THE ROLE OF THE ADVERTISING AGENCY OR DEPARTMENT

Advertising agencies create most advertisements and are the core of the advertising industry. Some companies, however, have their own advertising departments which function much like an agency. The development, production, and placement of a single ad can be a time-consuming process involving a large number of people with a variety of business and creative skills. Advertising agencies not only create the advertisements but also pay for the cost of placing the ad in a newspaper or magazine or on television or radio. A large advertising agency or department may employ hundreds or thousands of people, including advertising and marketing specialists, designers, writers known as copywriters, artists, economists, psychologists, researchers, media analysts, product testers, librarians, accountants and bookkeepers, and mathematicians.

A typical advertising agency is divided into a number of departments, such as account service, research, media planning and buying, the creative department, and production. A multinational advertising agency with clients that spend hundreds of millions of dollars on advertising may employ as many as 8,000 people worldwide and up to 900 people in a major office. A local agency with clients that spend about $15 million a year on advertising may employ only about 25 people.

Advertising agencies make money in a variety of ways. When the agency uses the client’s advertising budget to buy time for an ad on the radio or on television or when it buys space for an ad in a newspaper or magazine, the media outlet allows the agency to keep 15 percent of the cost of the space or the time as a commission. The 15 percent commission has become an advertising industry standard and usually accounts for the largest portion of the agency’s income. Agencies also charge clients for the cost of producing the ads. Increasingly, agencies are charging clients a straight monthly or hourly fee for all of their services or are combining a fee with some kind of commission. Agencies have turned to this approach because clients are asking them to address a range of marketing issues rather than just producing ads. The fee arrangement pays for the time devoted to these larger marketing issues.

Once a company selects an agency, the agency assigns an account executive to act as liaison between it and the client. The account executive manages all of the services conducted on behalf of the client and coordinates the team assigned to the client's business. The account executive directs the preparation of the advertising strategy, which includes deciding how and to whom the product or service will be presented. The account executive also assigns priorities, oversees the budget, reviews and approves all recommendations before they are taken to the client, and makes sure that the agency meets all deadlines.

METHODS OF ADVERTISING

To reach the consumer, advertisers employ a wide variety of media. In the United States, the most popular media, as measured by the amount of ad spending, are television, newspapers, direct mail, radio, Yellow Pages, magazines, the Internet, outdoor advertising, and a variety of other media, including transit ads, novelties, and point-of-purchase displays. (These rankings are measured each year by Advertising Age, an advertising trade magazine, and seldom vary.)

In Canada, newspapers are the most popular advertising medium, followed by television, magazines, radio, and outdoor advertising. Canada is the ninth largest advertising market in the world.

In 1999 television attracted about 23.4 percent, or $50.4 billion, of the advertising dollars spent in the United States. Television is available to advertisers in two forms: broadcast and cable. Broadcast TV—television signals that are sent over the air rather than through cable wires—generates all of its revenue from advertising. Advertising accounts for about 60 percent of cable television revenues with the rest coming from subscriber fees.

To run commercials on television, advertisers buy units of time known as spots. The standard units of time are 15, 30, or 60 seconds in length. These spots are purchased either locally or from a national network. Because of the high cost of national network spots, ranging from hundreds of thousands of dollars to millions of dollars, only large national advertisers can afford to run network television spots. Advertisers wishing to reach a local audience can buy time from an individual station. But even these spots cost so much to produce and run that small and even many mid-sized companies cannot afford them.

Because television commercials combine sight, sound, and motion, they are more dramatic than any other form of advertising and lend excitement and appeal to ordinary products. Advertisers consider television an excellent medium to build a product's brand image or to create excitement around a particular event such as a year-end auto sale. But TV spots are too brief to provide much product information. As a result, television works best for products such as automobiles, fashion, food, beverages, and credit cards that viewers are familiar with and easily understand.

In the United States, newspapers are the second most popular advertising medium after television and in 1999 received 21.7 percent, or $46.6 billion, of all advertising dollars. Newspapers enable advertisers to reach readers of all age groups, ethnic backgrounds, and income levels. Two types of advertising appear in newspapers: classified advertising, such as the want ads, and display advertising. Display ads range in size from as large as a full page to as small as one column in width and less than one centimeter (less than one inch) in length. Display ads often contain illustrations or photographs and usually provide information about where the product or service being advertised can be purchased. Typically, advertising makes up about 65 percent of a newspaper's content and generates about 65 percent of a newspaper's revenue. About 88 percent of this revenue comes from local businesses.

Most advertisers believe that newspaper ads fail to convey the kind of emotional images that build brand image. As a result, most newspaper advertising is done by retailers who use newspaper ads to provide timely information that can lead to immediate sales. Newspapers are particularly well suited to this role because most are published daily. Readers can clip coupons from the newspaper and cash them in quickly at local stores. People also turn to newspapers for immediately useful information about product discounts, bank interest rates, restaurant specials, and entertainment.
Direct mail is the third largest advertising medium, attracting about 19.2 percent, or $41 billion, of all U.S. advertising dollars in 1999. Direct mail advertising, as the name implies, is advertising that is sent directly to people by mail, usually through the postal system. Increasingly, however, electronic mail (e-mail) is being used as a direct mail device. Direct mail can be as simple as a single letter or as involved as a catalog or an elaborate e-mail known as HTML mail that offers graphics and links to more information.

