[ UGC-NET MANAGEMENT]

Contents
Instructions.................................................................................................................4 Organizational behavior...........................................................................................18 Management Thoughts.............................................................................................49 Human resource management.................................................................................51 Business statistics....................................................................................................55 Marketing environment an environment scanning.................................................!" #or$orate %trateg&...................................................................................................!' (alues an ethics in management...........................................................................94 #or$orate governance............................................................................................1"" )un amental an *thics Theories o+ #or$orate ,overnance..........................1"" -ro uction management........................................................................................14" )inancial management...........................................................................................15' .i++erent t&$es o+ transactions in the )oreign */change Market....................15' 0isk management...........................................................................................181 #ash management.................................................................................................188 #ash management services generall& o++ere ................................................188 Inventor&................................................................................................................191 Inventor& Management..................................................................................191 Business inventor&.........................................................................................191 The reasons +or kee$ing stock.....................................................................191 %$ecial terms use in ealing 2ith inventor&..............................................19" T&$olog&......................................................................................................19" Inventor& e/am$les.....................................................................................19" -rinci$le o+ inventor& $ro$ortionalit&..............................................................193 -ur$ose.......................................................................................................193 4$$lications.................................................................................................194 0oots...........................................................................................................194

High5level inventor& management.................................................................194 4ccounting +or inventor&................................................................................19! 0ole o+ inventor& accounting.......................................................................19' )I)O vs. 6I)O accounting.............................................................................19' %tan ar cost accounting............................................................................198 Theor& o+ constraints cost accounting.........................................................198 7ational accounts...........................................................................................198 .istresse inventor&.......................................................................................199 Inventor& cre it..............................................................................................199 #ash conversion c&cle............................................................................................"11 .e+inition........................................................................................................"11 8e it9 .erivation.........................................................................................."11 :uestion bank........................................................................................................"15 ;ob enrichment......................................................................................................."31 #ontents........................................................................................................."31 8e it9 Techni<ues............................................................................................"31 =hat are Management In+ormation %&stems>................................................"3" 4 vantages ? .isa vantages O+ In+ormation Management %&stems....................."38 4 vantages....................................................................................................."38 Better -lanning an #ontrol............................................................................"39 4i .ecision Making......................................................................................."39 .isa vantages................................................................................................"39 #onstant Monitoring Issues............................................................................"39

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
)irst

Paper
I

Marks
111

Duration
1@ Hours A19.31 4.M. to 11.45 4.M.B 1@ Hours A11.45 4.M. to 1".11 7OO7B "C Hours A11.31 -.M. to 14.11 -.M.B

)irst

II

111

%econ

III

"11

Paper-I shall be of eneral nature, intended to assess the teachin !research aptitude of the candidate. "t will primaril# be desi ned to test reasonin abilit#, comprehension, di$er ent thin%in and eneral awareness of the candidate. &'( has decided to pro$ide choice to the candidates from the December 200) &'(*+,T onwards. -i.t# (60) multiple choice /uestions of two mar%s each will be i$en, out of which the candidate would be re/uired to answer an# fift# (00). "n the e$ent of the candidate attemptin more than fift# /uestions, the first fift# /uestions attempted b# the candidate would be e$aluated. Paper-II shall consist of /uestions based on the sub1ect selected b# the candidate. ,ach of these papers will consist of a Test 2oo%let containin 00 compulsor# ob1ecti$e t#pe /uestions of two mar%s each. The candidate will ha$e to mar% the responses for /uestions of 3aper*" and 3aper*"" on the 4ptical 5ar% 6eader (456) sheet pro$ided alon with the Test 2oo%let. The detailed instructions for fillin up the 456 -heet will be sent to the candidate alon with the Admit (ard. Paper-III will consist of onl# descripti$e /uestions from the sub1ect selected b# the candidate. The candidate will be re/uired to attempt /uestions in the space pro$ided in the Test 2oo%let.

The structure of 3aper*""" has been re$ised from 7une, 2010 &'(*+,T and is a$ailable on the &'( website www.u c.ac.in.

3aper*""" will be e$aluated onl# for those candidates who are able to secure the minimum /ualif#in mar%s in 3aper*" and 3aper*"", as per the table i$en in the followin :
MINIMUM QUA IFYING MAR!S CATEGORY "A"ER - I 41 35 35 "A"ER - II 41 35 35 "A"ER - I # "A"ER $ II 111 A51 DB 91 A45 DB 81 A41 DB

,*7*046 OB#E-HE(H %#E%T

The minimum <uali+&ing criteria +or a2ar o+ ;0) is as +ollo2s F MINIMUM QUA IFYING MAR!S CATEGORY "A"ER - I 41 35 35 "A"ER - II 41 35 35 "A"ER - I # "A"ER - II 111 A51 DB 91 A45 DB 81 A41 DB "A"ER $ III 111 A51 DB 91 A45 DB 81 A41 DB

,*7*046 OB#E-HE(H %#E%T

8owe$er, the final /ualif#in criteria for 7unior 6esearch 9ellowship (769) and ,li ibilit# for :ectureship shall be decided b# &'( before declaration of result. (ii) For Visually Handicapped (VH) candidates thirt# minutes; e.tra time shall be pro$ided separatel# for paper*" and 3aper*"". 9or paper*""", fort# fi$e minutes; e.tra time shall be pro$ided. The# will also be pro$ided the ser$ices of a scribe who would be a raduate in a sub1ect other than that of the candidate. Those Physically Handicapped (PH) candidates who are not in a position to write in their own hand*writin can also a$ail these ser$ices b# ma%in

prior re/uest (at least one wee% before the date of &'(*+,T) in writin to the (o*ordinator of the test centre. ,.tra time and facilit# of scribe would not be pro$ided to other 3h#sicall# 8andicapped candidates. (iii) Syllabus of Test -#llabi for all +,T sub1ects can be downloaded from the &'( <ebsite www.u c.ac.in and are also a$ailable in the libraries of all "ndian uni$ersities. &'( will not send the s#llabus to indi$idual candidates. (i!) In Paper III" candidate has the option to ans#er either in Hindi or in $n%lish in all sub&ects e'cept the lan%ua%es #here the candidate is re(uired to #rite in the concerned lan%ua%e only) "n case of (omputer -cience = Applications, ,lectronic -cience and ,n$ironmental -ciences, the /uestion papers ha$e to be answered in ,n lish onl#.
AvB In case o+ an& iscre$anc& +oun in the *nglish an Hin i versionsG the <uestions in *nglish version shall be taken as +inal.

:atest -tructure of paper*""" To be implemented from 7une 2010 &'(*+,T -ection*1: ,ssa# writin *two /uestions with internal choice on eneral themes and contemporar#, theoretical or of disciplinar# rele$ance ma# be i$en. The candidate is e.pected to write up to 000 words for each /uestion of 20 mar%s (2> ? 20 5 @A0 mar%s). "n case the /uestions are based on electi$es, the choices should be of eneral nature, common to all candidates. "n case of science sub1ects li%e (omputer -cience etc. two /uestions carr#in 20 mar%s each ma# be i$en in place of essa# t#pe /uestions. The /uestions in this section should be numbered as 1 and 2. Three e.tended answer based /uestions to test the anal#tical abilit# of the candidates are to be as%ed on the ma1or specialiBation!electi$es. >uestions will be as%ed on all ma1or specialiBation!electi$es and the candidates ma# be as%ed to choose one specialiBation! electi$e and answer the three /uestions. There is to be no internal choice. ,ach /uestion will be answered in up to C00 words and shall carr# 10 mar%s each(C> ? 10 5@A0 5ar%s). <here there is no specialiBation!electi$e, C /uestions ma# be set across the s#llabus. The /uestions in this section should be numbered C to 0. +ine /uestions ma# be as%ed across the s#llabus. The /uestions will be definitional or see%in particular information and are to be answered in up to 00 words each. 9or -cience sub1ects as mentioned in -ection*1, short numerical!computational problems ma# be considered. ,ach /uestion will carr# 10 mar%s ()> ? 10 5 @)0 5ar%s). There should be no internal choice. The /uestions in this section should be numbered 6 to 1A. "t re/uires the candidates to answer /uestions from a i$en te.t of around 200*C00 words ta%en from the wor%s of a %nown thin%er!author. 9i$e carefull# considered specific /uestions are to be as%ed on the i$en te.t, re/uirin an answer in up to C0 words each. This section carries 0 /uestions of 0 mar%s each (0> ? 05 @20 5ar%s). "n the case of science sub1ects, a theoretical! numerical problem ma# be set. These /uestions are meant to test critical thin%in abilit# to comprehend and

-ection*2:

-ection*C:

-ection*A:

appl# %nowled e one possess. >uestion in this section should be numbered as 10 to 1).

-ection

T#pe of >uestions

Test of

+o. of /uestions

<ords 3er answer Total 1000

5ar%s 3er /uestion 20 Total A0

,ssa#

Abilit# to dwell on a theme at an optimum le$el

000

Three anal#tical! e$aluati$e /uestions

Abilit# to C reason and hold on ar ument on the i$en topic Abilit# to understand and e.press the same )

C00

)00

10

A0

+ine definitional ! short answer /uestions Te.t based /uestions

00

A00

10

)0

(ritical 0 thin%in , abilit# to comprehend and formulate the concept 1)

C0

100

20

Total

2000

200

8ere are some of the tips and techni/ues to score well in &'( +,T e.amination. 9ollow them at the best. 'ood :uc%. 1. <ritin s%ills matter a lot in the +,T ,.amination. 5ost of the candidates appearin for the +,T e.amination ha$e a lot of %nowled e, but lac% writin s%ills. Dou should be able to present all the information!%nowled e in a coherent and lo ical manner, as e.pected b# the e.aminer. 9or e.ample: >uotin with facts and substantiatin #our answer with related concepts and emphasiBin #our point of $iew. 2. 3reparations for +,T e.amination should be done intensi$el#. C. 3repare a standard answer to the /uestion papers of the pre$ious #ears. This will also ma%e #our tas% eas# at the &'( e.amination. A. Do +ot miss the concepts. >uestions as%ed are of the 5asters le$el e.amination. -ometimes the /uestions are Econceptual; in nature, aimed at testin the comprehension le$els of the basic concepts. 0. 'et a list of standard te.tboo%s from the successful candidates, or other sources and also selecti$e ood notes. The ri ht choice of readin material is important and crucial. Dou should not read all t#pes of boo%s as told b# others 6. <hile stud#in for the sub1ects, %eep in mind that there is no scope for selecti$e studies in &'(. The whole s#llabus must be co$ered thorou hl#. ,/ual stress and wei ht should be i$en all the sections of the s#llabus. F. +ote that in the ultimate anal#sis both sub1ects carr# e.actl# the same amount of ma.imum mar%s. G. 'o throu h the unsol$ed papers of the pre$ious papers and sol$e them to stimulate the atmosphere of the e.amination. ). -tic% to the time frame. -peed is the $er# essence of this e.amination. 8ence, time mana ement assumes crucial importance. 10. 9or de$elopin the writin s%ills, %eep writin model answers while preparin for the +,T e.amination. This helps et into the habit of writin under time pressure in the 5ains e.amination. 11. Tr# not to e.ceed the word limit, as far as possible. -tic%in to the word limit that will sa$e time. 2esides, the numbers of mar%s #ou achie$e are not oin to increase e$en if #ou e.ceed the word limit. "t;s the /ualit# that matters not the /uantit#.

12. 8i hli ht the important points which are important. 1C. 9ollow para raph writin rather than essa# form. A new point should start with a new para raph. 1A. "f the /uestion needs answer in point format i$e it a bullet format. 10. Heep sufficient space between two lines. 16. 'i$e space and di$ide it b# a di$idin line between two /uestions. 1F. Abo$e all be patient and belie$e in #ou and 'od. IIIIIIIIIIIIIIIII &nit 1 IIIIIIIIIIIIIIIII mana erial economics*demand anal#sis production function cost*output relations mar%et structures pricin theories ad$ertisin macro*economics national income concept infrastructure*mana ement and polic# business en$ironment capital bud etin IIIIIIIIIIIIIIIII &nit 2 IIIIIIIIIIIIIIIII the concept and si nificance of or anisational beha$iour*s%ills and role in an or anisation* classical, neo*classical and modern theories of or anisational structure* or anisational desi n* understandin and mana in indi$idual beha$iour personalit#*perception*$alues*attitudes* learnin *moti$ation. &nderstandin and mana in roup beha$iour, processes*"nter*personal and roup d#namics* communication*leadership*mana in can e*mana in conflicts. 4r anisational de$elopment IIIIIIIIIIIIIIIII &nit C IIIIIIIIIIIIIIIII (oncepts and perspecti$es of 865,865 in chan in en$ironment, 8uman resource plannin * ob1ecti$es, process and techni/ues. 7ob anal#sis* 1ob description -elect human resources "nduction, trainin and de$elopment ,.it polic# and implications performance appraisal and e$aluation

<a e determination "ndustrial relations and trade unions Dispute resolution and rie$ance mana ement :abour welfare and social securit# measures IIIIIIIIIIIIIIIII &nit A IIIIIIIIIIIIIIIII financial mana ement*nature and scope $aluation concepts and $aluation of securities (apital bud etin decision*ris% anal#sis (apital structure and cost of capital Di$idend policies*determinants :on term and short term financin instruments mer ers and ac/uisitions IIIIIIIIIIIIIIIII &nit 0 IIIIIIIIIIIIIIIII 5ar%etin en$ironment and en$ironment scannin , mar%etin information s#stems and mar%etin research, understandin consumer and industrial mar%ets, demand measurement and forecastin , mar%et se mentation*tar etin and positionin , product decisions,product mi., product life c#cle, new product de$elopment, brandin and pac%a in , pricin methods and strate ies. 3romotion decisions*promotion mi., ad$ertisin , personal sellin , channel mana ement, $ertical mar%etin s#stem, e$aluation and control of mar%etin effort, mar%etin of ser$ice, customer relation mana ement, &ses of internet as a mar%etin medium* other related issues li%e brandin , mar%et de$elopment, ad$ertisin and retailin on the net. +ew issues in mar%etin . IIIIIIIIIIIIIIIII &nit 6 IIIIIIIIIIIIIIIII 6ole and scope of production mana ement, facilit# location, la#out plannin and anal#sis, production plannin and control* production process anal#sis, demand forecastin for operations, determinant of product mi., production schedulin , wor% measurement, time and motion stud#, statistical /ualit# control. role and scope of operations research, linear pro rammin , sensiti$it# anal#sis, transportation model, in$entor# control, /ueuin theor#, decision theor#, mar%o$ anal#sis, 3,6T!(35 IIIIIIIIIIIIIIIII &nit F IIIIIIIIIIIIIIIII 3robabilit# theor#, probabilit# distribution*binomial, poission, normal and e.ponential, correlation and re ression anal#sis, samplin theor#, samplin distribution, tests of h#pothesis, lar e and small samples, t, B, f, chi*s/uare tests. use of computers in mana erial applications, technolo ical issues and data processin in or anisations. "nformation s#stems, 5"- and decision ma%in , s#stem anal#sis and desi n, trends in information technolo #,"nternet and internet*based applications.

IIIIIIIIIIIIIIIII &nit G IIIIIIIIIIIIIIIII (oncept of corporate strate #, component of strate # formulation, AnsoffJs rowth $ector, 2(' model, 3orterJs eneric strate ies, competitor anal#is, strate ic dimensions and roup mappin , industr# anal#sis, strate ies in industr# e$olution, fra mentation, maturit# and decline,competiti$e strate # and corporate strate #, transnationalisation of world econom#,mana in cultural di$ersit#, lobal entr# strate ies, lobalisation of financial s#stem and ser$ices, mana in international business, competiti$e ad$anta e of nations, 6T3 and <T4 IIIIIIIIIIIIIIIII &nit ) IIIIIIIIIIIIIIIII (oncepts* t#pes, characterstics, moti$ation, competencies and its de$elopment, inno$ation and entrepreneurship, small business*concepts 'o$ernment polic# for promotion of small and tin# enterprises, process of business opportunit# identification, detailed business plan preparation, mana in small enterprises, plannin for rowth, sic%ness in small enterprises, rehabilitation of sic% enterprises, "ntrapreneurship(or anisational entrepreneurship). IIIIIIIIIIIIIIIII &nit 10 IIIIIIIIIIIIIIIII ,thics and mana ement s#stems, ethical issues and anal#sis in mana ement, $alue based or anisations, personal framewor% for ethical choices, ethical pressure on indi$iduals in or anisations, ender issues, ecolo ical consciousness, en$ironmental ethics, social responsibilities of business, corporate o$ernance and ethics. IIIIIIIIIIIIIIIIIIIIIIII ,lecti$e*" IIIIIIIIIIIIIIIIIIIIIIII 8uman 6esource 5ana ement (865) * -i nificanceK 4b1ecti$esK functionsK a dia nostic modelK ,.ternal and "nternal en$ironment 9orces and "nfluencesK or aniBin 865 function 6ecruitment and selection*sources of recruitsK recruitin methodsK selection procedureK selection testsK 3lacement and follow*up. 3erformance appraisal s#stem*importance and ob1ecti$esK techni/ues of appraisal s#stemK new trends in appraisal s#stem. De$elopment of personnel* ob1ecti$esK determinin needsK methods o trainin and de$elopment pro ramsK e$aluation. (areer plannin and de$elopment*concept of careerK career plannin and de$elopment methods. (ompensation and benefits* 1ob e$aluation techni/uesK wa e and salar# administrationK frin e benefitsK human resource records and audit.

,mplo#ee discipline LimportanceK causes and formsK disciplinar# actionK domestic en/uir#. 'rie$ance mana ement* importanceK process and practicesK emplo#ee welfare and social securit# measures. "ndustrial relations* importanceK industrial conflictsK causesK dispute settlement machiner# Trade union* importance of unionismK union leadershipK national trade union mo$ement (ollecti$e bar ainin * conceptK processK pre*re/uisiteK new trends in collecti$e bar ainin "ndustrial democrac# and emplo#ee participation* need for industrial democrac#K pre*re/uisite for industrial democrac#K emplo#ee participation Lob1ecti$esK forms of emplo#ee participation. 9uture of 8uman 6esource 5ana ement. IIIIIIIIIIIIIIIIIIIIIIII ,lecti$e*"" IIIIIIIIIIIIIIIIIIIIIIII 5ar%etin *(onceptsK +ature and scopeK 5ar%etin m#opiaK 5ar%etin mi.K Different en$ironments and their influences on mar%etin K understandin the customer and competition. 6ole and rele$ance of -e mentation and positionin K -tatic and d#namic understandin of 2(' matri. and 3roduct :ife (#cleK 2rands*5eanin and roleK 2rand buildin strate iesK -hare increase strate ies. 3ricin ob1ecti$esK pricin conceptsK 3ricin methods 3roduct* 2asic and au mented sta es in new product de$elopment Test mar%etin concepts 3romotion mi.* 6ole and rele$ance of ad$ertisin -ales promotion* media plannin and mana ement Ad$ertisin * 3lannin , e.ecution and e$aluation Different tools used in sales promotion and their specific ad$anta es and limitations 3ublic relations* concept and rele$ance Distribution channel hierarch#K role of each member in the channelK Anal#sis of businesss potential and e$aluation of performance of the channel members <holesalin and retailin * Different formats and the stren th of each oneK ,mer in issues in different formats of retailin in "ndia

5ar%etin research* -ources of informationK Data collectionK 2asic tools used in data anal#sisK structurin a research report 5ar%etin to or aisations* -e mentation modelsK 2u#er beha$ior modelsK 4r aniational bu#in process (onsumer beha$ior theories and models and their specific rele$ance to mar%etin mana ers -ales function* 6ole of technolo # in sales function automation (ustomer relationship mana ement includin the concept of E 6elationship mar%etin ; &se of internet as a medium of mar%etin K 5ana erial issues in researchin consumer! or aniBation throu h internet -tructurin and mana in mar%etin or aniBations, ,.port 5ar%etin * "ndian and lobal conte.t IIIIIIIIIIIIIIIIIIIIIIII ,lecti$e*""" IIIIIIIIIIIIIIIIIIIIIIII +ature and scope of financial mana ement $aluation concepts*ris% and return, $aluation of securities, pricin theories* capital asset pricin model and arbitra e pricin theor# &nderstandin financial statements and anal#sis thereof (apital bud etin decision, ris% anal#sis in capital bud etin and lon *term sources of finance (apital structure* theories and factors, cost of capital Di$idend policies *theories and determinants <or%in capital mana ement*determinants and financin , cash mana ement,in$entor# mana ement, recei$ables mana ement ,lements of deri$ati$es (orporate ris% mana ement mer ers and ac/uisitions "nternational financial mana ement IIIIIIIIIIIIIIIIIIIIIIII ,lecti$e*"M IIIIIIIIIIIIIIIIIIIIIIII "ndia;s forei n Trade and 3olic#K ,.port promotion policiesK Trade a reements with other countriesK 3olic# and performance o ,.port Bones and ,.port*oriented unitK ,.port incenti$es. "nternational mar%etin lo isticsK "nternational lo istic structuresK ,.port Documentation framewor%K 4r anisation of shippin ser$icesK (harterin practicesK 5arine car o insurance.

"nternational financial en$ironmentK 9orei n e.chan e mar%etsK Determination of e.chan e ratesK ,.chan e ris% measuremetK "nternational in$estmentK "nternational capital mar%etsK "nternational credit A encies and "mplictions of their ratin s. <T4 and 5ultilateral trade a reements pertainin to trade in oodsK trade in ser$ices and T6"3-K 5ultilateral en$ironment a reements(5,As)K "nternational Trade 2loc%s* +A9TA, A-,A+, -AA6(, ,&, <T4 and Dispute -ettlement 5echanism. Technolo # 5onitorin K ,mer in opportunities for lobal business.

Managerial economics

5ana erial economics Definition of mana erial economics +ature and characteristics of mana erial economics -cope of mana erial economics Difference between mana erial economics and economics ,conomic tools used in mana erial economics Decision criteria
Managerial economics is the stu & o+ economic theoriesG logic an metho olog& 2hich are generall& a$$lie to seek solutions to the $ractical $roblems o+ business. 7ature an characteristics o+ managerial economics %co$e o+ managerial economics .eman anal&sis .eman curve .eman sche ule *lasticit& o+ eman .eman +orecasting 0elationshi$ bet2een 4verage an Marginal costF

In the +igure above the average an marginal cost curves have been ra2n. It 2ill be seen that so long as the average cost is +allingG marginal cost is less than average cost. In the same 2a& 2hen average cost is rising marginal cost is above the average cost.

The marginal average relation is mathematical truism 2hich is correct in all the con itions. =e can un erstan it easil& 2ith the hel$ o+ an e/am$le. %u$$ose in a cricket match the batting average o+ a batsman is !1 in the +irst innings. I+ Market structure -er+ect com$etition Mono$olistic com$etition Oligo$ol& Mono$ol& Mono$son&

%eller entr& barrier

%eller numbe r

Bu&er entr& barrier

Bu&er numbe r

7o 7o Hes Hes 7o

Man& Man& )e2 One Man&

7o 7o 7o 7o Hes

Man& Man& Man& Man& One

M%r&et structure -er+ect com$etition )eatures that all three market structures share ,oal o+ +irms 0ule +or ma/imizing #an earn economic $ro+it in the long run )eatures that Mono$olistic com$etition shares 2ith mono$ol& -rice takers> -rice -ro uces 2el+are ma/imizing level o+ out$ut> )eatures that Mono$olistic com$etition shares 2ith $er+ect com$etition 7umber o+ +irms *ntr& in long run> #an earn economic $ro+it in long run> Man& Hes 7o Man& Hes 7o one 7o Hes Hes -IM# Hes 7o -JM# 7o 7o -JM# 7o Ma/imize $ro+it M0I M# Hes Ma/imize $ro+it M0I M# &es Ma/imize $ro+it M0I M# Hes Mono$olistic com$etition Mono$ol&

<uantit & 1 1 " 3 4 5 ! ' 8 mono$ ol& <uantit & 1 1 " 3 4 5 ! ' 8

average cost

5 4 4 4."5 4.! 5 5.4"85'1 4"9 5.8'5 average cost

tot al cos t 3 5 8 1" 1' "3 31 38 4' tot al cos t 3 5 8 1" 1' "3 31 38 4'

margin al cost

average revenue

total reven ue 1 ! 1" 18 "4 31 3! 4" 48 total reven ue 11 18 "4 "8 31 31 "8 "4

margina l revenue ! ! ! ! ! ! ! ! margina l revenue 11 8 ! 4 " 1 5" 54

$ro+ it 53 1 4 ! ' ' ! 4 1 $ro+ it 53 5 11 1" 11 ' 1 511 5"3

change in $ro+it 4 3 " 1 1 51 5" 53 51 change in $ro+it 8 5 " 51 54 5' 511 513 "3

" 3 4 5 ! ' 8 9 margin al cost

! ! ! ! ! ! ! ! average revenue

5 4 4 4."5 4.! 5 5.4"85'1 4"9 5.8'5

" 3 4 5 ! ' 8 9

11 9 8 ' ! 5 4 3

M%cro-Econo'ics
Macro5economics is also kno2n as the theor& o+ income an em$lo&ment or sim$l& income anal&sis. It is concerne 2ith the $roblems o+ unem$lo&mentG economic +luctuationsG in+lation or e+lationG international tra e an economic gro2th. Macro5economics is the stu & o+ aggregates or averages covering the entire econom&G such as total em$lo&mentG national incomeG national out$utG national out$utG total investmentsG total consum$tionG an total savingK aggregate su$$l& an aggregate eman G general $rice levelG 2age level an cost structure. In other 2or sG it is aggregate economics 2hich e/amines the inter5relations among the various aggregatesG their etermination an causes o+ +luctuations in them. ThusG in the 2or s o+ -ro+essor 4ckle&G LMacro5economics eals 2ith economic a++airs Min the largeNK it concerns the overall imensions o+ economic li+e. It looks at the total size an sha$e an +unctioning o+ the Lele$hantO o+ economic e/$erienceG rather than 2orking o+ articulation or imensions o+ the

in ivi ual $arts. It stu ies the character o+ the +orest in e$en entl& o+ the trees 2hich com$ose it. %co$e an Im$ortance o+ Macro5economicsF5 4s a metho o+ economic anal&sis macro5economics is o+ much theoretical an $ractical im$ortance 1 " 3 4 5 ! ' 8 To un erstan the 2orking o+ *conom& In *conomic -olicies In ,eneral *m$lo&ment In 7ational Income In *conomic ,ro2th In Monetar& -roblems In Business #&cle )or Pn erstan ing the behavior o+ In ivi ual units

6imitations o+ Macro5economicsF5 1 " 3 4 5 )allac& o+ com$ositions To regar the aggregate as homogeneous 4ggregate variables ma& not be im$ortant necessaril& In iscriminate use o+ Macro5economics mislea ing %tatistical an conce$tual i++iculties

#a$ital Bu geting Meaning #a$ital bu geting ecisions $ertain to +i/e Elong term assets b& e+inition re+ers 2hich are in o$eration an &iel a returnG over a $erio o+ timeG usuall&G e/cee ing one &ear. The& there+oreG involve a current outla& o+ series o+ outla&s o+ cash resources in return +or an antici$ate +lo2 o+ +uture bene+its. In otherG the s&stem o+ ca$ital bu geting is em$lo&e to evaluate e/$en iture ecisions 2hich involve current outla&s but are likel& to $ro uce bene+its over a $erio o+ time longer than one &ear. These bene+its ma& be either in the +orm o+ increase revenues or re uce costs. #a$ital e/$en iture managementG there+oreG inclu es a itionG is$ositionG mo i+ication an re$lacement o+ +i/e assets. The +eatures o+ ca$ital bu geting are as +ollo2sF 1 " 3 -otentiall& large antici$ate bene+its 4 relativel& high egree o+ risk 4 relativel& long time $erio bet2een the initial outla& an antici$ate returns

the

The term ca$ital bu geting is use inter5changeabl& 2ith ca$ital e/$en iture ecisionG ca$ital e/$en iture managementG long5term investment ecisionG management o+ +i/e assets an so on. Im$ortance o+ #a$ital Bu geting

"

#a$ital Bu geting ecision a++ects the $ro+itabilit& o+ a +irm. #a$ital bu geting ecisions etermine the +uture estin& o+ the com$an&. 4 +e2 2rong ecisions an the +irm ma& be +orce into bankru$tc&. 4

(USINESS CYC E
Business #&cle re+ers to +luctuations in economic activit&. It is also kno2n as the economic c&cle. The Business #&cle has +our istinct $hases that revolve aroun its long5tern gro2th tren . 5 #ontraction F That +eatures slo2 o2n in economic activit&. 5 Trough F Turning $oint o+ business c&cle 2here contraction shi+ts to e/$ansion. 5 */$ansionF ,ro2th in economic activit&. 5 -eak F P$$er turning $oint o+ business c&cle. There are +our $hases o+ the business c&cleF 1. -eakEboom ". 0ecession 3. Trough 4. 0ecover& 6etQs brie+l& iscuss each $hase no2F 1. -eakEBoomF This is the stage 2hen the business activit& is at its ma/imumG although this level o+ activit& is tem$orar&. ". 0ecessionF 4+ter o$erating at ma/imum activit&G the business goes into the recession $hase. This $hase 2itnesses a ecrease in total out$utG em$lo&ment an tra e. 0ecession ma& last +or about ! months or more. 3. TroughF 4t this stageG out$ut an em$lo&ment are at their lo2est. This is also re+erre to as the stage o+ e$ression. This stage ma& be short term or ma& be long term e$en ing on circumstances an market con itions. 4. 0ecover&F The recover& stageG as the name suggests is the rise in out$utG em$lo&ment an tra e a+ter the e$ression stage. The em$lo&ment levels increase till ma/imum em$lo&ment is reache . These stages are o+ten e$icte as a gra$h. The gra$h 2oul look like a 2ave. The $eak o+ the 2ave is the boom $haseG the ecreasing slo$e is recessionG the rock bottom o+ the 2ave is the troughE e$ressionG an recover& $hase is sho2n as the increasing slo$e a+ter the trough. The vertical a/is measures real out$ut an the horizontal a/is measures time.

Or)%ni*%tion%+ ,e-%.ior
4r aniBational theor# is a set of interrelated constructs (concepts), definitions and propositions that present a s#stematic $iew of beha$ior of indi$iduals, roups, and sub roups interactin in some relati$el# patterned se/uence of acti$it#, the intent of which is oal directed. -ome important or aniBational theories are:* (a) (lassical theor# a. -cientific mana ement theor# b. Administrati$e theor# (b) +eo*classical theor# (c) 5odern theor# (oncept of or aniBational beha$ior 6ole of or aniBational beha$ior 4r aniBational theories Appraisal of (lassical theor# -#stems approach (ontin enc# or situational approach IIIIIIIIIIIII 4r anisational structure 5echanism of desi nin structure Departmentation (hoosin a basis of departmentation -pan of mana ement Dele ation of authorit# (entralisation and decentraliBation IIIIIIIIIIIII 3ersonalit# Determinants of personalit# 3ersonalit# and beha$ior 4r anisational applications of personalit#
"erson%+it/:-ersonalit& is the &namic organization 2ithin the in ivi ual o+ those $s&chological s&stems that etermine his uni<ue a Rustments to his environment. "erson%+it/ t-eories:"s/c-o%n%+/tic t-eor/:T-e ID The I G The *go an The su$er *go are the $arts o+ the $ersonalit&. The I $rocee s unchecke to satis+& li+e instincts an T-e E)o eath instincts.

The *go kee$s the I in check through the realities o+ the e/ternal environment through intellect an reason. Socio-0s/c-o+o)ic%+ t-eor/ %ocial variables an not the biological instinctsG are the im$ortant eterminant in sha$ing $ersonalit&. There is an interaction bet2een the societ& an the in ivi ual. Tr%it t-eor/ The trait a$$roach to $ersonalit& is one o+ the maRor theoretical areas in the stu & o+ $ersonalit&. The trait theor& suggests that in ivi ual $ersonalities are com$ose broa is$ositions. #onsi er ho2 &ou 2oul escribe the $ersonalit& o+ a close +rien . #hances are that &ou 2oul list a number o+ traitsG such as outgoingG kin an even5tem$ere . 4 trait can be thought o+ as a relativel& stable characteristic that causes in ivi uals to behave in certain 2a&s. Pnlike man& other theories o+ $ersonalit&G such as $s&choanal&tic or humanistic theoriesG the trait a$$roach to $ersonalit& is +ocuse on i++erences bet2een in ivi uals. The combination an interaction o+ various traits +orms a $ersonalit& that is uni<ue to each in ivi ual. Trait theor& is +ocuse on i enti+&ing an measuring these in ivi ual $ersonalit& characteristics. ,or on 4ll$ortNs Trait Theor& In 193!G $s&chologist ,or on 4ll$ort +oun that one *nglish5language ictionar& alone containe more than 4G111 2or s escribing i++erent $ersonalit& traits.1 He categorize these traits into three levelsF S #ar inal TraitsF Traits that ominate an in ivi ualNs 2hole li+eG o+ten to the $oint that the $erson becomes kno2n s$eci+icall& +or these traits. -eo$le 2ith such $ersonalities o+ten become so kno2n +or these traits that their names are o+ten s&non&mous 2ith these <ualities. #onsi er the origin an meaning o+ the +ollo2ing escri$tive termsF )reu ianG MachiavellianG narcissismG .on ;uanG #hrist5likeG etc. 4ll$ort suggeste that car inal traits are rare an ten to evelo$ later in li+e. S #entral TraitsF These are the general characteristics that +orm the basic +oun ations o+ $ersonalit&. These central traitsG 2hile not as ominating as car inal traitsG are the maRor characteristics &ou might use to escribe another $erson. Terms such as intelligentG honestG sh& an an/ious are consi ere central traits. S %econ ar& TraitsF These are the traits that are sometimes relate to attitu es or $re+erences an o+ten a$$ear onl& in certain situations or un er s$eci+ic circumstances. %ome e/am$les 2oul be getting an/ious 2hen s$eaking to a grou$ or im$atient 2hile 2aiting in line. 0a&mon #attellNs %i/teen -ersonalit& )actor :uestionnaire Trait theorist 0a&mon #attell re uce the number o+ main $ersonalit& traits +rom 4ll$ortNs initial list o+ over 4G111 o2n to 1'1G3 mostl& b& eliminating

uncommon traits an combining common characteristics. 7e/tG #attell rate a large sam$le o+ in ivi uals +or these 1'1 i++erent traits. ThenG using a statistical techni<ue kno2n as +actor anal&sisG he i enti+ie closel& relate terms an eventuall& re uce his list to Rust 1! ke& $ersonalit& traits. 4ccor ing to #attellG these 1! traits are the source o+ all human $ersonalit&. He also evelo$e one o+ the most 2i el& use $ersonalit& assessments kno2n as the %i/teen -ersonalit& )actor :uestionnaire A1!-)B. *&senckNs Three .imensions o+ -ersonalit& British $s&chologist Hans *&senck evelo$e a mo el o+ $ersonalit& base u$on Rust three universal trailsF 1. IntroversionE*/traversionF Introversion involves irecting attention on inner e/$eriencesG 2hile e/traversion relates to +ocusing attention out2ar on other $eo$le an the environment. %oG a $erson high in introversion might be <uiet an reserve G 2hile an in ivi ual high in e/traversion might be sociable an outgoing. ". 7euroticismE*motional %tabilit&F This imension o+ *&senckNs trait theor& is relate to moo iness versus even5 tem$ere ness. 7euroticism re+ers to an in ivi ualNs ten enc& to become u$set or emotionalG 2hile stabilit& re+ers to the ten enc& to remain emotionall& constant. 3. -s&choticismF 6aterG a+ter stu &ing in ivi uals su++ering +rom mental illnessG *&senck a e a $ersonalit& imension he calle $s&choticism to his trait theor&. In ivi uals 2ho are high on this trait ten to have i++icult& ealing 2ith realit& an ma& be antisocialG hostileG non5em$athetic an mani$ulative.4 The )ive5)actor Theor& o+ -ersonalit& Both #attellNs an *&senckNs theor& have been the subRect o+ consi erable researchG 2hich has le some theorists to believe that #attell +ocuse on too man& traitsG 2hile *&senck +ocuse on too +e2. 4s a resultG a ne2 trait theor& o+ten re+erre to as the TBig )iveT theor& emerge . This +ive5+actor mo el o+ $ersonalit& re$resents +ive core traits that interact to +orm human $ersonalit&.5 =hile researchers o+ten isagree about the e/act labels +or each imensionG the +ollo2ing are escribe most commonl&F 1. */traversion ". 4greeableness 3. #onscientiousness 4. 7euroticism 5. O$enness 4ssessing the Trait 4$$roach to -ersonalit&

=hile most agree that $eo$le can be escribe base u$on their $ersonalit& traitsG theorists continue to ebate the number o+ basic traits that make u$ human $ersonalit&. =hile trait theor& has obRectivit& that some $ersonalit& theories lack Asuch as )reu Ns $s&choanal&tic theor&BG it also has 2eaknesses. %ome o+ the most common criticisms o+ trait theor& center on the +act that traits are o+ten $oor $re ictors o+ behavior. =hile an in ivi ual ma& score high on assessments o+ a s$eci+ic traitG he or she ma& not al2a&s behave that 2a& in ever& situation. 4nother $roblem is that trait theories o not a ress ho2 or 2h& in ivi ual i++erences in $ersonalit& evelo$ or emerge. Se+1 t-eor/ Se+1-conce0t: The com$osite o+ i easG +eelingsG an attitu es that a $erson has about his or her o2n i entit&G 2orthG ca$abilitiesG an limitations. 4 $ersonNs sel+ conce$t gives him sense o+ meaning+ulness an consistenc&. There are +our +actors in shel+ conce$t. Se+1-i'%)e: 4 $ersonQs sel+ image is the mental $ictureG generall& o+ a kin that is <uite resistant to changeG that e$icts not onl& etails that are $otentiall& available to obRective investigation b& others AheightG 2eightG hair colorG gen erG I.:. scoreG etc.BG but also items that have been learne b& that $erson about himsel+ or hersel+G either +rom $ersonal e/$eriences or b& internalizing the Ru gments o+ others. In shortG sel+5image is the 2a& one sees onesel+. I2e%+-se+1: The i eal sel+ enotes the 2a& one 2oul like to be. oo&in) G+%ss-se+1: The $erce$tion o+ a $erson about ho2 others are $erceiving his <ualities an characteristics. Re%+-Se+1: The real5sel+ is 2hat one reall& is. Deter'in%nts o1 0erson%+it/

Biologica l +actor

)amil& an ua In ivi social l grou$ +actors

%ituation al +actor

#ultural +actors

"erson%+it/ %n2 ,e-%.ior Se+1-conce0t %n2 Se+1-estee' %el+5conce$t is the 2a& in ivi uals e+ine themselves as to 2ho the& are an erive their sense o+ i entit&. %el+5esteem enotes the e/tent to 2hich the& consistentl& regar themselves as ca$ableG success+ulG im$ortant an 2orth& in ivi ual. Nee2 0%ttern 4chievementG a++iliationG autonom&G ominance. M%c-i%.e++i%nis' re+ers to mani$ulating o+ others as a $rimar& 2a& o+ achieving oneNs goals. ocus o1 contro+ means 2hether $eo$le believe that the& are in control o+ events or events control them. T/0e A %n2 ( 0erson%+it/ T/0e A $eo$le al2a&s +eel a sense o+ time urgenc&G are highl& achievement5 oriente G e/hibit a com$etitive rive an are im$atient 2hen their 2ork is slo2e o2n +or an& reason. T/0e ( $eo$le are eas& goingG o not have urgenc& +or time an e/$erience the com$etitive rive. To+er%nce o1 %',i)uit/ Intro.ersion %n2 e3tro.ersion 4or&-et-ics orient%tion Or)%ni*%tion%+ %00+ic%tion o1 0erson%+it/:1. Matching Robs an in ivi uals ". .esigning motivation s&stem 3. .esigning control s&stem o not

IIIIIIIIIIIII 3erception 3erception is defined as a process b# which indi$iduals or aniBe and interpret their sensor# impressions in order to i$e meanin to their en$ironment. perceptual process 3erceptual selecti$it# 3erceptual or aniBation "nterpersonal perception 5ana erial application of perception

IIIIIIIIIIIII Attitudes Attitude is the persistent tendenc# to feel and beha$e in a fa$ourable or unfa$ourable wa# towards some ob1ect, person or idea. (oncepts of attitudes Attitudes and $alues Theories of attitude formation 9actors in attitude formation Attitude measurement Attitude chan e 5ethods of attitude chan e IIIIIIIIIIIII Malues Malues are lobal beliefs that uide actions and 1ud ment across a $ariet# of situations. Malues and attitudes Malues and beha$ior 9actors in $alue formation T#pes of $alues IIIIIIIIIIIII
6earning 6earning is a relative en uring change in behavior brought about as a conse<uence o+ e/$erience. 6earning theories con itioning theories #ognitive learning theor& %ocial learning theor& Integrating various learning theories 0ein+orcement T&$es o+ rein+orcement 4 ministering rein+orcement

IIIIIIIIIIIII
Organizational behavior mo i+ication

IIIIIIIIIIIII
Motivation Motivation re+ers to the 2a& in 2hich urgesG rivesG esiresG as$irationsG striving or nee irectG control or e/$lain the behavior o+ human beings. Motivation an behavior Moti.%tion

The term MmotivationN comes +rom the 6atin MmovereN 2hich means Mto moveN. Motivation as the base5buil ing block o+ human action has been stu ie e/tensivel&. %tu ies on motivation broa l& re+er to t2o areasF AaB Motivating sel+G an AbB Motivating others The conce$t LmotiveO re+ers to the $ur$ose un erl&ing all goal irecte actions. 4ll motivesG ho2everG ma& not be e<uall& im$ortant to the conte/t o+ goal. %ome actions arise +rom biological or $h&siological nee sG over 2hich $eo$le o not have much control. %uch motives are common to the entire animal king om. But there are certain crucial an other higher or er nee s 2hich are common to human beings. The istinctl& human motives are largel& unrelate to biological an survival nee s. These are relate to +eelings o+ sel+ esteemG com$etenc&G social acce$tanceG etc. -s&chologists have e+ine the term motivation asF The imme iate in+luence on the irectionG vigor an $ersistence o+ actionK The $rocess o+ arousing actionG sustaining the activit& in $rogress an regulating the $attern o+ activit&K 4n inner state that energize activities an irects or channels behavior to2ar s goalsK Ho2 behavior gets starte G is energize G is sustaine G is irecte G is sto$$e an 2hat kin s o+ subRective reactions are $resent in the organism 2hile all this is going onK %teering oneNs action to2ar s certain goals an to commit a certain $art o oneNs energies reacting to them.

Moti.%tion "rocess Motivation is essentiall& a $rocess. It ma& be illustrate generalize mo el. 2ith the hel$ o+ a

Inner state o+ ise<uilibriumG 7ee G esire or e/$ectancies accom$anie b& antici$ation

Behaviors or action

Incentive or goal

Motivation o+ inner state A+ee backB

)ig. Motivation $rocess The im$ortant as$ects o+ the mo el areF 1. ". 3. 4. 7ee s or e/$ectation Behavior ,oalG an %ome +orm o+ +ee back

Ac-ie.e'ent 'oti.%tion 4chievement motivation is also terme as Ln 4chOG the nee to achieveG the Lurge to im$roveO in common $arlance. I+ a man s$en s his time thinking about oing his Rob betterG accom$lishing something unusual an im$ortant or a vancing his careerG the $s&chologist sa&s he has a high nee o+ achievement. He thinks not onl& about the achievement goalG but also about ho2 it can be attaine G 2hat obstacles or blocks might be encountere an ho2 he 2oul take hel$ to overcome the obstacles in achieving his goal.

Attitu2e For'%tion
In %ocial -s&cholog& attitu es are e+ine as $ositive or negative evaluations o+ obRects o+ thought. 4ttitu es t&$icall& have three com$onents. The co)niti.e co'0onent is ma e u$ o+ the thoughts an belie+s $eo$le hol about the obRect o+ the attitu e. The %11ecti.e co'0onent consists o+ the emotional +eelings stimulate b& the obRect o+ the attitu e. The ,e-%.ior%+ co'0onent consists o+ $re is$ositions to act in certain 2a&s to2ar an attitu e obRect. The obRect o+ an attitu e can be an&thing $eo$le have o$inions about. There+oreG in ivi ual $eo$leG grou$s o+ $eo$leG institutionsG $ro uctsG social tren sG consumer $ro uctsG etc. all can be attitu inal obRects. 4ttitu es involve soci%+ 5u2)'ents. The& are either +orG or againstG $roG or conG $ositiveG or negativeK ho2everG it is $ossible to be ambivalent about the attitu inal obRect an have a mi/ o+ $ositive an negative +eelings an thoughts about it. 4ttitu es involve a rea iness Aor $re is$ositionB to res$on K ho2everG +or a variet& o+ reasons 2e onNt al2a&s act on our attitu es. 4ttitu es var& along imensions o+ stren)t- an %ccessi,i+it/. %trong attitu es are ver& im$ortant to the in ivi ual an ten to be urable an have a $o2er+ul im$act on behaviorG 2hereas 2eak attitu es are not ver& im$ortant an have little im$act. 4ccessible attitu es come to min <uickl&G 2hereas other attitu es ma& rarel& be notice . 4ttitu es ten to be stable over timeG but a number o+ +actors can cause attitu es to change. Stereot/0es are 2i el& hel belie+s that $eo$le have certain characteristics because o+ their membershi$ in a $articular grou$. 4 0re5u2ice is an arbitrar& belie+G or +eelingG irecte to2ar a grou$ o+ $eo$le or its in ivi ual members. -reRu ices can be either $ositive or negativeK ho2everG the term is usuall& use to re+er to a negative attitu e hel to2ar members o+ a grou$. -reRu ice ma& lea to 2iscri'in%tionG 2hich involves behaving i++erentl&G usuall& un+airl&G to2ar the members o+ a grou$.

"s/c-o+o)ic%+ 1%ctors in.o+.e2 in Attitu2e For'%tion %n2 Attitu2e C-%n)e 1. Direct Instruction involves being tol 2hat attitu es to have b& $arentsG schoolsG communit& organizationsG religious octrineG +rien sG etc. ". O0er%nt Con2itionin) is a sim$le +orm o+ learning. It is base on the L6a2 o+ *++ectO an involves voluntar& res$onses. Behaviors Ainclu ing verbal behaviors an ma&be even thoughtsB ten to be re$eate i+ the& are rein+orce Ai.e.G +ollo2e b& a $ositive e/$erienceB. #onversel&G behaviors ten to be sto$$e 2hen the& are $unishe Ai.e.G +ollo2e b& an un$leasant e/$erienceB. ThusG i+ one e/$ressesG or acts out an attitu e to2ar some grou$G an this is rein+orce b& oneNs $eersG the attitu e is strengthene an is

3.

4.

5.

!.

