[ UGC-NET MANAGEMENT]

Contents
Instructions.................................................................................................................4 Organizational behavior...........................................................................................18 Management Thoughts.............................................................................................49 Human resource management.................................................................................51 Business statistics....................................................................................................55 Marketing environment and environment scanning.................................................62 Corporate Strategy...................................................................................................67 Values and ethics in management...........................................................................94 Corporate governance............................................................................................122 Fundamental and Ethics Theories of Corporate Governance..........................122 Production management........................................................................................142 Financial management...........................................................................................157 Different types of transactions in the Foreign Exchange Market....................157 Risk management...........................................................................................181 Cash management.................................................................................................188 Cash management services generally offered................................................188 Inventory................................................................................................................190 Inventory Management..................................................................................190 Business inventory.........................................................................................191 The reasons for keeping stock.....................................................................191 Special terms used in dealing with inventory..............................................192 Typology......................................................................................................192 Inventory examples.....................................................................................192 Principle of inventory proportionality..............................................................193 Purpose.......................................................................................................193 Applications.................................................................................................194 Roots...........................................................................................................194

High-level inventory management.................................................................194 Accounting for inventory................................................................................196 Role of inventory accounting.......................................................................197 FIFO vs. LIFO accounting.............................................................................197 Standard cost accounting............................................................................198 Theory of constraints cost accounting.........................................................198 National accounts...........................................................................................198 Distressed inventory.......................................................................................199 Inventory credit..............................................................................................199 Cash conversion cycle............................................................................................201 Definition........................................................................................................201 [edit] Derivation..........................................................................................201 Question bank........................................................................................................205 Job enrichment.......................................................................................................230 Contents.........................................................................................................231 [edit] Techniques............................................................................................231 What are Management Information Systems?................................................232 Advantages & Disadvantages Of Information Management Systems.....................238 Advantages.....................................................................................................238 Better Planning and Control............................................................................239 Aid Decision Making.......................................................................................239 Disadvantages................................................................................................239 Constant Monitoring Issues............................................................................239

Instructions
SCHEME AND DATE OF TEST:

(i) The Test will consist of three papers. All the three papers will be held on 26th December, 2010 in two separate sessions as under:

Session
First

Paper
I

Marks
100

Duration
1 Hours (09.30 A.M. to 10.45 A.M.) 1 Hours (10.45 A.M. to 12.00 NOON) 2 Hours (01.30 P.M. to 04.00 P.M.)

First

II

100

Second

III

200

Paper-I shall be of general nature, intended to assess the teaching/research aptitude of the candidate. It will primarily be designed to test reasoning ability, comprehension, divergent thinking and general awareness of the candidate. UGC has decided to provide choice to the candidates from the December 2009 UGC-NET onwards. Sixty (60) multiple choice questions of two marks each will be given, out of which the candidate would be required to answer any fifty (50). In the event of the candidate attempting more than fifty questions, the first fifty questions attempted by the candidate would be evaluated. Paper-II shall consist of questions based on the subject selected by the candidate. Each of these papers will consist of a Test Booklet containing 50 compulsory objective type questions of two marks each. The candidate will have to mark the responses for questions of Paper-I and Paper-II on the Optical Mark Reader (OMR) sheet provided along with the Test Booklet. The detailed instructions for filling up the OMR Sheet will be sent to the candidate along with the Admit Card. Paper-III will consist of only descriptive questions from the subject selected by the candidate. The candidate will be required to attempt questions in the space provided in the Test Booklet.

The structure of Paper-III has been revised from June, 2010 UGC-NET and is available on the UGC website www.ugc.ac.in.

Paper-III will be evaluated only for those candidates who are able to secure the minimum qualifying marks in Paper-I and Paper-II, as per the table given in the following:
MINIMUM QUALIFYING MARKS CATEGORY PAPER - I 40 35 35 PAPER - II 40 35 35 PAPER - I + PAPER II 100 (50 %) 90 (45 %) 80 (40 %)

GENERAL OBC/PH/VH SC/ST

The minimum qualifying criteria for award of JRF is as follows : MINIMUM QUALIFYING MARKS CATEGORY PAPER - I 40 35 35 PAPER - II 40 35 35 PAPER - I + PAPER - II 100 (50 %) 90 (45 %) 80 (40 %) PAPER III 100 (50 %) 90 (45 %) 80 (40 %)

GENERAL OBC/PH/VH SC/ST

However, the final qualifying criteria for Junior Research Fellowship (JRF) and Eligibility for Lectureship shall be decided by UGC before declaration of result. (ii) For Visually Handicapped (VH) candidates thirty minutes extra time shall be provided separately for paper-I and Paper-II. For paper-III, forty five minutes extra time shall be provided. They will also be provided the services of a scribe who would be a graduate in a subject other than that of the candidate. Those Physically Handicapped (PH) candidates who are not in a position to write in their own hand-writing can also avail these services by making

prior request (at least one week before the date of UGC-NET) in writing to the Co-ordinator of the test centre. Extra time and facility of scribe would not be provided to other Physically Handicapped candidates. (iii) Syllabus of Test: Syllabi for all NET subjects can be downloaded from the UGC Website www.ugc.ac.in and are also available in the libraries of all Indian universities. UGC will not send the syllabus to individual candidates. (iv) In Paper III, candidate has the option to answer either in Hindi or in English in all subjects except the languages where the candidate is required to write in the concerned language only. In case of Computer Science & Applications, Electronic Science and Environmental Sciences, the question papers have to be answered in English only.
(v) In case of any discrepancy found in the English and Hindi versions, the questions in English version shall be taken as final.

Latest Structure of paper-III To be implemented from June 2010 UGC-NET Section-1: Essay writing-two questions with internal choice on general themes and contemporary, theoretical or of disciplinary relevance may be given. The candidate is expected to write up to 500 words for each question of 20 marks (2Q X 20 M =40 marks). In case the questions are based on electives, the choices should be of general nature, common to all candidates. In case of science subjects like Computer Science etc. two questions carrying 20 marks each may be given in place of essay type questions. The questions in this section should be numbered as 1 and 2. Three extended answer based questions to test the analytical ability of the candidates are to be asked on the major specialization/electives. Questions will be asked on all major specialization/electives and the candidates may be asked to choose one specialization/ elective and answer the three questions. There is to be no internal choice. Each question will be answered in up to 300 words and shall carry 15 marks each(3Q X 15 M=45 Marks). Where there is no specialization/elective, 3 questions may be set across the syllabus. The questions in this section should be numbered 3 to 5. Nine questions may be asked across the syllabus. The questions will be definitional or seeking particular information and are to be answered in up to 50 words each. For Science subjects as mentioned in Section-1, short numerical/computational problems may be considered. Each question will carry 10 marks (9Q X 10 M =90 Marks). There should be no internal choice. The questions in this section should be numbered 6 to 14. It requires the candidates to answer questions from a given text of around 200-300 words taken from the works of a known thinker/author. Five carefully considered specific questions are to be asked on the given text, requiring an answer in up to 30 words each. This section carries 5 questions of 5 marks each (5Q X 5M =25 Marks). In the case of science subjects, a theoretical/ numerical problem may be set. These questions are meant to test critical thinking ability to comprehend and

Section-2:

Section-3:

Section-4:

apply knowledge one possess. Question in this section should be numbered as 15 to 19.

Section

Type of Questions

Test of

No. of questions

Words Per answer Total 1000

Marks Per question 20 Total 40

Essay

Ability to dwell on a theme at an optimum level

500

Three analytical/ evaluative questions

Ability to 3 reason and hold on argument on the given topic Ability to understand and express the same 9

300

900

15

45

Nine definitional / short answer questions Text based questions

50

450

10

90

Critical 5 thinking, ability to comprehend and formulate the concept 19

30

150

25

Total

2500

200

Here are some of the tips and techniques to score well in UGC NET examination. Follow them at the best. Good Luck. 1. Writing skills matter a lot in the NET Examination. Most of the candidates appearing for the NET examination have a lot of knowledge, but lack writing skills. You should be able to present all the information/knowledge in a coherent and logical manner, as expected by the examiner. For example: Quoting with facts and substantiating your answer with related concepts and emphasizing your point of view. 2. Preparations for NET examination should be done intensively. 3. Prepare a standard answer to the question papers of the previous years. This will also make your task easy at the UGC examination. 4. Do Not miss the concepts. Questions asked are of the Masters level examination. Sometimes the questions are conceptual in nature, aimed at testing the comprehension levels of the basic concepts. 5. Get a list of standard textbooks from the successful candidates, or other sources and also selective good notes. The right choice of reading material is important and crucial. You should not read all types of books as told by others 6. While studying for the subjects, keep in mind that there is no scope for selective studies in UGC. The whole syllabus must be covered thoroughly. Equal stress and weight should be given all the sections of the syllabus. 7. Note that in the ultimate analysis both subjects carry exactly the same amount of maximum marks. 8. Go through the unsolved papers of the previous papers and solve them to stimulate the atmosphere of the examination. 9. Stick to the time frame. Speed is the very essence of this examination. Hence, time management assumes crucial importance. 10. For developing the writing skills, keep writing model answers while preparing for the NET examination. This helps get into the habit of writing under time pressure in the Mains examination. 11. Try not to exceed the word limit, as far as possible. Sticking to the word limit that will save time. Besides, the numbers of marks you achieve are not going to increase even if you exceed the word limit. Its the quality that matters not the quantity.

12. Highlight the important points which are important. 13. Follow paragraph writing rather than essay form. A new point should start with a new paragraph. 14. If the question needs answer in point format give it a bullet format. 15. Keep sufficient space between two lines. 16. Give space and divide it by a dividing line between two questions. 17. Above all be patient and believe in you and God. ***************** Unit 1 ***************** managerial economics-demand analysis production function cost-output relations market structures pricing theories advertising macro-economics national income concept infrastructure-management and policy business environment capital budgeting ***************** Unit 2 ***************** the concept and significance of organisational behaviour-skills and role in an organisationclassical, neo-classical and modern theories of organisational structure- organisational designunderstanding and managing individual behaviour personality-perception-values-attitudeslearning-motivation. Understanding and managing group behaviour, processes-Inter-personal and group dynamicscommunication-leadership-managing cange-managing conflicts. Organisational development ***************** Unit 3 ***************** Concepts and perspectives of HRM,HRM in changing environment, Human resource planningobjectives, process and techniques. Job analysis- job description Select human resources Induction, training and development Exit policy and implications performance appraisal and evaluation

Wage determination Industrial relations and trade unions Dispute resolution and grievance management Labour welfare and social security measures ***************** Unit 4 ***************** financial management-nature and scope valuation concepts and valuation of securities Capital budgeting decision-risk analysis Capital structure and cost of capital Dividend policies-determinants Long term and short term financing instruments mergers and acquisitions ***************** Unit 5 ***************** Marketing environment and environment scanning, marketing information systems and marketing research, understanding consumer and industrial markets, demand measurement and forecasting, market segmentation-targeting and positioning, product decisions,product mix, product life cycle, new product development, branding and packaging, pricing methods and strategies. Promotion decisions-promotion mix, advertising, personal selling, channel management, vertical marketing system, evaluation and control of marketing effort, marketing of service, customer relation management, Uses of internet as a marketing medium- other related issues like branding, market development, advertising and retailing on the net. New issues in marketing. ***************** Unit 6 ***************** Role and scope of production management, facility location, layout planning and analysis, production planning and control- production process analysis, demand forecasting for operations, determinant of product mix, production scheduling, work measurement, time and motion study, statistical quality control. role and scope of operations research, linear programming, sensitivity analysis, transportation model, inventory control, queuing theory, decision theory, markov analysis, PERT/CPM ***************** Unit 7 ***************** Probability theory, probability distribution-binomial, poission, normal and exponential, correlation and regression analysis, sampling theory, sampling distribution, tests of hypothesis, large and small samples, t, z, f, chi-square tests. use of computers in managerial applications, technological issues and data processing in organisations. Information systems, MIS and decision making, system analysis and design, trends in information technology,Internet and internet-based applications.

***************** Unit 8 ***************** Concept of corporate strategy, component of strategy formulation, Ansoff's growth vector, BCG model, Porter's generic strategies, competitor analyis, strategic dimensions and group mapping, industry analysis, strategies in industry evolution, fragmentation, maturity and decline,competitive strategy and corporate strategy, transnationalisation of world economy,managing cultural diversity, global entry strategies, globalisation of financial system and services, managing international business, competitive advantage of nations, RTP and WTO ***************** Unit 9 ***************** Concepts- types, characterstics, motivation, competencies and its development, innovation and entrepreneurship, small business-concepts Government policy for promotion of small and tiny enterprises, process of business opportunity identification, detailed business plan preparation, managing small enterprises, planning for growth, sickness in small enterprises, rehabilitation of sick enterprises, Intrapreneurship(organisational entrepreneurship). ***************** Unit 10 ***************** Ethics and management systems, ethical issues and analysis in management, value based organisations, personal framework for ethical choices, ethical pressure on individuals in organisations, gender issues, ecological consciousness, environmental ethics, social responsibilities of business, corporate governance and ethics. ************************ Elective-I ************************ Human Resource Management (HRM) - Significance; Objectives; functions; a diagnostic model; External and Internal environment Forces and Influences; organizing HRM function Recruitment and selection-sources of recruits; recruiting methods; selection procedure; selection tests; Placement and follow-up. Performance appraisal system-importance and objectives; techniques of appraisal system; new trends in appraisal system. Development of personnel- objectives; determining needs; methods o training and development programs; evaluation. Career planning and development-concept of career; career planning and development methods. Compensation and benefits- job evaluation techniques; wage and salary administration; fringe benefits; human resource records and audit.

Employee discipline importance; causes and forms; disciplinary action; domestic enquiry. Grievance management- importance; process and practices; employee welfare and social security measures. Industrial relations- importance; industrial conflicts; causes; dispute settlement machinery Trade union- importance of unionism; union leadership; national trade union movement Collective bargaining- concept; process; pre-requisite; new trends in collective bargaining Industrial democracy and employee participation- need for industrial democracy; pre-requisite for industrial democracy; employee participation objectives; forms of employee participation. Future of Human Resource Management. ************************ Elective-II ************************ Marketing-Concepts; Nature and scope; Marketing myopia; Marketing mix; Different environments and their influences on marketing; understanding the customer and competition. Role and relevance of Segmentation and positioning; Static and dynamic understanding of BCG matrix and Product Life Cycle; Brands-Meaning and role; Brand building strategies; Share increase strategies. Pricing objectives; pricing concepts; Pricing methods Product- Basic and augmented stages in new product development Test marketing concepts Promotion mix- Role and relevance of advertising Sales promotion- media planning and management Advertising- Planning, execution and evaluation Different tools used in sales promotion and their specific advantages and limitations Public relations- concept and relevance Distribution channel hierarchy; role of each member in the channel; Analysis of businesss potential and evaluation of performance of the channel members Wholesaling and retailing- Different formats and the strength of each one; Emerging issues in different formats of retailing in India

Marketing research- Sources of information; Data collection; Basic tools used in data analysis; structuring a research report Marketing to orgaisations- Segmentation models; Buyer behavior models; Organiational buying process Consumer behavior theories and models and their specific relevance to marketing managers Sales function- Role of technology in sales function automation Customer relationship management including the concept of Relationship marketing Use of internet as a medium of marketing; Managerial issues in researching consumer/ organization through internet Structuring and managing marketing organizations, Export Marketing- Indian and global context ************************ Elective-III ************************ Nature and scope of financial management valuation concepts-risk and return, valuation of securities, pricing theories- capital asset pricing model and arbitrage pricing theory Understanding financial statements and analysis thereof Capital budgeting decision, risk analysis in capital budgeting and long-term sources of finance Capital structure- theories and factors, cost of capital Dividend policies -theories and determinants Working capital management-determinants and financing, cash management,inventory management, receivables management Elements of derivatives Corporate risk management mergers and acquisitions International financial management ************************ Elective-IV ************************ Indias foreign Trade and Policy; Export promotion policies; Trade agreements with other countries; Policy and performance o Export zones and Export-oriented unit; Export incentives. International marketing logistics; International logistic structures; Export Documentation framework; Organisation of shipping services; Chartering practices; Marine cargo insurance.

International financial environment; Foreign exchange markets; Determination of exchange rates; Exchange risk measuremet; International investment; International capital markets; International credit Agencies and Implictions of their ratings. WTO and Multilateral trade agreements pertaining to trade in goods; trade in services and TRIPS; Multilateral environment agreements(MEAs); International Trade Blocks- NAFTA, ASEAN, SAARC, EU, WTO and Dispute Settlement Mechanism. Technology Monitoring; Emerging opportunities for global business.

Managerial economics

Managerial economics Definition of managerial economics Nature and characteristics of managerial economics Scope of managerial economics Difference between managerial economics and economics Economic tools used in managerial economics Decision criteria
Managerial economics is the study of economic theories, logic and methodology which are generally applied to seek solutions to the practical problems of business. Nature and characteristics of managerial economics Scope of managerial economics Demand analysis Demand curve Demand schedule Elasticity of demand Demand forecasting Relationship between Average and Marginal cost:

In the figure above the average and marginal cost curves have been drawn. It will be seen that so long as the average cost is falling, marginal cost is less than average cost. In the same way when average cost is rising marginal cost is above the average cost.

The marginal average relation is mathematical truism which is correct in all the conditions. We can understand it easily with the help of an example. Suppose in a cricket match the batting average of a batsman is 60 in the first innings. If Market structure Perfect competition Monopolistic competition Oligopoly Monopoly Monopsony

Seller entry barrier

Seller numbe r

Buyer entry barrier

Buyer numbe r

No No Yes Yes No

Many Many Few One Many

No No No No Yes

Many Many Many Many One

Market structure Perfect competition Features that all three market structures share Goal of firms Rule for maximizing Can earn economic profit in the long run Features that Monopolistic competition shares with monopoly Price takers? Price Produces welfare maximizing level of output? Features that Monopolistic competition shares with perfect competition Number of firms Entry in long run? Can earn economic profit in long run? Many Yes No Many Yes No one No Yes Yes P=MC Yes No P>MC No No P>MC No Maximize profit MR= MC Yes Maximize profit MR= MC yes Maximize profit MR= MC Yes Monopolistic competition Monopoly

quantit y 0 1 2 3 4 5 6 7 8 monop oly quantit y 0 1 2 3 4 5 6 7 8

average cost

5 4 4 4.25 4.6 5 5.428571 429 5.875 average cost

tot al cos t 3 5 8 12 17 23 30 38 47 tot al cos t 3 5 8 12 17 23 30 38 47

margin al cost

average revenue

total reven ue 0 6 12 18 24 30 36 42 48 total reven ue 10 18 24 28 30 30 28 24

margina l revenue 6 6 6 6 6 6 6 6 margina l revenue 10 8 6 4 2 0 -2 -4

prof it -3 1 4 6 7 7 6 4 1 prof it -3 5 10 12 11 7 0 -10 -23

change in profit 4 3 2 1 0 -1 -2 -3 -1 change in profit 8 5 2 -1 -4 -7 -10 -13 23

2 3 4 5 6 7 8 9 margin al cost

6 6 6 6 6 6 6 6 average revenue

5 4 4 4.25 4.6 5 5.428571 429 5.875

2 3 4 5 6 7 8 9

10 9 8 7 6 5 4 3

Macro-Economics
Macro-economics is also known as the theory of income and employment or simply income analysis. It is concerned with the problems of unemployment, economic fluctuations, inflation or deflation, international trade and economic growth. Macro-economics is the study of aggregates or averages covering the entire economy, such as total employment, national income, national output, national output, total investments, total consumption, and total saving; aggregate supply and aggregate demand, general price level, wage level and cost structure. In other words, it is aggregate economics which examines the inter-relations among the various aggregates, their determination and causes of fluctuations in them. Thus, in the words of Professor Ackley, Macro-economics deals with economic affairs in the large; it concerns the overall dimensions of economic life. It looks at the total size and shape and functioning of the elephant of economic experience, rather than working of articulation or dimensions of the

individual parts. It studies the character of the forest independently of the trees which compose it. Scope and Importance of Macro-economics:As a method of economic analysis macro-economics is of much theoretical and practical importance 1 2 3 4 5 6 7 8 To understand the working of Economy In Economic Policies In General Employment In National Income In Economic Growth In Monetary Problems In Business Cycle For Understanding the behavior of Individual units

Limitations of Macro-economics:1 2 3 4 5 Fallacy of compositions To regard the aggregate as homogeneous Aggregate variables may not be important necessarily Indiscriminate use of Macro-economics misleading Statistical and conceptual difficulties

Capital Budgeting Meaning Capital budgeting decisions pertain to fixed/long term assets by definition refers which are in operation and yield a return, over a period of time, usually, exceeding one year. They therefore, involve a current outlay of series of outlays of cash resources in return for an anticipated flow of future benefits. In other, the system of capital budgeting is employed to evaluate expenditure decisions which involve current outlays but are likely to produce benefits over a period of time longer than one year. These benefits may be either in the form of increased revenues or reduced costs. Capital expenditure management, therefore, includes addition, disposition, modification and replacement of fixed assets. The features of capital budgeting are as follows: 1 2 3 Potentially large anticipated benefits A relatively high degree of risk A relatively long time period between the initial outlay and the anticipated returns

The term capital budgeting is used inter-changeably with capital expenditure decision, capital expenditure management, long-term investment decision, management of fixed assets and so on. Importance of Capital Budgeting

Capital Budgeting decision affects the profitability of a firm. Capital budgeting decisions determine the future destiny of the company. A few wrong decisions and the firm may be forced into bankruptcy. A

BUSINESS CYCLE
Business Cycle refers to fluctuations in economic activity. It is also known as the economic cycle. The Business Cycle has four distinct phases that revolve around its long-tern growth trend. - Contraction : That features slow down in economic activity. - Trough : Turning point of business cycle where contraction shifts to expansion. - Expansion: Growth in economic activity. - Peak : Upper turning point of business cycle. There are four phases of the business cycle: 1. Peak/boom 2. Recession 3. Trough 4. Recovery Let's briefly discuss each phase now: 1. Peak/Boom: This is the stage when the business activity is at its maximum, although this level of activity is temporary. 2. Recession: After operating at maximum activity, the business goes into the recession phase. This phase witnesses a decrease in total output, employment and trade. Recession may last for about 6 months or more. 3. Trough: At this stage, output and employment are at their lowest. This is also referred to as the stage of depression. This stage may be short term or may be long term depending on circumstances and market conditions. 4. Recovery: The recovery stage, as the name suggests is the rise in output, employment and trade after the depression stage. The employment levels increase till maximum employment is reached. These stages are often depicted as a graph. The graph would look like a wave. The peak of the wave is the boom phase, the decreasing slope is recession, the rock bottom of the wave is the trough/depression, and recovery phase is shown as the increasing slope after the trough. The vertical axis measures real output and the horizontal axis measures time.

Organizational behavior
Organizational theory is a set of interrelated constructs (concepts), definitions and propositions that present a systematic view of behavior of individuals, groups, and subgroups interacting in some relatively patterned sequence of activity, the intent of which is goal directed. Some important organizational theories are:(a) Classical theory a. Scientific management theory b. Administrative theory (b) Neo-classical theory (c) Modern theory Concept of organizational behavior Role of organizational behavior Organizational theories Appraisal of Classical theory Systems approach Contingency or situational approach ************* Organisational structure Mechanism of designing structure Departmentation Choosing a basis of departmentation Span of management Delegation of authority Centralisation and decentralization ************* Personality Determinants of personality Personality and behavior Organisational applications of personality
Personality:Personality is the dynamic organization within the individual of those psychological systems that determine his unique adjustments to his environment. Personality theories:Psychoanalytic theory:The ID The Id, The Ego and The super Ego are the parts of the personality. The Id proceeds unchecked to satisfy life instincts and death instincts. The Ego

The Ego keeps the Id in check through the realities of the external environment through intellect and reason. Socio-psychological theory Social variables and not the biological instincts, are the important determinant in shaping personality. There is an interaction between the society and the individual. Trait theory The trait approach to personality is one of the major theoretical areas in the study of personality. The trait theory suggests that individual personalities are composed broad dispositions. Consider how you would describe the personality of a close friend. Chances are that you would list a number of traits, such as outgoing, kind and even-tempered. A trait can be thought of as a relatively stable characteristic that causes individuals to behave in certain ways. Unlike many other theories of personality, such as psychoanalytic or humanistic theories, the trait approach to personality is focused on differences between individuals. The combination and interaction of various traits forms a personality that is unique to each individual. Trait theory is focused on identifying and measuring these individual personality characteristics. Gordon Allports Trait Theory In 1936, psychologist Gordon Allport found that one English-language dictionary alone contained more than 4,000 words describing different personality traits.1 He categorized these traits into three levels: * Cardinal Traits: Traits that dominate an individuals whole life, often to the point that the person becomes known specifically for these traits. People with such personalities often become so known for these traits that their names are often synonymous with these qualities. Consider the origin and meaning of the following descriptive terms: Freudian, Machiavellian, narcissism, Don Juan, Christ-like, etc. Allport suggested that cardinal traits are rare and tend to develop later in life. * Central Traits: These are the general characteristics that form the basic foundations of personality. These central traits, while not as dominating as cardinal traits, are the major characteristics you might use to describe another person. Terms such as intelligent, honest, shy and anxious are considered central traits. * Secondary Traits: These are the traits that are sometimes related to attitudes or preferences and often appear only in certain situations or under specific circumstances. Some examples would be getting anxious when speaking to a group or impatient while waiting in line. Raymond Cattells Sixteen Personality Factor Questionnaire Trait theorist Raymond Cattell reduced the number of main personality traits from Allports initial list of over 4,000 down to 171,3 mostly by eliminating

uncommon traits and combining common characteristics. Next, Cattell rated a large sample of individuals for these 171 different traits. Then, using a statistical technique known as factor analysis, he identified closely related terms and eventually reduced his list to just 16 key personality traits. According to Cattell, these 16 traits are the source of all human personality. He also developed one of the most widely used personality assessments known as the Sixteen Personality Factor Questionnaire (16PF). Eysencks Three Dimensions of Personality British psychologist Hans Eysenck developed a model of personality based upon just three universal trails: 1. Introversion/Extraversion: Introversion involves directing attention on inner experiences, while extraversion relates to focusing attention outward on other people and the environment. So, a person high in introversion might be quiet and reserved, while an individual high in extraversion might be sociable and outgoing. 2. Neuroticism/Emotional Stability: This dimension of Eysencks trait theory is related to moodiness versus eventemperedness. Neuroticism refers to an individuals tendency to become upset or emotional, while stability refers to the tendency to remain emotionally constant. 3. Psychoticism: Later, after studying individuals suffering from mental illness, Eysenck added a personality dimension he called psychoticism to his trait theory. Individuals who are high on this trait tend to have difficulty dealing with reality and may be antisocial, hostile, non-empathetic and manipulative.4 The Five-Factor Theory of Personality Both Cattells and Eysencks theory have been the subject of considerable research, which has led some theorists to believe that Cattell focused on too many traits, while Eysenck focused on too few. As a result, a new trait theory often referred to as the "Big Five" theory emerged. This five-factor model of personality represents five core traits that interact to form human personality.5 While researchers often disagree about the exact labels for each dimension, the following are described most commonly: 1. Extraversion 2. Agreeableness 3. Conscientiousness 4. Neuroticism 5. Openness Assessing the Trait Approach to Personality

While most agree that people can be described based upon their personality traits, theorists continue to debate the number of basic traits that make up human personality. While trait theory has objectivity that some personality theories lack (such as Freuds psychoanalytic theory), it also has weaknesses. Some of the most common criticisms of trait theory center on the fact that traits are often poor predictors of behavior. While an individual may score high on assessments of a specific trait, he or she may not always behave that way in every situation. Another problem is that trait theories do not address how or why individual differences in personality develop or emerge. Self theory Self-concept: The composite of ideas, feelings, and attitudes that a person has about his or her own identity, worth, capabilities, and limitations. A persons self concept gives him sense of meaningfulness and consistency. There are four factors in shelf concept. Self-image: A person's self image is the mental picture, generally of a kind that is quite resistant to change, that depicts not only details that are potentially available to objective investigation by others (height, weight, hair color, gender, I.Q. score, etc.), but also items that have been learned by that person about himself or herself, either from personal experiences or by internalizing the judgments of others. In short, self-image is the way one sees oneself. Ideal-self: The ideal self denotes the way one would like to be. Looking Glass-self: The perception of a person about how others are perceiving his qualities and characteristics. Real-Self: The real-self is what one really is. Determinants of personality

Biologica l factor

Family and Individua social group l factors

Situation al factor

Cultural factors

Personality and behavior Self-concept and Self-esteem Self-concept is the way individuals define themselves as to who they are and derive their sense of identity. Self-esteem denotes the extent to which they consistently regard themselves as capable, successful, important and worthy individual. Need pattern Achievement, affiliation, autonomy, dominance. Machiavellianism refers to manipulating of others as a primary way of achieving ones goals. Locus of control means whether people believe that they are in control of events or events control them. Type A and B personality Type A people always feel a sense of time urgency, are highly achievementoriented, exhibit a competitive drive and are impatient when their work is slowed down for any reason. Type B people are easy going, do not have urgency for time and do not experience the competitive drive. Tolerance of ambiguity Introversion and extroversion Work-ethics orientation Organizational application of personality:1. Matching jobs and individuals 2. Designing motivation system 3. Designing control system

************* Perception Perception is defined as a process by which individuals organize and interpret their sensory impressions in order to give meaning to their environment. perceptual process Perceptual selectivity Perceptual organization Interpersonal perception Managerial application of perception

************* Attitudes Attitude is the persistent tendency to feel and behave in a favourable or unfavourable way towards some object, person or idea. Concepts of attitudes Attitudes and values Theories of attitude formation Factors in attitude formation Attitude measurement Attitude change Methods of attitude change ************* Values Values are global beliefs that guide actions and judgment across a variety of situations. Values and attitudes Values and behavior Factors in value formation Types of values *************
Learning Learning is a relative enduring change in behavior brought about as a consequence of experience. Learning theories conditioning theories Cognitive learning theory Social learning theory Integrating various learning theories Reinforcement Types of reinforcement Administering reinforcement

*************
Organizational behavior modification

*************
Motivation Motivation refers to the way in which urges, drives, desires, aspirations, striving or need direct, control or explain the behavior of human beings. Motivation and behavior Motivation

The term motivation comes from the Latin movere which means to move. Motivation as the base-building block of human action has been studied extensively. Studies on motivation broadly refer to two areas: (a) Motivating self, and (b) Motivating others The concept motive refers to the purpose underlying all goal directed actions. All motives, however, may not be equally important to the context of goal. Some actions arise from biological or physiological needs, over which people do not have much control. Such motives are common to the entire animal kingdom. But there are certain crucial and other higher order needs which are common to human beings. The distinctly human motives are largely unrelated to biological and survival needs. These are related to feelings of self esteem, competency, social acceptance, etc. Psychologists have defined the term motivation as: The immediate influence on the direction, vigor and persistence of action; The process of arousing action, sustaining the activity in progress and regulating the pattern of activity; An inner state that energize activities and directs or channels behavior towards goals; How behavior gets started, is energized, is sustained, is directed, is stopped and what kinds of subjective reactions are present in the organism while all this is going on; Steering ones action towards certain goals and to commit a certain part o ones energies reacting to them.

Motivation Process Motivation is essentially a process. It may be illustrated with the help of a generalized model.

Inner state of disequilibrium, Need, desire or expectancies accompanied by anticipation

Behaviors or action

Incentive or goal

Motivation of inner state (feedback)

Fig. Motivation process The important aspects of the model are: 1. 2. 3. 4. Needs or expectation Behavior Goal, and Some form of feedback

Achievement motivation Achievement motivation is also termed as n Ach, the need to achieve, the urge to improve in common parlance. If a man spends his time thinking about doing his job better, accomplishing something unusual and important or advancing his career, the psychologist says he has a high need of achievement. He thinks not only about the achievement goal, but also about how it can be attained , what obstacles or blocks might be encountered and how he would take help to overcome the obstacles in achieving his goal.

Attitude Formation
In Social Psychology attitudes are defined as positive or negative evaluations of objects of thought. Attitudes typically have three components. The cognitive component is made up of the thoughts and beliefs people hold about the object of the attitude. The affective component consists of the emotional feelings stimulated by the object of the attitude. The behavioral component consists of predispositions to act in certain ways toward an attitude object. The object of an attitude can be anything people have opinions about. Therefore, individual people, groups of people, institutions, products, social trends, consumer products, etc. all can be attitudinal objects. Attitudes involve social judgments. They are either for, or against, pro, or con, positive, or negative; however, it is possible to be ambivalent about the attitudinal object and have a mix of positive and negative feelings and thoughts about it. Attitudes involve a readiness (or predisposition) to respond; however, for a variety of reasons we dont always act on our attitudes. Attitudes vary along dimensions of strength and accessibility. Strong attitudes are very important to the individual and tend to be durable and have a powerful impact on behavior, whereas weak attitudes are not very important and have little impact. Accessible attitudes come to mind quickly, whereas other attitudes may rarely be noticed. Attitudes tend to be stable over time, but a number of factors can cause attitudes to change. Stereotypes are widely held beliefs that people have certain characteristics because of their membership in a particular group. A prejudice is an arbitrary belief, or feeling, directed toward a group of people or its individual members. Prejudices can be either positive or negative; however, the term is usually used to refer to a negative attitude held toward members of a group. Prejudice may lead to discrimination, which involves behaving differently, usually unfairly, toward the members of a group.

Psychological factors involved in Attitude Formation and Attitude Change 1. Direct Instruction involves being told what attitudes to have by parents, schools, community organizations, religious doctrine, friends, etc. 2. Operant Conditioning is a simple form of learning. It is based on the Law of Effect and involves voluntary responses. Behaviors (including verbal behaviors and maybe even thoughts) tend to be repeated if they are reinforced (i.e., followed by a positive experience). Conversely, behaviors tend to be stopped when they are punished (i.e., followed by an unpleasant experience). Thus, if one expresses, or acts out an attitude toward some group, and this is reinforced by ones peers, the attitude is strengthened and is

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likely to be expressed again. The reinforcement can be as subtle as a smile or as obvious as a raise in salary. Operant conditioning is especially involved with the behavioral component of attitudes. Classical conditioning is another simple form of learning. It involves involuntary responses and is acquired through the pairing of two stimuli. Two events that repeatedly occur close together in time become fused and before long the person responds in the same way to both events. Originally studied by Pavlov, the process requires an unconditioned stimulus (UCS) that produces an involuntary (reflexive) response (UCR). If a neutral stimulus (NS) is paired, either very dramatically on one occasion, or repeatedly for several acquisition trials, the neutral stimulus will lead to the same response elicited by the unconditioned stimulus. At this point the stimulus is no longer neutral and so is referred to as a conditioned stimulus (CS) and the response has now become a learned response and so is referred to as a conditioned response (CR). In Pavlovs research the UCS was meat powder which led to an UCR of salivation. The NS was a bell. At first the bell elicited no response from the dog, but eventually the bell alone caused the dog to salivate. Advertisers create positive attitudes towards their products by presenting attractive models in their ads. In this case the model is the UCS and our reaction to him, or her, is an automatic positive response. The product is the original NS which through pairing comes to elicit a positive conditioned response. In a similar fashion, pleasant or unpleasant experiences with members of a particular group could lead to positive or negative attitudes toward that group. Classical conditioning is especially involved with the emotional, or affective, component of attitudes. Social (Observational) Learning is based on modeling. We observe others. If they are getting reinforced for certain behaviors or the expression of certain attitudes, this serves as vicarious reinforcement and makes it more likely that we, too, will behave in this manner or express this attitude. Classical conditioning can also occur vicariously through observation of others. Cognitive Dissonance exists when related cognitions, feelings or behaviors are inconsistent or contradictory. Cognitive dissonance creates an unpleasant state of tension that motivates people to reduce their dissonance by changing their cognitions, feeling, or behaviors. For example, a person who starts out with a negative attitude toward marijuana will experience cognitive dissonance if they start smoking marijuana and find themselves enjoying the experience. The dissonance they experience is thus likely to motivate them to either change their attitude toward marijuana, or to stop using marijuana. This process can be conscious, but often occurs without conscious awareness. Unconscious Motivation. Some attitudes are held because they serve some unconscious function for an individual. For example, a person who is threatened by his homosexual feelings may employ the defense mechanism of reaction formation and become a crusader against homosexuals. Or, someone who feels inferior may feel somewhat better by putting down a group other than her own. Because it is unconscious, the person will not be aware of the unconscious motivation at the time it is operative, but may become aware of it as some later point in time. Rational Analysis involves the careful weighing of evidence for, and against, a particular attitude. For example, a person may carefully listen to the presidential debates and read opinions of

political experts in order to decide which candidate to vote for in an election. Consumer Attitude Formation / Change

Below is an article that I worked on with a group for a college class I took recently. Attitude Formation / Change: Importance to Marketers

As consumers, we have a wide variety of products and services to choose from when purchasing almost anything. Our attitudes towards certain products, services, brands, or advertisements can and do affect whether or not we will purchase a certain product or service. Attitudes will also affect whether or not we become a loyal customer and whether or not we recommend it to a friend. As marketers, it is important to understand how an attitude is formed and if there is any way of changing consumers attitudes.

Attitude Formation / Change: What is attitude?

What is an attitude exactly? It is defined as a learned predisposition to behave in a consistently favorable or unfavorable way with respect to a given object. There are two different types of models that have been found to explain consumers attitudes:

Attitude Formation / Change: 1st is Tricomponent

The first one is the tricomponent attitude model. It comprised of three categories: Cognitive component, Affective Component, and Conative Component. The Cognative component is made up of knowledge and perceptions that are acquired through direct experience with an object and related information from other sources. The Affective component is ones emotions or feelings about a particular product or brand. The Conative component is the likelihood that the consumer will take an action or behave in a certain way. Attitude Formation / Change: 2nd Model is Multiattribute

There are also multiattribute attitude models. The first one is the attitude toward an object model. This is when ones attitude toward a product or brand is a function of the presence, or absence, and evaluation of certain product-specific

beliefs and/or attitudes. The second is the attitude toward behavior model. This is when the individuals attitude toward behaving or acting with respect to an object rather than the attitude toward the object itself seem to correspond more closely to actual behavior than does the attitude toward object model. The theory of reasoned action model is a comprehensive integration of attitude components designed to lead to both better explanation and better predictions of behavior. It incorporates subjective norms that influence intention. This assesses normative beliefs attributed to others and motivation to comply with others. Attitude Formation / Change: Theory Of Trying to Consume and Attitude towards ad

Two last models were formed to look at consumers attitudes from a different perspective. There is the theory of trying-to-consume model, which reflects instances in which the action or outcome is not certain but instead reflects the consumers attempts to consume. And our final model is the attitude toward the ad model in which the consumer sees an ad and forms certain feelings and judgments as a result of the ad. These feelings and judgments in turn affect the consumers attitude toward the ad and beliefs about the brand. Then these two things combined influence his or her attitude toward the brand. Attitude Formation / Change: Attitudes are Learned

Attitudes are learned. This learning process is the shift from having no attitude about a product to having an attitude. For example, new technology is always coming out, and until something is invented we have no attitudes toward it. An attitude can follow the purchase or consumption of a product or it can come before the purchase, perhaps from something as simple as viewing an advertisement for that product. Things that may influence ones attitude are personal experience, influence of family and friends, direct marketing, mass media, and the Internet. Attitudes that have been formed from direct experiences are more confidently held, and therefore stronger, than attitudes formed from an indirect experience. As we discussed in class, a consumers personality will have an effect on how they perceive an advertisement. People with a high need for cognition enjoy lots of product information, whereas those low in need for cognition respond better to celebrities or attractive models. Attitude Formation / Change: Methods used to change attitudes

Consumers attitudes can be changed, however. There are five methods for attempting to alter the attitudes of consumers. They are: (1) Changing the consumers basic motivational function (2) associating the product with an admired group or event (3) resolving two conflicting attitudes (4) altering components of the multiattribute model and (5) changing consumer beliefs about competitors brands.

Attitude Formation / Change: Functional Approach to Change

The functional approach to changing attitudes says that there are four classifications of attitudes. They are the utilitarian function, the ego defensive function, the value-expressive function, and the knowledge function. The utilitarian function is when an attitude is held due to the brands utility. A way to change this attitude is to show the utility or purpose of the brand that they might not have considered. The next is the ego-defensive function which expresses peoples desire to protect their self-image. Showing how a product can boost peoples self esteem and feelings of self doubt is one way of changing their attitude in this situation. Attitude Formation / Change: Value Expressive

The value-expressive function says that consumers attitudes are a product of their lifestyle, beliefs, and outlook on life. Knowing the attitudes of a specific segment can help better reflect these characteristics in ads. The knowledge function says that people have a desire to know information and details about products they encounter. Comparing ones products to other products and explaining its benefits and advantages could be one way of appealing to this side of people.

There is also the idea of combining several of the above functions to appeal to different groups of people who may use the same product but for different reasons. Another way to change attitudes is to associate a product with an admired group or event, such as a charity cause. One example of this is Gaps Red campaign. Half the profit made from the Red clothing goes to the Global Fund, which helps women and children in Africa who are affected by AIDS/HIV. Attitude Formation / Change: Using negative attitudes

Showing consumers that their negative attitude toward a product, brand, etc. is not in conflict with another attitude, may make them inclined to change their negative opinion of the brand. This is just one more way of changing consumers attitudes. Another solution is altering components of the multiattribute model. One way of altering this model is changing the relative evaluation of attributes. It is easier to persuade customers to cross over to another product when the two are similar. They can be encouraged to shift their favorable attitude toward another version of the product. Another way of altering the model is by changing brand beliefs, which is changing perceptions or beliefs about the brand itself. Suggesting information about your brand, however, must be compelling and repeated

enough to overcome a consumers natural tendency to stick with their previously held attitude. Adding an attribute can be another option for changing attitudes. Adding a previously un-thought of attribute or one that shows improvement or technological innovation will also shift attitudes. An example would be advertising that yogurt has more potassium than a banana. Another possibility is eliminating a characteristic or feature, such as making unscented products. One last route is to change the overall brand rating. This is an attempt to alter a consumers overall assessment of a brand, such as mentioning that it is the most popular brand.

Attitude Formation / Change: Changing Beliefs about Competitors Brands

The final way of changing an attitude is by changing beliefs about competitors brands. Many brands do this, but an example would be a Ziploc bag commercial showing a store-brand or competitors brand bag leaking as it is turned upside down. This gives the viewer a negative connotation of the competitors bag, thereby improving their attitude toward Ziploc.

Now that we have discussed how attitudes are formed and how they can be altered, we will go into how attitudes affect the actions that consumers take, or vice versa. Consumers behavior can either precede or follow their attitude formation. Two explanations as to why behavior may precede attitude formation are the cognitive dissonance theory and the attribution theory. The cognitive dissonance theory is the discomfort or dissonance that occurs when a consumer holds conflicting thoughts about a belief or an attitude object. An example would be a post-purchase dissonance, where the consumer thinks about the unique, positive qualities of the brands that they did not select. An ad may help to assure the consumer that they made the right decision and ease this dissonance. The attribution theory explains how people assign blame or credit to events on the basis of either their behavior or the behavior of others. They may ask themselves why they made a decision. The process of making inferences is a major part of attitude formation and change. There are different perspectives on the attribution theory, which include selfperception theory, attributions toward others, attributions toward things, and how we test our attributions. Attitude Formation / Change: Self Perception Theory

Self-perception theory is individuals inferences or judgments as to the causes of their own behavior. Attitudes develop as consumers look at and make judgments about their own behavior. Included in this are internal attributions, giving credit to oneself for the outcome or results of using a product, external attributions,

which is attributing positive results to factors beyond ones control and defensive attribution, which says consumers will often accept personal credit success and credit failure to others or outside causes. Attitude Formation / Change: Attributions are Opinions

Attributions towards others and attributions towards things are the opinions people have of things which they come into contact with. For example, when talking to a salesperson at a store, a consumer will try to determine if the salesperson is knowledge, trustworthy, and reliable. The same can be said of attributions towards things. Consumers will judge a products performance and form attributes in an attempt to find out why the product meets or fails to meet their expectations. Testing Attributions is an important step for consumers. They want to test firsthand whether the attributions they have made towards a certain product, service, or person is correct. People want conviction about a particular observation and will go about collecting additional information in order to do this. They may use the following criteria: Distinctiveness, consistency over time, consistency over modality, and consensus. Attitude Formation / Change: Distinctiveness

Distinctiveness is attributing an action to a particular product or person if the action occurs only when that product/person is present and not in its absence. In order to have consistency over time, each time the person/product is present the consumers inference must be the same. In measuring consistency over modality, the inference/reaction must be the same, even when the situation varies. Finally, a consensus is when the action is perceived in the same way by other consumers. What is Organization Design? ________________________________________ A process for improving the probability that an organization will be successful. ________________________________________ More specifically, Organization Design is a formal, guided process for integrating the people, information and technology of an organization. It is used to match the form of the organization as closely as possible to the purpose(s) the organization seeks to achieve. Through the design process, organizations act to improve the probability that the collective efforts of members will be successful. Typically, design is approached as an internal change under the guidance of an external facilitator. Managers and members work together to define the needs of the organization then create systems to meet those needs most effectively. The facilitator assures that a systematic process is followed and encourages creative thinking.

Hierarchical Systems Western organizations have been heavily influenced by the command and control structure of ancient military organizations, and by the turn of the century introduction of Scientific Management. Most organizations today are designed as a bureaucracy in which authority and responsibility are arranged in a hierarchy. Within the hierarchy rules, policies, and procedures are uniformly and impersonally applied to exert control over member behaviors. Activity is organized within sub-units (bureaus, or departments) in which people perform specialized functions such as manufacturing, sales, or accounting. People who perform similar tasks are clustered together. The same basic organizational form is assumed to be appropriate for any organization, be it a government, school, business, church, or fraternity. It is familiar, predictable, and rational. It is what comes immediately to mind when we discover that ...we really have to get organized! As familiar and rational as the functional hierarchy may be, there are distinct disadvantages to blindly applying the same form of organization to all purposeful groups. To understand the problem, begin by observing that different groups wish to achieve different outcomes. Second, observe that different groups have different members, and that each group possesses a different culture. These differences in desired outcomes, and in people, should alert us to the danger of assuming there is any single best way of organizing. To be complete, however, also observe that different groups will likely choose different methods through which they will achieve their purpose. Service groups will choose different methods than manufacturing groups, and both will choose different methods than groups whose purpose is primarily social. One structure cannot possibly fit all. Organizing on Purpose The purpose for which a group exists should be the foundation for everything its members do including the choice of an appropriate way to organize. The idea is to create a way of organizing that best suits the purpose to be accomplished, regardless of the way in which other, dissimilar groups are organized. Only when there are close similarities in desired outcomes, culture, and methods should the basic form of one organization be applied to another. And even then, only with careful fine tuning. The danger is that the patterns of activity that help one group to be successful may be dysfunctional for another group, and actually inhibit group effectiveness. To optimize effectiveness, the form of organization must be matched to the purpose it seeks to achieve. The Design Process Organization design begins with the creation of a strategy a set of decision guidelines by which members will choose appropriate actions. The strategy is derived from clear, concise statements of purpose, and vision, and from the organizations basic philosophy. Strategy unifies the intent of the organization and focuses members toward actions designed to accomplish desired outcomes.

The strategy encourages actions that support the purpose and discourages those that do not. Creating a strategy is planning, not organizing. To organize we must connect people with each other in meaningful and purposeful ways. Further, we must connect people with the information and technology necessary for them to be successful. Organization structure defines the formal relationships among people and specifies both their roles and their responsibilities. Administrative systems govern the organization through guidelines, procedures and policies. Information and technology define the process(es) through which members achieve outcomes. Each element must support each of the others and together they must support the organizations purpose. Exercising Choice Organizations are an invention of man. They are contrived social systems through which groups seek to exert influence or achieve a stated purpose. People choose to organize when they recognize that by acting alone they are limited in their ability to achieve. We sense that by acting in concert we may overcome our individual limitations. When we organize we seek to direct, or pattern, the activities of a group of people toward a common outcome. How this pattern is designed and implemented greatly influences effectiveness. Patterns of activity that are complementary and interdependent are more likely to result in the achievement of intended outcomes. In contrast, activity patterns that are unrelated and independent are more likely to produce unpredictable, and often unintended results. The process of organization design matches people, information, and technology to the purpose, vision, and strategy of the organization. Structure is designed to enhance communication and information flow among people. Systems are designed to encourage individual responsibility and decision making. Technology is used to enhance human capabilities to accomplish meaningful work. The end product is an integrated system of people and resources, tailored to the specific direction of the organization.

Conflict
Conflict is any situation in which two or more parties feel themselves in opposition. It is an interpersonal process that arises from disagreements over the goals or the methods to accomplish those goals. Followings are the important features of conflict:1 Conflict arises because of incompatibility of two or more aspects of an element; it may be goals, interests, methods of working, or any other feature. Conflicts occur when an individual is not able to choose among the available courses of action. Conflict is a dynamic process as it indicates a series of events, each conflict is made of series of interlocking conflict episode Conflict must be perceived and expressed by the parties to it. If one is aware of a conflict, it is generally agreed that conflict does not exist even though there may be incompatibility in some respect.