From the advertiser's point of view, the key to a successful direct mail program is the mailing list. The mailing list contains the names and addresses of people who share certain common characteristics that suggest they will be likely to buy a particular product or service. Because advertisers are speaking directly to those who are most likely to buy their product or service, many advertisers consider direct mail the most effective of all advertising media for generating immediate results. Direct mail through the U.S. postal system, however, is the most expensive form of advertising, costing about 14 times as much per exposure as most magazine and newspaper ads. But because of the results it produces, many advertisers believe the expense is justified.

Radio attracted about 8 percent, or $17.2 billion, of all U.S. advertising dollars, making it the fourth largest advertising medium in 1999. Although national advertisers can buy national network radio time, 90 percent of all radio advertising is local. Unlike television which reaches a broad audience, the specialized programming of radio stations enables advertisers to reach a narrow, highly specific audience such as people who like sports or urban teenagers who listen to the latest styles of popular music. Because many people listen to radio while in their cars, radio also enables advertisers to reach prospects just before they go shopping. But because people listen to the radio while doing something else such as driving or working, radio commercials can be easily misunderstood. As a result, radio ads work best when the messages are relatively simple ones for familiar, easily understood products.

Yellow Pages, the thick directories of telephone listings and display advertisements, represented the fifth most popular advertising medium in 1999, attracting $12.6 billion, or 5.9 percent, of total advertising spending. Almost all advertising in the Yellow Pages is local advertising.

THE IMPACT OF ADVERTISING

Advertising has an important effect on a country’s economy, society, culture, and political system. This is especially true in the United States where the advertising industry plays such a prominent role.
Economic Impact: Most economists believe that advertising has a positive impact on the economy because it stimulates demand for products and services, strengthening the economy by promoting the sale of goods and services. Manufacturers know that advertising can help sell a new product quickly, enabling them to recoup the costs of developing new products. By stimulating the development of new products, advertising helps increase competition. Many economists believe that increased competition leads to lower prices, thereby benefiting consumers and the economy as a whole. These economists also argue that by interesting consumers in purchasing goods, advertising enables manufacturers and others to sell their products in larger quantities. The increased volume of sales enables companies to produce individual units at lower costs and therefore, sell them at a lower price. Advertising thus benefits consumers by helping lower prices.

Other economists, however, believe that advertising is wasteful. They argue that the cost of advertising adds to the cost of goods and that most advertising simply encourages consumers to buy one brand rather than another. According to this view, advertising simply moves sales from one company to another, rather than increasing sales overall and thereby benefiting the economy as a whole.

Social Impact: Advertising can have wide-ranging repercussions on a society. Some critics suggest that advertising promotes a materialistic way of life by leading people to believe that happiness is achieved by purchasing products. They argue that advertising creates a consumer culture in which buying exciting new products becomes the foundation of the society's values, pleasures, and goals.

Other critics express concern over the way advertising has affected women and racial minority groups. Ads in the 1950s depicted women primarily as decoration or sex objects. Although millions of women worked outside the home in the 1960s, ads continued to focus on their role as homemakers. Whether owing to the feminist movement or to women's increasing economic power, after the 1960s it became more common to see women depicted in professional roles. However, many ads today still emphasize a woman’s sexuality.

The way advertising has depicted racial minorities has also been harmful. Prior to 1960, African Americans were usually shown in a subordinate position. Due to the influence of the civil rights movement, however, advertisers by the 1980s had begun to depict African Americans as students, professionals, or business people. However, many African American organizations and community activists continue to object to the way that alcohol and tobacco companies have seemingly targeted low-income minority communities with a heavy preponderance of outdoor advertising for their products.

As ads have begun to more fully reflect the lives of women and African Americans in the United States, increasing attention has been paid to the way in which advertising shows other ethnic groups, including Hispanics, Asians, Native Americans, and Eastern Europeans. There is still considerable debate over how advertising influences public perception of gender and of particular ethnic groups.

Advertising has a major social impact by helping sustain mass communications media and making them relatively inexpensive, if not free, to the public. Newspapers, magazines, radio, and broadcast television all receive their primary income from advertising. Without advertising, many of these forms of mass communication might not exist to the extent that they do today, or they might be considerably more expensive, offer less variety, or even be subject to government control through subsidies. In-depth news programs, a diversity of magazines, and free entertainment might no longer be widely available.

At the same time, however, some critics warn that because advertising plays such a major economic role, it may exercise undue influence on the news media and thereby curtail the free flow of information in a free society. Reporters and editors, for example, may be hesitant to develop a news story that criticizes a major advertiser. As a result, society might not be alerted to harmful or potentially harmful conduct by the advertiser. Most members of the news media deny that pressure from an advertiser prevents them from pursuing news stories involving that advertiser, but some members of the media acknowledge that they might not be inclined to investigate an issue aggressively if it threatened to offend a major advertiser.