'.

likel& to be e/$resse again. The rein+orcement can be as subtle as a smile or as obvious as a raise in salar&. O$erant con itioning is es$eciall& involve 2ith the behavioral com$onent o+ attitu es. C+%ssic%+ con2itionin) is another sim$le +orm o+ learning. It involves involuntar& res$onses an is ac<uire through the $airing o+ t2o stimuli. T2o events that re$eate l& occur close together in time become +use an be+ore long the $erson res$on s in the same 2a& to both events. Originall& stu ie b& -avlovG the $rocess re<uires an uncon itione stimulus AP#%B that $ro uces an involuntar& Are+le/iveB res$onse AP#0B. I+ a neutral stimulus A7%B is $aire G either ver& ramaticall& on one occasionG or re$eate l& +or several ac<uisition trialsG the neutral stimulus 2ill lea to the same res$onse elicite b& the uncon itione stimulus. 4t this $oint the stimulus is no longer neutral an so is re+erre to as a con itione stimulus A#%B an the res$onse has no2 become a learne res$onse an so is re+erre to as a con itione res$onse A#0B. In -avlovNs research the P#% 2as meat $o2 er 2hich le to an P#0 o+ salivation. The 7% 2as a bell. 4t +irst the bell elicite no res$onse +rom the ogG but eventuall& the bell alone cause the og to salivate. 4 vertisers create $ositive attitu es to2ar s their $ro ucts b& $resenting attractive mo els in their a s. In this case the mo el is the P#% an our reaction to himG or herG is an automatic $ositive res$onse. The $ro uct is the original 7% 2hich through $airing comes to elicit a $ositive con itione res$onse. In a similar +ashionG $leasant or un$leasant e/$eriences 2ith members o+ a $articular grou$ coul lea to $ositive or negative attitu es to2ar that grou$. #lassical con itioning is es$eciall& involve 2ith the emotionalG or a++ectiveG com$onent o+ attitu es. Soci%+ 6O,ser.%tion%+7 e%rnin) is base on mo eling. =e observe others. I+ the& are getting rein+orce +or certain behaviors or the e/$ression o+ certain attitu esG this serves as vicarious rein+orcement an makes it more likel& that 2eG tooG 2ill behave in this manner or e/$ress this attitu e. #lassical con itioning can also occur vicariousl& through observation o+ others. Co)niti.e Disson%nce e/ists 2hen relate cognitionsG +eelings or behaviors are inconsistent or contra ictor&. #ognitive issonance creates an un$leasant state o+ tension that motivates $eo$le to re uce their issonance b& changing their cognitionsG +eelingG or behaviors. )or e/am$leG a $erson 2ho starts out 2ith a negative attitu e to2ar mariRuana 2ill e/$erience cognitive issonance i+ the& start smoking mariRuana an +in themselves enRo&ing the e/$erience. The issonance the& e/$erience is thus likel& to motivate them to either change their attitu e to2ar mariRuanaG or to sto$ using mariRuana. This $rocess can be consciousG but o+ten occurs 2ithout conscious a2areness. Unconscious Moti.%tion8 %ome attitu es are hel because the& serve some unconscious +unction +or an in ivi ual. )or e/am$leG a $erson 2ho is threatene b& his homose/ual +eelings ma& em$lo& the e+ense mechanism o+ reaction +ormation an become a crusa er against homose/uals. OrG someone 2ho +eels in+erior ma& +eel some2hat better b& $utting o2n a grou$ other than her o2n. Because it is unconsciousG the $erson 2ill not be a2are o+ the unconscious motivation at the time it is o$erativeG but ma& become a2are o+ it as some later $oint in time. R%tion%+ An%+/sis involves the care+ul 2eighing o+ evi ence +orG an againstG a $articular attitu e. )or e/am$leG a $erson ma& care+ull& listen to the $resi ential ebates an rea o$inions o+

$olitical e/$erts in or er to eci e 2hich can i ate to vote +or in an election. #onsumer 4ttitu e )ormation E #hange

Belo2 is an article that I 2orke recentl&.

on 2ith a grou$ +or a college class I took

4ttitu e )ormation E #hangeF Im$ortance to Marketers

4s consumersG 2e have a 2i e variet& o+ $ro ucts an services to choose +rom 2hen $urchasing almost an&thing. Our attitu es to2ar s certain $ro uctsG servicesG bran sG or a vertisements can an o a++ect 2hether or not 2e 2ill $urchase a certain $ro uct or service. 4ttitu es 2ill also a++ect 2hether or not 2e become a lo&al customer an 2hether or not 2e recommen it to a +rien . 4s marketersG it is im$ortant to un erstan ho2 an attitu e is +orme an i+ there is an& 2a& o+ changing consumersN attitu es.

4ttitu e )ormation E #hangeF =hat is attitu e>

=hat is an attitu e e/actl&> It is e+ine as a Llearne $re is$osition to behave in a consistentl& +avorable or un+avorable 2a& 2ith res$ect to a given obRectO. There are t2o i++erent t&$es o+ mo els that have been +oun to e/$lain consumersN attitu esF

4ttitu e )ormation E #hangeF 1st is Tricom$onent

The +irst one is the tricom$onent attitu e mo el. It com$rise o+ three categoriesF #ognitive com$onentG 4++ective #om$onentG an #onative #om$onent. The #ognative com$onent is ma e u$ o+ kno2le ge an $erce$tions that are ac<uire through irect e/$erience 2ith an obRect an relate in+ormation +rom other sources. The 4++ective com$onent is oneNs emotions or +eelings about a $articular $ro uct or bran . The #onative com$onent is the likelihoo that the consumer 2ill take an action or behave in a certain 2a&. 4ttitu e )ormation E #hangeF "n Mo el is Multiattribute

There are also multiattribute attitu e mo els. The +irst one is the attitu e to2ar an obRect mo el. This is 2hen oneNs attitu e to2ar a $ro uct or bran is a +unction o+ the $resenceG or absenceG an evaluation o+ certain $ro uct5s$eci+ic

belie+s an Eor attitu es. The secon is the attitu e to2ar behavior mo el. This is 2hen the in ivi ualNs attitu e to2ar behaving or acting 2ith res$ect to an obRect rather than the attitu e to2ar the obRect itsel+ seem to corres$on more closel& to actual behavior than oes the attitu e to2ar obRect mo el. The theor& o+ reasone action mo el is a com$rehensive integration o+ attitu e com$onents esigne to lea to both better e/$lanation an better $re ictions o+ behavior. It incor$orates subRective norms that in+luence intention. This assesses normative belie+s attribute to others an motivation to com$l& 2ith others. 4ttitu e )ormation E #hangeF Theor& O+ Tr&ing to #onsume an a 4ttitu e to2ar s

T2o last mo els 2ere +orme to look at consumersN attitu es +rom a i++erent $ers$ective. There is the theor& o+ tr&ing5to5consume mo elG 2hich re+lects instances in 2hich the action or outcome is not certain but instea re+lects the consumerNs attem$ts to consume. 4n our +inal mo el is the attitu e to2ar the a mo el in 2hich the consumer sees an a an +orms certain +eelings an Ru gments as a result o+ the a . These +eelings an Ru gments in turn a++ect the consumerNs attitu e to2ar the a an belie+s about the bran . Then these t2o things combine in+luence his or her attitu e to2ar the bran . 4ttitu e )ormation E #hangeF 4ttitu es are 6earne

4ttitu es are learne . This learning $rocess is the shi+t +rom having no attitu e about a $ro uct to having an attitu e. )or e/am$leG ne2 technolog& is al2a&s coming outG an until something is invente 2e have no attitu es to2ar it. 4n attitu e can +ollo2 the $urchase or consum$tion o+ a $ro uct or it can come be+ore the $urchaseG $erha$s +rom something as sim$le as vie2ing an a vertisement +or that $ro uct. Things that ma& in+luence oneNs attitu e are $ersonal e/$erienceG in+luence o+ +amil& an +rien sG irect marketingG mass me iaG an the Internet. 4ttitu es that have been +orme +rom irect e/$eriences are more con+i entl& hel G an there+ore strongerG than attitu es +orme +rom an in irect e/$erience. 4s 2e iscusse in classG a consumerNs $ersonalit& 2ill have an e++ect on ho2 the& $erceive an a vertisement. -eo$le 2ith a high nee +or cognition enRo& lots o+ $ro uct in+ormationG 2hereas those lo2 in nee +or cognition res$on better to celebrities or attractive mo els. 4ttitu e )ormation E #hangeF Metho s use to change attitu es

#onsumersN attitu es can be change G ho2ever. There are +ive metho s +or attem$ting to alter the attitu es o+ consumers. The& areF A1B #hanging the consumerNs basic motivational +unction A"B associating the $ro uct 2ith an a mire grou$ or event A3B resolving t2o con+licting attitu es A4B altering com$onents o+ the multiattribute mo el an A5B changing consumer belie+s about com$etitorsN bran s.

4ttitu e )ormation E #hangeF )unctional 4$$roach to #hange

The +unctional a$$roach to changing attitu es sa&s that there are +our classi+ications o+ attitu es. The& are the utilitarian +unctionG the ego e+ensive +unctionG the value5e/$ressive +unctionG an the kno2le ge +unction. The utilitarian +unction is 2hen an attitu e is hel ue to the bran Ns utilit&. 4 2a& to change this attitu e is to sho2 the utilit& or $ur$ose o+ the bran that the& might not have consi ere . The ne/t is the ego5 e+ensive +unction 2hich e/$resses $eo$leNs esire to $rotect their sel+5image. %ho2ing ho2 a $ro uct can boost $eo$leNs sel+ esteem an +eelings o+ sel+ oubt is one 2a& o+ changing their attitu e in this situation. 4ttitu e )ormation E #hangeF (alue */$ressive

The value5e/$ressive +unction sa&s that consumersN attitu es are a $ro uct o+ their li+est&leG belie+sG an outlook on li+e. Uno2ing the attitu es o+ a s$eci+ic segment can hel$ better re+lect these characteristics in a s. The kno2le ge +unction sa&s that $eo$le have a esire to kno2 in+ormation an etails about $ro ucts the& encounter. #om$aring oneNs $ro ucts to other $ro ucts an e/$laining its bene+its an a vantages coul be one 2a& o+ a$$ealing to this si e o+ $eo$le.

There is also the i ea o+ combining several o+ the above +unctions to a$$eal to i++erent grou$s o+ $eo$le 2ho ma& use the same $ro uct but +or i++erent reasons. 4nother 2a& to change attitu es is to associate a $ro uct 2ith an a mire grou$ or eventG such as a charit& cause. One e/am$le o+ this is ,a$Ns 0e cam$aign. Hal+ the $ro+it ma e +rom the 0e clothing goes to the ,lobal )un G 2hich hel$s 2omen an chil ren in 4+rica 2ho are a++ecte b& 4I.%EHI(. 4ttitu e )ormation E #hangeF Psing negative attitu es

%ho2ing consumers that their negative attitu e to2ar a $ro uctG bran G etc. is not in con+lict 2ith another attitu eG ma& make them incline to change their negative o$inion o+ the bran . This is Rust one more 2a& o+ changing consumersN attitu es. 4nother solution is altering com$onents o+ the multiattribute mo el. One 2a& o+ altering this mo el is changing the relative evaluation o+ attributes. It is easier to $ersua e customers to cross over to another $ro uct 2hen the t2o are similar. The& can be encourage to shi+t their +avorable attitu e to2ar another version o+ the $ro uct. 4nother 2a& o+ altering the mo el is b& changing bran belie+sG 2hich is changing $erce$tions or belie+s about the bran itsel+. %uggesting in+ormation about &our bran G ho2everG must be com$elling an re$eate

enough to overcome a consumerNs natural ten enc& to stick 2ith their $reviousl& hel attitu e. 4 ing an attribute can be another o$tion +or changing attitu es. 4 ing a $reviousl& un5thought o+ attribute or one that sho2s im$rovement or technological innovation 2ill also shi+t attitu es. 4n e/am$le 2oul be a vertising that &ogurt has more $otassium than a banana. 4nother $ossibilit& is eliminating a characteristic or +eatureG such as making unscente $ro ucts. One last route is to change the overall bran rating. This is an attem$t to alter a consumerNs overall assessment o+ a bran G such as mentioning that it is the Lmost $o$ular bran O.

4ttitu e )ormation E #hangeF #hanging Belie+s about #om$etitors Bran s

The +inal 2a& o+ changing an attitu e is b& changing belie+s about com$etitorNs bran s. Man& bran s o thisG but an e/am$le 2oul be a Vi$loc bag commercial sho2ing a store5bran or com$etitors bran bag leaking as it is turne u$si e o2n. This gives the vie2er a negative connotation o+ the com$etitorNs bagG thereb& im$roving their attitu e to2ar Vi$loc.

7o2 that 2e have iscusse ho2 attitu es are +orme an ho2 the& can be altere G 2e 2ill go into ho2 attitu es a++ect the actions that consumers takeG or vice versa. #onsumersN behavior can either $rece e or +ollo2 their attitu e +ormation. T2o e/$lanations as to 2h& behavior ma& $rece e attitu e +ormation are the cognitive issonance theor& an the attribution theor&. The cognitive issonance theor& is the iscom+ort or issonance that occurs 2hen a consumer hol s con+licting thoughts about a belie+ or an attitu e obRect. 4n e/am$le 2oul be a $ost5$urchase issonanceG 2here the consumer thinks about the uni<ueG $ositive <ualities o+ the bran s that the& i not select. 4n a ma& hel$ to assure the consumer that the& ma e the right ecision an ease this issonance. The attribution theor& e/$lains ho2 $eo$le assign blame or cre it to events on the basis o+ either their behavior or the behavior o+ others. The& ma& ask themselves 2h& the& ma e a ecision. The $rocess o+ making in+erences is a maRor $art o+ attitu e +ormation an change. There are i++erent $ers$ectives on the attribution theor&G 2hich inclu e sel+5 $erce$tion theor&G attributions to2ar othersG attributions to2ar thingsG an ho2 2e test our attributions. 4ttitu e )ormation E #hangeF %el+ -erce$tion Theor&

%el+5$erce$tion theor& is in ivi ualsN in+erences or Ru gments as to the causes o+ their o2n behavior. 4ttitu es evelo$ as consumers look at an make Ru gments about their o2n behavior. Inclu e in this are internal attributionsG giving cre it to onesel+ +or the outcome or results o+ using a $ro uctG e/ternal attributionsG

2hich is attributing $ositive results to +actors be&on oneNs control an e+ensive attributionG 2hich sa&s consumers 2ill o+ten acce$t $ersonal cre it success an cre it +ailure to others or outsi e causes. 4ttitu e )ormation E #hangeF 4ttributions are O$inions

4ttributions to2ar s others an attributions to2ar s things are the o$inions $eo$le have o+ things 2hich the& come into contact 2ith. )or e/am$leG 2hen talking to a sales$erson at a storeG a consumer 2ill tr& to etermine i+ the sales$erson is kno2le geG trust2orth&G an reliable. The same can be sai o+ attributions to2ar s things. #onsumers 2ill Ru ge a $ro uctNs $er+ormance an +orm attributes in an attem$t to +in out 2h& the $ro uct meets or +ails to meet their e/$ectations. Testing 4ttributions is an im$ortant ste$ +or consumers. The& 2ant to test +irsthan 2hether the attributions the& have ma e to2ar s a certain $ro uctG serviceG or $erson is correct. -eo$le 2ant conviction about a $articular observation an 2ill go about collecting a itional in+ormation in or er to o this. The& ma& use the +ollo2ing criteriaF .istinctivenessG consistenc& over timeG consistenc& over mo alit&G an consensus. 4ttitu e )ormation E #hangeF .istinctiveness

.istinctiveness is attributing an action to a $articular $ro uct or $erson i+ the action occurs onl& 2hen that $ro uctE$erson is $resent an not in its absence. In or er to have consistenc& over timeG each time the $ersonE$ro uct is $resent the consumerNs in+erence must be the same. In measuring consistenc& over mo alit&G the in+erenceEreaction must be the sameG even 2hen the situation varies. )inall&G a consensus is 2hen the action is $erceive in the same 2a& b& other consumers. =hat is Organization .esign> WWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWW 4 $rocess +or im$roving the $robabilit& that an organization 2ill be success+ul. WWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWW More s$eci+icall&G Organization .esign is a +ormalG gui e $rocess +or integrating the $eo$leG in+ormation an technolog& o+ an organization. It is use to match the +orm o+ the organization as closel& as $ossible to the $ur$oseAsB the organization seeks to achieve. Through the esign $rocessG organizations act to im$rove the $robabilit& that the collective e++orts o+ members 2ill be success+ul. T&$icall&G esign is a$$roache as an internal change un er the gui ance o+ an e/ternal +acilitator. Managers an members 2ork together to e+ine the nee s o+ the organization then create s&stems to meet those nee s most e++ectivel&. The +acilitator assures that a s&stematic $rocess is +ollo2e an encourages creative thinking.

Hierarchical %&stems =estern organizations have been heavil& in+luence b& the comman an control structure o+ ancient militar& organizationsG an b& the turn o+ the centur& intro uction o+ %cienti+ic Management. Most organizations to a& are esigne as a bureaucrac& in 2hich authorit& an res$onsibilit& are arrange in a hierarch&. =ithin the hierarch& rulesG $oliciesG an $roce ures are uni+orml& an im$ersonall& a$$lie to e/ert control over member behaviors. 4ctivit& is organize 2ithin sub5units AbureausG or e$artmentsB in 2hich $eo$le $er+orm s$ecialize +unctions such as manu+acturingG salesG or accounting. -eo$le 2ho $er+orm similar tasks are clustere together. The same basic organizational +orm is assume to be a$$ro$riate +or an& organizationG be it a governmentG schoolG businessG churchG or +raternit&. It is +amiliarG $re ictableG an rational. It is 2hat comes imme iatel& to min 2hen 2e iscover that ...2e reall& have to get organize X 4s +amiliar an rational as the +unctional hierarch& ma& beG there are istinct isa vantages to blin l& a$$l&ing the same +orm o+ organization to all $ur$ose+ul grou$s. To un erstan the $roblemG begin b& observing that i++erent grou$s 2ish to achieve i++erent outcomes. %econ G observe that i++erent grou$s have i++erent membersG an that each grou$ $ossesses a i++erent culture. These i++erences in esire outcomesG an in $eo$leG shoul alert us to the anger o+ assuming there is an& single best 2a& o+ organizing. To be com$leteG ho2everG also observe that i++erent grou$s 2ill likel& choose i++erent metho s through 2hich the& 2ill achieve their $ur$ose. %ervice grou$s 2ill choose i++erent metho s than manu+acturing grou$sG an both 2ill choose i++erent metho s than grou$s 2hose $ur$ose is $rimaril& social. One structure cannot $ossibl& +it all. Organizing on -ur$ose The $ur$ose +or 2hich a grou$ e/ists shoul be the +oun ation +or ever&thing its members o Y inclu ing the choice o+ an a$$ro$riate 2a& to organize. The i ea is to create a 2a& o+ organizing that best suits the $ur$ose to be accom$lishe G regar less o+ the 2a& in 2hich otherG issimilar grou$s are organize . Onl& 2hen there are close similarities in esire outcomesG cultureG an metho s shoul the basic +orm o+ one organization be a$$lie to another. 4n even thenG onl& 2ith care+ul +ine tuning. The anger is that the $atterns o+ activit& that hel$ one grou$ to be success+ul ma& be &s+unctional +or another grou$G an actuall& inhibit grou$ e++ectiveness. To o$timize e++ectivenessG the +orm o+ organization must be matche to the $ur$ose it seeks to achieve. The .esign -rocess Organization esign begins 2ith the creation o+ a strateg& Y a set o+ ecision gui elines b& 2hich members 2ill choose a$$ro$riate actions. The strateg& is erive +rom clearG concise statements o+ $ur$oseG an visionG an +rom the organizationNs basic $hiloso$h&. %trateg& uni+ies the intent o+ the organization an +ocuses members to2ar actions esigne to accom$lish esire outcomes.

The strateg& encourages actions that su$$ort the $ur$ose an that o not.

iscourages those

#reating a strateg& is $lanningG not organizing. To organize 2e must connect $eo$le 2ith each other in meaning+ul an $ur$ose+ul 2a&s. )urtherG 2e must connect $eo$le 2ith the in+ormation an technolog& necessar& +or them to be success+ul. Organization structure e+ines the +ormal relationshi$s among $eo$le an s$eci+ies both their roles an their res$onsibilities. 4 ministrative s&stems govern the organization through gui elinesG $roce ures an $olicies. In+ormation an technolog& e+ine the $rocessAesB through 2hich members achieve outcomes. *ach element must su$$ort each o+ the others an together the& must su$$ort the organizationNs $ur$ose. */ercising #hoice Organizations are an invention o+ man. The& are contrive social s&stems through 2hich grou$s seek to e/ert in+luence or achieve a state $ur$ose. -eo$le choose to organize 2hen the& recognize that b& acting alone the& are limite in their abilit& to achieve. =e sense that b& acting in concert 2e ma& overcome our in ivi ual limitations. =hen 2e organize 2e seek to irectG or $atternG the activities o+ a grou$ o+ $eo$le to2ar a common outcome. Ho2 this $attern is esigne an im$lemente greatl& in+luences e++ectiveness. -atterns o+ activit& that are com$lementar& an inter e$en ent are more likel& to result in the achievement o+ inten e outcomes. In contrastG activit& $atterns that are unrelate an in e$en ent are more likel& to $ro uce un$re ictableG an o+ten uninten e results. The $rocess o+ organization esign matches $eo$leG in+ormationG an technolog& to the $ur$oseG visionG an strateg& o+ the organization. %tructure is esigne to enhance communication an in+ormation +lo2 among $eo$le. %&stems are esigne to encourage in ivi ual res$onsibilit& an ecision making. Technolog& is use to enhance human ca$abilities to accom$lish meaning+ul 2ork. The en $ro uct is an integrate s&stem o+ $eo$le an resourcesG tailore to the s$eci+ic irection o+ the organization.

Con1+ict
#on+lict is an& situation in 2hich t2o or more $arties +eel themselves in o$$osition. It is an inter$ersonal $rocess that arises +rom isagreements over the goals or the metho s to accom$lish those goals. )ollo2ings are the im$ortant +eatures o+ con+lictF5 1 #on+lict arises because o+ incom$atibilit& o+ t2o or more as$ects o+ an elementK it ma& be goalsG interestsG metho s o+ 2orkingG or an& other +eature. #on+licts occur 2hen an in ivi ual is not able to choose among the available courses o+ action. #on+lict is a &namic $rocess as it in icates a series o+ eventsG each con+lict is ma e o+ series o+ interlocking con+lict e$iso e #on+lict must be $erceive an e/$resse b& the $arties to it. I+ one is a2are o+ a con+lictG it is generall& agree that con+lict oes not e/ist even though there ma& be incom$atibilit& in some res$ect.

" 3 4

There are +our basic issues 2hich ma& be involve in a con+lict. These areF5 A1B )acts5 #on+licts ma& occur because o+ isagreement that the $ersons have over the e+inition o+ a $roblemG relevant +acts relate to the $roblemG or their authorit& an $o2er. A"B ,oals5 %ometimesG there ma& be isagreement over the goals 2hich t2o $arties 2ant to achieve. The relationshi$ bet2een goals o+ the $arties ma& be vie2e as incom$atible 2ith the result that one goal ma& be achieve at the cost o+ the other. A3B Metho s5 *ven i+ goals are $erceive to be the sameG there ma& be i++erence over the metho sG $roce uresG strategiesG tacticsG etc. through 2hich goals ma& be achieve . A4B (alues5 There ma& be i++erences over the value5ethical stan ar sG consi erations +or +airnessG Rustice etc. These i++erences are o+ more intrinsic nature in $ersons an ma& a++ect the choice o+ goals or metho s o+ achieving those. T&$es o+ con+lictF5 In ivi ual level con+licts ,oal con+licts 0ole con+licts Inter$ersonal con+lict (ertical con+lict Horizontal con+lict ,rou$ level con+licts Organizational level con+licts

Or)%ni*%tion De.e+o0'ent Inter.entions Organization .evelo$ment AO.B interventions techni<ues are the metho s create b& O. $ro+essionals an others. %ingle organization or consultant cannot use all the interventions. The& use these interventions e$en ing u$on the nee or re<uirement. The most im$ortant interventions areG 1. %urve& +ee back ". -rocess #onsultation 3. sensitivit& Training 4. The Managerial gri 5. ,oal setting an -lanning !. Team Buil ing an management b& obRectives '. ;ob enrichmentG changes in organizational structure an $artici$ative management an :ualit& circlesG I%OG T:M Sur.e/ 1ee2,%c&: The intervention $rovi es ata an in+ormation to the managers. In+ormation on 4ttitu es o+ em$lo&ees about 2age levelG an structureG hours o+ 2orkG 2orking con itions an relations are collecte an the results are su$$lie to the to$ e/ecutive teams. The& anal&se the ataG +in out the $roblemG evaluate the results an evelo$ the means to correct the $roblems i enti+ie . The team are +orme 2ith the em$lo&ees at all levels in the organization hierarch& i.eG +rom the rank an +ile to the to$ level. "rocess Consu+t%tion : The $rocess consultant meets the members o+ the e$artment an 2ork teams observes thie interactionG $roblem i enti+ication skillsG solving $roce ures et. He +ee s back the team eith the in+ormation collecte through observationsG coaches an counsels in ivi uals ? grou$s in moul ing their behavior. Go%+ settin) %n2 0+%nnin) : *ach ivision in an organization sets the goals or +ormulates the $lans +or $ro+itabilit&. These goals are sent to the to$ management 2hich in turn sen s them back to the ivisions a+ter mo i+ication . 4 set o+ organization goals thus emerge there a+ter. M%n%)eri%+ )ri2: This i enti+ies a range o+ management behavior base on the i++erent 2a&s that ho2 $ro uctionEservice oriente an em$lo&ee oriente states interact 2ith each other. Managerial gri is also calle as instrumental laborator& training as it is a structure version o+ laborator& training. It consists o+ in ivi ual an grou$ e/ercises 2ith a vie2 to evelo$ing a2areness o+ in ivi ual managerial st&le inter$ersonal com$etence an grou$ e++eciveness. Thus gri training is relate to the lea ershi$ st&les. The managerial gri +ocuses on the observations o+ behaviour in e/ercises s$eci+icall& relate to 2ork. -artici$ants in this training are encourage an hel$e to a$$raise their o2n managerial st&le. T-ere %re 9 0-%ses in )ri2 OD: )irst $hase is concerne 2ith stu &ing the gri as a theoretical kno2le ge to un erstan the human behavior in the Organization. %econ $hase is concerne 2ith team 2ork evelo$ment. 4 seminar hel$s the

members in evelo$ing each memberNs $erce$tion an the insight into the $roblems +ace b& various members on the Rob. Thir $hase is inter grou$ evelo$ment. This $hase aims at evelo$ing the relationshi$s bet2een i++erent e$artments )ourth $hase is concerne 2ith the creation o+ a strategic mo el +or the organization 2here #hie+ */ecutives an their imme iate subor inates $artici$ate in this activit&. )i+th $hase is concerne 2ith im$lementation o+ strategic mo el.. -lanning teams are +orme +or each e$artment to kno2 the available resourcesG re<uire resourcesG $rocuring them i+ re<uire an im$lementing the mo el %i/th -hase is concerne 2ith the critical evaluation o+ the mo el an making necessar& a Rustment +or success+ul im$lementation. %tarting +rom the to$ o+ a com$an&G the si/ stages o+ Management b& ObRectives AMBOB areF 1. .e+ine cor$orate obRectives at boar level ". 4nal&ze management tasks an evise +ormal Rob s$eci+icationsG 2hich allocate res$onsibilities an ecisions to in ivi ual managers 3. %et $er+ormance stan ar s 4. 4gree an set s$eci+ic obRectives 5. 4lign in ivi ual targets 2ith cor$orate obRectives !. *stablish a management in+ormation s&stem to monitor achievements against obRectives

Management b& ObRectives AMBOB is a success+ul $hiloso$h& o+ management. It re$laces the tra itional $hiloso$h& o+ LManagement b& .ominationO. MBO le to a s&stematic ,oal setting an -lanning. -eter .rucker the eminent management ,uru in 1959 has +irst $ro$agate the $hiloso$h& since then it has become a movement. MBO is a $rocess b& 2hich managers at i++erent levels an their subor inates 2ork together in i enti+&ing goals an establishing obRectives consistent 2ith Organizational goals an attaining them. Team buil ing is an a$$lication o+ various techni<ues o+ %ensitivit& training to the actual 2ork grou$s in various e$artments. These 2ork grou$s consist o+ $eers an a su$ervisor. %ensitivit& training is calle a laborator& as it is con ucte b& creating an e/$erimental laborator& situation in 2hich em$lo&ees are brought together. The Team buil ing techni<ue an training is esigne to im$rove the abilit& o+ the em$lo&ees to 2ork together as teams. ;ob enrichment is currentl& $ractice all over the 2orl . It is base on the assum$tion in or er to motivate 2orkersG Rob itsel+ must $rovi e o$$ortunities +or

achievementG recognitionG res$onsibilit&G a vancement an gro2th. The basic i ea is to restore to Robs the elements o+ interest that 2ere taken a2a&. In a Rob enrichment $rogram the 2orker eci es ho2 the Rob is $er+orme G $lanne an controlle an makes more ecisions concerning the entire $rocess. Or)%ni*%tion%+ De.e+o0'ent Organizational %tructures Organizational .evelo$ment #&cles .iagnosis an Intervention %trategiesF Team Buil ing ,oal %etting %urve& )ee back %trategic -lanning %ensitivit& Training AT5,rou$sB ,ri Training Organizational #ulture 2ithin Organizational .evelo$ment International #ulture an Organizational .evelo$ment Organizational .evelo$ment in 0es$onse to Technological #hange

*r%ani+ational de!elop,ent
2ur%e (1)G2) defined or aniBational de$elopment (4D) as Na planned process of chan e in an or aniBationJs culture throu h the utiliBation of beha$iourial science, technolo #, research and theor#.N "t refers to the mana ement of chan e and the de$elopment of human resources. "t is a response to chan e (2ennis, 1)6)). 4D is a comple. educational strate # intended to chan e the beliefs, attitudes, $alues and structure of the or aniBation so that the or aniBation can better adapt to new technolo ies, mar%ets and challen es. A $ariet# of forces cause chan es in the modern or aniBation (8ellrie el, -locum and <oodman, 1)GC). -ome of these are: technolo ical chan eK the %nowled e e.plosionK product and ser$ice obsolescenceK and social chan e. ,n$ironment, resources and technolo # perform a decisi$e role in determinin or aniBational policies. "f an# one of these determinants chan es, the policies need to be re*e.amined to determine if a different or aniBational desi n would be better suited. -pproaches to *D The ma1or schools of thou ht in 4D are considered in the followin para raphs. Group Dynamics This is a historical and traditional method of 4D based on the assumption that 4D acti$ities are process consultation (Albrecht, 1)GC). "n this approach, an e.pert wor%s at a small* roup le$el, usin roup methods, sensiti$it# trainin and other related approaches. The Behaviour Modification School The Jbe*modJ school of 4D (based on the $arious wor%s of -%inner) attempts to rearran e the reward s#stem in the or aniBation so as to stren then selected Jtar etJ beha$iour on the part of emplo#ees. The Systems Approach This approach aims at enhancin the o$erall effecti$eness of the or aniBation. The s#stem can be defined as ha$in :

 some components that comprise itK functions and processes performed b# $arious componentsK relationship amon the components that ma%e them a s#stemK and an or aniBational principle, which i$es the s#stem a purpose. This approach is based on the assumption that an or aniBation is composed of four interloc%in s#stems (Albrecht, 1)GC), namel#: a technical system, referrin to the elements, acti$ities and relationships that ma%e up the primar# producti$e a.is of the or aniBation. "t includes ph#sical facilities, machiner#, special e/uipment, wor% processes, wor% methods, wor% procedures, wor%*oriented information and $arious means of handlin K a social system, referrin to the people in the or aniBation and the acti$ities in which the# are en a ed. "t includes the intra* roup roles and relationships, the form of power hierarch#, $alues and norms for beha$iour in the or aniBation, and the reward and punishment processesK an administrative system, which refers to the policies, procedures, instructions, reports, etc., which are re/uired to operate the or aniBation. "t also includes those who operate the technical and administrati$e s#stemsK and a strategic system, which is the steerin function of the or aniBation. "ts components include the mana ement team from the chief e.ecuti$e down to the lowest super$isor, the chain of command, reportin relationships, and the power $alues of the leaders of the or aniBation. "t also includes plans, the plannin process and the procedures used in o$ernin the or aniBation and adaptin it to chan in needs. The s#stems approach has four se/uential sta es: assessment, problem sol$in , implementation and e$aluation. The Socio-Technical Approach The socio*technical approach $iews an or aniBation (3asmore, 1)GG) as made up of people (a social s#stem and a technical s#stem) producin oods or ser$ices $alued b# customers (who are part of the e.ternal en$ironment). The social s#stem uses tools, techni/ues, and %nowled e. The technical s#stem produces oods and ser$ices which are $alued b# customers in the e.ternal en$ironment. The Environment Approach The en$ironment is an a ent of chan e. ,n$ironmental chan es are the primar# incitement and stimulus for or aniBational betterment. The socio*technical arran ements in the or aniBation must chan e accordin to chan es in the en$ironment. The en$ironment can chan e in both predictable and unpredictable wa#s. The e.ternal en$ironment can be relati$el# stable or rapidl# chan in . Thus, the en$ironment, the technical s#stem and the social s#stem are three basic elements which pla# a crucial role in an# or aniBationJs desi n, re*desi n or de$elopment. The efficienc# and effecti$eness of the or aniBation depend upon the e/uilibrium between the needs of these determinant elements.

The *D process
The 4D process entails $arious acti$ities at different le$els in the or aniBation. Throu h these acti$ities, inter$entions are made in the on oin or aniBation to chan e the structure, processes, beha$iour or $alues of indi$iduals and roups. 'olembiews%i, 3rochl and -in% (1)G1) cate oriBed these inter$entions under ei ht headin s: Process Analysis Activities, referrin to applications of beha$iourial science perspecti$es to fathom complete and d#namic situationsK

 S ill-!uilding Activities, in$ol$in $arious desi ns for elicitin beha$iours in con ruence with 4D $alues. This includes i$in and recei$in feedbac%, listenin , and settlin conflictsK Diagnostic Activities, includin process anal#sis to enerate data throu h inter$iews, ps#cholo ical instruments or opinion sur$e#sK "oaching or "ounselling Activities to help in resol$in conflicts throu h third*part# consultationK Team Building Activities, enhancin the efficienc# and effecti$eness of tas% roupsK #nter-group Activities, attemptin to create effecti$e and satisf#in lin%a es between two or more tas% roups or departments in the or aniBationK Techno-Structural Activities, aimin at buildin need*fulfillin roles, 1obs and structuresK and System-Building or System-$ene%al Activities, see%in e.hausti$e chan es in a lar e or aniBationJs climate and $alues usin combinations of the $arious 4D inter$entions listed abo$e.

Socio-technical syste,s approach for or%ani+ation re-desi%n

-ocio*technical s#stems desi n is better suited to meet the re/uirements of a chan in e.ternal en$ironment in comparison with traditional desi ns. "t endea$ours to re*desi n the or aniBationJs structure, processes and functions to create a balance between the or aniBation and its chan in e.ternal en$ironment. "t could in$ol$e the followin steps (9oster, 1)6FK (ummin s, 1)F6K 3asmore, 1)GG): definin the scope of the s#stem to be re*desi nedK definin the en$ironmental demandsK e$ol$in a $ision statementK enli htenin or aniBational membersK de$elopin the chan e structureK conductin socio*technical anal#sisK preparin re*desi n proposalsK implementin recommended chan esK and e$aluatin the chan es or re*desi n.

*D techni(ues
Techni/ues used for 4D are considered below. Sensitivity training This has man# applications and is still used widel#, e$en thou h new techni/ues ha$e emer ed (:ewin, 1)G1). -ensiti$it# trainin (2enn#, 2radford and :ippitt, 1)6A) basicall# aims at: rowth in effecti$e membershipK de$elopin abilit# to learnK stimulatin to i$e helpK and de$elopin insi hts to be sensiti$e to roup processes. These process $ariables * in a s#stems sense * interact and are interdependent. Grid Training 2la%e and 5outon;s 5ana erial 'rid The treatment of tas% orientation and people orientation as two independent dimensions was a ma1or step in leadership studies. 5an# of the leadership studies conducted in the 1)00s at the &ni$ersit# of 5ichi an and the 4hio -tate &ni$ersit# focused on these two dimensions.

2uildin on the wor% of the researchers at these &ni$ersities, 6obert 2la%e and 7ane 5outon (1)60s) proposed a raphic portra#al of leadership st#les throu h a mana erial rid (sometimes called leadership rid). The rid depicted two dimensions of leader beha$ior, concern for people (accommodatin people;s needs and i$in them priorit#) on #*a.is and concern for production (%eepin ti ht schedules) on .*a.is, with each dimension ran in from low (1) to hi h ()), thus creatin G1 different positions in which the leader;s st#le ma# fall.

The fi$e resultin leadership st#les are as follows:

#oncern +or -eo$le #oncern +or $ro uction

1. "mpo$erished 5ana ement (1, 1): 5ana ers with this approach are low on both the dimensions and e.ercise minimum effort to et the wor% done from subordinates. The leader has low concern for emplo#ee satisfaction and wor% deadlines and as a result disharmon# and disor aniBation pre$ail within the or aniBation. The leaders are termed ineffecti$e wherein their action is merel# aimed at preser$in 1ob and seniorit#. 2. Tas% mana ement (), 1): Also called dictatorial or perish st#le. 8ere leaders are more concerned about production and ha$e less concern for people. The st#le is based on theor# ? of 5c're or. The emplo#ees; needs are not ta%en care of and the# are simpl# a means to an end. The leader belie$es that efficienc# can result onl# throu h proper or aniBation of wor% s#stems and throu h elimination of people where$er possible. -uch a st#le can definitel# increase the output of or aniBation in short run but due to the strict policies and procedures, hi h labour turno$er is ine$itable. C. 5iddle*of*the*6oad (0, 0): This is basicall# a compromisin st#le wherein the leader tries to maintain a balance between oals of compan# and the needs of people. The leader does not push the boundaries of achie$ement resultin in a$era e performance for or aniBation. 8ere neither emplo#ee nor production needs are full# met. A. (ountr# (lub (1, )): This is a colle ial st#le characteriBed b# low tas% and hi h people orientation where the leader i$es thou htful attention to the needs of people thus pro$idin them with a friendl# and comfortable en$ironment. The leader feels that such a treatment with emplo#ees will lead to self*moti$ation and will find people wor%in hard on their own. 8owe$er, a low focus on tas%s can hamper production and lead to /uestionable results. 0. Team 5ana ement (), )): (haracteriBed b# hi h people and tas% focus, the st#le is based on the theor# D of 5c're or and has been termed as most effecti$e st#le accordin to 2la%e and 5outon. The leader feels that empowerment, commitment, trust, and respect are the %e# elements in creatin a team atmosphere which will automaticall# result in hi h emplo#ee satisfaction and production. Ad$anta es of 2la%e and 5outon;s 5ana erial 'rid The 5ana erial or :eadership 'rid is used to help mana ers anal#Be their own leadership st#les throu h a techni/ue %nown as rid trainin . This is done b# administerin a /uestionnaire that helps mana ers identif# how the# stand with respect to their concern for production and people. The trainin is aimed at basicall# helpin leaders reach to the ideal state of ), ). :imitations of 2la%e and 5outon;s 5ana erial 'rid The model i nores the importance of internal and e.ternal limits, matter and scenario. Also, there are some more aspects of leadership that can be co$ered but are not. 'rid trainin is an out rowth of the mana erial rid approach to leadership (2lac%e and 5outon, 1)FG). "t is an instrumental approach to laborator# trainin . -ensiti$it# trainin is supplemented with self*administered instruments (2enn#, 2radford and :ippitt, 1)6A). The anal#sis of these instruments helps in roup de$elopment and in the learnin of roup members. This techni/ue is widel# used and has pro$ed effecti$e. 'rid trainin for 4D is completed in si. phases. The# are: la!oratory-seminar training, which aims at ac/uaintin participants with concepts and material used in rid trainin K a team development phase, in$ol$in the comin to ether of members from the same department to chart out as to how the# will attain a ) . ) position on the ridK inter-group development aims at o$erall 4D. Durin this phase, conflict situations between roups are identified and anal#sedK organi&ation goal setting is based on participati$e mana ement, where participants contribute to and a ree upon important oals for the or aniBationK

 goal attainment aims at achie$in oal settin K and

oals which were set durin the phase of or aniBational estions for

sta!ili&ation in$ol$es the e$aluation of the o$erall pro ramme and ma%in su chan es if appropriate. Survey 'eed!ac

-ur$e# feedbac% is based on the stud# (sur$e#) of the unit of anal#sis (such as wor% roup, a department or a whole or aniBation) b# usin /uestionnaires (Ta#lor and 2owers, 1)F2). The resultin data are then used to identif# and anal#se problems and propose a suitable action plan to o$ercome them. A t#pical sur$e# /uestionnaire would enerate information on leadership, or aniBational climate and satisfaction (Table 1). -atisfaction with pa# Typical factors co!ered in a sur!ey research (uestionnaire -atisfaction with the wor% roup

$educing involvement and terminating This is the mutual a reement to cease the consultation. Third Party The third*part# peace*ma%in techni/ue attempts to settle inter*personal and inter* roup conflicts usin modern concepts and methods of conflict mana ement. This techni/ue

anal#ses the processes in$ol$ed, discerns the problem on the basis of the anal#sis, and suitabl# mana es the conflict situation. Team !uilding Team buildin has been considered the most popular 4D techni/ue in recent #ears, so much so that it has replaced sensiti$it# trainin . "t aims at impro$in o$erall performance, tends to be more tas%*oriented, and can be used with famil# roups (members from the same unit) as well as special roups (such as tas% forces, committees and inter*departmental roups). There are fi$e ma1or elements in$ol$ed in team buildin (9rench and 2ell, 1)FG): problem sol$in , decision ma%in , role clarification and oal settin for accomplishin the assi ned tas%sK buildin and maintainin effecti$e inter*personal relationshipsK understandin and mana in role ne otiation techni/ues. Transactional Analysis Transactional anal#sis is widel# used b# mana ement practitioners to anal#se roup d#namics and inter*personal communications. "t deals with aspects of identit#, maturation, insi ht and awareness (2erne, 1)6A). As a tool for 4D, it attempts to help people understand their e os * both their own and those of others * to allow them to interact in a more meanin ful manner with one another (8use, 1)F0). "t attempts to identif# peoplesJ dominant e o states and help people understand and anal#se their transactions with others. "t is /uite effecti$e if applied in the earl# sta e of the dia nostic phase. Tea, .uildin%
)ormi ng %tormi ng 7ormi ng -er+ormin g 4 Rourni ng

roup processes and cultureK

role anal#sis techni/ues for role clarification and definitionK and

e%2ers-i0 .s8 M%n%)e'ent

=hat is the i++erence bet2een management an lea ershi$> It is a <uestion that has been aske more than once an also ans2ere in i++erent 2a&s. The biggest i++erence bet2een managers an lea ers is the 2a& the& motivate the $eo$le 2ho 2ork or +ollo2 themG an this sets the tone +or most other as$ects o+ 2hat the& o. Man& $eo$leG b& the 2a&G are both. The& have management RobsG but the& realize that &ou cannot bu& heartsG es$eciall& to +ollo2 them o2n a i++icult $athG an so act as lea ers too. Managers have subor inates B& e+initionG managers have subor inates 5 unless their title is honorar& an given as a mark o+ seniorit&G in 2hich case the title is a misnomer an their $o2er over others is other than +ormal authorit&. 4uthoritarianG transactional st&le

Managers have a $osition o+ authorit& veste in them b& the com$an&G an their subor inates 2ork +or them an largel& o as the& are tol . Management st&le is transactionalG in that the manager tells the subor inate 2hat to oG an the subor inate oes this not because the& are a blin robotG but because the& have been $romise a re2ar Aat minimum their salar&B +or oing so. =ork +ocus Managers are $ai to get things one Athe& are subor inates tooBG o+ten 2ithin tight constraints o+ time an mone&. The& thus naturall& $ass on this 2ork +ocus to their subor inates. %eek com+ort 4n interesting research +in ing about managers is that the& ten to come +rom stable home backgroun s an le relativel& normal an com+ortable lives. This lea s them to be relativel& risk5averse an the& 2ill seek to avoi con+lict 2here $ossible. In terms o+ $eo$leG the& generall& like to run a Qha$$& shi$Q. 6ea ers have +ollo2ers 6ea ers o not have subor inates 5 at least not 2hen the& are lea ing. Man& organizational lea ers o have subor inatesG but onl& because the& are also managers. But 2hen the& 2ant to lea G the& have to give u$ +ormal authoritarian controlG because to lea is to have +ollo2ersG an +ollo2ing is al2a&s a voluntar& activit&. #harismaticG trans+ormational st&le Telling $eo$le 2hat to o oes not ins$ire them to +ollo2 &ou. Hou have to a$$eal to themG sho2ing ho2 +ollo2ing them 2ill lea to their heartsQ esire. The& must 2ant to +ollo2 &ou enough to sto$ 2hat the& are oing an $erha$s 2alk into anger an situations that the& 2oul not normall& consi er risking. 6ea ers 2ith a stronger charisma +in it easier to attract $eo$le to their cause. 4s a $art o+ their $ersuasion the& t&$icall& $romise trans+ormational bene+itsG such that their +ollo2ers 2ill not Rust receive e/trinsic re2ar s but 2ill someho2 become better $eo$le. -eo$le +ocus 4lthough man& lea ers have a charismatic st&le to some e/tentG this oes not re<uire a lou $ersonalit&. The& are al2a&s goo 2ith $eo$leG an <uiet st&les that give cre it to others Aan takes blame on themselvesB are ver& e++ective at creating the lo&alt& that great lea ers engen er. 4lthough lea ers are goo 2ith $eo$leG this oes not mean the& are +rien l& 2ith them. In or er to kee$ the m&sti<ue o+ lea ershi$G the& o+ten retain a egree o+ se$aration an aloo+ness. This oes not mean that lea ers o not $a& attention to tasks 5 in +act the& are o+ten ver& achievement5+ocuse . =hat the& o realizeG ho2everG is the im$ortance o+ enthusing others to 2ork to2ar s their vision.

%eek risk In the same stu & that sho2e managers as risk5averseG lea ers a$$eare as risk5seekingG although the& are not blin thrill5seekers. =hen $ursuing their visionG the& consi er it natural to encounter $roblems an hur les that must be overcome along the 2a&. The& are thus com+ortable 2ith risk an 2ill see routes that others avoi as $otential o$$ortunities +or a vantage an 2ill ha$$il& break rules in or er to get things one. 4 sur$rising number o+ these lea ers ha some +orm o+ han ica$ in their lives 2hich the& ha to overcome. %ome ha traumatic chil hoo sG some ha $roblems such as &sle/iaG others 2ere shorter than average. This $erha$s taught them the in e$en ence o+ min that is nee e to go out on a limb an not 2orr& about 2hat others are thinking about &ou. In summar& This table summarizes the above Aan moreB an gives a sense o+ the i++erences bet2een being a lea er an being a manager. This isG o+ courseG an illustrative characterizationG an there is a 2hole s$ectrum bet2een either en s o+ these scales along 2hich each role can range. 4n man& $eo$le lea an manage at the same timeG an so ma& is$la& a combination o+ behaviors.

%ubRect *ssence )ocus Have Horizon %eeks 4$$roach .ecision -o2er 4$$eal to *nerg& #ulture .&namic

6ea er #hange 6ea ing $eo$le )ollo2ers 6ong5term (ision %ets irection )acilitates -ersonal charisma Heart -assion %ha$es -roactive

Manager %tabilit& Managing 2ork %ubor inates %hort5term ObRectives -lans etail Makes )ormal authorit& Hea #ontrol *nacts 0eactive

-ersuasion %t&le */change 6ikes =ants 0isk 0ules #on+lict .irection Truth #oncern #re it Blame

%ell Trans+ormational */citement +or 2ork %triving 4chievement Takes Breaks Pses 7e2 roa s %eeks =hat is right ,ives Takes

Tell Transactional Mone& +or 2ork 4ction 0esults Minimizes Makes 4voi s */isting roa s *stablishes Being right Takes Blames

Rensis i&ert M%n%)e'ent S/ste's %n2 St/+es .r. 0ensis 6ikert has con ucte much research on human behavior 2ithin organizationsG $articularl& in the in ustrial situation. He has e/amine i++erent t&$es o+ organizations an lea ershi$ st&lesG an he asserts that to achieve ma/imum $ro+itabilit&G goo labor relations an high $ro uctivit&G ever& organization must make o$timum use o+ their human assets. The +orm o+ the organization 2hich 2ill make greatest use o+ the human ca$acit&G 6ikert conten sG isK highl& e++ective 2ork grou$s linke together in an overla$$ing $attern b& other similarl& e++ective grou$s.

Organizations at $resent have 2i el& var&ing t&$es o+ management st&le an 6ikert has i enti+ie +our main s&stemsF M%n%)e'ent St/+es

The e30+oiti.e - %ut-orit%ti.e s/ste'G 2here ecisions are im$ose on subor inatesG 2here motivation is characterize b& threatsG 2here high levels o+ management have great res$onsibilities but lo2er levels have virtuall& noneG 2here there is ver& little communication an no Roint team2ork. The ,ene.o+ent - %ut-orit%ti.e s/ste'G 2here lea ershi$ is b& a con escen ing +orm o+ master5servant trustG 2here motivation is mainl& b& re2ar sG 2here managerial $ersonnel +eel res$onsibilit& but lo2er levels o notG 2here there is little communication an relativel& little team2ork. The consu+t%ti.e s/ste'G 2here lea ershi$ is b& su$eriors 2ho have substantial but not com$lete trust in their subor inatesG 2here motivation is b& re2ar s an some involvementG 2here a high $ro$ortion o+ $ersonnelG es$eciall& those at the higher levels +eel res$onsibilit& +or achieving organization goalsG 2here there is some communication Aboth vertical an horizontalB an a mo erate amount o+ team2ork. The 0%rtici0%ti.e - )rou0 s/ste'G 2hich is the o$timum solutionG 2here lea ershi$ is b& su$eriors 2ho haveK com$lete con+i ence in their subor inatesG 2here motivation is b& economic re2ar s base on goals 2hich have been set in $artici$ationG 2here $ersonnel at all levels +eel real res$onsibilit& +or the organizational goalsG 2here there is much communicationG an a substantial amount o+ coo$erative team2ork. This +ourth s&stem is the one 2hich is the i eal +or the $ro+it oriente an human5concerne organizationG an 6ikert sa&s AThe Human OrganizationG Mcgra2 HillG 19!'B that all organizations shoul a o$t this s&stem. #learl&G the changes involve ma& be $ain+ul an long52in e G but it is necessar& i+ one is to achieve the ma/imum re2ar s +or the organization. To convert an organizationG +our main +eatures o+ e++ective management must be $ut into $racticeF Fe%tures o1 E11ecti.e M%n%)e'ent The motivation to 2ork must be +ostere b& mo ern $rinci$les an techni<uesG an not b& the ol s&stem o+ re2ar s an threats. *m$lo&ees must be seen as $eo$le 2ho have their o2n nee sG esires an values an their sel+52orth must be maintaine or enhance . 4n organization o+ tightl& knit an highl& e++ective 2ork grou$s must be built u$ 2hich are committe to achieving the obRectives o+ the organization. %u$$ortive relationshi$s must e/ist 2ithin each 2ork grou$. These are characterize not b& actual su$$ortG but b& mutual res$ect.