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There are four basic issues which may be involved in a conflict. These are:(1) Facts- Conflicts may occur because of disagreement that the persons have over the definition of a problem, relevant facts related to the problem, or their authority and power. (2) Goals- Sometimes, there may be disagreement over the goals which two parties want to achieve. The relationship between goals of the parties may be viewed as incompatible with the result that one goal may be achieved at the cost of the other. (3) Methods- Even if goals are perceived to be the same, there may be difference over the methods, procedures, strategies, tactics, etc. through which goals may be achieved. (4) Values- There may be differences over the value-ethical standards, considerations for fairness, justice etc. These differences are of more intrinsic nature in persons and may affect the choice of goals or methods of achieving those. Types of conflict: Individual level conflicts Goal conflicts Role conflicts Interpersonal conflict Vertical conflict Horizontal conflict Group level conflicts Organizational level conflicts

Organization Development Interventions Organization Development (OD) interventions techniques are the methods created by OD professionals and others. Single organization or consultant cannot use all the interventions. They use these interventions depending upon the need or requirement. The most important interventions are, 1. Survey feedback 2. Process Consultation 3. sensitivity Training 4. The Managerial grid 5. Goal setting and Planning 6. Team Building and management by objectives 7. Job enrichment, changes in organizational structure and participative management and Quality circles, ISO, TQM Survey feedback: The intervention provides data and information to the managers. Information on Attitudes of employees about wage level, and structure, hours of work, working conditions and relations are collected and the results are supplied to the top executive teams. They analyse the data, find out the problem, evaluate the results and develop the means to correct the problems identified. The team are formed with the employees at all levels in the organization hierarchy i.e, from the rank and file to the top level. Process Consultation : The process consultant meets the members of the department and work teams observes thie interaction, problem identification skills, solving procedures et. He feeds back the team eith the information collected through observations, coaches and counsels individuals & groups in moulding their behavior. Goal setting and planning : Each division in an organization sets the goals or formulates the plans for profitability. These goals are sent to the top management which in turn sends them back to the divisions after modification . A set of organization goals thus emerge there after. Managerial grid: This identifies a range of management behavior based on the different ways that how production/service oriented and employee oriented states interact with each other. Managerial grid is also called as instrumental laboratory training as it is a structured version of laboratory training. It consists of individual and group exercises with a view to developing awareness of individual managerial style interpersonal competence and group effeciveness. Thus grid training is related to the leadership styles. The managerial grid focuses on the observations of behaviour in exercises specifically related to work. Participants in this training are encouraged and helped to appraise their own managerial style. There are 6 phases in grid OD: First phase is concerned with studying the grid as a theoretical knowledge to understand the human behavior in the Organization. Second phase is concerned with team work development. A seminar helps the

members in developing each members perception and the insight into the problems faced by various members on the job. Third phase is inter group development. This phase aims at developing the relationships between different departments Fourth phase is concerned with the creation of a strategic model for the organization where Chief Executives and their immediate subordinates participate in this activity. Fifth phase is concerned with implementation of strategic model.. Planning teams are formed for each department to know the available resources, required resources, procuring them if required and implementing the model Sixth Phase is concerned with the critical evaluation of the model and making necessary adjustment for successful implementation. Starting from the top of a company, the six stages of Management by Objectives (MBO) are: 1. Define corporate objectives at board level 2. Analyze management tasks and devise formal job specifications, which allocate responsibilities and decisions to individual managers 3. Set performance standards 4. Agree and set specific objectives 5. Align individual targets with corporate objectives 6. Establish a management information system to monitor achievements against objectives

Management by Objectives (MBO) is a successful philosophy of management. It replaces the traditional philosophy of Management by Domination. MBO led to a systematic Goal setting and Planning. Peter Drucker the eminent management Guru in 1959 has first propagated the philosophy since then it has become a movement. MBO is a process by which managers at different levels and their subordinates work together in identifying goals and establishing objectives consistent with Organizational goals and attaining them. Team building is an application of various techniques of Sensitivity training to the actual work groups in various departments. These work groups consist of peers and a supervisor. Sensitivity training is called a laboratory as it is conducted by creating an experimental laboratory situation in which employees are brought together. The Team building technique and training is designed to improve the ability of the employees to work together as teams. Job enrichment is currently practiced all over the world. It is based on the assumption in order to motivate workers, job itself must provide opportunities for

achievement, recognition, responsibility, advancement and growth. The basic idea is to restore to jobs the elements of interest that were taken away. In a job enrichment program the worker decides how the job is performed, planned and controlled and makes more decisions concerning the entire process. Organizational Development Organizational Structures Organizational Development Cycles Diagnosis and Intervention Strategies: Team Building Goal Setting Survey Feedback Strategic Planning Sensitivity Training (T-Groups) Grid Training Organizational Culture within Organizational Development International Culture and Organizational Development Organizational Development in Response to Technological Change

Organizational development
Burke (1982) defined organizational development (OD) as "a planned process of change in an organization's culture through the utilization of behaviourial science, technology, research and theory." It refers to the management of change and the development of human resources. It is a response to change (Bennis, 1969). OD is a complex educational strategy intended to change the beliefs, attitudes, values and structure of the organization so that the organization can better adapt to new technologies, markets and challenges. A variety of forces cause changes in the modern organization (Hellriegel, Slocum and Woodman, 1983). Some of these are: technological change; the knowledge explosion; product and service obsolescence; and social change. Environment, resources and technology perform a decisive role in determining organizational policies. If any one of these determinants changes, the policies need to be re-examined to determine if a different organizational design would be better suited. Approaches to OD The major schools of thought in OD are considered in the following paragraphs. Group Dynamics This is a historical and traditional method of OD based on the assumption that OD activities are process consultation (Albrecht, 1983). In this approach, an expert works at a small-group level, using group methods, sensitivity training and other related approaches. The Behaviour Modification School The 'be-mod' school of OD (based on the various works of Skinner) attempts to rearrange the reward system in the organization so as to strengthen selected 'target' behaviour on the part of employees. The Systems Approach This approach aims at enhancing the overall effectiveness of the organization. The system can be defined as having:

 some components that comprise it; functions and processes performed by various components; relationship among the components that make them a system; and an organizational principle, which gives the system a purpose. This approach is based on the assumption that an organization is composed of four interlocking systems (Albrecht, 1983), namely: a technical system, referring to the elements, activities and relationships that make up the primary productive axis of the organization. It includes physical facilities, machinery, special equipment, work processes, work methods, work procedures, work-oriented information and various means of handling; a social system, referring to the people in the organization and the activities in which they are engaged. It includes the intra-group roles and relationships, the form of power hierarchy, values and norms for behaviour in the organization, and the reward and punishment processes; an administrative system, which refers to the policies, procedures, instructions, reports, etc., which are required to operate the organization. It also includes those who operate the technical and administrative systems; and a strategic system, which is the steering function of the organization. Its components include the management team from the chief executive down to the lowest supervisor, the chain of command, reporting relationships, and the power values of the leaders of the organization. It also includes plans, the planning process and the procedures used in governing the organization and adapting it to changing needs. The systems approach has four sequential stages: assessment, problem solving, implementation and evaluation. The Socio-Technical Approach The socio-technical approach views an organization (Pasmore, 1988) as made up of people (a social system and a technical system) producing goods or services valued by customers (who are part of the external environment). The social system uses tools, techniques, and knowledge. The technical system produces goods and services which are valued by customers in the external environment. The Environment Approach The environment is an agent of change. Environmental changes are the primary incitement and stimulus for organizational betterment. The socio-technical arrangements in the organization must change according to changes in the environment. The environment can change in both predictable and unpredictable ways. The external environment can be relatively stable or rapidly changing. Thus, the environment, the technical system and the social system are three basic elements which play a crucial role in any organization's design, re-design or development. The efficiency and effectiveness of the organization depend upon the equilibrium between the needs of these determinant elements.

The OD process
The OD process entails various activities at different levels in the organization. Through these activities, interventions are made in the ongoing organization to change the structure, processes, behaviour or values of individuals and groups. Golembiewski, Prochl and Sink (1981) categorized these interventions under eight headings: Process Analysis Activities, referring to applications of behaviourial science perspectives to fathom complete and dynamic situations;

 Skill-building Activities, involving various designs for eliciting behaviours in congruence with OD values. This includes giving and receiving feedback, listening, and settling conflicts; Diagnostic Activities, including process analysis to generate data through interviews, psychological instruments or opinion surveys; Coaching or Counselling Activities to help in resolving conflicts through third-party consultation; Team Building Activities, enhancing the efficiency and effectiveness of task groups; Inter-group Activities, attempting to create effective and satisfying linkages between two or more task groups or departments in the organization; Techno-Structural Activities, aiming at building need-fulfilling roles, jobs and structures; and System-Building or System-Renewal Activities, seeking exhaustive changes in a large organization's climate and values using combinations of the various OD interventions listed above.

Socio-technical systems approach for organization re-design

Socio-technical systems design is better suited to meet the requirements of a changing external environment in comparison with traditional designs. It endeavours to re-design the organization's structure, processes and functions to create a balance between the organization and its changing external environment. It could involve the following steps (Foster, 1967; Cummings, 1976; Pasmore, 1988): defining the scope of the system to be re-designed; defining the environmental demands; evolving a vision statement; enlightening organizational members; developing the change structure; conducting socio-technical analysis; preparing re-design proposals; implementing recommended changes; and evaluating the changes or re-design.

OD techniques
Techniques used for OD are considered below. Sensitivity training This has many applications and is still used widely, even though new techniques have emerged (Lewin, 1981). Sensitivity training (Benny, Bradford and Lippitt, 1964) basically aims at: growth in effective membership; developing ability to learn; stimulating to give help; and developing insights to be sensitive to group processes. These process variables - in a systems sense - interact and are interdependent. Grid Training Blake and Moutons Managerial Grid The treatment of task orientation and people orientation as two independent dimensions was a major step in leadership studies. Many of the leadership studies conducted in the 1950s at the University of Michigan and the Ohio State University focused on these two dimensions.

Building on the work of the researchers at these Universities, Robert Blake and Jane Mouton (1960s) proposed a graphic portrayal of leadership styles through a managerial grid (sometimes called leadership grid). The grid depicted two dimensions of leader behavior, concern for people (accommodating peoples needs and giving them priority) on y-axis and concern for production (keeping tight schedules) on x-axis, with each dimension ranging from low (1) to high (9), thus creating 81 different positions in which the leaders style may fall.

The five resulting leadership styles are as follows:

Concern for People Concern for production

1. Impoverished Management (1, 1): Managers with this approach are low on both the dimensions and exercise minimum effort to get the work done from subordinates. The leader has low concern for employee satisfaction and work deadlines and as a result disharmony and disorganization prevail within the organization. The leaders are termed ineffective wherein their action is merely aimed at preserving job and seniority. 2. Task management (9, 1): Also called dictatorial or perish style. Here leaders are more concerned about production and have less concern for people. The style is based on theory X of McGregor. The employees needs are not taken care of and they are simply a means to an end. The leader believes that efficiency can result only through proper organization of work systems and through elimination of people wherever possible. Such a style can definitely increase the output of organization in short run but due to the strict policies and procedures, high labour turnover is inevitable. 3. Middle-of-the-Road (5, 5): This is basically a compromising style wherein the leader tries to maintain a balance between goals of company and the needs of people. The leader does not push the boundaries of achievement resulting in average performance for organization. Here neither employee nor production needs are fully met. 4. Country Club (1, 9): This is a collegial style characterized by low task and high people orientation where the leader gives thoughtful attention to the needs of people thus providing them with a friendly and comfortable environment. The leader feels that such a treatment with employees will lead to self-motivation and will find people working hard on their own. However, a low focus on tasks can hamper production and lead to questionable results. 5. Team Management (9, 9): Characterized by high people and task focus, the style is based on the theory Y of McGregor and has been termed as most effective style according to Blake and Mouton. The leader feels that empowerment, commitment, trust, and respect are the key elements in creating a team atmosphere which will automatically result in high employee satisfaction and production. Advantages of Blake and Moutons Managerial Grid The Managerial or Leadership Grid is used to help managers analyze their own leadership styles through a technique known as grid training. This is done by administering a questionnaire that helps managers identify how they stand with respect to their concern for production and people. The training is aimed at basically helping leaders reach to the ideal state of 9, 9. Limitations of Blake and Moutons Managerial Grid The model ignores the importance of internal and external limits, matter and scenario. Also, there are some more aspects of leadership that can be covered but are not. Grid training is an outgrowth of the managerial grid approach to leadership (Blacke and Mouton, 1978). It is an instrumental approach to laboratory training. Sensitivity training is supplemented with self-administered instruments (Benny, Bradford and Lippitt, 1964). The analysis of these instruments helps in group development and in the learning of group members. This technique is widely used and has proved effective. Grid training for OD is completed in six phases. They are: laboratory-seminar training, which aims at acquainting participants with concepts and material used in grid training; a team development phase, involving the coming together of members from the same department to chart out as to how they will attain a 9 x 9 position on the grid; inter-group development aims at overall OD. During this phase, conflict situations between groups are identified and analysed; organization goal setting is based on participative management, where participants contribute to and agree upon important goals for the organization;

 goal attainment aims at achieving goals which were set during the phase of organizational goal setting; and stabilization involves the evaluation of the overall programme and making suggestions for changes if appropriate. Survey Feedback Survey feedback is based on the study (survey) of the unit of analysis (such as work group, a department or a whole organization) by using questionnaires (Taylor and Bowers, 1972). The resulting data are then used to identify and analyse problems and propose a suitable action plan to overcome them. A typical survey questionnaire would generate information on leadership, organizational climate and satisfaction (Table 1). Satisfaction with Typical factors covered in a survey research questionnairepay Satisfaction with the work group

Reducing involvement and terminating This is the mutual agreement to cease the consultation. Third Party The third-party peace-making technique attempts to settle inter-personal and inter-group conflicts using modern concepts and methods of conflict management. This technique

analyses the processes involved, discerns the problem on the basis of the analysis, and suitably manages the conflict situation. Team building Team building has been considered the most popular OD technique in recent years, so much so that it has replaced sensitivity training. It aims at improving overall performance, tends to be more task-oriented, and can be used with family groups (members from the same unit) as well as special groups (such as task forces, committees and inter-departmental groups). There are five major elements involved in team building (French and Bell, 1978): problem solving, decision making, role clarification and goal setting for accomplishing the assigned tasks; building and maintaining effective inter-personal relationships; understanding and managing group processes and culture; role analysis techniques for role clarification and definition; and role negotiation techniques. Transactional Analysis Transactional analysis is widely used by management practitioners to analyse group dynamics and inter-personal communications. It deals with aspects of identity, maturation, insight and awareness (Berne, 1964). As a tool for OD, it attempts to help people understand their egos - both their own and those of others - to allow them to interact in a more meaningful manner with one another (Huse, 1975). It attempts to identify peoples' dominant ego states and help people understand and analyse their transactions with others. It is quite effective if applied in the early stage of the diagnostic phase. Team Building
Formi ng Stormi ng Normi ng Performin g Adjourni ng

Leadership vs. Management

What is the difference between management and leadership? It is a question that has been asked more than once and also answered in different ways. The biggest difference between managers and leaders is the way they motivate the people who work or follow them, and this sets the tone for most other aspects of what they do. Many people, by the way, are both. They have management jobs, but they realize that you cannot buy hearts, especially to follow them down a difficult path, and so act as leaders too. Managers have subordinates By definition, managers have subordinates - unless their title is honorary and given as a mark of seniority, in which case the title is a misnomer and their power over others is other than formal authority. Authoritarian, transactional style

Managers have a position of authority vested in them by the company, and their subordinates work for them and largely do as they are told. Management style is transactional, in that the manager tells the subordinate what to do, and the subordinate does this not because they are a blind robot, but because they have been promised a reward (at minimum their salary) for doing so. Work focus Managers are paid to get things done (they are subordinates too), often within tight constraints of time and money. They thus naturally pass on this work focus to their subordinates. Seek comfort An interesting research finding about managers is that they tend to come from stable home backgrounds and led relatively normal and comfortable lives. This leads them to be relatively risk-averse and they will seek to avoid conflict where possible. In terms of people, they generally like to run a 'happy ship'. Leaders have followers Leaders do not have subordinates - at least not when they are leading. Many organizational leaders do have subordinates, but only because they are also managers. But when they want to lead, they have to give up formal authoritarian control, because to lead is to have followers, and following is always a voluntary activity. Charismatic, transformational style Telling people what to do does not inspire them to follow you. You have to appeal to them, showing how following them will lead to their hearts' desire. They must want to follow you enough to stop what they are doing and perhaps walk into danger and situations that they would not normally consider risking. Leaders with a stronger charisma find it easier to attract people to their cause. As a part of their persuasion they typically promise transformational benefits, such that their followers will not just receive extrinsic rewards but will somehow become better people. People focus Although many leaders have a charismatic style to some extent, this does not require a loud personality. They are always good with people, and quiet styles that give credit to others (and takes blame on themselves) are very effective at creating the loyalty that great leaders engender. Although leaders are good with people, this does not mean they are friendly with them. In order to keep the mystique of leadership, they often retain a degree of separation and aloofness. This does not mean that leaders do not pay attention to tasks - in fact they are often very achievement-focused. What they do realize, however, is the importance of enthusing others to work towards their vision.

Seek risk In the same study that showed managers as risk-averse, leaders appeared as risk-seeking, although they are not blind thrill-seekers. When pursuing their vision, they consider it natural to encounter problems and hurdles that must be overcome along the way. They are thus comfortable with risk and will see routes that others avoid as potential opportunities for advantage and will happily break rules in order to get things done. A surprising number of these leaders had some form of handicap in their lives which they had to overcome. Some had traumatic childhoods, some had problems such as dyslexia, others were shorter than average. This perhaps taught them the independence of mind that is needed to go out on a limb and not worry about what others are thinking about you. In summary This table summarizes the above (and more) and gives a sense of the differences between being a leader and being a manager. This is, of course, an illustrative characterization, and there is a whole spectrum between either ends of these scales along which each role can range. And many people lead and manage at the same time, and so may display a combination of behaviors.

Subject Essence Focus Have Horizon Seeks Approach Decision Power Appeal to Energy Culture Dynamic

Leader Change Leading people Followers Long-term Vision Sets direction Facilitates Personal charisma Heart Passion Shapes Proactive

Manager Stability Managing work Subordinates Short-term Objectives Plans detail Makes Formal authority Head Control Enacts Reactive

Persuasion Style Exchange Likes Wants Risk Rules Conflict Direction Truth Concern Credit Blame

Sell Transformational Excitement for work Striving Achievement Takes Breaks Uses New roads Seeks What is right Gives Takes

Tell Transactional Money for work Action Results Minimizes Makes Avoids Existing roads Establishes Being right Takes Blames

Rensis Likert Management Systems and Styles Dr. Rensis Likert has conducted much research on human behavior within organizations, particularly in the industrial situation. He has examined different types of organizations and leadership styles, and he asserts that to achieve maximum profitability, good labor relations and high productivity, every organization must make optimum use of their human assets. The form of the organization which will make greatest use of the human capacity, Likert contends, is; highly effective work groups linked together in an overlapping pattern by other similarly effective groups.

Organizations at present have widely varying types of management style and Likert has identified four main systems: Management Styles

The exploitive - authoritative system, where decisions are imposed on subordinates, where motivation is characterized by threats, where high levels of management have great responsibilities but lower levels have virtually none, where there is very little communication and no joint teamwork. The benevolent - authoritative system, where leadership is by a condescending form of master-servant trust, where motivation is mainly by rewards, where managerial personnel feel responsibility but lower levels do not, where there is little communication and relatively little teamwork. The consultative system, where leadership is by superiors who have substantial but not complete trust in their subordinates, where motivation is by rewards and some involvement, where a high proportion of personnel, especially those at the higher levels feel responsibility for achieving organization goals, where there is some communication (both vertical and horizontal) and a moderate amount of teamwork. The participative - group system, which is the optimum solution, where leadership is by superiors who have; complete confidence in their subordinates, where motivation is by economic rewards based on goals which have been set in participation, where personnel at all levels feel real responsibility for the organizational goals, where there is much communication, and a substantial amount of cooperative teamwork. This fourth system is the one which is the ideal for the profit oriented and human-concerned organization, and Likert says (The Human Organization, Mcgraw Hill, 1967) that all organizations should adopt this system. Clearly, the changes involved may be painful and long-winded, but it is necessary if one is to achieve the maximum rewards for the organization. To convert an organization, four main features of effective management must be put into practice: Features of Effective Management The motivation to work must be fostered by modern principles and techniques, and not by the old system of rewards and threats. Employees must be seen as people who have their own needs, desires and values and their self-worth must be maintained or enhanced. An organization of tightly knit and highly effective work groups must be built up which are committed to achieving the objectives of the organization. Supportive relationships must exist within each work group. These are characterized not by actual support, but by mutual respect.

The work groups which form the nuclei of the participative group system, are characterized by the group dynamics: Members are skilled in leadership and membership roles for easy interaction.

The group has existed long enough to have developed a well established relaxed working relationship. The members of the group are loyal to it and to each other since they have a high degree of mutual trust. The norms, values and goals of the group are an expression of the values and needs of its members. The members perform a "linking-pin" function and try to keep the goals of the different groups to which they belong in harmony with each other. Max Weber (1864-1920) was a German academic and sociologist who provided another approach in the development of classical management theory. As a German academic, Weber was primarily interested in the reasons behind the employees actions and in why people who work in an organization accept the authority of their superiors and comply with the rules of the organization. Legitimate Types of Authority by Max Weber Weber made a distinction between authority and power. According to Weber power educes obedience through force or the threat of force which induces individuals to adhere to regulations. In contrast, legitimate authority entails that individuals acquiesce that authority is exercised upon them by their superiors. Weber goes on to identify three types of legitimate authority: Traditional authority Traditional authority is readily accepted and unquestioned by individuals since it emanates from deeply set customs and tradition. Traditional authority is found in tribes and monarchies. Charismatic authority Charismatic authority is gained by those individuals who have gained the respect and trust of their followers. This type of authority is exercised by a charismatic leader in small and large groups alike. Rational-legal authority Rational-legal authority stems from the setup of an organization and the position held by the person in authority. Rationallegal authority is exercised within the stipulated rules and procedures of an organization.

The Key Characteristics of a Bureaucracy

Weber coined this last type of authority with the name of a bureaucracy. The term bureaucracy in terms of an organization and management functions refers to the following six characteristics: Management by rules. A bureaucracy follows a consistent set of rules that control the functions of the organization. Management controls the lower levels of the organization's hierarchy by applying established rules in a consistent and predictable manner. Division of labor. Authority and responsibility are clearly defined and officially sanctioned. Job descriptions are specified with responsibilities

and line of authority. All employees have thus clearly defined rules in a system of authority and subordination. Formal hierarchical structure. An organization is organized into a hierarchy of authority and follows a clear chain of command. The hierarchical structure effectively delineates the lines of authority and the subordination of the lower levels to the upper levels of the hierarchical structure. Personnel hired on grounds of technical competence. Appointment to a position within the organization is made on the grounds of technical competence. Work is assigned based on the experience and competence of the individual. Managers are salaried officials. A manager is a salaried official and does own the administered unit. All elements of a bureaucracy are defined with clearly defined roles and responsibilities and are managed by trained and experienced specialists. Written documents. All decisions, rules and actions taken by the organization are formulated and recorded in writing. Written documents ensure that there is continuity of the organizations policies and procedures.

Advantages and Disadvantages of Webers Bureaucracy Webers bureaucracy is based on logic and rationality which are supported by trained and qualified specialists. The element of a bureaucracy offers a stable and hierarchical model for an organization.Nevertheless, Webers bureaucracy does have its limitations since it is based on the roles and responsibilities of the individuals rather than on the tasks performed by the organization. Its rigidity implies a lack of flexibility to respond to the demands of change in the business environment.

Management Thoughts
There are a few people in every age who produce new, paradigm-shifting ideas. Sometimes these ideas don't catch on right away, but as time passes, their worth becomes more evident. The art of management is an old one, but it was a fairly static one until about 150 years ago, when changes in technology, e.g. railroads and telegraph, changed our economy quite dramatically, and at the same time changed the discipline of management. We don't really have much perspective yet. Without it, it's hard to say what ideas will endure, and who the real pioneers will turn out to be. But, guessing, here are some of the people in our management heroes gallery.

* George Box * Philip Crosby * W. Edwards Deming * John Dewey * Fredrick Herzberg

Kaoru Ishikawa

Kaoru Ishikawa wanted to change the way people think about work. He urged managers to resist becoming content with merely improving a product's quality, insisting that quality improvement can always go one step further. His notion of company-wide quality control called for continued customer service. This meant that a customer would continue receiving service even after receiving the product. This service would extend across the company itself in all levels of management, and even beyond the company to the everyday lives of those involved. According to Ishikawa, quality improvement is a continuous process, and it can always be taken one step further. With his cause and effect diagram (also called the "Ishikawa" or "fishbone" diagram) this management leader made significant and specific advancements in quality improvement. With the use of this new diagram, the user can see all possible causes of a result, and hopefully find the root of process imperfections. By pinpointing root problems, this diagram provides quality improvement from the "bottom up." Dr. W. Edwards Deming --one of Isikawa's colleagues -- adopted this diagram and used it to teach Total Quality Control in Japan as early as World War II. Both Ishikawa and Deming use this diagram as one the first tools in the quality management process. Ishikawa also showed the importance of the seven quality tools: control chart, run chart, histogram, scatter diagram, Pareto chart, and flowchart. Additionally, Ishikawa explored the concept of quality circles-- a Japanese philosophy which he drew from obscurity into world wide acceptance. .Ishikawa believed in the importance of support and leadership from top level management. He continually urged top level executives to take quality control courses, knowing that without the support of the management, these programs would ultimately fail. He stressed that it would take firm commitment from the entire hierarchy of employees to reach the company's potential for success. Another area of quality improvement that Ishikawa emphasized is quality throughout a product's life cycle -- not just during production. Although he believed strongly in creating standards, he felt that standards were like continuous quality improvement programs -- they too should be constantly evaluated and changed. Standards are not the ultimate source of decision making; customer satisfaction is. He wanted managers to consistently meet consumer needs; from these needs, all other decisions should stem. Besides his own developments, Ishikawa drew and expounded on principles from other quality gurus, including those of one man in particular: W. Edwards Deming, creator of the Plan-Do-Check-Act model. Ishikawa expanded Deming's four steps into the following six: Determine goals and targets. Determine methods of reaching goals. Engage in education and training. Implement work. Check the effects of implementation. Take appropriate action.

* Joseph M. Juran * Kurt Lewin * Lawrence D. Miles * Alex Osborne * Walter Shewhart * Genichi Taguchi * Frederick Winslow Taylor * J. Edgar Thomson

Human resource management

The maternity Benefit Act, 1961: Maternity benefit is an indemnity for the loss of wages incurred by a woman who voluntarily before child-birth and compulsorily thereafter abstains from work in the interest of the child and herself. The I.L.O. Maternity Protection Conventions of 1919 was revised in various details in 1952. Its purposes are to: (a) Enable the women employee to abstain from work during the 6 weeks preceding the expected date of her confinement; (b) Oblige her to abstain from work during the 6 weeks following her confinement; (c) Provide her, with free attendance by a doctor or certified mid-wife; (d) Provide her out of public funds or by means of insurance, with a cash benefit sufficient for the full and healthy maintenance of herself and child during the said period of abstention from work; (e) Prohibit her dismissal during the said periods or a subsequent period o sickness; and (f) Enable her to suckle her baby twice a day during working hours. The main purpose of Maternity Benefit Act, 1961 are: (a) To regulate the employment of women employees in certain establishments for certain specified periods before and after child-birth. (b) To provide for the payment of maternity benefits to women workers at the rate of average daily wages calculated on the basis of wages payable to her for the days on which she has worked during the three calendar months immediately preceding the date from which she absented herself on account of maternity. (c) To provide certain benefits in case of miscarriage, premature birth, or illness arising out of pregnancy. Dispute resolution and grievance management: According to the Industrial Disputes Act, 1947, industrial disputes mean any dispute or difference between employers and employees, or between employers and workmen, or between workmen and workmen, which is connected with the employment or non-employment or with the conditions of labor of any person. Causes of dispute: 1 2 3 4 5 6 Wages Union rivalry Political interference Unfair labor practices Multiplicity of labour law Others: Industrial relation managers stoke the fire and then try to extinguish it- all to justify their own existence in organization.

Methods of resolving dispute; 1 2 3 4 5 6 7 Collective bargaining Code of discipline Grievance procedure Arbitration Conciliation Adjudication Consultative machinery

Labour welfare and social security measures According to Arthur James Todd, Labour welfare means anything done for the comfort and improvement, intellectual or social, of the employee over and above the wages paid which is not a necessity of the Industry. Labour welfare is a part and parcel of Social Welfare. Labour welfare: (1) May be introduced by Central government, State government, Employers, Trade unions or by any charitable orgaisation. (2) Provides better life and physical and mental health to the workers. (3) Make them happy satisfied and efficient. (4) Relieves workers from industrial fatigue and improve intellectual, cultural and material condition. (5) The measures are in addition to regular wages and other economic benefits available to workers due to legal provision and collective bargaining. (6) New measures are added to the existing from time to time. (7) It helps the workers devote greater attention towards their work. The gain is in terms of productivity and quality. (8) It helps in maintaining peace with the employees unions (9) Employers get stable labour force (10)Absenteeism is less (11)Attract talented workers (12)Social evils like gambling, drinking are reduced. Agencies of Labour Welfare: (a) Central Government (b) State Government (c) Employers (d) Trade Unions (e) Charitable Organisations Types of Welfare services: (a) Economic Services- pension, life insurance, credit facilities. (b) Recreational Services- indoor games, outdoor games, reading rooms, libraries, radios, T.V etc

(c) Facilitative Services- canteen, rest room, lunch room, housing facility(rent free or loan), Medical facility, Washing facility, Education facility, Leave travel concession Social security: According to ILO, Social security is that security that society furnishes through appropriate orgainsation against certain risk to which its members are exposed. The term social security originated n U.S.A. In 1935, the Social Security Act was passed there and Social Security Board was established to govern and administer the scheme of unemployment, sickness and old-age insurance.

Social security schemes include health insurance, maternity benefits, compensation for employment injury, workers family pension cum- insurance schemes, compulsory and voluntary social insurance, provident fund schemes and public health services. Though social security program differ from country to country, they have three characteristics in common (i) (ii) They are established by law They provide some form of cash payment to individuals to compensate at least a part of the lost income that occurs due to such contingencies as unemployment, maternity, work injury, invalidism, industrial diseases, old age, burial, widowhood, and orphan hood; and The benefits or services are provided in three ways: (a) Social insurance contribution is made by the employers and the government. (b) Social assistance- non-contributory benefits (c) Public service- financed directly by the government from its general revenue.

(iii)

Social security in India: India is a Welfare State as envisaged in her constitution. There are several Acts and Schemes which provide security to the workers. 1 2 3 4 5 6 7 The Employees State Insurance Act, 1948 The Employees Provident Funds Act, 1952 Gratuity Scheme Employees Deposit-Linked Insurance Scheme Group Life Insurance The Workmens Compensation Act, 1923 The maternity Benefit Act, 1961

David C Mc Clelland has contributed to the understanding of motivation by identifying three types of basic motivating needs. He classified them as the need for power, need for affiliation and need for achievement. Considerable research has been done on methods of testing people with respect to these three types of needs, and Mc Clelland and his associates have done substantial research especially on the need for achievement.

Discuss the different steps involved in Pricing Procedure Following are the major steps involved in pricing procedures: 1 2 3 4 5 6 7 8 9 Identify the target customer segments and draw up their profile Decide the market position and price image that the firm desires for the brand Determine the extent of price elasticity of demand of the product, and the extent of price sensitivity of target groups Take into account the life-cycle stage of the product Analyze competitors prices Analyze other environmental factors Choose the pricing method to be adopted, taking all the above actors into account Select the final price Periodically review the pricing method as well as procedures

Discuss the assumptions under the law of return to a variable factor. According to Prof. Watson, the law of return to a variable factor is when total output o production of a commodity is increased by adding units of variable inputs while the quantities of other inputs are held constant, then increase in total production becomes, after some point, smaller and smaller. Assumptions behind this law are given here below: 1 2 3 4 It is possible to make changes in the factor proportions All units of the variable factors are homogeneous One is variable factor and others are the fixed factors There is no change in technique of production and organization

Business statistics
Define the term probability Probability measures provide the decision-maker with the means for quantifying the uncertainties which affect the choices of appropriate actions. Understanding probability and taking decision after understanding it minimizes the risk. What is priori approach to probability? Priori approach assumes that all the possible outcomes of an experiment are mutually exclusive and equally likely. The word equally likely conveys the motion of equally probable, and mutually exclusively means of one event occurs the other event will not occur. What are the steps involved in fitting a Binomial Distribution? When a binomial distribution is to be fitted to observe data the following procedure is adopted: 1 Determine the value of p and q. If one of these values is known the other can be found out by the simple relationships p= (1-q) and q=(1p). When p and q are equal, the distribution is symmetrical

Discuss the characteristics of the Poisson distribution. The characteristics of the Poisson distribution are as follow:1. The occurrence of the event is independent. That is, the occurrence of an event in an interval of space or time has no effect on the probability of a second occurrence of the event in the same or any other interval. 2. Theoretically, an infinite number of occurrences must be possible in the interval. 3. The probability of single occurrence of the event in a given interval is proportional to the length of the interval. 4. In any infinitesimal (extremely small) portion of interval, the probability of two or more occurrences of the event is negligible. Attributes of a Exponential Experiment

The exponential pdf has no shape parameter, as it has only one shape. The exponential pdf is always convex and is stretched to the right as decreases in value. The value of the pdf function is always equal to the value of at T = 0 (or T = ). The location parameter, , if positive, shifts the beginning of the distribution by a distance of to the right of the origin, signifying that the chance failures start to occur only after hours of operation, and cannot occur before this time. The scale parameter is .

As

Attributes of a Poisson Experiment

A Poisson experiment is a statistical experiment that has the following properties:

The experiment results in outcomes that can be classified as successes or failures. The average number of successes () that occurs in a specified region is known. The probability that a success will occur is proportional to the size of the region. The probability that a success will occur in an extremely small region is virtually zero.

Note that the specified region could take many forms. For instance, it could be a length, an area, a volume, a period of time, etc.
Notation

The following notation is helpful, when we talk about the Poisson distribution.
e: A constant equal to approximately 2.71828. (Actually, e is the base of the natural logarithm system.) : The mean number of successes that occur in a specified region. x: The actual number of successes that occur in a specified region. P(x; ): The Poisson probability that exactly x successes occur in a Poisson experiment, when the mean number of successes is .

Poisson Distribution

A Poisson random variable is the number of successes that result from a Poisson experiment. The probability distribution of a Poisson random variable is called a Poisson distribution. Given the mean number of successes () that occur in a specified region, we can compute the Poisson probability based on the following formula:
Poisson Formula. Suppose we conduct a Poisson experiment, in which the average number of successes within a given region is . Then, the Poisson probability is:

P(x; ) = (e-) (x) / x!

where x is the actual number of successes that result from the experiment, and e is approximately equal to 2.71828.

The Poisson distribution has the following properties:

The mean of the distribution is equal to . The variance is also equal to .

Example 1 The average number of homes sold by the Acme Realty company is 2 homes per day. What is the probability that exactly 3 homes will be sold tomorrow? Solution: This is a Poisson experiment in which we know the following:
= 2; since 2 homes are sold per day, on average.

x = 3; since we want to find the likelihood that 3 homes will be sold tomorrow. e = 2.71828; since e is a constant equal to approximately 2.71828.

We plug these values into the Poisson formula as follows: P(x; ) = (e-) (x) / x! P(3; 2) = (2.71828-2) (23) / 3! P(3; 2) = (0.13534) (8) / 6 P(3; 2) = 0.180 Thus, the probability of selling 3 homes tomorrow is 0.180 .
Cumulative Poisson Probability

A cumulative Poisson probability refers to the probability that the Poisson random variable is greater than some specified lower limit and less than some specified upper limit. Example 1 Suppose the average number of lions seen on a 1-day safari is 5. What is the probability that tourists will see fewer than four lions on the next 1-day safari? Solution: This is a Poisson experiment in which we know the following:
= 5; since 5 lions are seen per safari, on average. x = 0, 1, 2, or 3; since we want to find the likelihood that tourists will see fewer than 4 lions; that is, we want the probability that they will see 0, 1, 2, or 3 lions. e = 2.71828; since e is a constant equal to approximately 2.71828.

To solve this problem, we need to find the probability that tourists will see 0, 1, 2, or 3 lions. Thus, we need to calculate the sum of four probabilities: P(0; 5) + P(1; 5) + P(2; 5) + P(3; 5). To compute this sum, we use the Poisson formula: P(x < 3, 5) = P(0; 5) + P(1; 5) + P(2; 5) + P(3; 5) P(x < 3, 5) = [ (e-5)(50) / 0! ] + [ (e-5)(51) / 1! ] + [ (e-5)(52) / 2! ] + [ (e-5)(53) / 3! ] P(x < 3, 5) = [ (0.006738)(1) / 1 ] + [ (0.006738)(5) / 1 ] + [ (0.006738)(25) / 2 ] + [ (0.006738)(125) / 6 ] P(x < 3, 5) = [ 0.0067 ] + [ 0.03369 ] + [ 0.084224 ] + [ 0.140375 ] P(x < 3, 5) = 0.2650 Thus, the probability of seeing at no more than 3 lions is 0.2650. The weekly wages of 2000 workers in a factory is normally distributed with a mean of Rs. 200 and a standard deviation of Rs. 20. Estimate the lowest weekly wages at the 200 highest paid workers and the highest wages of 200 lowest paid workers. [Given phi(1.28)=0.09]

Marketing environment and environment scanning

In marketing environment analysis, a firm gathers relevant information relating to the environment, studies them in detail, takes note of the changes in the changes in each elements of the environment and forecasts the future position in each of them. Under the Mega/Macro environment the firm studies: 1 2 3 4 5 6 7 The geographic environment The political environment The Socio-cultural environment The economic environment The natural environment The technological environment Legal environment (Business Legislation)

As regards the environment that is specific to the given business, the firm studies: 1 2 3 4 5 6 The market demand The consumer The industry The competition Government policies (specific to business concerned) Supplier-related factors

Marketing information system Benefits: 1 2 3 In marketing planning In marketing implementation In marketing control

Classification of marketing information 1 2 Classification based on the end use/purpose Classification based on the subject matter

Steps involved in designing and developing an MIS Defining information needs Classifying information appropriately and identifying whether it is or planning, or implementation or control purposes. Evaluating the cost of collecting and processing the information and comparing the cost Vs benefits. Identifying the sources of the information Designing the mechanism/ procedure for gathering, processing, storing and retrieval of the information

Processing, analyzing and interpreting the information and disseminating it to the right persons at the right time in the right capsule Monitoring, maintaining, reviewing and improving the system

Requisites of a good MIS Must be unified system Should be conceived and used as a marketing decision support system Must be compatible with the culture and level of sophistication of the firm and of the marketing organization in particular Must be user-orients and user friendly; must also secure users involvement Must involve the suppliers of the information as well Must be economical. Value-cost position of the information should be favourable Must meet the principle of selectivity Must be capable of smoothly absorbing changes that may become necessary Must be fast Characteristics of Good Marketing Information Relevance to decision making Clarity Completeness Confidentiality Precision Cost reasonableness Reliability (from genuine sources) Accuracy Timeliness Objectivity Authenticity Strategic value Inputs from the MIS Periodic reports Triggered reports Demand reports Plan reports

Specialized databases Customer database Marketing intelligence Data mining and data warehousing 1 Bachelor stage Young, single, not living at home, few financial burdens, fashion opinion leaders. Recreation oriented. Buy; basic home equipments, furniture, cars, equipments for the mating game vacations.

2 Newly married couples

Young, no children, highest purchase rate and highest purchase of durables: Cars, appliances, furniture, vacations

3 Full nest I Youngest child under six, home purchasing at peak, liquid assets low, interested in new products, advertised products. Buy: Washers, dryers, TV, baby food, chest rub and cough medicines, vitamins, dolls, wagons, sleds,skates 4 Full nest II Youngest child six or over, financial position better. Less influenced by advertising. Buy large-size packages, multiple-unit deals. Buy: Manifolds, cleaning materials, bicycles,music lessons, pianos Older married couples with dependent children. Financial position still better. Some children get jobs. Hard to influence with advertising. High average purchase of durables: new, more tasteful, furniture, auto travel, unnecessary appliances, boats, dental services, magazines Older married couples, no children living with them, head of household in labour force. Home ownership at peak. Most satisfied with financial position and money saved. Interested in travel, recreation , self-education. Make gits and contributions. Not interested in new products. Buy: vacations, luxuries, home improvemet Older married. No children living at home, head of household retired. Drastic cut in income. Keep home. Buy: Medical appliances, medical-care products In labour force, Income still good but likely to sell home Retired. Same medical and product needs as other retired group; drastic cut in income, special need for attention, affection and security

5 Full nest III

6 Empty nest I

7 Empty nest II 8 Solitary survivor I 9 Solitary survivor II

Marketing research Marketing research is a systematic, objective and exhaustive search for the study of the facts realting to any problem in the field of marketing Richard Crisp Classification of marketing research jobs (Based on the subject of the research) Routine problem analysis and research on nonroutine problems Research on short-term and ling term problems demand Research on consumer Research on market/

Research on product/ brand Research on competition Research on distribution Research on price Research on advertising and promotion Research on sales methods Process of marketing research What is a service? Kotler and Bloom defined service as A service is any act or performance that one party can offer to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product. Characterstics of Service products Intangibility: Refers to the aspect not associated with any physical form or characteristics. It is very much, pronounced in the pure service elements like the lecture given by a professor. Inseparability: It means that the production and consumption of the service are inextricably interwined. Hence, the consumers presence is in most cases necessary at the time of production. Goods are usually purchased, sold and consumed; whereas, services are usually sold and then produced and consumed. Heterogeneity: The services offered are not similar all the time to all the customers. This feature of service is called Heterogenity. The quality of a service depends on the person, who provides the service, or the time, when provided. Even though standard systems may be used to handle a flight reservation, book a car for service, each unit of service differs from other units. Perishability: This means that the service units cannot be stocked. If a seat is unfilled when the plane leaves or the play starts, it cannot be stored and sold next day or next week; that revenue is lost forever. Difference between physical goods and Services Physical goods 1 Tangible 2 Homogeneous 3 Production and distribution separated from consumption 4 A thing 5 Core value produced in factory Services Intangible Heterogeneous Production, distribution and consumption are simultaneous process An activity or process Core value produced in buyer-seller

interactions 6 Customers do not participate in the production process 7 Can be kept in stock 8 Transfer of ownership Customers participate in the production Cannot be kept in stock No transfer of ownership

Market development process A process for developing sales - new business and new markets

This process is effective for developing all types of business, and delivers business growth via:
new products or services to existing customers, existing products or services to new customers, or new products or services to new customers.

Market development process:

1. Establish market development aims and targets. 2. Identify target market(s), sectors and niches. 3. Assess your existing sales organisation and develop it as necessary. 4. Source/utilise a suitable prospect database - ensure data is clean and up to date, and strategic decision-makers are identified. 5. Develop and agree your strategic proposition(s) - with reference to USP's, UPB's, competitors, positioning, product mix, margins, etc. 6. Design your communication(s) and method(s) to generate enquiries. 7. Design your response and sales processes and establish or provide required capabilities. 8. Design and provide your required monitoring, measurement and reporting systems. 9. Implement your sales development activity and reinforce it through coaching, training, meetings, executive endorsement, etc. 10.Follow-up the activity: coach as required, review, monitor, seek customer and prospect feedback (successful and unsuccessful) and report on performance. 11.Make changes and improvements and continue your activity at the appropriate stage.

Vertical Marketing System

A vertical marketing system (VMS) is one in which the main members of a distribution channelproducer, wholesaler, and retailerwork together as a unified group in order to meet consumer needs. In conventional marketing systems, producers, wholesalers, and retailers are separate businesses that are all trying to maximize their profits. When the effort of one channel member to maximize profits comes at the expense of other members, conflicts can arise that reduce profits for the entire channel. To address this problem, more and more companies are forming vertical marketing systems. Vertical marketing systems can take several forms. In a corporate VMS, one member of the distribution channel owns the other members. Although they are owned jointly, each

company in the chain continues to perform a separate task. In an administered VMS, one member of the channel is large and powerful enough to coordinate the activities of the other members without an ownership stake. Finally, a contractual VMS consists of independent firms joined together by contract for their mutual benefit. One type of contractual VMS is a retailer cooperative, in which a group of retailers buy from a jointly owned wholesaler. Another type of contractual VMS is a franchise organization, in which a producer licenses a wholesaler to distribute its products. The concept behind vertical marketing systems is similar to vertical integration. In vertical integration, a company expands its operations by assuming the activities of the next link in the chain of distribution. For example, an auto parts supplier might practice forward integration by purchasing a retail outlet to sell its products. Similarly, the auto parts supplier might practice backward integration by purchasing a steel plant to obtain the raw materials needed to manufacture its products. Vertical marketing should not be confused with horizontal marketing, in which members at the same level in a channel of distribution band together in strategic alliances or joint ventures to exploit a new marketing opportunity. As Tom Egelhoff wrote in an online article entitled "How to Use Vertical Marketing Systems," VMS holds both advantages and disadvantages for small businesses. The main advantage of VMS is that your company can control all of the elements of producing and selling a product. In this way, you are able to see the whole picture, anticipate problems, make changes as they become necessary, and thus increase your efficiency. However, being involved in all stages of distribution can make it difficult for a small business owner to keep track of what is happening. In addition, the arrangement can fail if the personalities of the different areas do not fit together well. For small business owners interested in forming a VMS, Egelhoff recommended starting out by developing close relationships with suppliers and distributors. "What suppliers or distributors would you buy if you had the money? These are the ones to work with and form a strong relationship," he stated. "Vertical marketing can give many companies a major advantage over their competitors."

Corporate Strategy
Key words: Strategic management,

Discuss the formulation of a strategic plan.

Main steps in the strategy formulation process are given below:1 Spelling out the Business Mission and Objectives: Mission is the overall purpose of an organization and the expressed reason for its existence. The mission should be clearly expressed and effectively communicated to the members of the organization. It serves as a reference point from which objectives can be derived for managerial decision-making. Mission provides unity of purpose specifies the identity of the firm and provides Environmental Scanning: Organizational analysis: In case of an established and on-going enterprise a thorough appraisal of its current position is essential to identify its strengths (internal capabilities) and weaknesses (deficiencies). A detailed analysis and evaluation of the functional areas of the enterprise will throw a profile of its abilities and disabilities. For example, the enterprise may have a sound distribution network and state of the art technology but it may be deficient in its communication system and control mechanism. Analysis of the internal environment is popularly known as corporate appraisal or selfappraisal. It should cover marketing, financial, operations, human resources, orgainsational culture, etc. Once the strength and weaknesses of the enterprise are identified, each of them should be assigned weights according to the degree of importance. Management can identify the areas that need immediate attention. Developing strategic alternatives: Evaluation of Strategic alternatives: Each strategic alternative has its own merits and demerits

2 3

4 5

Spelling out organizations mission and objectives

Environmental Scanning: Opportunities and threats

Organizational Analysis: Strengths and Weaknesses

Choice of strategy

Evaluation of Strategic Alternatives

Developing Strategic Alternatives

Fig. Strategy Making Process

Choice of Strategy: Once the available strategic alternatives are evaluated and compared, management selects the strategic alternatives that will maximize the long-run effectiveness of the organization. Selection of overall strategy is both the right and duty of top management but the resulting choice permeates deeply into the organization. In order to make an effective strategic choice, top management must have a clear shared conception of the firm and its future. The strategic choice must be clear and unambiguous. Commitment to a given choice often limits future strategy; the decision must be thoroughly researched and evaluated. Several factors influence the strategic choice: i. Degree of risk acceptable to management. ii.Knowledge of past strategy iii.Response of owners iv.Values and preference of top management v.Timing of the decision

Ansoffs Growth Vector Growth Strategies: One of the objectives of the firms is to continuously increase their sales and profit. At some point of time, a firm faces a situation that the expected sales and profit from its existing business do not reach the desired levels. The firms need to adopt suitable strategies to fill this strategic gap. The firms can adopt three possible approaches: Identify opportunities for further growth within the existing businesses (Intensive growth) Identify opportunities to build or acquire businesses related to the existing businesses (Integrative growth) Identify opportunities to add attractive businesses, unrelated to the existing businesses(Diversification growth)

You need to run faster and faster to remain at the same place

H. Igor Ansoff first published the now well-known vector matrix or product-matrix in the Harvard Business review in Sep/ Oct edition of 1957. The matrix also appeared in the book written later by Ansoff and published in 1965- corporate strategy. Although the matrix was published a long time ago, it still remains one of the most popular matrices and is used to identify the basic alternative strategies, which are options for a firm wanting to grow. Ansoff developed the matrix out of his realization that a firm needs a welldefined scope and growth direction. For most companies growth is often the perquisite for survival. Ansoff felt that many of the theorists had too broad a concept of business and that the traditional identification of a firm with a particular industry had become too narrow. This was because many firms acquired a diverse range of products through policies of vertical and horizontal integration to protect their existing markets, and also through new product development, done to exploit technological innovations and to develop new market with opportunities to growth. The vector matrix is based on joint consideration of the implication of change in the product (technology) and/ or the market and is perhaps the simplest and most basic statement of the strategic alternatives open to the firm who desires growth.

Products Existing Market penetration strategy 1. More purchase and usage from existing customers 2. Gain customers from competitors 3. Convert non users into users Market development strategy 1. New market segment 2. New distribution channels 3. New geographic areas New Product development strategy 1. Product modification via new features 2. Different quality levels 3. New product

Diversification strategy 1. 2. 3. 4. Organic growth Joint ventures Mergers Acquisition/take-overs

Existing Market

New

Fig: Market/ product expansion grid This grid may be also used to make an analysis of the marketing personality/ outlook of the individual/ firm Current products and current market: market penetration

Market penetration: the firm seeks to: a. Maintain or increase its share of the current market with current products. b. Secure dominance of growth markets. c. Restructure a mature market by driving out competitors. d. Increase usage by existing customer. Present products and new markets: market development a. New geographical areas and export markets b. Different package sizes for food and other domestic items so that those who buy in bulk and small quantities are catered for. c. New distribution channels to attract new customers (e.g. organic foods sold in supermarkets not just specialist shops) d. Differential pricing policies to attract different types of customer and create new market segments.

New products to present markets: product development a. Advantage Product development forces competition to innovate, new comers to the market might be discouraged. b. The drawbacks include the expense and the risk. New products and new markets: diversification Diversification occurs when a company decides to make new products for new markets. It has to have a clear idea of what it hopes to gain from diversification. There are two types of diversification, related and unrelated diversification. a. Growth - new products and new markets should be selected which offer prospects for growth, which the existing product market mix does not. b. Investing surplus funds not required for other expansion needs: but the funds could be returned to shareholders. c. The firms strengths matches the opportunity if outstanding new products have been developed by the companys research and development department. The profit opportunities from diversification are high. Related diversification Horizontal integration refers to development into activities which are competitive with or directly complementary to a companys present activities. Sony with its playstation started to compete in computer games. Vertical integration occurs when a company becomes its own; a. supplier of raw materials, components or services (backward vertical integration) b. Distributor or sales agent (forward vertical integration), for example: where a manufacturer of synthetic yarn begins to produce shirts from the yarn instead of selling it to other shirt manufacturers.

Advantage of vertical integration a. To secure supply of components or raw materials with more control. Supplier bargaining power is reduced. b. Strengthen the relationships and contacts of the manufacturer with the final consumer of the product. c. Win a share of the higher profits. d. Pursue a differentiation strategy more effectively. e. Raise barriers to entry. Disadvantages of vertical integration a. Over-concentration - A company places too many bets on a same end-market product b. The firm fails to benefit from any economies of scale or technical advances in the industry to which it has diversified. This is why in the publishing industry most printing is subcontracted to the specialist printing firms, who can work machinery to capacity by doing work for many firms.

Unrelated diversification - conglomerate diversification Unrelated diversification or conglomerate diversification is very unfashionable now but it has been a key strategy for many companies in Asia.

Advantages of conglomerate diversification a. Risk spreading entering new products into new markets offers protection against failure of current products and markets. b. High profit opportunities Ability to move into high growth profitable industries especially important if current industry is in decline. c. Escape from the present business if competition is too hot! d. Better access to capital markets. e. No other way to grow expansion in the existing industry might lead to monopoly and government investigation f. Use surplus cash g. Exploit under-utilized resources h. Obtain cash or other financial advantages i. Use a companys image reputation in one market to build products and services in another market. Disadvantages of conglomerate diversification a. The dilution of shareholders earnings if diversification is into growth industries with high P/E ratios. b. Lack of a common identity and purpose in a conglomerate organization. A conglomerate will be successful only if it has high quality of management and financial ability at head office where

diverse operations are brought together. c. Failure in one business will drag down the rest. d. Lack of management experience e. No good for shareholders shareholders can spread risk by buying shares in companies in different industries. Product Mix Optimization for Maximum Profitability Decision-making based on complex combinations of dynamic factors. Supply chain performance management Profits Manufacturing capacity Capabilities and costs Supply chain constraints Market opportunities Product might not be independent Customer loyalty might be lost when product is not available Price elasticity of demand Labor may be specialized and cannot switch between the two products Population increase Changes in the level of income of buyers Marketing influences Finance influences Production influences Management ability and effort

Product strategies Marketing strategies which are based on the product element are called product strategies. Product strategies are of two types:(a) Strategies based on Product Mix (b) Strategies based on Product life cycle Product modification Product elimination Diversification Stages Sale s Introducti on Low ch ar ac te Profit Strategic thrust Customer targets Growth Fast Growth Maturity Slow growth Decli ne Decli ne

ris tic s

Competition Differential advantage

Stages Sale s Introducti on Low Ma rk eti ng Mi x Product Price Promotion Advertising focus distribution Growth Fast Growth Maturity Slow growth Declin e Declin e

Products Immobile Existing non-innovative mobile non-innovative Market New individual / firm Immobile Existing innovative Immobile innovative

Existing

Fig: Analysis of the marketing personality/ outlook of the

To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on the firms present and potential products and markets (customers). By considering ways to grow via existing products and new products, and in existing markets, there are four possible product-market combinations. Ansoffs matrix provides four different growth strategies:-

BCG Model

Stars Lo w Porters Generic Strategies Competitors Analysis Hi gh Industry Analysis Competitive strategy Grand strategies Stability strategies Expansion strategies Retrenchment strategies Combination strategies

Question marks

Cash cows

Hig h Strategic dimensions and Group mapping

Fragmentation maturity and decline

Business Growth rate %

Dogs Market Share

Low

Corporate restructuring Transnationalisation of world economy World trade organization The Uruguay round of trade negotiations, after more than seven years of deliberation was wrapped uo on 14th Dec, 1993 and was formalized by more than 120 countries on April 15, 1994. WTO came into existence on Jan 1, 1995. Functions: 1. To facilitate the implementation, administration and operation of Uruguay round agreements. 2. To review national trade policies 3. To provide a forum for negotiations among member countries on their multilateral trade relations 4. To cooperate with other international institutions, especially the IMF and the World Bank in order to ensure more meaningful compatibility in global economic policies 5. To administer the trade dispute settlement procedures

Agreement on agriculture: The tariffs resulting from transformation of non-tariff barriers, as well as other tariffs on agricultural product to be reduced on an average by 36% in the case of Balanced Scorecard The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance. While the phrase balanced scorecard was coined in the early 1990s, the roots of the this type of approach are deep, and include the pioneering work of General Electric on performance measurement reporting in the 1950s and the work of French process engineers (who created the Tableau de Bord literally, a "dashboard" of performance measures) in the early part of the 20th century. The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The new balanced scorecard transforms an organizations strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only provides

performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies. This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise. Kaplan and Norton describe the innovation of the balanced scorecard as follows: "The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

Adapted from Robert S. Kaplan and David P. Norton, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review (January-February 1996): 76. Perspectives

The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives: The Learning & Growth Perspective This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledgeworker organization, people -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization. Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call "high performance work systems." The Business Process Perspective This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants. The Customer Perspective Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups. The Financial Perspective Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category. Strategy Mapping

Strategy maps are communication tools used to tell a story of how value is created for the organization. They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in the form of a causeand-effect chain. Generally speaking, improving performance in the objectives found in the Learning & Growth perspective (the bottom row) enables the organization to improve its Internal Process perspective Objectives (the next row up), which in turn enables the organization to create desirable results in the Customer and Financial perspectives (the top two rows).