Advertisers may affect media programming in other ways, too, critics charge. For example, companies that sponsor TV programs prefer relatively wholesome, non controversial programming to avoid offending a mass audience. This preference causes TV networks to emphasize this type of programming. The result is that society may be denied the benefits of being able to view challenging or highly original entertainment programs or news programs on controversial issues. Because advertisers are especially interested in attracting the 18 to 34 year olds who account for most consumer spending, television shows are often developed with this audience in mind. If the ratings show that a program is not attracting large audiences, particularly among 18 to 34 year olds, advertisers often withdraw support, which causes a program to be canceled. As a result, shows that are more likely to interest and to be of value to older audiences are not produced.

The impact of television on young children has received much attention. Research suggests that children see television advertising as just another form of programming and react uncritically to its messages, which makes them especially vulnerable to advertising. There is also concern about the way in which adolescent girls respond to advertising that features beautiful, thin models. Research indicates that many adolescent girls are unduly influenced by this standard of beauty, become dissatisfied with their own bodies, and may develop eating disorders in pursuit of a thin figure. New research suggests that adolescent boys are also being influenced by advertising images of bulked-up, buffed bodies. As a result, many become dissatisfied with their own body image, devote large amounts of time to weightlifting, and may even take drugs that have harmful side effects in order to develop more muscle. Those over the age of 60 are thought to be less influenced by advertising, but some elderly people no longer process messages as easily as younger people, making them more susceptible to questionable advertising claims.

Political Impact: Advertising is now a major component of political campaigns and therefore has a big influence on the democratic process itself. In 1998 more than $467 million was spent on election campaigns in the United States. That amount of spending placed political advertising in the ranks of the country’s 30 leading advertisers that year. Political advertising is a relatively new development in U.S. history. Advertising professionals did not become involved in electoral campaigns until the 1950s. But since then, political advertising has grown in sophistication and complexity.

Political advertising enables candidates to convey their positions on important issues and to acquaint voters with their accomplishments and personalities. Television advertising is especially effective for candidates running for national or statewide office because it can reach so many people at once. Candidates can also use advertising to respond effectively to the charges of their opponents.

Various campaign finance reform proposals, however, have tried to address the impact of television advertising on political campaigning. Because of the high cost of television ads, the costs of political campaigns have skyrocketed, making it necessary for candidates to raise money continually, even after they have been elected to office. Critics say this factor jeopardizes the democratic process by making elected officials beholden to wealthy contributors and by making it more likely that only the wealthy will run for office. Some reform proposals have called for free airtime, but television and radio networks have resisted this idea.

Critics of political advertising also charge that the 30-second television spot has become more important to a political campaign than a thorough discussion of the issues. As a result, voters are bombarded with image advertising rather than being acquainted with the candidate’s positions. They contend that this practice is harmful to good government. Issues are simplified, and candidates are “packaged and sold” much like a consumer product, thereby distorting the political process.

Cultural Impact: Advertising can affect cultural values. Some advertising messages, for example, encourage aggressive individualism, which may clash with the traditional cultural values of a country where the collective or group is emphasized over the individual or humility or modesty is preferred to aggressiveness. With the globalization of the world economy, multinational corporations often use the same advertising to sell to consumers around the world. Some critics argue that advertising messages are thus helping to break down distinct cultural differences and traditional values, causing the world to become increasingly homogeneous.

Many advertising campaigns, however, have universal appeal, overriding cultural differences, or they contribute to culture in a positive way. Humor in advertising has made many ad campaigns widely popular, in some cases achieving the status of folklore or taking on new life in another arena. For example, a popular ad campaign for a fast-food chain with the slogan “Where’s the beef?” became part of the 1980 Democratic presidential primary campaign between Gary Hart and Walter Mondale. The ad ridiculed a competitor by depicting a small hamburger patty dwarfed by a huge bun. During a primary debate one of the candidates used the ad slogan to suggest that his opponent’s campaign lacked substance.

REGULATION

REGULATION
Advertising is subject to both government regulation and industry self-regulation to prevent deceptive advertising or to limit the visibility of advertising. Advertising is heavily regulated in the United States, Canada, and a number of European and Asian countries.

In the United States Government Regulation
Federal, state, and city governments have all passed legislation restricting advertising in various ways in the United States. The Supreme Court of the United States has overturned some restrictions, however, ruling that advertising is protected under the free speech provisions of the First Amendment to the Constitution, although to a lesser extent than political speech. In a landmark 1976 ruling, Virginia State Board of Pharmacy v Virginia Citizens Consumer Council, the Court declared advertising to be a semiprivileged form of free expression, subject to some regulation. In the Virginia case the Supreme Court struck down a ban that prohibited pharmacists from advertising drug prices. The ruling removed bans that had applied to other professionals, such as physicians and lawyers, and enabled them to advertise their services.