The 2ork grou$s 2hich +orm the nuclei o+ the $artici$ative grou$ s&stemG are characterize b& the grou$ &namicsF Members are skille in lea ershi$ an membershi$ roles +or eas& interaction.

The grou$ has e/iste long enough to have evelo$e a 2ell establishe rela/e 2orking relationshi$. The members o+ the grou$ are lo&al to it an to each other since the& have a high egree o+ mutual trust. The normsG values an goals o+ the grou$ are an e/$ression o+ the values an nee s o+ its members. The members $er+orm a Tlinking5$inT +unction an tr& to kee$ the goals o+ the i++erent grou$s to 2hich the& belong in harmon& 2ith each other. Ma/ =eber A18!4519"1B 2as a ,erman aca emic an sociologist 2ho $rovi e another a$$roach in the evelo$ment o+ classical management theor&. 4s a ,erman aca emicG =eber 2as $rimaril& intereste in the reasons behin the em$lo&eesN actions an in 2h& $eo$le 2ho 2ork in an organization acce$t the authorit& o+ their su$eriors an com$l& 2ith the rules o+ the organization. 6egitimate T&$es o+ 4uthorit& b& Ma/ =eber =eber ma e a istinction bet2een authorit& an $o2er. 4ccor ing to =eber $o2er e uces obe ience through +orce or the threat o+ +orce 2hich in uces in ivi uals to a here to regulations. In contrastG legitimate authorit& entails that in ivi uals ac<uiesce that authorit& is e/ercise u$on them b& their su$eriors. =eber goes on to i enti+& three t&$es o+ legitimate authorit&F Tra itional authorit& Z Tra itional authorit& is rea il& acce$te an un<uestione b& in ivi uals since it emanates +rom ee$l& set customs an tra ition. Tra itional authorit& is +oun in tribes an monarchies. #harismatic authorit& Z #harismatic authorit& is gaine b& those in ivi uals 2ho have gaine the res$ect an trust o+ their +ollo2ers. This t&$e o+ authorit& is e/ercise b& a charismatic lea er in small an large grou$s alike. 0ational5legal authorit& Z 0ational5legal authorit& stems +rom the setu$ o+ an organization an the $osition hel b& the $erson in authorit&. 0ational5 legal authorit& is e/ercise 2ithin the sti$ulate rules an $roce ures o+ an organization.

T-e !e/ C-%r%cteristics o1 % (ure%ucr%c/

=eber coine this last t&$e o+ authorit& 2ith the name o+ a bureaucrac&. The term bureaucrac& in terms o+ an organization an management +unctions re+ers to the +ollo2ing si/ characteristicsF Management b& rules. 4 bureaucrac& +ollo2s a consistent set o+ rules that control the +unctions o+ the organization. Management controls the lo2er levels o+ the organizationQs hierarch& b& a$$l&ing establishe rules in a consistent an $re ictable manner. .ivision o+ labor. 4uthorit& an res$onsibilit& are clearl& e+ine an o++iciall& sanctione . ;ob escri$tions are s$eci+ie 2ith res$onsibilities

an line o+ authorit&. 4ll em$lo&ees have thus clearl& e+ine rules in a s&stem o+ authorit& an subor ination. )ormal hierarchical structure. 4n organization is organize into a hierarch& o+ authorit& an +ollo2s a clear chain o+ comman . The hierarchical structure e++ectivel& elineates the lines o+ authorit& an the subor ination o+ the lo2er levels to the u$$er levels o+ the hierarchical structure. -ersonnel hire on groun s o+ technical com$etence. 4$$ointment to a $osition 2ithin the organization is ma e on the groun s o+ technical com$etence. =ork is assigne base on the e/$erience an com$etence o+ the in ivi ual. Managers are salarie o++icials. 4 manager is a salarie o++icial an oes o2n the a ministere unit. 4ll elements o+ a bureaucrac& are e+ine 2ith clearl& e+ine roles an res$onsibilities an are manage b& traine an e/$erience s$ecialists. =ritten ocuments. 4ll ecisionsG rules an actions taken b& the organization are +ormulate an recor e in 2riting. =ritten ocuments ensure that there is continuit& o+ the organizationNs $olicies an $roce ures.

A2.%nt%)es %n2 Dis%2.%nt%)es o1 4e,er:s (ure%ucr%c/ =eberNs bureaucrac& is base on logic an rationalit& 2hich are su$$orte b& traine an <uali+ie s$ecialists. The element o+ a bureaucrac& o++ers a stable an hierarchical mo el +or an organization.7everthelessG =eberNs bureaucrac& oes have its limitations since it is base on the roles an res$onsibilities o+ the in ivi uals rather than on the tasks $er+orme b& the organization. Its rigi it& im$lies a lack o+ +le/ibilit& to res$on to the eman s o+ change in the business environment.

M%n%)e'ent T-ou)-ts
There are a +e2 $eo$le in ever& age 2ho $ro uce ne2G $ara igm5shi+ting i eas. %ometimes these i eas onQt catch on right a2a&G but as time $assesG their 2orth becomes more evi ent. The art o+ management is an ol oneG but it 2as a +airl& static one until about 151 &ears agoG 2hen changes in technolog&G e.g. railroa s an telegra$hG change our econom& <uite ramaticall&G an at the same time change the isci$line o+ management. =e onQt reall& have much $ers$ective &et. =ithout itG itQs har to sa& 2hat i eas 2ill en ureG an 2ho the real $ioneers 2ill turn out to be. ButG guessingG here are some o+ the $eo$le in our management heroes galler&.

S ,eorge Bo/ S -hili$ #rosb& S =. * 2ar s .eming S ;ohn .e2e& S )re rick Herzberg

!%oru Is-i&%;%

Haoru "shi%awa wanted to chan e the wa# people thin% about wor%. 8e ur ed mana ers to resist becomin content with merel# impro$in a productJs /ualit#, insistin that /ualit# impro$ement can alwa#s o one step further. 8is notion of compan#*wide /ualit# control called for continued customer ser$ice. This meant that a customer would continue recei$in ser$ice e$en after recei$in the product. This ser$ice would e.tend across the compan# itself in all le$els of mana ement, and e$en be#ond the compan# to the e$er#da# li$es of those in$ol$ed. Accordin to "shi%awa, /ualit# impro$ement is a continuous process, and it can alwa#s be ta%en one step further. <ith his cause and effect dia ram (also called the N"shi%awaN or NfishboneN dia ram) this mana ement leader made si nificant and specific ad$ancements in /ualit# impro$ement. <ith the use of this new dia ram, the user can see all possible causes of a result, and hopefull# find the root of process imperfections. 2# pinpointin root problems, this dia ram pro$ides /ualit# impro$ement from the Nbottom up.N Dr. <. ,dwards Demin **one of "si%awaJs collea ues ** adopted this dia ram and used it to teach Total >ualit# (ontrol in 7apan as earl# as <orld <ar "". 2oth "shi%awa and Demin use this dia ram as one the first tools in the /ualit# mana ement process. "shi%awa also showed the importance of the se$en /ualit# tools: control chart, run chart, histo ram, scatter dia ram, 3areto chart, and flowchart. Additionall#, "shi%awa e.plored the concept of /ualit# circles** a 7apanese philosoph# which he drew from obscurit# into world wide acceptance. ."shi%awa belie$ed in the importance of support and leadership from top le$el mana ement. 8e continuall# ur ed top le$el e.ecuti$es to ta%e /ualit# control courses, %nowin that without the support of the mana ement, these pro rams would ultimatel# fail. 8e stressed that it would ta%e firm commitment from the entire hierarch# of emplo#ees to reach the compan#Js potential for success. Another area of /ualit# impro$ement that "shi%awa emphasiBed is /ualit# throu hout a productJs life c#cle ** not 1ust durin production. Althou h he belie$ed stron l# in creatin standards, he felt that standards were li%e continuous /ualit# impro$ement pro rams ** the# too should be constantl# e$aluated and chan ed. -tandards are not the ultimate source of decision ma%in K customer satisfaction is. 8e wanted mana ers to consistentl# meet consumer needsK from these needs, all other decisions should stem. 2esides his own de$elopments, "shi%awa drew and e.pounded on principles from other /ualit# urus, includin those of one man in particular: <. ,dwards Demin , creator of the 3lan*Do*(hec%*Act model. "shi%awa e.panded Demin Js four steps into the followin si.: Determine oals and tar ets. Determine methods of reachin "mplement wor%. (hec% the effects of implementation. Ta%e appropriate action. oals. ,n a e in education and trainin .

S ;ose$h M. ;uran S Uurt 6e2in S 6a2rence .. Miles S 4le/ Osborne S =alter %he2hart S ,enichi Taguchi S )re erick =inslo2 Ta&lor S ;. * gar Thomson

Hu'%n resource '%n%)e'ent

T-e '%ternit/ (ene1it Act< =>9=F Maternit& bene+it is Lan in emnit& +or the loss o+ 2ages incurre b& a 2oman 2ho voluntaril& be+ore chil 5birth an com$ulsoril& therea+ter abstains +rom 2ork in the interest o+ the chil an hersel+O. The I.6.O. Maternit& -rotection #onventions o+ 1919 2as revise in various etails in 195". Its $ur$oses are toF AaB *nable the 2omen em$lo&ee to abstain +rom 2ork uring the ! 2eeks $rece ing the e/$ecte ate o+ her con+inementK AbB Oblige her to abstain +rom 2ork uring the ! 2eeks +ollo2ing her con+inementK AcB -rovi e herG 2ith +ree atten ance b& a octor or certi+ie mi 52i+eK A B -rovi e her out o+ $ublic +un s or b& means o+ insuranceG 2ith a cash bene+it su++icient +or the +ull an health& maintenance o+ hersel+ an chil uring the sai $erio o+ abstention +rom 2orkK AeB -rohibit her ismissal uring the sai $erio s or a subse<uent $erio o sicknessK an A+B *nable her to suckle her bab& t2ice a a& uring 2orking hours. The main $ur$ose o+ Maternit& Bene+it 4ctG 19!1 areF AaB To regulate the em$lo&ment o+ 2omen em$lo&ees in certain establishments +or certain s$eci+ie $erio s be+ore an a+ter chil 5birth. AbB To $rovi e +or the $a&ment o+ maternit& bene+its to 2omen 2orkers at the rate o+ average ail& 2ages calculate on the basis o+ 2ages $a&able to her +or the a&s on 2hich she has 2orke uring the three calen ar months imme iatel& $rece ing the ate +rom 2hich she absente hersel+ on account o+ maternit&. AcB To $rovi e certain bene+its in case o+ miscarriageG $remature birthG or illness arising out o+ $regnanc&. .is$ute resolution an grievance managementF 4ccor ing to the In ustrial .is$utes 4ctG 194'G in ustrial is$utes mean an& is$ute or i++erence bet2een em$lo&ers an em$lo&eesG or bet2een em$lo&ers an 2orkmenG or bet2een 2orkmen an 2orkmenG 2hich is connecte 2ith the em$lo&ment or non5em$lo&ment or 2ith the con itions o+ labor o+ an& $erson. #auses o+ is$uteF 1 " 3 4 5 ! =ages Pnion rivalr& -olitical inter+erence Pn+air labor $ractices Multi$licit& o+ labour la2 OthersF In ustrial relation managers stoke the +ire an then tr& to e/tinguish it5 all to Rusti+& their o2n e/istence in organization.

Metho s o+ resolving is$uteK 1 " 3 4 5 ! ' #ollective bargaining #o e o+ isci$line ,rievance $roce ure 4rbitration #onciliation 4 Ru ication #onsultative machiner&

6abour 2el+are an social securit& measures 4ccor ing to 4rthur ;ames To GO 6abour 2el+are means an&thing one +or the com+ort an im$rovementG intellectual or socialG o+ the em$lo&ee over an above the 2ages $ai 2hich is not a necessit& o+ the In ustr&.O 6abour 2el+are is a $art an $arcel o+ %ocial =el+are. 6abour 2el+areF A1B Ma& be intro uce b& #entral governmentG %tate governmentG *m$lo&ersG Tra e unions or b& an& charitable orgaisation. A"B -rovi es better li+e an $h&sical an mental health to the 2orkers. A3B Make them ha$$& satis+ie an e++icient. A4B 0elieves 2orkers +rom in ustrial +atigue an im$rove intellectualG cultural an material con ition. A5B The measures are in a ition to regular 2ages an other economic bene+its available to 2orkers ue to legal $rovision an collective bargaining. A!B 7e2 measures are a e to the e/isting +rom time to time. A'B It hel$s the 2orkers evote greater attention to2ar s their 2ork. The gain is in terms o+ $ro uctivit& an <ualit&. A8B It hel$s in maintaining $eace 2ith the em$lo&eesN unions A9B *m$lo&ers get stable labour +orce A11B4bsenteeism is less A11B4ttract talente 2orkers A1"B%ocial evils like gamblingG rinking are re uce . 4gencies o+ 6abour =el+areF AaB #entral ,overnment AbB %tate ,overnment AcB *m$lo&ers A B Tra e Pnions AeB #haritable Organisations T&$es o+ =el+are servicesF AaB *conomic %ervices5 $ensionG li+e insuranceG cre it +acilities. AbB 0ecreational %ervices5 in oor gamesG out oor gamesG rea ing roomsG librariesG ra iosG T.( etc

AcB )acilitative %ervices5 canteenG rest roomG lunch roomG housing +acilit&Arent +ree or loanBG Me ical +acilit&G =ashing +acilit&G * ucation +acilit&G 6eave travel concession %ocial securit&F 4ccor ing to I6OG L %ocial securit& is that securit& that societ& +urnishes through a$$ro$riate orgainsation against certain risk to 2hich its members are e/$ose O. The term social securit& originate n P.%.4. In 1935G the %ocial %ecurit& 4ct 2as $asse there an %ocial %ecurit& Boar 2as establishe to govern an a minister the scheme o+ unem$lo&mentG sickness an ol 5age insurance.

%ocial securit& schemes inclu e health insuranceG maternit& bene+itsG com$ensation +or em$lo&ment inRur&G 2orkerNs +amil& $ension Zcum5 insurance schemesG com$ulsor& an voluntar& social insuranceG $rovi ent +un schemes an $ublic health services. Though social securit& $rogram characteristics in common AiB AiiB i++er +rom countr& to countr&G the& have three

AiiiB

The& are establishe b& la2 The& $rovi e some +orm o+ cash $a&ment to in ivi uals to com$ensate at least a $art o+ the lost income that occurs ue to such contingencies as unem$lo&mentG maternit&G 2ork inRur&G invali ismG in ustrial iseasesG ol ageG burialG 2i o2hoo G an or$han hoo K an The bene+its or services are $rovi e in three 2a&sF AaB %ocial insurance Z contribution is ma e b& the em$lo&ers an the government. AbB %ocial assistance5 non5contributor& bene+its AcB -ublic service5 +inance irectl& b& the government +rom its general revenue.

%ocial securit& in In iaF In ia is a =el+are %tate as envisage in her constitution. There are several 4cts an %chemes 2hich $rovi e securit& to the 2orkers. 1 " 3 4 5 ! ' The *m$lo&eesN %tate Insurance 4ctG 1948 The *m$lo&eesN -rovi ent )un s 4ctG 195" ,ratuit& %cheme *m$lo&eesN .e$osit56inke Insurance %cheme ,rou$ 6i+e Insurance The =orkmenNs #om$ensation 4ctG 19"3 The maternit& Bene+it 4ctG 19!1

.avi # Mc #lellan has contribute to the un erstan ing o+ motivation b& i enti+&ing three t&$es o+ basic motivating nee s. He classi+ie them as the nee +or $o2erG nee +or a++iliation an nee +or achievement. #onsi erable research has been one on metho s o+ testing $eo$le 2ith res$ect to these three t&$es o+ nee sG an Mc #lellan an his associates have one substantial research es$eciall& on the nee +or achievement.

.iscuss the i++erent ste$s involve in -ricing -roce ure )ollo2ing are the maRor ste$s involve in $ricing $roce uresF 1 " 3 4 5 ! ' 8 9 I enti+& the target customer segments an ra2 u$ their $ro+ile .eci e the market $osition an $rice image that the +irm esires +or the bran .etermine the e/tent o+ $rice elasticit& o+ eman o+ the $ro uctG an the e/tent o+ $rice sensitivit& o+ target grou$s Take into account the li+e5c&cle stage o+ the $ro uct 4nal&ze com$etitorNs $rices 4nal&ze other environmental +actors #hoose the $ricing metho to be a o$te G taking all the above actors into account %elect the +inal $rice -erio icall& revie2 the $ricing metho as 2ell as $roce ures

Discuss t-e %ssu'0tions un2er t-e +%; o1 return to % .%ri%,+e 1%ctor8 4ccor ing to -ro+. =atsonG the la2 o+ return to a variable +actor is L2hen total out$ut o $ro uction o+ a commo it& is increase b& a ing units o+ variable in$uts 2hile the <uantities o+ other in$uts are hel constantG then increase in total $ro uction becomesG a+ter some $ointG smaller an smaller. 4ssum$tions behin this la2 are given here belo2F 1 " 3 4 It is $ossible to make changes in the +actor $ro$ortions 4ll units o+ the variable +actors are homogeneous One is variable +actor an others are the +i/e +actors There is no change in techni<ue o+ $ro uction an organization

(usiness st%tistics
De1ine t-e ter' 0ro,%,i+it/ -robabilit& measures $rovi e the ecision5maker 2ith the means +or <uanti+&ing the uncertainties 2hich a++ect the choices o+ a$$ro$riate actions. Pn erstan ing $robabilit& an taking ecision a+ter un erstan ing it minimizes the risk. 4-%t is 0riori %00ro%c- to 0ro,%,i+it/? -riori a$$roach assumes that all the $ossible outcomes o+ an e/$eriment are mutuall& e/clusive an e<uall& likel&. The 2or e<uall& likel& conve&s the motion o+ e<uall& $robableG an mutuall& e/clusivel& means o+ one event occurs the other event 2ill not occur. 4-%t %re t-e ste0s in.o+.e2 in 1ittin) % (ino'i%+ Distri,ution? =hen a binomial istribution is to be +itte to observe ata the +ollo2ing $roce ure is a o$te F 1 .etermine the value o+ $ an <. I+ one o+ these values is kno2n the other can be +oun out b& the sim$le relationshi$s $I A15<B an <IA15 $B. =hen $ an < are e<ualG the istribution is s&mmetrical

Discuss t-e c-%r%cteristics o1 t-e "oisson 2istri,ution8 The characteristics o+ the -oisson istribution are as +ollo2F5 1. The occurrence o+ the event is in e$en ent. That isG the occurrence o+ an event in an interval o+ s$ace or time has no e++ect on the $robabilit& o+ a secon occurrence o+ the event in the same or an& other interval. ". Theoreticall&G an in+inite number o+ occurrences must be $ossible in the interval. 3. The $robabilit& o+ single occurrence o+ the event in a given interval is $ro$ortional to the length o+ the interval. 4. In an& in+initesimal Ae/tremel& smallB $ortion o+ intervalG the $robabilit& o+ t2o or more occurrences o+ the event is negligible. 4ttributes o+ a */$onential */$eriment

The e.ponential pdf has no shape parameter, as it has onl# one shape. The e.ponential pdf is alwa#s con$e. and is stretched to the ri ht as ( decreases in $alue. The $alue of the pdf function is alwa#s e/ual to the $alue of ( at T @ 0 (or T @ )). The location parameter, ), if positi$e, shifts the be innin of the distribution b# a distance of ) to the ri ht of the ori in, si nif#in that the chance failures start to occur onl# after ) hours of operation, and cannot occur before this time. The scale parameter is .

As

4ttributes o+ a -oisson */$eriment

A Poisson e'peri,ent is a statistical e.periment that has the followin properties:

The e/$eriment results in outcomes that can be classi+ie as successes or +ailures. The average number o+ successes A[B that occurs in a s$eci+ie region is kno2n. The $robabilit& that a success 2ill occur is $ro$ortional to the size o+ the region. The $robabilit& that a success 2ill occur in an e/tremel& small region is virtuall& zero.

+ote that the specified re ion could ta%e man# forms. 9or instance, it could be a len th, an area, a $olume, a period of time, etc.
7otation

The followin notation is helpful, when we tal% about the 3oisson distribution.
eF 4 constant e<ual to a$$ro/imatel& ".'18"8. A4ctuall&G e is the base o+ the natural logarithm s&stem.B [F The mean number o+ successes that occur in a s$eci+ie region. xF The actual number o+ successes that occur in a s$eci+ie region. -AxK [BF The "oisson 0ro,%,i+it/ that e/actl& x successes occur in a -oisson e/$erimentG 2hen the mean number o+ successes is [.

-oisson .istribution

A Poisson rando, !ariable is the number of successes that result from a 3oisson e.periment. The probabilit# distribution of a 3oisson random $ariable is called a Poisson distribution. 'i$en the mean number of successes (O) that occur in a specified re ion, we can compute the 3oisson probabilit# based on the followin formula:
"oisson For'u+%8 %u$$ose 2e con uct a -oisson e/$erimentG in 2hich the average number o+ successes 2ithin a given region is [. ThenG the -oisson $robabilit& isF

3(*K O) @ (e*O) (O.) ! .P

2here x is the actual number o+ successes that result +rom the e/$erimentG an e is a$$ro/imatel& e<ual to ".'18"8.

The 3oisson distribution has the followin properties:

The mean o+ the istribution is e<ual to [ . The variance is also e<ual to [ .

$'a,ple / The a$era e number of homes sold b# the Acme 6ealt# compan# is 2 homes per da#. <hat is the probabilit# that e.actl# C homes will be sold tomorrowQ Solution+ This is a 3oisson e.periment in which we %now the followin :
[ I "K since " homes are sol $er a&G on average.

/ I 3K since 2e 2ant to +in the likelihoo that 3 homes 2ill be sol tomorro2. e I ".'18"8K since e is a constant e<ual to a$$ro/imatel& ".'18"8.

<e plu these $alues into the 3oisson formula as follows: 3(*K O) @ (e*O) (O.) ! .P 3(CK 2) @ (2.F1G2G*2) (2C) ! CP 3(CK 2) @ (0.1C0CA) (G) ! 6 3(CK 2) @ 0.1G0 Thus, the probabilit# of sellin C homes tomorrow is 0.1G0 .
#umulative -oisson -robabilit&

A cu,ulati!e Poisson probability refers to the probabilit# that the 3oisson random $ariable is reater than some specified lower limit and less than some specified upper limit. $'a,ple / -uppose the a$era e number of lions seen on a 1*da# safari is 0. <hat is the probabilit# that tourists will see fewer than four lions on the ne.t 1*da# safariQ Solution+ This is a 3oisson e.periment in which we %now the followin :
[ I 5K since 5 lions are seen $er sa+ariG on average. / I 1G 1G "G or 3K since 2e 2ant to +in the likelihoo that tourists 2ill see +e2er than 4 lionsK that isG 2e 2ant the $robabilit& that the& 2ill see 1G 1G "G or 3 lions. e I ".'18"8K since e is a constant e<ual to a$$ro/imatel& ".'18"8.

To sol$e this problem, we need to find the probabilit# that tourists will see 0, 1, 2, or C lions. Thus, we need to calculate the sum of four probabilities: 3(0K 0) R 3(1K 0) R 3(2K 0) R 3(CK 0). To compute this sum, we use the 3oisson formula: 3(. S C, 0) @ 3(0K 0) R 3(1K 0) R 3(2K 0) R 3(CK 0) 3(. S C, 0) @ T (e*0)(00) ! 0P U R T (e*0)(01) ! 1P U R T (e*0)(02) ! 2P U R T (e*0)(0C) ! CP U 3(. S C, 0) @ T (0.006FCG)(1) ! 1 U R T (0.006FCG)(0) ! 1 U R T (0.006FCG)(20) ! 2 U R T (0.006FCG)(120) ! 6 U 3(. S C, 0) @ T 0.006F U R T 0.0CC6) U R T 0.0GA22A U R T 0.1A0CF0 U 3(. S C, 0) @ 0.2600 Thus, the probabilit# of seein at no more than C lions is 0.2600. The #eekly #a%es of 0111 #orkers in a factory is nor,ally distributed #ith a ,ean of 2s) 011 and a standard de!iation of 2s) 01) $sti,ate the lo#est #eekly #a%es at the 011 hi%hest paid #orkers and the hi%hest #a%es of 011 lo#est paid #orkers) 34i!en phi(/)05)61)178

M%r&etin) en.iron'ent %n2 en.iron'ent sc%nnin)

In marketing environment anal&sisG a +irm gathers relevant in+ormation relating to the environmentG stu ies them in etailG takes note o+ the changes in the changes in each elements o+ the environment an +orecasts the +uture $osition in each o+ them. Pn er the MegaEMacro environment the +irm stu iesF 1 " 3 4 5 ! ' The geogra$hic environment The $olitical environment The %ocio5cultural environment The economic environment The natural environment The technological environment 6egal environment ABusiness 6egislationB

4s regar s the environment that is s$eci+ic to the given businessG the +irm stu iesF 1 " 3 4 5 ! The market eman The consumer The in ustr& The com$etition ,overnment $olicies As$eci+ic to business concerne B %u$$lier5relate +actors

Marketing in+ormation s&stem Bene+itsF 1 " 3 In marketing $lanning In marketing im$lementation In marketing control

#lassi+ication o+ marketing in+ormation 1 " #lassi+ication base on the en useE$ur$ose #lassi+ication base on the subRect matter evelo$ing an MI%

%te$s involve in esigning an

.e+ining in+ormation nee s #lassi+&ing in+ormation a$$ro$riatel& an i enti+&ing 2hether it is or $lanningG or im$lementation or control $ur$oses. *valuating the cost o+ collecting an $rocessing the in+ormation an com$aring the cost (s bene+its. I enti+&ing the sources o+ the in+ormation .esigning the mechanismE $roce ure +or gatheringG $rocessingG storing an retrieval o+ the in+ormation

-rocessingG anal&zing an inter$reting the in+ormation an isseminating it to the right $ersons at the right time in the right ca$sule MonitoringG maintainingG revie2ing an im$roving the s&stem

0e<uisites o+ a goo MI% Must be uni+ie s&stem %houl be conceive an use as a marketing ecision su$$ort s&stem Must be com$atible 2ith the culture an level o+ so$histication o+ the +irm an o+ the marketing organization in $articular Must be user5orients an user +rien l&K must also secure userNs involvement Must involve the su$$liers o+ the in+ormation as 2ell Must be economical. (alue5cost $osition o+ the in+ormation shoul be +avourable Must meet the $rinci$le o+ selectivit& Must be ca$able o+ smoothl& absorbing changes that ma& become necessar& Must be +ast #haracteristics o+ ,oo Marketing In+ormation 0elevance to ecision making #larit& #om$leteness #on+i entialit& -recision #ost reasonableness 0eliabilit& A+rom genuine sourcesB 4ccurac& Timeliness ObRectivit& 4uthenticit& %trategic value In$uts +rom the MI% -erio ic re$orts Triggere re$orts .eman re$orts -lan re$orts atabases

%$ecialize

#ustomer atabase Marketing intelligence .ata mining an ata 2arehousing 1 Bachelor stage HoungG singleG not living at homeG +e2 +inancial bur ensG +ashion o$inion lea ers. 0ecreation oriente . Bu&K basic home e<ui$mentsG +urnitureG carsG e<ui$ments +or the mating game vacations.

" 7e2l& marrie cou$les

HoungG no chil renG highest $urchase rate an highest $urchase o+ urablesF #arsG a$$liancesG +urnitureG vacations

3 )ull nest I Houngest chil un er si/G home $urchasing at $eakG li<ui assets lo2G intereste in ne2 $ro uctsG a vertise $ro ucts. Bu&F =ashersG r&ersG T(G bab& +oo G chest rub an cough me icinesG vitaminsG ollsG 2agonsG sle sGskates 4 )ull nest II Houngest chil si/ or overG +inancial $osition better. 6ess in+luence b& a vertising. Bu& large5size $ackagesG multi$le5unit eals. Bu&F Mani+ol sG cleaning materialsG bic&clesGmusic lessonsG $ianos Ol er marrie cou$les 2ith e$en ent chil ren. )inancial $osition still better. %ome chil ren get Robs. Har to in+luence 2ith a vertising. High average $urchase o+ urablesF ne2G more taste+ulG +urnitureG auto travelG unnecessar& a$$liancesG boatsG ental servicesG magazines Ol er marrie cou$lesG no chil ren living 2ith themG hea o+ househol in labour +orce. Home o2nershi$ at $eak. Most satis+ie 2ith +inancial $osition an mone& save . Intereste in travelG recreation G sel+5e ucation. Make gits an contributions. 7ot intereste in ne2 $ro ucts. Bu&F vacationsG lu/uriesG home im$rovemet Ol er marrie . 7o chil ren living at homeG hea o+ househol retire . .rastic cut in income. Uee$ home. Bu&F Me ical a$$liancesG me ical5care $ro ucts In labour +orceG Income still goo but likel& to sell home 0etire . %ame me ical an $ro uct nee s as other retire grou$K rastic cut in incomeG s$ecial nee +or attentionG a++ection an securit&

5 )ull nest III

! *m$t& nest I

' *m$t& nest II 8 %olitar& survivor I 9 %olitar& survivor II

Marketing research Marketing research is a s&stematicG obRective an e/haustive search +or the stu & o+ the +acts realting to an& $roblem in the +iel o+ marketing Z0ichar #ris$ C+%ssi1ic%tion o1 '%r&etin) rese%rc- 5o,s ABase on the subRect o+ the researchB 0outine $roblem anal&sis an research on non5 routine $roblems 0esearch on short5term an ling term $roblems eman 0esearch on consumer 0esearch on marketE

0esearch on $ro uctE bran 0esearch on com$etition 0esearch on istribution 0esearch on $rice 0esearch on a vertising an $romotion 0esearch on sales metho s -rocess o+ marketing research =hat is a service> Uotler an Bloom e+ine service as L 4 service is an& act or $er+ormance that one $art& can o++er to another that is essentiall& intangible an oes not result in the o2nershi$ o+ an&thing. Its $ro uction ma& or ma& not be tie to a $h&sical $ro uct.O #haracterstics o+ %ervice $ro ucts Intangibilit&F 0e+ers to the as$ect not associate 2ith an& $h&sical +orm or characteristics. It is ver& muchG $ronounce in the $ure service elements like the lecture given b& a $ro+essor. Inse$arabilit&F It means that the $ro uction an consum$tion o+ the service are ine/tricabl& inter2ine . HenceG the consumerNs $resence is in most cases necessar& at the time o+ $ro uction. ,oo s are usuall& $urchase G sol an consume K 2hereasG services are usuall& sol an then $ro uce an consume . Heterogeneit&F The services o++ere are not similar all the time to all the customers. This +eature o+ service is calle L Heterogenit&O. The <ualit& o+ a service e$en s on the $ersonG 2ho $rovi es the serviceG or the timeG 2hen $rovi e . *ven though stan ar s&stems ma& be use to han le a +light reservationG book a car +or serviceG each LunitO o+ service i++ers +rom other LunitsO. -erishabilit&F This means that the service LunitsO cannot be stocke . I+ a seat is un+ille 2hen the $lane leaves or the $la& startsG it cannot be store an sol ne/t a& or ne/t 2eekK that revenue is lost +orever. .i++erence bet2een $h&sical goo s an %ervices -h&sical goo s 1 Tangible " Homogeneous 3 -ro uction an istribution se$arate +rom consum$tion 4 4 thing 5 #ore value $ro uce in +actor& %ervices Intangible Heterogeneous -ro uctionG istribution an consum$tion are simultaneous $rocess 4n activit& or $rocess #ore value $ro uce in bu&er5seller

interactions ! #ustomers o not $artici$ate in the $ro uction $rocess ' #an be ke$t in stock 8 Trans+er o+ o2nershi$ #ustomers $artici$ate in the $ro uction #annot be ke$t in stock 7o trans+er o+ o2nershi$

Market evelo$ment $rocess 4 $rocess +or evelo$ing sales 5 ne2 business an ne2 markets

This process is effecti$e for de$elopin all t#pes of business, and deli$ers business rowth $ia:
ne2 $ro ucts or services to e/isting customersG e/isting $ro ucts or services to ne2 customersG or ne2 $ro ucts or services to ne2 customers.

5ar%et de$elopment process:

1. *stablish market evelo$ment aims an targets. ". I enti+& target marketAsBG sectors an niches. 3. 4ssess &our e/isting sales organisation an evelo$ it as necessar&. 4. %ourceEutilise a suitable $ros$ect atabase 5 ensure ata is clean an u$ to ateG an strategic ecision5makers are i enti+ie . 5. .evelo$ an agree &our strategic $ro$ositionAsB 5 2ith re+erence to P%-QsG P-BQsG com$etitorsG $ositioningG $ro uct mi/G marginsG etc. !. .esign &our communicationAsB an metho AsB to generate en<uiries. '. .esign &our res$onse an sales $rocesses an establish or $rovi e re<uire ca$abilities. 8. .esign an $rovi e &our re<uire monitoringG measurement an re$orting s&stems. 9. Im$lement &our sales evelo$ment activit& an rein+orce it through coachingG trainingG meetingsG e/ecutive en orsementG etc. 11.)ollo25u$ the activit&F coach as re<uire G revie2G monitorG seek customer an $ros$ect +ee back Asuccess+ul an unsuccess+ulB an re$ort on $er+ormance. 11.Make changes an im$rovements an continue &our activit& at the a$$ro$riate stage.

Vertical Marketin% Syste,

A $ertical mar%etin s#stem (M5-) is one in which the main members of a distribution channelVproducer, wholesaler, and retailerVwor% to ether as a unified roup in order to meet consumer needs. "n con$entional mar%etin s#stems, producers, wholesalers, and retailers are separate businesses that are all tr#in to ma.imiBe their profits. <hen the effort of one channel member to ma.imiBe profits comes at the e.pense of other members, conflicts can arise that reduce profits for the entire channel. To address this problem, more and more companies are formin $ertical mar%etin s#stems. Mertical mar%etin s#stems can ta%e se$eral forms. "n a corporate M5-, one member of the distribution channel owns the other members. Althou h the# are owned 1ointl#, each

compan# in the chain continues to perform a separate tas%. "n an administered M5-, one member of the channel is lar e and powerful enou h to coordinate the acti$ities of the other members without an ownership sta%e. 9inall#, a contractual M5- consists of independent firms 1oined to ether b# contract for their mutual benefit. 4ne t#pe of contractual M5- is a retailer cooperati$e, in which a roup of retailers bu# from a 1ointl# owned wholesaler. Another t#pe of contractual M5- is a franchise or aniBation, in which a producer licenses a wholesaler to distribute its products. The concept behind $ertical mar%etin s#stems is similar to $ertical inte ration. "n $ertical inte ration, a compan# e.pands its operations b# assumin the acti$ities of the ne.t lin% in the chain of distribution. 9or e.ample, an auto parts supplier mi ht practice forward inte ration b# purchasin a retail outlet to sell its products. -imilarl#, the auto parts supplier mi ht practice bac%ward inte ration b# purchasin a steel plant to obtain the raw materials needed to manufacture its products. Mertical mar%etin should not be confused with horiBontal mar%etin , in which members at the same le$el in a channel of distribution band to ether in strate ic alliances or 1oint $entures to e.ploit a new mar%etin opportunit#. As Tom , elhoff wrote in an online article entitled N8ow to &se Mertical 5ar%etin -#stems,N M5- holds both ad$anta es and disad$anta es for small businesses. The main ad$anta e of M5- is that #our compan# can control all of the elements of producin and sellin a product. "n this wa#, #ou are able to see the whole picture, anticipate problems, ma%e chan es as the# become necessar#, and thus increase #our efficienc#. 8owe$er, bein in$ol$ed in all sta es of distribution can ma%e it difficult for a small business owner to %eep trac% of what is happenin . "n addition, the arran ement can fail if the personalities of the different areas do not fit to ether well. 9or small business owners interested in formin a M5-, , elhoff recommended startin out b# de$elopin close relationships with suppliers and distributors. N<hat suppliers or distributors would #ou bu# if #ou had the mone#Q These are the ones to wor% with and form a stron relationship,N he stated. NMertical mar%etin can i$e man# companies a ma1or ad$anta e o$er their competitors.N

Cor0or%te Str%te)/
Ue& 2or sF %trategic managementG

Discuss t-e 1or'u+%tion o1 % str%te)ic 0+%n8

Main ste$s in the strateg& +ormulation $rocess are given belo2F5 1 S0e++in) out t-e (usiness Mission %n2 O,5ecti.es: Mission is the overall $ur$ose o+ an organization an the e/$resse reason +or its e/istence. The mission shoul be clearl& e/$resse an e++ectivel& communicate to the members o+ the organization. It serves as a re+erence $oint +rom 2hich obRectives can be erive +or managerial ecision5making. Mission $rovi es unit& o+ $ur$ose s$eci+ies the i entit& o+ the +irm an $rovi es\\\\\ En.iron'ent%+ Sc%nnin): Or)%ni*%tion%+ %n%+/sis: In case o+ an establishe an on5going enter$rise a thorough a$$raisal o+ its current $osition is essential to i enti+& its strengths Ainternal ca$abilitiesB an 2eaknesses A e+icienciesB. 4 etaile anal&sis an evaluation o+ the +unctional areas o+ the enter$rise 2ill thro2 a $ro+ile o+ its abilities an isabilities. )or e/am$leG the enter$rise ma& have a soun istribution net2ork an state o+ the art technolog& but it ma& be e+icient in its communication s&stem an control mechanism. 4nal&sis o+ the internal environment is $o$ularl& kno2n as cor$orate a$$raisal or sel+5 a$$raisal. It shoul cover marketingG +inancialG o$erationsG human resourcesG orgainsational cultureG etc. Once the strength an 2eaknesses o+ the enter$rise are i enti+ie G each o+ them shoul be assigne 2eights accor ing to the egree o+ im$ortance. Management can i enti+& the areas that nee imme iate attention. De.e+o0in) str%te)ic %+tern%ti.es: E.%+u%tion o1 Str%te)ic %+tern%ti.es: *ach strategic alternative has its o2n merits an emerits

@ 3

A 5

%$elling out organizationNs mission an obRectives

*nvironmental %canningF O$$ortunities an threats

Organizational 4nal&sisF %trengths an =eaknesses

#hoice o+ strateg&

*valuation o+ %trategic 4lternatives

.evelo$ing %trategic 4lternatives

Fi)8 Str%te)/ M%&in) "rocess

C-oice o1 Str%te)/: Once the available strategic alternatives are evaluate an com$are G management selects the strategic alternatives that 2ill ma/imize the long5run e++ectiveness o+ the organization. %election o+ overall strateg& is both the right an ut& o+ to$ management but the resulting choice $ermeates ee$l& into the organization. In or er to make an e++ective strategic choiceG to$ management must have a clear share conce$tion o+ the +irm an its +uture. The strategic choice must be clear an unambiguous. #ommitment to a given choice o+ten limits +uture strateg&K the ecision must be thoroughl& researche an evaluate . %everal +actors in+luence the strategic choiceF i. .egree o+ risk acce$table to management. ii.Uno2le ge o+ $ast strateg& iii.0es$onse o+ o2ners iv.(alues an $re+erence o+ to$ management v.Timing o+ the ecision

4nso++Ns ,ro2th (ector ,ro2th %trategiesF One o+ the obRectives o+ the +irms is to continuousl& increase their sales an $ro+it. 4t some $oint o+ timeG a +irm +aces a situation that the e/$ecte sales an $ro+it +rom its e/isting business o not reach the esire levels. The +irms nee to a o$t suitable strategies to +ill this strategic ga$. The +irms can a o$t three $ossible a$$roachesF I enti+& o$$ortunities +or +urther gro2th 2ithin the e/isting businesses AIntensive gro2thB I enti+& o$$ortunities to buil or ac<uire businesses relate to the e/isting businesses AIntegrative gro2thB I enti+& o$$ortunities to a attractive businessesG unrelate to the e/isting businessesA.iversi+ication gro2thB

Hou nee to run +aster an +aster to remain at the same $lace

H. Igor 4nso++ +irst $ublishe the no2 2ell5kno2n vector matri/ or $ro uct5matri/ in the Harvar Business revie2 in %e$E Oct e ition o+ 195'. The matri/ also a$$eare in the book 2ritten later b& 4nso++ an $ublishe in 19!55 cor$orate strateg&. 4lthough the matri/ 2as $ublishe a long time agoG it still remains one o+ the most $o$ular matrices an is use to i enti+& the basic alternative strategiesG 2hich are o$tions +or a +irm 2anting to gro2. 4nso++ evelo$e the matri/ out o+ his realization that a +irm nee s a 2ell5 e+ine sco$e an gro2th irection. )or most com$anies gro2th is o+ten the $er<uisite +or survival. 4nso++ +elt that man& o+ the theorists ha too broa a conce$t o+ business an that the tra itional i enti+ication o+ a +irm 2ith a $articular in ustr& ha become too narro2. This 2as because man& +irms ac<uire a iverse range o+ $ro ucts through $olicies o+ vertical an horizontal integration to $rotect their e/isting marketsG an also through ne2 $ro uct evelo$mentG one to e/$loit technological innovations an to evelo$ ne2 market 2ith o$$ortunities to gro2th. The vector matri/ is base on Roint consi eration o+ the im$lication o+ change in the $ro uct Atechnolog&B an E or the market an is $erha$s the sim$lest an most basic statement o+ the strategic alternatives o$en to the +irm 2ho esires gro2th.

-ro ucts */isting M%r&et 0enetr%tion str%te)/ 1. More $urchase an usage +rom e/isting customers ". ,ain customers +rom com$etitors 3. #onvert non users into users M%r&et 2e.e+o0'ent str%te)/ 1. 7e2 market segment ". 7e2 istribution channels 3. 7e2 geogra$hic areas 7e2 "ro2uct 2e.e+o0'ent str%te)/ 1. -ro uct mo i+ication via ne2 +eatures ". .i++erent <ualit& levels 3. M7e2N $ro uct

Di.ersi1ic%tion str%te)/ 1. ". 3. 4. Organic gro2th ;oint ventures Mergers 4c<uisitionEtake5overs

*/isting Market

7e2

)igF MarketE $ro uct e/$ansion gri This gri ma& be also use to make an anal&sis o+ the marketing $ersonalit&E outlook o+ the in ivi ualE +irm Current 0ro2ucts %n2 current '%r&et: '%r&et 0enetr%tion

Market $enetrationF the +irm seeks toF a. Maintain or increase its share o+ the current market 2ith current $ro ucts. b. %ecure ominance o+ gro2th markets. c. 0estructure a mature market b& riving out com$etitors. . Increase usage b& e/isting customer. "resent 0ro2ucts %n2 ne; '%r&ets: '%r&et 2e.e+o0'ent a. 7e2 geogra$hical areas an e/$ort markets b. .i++erent $ackage sizes +or +oo an other omestic items so that those 2ho bu& in bulk an small <uantities are catere +or. c. 7e2 istribution channels to attract ne2 customers Ae.g. organic +oo s sol in su$ermarkets not Rust s$ecialist sho$sB . .i++erential $ricing $olicies to attract i++erent t&$es o+ customer an create ne2 market segments.

Ne; 0ro2ucts to 0resent '%r&ets: 0ro2uct 2e.e+o0'ent a. 4 vantage Z -ro uct evelo$ment +orces com$etition to innovateG ne2 comers to the market might be iscourage . b. The ra2backs inclu e the e/$ense an the risk. Ne; 0ro2ucts %n2 ne; '%r&ets: 2i.ersi1ic%tion .iversi+ication occurs 2hen a com$an& eci es to make ne2 $ro ucts +or ne2 markets. It has to have a clear i ea o+ 2hat it ho$es to gain +rom iversi+ication. There are t2o t&$es o+ iversi+icationG relate an unrelate iversi+ication. a. ,ro2th 5 ne2 $ro ucts an ne2 markets shoul be selecte 2hich o++er $ros$ects +or gro2thG 2hich the e/isting $ro uct market mi/ oes not. b. Investing sur$lus Z +un s not re<uire +or other e/$ansion nee sF but the +un s coul be returne to sharehol ers. c. The +irms strengths matches the o$$ortunit& i+ Z outstan ing ne2 $ro ucts have been evelo$e b& the com$an&Ns research an evelo$ment e$artment. The $ro+it o$$ortunities +rom iversi+ication are high. Re+%te2 2i.ersi1ic%tion Horizontal integration re+ers to M evelo$ment into activities 2hich are com$etitive 2ith or irectl& com$lementar& to a com$an&Ns $resent activities.N %on& 2ith its $la&station starte to com$ete in com$uter games. (ertical integration occurs 2hen a com$an& becomes its o2nK a. su$$lier o+ ra2 materialsG com$onents or services Aback2ar vertical integrationB b. .istributor or sales agent A+or2ar vertical integrationBG +or e/am$leF 2here a manu+acturer o+ s&nthetic &arn begins to $ro uce shirts +rom the &arn instea o+ selling it to other shirt manu+acturers.

A2.%nt%)e o1 .ertic%+ inte)r%tion a. To secure su$$l& o+ com$onents or ra2 materials 2ith more control. %u$$lier bargaining $o2er is re uce . b. %trengthen the relationshi$s an contacts o+ the manu+acturer 2ith the +inal consumer o+ the $ro uct. c. =in a share o+ the higher $ro+its. . -ursue a i++erentiation strateg& more e++ectivel&. e. 0aise barriers to entr&. Dis%2.%nt%)es o1 .ertic%+ inte)r%tion a. Over5concentration 5 4 com$an& $laces too man& bets on Ma same en 5market $ro uctN b. The +irm +ails to bene+it +rom an& economies o+ scale or technical a vances in the in ustr& to 2hich it has iversi+ie . This is 2h& in the $ublishing in ustr& most $rinting is subcontracte to the s$ecialist $rinting +irmsG 2ho can 2ork machiner& to ca$acit& b& oing 2ork +or man& +irms.

Unre+%te2 2i.ersi1ic%tion - con)+o'er%te 2i.ersi1ic%tion Pnrelate iversi+ication or conglomerate iversi+ication is ver& un+ashionable no2 Z but it has been a ke& strateg& +or man& com$anies in 4sia.