Corporate level strategies Stability Expansion Retrenchment

Combination

Types of merger There are four types of merger, viz., horizontal merger, vertical merger, Simultaneous Sequential Simultaneous No- concentric merger and conglomerate merger. Horizontal mergers normally Pause/Proceed Profit and sequential change, with caution involve the merger of two or more companies which are producing similar Do products or rendering similar services, i.e. products or services which compete nothing directly with each other. This type of merger normally results in reduction in the number of players in that particular industry and may reduce or eliminate Turnaround Divestment Liquidation competition. Vertical mergers involve the merger of two companies, where one of them is an actual or potential supplier of goods or services to the other. The object of this kind of merger could be to ensure a source of supply or an outlet for products and the effect may improve efficiency. In concentric or congeneric mergers, the two companies may be related through Concentration Integration Diversification Internationalizatio Cooperation the basic technologies, production process or markets. The merged company n provides an extension of product line, market participations or technology to the surviving company. Such mergers provide greater opportunities to diversify into a relative market having higher return that it enjoyed earlier. Conglomerate International Vertical mergers neither constitute the bringing together of competitors or have a Strategic Merger Takeover Conglomerate vertical connection.Concentric It involves a predominant element of diversification Multidomestic of alliance activities. Thus, in this kind of merger, one company derives Joint of the revenue most Horizontal from a particular industry, acquiring companies operating venture industries-Global in other with a view to obtain greater stability of earnings through diversification or to MarketingHorizontal Friendly obtain benefits of economies of scale, etc. related Transnational Vertical What isTechnology industry lifecycle? Hostile related Concentric Like other living creatures, industry also has its circle of life. The industry Conglomerate lifecycle Marketingthe human lifecycle. The stages of industry lifecycle include imitates and technology fragmentation, shake-out, maturity and decline (Kotler 2003). These stages will related be described in the followings section. What are the main aspects of industry lifecycle? Pro-competitive Non-competitive Competitive Fragmentation Stage Tree of Strategic Alternatives the family Fragmentation is the first stage of the new industry. This is the stage when the new industry develops the business. At this stage, the new industry normally arises when an entrepreneur overcomes the twin problems of innovation and invention, and works out how to bring the new products or services into the market (Ayres et al., 2003). For example, air travel services of major airlines in Europe were sold to the target market at a high price. Therefore, the majority of airlines' customers in Europe were those people with high incomes who could afford premium prices for faster travel. In 1985, Ryanair made a huge change in the European airline industry. Ryanair was the first airline to engage low-cost airlines in Europe. At that time, Ryanair's services were perceived as the innovation of the European airline industry (Le Bel, 2005). Ryanair tickets are half the price of British Airways. Some of its sales Pre-competitive

promotions were as low as 0.01. This made people think that air travel was not just made for the rich, but everybody (Haley & Tan 1999). Ryanair overcame the twin problems of innovation and invention in the airline industry by inventing air travel services that could serve passengers with tight budgets and those who just wanted to reach their destination without breaking their bank savings. Ryanair achieved this goal by eliminating unnecessary services offered by traditional airlines (Kaynak & Kucukemiroglu, 1993). It does not offer free meals, uses paper-free air tickets, gets rid of mile collecting scheme, utilises secondary airports, and offers frequent flights. These techniques help Ryanair save time and costs spent in airline business operation (Haley & Tan 1999). Shake-out Shake-out is the second stage of the industry lifecycle. It is the stage at which a new industry emerges. During the shake-out stage, competitors start to realise business opportunities in the emerging industry. The value of the industry also quickly rises (Ayres et al., 2003). For example, many people die and suffer because of cigarettes every year. Thus, the UK government decided to launch a campaign to encourage people to quit smoking. Nicorette, one of the leading companies is producing several nicotine products to help people quit smoking. Some of its well-known products include Nicorette patches, Nicolette gums and Nicorette lozenges (Nicorette 2007). Smokers began to see an easy way to quit smoking. The new industry started to attract brand recognition and brand awareness among its target market during the shake-out stage (Hendrickson et al., 2006). Nicorette's products began to gain popularity among those who wanted to quit smoking or those who wanted to reduce their daily cigarette consumption. During this period, another company realised the opportunity in this market and decided to enter it by launching nicotine product ranges, including Nic Lite gum and patches. It recently went beyond UK boarder after the UK government introduced non-smoking policy in public places, including pubs and nightclubs. This business threat created a new business opportunity in the industry for Nic Lite to launch a new nicotine-related product called Nic Time (ABC News 2006). Nic Time is a whole new way for smokers to "get a cigarette" an eight-ounce bottle contains a lemon-flavoured drink laced with nicotine, the same amount of nicotine as two cigarettes (ABC News 2006). Nic Lite was first available at Los Angeles airports for smokers who got uneasy on flights, but now the nicotine soft drinks are available in some convenience stores (ABC News 2006). Maturity Maturity is the third stage in the industry lifecycle. Maturity is a stage at which the efficiencies of the dominant business model give these organisations competitive advantage over competition (Kotler, 2003). The competition in the industry is rather aggressive because there are many competitors and product substitutes. Price, competition, and cooperation take on a complex form (Gottschalk & Saether, 2006). Some companies may shift some of the production overseas in order to gain competitive advantage. For example, Toyota is one of the world's leading multinational companies, selling automobiles to customers worldwide. The export and import taxes mean

that its cars lose competitiveness to the local competitors, especially in the European automobile industry. As a result, Toyota decided to open a factory in the UK in order to produce cars and sell them to customers in the European market (Toyota, 2007). The haute couture fashion industry is another good example. There are many western-branded fashion labels that manufacture their products overseas by cooperating with overseas partners, or they could seek foreign suppliers who specialise in particular materials or items. For instance, Nike has factories in China and Thailand as both countries have cheap labour costs and cheap, quality materials, particularly rubber and fabric. However, their overseas partners are not allowed to sell shoes produced for Adidas and Nike (Harrison & Boyle, 2006). The items have to be shipped back to the US, and then will be exported to countries worldwide, including China and Thailand. Decline Decline is the final stage of the industry lifecycle. Decline is a stage during which a war of slow destruction between businesses may develop and those with heavy bureaucracies may fail (Segil, 2005). In addition, the demand in the market may be fully satisfied or suppliers may be running out (Ayres et al., 2003). In the stage of decline, some companies may leave the industry if there is no demand for the products or services they provide, or they may develop new products or services that meet the demand in the market. In such cases, this will create a new industry (Francis & Desai, 2005). For example, at the beginning of the communication industry, pagers were used as the main communication method among people working in the same organisation, such as doctors and nurses. Then, the cutting edge of the communication industry emerged in the form of the mobile phone. The communication process of pagers could not be accomplished without telephones. To send a message to another pager, the user had to phone the call-centre staff who would type and send the message to another pager. On the other hand, people who use mobile phones can make a phone-call and send messages to other mobiles without going through call-centre staff (Hui et al., 2002). In recent years, the features of mobile phones have been developing rapidly and continually. Now people can use mobiles to send multimedia messages, take pictures, check email, surf the internet, read news and listen to music (Hui et al., 2002). As mobile phone feature development has reached saturation, thus the new innovation of mobile phone technology has incorporated the use of computers. The launch of personal digital assistants (PDA) is a good example of the decline stage of the mobile phone industry as the features of most mobiles are similar. PDAs are hand-held computers that were originally designed as a personal organiser but it become much more multi-faceted in recent years. PDAs are known as pocket computers or palmtop computers (Wikipedia, 2007). They have many uses for both mobile phones and computers such as computer games, global positioning system, video recording, typewriting and wireless wide-area network (Wikipedia, 2007). How do you use industry lifecycle analysis? It is important for companies to understand the use of the industry lifecycle

because it is a survival tool for businesses to compete in the industry effectively and successfully (Baum & McGahan, 2004). The main aspects in terms of strategic issues of the industry lifecycle are described below: Competing over emerging industries The game rules in industry competition can be undetermined and the resources may be constrained. Thus, it is vital for firms to identify market segments that will allow them to secure and sustain a strong position within the industry (Ayres et al., 2003). The product in the industry may not be standardised so it is necessary for companies to obtain resources needed to support new product development and rapid company expansion (Ayres et al., 2003). The entry barriers may be low and the potential competition may be high, thus companies must adapt to shift the mobility barriers (Ayres et al., 2003). Consumers may be uncertain in terms of demand. As a result, determining the time of entry to the industry can help companies to take business opportunities before their rivals (Ayres et al., 2003). When competition in the industry increases, firms can have a sustainable competitive advantage that will provide a basis for competing against other companies (Baum & McGahan, 2004). The new products and applications are harder to come by, while buyers become more sophisticated and difficult to understand in the maturity stage of the industry lifecycle. Thus, consumer research should be carried out and this could help companies in building up new product lines (Baum & McGahan, 2004). Slower industry growth constrains capacity growth and often leads to reduced industry profitability and some consolidation. Therefore, companies can focus greater attention on costs through strategic cost analysis (Baum & McGahan, 2004). The change in the industry is rather dynamic, and an understanding of the industry lifecycle can help companies to monitor and tackle these changes effectively (Baum & McGahan, 2004). Firms can develop organisational structures and systems that can facilitate the transition (Baum & McGahan, 2004). Some companies may seek business opportunities overseas when the industries reach the maturity stage because during this stage, the demand in the market starts to decline (Baum & McGahan, 2004).

Competing during the transition to industry maturity

Competing in declining industries The characteristics of declining industries include the following: Declining demand for products Pruning of product lines Shrinking profit margins Falling research and development advertisement expenditure

Declining number of rivals as many are forced to leave the industry Measure the intensity of competition (Baum & McGahan, 2004) Assess the causes of decline (Baum & McGahan, 2004) Single out a viable strategy for decline such as leadership, liquidation and harvest (Baum & McGahan, 2004).

For companies to survive the dynamic environment, it is necessary for them to:

Where do you find information on the industry lifecycle? The information, model and theory for the industry lifecycle can be found in many business management books. Several variations of lifecycle model have been developed to address the development and transition of products, market and industry. The models are similar but the number and names of each stage can be different (Baum & McGahan, 2004). The following are some of the major models: Fox, 1973: Pre-commercialisation introduction, growth, maturity and decline Wasson, 1974: Market Development turbulence, saturation/maturity and decline rapid growth, competitive

Anderson & Zeithaml, 1984: introduction, growth, maturity and decline Hill & Jones, 1998: fragmentation, growth, shake-out, maturity and decline

Conclusion The industry lifecycle imitates the cycle of human being. Industry lifecycle comprises four stages including fragmentation, growth, maturity and decline. An understanding of the industry lifecycle can help competing companies survive during periods of transition. Information on the industry lifecycle can be found in most business management books. Several variations of the lifecycle model have been developed to address the development and transition of products, market and industry. The models are similar but the number of stages and names of each may differ. Major models include those developed by Fox (1973), Wasson (1974), Anderson & Zeithaml (1984), and Hill & Jones (1998). Strategic dimensions A careful balance of four interrelated elements: people, space, time and money.

Porter's Generic Strategies

If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns. A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm's strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter's generic strategies:
Porter's Generic Strategies

Advantage Target Scope Low Cost Product Uniqueness

Broad (Industry Wide)

Cost Leadership Strategy

Differentiation Strategy

Narrow (Market Segment)

Focus Strategy (low cost)

Focus Strategy (differentiation)

Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time. The cost leadership strategy usually targets a broad market.

Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership. Firms that succeed in cost leadership often have the following internal strengths: Access to the capital required to make a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome. Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process. High level of expertise in manufacturing process engineering. Efficient distribution channels.

Each generic strategy has its risks, including the low-cost strategy. For example, other firms may be able to lower their costs as well. As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally, several firms following a focus strategy and targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share. Differentiation Strategy A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product. Because of the product's unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute products easily. Firms that succeed in a differentiation strategy often have the following internal strengths: Access to leading scientific research. Highly skilled and creative product development team. Strong sales team with the ability to successfully communicate the perceived strengths of the product. Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors and changes in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments. Focus Strategy The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. The premise is that the needs of the group can be better serviced by focusing entirely on it. A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly.

Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist. Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well. Some risks of focus strategies include imitation and changes in the target segments. Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly. Finally, other focusers may be able to carve out subsegments that they can serve even better. A Combination of Generic Strategies - Stuck in the Middle? These generic strategies are not necessarily compatible with one another. If a firm attempts to achieve an advantage on all fronts, in this attempt it may achieve no advantage at all. For example, if a firm differentiates itself by supplying very high quality products, it risks undermining that quality if it seeks to become a cost leader. Even if the quality did not suffer, the firm would risk projecting a confusing image. For this reason, Michael Porter argued that to be successful over the long-term, a firm must select only one of these three generic strategies. Otherwise, with more than one single generic strategy the firm will be "stuck in the middle" and will not achieve a competitive advantage. Porter argued that firms that are able to succeed at multiple strategies often do so by creating separate business units for each strategy. By separating the strategies into different units having different policies and even different cultures, a corporation is less likely to become "stuck in the middle." However, there exists a viewpoint that a single generic strategy is not always best because within the same product customers often seek multi-dimensional satisfactions such as a combination of quality, style, convenience, and price. There have been cases in which high quality producers faithfully followed a single strategy and then suffered greatly when another firm entered the market with a lower-quality product that better met the overall needs of the customers. Generic Strategies and Industry Forces These generic strategies each have attributes that can serve to defend against competitive forces. The following table compares some characteristics of the generic strategies in the context of the Porter's five forces.
Generic Strategies and Industry Forces

Generic Strategies Industry Force

Cost Leadership

Differentiation
Customer loyalty can discourage potential

Focus
Focusing develops core competencies that can act as

Entry Ability to cut Barriers price in

retaliation deters potential entrants. entrants.

an entry barrier.

Buyer lower price to Power

Large buyers have less power to negotiate because of few close powerful buyers. alternatives. Ability to offer

Large buyers have less power to negotiate because of few alternatives. Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.

Better insulated Supplier from powerful Power suppliers.

Better able to pass on supplier price increases to customers.

Customer's become Threat Can use low price attached to Specialized products & core of to defend against differentiating attributes, competency protect against Substitu substitutes. reducing threat of substitutes. tes substitutes. Better able to Rivalry compete on price. Brand loyalty to keep customers from rivals. Rivals cannot meet differentiation-focused customer needs.

Strategic group mapping If you want to understand your environment and its implications in greater depth, it might be helpful to look more widely and add your beneficiary needs into the mix. In this way, you can also consider the important factors affecting other organisations in your specialist sector (perhaps health or social care), or for your field of operation (perhaps crime prevention or victim support). This is often called your strategic group. Take the top five other players in your strategic group. List them. Develop a profile for each: What services do they provide? What beneficiary group do they work with? What's their impact? What might their plans be for the future? How might you create greater impact by reconsidering your relationship with them?

It's important not only to think about who these other players are, but also about the marketplace you each work in and how this could affect your future strategies. To help with this, think about the two most important factors driving success (or ensuring outcomes) for your service users or beneficiaries. Examples that people sometimes come up with are: being able to access the service immediately having all their needs met in one place having a tailored service based on their unique needs.

You will have your own factors for your beneficiaries. Once you've picked the top two, draw up a matrix showing each factor as in the example below. Example of strategic group map

Description of the diagram The diagram shows a square divided into quadrants with 'Immediate access' on the y-access and 'Tailored service' on the x-access. Drawn in the appropriate position on the grid (with

regards to these two factors) are the other players. The size of the circle that represents each corresponds to their size in the marketplace. Create your own strategic group map Plot out each of the other players on this matrix. You could draw a circle for each that gives an idea of relative size. Put your organisation on there too. Where are the gaps? Where are the overlaps? What are the options for change? *

Financial Globalization and Financial Stability

Globalization is a complex process and it has different facets. Among all of them, financial globalization is the most powerful dimension. It has caused great impact on the global economy and constituted a remarkable change in the exhaustive cross-border financial and cost flows. In addition, financial globalization also has great impact in international risksharing management. There are myriad of aspects of Financial Globalization, and financial globalization and financial stability is one of them. Due to financial globalization, a massive change has been noticed in the market operators and institutions, in expanding the stakes of cross-border properties as well as the growing international profile in the financial stability of economic markets. These changes have been called as the second wave of financial globalization. When the financial markets cannot perform at its best due to an unrelenting predicament, the situation is called as financial instability. To counteract this instability, financial globalization takes an important role. First of all, it changes the traditional government-ruled exchange rate to a flexible exchange rate system. In addition, a precise application of liberalization and formation of institution is the crucial factor in all emerging markets. Reasons of financial globalization Technological advancement is considered as the prime cause of financial globalization. Especially, the transport and communications sectors have experienced an enormous growth which caused a change in the financial system. A combined effort of the technological advancement and the expansion of financial liberalization ensured active financial globalization in todays global economy. History Due to financial globalization there was a huge crisis in banking sector which affected almost all the countries in the world. The first impact had been noticed in the Nordic countries and Japan in the 1980s, while in the 1994, there was Mexican crisis, and crisis in banking sector in the Asian countries took place during the 1997-98. In the Russian countries it was in 1998. Impact of Financial Globalization and financial stability Earlier the system was mainly political dominated, but financial globalization and financial stability has reformed the entire system, and gave birth to the market-directed system. This system performs important role in determining the conditions of flexible accessibility in economy, and exchange rates. In addition, it also helps to cope up with any sort of financial crisis. There was massive impact of financial globalization on the countries and regions across the world. A total transmission noticed, and in the place of bank-centered financial system, a market-driven financial system has taken the charge. As a result, there was a downfall in the

banking sector, and they need to search for other options in domestic and global markets to rejuvenate the sector. Advantages of Financial Globalization and Financial Stability It can undoubtedly be said that due to financial globalization and financial stability there is boom in the economic sector. Plenty of options have been opened and the sources of global financing have become cheaper and easily accessible as well. Due to financial globalization numerous countries are enjoying financial stability which is widely accepted. The most important thing is that, for the developing countries, financial globalization and financial stability is really a boon. They have been highly benefited from the security markets of the developed countries. Furthermore, to keep the inflation rate in control, financial stability has been very much effectual. In a word, financial globalization and financial stability is definitely a perfect step for boosting up the economy in different countries worldwide. Technology and Innovation in Financial Services: Scenarios to 2020 Innovation has already transformed the financial services (FS) industry. Fourteen years ago, who expected the massive growth of e-banking and e-brokerage? Who envisioned the entry of new players such as retailers and telecommunications providers into financial services arena thanks to their ability to harness the power of innovative technology? Who predicted that technology would enable outsourcing and offshore contracting of core financial processes in lowcost countries such as India? The business environment continues to change today, and the financial services sector needs to confront many issues to remain competitive. In particular, technology and innovation are board level issues; they create opportunities and pose threats. To explore these issues, the World Economic Forum and representatives of the financial services, information technology and telecommunication communities set out to develop scenarios for the future of financial services and how they might be affected by innovation. The objective of these scenarios is to explore how innovation will transform access to, and delivery of, financial services by the year 2020. From the many key drivers, project participants in particular, leading industry representatives identified two crucial groups of questions. 1. How will the globalization of financial services evolve? Will it be further supported by governments and regulators? What outcomes will we see in the next decade? 2. Will innovation be incremental or fundamental? Will it be driven by traditional or new players? What types of innovation will we see for example, in products and services, distribution and sales channels, operations, and new business models? Project participants worked from these questions to develop three very different but plausible scenarios of the future of financial services over the next 14 years. Global Ivy League describes a highly concentrated financial services sector dominated by a small number of large, global players. Governments support globalization but take a very conservative approach to customer protection and regulation of the sector. At the same time, declining trust in digital media means customers favour the solidity of traditional financial service providers. In this environment, a small number of financial services institutions evolve into global powerhouses.

Next Frontier describes a world in which governments pursue deregulation and, as the title reflects, technology enables a great variety of new business models to emerge. The result is a financial services industry as an ecosystem of highly specialized providers, each focusing on creating a competitive advantage over incumbents. There are many new players, including telecommunications companies, peer-to-peer financial services providers, processing providers, retailers and Internet companies. Innovation Islands describes a world in which globalization stalls due to geopolitical tensions and global instability. Government policies toward the financial services sector differ widely among countries. Three trends become apparent: * "Leapfrogging": in large emerging economies such as China and India, government regulation and investment in infrastructure fosters the local financial service industry, expanding access to the poor and leading to new business models that "leapfrog" over developed markets in areas such as mobile banking and flexible, low-cost operating models. * "Business as usual": in other mainly developed economies such as the US or European countries where innovation neither accelerates nor decelerates. There is only limited change to business models. * "Back to the past": in the remaining countries and regions, mainly in developing economies. Governments increase control over the financial services sector but do not foster local innovation;as a result, there is little progress and sometimes even regression in the efficiency and quality of FS.

The Globalization Of Financial Services

In this age of globalization, the key to survival and success for many financial institutions is to cultivate strategic partnerships that allow them to be competitive and offer diverse services to consumers. In examining the barriers to - and impact of - mergers, acquisitions and diversification in the financial services industry, it's important to consider the keys to survival in this industry: 1. Understanding the individual client's needs and expectations 2. Providing customer service tailored to meet customers' needs and expectations In 2008, there were very high rates of mergers and acquisition (M&A) in the financial services sector. Let's take a look at some of the regulatory history that contributed to changes in the financial services landscape and what this means for the new landscape investors now need to traverse. Diversification Encouraged by Deregulation Because large, international mergers tend to impact the structure of entire domestic industries, national governments often devise and implement prevention policies aimed at reducing domestic competition among firms. Beginning in the early 1980s, the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St. Germaine Depository Act of 1982 were passed. By providing the Federal Reserve with greater control over non-member banks,

these two acts work to allow banks to merge and thrift institutions (credit unions, savings and loans and mutual savings banks) to offer checkable deposits. These changes also became the catalysts for the dramatic transformation of the U.S. financial service markets in 2008 and the emergence of reconstituted players as well as new players and service channels. (For more on this, check out our Financial Crisis Survival Guide special feature.) Nearly a decade later, the implementation of the Second Banking Directive in 1993 deregulated the markets of European Union countries. In 1994, European insurance markets underwent similar changes as a result of the Third Generation Insurance Directive of 1994. These two directives brought the financial services industries of the United States and Europe into fierce competitive alignment, creating a vigorous global scramble to secure customers that had been previously unreachable or untouchable. The ability for business entities to use the internet to deliver financial services to their clientle also impacted the product-oriented and geographic diversification in the financial services arena. Going Global Asian markets joined the expansion movement in 1996 when "Big Bang" financial reforms brought about deregulation in Japan. Relatively far-reaching financial systems in that country became competitive in a global environment that was enlarging and changing swiftly. By 1999, nearly all remaining restrictions on foreign exchange transactions between Japan and other countries were lifted. (For background on Japan, see The Lost Decade: Lessons From Japan's Real Estate Crisis and Crashes: The Asian Crisis.) Following the changes in the Asian financial market, the United States continued to implement several additional stages of deregulation, concluding with the Gramm-Leach-Bliley Act of 1999. This law allowed for the consolidation of major financial players, which pushed U.S.-domiciled financial service companies involved in M&A transactions to a total of $221 billion in 2000. According to a 2001 study by Joseph Teplitz, Gary Apanaschik and Elizabeth Harper Briglia in Bank Accounting & Finance, expansion of such magnitude involving trade liberalization, the privatization of banks in many emerging countries and technological advancements has become a rather common trend. (For more insight, see State-Run Economies: From Public To Private.) The immediate effects of deregulation were increased competition, market efficiency and enhanced consumer choice. Deregulation sparked unprecedented changes that transformed customers from passive consumers to powerful and sophisticated players. Studies suggest that additional, diverse regulatory efforts further complicated the running and managing of financial institutions by increasing the layers of bureaucracy and number of regulations. (For more on this topic, see Free Markets: What's The Cost?) Simultaneously, the technological revolution of the internet changed the nature, scope and competitive landscape of the financial services industry. Following deregulation, the new reality has each financial institution essentially operating in its own market and targeting its audience with narrower services, catering to the demands of a unique mix of customer segments. This deregulation forced financial institutions to prioritize their goals by shifting their focus from ratesetting and transaction-processing to becoming more customer-focused. Challenges and Drawbacks of Financial Partnerships Since 1998, the financial services industry in wealthy nations and the United States has been experiencing a rapid geographic expansion; customers previously served by local financial institutions are now targeted at a global level. Additionally, according to Alen Berger and Robert DeYoung in their article

Technological Progress and the Geographic Expansion of the Banking Industry (Journal of Money, Credit and Banking, September 2006), between 1985 and 1998, the average distance between a main bank and its affiliates within U.S. multibank holding companies has increased by more than 50%, from 123.4 miles to 188.9 miles. This indicates that the increased ability of banks to make small business loans at greater distances enabled them to suffer fewer diseconomies of scale and boost productivity. (To learn more, check out Competitive Advantage Counts.) Deregulation has also been the major factor behind this geographic diversification, and beginning in the early 1980s, a sequence of policy changes implemented a gradual reduction of intrastate and interstate banking restrictions. In the European Union, a similar counterpart of policy changes enabled banking organizations and certain other financial institutions to extend their operations across the member-states.Latin America, the transitional economies of Eastern Europe and other parts of the world also began to lower or eliminate restrictions on foreign entry, thus enabling multinational financial institutions headquartered in other countries to attain considerable market shares. Transactions without Boundaries, Borders Recent innovations in communications and information technology have resulted in a reduction in diseconomies of scale associated with business costs faced by financial institutions contemplating geographic expansion. ATM networks and banking websites has enabled efficient long-distance interactions between institutions and their customers, and consumers have become so dependent on their newfound ability to conduct boundary-less financial transactions on a continuous basis that businesses lose all competitiveness if they are not technologically connected. An additional driving force for financial service firms' geographic diversification has been the proliferation of corporate combination strategies such as mergers, acquisitions, strategic alliances and outsourcing. Such consolidation strategies may improve efficiency within the industry, resulting in M&As, voluntary exit, or forced withdrawal of poorly performing firms. Consolidation strategies further empower firms to capitalize on economies of scale and focus on lowering their unit production costs. Firms often publicly declare that their mergers are motivated by a desire for revenue growth, an increase in product bases, and for increased shareholder value via staff consolidation, overhead reduction and by offering a wider array of products. However, the main reason and value of such strategy combinations is often related to internal cost reduction and increased productivity. (For further reading, check out What Are Economies of Scale?) Unfavorable facts about the advantages and disadvantages of the major strategies used as a tool for geographic expansions within the financial services sectors were obscured in 2008 by the very high rates of M&As, such as those between Nations Bank and Bank of America (NYSE:BAC), Travelers Group and Citicorp (NYSE:C), JP Morgan Chase (NYSE:JPM) and Bank One. Their dilemma was to create a balance that maximized overall profit. Conclusion The conclusion regarding the impact, advantages and disadvantages of domestic and international geographic diversification and expansion on the financial service industry is the fact that with globalization, the survival and success of many financial service firms lies in understanding and meeting the needs,

desires and expectations of their customers. The most important and continually emerging factor for financial firms to operate successfully in extended global markets is their ability to efficiently serve discerning, highly sophisticated, better educated, more powerful consumers addicted to the ease and speed of technology. Financial firms that do not to realize the significance of being customer-oriented are wasting their resources and eventually will perish. Businesses that fail to recognize the impact of these consumer-driven transformations will struggle to survive or cease to exist in a newly forged global financial service community that has been forever changed by deregulation. (To learn more about this industry, check out The Evolution of Banking.) What is meant by globalization? Discuss Indias experience with globalization since 1991. Concept of Globalization: Globalization refers to the process of increasing economic integration and growing economic interdependence between nations. It means integration Indias experience with Globalization: The industrial policy 1991 aims to globalize the Indian economy through reforms in foreign trade policy, such as abolition of import licensing, convertibility of rupee, market determination of foreign exchange rates, etc. These policy reforms are explained below. (i) Imports liberalization: Quantitative restrictions such as import licenses and quotas have been phased out. Under the new foreign trade policy most imports have been put under Open General License (OGL) list, wherein automatic permission is granted to import goods. Now import license is necessary for every new item. Qualitative restrictions on a large number of export items have been removed. Several items of imports have been decanalised. The Foreign Trade Policy 2004-09 seek to double Indias percentage share of global merchandise trade within next five years. The measure proposed in the new policy is to continue the process of liberalization, simplification of procedures, reduction of transaction costs to the Indian exporters and importers and focus on areas of the core competency namely, agriculture, textile, cottage and handicraft sector. Rationalization of Tariff structure: The structure and patterns of custom duties levied on import of different commodities (known as tariff structure) has become very complex over the years. Since 1991 the peak tariff has been reduced substantially and the tariff structure has been rationalized. Reforms in Foreign Exchange management: Before 1991, Government of India exercised strict control over foreign exchange. Under the foreign exchange regulation act (FERA) all Indian exporters had to surrender their foreign exchange earnings to the reserve bank of India. Reforms in Foreign Direct Investment (FDI): Now 100 percent foreign equity is allowed in many industries. In other cases, the upper limit for foreign investment has been raised from 40% to 74%. Automatic permission is given to foreign technology agreements in high priority industries. Import of capital goods also gets automatic approval in case the foreign exchange required for such import is received through

(ii)

(iii)

(iv)

(v) 1)

2) 3)

4) 5)

foreign equity. Capital Market Reforms: The major reform in the capital market are as follows: The capital issues (control) Act 1947 has been repealed Indian Companies faced bureaucratic delays in issues of securities due to this act. Listing of Companies on stock exchanges has been liberalized. The role of foreign Institutional Investors (FIIs) on Indian stock has increased tremendously due to liberalization of foreign portfolio inflows. Private mutual funds (both Indian and Foreign) have been permitted to operate thereby ending the monopoly of UTI. The securities and Exchange Boards of India (SEBI) has become the regulator of capital market.

What is WTO? State the objective and function of WTO. WTO has a General council for its administration, which includes one permanent representative of each member nation. Generally, it has one meeting per month which is held in Geneva. The higher authority of policy making is WTOs ministerial conference which is held after every 2 years. Director General is the highest official of the organization to look after day to day working. General Council of WTO elects Director General for 4 years. The ex-trades WTO ministerial conference Conference I II III IV V VI Year Dec.9-13, 1996 May 18-20, 1998 Nov.30-Dec.9, 1999 Nov. 9-14,2001 Sep. 10-14, 2003 Dec. 13-18, 2005 Place Singapore Geneva Ciatel Doha Kankun Hong-kong

Minister of Italy Mr. Renatto Rugaro is its present Director General. Four Deputy Director General are also elected to assist the Director General. Like GATT, WTOs headquarter is also at Geneva. According to the latest WTO report (WTR-2003), at the end of April 2003, 146 countries were the members of WTO. WTO increased the present membership of WTO to 151. Objectives of WTO 1. To improve standard o living of people in the member countries. 2. To ensure full employment and broad increase in effective demand. 3. To enlarge production 4. To enlarge trade of goods. 5. To enlarge production with trade of services. 6. To ensure optimum utilization of world resources.

7. To accept the concept of sustainable development 8. To protect environment Function of WTO 1. To provide facilities or implementation administration and operation of multilateral and bilateral agreements of the world trade. 2. To provide a platform to member countries to decide future strategies related to trade and tariff. 3. To administer the rules and process related to dispute settlement 4. To implement rules and provisions realted to trade policy preview mechanism 5. To assist IMF and IBRD for establishing coherence in universal economic policy determination. 6. To ensure the optimum use of world resources 7. To accept the concept of sustainable development 8. To protect environment 9. To ensure optimum utilization of world resources 10.To enlarge production 11.To enlarge trade or services WTO agreements The main WTO agreements can be divided into the following categories: 1. Agreement on agriculture: This provides a framework for the long-term

Values and ethics in management

What is Management ethics? Ethics is the study of individual and collective moral awareness, judgment, character and conduct. Management ethics can be defined as the descriptive and normative study of moral awareness, judgment, character and conduct as they relate to all levels of managerial practice. What is morality and how is it different from ethics? Morality, is defined as the customary, sociolegal practices and activities that are considered importantly right and wrong; the rules that governs these activities; and the values that are embedded, fostered, or perused by those conventional, sociolegal activities and practices. Whereas management morality may allow one to succeed temporarily by conforming to current social norms or organizational mazes, management ethics calls for a sensitive, reflective, and systematic endorsement only after they have withstood critical challenge. What are the major types of Ethical theories? Teleological ethics theories Teleological ethics theories maintain that good ends and/or results determine the ethical values of action. Ethical egoism- an action is good if it produces or tends to produce results that maximize a particular persons self-interest as defined by the individual, even at the expense of others. Utilitarianism- an action is good if it produces or tends to produce the greatest amount of satisfaction for the greatest number of stakeholders for the greatest number of people. Eudaimonism- an action is good if it promotes or tends to promote the fulfillment of goals constitutive of human nature and its happiness.

Deontological ethics theory Deontological ethical theories maintain that responsibility fulfilling obligations, following proper procedure, doing the right thing. And adhering to moral standards determines the ethical value of actions. Deontological ethics maintains that actions are morally right independent of their consequences; for example, for the secularist, it is right to keep promises and for the religious, it is might to obey the Ten Commandments regardless of personal costs or benefits. Among the major types of deontological ethics are negative and positive right theories, social contract theories and social justice theories.

Negative and positive rights Negative rights- an action is right if it protects an individual from unwarranted interference from Government and/ or other people in the exercise of that right Positive rights- an action is right if it provides any individual with whatever he or she needs to exist Social Contract- an action is right if it conforms to the terms agreed upon, conditions, or rules for social well-being negotiated by competent parties Social justice- an action is right if it promotes the duty of fairness in the distributive, retributive, and compensatory dimensions of social benefits and burdens.

Virtue ethics theory Individual character Work character Professional character

System Development Ethics Theory Personal improvement Organizational ethics Extra- organizational ethics

What are the arguments for and against Social responsibility of Corporate? Arguments against social responsibilities are: 1 2 3 Contrary to basic functions of business Domination of business values Inefficiency in the system

Arguments in favor of social responsibilities are: 1 2 3 4 Business is a part of the society Avoidance of government regulation Long-run self-interest of business Traditional value

Social objective of Business and Enterprise

Social entrepreneurs play the role of change agents in the social sector by1 2 3 4 5 Adopting a mission to create and sustain social values Recognizing and relentlessly pursuing new opportunities to serve that mission Engaging in a process of continuous innovation, adaptation and learning Creating healthy environment by controlling pollution Acting boldly without being limited by resources currently in hand

6 7

Helping religions, charitable and cultural institutions which serve the people for betterment, and Helping the nation by improving its economy by producing and distributing such products which are essential for that nation.

Environmental Ethics and Corporate Responsibility

Environmental ethics is the part of environmental philosophy which considers extending the traditional boundaries of ethics from solely including humans to including the non-human world. It exerts influence on a large range of disciplines including law, sociology, theology, economics, ecology and geography. There are many ethical decisions that human beings make with respect to the environment. For example: Should we continue to clear cut forests for the sake of human consumption? Should we continue to propagate? Should we continue to make gasoline powered vehicles? What environmental generations? obligations do we need to keep for future

Is it right for humans to knowingly cause the extinction of a species for the convenience of humanity? Environmental ethics is becoming an important issue for many companies and businesses as there is a greater push for corporate responsibility. Leaders of organizations of all sizes and in all sectors face a growing number of issues related to ethical behavior, particularly in terms of environmental responsibility. As global understanding of the significant ecological and environmental ethics issues we face expands and moves to the forefront of debates, it is even more important for leaders to take action to both remedy the causes of the problem and to act as models for other organizations and individuals. Although there are many examples of responsible corporate and organizational environmental governance and behavior, there is yet to emerge a global initiative aimed at changing the face of environmentally ethical and responsible action that will promote further corporate responsibility. This lack of understanding of issues of environmental ethics and corporate responsibility occurs for a number of a reasons, one of which could be because of a lack of global consensus on the importance of taking the necessary steps to remedy the problem. As one scholar notes, "In our pluralistic societies, there is no uncontested common ethical ground in general and no undisputed conception of environmental responsibility in particular" (Enderle 2006) and as a result there is little unified action. If this assessment is valid then it is necessary to first define a clear set of issues and resolutions that organizations and leaders can agree upon.

One issue related to environmental ethics in the corporate and organizational sphere is that most will concur is vital for all leaders is that there cannot be any fuzzy distinctions between what is good for business versus what is good for the environment. In other words, the consensus must be that there should be a hierarchy of interests-one which places environmental and sustainability concerns at the peak. "The claim is that the various benefits and harms of development are incommensurable and not easily weighed, involving differences between global and local goods-the benefits of selling wood fiber for local populations versus the possible global benefits of a potential cure for cancer or a contribution to the reduction in greenhouse gases...Whose interests count for more?" (Light 2002). In short, the interests of the global good should always outweigh those of the short-term monetary or other gains produced by unethical or unsustainable practices and leadership decisions. Leaders in both business and civil society have focused too much on the friction between them and not enough on the points of intersection. The mutual dependence of corporations and society implies that "both business decisions and social policies must follow the principle of shared value. That is, choices must benefit both sides. If either a business or a society pursues policies that benefit its interests at the expense of the other, it will find itself on a dangerous path (Porter 2006). The bulk of recent peer-reviewed literature on the topic of environmental ethics and corporate responsibility has granted a great deal of focus on matters of ethical behavior in the organizational context. Although there are still several debates about possible courses of action that could and should be followed at the management level, it is generally agreed that "environmental leadership is a collective dynamic, wherein the difference between leaders and followers is based more on degrees of social influence (through words and deeds) than on traditional institutional power differentials" (Egri 2006). In addition, this also suggests another popular paradigm that has emerged that insists that businesses and organizations are increasingly more accountable for their environmentally ethical behavior-both with the organization and in the view of the public at large. With growing global consciousness devoted to understanding and championing issues of environmental sustainability, companies and their practices on such a level can no longer be viewed as separate matters. "The evolution of business and societal concern has led to businesses gradually reembracing formerly displaced social orientation for both social and environmental well-being" (Panwar 2006). What this means essentially, is that it is even more important for the overall success or failure of a corporation or organization to engage with public concerns and behave in a responsible way, particularly as far as environmental issues are concerned. As Panwar goes on to note, "When pursing [environmentally] ethical investments, individuals and organizations seek out companies with a positive reputation while avoiding companies linked to environmentally damaging practices, oppressive regimes, etc. The increase in environmental ethical investment has encouraged companies to give attention to corporate responsibility"(Panwar 2006). How organizations give this attention, however, is contested. The problem is becoming less a matter of recognizing that environmental ethics issues are present and pressing and more

an issue of what to do, leadership-wise and on a meta-organizational level to address these problems. There are various approaches to solving the organizational (and for that matter, national and international) problems surrounding effective and environmentally ethical leadership. The main issue is, however, a lack of coherent ideology surrounding organizational and corporate responses-even if the desire to be more aware of environmental ethics matters exists. For example, according to a survey conducted in December of 2006, "198 medium-sized to large multinationals found that most said they lacked an active approach to developing new business opportunities arising from meeting citizenship and sustainability needs" (Marshall 2007). In order to remedy this crisis, many larger organizations hired corporate responsibility officers to monitor such things as environmental ethics. These individuals were charged with the task of reviewing and analyzing current policy and practices to ensure that the highest ethical standards were being met in a way that was conducive to the organization's mission statement, budget, and overall corporate culture. In short, one approach to solving the ethical demands that increasingly valued by both the public and investors is to ensure corporate responsibility through the hiring of an outside consultant. With larger organizations understanding the value of environmental ethical responsibility, it is natural to assume that smaller entities will take notice and follow suit. Being an effective and responsible corporate leader is not simply something that is an issue in the organizational context, but it extends to the community level as well. Consider the case of Detroit and its rapidly dwindling reserve of natural areas and resources. In Detroit, an urban ecosystem analysis undertaken by American Forests revealed how land cover changes over the past 11 years have affected environmental quality in a nine-county area of southeast Michigan. "From 1991 to 2002 that region's open space declined by 10 percent while urban areas increased dramatically-21 percent. As a result, the region lost $1 billion in stormwater management services with a corresponding decline in water quality" (Kollin 2006). "The companies were rated on their ability to provide good jobs for employees, environmental sustainability, and healthy community relations" (Mirren 2006).

INFORMAL CONSULTATION ON STRATEGIES FOR GENDER EQUALITY- IS MAINSTREAMING A DEAD END?

Following four days of discussion of strategies for gender equality in international organisations, the gender focal points of 15 UN organisations and development banks together with representatives of 5 donor agencies and resource persons drew the following conclusions and recommendations related to lessons learned in promoting institutional change and effective strategies for the future: A. Gender mainstreaming is not a dead end strategy. But it is not always fully understood and implemented in the right way. * There is confusion about concepts: gender and women. However, one does not exclude the other. The use depends on the context. Gender is most fruitfully used as an adjective, not a noun, in concepts like gender equality and

gender analysis. Women (and girls) are essential actors and target groups in relation to gender equality. It is important to analyse issues so that gender differences and disparities appear and women are visible in relation to men. * There is also confusion about goals and means. The goal is gender equality and womens empowerment. To achieve the goal, different strategies and actions are needed according to circumstances. Polarisation of approaches does not work. A main strategy is gender mainstreaming of all policies, programmes and projects. But women must not be lost in the mainstream, or malestream!. Targeted women-specific policies, programmes and projects are necessary to strengthen the status of women and promote mainstreaming. In any case, there must be specialist support, institutional mechanisms and accountability.

* Agencies have chosen different bases for their action: human rights or efficiency considerations. In fact, it is not a question of either/or. The human rights basis is more fundamental, but is not always made explicit and in some organisations it is not well understood or appreciated. The emphasis will vary from one organisation to the other, but it is important to realise that the promotion of gender equality implies a social transformation in society in addition to more effective economic development and poverty reduction. B. Global commitment. The international womens conferences from Mexico (1975) to Beijing (1995) established a global consensus and commitment to promote gender equality which was reaffirmed by the Millennium Summit (2000). This is a long term commitment and it is important to keep the goal on the agenda. Ongoing political and financial support from Member States is essential to maintain focus on gender issues and ensure implementation of the recommendations. The mandates and policy statements of UN organisations and development banks should have conceptual clarity and explicit language so people understand them. Commitments should be clearly spelled out, given visibility and cultivated. Without pressure from governing bodies and top management mandates and policy statements do not get implemented. External advisory gender boards or panels can be used to answer questions and help elucidate and depersonalise issues. C. Organizational change. The challenge is to transform multilateral organisations to actively pursue the goal of promoting gender equality and womens empowerment through a process of gender mainstreaming and other forms of organizational change. As gender equality often touches on power relations, there can be strong discomfort and even reistance to change. To make progress the following is needed: - strong, active leadership - incentives and accountability - a critical mass of commited individuals D. Tools. Useful tools include - partnerships: internally and externally

- action plans to move from general policies to practice - advocacy events to keep the issues visible - simple, understandable language that is suitable for non-specialist audiences - universal norms, country statistics and local knowledge - sex-disaggregated data and analyses - best practice dissemination to excite the imagination - regular reporting om commitments, monitoring and evaluation - gender champions in relevant positions with appropriate financial resources - gender-balanced staffing and supports, including adequate training - individual recognition for good practice, rewards and incentives E. Top management. Responsibility for promoting gender equality is system-wide and rests at the highest levels of management. The active support of top management is crucial to increase action and impact. There must be more than lip-service. Leaders need to issue regular instructions and walk the talk. The responsibility of different levels of management must be clearly defined. The most important responsibility must be to create an enabling environment for gender equality. Measures score-cards for enabling environment should be put in place by top management. The gender units/advisers need to be proactive in advocating with and assisting top management to obtain the necessary support for gender equality. Also female top leaders need assistance on this. There are competing concerns, goal congestion and resistance to change and to addressing gender issues. F. Enabling environment. An enabling environment for the promotion of gender equality is important. Indicators of this include among others: - percentage of core funds dedicated to gender issues - gender inputs and outputs in corporate programmes and results frameworks - gender issues integrated in corporate policy - gender mainstreaming performance in performance appraisal reviews of staff - gender perspectives in human resources policy: affirmative action in recruitment, gender balance, work/life measures, harassment policy, value and visibility of interdisciplinary skills in vacancy announcements and promotions - regular gender audits including baseline data and monitoring G. Gender units. To promote gender equality, funds and competent staff are required. Corporate gender units are necessary. Regarding the level, resources and institutional placement of the gender units, the key objective is maximum and timely access to key corporate strategic processes and high-level management. There must be a critical mass of staff resources/gender specialists

kept together and then ideally additional fulltime specialists in other units and decentralized offices. There should be allocation of adequate resources and a match of expectations and resources expressed in clear terms of reference of catalytic functions of the gender unit H. Capacity-building. Capacity-building for gender mainstreaming is still needed in international organisations. A corporate capacity-building plan should be elaborated and be the responsibility of the staff training and capacity-building unit. The sustainability of efforts and investments is crucial, particularly in times of high staff turn-over. It is important that policy informs practice as practice should influence policy. Capacity-building should be tailor-made and demanddriven for various audiences: orientation for newcomers, gender modules in other courses (e.g. project cycle), gender sensitivity training, gender analysis training etc. Examples of successful practice are very useful and more cases should be presented. But lessons learned cannot only be general, some must be context-related. I. Networks. Networks and alliances are important within the organisation and outside. Internally, ownership should be shared with both women and men, and between Headquarters and the field. Externally collaboration should be established with governments, civil society and other UN organisations. Links should be established and support provided for womens organisations and groups, keeping in mind the character of the different groups and organisations. It is also important to collaborate with business and professional organizations, employers and trade unions, social and cultural associations, youth clubs etc. J. Involvement of men. The involvement of men is important to promote gender equality: more male staff in gender specialist posts, more male gender focal points in other units and more male trainees/facilitators for gender capacitybuilding courses. Training curriculum should be packaged with a resultsoriented focus to appeal to managers. It is important to break stereotypes. HIV/AIDS might be a good entry-point for talking with men about masculinity, gender-based violence, trafficking etc. Contacts should be established with male government and NGO representatives and they should be encouraged to participate in advocacy events and discussions. K. Accountability. To monitor progress it is important to define different roles and responsibilities for staff members at different levels of accountability. Existing accountability mechanisms need to be catalogued or mapped by level: leadership (executive head), management (ADGs/Directors), gender advisers in units, corporate gender units, country representatives. The role and accountability should also be mapped for non-programme/non-technical units such as evaluation/audit offices, programme budget offices and human resources offices. Core competencies needed for fulfilling various responsabilities need to be identified. Special attention should be given to the development of results frameworks and systematic measurement of results. Even if planned results are not achieved, efforts undertaken to meet gender commitments should be acknowledged. L. Mottos:

Whatever works, do it (dont be hung up in dogmatic approaches or language) Be persistent (things are never fast and easy), passionate (both competence and involvement are needed) and keep a sense of humour (there are many perspectives and ways of thinking) Dont compromise your dignity (there are limits to what a gender focal point can or should do) Damned if you do, damned if you dont (there are rarely simple solutions)Dont reinvent the wheel, there are so many wheels (learn from the experiences of others) The more you advance, the more remains to be done (new opportunities entail new challenges)

Pune: Women occupy just about 5% positions on the boards of director of Indian firms listed on the Bombay Stock Exchange. The revelation, which comes amid The study-a first of its kind in India and second in Asia- note that only 59 (5.3%) of the 1,112 directors of companies that form the elite BSE-100 group are women. These directorships are held by 48 different women, the study said. The percentage compares unfavorably with Canada, where women hold 15% of directorships, the United States (14.5%), the United Kingdom(12.2%), Hongkong(8.9%) and Australia(8.3%). The findings also reveal that 12 companies on the BSE-100 have more than one female director, 7 companies have female executive directors and 2.5% of all executive director roles are held by women. Less than half of the companies-only 46%- have women on their boards. Of all the appointments made in 2010 (as of May 2010), 4.9% were women. Two companies Jindal Steel& Power ltd. Have women as chairpersons and two of the countries most significant banks-ICICI Bank and Axis Bank- have female CEOs. The report includes a Women on Boards League Table which ranks companies listed on the BSE-100 in terms of the gender diversity of their boards, with those with the highest percentage o women on their boards appearing at the top. At the top of the list is JSW Steel Limited, which has three women (23.1%) on its board of 13. Oracle Financial Services Software is second with two women(22.2%) on its board of nine and Piramal Healthcare is third with 20% female board directors. Both of Piramal Healthcares two female directors hold executive directorships, the only BSE-100 company with two executive female directors. In forth place is Axis Bank Ltd, with two (18.2%) of its 11 board members being female. In joint fifth place, with two women (16.7%) out of 12 board members, are Lupin and Titan Industries. The research looks at the representation o female directors on the BSE-100 and ranks the companies in terms of the gender diversity of their boards, with those with the highest percentage of women on their boards

appearing at the top. We hope that this research will act as a catalyst for discussion in and amongst corporate India on the need for greater gender diversity at senior levels, said Shalini Mahtani, co-author of the report and Founder of Community Business. Our aspiration is that in time we will have a true meritocracy in corporate India, allowing each person, regardless of gender or background, to achieve their full potential.

Shackles down the ages Jemila Samerin The Hindu/ Sunday, March 28, 2010

Prime minister Manmohan singh has described the historic womens reservation bill as a giant step towards the empowerment of women and a celebration of womanhood. The passing of the bill in the Rajya Sabha is a momentous, heart warming step for India; also an inspirational trendsetter for womens empowerment in the entire region.

The movement for womens right has broken many a fetter, but it has also forged new ones. Women today are the striking power, a great contributor to many working sectors, ready to accept challenges. But do we ever recognize what boundaries they are being forced to cross?