In the United States the main government regulatory agency for advertising is the Federal Trade Commission (FTC). The FTC enforces a variety of consumer protection laws to eliminate ads that deceive the consumer. The FTC defines deceptive advertising as any ad containing a misrepresentation or omission harmful to the consumer. An advertisement does not have to be untrue to be deceptive. For example, ads for a certain bread product claimed that it had half as many calories per slice as its leading competitors. The advertiser failed to say, however, that each slice of its bread was also half as thick as the competitors. The ads were ruled to be deceptive.

The key to the FTC's regulation of advertising is its power to require that advertisers substantiate the accuracy of their claims. So if advertisers say that "tests prove" or "physicians recommend," they must be able to show test results or affidavits from doctors. Moreover, companies cannot misuse evidence. For example, claims that a particular brand of dog food provided all the milk protein a dog needs were ruled to be misleading because dogs do not need milk protein.

Products that can affect health receive special regulatory attention. The U.S. Congress banned cigarette advertising from radio and TV in 1971 under the Public Health Cigarette Smoking Act. In 1998 the tobacco industry and the attorneys general of 46 states agreed to ban outdoor cigarette advertising and the use of cartoon characters in advertising, a practice that many thought had encouraged young people to start smoking.

Advertising directed to children has received considerable scrutiny. In 1990 Congress passed the Children's Television Advertising Practice Act. Among other things, it set limits on the amount of advertising that could be included in children's television programming and barred hosts of children's shows from selling products.

State laws and enforcement bureaus impose additional regulations on certain types of advertising, particularly those involving contests. These regulations may differ from state to state. Consequently, advertisers planning a national contest through newspapers may have to prepare several different versions of an advertisement to comply with the varying laws. In some states the media are themselves regulated. For example, it is illegal in a number of states for radio and television stations to broadcast distilled-liquor advertising; outdoor billboard advertising is banned in certain other states.

Industry Regulation
The advertising industry has resorted to self-regulation in a serious effort to stop abuses before they occur. These self-imposed codes of ethics and procedures aim principally to curtail not only bad taste but also misrepresentation and deception in copy and illustrations, as well as derogatory and unfair representations of products of competitors.

Several advertising trade associations are concerned with maintaining high standards. The associations believe it is good public relations to do so, inasmuch as advertising that weakens public confidence damages the impact and influence of all advertising.

Individual media and media groups often establish their own codes of ethics. Some newspapers and magazines refuse to publish advertising for tobacco and alcoholic beverages; most of them, in varying degree, investigate the reliability of advertisers before accepting their copy. Some publishers have strict rules about the presentation of advertising to prevent the publication of false or exaggerated claims and to preserve the aesthetic tone of their publications.

Radio and television stations generally try to investigate the company and its product before broadcasting advertising messages that might cause unfavorable reactions. The networks and the National Association of Broadcasters have established codes regulating the advertising of medical products and controlling contests, premiums, and other offers. All the networks maintain so-called acceptance departments, which screen both commercial and noncommercial scripts, either deleting or challenging for substantiation any questionable material. Most magazine publishers have their own strict rules on acceptance of advertising copy.

The American Advertising Federation, an organization of leading national advertisers, has long campaigned for “truth in advertising.” Other organizations that promote ethical standards are the American Association of Advertising Agencies and the Association of National Advertisers. The Institute of Outdoor Advertising encourages its members to improve the design of their advertising posters and signs and, more importantly, to make sure they do not erect advertising billboards in locations where they will mar the landscape or otherwise offend the public. The best-known and most active watchdogs in the advertising field are the Better Business Bureaus, which bring pressure to bear on unethical advertisers through persuasion, publicity, or, in extreme cases, legal action. The fact that local and national bureaus are subsidized by both advertisers and media reflects the conviction of modern business management that “good advertising is good business.”

In Canada
Canadian advertising regulations are even stricter than those in the United States. The Competition Act is the Canadian federal statute that seeks to prevent false and misleading advertising. The act is administered by the Bureau of Competition Policy which is part of Consumer and Corporate Affairs. If the bureau finds advertising to be misleading, it may simply ask the advertiser to stop running the ad or it may ask a company to take certain steps to correct the impression made by the false claims. The bureau may also take legal action against the advertiser in which case it will turn over its evidence to the Attorney General of Canada who will decide whether the evidence warrants a criminal prosecution.

Canada’s self-regulatory body, the Canadian Advertising Standards Council, has the right to take a commercial off the air if it offends taste and public decency. Moreover, in Canada ads that deal with products regulated by the government (for example, food, drugs, alcohol, and children's products) have to be approved before they air and can also be pulled if complaints arise after they run. In the United States, action can only be taken after the advertisement runs. Finally, beginning in 2001 tobacco advertising in Canada was limited to direct mail and to adults-only environments such as bars.

In Other Countries
Advertising is often heavily regulated in other countries as well. But the regulations vary from country to country. For example, in Mexico advertising for tobacco and alcohol is limited to late evenings after children have gone to bed. France prohibits any reference to health in tobacco ads, and Italy allows alcohol advertising to promote the brand name but not product attributes such as "cold filtered" or "smooth tasting."