A2.%nt%)es o1 con)+o'er%te 2i.ersi1ic%tion a. 0isk s$rea ing Z entering ne2 $ro ucts into ne2 markets o++ers $rotection against +ailure o+ current $ro ucts an markets. b. High $ro+it o$$ortunities Z 4bilit& to move into high gro2th $ro+itable in ustries es$eciall& im$ortant i+ current in ustr& is in ecline. c. *sca$e Z +rom the $resent business i+ com$etition is too hotX . Better access to ca$ital markets. e. 7o other 2a& to gro2 Z e/$ansion in the e/isting in ustr& might lea to mono$ol& an government investigation +. Pse sur$lus cash g. */$loit un er5utilize resources h. Obtain cash or other +inancial a vantages i. Pse a com$an&Ns image re$utation in one market to buil $ro ucts an services in another market. Dis%2.%nt%)es o1 con)+o'er%te 2i.ersi1ic%tion a. The ilution o+ sharehol ers earnings i+ iversi+ication is into gro2th in ustries 2ith high -E* ratios. b. 6ack o+ a common i entit& an $ur$ose in a conglomerate organization. 4 conglomerate 2ill be success+ul onl& i+ it has high <ualit& o+ management an +inancial abilit& at hea o++ice 2here

iverse o$erations are brought together. c. )ailure in one business 2ill rag o2n the rest. . 6ack o+ management e/$erience e. 7o goo +or sharehol ers Z sharehol ers can s$rea risk b& bu&ing shares in com$anies in i++erent in ustries. "ro2uct Mi3 O0ti'i*%tion 1or M%3i'u' "ro1it%,i+it/ .ecision5making base on com$le/ combinations o+ &namic +actors. %u$$l& chain $er+ormance management -ro+its Manu+acturing ca$acit& #a$abilities an costs %u$$l& chain constraints Market o$$ortunities -ro uct might not be in e$en ent #ustomer lo&alt& might be lost 2hen $ro uct is not available -rice elasticit& o+ eman 6abor ma& be s$ecialize an cannot s2itch bet2een the t2o $ro ucts -o$ulation increase #hanges in the level o+ income o+ bu&ers Marketing in+luences )inance in+luences -ro uction in+luences Management abilit& an e++ort

"ro2uct str%te)ies Marketing strategies 2hich are base on the $ro uct element are calle $ro uct strategies. -ro uct strategies are o+ t2o t&$esF5 AaB %trategies base on L-ro uct Mi/O AbB %trategies base on L-ro uct li+e c&cleO -ro uct mo i+ication -ro uct elimination .iversi+ication %tages %ale s Intro ucti on 6o2 ch ar ac te -ro+it %trategic thrust #ustomer targets ,ro2th )ast ,ro2th Maturit& %lo2 gro2th .ecli ne .ecli ne

ris tic s

#om$etition .i++erential a vantage

%tages %ale s Intro ucti on 6o2 Ma rk eti ng Mi / -ro uct -rice -romotion 4 vertising +ocus istribution ,ro2th )ast ,ro2th Maturit& %lo2 gro2th .eclin e .eclin e

-ro ucts Immobile */isting non5innovative mobile non5innovative Market 7e2 in ivi ual E +irm Immobile */isting innovative Immobile innovative

*/isting

)igF 4nal&sis o+ the marketing $ersonalit&E outlook o+ the

To $ortra& alternative cor$orate gro2th strategiesG Igor 4nso++ $resente a matri/ that +ocuse on the +irmNs $resent an $otential $ro ucts an markets AcustomerNsB. B& consi ering 2a&s to gro2 via e/isting $ro ucts an ne2 $ro uctsG an in e/isting marketsG there are +our $ossible $ro uct5market combinations. 4nso++Ns matri/ $rovi es +our i++erent gro2th strategiesF5

(CG Mo2e+

%tars 6o 2 "orter:s Generic Str%te)ies #om$etitorNs 4nal&sis Hi gh In ustr& 4nal&sis )ragmentation maturit& an #om$etitive strateg& ,ran strategies %tabilit& strategies */$ansion strategies 0etrenchment strategies #ombination strategies

:uestion marks

#ash co2s

Hig h %trategic imensions an ,rou$ ma$$ing

ecline

Business ,ro2th rate D

.ogs Market %hare

6o2

#or$orate restructuring Transnationalisation o+ 2orl econom& =orl tra e organization The Prugua& roun o+ tra e negotiationsG a+ter more than seven &ears o+ eliberation 2as 2ra$$e uo on 14th .ecG 1993 an 2as +ormalize b& more than 1"1 countries on 4$ril 15G 1994. =TO came into e/istence on ;an 1G 1995. )unctionsF 1. To +acilitate the im$lementationG a ministration an o$eration o+ Prugua& roun agreements. ". To revie2 national tra e $olicies 3. To $rovi e a +orum +or negotiations among member countries on their multilateral tra e relations 4. To coo$erate 2ith other international institutionsG es$eciall& the IM) an the =orl Bank in or er to ensure more meaning+ul com$atibilit& in global economic $olicies 5. To a minister the tra e is$ute settlement $roce ures

4greement on agricultureF The tari++s resulting +rom trans+ormation o+ non5tari++ barriersG as 2ell as other tari++s on agricultural $ro uct to be re uce on an average b& 3!D in the case o+ (%+%nce2 Scorec%r2 The balance scorecar is a strategic $lanning an management s&stem that is use e/tensivel& in business an in ustr&G governmentG an non$ro+it organizations 2orl 2i e to align business activities to the vision an strateg& o+ the organizationG im$rove internal an e/ternal communicationsG an monitor organization $er+ormance against strategic goals. It 2as originate b& .rs. 0obert Ua$lan AHarvar Business %choolB an .avi 7orton as a $er+ormance measurement +rame2ork that a e strategic non5+inancial $er+ormance measures to tra itional +inancial metrics to give managers an e/ecutives a more Qbalance Q vie2 o+ organizational $er+ormance. =hile the $hrase balance scorecar 2as coine in the earl& 1991sG the roots o+ the this t&$e o+ a$$roach are ee$G an inclu e the $ioneering 2ork o+ ,eneral *lectric on $er+ormance measurement re$orting in the 1951Ns an the 2ork o+ )rench $rocess engineers A2ho create the Tableau de Bord Z literall&G a T ashboar T o+ $er+ormance measuresB in the earl& $art o+ the "1th centur&. The balance scorecar has evolve +rom its earl& use as a sim$le $er+ormance measurement +rame2ork to a +ull strategic $lanning an management s&stem. The Lne2O balance scorecar trans+orms an organizationNs strategic $lan +rom an attractive but $assive ocument into the Tmarching or ersT +or the organization on a ail& basis. It $rovi es a +rame2ork that not onl& $rovi es

$er+ormance measurementsG but hel$s $lanners i enti+& 2hat shoul an measure . It enables e/ecutives to trul& e/ecute their strategies.

be

one

This ne2 a$$roach to strategic management 2as +irst etaile in a series o+ articles an books b& .rs. Ua$lan an 7orton. 0ecognizing some o+ the 2eaknesses an vagueness o+ $revious management a$$roachesG the balance scorecar a$$roach $rovi es a clear $rescri$tion as to 2hat com$anies shoul measure in or er to QbalanceQ the +inancial $ers$ective. The balance scorecar is a management s&stem Anot onl& a measurement s&stemB that enables organizations to clari+& their vision an strateg& an translate them into action. It $rovi es +ee back aroun both the internal business $rocesses an e/ternal outcomes in or er to continuousl& im$rove strategic $er+ormance an results. =hen +ull& e$lo&e G the balance scorecar trans+orms strategic $lanning +rom an aca emic e/ercise into the nerve center o+ an enter$rise. Ua$lan an 7orton escribe the innovation o+ the balance scorecar as +ollo2sF TThe balance scorecar retains tra itional +inancial measures. But +inancial measures tell the stor& o+ $ast eventsG an a e<uate stor& +or in ustrial age com$anies +or 2hich investments in long5term ca$abilities an customer relationshi$s 2ere not critical +or success. These +inancial measures are ina e<uateG ho2everG +or gui ing an evaluating the Rourne& that in+ormation age com$anies must make to create +uture value through investment in customersG su$$liersG em$lo&eesG $rocessesG technolog&G an innovation.T

4 a$te +rom 0obert %. Ua$lan an .avi -. 7ortonG LPsing the Balance %corecar as a %trategic Management %&stemGO Harvar Business 0evie2 A;anuar&5)ebruar& 199!BF '!. "ers0ecti.es

The balance scorecar suggests that 2e vie2 the organization +rom +our $ers$ectivesG an to evelo$ metricsG collect ata an anal&ze it relative to each o+ these $ers$ectivesF T-e e%rnin) B Gro;t- "ers0ecti.e This $ers$ective inclu es em$lo&ee training an cor$orate cultural attitu es relate to both in ivi ual an cor$orate sel+5im$rovement. In a kno2le ge5 2orker organizationG $eo$le 55 the onl& re$ositor& o+ kno2le ge 55 are the main resource. In the current climate o+ ra$i technological changeG it is becoming necessar& +or kno2le ge 2orkers to be in a continuous learning mo e. Metrics can be $ut into $lace to gui e managers in +ocusing training +un s 2here the& can hel$ the most. In an& caseG learning an gro2th constitute the essential +oun ation +or success o+ an& kno2le ge52orker organization. Ua$lan an 7orton em$hasize that QlearningQ is more than QtrainingQK it also inclu es things like mentors an tutors 2ithin the organizationG as 2ell as that ease o+ communication among 2orkers that allo2s them to rea il& get hel$ on a $roblem 2hen it is nee e . It also inclu es technological toolsK 2hat the Bal rige criteria call Thigh $er+ormance 2ork s&stems.T T-e (usiness "rocess "ers0ecti.e This $ers$ective re+ers to internal business $rocesses. Metrics base on this $ers$ective allo2 the managers to kno2 ho2 2ell their business is runningG an 2hether its $ro ucts an services con+orm to customer re<uirements Athe missionB. These metrics have to be care+ull& esigne b& those 2ho kno2 these $rocesses most intimatel&K 2ith our uni<ue missions these are not something that can be evelo$e b& outsi e consultants. T-e Custo'er "ers0ecti.e 0ecent management $hiloso$h& has sho2n an increasing realization o+ the im$ortance o+ customer +ocus an customer satis+action in an& business. These are lea ing in icatorsF i+ customers are not satis+ie G the& 2ill eventuall& +in other su$$liers that 2ill meet their nee s. -oor $er+ormance +rom this $ers$ective is thus a lea ing in icator o+ +uture eclineG even though the current +inancial $icture ma& look goo . In evelo$ing metrics +or satis+actionG customers shoul be anal&ze in terms o+ kin s o+ customers an the kin s o+ $rocesses +or 2hich 2e are $rovi ing a $ro uct or service to those customer grou$s. T-e Fin%nci%+ "ers0ecti.e Ua$lan an 7orton o not isregar the tra itional nee +or +inancial ata. Timel& an accurate +un ing ata 2ill al2a&s be a $riorit&G an managers 2ill o 2hatever necessar& to $rovi e it. In +actG o+ten there is more than enough han ling an $rocessing o+ +inancial ata. =ith the im$lementation o+ a cor$orate atabaseG it is ho$e that more o+ the $rocessing can be centralize an automate . But the $oint is that the current em$hasis on +inancials lea s to the Tunbalance T situation 2ith regar to other $ers$ectives. There is $erha$s a nee to inclu e a itional +inancial5relate ataG such as risk assessment an cost5bene+it ataG in this categor&. Str%te)/ M%00in)

%trateg& ma$s are communication tools use to tell a stor& o+ ho2 value is create +or the organization. The& sho2 a logicalG ste$5b&5ste$ connection bet2een strategic obRectives Asho2n as ovals on the ma$B in the +orm o+ a cause5 an 5e++ect chain. ,enerall& s$eakingG im$roving $er+ormance in the obRectives +oun in the 6earning ? ,ro2th $ers$ective Athe bottom ro2B enables the organization to im$rove its Internal -rocess $ers$ective ObRectives Athe ne/t ro2 u$BG 2hich in turn enables the organization to create esirable results in the #ustomer an )inancial $ers$ectives Athe to$ t2o ro2sB.

Cor0or%te +e.e+ str%te)ies %tabilit& */$ansion 0etrenchment

#ombination

T/0es o1 'er)er There are +our t&$es o+ mergerG viz.G horizontal mergerG vertical mergerG %imultaneous %e<uential %imultaneous 7o5 concentric -auseE-rocee -ro+it merger an conglomerate merger. Horizontal mergers normall& an se<uential changeG 2ith caution involve the merger o+ t2o or more com$anies 2hich are $ro ucing similar .o $ro ucts or ren ering similar servicesG i.e. $ro ucts or services 2hich com$ete nothingirectl& 2ith each other. This t&$e o+ merger normall& results in re uction in the number o+ $la&ers in that $articular in ustr& an ma& re uce or eliminate Turnaroun .ivestment 6i<ui ation com$etition. (ertical mergers involve the merger o+ t2o com$aniesG 2here one o+ them is an actual or $otential su$$lier o+ goo s or services to the other. The obRect o+ this kin o+ merger coul be to ensure a source o+ su$$l& or an outlet +or $ro ucts an the e++ect ma& im$rove e++icienc&. In concentric or congeneric mergersG the t2o com$anies ma& be relate through #oncentration Integration .iversi+ication Internationalizatio #oo$eration the basic technologiesG $ro uction $rocess or markets. The merge com$an& n to the $rovi es an e/tension o+ $ro uct lineG market $artici$ations or technolog& surviving com$an&. %uch mergers $rovi e greater o$$ortunities to iversi+& into a relative market having higher return that it enRo&e earlier. #onglomerate International (ertical mergers neither constitute the bringing together o+ com$etitors or have a %trategic Merger Takeover #onglomerate omestic vertical connection.#oncentric It involves a $re ominant element o+ iversi+ication o+ alliance Multi activities. ThusG in this kin o+ mergerG one com$an& erives ;oint most o+ the revenue Horizontal +rom a $articular in ustr&G ac<uiring com$anies o$erating venture in other in ustries5,lobal 2ith a vie2 to obtain greater stabilit& o+ earnings through iversi+ication or to Marketing5 Horizontal )rien l& obtain bene+its relate o+ economies o+ scaleG etc. Transnational (ertical 4-%t isTechnolog& in2ustr/ +i1ec/c+e? Hostile relate #oncentric 6ike other living creaturesG in ustr& also has its circle o+ li+e. The in ustr& #onglomerate Marketing an li+ec&cle imitates the human li+ec&cle. The stages o+ in ustr& li+ec&cle inclu e technolog& +ragmentationG shake5outG maturit& an ecline AUotler "113B. These stages 2ill relate be escribe in the +ollo2ings section. 4-%t %re t-e '%in %s0ects o1 in2ustr/ +i1ec/c+e? -ro5com$etitive 7on5com$etitive #om$etitive Fragmentation Stage Tree o+ %trategic 4lternatives the +amil& )ragmentation is the +irst stage o+ the ne2 in ustr&. This is the stage 2hen the ne2 in ustr& evelo$s the business. 4t this stageG the ne2 in ustr& normall& arises 2hen an entre$reneur overcomes the t2in $roblems o+ innovation an inventionG an 2orks out ho2 to bring the ne2 $ro ucts or services into the market A4&res et al.G "113B. )or e/am$leG air travel services o+ maRor airlines in *uro$e 2ere sol to the target market at a high $rice. There+oreG the maRorit& o+ airlinesQ customers in *uro$e 2ere those $eo$le 2ith high incomes 2ho coul a++or $remium $rices +or +aster travel. In 1985G 0&anair ma e a huge change in the *uro$ean airline in ustr&. 0&anair 2as the +irst airline to engage lo25cost airlines in *uro$e. 4t that timeG 0&anairQs services 2ere $erceive as the innovation o+ the *uro$ean airline in ustr& A6e BelG "115B. 0&anair tickets are hal+ the $rice o+ British 4ir2a&s. %ome o+ its sales -re5com$etitive

$romotions 2ere as lo2 as ]1.11. This ma e $eo$le think that air travel 2as not Rust ma e +or the richG but ever&bo & AHale& ? Tan 1999B. 0&anair overcame the t2in $roblems o+ innovation an invention in the airline in ustr& b& inventing air travel services that coul serve $assengers 2ith tight bu gets an those 2ho Rust 2ante to reach their estination 2ithout breaking their bank savings. 0&anair achieve this goal b& eliminating unnecessar& services o++ere b& tra itional airlines AUa&nak ? UucukemirogluG 1993B. It oes not o++er +ree mealsG uses $a$er5+ree air ticketsG gets ri o+ mile collecting schemeG utilises secon ar& air$ortsG an o++ers +re<uent +lights. These techni<ues hel$ 0&anair save time an costs s$ent in airline business o$eration AHale& ? Tan 1999B. Shake-out %hake5out is the secon stage o+ the in ustr& li+ec&cle. It is the stage at 2hich a ne2 in ustr& emerges. .uring the shake5out stageG com$etitors start to realise business o$$ortunities in the emerging in ustr&. The value o+ the in ustr& also <uickl& rises A4&res et al.G "113B. )or e/am$leG man& $eo$le ie an su++er because o+ cigarettes ever& &ear. ThusG the PU government eci e to launch a cam$aign to encourage $eo$le to <uit smoking. 7icoretteG one o+ the lea ing com$anies is $ro ucing several nicotine $ro ucts to hel$ $eo$le <uit smoking. %ome o+ its 2ell5kno2n $ro ucts inclu e 7icorette $atchesG 7icolette gums an 7icorette lozenges A7icorette "11'B. %mokers began to see an eas& 2a& to <uit smoking. The ne2 in ustr& starte to attract bran recognition an bran a2areness among its target market uring the shake5out stage AHen rickson et al.G "11!B. 7icoretteQs $ro ucts began to gain $o$ularit& among those 2ho 2ante to <uit smoking or those 2ho 2ante to re uce their ail& cigarette consum$tion. .uring this $erio G another com$an& realise the o$$ortunit& in this market an eci e to enter it b& launching nicotine $ro uct rangesG inclu ing 7ic 6ite gum an $atches. It recentl& 2ent be&on PU boar er a+ter the PU government intro uce non5smoking $olic& in $ublic $lacesG inclu ing $ubs an nightclubs. This business threat create a ne2 business o$$ortunit& in the in ustr& +or 7ic 6ite to launch a ne2 nicotine5relate $ro uct calle 7ic Time A4B# 7e2s "11!B. 7ic Time is a 2hole ne2 2a& +or smokers to Tget a cigaretteT Z an eight5ounce bottle contains a lemon5+lavoure rink lace 2ith nicotineG the same amount o+ nicotine as t2o cigarettes A4B# 7e2s "11!B. 7ic 6ite 2as +irst available at 6os 4ngeles air$orts +or smokers 2ho got uneas& on +lightsG but no2 the nicotine so+t rinks are available in some convenience stores A4B# 7e2s "11!B. Maturity Maturit& is the thir stage in the in ustr& li+ec&cle. Maturit& is a stage at 2hich the e++iciencies o+ the ominant business mo el give these organisations com$etitive a vantage over com$etition AUotlerG "113B. The com$etition in the in ustr& is rather aggressive because there are man& com$etitors an $ro uct substitutes. -riceG com$etitionG an coo$eration take on a com$le/ +orm A,ottschalk ? %aetherG "11!B. %ome com$anies ma& shi+t some o+ the $ro uction overseas in or er to gain com$etitive a vantage. )or e/am$leG To&ota is one o+ the 2orl Qs lea ing multinational com$aniesG selling automobiles to customers 2orl 2i e. The e/$ort an im$ort ta/es mean

that its cars lose com$etitiveness to the local com$etitorsG es$eciall& in the *uro$ean automobile in ustr&. 4s a resultG To&ota eci e to o$en a +actor& in the PU in or er to $ro uce cars an sell them to customers in the *uro$ean market ATo&otaG "11'B. The haute couture +ashion in ustr& is another goo e/am$le. There are man& 2estern5bran e +ashion labels that manu+acture their $ro ucts overseas b& coo$erating 2ith overseas $artnersG or the& coul seek +oreign su$$liers 2ho s$ecialise in $articular materials or items. )or instanceG 7ike has +actories in #hina an Thailan as both countries have chea$ labour costs an chea$G <ualit& materialsG $articularl& rubber an +abric. Ho2everG their overseas $artners are not allo2e to sell shoes $ro uce +or 4 i as an 7ike AHarrison ? Bo&leG "11!B. The items have to be shi$$e back to the P%G an then 2ill be e/$orte to countries 2orl 2i eG inclu ing #hina an Thailan . Decline .ecline is the +inal stage o+ the in ustr& li+ec&cle. .ecline is a stage uring 2hich a 2ar o+ slo2 estruction bet2een businesses ma& evelo$ an those 2ith heav& bureaucracies ma& +ail A%egilG "115B. In a itionG the eman in the market ma& be +ull& satis+ie or su$$liers ma& be running out A4&res et al.G "113B. In the stage o+ eclineG some com$anies ma& leave the in ustr& i+ there is no eman +or the $ro ucts or services the& $rovi eG or the& ma& evelo$ ne2 $ro ucts or services that meet the eman in the market. In such casesG this 2ill create a ne2 in ustr& A)rancis ? .esaiG "115B. )or e/am$leG at the beginning o+ the communication in ustr&G $agers 2ere use as the main communication metho among $eo$le 2orking in the same organisationG such as octors an nurses. ThenG the cutting e ge o+ the communication in ustr& emerge in the +orm o+ the mobile $hone. The communication $rocess o+ $agers coul not be accom$lishe 2ithout tele$hones. To sen a message to another $agerG the user ha to $hone the call5centre sta++ 2ho 2oul t&$e an sen the message to another $ager. On the other han G $eo$le 2ho use mobile $hones can make a $hone5call an sen messages to other mobiles 2ithout going through call5centre sta++ AHui et al.G "11"B. In recent &earsG the +eatures o+ mobile $hones have been evelo$ing ra$i l& an continuall&. 7o2 $eo$le can use mobiles to sen multime ia messagesG take $icturesG check emailG sur+ the internetG rea ne2s an listen to music AHui et al.G "11"B. 4s mobile $hone +eature evelo$ment has reache saturationG thus the ne2 innovation o+ mobile $hone technolog& has incor$orate the use o+ com$uters. The launch o+ $ersonal igital assistants A-.4B is a goo e/am$le o+ the ecline stage o+ the mobile $hone in ustr& as the +eatures o+ most mobiles are similar. -.4s are han 5hel com$uters that 2ere originall& esigne as a $ersonal organiser but it become much more multi5+acete in recent &ears. -.4s are kno2n as $ocket com$uters or $almto$ com$uters A=iki$e iaG "11'B. The& have man& uses +or both mobile $hones an com$uters such as com$uter gamesG global $ositioning s&stemG vi eo recor ingG t&$e2riting an 2ireless 2i e5area net2ork A=iki$e iaG "11'B. Ho; 2o /ou use in2ustr/ +i1ec/c+e %n%+/sis? It is im$ortant +or com$anies to un erstan the use o+ the in ustr& li+ec&cle

because it is a survival tool +or businesses to com$ete in the in ustr& e++ectivel& an success+ull& ABaum ? Mc,ahanG "114B. The main as$ects in terms o+ strategic issues o+ the in ustr& li+ec&cle are escribe belo2F Com eting over emerging indu!trie! The game rules in in ustr& com$etition can be un etermine an the resources ma& be constraine . ThusG it is vital +or +irms to i enti+& market segments that 2ill allo2 them to secure an sustain a strong $osition 2ithin the in ustr& A4&res et al.G "113B. The $ro uct in the in ustr& ma& not be stan ar ise so it is necessar& +or com$anies to obtain resources nee e to su$$ort ne2 $ro uct evelo$ment an ra$i com$an& e/$ansion A4&res et al.G "113B. The entr& barriers ma& be lo2 an the $otential com$etition ma& be highG thus com$anies must a a$t to shi+t the mobilit& barriers A4&res et al.G "113B. #onsumers ma& be uncertain in terms o+ eman . 4s a resultG etermining the time o+ entr& to the in ustr& can hel$ com$anies to take business o$$ortunities be+ore their rivals A4&res et al.G "113B. =hen com$etition in the in ustr& increasesG +irms can have a sustainable com$etitive a vantage that 2ill $rovi e a basis +or com$eting against other com$anies ABaum ? Mc,ahanG "114B. The ne2 $ro ucts an a$$lications are har er to come b&G 2hile bu&ers become more so$histicate an i++icult to un erstan in the maturit& stage o+ the in ustr& li+ec&cle. ThusG consumer research shoul be carrie out an this coul hel$ com$anies in buil ing u$ ne2 $ro uct lines ABaum ? Mc,ahanG "114B. %lo2er in ustr& gro2th constrains ca$acit& gro2th an o+ten lea s to re uce in ustr& $ro+itabilit& an some consoli ation. There+oreG com$anies can +ocus greater attention on costs through strategic cost anal&sis ABaum ? Mc,ahanG "114B. The change in the in ustr& is rather &namicG an an un erstan ing o+ the in ustr& li+ec&cle can hel$ com$anies to monitor an tackle these changes e++ectivel& ABaum ? Mc,ahanG "114B. )irms can evelo$ organisational structures an s&stems that can +acilitate the transition ABaum ? Mc,ahanG "114B. %ome com$anies ma& seek business o$$ortunities overseas 2hen the in ustries reach the maturit& stage because uring this stageG the eman in the market starts to ecline ABaum ? Mc,ahanG "114B.

Com eting during the tran!ition to indu!try maturity

Com eting in declining indu!trie! The characteristics o+ eclining in ustries inclu e the +ollo2ingF .eclining eman +or $ro ucts -runing o+ $ro uct lines %hrinking $ro+it margins )alling research an evelo$ment a vertisement e/$en iture

.eclining number o+ rivals as man& are +orce to leave the in ustr& Measure the intensit& o+ com$etition ABaum ? Mc,ahanG "114B 4ssess the causes o+ ecline ABaum ? Mc,ahanG "114B %ingle out a viable strateg& +or ecline such as lea ershi$G li<ui ation an harvest ABaum ? Mc,ahanG "114B.

)or com$anies to survive the &namic environmentG it is necessar& +or them toF

4-ere 2o /ou 1in2 in1or'%tion on t-e in2ustr/ +i1ec/c+e? The in+ormationG mo el an theor& +or the in ustr& li+ec&cle can be +oun in man& business management books. %everal variations o+ li+ec&cle mo el have been evelo$e to a ress the evelo$ment an transition o+ $ro uctsG market an in ustr&. The mo els are similar but the number an names o+ each stage can be i++erent ABaum ? Mc,ahanG "114B. The +ollo2ing are some o+ the maRor mo elsF )o/G 19'3F -re5commercialisation Z intro uctionG gro2thG maturit& an ecline =assonG 19'4F Market .evelo$ment Z turbulenceG saturationEmaturit& an ecline ra$i gro2thG com$etitive ecline ecline

4n erson ? VeithamlG 1984F intro uctionG gro2thG maturit& an

Hill ? ;onesG 1998F +ragmentationG gro2thG shake5outG maturit& an

Conc+usion The in ustr& li+ec&cle imitates the c&cle o+ human being. In ustr& li+ec&cle com$rises +our stages inclu ing +ragmentationG gro2thG maturit& an ecline. 4n un erstan ing o+ the in ustr& li+ec&cle can hel$ com$eting com$anies survive uring $erio s o+ transition. In+ormation on the in ustr& li+ec&cle can be +oun in most business management books. %everal variations o+ the li+ec&cle mo el have been evelo$e to a ress the evelo$ment an transition o+ $ro uctsG market an in ustr&. The mo els are similar but the number o+ stages an names o+ each ma& i++er. MaRor mo els inclu e those evelo$e b& )o/ A19'3BG =asson A19'4BG 4n erson ? Veithaml A1984BG an Hill ? ;ones A1998B. Str%te)ic 2i'ensions 4 care+ul balance o+ +our interrelate elementsF $eo$leG s$aceG time an mone&.

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. firm positions itself by leveraging its strengths. !ichael Porter has argued that a firm's strengths ultimately fall into one of two headings" cost advantage and differentiation. #y applying these strengths in either a broad or narrow scope, three generic strategies result" cost leadership, differentiation, and focus. $hese strategies are applied at the business unit level. $hey are called generic strategies because they are not firm or industry dependent. $he following table illustrates Porter's generic strategies"
Porter's Generic Strategies

Advantage Target Scope Low Cost Product Uniqueness

Broad (Industry Wide)

Cost Leadership Strategy

Di erentiation Strategy

!arrow ("ar#et Seg$ent)

%ocus Strategy %low cost&

%ocus Strategy %differentiation&

Cost Leadership Strategy

$his generic strategy calls for being the low cost producer in an industry for a given level of 'uality. $he 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 mar(et 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. $he cost leadership strategy usually targets a broad mar(et.

Some of the ways that firms ac'uire cost advantages are by improving process efficiencies, gaining uni'ue access to a large source of lower cost materials, ma(ing 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. )irms that succeed in cost leadership often have the following internal strengths" ccess to the capital re'uired to ma(e a significant investment in production assets* this investment represents a barrier to entry that many firms may not overcome. S(ill in designing products for efficient manufacturing, for e+ample, having a small component count to shorten the assembly process. ,igh level of e+pertise in manufacturing process engineering. Efficient distribution channels.

Each generic strategy has its ris(s, including the low-cost strategy. )or e+ample, other firms may be able to lower their costs as well. s technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. dditionally, several firms following a focus strategy and targeting various narrow mar(ets may be able to achieve an even lower cost within their segments and as a group gain significant mar(et share. Di erentiation Strategy differentiation strategy calls for the development of a product or service that offers uni'ue attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. $he value added by the uni'ueness of the product may allow the firm to charge a premium price for it. $he firm hopes that the higher price will more than cover the e+tra costs incurred in offering the uni'ue product. #ecause of the product's uni'ue 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. )irms that succeed in a differentiation strategy often have the following internal strengths" ccess to leading scientific research. ,ighly s(illed and creative product development team. Strong sales team with the ability to successfully communicate the perceived strengths of the product. -orporate reputation for 'uality and innovation.

$he ris(s associated with a differentiation strategy include imitation by competitors and changes in customer tastes. dditionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their mar(et segments. %ocus Strategy $he focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. $he premise is that the needs of the group can be better serviced by focusing entirely on it. firm using a focus strategy often en.oys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly.

#ecause of their narrow mar(et focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. ,owever, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not e+ist. )irms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow mar(et segment that they (now very well. Some ris(s of focus strategies include imitation and changes in the target segments. )urthermore, it may be fairly easy for a broad-mar(et cost leader to adapt its product in order to compete directly. )inally, other focusers may be able to carve out subsegments that they can serve even better. & Co$'ination o Generic Strategies ( Stuc# in the "idd)e* $hese 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. )or e+ample, if a firm differentiates itself by supplying very high 'uality products, it ris(s undermining that 'uality if it see(s to become a cost leader. Even if the 'uality did not suffer, the firm would ris( pro.ecting a confusing image. )or this reason, !ichael Porter argued that to be successful over the long-term, a firm must select only one of these three generic strategies. /therwise, with more than one single generic strategy the firm will be 0stuc( in the middle0 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. #y separating the strategies into different units having different policies and even different cultures, a corporation is less li(ely to become 0stuc( in the middle.0 ,owever, there e+ists a viewpoint that a single generic strategy is not always best because within the same product customers often see( multi-dimensional satisfactions such as a combination of 'uality, style, convenience, and price. $here have been cases in which high 'uality producers faithfully followed a single strategy and then suffered greatly when another firm entered the mar(et with a lower-'uality product that better met the overall needs of the customers. Generic Strategies and Industry %orces $hese generic strategies each have attributes that can serve to defend against competitive forces. $he following table compares some characteristics of the generic strategies in the conte+t of the Porter's five forces.
Generic Strategies and Industry %orces

Generic Strategies Industry Force

Cost e%2ers-i0

Di11erenti%tion
#ustomer lo&alt& can iscourage $otential

Focus
)ocusing evelo$s core com$etencies that can act as

Entr/ 4bilit& to cut (%rriers $rice in

retaliation eters $otential entrants. entrants.

an entr& barrier.

(u/er lo2er $rice to "o;er

6arge bu&ers have less $o2er to negotiate because o+ +e2 close $o2er+ul bu&ers. alternatives. 4bilit& to o++er

6arge bu&ers have less $o2er to negotiate because o+ +e2 alternatives. %u$$liers have $o2er because o+ lo2 volumesG but a i++erentiation5+ocuse +irm is better able to $ass on su$$lier $rice increases.

Better insulate Su00+ier +rom $o2er+ul "o;er su$$liers.

Better able to $ass on su$$lier $rice increases to customers.

#ustomerQs become T-re%t #an use lo2 $rice attache to %$ecialize $ro ucts ? core o1 to e+en against i++erentiating attributesG com$etenc& $rotect against Su,stitu substitutes. re ucing threat o+ substitutes. tes substitutes. Better able to Ri.%+r/ com$ete on $rice. Bran lo&alt& to kee$ customers +rom rivals. 0ivals cannot meet i++erentiation5+ocuse customer nee s.

Strate%ic %roup ,appin% "f #ou want to understand #our en$ironment and its implications in reater depth, it mi ht be helpful to loo% more widel# and add #our beneficiar# needs into the mi.. "n this wa#, #ou can also consider the important factors affectin other or anisations in #our specialist sector (perhaps health or social care), or for #our field of operation (perhaps crime pre$ention or $ictim support). This is often called #our strate ic roup. Ta%e the top fi$e other pla#ers in #our strate ic roup. :ist them. De$elop a profile for each: <hat ser$ices do the# pro$ideQ <hat beneficiar# roup do the# wor% withQ <hatJs their impactQ <hat mi ht their plans be for the futureQ 8ow mi ht #ou create reater impact b# reconsiderin #our relationship with themQ

"tJs important not onl# to thin% about who these other pla#ers are, but also about the mar%etplace #ou each wor% in and how this could affect #our future strate ies. To help with this, thin% about the two most important factors dri$in success (or ensurin outcomes) for #our ser$ice users or beneficiaries. ,.amples that people sometimes come up with are: bein able to access the ser$ice immediatel# ha$in all their needs met in one place ha$in a tailored ser$ice based on their uni/ue needs.

Dou will ha$e #our own factors for #our beneficiaries. 4nce #ouJ$e pic%ed the top two, draw up a matri. showin each factor as in the e.ample below. $'a,ple of strate%ic %roup ,ap

Description of the dia%ra, The dia ram shows a s/uare di$ided into /uadrants with J"mmediate accessJ on the #*access and JTailored ser$iceJ on the .*access. Drawn in the appropriate position on the rid (with

re ards to these two factors) are the other pla#ers. The siBe of the circle that represents each corresponds to their siBe in the mar%etplace. 9reate your o#n strate%ic %roup ,ap 3lot out each of the other pla#ers on this matri.. Dou could draw a circle for each that i$es an idea of relati$e siBe. 3ut #our or anisation on there too. <here are the apsQ <here are the o$erlapsQ <hat are the options for chan eQ I

Fin%nci%+ G+o,%+i*%tion %n2 Fin%nci%+ St%,i+it/

'lobaliBation is a comple. process and it has different facets. Amon all of them, financial lobaliBation is the most powerful dimension. "t has caused reat impact on the lobal econom# and constituted a remar%able chan e in the e.hausti$e cross*border financial and cost flows. "n addition, financial lobaliBation also has reat impact in international ris%* sharin mana ement. There are m#riad of aspects of 9inancial 'lobaliBation, and financial lobaliBation and financial stabilit# is one of them. Due to financial lobaliBation, a massi$e chan e has been noticed in the mar%et operators and institutions, in e.pandin the sta%es of cross*border properties as well as the rowin international profile in the financial stabilit# of economic mar%ets. These chan es ha$e been called as the Esecond wa$e; of financial lobaliBation. <hen the financial mar%ets cannot perform at its best due to an unrelentin predicament, the situation is called as financial instabilit#. To counteract this instabilit#, financial lobaliBation ta%es an important role. 9irst of all, it chan es the traditional o$ernment*ruled e.chan e rate to a fle.ible e.chan e rate s#stem. "n addition, a precise application of liberaliBation and formation of institution is the crucial factor in all emer in mar%ets. 6easons of financial lobaliBation Technolo ical ad$ancement is considered as the prime cause of financial lobaliBation. ,speciall#, the transport and communications sectors ha$e e.perienced an enormous rowth which caused a chan e in the financial s#stem. A combined effort of the technolo ical ad$ancement and the e.pansion of financial liberaliBation ensured acti$e financial lobaliBation in toda#;s lobal econom#. 8istor# Due to financial lobaliBation there was a hu e crisis in ban%in sector which affected almost all the countries in the world. The first impact had been noticed in the +ordic countries and 7apan in the 1)G0s, while in the 1))A, there was 5e.ican crisis, and crisis in ban%in sector in the Asian countries too% place durin the 1))F*)G. "n the 6ussian countries it was in 1))G. "mpact of 9inancial 'lobaliBation and financial stabilit# ,arlier the s#stem was mainl# political dominated, but financial lobaliBation and financial stabilit# has reformed the entire s#stem, and a$e birth to the mar%et*directed s#stem. This s#stem performs important role in determinin the conditions of fle.ible accessibilit# in econom#, and e.chan e rates. "n addition, it also helps to cope up with an# sort of financial crisis. There was massi$e impact of financial lobaliBation on the countries and re ions across the world. A total transmission noticed, and in the place of ban%*centered financial s#stem, a mar%et*dri$en financial s#stem has ta%en the char e. As a result, there was a downfall in the

ban%in sector, and the# need to search for other options in domestic and lobal mar%ets to re1u$enate the sector. Ad$anta es of 9inancial 'lobaliBation and 9inancial -tabilit# "t can undoubtedl# be said that due to financial lobaliBation and financial stabilit# there is boom in the economic sector. 3lent# of options ha$e been opened and the sources of lobal financin ha$e become cheaper and easil# accessible as well. Due to financial lobaliBation numerous countries are en1o#in financial stabilit# which is widel# accepted. The most important thin is that, for the de$elopin countries, financial lobaliBation and financial stabilit# is reall# a boon. The# ha$e been hi hl# benefited from the securit# mar%ets of the de$eloped countries. 9urthermore, to %eep the inflation rate in control, financial stabilit# has been $er# much effectual. "n a word, financial lobaliBation and financial stabilit# is definitel# a perfect step for boostin up the econom# in different countries worldwide. Technolo # and "nno$ation in 9inancial -er$ices: -cenarios to 2020 "nno$ation has alread# transformed the financial ser$ices (9-) industr#. 9ourteen #ears a o, who e.pected the massi$e rowth of e*ban%in and e*bro%era eQ <ho en$isioned the entr# of new pla#ers such as retailers and telecommunications pro$iders into financial ser$ices arena than%s to their abilit# to harness the power of inno$ati$e technolo #Q <ho predicted that technolo # would enable outsourcin and offshore contractin of core financial processes in lowcost countries such as "ndiaQ The business en$ironment continues to chan e toda#, and the financial ser$ices sector needs to confront man# issues to remain competiti$e. "n particular, technolo # and inno$ation are board le$el issuesK the# create opportunities and pose threats. To e.plore these issues, the <orld ,conomic 9orum and representati$es of the financial ser$ices, information technolo # and telecommunication communities set out to de$elop scenarios for the future of financial ser$ices and how the# mi ht be affected b# inno$ation. The ob1ecti$e of these scenarios is to e.plore how inno$ation will transform access to, and deli$er# of, financial ser$ices b# the #ear 2020. 9rom the man# %e# dri$ers, pro1ect participants L in particular, leadin representati$es L identified two crucial roups of /uestions. industr#

1. 8ow will the lobaliBation of financial ser$ices e$ol$eQ <ill it be further supported b# o$ernments and re ulatorsQ <hat outcomes will we see in the ne.t decadeQ 2. <ill inno$ation be incremental or fundamentalQ <ill it be dri$en b# traditional or new pla#ersQ <hat t#pes of inno$ation will we see L for e.ample, in products and ser$ices, distribution and sales channels, operations, and new business modelsQ 3ro1ect participants wor%ed from these /uestions to de$elop three $er# different but plausible scenarios of the future of financial ser$ices o$er the ne.t 1A #ears. 'lobal "$# :ea ue describes a hi hl# concentrated financial ser$ices sector dominated b# a small number of lar e, lobal pla#ers. 'o$ernments support lobaliBation but ta%e a $er# conser$ati$e approach to customer protection and re ulation of the sector. At the same time, declinin trust in di ital media means customers fa$our the solidit# of traditional financial ser$ice pro$iders. "n this en$ironment, a small number of financial ser$ices institutions e$ol$e into lobal powerhouses.

+e.t 9rontier describes a world in which o$ernments pursue dere ulation and, as the title reflects, technolo # enables a reat $ariet# of new business models to emer e. The result is a financial ser$ices industr# as an ecos#stem of hi hl# specialiBed pro$iders, each focusin on creatin a competiti$e ad$anta e o$er incumbents. There are man# new pla#ers, includin telecommunications companies, peer*to*peer financial ser$ices pro$iders, processin pro$iders, retailers and "nternet companies. "nno$ation "slands describes a world in which lobaliBation stalls due to eopolitical tensions and lobal instabilit#. 'o$ernment policies toward the financial ser$ices sector differ widel# amon countries. Three trends become apparent: I N:eapfro in N: in lar e emer in economies such as (hina and "ndia, o$ernment re ulation and in$estment in infrastructure fosters the local financial ser$ice industr#, e.pandin access to the poor and leadin to new business models that Nleapfro N o$er de$eloped mar%ets in areas such as mobile ban%in and fle.ible, low*cost operatin models. I N2usiness as usualN: in other mainl# de$eloped economies such as the &- or ,uropean countries where inno$ation neither accelerates nor decelerates. There is onl# limited chan e to business models. I N2ac% to the pastN: in the remainin countries and re ions, mainl# in de$elopin economies. 'o$ernments increase control o$er the financial ser$ices sector but do not foster local inno$ationKas a result, there is little pro ress and sometimes e$en re ression in the efficienc# and /ualit# of 9-.

T-e G+o,%+i*%tion O1 Fin%nci%+ Ser.ices

In this age o+ globalizationG the ke& to survival an success +or man& +inancial institutions is to cultivate strategic $artnershi$s that allo2 them to be com$etitive an o++er iverse services to consumers. In e/amining the barriers to 5 an im$act o+ 5 mergersG ac<uisitions an iversi+ication in the +inancial services in ustr&G itQs im$ortant to consi er the ke&s to survival in this in ustr&F 1. Pn erstan ing the in ivi ual clientQs nee s an e/$ectations ". -rovi ing customer service tailore e/$ectations to meet customersQ nee s an

In "118G there 2ere ver& high rates o+ mergers an ac<uisition AM?4B in the +inancial services sector. 6etQs take a look at some o+ the regulator& histor& that contribute to changes in the +inancial services lan sca$e an 2hat this means +or the ne2 lan sca$e investors no2 nee to traverse. .iversi+ication *ncourage b& .eregulation Because largeG international mergers ten to im$act the structure o+ entire omestic in ustriesG national governments o+ten evise an im$lement $revention $olicies aime at re ucing omestic com$etition among +irms. Beginning in the earl& 1981sG the .e$ositor& Institutions .eregulation an Monetar& #ontrol 4ct o+ 1981 an the ,arn5%t. ,ermaine .e$ositor& 4ct o+ 198" 2ere $asse . B& $rovi ing the )e eral 0eserve 2ith greater control over non5member banksG

these t2o acts 2ork to allo2 banks to merge an thri+t institutions Acre it unionsG savings an loans an mutual savings banksB to o++er checkable e$osits. These changes also became the catal&sts +or the ramatic trans+ormation o+ the P.%. +inancial service markets in "118 an the emergence o+ reconstitute $la&ers as 2ell as ne2 $la&ers an service channels. A)or more on thisG check out our )inancial #risis %urvival ,ui e s$ecial +eature.B 7earl& a eca e laterG the im$lementation o+ the %econ Banking .irective in 1993 eregulate the markets o+ *uro$ean Pnion countries. In 1994G *uro$ean insurance markets un er2ent similar changes as a result o+ the Thir ,eneration Insurance .irective o+ 1994. These t2o irectives brought the +inancial services in ustries o+ the Pnite %tates an *uro$e into +ierce com$etitive alignmentG creating a vigorous global scramble to secure customers that ha been $reviousl& unreachable or untouchable. The abilit& +or business entities to use the internet to eliver +inancial services to their client^le also im$acte the $ro uct5oriente an geogra$hic iversi+ication in the +inancial services arena. ,oing ,lobal 4sian markets Roine the e/$ansion movement in 199! 2hen TBig BangT +inancial re+orms brought about eregulation in ;a$an. 0elativel& +ar5reaching +inancial s&stems in that countr& became com$etitive in a global environment that 2as enlarging an changing s2i+tl&. B& 1999G nearl& all remaining restrictions on +oreign e/change transactions bet2een ;a$an an other countries 2ere li+te . A)or backgroun on ;a$anG see The 6ost .eca eF 6essons )rom ;a$anQs 0eal *state #risis an #rashesF The 4sian #risis.B )ollo2ing the changes in the 4sian +inancial marketG the Pnite %tates continue to im$lement several a itional stages o+ eregulationG conclu ing 2ith the ,ramm56each5Blile& 4ct o+ 1999. This la2 allo2e +or the consoli ation o+ maRor +inancial $la&ersG 2hich $ushe P.%.5 omicile +inancial service com$anies involve in M?4 transactions to a total o+ _""1 billion in "111. 4ccor ing to a "111 stu & b& ;ose$h Te$litzG ,ar& 4$anaschik an *lizabeth Har$er Briglia in Bank 4ccounting ? )inanceG e/$ansion o+ such magnitu e involving tra e liberalizationG the $rivatization o+ banks in man& emerging countries an technological a vancements has become a rather common tren . A)or more insightG see %tate50un *conomiesF )rom -ublic To -rivate.B The imme iate e++ects o+ eregulation 2ere increase com$etitionG market e++icienc& an enhance consumer choice. .eregulation s$arke un$rece ente changes that trans+orme customers +rom $assive consumers to $o2er+ul an so$histicate $la&ers. %tu ies suggest that a itionalG iverse regulator& e++orts +urther com$licate the running an managing o+ +inancial institutions b& increasing the la&ers o+ bureaucrac& an number o+ regulations. A)or more on this to$icG see )ree MarketsF =hatQs The #ost>B %imultaneousl&G the technological revolution o+ the internet change the natureG sco$e an com$etitive lan sca$e o+ the +inancial services in ustr&. )ollo2ing eregulationG the ne2 realit& has each +inancial institution essentiall& o$erating in its o2n market an targeting its au ience 2ith narro2er servicesG catering to the eman s o+ a uni<ue mi/ o+ customer segments. This eregulation +orce +inancial institutions to $rioritize their goals b& shi+ting their +ocus +rom rate5 setting an transaction5$rocessing to becoming more customer5+ocuse . #hallenges an .ra2backs o+ )inancial -artnershi$s %ince 1998G the +inancial services in ustr& in 2ealth& nations an %tates has been e/$eriencing a ra$i geogra$hic e/$ansionK $reviousl& serve b& local +inancial institutions are no2 targete level. 4 itionall&G accor ing to 4len Berger an 0obert .eHoung in the Pnite customers at a global their article

LTechnological -rogress an the ,eogra$hic */$ansion o+ the Banking In ustr&O A;ournal o+ Mone&G #re it an BankingG %e$tember "11!BG bet2een 1985 an 1998G the average istance bet2een a main bank an its a++iliates 2ithin P.%. multibank hol ing com$anies has increase b& more than 51DG +rom 1"3.4 miles to 188.9 miles. This in icates that the increase abilit& o+ banks to make small business loans at greater istances enable them to su++er +e2er iseconomies o+ scale an boost $ro uctivit&. ATo learn moreG check out #om$etitive 4 vantage #ounts.B .eregulation has also been the maRor +actor behin this geogra$hic iversi+icationG an beginning in the earl& 1981sG a se<uence o+ $olic& changes im$lemente a gra ual re uction o+ intrastate an interstate banking restrictions. In the *uro$ean PnionG a similar counter$art o+ $olic& changes enable banking organizations an certain other +inancial institutions to e/ten their o$erations across the member5states.6atin 4mericaG the transitional economies o+ *astern *uro$e an other $arts o+ the 2orl also began to lo2er or eliminate restrictions on +oreign entr&G thus enabling multinational +inancial institutions hea <uartere in other countries to attain consi erable market shares. Transactions 2ithout Boun ariesG Bor ers 0ecent innovations in communications an in+ormation technolog& have resulte in a re uction in iseconomies o+ scale associate 2ith business costs +ace b& +inancial institutions contem$lating geogra$hic e/$ansion. 4TM net2orks an banking 2ebsites has enable e++icient long5 istance interactions bet2een institutions an their customersG an consumers have become so e$en ent on their ne2+oun abilit& to con uct boun ar&5less +inancial transactions on a continuous basis that businesses lose all com$etitiveness i+ the& are not technologicall& connecte . 4n a itional riving +orce +or +inancial service +irmsQ geogra$hic iversi+ication has been the $roli+eration o+ cor$orate combination strategies such as mergersG ac<uisitionsG strategic alliances an outsourcing. %uch consoli ation strategies ma& im$rove e++icienc& 2ithin the in ustr&G resulting in M?4sG voluntar& e/itG or +orce 2ith ra2al o+ $oorl& $er+orming +irms. #onsoli ation strategies +urther em$o2er +irms to ca$italize on economies o+ scale an +ocus on lo2ering their unit $ro uction costs. )irms o+ten $ublicl& eclare that their mergers are motivate b& a esire +or revenue gro2thG an increase in $ro uct basesG an +or increase sharehol er value via sta++ consoli ationG overhea re uction an b& o++ering a 2i er arra& o+ $ro ucts. Ho2everG the main reason an value o+ such strateg& combinations is o+ten relate to internal cost re uction an increase $ro uctivit&. A)or +urther rea ingG check out =hat 4re *conomies o+ %cale>B Pn+avorable +acts about the a vantages an isa vantages o+ the maRor strategies use as a tool +or geogra$hic e/$ansions 2ithin the +inancial services sectors 2ere obscure in "118 b& the ver& high rates o+ M?4sG such as those bet2een 7ations Bank an Bank o+ 4merica A7H%*FB4#BG Travelers ,rou$ an #iticor$ A7H%*F#BG ;- Morgan #hase A7H%*F;-MB an Bank One. Their ilemma 2as to create a balance that ma/imize overall $ro+it. #onclusion The conclusion regar ing the im$actG a vantages an isa vantages o+ omestic an international geogra$hic iversi+ication an e/$ansion on the +inancial service in ustr& is the +act that 2ith globalizationG the survival an success o+ man& +inancial service +irms lies in un erstan ing an meeting the nee sG

esires an e/$ectations o+ their customers. The most im$ortant an continuall& emerging +actor +or +inancial +irms to o$erate success+ull& in e/ten e global markets is their abilit& to e++icientl& serve iscerningG highl& so$histicate G better e ucate G more $o2er+ul consumers a icte to the ease an s$ee o+ technolog&. )inancial +irms that o not to realize the signi+icance o+ being customer5oriente are 2asting their resources an eventuall& 2ill $erish. Businesses that +ail to recognize the im$act o+ these consumer5 riven trans+ormations 2ill struggle to survive or cease to e/ist in a ne2l& +orge global +inancial service communit& that has been +orever change b& eregulation. ATo learn more about this in ustr&G check out The *volution o+ Banking.B 4-%t is 'e%nt ,/ )+o,%+i*%tion? Discuss In2i%:s e30erience ;it)+o,%+i*%tion since =>>=8 Conce0t o1 G+o,%+i*%tion: ,lobalization re+ers to the $rocess o+ increasing economic integration an gro2ing economic inter e$en ence bet2een nations. It means integration In2i%:s e30erience ;it- G+o,%+i*%tion: The in ustrial $olic& 1991 aims to globalize the In ian econom& through re+orms in +oreign tra e $olic&G such as abolition o+ im$ort licensingG convertibilit& o+ ru$eeG market etermination o+ +oreign e/change ratesG etc. These $olic& re+orms are e/$laine belo2. AiB Im$orts liberalizationF :uantitative restrictions such as im$ort licenses an <uotas have been $hase out. Pn er the ne2 +oreign tra e $olic& most im$orts have been $ut un er O$en ,eneral 6icense AO,6B listG 2herein automatic $ermission is grante to im$ort goo s. 7o2 im$ort license is necessar& +or ever& ne2 item. :ualitative restrictions on a large number o+ e/$ort items have been remove . %everal items o+ im$orts have been ecanalise . The )oreign Tra e -olic& "114519 seek to ouble In iaNs $ercentage share o+ global merchan ise tra e 2ithin ne/t +ive &ears. The measure $ro$ose in the ne2 $olic& is to continue the $rocess o+ liberalizationG sim$li+ication o+ $roce uresG re uction o+ transaction costs to the In ian e/$orters an im$orters an +ocus on areas o+ the core com$etenc& namel&G agricultureG te/tileG cottage an han icra+t sector. 0ationalization o+ Tari++ structureF The structure an $atterns o+ custom uties levie on im$ort o+ i++erent commo ities Akno2n as tari++ structureB has become ver& com$le/ over the &ears. %ince 1991 the $eak tari++ has been re uce substantiall& an the tari++ structure has been rationalize . 0e+orms in )oreign */change managementF Be+ore 1991G ,overnment o+ In ia e/ercise strict control over +oreign e/change. Pn er the +oreign e/change regulation act A)*04B all In ian e/$orters ha to surren er their +oreign e/change earnings to the reserve bank o+ In ia. 0e+orms in )oreign .irect Investment A).IBF 7o2 111 $ercent +oreign e<uit& is allo2e in man& in ustries. In other casesG the u$$er limit +or +oreign investment has been raise +rom 41D to '4D. 4utomatic $ermission is given to +oreign technolog& agreements in high $riorit& in ustries. Im$ort o+ ca$ital goo s also gets automatic a$$roval in case the +oreign e/change re<uire +or such im$ort is receive through

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AvB 1B

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+oreign e<uit&. #a$ital Market 0e+ormsF The maRor re+orm in the ca$ital market are as +ollo2sF The ca$ital issues AcontrolB 4ct 194' has been re$eale In ian #om$anies +ace bureaucratic ela&s in issues o+ securities ue to this act. 6isting o+ #om$anies on stock e/changes has been liberalize . The role o+ +oreign Institutional Investors A)IIsB on In ian stock has increase tremen ousl& ue to liberalization o+ +oreign $ort+olio in+lo2s. -rivate mutual +un s Aboth In ian an )oreignB have been $ermitte to o$erate thereb& en ing the mono$ol& o+ PTI. The securities an */change Boar s o+ In ia A%*BIB has become the regulator o+ ca$ital market.

