AP Business with Personal Finance · Lesson 3

Ethics, organization and supply chains

Know Know it

Business ethics are the standards of right and wrong that guide business decisions. The law sets a minimum, but something can be legal and still unethical, such as an ad that is technically true but designed to mislead. Decisions affect many stakeholders: customers, employees, owners or shareholders, suppliers, lenders, the community and government. Corporate social responsibility means going beyond the law to benefit them; the triple bottom line judges a business on people, planet and profit. Common problems include conflicts of interest, bribery, discrimination, unsafe working conditions, greenwashing (claiming to be greener than you are) and misleading financial reports. Many firms write a code of ethics, and a whistleblower is an employee who reports wrongdoing to someone who can stop it.

Most firms divide work into functional areas: marketing, finance and accounting, operations (making the product or delivering the service) and human resources (hiring, training, pay and benefits). An organizational chart shows the chain of command, who reports to whom. Span of control is the number of people who report directly to one manager. A tall structure has many levels and narrow spans; a flat one has few levels and wide spans, so decisions move faster but each manager has more people to support. A functional structure groups people by job; a divisional structure groups them by product or region, each division with its own functions; a matrix structure gives some workers two bosses, one for their function and one for a project. Shareholders elect a board of directors, which oversees the company and hires the chief executive. Managers plan, organize, lead and control.

A supply chain is every step that turns raw materials into a product in a customer’s hands: suppliers, manufacturers, distributors or wholesalers, retailers and customers. Logistics is moving and storing the goods along the way. Inventory comes as raw materials, work in process and finished goods. Just-in-time inventory keeps little stock and relies on fast, reliable deliveries; just-in-case inventory keeps extra stock as a cushion, at a higher storage cost. Vertical integration means owning more steps of the chain: backward toward suppliers or forward toward customers. Firms may outsource a task to another company, offshore it to another country or reshore it back home. When choosing a supplier, compare the landed cost (price plus shipping, duties and other charges), quality, reliability and the supplier’s ethics.

Trap Legal is the floor, not the ceiling

Do not treat “it is legal” as “it is ethical.” A question that asks you to evaluate a decision ethically wants you to look at who is helped or harmed and whether people are treated honestly and fairly, even when no law is broken.

Worked example Easy

A fictional grocery store has one store manager. Four department heads report to her, and 32 clerks are split evenly among the four department heads. What is each department head’s span of control?

  1. 4 people
  2. 8 peopleAnswer
  3. 32 people
  4. 36 people

How to solve it

  1. Span of control counts only the people who report directly to one manager.
  2. Each department head has an equal share of the 32 clerks.
  3. 32 / 4 = 8 clerks report to each department head.

Why each choice is right or wrong

  • A. Incorrect. 4 people is the store manager’s span of control, the four department heads who report to her.
  • B. Correct. 32 clerks shared evenly by 4 department heads gives 32 / 4 = 8 direct reports each.
  • C. Incorrect. 32 people is all of the clerks in the store, not the number reporting to one department head.
  • D. Incorrect. 36 people counts everyone below the store manager, 4 + 32, not one department head’s direct reports.

Explain Explain it

Task verbs: explain, compare

To explain an ethical problem, start with the people. Ask who is affected by the decision, then for each group ask what they lose or risk if the business does nothing. A specific harm tied to a detail of the case is stronger than a general one such as “it is bad for them.”

To compare suppliers, put every cost on the same basis, usually cost per unit delivered, before you decide. A low price can hide high shipping or duty costs.

Worked example Medium

Two suppliers of ceramic mugs for a fictional café chain, Hollow Oak (dollars per mug)

SupplierPriceShippingImport duty
Supplier A4.001.1010 percent of the price
Supplier B4.600.20None

Counting price, shipping and duty, which supplier is cheaper per mug, and by how much?

  1. Supplier A, by 0.60 dollars per mug
  2. Supplier B, by 0.30 dollars per mug
  3. Supplier B, by 0.70 dollars per mugAnswer
  4. Supplier A, by 0.10 dollars per mug

How to solve it

  1. Supplier A: duty is 10 percent of 4.00 = 0.40, so landed cost is 4.00 + 1.10 + 0.40 = 5.50 dollars.
  2. Supplier B: 4.60 + 0.20 + 0 = 4.80 dollars.
  3. 5.50 - 4.80 = 0.70, so B is cheaper by 0.70 dollars per mug.

Why each choice is right or wrong

  • A. Incorrect. 0.60 dollars in favor of A compares only the prices, 4.60 - 4.00, and ignores shipping and duty.
  • B. Incorrect. 0.30 dollars leaves out A’s 0.40 dollar duty: 5.10 - 4.80 = 0.30.
  • C. Correct. A costs 4.00 + 1.10 + 0.40 = 5.50 dollars; B costs 4.60 + 0.20 = 4.80 dollars; B is cheaper by 0.70 dollars.
  • D. Incorrect. 0.10 dollars in favor of A has no basis in the table; once shipping and duty are added, A costs more than B, not less.

Explain Your turn

A fictional sneaker company, Stridelane, learns that the factory that makes its shoes forces workers to stay 13 hours a day without overtime pay. This factory is Stridelane’s cheapest supplier. Explain one way the factory workers are harmed if Stridelane keeps using the factory and changes nothing. Then explain one way Stridelane’s own shareholders could be harmed if the public learns about the factory.

Write it, then compare. Nothing you type here is saved or graded.

Compare with a model answer

A full answer does this

  • Explains a harm to the factory workers
  • Explains a harm to Stridelane’s shareholders that follows from the public learning about the factory

Model answer

The factory workers are harmed because 13-hour days wear down their health, and they are not paid for the overtime they work. Stridelane’s shareholders could be harmed if the public learns about the factory: many customers might refuse to buy Stridelane shoes, so sales and profit fall, and the value of the shareholders’ stock could drop with them.

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