Advertising regulations in other countries are often designed to protect culture and morals. France prohibits the use of foreign expressions where there are equivalent French terms as a way of protecting the French language. Advertising regulations in Malaysia bar the depiction of nudity, disco dancing, seductive clothing, and blue jeans in ads and require ads to project the Malaysian culture and identity. Varying regulations present numerous challenges to multinational corporations that advertise their products in many different countries.

HISTORY of ADS

Archaeologists have found evidence of advertising dating back to the 3000s bc, among the Babylonians. One of the first known methods of advertising was the outdoor display, usually an eye-catching sign painted on the wall of a building. Archaeologists have uncovered many such signs, notably in the ruins of ancient Rome and Pompeii. An outdoor advertisement excavated in Rome offers property for rent, and one found painted on a wall in Pompeii calls the attention of travelers to a tavern situated in another town.

In medieval times word-of-mouth praise of products gave rise to a simple but effective form of advertising, the use of so-called town criers. The criers were citizens who read public notices aloud and were also employed by merchants to shout the praises of their wares. Later they became familiar figures on the streets of colonial American settlements. The town criers were forerunners of the modern announcer who delivers radio and television commercials.

Although graphic forms of advertising appeared early in history, printed advertising made little headway until the invention of the movable-type printing press by German printer Johannes Gutenberg about 1450. This invention made the mass distribution of posters and circulars possible. The first advertisement in English appeared in 1472 in the form of a handbill announcing a prayer book for sale. Two hundred years later, the first newspaper ad was published offering a reward for the return of 12 stolen horses. In the American colonies, the Boston News-Letter, the first regularly published newspaper in America, began carrying ads in 1704, and about 25 years later Benjamin Franklin made ads more readable by using large headlines.

In the United States, the advertising profession began in Philadelphia, Pennsylvania, in 1841 when Volney B. Palmer set up shop as an advertising agent, the forerunner of the advertising agency. Agents contracted with newspapers for large amounts of advertising space at discount rates and then resold the space to advertisers at a higher rate. The ads themselves were created by the advertisers. In 1869 Francis Ayer bought out Palmer and founded N. W. Ayer & Son, an agency that still exists today. Ayer transformed the standard agent practice by billing advertisers exactly what he paid to publishers plus an agreed upon commission. Soon Ayer was not only selling space but was also conducting market research and writing the advertising copy.

Advertising agencies initially focused on print. But the introduction of radio created a new opportunity and by the end of the 1920s, advertising had established itself in radio to such an extent that advertisers were producing many of their own programs. The early 1930s ushered in dozens of radio dramatic series that were known as soap operas because they were sponsored by soap companies.

Television had been introduced in 1940, but because of the high cost of TV sets and the lack of programming, it was not immediately embraced. As the American economy soared in the 1950s, so did the sale of TV sets and the advertising that paid for the popular new shows. Soon TV far surpassed radio as an advertising medium.

The tone of the advertising was also changing. No longer did advertising simply present the product benefit. Instead it began to create a product image. Bill Bernbach, founder of Doyle Dane Bernbach in New York City; Leo Burnett, founder of the Leo Burnett agency in Chicago, Illinois; and David Ogilvy, founder of Ogilvy & Mather in New York City, all came to prominence in the late 1950s and 1960s and led what has been called the "creative revolution." Bernbach's agency captured the spirit of the new age. Bernbach believed that advertising had to be creative and artistic or it would bore people. He also believed that good advertising began with respect for the public's intelligence. The ads his agency created were understated, sophisticated, and witty.

For example, when Bernbach's agency picked up the account for the Henry S. Levy Bakery in Brooklyn, a borough of New York City, the agency created an ad that entertained New Yorkers and provided fodder for many conversations. The ad showed a Native American eating a slice of the bakery's rye bread with the headline, "You don't have to be Jewish to love Levy's." But it was the advertising for Volkswagen that made the agency's reputation. At a time when American cars were getting bigger and bigger and the advertising for them trumpeted that bigger was better, Doyle Dane Bernbach created a magazine ad that showed a small picture of the Volkswagen Beetle surrounded by a sea of white space with the headline, "think small." An equally unconventional ad carried the headline "lemon" beneath a photo of an apparently flawed Volkswagen. The ad's copy explained that "this Volkswagen missed the boat. The chrome strip on the glove compartment is blemished and must be replaced…We pluck the lemons; you get the plums." In an era of hype and bombast, the Volkswagen ads stood out because they admitted failure in a witty way and gave facts in a believable manner that underlined the car's strengths. This wit together with a conversational and believable style was a hallmark of the advertising created by Doyle Dane Bernbach and that style became highly influential.

The creative foundation established by Bernbach and others has been critical to the success of contemporary advertising. The introduction of the TV remote control and access to hundreds of cable channels mean that today advertising must interest and entertain consumers or else they will simply use the remote to change the channel. New digital devices even threaten to make it possible to edit out commercials. The development of interactive television, combining the functions of a computer with access to high-speed transmission over cable lines or optical fibers, will likely enable consumers to select from a vast video library. Consumers will be able to determine not only when they watch something, but also, to a greater extent than ever before, what they will watch. Some industry observers believe that as consumers gain greater control over their viewing activities, they will find it easier to avoid advertising.