=hat is =TO> %tate the obRective an +unction o+ =TO. =TO has a ,eneral council +or its a ministrationG 2hich inclu es one $ermanent re$resentative o+ each member nation. ,enerall&G it has one meeting $er month 2hich is hel in ,eneva. The higher authorit& o+ $olic& making is =TONs ministerial con+erence 2hich is hel a+ter ever& " &ears. .irector ,eneral is the highest o++icial o+ the organization to look a+ter a& to a& 2orking. ,eneral #ouncil o+ =TO elects .irector ,eneral +or 4 &ears. The e/5tra eNs =TO ministerial con+erence #on+erence I II III I( ( (I Hear .ec.9513G 199! Ma& 185"1G 1998 7ov.315.ec.9G 1999 7ov. 9514G"111 %e$. 11514G "113 .ec. 13518G "115 -lace %inga$ore ,eneva #iatel .oha Uankun Hong5kong

Minister o+ Ital& Mr. 0enatto 0ugaro is its $resent .irector ,eneral. )our .e$ut& .irector ,eneral are also electe to assist the .irector ,eneral. 6ike ,4TTG =TONs hea <uarter is also at ,eneva. 4ccor ing to the latest =TO re$ort A=T05"113BG at the en o+ 4$ril "113G 14! countries 2ere the members o+ =TO. =TO increase the $resent membershi$ o+ =TO to 151. ObRectives o+ =TO 1. To im$rove stan ar o living o+ $eo$le in the member countries. ". To ensure +ull em$lo&ment an broa increase in e++ective eman . 3. To enlarge $ro uction 4. To enlarge tra e o+ goo s. 5. To enlarge $ro uction 2ith tra e o+ services. !. To ensure o$timum utilization o+ 2orl resources.

'. To acce$t the conce$t o+ sustainable evelo$ment 8. To $rotect environment )unction o+ =TO 1. To $rovi e +acilities or im$lementation a ministration an o$eration o+ multilateral an bilateral agreements o+ the 2orl tra e. ". To $rovi e a $lat+orm to member countries to eci e +uture strategies relate to tra e an tari++. 3. To a minister the rules an $rocess relate to is$ute settlement 4. To im$lement rules an $rovisions realte to tra e $olic& $revie2 mechanism 5. To assist IM) an IB0. +or establishing coherence in universal economic $olic& etermination. !. To ensure the o$timum use o+ 2orl resources '. To acce$t the conce$t o+ sustainable evelo$ment 8. To $rotect environment 9. To ensure o$timum utilization o+ 2orl resources 11.To enlarge $ro uction 11.To enlarge tra e or services =TO agreements The main =TO agreements can be ivi e into the +ollo2ing categoriesF 1. 4greement on agricultureF This $rovi es a +rame2ork +or the long5term

C%+ues %n2 et-ics in '%n%)e'ent

4-%t is M%n%)e'ent et-ics? *thics is the stu & o+ in ivi ual an collective moral a2arenessG Ru gmentG character an con uct. Management ethics can be e+ine as the escri$tive an normative stu & o+ moral a2arenessG Ru gmentG character an con uct as the& relate to all levels o+ managerial $ractice. 4-%t is 'or%+it/ %n2 -o; is it 2i11erent 1ro' et-ics? Moralit&G is e+ine as the customar&G sociolegal $ractices an activities that are consi ere im$ortantl& right an 2rongK the rules that governs these activitiesK an the values that are embe e G +ostere G or $eruse b& those conventionalG sociolegal activities an $ractices. =hereas management moralit& ma& allo2 one to succee tem$oraril& b& con+orming to current social norms or organizational mazesG management ethics calls +or a sensitiveG re+lectiveG an s&stematic en orsement onl& a+ter the& have 2ithstoo critical challenge. 4-%t %re t-e '%5or t/0es o1 Et-ic%+ t-eories? Teleological ethics theories Teleological ethics theories maintain that goo en s an Eor results etermine the ethical values o+ action. *thical egoism5 an action is goo i+ it $ro uces or ten s to $ro uce results that ma/imize a $articular $ersonNs sel+5interest as e+ine b& the in ivi ualG even at the e/$ense o+ others. Ptilitarianism5 an action is goo i+ it $ro uces or ten s to $ro uce the greatest amount o+ satis+action +or the greatest number o+ stakehol ers +or the greatest number o+ $eo$le. *u aimonism5 an action is goo i+ it $romotes or ten s to $romote the +ul+illment o+ goals constitutive o+ human nature an its ha$$iness.

.eontological ethics theor& .eontological ethical theories maintain that res$onsibilit& +ul+illing obligationsG +ollo2ing $ro$er $roce ureG L oing the right thing.O 4n a hering to moral stan ar s etermines the ethical value o+ actions. .eontological ethics maintains that actions are morall& right in e$en ent o+ their conse<uencesK +or e/am$leG +or the secularistG it is right to kee$ $romises an +or the religiousG it is might to obe& the Ten #omman ments regar less o+ $ersonal costs or bene+its. 4mong the maRor t&$es o+ eontological ethics are negative an $ositive right theoriesG social contract theories an social Rustice theories.

7egative an $ositive rights5 7egative rights5 an action is right i+ it $rotects an in ivi ual +rom un2arrante inter+erence +rom ,overnment an E or other $eo$le in the e/ercise o+ that right -ositive rights5 an action is right i+ it $rovi es an& in ivi ual 2ith 2hatever he or she nee s to e/ist %ocial #ontract5 an action is right i+ it con+orms to the terms agree u$onG con itionsG or rules +or social 2ell5being negotiate b& com$etent $arties %ocial Rustice5 an action is right i+ it $romotes the ut& o+ +airness in the istributiveG retributiveG an com$ensator& imensions o+ social bene+its an bur ens.

(irtue ethics theor& In ivi ual character =ork character -ro+essional character

%&stem .evelo$ment *thics Theor& -ersonal im$rovement Organizational ethics */tra5 organizational ethics

4-%t %re t-e %r)u'ents 1or %n2 %)%inst Soci%+ res0onsi,i+it/ o1 Cor0or%te? 4rguments against social res$onsibilities areF 1 " 3 #ontrar& to basic +unctions o+ business .omination o+ business values Ine++icienc& in the s&stem

4rguments in +avor o+ social res$onsibilities areF 1 " 3 4 Business is a $art o+ the societ& 4voi ance o+ government regulation 6ong5run sel+5interest o+ business Tra itional value

Soci%+ o,5ecti.e o1 (usiness %n2 Enter0rise

%ocial entre$reneurs $la& the role o+ change agents in the social sector b&5 1 " 3 4 5 4 o$ting a mission to create an sustain social values 0ecognizing an relentlessl& $ursuing ne2 o$$ortunities to serve that mission *ngaging in a $rocess o+ continuous innovationG a a$tation an learning #reating health& environment b& controlling $ollution 4cting bol l& 2ithout being limite b& resources currentl& in han

! '

Hel$ing religionsG charitable an cultural institutions 2hich serve the $eo$le +or bettermentG an Hel$ing the nation b& im$roving its econom& b& $ro ucing an istributing such $ro ucts 2hich are essential +or that nation.

En.iron'ent%+ Et-ics %n2 Cor0or%te Res0onsi,i+it/

*nvironmental ethics is the $art o+ environmental $hiloso$h& 2hich consi ers e/ten ing the tra itional boun aries o+ ethics +rom solel& inclu ing humans to inclu ing the non5human 2orl . It e/erts in+luence on a large range o+ isci$lines inclu ing la2G sociolog&G theolog&G economicsG ecolog& an geogra$h&. There are man& ethical ecisions that human beings make 2ith res$ect to the environment. )or e/am$leF %houl 2e continue to clear cut +orests +or the sake o+ human consum$tion> %houl 2e continue to $ro$agate> %houl 2e continue to make gasoline $o2ere vehicles> =hat environmental generations> obligations o 2e nee to kee$ +or +uture

Is it right +or humans to kno2ingl& cause the e/tinction o+ a s$ecies +or the convenience o+ humanit&> *nvironmental ethics is becoming an im$ortant issue +or man& com$anies an businesses as there is a greater $ush +or cor$orate res$onsibilit&. 6ea ers o+ organizations o+ all sizes an in all sectors +ace a gro2ing number o+ issues relate to ethical behaviorG $articularl& in terms o+ environmental res$onsibilit&. 4s global un erstan ing o+ the signi+icant ecological an environmental ethics issues 2e +ace e/$an s an moves to the +ore+ront o+ ebatesG it is even more im$ortant +or lea ers to take action to both reme & the causes o+ the $roblem an to act as mo els +or other organizations an in ivi uals. 4lthough there are man& e/am$les o+ res$onsible cor$orate an organizational environmental governance an behaviorG there is &et to emerge a global initiative aime at changing the +ace o+ environmentall& ethical an res$onsible action that 2ill $romote +urther cor$orate res$onsibilit&. This lack o+ un erstan ing o+ issues o+ environmental ethics an cor$orate res$onsibilit& occurs +or a number o+ a reasonsG one o+ 2hich coul be because o+ a lack o+ global consensus on the im$ortance o+ taking the necessar& ste$s to reme & the $roblem. 4s one scholar notesG TIn our $luralistic societiesG there is no unconteste common ethical groun in general an no un is$ute conce$tion o+ environmental res$onsibilit& in $articularT A*n erle "11!B an as a result there is little uni+ie action. I+ this assessment is vali then it is necessar& to +irst e+ine a clear set o+ issues an resolutions that organizations an lea ers can agree u$on.

One issue relate to environmental ethics in the cor$orate an organizational s$here is that most 2ill concur is vital +or all lea ers is that there cannot be an& +uzz& istinctions bet2een 2hat is goo +or business versus 2hat is goo +or the environment. In other 2or sG the consensus must be that there shoul be a hierarch& o+ interests5one 2hich $laces environmental an sustainabilit& concerns at the $eak. TThe claim is that the various bene+its an harms o+ evelo$ment are incommensurable an not easil& 2eighe G involving i++erences bet2een global an local goo s5the bene+its o+ selling 2oo +iber +or local $o$ulations versus the $ossible global bene+its o+ a $otential cure +or cancer or a contribution to the re uction in greenhouse gases...=hose interests count +or more>T A6ight "11"B. In shortG the interests o+ the global goo shoul al2a&s out2eigh those o+ the short5term monetar& or other gains $ro uce b& unethical or unsustainable $ractices an lea ershi$ ecisions. 6ea ers in both business an civil societ& have +ocuse too much on the +riction bet2een them an not enough on the $oints o+ intersection. The mutual e$en ence o+ cor$orations an societ& im$lies that Tboth business ecisions an social $olicies must +ollo2 the $rinci$le o+ share value. That isG choices must bene+it both si es. I+ either a business or a societ& $ursues $olicies that bene+it its interests at the e/$ense o+ the otherG it 2ill +in itsel+ on a angerous $ath A-orter "11!B. The bulk o+ recent $eer5revie2e literature on the to$ic o+ environmental ethics an cor$orate res$onsibilit& has grante a great eal o+ +ocus on matters o+ ethical behavior in the organizational conte/t. 4lthough there are still several ebates about $ossible courses o+ action that coul an shoul be +ollo2e at the management levelG it is generall& agree that Tenvironmental lea ershi$ is a collective &namicG 2herein the i++erence bet2een lea ers an +ollo2ers is base more on egrees o+ social in+luence Athrough 2or s an ee sB than on tra itional institutional $o2er i++erentialsT A*gri "11!B. In a itionG this also suggests another $o$ular $ara igm that has emerge that insists that businesses an organizations are increasingl& more accountable +or their environmentall& ethical behavior5both 2ith the organization an in the vie2 o+ the $ublic at large. =ith gro2ing global consciousness evote to un erstan ing an cham$ioning issues o+ environmental sustainabilit&G com$anies an their $ractices on such a level can no longer be vie2e as se$arate matters. TThe evolution o+ business an societal concern has le to businesses gra uall& re5 embracing +ormerl& is$lace social orientation +or both social an environmental 2ell5beingT A-an2ar "11!B. =hat this means essentiall&G is that it is even more im$ortant +or the overall success or +ailure o+ a cor$oration or organization to engage 2ith $ublic concerns an behave in a res$onsible 2a&G $articularl& as +ar as environmental issues are concerne . 4s -an2ar goes on to noteG T=hen $ursing 8environmentall&9 ethical investmentsG in ivi uals an organizations seek out com$anies 2ith a $ositive re$utation 2hile avoi ing com$anies linke to environmentall& amaging $racticesG o$$ressive regimesG etc. The increase in environmental ethical investment has encourage com$anies to give attention to cor$orate res$onsibilit&TA-an2ar "11!B. Ho2 organizations give this attentionG ho2everG is conteste . The $roblem is becoming less a matter o+ recognizing that environmental ethics issues are $resent an $ressing an more

an issue o+ 2hat to oG lea ershi$52ise an a ress these $roblems.

on a meta5organizational level to

There are various a$$roaches to solving the organizational Aan +or that matterG national an internationalB $roblems surroun ing e++ective an environmentall& ethical lea ershi$. The main issue isG ho2everG a lack o+ coherent i eolog& surroun ing organizational an cor$orate res$onses5even i+ the esire to be more a2are o+ environmental ethics matters e/ists. )or e/am$leG accor ing to a surve& con ucte in .ecember o+ "11!G T198 me ium5size to large multinationals +oun that most sai the& lacke an active a$$roach to evelo$ing ne2 business o$$ortunities arising +rom meeting citizenshi$ an sustainabilit& nee sT AMarshall "11'B. In or er to reme & this crisisG man& larger organizations hire cor$orate res$onsibilit& o++icers to monitor such things as environmental ethics. These in ivi uals 2ere charge 2ith the task o+ revie2ing an anal&zing current $olic& an $ractices to ensure that the highest ethical stan ar s 2ere being met in a 2a& that 2as con ucive to the organizationQs mission statementG bu getG an overall cor$orate culture. In shortG one a$$roach to solving the ethical eman s that increasingl& value b& both the $ublic an investors is to ensure cor$orate res$onsibilit& through the hiring o+ an outsi e consultant. =ith larger organizations un erstan ing the value o+ environmental ethical res$onsibilit&G it is natural to assume that smaller entities 2ill take notice an +ollo2 suit. Being an e++ective an res$onsible cor$orate lea er is not sim$l& something that is an issue in the organizational conte/tG but it e/ten s to the communit& level as 2ell. #onsi er the case o+ .etroit an its ra$i l& 2in ling reserve o+ natural areas an resources. In .etroitG an urban ecos&stem anal&sis un ertaken b& 4merican )orests reveale ho2 lan cover changes over the $ast 11 &ears have a++ecte environmental <ualit& in a nine5count& area o+ southeast Michigan. T)rom 1991 to "11" that regionQs o$en s$ace ecline b& 11 $ercent 2hile urban areas increase ramaticall&5"1 $ercent. 4s a resultG the region lost _1 billion in storm2ater management services 2ith a corres$on ing ecline in 2ater <ualit&T AUollin "11!B. TThe com$anies 2ere rate on their abilit& to $rovi e goo Robs +or em$lo&eesG environmental sustainabilit&G an health& communit& relationsT AMirren "11!B.

INFORMA CONSU TATION ON DSTRATEGIES FOR GENDER EQUA ITY- IS MAINSTREAMING A DEAD END?E
)ollo2ing +our a&s o+ iscussion o+ strategies +or gen er e<ualit& in international organisationsG the gen er +ocal $oints o+ 15 P7 organisations an evelo$ment banks together 2ith re$resentatives o+ 5 onor agencies an resource $ersons re2 the +ollo2ing conclusions an recommen ations relate to lessons learne in $romoting institutional change an e++ective strategies +or the +utureF 4. ,en er mainstreaming is not a ea en strateg&. But it is not al2a&s +ull& un erstoo an im$lemente in the right 2a&. S There is con+usion about conce$tsF Lgen erO an L2omenO. Ho2everG one oes not e/clu e the other. The use e$en s on the conte/t. L,en erO is most +ruit+ull& use as an a RectiveG not a nounG in conce$ts like Lgen er e<ualit&O an

Lgen er anal&sisO. L=omenO Aan girlsB are essential actors an target grou$s in relation to gen er e<ualit&. It is im$ortant to anal&se issues so that gen er i++erences an is$arities a$$ear an 2omen are visible in relation to men. S There is also con+usion about goals an means. The goal is gen er e<ualit& an 2omenNs em$o2erment. To achieve the goalG i++erent strategies an actions are nee e accor ing to circumstances. -olarisation o+ a$$roaches oes not 2ork. 4 main strateg& is gen er mainstreaming o+ all $oliciesG $rogrammes an $roRects. But L2omen must not be lost in the mainstreamG or malestreamXO. Targete 2omen5s$eci+ic $oliciesG $rogrammes an $roRects are necessar& to strengthen the status o+ 2omen an $romote mainstreaming. In an& caseG there must be s$ecialist su$$ortG institutional mechanisms an accountabilit&.

S 4gencies have chosen i++erent bases +or their actionF human rights or e++icienc& consi erations. In +actG it is not a <uestion o+ eitherEor. The human rights basis is more +un amentalG but is not al2a&s ma e e/$licit an in some organisations it is not 2ell un erstoo or a$$reciate . The em$hasis 2ill var& +rom one organisation to the otherG but it is im$ortant to realise that the $romotion o+ gen er e<ualit& im$lies a social trans+ormation in societ& in a ition to more e++ective economic evelo$ment an $overt& re uction. B. ,lobal commitment. The international 2omenNs con+erences +rom Me/ico A19'5B to BeiRing A1995B establishe a global consensus an commitment to $romote gen er e<ualit& 2hich 2as rea++irme b& the Millennium %ummit A"111B. This is a long term commitment an it is im$ortant to kee$ the goal on the agen a. Ongoing $olitical an +inancial su$$ort +rom Member %tates is essential to maintain +ocus on gen er issues an ensure im$lementation o+ the recommen ations. The man ates an $olic& statements o+ P7 organisations an evelo$ment banks shoul have conce$tual clarit& an e/$licit language so $eo$le un erstan them. #ommitments shoul be clearl& s$elle outG given visibilit& an cultivate . =ithout $ressure +rom governing bo ies an to$ management man ates an $olic& statements o not get im$lemente . */ternal a visor& gen er boar s or $anels can be use to ans2er <uestions an hel$ eluci ate an e$ersonalise issues. #. Organizational change. The challenge is to trans+orm multilateral organisations to activel& $ursue the goal o+ $romoting gen er e<ualit& an 2omenNs em$o2erment through a $rocess o+ gen er mainstreaming an other +orms o+ organizational change. 4s gen er e<ualit& o+ten touches on $o2er relationsG there can be strong iscom+ort an even reistance to change. To make $rogress the +ollo2ing is nee e F 5 strongG active lea ershi$ 5 incentives an accountabilit& 5 a critical mass o+ commite in ivi uals .. Tools. Pse+ul tools inclu e 5 $artnershi$sF internall& an e/ternall&

5 action $lans to move +rom general $olicies to $ractice 5 a vocac& events to kee$ the issues visible 5 sim$leG un erstan able language that is suitable +or non5s$ecialist au iences 5 universal normsG countr& statistics an local kno2le ge 5 se/5 isaggregate ata an anal&ses

5 best $ractice issemination to e/cite the imagination 5 regular re$orting om commitmentsG monitoring an evaluation 5 gen er cham$ions in relevant $ositions 2ith a$$ro$riate +inancial resources 5 gen er5balance sta++ing an su$$ortsG inclu ing a e<uate training 5 in ivi ual recognition +or goo $racticeG re2ar s an incentives *. To$ management. 0es$onsibilit& +or $romoting gen er e<ualit& is s&stem52i e an rests at the highest levels o+ management. The active su$$ort o+ to$ management is crucial to increase action an im$act. There must be more than li$5service. 6ea ers nee to issue regular instructions an L2alk the talkO. The res$onsibilit& o+ i++erent levels o+ management must be clearl& e+ine . The most im$ortant res$onsibilit& must be to create an enabling environment +or gen er e<ualit&. Measures Z score5car s Z +or Lenabling environmentO shoul be $ut in $lace b& to$ management. The gen er unitsEa visers nee to be $roactive in a vocating 2ith an assisting to$ management to obtain the necessar& su$$ort +or gen er e<ualit&. 4lso +emale to$ lea ers nee assistance on this. There are com$eting concernsG goal congestion an resistance to change an to a ressing gen er issues. ). *nabling environment. 4n enabling environment +or the $romotion o+ gen er e<ualit& is im$ortant. In icators o+ this inclu e among othersF 5 $ercentage o+ core +un s e icate to gen er issues 5 gen er in$uts an out$uts in cor$orate $rogrammes an results +rame2orks 5 gen er issues integrate in cor$orate $olic& 5 gen er mainstreaming $er+ormance in $er+ormance a$$raisal revie2s o+ sta++ 5 gen er $ers$ectives in human resources $olic&F a++irmative action in recruitmentG gen er balanceG 2orkEli+e measuresG harassment $olic&G value an visibilit& o+ inter isci$linar& skills in vacanc& announcements an $romotions 5 regular gen er Lau itsO inclu ing baseline ata an monitoring ,. ,en er units. To $romote gen er e<ualit&G +un s an com$etent sta++ are re<uire . #or$orate gen er units are necessar&. 0egar ing the levelG resources an institutional $lacement o+ the gen er unitsG the ke& obRective is ma/imum an timel& access to ke& cor$orate strategic $rocesses an high5level management. There must be a critical mass o+ sta++ resourcesEgen er s$ecialists

ke$t together an then i eall& a itional +ulltime s$ecialists in other units an ecentralize o++ices. There shoul be allocation o+ a e<uate resources an a match o+ e/$ectations an resources e/$resse in clear terms o+ re+erence o+ catal&tic +unctions o+ the gen er unit H. #a$acit&5buil ing. #a$acit&5buil ing +or gen er mainstreaming is still nee e in international organisations. 4 cor$orate ca$acit&5buil ing $lan shoul be elaborate an be the res$onsibilit& o+ the sta++ training an ca$acit&5buil ing unit. The sustainabilit& o+ e++orts an investments is crucialG $articularl& in times o+ high sta++ turn5over. It is im$ortant that $olic& in+orms $ractice as $ractice shoul in+luence $olic&. #a$acit&5buil ing shoul be tailor5ma e an eman 5 riven +or various au iencesF orientation +or ne2comersG gen er mo ules in other courses Ae.g. $roRect c&cleBG gen er sensitivit& trainingG gen er anal&sis training etc. */am$les o+ success+ul $ractice are ver& use+ul an more cases shoul be $resente . But lessons learne cannot onl& be generalG some must be conte/t5relate . I. 7et2orks. 7et2orks an alliances are im$ortant 2ithin the organisation an outsi e. Internall&G o2nershi$ shoul be share 2ith both 2omen an menG an bet2een Hea <uarters an the +iel . */ternall& collaboration shoul be establishe 2ith governmentsG civil societ& an other P7 organisations. 6inks shoul be establishe an su$$ort $rovi e +or 2omenNs organisations an grou$sG kee$ing in min the character o+ the i++erent grou$s an organisations. It is also im$ortant to collaborate 2ith business an $ro+essional organizationsG em$lo&ers an tra e unionsG social an cultural associationsG &outh clubs etc. ;. Involvement o+ men. The involvement o+ men is im$ortant to $romote gen er e<ualit&F more male sta++ in gen er s$ecialist $ostsG more male gen er +ocal $oints in other units an more male traineesE+acilitators +or gen er ca$acit&5 buil ing courses. Training curriculum shoul be L$ackage O 2ith a results5 oriente +ocus to a$$eal to managers. It is im$ortant to break stereot&$es. HI(E4I.% might be a goo entr&5$oint +or talking 2ith men about Lmasculinit&OG gen er5base violenceG tra++icking etc. #ontacts shoul be establishe 2ith male government an 7,O re$resentatives an the& shoul be encourage to $artici$ate in a vocac& events an iscussions. U. 4ccountabilit&. To monitor $rogress it is im$ortant to e+ine i++erent roles an res$onsibilities +or sta++ members at i++erent levels o+ accountabilit&. */isting accountabilit& mechanisms nee to be catalogue or ma$$e b& levelF lea ershi$ Ae/ecutive hea BG management A4.,sE.irectorsBG gen er a visers in unitsG cor$orate gen er unitsG countr& re$resentatives. The role an accountabilit& shoul also be ma$$e +or non5$rogrammeEnon5technical units such as evaluationEau it o++icesG $rogramme bu get o++ices an human resources o++ices. #ore com$etencies nee e +or +ul+illing various res$onsabilities nee to be i enti+ie . %$ecial attention shoul be given to the evelo$ment o+ results +rame2orks an s&stematic measurement o+ results. *ven i+ $lanne results are not achieve G e++orts un ertaken to meet gen er commitments shoul be ackno2le ge . 6. MottosF

L=hatever 2orksG o itO A onNt be hung u$ in ogmatic a$$roaches or languageB LBe $ersistent Athings are never +ast an eas&BG $assionate Aboth com$etence an involvement are nee e B an kee$ a sense o+ humour Athere are man& $ers$ectives an 2a&s o+ thinkingBO L.onNt com$romise &our can or shoul oB ignit&O Athere are limits to 2hat a gen er +ocal $oint

L.amne i+ &ou oG amne i+ &ou onNtO Athere are rarel& sim$le solutionsBL.onNt reinvent the 2heelG there are so man& 2heelsO Alearn +rom the e/$eriences o+ othersB LThe more &ou a vanceG the more remains to be oneO Ane2 o$$ortunities entail ne2 challengesB

-uneF =omen occu$& Rust about 5D $ositions on the boar s o+ irector o+ In ian +irms liste on the Bomba& %tock */change. The revelationG 2hich comes ami The stu &5a +irst o+ its kin in In ia an secon in 4sia5 note that onl& 59 A5.3DB o+ the 1G11" irectors o+ com$anies that +orm the elite B%*5111 grou$ are 2omen. These irectorshi$s are hel b& 48 i++erent 2omenG the stu & sai . The $ercentage com$ares un+avorabl& 2ith #ana aG 2here 2omen hol 15D o+ irectorshi$sG the Pnite %tates A14.5DBG the Pnite Uing omA1"."DBG HongkongA8.9DB an 4ustraliaA8.3DB. The +in ings also reveal that 1" com$anies on the B%*5111 have more than one +emale irectorG ' com$anies have +emale e/ecutive irectors an ".5D o+ all e/ecutive irector roles are hel b& 2omen. 6ess than hal+ o+ the com$anies5onl& 4!D5 have 2omen on their boar s. O+ all the a$$ointments ma e in "111 Aas o+ Ma& "111BG 4.9D 2ere 2omen. T2o com$anies Z;in al %teel? -o2er lt . Have 2omen as chair$ersons an t2o o+ the countries most signi+icant banks5I#I#I Bank an 4/is Bank5 have +emale #*Os. The re$ort inclu es a M=omen on Boar s 6eague TableO 2hich ranks com$anies liste on the B%*5111 in terms o+ the gen er iversit& o+ their boar sG 2ith those 2ith the highest $ercentage o 2omen on their boar s a$$earing at the to$. 4t the to$ o+ the list is ;%= %teel 6imite G 2hich has three 2omen A"3.1DB on its boar o+ 13. Oracle )inancial %ervices %o+t2are is secon 2ith t2o 2omenA""."DB on its boar o+ nine an -iramal Healthcare is thir 2ith "1D +emale boar irectors. Both o+ -iramal HealthcareNs t2o +emale irectors hol e/ecutive irectorshi$sG the onl& B%*5111 com$an& 2ith t2o e/ecutive +emale irectors. In +orth $lace is 4/is Bank 6t G 2ith t2o A18."DB o+ its 11 boar members being +emale. In Roint +i+th $laceG 2ith t2o 2omen A1!.'DB out o+ 1" boar membersG are 6u$in an Titan In ustries. The research looks at the re$resentation o +emale irectors on the B%*5111 an ranks the com$anies in terms o+ the gen er iversit& o+ their boar sG 2ith those 2ith the highest $ercentage o+ 2omen on their boar s

a$$earing at the to$. L =e ho$e that this research 2ill act as a catal&st +or iscussion in an amongst cor$orate In ia on the nee +or greater gen er iversit& at senior levelsGO sai %halini MahtaniG co5author o+ the re$ort an )oun er o+ #ommunit& Business. LOur as$iration is that in time 2e 2ill have a true meritocrac& in cor$orate In iaG allo2ing each $ersonG regar less o+ gen er or backgroun G to achieve their +ull $otential.O

%hackles o2n the ages ;emila %amerin The Hin uE %un a&G March "8G "111

-rime minister Manmohan singh has escribe the historic 2omenNs reservation bill as a Lgiant ste$O to2ar s the em$o2erment o+ 2omen an a Lcelebration o+ 2omanhoo .O The $assing o+ the bill in the 0aR&a %abha is a momentousG heart 2arming ste$ +or In iaK also an ins$irational tren setter +or 2omenNs em$o2erment in the entire region.

The movement +or 2omenNs right has broken man& a +etterG but it has also +orge ne2 ones. =omen to a& are the striking $o2erG a great contributor to man& 2orking sectorsG rea & to acce$t challenges. But o 2e ever recognize 2hat boun aries the& are being +orce to cross>

The se/ual la2s an moral stan ar s have al2a&s been stricter +or 2omen. The +emale bo & 2as regar e o2n the ages as a mere vessel +or the male creative +lui s. =omen 2ere the soil in 2hich men $lante their see s. This $erce$tion 2as also re+lecte in religious belie+s. =omen 2ere stri$$e o+ their creative role an bur ene 2ith the res$onsibilit& +or the Original %in. The Ten #omman ments list 2ives among a manNs $ossessions. 7ot sur$risingl&G there+oreG in a tra itional ;e2ish $ra&er men im$lore ,o G L6et not m& o++s$ring be a girlG +or ver& 2retche is the li+e o+ 2oman.O 4n the& gla l& re$eate ever& a&F LBlesse be ThouG O 6or our ,o G +or not making me a 2oman.O The sacre te/ts o+ ever& maRor religion enshrines the subRugation o+ 2omen through m&th A*ve causing Lthe +all o+ manOB or through co e Athe %hariah that values a 2omanNs testimon& as hal+ that o+ a man an authorizes a man to beat an 2hi$ his 2i+e to kee$ her obe ient to himB. 4$ostle -aul ma e it clear that the hea o+ the 2oman is the manG )or the man is not o+ the 2omanK but the 2oman o+ the man. 4n i+ the& 2ill learn an&thingG let them ask their husban s at homeF or it is a shame +or 2omen to s$eak in the

church. #hristianit& e/clu e 2omen +rom $riesthoo an other church o++ices. 4t the same timeG the& 2ere also e/$ecte to remain subservient to men at home. In all societiesG the obvious biological i++erence bet2een men an 2omen is use as a Rusti+ication +or +orcing them into i++erent social roles 2hich limit an sha$e their attitu es an behavior. 4 2omanG in a ition to being a +emaleG must be +eminine. %e/ual o$$ressionG no matter ho2 harsh or unRusti+ie G has never lacke rationalization. These ma& range +rom sim$le religious ogmas to so$histicate $seu o5scienti+ic theories. )or over a hun re &earsG the ol +orm o+ marriageG base on the BibleG Ltill eath o us $artGO has been enounce as an institution that stan s +or the sovereignt& o+ the man over the 2omanG o+ her com$lete submission to his 2hims an comman sG an absolute e$en ence on his name an su$$ort. In a itionG 2omen are generall& e/$loite b& the me ia. The& become like goo s 2hich are sol an bought. )or instanceG in a vertisements 2e usuall& see 2omen $resenting $ro uctsK but un+ortunatel&G their bo ies are use to attract consumers. Break barriers. The $roblem that con+ronts us to a& is ho2 to be oneNs sel+ an &et be in oneness 2ith othersG to +eel ee$l& 2ith all human beings an still retain oneNs o2n characteristic <ualities. The mo ern 2oman 2oul be enable to blossom in true sense5 2ith +ull res$ect +or her $ersonalit&K all arti+icial barriers shoul be brokenG an the roa to2ar s grater +ree om cleare o+ ever& trace o+ centuries o+ submission an slaver&

Et-ics t-e Fr%'e;or& 1or success: ;-i+e so'e et-ic%+ 2ecisions %re si'0+/ % '%tter o1 ri)-t .s8 ;ron)< t-e tou)- et-ic%+ 2ecisions %re ri)-t .s8 ri)-t8 The 2i es$rea attention given to the +all o+ com$anies such as T&coG=orl #omG an *nron has le to an increase +ocus on ethics in the business 2orl . Because o+ the enormous $ressure to $ro uce higher an better returnsG some in ivi uals at cor$orations have a o$te the $hiloso$h&G Tthe en s Rusti+& the means.T The& +all into the tra$ o+ setting unrealistic bu getsG im$robable e/$ectationsG an unlikel& goals. 7ot sur$risingl&G investor con+i ence has been lo2 ue to the man& cor$orate scan als. .es$ite these resultsG ho2everG +irms continue to allo2 e/ternal sourcesG such as outsi e anal&stsG to e+ine success. Instea G com$anies must ask the +ollo2ing <uestionF THave 2e re$lace our un erl&ing business theme o+ Qsuccee ing at all costsQ 2ith Qsuccee ing onl& the right 2a&Q>T 4n ethical culture can ensure success b& establishing a$$ro$riate e/$ectations using $ro$er gui elinesG thus $reventing the nee or esire to be

involve in an& <uestionable business $ractices. Pltimatel&G success is about kee$ing &our 2or G an com$anies that live u$ to their $romises are success+ul. =hile itQs true that some businesses hol themselves to a higher ethical stan ar G not all com$anies o$erate in an ethical environment. )inancial ecisions o+ten are ma e 2ithout consi ering the ethical im$lications.=hen com$anies onQt hol themselves to high ethical stan ar sG the im$act reverberates throughout the +inancial markets. #om$anies are estro&e G Robs are lostG an retirement savings are ecimate . One o+ the governmentQs reactions to cor$orate 2rong oing 2as enactment o+ the %arbanes5O/le& 4ct o+ "11" A%O`B. But as ,ar& %mithG #*O o+ #I*74G characterize it in the October "1G "113G e ition o+ P%4 To a&G %O` 2as TQchemothera$&Q to $revent the cancer +rom recurring a+ter cutting out cor$orate tumors at *nronG=orl #omG an else2here.T *nsuring that an e++ective ethical culture e/ists in an organization isnQt onl& a ke& +actor in $reventing the kin s o+ losses brought about b& cor$orate +rau s an avoi ing the nee +or costl&G bur ensome legislationG but it can also enhance a com$an&Qs re$utationG im$rove moraleG an even increase sales. This article e/amines to$ managementQs role in buil ing an ethicall& min e cultureG ste$s +or making soun choicesG an e/am$les o+ ethical issues. )0OM TH* TO- .O=7 *stablishing ethical stan ar s +or a business shoul be the $rimar& goal o+ e/ecutive management. #om$anies must esign an environment that not onl& encourages high ethical stan ar s but also $ro uces ethicall& min e managementG em$lo&eesG su$$liersG an customers. To establish an ethical cultureG to$ management must acce$t res$onsibilit& +or the ethical climate 2ithin their organizations. In realit&G the actions o+ to$ e/ecutives e+ine a com$an&Qs culture because em$lo&ees emulate their bossQs behavior.Michael Hack2orthG author o+ TOnl& the *thical %urviveT in the )all 1999 Issues in *thicsG believes to$ lea ershi$ is ultimatel& res$onsible +or the culture o+ their organizationG inclu ing the ethical culture. To establish an ethical environmentG to$ management nee s to use +ive ke& elements to buil trustF integrit&G com$etenceG consistenc&G lo&alt&G an o$enness 2ith em$lo&eesG ven orsG an stakehol ers. %takehol er is a better 2or than stockhol er because it re$resents the signi+icant e++ect that business has on the communit& as a 2hole. #om$anies that o$erate un er high ethical values onQt have to s$en an& negative energ& hi ing 2rong oings i+ the& make all ecisions 2hile consi ering the ethical im$lications. Most +inancial anal&sts agree that no single variable a++ects the climate o+ an organization more than the belie+sG $racticesG an i eas o+ its to$ management. TH* ,OO. 47. TH* B4. One com$an& that $rovi es a $rime e/am$le o+ making goo ethical ecisions is ;ohnson ? ;ohnson. In 198"G ;ames BurkeG then #*OG +ace an ethical ilemma. The com$an& e/$erience a maRor crisis 2hen some o+ its */tra5%trength T&lenol ca$sules 2ere +oun lace 2ith c&ani e. )ace 2ith a i++icult ecisionG Burke

turne to ;ohnson ? ;ohnsonQs cre oF T=e believe our +irst res$onsibilit& is to octorsG nursesG an $atientsG to mothers an +athers an all others 2ho use our $ro ucts an services.T He ignore the imme iate short5term +inancial im$lication an a here to the attitu e o+ T oing the right thingGT or ering the recall o+ more than 31 million bottles at a cost o+ more than _111 million. This action set a ne2 stan ar +or crisis management. 4s a result o+ these eventsG the com$an& evelo$e the tam$er5$roo+ seal an gaine even more market share an customer lo&alt& than it ha be+ore the inci ent. To make choices like Burke re<uires in ivi uals to take the ste$s liste in T4 )rame2ork +or Thinking *thicall&T +rom the Markkula #enter +or 4$$lie *thics at %anta #lara Pniversit& A222.scu.e uEethicsBF S Be sensitive to ethical issuesG S */$lore ethical as$ects o+ a ecisionG S =eigh the consi erations that im$act their course o+ actionG an S Have the moral courage to make the right ethical choice. 8I66P%T04TIO7 OMITT*.9 =hile com$anies 2ill inevitabl& +ace i++icult situationsG their abilit& to make ethical ecisions must not be com$romise +or an& reason. #onsi er *//onG +or e/am$le. This com$an& re+use to acce$t res$onsibilit& +or the (al ez acci entG an their attem$t to blame state an +e eral o++icials +or ela&s in containing the s$ill amage their re$utation. *ven to a& the name *//on is s&non&mous 2ith environmental catastro$he. .ue to ine++ective communication +rom *//onG the $ublic <uestione their cre ibilit& an truth+ulness. 4ccor ing to ;enni+er Hogue in T=hat is #risis Management>T Ahtt$FEEiml.Rou.u+l.e uE $roRectsE%$ring11EHogueEcrisismanagement.htmlBG a surve& con ucte b& -orter 7ovelli several &ears a+ter the acci ent +oun that 54D o+ res$on ents 2ere still less likel& to bu& *//on $ro ucts. TH* .47I*6 *))*#T *ver&one 2ithin an organization shoul 2ork together to create the T.aniel *++ect.T This comes +rom the Ol Testament account o+ a governing bo & tr&ing to iscre it .aniel in +ront o+ the 2hole king om o+ Bab&lon. In the 7e2 Uing ;ames (ersionG the Book o+ .anielG #ha$ter !F354G sa&sG TThen this .aniel istinguishe himsel+ above the governors an satra$sG because an e/cellent s$irit 2as in himK an the king gave thought to setting him over the 2hole realm. %o the governors an satra$s sought to +in some charge against .aniel concerning the king omK but the& coul +in no charge or +aultG because he 2as +aith+ulK nor 2as there an& error or +ault +oun in him.T *m$lo&ees 2oul bene+it in ivi uall& +rom this min set uring their careers b& a hering to high ethical stan ar s. #om$anies must buil a strong ethical +rame2ork to 2ithstan attacks +rom the $ublic through +rivolous la2suitsG com$etitionQs claims o+ 2rong oingG an an& +rau attem$te b& their em$lo&ees. -ositive $ublic $erce$tion is vital to success in the market$laceG

2hich is $rotecte b& ethical behavior Rust as .aniel $rotecte enemies b& remaining +aith+ul to his high moral stan ar s.

himsel+ +rom his

%ome ethical ecisionsG such as cheating on ta/esG l&ing un er oathG or overstating revenue an un erstating e/$ensesG are sim$l& a matter o+ right vs. 2rong. The tough ethical ecisions are right vs. right. )our such ilemmas inclu e truth vs. lo&alt&G in ivi ual vs. communit&G short5term vs. long5termG Rustice vs. merc&. Here are some real52orl e/am$les +rom 0ush2orth Ui erQs Ho2 ,oo -eo$le Make Tough #hoicesF S It is right to +in out all &ou can about &our com$etitorQs costs an structures55an right to obtain in+ormation onl& through $ro$er channelsK $rice

S It is right to thro2 the book at goo em$lo&ees 2ho make umb ecisions that en anger the +irm55an right to have enough com$assion to mitigate the $unishment an give them another chance. S It is right to $rotect the en angere s$otte o2l in the ol 5gro2th +orests o+ the 4merican 7orth2est55an right to $rovi e Robs to loggers. Pn+ortunatel&G no magic +ormula e/ists to gui e management through these t&$es o+ ecisions. #om$anies must be 2illing to e<uall& 2eigh the ethical re$ercussions o+ one ecision over the other. .I))I#P6T #HOI#*% In Moral #ourageG Ui er relates the stor& o+ *ric .uck2orth. 4 metallurgist b& trainingG the recentl& marrie .uck2orth took a $osition in 1949 2ith )e eral MogulG a +irm that ma e bearings +or internal combustion engines. His Rob escri$tion inclu e e/amining amage bearings returne b& customers. He 2oul etermine the cause o+ the +ailureG re$ort to the customersG an recommen changes to correct the $roblem.Most 2ere ue to misuseG im$ro$er installationG an lack o+ lubrication. %ometimes he iscovere that the +ault& $arts 2ere the result o+ $ro uction mistakes. His bossG the chie+ metallurgistG regularl& trie to cover u$ such +aults b& re+using to ivulge all the +acts an b& attributing the +ailure to en users mishan ling the bearingsG making no e++ort to com$ensate customers. 4t +irstG .uck2orth rationalize Tthat he 2as $re$are to commit sins o+ omission but not o+ commission.T *ventuall&G a $articularl& +lagrant case rove him to 2rite a com$letel& honest re$ortG 2hich his boss reRecte . %ummoning his moral courageG he $roteste that he 2oul resign i+ the& i nQt re$ort the true +in ings to the customer. His bossG as 2ell as the sales e$artmentG $roteste that such +in ings 2oul cost them customers an $erha$s more. )ortunatel&G .uck2orth $reviousl& ha ma e several suggestions that increase the $ro uctivit& o+ the manu+acturing $rocess an 2on him the a miration o+ the #*OG 2ho backe him against his boss. The re$ort 2ent to the customerG 2ho res$on e 2ith a congratulator& letter that sai F T=e ha al2a&s sus$ecte concealment in some o+ &our re$orts.T In the 2ake o+ the com$an&Qs ne25+oun honest&G the customer increase or ers. .uck2orth later recalle his moral

courageG TOn one occasion 2hen I 2as &oung an have been $rou o+ it ever since.T

i ealisticG I succee e 55an

M& o2n e/$erience illustrates ho2 one bene+it o+ ethical behavior is im$rove em$lo&ee morale. The testing lab at a +ormer em$lo&er o+ mine iscovere a $otential electrical hazar relate to a s$eci+ic motor su$$lier. Pn er uni<ue circumstances that re<uire the e/istence o+ several con itionsG this motor ha the $otential to eliver an electric shock to the en user. The $ossible +inancial im$act o+ re2ork or $ossible recall coul cost the com$an& millions o+ ollars. Our management teamG a2are o+ the chance +or a $ossible recallG eci e to re$ort this issue to the #onsumer -ro uct %a+et& #ommission A#-%#B. Taking a $ro5ethical a$$roach ha a $ositive im$act on me an other em$lo&ees because 2e all 2ere im$resse 2ith the com$an&Qs commitment to $ro uct sa+et&. %4)*,P40. TH* )PTP0* *ver& a&G management ecisions a++ect in ivi ualsG +amiliesG an even nations. Be+ore making a +inal ecisionG the goal shoul be to com$letel& consi er the ethical im$licationsG inclu ing the imme iate +inancial im$act as 2ell as the lasting conse<uences. I+ the organizationQs climate is to not $ermit 2rong oing o+ an& kin G then em$lo&ees are more likel& to 2ork har er +or the com$an&Qs common goo . *thical ecision making sa+eguar s an enter$riseQs +uture. Managing com$anies in the ever5changing business environment is i++icult even 2ithout +alling into the tra$ o+ earnings5onl& management. But an organizationQs management canQt concentrate on the +uture i+ itQs 2orrie about an& $ast corru$t business ealings. 4n ethical culture cultivates realistic e/$ectations 2ith the +ocus on +ollo2ing soun an un<uestionable business $rinci$les. *thics im$roves goo 2illG com$an& $erce$tionG em$lo&ee moraleG an even sales. *thics allo2s management to be +ocuse on the +utureG thereb& becoming the +rame2ork +or long5term success. %teve HunterG #M4G is a senior +inance manager +or e<ui$ment at an international com$an&. He has 1! &ears o+ e/$erience in accounting an +inance. Hou can reach %teve at A'31B !45545"! or shunter'"!3abellsouth.net. *thics is a to$ic at IM4Qs 4nnual #on+erenceG ;une 14518G "118G in Tam$aG )la. )or in+ormationG visit 222.imacon+erence.org. BH %T*(* HP7T*0G #M4 SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS T-in&in) Et-ic%++/: A Fr%'e;or& 1or Mor%+ Decision M%&in) De.e+o0e2 ,/ M%nue+ Ce+%sFue*< C+%ire An2re< T-o'%s S-%n&s< S8G8< %n2 Mic-%e+ G8 Me/er Moral issues greet us each morning in the ne2s$a$erG con+ront us in the memos on our esksG nag us +rom our chil renQs soccer +iel sG an bi us goo night on the evening ne2s. =e are bombar e ail& 2ith <uestions about the Rustice o+ our +oreign $olic&G the moralit& o+ me ical technologies that can $rolong our

livesG the rights o+ the homelessG the +airness o+ our chil renQs teachers to the iverse stu ents in their classrooms. .ealing 2ith these moral issues is o+ten $er$le/ing. Ho2G e/actl&G shoul 2e think through an ethical issue> =hat <uestions shoul 2e ask> =hat +actors shoul 2e consi er> The +irst ste$ in anal&zing moral issues is obvious but not al2a&s eas&F ,et the +acts. %ome moral issues create controversies sim$l& because 2e o not bother to check the +acts. This +irst ste$G although obviousG is also among the most im$ortant an the most +re<uentl& overlooke . But having the +acts is not enough. )acts b& themselves onl& tell us 2hat i!K the& o not tell us 2hat ought to be. In a ition to getting the +actsG resolving an ethical issue also re<uires an a$$eal to values. -hiloso$hers have evelo$e +ive i++erent a$$roaches to values to eal 2ith moral issues. T-e Uti+it%ri%n A00ro%cPtilitarianism 2as conceive in the 19th centur& b& ;erem& Bentham an ;ohn %tuart Mill to hel$ legislators etermine 2hich la2s 2ere morall& best. Both Bentham an Mill suggeste that ethical actions are those that $rovi e the greatest balance o+ goo over evil. To anal&ze an issue using the utilitarian a$$roachG 2e +irst i enti+& the various courses o+ action available to us. %econ G 2e ask 2ho 2ill be a++ecte b& each action an 2hat bene+its or harms 2ill be erive +rom each. 4n thir G 2e choose the action that 2ill $ro uce the greatest bene+its an the least harm. The ethical action is the one that $rovi es the greatest goo +or the greatest number. T-e Ri)-ts A00ro%cThe secon im$ortant a$$roach to ethics has its roots in the $hiloso$h& o+ the 18th5centur& thinker Immanuel Uant an others like himG 2ho +ocuse on the in ivi ualQs right to choose +or hersel+ or himsel+. 4ccor ing to these $hiloso$hersG 2hat makes human beings i++erent +rom mere things is that $eo$le have ignit& base on their abilit& to choose +reel& 2hat the& 2ill o 2ith their livesG an the& have a +un amental moral right to have these choices res$ecte . -eo$le are not obRects to be mani$ulate K it is a violation o+ human ignit& to use $eo$le in 2a&s the& o not +reel& choose. O+ courseG man& i++erentG but relate G rights e/ist besi es this basic one. These other rights Aan incom$lete list belo2B can be thought o+ as i++erent as$ects o+ the basic right to be treate as 2e choose. The right to the truthF =e have a right to be tol the truth an in+orme about matters that signi+icantl& a++ect our choices. to be

The right o+ $rivac&F =e have the right to oG believeG an sa& 2hatever 2e choose in our $ersonal lives so long as 2e o not violate the rights o+ others. The right not to be inRure F =e have the right not to be harme or inRure unless 2e +reel& an kno2ingl& o something to eserve $unishment or 2e +reel& an kno2ingl& choose to risk such inRuries.

