuity at Bell Atlantic's expense,

at a price not to exceed Genuity's reasonable costs of providing the

training. The parties shall develop a training support plan within ninety

(90) days of the effective date of this Agreement.

3.5 Marketing Support. Genuity shall reasonably assist Bell

Atlantic in Bell----------------- Atlantic's marketing and provision of the

Genuity Services to End Users identified by Bell Atlantic. The parties

shall develop procedures and guidelines for such marketing support

within ninety (90) days following the Effective Date. Such assistance

shall include making sales support and technical experts reasonably

available for consultation with Bell Atlantic and the End User. At Bell

Atlantic's request, Genuity shall provide qualified sales and/or technical

315

support individual(s) to accompany Bell Atlantic on sales calls End

Users. In such joint presentation to an End User, Bell Atlantic shall

determine whether the proposed service shall be identified as a co-

branded offering. Genuity's sales support and technical personnel who

work on End User accounts associated with Bell Atlantic marketing

activities shall not concurrently provide services pertaining to that End

User to either Genuity's internal sales channels or any other reseller of

Genuity. Any information about the End User, to include the

identification of the sales opportunity, that is provided by Bell Atlantic,

or that is developed by Genuity in its support of Bell Atlantic's sales

efforts, shall be Bell Atlantic Confidential Information. In providing

business and marketing support to Bell Atlantic pursuant to this Section

3.5, Genuity shall not sell or attempt to sell the products or services of

any party other than Bell Atlantic, provided, however, that Genuity may,

----------------- while providing such support and in consultation with

Bell Atlantic, make recommendations to End Users regarding other

Genuity Services available from Bell Atlantic.

3.6 Availability of Services and Support.-----------------------------

(a) Genuity shall provide to Bell Atlantic the same type and quality

of Genuity Services (including, without limitation, Service Descriptions,

service level agreements and remedies, geographic availability, and

support) as Genuity provides to other resellers and to its own internal

sales channel and retail customers. Genuity shall modify the Genuity

Services and add new Genuity Services as reasonably necessary to keep

the portfolio of Genuity Services (including, without limitation, Service

Descriptions, service level agreements and remedies, capacity

316

availability in the Territory, and support) available under this Agreement

competitive and current with comparable services available from other

suppliers. Genuity shall not reduce the geographic coverage of a Genuity

Service existing as of the date the parties executed this Agreement.

Subject to the foregoing, Genuity shall be the sole determiner of its

services portfolio and its market strategy, including the market segments

upon which it shall focus and the levels of investment it shall make in

particular services or market segments, or the geographic locations in

which it will offer the Genuity Services.

(b) Genuity shall keep Bell Atlantic informed about new service

offerings and significant product enhancements, and shall offer any new

services and service enhancements to Bell Atlantic so that Bell Atlantic

may market such new services or enhancements to End Users on as

timely a basis as Genuity's internal sales channel or Genuity's other

resellers or sales agents. In the event that Bell Atlantic has information

that one or more of the Genuity Services are not competitive in the

market, Bell Atlantic shall provide evidence thereof to Genuity and

Genuity shall review this information and meet with Bell Atlantic to

provide Genuity's response to Bell Atlantic's information.

(c) Within ninety (90) days of the Effective Date, the parties shall

develop a benchmarking process to track prices and related terms for

services comparable to the Genuity Services for the purpose of

administering this Section 3.6.

3.7 Availability of Competitive Terms and Prices For Individual

Customer-----------------------------------------------------------------Requests

--------

317

(a) Bell Atlantic may request that Genuity provide reduced prices

or discounts, different terms, or changed Service Descriptions ("Custom

Bids") for purposes of responding to individual End User requests for

proposals or negotiation with the End User. When Bell Atlantic has

quoted Genuity Services and the End User has requested a Custom Bid,

Bell Atlantic shall as soon as possible consult with Genuity regarding

such requests. Genuity agrees to give good faith consideration to such

requests, to offer such changes as Genuity determines it is willing to

make and to respond to Bell Atlantic within the timeframes of the

individual transaction which has generated such request. Bell Atlantic

may obtain offers of services comparable to, or as reasonable substitutes

for, Genuity Services from third parties. Where prices and/or other terms

for such services are both responsive to the particular customer request

and more favorable to Bell Atlantic than the prices and/or terms for

Genuity Services, Bell Atlantic may notify Genuity that it has received

offers that include such favorable prices and terms and request Genuity

to meet such prices and terms. Genuity shall respond within the

timeframes of an individual sales transaction as requested by Bell

Atlantic. The parties agree to establish procedures under which such

requests shall be handled, no later than ninety (90) days after the

Effective Date, and to add such procedures as a schedule to this

Agreement. Genuity shall treat information concerning price reductions

and other information requested as Confidential Information of Bell

Atlantic. Bell Atlantic shall treat Genuity's response, including any

information developed by Genuity and provided to Bell Atlantic

regarding pricing and other competitive information, as Confidential

318

Information of Genuity and shall not provide such information to any

third party other than in connection with providing a bid to the End User

or as otherwise permitted by this Agreement.