No one can predict what new forms advertising may take in the future. But the rapidly increasing cost of acquiring new customers makes one thing certain. Advertisers will seek to hold onto current customers by forming closer relationships with them and by tailoring products, services, and advertising messages to meet their individual needs. So while advertising will continue to encourage people to consume, it will also help provide them with products and services more likely to satisfy their needs.

Business

INTRODUCTION
Business, organized approach to providing customers with the goods and services they want. The word business also refers to an organization that provides these goods and services. Most businesses seek to make a profit—that is, they aim to achieve revenues that exceed the costs of operating the business. Prominent examples of for-profit businesses include Mitsubishi Group, General Motors Corporation, and Royal Dutch/Shell Group. However, some businesses only seek to earn enough to cover their operating costs. Commonly called nonprofits, these organizations are primarily nongovernmental service providers. Examples of nonprofit businesses include such organizations as social service agencies, foundations, advocacy groups, and many hospitals.

Business plays a vital role in the life and culture of countries with industrial and postindustrial (service- and information-based) free-market economies such as the United States. In free-market systems, prices and wages are primarily determined by competition, not by governments. In the United States, for example, many people buy and sell goods and services as their primary occupations. In 2001 American companies sold in excess of $10 trillion worth of goods and services. Businesses provide just about anything consumers want or need, including basic necessities such as food and housing, luxuries such as whirlpool baths and wide-screen televisions, and even personal services such as caring for children and finding companionship.

TYPES OF BUSINESSES

There are many types of businesses in a free-market economy. The three most common are (1) manufacturing firms, (2) merchandisers, and (3) service enterprises.

Manufacturing Firms: Manufacturing firms produce a wide range of products. Large manufacturers include producers of airplanes, cars, computers, and furniture. Many manufacturing firms construct only parts rather than complete, finished products. These suppliers are usually smaller manufacturing firms, which supply parts and components to larger firms. The larger firms then assemble final products for market to consumers. For example, suppliers provide many of the components in personal computers, automobiles, and home appliances to large firms that create the finished or end products. These larger end-product manufacturers are often also responsible for marketing and distributing the products. The advantage that large businesses have in being able to efficiently and inexpensively control any parts of a production process is known as economies of scale. But small manufacturing firms may work best for producing certain types of finished products. Smaller end-product firms are common in the food industry and among artisan trades such as custom cabinetry.

Merchandisers: Merchandisers are businesses that help move goods through a channel of distribution—that is, the route goods take in reaching the consumer. Merchandisers may be involved in wholesaling or retailing, or sometimes both.

A wholesaler is a merchandiser who purchases goods and then sells them to buyers, typically retailers, for the purpose of resale. A retailer is a merchandiser who sells goods to consumers. A wholesaler often purchases products in large quantities and then sells smaller quantities of each product to retailers who are unable to either buy or stock large amounts of the product. Wholesalers operate somewhat like large, end-product manufacturing firms, benefiting from economies of scale. For example, a wholesaler might purchase 5,000 pairs of work gloves and then sell 100 pairs to 50 different retailers. Some large American discount chains, such as Kmart Corporation and Wal-Mart Stores, Inc., serve as their own wholesalers. These companies go directly to factories and other manufacturing outlets, buy in large amounts, and then warehouse and ship the goods to their stores.

The division between retailing and wholesaling is now being blurred by new technologies that allow retailing to become an economy of scale. Telephone and computer communications allow retailers to serve far greater numbers of customers in a given span of time than is possible in face-to-face interactions between a consumer and a retail salesperson. Computer networks such as the Internet, because they do not require any physical communication between salespeople and customers, allow a nearly unlimited capacity for sales interactions known as 24/7—that is, the Internet site can be open for a transaction 24 hours a day, seven days a week and for as many transactions as the network can handle. For example, a typical transaction to purchase a pair of shoes at a shoe store may take a half-hour from browsing, to fitting, to the transaction with a cashier. But a customer can purchase a pair of shoes through a computer interface with a retailer in a matter of seconds.

Computer technology also provides retailers with another economy of scale through the ability to sell goods without opening any physical stores, often referred to as electronic commerce or e-commerce. Retailers that provide goods entirely through Internet transactions do not incur the expense of building so-called brick-and-mortar stores or the expense of maintaining them.

Service Enterprises: Service enterprises include many kinds of businesses. Examples include dry cleaners, shoe repair stores, barbershops, restaurants, ski resorts, hospitals, and hotels. In many cases service enterprises are moderately small because they do not have mechanized services and limit service to only as many individuals as they can accommodate at one time. For example, a waiter may be able to provide good service to four tables at once, but with five or more tables, customer service will suffer.