The sexual laws and moral standards have always been stricter for women. The female body was regarded down the ages as a mere vessel for the male creative fluids. Women were the soil in which men planted their seeds. This perception was also reflected in religious beliefs. Women were stripped of their creative role and burdened with the responsibility for the Original Sin. The Ten Commandments list wives among a mans possessions. Not surprisingly, therefore, in a traditional Jewish prayer men implored God, Let not my offspring be a girl, for very wretched is the life of woman. And they gladly repeated every day: Blessed be Thou, O Lord our God, for not making me a woman. The sacred texts of every major religion enshrines the subjugation of women through myth (Eve causing the fall of man) or through code (the Shariah that values a womans testimony as half that of a man and authorizes a man to beat and whip his wife to keep her obedient to him). Apostle Paul made it clear that the head of the woman is the man, For the man is not of the woman; but the woman of the man. And if they will learn anything, let them ask their husbands at home: or it is a shame for women to speak in the

church. Christianity excluded women from priesthood and other church offices. At the same time, they were also expected to remain subservient to men at home. In all societies, the obvious biological difference between men and women is used as a justification for forcing them into different social roles which limit and shape their attitudes and behavior. A woman, in addition to being a female, must be feminine. Sexual oppression, no matter how harsh or unjustified, has never lacked rationalization. These may range from simple religious dogmas to sophisticated pseudo-scientific theories. For over a hundred years, the old form of marriage, based on the Bible, till death do us part, has been denounced as an institution that stands for the sovereignty of the man over the woman, of her complete submission to his whims and commands, and absolute dependence on his name and support. In addition, women are generally exploited by the media. They become like goods which are sold and bought. For instance, in advertisements we usually see women presenting products; but unfortunately, their bodies are used to attract consumers. Break barriers. The problem that confronts us today is how to be ones self and yet be in oneness with others, to feel deeply with all human beings and still retain ones own characteristic qualities. The modern woman would be enabled to blossom in true sense- with full respect for her personality; all artificial barriers should be broken, and the road towards grater freedom cleared of every trace of centuries of submission and slavery

Ethics the Framework for success: while some ethical decisions are simply a matter of right vs. wrong, the tough ethical decisions are right vs. right. The widespread attention given to the fall of companies such as Tyco,WorldCom, and Enron has led to an increased focus on ethics in the business world. Because of the enormous pressure to produce higher and better returns, some individuals at corporations have adopted the philosophy, "the ends justify the means." They fall into the trap of setting unrealistic budgets, improbable expectations, and unlikely goals. Not surprisingly, investor confidence has been low due to the many corporate scandals. Despite these results, however, firms continue to allow external sources, such as outside analysts, to define success. Instead, companies must ask the following question: "Have we replaced our underlying business theme of 'succeeding at all costs' with 'succeeding only the right way'?" An ethical culture can ensure success by establishing appropriate expectations using proper guidelines, thus preventing the need or desire to be

involved in any questionable business practices. Ultimately, success is about keeping your word, and companies that live up to their promises are successful. While it's true that some businesses hold themselves to a higher ethical standard, not all companies operate in an ethical environment. Financial decisions often are made without considering the ethical implications.When companies don't hold themselves to high ethical standards, the impact reverberates throughout the financial markets. Companies are destroyed, jobs are lost, and retirement savings are decimated. One of the government's reactions to corporate wrongdoing was enactment of the Sarbanes-Oxley Act of 2002 (SOX). But as Gary Smith, CEO of CIENA, characterized it in the October 20, 2003, edition of USA Today, SOX was "'chemotherapy' to prevent the cancer from recurring after cutting out corporate tumors at Enron,WorldCom, and elsewhere." Ensuring that an effective ethical culture exists in an organization isn't only a key factor in preventing the kinds of losses brought about by corporate frauds and avoiding the need for costly, burdensome legislation, but it can also enhance a company's reputation, improve morale, and even increase sales. This article examines top management's role in building an ethically minded culture, steps for making sound choices, and examples of ethical issues. FROM THE TOP DOWN Establishing ethical standards for a business should be the primary goal of executive management. Companies must design an environment that not only encourages high ethical standards but also produces ethically minded management, employees, suppliers, and customers. To establish an ethical culture, top management must accept responsibility for the ethical climate within their organizations. In reality, the actions of top executives define a company's culture because employees emulate their boss's behavior.Michael Hackworth, author of "Only the Ethical Survive" in the Fall 1999 Issues in Ethics, believes top leadership is ultimately responsible for the culture of their organization, including the ethical culture. To establish an ethical environment, top management needs to use five key elements to build trust: integrity, competence, consistency, loyalty, and openness with employees, vendors, and stakeholders. Stakeholder is a better word than stockholder because it represents the significant effect that business has on the community as a whole. Companies that operate under high ethical values don't have to spend any negative energy hiding wrongdoings if they make all decisions while considering the ethical implications. Most financial analysts agree that no single variable affects the climate of an organization more than the beliefs, practices, and ideas of its top management. THE GOOD AND THE BAD One company that provides a prime example of making good ethical decisions is Johnson & Johnson. In 1982, James Burke, then CEO, faced an ethical dilemma. The company experienced a major crisis when some of its Extra-Strength Tylenol capsules were found laced with cyanide. Faced with a difficult decision, Burke

turned to Johnson & Johnson's credo: "We believe our first responsibility is to doctors, nurses, and patients, to mothers and fathers and all others who use our products and services." He ignored the immediate short-term financial implication and adhered to the attitude of "doing the right thing," ordering the recall of more than 31 million bottles at a cost of more than $100 million. This action set a new standard for crisis management. As a result of these events, the company developed the tamper-proof seal and gained even more market share and customer loyalty than it had before the incident. To make choices like Burke requires individuals to take the steps listed in "A Framework for Thinking Ethically" from the Markkula Center for Applied Ethics at Santa Clara University (www.scu.edu/ethics): * Be sensitive to ethical issues, * Explore ethical aspects of a decision, * Weigh the considerations that impact their course of action, and * Have the moral courage to make the right ethical choice. [ILLUSTRATION OMITTED] While companies will inevitably face difficult situations, their ability to make ethical decisions must not be compromised for any reason. Consider Exxon, for example. This company refused to accept responsibility for the Valdez accident, and their attempt to blame state and federal officials for delays in containing the spill damaged their reputation. Even today the name Exxon is synonymous with environmental catastrophe. Due to ineffective communication from Exxon, the public questioned their credibility and truthfulness. According to Jennifer Hogue in "What is Crisis Management?" (http://iml.jou.ufl.edu/ projects/Spring01/Hogue/crisismanagement.html), a survey conducted by Porter Novelli several years after the accident found that 54% of respondents were still less likely to buy Exxon products. THE DANIEL EFFECT Everyone within an organization should work together to create the "Daniel Effect." This comes from the Old Testament account of a governing body trying to discredit Daniel in front of the whole kingdom of Babylon. In the New King James Version, the Book of Daniel, Chapter 6:3-4, says, "Then this Daniel distinguished himself above the governors and satraps, because an excellent spirit was in him; and the king gave thought to setting him over the whole realm. So the governors and satraps sought to find some charge against Daniel concerning the kingdom; but they could find no charge or fault, because he was faithful; nor was there any error or fault found in him." Employees would benefit individually from this mindset during their careers by adhering to high ethical standards. Companies must build a strong ethical framework to withstand attacks from the public through frivolous lawsuits, competition's claims of wrongdoing, and any fraud attempted by their employees. Positive public perception is vital to success in the marketplace,

which is protected by ethical behavior just as Daniel protected himself from his enemies by remaining faithful to his high moral standards. Some ethical decisions, such as cheating on taxes, lying under oath, or overstating revenue and understating expenses, are simply a matter of right vs. wrong. The tough ethical decisions are right vs. right. Four such dilemmas include truth vs. loyalty, individual vs. community, short-term vs. long-term, justice vs. mercy. Here are some real-world examples from Rushworth Kidder's How Good People Make Tough Choices: * It is right to find out all you can about your competitor's costs and price structures--and right to obtain information only through proper channels; * It is right to throw the book at good employees who make dumb decisions that endanger the firm--and right to have enough compassion to mitigate the punishment and give them another chance. * It is right to protect the endangered spotted owl in the old-growth forests of the American Northwest--and right to provide jobs to loggers. Unfortunately, no magic formula exists to guide management through these types of decisions. Companies must be willing to equally weigh the ethical repercussions of one decision over the other. DIFFICULT CHOICES In Moral Courage, Kidder relates the story of Eric Duckworth. A metallurgist by training, the recently married Duckworth took a position in 1949 with Federal Mogul, a firm that made bearings for internal combustion engines. His job description included examining damaged bearings returned by customers. He would determine the cause of the failure, report to the customers, and recommend changes to correct the problem.Most were due to misuse, improper installation, and lack of lubrication. Sometimes he discovered that the faulty parts were the result of production mistakes. His boss, the chief metallurgist, regularly tried to cover up such faults by refusing to divulge all the facts and by attributing the failure to end users mishandling the bearings, making no effort to compensate customers. At first, Duckworth rationalized "that he was prepared to commit sins of omission but not of commission." Eventually, a particularly flagrant case drove him to write a completely honest report, which his boss rejected. Summoning his moral courage, he protested that he would resign if they didn't report the true findings to the customer. His boss, as well as the sales department, protested that such findings would cost them customers and perhaps more. Fortunately, Duckworth previously had made several suggestions that increased the productivity of the manufacturing process and won him the admiration of the CEO, who backed him against his boss. The report went to the customer, who responded with a congratulatory letter that said: "We had always suspected concealment in some of your reports." In the wake of the company's new-found honesty, the customer increased orders. Duckworth later recalled his moral

courage, "On one occasion when I was young and idealistic, I succeeded--and have been proud of it ever since." My own experience illustrates how one benefit of ethical behavior is improved employee morale. The testing lab at a former employer of mine discovered a potential electrical hazard related to a specific motor supplier. Under unique circumstances that required the existence of several conditions, this motor had the potential to deliver an electric shock to the end user. The possible financial impact of rework or possible recall could cost the company millions of dollars. Our management team, aware of the chance for a possible recall, decided to report this issue to the Consumer Product Safety Commission (CPSC). Taking a pro-ethical approach had a positive impact on me and other employees because we all were impressed with the company's commitment to product safety. SAFEGUARD THE FUTURE Every day, management decisions affect individuals, families, and even nations. Before making a final decision, the goal should be to completely consider the ethical implications, including the immediate financial impact as well as the lasting consequences. If the organization's climate is to not permit wrongdoing of any kind, then employees are more likely to work harder for the company's common good. Ethical decision making safeguards an enterprise's future. Managing companies in the ever-changing business environment is difficult even without falling into the trap of earnings-only management. But an organization's management can't concentrate on the future if it's worried about any past corrupt business dealings. An ethical culture cultivates realistic expectations with the focus on following sound and unquestionable business principles. Ethics improves goodwill, company perception, employee morale, and even sales. Ethics allows management to be focused on the future, thereby becoming the framework for long-term success. Steve Hunter, CMA, is a senior finance manager for equipment at an international company. He has 16 years of experience in accounting and finance. You can reach Steve at (731) 645-4526 or shunter7263@bellsouth.net. Ethics is a topic at IMA's Annual Conference, June 14-18, 2008, in Tampa, Fla. For information, visit www.imaconference.org. BY STEVE HUNTER, CMA **************************************** Thinking Ethically: A Framework for Moral Decision Making Developed by Manuel Velasquez, Claire Andre, Thomas Shanks, S.J., and Michael J. Meyer Moral issues greet us each morning in the newspaper, confront us in the memos on our desks, nag us from our children's soccer fields, and bid us good night on the evening news. We are bombarded daily with questions about the justice of our foreign policy, the morality of medical technologies that can prolong our

lives, the rights of the homeless, the fairness of our children's teachers to the diverse students in their classrooms. Dealing with these moral issues is often perplexing. How, exactly, should we think through an ethical issue? What questions should we ask? What factors should we consider? The first step in analyzing moral issues is obvious but not always easy: Get the facts. Some moral issues create controversies simply because we do not bother to check the facts. This first step, although obvious, is also among the most important and the most frequently overlooked. But having the facts is not enough. Facts by themselves only tell us what is; they do not tell us what ought to be. In addition to getting the facts, resolving an ethical issue also requires an appeal to values. Philosophers have developed five different approaches to values to deal with moral issues. The Utilitarian Approach Utilitarianism was conceived in the 19th century by Jeremy Bentham and John Stuart Mill to help legislators determine which laws were morally best. Both Bentham and Mill suggested that ethical actions are those that provide the greatest balance of good over evil. To analyze an issue using the utilitarian approach, we first identify the various courses of action available to us. Second, we ask who will be affected by each action and what benefits or harms will be derived from each. And third, we choose the action that will produce the greatest benefits and the least harm. The ethical action is the one that provides the greatest good for the greatest number. The Rights Approach The second important approach to ethics has its roots in the philosophy of the 18th-century thinker Immanuel Kant and others like him, who focused on the individual's right to choose for herself or himself. According to these philosophers, what makes human beings different from mere things is that people have dignity based on their ability to choose freely what they will do with their lives, and they have a fundamental moral right to have these choices respected. People are not objects to be manipulated; it is a violation of human dignity to use people in ways they do not freely choose. Of course, many different, but related, rights exist besides this basic one. These other rights (an incomplete list below) can be thought of as different aspects of the basic right to be treated as we choose. The right to the truth: We have a right to be told the truth and to be informed about matters that significantly affect our choices. The right of privacy: We have the right to do, believe, and say whatever we choose in our personal lives so long as we do not violate the rights of others. The right not to be injured: We have the right not to be harmed or injured unless we freely and knowingly do something to deserve punishment or we freely and knowingly choose to risk such injuries.

The right to what is agreed: We have a right to what has been promised by those with whom we have freely entered into a contract or agreement.

In deciding whether an action is moral or immoral using this second approach, then, we must ask, Does the action respect the moral rights of everyone? Actions are wrong to the extent that they violate the rights of individuals; the more serious the violation, the more wrongful the action. The Fairness or Justice Approach The fairness or justice approach to ethics has its roots in the teachings of the ancient Greek philosopher Aristotle, who said that "equals should be treated equally and unequals unequally." The basic moral question in this approach is: How fair is an action? Does it treat everyone in the same way, or does it show favoritism and discrimination? Favoritism gives benefits to some people without a justifiable reason for singling them out; discrimination imposes burdens on people who are no different from those on whom burdens are not imposed. Both favoritism and discrimination are unjust and wrong. The Common-Good Approach This approach to ethics assumes a society comprising individuals whose own good is inextricably linked to the good of the community. Community members are bound by the pursuit of common values and goals. The common good is a notion that originated more than 2,000 years ago in the writings of Plato, Aristotle, and Cicero. More recently, contemporary ethicist John Rawls defined the common good as "certain general conditions that are...equally to everyone's advantage." In this approach, we focus on ensuring that the social policies, social systems, institutions, and environments on which we depend are beneficial to all. Examples of goods common to all include affordable health care, effective public safety, peace among nations, a just legal system, and an unpolluted environment. Appeals to the common good urge us to view ourselves as members of the same community, reflecting on broad questions concerning the kind of society we want to become and how we are to achieve that society. While respecting and valuing the freedom of individuals to pursue their own goals, the common-good approach challenges us also to recognize and further those goals we share in common. The Virtue Approach The virtue approach to ethics assumes that there are certain ideals toward which we should strive, which provide for the full development of our humanity. These ideals are discovered through thoughtful reflection on what kind of people we have the potential to become. Virtues are attitudes or character traits that enable us to be and to act in ways that develop our highest potential. They enable us to pursue the ideals we have

adopted. Honesty, courage, compassion, generosity, fidelity, integrity, fairness, self-control, and prudence are all examples of virtues. Virtues are like habits; that is, once acquired, they become characteristic of a person. Moreover, a person who has developed virtues will be naturally disposed to act in ways consistent with moral principles. The virtuous person is the ethical person. In dealing with an ethical problem using the virtue approach, we might ask, What kind of person should I be? What will promote the development of character within myself and my community? Ethical Problem Solving These five approaches suggest that once we have ascertained the facts, we should ask ourselves five questions when trying to resolve a moral issue: What benefits and what harms will each course of action produce, and which alternative will lead to the best overall consequences? What moral rights do the affected parties have, and which course of action best respects those rights? Which course of action treats everyone the same, except where there is a morally justifiable reason not to, and does not show favoritism or discrimination? Which course of action advances the common good? Which course of action develops moral virtues?

This method, of course, does not provide an automatic solution to moral problems. It is not meant to. The method is merely meant to help identify most of the important ethical considerations. In the end, we must deliberate on moral issues for ourselves, keeping a careful eye on both the facts and on the ethical considerations involved. This article updates several previous pieces from Issues in Ethics by Manuel Velasquez - Dirksen Professor of Business Ethics at Santa Clara University and former Center director - and Claire Andre, associate Center director. "Thinking Ethically" is based on a framework developed by the authors in collaboration with Center Director Thomas Shanks, S.J., Presidential Professor of Ethics and the Common Good Michael J. Meyer, and others. The framework is used as the basis for many programs and presentations at the Markkula Center for Applied Ethics. This article appeared originally in Issues in Ethics V7 N1 (Winter 1996) ********************* Relationships among ethical pressure, professional expectation, stress, and job quality of accountants in Thailand ABSTRACT

This study aims at testing the influence of ethical pressure, professional expectation in stress and job quality via moderators of time pressure and self esteem. Accountants in Thailand are the sample. The results show that ethical pressure and professional expectation have positive and significant association with stress. In addition, stress is positively and significantly related to job quality. these findings provide some initial empirical support for suggests need for additional investigation of factors that influence an accountant's stress and for further investigation into the effect of ethical pressure, professional expectation on job quality. Therefore, contributions and suggestion are also provided for further research. Keywords: Ethical Pressure, Professional Expectation, Stress, Job Quality, Time Pressure, Self-Esteem 1. INTRODUCTION The rapid acceleration of the global economic system, world trade and free markets continue to expand organizations seek new business opportunities to enhance their competitiveness. Organizations focus to improve services, enhance product quality and improve production efficiency. The significant influence of business activities on accountant professionalism is interesting. It is commonly accepted that accounting information is used to manage business. Accountants cannot escape involvement in this undertaking. Accounting professionals are generally perceived by the public. The characteristics of a professional, which include the presence of a systematic body of the skills required for practice, the sanction of the community in the form of formal credentials and licensing, recognition by the general public of profession authority over the knowledge and skills in the field, a regulative code of ethics and a professional culture with a language, symbols and norm of its own. Accounting professionals have found to experience various kinds of stress related to their work and workplace. Examples of stressful job characteristics are job pressure from public's expectation, requires professional's ethic, and professional institution's control, which sometimes lead to job quality. Sanders et al. (1995) described that eight work-related sources of stress are: role ambiguity, role conflict, overload-quantitative, overload-qualitative, career progress, responsibility for people, time pressure, and job scope. Accounting professionals in Thailand are related to business societies that are expected and pressured to accountants' practice about accountability and professionalism. Thus, the accountants perceive stress from their practices. Research questions are how the ethical pressure and professional expectation influence stress, stress affects the job quality. Therefore, the primary purpose of this study is to examine the relationships between (1) ethical pressure and stress, (2) professional expectation and stress, (3) ethical pressure and stress when moderated by time pressure, (4) professional expectation and stress when moderated by time pressure, (5) stress and job quality, and (6) stress and job quality when moderated by self esteem. This structure of the paper is outlined as follows. In section 2, the relevant literature on all constructs is reviewed. Section 3 presents research method of

this paper. Section 4 presents the results of the empirical study and discussion. Section 5 proposes the theoretical and managerial contributions, and suggestions for future research and section 6 ends the study with the conclusion. 2. RELATION MODEL AND HYPOTHESES In this study and attend to test the effect of ethical pressure, and professional expectation are independent variables, job quality is dependent variable, stress is mediating variable, time pressure, and self esteem are moderator variable, as shown in Figure 1. [FIGURE 1 OMITTED] 2.1 Ethical Pressure Ethical pressure is defined as an objective stimulus constructs referring to individual characteristics or combinations of characteristics and events that impinge on the perceptual and cognitive processes of individuals (DeZoort and Lord, 1997; Pratt and Barling, 1988; Eden, 1982; Kahn et al. 1964). It refers to conformity pressure affects individuals who tend to alter their attitudes or behavior in an effort to be consistent with perceived group norm (DeZoort and Lord, 1997; Brehm and Kassin, 1990). In this study, Ethical pressure is defined as perceptions of professional values which accountants have as a professional responsibility to adhere to a code of conduct, and ethical code that expressly prohibits engaging in actions such as the fact of reported financial results. Shafer (2002) and Aranya and Ferris (1984) found that accountants employed in industry did in fact experience higher levels of organizational-professional conflict than those employed in public accounting. Perceived ethical conflicts can lead to dysfunctional organizational outcomes such as lower organizational outcomes such as lower organizational commitment and higher turnover intentions (Shafer, 2002; Schwepker, 1999). Thus ethical pressure is an important factor to impact an accountant's stress. This implies that if there is high ethical pressure it may also have great stress. This leads to the following hypotheses: H1a: The accountants with higher ethical pressure will have greater stress. 2.2 Professional expectation Brierley (1999) and Lachman & Aranya (1986b) described that the realization of professional expectations has been measured in research of accountants by assessing the discrepancy between responses to questions about "how much should there be" and "how much is there now", on aspects of professional values, such as the autonomy to act according to professional judgment and responsibility to clients. Thus in this study, Professional expectation refers to the perceptions of public about professionalism, independence, self improvement, commitment to learning, responsibility, skill with accountant's practice. Sanders et al., (1995) described stress created by job requirements which exceed the individual's ability or skill level. Professional expectation requires accountant's ability and skill. Thus professional expectation has effect on

accountant's stress. If there is high professional expectation it may also have great stress. This leads to the following hypotheses: H1b: The accountants with higher professional expectation will have greater stress. 2.3 Stress In modern times, stress is related to several outcomes. Such as job-tension, job satisfaction, absenteeism, turnover intention, and job performance. In order to examine effect of stress on job quality, stress here refers to a response construct dealing with how internalize and represent pressure with their cognitive processes (DeZoort and Lord, 1997; Pratt and Barling, 1988). Stress has been defined as a state which arises from an actual or perceived demand/capability imbalance in an individual's vital adjustment actions (Picccoli and Emig, 1988). Also, stress is defined as perceptions of accountant demand and capability imbalance about ethics and professionalism. Tulen and Neidermeyer (2004) and Sullivan and Baghat (1992) reviewed four possible scenarios regarding stress and performance: stress may increase performance, stress may decrease performance, stress may have no effect on performance, and the relationship between stress and performance may represent an inverted-U. Their findings supported a negative relationship between stress and performance. Tulen and Neidermeyer (2004) and Rabinowitz and Stumpf (1987) described that there is a positive relationship between stress and job performance. Thus, stress may be closely related to job quality. This leads to the following hypotheses: H2a: Accountants with the greater stress will have greater job quality. 2.4 Time pressure Time budget pressure refers to the pervasive constraint on resources that can be allocated to accomplish a job (DeZoort and Lord, 1997). It is the perception of unreasonable deadlines and time demands. Sanders et al.,(1995) found role ambiguity, role conflict, overload quantitative, overload-qualitative, career progress, responsibility for people, time pressure, and job scope, related to auditor's stress. In order to examine the effects of time pressure on stress, time pressure thus may be closely related to stress. This leads to the following hypotheses: H1c: The accountants with the higher time pressure will potentially have greater positive relationship between ethical pressure and stress. H1d: The accountants with the higher time pressure will potentially have greater positive relationship between professional expectation and stress. 2.5 Self-esteem Self-esteem refers to as the extent that employees feel valued and taken seriously (LeRouge, et al., 2006). It significantly moderates the relationship

between role stress fit and job satisfaction. In order to examine the effects of self-esteem on job quality, self-esteem thus may be related to job quality. H2b: Accountants with the higher self esteem will potentially have greater positive relationship between stress and job quality. 3. RESEARCH METHODS 3.1 Data collection The samples were randomly drawn from 818 companies in Automotive/Auto parts and accessories/Machiner in Thailand's Exporting Industries. The sampling frame was listed from the Thailand's exporting firm database. The questionnaire was constructed covering contents according to each variable that was operationalized for empirical studies. The pretest was used to verify the validity and reliability of expertise and misunderstanding were reduced that can arise from ambiguities, and it is improved in its contents, item ordering, and wording. Reliability was tested by Cronbach alpha reliability coefficients of all constructs to make sure that the items of the questionnaire were designed to measure consistency for each concept. Later, 600 questionnaires were sent to accounting manager firms to provide data for this study via mail. After two weeks 152 questionnaires were received. There were 33 questionnaires that could not be sent to receivers and these were returned. However, 2 received questionnaires were incomplete, and were not included in the data analysis. This resulted in 100 usable responses or a response rate of 26%. 3.2 Reliability and Validity Constructs, multi-item scale, were tested by Cronbach alpha to measure reliability of the data. Table 1 shows an alpha ranged from 0.60-0.80.comfortably above the minimum 0.60 requirements (Chalos and Poon, 2000).That is internal consistency of the measures used in this study can be considered very well for all constructs. Factor analysis is employed to test the validity of data in the questionnaire. Items are used to measure each construct that is extracted to be one only principal component. Table 1 shows factor loading of each construct that presents a value higher than 0.50. Thus, construct validity of this study is tapped by items in the measure, as theorized. That is, factor loading of each construct should not be less than 4.00 (Hair et al., 2006). 3.3 Statistic Technique OLS regression analysis is employed to estimate parameters in hypothesis test. From the relationship model and the hypotheses the following seven equation models are formulated: Equation 1: S = [[beta].sub.01] [[beta].sub.1] EP [epsilon] Equation 2: S = [[beta].sub.02] [[beta].sub.2] EP [[beta].sub.3] PE [epsilon]

Equation 3: S = [[beta].sub.03] [[beta].sub.4] EP [[beta].sub.5] PE [[beta].sub.6] TP [[beta].sub.7] [EP.sup.*] TP [[beta].sub.8 [PE.sup.*] TP [epsilon] Equation 4: JQ = [[beta].sub.04] [[beta].sub.9] S [epsilon] Equation 5: JQ = [[beta].sub.05] [[beta].sub.12] [S.sup.*] SE [epsilon] [[beta].sub.10] S [[beta].sub.11] SE

Where EP is Ethical Pressure; PE is Professional Expectation; S is Stress; TP is Time Pressure; JQ is Job Quality; SE is Self-Esteem. These regression equations are employed to estimate inferred parameters whether the hypotheses are substantiated and fit overall model (f value) or not. Then, the model variables and parameters are presented in various tables later. 3.4 Measure All variables in Table1 use the 5-point Likert scale and show numbers of items in order to tap each variable. Five-point Likert scale ranging from strongly disagree (score one) to strongly agree (scored five) were used to measure all variable. Next, respondents were asked to indicate ethical pressure, professional expectation, stress, time pressure, self esteem, and job quality. 4. RESULTS AND DISCUSSION This study aims at examining the relationship among ethical pressure, professional expectation, and stress; stress and job quality, analyzed by OLS regression model. Thus, the results will be presented by Table 3. Table 2 shows the inter-correlation of all constructs to explore relating of each dual variable. Results find that stress would be expected to positively and significantly correlate with ethical pressure, professional expectation, and job quality. The correlations among independent variables, ethical pressure and professional expectation are not more high level; therefore multicolinearity is expected low level when multiple regression model is employed; the model has stress as dependent variable. 4.1 Antecedent of Stress Table 3 shows the results of regression analysis to inference H1a, H1b, H1c, H1d that is measured via user information satisfaction and monitoring items, moderated by time pressure. The results indicate that in Model 3 of regression equation consisting of ethical pressure, and professional expectation as independent variables, and stress as dependent variable, there is a significant and positive association between ethical pressure and stress (b =. 048; p>.05); therefore, H1a is supported. Likewise, the relationship between professional expectation and stress is significant and positive (b = .381; p<.01), which is consistent with H1b. The results of Model 1 presents according to Model 2 that the linkage between ethical pressure and stress, and the linkage among ethical pressure, professional expectation and stress are positive and significant. Indeed, Model 3 is added moderator variable. Finding shows not significant relationship between

interaction of ethical pressure and time pressure with stress (b =. 052; p>.95). Other interactions are not significant. Therefore, H1c and H1d are not supported. 4.2 Consequence of Stress Results are presented in table 4; regression analysis is employed to estimate parameters to test H2a. For Model 4, there is a positive and significant relationship between stress and job quality (b = .326; p<.01). Job quality is explained by stress equaling 10 percent. VIF values among independent variables in less than 10 (Maximum of VIF value = 2.186), and little multicolinearity is accepted. Thus, H2a is supported. Table 4 shows the results of regression analysis to inference H2b that is measured via user information satisfaction and monitoring items, moderated by self esteem. The results indicate that in Model 5 of regression equation consisting of stress, and self-esteem as independent variables, and job quality as dependent variable, there is a significant and positive association between stress and job quality (b =. 418; p<.01); but finding shows not significant relationship between interaction of stress and self-esteem with job quality (b =. 056; p >.44). Therefore, H2b is not supported. 5. CONTRIBUTIONS AND FUTURE DIRECTIONS FOR RESEARCH 5.1 Theoretical Contributions and Future Direction for Research This research aims to provide an understanding of ethical pressure and professional expectation that have a significant direct positive influence on accountant's stress, stress has a significant direct positive influence on job quality. The study provides important theoretical contributions expanding on previous knowledge and literature of ethical pressure, professional expectation, stress, and job quality. This research is one of the first known studies to link among ethical pressure, professional expectation, stress, and job quality in accountants' perspective. In addition, this study examines differences of pressure affects accountants' stress and job quality via moderating effects of time pressure, and self-esteem. According to the results of this research, the need for future research should have effects of ethical pressure and professional expectation with other industry. 5.2 Managerial Contributions This study helps accountants identify and explain key components that may influence to accountants' stress. Accountants should be continuously training in order to continuously maintain knowledge and increase skills and ethics that reduce accountants' stress. Accountants should provide other factors to support job quality including the good staff, the greater time-management, the appropriate accounting work scope, the character and number of work when suit to accountant's capability. An important point is accountant's professional ethic behavior that he or she should care for acting to professions and users. Consequently, reducing accountant's stress and job quality are needed for businesses and managers. 6. CONCLUSION

Our expectations regarding perceptions of accountant's stress were confirmed. Both ethical pressure and professional expectation have a direct positively influence on stress and stress has a direct positively influence on job quality. In hypotheses testing professional expectation is more a superior variable than ethical pressure in all relational. But interactions of moderator have not association. Our results suggest that it would be prudent for firm managers to focus their stress-reduction strategy upon accountant.

Corporate Ethics and Accountability

I was attending a conference on social investing in Boston this spring when a spirited debate erupted over lunch. It was about what constitutes a socially responsible business, not a topic expected to get ones blood boiling. But this day, the discourse was particularly fierce, probably because the sub-text of the debate was about integrity, and that's always a hot topic. To everyone at my table, or at least to everyone but me, the corporate world divided into so-called ethical corporations with "good intentions" and most of the rest of the world. These "evil" corporations were led by businessmen ascribed the most selfish of motivations, a desire to grow their companies. As such, they risked being dismissed as mere "capitalists," a characterization among this group akin to being labeled a pro-life activist at a NOW convention. No one, it seemed, wanted to talk about what I wanted to discuss, which was which companies turned out quality, affordable products or services, treated their trading partners and employees fairly, and generally kept their noses clean. Instead, the talk focused on such sexy subjects as world peace, spirituality in business, and the worldwide battle of good and evil. Who were the "bad" guys? According to group consensus, corporations that manufacture weapons (which helped the United States defeat Iraq in the Gulf War), refine oil (for planes and cars) or, the worst of all offenses, test their ingredients according to accepted international standards to ensure the safety of consumers. The good guys? Many of the companies cited by my lunch companions pay their workers near-minimum wage, are strongly anti-union, have an unhappy workforce, and/or make luxury products at pricey premiums. No matter that in marketing their products these ethical business superstars frequently confuse their intentions and reputations with their not-so-lustrous corporate actions. While reflecting on my inability to make any headway with this table of social visionaries, my thoughts turned to Mark Twain, always a good source for irony in the midst of hubris. "The secret of success is honesty and fair dealing," he once said. "If you can fake these, you've got it made." Are good intentions enough? No one took kindly to my observation that corporations and individuals can be idealistic in intent while the consequences of their actions are not particularly ethical. I wanted to talk about organizational structures, internal auditing, corporate governance, and other snore-inducing subjects. This just wasn't sexy, and it didn't result in the kind of rhetorical flourishes and promises of social change that this group embraced as the Holy

Grail of socially responsible business. The lunch ended as unproductively as it began. What Does "Ethical" Mean? The sobering reality is that the socially responsible business movement may promote corporate behavior that is neither progressive nor particularly ethical. Business ethics is based on broad principles of integrity and fairness and focuses on internal stakeholder issues such as product quality, customer satisfaction, employee wages and benefits, and local community and environmental responsibilities?issues that a company can actually influence. The corporate responsibility movement, on the other hand, has come to elevate a social and political agenda that draws on notions of liberal propriety and correctness that date to the 1960s. Truisms of social responsibility include the embrace of environmentalism, antiwar pacificism, human rights, animal rights, sexual rights, women's rights, and other -isms that few disagree about in principle. For instance, military production and animal testing are negative screens while the use of "natural" products or campaigning for Third World rights demonstrates a higher ethical standard. Academics, the media, and social investment firms have uncritically promoted these fashionable standards. Unfortunately, applying these ambiguous litmus screens is more than just problematic; these categories can promote a not-so-thoughtful social agenda of questionable ethics. The business ethics community has some soul searching ahead of it. Is it about outward-focused social vision, as represented by many vocal leaders? Or is it about ethics?putting out a quality product at reasonable prices; treating employees, vendors, franchisees, and investors fairly; acting responsibly toward the local environment and community; and, most of all, embracing transparency in operations and accountability to critics, internal and external? Easier in Theory Than in Practice Ethics, like democracy, is a lot easier in theory than in practice. As an example, let's look at the proliferation of codes of conduct and mission statements that have been drafted in the wake of the Kathie Lee Gifford fiasco over foreign sweatshops. The Gifford scandalette, as helpful as it has been in shining needed light on the complicated issue of foreign sourcing, may also leave us with a notvery-progressive legacy if we're not careful. The most highly touted solution to U.S. manufacturers' sourcing of goods from low-wage countries?corporate codes of conduct on sourcing?frequently ends up doing far more harm than good. As well-meaning as these codes and mission statements purport to be, promises that companies cannot hope to implement? or that cause more harm than good if they are implemented?divert attention from the need for structural changes in the relationship between consuming nations and raw material suppliers. The real benefits of many well-publicized codes have gone to the companies who are embarrassed into drafting them, not the people they were designed to help. Starbucks

Take Starbucks, the boutique Seattle-based coffee retailer, as an example. To earn enough to afford a pound of Starbucks' coffee, a Guatemalan worker would have to pick 500 pounds of beans, about five days of work. As you choke on your scone, note that this story has a twist: in a glittering ceremony in New York recently, Starbucks was awarded the International Human Rights Award by the Council on Economic Priorities (CEP) at its annual "Corporate Conscience" awards ceremony. How does a company under attack for exploiting cheap, foreign labor by activist, environmental, and church groups become the belle of the socially responsible ball? During 1994, Starbucks suffered embarrassing grassroots protests because it sourced beans from export houses that paid Guatemalan workers below a living daily wage, about $2.50 a day. The company is no worse than the average wholesaler, but it has a better-than-average reputation as a new-breed, valuesdriven corporation. So when protesters leafleted Starbucks stores and targeted its annual meeting, a peace plan was offered. Last year, Starbucks became the first company in the agricultural commodities sector to announce a "framework" for a code of conduct. There are more than 30,000 farms in Guatemala, one of 20 coffee-supplying countries. Starbucks was targeted not because it could change the labor status quo--it is a bit player in the coffee business--but because of its high public profile. The increasingly visible protests left Starbucks with little choice but to pass its code, and it cost the company little. We were "prodded" into it, notes David Olsen, Starbucks' senior vice president, diplomatically. But according to Alice Tepper Marlin, CEP's executive director, the mission statement alone was enough to earn Starbucks its honor. How has Starbucks enforced its code? "We've done nothing yet," acknowledges Olsen. "It's a slow, incremental process." Very incremental. Starbucks' promised review of plantation conditions is being carried out by the Guatemalan coffee growers association, the very organization accused of perpetuating the low wages. First condemned for labor practices it could not hope to change, Starbucks is now praised for actions it has not yet taken. What can Starbucks accomplish with its code, putting aside its obvious goal of quieting protests? "Codes are a start," says Eric Hahn of the US/Guatemala Labor Education Project. "But only if it's part of a bigger strategy of industry monitoring, which is one of the few tools available in an international, deregulated economy. Otherwise it's just a balm to consumers." This is not to suggest that codes are entirely meaningless. As Kathie Lee Gifford has learned, promises focus attention. But solutions rest with accountability, and there doesn't appear to be any here. Starbucks has no practical ability to oversee conditions and says it cannot risk punishing violators. The Apparel Industry There is also the labyrinthine social and political climate in impoverished countries to consider. In a follow-up article to the Gifford Story, New York Times reporter Larry Rohter visited Honduras where clothes used to be made for Gifford.1 The apparel assembly plants in Central America employ "slave labor"

and are "monstrous sweatshops of the New World Order," according to the National Labor Committee, the New York-based group that publicized the issue. But Honduran union leaders universally resent the moralizing of U.S. labor activists who, like the National Labor Committee, are funded by organized labor committed to preserving American jobs. According to Honduran labor leaders, maquiladoras are increasingly unionized and offer wages two-to-three times the minimum wage. These are prime jobs in an economy in which almost half of the population can find no work at all. Labor shortages at these jobs have helped bump up wages throughout the economy. Even the bugaboo of child labor is more complicated than it seems. Honduran adolescents are legally allowed to work at 14 with parental permission, and most are desperate to help their families. The frenzy sparked by the Gifford spectacle has led to the dismissal of hundreds of legally hired adolescents. Rather than returning to school, which is not an option for most families who cannot afford to feed and clothe their children, adolescents buy documents to work at even lower pay or in some cases peddle their bodies. When confronted with the consequences of their highpowered campaign, the New York labor group offered little solace: "Obviously, this is not what we wanted to happen." Although many clothing companies, such as Nike, KMart, JC Penney, and Reebok, have rushed to pass sourcing codes, few make the effort to examine the complexity of these issues. Of the high-profile retailers, Levi Strauss and The Gap have distinguished themselves by devoting considerable resources to identifying the first link in the supply chain (the shops that supply their suppliers) and bringing direct pressure to establish minimum wage standards and working conditions. The Never-Never-Land of Good Intentions Celebrating "good intentions" when complex social problems are at issue and not understood goes to the heart of the corporate ethics conundrum. Rewarding noble posturing also obscures meaningful progress by "messier" companies. While many highly praised "New Age" firms have been found lacking in critical areas of accountability and honesty of marketing, some of yesterday's most vilified companies have quietly moved to the forefront of corporate responsibility. Despite their regular appearances on "dishonorable" lists, controversial multinationals such as Monsanto, DuPont, or Gillette offer fair wages and benefits, have launched impressive affirmative action practices, are addressing complicated environmental issues, actively engage their community responsibilities, give many millions of dollars to charity, and sell quality, competitively priced products and services. Reforms can reduce litigation expenses, lighten regulatory pressures, and improve company morale. Frequently they can result in considerable savings in their own right. Selling necessary products with an eye to a broader definition of stakeholder responsibilities is not politically sexy, but it can promote positive social change. When comparing these environmental and social reforms with the cosmetic code at Starbucks or other boutique retailers, one has to wonder how they rack up so

many "good business" honors. A more basic question is why do so many "socially responsible" awards go to companies that sell commodity goods to affluent consumers at eyepopping prices?Starbucks, for example, where mark-ups exceed 1,000 percent? When asked why Starbucks was honored, CEP's Marlin says, "We want to reward positive role models." Dare one suggest that CEP should have waited until Starbucks did more than pass a "framework for a code of conduct," as admirably symbolic as it may be? According to Starbucks, its code has had no effect on the way it does business in Guatemala or dozens of other countries. Awarding "A"s for visionary rhetoric shifts focus away from corporate governance and behavior to the nevernever-land of good intentions. It's a dangerous trend that companies promote Thoreau-like mission statements without organizational commitments to implement those ideals. Character demonstrated by actions, not by intentions, is the only reliable measure of corporate ethics. Raising the Ethical Parapet Socially responsible business, by promoting boutique social issues and using simplistic litmus tests, encourages cynicism. Can we break out of this ideological box and raise the ethical parapet? This special issue of At Work moves us beyond the concept of corporate responsibility to its expression. How are companies manifesting social and environmental responsibility? In what ways can they be influenced to become better in this arena? Our first articles describe the steps taken by the chemical industry and one of its member firms, Velsicol Chemical Corporation, to become accountable to local communities and to the environment. Then David Mager draws from 20 years of experience to tell how socially and environmentally responsible behavior benefits the bottom line. Richard Adams' description of the new retail chain he has founded, Out of this World, illustrates how it is possible to incorporate the means for corporate accountability to multiple stakeholders into the design and operation of a company. We conclude with two articles that examine the principal avenues owners can take to influence corporate behavior in a positive direction: ethical investing and pension fund activism. The corporate world cannot be divided easily into "good guys" and "evil companies." Companies are dysfunctional families writ large. Mistakes, sometimes whoppers, are built into life, including the life of corporations. Selfscrutiny and accountability are essential. The measure of a company's integrity is not how loudlyit beats its own breast, or whether it blunders, but its respect for its stakeholders and its responsiveness to problems.
1

"In Honduras, 'Sweatshops' Can Look Like Progress." New York Times, July 18, 1996, p. A1.

A framework for ethical decision making

The framework overview:Step one: Describe the problem Step two: Determine whether there is an ethical issue or ethical dilemma Step three: Identify and rank the key values and principles Step four: Gather your information Step five: Review any applicable code of ethics Step six: Determine the options Step seven: Select a course of action Step eight: Put your plan into action Step nine: Evaluate the results Step ten: Submit cases to your ethical review team or board regularly for review Step One: Describe the Problem Ethical problems are always embedded in a context. Circumstances impact upon the problem definition (for whom does the problem exist? What is the setting?) Beware of the tendency to look toward the clinical or purely legal perspective for guidance.

Corporate governance
Corporate governance is a broad term that has to do with the manner in which the rights and responsibilities are shared among owners, managers and shareholders of a given company. In essence, the exact structure of the corporate governance will determine what rights, responsibilities, and privileges are extended to each of the corporate participants, and to what degree each participant may enjoy those rights. Generally, the foundation for any system of corporate governance will be determined by several factors, all of which help to form the final form of governing the company. Within any corporation, the structure of corporate governance begins with laws that impact the operation of any company within the area of jurisdiction. Companies cannot legally operate without a corporate structure that meets the minimum requirements set by the appropriate government jurisdiction. All founding documents of the company must comply with these laws in order to be granted the privilege of incorporation. In many jurisdictions, these documents are required by law to contain at least the seeds of how the company will be structured to allow the creation of a balance of power within the corporation. Much of the basis for corporate governance is found in the documents that must be prepared and approved before incorporation can take place. These documents help to form the basis for the final expression of the balance of power between shareholders, stakeholders, management, and the board of directors. The bylaws, articles of incorporation, and the company charter will all include details that determine who has what authority in the decision making process of the company. Along with the laws of the land and the founding documents, corporate governance is further refined by the drafting of formal policies that not only recognize the assignment of powers in accordance to the bylaws and corporate charter, but also help to further define how those powers may be employed. This helps to allow the company some degree of flexibility in maintaining a balance of power as the company grows, without undermining the rights and privileges inherent in each type of corporate participation.

Fundamental Governance

and

Ethics

Theories

of

Corporate

History has revealed that there is a never-ending evolution of theories or models of corporate governance. One of the reasons is due to the very essence of social consciences that is minimal and profit making took center stage. All over the world, companies are trying to instill the sense of governance into their corporate structure. With the surge of capitalism, corporation became stronger while governments all over the world had to succumb to its manipulations and dominance. Hence, this article is a review of literature on the range of theories in corporate governance. The fundamental theories in corporate

governance began with the agency theory, expanded into stewardship theory and stakeholder theory and evolved to resource dependency theory, transaction cost theory, political theory and ethics related theories such as business ethics theory, virtue ethics theory, feminists ethics theory, discourse theory and postmodernism ethics theory. However, these theories address the cause and effect of variables, such as the configuration of board members, audit committee, independent directors and the role of top management and their social relationships rather than its regulatory frameworks. Hence, it is suggested that a combination of various theories is best to describe an effective and good governance practice rather than theorizing corporate governance based on a single theory.

Introduction

Corporations have become a powerful and dominant institution. They have reached to every corner of the globe in various sizes, capabilities and influences. Their governance has influenced economies and various aspects of social landscape. Shareholders are seen to be losing trust and market value has been tremendously affected. Moreover with the emergence of globalization, there is greater deterritorialization and less of governmental control, which results is a greater need for accountability (Crane and Matten, 2007). Hence, corporate governance has become an important factor in managing organizations in the current global and complex environment. In order to understand corporate governance, it is important to highlight its definition. Even though, there is no single accepted definition of corporate governance but it can be defined as a set of processes and structures for controlling and directing an organization. It constitutes a set of rules, which governs the relationships between management, shareholders and stakeholders (Ching et al, 2006). The term corporate governance has a clear origin from a Greek word, kyberman meaning to steer, guide or govern. From a Greek word, it moved over to Latin, where it was known as gubernare and the French version of governer . It could also mean the process of decision-making and the process by which decisions may be implemented. Henceforth, corporate governance has much a different meaning to different organizations (Abu-Tapanjeh, 2008). In recent years, with much corporate failures, the countenance of corporate has been scared. Corporate governance includes all types of firms and its definitions could extend to cover all of the economic and non-economic activities. Literatures in corporate governance provide some form of meaning on governance, but fall short in its precise meaning of governance. Such ambiguity emerges in words like control, regulate, manage, govern and governance. Owing to such ambiguity, there are many interpretations. It may be important to consider the influences a firm has or affected by in order to grasp a better understanding of governance. Owing to vast influential factors, proposed models of corporate governance can be flawed as each social scientist is forming their own scope and concerns. Hence, this article reviews various fundamental theories underlining corporate governance. These theories range from the agency theory and expanded into stewardship theory, stakeholder theory, resource dependency theory, transaction cost theory, political theory and ethics related theories such as business ethics theory, virtue ethics theory, feminists ethics theory, discourse theory and postmodernism ethics theory.

Fundamental Corporate Governance Theories

Agency Theory Agency theory having its roots in economic theory was exposited by Alchian and Demsetz (1972) and further developed by Jensen and Meckling (1976). Agency theory is defined as the relationship between the principals, such as shareholders and agents such as the company executives and managers. In this theory, shareholders who are the owners or principals of the company, hires the agents to perform work. Principals delegate the running of business to the directors or managers, who are the shareholders agents (Clarke, 2004). Indeed, Daily et al (2003) argued that two factors can influence the prominence of agency theory. First, the theory is conceptually and simple theory that reduces the corporation to two participants of managers and shareholders. Second, agency theory suggests that employees or managers in organizations can be selfinterested. The agency theory shareholders expect the agents to act and make decisions in the principals interest. On the contrary, the agent may not necessarily make decisions in the best interests of the principals (Padilla, 2000). Such a problem was first highlighted by Adam Smith in the 18th century and subsequently explored by Ross (1973) and the first detailed description of agency theory was presented by Jensen and Meckling (1976). Indeed, the notion of problems arising from the separation of ownership and control in agency theory has been confirmed by Davis, Schoorman and Donaldson (1997). In agency theory, the agent may be succumbed to self-interest, opportunistic behavior and falling short of congruence between the aspirations of the principal and the agents pursuits. Even the understanding of risk defers in its approach. Although with such setbacks, agency theory was introduced basically as a separation of ownership and control (Bhimani, 2008). Holmstrom and Milgrom (1994) argued that instead of providing fluctuating incentive payments, the agents will only focus on projects that have a high return and have a fixed wage without any incentive component. Although this will provide a fair assessment, but it does not eradicate or even minimize corporate misconduct. Here, the positivist approach is used where the agents are controlled by principal-made rules, with the aim of maximizing shareholders value. Hence, a more individualistic view is applied in this theory (Clarke, 2004). Indeed, agency theory can be employed to explore the relationship between the ownership and management structure. However, where there is a separation, the agency model can be applied to align the goals of the management with that of the owners. Due to the fact that in a family firm, the management comprises of family members, hence the agency cost would be minimal as any firms performance does not really affect the firm performance (Eisenhardt, 1989). The model of an employee portrayed in the agency theory is more of a self-interested, individualistic and are bounded rationality where rewards and punishments seem to take priority (Jensen & Meckling, 1976). This theory prescribes that people or employees are held accountable in their tasks and responsibilities. Employees must constitute a good governance structure rather than just providing the need of shareholders, which maybe challenging the governance structure.
Figure 1: The Agency Model
Self interest Self interest Performs Hires & delegate Principals Agents

2.2. Stewardship Theory Stewardship theory has its roots from psychology and sociology and is defined by Davis, Schoorman & Donaldson (1997) as a steward protects and maximises shareholders wealth through firm performance, because by so doing, the stewards utility functions are maximised. In this perspective, stewards are company executives and managers working for the shareholders, protects and make profits for the shareholders. Unlike agency theory, stewardship theory stresses not on the perspective of individualism (Donaldson & Davis, 1991), but rather on the role of top management being as stewards, integrating their goals as part of the organization. The stewardship perspective suggests that stewards are satisfied and motivated when organizational success is attained. Agyris (1973) argues agency theory looks at an employee or people as an economic being, which suppresses an individuals own aspirations. However, stewardship theory recognizes the importance of structures that empower the steward and offers maximum autonomy built on trust (Donaldson and Davis, 1991). It stresses on the position of employees or executives to act more autonomously so that the shareholders returns are maximized. Indeed, this can minimize the costs aimed at monitoring and controlling behaviours (Davis, Schoorman & Donaldson, 1997). On the other end, Daly et al. (2003) argued that in order to protect their reputations as decision makers in organizations, executives and directors are inclined to operate the firm to maximize financial performance as well as shareholders profits. In this sense, it is believed that the firms performance can directly impact perceptions of their individual performance. Indeed, Fama (1980) contend that executives and directors are also managing their careers in order to be seen as effective stewards of their organization, whilst, Shleifer and Vishny (1997) insists that managers return finance to investors to establish a good reputation so that that can re-enter the market for future finance. Stewardship model can have linking or resemblance in countries like Japan, where the Japanese worker assumes the role of stewards and takes ownership of their jobs and work at them diligently. Moreover, stewardship theory suggests unifying the role of the CEO and the chairman so as to reduce agency costs and to have greater role as stewards in the organization. It was evident that there would be better safeguarding of the interest of the shareholders. It was empirically found that the returns have improved by having both these theories combined rather than separated (Donaldson and Davis, 1991). Middle Eastern Finance and Economics - Issue 4 (2009) 91
Figure 2: The Stewardship Model
Intrinsic and extrinsic motivation Shareholders profits and returns Protects and maximise

shareholders wealth Empower and

trust

Shareholders Stewards

2.3. Stakeholder Theory Stakeholder theory was embedded in the management discipline in 1970 and gradually developed by Freeman (1984) incorporating corporate accountability to a broad range of stakeholders. Wheeler et al, (2002) argued that stakeholder theory derived from a combination of the sociological and organizational disciplines. Indeed, stakeholder theory is less of a formal unified theory and more of a broad research tradition, incorporating philosophy, ethics, political theory, economics, law and organizational science. Stakeholder theory can be defined as any group or individual who can affect or is affected by the achievement of the organizations objectives. Unlike agency theory in which the managers are working and serving for the stakeholders, stakeholder theorists suggest that managers in organizations have a network of relationships to serve this include the suppliers, employees and business partners. And it was argued that this group of network is important other than owner-manageremployee relationship as in agency theory (Freeman, 1999). On the other end, Sundaram & Inkpen (2004) contend that stakeholder theory attempts to address the group of stakeholder deserving and requiring managements attention. Whilst, Donaldson & Preston (1995) claimed that all groups participate in a business to obtain benefits. Nevertheless, Clarkson (1995) suggested that the firm is a system, where there are stakeholders and the purpose of the organization is to create wealth for its stakeholders. Freeman (1984) contends that the network of relationships with many groups can affect decision making processes as stakeholder theory is concerned with the nature of these relationships in terms of both processes and outcomes for the firm and its stakeholders. Donaldson & Preston (1995) argued that this theory focuses on managerial decision making and interests of all stakeholders have intrinsic value, and no sets of interests is assumed to dominate the others. 92 Middle Eastern Finance and Economics - Issue 4 (2009)
Figure 3: The Stakeholder Model (Donaldson and Preston, 1995)
Government Investors Political Groups Supplier Trade Associations Customers Communities Employees

FIRM 2.4. Resource Dependency Theory Whilst, the stakeholder theory focuses on relationships with many groups for individual benefits,

resource dependency theory concentrates on the role of board directors in providing access to resources needed by the firm. Hillman, Canella and Paetzold (2000) contend that resource dependency theory focuses on the role that directors play in providing or securing essential resources to an organization through their linkages to the external environment. Indeed, Johnson et al, (1996) concurs that resource dependency theorists provide focus on the appointment of representatives of independent organizations as a means for gaining access in resources critical to firm success. For example, outside directors who are partners to a law firm provide legal advice, either in board meetings or in private communication with the firm executives that may otherwise be more costly for the firm to secure. It has been argued that the provision of resources enhances organizational functioning, firms performance and its survival (Daily et al, 2003). According to Hillman, Canella and Paetzold (2000) that directors bring resources to the firm, such as information, skills, access to key constituents such as suppliers, buyers, public policy makers, social groups as well as legitimacy. Directors can be classified into four categories of insiders, business experts, support specialists and community influentials. First, the insiders are current and former executives of the firm and they provide expertise in specific areas such as finance and law on the firm itself as well as general strategy and direction. Second, the business experts are current, former senior executives and directors of other large for-profit firms and they provide expertise on business strategy, decision making and problem solving. Third, the support specialists are the lawyers, bankers, insurance company representatives and public relations experts and these specialists provide support in their individual specialized field. Finally, the community influentials are the political leaders, university faculty, members of clergy, leaders of social or community organizations. 2.5. Transaction Cost Theory Transaction cost theory was first initiated by Cyert and March (1963) and later theoretical described and exposed by Williamson (1996). Transaction cost theory was an interdisciplinary alliance of law, economics and organizations. This theory attempts to view the firm as an organization comprising people with different views and objectives. The underlying assumption of transaction theory is that firms have become so large they in effect substitute for the market in determining the allocation of resources. In other words, the organization and structure of a firm can determine price and production. The unit of analysis in transaction cost theory is the transaction. Therefore, the combination of people

with transaction suggests that transaction cost theory managers are opportunists and arrange firms transactions to their interests (Williamson, 1996). Middle Eastern Finance and Economics - Issue 4 (2009) 93 2.6. Political Theory Political theory brings the approach of developing voting support from shareholders, rather by purchasing voting power. Hence having a political influence in corporate governance may direct corporate governance within the organization. Public interest is much reserved as the government participates in corporate decision making, taking into consideration cultural challenges (Pound, 1993). The political model highlights the allocation of corporate power, profits and privileges are determined via the governments favor. The political model of corporate governance can have an immense influence on governance developments. Over the last decades, the government of a country has been seen to have a strong political influence on firms. As a result, there is an entrance of politics into the governance structure or firms mechanism (Hawley and Williams, 1996).