The right to 2hat is agree F =e have a right to 2hat has been $romise b& those 2ith 2hom 2e have +reel& entere into a contract or agreement.

In eci ing 2hether an action is moral or immoral using this secon a$$roachG thenG 2e must askG .oes the action res$ect the moral rights o+ ever&one> 4ctions are 2rong to the e/tent that the& violate the rights o+ in ivi ualsK the more serious the violationG the more 2rong+ul the action. T-e F%irness or Gustice A00ro%cThe +airness or Rustice a$$roach to ethics has its roots in the teachings o+ the ancient ,reek $hiloso$her 4ristotleG 2ho sai that Te<uals shoul be treate e<uall& an une<uals une<uall&.T The basic moral <uestion in this a$$roach isF Ho2 +air is an action> .oes it treat ever&one in the same 2a&G or oes it sho2 +avoritism an iscrimination> )avoritism gives bene+its to some $eo$le 2ithout a Rusti+iable reason +or singling them outK iscrimination im$oses bur ens on $eo$le 2ho are no i++erent +rom those on 2hom bur ens are not im$ose . Both +avoritism an iscrimination are unRust an 2rong. T-e Co''on-Goo2 A00ro%cThis a$$roach to ethics assumes a societ& com$rising in ivi uals 2hose o2n goo is ine/tricabl& linke to the goo o+ the communit&. #ommunit& members are boun b& the $ursuit o+ common values an goals. The common goo is a notion that originate more than "G111 &ears ago in the 2ritings o+ -latoG 4ristotleG an #icero. More recentl&G contem$orar& ethicist ;ohn 0a2ls e+ine the common goo as Tcertain general con itions that are...e<uall& to ever&oneQs a vantage.T In this a$$roachG 2e +ocus on ensuring that the social $oliciesG social s&stemsG institutionsG an environments on 2hich 2e e$en are bene+icial to all. */am$les o+ goo s common to all inclu e a++or able health careG e++ective $ublic sa+et&G $eace among nationsG a Rust legal s&stemG an an un$ollute environment. 4$$eals to the common goo urge us to vie2 ourselves as members o+ the same communit&G re+lecting on broa <uestions concerning the kin o+ societ& 2e 2ant to become an ho2 2e are to achieve that societ&. =hile res$ecting an valuing the +ree om o+ in ivi uals to $ursue their o2n goalsG the common5goo a$$roach challenges us also to recognize an +urther those goals 2e share in common. T-e Cirtue A00ro%cThe virtue a$$roach to ethics assumes that there are certain i eals to2ar 2hich 2e shoul striveG 2hich $rovi e +or the +ull evelo$ment o+ our humanit&. These i eals are iscovere through thought+ul re+lection on 2hat kin o+ $eo$le 2e have the $otential to become. (irtues are attitu es or character traits that enable us to be an to act in 2a&s that evelo$ our highest $otential. The& enable us to $ursue the i eals 2e have

a o$te . Honest&G courageG com$assionG generosit&G +i elit&G integrit&G +airnessG sel+5controlG an $ru ence are all e/am$les o+ virtues. (irtues are like habitsK that isG once ac<uire G the& become characteristic o+ a $erson. MoreoverG a $erson 2ho has evelo$e virtues 2ill be naturall& is$ose to act in 2a&s consistent 2ith moral $rinci$les. The virtuous $erson is the ethical $erson. In ealing 2ith an ethical $roblem using the virtue a$$roachG 2e might askG =hat kin o+ $erson shoul I be> =hat 2ill $romote the evelo$ment o+ character 2ithin m&sel+ an m& communit&> Et-ic%+ "ro,+e' So+.in) These +ive a$$roaches suggest that once 2e have ascertaine the +actsG 2e shoul ask ourselves +ive <uestions 2hen tr&ing to resolve a moral issueF =hat bene+its an 2hat harms 2ill each course o+ action $ro uceG an 2hich alternative 2ill lea to the best overall conse<uences> =hat moral rights o the a++ecte $arties haveG an 2hich course o+ action best res$ects those rights> =hich course o+ action treats ever&one the sameG e/ce$t 2here there is a morall& Rusti+iable reason not toG an oes not sho2 +avoritism or iscrimination> =hich course o+ action a vances the common goo > =hich course o+ action evelo$s moral virtues>

This metho G o+ courseG oes not $rovi e an automatic solution to moral $roblems. It is not meant to. The metho is merel& meant to hel$ i enti+& most o+ the im$ortant ethical consi erations. In the en G 2e must eliberate on moral issues +or ourselvesG kee$ing a care+ul e&e on both the +acts an on the ethical consi erations involve . This article u$ ates several $revious $ieces +rom Issues in *thics b& Manuel (elas<uez 5 .irksen -ro+essor o+ Business *thics at %anta #lara Pniversit& an +ormer #enter irector 5 an #laire 4n reG associate #enter irector. TThinking *thicall&T is base on a +rame2ork evelo$e b& the authors in collaboration 2ith #enter .irector Thomas %hanksG %.;.G -resi ential -ro+essor o+ *thics an the #ommon ,oo Michael ;. Me&erG an others. The +rame2ork is use as the basis +or man& $rograms an $resentations at the Markkula #enter +or 4$$lie *thics. This article a$$eare originall& in "!!ue! in #thic! (' 71 A=inter 199!B SSSSSSSSSSSSSSSSSSSSS Re+%tions-i0s %'on) et-ic%+ 0ressure< 0ro1ession%+ e30ect%tion< stress< %n2 5o, Fu%+it/ o1 %ccount%nts in T-%i+%n2 4B%T04#T

This stu & aims at testing the in+luence o+ ethical $ressureG $ro+essional e/$ectation in stress an Rob <ualit& via mo erators o+ time $ressure an sel+ esteem. 4ccountants in Thailan are the sam$le. The results sho2 that ethical $ressure an $ro+essional e/$ectation have $ositive an signi+icant association 2ith stress. In a itionG stress is $ositivel& an signi+icantl& relate to Rob <ualit&. these +in ings $rovi e some initial em$irical su$$ort +or suggests nee +or a itional investigation o+ +actors that in+luence an accountantQs stress an +or +urther investigation into the e++ect o+ ethical $ressureG $ro+essional e/$ectation on Rob <ualit&. There+oreG contributions an suggestion are also $rovi e +or +urther research. Ue&2or sF *thical -ressureG -ro+essional */$ectationG %tressG ;ob :ualit&G Time -ressureG %el+5*steem 1. I7T0O.P#TIO7 The ra$i acceleration o+ the global economic s&stemG 2orl tra e an +ree markets continue to e/$an organizations seek ne2 business o$$ortunities to enhance their com$etitiveness. Organizations +ocus to im$rove servicesG enhance $ro uct <ualit& an im$rove $ro uction e++icienc&. The signi+icant in+luence o+ business activities on accountant $ro+essionalism is interesting. It is commonl& acce$te that accounting in+ormation is use to manage business. 4ccountants cannot esca$e involvement in this un ertaking. 4ccounting $ro+essionals are generall& $erceive b& the $ublic. The characteristics o+ a $ro+essionalG 2hich inclu e the $resence o+ a s&stematic bo & o+ the skills re<uire +or $racticeG the sanction o+ the communit& in the +orm o+ +ormal cre entials an licensingG recognition b& the general $ublic o+ $ro+ession authorit& over the kno2le ge an skills in the +iel G a regulative co e o+ ethics an a $ro+essional culture 2ith a languageG s&mbols an norm o+ its o2n. 4ccounting $ro+essionals have +oun to e/$erience various kin s o+ stress relate to their 2ork an 2ork$lace. */am$les o+ stress+ul Rob characteristics are Rob $ressure +rom $ublicQs e/$ectationG re<uires $ro+essionalQs ethicG an $ro+essional institutionQs controlG 2hich sometimes lea to Rob <ualit&. %an ers et al. A1995B escribe that eight 2ork5relate sources o+ stress areF role ambiguit&G role con+lictG overloa 5<uantitativeG overloa 5<ualitativeG career $rogressG res$onsibilit& +or $eo$leG time $ressureG an Rob sco$e. 4ccounting $ro+essionals in Thailan are relate to business societies that are e/$ecte an $ressure to accountantsQ $ractice about accountabilit& an $ro+essionalism. ThusG the accountants $erceive stress +rom their $ractices. 0esearch <uestions are ho2 the ethical $ressure an $ro+essional e/$ectation in+luence stressG stress a++ects the Rob <ualit&. There+oreG the $rimar& $ur$ose o+ this stu & is to e/amine the relationshi$s bet2een A1B ethical $ressure an stressG A"B $ro+essional e/$ectation an stressG A3B ethical $ressure an stress 2hen mo erate b& time $ressureG A4B $ro+essional e/$ectation an stress 2hen mo erate b& time $ressureG A5B stress an Rob <ualit&G an A!B stress an Rob <ualit& 2hen mo erate b& sel+ esteem. This structure o+ the $a$er is outline as +ollo2s. In section "G the relevant literature on all constructs is revie2e . %ection 3 $resents research metho o+

this $a$er. %ection 4 $resents the results o+ the em$irical stu & an iscussion. %ection 5 $ro$oses the theoretical an managerial contributionsG an suggestions +or +uture research an section ! en s the stu & 2ith the conclusion. ". 0*64TIO7 MO.*6 47. HH-OTH*%*% In this stu & an atten to test the e++ect o+ ethical $ressureG an $ro+essional e/$ectation are in e$en ent variablesG Rob <ualit& is e$en ent variableG stress is me iating variableG time $ressureG an sel+ esteem are mo erator variableG as sho2n in )igure 1. 8)I,P0* 1 OMITT*.9 ".1 *thical -ressure *thical $ressure is e+ine as an obRective stimulus constructs re+erring to in ivi ual characteristics or combinations o+ characteristics an events that im$inge on the $erce$tual an cognitive $rocesses o+ in ivi uals A.eVoort an 6or G 199'K -ratt an BarlingG 1988K * enG 198"K Uahn et al. 19!4B. It re+ers to con+ormit& $ressure a++ects in ivi uals 2ho ten to alter their attitu es or behavior in an e++ort to be consistent 2ith $erceive grou$ norm A.eVoort an 6or G 199'K Brehm an UassinG 1991B. In this stu &G *thical $ressure is e+ine as $erce$tions o+ $ro+essional values 2hich accountants have as a $ro+essional res$onsibilit& to a here to a co e o+ con uctG an ethical co e that e/$ressl& $rohibits engaging in actions such as the +act o+ re$orte +inancial results. %ha+er A"11"B an 4ran&a an )erris A1984B +oun that accountants em$lo&e in in ustr& i in +act e/$erience higher levels o+ organizational5$ro+essional con+lict than those em$lo&e in $ublic accounting. -erceive ethical con+licts can lea to &s+unctional organizational outcomes such as lo2er organizational outcomes such as lo2er organizational commitment an higher turnover intentions A%ha+erG "11"K %ch2e$kerG 1999B. Thus ethical $ressure is an im$ortant +actor to im$act an accountantQs stress. This im$lies that i+ there is high ethical $ressure it ma& also have great stress. This lea s to the +ollo2ing h&$othesesF H1aF The accountants 2ith higher ethical $ressure 2ill have greater stress. "." -ro+essional e/$ectation Brierle& A1999B an 6achman ? 4ran&a A198!bB escribe that the realization o+ $ro+essional e/$ectations has been measure in research o+ accountants b& assessing the iscre$anc& bet2een res$onses to <uestions about Tho2 much shoul there beT an Tho2 much is there no2TG on as$ects o+ $ro+essional valuesG such as the autonom& to act accor ing to $ro+essional Ru gment an res$onsibilit& to clients. Thus in this stu &G -ro+essional e/$ectation re+ers to the $erce$tions o+ $ublic about $ro+essionalismG in e$en enceG sel+ im$rovementG commitment to learningG res$onsibilit&G skill 2ith accountantQs $ractice. %an ers et al.G A1995B escribe stress create b& Rob re<uirements 2hich e/cee the in ivi ualQs abilit& or skill level. -ro+essional e/$ectation re<uires accountantQs abilit& an skill. Thus $ro+essional e/$ectation has e++ect on

accountantQs stress. I+ there is high $ro+essional e/$ectation it ma& also have great stress. This lea s to the +ollo2ing h&$othesesF H1bF The accountants 2ith higher $ro+essional e/$ectation 2ill have greater stress. ".3 %tress In mo ern timesG stress is relate to several outcomes. %uch as Rob5tensionG Rob satis+actionG absenteeismG turnover intentionG an Rob $er+ormance. In or er to e/amine e++ect o+ stress on Rob <ualit&G stress here re+ers to a res$onse construct ealing 2ith ho2 internalize an re$resent $ressure 2ith their cognitive $rocesses A.eVoort an 6or G 199'K -ratt an BarlingG 1988B. %tress has been e+ine as a state 2hich arises +rom an actual or $erceive eman Eca$abilit& imbalance in an in ivi ualQs vital a Rustment actions A-icccoli an *migG 1988B. 4lsoG stress is e+ine as $erce$tions o+ accountant eman an ca$abilit& imbalance about ethics an $ro+essionalism. Tulen an 7ei erme&er A"114B an %ullivan an Baghat A199"B revie2e +our $ossible scenarios regar ing stress an $er+ormanceF stress ma& increase $er+ormanceG stress ma& ecrease $er+ormanceG stress ma& have no e++ect on $er+ormanceG an the relationshi$ bet2een stress an $er+ormance ma& re$resent an inverte 5P. Their +in ings su$$orte a negative relationshi$ bet2een stress an $er+ormance. Tulen an 7ei erme&er A"114B an 0abino2itz an %tum$+ A198'B escribe that there is a $ositive relationshi$ bet2een stress an Rob $er+ormance. ThusG stress ma& be closel& relate to Rob <ualit&. This lea s to the +ollo2ing h&$othesesF H"aF 4ccountants 2ith the greater stress 2ill have greater Rob <ualit&. ".4 Time $ressure Time bu get $ressure re+ers to the $ervasive constraint on resources that can be allocate to accom$lish a Rob A.eVoort an 6or G 199'B. It is the $erce$tion o+ unreasonable ea lines an time eman s. %an ers et al.GA1995B +oun role ambiguit&G role con+lictG overloa <uantitativeG overloa 5<ualitativeG career $rogressG res$onsibilit& +or $eo$leG time $ressureG an Rob sco$eG relate to au itorQs stress. In or er to e/amine the e++ects o+ time $ressure on stressG time $ressure thus ma& be closel& relate to stress. This lea s to the +ollo2ing h&$othesesF H1cF The accountants 2ith the higher time $ressure 2ill $otentiall& have greater $ositive relationshi$ bet2een ethical $ressure an stress. H1 F The accountants 2ith the higher time $ressure 2ill $otentiall& have greater $ositive relationshi$ bet2een $ro+essional e/$ectation an stress. ".5 %el+5esteem %el+5esteem re+ers to as the e/tent that em$lo&ees +eel value an taken seriousl& A6e0ougeG et al.G "11!B. It signi+icantl& mo erates the relationshi$

bet2een role stress +it an Rob satis+action. In or er to e/amine the e++ects o+ sel+5esteem on Rob <ualit&G sel+5esteem thus ma& be relate to Rob <ualit&. H"bF 4ccountants 2ith the higher sel+ esteem 2ill $otentiall& have greater $ositive relationshi$ bet2een stress an Rob <ualit&. 3. 0*%*40#H M*THO.% 3.1 .ata collection The sam$les 2ere ran oml& ra2n +rom 818 com$anies in 4utomotiveE4uto $arts an accessoriesEMachiner in Thailan Qs */$orting In ustries. The sam$ling +rame 2as liste +rom the Thailan Qs e/$orting +irm atabase. The <uestionnaire 2as constructe covering contents accor ing to each variable that 2as o$erationalize +or em$irical stu ies. The $retest 2as use to veri+& the vali it& an reliabilit& o+ e/$ertise an misun erstan ing 2ere re uce that can arise +rom ambiguitiesG an it is im$rove in its contentsG item or eringG an 2or ing. 0eliabilit& 2as teste b& #ronbach al$ha reliabilit& coe++icients o+ all constructs to make sure that the items o+ the <uestionnaire 2ere esigne to measure consistenc& +or each conce$t. 6aterG !11 <uestionnaires 2ere sent to accounting manager +irms to $rovi e ata +or this stu & via mail. 4+ter t2o 2eeks 15" <uestionnaires 2ere receive . There 2ere 33 <uestionnaires that coul not be sent to receivers an these 2ere returne . Ho2everG " receive <uestionnaires 2ere incom$leteG an 2ere not inclu e in the ata anal&sis. This resulte in 111 usable res$onses or a res$onse rate o+ "!D. 3." 0eliabilit& an (ali it& #onstructsG multi5item scaleG 2ere teste b& #ronbach al$ha to measure reliabilit& o+ the ata. Table 1 sho2s an al$ha range +rom 1.!151.81.com+ortabl& above the minimum 1.!1 re<uirements A#halos an -oonG "111B.That is internal consistenc& o+ the measures use in this stu & can be consi ere ver& 2ell +or all constructs. )actor anal&sis is em$lo&e to test the vali it& o+ ata in the <uestionnaire. Items are use to measure each construct that is e/tracte to be one onl& $rinci$al com$onent. Table 1 sho2s +actor loa ing o+ each construct that $resents a value higher than 1.51. ThusG construct vali it& o+ this stu & is ta$$e b& items in the measureG as theorize . That isG +actor loa ing o+ each construct shoul not be less than 4.11 AHair et al.G "11!B. 3.3 %tatistic Techni<ue O6% regression anal&sis is em$lo&e to estimate $arameters in h&$othesis test. )rom the relationshi$ mo el an the h&$otheses the +ollo2ing seven e<uation mo els are +ormulate F *<uation 1F % I 88beta9.sub.119 88beta9.sub.19 *- 8e$silon9 *<uation "F % I 88beta9.sub.1"9 88beta9.sub."9 *- 88beta9.sub.39 -* 8e$silon9

*<uation 3F % I 88beta9.sub.139 88beta9.sub.49 *- 88beta9.sub.59 -* 88beta9.sub.!9 T- 88beta9.sub.'9 8*-.su$.S9 T- 88beta9.sub.8 8-*.su$.S9 T- 8e$silon9 *<uation 4F ;: I 88beta9.sub.149 88beta9.sub.99 % 8e$silon9 *<uation 5F ;: I 88beta9.sub.159 88beta9.sub.1"9 8%.su$.S9 %* 8e$silon9 88beta9.sub.119 % 88beta9.sub.119 %*

=here *- is *thical -ressureK -* is -ro+essional */$ectationK % is %tressK T- is Time -ressureK ;: is ;ob :ualit&K %* is %el+5*steem. These regression e<uations are em$lo&e to estimate in+erre $arameters 2hether the h&$otheses are substantiate an +it overall mo el A+ valueB or not. ThenG the mo el variables an $arameters are $resente in various tables later. 3.4 Measure 4ll variables in Table1 use the 55$oint 6ikert scale an sho2 numbers o+ items in or er to ta$ each variable. )ive5$oint 6ikert scale ranging +rom strongl& isagree Ascore oneB to strongl& agree Ascore +iveB 2ere use to measure all variable. 7e/tG res$on ents 2ere aske to in icate ethical $ressureG $ro+essional e/$ectationG stressG time $ressureG sel+ esteemG an Rob <ualit&. 4. 0*%P6T% 47. .I%#P%%IO7 This stu & aims at e/amining the relationshi$ among ethical $ressureG $ro+essional e/$ectationG an stressK stress an Rob <ualit&G anal&ze b& O6% regression mo el. ThusG the results 2ill be $resente b& Table 3. Table " sho2s the inter5correlation o+ all constructs to e/$lore relating o+ each ual variable. 0esults +in that stress 2oul be e/$ecte to $ositivel& an signi+icantl& correlate 2ith ethical $ressureG $ro+essional e/$ectationG an Rob <ualit&. The correlations among in e$en ent variablesG ethical $ressure an $ro+essional e/$ectation are not more high levelK there+ore multicolinearit& is e/$ecte lo2 level 2hen multi$le regression mo el is em$lo&e K the mo el has stress as e$en ent variable. 4.1 4ntece ent o+ %tress Table 3 sho2s the results o+ regression anal&sis to in+erence H1aG H1bG H1cG H1 that is measure via user in+ormation satis+action an monitoring itemsG mo erate b& time $ressure. The results in icate that in Mo el 3 o+ regression e<uation consisting o+ ethical $ressureG an $ro+essional e/$ectation as in e$en ent variablesG an stress as e$en ent variableG there is a signi+icant an $ositive association bet2een ethical $ressure an stress Ab I. 148K $J.15BK there+oreG H1a is su$$orte . 6ike2iseG the relationshi$ bet2een $ro+essional e/$ectation an stress is signi+icant an $ositive Ab I .381K $b.11BG 2hich is consistent 2ith H1b. The results o+ Mo el 1 $resents accor ing to Mo el " that the linkage bet2een ethical $ressure an stressG an the linkage among ethical $ressureG $ro+essional e/$ectation an stress are $ositive an signi+icant. In ee G Mo el 3 is a e mo erator variable. )in ing sho2s not signi+icant relationshi$ bet2een

interaction o+ ethical $ressure an time $ressure 2ith stress Ab I. 15"K $J.95B. Other interactions are not signi+icant. There+oreG H1c an H1 are not su$$orte . 4." #onse<uence o+ %tress 0esults are $resente in table 4K regression anal&sis is em$lo&e to estimate $arameters to test H"a. )or Mo el 4G there is a $ositive an signi+icant relationshi$ bet2een stress an Rob <ualit& Ab I .3"!K $b.11B. ;ob <ualit& is e/$laine b& stress e<ualing 11 $ercent. (I) values among in e$en ent variables in less than 11 AMa/imum o+ (I) value I ".18!BG an little multicolinearit& is acce$te . ThusG H"a is su$$orte . Table 4 sho2s the results o+ regression anal&sis to in+erence H"b that is measure via user in+ormation satis+action an monitoring itemsG mo erate b& sel+ esteem. The results in icate that in Mo el 5 o+ regression e<uation consisting o+ stressG an sel+5esteem as in e$en ent variablesG an Rob <ualit& as e$en ent variableG there is a signi+icant an $ositive association bet2een stress an Rob <ualit& Ab I. 418K $b.11BK but +in ing sho2s not signi+icant relationshi$ bet2een interaction o+ stress an sel+5esteem 2ith Rob <ualit& Ab I. 15!K $ J.44B. There+oreG H"b is not su$$orte . 5. #O7T0IBPTIO7% 47. )PTP0* .I0*#TIO7% )O0 0*%*40#H 5.1 Theoretical #ontributions an )uture .irection +or 0esearch This research aims to $rovi e an un erstan ing o+ ethical $ressure an $ro+essional e/$ectation that have a signi+icant irect $ositive in+luence on accountantQs stressG stress has a signi+icant irect $ositive in+luence on Rob <ualit&. The stu & $rovi es im$ortant theoretical contributions e/$an ing on $revious kno2le ge an literature o+ ethical $ressureG $ro+essional e/$ectationG stressG an Rob <ualit&. This research is one o+ the +irst kno2n stu ies to link among ethical $ressureG $ro+essional e/$ectationG stressG an Rob <ualit& in accountantsQ $ers$ective. In a itionG this stu & e/amines i++erences o+ $ressure a++ects accountantsQ stress an Rob <ualit& via mo erating e++ects o+ time $ressureG an sel+5esteem. 4ccor ing to the results o+ this researchG the nee +or +uture research shoul have e++ects o+ ethical $ressure an $ro+essional e/$ectation 2ith other in ustr&. 5." Managerial #ontributions This stu & hel$s accountants i enti+& an e/$lain ke& com$onents that ma& in+luence to accountantsQ stress. 4ccountants shoul be continuousl& training in or er to continuousl& maintain kno2le ge an increase skills an ethics that re uce accountantsQ stress. 4ccountants shoul $rovi e other +actors to su$$ort Rob <ualit& inclu ing the goo sta++G the greater time5managementG the a$$ro$riate accounting 2ork sco$eG the character an number o+ 2ork 2hen suit to accountantQs ca$abilit&. 4n im$ortant $oint is accountantQs $ro+essional ethic behavior that he or she shoul care +or acting to $ro+essions an users. #onse<uentl&G re ucing accountantQs stress an Rob <ualit& are nee e +or businesses an managers. !. #O7#6P%IO7

Our e/$ectations regar ing $erce$tions o+ accountantQs stress 2ere con+irme . Both ethical $ressure an $ro+essional e/$ectation have a irect $ositivel& in+luence on stress an stress has a irect $ositivel& in+luence on Rob <ualit&. In h&$otheses testing $ro+essional e/$ectation is more a su$erior variable than ethical $ressure in all relational. But interactions o+ mo erator have not association. Our results suggest that it 2oul be $ru ent +or +irm managers to +ocus their stress5re uction strateg& u$on accountant.

Cor0or%te Et-ics %n2 Account%,i+it/

I 2as atten ing a con+erence on social investing in Boston this s$ring 2hen a s$irite ebate eru$te over lunch. It 2as about 2hat constitutes a sociall& res$onsible businessG not a to$ic e/$ecte to get ones bloo boiling. But this a&G the iscourse 2as $articularl& +ierceG $robabl& because the sub5te/t o+ the ebate 2as about integrit&G an thatQs al2a&s a hot to$ic. To ever&one at m& tableG or at least to ever&one but meG the cor$orate 2orl ivi e into so5calle ethical cor$orations 2ith Tgoo intentionsT an most o+ the rest o+ the 2orl . These TevilT cor$orations 2ere le b& businessmen ascribe the most sel+ish o+ motivationsG a esire to gro2 their com$anies. 4s suchG the& riske being ismisse as mere Tca$italistsGT a characterization among this grou$ akin to being labele a $ro5li+e activist at a 7O= convention. 7o oneG it seeme G 2ante to talk about 2hat I 2ante to iscussG 2hich 2as 2hich com$anies turne out <ualit&G a++or able $ro ucts or servicesG treate their tra ing $artners an em$lo&ees +airl&G an generall& ke$t their noses clean. Instea G the talk +ocuse on such se/& subRects as 2orl $eaceG s$iritualit& in businessG an the 2orl 2i e battle o+ goo an evil. =ho 2ere the Tba T gu&s> 4ccor ing to grou$ consensusG cor$orations that manu+acture 2ea$ons A2hich hel$e the Pnite %tates e+eat Ira< in the ,ul+ =arBG re+ine oil A+or $lanes an carsB orG the 2orst o+ all o++ensesG test their ingre ients accor ing to acce$te international stan ar s to ensure the sa+et& o+ consumers. The goo gu&s> Man& o+ the com$anies cite b& m& lunch com$anions $a& their 2orkers near5minimum 2ageG are strongl& anti5unionG have an unha$$& 2ork+orceG an Eor make lu/ur& $ro ucts at $rice& $remiums. 7o matter that in marketing their $ro ucts these ethical business su$erstars +re<uentl& con+use their intentions an re$utations 2ith their not5so5lustrous cor$orate actions. =hile re+lecting on m& inabilit& to make an& hea 2a& 2ith this table o+ social visionariesG m& thoughts turne to Mark T2ainG al2a&s a goo source +or iron& in the mi st o+ hubris. TThe secret o+ success is honest& an +air ealingGT he once sai . TI+ &ou can +ake theseG &ouQve got it ma e.T 4re goo intentions enough> 7o one took kin l& to m& observation that cor$orations an in ivi uals can be i ealistic in intent 2hile the conse<uences o+ their actions are not $articularl& ethical. I 2ante to talk about organizational structuresG internal au itingG cor$orate governanceG an other snore5in ucing subRects. This Rust 2asnQt se/&G an it i nQt result in the kin o+ rhetorical +lourishes an $romises o+ social change that this grou$ embrace as the Hol&

,rail o+ sociall& res$onsible business. The lunch en e began. 4-%t Does HEt-ic%+H Me%n?

as un$ro uctivel& as it

The sobering realit& is that the sociall& res$onsible business movement ma& $romote cor$orate behavior that is neither $rogressive nor $articularl& ethical. Business ethics is base on broa $rinci$les o+ integrit& an +airness an +ocuses on internal stakehol er issues such as $ro uct <ualit&G customer satis+actionG em$lo&ee 2ages an bene+itsG an local communit& an environmental res$onsibilities>issues that a com$an& can actuall& in+luence. The cor$orate res$onsibilit& movementG on the other han G has come to elevate a social an $olitical agen a that ra2s on notions o+ liberal $ro$riet& an correctness that ate to the 19!1s. Truisms o+ social res$onsibilit& inclu e the embrace o+ environmentalismG anti2ar $aci+icismG human rightsG animal rightsG se/ual rightsG 2omenQs rightsG an other 5isms that +e2 isagree about in $rinci$le. )or instanceG militar& $ro uction an animal testing are negative screens 2hile the use o+ TnaturalT $ro ucts or cam$aigning +or Thir =orl rights emonstrates a higher ethical stan ar . 4ca emicsG the me iaG an social investment +irms have uncriticall& $romote these +ashionable stan ar s. Pn+ortunatel&G a$$l&ing these ambiguous litmus screens is more than Rust $roblematicK these categories can $romote a not5so5thought+ul social agen a o+ <uestionable ethics. The business ethics communit& has some soul searching ahea o+ it. Is it about out2ar 5+ocuse social visionG as re$resente b& man& vocal lea ers> Or is it about ethics>$utting out a <ualit& $ro uct at reasonable $ricesK treating em$lo&eesG ven orsG +ranchiseesG an investors +airl&K acting res$onsibl& to2ar the local environment an communit&K an G most o+ allG embracing trans$arenc& in o$erations an accountabilit& to criticsG internal an e/ternal> E%sier in T-eor/ T-%n in "r%ctice *thicsG like emocrac&G is a lot easier in theor& than in $ractice. 4s an e/am$leG letQs look at the $roli+eration o+ co es o+ con uct an mission statements that have been ra+te in the 2ake o+ the Uathie 6ee ,i++or +iasco over +oreign s2eatsho$s. The ,i++or scan aletteG as hel$+ul as it has been in shining nee e light on the com$licate issue o+ +oreign sourcingG ma& also leave us 2ith a not5 ver&5$rogressive legac& i+ 2eQre not care+ul. The most highl& toute solution to P.%. manu+acturersQ sourcing o+ goo s +rom lo252age countries>cor$orate co es o+ con uct on sourcing>+re<uentl& en s u$ oing +ar more harm than goo . 4s 2ell5meaning as these co es an mission statements $ur$ort to beG $romises that com$anies cannot ho$e to im$lement> or that cause more harm than goo i+ the& are im$lemente > ivert attention +rom the nee +or structural changes in the relationshi$ bet2een consuming nations an ra2 material su$$liers. The real bene+its o+ man& 2ell5$ublicize co es have gone to the com$anies 2ho are embarrasse into ra+ting themG not the $eo$le the& 2ere esigne to hel$. St%r,uc&s

Take %tarbucksG the bouti<ue %eattle5base co++ee retailerG as an e/am$le. To earn enough to a++or a $oun o+ %tarbucksQ co++eeG a ,uatemalan 2orker 2oul have to $ick 511 $oun s o+ beansG about +ive a&s o+ 2ork. 4s &ou choke on &our sconeG note that this stor& has a t2istF in a glittering ceremon& in 7e2 Hork recentl&G %tarbucks 2as a2ar e the International Human 0ights 42ar b& the #ouncil on *conomic -riorities A#*-B at its annual T#or$orate #onscienceT a2ar s ceremon&. Ho2 oes a com$an& un er attack +or e/$loiting chea$G +oreign labor b& activistG environmentalG an church grou$s become the belle o+ the sociall& res$onsible ball> .uring 1994G %tarbucks su++ere embarrassing grassroots $rotests because it source beans +rom e/$ort houses that $ai ,uatemalan 2orkers belo2 a living ail& 2ageG about _".51 a a&. The com$an& is no 2orse than the average 2holesalerG but it has a better5than5average re$utation as a ne25bree G values5 riven cor$oration. %o 2hen $rotesters lea+lete %tarbucks stores an targete its annual meetingG a $eace $lan 2as o++ere . 6ast &earG %tarbucks became the +irst com$an& in the agricultural commo ities sector to announce a T+rame2orkT +or a co e o+ con uct. There are more than 31G111 +arms in ,uatemalaG one o+ "1 co++ee5su$$l&ing countries. %tarbucks 2as targete not because it coul change the labor status <uo55it is a bit $la&er in the co++ee business55but because o+ its high $ublic $ro+ile. The increasingl& visible $rotests le+t %tarbucks 2ith little choice but to $ass its co eG an it cost the com$an& little. =e 2ere T$ro e T into itG notes .avi OlsenG %tarbucksQ senior vice $resi entG i$lomaticall&. But accor ing to 4lice Te$$er MarlinG #*-Qs e/ecutive irectorG the mission statement alone 2as enough to earn %tarbucks its honor. Ho2 has %tarbucks en+orce its co e> T=eQve one nothing &etGT ackno2le ges Olsen. TItQs a slo2G incremental $rocess.T (er& incremental. %tarbucksQ $romise revie2 o+ $lantation con itions is being carrie out b& the ,uatemalan co++ee gro2ers associationG the ver& organization accuse o+ $er$etuating the lo2 2ages. )irst con emne +or labor $ractices it coul not ho$e to changeG %tarbucks is no2 $raise +or actions it has not &et taken. =hat can %tarbucks accom$lish 2ith its co eG $utting asi e its obvious goal o+ <uieting $rotests> T#o es are a startGT sa&s *ric Hahn o+ the P%E,uatemala 6abor * ucation -roRect. TBut onl& i+ itQs $art o+ a bigger strateg& o+ in ustr& monitoringG 2hich is one o+ the +e2 tools available in an internationalG eregulate econom&. Other2ise itQs Rust a balm to consumers.T This is not to suggest that co es are entirel& meaningless. 4s Uathie 6ee ,i++or has learne G $romises +ocus attention. But solutions rest 2ith accountabilit&G an there oesnQt a$$ear to be an& here. %tarbucks has no $ractical abilit& to oversee con itions an sa&s it cannot risk $unishing violators. T-e A00%re+ In2ustr/ There is also the lab&rinthine social an $olitical climate in im$overishe countries to consi er. In a +ollo25u$ article to the ,i++or %tor&G $e% &ork Time! re$orter 6arr& 0ohter visite Hon uras 2here clothes use to be ma e +or ,i++or .1 The a$$arel assembl& $lants in #entral 4merica em$lo& Tslave laborT

an are Tmonstrous s2eatsho$s o+ the 7e2 =orl Or erGT accor ing to the 7ational 6abor #ommitteeG the 7e2 Hork5base grou$ that $ublicize the issue. But Hon uran union lea ers universall& resent the moralizing o+ P.%. labor activists 2hoG like the 7ational 6abor #ommitteeG are +un e b& organize labor committe to $reserving 4merican Robs. 4ccor ing to Hon uran labor lea ersG ma<uila oras are increasingl& unionize an o++er 2ages t2o5to5three times the minimum 2age. These are $rime Robs in an econom& in 2hich almost hal+ o+ the $o$ulation can +in no 2ork at all. 6abor shortages at these Robs have hel$e bum$ u$ 2ages throughout the econom&. *ven the bugaboo o+ chil labor is more com$licate than it seems. Hon uran a olescents are legall& allo2e to 2ork at 14 2ith $arental $ermissionG an most are es$erate to hel$ their +amilies. The +renz& s$arke b& the ,i++or s$ectacle has le to the ismissal o+ hun re s o+ legall& hire a olescents. 0ather than returning to schoolG 2hich is not an o$tion +or most +amilies 2ho cannot a++or to +ee an clothe their chil renG a olescents bu& ocuments to 2ork at even lo2er $a& or in some cases $e le their bo ies. =hen con+ronte 2ith the conse<uences o+ their high$o2ere cam$aignG the 7e2 Hork labor grou$ o++ere little solaceF TObviousl&G this is not 2hat 2e 2ante to ha$$en.T 4lthough man& clothing com$aniesG such as 7ikeG UMartG ;# -enne&G an 0eebokG have rushe to $ass sourcing co esG +e2 make the e++ort to e/amine the com$le/it& o+ these issues. O+ the high5$ro+ile retailersG 6evi %trauss an The ,a$ have istinguishe themselves b& evoting consi erable resources to i enti+&ing the +irst link in the su$$l& chain Athe sho$s that su$$l& their su$$liersB an bringing irect $ressure to establish minimum 2age stan ar s an 2orking con itions. T-e Ne.er-Ne.er- %n2 o1 Goo2 Intentions #elebrating Tgoo intentionsT 2hen com$le/ social $roblems are at issue an not un erstoo goes to the heart o+ the cor$orate ethics conun rum. 0e2ar ing noble $osturing also obscures meaning+ul $rogress b& TmessierT com$anies. =hile man& highl& $raise T7e2 4geT +irms have been +oun lacking in critical areas o+ accountabilit& an honest& o+ marketingG some o+ &ester a&Qs most vili+ie com$anies have <uietl& move to the +ore+ront o+ cor$orate res$onsibilit&. .es$ite their regular a$$earances on T ishonorableT listsG controversial multinationals such as MonsantoG .u-ontG or ,illette o++er +air 2ages an bene+itsG have launche im$ressive a++irmative action $racticesG are a ressing com$licate environmental issuesG activel& engage their communit& res$onsibilitiesG give man& millions o+ ollars to charit&G an sell <ualit&G com$etitivel& $rice $ro ucts an services. 0e+orms can re uce litigation e/$ensesG lighten regulator& $ressuresG an im$rove com$an& morale. )re<uentl& the& can result in consi erable savings in their o2n right. %elling necessar& $ro ucts 2ith an e&e to a broa er e+inition o+ stakehol er res$onsibilities is not $oliticall& se/&G but it can $romote $ositive social change. =hen com$aring these environmental an social re+orms 2ith the cosmetic co e at %tarbucks or other bouti<ue retailersG one has to 2on er ho2 the& rack u$ so

man& Tgoo businessT honors. 4 more basic <uestion is 2h& o so man& Tsociall& res$onsibleT a2ar s go to com$anies that sell commo it& goo s to a++luent consumers at e&e$o$$ing $rices>%tarbucksG +or e/am$leG 2here mark5u$s e/cee 1G111 $ercent> =hen aske 2h& %tarbucks 2as honore G #*-Qs Marlin sa&sG T=e 2ant to re2ar $ositive role mo els.T .are one suggest that #*- shoul have 2aite until %tarbucks i more than $ass a T+rame2ork +or a co e o+ con uctGT as a mirabl& s&mbolic as it ma& be> 4ccor ing to %tarbucksG its co e has ha no e++ect on the 2a& it oes business in ,uatemala or ozens o+ other countries. 42ar ing T4Ts +or visionar& rhetoric shi+ts +ocus a2a& +rom cor$orate governance an behavior to the nevernever5lan o+ goo intentions. ItQs a angerous tren that com$anies $romote Thoreau5like mission statements 2ithout organizational commitments to im$lement those i eals. #haracter emonstrate b& actionsG not b& intentionsG is the onl& reliable measure o+ cor$orate ethics. R%isin) t-e Et-ic%+ "%r%0et %ociall& res$onsible businessG b& $romoting bouti<ue social issues an using sim$listic litmus testsG encourages c&nicism. #an 2e break out o+ this i eological bo/ an raise the ethical $ara$et> This s$ecial issue o+ 't (ork moves us be&on the conce t o+ cor$orate res$onsibilit& to its ex re!!ion. Ho2 are com$anies mani+esting social an environmental res$onsibilit&> In 2hat 2a&s can the& be in+luence to become better in this arena> Our +irst articles escribe the ste$s taken b& the chemical in ustr& an one o+ its member +irmsG (elsicol #hemical #or$orationG to become accountable to local communities an to the environment. Then .avi Mager ra2s +rom "1 &ears o+ e/$erience to tell ho2 sociall& an environmentall& res$onsible behavior bene+its the bottom line. 0ichar 4 amsQ escri$tion o+ the ne2 retail chain he has +oun e G Out o+ this =orl G illustrates ho2 it is $ossible to incor$orate the means +or cor$orate accountabilit& to multi$le stakehol ers into the esign an o$eration o+ a com$an&. =e conclu e 2ith t2o articles that e/amine the $rinci$al avenues o2ners can take to in+luence cor$orate behavior in a $ositive irectionF ethical investing an $ension +un activism. The cor$orate 2orl cannot be ivi e easil& into Tgoo gu&sT an Tevil com$anies.T #om$anies are &s+unctional +amilies 2rit large. MistakesG sometimes 2ho$$ersG are built into li+eG inclu ing the li+e o+ cor$orations. %el+5 scrutin& an accountabilit& are essential. The measure o+ a com$an&Qs integrit& is not ho2 lou l&it beats its o2n breastG or 2hether it blun ersG but its res$ect +or its stakehol ers an its res$onsiveness to $roblems.
1

TIn Hon urasG Q%2eatsho$sQ #an 6ook 6ike -rogress.T $e% &ork Time!G ;ul& 18G 199!G $. 41.

A 1r%'e;or& 1or et-ic%+ 2ecision '%&in)

The +rame2ork overvie2F5 %te$ oneF .escribe the $roblem %te$ t2oF .etermine 2hether there is an ethical issue or ethical ilemma %te$ threeF I enti+& an rank the ke& values an $rinci$les %te$ +ourF ,ather &our in+ormation %te$ +iveF 0evie2 an& a$$licable co e o+ ethics %te$ si/F .etermine the o$tions %te$ sevenF %elect a course o+ action %te$ eightF -ut &our $lan into action %te$ nineF *valuate the results %te$ tenF %ubmit cases to &our ethical revie2 team or boar regularl& +or revie2 Ste One) De!cribe the *roblem W W W *thical $roblems are al2a&s embe e in a conte/t. e+inition A+or 2hom oes the

#ircumstances im$act u$on the $roblem $roblem e/ist> =hat is the setting>B Be2are o+ the ten enc& to look to2ar $ers$ective +or gui ance.

the clinical or $urel& legal

Cor0or%te )o.ern%nce
#or$orate governance is a broa term that has to o 2ith the manner in 2hich the rights an res$onsibilities are share among o2nersG managers an sharehol ers o+ a given com$an&. In essenceG the e/act structure o+ the cor$orate governance 2ill etermine 2hat rightsG res$onsibilitiesG an $rivileges are e/ten e to each o+ the cor$orate $artici$antsG an to 2hat egree each $artici$ant ma& enRo& those rights. ,enerall&G the +oun ation +or an& s&stem o+ cor$orate governance 2ill be etermine b& several +actorsG all o+ 2hich hel$ to +orm the +inal +orm o+ governing the com$an&. =ithin an& cor$orationG the structure o+ cor$orate governance begins 2ith la2s that im$act the o$eration o+ an& com$an& 2ithin the area o+ Ruris iction. #om$anies cannot legall& o$erate 2ithout a cor$orate structure that meets the minimum re<uirements set b& the a$$ro$riate government Ruris iction. 4ll +oun ing ocuments o+ the com$an& must com$l& 2ith these la2s in or er to be grante the $rivilege o+ incor$oration. In man& Ruris ictionsG these ocuments are re<uire b& la2 to contain at least the see s o+ ho2 the com$an& 2ill be structure to allo2 the creation o+ a balance o+ $o2er 2ithin the cor$oration. Much o+ the basis +or cor$orate governance is +oun in the ocuments that must be $re$are an a$$rove be+ore incor$oration can take $lace. These ocuments hel$ to +orm the basis +or the +inal e/$ression o+ the balance o+ $o2er bet2een sharehol ersG stakehol ersG managementG an the boar o+ irectors. The b&la2sG articles o+ incor$orationG an the com$an& charter 2ill all inclu e etails that etermine 2ho has 2hat authorit& in the ecision making $rocess o+ the com$an&. 4long 2ith the la2s o+ the lan an the +oun ing ocumentsG cor$orate governance is +urther re+ine b& the ra+ting o+ +ormal $olicies that not onl& recognize the assignment o+ $o2ers in accor ance to the b&la2s an cor$orate charterG but also hel$ to +urther e+ine ho2 those $o2ers ma& be em$lo&e . This hel$s to allo2 the com$an& some egree o+ +le/ibilit& in maintaining a balance o+ $o2er as the com$an& gro2sG 2ithout un ermining the rights an $rivileges inherent in each t&$e o+ cor$orate $artici$ation.