In recent years the number of service enterprises in wealthier free-market economies has grown rapidly, and spending on services now accounts for a significant percentage of all spending. By the late 1990s, private services accounted for more than 21 percent of U.S. spending. Wealthier nations have developed postindustrial economies, where entertainment and recreation businesses have become more important than most raw material extraction such as the mining of mineral ores and some manufacturing industries in terms of creating jobs and stimulating economic growth. Many of these industries have moved to developing nations, especially with the rise of large multinational corporations. As postindustrial economies have accumulated wealth, they have come to support systems of leisure, in which people are willing to pay others to do things for them. In the United States, vast numbers of people work rigid schedules for long hours in indoor offices, stores, and factories. Many employers pay high enough wages so that employees can afford to balance their work schedules with purchased recreation. People in the United States, for example, support thriving travel, theme park, resort, and recreational sport businesses.

FORMS OF BUSINESS OWNERSHIP

There are a number of different forms of business ownership. These include (1) sole proprietorships, (2) partnerships, (3) corporations, (4) joint ventures, and (5) syndicates.

Sole Proprietorship: The most common form of ownership is a sole proprietorship—that is, a business owned by one individual. At the beginning of the 21st century, there were more than 17 million sole proprietorships in the United States. These businesses have the advantage of being easy to set up and to dissolve because few laws exist to regulate them. Proprietors, as owners, also maintain direct control of their businesses and own all their profits. On the other hand, owners of proprietorships are personally responsible for all business debts and, because they are constrained by the limits of their personal financial resources, they may find it difficult to expand or increase their profits. For those reasons, sole proprietorships tend to be small, primarily service and retail businesses.

Partnership: A partnership is an association of two or more people who operate a business as co-owners. There are different types of partners. A general partner is active in the operation of a business and is liable for all of its debts. In small businesses with only two or three owners, all typically will be general partners. A limited partner, by contrast, invests in a business but is not involved in its daily operations. Partnerships, like sole proprietorships, are relatively easy to establish. Furthermore, partners can pool financial resources to fund expansion and can divide their duties and responsibilities according to personal expertise and abilities. For example, one partner may be very good at selling, while another has a knack for maintaining good financial records. As with sole proprietorships, however, partnerships may entail substantial financial risks, as all of the general partners are liable for the debts of the business. And unlike proprietorships, disagreements among partners can harm partnership businesses.

Corporation: A corporation is a legal entity that exists as distinct from the individuals who control and invest in it. As a result, a corporation can continue indefinitely through complete changes of ownership, leadership, and staffing. Current owners can sell their holdings to other individuals or, if they die, have their assets transferred to heirs. This is possible because a corporation creates shares of stock that are sold to investors. One strength of the corporate business structure is that stockholders have limited liability, as opposed to the unlimited liability of general partners, so they cannot lose more than their initial investment. Investors may also easily buy and sell stocks of public corporations through stock exchanges. By offering stock publicly, a corporation enables anyone with some money to buy the stock and become a part-owner of the company. As a result, corporations can more easily raise capital for business expansion than can sole proprietorships and most partnerships.

Investors control a corporation through the election of a managing body, known as a board of directors. In a large corporation, investors collectively decide who will oversee the operation of the enterprise. In turn, the board chooses a president, who decides on the key company personnel and helps formulate company strategy.

Many corporations are highly successful business organizations, with profits far exceeding those of many sole proprietorships and partnerships. However, they traditionally have higher tax burdens than other kinds of businesses. Also, the fees involved in creating and organizing a corporation can be expensive.

Joint Ventures and Syndicates: In joint ventures and syndicates, individuals or businesses cooperate to create a single product or service package. A joint venture is a partnership agreement in which two or more individual- or group-run businesses join together to carry out a single business project. For example, U.S.-based General Motors Corporation and Toyota Motor Corporation, based in Japan, have a joint venture called New United Motor Manufacturing, Inc., created for the purpose of producing cars in California.

A syndicate is an association of individuals or corporations formed to conduct a specific financial transaction such as buying a business. Quite often syndicates are created for the purpose of buying sports franchises. For example, the Miami Heat basketball team and the New York Yankees baseball team are each owned by syndicates of individuals. Each member of these syndicates is also involved in the operation of other businesses.

BUSINESS OPERATIONS

A variety of operations keep businesses, especially large corporations, running efficiently and effectively. Common business operation divisions include (1) production, (2) marketing, (3) finance, and (4) human resource management.

Production: Production includes those activities involved in conceptualizing, designing, and creating products and services. In recent years there have been dramatic changes in the way goods are produced. Today, computers help monitor, control, and even perform work. Flexible, high-tech machines can do in minutes what it used to take people hours to accomplish. Another important development has been the trend toward just-in-time inventory. The word inventory refers to the amount of goods a business keeps available for wholesale or retail. In just-in-time inventory, the firm stocks only what it needs for the next day or two. Many businesses rely on fast, global computer communications to allow them to respond quickly to changes in consumer demand. Inventories are thus minimized and businesses can invest more in product research, development, and marketing.