3.0. Ethics Theories and Corporate Governace

Other than the fundamental corporate governance theories of agency theory, stewardship theory, stakeholder theory, resource dependency theory, transaction cost theory and political theory, there are other ethical theories that can be closely associated to corporate governance. These include business ethics theory, virtue ethics theory, feminist ethics theory, discourse ethics theory, postmodern ethics theory. Business ethics is a study of business activities, decisions and situations where the right and wrongs are addressed. The main reasons for this are the power and influence of business in any given society is stronger than ever before. Businesses have become a major provider to the society, in terms of jobs, products and services. Business collapse has a greater impact on society than ever before and the demands placed by the firms stakeholders are more complex and challenging. Only a handful of business giants have had any formal education on business ethics but there seems to be more compromises these days. Business ethics helps us to identify benefits and problems associated with ethical issues within the firm and business ethics is important as it gives us a new light into present and traditional view of ethics (Crane and Matten, 2007). In understanding the right and wrongs in business ethics, Crane & Matten, (2007) injected morality that is concerned with the norms, values and beliefs fixed in the social process which helps right and wrong for an individual or social community.

Ethics is defined as the study of morality and the application of reason which sheds light on rules and principle, which is called ethical theories that ascertains the right and wrong for a situation. Whilst business ethics theory focuses on the rights and wrongs in business, feminist ethics theory emphasizes on empathy, healthy social relationship, loving care for each other and the avoidance of harm. In an organization, to care for one another is a social concern and not merely a profit centered motive. Ethics has also to be seen in the light of the environment in which it is exercised. This is important as an organization is a network of actions, hence influencing transcommunal levels and interactions (Casey, 2006). On the other end, discourse ethics theory is concerned with peaceful settlement of conflicts. Discourse ethics, also called argumentation ethics, refers to a type of argument that tries to establish ethical truths by investigating the presuppositions of discourse (Habermas, 1996). Meisenbach (2006) contends that such kind of settlement would be beneficial to promote cultural rationality and cultivate openness. Virtue ethics theory focuses on moral excellence, goodness, chastity and good character. Virtue is a state to act in a given situation. It is not a habit as a habit can be mindless (Annas, 2003). Aristotle calls it as disposition with choice or decision. For example, if a board member decides to be honest, now that a decision which he makes and thus strengthens his virtue of honesty. Virtue involves two aspects, the affective and intellectual. The concept of affective in virtue theory suggests doing the right thing and have positive feelings, whilst, the concept of intellectual suggests to do virtuous act with the right reason. Virtues can be instilled with education. Aristotle mentions that knowledge on ethics is just like becoming a builder (Annas, 2003). Through the process of educating and exposure to good virtues, the development of ethical values in a childs life is evident. Hence, if a person is 94 Middle Eastern Finance and Economics - Issue 4 (2009) exposed to good or positive ethical standards, exhibiting honesty, just and fairness, than he would exercise the same and it will be embedded in his will to do the right thing at any given situation. Virtue ethics is eminent to bring about the intangibles into an organization. Virtue ethics highlights the virtuous character towards developing a morally positive behavior (Crane and Matten, 2007). Virtues are a set of traits that helps a person to lead a good life. Virtues are exhibited in a persons life. Aristotle believed that virtue ethics consists of happiness not on a hedonistic sense, but rather on a broader level. Nevertheless, postmodern ethics theory goes beyond the facial value of morality and addressed the inner feelings and gut feelings of a situation. It provides a more holistic approach in which firms may make goals achievement as their priority, foregoing or having a minimal focus on

values, hence having a long term detrimental effect. On the other hand, there are firms today who are so value driven that their values become their ultimate goal (Balasubramaniam, 1999).

4.0. Conclusion

This review has seen corporate governance from various theoretical perspectives. The emergence of agency theory, stewardship theory, stakeholder theory, transaction cost theory and political theory addresses the cause and effect of variables, such as the configuration of board members, audit committee, independent directors and the role of top management. In addition, ethics in business have been closely associated with corporate governance. This can be seen with the association of business ethics theory, feminist ethics theory, discourse ethics theory, virtue ethics theory and postmodern ethics theory. Hence, it can be argued that corporate governance is more of a social relationships rather than process orientated structure. In addition, these theories focused on the view that the shareholders aimed to get a return on their investments. In todays business environment, business process should also focus on other critical factors such as legislation, culture and institutional contexts. Corporate governance is constantly changing and evolving and changes are driven by both internal and external environmental dynamics. The internal environment has a fixed mindset of shareholders relationship with stakeholders and maximizing profits. Whilst, issues in the external environment such as the breakup of large conglomerates like Enron, mergers and acquisitions of corporation, business collaborations, easier financial funding, human resource diversity, new business start-ups, globalization and business internationalization, and the advance of communication and information technology have directly and indirectly caused the changes in corporate governance. The current corporate governance theories cannot fully explain the complexity and heterogeneity of corporate business. Governance for different country may vary due to its cultural values, political and social and historical circumstances. In this sense, governance for developed countries and developing countries can vary due to the culture and economic contexts of individual country. Moreover, an effective and good corporate governance cannot be explained by one theory but it is best to combine a variation of theories, addressing not only the social relationships but also emphasize on the rules and legislation and stricter enforcement surrounding good governance practice and going beyond the norms of a mechanical approach towards corporate governance. Literature has proven that even with strict regulations, there have been infringements in corporate governance. Hence it is crucial that a holistic realization be driven across the corporate world that would bring about a

different perspective towards corporate governance. The days of cane and bridle are becoming a mere shadow and the need to get to the root of a corporation is essential. Therefore, it is important to re-visit corporate governance in the light of the convergence of these theories and with a fresh angle, which has a holistic view and incorporating subjectivity from the perspective of social sciences. Middle Eastern Finance and Economics - Issue 4 (2009) 95

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CEO Duality and Agency Theory

Time Warner president and CEO Jeffrey Bewkes accepted a position of duality when he took on the role of chairman of the board of the company in January 2009.

Appointing a CEO's successor gets a little more complicated when the chief executive officer is also a member of the board of directors. Let's examine how muddled up things can get in this case. So we know that shareholders elect a board of directors for a company, and that board in turn elects the CEO. But we've also learned that in some cases, a CEO can be a member of the board itself. In fact, he or she can simultaneously hold the position of chairman of the board and CEO. Those who study corporate governance call this situation CEO duality. As you might expect, duality is controversial. Even theorists who strive to find the best ways of managing a company are split about the issue. Two schools of thought represent the different arguments. Advocates of agency theory argue that the positions of CEO and chairman should be separate. They say that a single officer who holds both positions creates a conflict of interest that could negatively affect the interests of the shareholders. Why? Well, in this situation, the CEO/chairman is be able to direct board meetings and isn't restrained from acting in his or her own self-interest when a separate chairman isn't there to look out for shareholders. This very powerful CEO would therefore generally weaken the oversight power that boards hold -- in other words, there wouldn't be a solid system of checks and balances. And it's not just an issue of power for the acting CEO/chairman. CEO duality can also complicate the already frustrating issue of CEO succession. In some cases, a CEO/chairman may choose to retire as CEO, but keep his or her role as the chairman. Although this splits up the roles, which appeases agency theorists somewhat, it nonetheless puts the new CEO in a difficult position. The chairman is bound to question some of the new changes put in place, and the board as a whole might take sides with the chairman whom they trust and have a history with [source: Lavelle]. This conflict of interest would make it difficult for the new CEO to institute any changes, as the power and influence still remains with the former CEO. If that's agency theory, what does the opposing side argue?
CEO Duality and Stewardship Theory Breaking Barriers In the United States, the positions of CEO and board members have been dominated historically by white males, but this is slowly changing. Now, about 14.5 percent of Fortune 500 companies have female CEOs [source: Shambaugh]. Women and minorities also make up about 11 percent of board members in corporations [source: Kidder].

CEO duality is a pretty hot debate. While advocates of agency theory believe that little good can come from a CEO who serves simultaneously as chairman of the board of directors, there is another side to the argument. Those who support stewardship theory maintain that when one person holds both roles, he or she is able to act more efficiently and effectively. Holding dual roles as CEO/chairman creates unity across the company's managers and board of directors, which ultimately allows the CEO to serve the shareholders even better. Unfortunately, studies on the different situations (companies that have duality and those who do not) haven't been able to come up with a clear answer on which is better for running a company [source: Crane]. Studies seem to indicate that duality doesn't have a direct correlation to how well a company performs. One might assume that without a separate chairman to oversee the CEO, the environment is ripe for corruption. However, many are surprised to learn that even in the high-profile corporate scandals of Enron and WorldCom, which centered around CEO corruption, the companies didn't have a duality structure [source: Knowledge@Wharton]. This last fact is even more intriguing when you consider that most CEOs of big companies in the United States also act as the chairman. About 80 percent of the big corporations in the

United States have a system of duality [source: Alvarez]. The same isn't true in Europe, however. There, duality is either not permitted or, as in the U.K., not very common [source: Huse]. Up until now, we haven't discussed what is actually the most hot-button issue regarding CEOs: salary. We'll get to that next.
CEO Salaries

We all know that our boss makes more money than we do -- but finding out just how much more can be shocking and often hard to swallow. Chief executive officers (CEOs) obviously get paid handsomely (for the most part). But how much is too much? CEO pay is always controversial -- especially when the CEOs are getting perks at a time when the company isn't doing well. Looking at how much modern CEOs get paid, you may think that they get to decide their own salary. But this isn't allowed in public companies. Boards of directors have that responsibility, and this is a harder task than you might expect. Pay too much and the board risks not only marring the public image of the company, but also squandering corporate funds. Pay too little and the board won't be able to attract or retain talented executives who are sought after in a competitive market. It's such a difficult decision that boards often designate a compensation committee made up typically of two to five board members to determine how much to pay a CEO. Regulations stipulate that the members of this committee can't be current employees of the company (inside directors), which would cause a conflict of interest. Although private companies aren't required to follow such regulations, many do anyway [source: Smith]. Compensation committees often consider the advice of internal executives, but they also recruit outside consultants to help them determine an appropriate salary for the company's CEO. The committees strive to design an appropriate philosophy for compensating the CEO in a way that motivates performance. After the committee makes its recommendations, the board can decide whether or not to approve them. In the United States, Securities and Exchange Commission (SEC) regulations require that committees explain the reasons for their decision to shareholders in a released statement [source: Smith]. There's at least one CEO who makes less than minimum wage -- kind of. Find out who on the next page.
CEO Perks Loss of Loyalty Although it used to be customary for upper-management employees to stick with a single company for much of their lives, this tradition changed in the 1980s. Since then, executives have been more willing to switch companies for better offers. This trend has contributed to higher salaries for executives as companies make bids for the best candidates on the job market [source: Knowledge@Wharton].

Steve Jobs, the CEO of Apple whose health we discussed on a previous page, is a pretty notable exception when it comes to high CEO salaries. Apple pays him $1 a year. You read that right: a single dollar. But don't feel too badly for him; he actually takes home a whole lot more than that and is reportedly worth billions [source: Knowledge@Wharton]. That's because in lieu of a traditional paycheck, Jobs receives stock options that allow him to cash in on the success of the company. As Jobs' case clearly illustrates, CEO compensation is more than just salary. Actually, most top earners receive the bulk of their take-home pay from stock options. Larry Ellison, CEO of

Oracle Corporation and the top-paid CEO of 2007, received a cool $182 million in stock options and a mere million from his salary [source: DeCarlo]. In addition to stock options, CEOs often get hefty bonuses, privileges to use company-paid perks (like private jets) and large contributions to their retirement plans. And although this is great news for CEOs, it gives researchers quite a headache. Because compensation takes so many forms, those who want to analyze, compare and determine CEO compensation find it a daunting task. Overall, it's important to take sensationalized reports of a CEO's high salary with a grain of salt. It can be difficult to estimate his or her value to a company and to guess the various factors that go into the board's difficult decision of determining salary. If you want more on the spoken and unspoken rules that govern a company, browse the links on the next page.
How CEOs Work If you're too intimidated to ask him or her personally, this article will tell you what a CEO does. See more pictures of corporate life.

You've heard about his private jet, fancy mansion and sports car collection -- not to mention the cutthroat business practices that helped him attain all these things. He's the CEO of your company, and you're probably lucky if he knows your name. Well, this is the stereotypical portrait of a CEO, anyway. In reality, yours might be a nice, down-to-earth guy, or he may be a she. Regardless, CEOs have a reputation for living luxuriously, having keen business minds and striking fear into the hearts of employees whenever they happen to drop in. In corporate culture, a chief executive officer, or CEO, is the big boss. CEOs may not do the nitty-gritty hirings and firings themselves, but they run the show. They're in charge of setting strategy, company goals and making the high-end decisions. Because this is a big job, they delegate many of their powers to other executives. Employees can question a CEO's judgment, but only at their own risk. That's not to say CEOs are untouchable or have unchecked power. Although he or she may be top dog in the office, the CEO must answer to a board of directors. Nevertheless, the power associated with the position often generates suspicion and controversy. When a company is suffering through a tough quarter and sends word to its employees that there won't be any Christmas bonus this year, it certainly looks bad to see a CEO take an increase in salary and fly off on vacation in the company jet. It's also suspicious when a company's CEO serves simultaneously as chairman of the board of directors. What's more, the position draws heightened scrutiny these days after such corporate scandals as Enron exposed CEOs abusing their power. Before we delve into these and other controversies that swarm around CEOs, we need to understand what these officers do. It can be difficult to define a CEO's responsibilities due to the fact that every company's CEO is different. Because they hold the top internal position in a corporation, CEOs get to decide which duties they want to take on personally and which they want to delegate. And because every corporation has its own culture and various industries operate on different corporate structures, we'll have to look at the role from a general perspective. Let's start with a brief overview of how corporations work.
Corporate Structure: Board of Directors

Have you ever tried to understand the ranks of executives in a company only to get lost in acronyms and jargon? You're not alone; the balance of power in the corporate world can be confusing even to those entrenched in it. But don't dismay: We'll walk you through the basic corporate structure.

Just like many governments, corporations have a system of checks and balances so that not too much power is centered in one person or group. In companies, the structure is set up to separate powers of ownership and management. This wasn't always the case. Before the Industrial Revolution in the 19th century, companies were typically family-run and very small by today's standards. But eventually, powered by machines and advanced efficiency, individual companies grew exponentially. Soon after came the dawn of public ownership of companies, which helped fund these gargantuan institutions. When various shareholders have partial ownership of a company, they want to make sure whoever's running the show is looking out for their best interests. This is what a board of directors is for. The board represents the shareholders and other stakeholders (those who have a vested interest in the company). The board of directors doesn't run the company itself, but it oversees those who do. In a public company, the shareholders elect the members of a board of directors. The board is headed by a chairman and contains other directors, the number of which varies from company to company. Directors can be either inside directors or outside directors. Inside directors are those who are also managers in the company or happen to be major shareholders. Outside directors, on the other hand, don't have a role in the company. They typically have experience in the industry (or might even be chief executive officers of other companies), which allows them to make informed decisions about the business. Some have memberships on multiple boards. While inside directors can share their unique insight from an internal perspective, outside directors are considered unbiased. Both kinds of directors have the same general responsibilities on a board. Directors oversee the management of the company collectively by approving strategies and budgets. They may not meet regularly, and the influence they truly wield over management can depend on the dynamics and atmosphere of the company.
Corporate Structure: Company Management Ladder

Private Matters Today, even if a corporation is private and isn't publicly traded, laws and regulations usually require it to have a board of directors that looks out for the interests of owners and various stakeholders, such as the local community. However, the board of a private company has fewer oversight rules and regulations to follow. Many private companies also have CEOs, though not all of them do.

Part of a board of directors' responsibilities of overseeing management is electing a chief executive officer (CEO). From that point, the similarities among most companies end -- each typically has its own unique management structure. Sometimes, a company will have a president, which may or may not be the same person as the CEO. If the CEO and the president aren't the same person, the president's rank is just below the CEO. Another important figure who may be under the CEO is the chief operations officer (COO). The person in this position is closer to the detailed operations and goings-on of business. Although the COO doesn't set the company strategy like the CEO does, he or she does make sure that strategy is getting carried out by upper management. A similar position is that of the chief finance officer (CFO), who, like you might expect, is in charge of the company's financial matters. The CFO's primary responsibility is interpreting financial situations and reporting them to the CEO and the board, as well as making the information available to shareholders. If necessary, a CEO can also hire various vice presidents for different departments in the company.

The different theories on how best to organize and run a large corporation have allowed the subject to blossom into its own field of study known as corporate governance. Under this subject, researchers inspect such things as how many inside or outside directors should make up a board, or the best balance of powers between the board and the CEO. Next, let's focus in on the CEO.

Duties of a CEO
A CEO must make the important high-end decisions for the company.

Putting aside the vague language, what does a chief executive officer (CEO) do, exactly? All CEOs are responsible for determining the overall strategy of a company. For example, the CEO of a car company would have to decide whether to focus on building large SUVs for the family and adventurer demographic or to jump on the latest green trend and build vehicles with more efficient gas mileage, instead. The CEO of a company that makes computers might decide whether to cut prices to be more competitive in the consumer market or to hire more engineers so that the company can make a better computer. The CEO's day-to-day duties may depend on the size of the company he or she oversees. In a big company, setting the strategy in all departments and for all facets of the industry can be a full-time job. This is why you never see CEOs of large corporations stepping into the warehouse and helping to get orders through (except, perhaps, in photo ops). In smaller companies and start-ups, things are usually different. A CEO who was also the founder of the company and is struggling to make it grow probably has a more hands-on role. He or she is more likely to step into any role necessary to get the job done. And, of course, the daily responsibilities of a CEO may also vary across industries. Even though they can delegate power, CEOs are ultimately responsible for everything related to management, such as operations and financial matters. This means that the chief operating officer (COO) and chief financial officer (CFO) report directly to the CEO. As we've mentioned, since the board of directors chooses the CEO, the CEO must, in turn, report to the board. Depending on how involved the board chooses to be, it can take a backseat to the CEO's vision and decisions. Or, the board could opt to take a more direct role and charge the CEO with carrying out its plans. The CEO's personality is a major factor in determining his or her relationship with the board. In general, CEOs tend to have domineering, arresting personalities that can help them wield power over a board. But because the board has the power to choose and remove the CEO, there's always that check on power that can reign in a CEO's behavior.
More CEO Responsibilities

Regardless of whether it's a big or small company that he or she oversees, the CEO is usually instrumental in setting the tone for an organization. CEOs are able to use their power and method of leadership in a way that motivates employees. For instance, if employees get the impression that their CEO is working as hard as they do and that he or she really appreciates their hard work, this can elicit loyalty from all levels of employees. But the CEO doesn't always set a positive tone; his or her behavior can discourage employees as easily as it bolsters their morale. If a CEO comes across as unattached to the company's employees and flies off frequently on exotic vacations, employees may not feel compelled to work hard for him or her. Many people assume that because of their heavy responsibilities, CEOs are especially prone to stress-related health problems. According to some research, however, those in mid-level management are more likely to develop health problems than those who work at higher levels

of the corporate ladder [source: Quick]. So it would seem that more responsibility doesn't necessarily equate to more stress. However, some argue that top-ranking CEOs are able to avoid job stress by dodging responsibility. When a company's performance takes a dive, CEOs may try to pass the buck down to lower executives. Although this is just one possible explanation for why CEOs wouldn't be as stressed as some of those managers to whom they delegate power, shirking responsibility has shown to be an unwise business tactic. According to some studies of Fortune 500 companies, when high-level executives take the blame for slumps, it's more likely to result in improved performance from the employees [source: Pfeffer]. Other studies confirm that even in hypothetical situations, employees are more likely to approve of and respect executives who shoulder the blame for unfavorable events [source: Pfeffer]. Because CEOs are so vital to the success, identity and tone of a company, controversy always lurks around the corner when the top dog retires, as we'll see next.
The Problem of Losing a CEO

Car accidents, heart attacks, cancer. As much as we hate to think about it, no one lives forever. If a CEO is truly successful, he or she won't outlive the corporation itself. And, CEOs may also choose to leave the company suddenly to go another organization, to pursue other exploits or retire. Of course, the board can always fire the CEO as well. Whatever the cause, when a company loses a CEO, it can be like the frenzy of a chicken running around with its head cut off. That's because of the problem of CEO succession -- in other words, deciding who will be a suitable replacement. Just as monarchies have struggled historically with the death of a king who has no strong or obvious successor, so must companies struggle with the departure of a CEO. If companies aren't careful, what plays out is the stuff of Shakespearean drama. In fact, in the 2000 motion picture release of Shakespeare's "Hamlet," which deals with problems of royal succession, filmmaker Michael Almereyda modernized the plot to revolve around the death of a CEO in place of a king. So why is naming a new CEO such a big deal? Why does the media rush to the scene when Steve Jobs, the CEO of Apple, so much as sneezes? Basically, it's because of the reasons we laid out on the last page -- the CEO is the lifeblood of a company. He or she sets the direction of a corporation, and shareholders don't want to hold on to the stock of a directionless company for long. Jobs himself is a great example of this because many credit him with saving Apple from the brink of bankruptcy and subsequently raising it to enormous success. Without him, some fear the company might sink yet again. To see evidence of how much a company hinges on its CEO, note how Apple's shares dipped at the mere rumor of Jobs' remission into ill health [source: Reuters]. In January 2009, news surfaced of Steve Jobs taking a leave of absence from his position at Apple. The announcement was enough to institute a temporary halt on the trading of Apple stock. To calm investors, Jobs appointed COO Tim Cook to take over daily operations for him during his leave.
CEO Succession

So what does happen to a company when a CEO leaves? As we've learned, it's up to the board of directors to hire and fire CEOs. The decision of CEO succession is entirely up to the board -- in theory, at least. In reality, it might be a different story. In the past, boards of directors generally took a passive role in their corporate oversight. It was the accepted tradition that CEOs should choose and groom their successors while they're still at the company. Once the CEO died or retired, boards typically followed suit and elected the former CEO's choice. Microsoft's Bill Gates took a variation of this route, as he began planning his own succession at age 45 [source: Mader]. He bowed out gradually, leaving the CEO position and naming a successor in 2000, but retaining his position as chairman and taking on a new role of chief software architect. By 2006, he decided to leave the management position but stay on as chairman.

But not every CEO phases himself or herself out of the picture gradually like Gates did. In the modern dynamic of corporate culture, a board of directors is more likely to take an aggressive role in appointing a successor. In fact, it's not uncommon for the board to make an independent choice, perhaps selecting a candidate from outside the company. Hiring CEOs from outside the organization has become more popular lately. In the 1960s, for instance, outsiders accounted for 9 percent of new CEOs, but by 2000, this figure had risen to about 33 percent [source: Carey]. Theorists disagree about what factors are behind this shifting ideology. Some claim that boards increasingly (and unwisely) seek charismatic, superstar CEOs for the illusion of strong company leadership [source: Monks]. Because of the problems than can ensue from the sudden death or departure of a CEO, experts recommend that boards always have a plan ready for a stable transition. This would involve communicating with various managers to appoint the best successor [source: Monks].

Production management
How Transportation method works? The transportation method consists of the following three steps: 1 2 3 Obtaining an initial solution, that is to say making an initial assignment n such a way that a basic feasible solution is obtained; Ascertaining whether it is optimal or not by determining opportunity costs associated with the empty cells, and if the solution is not optimal; Revising the solution until an optimal solution is obtained.

Layout Planning The term 'layout planning' can be applied at various levels of planning: Plant location planning (where you are concerned with location of a factory or a warehouse or other facility.) This is of some importance in design of multi-nationally cooperating, Globalsupply Chain systems. Department location Planning: This deals with the location of different departments or sections within a plant/factory. This is the problem we shall study in a little more detail, below. Machine location problems: which deal with the location of separate machine tools, desks, offices, and other facilities within each cell or department. Detailed planning: The final stage of a facility planning is the generation, using CAD tools or detailed engineering drawings, of scaled models of the entire floor plans, including details such as the location of power supplies, cabling for computer networks and phone lines, etc. The Department Location Problem: A department is defined as any single, large resource, with a well defined set of operations, and fixed material entry and exit points. Examples range from a large machine tool, or a design department. The aim is to develop a BLOCK PLAN showing the relative locations of the departments. Criteria: The primary criteria for evaluating any layout will be the: MINIMIZATION of material handling costs. MH cost components: depreciation of MH equipment, variable operating costs, labor expenses. Also, MH costs are typically directly proportional to (a) the frequency of movement of material, and (b) The length over which material is moved.

Advantages of these criteria (reduced material movements): 1. Reduction of Aisle space required.

2. Lower WIP levels 3. Lower throughput times 4. Less product damage and lower obsolescence 5. Reduced storage space 6. Simplified material control and scheduling 7. Less congestion in system. Consider the following:

Location of next operation adjacent machine across the aisle across the plant another plant

Material Handled per move single part unit load lot size of over 1 hour of production one day's production

At each stage, the WIP is increasing by as much as 10 times. The most popular layout for complex systems is the SPINE LAYOUT. Examples are shown in the following figure.

The spine defines a central channel of material flow for the entire facility. Each department branches out of this central core. Ideally, each department has its own input/output area along the spine. This departmental point of usage concept reduces material flow.

We shall now look at some details of how to locate departments along a spine to optimize the flow of materials. Let us first try to see if we can evaluate whether there is a dominant flow pattern in a manufacturing system or not.

fij = flow volume (trips/time) between department I and j. hij = cost/unit distance for the material handling system.
The cost = unit fixed cost + unit variable cost. We define the weight of the cost of moving material between departments i and j as:

wij = fij.hij
Given the values of all the wij's, one measure of flow dominance is the coefficient of variation, defined as:

What do different computed values of f mean ? Clearly, f=0 implies that there is no significant variation of flow volumes between different pairs of departments. In such cases, almost any solution for layouts will be close to optimal. Similarly, if f is large (>2), it implies that some flows in the system are very low, while others are extremely dominant. This is typical for assembly lines types of systems. It is easy to design the layout for such systems (Why?). However, if the value of f is close to 1, then it is difficult to see dominant flows, and other techniques of layout design need to be employed. One such technique is the manual design methodology developed by Muther, called:

Systematic Layout Planning The figure below shows the steps of this methodology.

The method can be described in terms of the basic steps: 1. Data Collection: A study of the Product Mix, Quantity of each product to be produced, Routing for each product, Support services needed, and the Schedule (or the timing and transport issues related to production schedules of the products types). 2. Flow Analysis: whence we identify what each department will be, what its inputs and outputs are likely to be, specification of physical workstations required to do the tasks (in the process plan) etc. At the early stages, this involves considerations of quantity of material flow, as well as overall flow lines that could be better in the implementation of departments. Examples include straight-line flow, S-shaped flow, U-shaped flow, or W-shaped flows. Further, even for a spine shaped system, the spine geometry can be straight line, or Ushaped (the latter case is useful if a single material receiving/delivery point is preferred.)

3. Quantitative analysis: Some factors, such as flow costs, can be quantified. Several others are not so easy to quantify. For example a. MH receiving and delivery stations to be kept together. b. Delicate testing equipment should be placed far from high vibration areas, etc. Such relationships can be quantified by using REL diagrams, as shown in the figure below. The relative importance of each factor is expressed in terms of subjective evaluations, ranging from A (absolutely necessary) to U (unnecessary), and X (necessary to keep apart). The diagram can also give reasons for such decisions. An example is shown below.

4. Relationship Diagram: The quantitative and qualitative analysis is combined into a relationship diagram. One way to do this is to assign some numerical values to the A-X ratings, (typically, large integer for A-rating, 0 for U-rating, and large -ve integer for Xrating). These ratings can then be used to determine the closeness rating for each department as the sum of all the rating-values of all links coming into it. Usually, a department with a large rating value should have significant links will many other departments, and should therefore be at the center of the layout (to be close to all other departments.) We can now use these ratings (or their numerical values) to define the total closeness rating of different departments. If V(X) is a function which defines the value of achieving closeness between two departments, the total closeness rating of a department can be defined as the sum of its closeness rating values for all its sister departments.

To give a numerical example, assume that we allow: V(A) = 81, V(E) = 27, V(I) =9, V(O) = 3 and V(U) = 1. Then the closeness ratings corresponding to each department in the example figure above are:

Department

Total Closeness Rating 9+3+9+3+81 = 105 9+0+1+1+27 = 38 58 39 35 165

SR

PC

PS IC XT AT

In the above, the X-ratings were ignored in order to allow each department to have a fair chance in placement in the initial design of the layout. The real value of this rating will be used later, when we put some effort into modification on the first-guess solution. Forming the first guess solution (greedy algorithm): Step 1. Notice that AT has the highest rating, and so is placed in the center of the layout (why ?) Step 2. The next highest ranked department is SR, which may be placed adjacent to AT due to their mutual A-rating. We put it on top of AT. Step 3. Next up is PS, which should go adjacent to AT (since V(AT,PS) is the highest rated closeness value for PS. Step 4. Next comes XT, which should be close to PS. Step 5. Next is IC, which should be close to AT and is placed below it. Step 6. Finally, we have PC, which must stay away from PS. Using these directions, we have a first attempt at the layout as follows:

Notice the odd shape of the final layout. This does not matter, since we still have not considered the relative sizes of the departments. But before considering that, we must also attempt to improve upon our greedy solution. One heuristic to do so is called the 2-Opt method. A k-opt method is said to have converged when any switching between k variables (in this case, locations of departments) cannot improve upon the objective (in our case, minimization of the total MH cost). The 2-Opt procedure to improve on the greedy solution is pretty straightforward, and described rather well in your text (Askin and Standridge, pp 219). In summary, it is a hillclimbing heuristic, in which, starting from the initial solution, at each step we compute the reduction (if any) in cost associated with switching the positions of each pair of departments. The pair which yields the maximum reduction in costs (steepest local benefit) is selected at this step. The switch is made, and the procedure continues, until at some stage, we are unable to find any pair-switch which improves on the MH cost. In the above, the MH cost associated with any pair of departments is often based on the estimated MH cost factor, wij that we computed earlier, multiplied by an estimate of the distance between the two cells. 5. Space requirements: these are determined based on industrial standards, equipment required, shelf space required, etc. 6. Space availability: this is determined based on the economic analysis, as well as on other constraints that may arise (especially if the system is to be housed in an existing facility). The last two considerations will give an estimate of total space for each department, and sometimes also the shape of each department (based on flow type within the department). 7. Space relationship diagram: In this part, we substitute in the actual area on each department, and fit the departments into the available space. Usually, the solution methods may be computer-assisted heuristics, or just direct visual methods. 8. Putting in the constraints: Finally, other existing constraints are employed to cut down the number of feasible solutions, to result in a small set of solutions. from among these, direct comparison can be used to rank, eliminate, or select the optimum design. The decision theory is a branch of the applied probability theory, which evaluates consequences of decisions. The decision theory is often used as economical instrument. Two well-known methods in addition are e.g. the simple efficiency analysis (NWA) or the more precise Analytic

Hierarchy Process (AHP), where criteria and alternatives are represented, compared and evaluated, in order to find the optimal solution to a decision or a problem definition. One differentiates between three subsections of the decision theory: 1. The normative decision theory looks for criteria of rational deciding and wants to give assistance for the question, how one is to decide in a given situation reasonably. In addition it must meet some simplifying model acceptance, then it must proceed for example from the axiom of the of the Entscheiders. 2. The decision theory concerns itself with the supply from procedures to the precipitation of rational and practicable decisions. 3. The descriptive decision theory examines against it empirically the question how decisions in the reality are actually made. The basic model (normative) of the decision theory consists of the decision field and the target system. The decision field contains the activity space (quantity of the possible action alternatives), the Zustandsraum (quantity of the possible environmental conditions) and a result function, which assign a value to each combination of action and condition. A frequent problem is that the true environmental condition does not admit is. Here one speaks of uncertainty, contrary to the situation of the security, in which the environmental condition admits is. The uncertainty situation can be arranged into * Decision under security: The occurring situation is well-known. (Deterministic decision model) * Decision under uncertainty: It is not with security well-known, which environmental situation occurs s_j, one continues to differentiate thereby in: o Decision under risk: The probability p_j for the possibly occurring environmental situations s_j is well-known. (Stochastic decision model) o Decision under uncertainty: One knows the possibly occurring environmental situations, however not their probabilities of entrance. With a decision under risk expectancy values can be calculated over all possible consequences of each individual decision, while with a decision under uncertainty and/or is used the principle is not possible by the insufficient reason/Indifferenzprinzip, which assigns the same probability to each option. On the basis of such probability evaluations a determination of the expectancy value can be made also under uncertainty (In or multi-level) the decision-making process with the different consequences can be plotted as decision tree.

The decision theory is not applicable, if the entrepreneur and/or manager lets this competition likewise flow competed with a rationally acting opponent (a competitor about) to which into his decision. This can do also with the help of the probability calculation alone is not no more illustrated, since the behavior of the opponent is not deterministically however not coincidental. In such a case the game theory is used. The decision theory is used recently also with the evaluation of investments. Under the name material option is used the decision tree procedure (and/or options) for it to be able to decide the value of flexibility concerning decisions - i.e. the option (at a later time) - to judge. OPERATIONS SCHEDULING Scheduling pertains to establishing both the timing and use of resources within an organization. Under the operations function (both manufacturing and services), scheduling relates to use of equipment and facilities, the scheduling of human activities, and receipt of materials. While issues relating to facility location and plant and equipment acquisition are considered long term and aggregate planning is considered intermediate term, operations scheduling is considered to be a short-term issue. As such, in the decision-making hierarchy, scheduling is usually the final step in the transformation process before the actual output (e.g., finished goods) is produced. Consequently, scheduling decisions are made within the constraints established by these longer-term decisions. Generally, scheduling objectives deals with tradeoffs among conflicting goals for efficient utilization of labor and equipment, lead time, inventory levels, and processing times. Byron Finch notes that effective scheduling has recently increased in importance. This increase is due in part to the popularity of lean manufacturing and just-in-time. The resulting drop in inventory levels and subsequent increased replenishment frequency has greatly increased the probability of the occurrence of stock-outs. In addition, the Internet has increased pressure to schedule effectively. "Business to customer" (B2C) and "business to business" (B2B) relationships have drastically reduced the time needed to compare prices, check product availability, make the purchase, etc. Such instantaneous transactions have increased the expectations of customers, thereby, making effective scheduling a key to customer satisfaction. It is noteworthy that there are over 100 software scheduling packages that can perform schedule evaluation, schedule generation, and automated scheduling. However, their results can often be improved through a human scheduler's judgment and experience. There are two general approaches to scheduling: forward scheduling and backward scheduling. As long as the concepts are applied properly, the choice of methods is not significant. In fact, if process lead times (move, queue and setup times) add to the job lead time and process time is assumed to occur at the end of process time, then forward scheduling and backward scheduling yield the same result. With forward scheduling, the scheduler selects a planned order release date and schedules all activities from this point forward in time. With backward scheduling, the scheduler begins with a planned receipt date or due date and moves backward in time, according to the required processing times, until he or she reaches the point where the order will be released. Of course there are other variables to consider other than due dates or shipping dates. Other factors which directly impact the scheduling process include: the types of jobs to be processed

and the different resources that can process each, process routings, processing times, setup times, changeover times, resource availability, number of shifts, downtime, and planned maintenance. LOADING Loading involves assigning jobs to work centers and to various machines in the work centers. If a job can be processed on only one machine, no difficulty is presented. However, if a job can be loaded on multiple work centers or machines, and there are multiple jobs to process, the assignment process becomes more complicated. The scheduler needs some way to assign jobs to the centers in such a way that processing and setups are minimized along with idle time and throughput time. Two approaches are used for loading work centers: infinite loading and finite loading. With infinite loading jobs are assigned to work centers without regard for capacity of the work center. Priority rules are appropriate for use under the infinite loading approach. Jobs are loaded at work centers according to the chosen priority rule. This is known as vertical loading. Finite loading projects the actual start and stop times of each job at each work center. Finite loading considers the capacity of each work center and compares the processing time so that process time does not exceed capacity. With finite loading the scheduler loads the job that has the highest priority on all work centers it will require. Then the job with the next highest priority is loaded on all required work centers, and so on. This process is referred to as horizontal loading. The scheduler using finite loading can then project the number of hours each work center will operate. A drawback of horizontal loading is that jobs may be kept waiting at a work center, even though the work center is idle. This happens when a higher priority job is expected to arrive shortly. The work center is kept idle so that it will be ready to process the higher priority job as soon as it arrives. With vertical loading the work center would be fully loaded. Of course, this would mean that a higher priority job would then have to wait to be processed since the work center was already busy. The scheduler will have to weigh the relative costs of keeping higher priority jobs waiting, the cost of idle work centers, the number of jobs and work centers, and the potential for disruptions, new jobs and cancellations. If the firm has limited capacity (e.g., already running three shifts), finite loading would be appropriate since it reflects an upper limit on capacity. If infinite loading is used, capacity may have to be increased through overtime, subcontracting, or expansion, or work may have to be shifted to other periods or machines. SEQUENCING Sequencing is concerned with determining the order in which jobs are processed. Not only must the order be determined for processing jobs at work centers but also for work processed at individual work stations. When work centers are heavily loaded and lengthy jobs are involved, the situation can become complicated. The order of processing can be crucial when it comes to the cost of waiting to be processed and the cost of idle time at work centers. There are a number of priority rules or heuristics that can be used to select the order of jobs waiting for processing. Some well known ones are presented in a list adapted from Vollmann, Berry, Whybark, and Jacobs (2005): Random (R). Pick any job in the queue with equal probability. This rule is often used as a benchmark for other rules. First come/first served (FC/FS). This rule is sometimes deemed to be fair since jobs are processed in the order in which they arrive.

Shortest processing time (SPT). The job with the shortest processing time requirement goes first. This rule tends to reduce work-in-process inventory, average throughput time, and average job lateness. Earliest due date (EDD). The job with the earliest due date goes first. This seems to work well if the firm performance is judged by job lateness. Critical ratio (CR). To use this rule one must calculate a priority index using the formula (due datenow)/(lead time remaining). This rule is widely used in practice. Least work remaining (LWR). An extension of SPT, this rule dictates that work be scheduled according to the processing time remaining before the job is considered to be complete. The less work remaining in a job, the earlier it is in the production schedule. Fewest operations remaining (FOR). This rule is another variant of SPT; it sequences jobs based on the number of successive operations remaining until the job is considered complete. The fewer operations that remain, the earlier the job is scheduled. Slack time (ST). This rule is a variant of EDD; it utilizes a variable known as slack. Slack is computed by subtracting the sum of setup and processing times from the time remaining until the job's due date. Jobs are run in order of the smallest amount of slack. Slack time per operation (ST/O). This is a variant of ST. The slack time is divided by the number of operations remaining until the job is complete with the smallest values being scheduled first. Next queue (NQ). NQ is based on machine utilization. The idea is to consider queues (waiting lines) at each of the succeeding work centers at which the jobs will go. One then selects the job for processing that is going to the smallest queue, measured either in hours or jobs. Least setup (LSU). This rule maximizes utilization. The process calls for scheduling first the job that minimizes changeover time on a given machine.

These rules assume that setup time and setup cost are independent of the processing sequence. However, this is not always the case. Jobs that require similar setups can reduce setup times if sequenced back to back. In addition to this assumption, the priority rules also assume that setup time and processing times are deterministic and not variable, there will be no interruptions in processing, the set of jobs is known, no new jobs arrive after processing begins, and no jobs are canceled. While little of this is true in practice, it does make the scheduling problem manageable. GANTT CHARTS Gantt charts are named for Henry Gantt, a management pioneer of the early 1900s. He proposed the use of a visual aid for loading and scheduling. Appropriately, this visual aid is known as a Gantt chart. This Gantt chart is used to organize and clarify actual or intended use of resources within a time framework. Generally, time is represented horizontally with scheduled resources listed vertically. Managers are able to use the Gantt chart to make trial-and-error schedules to get some sense of the impact of different arrangements. There are a number of different types of Gantt charts, but the most common ones, and the ones most appropriate to our discussion, are the load chart and schedule chart. A load chart displays the loading and idle times for machines or departments; this shows when certain jobs are scheduled to start and finish and where idle time can be expected. This can help the scheduler redo loading assignments for better utilization of the work centers. A schedule chart is used to monitor job progress. On this type of Gantt chart, the vertical axis shows the orders or jobs in

progress while the horizontal axis represents time. A quick glance at the chart reveals which jobs are on schedule and which jobs are on time. Gantt charts are the most widely used scheduling tools. However, they do have some limitations. The chart must be repeatedly updated to keep it current. Also, the chart does not directly reveal costs of alternate loadings nor does it consider that processing times may vary among work centers. SCHEDULING SERVICE OPERATIONS The scheduling of services often encounters problems not seen in manufacturing. Much of this is due to the nature of service, i.e., the intangibility of services and the inability to inventory or store services and the fact that demand for services is usually random. Random demand makes the scheduling of labor extremely difficult as seen in restaurants, movie theaters, and amusement parks. Since customers don't like to wait, labor must be scheduled so that customer wait is minimized. This sometimes requires the use of queuing theory or waiting line theory. Queuing theory uses estimate arrival rates and service rates to calculate an optimum staffing plan. In addition, flexibility can often be built into the service operation through the use of casual labor, on-call employees, and cross-training. Scheduling of services can also be complicated when it is necessary to coordinate and schedule more than one resource. For example, when hospitals schedule surgery, not only is the scheduling of surgeons involved but also the scheduling of operating room facilities, support staff, and special equipment. Along with the scheduling of classes, universities must also schedule faculty, classrooms, labs, audiovisual and computer equipment, and students. To further complicate matters, cancellations are also common and can add further disruption and confusion to the scheduling process. Instead of scheduling labor, service firms frequently try to facilitate their service operations by scheduling demand. This is done through the use of appointment systems and reservations. Frank and Lillian Gilbreth Pioneers of Ergonomics and "Time and Motion" Efficiency and productivity go together, and working efficiently has many meanings. It's not just about working in a way that allows you to get the most done in a fixed period of time. It also involves making sure that you don't hurt productivity. If you work too fast, you risk making mistakes. You also risk becoming so tired, either mentally or physically, that you have to stop working too early, which means that your total efficiency suffers. Today, we regularly use ergonomic principles to design work and workplace equipment. From something as simple as placing the photocopier in a central location, to custom designing workstations to minimize repetitive strain injuries, the principles of work efficiency are all around us. But where did these ideas originate? The poorly-designed, inefficient workplaces of the late 19th century led to the scientific management movement in the early 20th century, which applied the scientific method to the study of the workplace. Frank Gilbreth and his wife, Lillian, were supporters of this movement. The Gilbreths pioneered the study of "time and motion" at work. They were interested in efficiency, so they set up experiments to examine the movements that individual workers made while doing their daily work.

Before he became a workplace researcher, Frank was a bricklayer. He noted that every worker had his own way of laying bricks. By observing these individual methods, he determined the most efficient way to complete the task. Frank believed that by working efficiently, both the employer and the worker would benefit employers would gain more productivity, and workers would have reduced stress and fatigue. His observations eventually led to a new way of laying bricks that more than doubled daily output. Another of Frank's studies led to creating the role of the surgical assistant in modern operating rooms. Instead of the surgeon finding each instrument he needed, a nurse would stand by and hand the surgeon the appropriate tool. Interesting Fact: The book "Cheaper by the Dozen" was written by Frank and Lillian's children Frank Jr. and Ernestine. There were 12 children in the family, and the book (and subsequent movies) highlighted the efficiencies that were introduced into their household as a result of their parents' methods. Experimental Technique Work simplification strategies can be traced back to the work of the Gilbreths, whose methods were quite sophisticated. For example, they weren't satisfied with simply saying that a person "moved the hand," so they broke down this action into 17 separate units of motion. They called each motion a "therblig," which is "Gilbreth" spelled backward (the "th" is transposed for easier pronunciation). They also invented a microchronometer to study work motion. This is a clock capable of recording time to the 1/2000th of a second. By placing the clock in the field of the picture, they could break movements down into very small units of time. Henry Gantt, the originator of the Gantt Chart, was a contemporary of the Gilbreths, who used a Gantt Chart to demonstrate graphically the various pieces of a larger task. The Gilbreths' discoveries about workplace efficiency were not limited to the need to increase output. They were also interested in how workers could reduce fatigue. From this industrial psychology perspective, they advanced ideas about how best to train and develop workers. Tactics like job rotation and finding work best suited for a worker's natural skills and abilities developed from the Gilbreths' extensive experiments. While the Gilbreths' work is very important, their methods are no longer used directly in the modern workplace. However, the underlying theory of workplace efficiency remains strong. See a current list of team tools to improve the effectiveness and functionality of your team, and learn about the Kaizen approach to efficiency. Key Points While you may not have known the names Frank and Lillian Gilbreth before reading this article, their contribution to the advancement of management science and modern management theory was significant. Today, we're very familiar with the idea of workplace efficiency no one argues with its importance. We can thank pioneers in the management science movement, like the Gilbreths, for this knowledge.

Financial management

Advantages of Ratios Analysis:

Ratio analysis is an important and age-old technique of financial analysis. The following are some of the advantages / Benefits of ratio analysis:

1. Simplifies financial statements: It simplifies the comprehension of financial

statements. Ratios tell the whole story of changes in the financial condition of the business Ratios highlight the factors associated with with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms. management, in its basic functions of forecasting. Planning, co-ordination, control and communications. comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future. investors and lending decisions in the case of bankers etc.

2. Facilitates inter-firm comparison: It provides data for inter-firm comparison.

3. Helps in planning: It helps in planning and forecasting. Ratios can assist

4. Makes inter-firm comparison possible: Ratios analysis also makes possible

5. Help in investment decisions: It helps in investment decisions in the case of

Limitations of Ratios Analysis:

The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from serious limitations.

1. Limitations of financial statements: Ratios are based only on the information

which has been recorded in the financial statements. Financial statements themselves are subject to several limitations. Thus ratios derived, there from, are also subject to those limitations. For example, non-financial changes though important for the business are not relevant by the financial statements. Financial statements are affected to a very great extent by accounting conventions and concepts. Personal judgment plays a great part in determining the figures for financial statements.

2. Comparative study required: Ratios are useful in judging the efficiency of the

business only when they are compared with past results of the business. However, such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors like market conditions, management policies, etc. may affect the future operations.

3. Ratios alone are not adequate: Ratios are only indicators, they cannot be taken as final regarding good or bad financial position of the business. Other things have also to be seen.

4. Problems of price level changes: A change in price level can affect the validity of
ratios calculated for different time periods. In such a case the ratio analysis may not

clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. 5. Lack of adequate standard: No fixed standard can be laid down for ideal ratios. There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult.

6. Limited use of single ratios: A single ratio, usually, does not convey much of a
sense. To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision.

7. Personal bias: Ratios are only means of financial analysis and not an end in itself.
Ratios have to interpreted and different people may interpret the same ratio in different way.

8. Incomparable: Not only industries differ in their nature, but also the firms of the
similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.

Profit Maximization vs Wealth maximization The traditional approach of financial management was all about profit maximization.The main objective of companies was to make profits. The traditional approach of financial management had many limitations: 1.Business may have several other objectives other than profit maximization.Companies may have goals like: a larger market share, high sales,greater stability and so on.The traditional approach did not take into account so many of these other aspects. 2.Profit Maximization has to defined after taking into account many things like: a.Short term,mid term,and long term profits b.Profits over period of time The traditional approach ignored these important points. 3.Social Responsibility is one of the most important objectives of many firms.Big corporates make an effort towards giving back something to the society.The big companies use a certain amount of the profits for social causes.It seems that the traditional approach did not consider this point.

Modern Approach is about the idea of wealth maximization.This involves increasing the Earning per share of the shareholders and to maximize the net present worth. Wealth is equal to the the difference between gross present worth of some decision or course of action and the investment required to achieve the expected benefits. Gross present worth involves the capitalised value of the expected benefits.This value is discounted a some rate,this rate depends on the certainty or uncertainty factor of the expected benefits. The Wealth Maximization approach is concerned with the amount of cash flow generated by a course of action rather than the profits. Any course of action that has net present worth above zero or in other words,creates wealth should be selected. The financial management come a long way by shifting its focus from traditional approach to modern approach. The modern approach focuses on wealth maximization rather than profit maximization. This gives a longer term horizon for assessment, making way for sustainable performance by businesses.

A myopic person or business is mostly concerned about short term benefits. A short term horizon can fulfill objective of earning profit but may not help in creating wealth. It is because wealth creation needs a longer term horizon Therefore, Finance Management or Financial Management emphasizes on wealth maximization rather than profit maximization. For a business, it is not necessary that profit should be the only objective; it may concentrate on various other aspects like increasing sales, capturing more market share etc, which will take care of profitability. So, we can say that profit maximization is a subset of wealth and being a subset, it will facilitate wealth creation.