Funda,ental 4o!ernance

and

$thics

Theories

of

9orporate

8istor# has re$ealed that there is a ne$er*endin e$olution of theories or models of corporate o$ernance. 4ne of the reasons is due to the $er# essence of social consciences that is minimal and profit ma%in too% center sta e. All o$er the world, companies are tr#in to instill the sense of o$ernance into their corporate structure. <ith the sur e of capitalism, corporation became stron er while o$ernments all o$er the world had to succumb to its manipulations and dominance. 8ence, this article is a re$iew of literature on the ran e of theories in corporate o$ernance. The fundamental theories in corporate

o$ernance be an with the a enc# theor#, e.panded into stewardship theor# and sta%eholder theor# and e$ol$ed to resource dependenc# theor#, transaction cost theor#, political theor# and ethics related theories such as business ethics theor#, $irtue ethics theor#, feminists ethics theor#, discourse theor# and postmodernism ethics theor#. 8owe$er, these theories address the cause and effect of $ariables, such as the confi uration of board members, audit committee, independent directors and the role of top mana ement and their social relationships rather than its re ulator# framewor%s. 8ence, it is su ested that a combination of $arious theories is best to describe an effecti$e and ood o$ernance practice rather than theoriBin corporate o$ernance based on a sin le theor#.

Introduction

(orporations ha$e become a powerful and dominant institution. The# ha$e reached to e$er# corner of the lobe in $arious siBes, capabilities and influences. Their o$ernance has influenced economies and $arious aspects of social landscape. -hareholders are seen to be losin trust and mar%et $alue has been tremendousl# affected. 5oreo$er with the emer ence of lobaliBation, there is reater deterritorialiBation and less of o$ernmental control, which results is a reater need for accountabilit# ((rane and 5atten, 200F). 8ence, corporate o$ernance has become an important factor in mana in or aniBations in the current lobal and comple. en$ironment. "n order to understand corporate o$ernance, it is important to hi hli ht its definition. ,$en thou h, there is no sin le accepted definition of corporate o$ernance but it can be defined as a set of processes and structures for controllin and directin an or aniBation. "t constitutes a set of rules, which o$erns the relationships between mana ement, shareholders and sta%eholders ((hin et al, 2006). The term Xcorporate o$ernanceY has a clear ori in from a 'ree% word, X%#bermanY meanin to steer, uide or o$ern. 9rom a 'ree% word, it mo$ed o$er to :atin, where it was %nown as X ubernareY and the 9rench $ersion of X o$ernerY . "t could also mean the process of decision*ma%in and the process b# which decisions ma# be implemented. 8enceforth, corporate o$ernance has much a different meanin to different or aniBations (Abu*Tapan1eh, 200G). "n recent #ears, with much corporate failures, the countenance of corporate has been scared. (orporate o$ernance includes all t#pes of firms and its definitions could e.tend to co$er all of the economic and non*economic acti$ities. :iteratures in corporate o$ernance pro$ide some form of meanin on o$ernance, but fall short in its precise meanin of o$ernance. -uch ambi uit# emer es in words li%e control, re ulate, mana e, o$ern and o$ernance. 4win to such ambi uit#, there are man# interpretations. "t ma# be important to consider the influences a firm has or affected b# in order to rasp a better understandin of o$ernance. 4win to $ast influential factors, proposed models of corporate o$ernance can be flawed as each social scientist is formin their own scope and concerns. 8ence, this article re$iews $arious fundamental theories underlinin corporate o$ernance. These theories ran e from the a enc# theor# and e.panded into stewardship theor#, sta%eholder theor#, resource dependenc# theor#, transaction cost theor#, political theor# and ethics related theories such as business ethics theor#, $irtue ethics theor#, feminists ethics theor#, discourse theor# and postmodernism ethics theor#.

Funda,ental 9orporate 4o!ernance Theories

-%ency Theory A enc# theor# ha$in its roots in economic theor# was e.posited b# Alchian and DemsetB (1)F2) and further de$eloped b# 7ensen and 5ec%lin (1)F6). A enc# theor# is defined as Xthe relationship !et%een the principals, such as shareholders and agents such as the company e*ecutives and managersY. "n this theor#, shareholders who are the owners or principals of the compan#, hires the a ents to perform wor%. 3rincipals dele ate the runnin of business to the directors or mana ers, who are the shareholder;s a ents ((lar%e, 200A). "ndeed, Dail# et al (200C) ar ued that two factors can influence the prominence of a enc# theor#. 9irst, the theor# is conceptuall# and simple theor# that reduces the corporation to two participants of mana ers and shareholders. -econd, a enc# theor# su ests that emplo#ees or mana ers in or aniBations can be self* interested. The a enc# theor# shareholders e.pect the a ents to act and ma%e decisions in the principal;s interest. 4n the contrar#, the a ent ma# not necessaril# ma%e decisions in the best interests of the principals (3adilla, 2000). -uch a problem was first hi hli hted b# Adam -mith in the 1Gth centur# and subse/uentl# e.plored b# 6oss (1)FC) and the first detailed description of a enc# theor# was presented b# 7ensen and 5ec%lin (1)F6). "ndeed, the notion of problems arisin from the separation of ownership and control in a enc# theor# has been confirmed b# Da$is, -choorman and Donaldson (1))F). "n a enc# theor#, the a ent ma# be succumbed to self*interest, opportunistic beha$ior and fallin short of con ruence between the aspirations of the principal and the a ent;s pursuits. ,$en the understandin of ris% defers in its approach. Althou h with such setbac%s, a enc# theor# was introduced basicall# as a separation of ownership and control (2himani, 200G). 8olmstrom and 5il rom (1))A) ar ued that instead of pro$idin fluctuatin incenti$e pa#ments, the a ents will onl# focus on pro1ects that ha$e a hi h return and ha$e a fi.ed wa e without an# incenti$e component. Althou h this will pro$ide a fair assessment, but it does not eradicate or e$en minimiBe corporate misconduct. 8ere, the positi$ist approach is used where the a ents are controlled b# principal*made rules, with the aim of ma.imiBin shareholders $alue. 8ence, a more indi$idualistic $iew is applied in this theor# ((lar%e, 200A). "ndeed, a enc# theor# can be emplo#ed to e.plore the relationship between the ownership and mana ement structure. 8owe$er, where there is a separation, the a enc# model can be applied to ali n the oals of the mana ement with that of the owners. Due to the fact that in a famil# firm, the mana ement comprises of famil# members, hence the a enc# cost would be minimal as an# firm;s performance does not reall# affect the firm performance (,isenhardt, 1)G)). The model of an emplo#ee portra#ed in the a enc# theor# is more of a self*interested, indi$idualistic and are bounded rationalit# where rewards and punishments seem to ta%e priorit# (7ensen = 5ec%lin , 1)F6). This theor# prescribes that people or emplo#ees are held accountable in their tas%s and responsibilities. ,mplo#ees must constitute a ood o$ernance structure rather than 1ust pro$idin the need of shareholders, which ma#be challen in the o$ernance structure.
Fi%ure / The A enc# 5odel
-elf interest -elf interest 3erforms 8ires = dele ate 3rincipals A ents

0)0) Ste#ardship Theory -tewardship theor# has its roots from ps#cholo # and sociolo # and is defined b# Da$is, -choorman = Donaldson (1))F) as ,a ste%ard protects and ma*imises shareholders %ealth through firm performance, !ecause !y so doing, the ste%ard-s utility functions are ma*imisedY. "n this perspecti$e, stewards are compan# e.ecuti$es and mana ers wor%in for the shareholders, protects and ma%e profits for the shareholders. &nli%e a enc# theor#, stewardship theor# stresses not on the perspecti$e of indi$idualism (Donaldson = Da$is, 1))1), but rather on the role of top mana ement bein as stewards, inte ratin their oals as part of the or aniBation. The stewardship perspecti$e su ests that stewards are satisfied and moti$ated when or aniBational success is attained. A #ris (1)FC) ar ues a enc# theor# loo%s at an emplo#ee or people as an economic bein , which suppresses an indi$idual;s own aspirations. 8owe$er, stewardship theor# reco niBes the importance of structures that empower the steward and offers ma.imum autonom# built on trust (Donaldson and Da$is, 1))1). "t stresses on the position of emplo#ees or e.ecuti$es to act more autonomousl# so that the shareholders; returns are ma.imiBed. "ndeed, this can minimiBe the costs aimed at monitorin and controllin beha$iours (Da$is, -choorman = Donaldson, 1))F). 4n the other end, Dal# et al. (200C) ar ued that in order to protect their reputations as decision ma%ers in or aniBations, e.ecuti$es and directors are inclined to operate the firm to ma.imiBe financial performance as well as shareholders; profits. "n this sense, it is belie$ed that the firm;s performance can directl# impact perceptions of their indi$idual performance. "ndeed, 9ama (1)G0) contend that e.ecuti$es and directors are also mana in their careers in order to be seen as effecti$e stewards of their or aniBation, whilst, -hleifer and Mishn# (1))F) insists that mana ers return finance to in$estors to establish a ood reputation so that that can re*enter the mar%et for future finance. -tewardship model can ha$e lin%in or resemblance in countries li%e 7apan, where the 7apanese wor%er assumes the role of stewards and ta%es ownership of their 1obs and wor% at them dili entl#. 5oreo$er, stewardship theor# su ests unif#in the role of the (,4 and the chairman so as to reduce a enc# costs and to ha$e reater role as stewards in the or aniBation. "t was e$ident that there would be better safe uardin of the interest of the shareholders. "t was empiricall# found that the returns ha$e impro$ed b# ha$in both these theories combined rather than separated (Donaldson and Da$is, 1))1). Middle Eastern 'inance and Economics - #ssue . /01123 )1
Fi%ure 0 The -tewardship 5odel
"ntrinsic and e.trinsic moti$ation -hareholders; profits and returns 3rotects and ma.imise

shareholders wealth ,mpower and

trust

-hareholders -tewards

0):) Stakeholder Theory -ta%eholder theor# was embedded in the mana ement discipline in 1)F0 and raduall# de$eloped b# 9reeman (1)GA) incorporatin corporate accountabilit# to a broad ran e of sta%eholders. <heeler et al, (2002) ar ued that sta%eholder theor# deri$ed from a combination of the sociolo ical and or aniBational disciplines. "ndeed, sta%eholder theor# is less of a formal unified theor# and more of a broad research tradition, incorporatin philosoph#, ethics, political theor#, economics, law and or aniBational science. -ta%eholder theor# can be defined as Xany group or individual %ho can affect or is affected !y the achievement of the organi&ation-s o!4ectivesY. &nli%e a enc# theor# in which the mana ers are wor%in and ser$in for the sta%eholders, sta%eholder theorists su est that mana ers in or aniBations ha$e a networ% of relationships to ser$e L this include the suppliers, emplo#ees and business partners. And it was ar ued that this roup of networ% is important other than owner*mana er* emplo#ee relationship as in a enc# theor# (9reeman, 1)))). 4n the other end, -undaram = "n%pen (200A) contend that sta%eholder theor# attempts to address the roup of sta%eholder deser$in and re/uirin mana ement;s attention. <hilst, Donaldson = 3reston (1))0) claimed that all roups participate in a business to obtain benefits. +e$ertheless, (lar%son (1))0) su ested that the firm is a s#stem, where there are sta%eholders and the purpose of the or aniBation is to create wealth for its sta%eholders. 9reeman (1)GA) contends that the networ% of relationships with man# roups can affect decision ma%in processes as sta%eholder theor# is concerned with the nature of these relationships in terms of both processes and outcomes for the firm and its sta%eholders. Donaldson = 3reston (1))0) ar ued that this theor# focuses on mana erial decision ma%in and interests of all sta%eholders ha$e intrinsic $alue, and no sets of interests is assumed to dominate the others. )2 Middle Eastern 'inance and Economics - #ssue . /01123
Fi%ure : The -ta%eholder 5odel (Donaldson and 3reston, 1))0)
'o$ernment "n$estors 3olitical 'roups -upplier Trade Associations (ustomers (ommunities ,mplo#ees

FI2M 0);) 2esource Dependency Theory <hilst, the sta%eholder theor# focuses on relationships with man# roups for indi$idual benefits,

resource dependenc# theor# concentrates on the role of board directors in pro$idin access to resources needed b# the firm. 8illman, (anella and 3aetBold (2000) contend that resource dependenc# theor# focuses on the role that directors pla# in pro$idin or securin essential resources to an or aniBation throu h their lin%a es to the e.ternal en$ironment. "ndeed, 7ohnson et al, (1))6) concurs that resource dependenc# theorists pro$ide focus on the appointment of representati$es of independent or aniBations as a means for ainin access in resources critical to firm success. 9or e.ample, outside directors who are partners to a law firm pro$ide le al ad$ice, either in board meetin s or in pri$ate communication with the firm e.ecuti$es that ma# otherwise be more costl# for the firm to secure. "t has been ar ued that the pro$ision of resources enhances or aniBational functionin , firm;s performance and its sur$i$al (Dail# et al, 200C). Accordin to 8illman, (anella and 3aetBold (2000) that directors brin resources to the firm, such as information, s%ills, access to %e# constituents such as suppliers, bu#ers, public polic# ma%ers, social roups as well as le itimac#. Directors can be classified into four cate ories of insiders, business e.perts, support specialists and communit# influentials. 9irst, the insiders are current and former e.ecuti$es of the firm and the# pro$ide e.pertise in specific areas such as finance and law on the firm itself as well as eneral strate # and direction. -econd, the business e.perts are current, former senior e.ecuti$es and directors of other lar e for*profit firms and the# pro$ide e.pertise on business strate #, decision ma%in and problem sol$in . Third, the support specialists are the law#ers, ban%ers, insurance compan# representati$es and public relations e.perts and these specialists pro$ide support in their indi$idual specialiBed field. 9inall#, the communit# influentials are the political leaders, uni$ersit# facult#, members of cler #, leaders of social or communit# or aniBations. 0)<) Transaction 9ost Theory Transaction cost theory was first initiated b# (#ert and 5arch (1)6C) and later theoretical described and e.posed b# <illiamson (1))6). Transaction cost theor# was an interdisciplinar# alliance of law, economics and or aniBations. This theor# attempts to $iew the firm as an or aniBation comprisin people with different $iews and ob1ecti$es. The underl#in assumption of transaction theor# is that firms ha$e become so lar e the# in effect substitute for the mar%et in determinin the allocation of resources. "n other words, the or aniBation and structure of a firm can determine price and production. The unit of anal#sis in transaction cost theor# is the transaction. Therefore, the combination of people

with transaction su ests that transaction cost theor# mana ers are opportunists and arran e firms; transactions to their interests (<illiamson, 1))6). Middle Eastern 'inance and Economics - #ssue . /01123 )C 0)=) Political Theory Political theory brin s the approach of de$elopin $otin support from shareholders, rather b# purchasin $otin power. 8ence ha$in a political influence in corporate o$ernance ma# direct corporate o$ernance within the or aniBation. 3ublic interest is much reser$ed as the o$ernment participates in corporate decision ma%in , ta%in into consideration cultural challen es (3ound, 1))C). The political model hi hli hts the allocation of corporate power, profits and pri$ile es are determined $ia the o$ernments; fa$or. The political model of corporate o$ernance can ha$e an immense influence on o$ernance de$elopments. 4$er the last decades, the o$ernment of a countr# has been seen to ha$e a stron political influence on firms. As a result, there is an entrance of politics into the o$ernance structure or firms; mechanism (8awle# and <illiams, 1))6).

:)1) $thics Theories and 9orporate 4o!ernace

4ther than the fundamental corporate o$ernance theories of a enc# theor#, stewardship theor#, sta%eholder theor#, resource dependenc# theor#, transaction cost theor# and political theor#, there are other ethical theories that can be closel# associated to corporate o$ernance. These include business ethics theor#, $irtue ethics theor#, feminist ethics theor#, discourse ethics theor#, postmodern ethics theor#. 2usiness ethics is a stud# of business acti$ities, decisions and situations where the ri ht and wron s are addressed. The main reasons for this are the power and influence of business in an# i$en societ# is stron er than e$er before. 2usinesses ha$e become a ma1or pro$ider to the societ#, in terms of 1obs, products and ser$ices. 2usiness collapse has a reater impact on societ# than e$er before and the demands placed b# the firm;s sta%eholders are more comple. and challen in . 4nl# a handful of business iants ha$e had an# formal education on business ethics but there seems to be more compromises these da#s. 2usiness ethics helps us to identif# benefits and problems associated with ethical issues within the firm and business ethics is important as it i$es us a new li ht into present and traditional $iew of ethics ((rane and 5atten, 200F). "n understandin the Eri ht and wron s; in business ethics, (rane = 5atten, (200F) in1ected moralit# that is concerned with the norms, $alues and beliefs fi.ed in the social process which helps ri ht and wron for an indi$idual or social communit#.

,thics is defined as the stud# of moralit# and the application of reason which sheds li ht on rules and principle, which is called ethical theories that ascertains the ri ht and wron for a situation. <hilst business ethics theor# focuses on the Xri hts and wron s; in business, feminist ethics theory emphasiBes on empath#, health# social relationship, lo$in care for each other and the a$oidance of harm. "n an or aniBation, to care for one another is a social concern and not merel# a profit centered moti$e. ,thics has also to be seen in the li ht of the en$ironment in which it is e.ercised. This is important as an or aniBation is a networ% of actions, hence influencin transcommunal le$els and interactions ((ase#, 2006). 4n the other end, discourse ethics theory is concerned with peaceful settlement of conflicts. Discourse ethics, also called ar umentation ethics, refers to a t#pe of ar ument that tries to establish ethical truths b# in$esti atin the presuppositions of discourse (8abermas, 1))6). 5eisenbach (2006) contends that such %ind of settlement would be beneficial to promote cultural rationalit# and culti$ate openness. 5irtue ethics theory focuses on moral e.cellence, oodness, chastit# and ood character. Mirtue is a state to act in a i$en situation. "t is not a habit as a habit can be mindless (Annas, 200C). Aristotle calls it as disposition with choice or decision. 9or e.ample, if a board member decides to be honest, now that a decision which he ma%es and thus stren thens his $irtue of honest#. Mirtue in$ol$es two aspects, the affecti$e and intellectual. The concept of affecti$e in $irtue theor# su ests Xdoin the ri ht thin and ha$e positi$e feelin sY, whilst, the concept of intellectual su ests Xto do $irtuous act with the ri ht reasonY. Mirtues can be instilled with education. Aristotle mentions that %nowled e on ethics is 1ust li%e becomin a builder (Annas, 200C). Throu h the process of educatin and e.posure to ood $irtues, the de$elopment of ethical $alues in a child;s life is e$ident. 8ence, if a person is )A Middle Eastern 'inance and Economics - #ssue . /01123 e.posed to ood or positi$e ethical standards, e.hibitin honest#, 1ust and fairness, than he would e.ercise the same and it will be embedded in his will to do the ri ht thin at an# i$en situation. Mirtue ethics is eminent to brin about the intan ibles into an or aniBation. Mirtue ethics hi hli hts the $irtuous character towards de$elopin a morall# positi$e beha$ior ((rane and 5atten, 200F). Mirtues are a set of traits that helps a person to lead a ood life. Mirtues are e.hibited in a person;s life. Aristotle belie$ed that $irtue ethics consists of happiness not on a hedonistic sense, but rather on a broader le$el. +e$ertheless, postmodern ethics theory oes be#ond the facial $alue of moralit# and addressed the inner feelin s and E ut feelin s; of a situation. "t pro$ides a more holistic approach in which firms ma# ma%e oals achie$ement as their priorit#, fore oin or ha$in a minimal focus on

$alues, hence ha$in a lon term detrimental effect. 4n the other hand, there are firms toda# who are so $alue dri$en that their $alues become their ultimate oal (2alasubramaniam, 1)))).

;)1) 9onclusion

This re$iew has seen corporate o$ernance from $arious theoretical perspecti$es. The emer ence of a enc# theor#, stewardship theor#, sta%eholder theor#, transaction cost theor# and political theor# addresses the cause and effect of $ariables, such as the confi uration of board members, audit committee, independent directors and the role of top mana ement. "n addition, ethics in business ha$e been closel# associated with corporate o$ernance. This can be seen with the association of business ethics theor#, feminist ethics theor#, discourse ethics theor#, $irtue ethics theor# and postmodern ethics theor#. 8ence, it can be ar ued that corporate o$ernance is more of a social relationships rather than process orientated structure. "n addition, these theories focused on the $iew that the shareholders; aimed to et a return on their in$estments. "n toda#s business en$ironment, business process should also focus on other critical factors such as le islation, culture and institutional conte.ts. (orporate o$ernance is constantl# chan in and e$ol$in and chan es are dri$en b# both internal and e.ternal en$ironmental d#namics. The internal en$ironment has a fi.ed mindset of shareholders; relationship with sta%eholders and ma.imiBin profits. <hilst, issues in the e.ternal en$ironment such as the brea%up of lar e con lomerates li%e ,nron, mer ers and ac/uisitions of corporation, business collaborations, easier financial fundin , human resource di$ersit#, new business start*ups, lobaliBation and business internationaliBation, and the ad$ance of communication and information technolo # ha$e directl# and indirectl# caused the chan es in corporate o$ernance. The current corporate o$ernance theories cannot full# e.plain the comple.it# and hetero eneit# of corporate business. 'o$ernance for different countr# ma# $ar# due to its cultural $alues, political and social and historical circumstances. "n this sense, o$ernance for de$eloped countries and de$elopin countries can $ar# due to the culture and economic conte.ts of indi$idual countr#. 5oreo$er, an effecti$e and ood corporate o$ernance cannot be e.plained b# one theor# but it is best to combine a $ariation of theories, addressin not onl# the social relationships but also emphasiBe on the rules and le islation and stricter enforcement surroundin ood o$ernance practice and oin be#ond the norms of a mechanical approach towards corporate o$ernance. :iterature has pro$en that e$en with strict re ulations, there ha$e been infrin ements in corporate o$ernance. 8ence it is crucial that a holistic realiBation be dri$en across the corporate world that would brin about a

different perspecti$e towards corporate o$ernance. The da#s of cane and bridle are becomin a mere shadow and the need to et to the root of a corporation is essential. Therefore, it is important to re*$isit corporate o$ernance in the li ht of the con$er ence of these theories and with a fresh an le, which has a holistic $iew and incorporatin sub1ecti$it# from the perspecti$e of social sciences. Middle Eastern 'inance and Economics - #ssue . /01123 )0

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9$* Duality and -%ency Theory

Time =arner $resi ent an #*O ;e++re& Be2kes acce$te a $osition o+ ualit& 2hen he took on the role o+ chairman o+ the boar o+ the com$an& in ;anuar& "119.

Appointin a (,4Js successor ets a little more complicated when the chief e.ecuti$e officer is also a member of the board of directors. :etJs e.amine how muddled up thin s can et in this case. -o we %now that shareholders elect a board of directors for a compan#, and that board in turn elects the (,4. 2ut weJ$e also learned that in some cases, a (,4 can be a member of the board itself. "n fact, he or she can simultaneousl# hold the position of chairman of the board and (,4. Those who stud# corporate o$ernance call this situation 9$* duality. As #ou mi ht e.pect, dualit# is contro$ersial. ,$en theorists who stri$e to find the best wa#s of mana in a compan# are split about the issue. Two schools of thou ht represent the different ar uments. Ad$ocates of a%ency theory ar ue that the positions of (,4 and chairman should be separate. The# sa# that a sin le officer who holds both positions creates a conflict of interest that could ne ati$el# affect the interests of the shareholders. <h#Q <ell, in this situation, the (,4!chairman is be able to direct board meetin s and isnJt restrained from actin in his or her own self*interest when a separate chairman isnJt there to loo% out for shareholders. This $er# powerful (,4 would therefore enerall# wea%en the o$ersi ht power that boards hold ** in other words, there wouldnJt be a solid s#stem of chec%s and balances. And itJs not 1ust an issue of power for the actin (,4!chairman. (,4 dualit# can also complicate the alread# frustratin issue of (,4 succession. "n some cases, a (,4!chairman ma# choose to retire as (,4, but %eep his or her role as the chairman. Althou h this splits up the roles, which appeases a enc# theorists somewhat, it nonetheless puts the new (,4 in a difficult position. The chairman is bound to /uestion some of the new chan es put in place, and the board as a whole mi ht ta%e sides with the chairman whom the# trust and ha$e a histor# with Tsource: :a$elleU. This conflict of interest would ma%e it difficult for the new (,4 to institute an# chan es, as the power and influence still remains with the former (,4. "f thatJs a enc# theor#, what does the opposin side ar ueQ
#*O .ualit& an %te2ar shi$ Theor& Breaking Barriers In the Pnite %tatesG the $ositions o+ #*O an boar members have been ominate historicall& b& 2hite malesG but this is slo2l& changing. 7o2G about 14.5 $ercent o+ )ortune 511 com$anies have +emale #*Os 8sourceF %hambaugh9. =omen an minorities also make u$ about 11 $ercent o+ boar members in cor$orations 8sourceF Ui er9.

(,4 dualit# is a prett# hot debate. <hile ad$ocates of a enc# theor# belie$e that little ood can come from a (,4 who ser$es simultaneousl# as chairman of the board of directors, there is another side to the ar ument. Those who support ste#ardship theory maintain that when one person holds both roles, he or she is able to act more efficientl# and effecti$el#. 8oldin dual roles as (,4!chairman creates unit# across the compan#Js mana ers and board of directors, which ultimatel# allows the (,4 to ser$e the shareholders e$en better. &nfortunatel#, studies on the different situations (companies that ha$e dualit# and those who do not) ha$enJt been able to come up with a clear answer on which is better for runnin a compan# Tsource: (raneU. -tudies seem to indicate that dualit# doesnJt ha$e a direct correlation to how well a compan# performs. 4ne mi ht assume that without a separate chairman to o$ersee the (,4, the en$ironment is ripe for corruption. 8owe$er, man# are surprised to learn that e$en in the hi h*profile corporate scandals of ,nron and <orld(om, which centered around (,4 corruption, the companies didnJt ha$e a dualit# structure Tsource: Hnowled eZ<hartonU. This last fact is e$en more intri uin when #ou consider that most (,4s of bi companies in the &nited -tates also act as the chairman. About G0 percent of the bi corporations in the

&nited -tates ha$e a s#stem of dualit# Tsource: Al$areBU. The same isnJt true in ,urope, howe$er. There, dualit# is either not permitted or, as in the &.H., not $er# common Tsource: 8useU. &p until now, we ha$enJt discussed what is actuall# the most hot*button issue re ardin (,4s: salar#. <eJll et to that ne.t.
#*O %alaries

<e all %now that our boss ma%es more mone# than we do ** but findin out 1ust how much more can be shoc%in and often hard to swallow. (hief e.ecuti$e officers ((,4s) ob$iousl# et paid handsomel# (for the most part). 2ut how much is too muchQ (,4 pa# is alwa#s contro$ersial ** especiall# when the (,4s are ettin per%s at a time when the compan# isnJt doin well. :oo%in at how much modern (,4s et paid, #ou ma# thin% that the# et to decide their own salar#. 2ut this isnJt allowed in public companies. 2oards of directors ha$e that responsibilit#, and this is a harder tas% than #ou mi ht e.pect. 3a# too much and the board ris%s not onl# marrin the public ima e of the compan#, but also s/uanderin corporate funds. 3a# too little and the board wonJt be able to attract or retain talented e.ecuti$es who are sou ht after in a competiti$e mar%et. "tJs such a difficult decision that boards often desi nate a co,pensation co,,ittee made up t#picall# of two to fi$e board members to determine how much to pa# a (,4. 6e ulations stipulate that the members of this committee canJt be current emplo#ees of the compan# (inside directors), which would cause a conflict of interest. Althou h pri$ate companies arenJt re/uired to follow such re ulations, man# do an#wa# Tsource: -mithU. (ompensation committees often consider the ad$ice of internal e.ecuti$es, but the# also recruit outside consultants to help them determine an appropriate salar# for the compan#Js (,4. The committees stri$e to desi n an appropriate philosoph# for compensatin the (,4 in a wa# that moti$ates performance. After the committee ma%es its recommendations, the board can decide whether or not to appro$e them. "n the &nited -tates, -ecurities and ,.chan e (ommission (-,() re ulations re/uire that committees e.plain the reasons for their decision to shareholders in a released statement Tsource: -mithU. ThereJs at least one (,4 who ma%es less than minimum wa e ** %ind of. 9ind out who on the ne.t pa e.
#*O -erks 6oss o+ 6o&alt& 4lthough it use to be customar& +or u$$er5management em$lo&ees to stick 2ith a single com$an& +or much o+ their livesG this tra ition change in the 1981s. %ince thenG e/ecutives have been more 2illing to s2itch com$anies +or better o++ers. This tren has contribute to higher salaries +or e/ecutives as com$anies make bi s +or the best can i ates on the Rob market 8sourceF Uno2le gea=harton9.

-te$e 7obs, the (,4 of Apple whose health we discussed on a pre$ious pa e, is a prett# notable e.ception when it comes to hi h (,4 salaries. Apple pa#s him [1 a #ear. Dou read that ri ht: a sin le dollar. 2ut donJt feel too badl# for himK he actuall# ta%es home a whole lot more than that and is reportedl# worth billions Tsource: Hnowled eZ<hartonU. ThatJs because in lieu of a traditional pa#chec%, 7obs recei$es stoc% options that allow him to cash in on the success of the compan#. As 7obsJ case clearl# illustrates, (,4 compensation is more than 1ust salar#. Actuall#, most top earners recei$e the bul% of their ta%e*home pa# from stoc% options. :arr# ,llison, (,4 of

4racle (orporation and the top*paid (,4 of 200F, recei$ed a cool [1G2 million in stoc% options and a mere million from his salar# Tsource: De(arloU. "n addition to stoc% options, (,4s often et heft# bonuses, pri$ile es to use compan#*paid per%s (li%e pri$ate 1ets) and lar e contributions to their retirement plans. And althou h this is reat news for (,4s, it i$es researchers /uite a headache. 2ecause compensation ta%es so man# forms, those who want to anal#Be, compare and determine (,4 compensation find it a dauntin tas%. 4$erall, itJs important to ta%e sensationaliBed reports of a (,4Js hi h salar# with a rain of salt. "t can be difficult to estimate his or her $alue to a compan# and to uess the $arious factors that o into the boardJs difficult decision of determinin salar#. "f #ou want more on the spo%en and unspo%en rules that o$ern a compan#, browse the lin%s on the ne.t pa e.
Ho2 #*Os =ork I+ &ouQre too intimi ate to ask him or her $ersonall&G this article 2ill tell &ou 2hat a #*O oes. %ee more $ictures o+ cor$orate li+e.

DouJ$e heard about his pri$ate 1et, fanc# mansion and sports car collection ** not to mention the cutthroat business practices that helped him attain all these thin s. 8eJs the (,4 of #our compan#, and #ouJre probabl# luc%# if he %nows #our name. <ell, this is the stereot#pical portrait of a (,4, an#wa#. "n realit#, #ours mi ht be a nice, down*to*earth u#, or he ma# be a she. 6e ardless, (,4s ha$e a reputation for li$in lu.uriousl#, ha$in %een business minds and stri%in fear into the hearts of emplo#ees whene$er the# happen to drop in. "n corporate culture, a chief e'ecuti!e officer, or 9$*, is the bi boss. (,4s ma# not do the nitt#* ritt# hirin s and firin s themsel$es, but the# run the show. The#Jre in char e of settin strate #, compan# oals and ma%in the hi h*end decisions. 2ecause this is a bi 1ob, the# dele ate man# of their powers to other e.ecuti$es. ,mplo#ees can /uestion a (,4Js 1ud ment, but onl# at their own ris%. ThatJs not to sa# (,4s are untouchable or ha$e unchec%ed power. Althou h he or she ma# be top do in the office, the (,4 must answer to a board of directors. +e$ertheless, the power associated with the position often enerates suspicion and contro$ers#. <hen a compan# is sufferin throu h a tou h /uarter and sends word to its emplo#ees that there wonJt be an# (hristmas bonus this #ear, it certainl# loo%s bad to see a (,4 ta%e an increase in salar# and fl# off on $acation in the compan# 1et. "tJs also suspicious when a compan#Js (,4 ser$es simultaneousl# as chairman of the board of directors. <hatJs more, the position draws hei htened scrutin# these da#s after such corporate scandals as ,nron e.posed (,4s abusin their power. 2efore we del$e into these and other contro$ersies that swarm around (,4s, we need to understand what these officers do. "t can be difficult to define a (,4Js responsibilities due to the fact that e$er# compan#Js (,4 is different. 2ecause the# hold the top internal position in a corporation, (,4s et to decide which duties the# want to ta%e on personall# and which the# want to dele ate. And because e$er# corporation has its own culture and $arious industries operate on different corporate structures, weJll ha$e to loo% at the role from a eneral perspecti$e. :etJs start with a brief o$er$iew of how corporations wor%.
#or$orate %tructureF Boar o+ .irectors

8a$e #ou e$er tried to understand the ran%s of e.ecuti$es in a compan# onl# to et lost in acron#ms and 1ar onQ DouJre not aloneK the balance of power in the corporate world can be confusin e$en to those entrenched in it. 2ut donJt disma#: <eJll wal% #ou throu h the basic corporate structure.

7ust li%e man# o$ernments, corporations ha$e a s#stem of chec%s and balances so that not too much power is centered in one person or roup. "n companies, the structure is set up to separate powers of ownership and mana ement. This wasnJt alwa#s the case. 2efore the "ndustrial 6e$olution in the 1)th centur#, companies were t#picall# famil#*run and $er# small b# toda#Js standards. 2ut e$entuall#, powered b# machines and ad$anced efficienc#, indi$idual companies rew e.ponentiall#. -oon after came the dawn of public ownership of companies, which helped fund these ar antuan institutions. <hen $arious shareholders ha$e partial ownership of a compan#, the# want to ma%e sure whoe$erJs runnin the show is loo%in out for their best interests. This is what a board of directors is for. The board represents the shareholders and other stakeholders (those who ha$e a $ested interest in the compan#). The board of directors doesnJt run the compan# itself, but it o$ersees those who do. "n a public compan#, the shareholders elect the members of a board of directors. The board is headed b# a chairman and contains other directors, the number of which $aries from compan# to compan#. Directors can be either inside directors or outside directors. Inside directors are those who are also mana ers in the compan# or happen to be ma1or shareholders. *utside directors, on the other hand, donJt ha$e a role in the compan#. The# t#picall# ha$e e.perience in the industr# (or mi ht e$en be chief e.ecuti$e officers of other companies), which allows them to ma%e informed decisions about the business. -ome ha$e memberships on multiple boards. <hile inside directors can share their uni/ue insi ht from an internal perspecti$e, outside directors are considered unbiased. 2oth %inds of directors ha$e the same eneral responsibilities on a board. Directors o$ersee the mana ement of the compan# collecti$el# b# appro$in strate ies and bud ets. The# ma# not meet re ularl#, and the influence the# trul# wield o$er mana ement can depend on the d#namics and atmosphere of the compan#.
#or$orate %tructureF #om$an& Management 6a er

-rivate Matters To a&G even i+ a cor$oration is $rivate an isnQt $ublicl& tra e G la2s an regulations usuall& re<uire it to have a boar o+ irectors that looks out +or the interests o+ o2ners an various stakehol ersG such as the local communit&. Ho2everG the boar o+ a $rivate com$an& has +e2er oversight rules an regulations to +ollo2. Man& $rivate com$anies also have #*OsG though not all o+ them o.

3art of a board of directorsJ responsibilities of o$erseein mana ement is electin a chief e.ecuti$e officer ((,4). 9rom that point, the similarities amon most companies end ** each t#picall# has its own uni/ue mana ement structure. -ometimes, a compan# will ha$e a president, which ma# or ma# not be the same person as the (,4. "f the (,4 and the president arenJt the same person, the presidentJs ran% is 1ust below the (,4. Another important fi ure who ma# be under the (,4 is the chief operations officer (9**). The person in this position is closer to the detailed operations and oin s*on of business. Althou h the (44 doesnJt set the compan# strate # li%e the (,4 does, he or she does ma%e sure that strate # is ettin carried out b# upper mana ement. A similar position is that of the chief finance officer (9F*), who, li%e #ou mi ht e.pect, is in char e of the compan#Js financial matters. The (94Js primar# responsibilit# is interpretin financial situations and reportin them to the (,4 and the board, as well as ma%in the information a$ailable to shareholders. "f necessar#, a (,4 can also hire $arious $ice presidents for different departments in the compan#.

The different theories on how best to or aniBe and run a lar e corporation ha$e allowed the sub1ect to blossom into its own field of stud# %nown as corporate %o!ernance. &nder this sub1ect, researchers inspect such thin s as how man# inside or outside directors should ma%e up a board, or the best balance of powers between the board and the (,4. +e.t, letJs focus in on the (,4.

Duties of a 9$*
4 #*O must make the im$ortant high5en ecisions +or the com$an&.

3uttin aside the $a ue lan ua e, what does a chief e.ecuti$e officer ((,4) do, e.actl#Q All (,4s are responsible for determinin the o$erall strate # of a compan#. 9or e.ample, the (,4 of a car compan# would ha$e to decide whether to focus on buildin lar e -&Ms for the famil# and ad$enturer demo raphic or to 1ump on the latest reen trend and build $ehicles with more efficient as milea e, instead. The (,4 of a compan# that ma%es computers mi ht decide whether to cut prices to be more competiti$e in the consumer mar%et or to hire more en ineers so that the compan# can ma%e a better computer. The (,4Js da#*to*da# duties ma# depend on the siBe of the compan# he or she o$ersees. "n a bi compan#, settin the strate # in all departments and for all facets of the industr# can be a full*time 1ob. This is wh# #ou ne$er see (,4s of lar e corporations steppin into the warehouse and helpin to et orders throu h (e.cept, perhaps, in photo ops). "n smaller companies and start*ups, thin s are usuall# different. A (,4 who was also the founder of the compan# and is stru lin to ma%e it row probabl# has a more hands*on role. 8e or she is more li%el# to step into an# role necessar# to et the 1ob done. And, of course, the dail# responsibilities of a (,4 ma# also $ar# across industries. ,$en thou h the# can dele ate power, (,4s are ultimatel# responsible for e$er#thin related to mana ement, such as operations and financial matters. This means that the chief operatin officer ((44) and chief financial officer ((94) report directl# to the (,4. As weJ$e mentioned, since the board of directors chooses the (,4, the (,4 must, in turn, report to the board. Dependin on how in$ol$ed the board chooses to be, it can ta%e a bac%seat to the (,4Js $ision and decisions. 4r, the board could opt to ta%e a more direct role and char e the (,4 with carr#in out its plans. The (,4Js personalit# is a ma1or factor in determinin his or her relationship with the board. "n eneral, (,4s tend to ha$e domineerin , arrestin personalities that can help them wield power o$er a board. 2ut because the board has the power to choose and remo$e the (,4, thereJs alwa#s that chec% on power that can rei n in a (,4Js beha$ior.
More #*O 0es$onsibilities

6e ardless of whether itJs a bi or small compan# that he or she o$ersees, the (,4 is usuall# instrumental in settin the tone for an or aniBation. (,4s are able to use their power and method of leadership in a wa# that moti$ates emplo#ees. 9or instance, if emplo#ees et the impression that their (,4 is wor%in as hard as the# do and that he or she reall# appreciates their hard wor%, this can elicit lo#alt# from all le$els of emplo#ees. 2ut the (,4 doesnJt alwa#s set a positi$e toneK his or her beha$ior can discoura e emplo#ees as easil# as it bolsters their morale. "f a (,4 comes across as unattached to the compan#Js emplo#ees and flies off fre/uentl# on e.otic $acations, emplo#ees ma# not feel compelled to wor% hard for him or her. 5an# people assume that because of their hea$# responsibilities, (,4s are especiall# prone to stress*related health problems. Accordin to some research, howe$er, those in mid*le$el mana ement are more li%el# to de$elop health problems than those who wor% at hi her le$els

of the corporate ladder Tsource: >uic%U. -o it would seem that more responsibilit# doesnJt necessaril# e/uate to more stress. 8owe$er, some ar ue that top*ran%in (,4s are able to a$oid 1ob stress b# dod in responsibilit#. <hen a compan#Js performance ta%es a di$e, (,4s ma# tr# to pass the buc% down to lower e.ecuti$es. Althou h this is 1ust one possible e.planation for wh# (,4s wouldnJt be as stressed as some of those mana ers to whom the# dele ate power, shir%in responsibilit# has shown to be an unwise business tactic. Accordin to some studies of 9ortune 000 companies, when hi h*le$el e.ecuti$es ta%e the blame for slumps, itJs more li%el# to result in impro$ed performance from the emplo#ees Tsource: 3fefferU. 4ther studies confirm that e$en in h#pothetical situations, emplo#ees are more li%el# to appro$e of and respect e.ecuti$es who shoulder the blame for unfa$orable e$ents Tsource: 3fefferU. 2ecause (,4s are so $ital to the success, identit# and tone of a compan#, contro$ers# alwa#s lur%s around the corner when the top do retires, as weJll see ne.t.
The -roblem o+ 6osing a #*O

(ar accidents, heart attac%s, cancer. As much as we hate to thin% about it, no one li$es fore$er. "f a (,4 is trul# successful, he or she wonJt outli$e the corporation itself. And, (,4s ma# also choose to lea$e the compan# suddenl# to o another or aniBation, to pursue other e.ploits or retire. 4f course, the board can alwa#s fire the (,4 as well. <hate$er the cause, when a compan# loses a (,4, it can be li%e the frenB# of a chic%en runnin around with its head cut off. ThatJs because of the problem of 9$* succession ** in other words, decidin who will be a suitable replacement. 7ust as monarchies ha$e stru led historicall# with the death of a %in who has no stron or ob$ious successor, so must companies stru le with the departure of a (,4. "f companies arenJt careful, what pla#s out is the stuff of -ha%espearean drama. "n fact, in the 2000 motion picture release of -ha%espeareJs N8amlet,N which deals with problems of ro#al succession, filmma%er 5ichael Almere#da moderniBed the plot to re$ol$e around the death of a (,4 in place of a %in . -o wh# is namin a new (,4 such a bi dealQ <h# does the media rush to the scene when -te$e 7obs, the (,4 of Apple, so much as sneeBesQ 2asicall#, itJs because of the reasons we laid out on the last pa e ** the (,4 is the lifeblood of a compan#. 8e or she sets the direction of a corporation, and shareholders donJt want to hold on to the stoc% of a directionless compan# for lon . 7obs himself is a reat e.ample of this because man# credit him with sa$in Apple from the brin% of ban%ruptc# and subse/uentl# raisin it to enormous success. <ithout him, some fear the compan# mi ht sin% #et a ain. To see e$idence of how much a compan# hin es on its (,4, note how AppleJs shares dipped at the mere rumor of 7obsJ remission into ill health Tsource: 6eutersU. "n 7anuar# 200), news surfaced of -te$e 7obs ta%in a lea$e of absence from his position at Apple. The announcement was enou h to institute a temporar# halt on the tradin of Apple stoc%. To calm in$estors, 7obs appointed (44 Tim (oo% to ta%e o$er dail# operations for him durin his lea$e.
#*O %uccession

-o what does happen to a compan# when a (,4 lea$esQ As weJ$e learned, itJs up to the board of directors to hire and fire (,4s. The decision of (,4 succession is entirel# up to the board ** in theor#, at least. "n realit#, it mi ht be a different stor#. "n the past, boards of directors enerall# too% a passi$e role in their corporate o$ersi ht. "t was the accepted tradition that (,4s should choose and room their successors while the#Jre still at the compan#. 4nce the (,4 died or retired, boards t#picall# followed suit and elected the former (,4Js choice. 5icrosoftJs 2ill 'ates too% a $ariation of this route, as he be an plannin his own succession at a e A0 Tsource: 5aderU. 8e bowed out raduall#, lea$in the (,4 position and namin a successor in 2000, but retainin his position as chairman and ta%in on a new role of chief software architect. 2# 2006, he decided to lea$e the mana ement position but sta# on as chairman.

2ut not e$er# (,4 phases himself or herself out of the picture raduall# li%e 'ates did. "n the modern d#namic of corporate culture, a board of directors is more li%el# to ta%e an a ressi$e role in appointin a successor. "n fact, itJs not uncommon for the board to ma%e an independent choice, perhaps selectin a candidate from outside the compan#. 8irin (,4s from outside the or aniBation has become more popular latel#. "n the 1)60s, for instance, outsiders accounted for ) percent of new (,4s, but b# 2000, this fi ure had risen to about CC percent Tsource: (are#U. Theorists disa ree about what factors are behind this shiftin ideolo #. -ome claim that boards increasin l# (and unwisel#) see% charismatic, superstar (,4s for the illusion of stron compan# leadership Tsource: 5on%sU. 2ecause of the problems than can ensue from the sudden death or departure of a (,4, e.perts recommend that boards alwa#s ha$e a plan read# for a stable transition. This would in$ol$e communicatin with $arious mana ers to appoint the best successor Tsource: 5on%sU.

"ro2uction '%n%)e'ent
Ho; Tr%ns0ort%tion 'et-o2 ;or&s? The trans$ortation metho consists o+ the +ollo2ing three ste$sF 1 " 3 Obtaining an initial solutionG that is to sa& making an initial assignment n such a 2a& that a basic +easible solution is obtaine K 4scertaining 2hether it is o$timal or not b& etermining o$$ortunit& costs associate 2ith the em$t& cellsG an i+ the solution is not o$timalK 0evising the solution until an o$timal solution is obtaine .

>ayout Plannin% The term Jla#out plannin J can be applied at $arious le$els of plannin : 3lant location plannin (where #ou are concerned with location of a factor# or a warehouse or other facilit#.) This is of some importance in desi n of multi*nationall# cooperatin , 'lobal* suppl# (hain s#stems. Department location 3lannin : This deals with the location of different departments or sections within a plant!factor#. This is the problem we shall stud# in a little more detail, below. 5achine location problems: which deal with the location of separate machine tools, des%s, offices, and other facilities within each cell or department. Detailed plannin : The final sta e of a facilit# plannin is the eneration, usin (AD tools or detailed en ineerin drawin s, of scaled models of the entire floor plans, includin details such as the location of power supplies, cablin for computer networ%s and phone lines, etc. The Department :ocation 3roblem: A department is defined as an# sin le, lar e resource, with a well defined set of operations, and fi.ed material entr# and e.it points. ,.amples ran e from a lar e machine tool, or a desi n department. The aim is to de$elop a 2:4(H 3:A+ showin the relati$e locations of the departments. (riteria: The primar# criteria for e$aluatin an# la#out will be the: 5"+"5"\AT"4+ of material handlin costs. 58 cost components: depreciation of 58 e/uipment, $ariable operatin costs, labor e.penses. Also, 58 costs are t#picall# directl# proportional to (a) the fre/uenc# of mo$ement of material, and (b) The len th o$er which material is mo$ed.

Ad$anta es of these criteria (reduced material mo$ements): 1. 6eduction of Aisle space re/uired.

2. :ower <"3 le$els C. :ower throu hput times A. :ess product dama e and lower obsolescence 0. 6educed stora e space 6. -implified material control and schedulin F. :ess con estion in s#stem. (onsider the followin :

:ocation of ne.t operation ad1acent machine across the aisle across the plant another plant

5aterial 8andled per mo$e sin le part unit load lot siBe of o$er 1 hour of production one da#Js production

At each sta e, the <"3 is increasin b# as much as 10 times. The most popular la#out for comple. s#stems is the -3"+, :AD4&T. ,.amples are shown in the followin fi ure.

The spine defines a central channel of material flow for the entire facilit#. ,ach department branches out of this central core. "deall#, each department has its own input!output area alon the spine. This departmental point of usa e concept reduces material flow.

<e shall now loo% at some details of how to locate departments alon a spine to optimiBe the flow of materials. :et us first tr# to see if we can e$aluate whether there is a dominant flow pattern in a manufacturin s#stem or not.

fi4 @ flow $olume (trips!time) between department " and 1. hi4 @ cost!unit distance for the material handlin s#stem.
The cost @ unit fi.ed cost R unit $ariable cost. <e define the wei ht of the cost of mo$in material between departments i and 4 as:

%i4 6 fi47hi4
'i$en the $alues of all the %i4Js, one measure of flow dominance is the coefficient of $ariation, defined as:

<hat do different computed $alues of f mean Q (learl#, f61 implies that there is no si nificant $ariation of flow $olumes between different pairs of departments. "n such cases, almost an# solution for la#outs will be close to optimal. -imilarl#, if f is lar e (]2), it implies that some flows in the s#stem are $er# low, while others are e.tremel# dominant. This is t#pical for assembl# lines t#pes of s#stems. "t is eas# to desi n the la#out for such s#stems (<h#Q). 8owe$er, if the $alue of f is close to 1, then it is difficult to see dominant flows, and other techni/ues of la#out desi n need to be emplo#ed. 4ne such techni/ue is the manual desi n methodolo # de$eloped b# 5uther, called:

Syste,atic >ayout Plannin% The fi ure below shows the steps of this methodolo #.