Marketing: Marketing is the process of identifying the goods and services that consumers need and want and providing those goods and services at the right price, place, and time. Businesses develop marketing strategies by conducting research to determine what products and services potential customers think they would like to be able to purchase. Firms also promote their products and services through such techniques as advertising and personalized sales, which serve to inform potential customers and motivate them to purchase. Firms that market products for which there is always some demand, such as foods and household goods, often advertise if they face competition from other firms marketing similar products. Such products rarely need to be sold face-to-face. On the other hand, firms that market products and services that buyers will want to see, use, or better understand before buying, often rely on personalized sales. Expensive and durable goods—such as automobiles, electronics, or furniture—benefit from personalized sales, as do legal, financial, and accounting services.

Finance: Finance involves the management of money. All businesses must have enough capital on hand to pay their bills, and for-profit businesses seek extra capital to expand their operations. In some cases, they raise long-term capital by selling ownership in the company. Other common financial activities include granting, monitoring, and collecting on credit or loans and ensuring that customers pay bills on time. The financial division of any business must also establish a good working relationship with a bank. This is particularly important when a business wants to obtain a loan.

Human Resource Management
Businesses rely on effective human resource management (HRM) to ensure that they hire and keep good employees, and that they are able to respond to conflicts between workers and management. HRM specialists initially determine the number and type of employees that a business will need over its first few years of operation. They are then responsible for recruiting new employees to replace those who leave and for filling newly created positions. A business’s HRM division also trains or arranges for the training of its staff to encourage worker productivity, efficiency, and satisfaction, and to promote the overall success of the business. Finally, human resource managers create workers’ compensation plans and benefit packages for employees.

FREE MARKET ECONOMY

BUSINESS IN A FREE MARKET ECONOMY
The economy of the United States, as well as that of most developed nations, operates according to the principles of the free market. This differs from the economies of Socialist or Communist countries, where governments play a strong role in deciding what goods and services will be produced, how they will be distributed, and how much they will cost (see Socialism; Communism). Businesses in free-market economies benefit from certain fundamental rights or freedoms. All people in free-market societies have the right to own, use, buy, sell, or give away property, thus permitting them to own and operate their own businesses as private, profit-seeking enterprises. Business owners in free markets may choose to run their businesses however they like, within the limits of other, mostly non-business-oriented laws. This right gives businesses the authority to hire and fire employees, invest money, purchase machinery and equipment, and choose the markets where they want to operate. In doing so, however, they may not violate or infringe on the rights of other businesses and people. Free-market businesses also have the right to keep or reinvest their profits.

All free-market economies, however, keep the rights of businesses in check to some degree through laws and regulations that monitor business activities. Such laws vary from country to country, but they generally encourage competition by protecting small businesses and consumers from being hurt by more powerful, large enterprises. For example, in the United States the Sherman Antitrust Act, enacted in 1890, and the Clayton Antitrust Act of 1914 forbid business agreements that impede interstate and most international commerce. The Clayton Antitrust Act also protects against unfair business practices aimed at creating monopolies and guarantees the rights of labor to challenge management practices perceived as unfair. The U.S. Federal Trade Commission Act of 1914 prohibits businesses from attempting to control the prices of its products or services, among other provisions. Other laws prohibit mergers that decrease competition within an industry and require large merging companies to notify the Federal Trade Commission (FTC) for approval.

CURRENT TRENDS

CURRENT TRENDS
Business activities are becoming increasingly global as numerous firms expand their operations into overseas markets. Many U.S. firms, for example, attempt to tap emerging markets by pursuing business in China, India, Brazil, and Russia and other Eastern European countries. Multinational corporations (MNCs), which operate in more than one country at once, typically move operations to wherever they can find the least expensive labor pool able to do the work well. Production jobs requiring only basic or repetitive skills—such as sewing or etching computer chips—are usually the first to be moved abroad. MNCs can pay these workers a fraction of what they would have to pay in a domestic division, and often work them longer and harder. Most U.S. multinational businesses keep the majority of their upper-level management, marketing, finance, and human resources divisions within the United States. They employ some lower-level managers and a vast number of their production workers in offices, factories, and warehouses in developing countries. MNCs based in the United States have moved many of their production operations to countries in Central and South America, China, India, and nations of Southeast Asia.

Mergers and acquisitions are also becoming more common than in the past. In the United States, for example, America Online, Inc. (AOL) and Time Warner merged in 2000 to form AOL Time Warner, Inc., a massive corporation that brought together AOL’s Internet franchises, technology and infrastructure, and e-commerce capabilities with Time Warner’s vast array of media, entertainment, and news products. Internationally, a growing number of mergers and acquisitions have been taking place, including Daimler Benz’s acquisition of Chrysler to form DaimlerChrysler AG and Ford Motor Company’s acquisition of Volvo’s automobile line.

With large mergers and the development of new free markets around the world, major corporations now wield more economic and political power than the governments under which they operate. In response, public pressure has increased for businesses to take on more social responsibility and operate according to higher levels of ethics. Firms in developed nations now promote—and are often required by law to observe—nondiscriminatory policies for the hiring, treatment, and pay of all employees. Some companies are also now more aware of the economic and social benefits of being active in local communities by sponsoring events and encouraging employees to serve on civic committees. Businesses will continue to adjust their operations according to the competing goals of earning profits and responding to public pressures for them to behave in ways that benefit society.