Giving priority to value creation, managers have now shifted from traditional approach to modern approach of financial management that focuses on wealth maximization. This leads to better and true evaluation of business. For e.g., under wealth maximization, more importance is given to cash flows rather than profitability. As it is said that profit is a relative term, it can be a figure in some currency, it can be in percentage etc. For e.g. a profit of say $10,000 cannot be judged as good or bad for a business, till it is compared with investment, sales etc. Similarly, duration of earning the profit is also important i.e. whether it is earned in short term or long term.

In wealth maximization, major emphasizes is on cash flows rather than profit. So, to evaluate various alternatives for decision making, cash flows are taken under consideration. For e.g. to measure the worth of a project, criteria like: present value of its cash inflow present value of cash outflows (net present value) is taken. This approach considers cash flows rather than profits into consideration and also use discounting technique to find out worth of a project. Thus, maximization of wealth approach believes that money has time value.

An obvious question that arises now is that how can we measure wealth. Well, a basic principle is that ultimately wealth maximization should be discovered in increased net worth or value of business. So, to measure the same, value of business is said to be a function of two factors - earnings per share and capitalization rate. And it can be measured by adopting following relation:

Value of business = EPS / Capitalization rate

At times, wealth maximization may create conflict, known as agency problem. This describes conflict between the owners and managers of firm. As, managers are the agents appointed by owners, a strategic investor or the owner of the firm would be majorly concerned about the longer term performance of the business that can lead to maximization of shareholders wealth. Whereas, a manager might focus on taking such decisions that can bring quick result, so that he/she can get credit for good performance. However, in course of fulfilling the same, a manager might opt for risky decisions which can put on stake the owners objectives.

Hence, a manager should align his/her objective to broad objective of organization and achieve a tradeoff between risk and return while making decision; keeping in mind the ultimate goal of financial management i.e. to maximize the wealth of its current shareholders.

1. Financial statement analysis of firms presents you an intuition on how the corporation is conducting its program. For stockholders who are interested in finding out whether the management is properly utilizing the corporations resources to create shareholder wealth, a financial analysis of a corporation will be able to help investors come to proper decision. As such, financial analysis of a corporation has several items, including capital budgeting and capital structure

decisions when the analysis of financial statements is done for the management of the firm. The peformane of competitors within the industry, and the viability of businesss future can be evaluated through financial statement analysis. 2. Viability of a project can be found out through a financial statement analysis which can be performed by financial analysts employed by the firm. Projects that would bring in the maximum amount of revenues over the course of time over similar projects are recommended by financial analysts to the management. Expected returns from projects are provided by financial analysts to the management. Analysts employed by the business can also give the management suggestions on whether to issue new stocks or borrow money to fund new projects. Financial analysts will recommend whether a new project should be undertaken or invest the money somewhere else, essentially performing capital budgeting decisions. 3. Financial Institutions will carry out a financial statement analysis of a business to see how strong its fundamentals are, and then use their findings to either make good investments for themselves, or pass on ther findings to their clients. Large investment corporations have their own in house financial analysts who advice to their employers on what stocks might be a good buy, these recommendations are usually private and only available within the company. A corporations stock price can be affected based on a financial analyst recommendations as these recommendations are used by stockholders to determine whether it is a good investment. If a financial analyst after evaluating a companys financial statements finds that the company isnt performing well, he might suggest owners to sell the stock if they already own it. If such a suggestion were to be made public, the price of that businesss share could see its value drop moderately.

*********************** What is trading on equity? How can it prove to be a double-edged sword?

Trading on equity is sometimes referred to as financial leverage or the leverage factor. Trading on equity occurs when a corporation uses bonds, other debt, and preferred stock to increase its earnings on common stock. For example, a corporation might use long term debt to purchase assets that are expected to earn more than the interest on the debt. The earnings in excess of the interest expense on the new debt will increase the earnings of the corporations common stockholders. The increase in earnings indicates that the corporation was successful in trading on equity. If the newly purchased assets earn less than the interest expense on the new debt, the earnings of the common stockholders will decrease.
trading on the equity Borrowing funds to increase capital investment with the hope that the business will be able to generate returns in excess of the interest charges.

Course 2: Capital Budgeting Analysis Risk Analysis in Capital Budgeting Decisions

Conceptually, a capital budgeting decision is simplicity itself. The analyst determines the upfront cost of a project, as well as the periodic future cash flows resulting from the project. Those cash flows are then used to calculate either the net present value (NPV) of the project - using the firm's weighted-average costof-capital (WACC) as a discount rate - or the internal rate of return (IRR) for the project. If the NPV is positive, or if the IRR exceeds the WACC, the firm undertakes the project; otherwise it doesn't.

The difficulty in making proper capital budgeting decisions arises as a consequence of the difficulty in determining the upfront costs, the periodic cash flows, even the proper WACC. All of these quantities must be estimated, and all of the ensuing estimates will contain some degree of uncertainty; the process in inherently risky.

In their book Fundamentals of Financial Management, 8th edition, SouthWestern, 1998, authors Eugene F. Brigham and Joel F. Houston include a chapter entitled Risk Analysis and the Optimal Capital Budget. With examples from industry, they illustrate the pitfalls of using uncertain single-point estimates for the cash flows associated with a project. One recommendation in the chapter is to model the uncertainty in all of the quantities being estimated and to use Monte Carlo simulation to produce a probability distrubution for the NPV (or the IRR) of the project. Additionally, the analyst can produce sensitivity analyses to determine the most critical uncertainties in the estimation. The additional information that these statistical techniques provide can aid the capital budget decision-makers and can help them avoid costly mistakes.

As part of the CFA exam review courses that he teaches, Bill covers the area of risk analysis in capital budgeting. His experience in developing mathematical models for Monte Carlo simulation fit naturally into this very important area of corporate decision-making. Risk Analysis in Capital Budgeting

Introduction

In discussing the capital budgeting techniques, we have so far assumed that the proposed investment projects do not involve any risk. This assumption was made simply to facilitate the understanding of the capital budgeting techniques. In real world situation, however, the firm in general and its investment projects in particular are exposed to different of risk. What is risk? How can risk be measured and analyzed in the investment decisions?

Nature of risk

Risk exists because of the inability of the decision maker to make perfect forecasts. Forecasts cannot be made with perfection or certainty since the future events on which they depend are uncertain. An investment is not risky if, we can specify a unique sequence of cash flows for it. But whole trouble is that cash flows cannot be forecast accurately, and alternative sequences of cash flows can occur depending on the future events. Thus, risk arises in investment evaluation because we cannot anticipate the occurrence of the possible future events with certainty and consequently, cannot, make are correct prediction about the cash flow sequence. To illustrate, let us suppose that a firm is considering a proposal to commit its funds in a machine, which will help to produce a new product. The demand for this product may be very sensitive to the general economic conditions. It may be very high under favorable economic conditions and very low under unfavorable economic conditions. Thus, the investment would be profitable in the former situation and unprofitable in the later case. But, it is quite difficult to predict the future state of economic conditions, uncertainty about the cash flows associated with the investment derives A large number of events influence forecasts. These events can be grouped in different ways. However, no particular grouping of events will be useful for all purposes. We may, for example, consider three broad categories of the events influencing the investment forecasts.

General economic conditions

This category includes events which influence general level of business activity. The level of business activity might be affected by such events as internal and external economic and political situations, monetary and fiscal policies, social conditions etc.

Industry factors

This category of events may affect all companies in an industry. For example, companies in an industry would be affected by the industrial relations in the industry, by innovations, by change in material cost etc.

Company factors

This category of events may affect only a company. The change in management, strike in the company, a natural disaster such as flood or fire may affect directly a particular company Risk Analysis in Capital Budgeting Capital budgeting is used to ascertain the requirements of the long-term investments of a company.

Examples of long-term investments are those required for replacement of equipments and machinery, purchase of new equipments and machinery, new products, and new business premises or factory buildings, as well as those required for R&D plans.

The different techniques used for capital budgeting include: Profitability index Net present value

Modified Internal Rate of Return Equivalent annuity Internal Rate of Return

Besides these methods, other methods that are used include Return on Investment (ROI), Accounting Rate of Return (ARR), Discounted Payback Period and Payback Period.

The different types of risks that are faced by entrepreneurs regarding capital budgeting are the following: Corporate risk International risk Stand-alone risk Competitive risk Market risk Project specific risk Industry specific risk

The following methods are used for Risk Analysis in Capital Budgeting:

Sensitivity Analysis: This is also known as a "what if analysis". Because of the uncertainty of the future, if an entrepreneur wants to know about the feasibility of a project in variable quantities, for example investments or sales change from the anticipated value, sensitivity analysis can be a useful method. This is calculated in terms of NPV, or net present value.

Scenario Analysis: In the case of scenario analysis, the focus is on the deviation of a number of interconnected variables. It is different from sensitivity analysis, which usually concentrates on the change in one particular variable at a specific point of time. Break Even Analysis: The Break Even Analysis allows a company to determine the minimum production and sales amounts for a project to avoid losing money. The lowest possible quantity at which no loss occurs is called the break-even point. The break-even point can be delineated both in financial or accounting terms. Hillier Model: In particular situations, the anticipated NPV and the standard deviation of NPV can be incurred with the help of analytical derivation. This was first realized by F.S. Hillier. There are situations where correlation between cash flows is either complete or nonexistent.

Simulation Analysis: Simulation analysis is utilized for formulating the probability analysis for a criterion of merit with the help of random blending of variable values that carry a relationship with the selected criterion.

Decision Tree Analysis: The principal steps of decision tree analysis are the definition of the decision tree and the assessment of the alternatives.

Corporate Risk Analysis: Corporate risk analysis focuses on the analysis of risk that may influence the project in terms of the entire cash flow of the firm. The corporate risk of a project refers to its share of the total risk of a company.

Risk Management: Risk management focuses on factors such as pricing strategy, fixed and variable costs, sequential investment, insurance, financial leverage, long term arrangements, derivatives, strategic alliance and improvement of information.

Selection of project under risk: This involves procedures such as payback period requirement, risk adjusted discount rate, judgmental evaluation and certainty equivalent method.

Practical Risk Analysis: The techniques involved include the Acceptable Overall Certainty Index, Margin of Safety in Cost Figures, Conservative Revenue Estimation, Flexible Investment Yardsticks and Judgment on Three Point Estimates. Chapter 4: Additional Considerations in Capital Budgeting Analysis Whenever we analyze a capital project, we must consider unique factors. A discussion of all of these factors is beyond the scope of this course. However, three common factors to consider are:

Compensating for different levels of risks between projects. Recognizing risks that are specific to foreign projects. Making adjustments to capital budgeting analysis by looking at the actual results.

Adjusting for Risk We previously learned that we can manage uncertainty by initiating decision analysis and building options into our projects. We now want to turn our attention to managing risks. It is worth noting that uncertainty and risk are not the same thing. Uncertainty is where you have no basis for a decision. Risk is where you do have a basis for a decision, but you have the possibility of several outcomes. The wider the variation of outcomes, the higher the risk.

In our previous example (Example 6), we used the cost of capital for discounting cash flows. Our example involved the replacement of equipment and carried a low level of risk since the expected outcome was reasonably certain. Suppose we have a project involving a new product line. Would we still use our cost of capital to discount these cash flows? The answer is no since this project could have a much wider variation in outcomes. We can adjust for higher levels of risk by increasing the discount rate. A higher discount rate reflects a higher rate of return that we require whenever we have higher levels of risk.

Another way to adjust for risk is to understand the impact of risk on outcomes. Sensitivity Analysis and Simulation can be used to measure how changes to a

project affect the outcome. Sensitivity analysis is used to determine the change in Net Present Value given a change in a specific variable, such as estimated project revenues. Simulation allows us to simulate the results of a project for a given distribution of variables. Both sensitivity analysis and simulation require a definition of all relevant variables associated with the project. It should be noted that sensitivity analysis is much easier to implement since sophisticated computer models are usually required for simulation. sitemap | top International Projects Capital investments in other countries can involve additional risks. Whenever we invest in a foreign project, we want to focus on the values that are added (or subtracted) to the Parent Company. This makes us consider all relevant risks of the project, such as exchange rate risk, political risk, hyper-inflation, etc. For example, the discounted cash flows of the project are the discounted cash flows of the project to the foreign subsidiary converted to the currency of the home country of the Parent Company at the current exchange rate. This forces us to take into account exchange rate risks and its impact to the Parent Company. Post Analysis One of the most important steps in capital budgeting analysis is to follow-up and compare your estimates to actual results. This post analysis or review can help identify bias and errors within the overall process. A formal tracking system of capital projects also keeps everyone honest. For example, if you were to announce to everyone that actual results will be tracked during the life of the project, you may find that people who submit estimates will be more careful. The purpose of post analysis and tracking is to collect information that will lead to improvements within the capital budgeting process. sitemap | top Course Summary The long-term investments we make today determines the value we will have tomorrow. Therefore, capital budgeting analysis is critical to creating value within financial management. And the only certainty within capital budgeting is uncertainty. Therefore, one of the biggest challenges in capital budgeting is to manage uncertainty. We deal with uncertainty through a three-stage process:

1. Build knowledge through decision analysis. 2. Recognize and encourage options within projects.

3. Invest based on economic criteria that have realistic economic assumptions.

Once we have completed the three-stage process (as outlined above), we evaluate capital projects using a mix of economic criteria that adheres to the principles of financial management. Three good economic criteria are Net Present Value, Modified Internal Rate of Return, and Discounted Payback.

Additionally, we need to manage project risk differently than we would manage uncertainty. We have several tools to help us manage risks, such as increasing the discount rate. Finally, we want to implement post analysis and tracking of projects after we have made the investment. This helps eliminate bias and errors in the capital budgeting process. Sensitivity and Simulation Analysis Assignment Help

Finance Assignment help --> Capital Budgeting -->Sensitivity and Simulation Analysis

Sensitivity Analysis

In the evaluation of an investment project, we work with the forecasts of cash flows. Forecasted cash flows depend on the expected revenue and costs. Further, expected revenue is a function of sales volume and unit selling price. Similarly, sales volume will depend on the market size and the firms market share. Costs include variable costs, which depend on sales volume, and unit variable cost and fixed costs. The net present value or the internal rate of return of a project is determined by analyzing the after-tax cash flows arrived at by combining forecasts of various variables. It is difficult to arrive at an accurate and unbiased forecast of each variable. The reliability of the NPV of variable underlying the estimates of net cash flows. To determine the reliability id the projects NPV or IRR, we can work out how much difference it males in any of these forecasts goes wrong. We can change each of the forecasts, one at a time to at least three values: pessimistic, expected, and optimistic. The NPV of the project is recalculated under these different changing each forecast is called sensitivity analysis.

Sensitivity analysis is a way of analyzing change in the projects NPV (or IRR) for a given change in one of the variables. It indicates how sensitive a projects NPV (or IRR) is to changes in particular variables. The more sensitive the NPV, the more critical is the variable. The following three steps are unsolved in the use or sensitivity analysis:

Identification of all those variables, which have an influence on the projects NPV (or IRR). Definition of the underlying (mathematical) relationship between the variables. Analysis of the impact of the change in each of the variables on the projects NPV.

The decision-maker, while performing sensitivity analysis, computer the projects (or IRR) for each forecast under three assumptions: (a) pessimistic, (b) expected, and (c) optimistic. It allows him to ask what if question. For example, what (is the NPV) if volume increase or decreases? What (is the NPV) if variable cost of fixed cost increases or decreases? What (is the NPV) if the selling price increases or decreases? That (is the NPV) if the project is delayed or outplay escalate or he questions can be answered with the help of sensitivity analysis. It examines the sensitivity of the variables underlying the computation of NPV or IRR, rather than attempting to quantify risk. It can be applied to any variable, which is an input for the after-tax cash flows.

Simulation Analysis

Sensitivity and scenario analyses are quite useful to understand the uncertainty of the investment projects. But both Approaches suffer from certain weaknesses. As we have discusses, they do not consider the interactions between variables and also, they do not reflect on the probability of the changes in variables.

The Monte carol simulation or simple the simulation analysis considers the interactions among variables and probability of the change in variables. It does not given the probability distribution of NPV. The simulation analysis is an extension of scenario analysis. In simulation analysis a computer generates a very large number of scenarios according to the probability distributions of the variables. The simulation analysis involves the following steps:

 First, you should identify variables that influence cash inflows and outflows. For example, when a firm introduces a new product in the market these variables are initial investment, market size, market growth, market share, price, variable costs, fixed costs fixed costs, product life cycle, and terminal value. Second specify the formulas that relate variables. For example, revenue depends on by sales volume and price: sales volume is given by market size, market share and market growth. Similarly, operating expenses depend on production, sales and variable and fixed costs. Third, indicate the probability distribution for each variable. Some variables will have more uncertainty than others. For example, it is quite difficult to predict or market growth with confidence. Fourth, develop a computer programmed that randomly selects on e value from the probability distribution of each variable and uses these values to calculate the projects NPV. The computer generates a large; number of such scenarios, calculates NPVs and stores them. The stored value are primed as a probability distribution of the projects NPVs along with the expected NPV and its standard deviation the rick-free rate should be used as the discount rate to computer the projects cash flows, the discount rate should reflect only the time value of money.

Simulation analysis is a very useful technique for risk analysis. Unfortunately. Its practical use is limited because of a number of shortcomings. First the model becomes quite complex to use because the variables are interrelated with each other and each variable depends on its value in the precious periods as well. Identifying all possible relationships and estimating as well as expensive. Second, the model helps in generating a probability distribution of the projects NPVs. But it does not indicate whether or not the project should be accepted. Third, simulation analysis, like sensitivity or scenario analysis, considers the risk of any project in isolation of other projects. We know that if we consider the portfolio of projects, the unsystematic risk can be diversified. A risky project may have a negative correlation with the firms other projects, and therefore accepting the project may reduce the overall risk of the firm.

INTERNATIONAL FINANCE Different types of transactions in the Foreign Exchange Market

Spot and Forward Exchanges Spot Market: The term spot exchange refers to the class of foreign exchange transaction which requires the immediate delivery or exchange of currencies on the spot. In practice the settlement takes place within two days in most markets. The rate of exchange effective for the spot transaction is known as the spot rate and the market for such transactions is known as the spot market. Forward Market: The forward transactions is an agreement between two parties, requiring the delivery at some specified future date of a specified amount of foreign currency by one of the parties, against payment in domestic currency be the other party, at the price agreed upon in the contract. The rate of exchange applicable to the forward contract is called the forward exchange rate and the market for forward transactions is known as the forward market. The foreign exchange regulations of various countries generally regulate the forward exchange transactions with a view to curbing speculation in the foreign exchanges market. In India, for example, commercial banks are permitted to offer forward cover only with respect to genuine export and import transactions. Forward exchange facilities, obviously, are of immense help to exporters and importers as they can cover the risks arising out of exchange rate fluctuations be entering into an appropriate forward exchange contract. With reference to its relationship with spot rate, the forward rate may be at par, discount or premium. If the forward exchange rate quoted is exact equivalent to the spot rate at the time of making the contract the forward exchange rate is said to be at par. The forward rate for a currency, say the dollar, is said to be at premium with respect to the spot rate when one dollar buys more units of another currency, say rupee, in the forward than in the spot rate on a per annum basis. The forward rate for a currency, say the dollar, is said to be at discount with respect to the spot rate when one dollar buys fewer rupees in the forward than in the spot market. The discount is also usually expressed as a percentage deviation from the spot rate on a per annum basis. The forward exchange rate is determined mostly be the demand for and supply of forward exchange. Naturally when the demand for forward exchange exceeds its supply, the forward rate will be quoted at a premium and conversely, when the supply of forward exchange exceeds the demand for it, the rate will be quoted at discount. When the supply is equivalent to the demand for forward exchange, the forward rate will tend to be at par. Futures

While a focus contract is similar to a forward contract, there are several differences between them. While a forward contract is tailor made for the client be his international bank, a future contract has standardized features the contract size and maturity dates are standardized. Futures cab traded only on an organized exchange and they are traded competitively. Margins are not required in respect of a forward contract but margins are required of all participants in the futures market an initial margin must be deposited into a collateral account to establish a futures position. Options While the forward or futures contract protects the purchaser of the contract fro m the adverse exchange rate movements, it eliminates the possibility of gaining a windfall profit from favorable exchange rate movement. An option is a contract or financial instrument that gives holder the right, but not the obligation, to sell or buy a given quantity of an asset as a specified price at a specified future date. An option to buy the underlying asset is known as a call option and an option to sell the underlying asset is known as a put option. Buying or selling the underlying asset via the option is known as exercising the option. The stated price paid (or received) is known as the exercise or striking price. The buyer of an option is known as the long and the seller of an option is known as the writer of the option, or the short. The price for the option is known as premium. Types of options: With reference to their exercise characteristics, there are two types of options, American and European. A European option cab is exercised only at the maturity or expiration date of the contract, whereas an American option can be exercised at any time during the contract. Swap operation Commercial banks who conduct forward exchange business may resort to a swap operation to adjust their fund position. The term swap means simultaneous sale of spot currency for the forward purchase of the same currency or the purchase of spot for the forward sale of the same currency. The spot is swapped against forward. Operations consisting of a simultaneous sale or purchase of spot currency accompanies by a purchase or sale, respectively of the same currency for forward delivery are technically known as swaps or double deals as the spot currency is swapped against forward. Arbitrage Arbitrage is the simultaneous buying and selling of foreign currencies with intention of making profits from the difference between the exchange rate prevailing at the same time in different markets.

Foreign exchange exposure

Transaction exposure Hedging through invoice currency

Translation (Accounting) exposure

Operating/Econo mic -Exposure

Positive

Negati ve

Asset

Operatin g

Hedging through invoice currency

Selecting low cost productio n sites

Flexible sourcing policy

Diversificatio n of the market

R & D efforts Financial and product hedging differentiatio n

Foreign Exchange Exposure Foreign exchange risk is related to the variability of the domestic currency values of assets, liabilities or operating income due to unanticipated changes in exchange rates, whereas foreign exchange exposure is what is at risk. Foreign currency exposures and the attendant risk arise whenever a company has an income or expenditure or an asset or liability in a currency other than that of the balance-sheet currency. Indeed exposures can arise even for companies with no income, expenditure, asset or liability in a currency different from the balance-sheet currency. When there is a condition prevalent where the exchange rates become extremely volatile the exchange rate movements destabilize the cash flows of a business significantly. Such destabilization of cash flows that affects the profitability of the business is the risk from foreign currency exposures. Classification of Exposures Financial economists distinguish between three types of currency exposures transaction exposures, translation exposures, and economic exposures. All three affect the bottom- line of the business. 1. Transaction Exposure Transaction exposure can be defined as the sensitivity of realized domestic currency values of the firms contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. Transaction exposure is sometimes regarded as a short-term economic exposure. Transaction exposure arises from fixed-price contracting in a world where exchange rates are changing randomly. Suppose that a company is exporting deutsche mark and while costing the transaction had reckoned on getting say Rs.24 per mark. By the time the exchange transaction materializes i.e. the export is affected and the mark sold for rupees, the exchange rate moved to say Rs.20 per mark. The profitability of the export transaction can be completely wiped out by the movement in the exchange rate. Such transaction exposures arise whenever a business has foreign currency denominated receipt and payment. The risk is an adverse movement of the exchange rate from the time the transaction is budgeted till the time the exposure is extinguished by sale or purchase of the foreign currency against the domestic currency. Furthermore, in view of the fact that firms are now more frequently entering into commercial and financial contracts denominated in foreign currencies, judicious management of transaction exposure has become an important function of international financial management. Some strategy to manage transaction exposure
Hedging through invoice currency: While such financial hedging instruments as forward contract, swap, future and option contracts are well known, hedging through the choice of invoice currency, an operational technique, has not received much attention. The firm can shift, share or diversify exchange risk by appropriately choosing the currency of invoice. Firm can avoid exchange rate risk by invoicing in domestic currency, there by shifting exchange rate risk on buyer. As a practical matter, however, the firm may not be able to use risk shifting or sharing as much as it wishes to for fear

of losing sales to competitors. Only an exporter with substantial market power can use this approach. Further, if the currencies of both the exporter and importer are not suitable for settling international trade, neither party can resort to risk shifting to deal with exchange exposure. Hedging via lead and lag: Another operational technique the firm can use to reduce transaction exposure is leading and lagging foreign currency receipts and payments. Lead means to pay or collect early, where as Lag means to pay or collect late. The firm would like to lead soft currency receivables and lag hard currency receivables to avoid the loss from depreciation of the soft currency and benefit from the appreciation of the hard currency. For the same reason, the firm will attempt to lead the hard currency payables and lag soft currency payables. To the extent that the firm can effectively implement the Lead/Lag strategy, the transaction exposure the firm faces can be reduced.

2. Translation Exposure (Accounting Exposures) Translation exposure is defined as the likely increase or decrease in the parent companys net worth caused by a change in exchange rates since last translation. This arises when an asset or liability is valued at the current rate. No exposure arises in respect of assets/liabilities valued at historical rate, as they are not affected by exchange rate differences. Translation exposure is measured as the net of the foreign currency denominated assets and liabilities valued at current rates of exchange. If exposed assets exceed the exposed liabilities, the concern has a positive or long or asset translation exposure, and exposure is equivalent to the net value. If the exposed liabilities exceed the exposed assets and results in negative or short or liabilities translation exposure to the extent of the net difference. Translation exposure arises from the need to translate foreign currency assets or liabilities into the home currency for the purpose of finalizing the accounts for any given period. A typical example of translation exposure is the treatment of foreign currency borrowings. Consider that a company has borrowed dollars to finance the import of capital goods worth $10000. When the import materialized the exchange rate was say Rs 30 per dollar. The imported fixed asset was therefore capitalized in the books of the company for Rs 300000. In the ordinary course and assuming no change in the exchange rate the company would have provided depreciation on the asset valued at Rs 300000 for finalizing its accounts for the year in which the asset was purchased. If at the time of finalization of the accounts the exchange rate has moved to say Rs 35 per dollar, the dollar loan has to be translated involving translation loss of Rs50000. The book value of the asset thus becomes 350000 and consequently higher depreciation has to be provided thus reducing the net profit. Thus, Translation loss or gain is measured by the difference between the value of assets and liabilities at the historical rate and current rate. A company which has a positive exposure will have translation gains if the current rate for the foreign currency is higher than the historic rate. In the same situation, a company with negative exposure will post translation

loss. The position will be reversed if the currency rate for foreign currency is lesser than its historic rate of exchange. The translation gain/loss is shown as a separate component of the shareholders equity in the balance-sheet. It does not affect the current earnings of the company. 3. Economic Exposure Economic exposure can be defined as the extent to which the value of the firm would be affected by unanticipated changes in exchange rates. An economic exposure is more a managerial concept than an accounting concept. A company can have an economic exposure to say Yen: Rupee rates even if it does not have any transaction or translation exposure in the Japanese currency. This would be the case for example, when the companys competitors are using Japanese imports. If the Yen weekends the company loses its competitiveness (vice-versa is also possible). The companys competitor uses the cheap imports and can have competitive edge over the company in terms of his cost cutting. Therefore the companys exposed to Japanese Yen in an indirect way. In simple words, economic exposure to an exchange rate is the risk that a change in the rate affects the companys competitive position in the market and hence, indirectly the bottomline. Broadly speaking, economic exposure affects the profitability over a longer time span than transaction and even translation exposure. Under the Indian exchange control, while translation and transaction exposures can be hedged, economic exposure cannot be hedged. Economic exposure consists of mainly two types of exposures.
Asset exposure Operating exposure

Exposure to currency risk can be properly measured by the sensitivities of (1) the future home currency values of the firms assets (and liabilities) (2) the firms operating cash flows to random changes in exchange rates. Asset exposure: Let us discuss the case of asset exposure. For convenience, assume that dollar inflation is non random. Then, from the perspective of the U.S. firm that owns an asset in Britain, the exposure can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rate S. P=a+b*S+e Where a is the regression constant and e is the random error term with mean zero, P = SP*, where P* is the local currency (pound) price of asset. It is obvious from the above equation that the regression coefficient b measures the sensitivity of the dollar value of asset (P) to the exchange rate (S). If the regression coefficient is zero, the dollar value of the asset is independent of exchange rate movement, implying no exposure. On the basis of above analysis, one can say that exposure is the regression coefficient. Statistically, the exposure coefficient, b, is defined as follows: b = Cov (P,S)/ Var (S) Where Cov (P,S) is the covariance between the dollar value of the asset and the exchange rate, and Var (S) is the variance of the exchange rate. Next, we show how to apply the exposure measurement technique using numerical examples. Suppose that a U.S. firm has an asset in Britain whose local currency price is random. For

simplicity, let us assume that there are three states of the world, with each state equally likely to occur. The future local currency price of this British asset as well as the future exchange rate will be determined, depending on the realized state of the world. Operating exposure: Operating exposure can be defined as the extent to which the firms operating cash flows would be affected by random changes in exchange rates. Operating exposure may affect in two different ways to the firm, viz., competitive effect and conversion effect. Adverse exchange rate change increase cost of import which makes firms product costly thus firms position becomes less competitive, which is competitive effect. Adverse exchange rate change may reduce value of receivable to the exporting firm which is called conversion effect. Some strategy to manage operating exposure
Selecting low cost production sites: When the domestic currency is strong or expected to become strong, eroding the competitive position of the firm, it can choose to locate production facilities in a foreign country where costs are low due to either the undervalued currency or under priced factors of production. Recently, Japanese car makers, including Nissan and Toyota, have been increasingly shifting production to U.S. manufacturing facilities in order to mitigate the negative effect of the strong yen on U.S. sales. German car makers such as Daimler Benz and BMW also decided to establish manufacturing facilities in the U.S. for the same reason. Also, the firm can choose to establish and maintain production facilities in multiple countries to deal with the effect of exchange rate changes. Consider Nissan, which has manufacturing facilities in the U.S. and Mexico, as well as in Japan. Multiple manufacturing sites provide Nissan with great deal of flexibility regarding where to produce, given the prevailing exchange rates. When the yen appreciated substantially against the dollar, the Mexican peso depreciated against the dollar in recent years. Under this sort of exchange rate development, Nissan may choose to increase production in the U.S. and especially in Mexico, in order to serve the U.S. market. This is, in fact, how Nissan has reacted to the rising yen in recent years. Maintaining multiple manufacturing sites, however, may prevent the firm from taking advantage of economies of scale, raising its cost of production. The resultant higher cost can partially offset the advantages of maintaining multiple production sites. Flexible sourcing policy: Even if the firm manufacturing facilities only in the domestic country, it can substantially lessen the effect of exchange rate changes by sourcing from where input costs are low. Facing the strong yen in recent years, many Japanese firms are adopting the same practice. It is well known that Japanese manufacturers, especially in the car and consumer electronics industries, depend heavily on parts and intermediate products from such low cost countries as Thailand, Malaysia, and China. Flexible sourcing need not be confined just to materials and parts. Firms can also hire low cost guest workers from foreign countries instead of high cost domestic workers in order to be competitive.

Diversification of the market: Another way of dealing with exchange exposure is to diversify the market for the firms products as much as possible. Suppose that GE is selling power generators in Mexico as well as Germany. Reduced sales in Mexico due to the dollar appreciation against the peso can be compensated by increased sales in Germany due to dollar depreciation against the euro. As a result, GEs overall cash flows will be much more stable than would be the case if GE sold only in one foreign market, either Mexico or Germany. As long as exchange rates do not always move in the same direction, the firm can stabilize its operating cash flow by diversifying its export market. R&D efforts and product differentiation: Investment in R&D activities can allow the firm to maintain and strengthen its competitive position in the face of adverse exchange rate movements. Successful R&D efforts allow the firm to cut costs and enhance productivity. In addition, R&D efforts can lead to the introduction of new and unique products for which competitors offer no close substitutes. Since the demand for unique products tend to be highly inelastic, the firm would be less exposed to exchange risk. At the same time, the firm can strive to create a perception among consumers that its product is indeed different from those offered by competitors. This helps firm to pass-through any adverse effect of exchange rate on to the customers. Financial hedging: While not a substitute for the long-term, financial hedging can be used to stabilize the firms cash flow. For example, the firm can lend or borrow foreign currencies as a long term basis. Or, the firm can use currency forward of options contracts and roll them over if necessary.

Related posts:
1. Foreign Exchange Risk 2. Economics of the Foreign Exchange Market 3. Settlement of Transactions in Foreign Exchange Markets 4. Flexible v/s fixed foreign exchange rates 5. Official actions to influence foreign exchange rates 6. Management of Foreign Exchange Risks 7. Role of FEDAI in Foreign Exchange 8. Foreign Exchange Management Policy in India 9. Different types of transactions in the Foreign Exchange Market 10.Merchant Rate and Exchange Margin in Foreign Exchange Markets

Capital Asset Pricing Model and Arbitrage Pricing Theory The three portfolios we looked at in Topic 2 helped down the foundation for many of the asset pricing models commonly used in the financial industry today. Two of such models are the capital asset pricing model (CAPM) and the arbitrage pricing theory (APT). We will focus first on the capital asset pricing model for two reasons: (i) many of you have seen the CAPM in an introductory finance course, and (ii) the approach the CAPM takes to estimate the risk of a portfolio is very similar to the approach of the third portfolio we analyzed in Topic 2.

1. Assumptions of the Capital Asset Pricing Model

Before we look at how the CAPM can be used to price a portfolio (or an investment), it is important for you to understand that it is after all a theoretical model, which means that it is based on an idealistic investment environment different from the real world. Despite its simplistic assumptions about the investment environment, the CAPM still serves as a valuable tool in understanding the relationship between the risk and return.

The following are the assumptions of the CAPM. Briefly explain what each assumption means. (a) Investors are price takers (b) Investors have identical single-period holding horizons (c) Investors have access to all investments and have access to unlimited borrowing and lending opportunities at the risk-free rate (d) The financial markets are frictionless (e) Investors are rational mean-variance optimizer (f) Investors have homogenous expectations

1. Relationship Between the CAPM and the CML

In Topic 2, we know that when you have access to all the different investments available in the financial market, the best place you can be is on the capital market line (CML). Portfolios that are located on this line will provide you the best (or optimal) combination of risk and return. As a result, the CML is a good measure for the relationship between risk and return. Just in case you forgot, the CML is represented by the following formula:

E (rm ) rrf E (r p ) = rrf + rm

What is the similarity and difference between the CAPM and the CML in measuring the relationship between risk and return? We need to first re-arrange the formula (which is presented below) for the CML before we will address the question.

E (r p ) = rrf +

p m

[ E (r

) rrf

If you remembered what you learned in your Introductory Finance course, no doubt you will recognize the equation for the CAPM:

E (r p ) = rrf + p E (rm ) rrf

where the beta of the portfolio. is

Do you begin to see the resemblance between the CML and the CAPM? According to the two formulae, the return of the portfolio can be broken down into two components: (i) the guaranteed risk-free rate and (ii) the compensation for taking on risk. In addition, the compensation is determined by two things: (i) a relative measurement of the portfolios risk and (ii) the market risk premium [i.e. E(rmr)rf].

What about the differences between the CML and the CAPM? Can you tell what are the two differences between the CML and CAPM? 2. , and SML The CAPM, Beta (i.e. Now that we know more about the similarities and differences between the CML and the CAPM, we need to go back and look at some of the details related to the CAPM. Even though the formula presented earlier for the CAPM is for a portfolio, the formula can easily be modified to determine the return of a single investment as follows:

E (ri ) = rrf + i E (rm ) rrf

Since the risk-free rate and the market return should be the same for every investment in the financial market, the only thing that is different from investment to investment is the beta of the investment. As a result, we can claim that the only driving force behind the determination of an investments return is its beta.

What is the beta? It represents an investments non-diversifiable risk (and not its total risk) relative to the market risk. In other words, the beta of an investment measures the co-movement of the investments expected return with the markets expected return. The formula of an investments beta is as follows:

i =

im i m

where = correlation between investment is return and the markets return im = investment is non-diversifiable risk i m = market risk We know the CAPM can be easily modified to determine the expected return of either a portfolio or an individual investment. The only difference between the two is the beta: beta of a portfolio and beta of an individual investment. What is the relationship between the two? The beta of a portfolio is simply the weighted average of the betas of the investments included in the portfolio. The formula for the beta of a portfolio is as follows:

p = wi i

Just as in the case with the capital allocation line, we can also represent the CAPM in a graphical manner. The straight line that represents the relationship between risk and return (according to the CAPM) is known as the security market line (SML).

E(ri)

SML

E(rm) rrf

1.0

The security market line will help you determine if an investment is correctly price. In other words, help you determine if the investment is offering a return that is appropriate for its level of risk (as measured by the beta). If an investments return falls on the SML, the investment is considered to be correctly price because the expected return of the investment matches the one according to the CAPM (based on for its beta). However, if the expected return of the investment differs from the one as predicted by the CAPM, the investment is considered to be either underpriced or overpriced. The difference between the investments actual expected return and its fair return (as dictated by the CAPM) is known as the investments alpha (i.e. ).

Lets analyze the two investments A and B as depicted in the graph above. Based on your analysis, what can you say about the two investments? (a) Investment A (b) Investment B Estimating the Beta of an Investment Using the Index Model Since the driving force behind the CAPM in determining the return of an investment is its beta, it is important that you know the process commonly adopted to estimate the beta of an investment. Before we can proceed with the discussion on how to estimate beta, you need to first understand that we cannot

implement the CAPM in the real world as it is because of two main issues. First, the CAPM assumes that the market portfolio (which includes all investments in the financial market) is available to all investors. Second, it focuses on the expected return of an investment.

Index model
To apply the CAPM in the real world, we need to use the index model, which addresses the above two issues as follows: (a) The index model uses a proxy such as a market index (e.g. S&P 500) to represents a more relevant market portfolio (and the market risk). (b) The index model uses realized returns (rather than expected returns, which are not easily observable). If we are to estimate the beta of an investment using CAPM, we will need to establish the following regression model, which is based on the realized excess returns of the investment in relation to the realized excess returns of the market:
E (ri ) rrf = i + i [ E (rm ) rrf ]

However, since we are using the index model (i.e. using realized returns), the regression model will look as follows:
ri rrf = i + i [rm rrf ]

To estimate the beta of an investment, we need first to determine the holding period returns of the investment and the chosen market index. Once we have identified the proxy for the risk-free rate, we can determine the excess returns of the investment and the excess returns of the market index. If you plot the excess returns of the investment and the market index as follows, you will have a very good idea whether the beta will be positive or negative.

Based on the graph above, can you tell if the beta will be positive or negative? One thing that is crucial to remember is that because of the setup of the regression model, the excess returns of the investment have to be on the y-axis and the excess returns of the market index have to be on the x-axis. Once you have the excess returns of the investment and the market index plotted as above, you want to find a straight line that best fit the data as presented in the graph below:

What does it mean to have a straight line that best fit the data points? The straight line, which best fit the data points, is known as the security characteristic line (SCL). Once again, a straight line is determined by its yintercept and its slope. How do you determine the y-intercept and the slope of the SCL? You can do so by performing a regression analysis using any statistical packages or Microsoft Excel.

Problems of the Capital Asset Pricing Model Although the Capital Asset Pricing Model is the most popular tool among many of the investors and investment analysts, it does have its problems. We know the CAPM uses 3 variables to determine the expected return of an asset: the riskfree rate, the expected return of the market portfolio, and the beta of the asset. An error in the estimation of any of these variables might lead to a wrong recommendation or investment decision. The following are some of the sources of error in estimating the 3 variables for the CAPM: (a) Although a 1-year T-bill is commonly used as a representation for a riskfree asset, it might not be the most appropriate choice in certain situations. Some analysts have suggested that a 30-year T-bond might be a more appropriate choice because its time horizon closely matches the investment horizons of most investors. In this case, the choice of the representation of a risk-free asset might lead to a wrong investment decision because the return of a 1-year T-bill can differ significantly from the return of a 30-year T-bond. (b) We know there are many representations (or proxies) for the market, which means that there are many choices to represent the market portfolio: the Dow Jones Industrial Average, the S&P 500 index, the NYSE Composite index, etc. Each of these choices will provide a different estimate for the market return. Just as in the case of the risk-free asset,

the choice of the representation for the market portfolio will affect an investors investment decisions.

(c) It has been proven empirically that the beta of an investment is unstable over time. In other words, the value of the beta of an investment changes over time. This could be due to changes in the companys management, its financing policy, etc. In addition, the estimates for the beta of a particular investment vary among analysts and publications for several reasons:

(i) The proxy for the market can be different among analysts and publications. For example, one analyst might be using the Value Line index (which contains 1700 stocks), while another analyst might be using the S&P 500 index. (ii) The time period used in estimating the beta of a stock can be different among analysts and publications. For example, the beta of an investment estimated using 5 years of return will differ from the one estimated using 10 years of return. (iii)The intervals of the measurement of the returns will also affect the estimates of the betas. For example, a beta estimated with weekly returns will differ from the one estimated with monthly returns.

Capital Asset Pricing Model and Arbitrage Theory The major criticism of the CAPM is that it uses only a single factor in determining the return of a portfolio, namely the beta of the portfolio. In other words, the non-diversifiable risk of the portfolio (in relation to the market risk) is the sole determinant of its return. No other factors will have any effect on the portfolios return. To address this criticism of the CAPM, a new model has been developed based on the arbitrage pricing theory (APT). Similar to the CAPM, the APT assumes that there is a relationship between the risk and return of a portfolio. However, compared to the CAPM, the APT has fewer assumptions. The following assumptions are required for the CAPM but not for the APT: (a) A single-period investment horizon (b) Borrowing and lending at the risk-free rate

(c) Investors are mean-variance optimizer

The APT is based on the concept of arbitrage (or law of one price), which states that any two identical investments cannot be sold at a different price. In other words, the theory states that market forces will adjust to eliminate any arbitrage opportunities, where a zero investment portfolio can be created to yield a riskfree profit.

The key thing you need to understand is that, unlike the CAPM, the APT does not assume that the market risk is the only factor that influences the return of a portfolio. The APT recognizes that several other factors (or risks) can influence the return of a portfolio. The APT preserves the linear relationship between risk and return of the CAPM but abandons the single measure of risk by the beta of the portfolio. The APT model is a multiple factor model, which uses factors such as the inflation rate, the growth rate of the economy, the slope of the yield curve, etc. in addition to the beta of the portfolio in determining the return of the portfolio. Keep in mind that just as in the case with the CAPM, the APT can also be modified to determine the return of an individual investment. The formula of the APT can be presented as follows:

E (ri ) = rrf + 1 E (r1 ) rrf + 2 E (r2 ) rrf + ... + n E (rn ) rrf

where 1, 2, , n represent the different factors that have impact over an investments return. The problem with the APT is that the factors are not well-specified ex-ante. Some research had been conducted to determine the appropriate factors that should be included in the model. However, there is no consensus on what the factors should be. One study suggested that the factors that should be included are changes in expected inflation, unanticipated changes in inflation, unanticipated changes in industrial production, unanticipated changes in the default riskpremium, and unanticipated changes in the term structure of interest rates. On the other hand, another study suggested that the factors should be default risk, the term structure of interest rates, inflation or deflation, the long-run expected growth rate of profits for the economy, and residual market risk.

What does this all means to an investor like you? Should you use the CAPM or the APT? The key thing you need to remember is that neither of the theories dominates the other one. The APT is more general because it does not require as many assumptions as the CAPM. However, the CAPM is more general because it applies to all individual investments without reservation (whereas the APT works better with well-diversified portfolio).

Arbitrage pricing theory

Arbitrage pricing theory (APT), in Finance, is a general theory of asset pricing, that has become influential in the pricing of shares. APT holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. The model-derived rate of return will then be used to price the asset correctly - the asset price should equal the expected end of period price discounted at the rate implied by model. If the price diverges, arbitrage should bring it back into line. The theory was initiated by the economist Stephen Ross in 1976.

The APT model

If APT holds, then a risky asset can be described as satisfying the following relation:

where

E(rj) is the risky asset's expected return, RPk is the risk premium of the factor, rf is the risk-free rate, Fk is the macroeconomic factor, bjk is the sensitivity of the asset to factor k, also called factor loading, and j is the risky asset's idiosyncratic random shock with mean zero.

That is, the uncertain return of an asset j is a linear relationship among n factors. Additionally, every factor is also considered to be a random variable with mean zero. Note that there are some assumptions and requirements that have to be fulfilled for the latter to be correct: There must be perfect competition in the market, and the total number of factors may never surpass the total number of assets (in order to avoid the problem of matrix singularity),

Arbitrage and the APT

Arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets and thereby making a risk free profit; see Rational pricing.

Arbitrage in expectations
The APT describes the mechanism whereby arbitrage by investors will bring an asset which is mispriced, according to the APT model, back into line with its expected price. Note that under true arbitrage, the investor locks-in a guaranteed payoff, whereas under APT arbitrage as described below, the investor locks-in a positive expected payoff. The APT thus assumes "arbitrage in expectations" - i.e. that arbitrage by investors will bring asset prices back into line with the returns expected by the model portfolio theory.

Arbitrage mechanics
In the APT context, arbitrage consists of trading in two assets with at least one being mispriced. The arbitrageur sells the asset which is relatively too expensive and uses the proceeds to buy one which is relatively too cheap. Under the APT, an asset is mispriced if its current price diverges from the price predicted by the model. The asset price today should equal the sum of all future cash flows discounted at the APT rate, where the expected return of the asset is a linear function of various factors, and sensitivity to changes in each factor is represented by a factor-specific beta coefficient. A correctly priced asset here may be in fact a synthetic asset - a portfolio consisting of other correctly priced assets. This portfolio has the same exposure to each of the macroeconomic factors as the mispriced asset. The arbitrageur creates the portfolio by identifying x correctly priced assets (one per factor plus one) and then weighting the assets such that portfolio beta per factor is the same as for the mispriced asset. When the investor is long the asset and short the portfolio (or vice versa) he has created a position which has a positive expected return (the difference between asset return and portfolio return) and which has a net-zero exposure to any macroeconomic factor and is therefore risk free (other than for firm specific risk). The arbitrageur is thus in a position to make a risk free profit: Where today's price is too low: The implication is that at the end of the period the portfolio would have appreciated at the rate implied by the APT, whereas the mispriced asset would have appreciated at more than this rate. The arbitrageur could therefore: Today: 1 short sell the portfolio 2 buy the mispriced-asset with the proceeds. At the end of the period: 1 sell the mispriced asset 2 use the proceeds to buy back the portfolio 3 pocket the difference. Where today's price is too high: The implication is that at the end of the period the portfolio would have appreciated at the rate implied by the APT, whereas the mispriced asset would have appreciated at less than this rate. The arbitrageur could therefore: Today: 1 short sell the mispriced-asset

2 buy the portfolio with the proceeds. At the end of the period: 1 sell the portfolio 2 use the proceeds to buy back the mispriced-asset 3 pocket the difference.

Relationship with the capital asset pricing model

The APT along with the capital asset pricing model (CAPM) is one of two influential theories on asset pricing. The APT differs from the CAPM in that it is less restrictive in its assumptions. It allows for an explanatory (as opposed to statistical) model of asset returns. It assumes that each investor will hold a unique portfolio with its own particular array of betas, as opposed to the identical "market portfolio". In some ways, the CAPM can be considered a "special case" of the APT in that the securities market line represents a single-factor model of the asset price, where Beta is exposed to changes in value of the Market. Additionally, the APT can be seen as a "supply side" model, since its beta coefficients reflect the sensitivity of the underlying asset to economic factors. Thus, factor shocks would cause structural changes in the asset's expected return, or in the case of stocks, in the firm's profitability. On the other side, the capital asset pricing model is considered a "demand side" model. Its results, although similar to those in the APT, arise from a maximization problem of each investor's utility function, and from the resulting market equilibrium (investors are considered to be the "consumers" of the assets).

Using the APT

Identifying the factors
As with the CAPM, the factor-specific Betas are found via a linear regression of historical security returns on the factor in question. Unlike the CAPM, the APT, however, does not itself reveal the identity of its priced factors - the number and nature of these factors is likely to change over time and between economies. As a result, this issue is essentially empirical in nature. Several a priori guidelines as to the characteristics required of potential factors are, however, suggested:
1. their impact on asset prices manifests in their unexpected movements 2. they should represent undiversifiable influences (these are, clearly, more

likely to be macroeconomic rather than firm-specific in nature) 3. timely and accurate information on these variables is required 4. the relationship should be theoretically justifiable on economic grounds Chen, Roll and Ross identified the following macro-economic factors as significant in explaining security returns: surprises in inflation; surprises in GNP as indicted by an industrial production index; surprises in investor confidence due to changes in default premium in corporate bonds; surprise shifts in the yield curve.

As a practical matter, indices or spot or futures market prices may be used in place of macroeconomic factors, which are reported at low frequency (e.g. monthly) and often with significant estimation errors. Market indices are sometimes derived by means of factor analysis. More direct "indices" that might be used are: short term interest rates; the difference in long-term and short term interest rates; a diversified stock index such as the S&P 500 or NYSE Composite Index; oil prices gold or other precious metal prices Currency exchange rates

What is Capital Asset Pricing Model? Discuss its assumptions Capital asset pricing model is a model that describes the relationship/trade-off between risk and expected/required return. It explains the behavior of security prices and provides a mechanism to assess the impact of a proposed security investment on investors overall portfolio risk and return. The CAPM provides a framework for basic risk-return trade-offs in portfolio management. It enables drawing certain implications about risk and the size of risk premium necessary to compensate for bearing risk. Assumptions: the basic assumptions of CAPM are related to (i) The efficiency of the markets: In an efficient capital market, investors are well informed, transaction costs are low, there are negligible restrictions on investment, no investment is large enough to influence the market price of a share and investors are in general agreement about the likely performance of individual securities and their expectations are based on a one year common ownership (holding) period. Investor preferences: Investors are assumed to proper to invest in securities with the highest return for a given level of risk or the lowest risk for a given level of return, return and risk being measured in terms of expected value and standard deviation relatively.

(ii)

Net operating income approach to Capital Structure The second approach as propounded by David Durand the net operating income approach examines the effects of changes in capital structure in terms of net operating income. In the net income approach discussed above net income available to shareholders is obtained by deducting interest on debentures form net operating income. Then overall value of the firm is calculated through capitalization rate of equities obtained on the basis of net operating income, it is called net

income approach. In the second approach, on the other hand overall value of the firm is assessed on the basis of net operating income not on the basis of net income. Hence this second approach is known as net operating income approach.

The NOI approach implies that (i) whatever may be the change in capital structure the overall value of the firm is not affected. Thus the overall value of the firm is independent of the degree of leverage in capital structure. (ii) Similarly the overall cost of capital is not affected by any change in the degree of leverage in capital structure. The overall cost of capital is independent of leverage.

If the cost of debt is less than that of equity capital the overall cost of capital must decrease with the increase in debts whereas it is assumed under this method that overall cost of capital is unaffected and hence it remains constant irrespective of the change in the ratio of debts to equity capital. How can this assumption be justified? The advocates of this method are of the opinion that the degree of risk of business increases with the increase in the amount of debts. Consequently the rate of equity over investment in equity shares thus on the one hand cost of capital decreases with the increase in the volume of debts; on the other hand cost of equity capital increases to the same extent. Hence the benefit of leverage is wiped out and overall cost of capital remains at the same level as before. Let us illustrate this point.

If follows that with the increase in debts rate of equity capitalization also increases and consequently the overall cost of capital remains constant; it does not decline.

To put the same in other words there are two parts of the cost of capital. One is the explicit cost which is expressed in terms of interest charges on debentures. The other is implicit cost which refers to the increase in the rate of equity capitalization resulting from the increase in risk of business due to higher level of debts.