(b) Genuity shall be obligated to provide Custom Bids to Bell

Atlantic with respect to a Genuity Service where Genuity customarily

provides such Genuity Service to other customers on a custom basis. In

situations not covered by the preceding sentence, Genuity shall not be

obligated to respond to Bell Atlantic requests for Custom Bids to the

extent they exceed twenty percent (20%) of the quotes requested by Bell

Atlantic for a particular Genuity Service in a calendar quarter.

3.8 Proposal Materials. Unless otherwise agreed by Bell Atlantic,

all sales------------------ collateral, proposals, contracts and related

proposal documents for Genuity Services covered by this Agreement

and marketed by Bell Atlantic shall be prepared and presented by Bell

Atlantic, using Bell Atlantic letterhead and other indicia. Genuity shall

provide content that may be used without Genuity identification, as

requested by Bell Atlantic. Bell Atlantic agrees to take all reasonable

steps necessary to protect Genuity's intellectual property rights in such

content, including reproducing all copyright notices, if any. Bell Atlantic

further agrees that Genuity shall retain all rights in such content. If the

End User indicates interest in Genuity services that are outside the scope

of the Genuity Services, Genuity shall coordinate with Bell Atlantic

before making a proposal for such services. Genuity may submit

proposal materials and customer contracts for such other services using

Genuity letterhead, forms and indicia.

319

3.9 Return of Materials. Upon request from Bell Atlantic, Genuity

shall return------------------- or destroy all materials provided by Bell

Atlantic related to any proposal development or other marketing activity

pertaining to an End User identified by Bell Atlantic. In such event, Bell

Atlantic shall return to Genuity or destroy all proposal development or

marketing material Genuity has provided to Bell Atlantic relating to

such End User.

4. OBLIGATION OF BOTH PARTIES

4.1 No Disparaging Conduct. Neither party shall do anything that

would tend to---------------------- discredit, dishonor, reflect adversely

upon, or in any manner injure the reputation of the other party or any

affiliate. This provision shall not, however, prevent either party from

marketing competing services of either itself or other entities.

4.2 Identification with a Party. Representatives of a party shall not

--------------------------- represent themselves as employees of the other

party in contacts with End Users or others.

5. BELL ATLANTIC OBLIGATIONS

5.1 Sales. Bell Atlantic is authorized to sell the Genuity Services in

the----- Territory. Bell Atlantic may not market or sell the Genuity

Services to End Users located outside of the Territory without the prior

written consent of Genuity.

5.2 Bell Atlantic End User Support. Unless otherwise addressed in

a Service------------------------------ Schedule or in this Agreement, or

320

separately agreed between Bell Atlantic and Genuity, Bell Atlantic shall

provide pre- and post-sales support to End Users.

5.3 Representations. Bell Atlantic shall not make any

representations or--------------- statements regarding Genuity Services

other than those contained in the applicable Genuity Service Description

or approved in writing by Genuity.

5.4 Quotations/End User Billing. Bell Atlantic shall be responsible

for--------------------------- issuing quotations to End Users for Genuity

Services at prices to be determined by Bell Atlantic. Bell Atlantic is

solely responsible for credit checks, credit approvals, billing and

collection of fees for Genuity Services provided to End Users.

5.5 End User Prices. Bell Atlantic shall be responsible for

determining the--------------- prices at which it shall offer the Genuity

Services to End Users, and for communicating pricing information,

including quotations, to End Users.

5.6 Compensation. Bell Atlantic shall be responsible for

compensating its------------ employees, contractors, agents and other

representatives for sales of Genuity Services to End Users.

5.7 End-User Agreement(s). Bell Atlantic shall sell the Genuity

Services by--------------------- means of written agreements by and

between End User and Bell Atlantic. Such agreements shall contain

terms and conditions that are at least as

5.8 Order Forecasts, Bell Atlantic shall provide Genuity with

calendar--------------- quarterly forecasts no later than the first day of the

calendar quarter. The forecast shall reflect anticipated demand for the

Genuity Services for the next eighteen (18) months by volume for each

321

Genuity Service and shall reflect, if the information is available, the

anticipated geographic areas where the Genuity Services shall be sold.

Genuity shall treat the forecasts as Bell Atlantic Confidential

Information. Within sixty (60) days following the Effective Date of this

Agreement, the parties shall develop mutually agreed upon detailed

forecasting requirements for each Genuity Service that shall be set forth

as supplements to the applicable Service Schedules. The parties agree to

work together to make the forecasting process a mutually beneficial

business arrangement that supports each party's planning. Bell Atlantic

shall make reasonable efforts to provide Genuity with the most complete

and accurate forecast information possible for Genuity to effectively

plan service availability. Reasonable efforts shall be made by Genuity to

make the Genuity Services available to meet Bell Atlantic's forecasts.

6. TERM AND TERMINATION

6.1 Term. This Agreement shall take effect on the date on which,

pursuant to---- their Agreement and Plan of Merger, Bell Atlantic

Corporation and GTE Corporation cause a Certificate of Merger to be

executed, acknowledged, and filed with the Secretary of State of New

York as provided in New York Corporation Law, Section 907

("Effective Date"), and unless terminated earlier as provided herein,

shall continue ...

322

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