Optimum capital structure

This approach suggests that whatever may be the degree of leverage the market value of the firm remains constant. In spite of the change in the ratio of debts to equity the market value of its equity shares remains constant. This means there does not exist a optimum capital structure. Every capital structure is optimum according to net operating income approach. Working capital management Working capital management involves the relationship between a firm's shortterm assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Why Firms Hold Cash The finance profession recognizes the three primary reasons offered by economist John Maynard Keynes to explain why firms hold cash. The three reasons are for the purpose of speculation, for the purpose of precaution, and for the purpose of making transactions. All three of these reasons stem from the need for companies to possess liquidity. Speculation Economist Keynes described this reason for holding cash as creating the ability for a firm to take advantage of special opportunities that if acted upon quickly will favor the firm. An example of this would be purchasing extra inventory at a discount that is greater than the carrying costs of holding the inventory. Precaution Holding cash as a precaution serves as an emergency fund for a firm. If expected cash inflows are not received as expected cash held on a precautionary basis could be used to satisfy short-term obligations that the cash inflow may have been bench marked for. Transaction Firms are in existence to create products or provide services. The providing of services and creating of products results in the need for cash inflows and outflows. Firms hold cash in order to satisfy the cash inflow and cash outflow needs that they have. Float

Float is defined as the difference between the book balance and the bank balance of an account. For example, assume that you go to the bank and open a checking account with $500. You receive no interest on the $500 and pay no fee to have the account. Now assume that you receive your water bill in the mail and that it is for $100. You write a check for $100 and mail it to the water company. At the time you write the $100 check you also record the payment in your bank register. Your bank register reflects the book value of the checking account. The check will literally be "in the mail" for a few days before it is received by the water company and may go several more days before the water company cashes it. The time between the moment you write the check and the time the bank cashes the check there is a difference in your book balance and the balance the bank lists for your checking account. That difference is float. This float can be managed. If you know that the bank will not learn about your check for five days, you could take the $100 and invest it in a savings account at the bank for the five days and then place it back into your checking account "just in time" to cover the $100 check. Bo ok Bal an ce $5 00 $4 00 $4 00

Time

Bank Balance

Time 0 (make deposit) Time 1 (write $100 check) Time 2 (bank receives check)

$500 $500 $400

Float is calculated by subtracting the book balance from the bank balance. Float at Time 0: $500 - $500 = $0

Float at Time 1: $500 - $400 = $100 Float at Time 2: $400 - $400 = $0

Ways to Manage Cash

Firms can manage cash in virtually all areas of operations that involve the use of cash. The goal is to receive cash as soon as possible while at the same time waiting to pay out cash as long as possible. Below are several examples of how firms are able to do this. Policy For Cash Being Held Here a firm already is holding the cash so the goal is to maximize the benefits from holding it and wait to pay out the cash being held until the last possible moment. Previously there was a discussion on Float which includes an example based on a checking account. That example is expanded here.

Assume that rather than investing $500 in a checking account that does not pay any interest, you invest that $500 in liquid investments. Further assume that the bank believes you to be a low credit risk and allows you to maintain a balance of $0 in your checking account.

This allows you to write a $100 check to the water company and then transfer funds from your investment to the checking account in a "just in time" (JIT) fashion. By employing this JIT system you are able to draw interest on the entire $500 up until you need the $100 to pay the water company. Firms often have policies similar to this one to allow them to maximize idle cash.

Sales The goal for cash management here is to shorten the amount of time before the cash is received. Firms that make sales on credit are able to decrease the amount of time that their customers wait until they pay the firm by offering discounts.

For example, credit sales are often made with terms such as 3/10 net 60. The first part of the sales term "3/10" means that if the customer pays for the sale within 10 days they will receive a 3% discount on the sale. The remainder of the sales term, "net 60," means that the bill is due within 60 days. By offering an inducement, the 3% discount in this case, firms are able to cause their customers to pay off their bills early. This results in the firm receiving the cash earlier. Inventory The goal here is to put off the payment of cash for as long as possible and to manage the cash being held. By using a JIT inventory system, a firm is able to avoid paying for the inventory until it is needed while also avoiding carrying costs on the inventory. JIT is a system where raw materials are purchased and received just in time, as they are needed in the production lines of a firm.

Limitations Of Ratio Analysis

Although ratio analysis is very important tool to judge the company's performance , following are the limitations of it.

1. Ratios are tools of quantitative analysis, which ignore qualitative points of view.

2. Ratios are generally distorted by inflation.

3. Ratios give false result, if they are calculated from incorrect accounting data.

4. Ratios are calculated on the basis of past data. Therefore, they do not provide complete information for future forecasting.

5. Ratios may be misleading, if they are based on false or window-dressed accounting information.

Advantages of Financial Statement Analysis:

There are various advantages of financial statements analysis. The major benefit is that the investors get enough idea to decide about the investments of their funds in the

specific company. Secondly, regulatory authorities like International Accounting Standards Board can ensure whether the company is following accounting standards or not. Thirdly, financial statements analysis can help the government agencies to analyze the taxation due to the company. Moreover, company can analyze its own performance over the period of time through financial statements analysis.

Limitations of Financial Statement Analysis: Although financial statement analysis is highly useful tool, it has two limitations. These two limitations involve the comparability of financial data between companies and the need to look beyond ratios. Comparison of Financial Data: Comparison of one company with another can provide valuable clues about the financial health of an organization. Unfortunately, differences in accounting methods between companies sometimes make it difficult to compare the companies' financial data. For example if one firm values its inventories by LIFO method and another firm by the average cost method, then direct comparison of financial data such as inventory valuations and cost of goods sold between the two firms may be misleading. Sometimes enough data are presented in foot notes to the financial statements to restate data to a comparable basis. Otherwise, the analyst should keep in mind the lack of comparability of the data before drawing any definite conclusion. Nevertheless, even with this limitation in mind, comparisons of key ratios with other companies and with industry average often suggest avenues for further investigation. The Need to Look Beyond Ratios: An inexperienced analyst may assume that ratios are sufficient in themselves as a basis for judgment about the future. Nothing could be further from the truth. Conclusions based on ratios analysis must be regarded as tentative. Ratios should not be viewed as an end, but rather they should be viewed as starting point, as indicators of what to pursue in greater depth. they raise many questions, but they rarely answer any question by themselves. In addition to ratios, other sources of data should be analyzed in order to make judgment about the future of an organization. The analyst should look, for example, at industry trends, technological changes, changes in consumer tastes, changes in broad economic factors, and changes within the firm itself. A recent change in a key management position, for example, might provide a basis for optimization about the

future, even though the past performance of the firm (as shown by its ratios) may have been mediocre. Financial Statement Analysis Limitations

Many things can impact the calculation of ratios and make comparisons difficult. The limitations include:

The use of estimates in allocating costs to each period. The ratios will be as accurate as the estimates.

The cost principle is used to prepare financial statements. Financial data is not adjusted for price changes or inflation/deflation.

Companies have a choice of accounting methods (for example, inventory LIFO vs FIFO and depreciation methods). These differences impact ratios and make it difficult to compare companies using different methods.

Companies may have different fiscal year ends making comparison difficult if the industry is cyclical.

Diversified companies are difficult to classify for comparison purposes.

Financial statement analysis does not provide answers to all the users' questions. In fact, it usually generates more questions! Common Size Financial Statements

Common size ratios are used to compare financial statements of different-size companies, or of the same company over different periods. By expressing the items in proportion to some size-related measure, standardized financial

statements can be created, revealing trends and providing insight into how the different companies compare.

The common size ratio for each line on the financial statement is calculated as follows: Item Interest Common Ratio Size = Reference Item For example, if the item of interest is inventory and it is referenced to total assets (as it normally would be), the common size ratio would be: Inventory Common Size Ratio Inventory for = Total Assets of

The ratios often are expressed as percentages of the reference amount. Common size statements usually are prepared for the income statement and balance sheet, expressing information as follows: Income statement items - expressed as a percentage of total revenue Balance sheet items - expressed as a percentage of total assets

The following example income statement shows both the dollar amounts and the common size ratios: Common Size Income Statement Income Statement Revenue 70,134 Common-Size Income Statement 100%

Cost Sold

of

Goods

44,221 25,913 13,531 12,382 2,862 3,766 5,754

63.1% 36.9% 19.3% 17.7% 4.1% 5.4% 8.2%

Gross Profit SG&A Expense Operating Income Interest Expense Provision for Taxes Net Income

For the balance sheet, the common size percentages are referenced to the total assets. The following sample balance sheet shows both the dollar amounts and the common size ratios: Common Size Balance Sheet Balance Sheet ASSETS Cash & Securities Marketable 6,029 14,378 17,136 37,543 & 2,442 39,985 15.1% 36.0% 42.9% 93.9% 6.1% 100% CommonSize Balance Sheet

Accounts Receivable Inventory Total Current Assets Property, Equipment Total Assets Plant,

LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Long-Term Debt 14,251 12,624 35.6% 31.6%

Total Liabilities Shareholders' Equity Total Liabilities & Equity

26,875 13,110 39,985

67.2% 32.8% 100%

The above common size statements are prepared in a vertical analysis, referencing each line on the financial statement to a total value on the statement in a given period. The ratios in common size statements tend to have less variation than the absolute values themselves, and trends in the ratios can reveal important changes in the business. Historical comparisons can be made in a time-series analysis to identify such trends. Common size statements also can be used to compare the firm to other firms. Comparisons Between Companies (Cross-Sectional Analysis) Common size financial statements can be used to compare multiple companies at the same point in time. A common-size analysis is especially useful when comparing companies of different sizes. It often is insightful to compare a firm to the best performing firm in its industry (benchmarking). A firm also can be compared to its industry as a whole. To compare to the industry, the ratios are calculated for each firm in the industry and an average for the industry is calculated. Comparative statements then may be constructed with the company of interest in one column and the industry averages in another. The result is a quick overview of where the firm stands in the industry with respect to key items on the financial statements. Limitations As with financial statements in general, the interpretation of common size statements is subject to many of the limitations in the accounting data used to construct them. For example: Different accounting policies may be used by different firms or within the same firm at different points in time. Adjustments should be made for such differences. Different firms may use different accounting calendars, so the accounting periods may not be directly comparable.

What Is the Function of a Comparative Balance Sheet ?

I want to do this! What's This? A comparative balance sheet is designed to show financial differences between several accounting periods. A balance sheet is a detailed account of everything lost and gained financially during a certain time, containing both physical and abstract data. A comparative balance sheet is useful because a business can instantly compare profits and losses between different time periods. Most businesses use comparative balance sheets to help increase profits and functionality of a company. Features 1. A comparative balance sheet will include several different types of accounting data. First there will be the income received and money spent. There will also be a list of credits and debits to the company. A list of assets and liabilities is also included. All of these factors are necessary to see what the total worth of the company is through the balance sheet. The comparative balance sheet allows the company or business to see at a glance how its profits differ from one year to another. These comparative balance sheets are aligned so that business people can see at a glance the financial differences from year to year. Function 2. A balance sheet is designed to help keep a business or company aware of every expense and profit that it is receiving. It also allows the company to see which times of the year are most profitable, and which years they did the best. This knowledge is important so that the company can adapt to the information to build the best business possible. If the business did better three years ago, they can look at that data and try to decide what it was that made them do so well that year. Then they can change what they are doing in the present to help boost current profits. Benefits 3. The main benefit of a comparative balance sheet is that profits and losses can be seen at a glance. It is also possible to see the increase or decrease of assets that the business has. The company will be able to tell what the biggest money suckers in the business are, and try to think of ways to cut down losses in that area. Significance 4. Without a comparative balance sheet, businesses would not know how to change their strategy from year to year. All they would have

to go on would their current balance statements. This would be detrimental to most businesses. It is very important to be able to look at past profit information to judge how to act for the future. Expert Insight 5. Most businesses and companies use comparative balance sheets. It would be a very poor business decision not to use them. A lot of times these comparative balance sheets are used when proposing new additions or changes to a business. The company can go back as many as 10 or 20 years to identify trends, and to judge if a new project is right for the company. Comparative balance sheets are a necessity in the business world.

Derivative
Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying on which a derivative is based can be an asset (e.g., commodities, equities (stocks), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index (CPI) see inflation derivatives), or other items (e.g., weather conditions, or other derivatives). Credit derivatives are based on loans, bonds or other forms of credit. The main types of derivatives are forwards, futures, options, and swaps. Derivatives can be used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect. This activity is known as speculation. Because the value of a derivative is contingent on the value of the underlying, the notional value of derivatives is recorded off the balance sheet of an institution, although the market value of derivatives is recorded on the balance sheet.

Uses
Hedging
Derivatives allow risk about the value of the underlying asset to be transferred from one party to another. For example, a wheat farmer and a miller could sign a futures contract to exchange a specified amount of cash for a specified amount of wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the miller, the availability of wheat. However, there is still the risk that no wheat will be available due to causes unspecified by the contract, like the weather, or that one party will renege on the contract. Although a third party, called a clearing house, insures a futures contract, not all derivatives are insured against counterparty risk. From another perspective, the farmer and the miller both reduce a risk and acquire a risk when they sign the futures contract: The farmer reduces the risk that the price of wheat will fall below the price specified in the contract and acquires the risk that the price of wheat will

rise above the price specified in the contract (thereby losing additional income that he could have earned). The miller, on the other hand, acquires the risk that the price of wheat will fall below the price specified in the contract (thereby paying more in the future than he otherwise would) and reduces the risk that the price of wheat will rise above the price specified in the contract. In this sense, one party is the insurer (risk taker) for one type of risk, and the counterparty is the insurer (risk taker) for another type of risk. Hedging also occurs when an individual or institution buys an asset (like a commodity, a bond that has coupon payments, a stock that pays dividends, and so on) and sells it using a futures contract. The individual or institution has access to the asset for a specified amount of time, and then can sell it in the future at a specified price according to the futures contract. Of course, this allows the individual or institution the benefit of holding the asset while reducing the risk that the future selling price will deviate unexpectedly from the market's current assessment of the future value of the asset.

Speculation and arbitrage

Derivatives can be used to acquire risk, rather than to insure or hedge against risk. Thus, some individuals and institutions will enter into a derivative contract to speculate on the value of the underlying asset, betting that the party seeking insurance will be wrong about the future value of the underlying asset. Speculators will want to be able to buy an asset in the future at a low price according to a derivative contract when the future market price is high, or to sell an asset in the future at a high price according to a derivative contract when the future market price is low. Individuals and institutions may also look for arbitrage opportunities, as when the current buying price of an asset falls below the price specified in a futures contract to sell the asset. Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in futures contracts. Through a combination of poor judgment, lack of oversight by the bank's management and by regulators, and unfortunate events like the Kobe earthquake, Leeson incurred a $1.3 billion loss that bankrupted the centuries-old institution.[1]

Types of derivatives
OTC and exchange-traded
Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market:
Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can occur in private, without activity being visible on any exchange. According to the Bank for International Settlements, the total outstanding notional amount is $684 trillion (as of June 2008)[2]. Of this total notional amount, 67% are interest

rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counterparty risk, like an ordinary contract, since each counterparty relies on the other to perform. Exchange-traded derivatives (ETD) are those derivatives products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world's largest[3] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange). According to BIS, the combined turnover in the world's derivatives exchanges totalled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on equity exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive.

Common derivative contract types

There are three major classes of derivatives:
1. Futures/Forwards are contracts to buy or sell an asset on or before a future date at a price specified today. A futures contract differs from a forward contract in that the futures contract is a standardized contract written by a clearing house that operates an exchange where the contract can be bought and sold, while a forward contract is a non-standardized contract written by the parties themselves. 2. Options are contracts that give the owner the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) an asset. The price at which the sale takes place is known as the strike price, and is specified at the time the parties enter into the option. The option contract also specifies a maturity date. In the case of a European option, the owner has the right to require the sale to take place on (but not before) the maturity date; in the case of an American option, the owner can require the sale to take place at any time up to the maturity date. If the owner of the

contract exercises this right, the counterparty has the obligation to carry out the transaction. 3. Swaps are contracts to exchange cash (flows) on or before a specified future date based on the underlying value of currencies/exchange rates, bonds/interest rates, commodities, stocks or other assets.

More complex derivatives can be created by combining the elements of these basic types. For example, the holder of a swaption has the right, but not the obligation, to enter into a swap on or before a specified future date.

Examples
Some common examples of these derivatives are:
CONTRACT TYPES UNDERLYI NG Exchang e-traded futures DJIA Index future NASDAQ Index future Exchang e-traded options Option on DJIA Index future Option on NASDAQ Index future Option on Eurodollar future Option on Euribor future Option on Bond future Singleshare option OTC swap OTC forward OTC option

Equity Index

Equity swap

Back-toback

n/a

Money market

Eurodolla r future Euribor future

Interes t rate swap

Forward rate agreemen t

Interest rate cap and floor Swaption Basis swap

Bonds

Bond future

Total return swap Equity swap

Repurchas e agreemen t Repurchas e agreemen t

Bond option

Single Stocks

Singlestock future

Stock option Warrant Turbo

warrant Credit default swap Credit default option

Credit

n/a

n/a

n/a

Other examples of underlying exchangeables are:

Property (mortgage) derivatives Economic derivatives that pay off according to economic reports [1] as measured and reported by national statistical agencies Energy derivatives that pay off according to a wide variety of indexed energy prices. Usually classified as either physical or financial, where physical means the contract includes actual delivery of the underlying energy commodity (oil, gas, power, etc.) Commodities Freight derivatives Inflation derivatives Insurance derivatives[citation needed] Weather derivatives Credit derivatives

Cash flow
The payments between the parties may be determined by:
the price of some other, independently traded asset in the future (e.g., a common stock); the level of an independently determined index (e.g., a stock market index or heating-degree-days); the occurrence of some well-specified event (e.g., a company defaulting); an interest rate; an exchange rate; or some other factor.

Some derivatives are the right to buy or sell the underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves into the right direction, the owner of the derivative makes money; otherwise, they lose money or the derivative becomes worthless. Depending on the terms of the contract, the potential gain or loss on a derivative can be much higher than if they had traded the underlying security or commodity directly.

Valuation

Total world derivatives from 1998-2007[4] compared to total world wealth in the year 2000[citation needed]

Market and arbitrage-free prices

Two common measures of value are:
Market price, i.e. the price at which traders are willing to buy or sell the contract Arbitrage-free price, meaning that no risk-free profits can be made by trading in these contracts; see rational pricing

Determining the market price

For exchange-traded derivatives, market price is usually transparent (often published in real time by the exchange, based on all the current bids and offers placed on that particular contract at any one time). Complications can arise with OTC or floor-traded contracts though, as trading is handled manually, making it difficult to automatically broadcast prices. In particular with OTC contracts, there is no central exchange to collate and disseminate prices.

Determining the arbitrage-free price

The arbitrage-free price for a derivatives contract is complex, and there are many different variables to consider. Arbitrage-free pricing is a central topic of financial mathematics. The stochastic process of the price of the underlying asset is often crucial. A key equation for the theoretical valuation of options is the BlackScholes formula, which is based on the assumption that the cash flows from a European stock option can be replicated by a continuous buying and selling strategy using only the stock. A simplified version of this valuation technique is the binomial options model.

Criticisms

Derivatives are often subject to the following criticisms:

Possible large losses

The use of derivatives can result in large losses due to the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset's price. However, investors could lose large amounts if the price of the underlying moves against them significantly. There have been several instances of massive losses in derivative markets, such as:
The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government[5]. An AIG subsidiary had lost more than $18 billion over the preceding three quarters on Credit Default Swaps (CDS) it had written.[6] It was reported that the recapitalization was necessary because further losses were foreseeable over the next few quarters. The loss of $7.2 Billion by Socit Gnrale in January 2008 through mis-use of futures contracts. The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long natural gas in September 2006 when the price plummeted. The loss of US$4.6 billion in the failed fund Long-Term Capital Management in 1998. The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, from which it emerged in June 1995. The county lost about $1.6 billion through derivatives trading. Orange County was neither bankrupt nor insolvent at the time; however, because of the strategy the county employed it was unable to generate the cash flows needed to maintain services. Orange County is a good example of what happens when derivatives are used incorrectly and positions liquidated in an unplanned manner; had they not liquidated they would not have lost any money as their positions rebounded.[citation needed] Potentially problematic use of interest-rate derivatives by US municipalities has continued in recent years. See, for example:[7] The Nick Leeson affair in 1994

Counter-party risk
Derivatives (especially swaps) expose investors to counter-party risk. For example, suppose a person wanting a fixed interest rate loan for his business, but finding that banks only offer variable rates, swaps payments with another business who wants a variable rate, synthetically creating a fixed rate for the person. However if the second business goes bankrupt, it can't pay its variable rate and so the first business will lose its fixed rate and will be paying a variable rate again. If interest rates have increased, it is possible that the first business may be adversely affected, because it may not be prepared to pay the higher variable rate.

Different types of derivatives have different levels of risk for this effect. For example, standardized stock options by law require the party at risk to have a certain amount deposited with the exchange, showing that they can pay for any losses; Banks who help businesses swap variable for fixed rates on loans may do credit checks on both parties. However in private agreements between two companies, for example, there may not be benchmarks for performing due diligence and risk analysis.

Unsuitably high risk for small/inexperienced investors

Derivatives pose unsuitably high amounts of risk for small or inexperienced investors. Because derivatives offer the possibility of large rewards, they offer an attraction even to individual investors. However, speculation in derivatives often assumes a great deal of risk, requiring commensurate experience and market knowledge, especially for the small investor, a reason why some financial planners advise against the use of these instruments. Derivatives are complex instruments devised as a form of insurance, to transfer risk among parties based on their willingness to assume additional risk, or hedge against it. Add Moral Hazard spread over the risk.

Large notional value

Derivatives typically have a large notional value. As such, there is the danger that their use could result in losses that the investor would be unable to compensate for. The possibility that this could lead to a chain reaction ensuing in an economic crisis, has been pointed out by legendary investor Warren Buffett in Berkshire Hathaway's annual report. Buffett called them 'financial weapons of mass destruction.' The problem with derivatives is that they control an increasingly larger notional amount of assets and this may lead to distortions in the real capital and equities markets. Investors begin to look at the derivatives markets to make a decision to buy or sell securities and so what was originally meant to be a market to transfer risk now becomes a leading indicator.

Leverage of an economy's debt

Derivatives massively leverage the debt in an economy, making it ever more difficult for the underlying real economy to service its debt obligations and curtailing real economic activity, which can cause a recession or even depression.[8] In the view of Marriner S. Eccles, U.S. Federal Reserve Chairman from November, 1934 to February, 1948, too high a level of debt was one of the primary causes of the 1920s-30s Great Depression. (See Berkshire Hathaway Annual Report for 2002)

Benefits
Nevertheless, the use of derivatives also has its benefits:
Derivatives facilitate the buying and selling of risk, and thus have a positive impact on the economic system[citation needed]. Although someone loses money while someone else gains money with a derivative, under normal circumstances, trading in derivatives should not adversely affect the economic system because it is not zero sum in utility.

Former Federal Reserve Board chairman Alan Greenspan commented in 2003 that he believed that the use of derivatives has softened the impact of the economic downturn at the beginning of the 21st century.[citation needed]

Definitions
Bilateral netting: A legally enforceable arrangement between a bank and a counter-party that creates a single legal obligation covering all included individual contracts. This means that a banks obligation, in the event of the default or insolvency of one of the parties, would be the net sum of all positive and negative fair values of contracts included in the bilateral netting arrangement. Credit derivative: A contract that transfers credit risk from a protection buyer to a credit protection seller. Credit derivative products can take many forms, such as credit default swaps, credit linked notes and total return swaps. Derivative: A financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates, or indexes. Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards and various combinations thereof. Exchange-traded derivative contracts: Standardized derivative contracts (e.g. futures contracts and options) that are transacted on an organized futures exchange. Gross negative fair value: The sum of the fair values of contracts where the bank owes money to its counter-parties, without taking into account netting. This represents the maximum losses the banks counter-parties would incur if the bank defaults and there is no netting of contracts, and no bank collateral was held by the counter-parties. Gross positive fair value: The sum total of the fair values of contracts where the bank is owed money by its counter-parties, without taking into account netting. This represents the maximum losses a bank could incur if all its counter-parties default and there is no netting of contracts, and the bank holds no counter-party collateral. High-risk mortgage securities: Securities where the price or expected average life is highly sensitive to interest rate changes, as determined by the FFIEC policy statement on high-risk mortgage securities. Notional amount: The nominal or face amount that is used to calculate payments made on swaps and other risk management products. This amount generally does not change hands and is thus referred to as notional.

Over-the-counter (OTC) derivative contracts : Privately negotiated derivative contracts that are transacted off organized futures exchanges. Structured notes: Non-mortgage-backed debt securities, whose cash flow characteristics depend on one or more indices and/or have embedded forwards or options. Total risk-based capital: The sum of tier 1 plus tier 2 capital. Tier 1 capital consists of common shareholders equity, perpetual preferred shareholders equity with non-cumulative dividends, retained earnings, and minority interests in the equity accounts of consolidated subsidiaries. Tier 2 capital consists of subordinated debt, intermediate-term preferred stock, cumulative and long-term preferred stock, and a portion of a banks allowance for loan and lease losses.

Risk management
The broad parameters of risk management function should cover:
(a) (b) (c) Organizational structure Comprehensive risk management approach Risk management policies approved by the board, which should be consistent with the broader business strategies, capital strength, management expertise and overall willingness to assume risk Guidelines and other parameters used to govern risk taking, including detailed structure of prudential limits Strong MIS or reporting, monitoring and controlling risk Well laid out procedures, effective control and comprehensive risk reporting framework Separate risk management organization/framework independent of operational departments and with clear delineation of levels of responsibility for management of risk

(d) (e) (f) (g)

(h)

Periodical review and evaluation

Accurate and timely credit grading is one of the basic components of risk management. Credit risk Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. Market risk Market risk takes the form of: (a) Liquidity risk (b) Interest rate risk (c) Foreign exchange rate(forex) risk (d) Commodity price risk (e) Equity price risk Operational risk Managing operational risk is becoming an important feature of sound risk management practices in modern financial markets in the wake of phenomenal increase in the volume of transactions, high degree o structural changes and complex support systems. The most important type of operational risk involves breakdowns in internal controls and corporate governance. Such breakdowns can lead to financial loss through error, fraud, or failure to perform in a timely manner or cause the interest of the banks to be compromised. Generally, operational risk is defined as any risk, which is not categorized as market or credit risk or the risk of loss arising from various types of human or technical error. It is also synonymous with settlement or payments risk and business interruption, administrative and legal risks. Operational risk has some form of link between credit and market risks. An operational problem with a business transaction could trigger a credit or market risk.

Corporate Risk Management

Financial risk management (FRM) had its origins in trading floors and the Basel Accords on banking regulation during the 1980s and 1990s. If a unifying theme emerged, it was a need to update asset-liability management (ALM) techniques. These tended to define risks in terms of their effects on a firm's accounting resultssuch as earnings, net interest income, and return on assets. The proliferation of off-balance sheet tools, including derivatives and securitization, were rendering those metrics of performance easy to manipulate. The solution of financial risk management was to ignore accounting metrics of value and focus exclusively on market values. Till Guldimann (1994) captured the new spirit: Across markets, traded securities have replaced many illiquid instruments, e.g., loans and mortgages have been securitized to permit disintermediation and trading. Global securities markets have expanded and both exchange traded and over-the-counter derivatives have become major components of the markets. These developments, along with technological breakthroughs in data processing, have gone hand in hand with changes in management practices: a movement away from management based on accrual accounting toward risk management based on marking-to-market of positions. Financial risks came to be divided into three categories: Financial risks Market risk Credit risk Operational risk

New techniques for assessing and managing these risks all focused on their impact on market value. Market risk, by definition, is risk due to uncertainty in future market values. New credit risk models assessed potential defaults or credit deteriorations in terms of their mark-to-market impact. Operational risk was also assessed in terms of its actual or potential direct costs.

Such techniques proved effective on bank trading floors, where market values were readily available. Extending them to other parts of the bank, or even to non-financial corporations,

proved problematic. This was the realm of book value accounting. Market values were difficult or impossible to secure for items such as private equity, pension liabilities, factory equipment, intellectual property or natural resource reserves. Corporate risk management emerged as a catch-all phrase for practices that serve to optimize risk taking in a context of book value accounting. Generally, this includes risks of nonfinancial corporations, but also those of business lines of financial institutions that are not engaged in trading or investment management. Risks vary from one corporation to the next, depending on such factors as size, industry, diversity of business lines, sources of capital, etc. Practices that are appropriate for one corporation are inappropriate for another. For this reason, corporate risk management is a more elusive notion than is financial risk management. It encompasses a variety of techniques drawn from both FRM and ALM. Corporations pick and choose from these, adapting techniques to suit their own needs. This article is an overview. Corporate Risk Management In a corporate setting, the familiar division of risks into market, credit and operational risks breaks down. Of these, credit risk poses the least challenges. To the extent that corporations take credit risk (some take a lot; others take little), new and traditional techniques of credit risk management are easily adapted. Operational risk largely doesn't apply to corporations. It includes such factors as model risk or back office errors. Some aspects do affect corporationssuch as fraud or natural disastersbut corporations have been addressing these with internal audit, facilities management and legal departments for decades. Also, corporations face risks that are akin to the operational risk of financial institutions but are unique to their own business lines. An airline is exposed to risks due to weather, equipment failure and terrorism. A power generator faces the risk that a generating plant may go down for unscheduled maintenance. In corporate risk management, these risksthose that overlap with the operational risks of financial firms and those that are akin to such operational risks but are unique to non-financial firmsare called operations risks. The real challenge of corporate risk management is those risks that are akin to market risk but aren't market risk. An oil company holds oil reserves. Their "value" fluctuates with the market price of oil, but what does this mean? The oil reserves don't have a market value. A chain of restaurants is thriving. Its restaurants are "valuable," but it is impossible to assign them market values. Something that doesn't have a market value doesn't pose market risk. This is almost a tautology. Such risks are business risks as opposed to market risks. In the realm of corporate risk management, we abandon the division of risks into market, credit and operational risks and replace it with a new categorization: Corporate risk

Market risk risk

Business risk

Credit risk

Operations

Corporations do face some market risks, such as commodity price risk or foreign exchange risk. These are usually dwarfed by business risks. In a nutshell, the challenge of corporate risk management is the management of business risk. Addressing Business Risk Techniques for addressing business risk take two forms: Those that treat business risks as market risks, so that techniques of FRM can be directly applied, and Those that address business risks from a book value standpoint, modifying or adapting techniques of FRM and ALM as appropriate.

Both approaches are discussed below. Economic Value Techniques of the first form focus on a concept called economic value. This is a vague notion that generalizes the concept of market value. If a market value exists for an asset, then that market value is the asset's economic value. If a market value doesn't exist, then economic value is the "intrinsic value" of the assetwhat the market value of the asset would be, if it had a market value. Economic values can be assigned in two ways. One is to start with accounting metrics of value and make suitable adjustments, so they are more reflective of some intrinsic value. This is the approach employed with economic value added (EVA) analyses. The other approach is to construct some model to predict what value the asset might command, if a liquid market existed for it. In this respect, a derogatory name for economic value is mark-to-model value.

Once some means has been established for assigning economic values, these are treated like market values. Standard techniques of financial risk managementsuch as value-atrisk (VaR) or economic capital allocationare then applied. This economic approach to managing business risk is applicable if most of a firm's balance sheet can be marked to market. Economic values then only need to be assigned to a few items in order for techniques of FRM to be applied firm wide. An example would be a commodity wholesaler. Most of its balance sheet comprises physical and forward positions in commodities, which can be mostly marked to market. More controversial has been the use of economic valuations in power and natural gas markets. The actual energies trade and, for the most part, can be marked to market. However, producers also hold significant investments in plants and equipmentand these cannot be marked to market. Suppose some energy trades spot and forward out three years. An asset that produces the energy has an expected life of 50 years, which means that an economic value for the asset must reflect a hypothetical 50-year forward curve. The forward curve doesn't exist, so a model must construct one. Consequently, assigned economic values are highly dependent on assumptions. Often, they are arbitrary.

In this context, it isn't enough to assign economic values. VaR analyses require standard deviations and correlations as well. Assigning these to 50-year forward prices that are themselves hypothetical is essentially meaninglessyet, those standard deviations and correlations determine the reported VaR. These dubious techniques were widely (but not universally) adopted by US energy merchants in the late 1990s and early 2000s. The most publicized of these was Enron Corp., which went beyond using economic values for internal reporting and incorporated them into its financial reporting to investors. The 2001 bankruptcy of Enron and subsequent revelations of fraud tainted mark-to-model techniques. Book Value The second approach to addressing business risk starts by defining risks that are meaningful in the context of book value accounting. Most typical of these are: Earnings risk, which is risk due to uncertainty in future reported earnings, and

Cash flow risk, which is risk due to uncertainty in future reported cash flows.

Of the two, earnings risk is more akin to market risk. Yet, it avoids the arbitrary assumptions of economic valuations. A firm's accounting earnings are a well defined notion. A problem with looking at earnings risk is that earnings are, well, non-economic. Earnings may be suggestive of economic value, but they can be misleading and are often easy to manipulate. A firm can report high earnings while its long term franchise is eroded away by lack of investment or competing technologies. Financial transactions can boost short-term earnings at the expense of long-term earnings. After all, traditional techniques of ALM focus on earnings, and their shortcomings remain today. Cash flow risk is less akin to market risk. It relates more to liquidity than the value of a firm, but this is only partly true. As anyone who has ever worked with distressed firms can attest, "cash is king." When a firm gets into difficulty, earnings and market values don't pay the bills. Cash flow is the life blood of a firm. However, as with earnings risk, cash flow risk offers only an imperfect picture of a firm's business risk. Cash flows can also be manipulated, and steady cash flows may hide corporate decline. Techniques for managing earnings risk and cash flow risk draw heavily on techniques of ALMespecially scenario analysis and simulation analysis. They also adapt techniques of FRM. In this context, value-at-risk (VaR) becomes earnings-at-risk (EaR) or cash-flow-at-risk (CFaR). For example, EaR might be reported as the 10% quantile of this quarter's earnings (which is the same as the 90% quantile of reported loss, multiplied by minus one). The actual calculations of EaR or CFaR differ from those for VaR. These are long-term risk metrics, with horizons of three months or a year. VaR is routinely calculated over a one-day horizon. Also, EaR and CFaR are driven by rules of accounting while VaR is driven by financial engineering principles. Typically, EaR or CFaR are calculated by first performing a simulation analysis. That generates a probability distribution for the period's earnings or cash flow, which is then used to value the desired metric of EaR or CFaR.

One decision that needs to be made with EaR or CFaR is whether to use a constant or contracting horizon. If management wants an EaR analysis for quarterly earnings, should the analysis actually assess risk to the current quarter's earnings? If that is the case, the horizon will start at three months on the first day of the quarter and gradually shrink to zero by the end of the quarter. The alternative is to use a constant three-month horizon. After the first day of the quarter, results will no longer apply to that quarter's actual earnings, but to some hypothetical earnings over a shifting three-month horizon. Both approaches are used. The advantage of a contracting horizon is that it addresses an actual concern of management will we hit our earnings target this quarter? A disadvantage is that the risk metric keeps changingif reported EaR declines over a week, does this mean that actual risk has declined, or does it simply reflect a shortened horizon? Conclusion While the two approaches to business risk managementthat based on economic value and that based on book valueare philosophically different, they can complement each other. Some firms use them side-by-side to assess different aspects of business risk. This article has focused on the unique challenges of corporate risk management. There is much else about corporate risk management that overlaps with financial risk management the need for a risk management function, the role of corporate culture, technology issues, independence, etc. See the article Financial Risk Management for a discussion of these and other topics. Corporate Risk Management Listed below are brief tips that may be helpful as an overview and guidelines for risk management activities. If there are questions on these risk management highlights or if more detailed information is needed, please contact Risk Limited directly. Please click on text links for display of more information. 10. Identify and assess risks Risk is everywhere. Success in business often comes down to recognizing and managing possible risks associated with potential opportunities and returns. The types of risks faced in most businesses are quite varied and far ranging. Risks typically include both financial and physical categories. Types of risk include sometimes apparent hazards, such as safety and health risks associated with operations, as well as financial risks from exposures to market price volatility, counter party credit defaults, and legal liabilities. Some risks are intuitively obvious; unfortunately, many are not. Risk categories include: Market, Credit, Legal, Regulatory, Political, Operational, Strategic, Reputational, Event, Country and Model Risks. So first identify possible risks throughout your business. 9. Know the numbers Systematic processes such as a RiskRegister to identify and rank risks by order of magnitude can be a key first step, but effective risk management strategies typically depend on quantification of risks, often through probabilistic modeling techniques. Said another way: one must 'measure it to manage it.' Measurement and valuation can be one of the most difficult efforts in risk management and finance, but these are crucial for cost effective risk

management and informed decision-making. Spend the time and money to get the tools and expertise to best quantify the company's key risks. A close corollary is to know what is in any 'black-box' models used for valuation & reporting. 8. Risks are interrelated Interactions and correlations of risks are a key element of which to be aware in identifying, quantifying and mitigating risks. For example, exposure to credit risks may also affect market price risks, whereas operational risks such as fraud may create legal and reputational risks. Recognition that risks interact between business activities is one of the basis for the 'enterprise-wide risk management' approach now widely practiced by leading companies. 7. Continually reassess risks Things change, and so do risks. Market conditions and volatility levels change, financial strength of counter parties change, physical environments change, geopolitical situations change, and on-and-on. And these changes can be rather sudden, or they can be creeping and hidden. Exposures to risks that result from business activities may also change. Effective risk management requires that one reevaluate risks on an ongoing basis, and processes such as a RiskAudit should be built into the corporate risk management framework to assess both current and projected risk exposures. Forecasting future exposures is necessary since hedge decisions are based on projected risk levels. 6. Commit adequate resources Effective risk management also requires considerable expertise and resources, from basic risk control, compliance and governance activities, through advanced quantitative risk analysis. The costs for these resources are usually not cheap, but as has been proven repeatedly by high-profile business failures, the cost of losses due to risk management weaknesses or lapses can be catastrophically high. Investment in risk management capabilities for most businesses has a high payoff. Due to the potentially extreme cost of mistakes, risk managers should be especially well trained. 5. Review the cost of risk mitigation Transferring risks through hedge transactions or other activities is often an effective and advisable risk management technique, but risk mitigation strategy may largely depend on the hedge costs. Risk mitigation strategies also depend on the capacity of the firm to sustain risks and possible losses. Trading activities that are truly for hedging should not be avoided due to concern that trading could be misconstrued as 'speculative'; however, various hedge instruments may not have the same cost effectiveness or appropriateness for every company and environment. 4. Reduce exposure Risks arise from exposure. A commonly accepted definition of risk is 'exposure to uncertainty' (at least for that uncertainty for which one is concerned about the outcome). Reduce the exposure and you likely reduce the risk. The selected approach and structure of

business activities can have a significant effect on the exposure & risk levels generated. Commercial agreements and transaction structures may result in transference or acceptance of risks with a counter party. Risk awareness in business processes and commercial activities can lead to opportunities to reduce current and future exposures. Billing currency for international purchases is an example of exposure effect. 3. Assess the Risk/Return Ratio Risk management does not equate to risk aversion; however, decisions driven by risk/reward assessments usually have a higher probability of successful outcomes. A consideration in such risk-based business decision-making should also be the capacity of the firm to sustain risks. As in the well developed finance field of portfolio theory (which in general terms focuses on how investors can best balance risks and rewards in constructing investment portfolios), business decisions based on risk/reward balance should optimize returns. 2. Monitor for quantum shifts in risk levels A key value of quantitative risk measures is to highlight significant changes in risk levels. Although opinions may differ on the optimal methodology for some valuation metrics, significant changes or trends in risk metrics, such as Value-at-Risk measures, can provide a key signal to management. Best practices designs of management reporting 'dashboards' provide this risk monitoring capability, also showing segment reporting and consolidation to reflect correlations such as offsets in price risks between markets. 1. Create a risk aware culture Educate the organization in practical aspects of risk management, and that especially includes the most senior business executives and the corporate board of directors. Risk management responsibilities should be clear. Whether it is intuitive actions based on experience and expertise in risk management or whether it is a result of institutionalized risk policies and procedures, effective risk management is typically a key factor in successful businesses. Training and building awareness can lead to a risk management culture that will drive business success.

Cash management
In United States banking, cash management, or treasury management, is a marketing term for certain services offered primarily to larger business customers. It may be used to describe all bank accounts (such as checking accounts) provided to businesses of a certain size, but it is more often used to describe specific services such as cash concentration, zero balance accounting, and automated clearing house facilities. Sometimes, private banking customers are given cash management services.

Cash management services generally offered

The following is a list of services generally offered by banks and utilised by larger businesses and corporations:
Account Reconcilement Services: Balancing a checkbook can be a difficult process for a very large business, since it issues so many checks it can take a lot of human monitoring to understand which checks have not cleared and therefore what the company's true balance is. To address this, banks have developed a system which allows companies to upload a list of all the checks that they issue on a daily basis, so that at the end of the month the bank statement will show not only which checks have cleared, but also which have not. More recently, banks have used this system to prevent checks from being fraudulently cashed if they are not on the list, a process known as positive pay. Advanced Web Services: Most banks have an Internet-based system which is more advanced than the one available to consumers. This enables managers to create and authorize special internal logon credentials, allowing employees to send wires and access other cash management features normally not found on the consumer web site. Armored Car Services (Cash Collection Services): Large retailers who collect a great deal of cash may have the bank pick this cash up via an armored car company, instead of asking its employees to deposit the cash. Automated Clearing House: services are usually offered by the cash management division of a bank. The Automated Clearing House is an electronic system used to transfer funds between banks. Companies use this to pay others, especially employees (this is how direct deposit works). Certain companies also use it to collect funds from customers (this is generally how automatic payment plans work). This system is criticized by some consumer advocacy groups, because under this system banks assume that the company initiating the debit is correct until proven otherwise. Balance Reporting Services: Corporate clients who actively manage their cash balances usually subscribe to secure web-based reporting of their account and transaction information at their lead

bank. These sophisticated compilations of banking activity may include balances in foreign currencies, as well as those at other banks. They include information on cash positions as well as 'float' (e.g., checks in the process of collection). Finally, they offer transaction-specific details on all forms of payment activity, including deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and credits), investments, etc. Cash Concentration Services: Large or national chain retailers often are in areas where their primary bank does not have branches. Therefore, they open bank accounts at various local banks in the area. To prevent funds in these accounts from being idle and not earning sufficient interest, many of these companies have an agreement set with their primary bank, whereby their primary bank uses the Automated Clearing House to electronically "pull" the money from these banks into a single interest-bearing bank account. Lockbox - Retail: services: Often companies (such as utilities) which receive a large number of payments via checks in the mail have the bank set up a post office box for them, open their mail, and deposit any checks found. This is referred to as a "lockbox" service. Lockbox - Wholesale: services: are for companies with small numbers of payments, sometimes with detailed requirements for processing. This might be a company like a dentist's office or small manufacturing company. Positive Pay: Positive pay is a service whereby the company electronically shares its check register of all written checks with the bank. The bank therefore will only pay checks listed in that register, with exactly the same specifications as listed in the register (amount, payee, serial number, etc.). This system dramatically reduces check fraud. Reverse Positive Pay: Reverse positive pay is similar to positive pay, but the process is reversed, with the company, not the bank, maintaining the list of checks issued. When checks are presented for payment and clear through the Federal Reserve System, the Federal Reserve prepares a file of the checks' account numbers, serial numbers, and dollar amounts and sends the file to the bank. In reverse positive pay, the bank sends that file to the company, where the company compares the information to its internal records. The company lets the bank know which checks match its internal information, and the bank pays those items. The bank then researches the checks that do not match, corrects any misreads or encoding errors, and determines if any items are fraudulent. The bank pays only "true" exceptions, that is, those that can be reconciled with the company's files. Sweep accounts: are typically offered by the cash management division of a bank. Under this system, excess funds from a company's bank accounts are automatically moved into a money

market mutual fund overnight, and then moved back the next morning. This allows them to earn interest overnight. This is the primary use of money market mutual funds. Zero Balance Accounting: can be thought of as somewhat of a hack. Companies with large numbers of stores or locations can very often be confused if all those stores are depositing into a single bank account. Traditionally, it would be impossible to know which deposits were from which stores without seeking to view images of those deposits. To help correct this problem, banks developed a system where each store is given their own bank account, but all the money deposited into the individual store accounts are automatically moved or swept into the company's main bank account. This allows the company to look at individual statements for each store. U.S. banks are almost all converting their systems so that companies can tell which store made a particular deposit, even if these deposits are all deposited into a single account. Therefore, zero balance accounting is being used less frequently. Wire Transfer: A wire transfer is an electronic transfer of funds. Wire transfers can be done by a simple bank account transfer, or by a transfer of cash at a cash office. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance with the instructions given. The message also includes settlement instructions. The actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a telephone call. Controlled Disbursement: This is another product offered by banks under Cash Management Services. The bank provides a daily report, typically early in the day, that provides the amount of disbursements that will be charged to the customer's account. This early knowledge of daily funds requirement allows the customer to invest any surplus in intraday investment opportunities, typically money market investments. This is different from delayed disbursements, where payments are issued through a remote branch of a bank and customer is able to delay the payment due to increased float time.

In the past, other services have been offered the usefulness of which has diminished with the rise of the Internet. For example, companies could have daily faxes of their most recent transactions or be sent CD-ROMs of images of their cashed checks. Cash management services can be costly but usually the cost to a company is outweighed by the benefits: cost savings, accuracy, efficiencies, etc.

INVENTORY
Inventory means goods and materials, or those goods and materials themselves, held available in stock by a business. This word is also used for a list of the contents of a household and for a list for testamentary purposes of the possessions of someone who has died. In accounting, inventory is considered an asset. In business management, inventory consists of a list of goods and materials held available in stock.

Inventory Management
Inventory refers to the stock of resources, that possess economic value, held by an organization at any point of time. These resource stocks can be manpower, machines, capital goods or materials at various stages. Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment. Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc. Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs. See inventory proportionality.

Business inventory
The reasons for keeping stock
There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this "lead time." 2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. 3. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.

All these stock reasons can apply to any owner or product stage.
Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in long setup or change over time. This stock is then used while that changeover is happening. This stock can be eliminated by tools like SMED.

These classifications apply along the whole Supply chain, not just within a facility or plant. Where these stocks contain the same or similar items, it is often the work practice to hold all these stocks mixed together before or after the sub-process to which they relate. This 'reduces' costs. Because they are mixed up together there is no visual reminder to operators of the adjacent sub-processes or line management of the stock, which is due to a particular cause and should be a particular individual's responsibility with inevitable consequences. Some plants have centralized stock holding across sub-processes, which makes the situation even more acute.

Special terms used in dealing with inventory

Stock Keeping Unit (SKU) is a unique combination of all the components that are assembled into the purchasable item. Therefore, any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory. Stockout means running out of the inventory of an SKU.[1] "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time.

Typology
1. Buffer/safety stock 2. Cycle stock (Used in batch processes, it is the available inventory, excluding buffer stock) 3. De-coupling (Buffer stock that is held by both the supplier and the user) 4. Anticipation stock (Building up extra stock for periods of increased demand - e.g. ice cream for summer)

5. Pipeline stock (Goods still in transit or in the process of distribution have left the factory but not arrived at the customer yet)

Inventory examples
While accountants often discuss inventory in terms of goods for sale, organizations manufacturers, service-providers and not-for-profits - also have inventories (fixtures, furniture, supplies, ...) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them. While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into:
Raw materials - materials and components scheduled for use in making a product. Work in process, WIP - materials and components that have begun their transformation to finished goods. Finished goods - goods ready for sale to customers. Goods for resale - returned goods that are salable.

For example:
Manufacturing

A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, ...) that will form part of a finished can. The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. This may be vats of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers. Examples of case studies are very revealing, and consistently show that the improvement of inventory management has two parts: the capability of the organisation to manage inventory, and the way in which it chooses to do so. For example, a company may wish to install a complex inventory system, but unless there is a good understanding of the role of inventory and its perameters, and an effective business process to support that, the system cannot bring the necessary benefits to the organisation in isolation. Typical Inventory Management techniques include Pareto Curve ABC Classification[2] and Economic Order Quantity Management. A more sophisticated method takes these two techniques further, combining certain aspects of each to create The K Curve Methodology[3]. A case study of k-curve[4] benefits to one company shows a successful implementation.

Unnecessary inventory adds enormously to the working capital tied up in the business, as well as the complexity of the supply chain. Reduction and elimination of these inventory 'wait' states is a key concept in Lean[5]. Too big an inventory reduction too quickly can cause a business to be anorexic. There are well-proven processes and techniques to assist in inventory planning and strategy, both at the business overview and part number level. Many of the big MRP/and ERP systems do not offer the necessary inventory planning tools within their integrated planning applications.

Principle of inventory proportionality

Purpose
Inventory proportionality is the goal of demand-driven inventory management. The primary optimal outcome is to have the same number of days' (or hours', etc.) worth of inventory on hand across all products so that the time of runout of all products would be simultaneous. In such a case, there is no "excess inventory," that is, inventory that would be left over of another product when the first product runs out. Excess inventory is sub-optimal because the money spent to obtain it could have been utilized better elsewhere, i.e. to the product that just ran out. The secondary goal of inventory proportionality is inventory minimization. By integrating accurate demand forecasting with inventory management, replenishment inventories can be scheduled to arrive just in time to replenish the product destined to run out first, while at the same time balancing out the inventory supply of all products to make their inventories more proportional, and thereby closer to achieving the primary goal. Accurate demand forecasting also allows the desired inventory proportions to be dynamic by determining expected sales out into the future; this allows for inventory to be in proportion to expected short-term sales or consumption rather than to past averages, a much more accurate and optimal outcome. Integrating demand forecasting into inventory management in this way also allows for the prediction of the "can fit" point when inventory storage is limited on a per-product basis.

Applications
The technique of inventory proportionality is most appropriate for inventories that remain unseen by the consumer. As opposed to "keep full" systems where a retail consumer would like to see full shelves of the product they are buying so as not to think they are buying something old, unwanted or stale; and differentiated from the "trigger point" systems where product is reordered when it hits a certain level; inventory proportionality is used effectively by just-in-time manufacturing processes and retail applications where the product is hidden from view. One early example of inventory proportionality used in a retail application in the United States is for motor fuel. Motor fuel (e.g. gasoline) is generally stored in underground storage tanks. The motorists do not know whether they are buying gasoline off the top or bottom of the tank, nor need they care. Additionally, these storage tanks have a maximum capacity and cannot be overfilled. Finally, the product is expensive. Inventory proportionality is used to balance the inventories of the different grades of motor fuel, each stored in dedicated tanks, in proportion to the sales of each grade. Excess inventory is not seen or valued by the consumer, so it is simply cash sunk (literally) into the ground. Inventory proportionality minimizes the amount of excess inventory carried in underground storage tanks. This

application for motor fuel was first developed and implemented by Petrolsoft Corporation in 1990 for Chevron Products Company. Most major oil companies use such systems today.[6]

Roots
The use of inventory proportionality in the United States is thought to have been inspired by Japanese just-in-time parts inventory management made famous by Toyota Motors in the 1980s.[3]

High-level inventory management

It seems that around 1880[7] there was a change in manufacturing practice from companies with relatively homogeneous lines of products to vertically integrated companies with unprecedented diversity in processes and products. Those companies (especially in metalworking) attempted to achieve success through economies of scope - the gains of jointly producing two or more products in one facility. The managers now needed information on the effect of product-mix decisions on overall profits and therefore needed accurate product-cost information. A variety of attempts to achieve this were unsuccessful due to the huge overhead of the information processing of the time. However, the burgeoning need for financial reporting after 1900 created unavoidable pressure for financial accounting of stock and the management need to cost manage products became overshadowed. In particular, it was the need for audited accounts that sealed the fate of managerial cost accounting. The dominance of financial reporting accounting over management accounting remains to this day with few exceptions, and the financial reporting definitions of 'cost' have distorted effective management 'cost' accounting since that time. This is particularly true of inventory. Hence, high-level financial inventory has these two basic formulas, which relate to the accounting period:
1. Cost of Beginning Inventory at the start of the period + inventory purchases within the period + cost of production within the period = cost of goods available 2. Cost of goods available cost of ending inventory at the end of the period = cost of goods sold

The benefit of these formulae is that the first absorbs all overheads of production and raw material costs into a value of inventory for reporting. The second formula then creates the new start point for the next period and gives a figure to be subtracted from the sales price to determine some form of sales-margin figure. Manufacturing management is more interested in inventory turnover ratio or average days to sell inventory since it tells them something about relative inventory levels.
Inventory turnover ratio (also known as inventory turns) = cost of goods sold / Average Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2)

and its inverse

Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio = 365 days a year / Inventory Turnover Ratio

This ratio estimates how many times the inventory turns over a year. This number tells how much cash/goods are tied up waiting for the process and is a critical measure of process reliability and effectiveness. So a factory with two inventory turns has six months stock on hand, which is generally not a good figure (depending upon the industry), whereas a factory that moves from six turns to twelve turns has probably improved effectiveness by 100%. This improvement will have some negative results in the financial reporting, since the 'value' now stored in the factory as inventory is reduced. While these accounting measures of inventory are very useful because of their simplicity, they are also fraught with the danger of their own assumptions. There are, in fact, so many things that can vary hidden under this appearance of simplicity that a variety of 'adjusting' assumptions may be used. These include:
Specific Identification Weighted Average Cost Moving-Average Cost FIFO and LIFO.

Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily a management tool. Inventory management should be forward looking. The methodology applied is based on historical cost of goods sold. The ratio may not be able to reflect the usability of future production demand, as well as customer demand. Business models, including Just in Time (JIT) Inventory, Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI), attempt to minimize on-hand inventory and increase inventory turns. VMI and CMI have gained considerable attention due to the success of third-party vendors who offer added expertise and knowledge that organizations may not possess.

Accounting for inventory

Each country has its own rules about accounting for inventory that fit with their financialreporting rules. For example, organizations in the U.S. define inventory to suit their needs within US Generally Accepted Accounting Practices (GAAP), the rules defined by the Financial Accounting Standards Board (FASB) (and others) and enforced by the U.S. Securities and Exchange Commission (SEC) and other federal and state agencies. Other countries often have similar arrangements but with their own GAAP and national agencies instead. It is intentional that financial accounting uses standards that allow the public to compare firms' performance, cost accounting functions internally to an organization and potentially with much greater flexibility. A discussion of inventory from standard and Theory of Constraints-based (throughput) cost accounting perspective follows some examples and a discussion of inventory from a financial accounting perspective. The internal costing/valuation of inventory can be complex. Whereas in the past most enterprises ran simple, one-process factories, such enterprises are quite probably in the minority in the 21st century. Where 'one process' factories exist, there is a market for the goods created, which establishes an independent market value for the good. Today, with multistage-process companies, there is much inventory that would once have been finished goods which is now held as 'work in process' (WIP). This needs to be valued in the accounts,

but the valuation is a management decision since there is no market for the partially finished product. This somewhat arbitrary 'valuation' of WIP combined with the allocation of overheads to it has led to some unintended and undesirable results.
Financial accounting

An organization's inventory can appear a mixed blessing, since it counts as an asset on the balance sheet, but it also ties up money that could serve for other purposes and requires additional expense for its protection. Inventory may also cause significant tax expenses, depending on particular countries' laws regarding depreciation of inventory, as in Thor Power Tool Company v. Commissioner. Inventory appears as a current asset on an organization's balance sheet because the organization can, in principle, turn it into cash by selling it. Some organizations hold larger inventories than their operations require in order to inflate their apparent asset value and their perceived profitability. In addition to the money tied up by acquiring inventory, inventory also brings associated costs for warehouse space, for utilities, and for insurance to cover staff to handle and protect it from fire and other disasters, obsolescence, shrinkage (theft and errors), and others. Such holding costs can mount up: between a third and a half of its acquisition value per year. Businesses that stock too little inventory cannot take advantage of large orders from customers if they cannot deliver. The conflicting objectives of cost control and customer service often pit an organization's financial and operating managers against its sales and marketing departments. Salespeople, in particular, often receive sales-commission payments, so unavailable goods may reduce their potential personal income. This conflict can be minimised by reducing production time to being near or less than customers' expected delivery time. This effort, known as "Lean production" will significantly reduce working capital tied up in inventory and reduce manufacturing costs (See the Toyota Production System).

Role of inventory accounting

By helping the organization to make better decisions, the accountants can help the public sector to change in a very positive way that delivers increased value for the taxpayers investment. It can also help to incentivise progress and to ensure that reforms are sustainable and effective in the long term, by ensuring that success is appropriately recognized in both the formal and informal reward systems of the organization. To say that they have a key role to play is an understatement. Finance is connected to most, if not all, of the key business processes within the organization. It should be steering the stewardship and accountability systems that ensure that the organization is conducting its business in an appropriate, ethical manner. It is critical that these foundations are firmly laid. So often they are the litmus test by which public confidence in the institution is either won or lost. Finance should also be providing the information, analysis and advice to enable the organizations service managers to operate effectively. This goes beyond the traditional preoccupation with budgets how much have we spent so far, how much do we have left to spend? It is about helping the organization to better understand its own performance. That means making the connections and understanding the relationships between given inputs

the resources brought to bear and the outputs and outcomes that they achieve. It is also about understanding and actively managing risks within the organization and its activities.

FIFO vs. LIFO accounting

When a merchant buys goods from inventory, the value of the inventory account is reduced by the cost of goods sold (COGS). This is simple where the CoG has not varied across those held in stock; but where it has, then an agreed method must be derived to evaluate it. For commodity items that one cannot track individually, accountants must choose a method that fits the nature of the sale. Two popular methods that normally exist are: FIFO and LIFO accounting (first in - first out, last in - first out). FIFO regards the first unit that arrived in inventory as the first one sold. LIFO considers the last unit arriving in inventory as the first one sold. Which method an accountant selects can have a significant effect on net income and book value and, in turn, on taxation. Using LIFO accounting for inventory, a company generally reports lower net income and lower book value, due to the effects of inflation. This generally results in lower taxation. Due to LIFO's potential to skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory accounting.

Standard cost accounting

Standard cost accounting uses ratios called efficiencies that compare the labour and materials actually used to produce a good with those that the same goods would have required under "standard" conditions. As long as similar actual and standard conditions obtain, few problems arise. Unfortunately, standard cost accounting methods developed about 100 years ago, when labor comprised the most important cost in manufactured goods. Standard methods continue to emphasize labor efficiency even though that resource now constitutes a (very) small part of cost in most cases. Standard cost accounting can hurt managers, workers, and firms in several ways. For example, a policy decision to increase inventory can harm a manufacturing manager's performance evaluation. Increasing inventory requires increased production, which means that processes must operate at higher rates. When (not if) something goes wrong, the process takes longer and uses more than the standard labor time. The manager appears responsible for the excess, even though s/he has no control over the production requirement or the problem. In adverse economic times, firms use the same efficiencies to downsize, rightsize, or otherwise reduce their labor force. Workers laid off under those circumstances have even less control over excess inventory and cost efficiencies than their managers. Many financial and cost accountants have agreed for many years on the desirability of replacing standard cost accounting. They have not, however, found a successor.

Theory of constraints cost accounting

Eliyahu M. Goldratt developed the Theory of Constraints in part to address the costaccounting problems in what he calls the "cost world." He offers a substitute, called throughput accounting, that uses throughput (money for goods sold to customers) in place of output (goods produced that may sell or may boost inventory) and considers labor as a fixed rather than as a variable cost. He defines inventory simply as everything the organization owns that it plans to sell, including buildings, machinery, and many other things in addition to the categories listed here. Throughput accounting recognizes only one class of variable

costs: the truly variable costs, like materials and components, which vary directly with the quantity produced. Finished goods inventories remain balance-sheet assets, but labor-efficiency ratios no longer evaluate managers and workers. Instead of an incentive to reduce labor cost, throughput accounting focuses attention on the relationships between throughput (revenue or income) on one hand and controllable operating expenses and changes in inventory on the other. Those relationships direct attention to the constraints or bottlenecks that prevent the system from producing more throughput, rather than to people - who have little or no control over their situations.

National accounts
Inventories also play an important role in national accounts and the analysis of the business cycle. Some short-term macroeconomic fluctuations are attributed to the inventory cycle.

Distressed inventory
Also known as distressed or expired stock, distressed inventory is inventory whose potential to be sold at a normal cost has passed or will soon pass. In certain industries it could also mean that the stock is or will soon be impossible to sell. Examples of distressed inventory include products that have reached their expiry date, or have reached a date in advance of expiry at which the planned market will no longer purchase them (e.g. 3 months left to expiry), clothing that is defective or out of fashion, and old newspapers or magazines. It also includes computer or consumer-electronic equipment that is obsolete or discontinued and whose manufacturer is unable to support it. One current example of distressed inventory is the VHS format.[8] In 2001, Cisco wrote off inventory worth US $2.25 billion due to duplicate orders [9]. This is one of the biggest inventory write-offs in business history.

Inventory credit
Inventory credit refers to the use of stock, or inventory, as collateral to raise finance. Where banks may be reluctant to accept traditional collateral, for example in developing countries where land title may be lacking, inventory credit is a potentially important way of overcoming financing constraints. This is not a new concept; archaeological evidence suggests that it was practiced in Ancient Rome. Obtaining finance against stocks of a wide range of products held in a bonded warehouse is common in much of the world. It is, for example, used with Parmesan cheese in Italy.[10] Inventory credit on the basis of stored agricultural produce is widely used in Latin American countries and in some Asian countries. [11] A precondition for such credit is that banks must be confident that the stored product will be available if they need to call on the collateral; this implies the existence of a reliable network of certified warehouses. Banks also face problems in valuing the inventory. The possibility of sudden falls in commodity prices means that they are usually reluctant to lend more than about 60% of the value of the inventory at the time of the loan.

BASIC ACCOUNTS RECEIVABLE MANAGEMENT

This article will outline some of the basic components for managing accounts receivable, ranging from policies and measurement to outsourcing options. Managing accounts receivables

Policies options

Tracking

Measurement

outsourcing

The foundation behind account receivables is your policies and procedures for sales. For example, do you have a credit policy? When and how do you evaluate a customer for credit? If you look at past payment histories, you should be able to ascertain who should get credit and who shouldn't. Additionally, you need to establish sales terms. For example, is it beneficial to offer discounts to speed-up cash collections? What is the industry standard for sales terms? There are several questions that have to be answered in building the foundation for managing accounts receivables. A system must be in place to track accounts receivables. This will include balance forwards, listing of all open invoices, and generation of monthly statements to customers. An aging of receivables will be used to collect overdue accounts. You must act quickly to collect overdue accounts. Start by making phone calls followed by letters to upper-level managers for the Customer. Try to negotiate settlement payments, such as installments or asset donations. If your collection efforts fail, you may want to use a collection agency. Also remember that the collection process is the art of knowing the customer. A psychological understanding of the customer gives you insights into what buttons to push in collecting the account. One of the biggest mistakes made in the collection process is a "sticks only" approach. For some customers, using a carrot can work wonders in collecting the overdue account. For example, in one case the company mailed a set of football tickets to a customer with a friendly note and within weeks, they received full payment of the outstanding account. MEASUREMENT Measurement is another component within account receivable management. Traditional ratios, such as turnover will measure how many times you were able to convert receivables over into cash.

Example: Monthly sales were $ 50,000, the beginning monthly balance for receivables was $ 70,000 and the ending monthly balance was $ 90,000. The turnover ratio is: .625 ($ 50,000 / (($70,000 + $ 90,000)/2)). Annual turnover is .625 x 360 / 30 or 7.5 times. If you divide 360 (bankers year) by 7.5, you get 48 days on average to collect your account receivables. You can also measure your investment in receivables. This calculation is based on the number of days it takes you to collect receivables and the amount of credit sales. Example: Annual credit sales are $ 100,000. Your invoice terms are net 30 days. On average, most accounts are 13 days past due. Your investment in accounts receivable is: (30 + 13) / 365 x $ 100,000 or $ 11,781. Example: Average monthly sales are $ 10,000. On average, accounts receivable are paid 60 days after the sales date. The product costs are 50% of sales and inventory-carrying costs are 10% of sales. Your investment in accounts receivable is: 2 months x $ 10,000 = $ 20,000 of sales x .60 = $ 18,000. Measurements may need to be modified to account for wide fluctuations within the sales cycle. The use of weights can help ensure comparable measurements. Example: Weighted Average Days to Pay = Sum of ((Date Paid - Due Date) x Amount Paid) / Total Payments Example: Best Possible Days Outstanding = (Current A/R x # of Days in Period) / Credit Sales for Period Receivable Management also involves the use of specialist. After-all, you need to spend most of your time trying to lower your losses and not trying to collect overdue accounts. A wide range of specialist can help: - Credit Bureau services to review and approve new customers. - Deduction and collection agencies - Complete management of billings and collections

Cash conversion cycle

In management accounting, the Cash Conversion Cycle (CCC) measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth. However, shortening the CCC creates its own risks: while a firm could even achieve a negative CCC by collecting from customers before paying suppliers, a policy of strict collections and lax payments is not always sustainable.

Definition
CC C = # days between disbursing cash and collecting cash in connection with undertaking a discrete unit of operations.

Inventory conversion period

Receivables conversion period

Payables conversion period

Avg. Inventory COGS / 365

Avg. Accounts Receivable + Credit Sales / 365

Avg. Accounts Payable COGS / 365

Derivation
Cashflows insufficient. The term "cash conversion cycle" refers to the timespan between a firm's disbursing and collecting cash. However, the CCC cannot be directly observed in cashflows, because these are also influenced by investment and financing activities; it must be derived from Statement of Financial Position data associated with the firm's operations. Equation describes retailer. Although the term "cash conversion cycle" technically applies to a firm in any industry, the equation is generically formulated to apply specifically to a retailer. Since a retailer's operations consist in buying and selling inventory, the equation models the time between
(1) disbursing cash to satisfy the accounts payable created by sale of a unit of inventory, and (2) collecting cash to satisfy the accounts receivable generated by that sale.

Equation describes a firm that buys & sells on account. Also, the equation is written to accommodate a firm that buys and sells on account. For a cash-only firm, the equation would only need data from sales operations (e.g. changes in inventory), because disbursing cash would be directly measurable as purchase of inventory, and collecting cash would be directly measurable as sale of inventory. However, no such 1:1 correspondence exists for a firm that buys and sells on account: Increases and decreases in inventory do not occasion cashflows but accounting vehicles (receivables and payables, respectively); increases and decreases in cash will remove these accounting vehicles (receivables and payables, respectively) from the books. Thus, the CCC must be calculated by tracing a change in cash through its effect upon receivables, inventory, payables, and finally back to cashthus, the term cash conversion cycle, and the observation that these four accounts "articulate" with one another.
Lab el Transaction Accounting (use different accounting vehicles if the transactions occur in a different order) Operations (increasing inventory by $X) Create accounting vehicle (increasing accounts payable by $X) Operations (decreasing inventory by $X) Create accounting vehicles (booking "COGS" expense of $X; accruing revenue and increasing accounts receivable of $Y)

Suppliers (agree to) deliver inventory

A Firm owes $X cash (debt) to suppliers

Customers (agree to) acquire that inventory

B Firm is owed $Y cash (credit) from customers

Firm disburses $X cash to suppliers

C Firm removes its debts to its suppliers

Cashflows (decreasing cash by $X) Remove accounting vehicle (decreasing accounts payable by $X)

Firm collects $Y cash from customers

D Firm removes its credit from its customers.

Cashflows (increasing cash by $Y) Remove accounting vehicle (decreasing accounts receivable by $Y.)

Taking these four transactions in pairs, analysts draw attention to five important intervals, referred to as conversion cycles (or conversion periods):
the Cash Conversion Cycle emerges as interval CD (i.e. disbursing cashcollecting cash). the payables conversion period (or "Days payables outstanding") emerges as interval AC (i.e. owing cashdisbursing cash) the operating cycle emerges as interval AD (i.e. owing cashcollecting cash) the inventory conversion period or "Days inventory outstanding" emerges as interval AB (i.e. owing cashbeing owed cash) the receivables conversion period (or "Days sales outstanding") emerges as interval BD (i.e.being owed cashcollecting cash

Knowledge of any three of these conversion cycles permits derivation of the fourth (leaving aside the operating cycle, which is just the sum of the inventory conversion period and the receivables conversion period.) Hence,
interval {C D} CCC (in days) = interval {A B} Inventory conversion period + interval {B D} Receivables conversion period interval {A C} Payables conversion period

In calculating each of these three constituent Conversion Cycles, we use the equation TIME =LEVEL/RATE (since each interval roughly equals the TIME needed for its LEVEL to be achieved at its corresponding RATE).
We estimate its LEVEL "during the period in question" as the average of its levels in the two balance-sheets that surround the period: (Lt1+Lt2)/2. To estimate its RATE, we note that Accounts Receivable grows only when revenue is accrued; and Inventory shrinks and Accounts Payable grows by an amount equal to the COGS expense (in the long run, since COGS actually accrues sometime after the inventory delivery, when the customers acquire it). Payables conversion period: Rate = [inventory increase + COGS], since these are the items for the period that can increase "trade accounts payables," i.e. the ones that grew its inventory.

NOTICE that we make an exception when calculating this interval: although we use a period average for the LEVEL of inventory, we also consider any increase in inventory as contributing to its RATE of change. This is because the purpose of the CCC is to measure the effects of

inventory growth on cash outlays. If inventory grew during the period, we want to know about it. Inventory conversion period: Rate = COGS, since this is the item that (eventually) shrinks inventory. Receivables conversion period: Rate = revenue, since this is the item that can grow receivables (sales).

Inventory Account receivable Cash conversion cycle Cash

Accounts payable

Restrictive trade practices

The term restrictive trade practice is used for any strategy used by producers to restrict competition within a given market. Collusion resulting in the formation of a cartel is one such practice. Other practices that fall short of the formation of a cartel but are nonetheless against the public interest and illegal include: (a) the setting of minimum prices; (b) agreements to share markets; (c) the refusal to supply retailers that stock the products of other competitors; (d) setting different prices for different buyers (discriminatory pricing); (e) exchanging information. The aim of restrictive practices is to raise prices and restrict output to the benefit of the companies practicing them.

Monopolies and Restrictive Trade Practices Commission (MRTPC) An important organ of the Department of Company Affairs is the Monopolies and Restrictive Trade Practices Commission (MRTP Commission) a quasi-judicial body. The MRTP Commission established under Section 5 of the Monopolies and Restrictive Trade Practices Act, 1969, discharge functions as per the provisions of the Act. The main function of the MRTP Commission is to enquire into and take appropriate action in respect of unfair trade practices and restrictive trade practices. In regard to monopolistic trade practices the Commission is empowered under section 10(b) to inquire into such practices (i) upon a reference made to it by the Central Government or (ii) upon its own knowledge or information and submit its findings to Central Government for further action.

Question bank
Mangement paper-ll Note: This paper contains fifty (50) multiple-choice questions, each carrying two (2) marks. Attmpt all of them. 1. The demand curve of a monopolistically competitive firm is; a. Highly though not perfectly elastic b. Perfectly-inelastic c. Kinky demand curve d. Demand curve will be a straight line 2. A decision maker has to remember the proverb, A bird in hand is worth two in the bush, while he examines: a. Opportunity cost principle b. Discounting and compounding principle c. Marginal or incremental principle d. Equi-marginal principle 3. Market with one buyer and one seller is called: a. Monopsony b. Bilateral monolpoy c. Monopoly d. Duopoly 4. Cardinal measure of utility is required in: a. Utility theory b. Indifference curve analysis c. Revealed preference d. Inferior goods 5. In case of giffen goods, price effect is: a. Negative b. Zero c. Positive d. -1 6. Which of the following theories state that employees make comparisions of their efforts and rewards with those of others in similar work situations? a. Vrooms Expectancy theory b. Adams equity theory c. Alderfers ERG theory d. Hertzbergs Two Factor Theory

7. Which of the followings is a method of indicating the feeling of acceptance or rejection among members of a group? a. Mutuality b. Simulation c. T-group d. Sociometry 8. Which of the following statements correctly describe extinction?When a previously reinforced behavior: a. Is reinforced immediately b. Is reinforced for a short period c. Is not reinforced for a long time d. Both (b) and (c) above 9. In which of the following processes a person rejects his own feelings about the other person? a. Self-analysis b. Projection c. Empathy d. Denial 10.Which of the following methods avoid a win-lose attitude? a. Integration b. Domination c. Compromise d. All of the above 11.In Transactional analysis the I am ok, you are not ok life position is also referred to as: a. Bossing b. Avoidant c. Diffident d. Bohemian 12.The main objective of 360 degree appraisal is to bring; a. Subjectivity b. Objectivity c. Uniformity of standards d. None of these 13.At which level of PCMM the concept of competency management is brought into workforce practices: a. One b. Two c. Three d. Four 14.The total dedication of continuous improvement so that customers needs are met is known as: a. Theory X b. Theory Y

c. Total Quality Management d. Change Management 15.The Employee Stock Ownership Plan(ESOP) was developed by: a. Michael Porter b. Kaplan c. P.F.Drucker d. Louis Kelso 16.When monotony in work is reduced by giving a wider variety of duties to employees this is known as: a. Job rotation b. Job redesign c. Job enlargement d. Job enrichment 17.The book HR Champions is authored by; a. Mintzberg b. J. Pfeffer c. M. Porter d. Dave Ulrich 18.The central trade union CITU is associated with: a. Congress party of India b. Communist party of India Marxist c. Communist party of India d. Shiv sena 19.One of the goals of financial management is: a. Wealth maximization b. Hostile take-over c. To raise funds from outsiders d. None of the above 20.If bond sells at discount, the price is less than par value and: a. YTM= coupon rate b. YTM< coupon rate c. YTM> coupon rate d. None of the above 21.The discount rate that equates the present value of the future net cashflows from an investment project with the projects initial cash outflow is known as: a. Average rate of return b. Internal rate of return c. Cost of capital d. Hurdle rate 22.As per pecking order theory of capital structure: a. Internal equity is preferred over external debt b. External debt is preferred over internal equity c. External equity is preferred over external debt

d. None of the above 23.A formal legal commitment to extend credit upto some maximum amount over a stated period of time is known as: a. Line of credit b. Revolving credit agreement c. Commitment charge d. Secured term loan 24.Economics realized in a merger where the performance of the combined form exceeds that of its previously separate parts is known as: a. Economics of scale b. Synergy c. Horizontal integration d. Leveraged buy-out 25.Macro marketing environment refers to: a. Internal to the company b. Employees and shareholders of a company c. External to the company d. Stake holders 26.Environment scanning involves: a. Weather forecasting b. Studying depression in a sea c. Identifying threats and opportunities d. Identifying strengths and weaknesses 27.Product mix refers to: a. The ingredients used for making a product b. Features of a product c. Marketing mix element d. A group of products 28.Which of the following is not a stage in the new product development? a. Generation of ideas b. Screening c. Market segmentation d. Commercialization 29.Industrial marketing involves: a. Business to business b. Customer to customer c. Online marketing d. Customer to business 30.Which of the following is not included in the 7 ps of the services marketing a. People b. Products c. Physical evidence d. Public relations

Economics:Explain the concept of consumers surplus Define oligopoly and explain price rigidity under oligopoly in terms of Kinked demand curve Explain production function and what are its managerial uses? Distinguish between micro and macro environments and explain the relationship between the two. What are the salient features of Monoloplistic competition What do you mean by circular flow of national income Describe the incentive and concessions available to the SSI in India What are important measures for rehabilitation of sick enterprises in India? What are the factors guiding the activities of corporate social responsibility? The short-run cost curves are derived from production function, Evaluate What are the objectives of human resource planning? What are the weaknesses of Indian trade unions? What are the methods of segmentation of market? Distinguish between advertising and publicity What do you understand by testing of hypothesis? State the application if t-tests in testing o hypothesis. Describe the properties of correlation coefficient. Distinguish between Internet and intranet. Descibe their application in business. How is the strategic decision different from other kinds of decisions? State the reasons for the sickness in small enterprises. Explain the social responsibilities shown by Indian Business Houses. What is meant by a transportation problem? Formulate the typical transportation problem as a linear programming problem.

Describe the steps of Vogels approximation method for obtaining an initial basic feasible solution to a transportation problem. Summarize the salient feature of realistic approach to risk What are the economics of scale of operation? What is Business Cycle and what are the different phases of Business Cycle? Organizational Behavior:Discuss Douglas McGregors theory of motivation Examine the opinion of peter F.Drucker on scientific management What is the essence of scientific management How can the divorce of planning and doing improve the productivity and effectiveness of work/ Why was there resistance against acceptance of scientific management by the workers. What is the engineering part of scientific management? How does it compliment the philosophy part of it? Explain. Explain the Maslows theory of motivation Max Weber Bureaucracy Theory Explain the contribution of F.W. Taylor to the scientific management. Bring out the limitations of F.W.Taylor contribution Do you think in the light of the Hawthorne experiment that there exists a relationship between working conditions and productivity/ Atttitude is more important than working condition. Discuss the above statement in the light of Hwthorne experiment. Compare and contrast the contribution of F.W.Taylor with that of Elton Mayo. How do emotional states and prejudices affect perception Compare and contrast between trait and type approaches to Personality Selection tests reveal more but that is suggested. They conceal less but that is vitalCritically evaluate the statement.

What is potential appraisal? How does it differ from Performance appraisal? Discuss. Explain Victor Vrooms Expectancy theory and point out its limitations What is a balanced score card? What is skills inventory? What is Organisational Behaviour? Discuss its significance What is job analysis? Discuss its methods What is the current relevance of McClellands contribution to the understanding of motivation/ Critically examine the contributions of McCleland to the concept of motivation Determine the job suitability of the people who have high need for power Why do some of the people avoid the pain of being rejected by a social group? The tendency to feel rejection as an acute pain may have developed in humans as a defensive mechanism for the species, she said. "Because we have such a long time as infants and need to be taken care of, it is really important that we stay close to the social group. If we don't we're not going to survive," said Eisenberger. "The hypothesis is that the social attachment system that makes sure we don't stray too far from the group piggybacked onto the pain system to help our species survive." This suggests that the need to be accepted as part of a social group is as important to humans as avoiding other types of pain, she said. Just as an infant may learn to avoid fire by first being burned, humans may learn to stick together because rejection causes distress in the pain center of the brain, said Eisenberger. "If it hurts to be separated from other people, then it will prevent us from straying too far from the social group," she said.

Social Groups A social group consists of two or more people who interact with one another and who recognize themselves as a distinct social unit. The definition is simple enough, but it has

significant implications. Frequent interaction leads people to share values and beliefs. This similarity and the interaction cause them to identify with one another. Identification and attachment, in turn, stimulate more frequent and intense interaction. Each group maintains solidarity with all to other groups and other types of social systems. Groups are among the most stable and enduring of social units. They are important both to their members and to the society at large. Through encouraging regular and predictable behavior, groups form the foundation upon which society rests. Thus, a family, a village, a political party a trade union is all social groups. These, it should be noted are different from social classes, status groups or crowds, which not only lack structure but whose members are less aware or even unaware of the existence of the group. These have been called quasigroups or groupings. Nevertheless, the distinction between social groups and quasi-groups is fluid and variable since quasi-groups very often give rise to social groups, as for example, social classes give rise to political parties. Primary Groups If all groups are important to their members and to society, some groups are more important than others. Early in the twentieth century, Charles H. Cooley gave the name, primary groups, to those groups that he said are characterized by intimate face-to-face association and those are fundamental in the development and continued adjustment of their members. He identified three basic primary groups, the family, the child's play group, and the neighborhoods or community among adults. These groups, he said, are almost universal in all societies; they give to people their earliest and most complete experiences of social unity; they are instrumental in the development of the social life; and they promote the integration of their members in the larger society. Since Cooley wrote, over 65 years ago, life in the United States has become much more urban, complex, and impersonal, and the family play group and neighborhood have become less dominant features of the social order. Secondary groups, characterized by anonymous, impersonal, and instrumental relationships, have become much more numerous. People move frequently, often from one section of the country to another and they change from established relationships and promoting widespread loneliness. Young people, particularly, turn to drugs, seek communal living groups and adopt deviant lifestyles in attempts to find meaningful primary-group relationships. The social context has changed so much so that primary group relationship today is not as simple as they were in Cooley's time. Secondary Groups An understanding of the modern industrial society requires an understanding of the secondary groups. The social groups other than those of primary groups may be termed as secondary groups. They are a residual category. They are often called special interest groups.Maclver and Page refers to them as great associations. They are of the opinion that secondary groups have become almost inevitable today. Their appearance is mainly due to

the growing cultural complexity. Primary groups are found predominantly in societies where life is relatively simple. With the expansion in population and territory of a society however interests become diversified and other types of relationships which can be called secondary or impersonal become necessary. Interests become differentiated. The services of experts are required. The new range of the interests demands a complex organization. Especially selected persons act on behalf of all and hence arises a hierarchy of officials called bureaucracy. These features characterize the rise of the modern state, the great corporation, the factory, the labor union, a university or a nationwide political party and so on. These are secondary groups.Ogburn and Nimkoff defines secondary groups as groups which provide experience lacking in intimacy. Frank D. Watson writes that the secondary group is larger and more formal ,is specialized and direct in its contacts and relies more for unity and continuance upon the stability of its social organization than does the primary group. Characteristics of secondary group: Dominance of secondary relations: Secondary groups are characterized by indirect, impersonal, contractual and non-inclusive relations. Relations are indirect because secondary groups are bigger in size and members may not stay together. Relations are contractual in the sense they are oriented towards certain interests Largeness of the size: Secondary groups are relatively larger in size. City, nation, political parties, trade unions and corporations, international associations are bigger in size. They may have thousands and lakhs of members. There may not be any limit to the membership in the case of some secondary groups. Membership: Membership in the case of secondary groups is mainly voluntary. Individuals are at liberty to join or to go away from the groups. However there are some secondary groups like the state whose membership is almost involuntary. No physical basis: Secondary groups are not characterized by physical proximity. Many secondary groups are not limited to any definite area. There are some secondary groups like the Rotary Club and Lions Club which are international in character. The members of such groups are scattered over a vast area. Specific ends or interest: Secondary groups are formed for the realization of some specific interests or ends. They are called special interest groups. Members are interested in the groups because they have specific ends to aim at. Indirect communication: Contacts and communications in the case of secondary groups are mostly indirect. Mass media of communication such as radio, telephone, television, newspaper, movies, magazines and post and telegraph are resorted to by the members to have communication. Communication may not be quick and effective even. Impersonal nature of social relationships in secondary groups is both the cause and the effect of indirect communication.

Nature of group control: Informal means of social control are less effective in regulating the relations of members. Moral control is only secondary. Formal means of social control such as law, legislation, police, court etc are made of to control the behavior of members. The behavior of the people is largely influenced and controlled by public opinion, propaganda, rule of law and political ideologies. Group structure: The secondary group has a formal structure. A formal authority is set up with designated powers and a clear-cut division of labor in which the function of each is specified in relation to the function of all. Secondary groups are mostly organized groups. Different statuses and roles that the members assume are specified. Distinctions based on caste, colour, religion, class, language etc are less rigid and there is greater tolerance towards other people or groups. Limited influence on personality: Secondary groups are specialized in character. People involvement in them is also of limited significance.Members's attachment to them is also very much limited. Further people spend most of their time in primary groups than in secondary groups. Hence secondary groups have very limited influence on the personality of the members. Reference Groups According to Merton reference groups are those groups which are the referring points of the individuals, towards which he is oriented and which influences his opinion, tendency and behaviour.The individual is surrounded by countless reference groups. Both the memberships and inner groups and non memberships and outer groups may be reference groups.
What factors are considered while preparing PERT chart? What is the status of implementation of WTO guidelines in India? Discuss the measures taken by government for the promotion of small and tiny enterprises in the wake of globalization? What is corporate governance? HRM:Explain some typical on-the job training techniques Discuss future of trade unions in India Who are called rate busters and Christers? Rate buster: An employee who is highly productive and exceeds the formally agreed rate of output for the particular task. Whilst this is advantageous for management, rate-busters are usually disliked by their colleagues because their action provides managers with the excuse to raise the rate of output for all the other employees. Typically, there is informal social regulation of work in most workgroups where rate-busting is deemed antisocial behaviour and potential

rate-busters are brought into line by their work colleagues through a mixture of persuasion and coercion. Define Selection. What is potential assessment?

Finance:Discuss the utility of common size analysis and index analysis For analyzing the risk involved in capital budgeting decision, simulation is superior to sensitivity analysis. Define discounted and non-discounted approaches for appraising capital budgeting decision. State bond valuation theorems. State the meaning and rationale of fundamental analysis with reference to valuation of securities What is Adjusted rate of Discount method for incorporating risk in capital budgeting? What is consideration of time important in financial decision making? How can time be adjusted? Explain briefly cost of capital Combined leverage is the product of degree of operating leverage and degree of financial leverage.Comment According to Modigilliani-Miller approach, the value of the firm is affected by the debt-equity mix. Discuss

The financial goal of a firm should be to maximize profit and wealth. Do you agree with the statement? Comment Explain briefly: Equity shareholders provide risk capital Weighted average cost of capital of the firm How is merger evaluated as a capital budgeting proposal? State the method of risk analysis with reference to capital budgeting decision State the reason for merger Trading on equity is a double-edged weapon elucidate. Financial statements reflect a combination of recorded facts, accounting conventions and personal judgement explain Discuss arbitrage pricing theory for valuation of securities. How is it different from capital asset pricing model? What is cash flow statement? What purpose does it serve? What is hedging? Discuss its utility. What is working capital? How would you assess the working capital requirement of a firm? Explain Arbitrage Pricing Theory with reference to capital market Discuss Modigliani-Miller approach for capital structure Discuss Walter-model and Gordon-model or dividend policy and valuation. Discuss Black-scholes option valuation model Discuss tools of financial analysis. Explain its role in interpretation and signaling of corporate health. Explain the concept and measurement of risk and return of single asset and a portfolio. Sensitivity analysis as a tool of risk-analysis is superior to simulation technique of risk-analysis for capital budgeting decision. Comment. What is the relationship between an investors required rate of return and the value of a security? Explain with example

Discuss the purpose of the statements of changes in financial position when prepared on working capital basis and cash basis How is cost of debt similar to cost of preference capital/ Descibe the uses and limitations of cost of capital to a financial manager. What are the basic financial derivatives? Describe the function of economic nature as performed by participants in derivative market. What are the different conflicting views on capital structure? Describe the Modiglianni and Miller theory on relationship between capital structure and value of firm. Describe the important elements of forward contracts, futures aand options. How can they be used as risk management tools? Describe the strategies to be adopted to expedite the recovery of receivables. The final implication of both Walter-model and Gordon-model are same for dividend distribution Discuss and comment. Expalin the factors determining the value of an option Exposure of corporate to risk has increased over a period of time. Explain in brief the main guidelines for risk-management. Proper financial analysis can provide early warning signals about the health of the organization. Elaborate. What is the relationship between risk and return as per CAPM? How is risk-return relationship explained by Capital Asset Pricing Model(CAPM)? How does Arbitrage pricing Theory (Apt) overcome the shortcomings of CAPM? What are the two important characteristics of current assets? State their implications for Working Capital Management Explain transaction exposure, translation exposure and operating exposure with reference to International Finance. Financing decision is irrelevant to wealth maximization Explain in the context of M.M.hypothesis. Reducing rate of interest on loans and debts has led to debt restructuring Explain this in the context of rising rate of inflation and cost of capital of the firm.

How are the values of perpetual bonds and preference shares determined? Bring out the similarity of this process with that used to value a zero growth share Bring out the difference between a common-size balance sheet and comparative balance sheet. Discuss the process for calculating the cost of retained earnings. Also bring out the theoretical and practical difficulties associated with this calculation. Explain the relationship between capital structure and value of the firm. Explain the net operating income approach Briefly describe the major types of Financial Management Decisions that a firm takes. Explain the computation of operating cycle for a manufacturing unit. What is meant by technical analysis with reference to valuation of securities? What is trading on equity?

Trading on equity is sometimes referred to as financial leverage or the leverage factor. Trading on equity occurs when a corporation uses bonds, other debt, and preferred stock to increase its earnings on common stock. For example, a corporation might use long term debt to purchase assets that are expected to earn more than the interest on the debt. The earnings in excess of the interest expense on the new debt will increase the earnings of the corporations common stockholders. The increase in earnings indicates that the corporation was successful in trading on equity. If the newly purchased assets earn less than the interest expense on the new debt, the earnings of the common stockholders will decrease.
trading on the equity Borrowing funds to increase capital investment with the hope that the business will be able to generate returns in excess of the interest charges. *************************************** Do dividend have a bearing on share valuation? Discuss the models which assume that investment and dividend decisions are related with each other. Dividend announcement has signaling effect on the price of the equity shares and hence, on the wealth of the shareholder. Discuss the dividend policy of Indian companies in this context.

periods. Both the stocks are currently selling for Rs. 50 per share. The rupee return (dividend plus price) of these stocks for the next year would be as follows:

Economic condition High growth Probability Return of P Ltd. stock Return of Q Ltd. stock 0.28 55 75 Low growth 0.32 50 65 Stagnati on 0.22 60 50 Recessi on 0.18 70 40

Calculate the expected return and standard deviation of: Rs.1000 in the equity stock of P Ltd; Rs.1000 in the equity stock of Q Ltd; Rs.500 in the equity stock of P Ltd and Rs.500 in the equity stock of Q Ltd; Rs.700 in the equity stock of P Ltd and Rs.300 in the equity stock of Q Ltd Which of the above four options would you chose? Why? In what different ways are the investment, financing and dividend decisions interrelated? Give arguments in support of the position that dividends are relevant to stock valuation and that dividend policy is an active decision variable. Dividend policy is based on the goal of shareholders wealth maximization. Critically examine the statement. Explain briefly the factors which are influencing dividend policy of a company Financial Management is concerned with solution of three major decisions a firm must make: the investment decision, the financing decision and the dividend decisions. Explain this statement highlighting the interrelationship amongst these decisions. **************************************** Briefly explain why one prefer NPV method over the IRR method as project evaluation technique

Define Capital Budgeting and discuss its features Under what conditions do the NPV and IRR methods conflict? Which of these two methods should be used to take capital budgeting decision under such conflicting situation/ Comapre the NPVmethod with the IRR method. What are the steps involved in the calculation of IRR in the case of uneven cash inflows? Explain the criterion for judging the acceptability of investments when benefit cost ration is used. What is the B/C ration of an investment when its NPV is zero? ****************************************** What is the basic purpose of holding inventory? Describe the risk-return trade offs associated with inventory management. In what different ways is accounts receivable management different from cash management and inventory management? How will you evaluate the risk of extending credit to an applicant? Discuss What are the costs associated with inventory management? Illustrate the use of Economic Order Quantity Briefly explain the concept of factor productivity, factor intensity and returns to scale under production analysis. Discuss determinants of working capital requirement

Marketing:State the different techniques used in sales promotion Explain the role of segmentation in marketing Discuss the methods adopted for gathering of primary data in marketing research. What is linear programming problem and what are its components? Discuss the scope and role of linear programming in solving management problems. Discuss the different types of variations in the manufacturing purpose. How does SQC help to identify different types of variations? What is System Life Cycle? What are the important steps involved in the system analysis? Illustrate your answer with reference to a real life situation. Is there any value creation in retailing on net? If yes, Discuss. When is family branding preferred? Operations:Point out the benefits of Queuing theory Trace out the subsequent developments to the Henry Gnatts Chart How Gantt Chart can be used in work scheduling Describe the North West Corner Rule for solving a transportation problem. The business planning differs from project planning. Explain Briefly describe the principles propounded by Frank Gilberth for improving the work efficiency. Bring out the contributions of Lillian Gilberth Identify management thinker of your interest and compare his contributions with the any of the above mentioned thinkers Describe Porters approach to Industry analysis. Critically analyse the issue covered in the last three Ministerial conference of world trade organization.

Statistics:The weekly wages of 2000 workers in the factory is normally distributed with a mean of Rs. 200 and a standard deviation of Rs. 20. Estimate the lowest weekly wages of the 200 highest paid workers and the highest weekly wages of 200 lowest paid workers (given hi(1.28) =0.90) Differentiate between correlation and regression analysis and give their properties Explain the method of testing the significance of correlation coefficient What factors determine market structure? Explain a few difficulties in the estimation of national income What do you understand by trait theory of leadership? Selection is a process of rejection How? What is the role of competence mapping in performance management? Define modern concept of marketing Explain product mix Explain the graphical method of solving an LPP involving two variables Explain the terms Lead time, re-order point, stock-out cast and set-up cast in inventory management What is the significance of regression analysis? Why we have two regression equations. Derive the correlation coefficient from the two regression coefficients. Write a short note on management information system Describe the strategic management process What is meant by accounting ratios? Distinguish between liquidity and leverage ratios. Discuss the concept of operating profit. How is it different from net profit/

What is dividend growth model approach to the cost of equity ? Discuss its rationale. Discuss the basic financial derivatives What is the funds flow statement based on working capital concept? What purpose does it serve? Discuss the methods for ranking investment proposals. What are the methods commonly used for incorporating risk in capital budgeting decisions? What is Balanced Score Card? Write major function of a Trade Union. State derivation of cost of debt adapting both book-value and market value approach Define functions of financial management Distinguish between marketing information system and marketing research List out different distribution channels Describe briefly the basic steps to be followed in developing PERT/CPM programme. Hoe does PERT differ from CPM? What is rank correlation? How is it measured? Why rank correlation is used? Define a simple random sample. Describe briefly some practical methods of drawing a random sample from a finite population. Explain generic strategies. How these strategies can be used to gain competitive advantage/ Discuss the basic features of small enterprises Identify the ethical issues involved in gender related problems in organisatons. Distinguish between complete enumeration and sample survey. What are the advantages of sampling over complete enumeration. Describe in brief different sampling methods. Implementing empowerment calls for organization wide revolution and if pursued religiously can deliver unparallel results. Elaborate this statement and reason out your answer. What are the pre-requisites for implementing empowerment programme in an organization.

Discuss the significance of cultural Fit,leadership and total quality in the process of empowerment at organizational level. Critically evaluate how is management by stressapproach being equated with empowerment. What are the critical factors responsible for failure of empowerment. Define Production Function. What are its managerial applications? List out Hygiene factors and motivators of the Hertzbergs Two Factor Theory How do you segment a market or Health Beverage? Explain different positioning strategies adopted by different shampoo brands in the market. What factors are considered in Plant location Define a student t-statistic and state its uses. Describe in brief the steps involved in designing the data base for an information system of the Mangement Department of your University/Institute. What is the structural analysis of Industry? How Porters five force model can be used in industry analysis? Identify the steps involved in the business plan preparation What environmental and ecological issues can crop up as ethical challenge to business? What is meant by transportation problem? Formulate the typical transportation problem as a linear programming problem. Discuss the steps of Vogels Approxiamtion Method for obtaining an initial basic feasible solution to a transportation problem. What is the current relevance of managerial roles approach/ Are classical managerial functions inclusive in nature/ What are the roles of managers in addition to their classical functions? On what ground the contribution of Mintzberg has been criticized? Is sources allocation a planning exercise? If yes, how? What is a kinked demand curve and what is the point of kink? What is the basis on which advertising budget is determined?

Explain Abraham Maslows theory of hierarchy of needs Distinguish between Job enlargement and job enrichment What is downsizing and rightsizing? How does packaging work as means of marketing communication/ How is customer relationship management useful in aggregated marketing efforts? Discuss the importance of production management What is MRP? Explain its significance. Define chi-square. Cite some statistical problems where you can apply chi square for testing hypothesis. Distinguish between corporate strategy and Business strategy Examine the causes for the sickness in small enterprises. What are the Corporate Social responsibilities practiced by Indian companies/ What is organizational behavior? Enumerate its elements What are the challenges before the Human Resource Mangement in India? Name five social security legislations of our country Discuss any two important elements of promotional mix What do you mean by marketing and how does it differ for Selling? Compare and contrast: Product layout vs Process layout. Discuss briefly the basic steps to be followed in developing PERT programme for a project. Two random samples gave the following results: Samp le 1 2 Siz e 10 12 Sample mean 15 14 Sum of squares of deviations from the means 90 108

Test whether the sample come from the same normal population at 5% level of significance. {given:} What is a Data Flow Diagram (DFD) and a Data Dictionary? Draw a DFD for payroll processing of an organization Explain the BCG matrix. Bring out its usefulness in corporate level strategy formulation. Elucidate the characteristics of an Entrepreneur What is Ecological Consciousness? Give illustrations What are the main features of the scientific management? What is the importance of time and motion study in scientific management What are the main benefit of specialization What are the main feature of the Industrial age How will the business world change in the information age? State the law of variable proportion Discuss the relevance of Need Hierarchy Theory of Motivation in developing economics How 360 degree appraisal is an improved technique of performance appraisal? In what ways have the functions of Human Resource Manager changed in the post globalistion scenario What is customer orientation in marketing Define branding Define and explain the following terms Optimum solution, feasible solution, unrestricted variables Derive the EOQ in the inventory control method Give the classical and frequency definition of probability. What are the objections raised in these definitions? Write down the Normal Distribution unction and the characteristics of the Normal Probability Curve

Why has strategic management become so important to todays business organizations What are essentials of a successful entrepreneur? What is the scope of corporate governance? Distinguish between marketing information system and marketing research What are the objectives of Production management? Discuss the 5 ps pf production management Discuss the steps involved in the selection of best strategy Examine the concept of corporate governanace. Give the example of corporate governance Explain the contribution of Elton Mayo in the area of Management How can productivity be increased according to Mayos experiments/ Where and under what conditions did Elton Mayo conduct his experiments/ What is the experiment regarding work incentive pay paln? Strategy:Discuss the importance of a clear business strategy Define the PEST analysis and describe how to carry one out Proper Working capital management is the backbone for success of the organization. Discuss various aspects of capital management from angle of profitability and liquidity. Entrepreneurship:Discuss the role played by government in the promotion of small business Examine the process of business opportunity identification Economics:What is meant by Elasticity of Demand? Gross National Product (GNP) measures national welfare.Comment Explain the significance of ordering and carrying cost of inventories.

Distinguish between the perfectly competitive market and monopolistic competition. Prove that perfectly competitive market is more efficient than the monopolistic competition.

Ethics and corporate governance:Explain ethical issues involved in corporate governance Corporate governance: In the context of corporate governance, discuss the role of Board of Directors under Agency Theory and Stewardship theory perspective. Discuss the role of independent directors in the context of CEO duality.

Just in time, lean manufacturing

Job enrichment
Job enrichment is an attempt to motivate employees by giving them the opportunity to use the range of their abilities. It is an idea that was developed by the American psychologist Frederick Hertzberg in the 1950s. It can be contrasted to job enlargement which simply increases the number of tasks without changing the challenge. As such job enrichment has been described as 'vertical loading' of a job, while job enlargement is 'horizontal loading'. An enriched job should ideally contain:
A range of tasks and challenges of varying difficulties (Physical or Mental) A complete unit of work - a meaningful task Feedback, encouragement and communication

Contents
[hide] 1 Techniques 2 Literature 3 References 4 See also

[edit] Techniques
Job enrichment, as a managerial activity includes a three steps technique:[citation needed] 1. Turn employees' effort into performance:
Ensuring that objectives are well-defined and understood by everyone. The overall corporate mission statement should be communicated to all. Individual's goals should also be clear. Each employee should know exactly how he/she fits into the overall

process and be aware of how important their contributions are to the organization and its customers. Providing adequate resources for each employee to perform well. This includes support functions like information technology, communication technology, and personnel training and development. Creating a supportive corporate culture. This includes peer support networks, supportive management, and removing elements that foster mistrust and politicking. Free flow of information. Eliminate secrecy. Provide enough freedom to facilitate job excellence. Encourage and reward employee initiative. Flextime or compressed hours could be offered. Provide adequate recognition, appreciation, and other motivators. Provide skill improvement opportunities. This could include paid education at universities or on the job training. Provide job variety. This can be done by job sharing or job rotation programmes. It may be necessary to re-engineer the job process. This could involve redesigning the physical facility, redesign processes, change technologies, simplification of procedures, elimination of repetitiveness, redesigning authority structures. Clear definition of the reward is a must Explanation of the link between performance and reward is important Make sure the employee gets the right reward if performs well If reward is not given, explanation is needed Ask them Use surveys( checklist, listing, questions)

2. Link employees performance directly to reward:[citation needed]

3. Make sure the employee wants the reward. How to find out?[citation needed]

What are Management Information Systems?

Management information systems (MIS) are a combination of hardware and software used to process information automatically. Commonly, MIS are used within organizations to allow many individuals to access and modify information. In most situations, the management information system mainly operates behind the scenes, and the user community is rarely involved or even aware of the processes that are handled by the system. A computer system used to process orders for a business could be considered a management information system because it is assisting users in automating processes related to orders. Other examples of modern management information systems are websites that process transactions for an organization or even those that serve support requests to users. A simple example of a management information system might be the support website for a product, because it automatically returns information to the end user after some initial input is provided. Online bill pay at a bank also qualifies as a management information system when a bill is scheduled to be paid, the user has provided information for the system to act against. The management information system then processes the payment when the due date approaches. The automated action taken by the online system is to pay the bill as requested. Since the bills within an online bill pay system can be scheduled to be automatically paid month after month, the user is not required to provide further information. Many times, the bill pay system will also produce an email for the user to let him know that the action has occurred and what the outcome of the action was. Management information systems typically have their own staff whose function it is to maintain existing systems and implement new technologies within a company. These positions are often highly specialized, allowing a team of people to focus on different areas within the computer system. In recent years, colleges and universities have begun offering entire programs devoted to management information systems. In these programs, students learn how to manage large interconnected computer systems and troubleshoot the automation of these management information systems. Many people use management information systems every day without thinking about the actual system they are using. The individual will see a website and enter information with the expectation that a specific action will happen; these websites, just like the accounting systems used by large corporations, act as management information systems to automate the process.

Definition: Management Information Systems (MIS) is the term given to the discipline focused on the integration of computer systems with the aims and objectives on an organisation. The development and management of information technology tools assists executives and the general workforce in performing any tasks related to the processing of information. MIS and business systems are especially useful in the collation of business data and the production of reports to be used as tools for decision making. Applications of MIS

With computers being as ubiquitous as they are today, there's hardly any large business that does not rely extensively on their IT systems. However, there are several specific fields in which MIS has become invaluable. * Strategy Support While computers cannot create business strategies by themselves they can assist management in understanding the effects of their strategies, and help enable effective decision-making. MIS systems can be used to transform data into information useful for decision making. Computers can provide financial statements and performance reports to assist in the planning, monitoring and implementation of strategy. MIS systems provide a valuable function in that they can collate into coherent reports unmanageable volumes of data that would otherwise be broadly useless to decision makers. By studying these reports decision-makers can identify patterns and trends that would have remained unseen if the raw data were consulted manually. MIS systems can also use these raw data to run simulations hypothetical scenarios that answer a range of what if questions regarding alterations in strategy. For instance, MIS systems can provide predictions about the effect on sales that an alteration in price would have on a product. These Decision Support Systems (DSS) enable more informed decision making within an enterprise than would be possible without MIS systems. * Data Processing Not only do MIS systems allow for the collation of vast amounts of business data, but they also provide a valuable time saving benefit to the workforce. Where in the past business information had to be manually processed for filing and analysis it can now be entered quickly and easily onto a computer by a data processor, allowing for faster decision making and quicker reflexes for the enterprise as

Q1. A 300 meter long train passes a pole in 12 seconds. What is its speed in kilometer per hour? Q2. Q3. Q4. In an examination 40% students fail in maths, 30% in English and 15% in both. Find the pass percentage. If the hands of a clock are in perpendicular position what will be the time when they are in the 8-9 position? In the figure OR and PR are radii of circles. The length of OP is 4. If OR=2, what is PR?(PR is tangent to circle with centre O) R O Q5. P

ABCD is a square, EPGH is a rectangle, AB =3 EF=4, FG=6 what is the area of the region outside of ABCD and inside EFGH?

F B C

A E

D H

Q6.

A train completes a journey with a few stoppages in between at an average speed of 40 km per hour. If the train had not stopped anywhere, it would have completed the journey at an average speed of 60 km per hour on average how many minutes per hour does the train stop during the journey?

Q7.

In the figure, CD is parallel to EF, AD=DF, CD=4 and DF=3, what is EF? E C