The method can be described in terms of the basic steps: 1. Data (ollection: A stud# of the 3roduct 5i., >uantit# of each product to be produced, 6outin for each product, -upport ser$ices needed, and the -chedule (or the timin and transport issues related to production schedules of the products t#pes). 2. 9low Anal#sis: whence we identif# what each department will be, what its inputs and outputs are li%el# to be, specification of ph#sical wor%stations re/uired to do the tas%s (in the process plan) etc. At the earl# sta es, this in$ol$es considerations of /uantit# of material flow, as well as o$erall flow lines that could be better in the implementation of departments. ,.amples include strai ht*line flow, -*shaped flow, &*shaped flow, or <*shaped flows. 9urther, e$en for a spine shaped s#stem, the spine eometr# can be strai ht line, or &* shaped (the latter case is useful if a sin le material recei$in !deli$er# point is preferred.)

C. >uantitati$e anal#sis: -ome factors, such as flow costs, can be /uantified. -e$eral others are not so eas# to /uantif#. 9or e.ample a. 58 recei$in and deli$er# stations to be %ept to ether. b. Delicate testin e/uipment should be placed far from hi h $ibration areas, etc. -uch relationships can be /uantified b# usin 6,: dia rams, as shown in the fi ure below. The relati$e importance of each factor is e.pressed in terms of sub1ecti$e e$aluations, ran in from A (absolutel# necessar#) to & (unnecessar#), and ? (necessar# to %eep apart). The dia ram can also i$e reasons for such decisions. An e.ample is shown below.

A. 6elationship Dia ram: The /uantitati$e and /ualitati$e anal#sis is combined into a relationship dia ram. 4ne wa# to do this is to assi n some numerical $alues to the A*? ratin s, (t#picall#, lar e inte er for A*ratin , 0 for &*ratin , and lar e *$e inte er for ?* ratin ). These ratin s can then be used to determine the closeness ratin for each department as the sum of all the ratin *$alues of all lin%s comin into it. &suall#, a department with a lar e ratin $alue should ha$e si nificant lin%s will man# other departments, and should therefore be at the center of the la#out (to be close to all other departments.) <e can now use these ratin s (or their numerical $alues) to define the total closeness ratin% of different departments. "f M(?) is a function which defines the $alue of achie$in closeness between two departments, the total closeness ratin of a department can be defined as the sum of its closeness ratin $alues for all its sister departments.

To i$e a numerical e.ample, assume that we allow: M(A) @ G1, M(,) @ 2F, M(") @), M(4) @ C and M(&) @ 1. Then the closeness ratin s correspondin to each department in the e.ample fi ure abo$e are:

Department

Total (loseness 6atin )RCR)RCRG1 @ 100 )R0R1R1R2F @ CG 0G C) C0 160

-6

3(

3"( ?T AT

"n the abo$e, the ?*ratin s were i nored in order to allow each department to ha$e a fair chance in placement in the initial desi n of the la#out. The real $alue of this ratin will be used later, when we put some effort into modification on the first* uess solution. 9ormin the first uess solution ( reed# al orithm): -tep 1. +otice that AT has the hi hest ratin , and so is placed in the center of the la#out (wh# Q) -tep 2. The ne.t hi hest ran%ed department is -6, which ma# be placed ad1acent to AT due to their mutual A*ratin . <e put it on top of AT. -tep C. +e.t up is 3-, which should o ad1acent to AT (since M(AT,3-) is the hi hest rated closeness $alue for 3-. -tep A. +e.t comes ?T, which should be close to 3-. -tep 0. +e.t is "(, which should be close to AT and is placed below it. -tep 6. 9inall#, we ha$e 3(, which must sta# awa# from 3-. &sin these directions, we ha$e a first attempt at the la#out as follows:

+otice the odd shape of the final la#out. This does not matter, since we still ha$e not considered the relati$e siBes of the departments. 2ut before considerin that, we must also attempt to impro$e upon our reed# solution. 4ne heuristic to do so is called the 2*4pt method. A *opt method is said to ha$e con$er ed when an# switchin between $ariables (in this case, locations of departments) cannot impro$e upon the ob1ecti$e (in our case, minimiBation of the total 58 cost). The 2*4pt procedure to impro$e on the reed# solution is prett# strai htforward, and described rather well in #our te.t (As%in and -tandrid e, pp 21)). "n summar#, it is a hill* climbin heuristic, in which, startin from the initial solution, at each step we compute the reduction (if an#) in cost associated with switchin the positions of each pair of departments. The pair which #ields the ma.imum reduction in costs (steepest local benefit) is selected at this step. The switch is made, and the procedure continues, until at some sta e, we are unable to find an# pair*switch which impro$es on the 58 cost. "n the abo$e, the 58 cost associated with an# pair of departments is often based on the estimated 58 cost factor, %i4 that we computed earlier, multiplied b# an estimate of the distance between the two cells. 0. -pace re/uirements: these are determined based on industrial standards, e/uipment re/uired, shelf space re/uired, etc. 6. -pace a$ailabilit#: this is determined based on the economic anal#sis, as well as on other constraints that ma# arise (especiall# if the s#stem is to be housed in an e.istin facilit#). The last two considerations will i$e an estimate of total space for each department, and sometimes also the shape of each department (based on flow t#pe within the department). F. -pace relationship dia ram: "n this part, we substitute in the actual area on each department, and fit the departments into the a$ailable space. &suall#, the solution methods ma# be computer*assisted heuristics, or 1ust direct $isual methods. G. 3uttin in the constraints: 9inall#, other e.istin constraints are emplo#ed to cut down the number of feasible solutions, to result in a small set of solutions. from amon these, direct comparison can be used to ran%, eliminate, or select the optimum desi n. The decision theor# is a branch of the applied probabilit# theor#, which e$aluates conse/uences of decisions. The decision theor# is often used as economical instrument. Two well*%nown methods in addition are e. . the simple efficienc# anal#sis (+<A) or the more precise Anal#tic

8ierarch# 3rocess (A83), where criteria and alternati$es are represented, compared and e$aluated, in order to find the optimal solution to a decision or a problem definition. 4ne differentiates between three subsections of the decision theor#: 1. The normati$e decision theor# loo%s for criteria of rational decidin and wants to i$e assistance for the /uestion, how one is to decide in a i$en situation reasonabl#. "n addition it must meet some simplif#in model acceptance, then it must proceed for e.ample from the a.iom of the of the ,ntscheiders. 2. The decision theor# concerns itself with the suppl# from procedures to the precipitation of rational and practicable decisions. C. The descripti$e decision theor# e.amines a ainst it empiricall# the /uestion how decisions in the realit# are actuall# made. The basic model (normati$e) of the decision theor# consists of the decision field and the tar et s#stem. The decision field contains the acti$it# space (/uantit# of the possible action alternati$es), the \ustandsraum (/uantit# of the possible en$ironmental conditions) and a result function, which assi n a $alue to each combination of action and condition. A fre/uent problem is that the true en$ironmental condition does not admit is. 8ere one spea%s of uncertaint#, contrar# to the situation of the securit#, in which the en$ironmental condition admits is. The uncertaint# situation can be arran ed into I Decision under securit#: The occurrin situation is well*%nown. (Deterministic decision model) I Decision under uncertaint#: "t is not with securit# well*%nown, which en$ironmental situation occurs s^1, one continues to differentiate thereb# in: o Decision under ris%: The probabilit# p^1 for the possibl# occurrin en$ironmental situations s^1 is well*%nown. (-tochastic decision model) o Decision under uncertaint#: 4ne %nows the possibl# occurrin en$ironmental situations, howe$er not their probabilities of entrance. <ith a decision under ris% e.pectanc# $alues can be calculated o$er all possible conse/uences of each indi$idual decision, while with a decision under uncertaint# and!or is used the principle is not possible b# the insufficient reason!"ndifferenBprinBip, which assi ns the same probabilit# to each option. 4n the basis of such probabilit# e$aluations a determination of the e.pectanc# $alue can be made also under uncertaint# ("n or multi*le$el) the decision*ma%in process with the different conse/uences can be plotted as decision tree.

The decision theor# is not applicable, if the entrepreneur and!or mana er lets this competition li%ewise flow competed with a rationall# actin opponent (a competitor about) to which into his decision. This can do also with the help of the probabilit# calculation alone is not no more illustrated, since the beha$ior of the opponent is not deterministicall# howe$er not coincidental. "n such a case the ame theor# is used. The decision theor# is used recentl# also with the e$aluation of in$estments. &nder the name material option is used the decision tree procedure (and!or options) for it to be able to decide the $alue of fle.ibilit# concernin decisions * i.e. the option (at a later time) * to 1ud e. *P$2-TI*?S S9H$D@>I?4 -chedulin pertains to establishin both the timin and use of resources within an or aniBation. &nder the operations function (both manufacturin and ser$ices), schedulin relates to use of e/uipment and facilities, the schedulin of human acti$ities, and receipt of materials. <hile issues relatin to facilit# location and plant and e/uipment ac/uisition are considered lon term and a re ate plannin is considered intermediate term, operations schedulin is considered to be a short*term issue. As such, in the decision*ma%in hierarch#, schedulin is usuall# the final step in the transformation process before the actual output (e. ., finished oods) is produced. (onse/uentl#, schedulin decisions are made within the constraints established b# these lon er*term decisions. 'enerall#, schedulin ob1ecti$es deals with tradeoffs amon conflictin oals for efficient utiliBation of labor and e/uipment, lead time, in$entor# le$els, and processin times. 2#ron 9inch notes that effecti$e schedulin has recentl# increased in importance. This increase is due in part to the popularit# of lean manufacturin and 1ust*in*time. The resultin drop in in$entor# le$els and subse/uent increased replenishment fre/uenc# has reatl# increased the probabilit# of the occurrence of stoc%*outs. "n addition, the "nternet has increased pressure to schedule effecti$el#. N2usiness to customerN (22() and Nbusiness to businessN (222) relationships ha$e drasticall# reduced the time needed to compare prices, chec% product a$ailabilit#, ma%e the purchase, etc. -uch instantaneous transactions ha$e increased the e.pectations of customers, thereb#, ma%in effecti$e schedulin a %e# to customer satisfaction. "t is noteworth# that there are o$er 100 software schedulin pac%a es that can perform schedule e$aluation, schedule eneration, and automated schedulin . 8owe$er, their results can often be impro$ed throu h a human schedulerJs 1ud ment and e.perience. There are two eneral approaches to schedulin : forward schedulin and bac%ward schedulin . As lon as the concepts are applied properl#, the choice of methods is not si nificant. "n fact, if process lead times (mo$e, /ueue and setup times) add to the 1ob lead time and process time is assumed to occur at the end of process time, then forward schedulin and bac%ward schedulin #ield the same result. <ith forward schedulin , the scheduler selects a planned order release date and schedules all acti$ities from this point forward in time. <ith bac%ward schedulin , the scheduler be ins with a planned receipt date or due date and mo$es bac%ward in time, accordin to the re/uired processin times, until he or she reaches the point where the order will be released. 4f course there are other $ariables to consider other than due dates or shippin dates. 4ther factors which directl# impact the schedulin process include: the t#pes of 1obs to be processed

and the different resources that can process each, process routin s, processin times, setup times, chan eo$er times, resource a$ailabilit#, number of shifts, downtime, and planned maintenance. >*-DI?4 :oadin in$ol$es assi nin 1obs to wor% centers and to $arious machines in the wor% centers. "f a 1ob can be processed on onl# one machine, no difficult# is presented. 8owe$er, if a 1ob can be loaded on multiple wor% centers or machines, and there are multiple 1obs to process, the assi nment process becomes more complicated. The scheduler needs some wa# to assi n 1obs to the centers in such a wa# that processin and setups are minimiBed alon with idle time and throu hput time. Two approaches are used for loadin wor% centers: infinite loadin and finite loadin . <ith infinite loadin 1obs are assi ned to wor% centers without re ard for capacit# of the wor% center. 3riorit# rules are appropriate for use under the infinite loadin approach. 7obs are loaded at wor% centers accordin to the chosen priorit# rule. This is %nown as $ertical loadin . 9inite loadin pro1ects the actual start and stop times of each 1ob at each wor% center. 9inite loadin considers the capacit# of each wor% center and compares the processin time so that process time does not e.ceed capacit#. <ith finite loadin the scheduler loads the 1ob that has the hi hest priorit# on all wor% centers it will re/uire. Then the 1ob with the ne.t hi hest priorit# is loaded on all re/uired wor% centers, and so on. This process is referred to as horiBontal loadin . The scheduler usin finite loadin can then pro1ect the number of hours each wor% center will operate. A drawbac% of horiBontal loadin is that 1obs ma# be %ept waitin at a wor% center, e$en thou h the wor% center is idle. This happens when a hi her priorit# 1ob is e.pected to arri$e shortl#. The wor% center is %ept idle so that it will be read# to process the hi her priorit# 1ob as soon as it arri$es. <ith $ertical loadin the wor% center would be full# loaded. 4f course, this would mean that a hi her priorit# 1ob would then ha$e to wait to be processed since the wor% center was alread# bus#. The scheduler will ha$e to wei h the relati$e costs of %eepin hi her priorit# 1obs waitin , the cost of idle wor% centers, the number of 1obs and wor% centers, and the potential for disruptions, new 1obs and cancellations. "f the firm has limited capacit# (e. ., alread# runnin three shifts), finite loadin would be appropriate since it reflects an upper limit on capacit#. "f infinite loadin is used, capacit# ma# ha$e to be increased throu h o$ertime, subcontractin , or e.pansion, or wor% ma# ha$e to be shifted to other periods or machines. S$A@$?9I?4 -e/uencin is concerned with determinin the order in which 1obs are processed. +ot onl# must the order be determined for processin 1obs at wor% centers but also for wor% processed at indi$idual wor% stations. <hen wor% centers are hea$il# loaded and len th# 1obs are in$ol$ed, the situation can become complicated. The order of processin can be crucial when it comes to the cost of waitin to be processed and the cost of idle time at wor% centers. There are a number of priorit# rules or heuristics that can be used to select the order of 1obs waitin for processin . -ome well %nown ones are presented in a list adapted from Mollmann, 2err#, <h#bar%, and 7acobs (2000): 6andom (6). 3ic% an# 1ob in the /ueue with e/ual probabilit#. This rule is often used as a benchmar% for other rules. 9irst come!first ser$ed (9(!9-). This rule is sometimes deemed to be fair since 1obs are processed in the order in which the# arri$e.

-hortest processin time (-3T). The 1ob with the shortest processin time re/uirement oes first. This rule tends to reduce wor%*in*process in$entor#, a$era e throu hput time, and a$era e 1ob lateness. ,arliest due date (,DD). The 1ob with the earliest due date oes first. This seems to wor% well if the firm performance is 1ud ed b# 1ob lateness. (ritical ratio ((6). To use this rule one must calculate a priorit# inde. usin the formula (due dateLnow)!(lead time remainin ). This rule is widel# used in practice. :east wor% remainin (:<6). An e.tension of -3T, this rule dictates that wor% be scheduled accordin to the processin time remainin before the 1ob is considered to be complete. The less wor% remainin in a 1ob, the earlier it is in the production schedule. 9ewest operations remainin (946). This rule is another $ariant of -3TK it se/uences 1obs based on the number of successi$e operations remainin until the 1ob is considered complete. The fewer operations that remain, the earlier the 1ob is scheduled. -lac% time (-T). This rule is a $ariant of ,DDK it utiliBes a $ariable %nown as slac%. -lac% is computed b# subtractin the sum of setup and processin times from the time remainin until the 1obJs due date. 7obs are run in order of the smallest amount of slac%. -lac% time per operation (-T!4). This is a $ariant of -T. The slac% time is di$ided b# the number of operations remainin until the 1ob is complete with the smallest $alues bein scheduled first. +e.t /ueue (+>). +> is based on machine utiliBation. The idea is to consider /ueues (waitin lines) at each of the succeedin wor% centers at which the 1obs will o. 4ne then selects the 1ob for processin that is oin to the smallest /ueue, measured either in hours or 1obs. :east setup (:-&). This rule ma.imiBes utiliBation. The process calls for schedulin first the 1ob that minimiBes chan eo$er time on a i$en machine.

These rules assume that setup time and setup cost are independent of the processin se/uence. 8owe$er, this is not alwa#s the case. 7obs that re/uire similar setups can reduce setup times if se/uenced bac% to bac%. "n addition to this assumption, the priorit# rules also assume that setup time and processin times are deterministic and not $ariable, there will be no interruptions in processin , the set of 1obs is %nown, no new 1obs arri$e after processin be ins, and no 1obs are canceled. <hile little of this is true in practice, it does ma%e the schedulin problem mana eable. 4-?TT 9H-2TS 'antt charts are named for 8enr# 'antt, a mana ement pioneer of the earl# 1)00s. 8e proposed the use of a $isual aid for loadin and schedulin . Appropriatel#, this $isual aid is %nown as a 'antt chart. This 'antt chart is used to or aniBe and clarif# actual or intended use of resources within a time framewor%. 'enerall#, time is represented horiBontall# with scheduled resources listed $erticall#. 5ana ers are able to use the 'antt chart to ma%e trial*and*error schedules to et some sense of the impact of different arran ements. There are a number of different t#pes of 'antt charts, but the most common ones, and the ones most appropriate to our discussion, are the load chart and schedule chart. A load chart displa#s the loadin and idle times for machines or departmentsK this shows when certain 1obs are scheduled to start and finish and where idle time can be e.pected. This can help the scheduler redo loadin assi nments for better utiliBation of the wor% centers. A schedule chart is used to monitor 1ob pro ress. 4n this t#pe of 'antt chart, the $ertical a.is shows the orders or 1obs in

pro ress while the horiBontal a.is represents time. A /uic% lance at the chart re$eals which 1obs are on schedule and which 1obs are on time. 'antt charts are the most widel# used schedulin tools. 8owe$er, the# do ha$e some limitations. The chart must be repeatedl# updated to %eep it current. Also, the chart does not directl# re$eal costs of alternate loadin s nor does it consider that processin times ma# $ar# amon wor% centers. S9H$D@>I?4 S$2VI9$ *P$2-TI*?S The schedulin of ser$ices often encounters problems not seen in manufacturin . 5uch of this is due to the nature of ser$ice, i.e., the intan ibilit# of ser$ices and the inabilit# to in$entor# or store ser$ices and the fact that demand for ser$ices is usuall# random. 6andom demand ma%es the schedulin of labor e.tremel# difficult as seen in restaurants, mo$ie theaters, and amusement par%s. -ince customers donJt li%e to wait, labor must be scheduled so that customer wait is minimiBed. This sometimes re/uires the use of /ueuin theor# or waitin line theor#. >ueuin theor# uses estimate arri$al rates and ser$ice rates to calculate an optimum staffin plan. "n addition, fle.ibilit# can often be built into the ser$ice operation throu h the use of casual labor, on*call emplo#ees, and cross*trainin . -chedulin of ser$ices can also be complicated when it is necessar# to coordinate and schedule more than one resource. 9or e.ample, when hospitals schedule sur er#, not onl# is the schedulin of sur eons in$ol$ed but also the schedulin of operatin room facilities, support staff, and special e/uipment. Alon with the schedulin of classes, uni$ersities must also schedule facult#, classrooms, labs, audio$isual and computer e/uipment, and students. To further complicate matters, cancellations are also common and can add further disruption and confusion to the schedulin process. "nstead of schedulin labor, ser$ice firms fre/uentl# tr# to facilitate their ser$ice operations b# schedulin demand. This is done throu h the use of appointment s#stems and reser$ations. Frank and >illian 4ilbreth Pioneers of $r%ono,ics and BTi,e and MotionB ,fficienc# and producti$it# o to ether, and wor%in efficientl# has man# meanin s. "tJs not 1ust about wor%in in a wa# that allows #ou to et the most done in a fi.ed period of time. "t also in$ol$es ma%in sure that #ou donJt hurt producti$it#. "f #ou wor% too fast, #ou ris% ma%in mista%es. Dou also ris% becomin so tired, either mentall# or ph#sicall#, that #ou ha$e to stop wor%in too earl#, which means that #our total efficienc# suffers. Toda#, we re ularl# use er onomic principles to desi n wor% and wor%place e/uipment. 9rom somethin as simple as placin the photocopier in a central location, to custom desi nin wor%stations to minimiBe repetiti$e strain in1uries, the principles of wor% efficienc# are all around us. 2ut where did these ideas ori inateQ The poorl#*desi ned, inefficient wor%places of the late 1)th centur# led to the scientific mana ement mo$ement in the earl# 20th centur#, which applied the scientific method to the stud# of the wor%place. 9ran% 'ilbreth and his wife, :illian, were supporters of this mo$ement. The 'ilbreths pioneered the stud# of Ntime and motionN at wor%. The# were interested in efficienc#, so the# set up e.periments to e.amine the mo$ements that indi$idual wor%ers made while doin their dail# wor%.

2efore he became a wor%place researcher, 9ran% was a bric%la#er. 8e noted that e$er# wor%er had his own wa# of la#in bric%s. 2# obser$in these indi$idual methods, he determined the most efficient wa# to complete the tas%. 9ran% belie$ed that b# wor%in efficientl#, both the emplo#er and the wor%er would benefit L emplo#ers would ain more producti$it#, and wor%ers would ha$e reduced stress and fati ue. 8is obser$ations e$entuall# led to a new wa# of la#in bric%s that more than doubled dail# output. Another of 9ran%Js studies led to creatin the role of the sur ical assistant in modern operatin rooms. "nstead of the sur eon findin each instrument he needed, a nurse would stand b# and hand the sur eon the appropriate tool. "nterestin 9act: The boo% N(heaper b# the DoBenN was written b# 9ran% and :illianJs children 9ran% 7r. and ,rnestine. There were 12 children in the famil#, and the boo% (and subse/uent mo$ies) hi hli hted the efficiencies that were introduced into their household as a result of their parentsJ methods. $'peri,ental Techni(ue <or% simplification strate ies can be traced bac% to the wor% of the 'ilbreths, whose methods were /uite sophisticated. 9or e.ample, the# werenJt satisfied with simpl# sa#in that a person Nmo$ed the hand,N so the# bro%e down this action into 1F separate units of motion. The# called each motion a Ntherbli ,N which is N'ilbrethN spelled bac%ward (the NthN is transposed for easier pronunciation). The# also in$ented a microchronometer to stud# wor% motion. This is a cloc% capable of recordin time to the 1!2000th of a second. 2# placin the cloc% in the field of the picture, the# could brea% mo$ements down into $er# small units of time. 8enr# 'antt, the ori inator of the 'antt (hart, was a contemporar# of the 'ilbreths, who used a 'antt (hart to demonstrate raphicall# the $arious pieces of a lar er tas%. The 'ilbrethsJ disco$eries about wor%place efficienc# were not limited to the need to increase output. The# were also interested in how wor%ers could reduce fati ue. 9rom this industrial ps#cholo # perspecti$e, the# ad$anced ideas about how best to train and de$elop wor%ers. Tactics li%e 1ob rotation and findin wor% best suited for a wor%erJs natural s%ills and abilities de$eloped from the 'ilbrethsJ e.tensi$e e.periments. <hile the 'ilbrethsJ wor% is $er# important, their methods are no lon er used directl# in the modern wor%place. 8owe$er, the underl#in theor# of wor%place efficienc# remains stron . -ee a current list of team tools to impro$e the effecti$eness and functionalit# of #our team, and learn about the HaiBen approach to efficienc#. Cey Points <hile #ou ma# not ha$e %nown the names 9ran% and :illian 'ilbreth before readin this article, their contribution to the ad$ancement of mana ement science and modern mana ement theor# was si nificant. Toda#, weJre $er# familiar with the idea of wor%place efficienc# L no one ar ues with its importance. <e can than% pioneers in the mana ement science mo$ement, li%e the 'ilbreths, for this %nowled e.

Fin%nci%+ '%n%)e'ent

-d!anta%es of 2atios -nalysis

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 wea firms! overvalued and undervalued firms. management! in its basic functions of forecasting. "lanning! 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 li ely performance in the future. investors and lending decisions in the case of ban ers etc.

". 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 ma es possible

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

>i,itations of 2atios -nalysis

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. #inancial statements themselves are sub$ect to several limitations. Thus ratios derived! there from! are also sub$ect to those limitations. #or e%ample! non-financial changes though important for the business are not relevant by the financial statements. #inancial statements are affected to a very great e%tent by accounting conventions and concepts. "ersonal $udgment plays a great part in determining the figures for financial statements.

". Comparative study required: Ratios are useful in $udging the efficiency of the

business only when they are compared with past results of the business. &owever! such a comparison only provide glimpse of the past performance and forecasts for future may not prove correct since several other factors li e mar et conditions! management policies! etc. may affect the future operations.

'. Ratios alone are not adequate: Ratios are only indicators! they cannot be ta en as final regarding good or bad financial position of the business. (ther things have also to be seen.

4. Problems of price level c anges: ) 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 ad$usted eeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. *. +ac of adequate standard: ,o fi%ed 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.

!. Limited use of single ratios: ) single ratio! usually! does not convey much of a
sense. To ma e a better interpretation! a number of ratios have to be calculated which is li ely to confuse the analyst than help him in ma ing any good decision.

'. 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. !ncomparable: ,ot only industries differ in their nature! but also the firms of the
similar business widely differ in their si-e and accounting procedures etc. It ma es comparison of ratios difficult and misleading.

"ro1it M%3i'i*%tion .s 4e%+t- '%3i'i*%tion The tra itional a$$roach o+ +inancial management 2as all about $ro+it ma/imization.The main obRective o+ com$anies 2as to make $ro+its. The tra itional a$$roach o+ +inancial management ha man& limitationsF 1.Business ma& have several other obRectives other than $ro+it ma/imization.#om$anies ma& have goals likeF a larger market shareG high salesGgreater stabilit& an so on.The tra itional a$$roach i not take into account so man& o+ these other as$ects. ".-ro+it Ma/imization has to e+ine a+ter taking into account man& things likeF a.%hort termGmi termGan long term $ro+its b.-ro+its over $erio o+ time The tra itional a$$roach ignore these im$ortant $oints. 3.%ocial 0es$onsibilit& is one o+ the most im$ortant obRectives o+ man& +irms.Big cor$orates make an e++ort to2ar s giving back something to the societ&.The big com$anies use a certain amount o+ the $ro+its +or social causes.It seems that the tra itional a$$roach i not consi er this $oint.

Mo ern 4$$roach is about the i ea o+ 2ealth ma/imization.This involves increasing the *arning $er share o+ the sharehol ers an to ma/imize the net $resent 2orth. =ealth is e<ual to the the i++erence bet2een gross $resent 2orth o+ some ecision or course o+ action an the investment re<uire to achieve the e/$ecte bene+its. ,ross $resent 2orth involves the ca$italise value o+ the e/$ecte bene+its.This value is iscounte a some rateGthis rate e$en s on the certaint& or uncertaint& +actor o+ the e/$ecte bene+its. The =ealth Ma/imization a$$roach is concerne 2ith the amount o+ cash +lo2 generate b& a course o+ action rather than the $ro+its. 4n& course o+ action that has net $resent 2orth above zero or in other 2or sGcreates 2ealth shoul be selecte . The +inancial management come a long 2a& b& shi+ting its +ocus +rom tra itional a$$roach to mo ern a$$roach. The mo ern a$$roach +ocuses on 2ealth ma/imization rather than $ro+it ma/imization. This gives a longer term horizon +or assessmentG making 2a& +or sustainable $er+ormance b& businesses.

4 m&o$ic $erson or business is mostl& concerne about short term bene+its. 4 short term horizon can +ul+ill obRective o+ earning $ro+it but ma& not hel$ in creating 2ealth. It is because 2ealth creation nee s a longer term horizon There+oreG )inance Management or )inancial Management em$hasizes on 2ealth ma/imization rather than $ro+it ma/imization. )or a businessG it is not necessar& that $ro+it shoul be the onl& obRectiveK it ma& concentrate on various other as$ects like increasing salesG ca$turing more market share etcG 2hich 2ill take care o+ $ro+itabilit&. %oG 2e can sa& that $ro+it ma/imization is a subset o+ 2ealth an being a subsetG it 2ill +acilitate 2ealth creation.

,iving $riorit& to value creationG managers have no2 shi+te +rom tra itional a$$roach to mo ern a$$roach o+ +inancial management that +ocuses on 2ealth ma/imization. This lea s to better an true evaluation o+ business. )or e.g.G un er 2ealth ma/imizationG more im$ortance is given to cash +lo2s rather than $ro+itabilit&. 4s it is sai that $ro+it is a relative termG it can be a +igure in some currenc&G it can be in $ercentage etc. )or e.g. a $ro+it o+ sa& _11G111 cannot be Ru ge as goo or ba +or a businessG till it is com$are 2ith investmentG sales etc. %imilarl&G uration o+ earning the $ro+it is also im$ortant i.e. 2hether it is earne in short term or long term.

In 2ealth ma/imizationG maRor em$hasizes is on cash +lo2s rather than $ro+it. %oG to evaluate various alternatives +or ecision makingG cash +lo2s are taken un er consi eration. )or e.g. to measure the 2orth o+ a $roRectG criteria likeF L $resent value o+ its cash in+lo2 Z $resent value o+ cash out+lo2sO Anet $resent valueB is taken. This a$$roach consi ers cash +lo2s rather than $ro+its into consi eration an also use iscounting techni<ue to +in out 2orth o+ a $roRect. ThusG ma/imization o+ 2ealth a$$roach believes that mone& has time value.

4n obvious <uestion that arises no2 is that ho2 can 2e measure 2ealth. =ellG a basic $rinci$le is that ultimatel& 2ealth ma/imization shoul be iscovere in increase net 2orth or value o+ business. %oG to measure the sameG value o+ business is sai to be a +unction o+ t2o +actors 5 earnings $er share an ca$italization rate. 4n it can be measure b& a o$ting +ollo2ing relationF

(alue o+ business I *-% E #a$italization rate

4t timesG 2ealth ma/imization ma& create con+lictG kno2n as agenc& $roblem. This escribes con+lict bet2een the o2ners an managers o+ +irm. 4sG managers are the agents a$$ointe b& o2nersG a strategic investor or the o2ner o+ the +irm 2oul be maRorl& concerne about the longer term $er+ormance o+ the business that can lea to ma/imization o+ sharehol erNs 2ealth. =hereasG a manager might +ocus on taking such ecisions that can bring <uick resultG so that heEshe can get cre it +or goo $er+ormance. Ho2everG in course o+ +ul+illing the sameG a manager might o$t +or risk& ecisions 2hich can $ut on stake the o2nerNs obRectives.

HenceG a manager shoul align hisEher obRective to broa obRective o+ organization an achieve a tra eo++ bet2een risk an return 2hile making ecisionK kee$ing in min the ultimate goal o+ +inancial management i.e. to ma/imize the 2ealth o+ its current sharehol ers.

1. 9inancial statement anal#sis of firms presents #ou an intuition on how the corporation is conductin its pro ram. 9or stoc%holders who are interested in findin out whether the mana ement is properl# utiliBin the corporation;s resources to create shareholder wealth, a financial anal#sis of a corporation will be able to help in$estors come to proper decision. As such, financial anal#sis of a corporation has se$eral items, includin capital bud etin and capital structure

decisions when the anal#sis of financial statements is done for the mana ement of the firm. The peformane of competitors within the industr#, and the $iabilit# of business;s future can be e$aluated throu h financial statement anal#sis. 2. Miabilit# of a pro1ect can be found out throu h a financial statement anal#sis which can be performed b# financial anal#sts emplo#ed b# the firm. 3ro1ects that would brin in the ma.imum amount of re$enues o$er the course of time o$er similar pro1ects are recommended b# financial anal#sts to the mana ement. ,.pected returns from pro1ects are pro$ided b# financial anal#sts to the mana ement. Anal#sts emplo#ed b# the business can also i$e the mana ement su estions on whether to issue new stoc%s or borrow mone# to fund new pro1ects. 9inancial anal#sts will recommend whether a new pro1ect should be underta%en or in$est the mone# somewhere else, essentiall# performin capital bud etin decisions. C. 9inancial "nstitutions will carr# out a financial statement anal#sis of a business to see how stron its fundamentals are, and then use their findin s to either ma%e ood in$estments for themsel$es, or pass on ther findin s to their clients. :ar e in$estment corporations ha$e their own in house financial anal#sts who ad$ice to their emplo#ers on what stoc%s mi ht be a ood bu#, these recommendations are usuall# pri$ate and onl# a$ailable within the compan#. A corporation;s stoc% price can be affected based on a financial anal#st recommendations as these recommendations are used b# stoc%holders to determine whether it is a ood in$estment. "f a financial anal#st after e$aluatin a compan#;s financial statements finds that the compan# isn;t performin well, he mi ht su est owners to sell the stoc% if the# alread# own it. "f such a su estion were to be made public, the price of that business;s share could see its $alue drop moderatel#.

SSSSSSSSSSSSSSSSSSSSSSS =hat is tra ing on e<uit&> Ho2 can it $rove to be a ouble5e ge s2or >

Trading on e8uity is sometimes referred to as financial leverage or the leverage factor. Tradin on e/uit# occurs when a corporation uses bonds, other debt, and preferred stoc% to increase its earnin s on common stoc%. 9or e.ample, a corporation mi ht use lon term debt to purchase assets that are e.pected to earn more than the interest on the debt. The earnin s in e.cess of the interest e.pense on the new debt will increase the earnin s of the corporation;s common stoc%holders. The increase in earnin s indicates that the corporation was successful in tradin on e/uit#. "f the newl# purchased assets earn less than the interest e.pense on the new debt, the earnin s of the common stoc%holders will decrease.
tr%2in) on t-e eFuit/ Borro2ing +un s to increase ca$ital investment 2ith the ho$e that the business 2ill be able to generate returns in e/cess o+ the interest charges.

#ourse "F #a$ital Bu geting 4nal&sis 0isk 4nal&sis in #a$ital Bu geting .ecisions

#once$tuall&G a ca$ital bu geting ecision is sim$licit& itsel+. The anal&st etermines the u$+ront cost o+ a $roRectG as 2ell as the $erio ic +uture cash +lo2s resulting +rom the $roRect. Those cash +lo2s are then use to calculate either the net $resent value A7-(B o+ the $roRect 5 using the +irmQs 2eighte 5average cost5 o+5ca$ital A=4##B as a iscount rate 5 or the internal rate o+ return AI00B +or the $roRect. I+ the 7-( is $ositiveG or i+ the I00 e/cee s the =4##G the +irm un ertakes the $roRectK other2ise it oesnQt.

The i++icult& in making $ro$er ca$ital bu geting ecisions arises as a conse<uence o+ the i++icult& in etermining the u$+ront costsG the $erio ic cash +lo2sG even the $ro$er =4##. 4ll o+ these <uantities must be estimate G an all o+ the ensuing estimates 2ill contain some egree o+ uncertaint&K the $rocess in inherentl& risk&.

In their book )un amentals o+ )inancial ManagementG 8th e itionG %outh5 =esternG 1998G authors *ugene ). Brigham an ;oel ). Houston inclu e a cha$ter entitle 0isk 4nal&sis an the O$timal #a$ital Bu get. =ith e/am$les +rom in ustr&G the& illustrate the $it+alls o+ using uncertain single5$oint estimates +or the cash +lo2s associate 2ith a $roRect. One recommen ation in the cha$ter is to mo el the uncertaint& in all o+ the <uantities being estimate an to use Monte #arlo simulation to $ro uce a $robabilit& istrubution +or the 7-( Aor the I00B o+ the $roRect. 4 itionall&G the anal&st can $ro uce sensitivit& anal&ses to etermine the most critical uncertainties in the estimation. The a itional in+ormation that these statistical techni<ues $rovi e can ai the ca$ital bu get ecision5makers an can hel$ them avoi costl& mistakes.

4s $art o+ the #)4c e/am revie2 courses that he teachesG Bill covers the area o+ risk anal&sis in ca$ital bu geting. His e/$erience in evelo$ing mathematical mo els +or Monte #arlo simulation +it naturall& into this ver& im$ortant area o+ cor$orate ecision5making. 0isk 4nal&sis in #a$ital Bu geting

Intro uction

In iscussing the ca$ital bu geting techni<uesG 2e have so +ar assume that the $ro$ose investment $roRects o not involve an& risk. This assum$tion 2as ma e sim$l& to +acilitate the un erstan ing o+ the ca$ital bu geting techni<ues. In real 2orl situationG ho2everG the +irm in general an its investment $roRects in $articular are e/$ose to i++erent o+ risk. =hat is risk> Ho2 can risk be measure an anal&ze in the investment ecisions>

7ature o+ risk

0isk e/ists because o+ the inabilit& o+ the ecision maker to make $er+ect +orecasts. )orecasts cannot be ma e 2ith $er+ection or certaint& since the +uture events on 2hich the& e$en are uncertain. 4n investment is not risk& i+G 2e can s$eci+& a uni<ue se<uence o+ cash +lo2s +or it. But 2hole trouble is that cash +lo2s cannot be +orecast accuratel&G an alternative se<uences o+ cash +lo2s can occur e$en ing on the +uture events. ThusG risk arises in investment evaluation because 2e cannot antici$ate the occurrence o+ the $ossible +uture events 2ith certaint& an conse<uentl&G cannotG make are correct $re iction about the cash +lo2 se<uence. To illustrateG let us su$$ose that a +irm is consi ering a $ro$osal to commit its +un s in a machineG 2hich 2ill hel$ to $ro uce a ne2 $ro uct. The eman +or this $ro uct ma& be ver& sensitive to the general economic con itions. It ma& be ver& high un er +avorable economic con itions an ver& lo2 un er un+avorable economic con itions. ThusG the investment 2oul be $ro+itable in the +ormer situation an un$ro+itable in the later case. ButG it is <uite i++icult to $re ict the +uture state o+ economic con itionsG uncertaint& about the cash +lo2s associate 2ith the investment erives 4 large number o+ events in+luence +orecasts. These events can be grou$e in i++erent 2a&s. Ho2everG no $articular grou$ing o+ events 2ill be use+ul +or all $ur$oses. =e ma&G +or e/am$leG consi er three broa categories o+ the events in+luencing the investment +orecasts.

,eneral economic con itions

This categor& inclu es events 2hich in+luence general level o+ business activit&. The level o+ business activit& might be a++ecte b& such events as internal an e/ternal economic an $olitical situationsG monetar& an +iscal $oliciesG social con itions etc.

In ustr& +actors

This categor& o+ events ma& a++ect all com$anies in an in ustr&. )or e/am$leG com$anies in an in ustr& 2oul be a++ecte b& the in ustrial relations in the in ustr&G b& innovationsG b& change in material cost etc.

#om$an& +actors

This categor& o+ events ma& a++ect onl& a com$an&. The change in managementG strike in the com$an&G a natural isaster such as +loo or +ire ma& a++ect irectl& a $articular com$an& 0isk 4nal&sis in #a$ital Bu geting #a$ital bu geting is use to ascertain the re<uirements o+ the long5term investments o+ a com$an&.

*/am$les o+ long5term investments are those re<uire +or re$lacement o+ e<ui$ments an machiner&G $urchase o+ ne2 e<ui$ments an machiner&G ne2 $ro uctsG an ne2 business $remises or +actor& buil ingsG as 2ell as those re<uire +or 0?. $lans.

The i++erent techni<ues use +or ca$ital bu geting inclu eF d d -ro+itabilit& in e/ 7et $resent value

d d d

Mo i+ie Internal 0ate o+ 0eturn *<uivalent annuit& Internal 0ate o+ 0eturn

Besi es these metho sG other metho s that are use inclu e 0eturn on Investment A0OIBG 4ccounting 0ate o+ 0eturn A400BG .iscounte -a&back -erio an -a&back -erio .

The i++erent t&$es o+ risks that are +ace b& entre$reneurs regar ing ca$ital bu geting are the +ollo2ingF d d d d d d d #or$orate risk International risk %tan 5alone risk #om$etitive risk Market risk -roRect s$eci+ic risk In ustr& s$eci+ic risk

The +ollo2ing metho s are use +or 0isk 4nal&sis in #a$ital Bu getingF

%ensitivit& 4nal&sisF This is also kno2n as a T2hat i+ anal&sisT. Because o+ the uncertaint& o+ the +utureG i+ an entre$reneur 2ants to kno2 about the +easibilit& o+ a $roRect in variable <uantitiesG +or e/am$le investments or sales change +rom the antici$ate valueG sensitivit& anal&sis can be a use+ul metho . This is calculate in terms o+ 7-(G or net $resent value.

%cenario 4nal&sisF In the case o+ scenario anal&sisG the +ocus is on the eviation o+ a number o+ interconnecte variables. It is i++erent +rom sensitivit& anal&sisG 2hich usuall& concentrates on the change in one $articular variable at a s$eci+ic $oint o+ time. Break *ven 4nal&sisF The Break *ven 4nal&sis allo2s a com$an& to etermine the minimum $ro uction an sales amounts +or a $roRect to avoi losing mone&. The lo2est $ossible <uantit& at 2hich no loss occurs is calle the break5even $oint. The break5even $oint can be elineate both in +inancial or accounting terms. Hillier Mo elF In $articular situationsG the antici$ate 7-( an the stan ar eviation o+ 7-( can be incurre 2ith the hel$ o+ anal&tical erivation. This 2as +irst realize b& ).%. Hillier. There are situations 2here correlation bet2een cash +lo2s is either com$lete or none/istent.

%imulation 4nal&sisF %imulation anal&sis is utilize +or +ormulating the $robabilit& anal&sis +or a criterion o+ merit 2ith the hel$ o+ ran om blen ing o+ variable values that carr& a relationshi$ 2ith the selecte criterion.

.ecision Tree 4nal&sisF The $rinci$al ste$s o+ ecision tree anal&sis are the e+inition o+ the ecision tree an the assessment o+ the alternatives.

#or$orate 0isk 4nal&sisF #or$orate risk anal&sis +ocuses on the anal&sis o+ risk that ma& in+luence the $roRect in terms o+ the entire cash +lo2 o+ the +irm. The cor$orate risk o+ a $roRect re+ers to its share o+ the total risk o+ a com$an&.

0isk ManagementF 0isk management +ocuses on +actors such as $ricing strateg&G +i/e an variable costsG se<uential investmentG insuranceG +inancial leverageG long term arrangementsG erivativesG strategic alliance an im$rovement o+ in+ormation.

%election o+ $roRect un er riskF This involves $roce ures such as $a&back $erio re<uirementG risk a Ruste iscount rateG Ru gmental evaluation an certaint& e<uivalent metho .

-ractical 0isk 4nal&sisF The techni<ues involve inclu e the 4cce$table Overall #ertaint& In e/G Margin o+ %a+et& in #ost )iguresG #onservative 0evenue *stimationG )le/ible Investment Har sticks an ;u gment on Three -oint *stimates. #ha$ter 4F 4 itional #onsi erations in #a$ital Bu geting 4nal&sis

=henever 2e anal&ze a ca$ital $roRectG 2e must consi er uni<ue +actors. 4 iscussion o+ all o+ these +actors is be&on the sco$e o+ this course. Ho2everG three common +actors to consi er areF

#om$ensating +or i++erent levels o+ risks bet2een $roRects. 0ecognizing risks that are s$eci+ic to +oreign $roRects. Making a Rustments to ca$ital bu geting anal&sis b& looking at the actual results.

4 Rusting +or 0isk =e $reviousl& learne that 2e can manage uncertaint& b& initiating ecision anal&sis an buil ing o$tions into our $roRects. =e no2 2ant to turn our attention to managing risks. It is 2orth noting that uncertaint& an risk are not the same thing. Pncertaint& is 2here &ou have no basis +or a ecision. 0isk is 2here &ou o have a basis +or a ecisionG but &ou have the $ossibilit& o+ several outcomes. The 2i er the variation o+ outcomesG the higher the risk.

In our $revious e/am$le A*/am$le !BG 2e use the cost o+ ca$ital +or iscounting cash +lo2s. Our e/am$le involve the re$lacement o+ e<ui$ment an carrie a lo2 level o+ risk since the e/$ecte outcome 2as reasonabl& certain. %u$$ose 2e have a $roRect involving a ne2 $ro uct line. =oul 2e still use our cost o+ ca$ital to iscount these cash +lo2s> The ans2er is no since this $roRect coul have a much 2i er variation in outcomes. =e can a Rust +or higher levels o+ risk b& increasing the iscount rate. 4 higher iscount rate re+lects a higher rate o+ return that 2e re<uire 2henever 2e have higher levels o+ risk.

4nother 2a& to a Rust +or risk is to un erstan the im$act o+ risk on outcomes. %ensitivit& 4nal&sis an %imulation can be use to measure ho2 changes to a

$roRect a++ect the outcome. %ensitivit& anal&sis is use to etermine the change in 7et -resent (alue given a change in a s$eci+ic variableG such as estimate $roRect revenues. %imulation allo2s us to simulate the results o+ a $roRect +or a given istribution o+ variables. Both sensitivit& anal&sis an simulation re<uire a e+inition o+ all relevant variables associate 2ith the $roRect. It shoul be note that sensitivit& anal&sis is much easier to im$lement since so$histicate com$uter mo els are usuall& re<uire +or simulation. sitema$ e to$ International -roRects #a$ital investments in other countries can involve a itional risks. =henever 2e invest in a +oreign $roRectG 2e 2ant to +ocus on the values that are a e Aor subtracte B to the -arent #om$an&. This makes us consi er all relevant risks o+ the $roRectG such as e/change rate riskG $olitical riskG h&$er5in+lationG etc. )or e/am$leG the iscounte cash +lo2s o+ the $roRect are the iscounte cash +lo2s o+ the $roRect to the +oreign subsi iar& converte to the currenc& o+ the home countr& o+ the -arent #om$an& at the current e/change rate. This +orces us to take into account e/change rate risks an its im$act to the -arent #om$an&. -ost 4nal&sis One o+ the most im$ortant ste$s in ca$ital bu geting anal&sis is to +ollo25u$ an com$are &our estimates to actual results. This $ost anal&sis or revie2 can hel$ i enti+& bias an errors 2ithin the overall $rocess. 4 +ormal tracking s&stem o+ ca$ital $roRects also kee$s ever&one honest. )or e/am$leG i+ &ou 2ere to announce to ever&one that actual results 2ill be tracke uring the li+e o+ the $roRectG &ou ma& +in that $eo$le 2ho submit estimates 2ill be more care+ul. The $ur$ose o+ $ost anal&sis an tracking is to collect in+ormation that 2ill lea to im$rovements 2ithin the ca$ital bu geting $rocess. sitema$ e to$ #ourse %ummar& The long5term investments 2e make to a& etermines the value 2e 2ill have tomorro2. There+oreG ca$ital bu geting anal&sis is critical to creating value 2ithin +inancial management. 4n the onl& certaint& 2ithin ca$ital bu geting is uncertaint&. There+oreG one o+ the biggest challenges in ca$ital bu geting is to manage uncertaint&. =e eal 2ith uncertaint& through a three5stage $rocessF

1. Buil kno2le ge through ecision anal&sis. ". 0ecognize an encourage o$tions 2ithin $roRects.

3. Invest base on economic criteria that have realistic economic assum$tions.

Once 2e have com$lete the three5stage $rocess Aas outline aboveBG 2e evaluate ca$ital $roRects using a mi/ o+ economic criteria that a heres to the $rinci$les o+ +inancial management. Three goo economic criteria are 7et -resent (alueG Mo i+ie Internal 0ate o+ 0eturnG an .iscounte -a&back.

4 itionall&G 2e nee to manage $roRect risk i++erentl& than 2e 2oul manage uncertaint&. =e have several tools to hel$ us manage risksG such as increasing the iscount rate. )inall&G 2e 2ant to im$lement $ost anal&sis an tracking o+ $roRects a+ter 2e have ma e the investment. This hel$s eliminate bias an errors in the ca$ital bu geting $rocess. %ensitivit& an %imulation 4nal&sis 4ssignment Hel$

)inance 4ssignment hel$ 55J #a$ital Bu geting 55J%ensitivit& an %imulation 4nal&sis

%ensitivit& 4nal&sis

In the evaluation o+ an investment $roRectG 2e 2ork 2ith the +orecasts o+ cash +lo2s. )orecaste cash +lo2s e$en on the e/$ecte revenue an costs. )urtherG e/$ecte revenue is a +unction o+ sales volume an unit selling $rice. %imilarl&G sales volume 2ill e$en on the market size an the +irmNs market share. #osts inclu e variable costsG 2hich e$en on sales volumeG an unit variable cost an +i/e costs. The net $resent value or the internal rate o+ return o+ a $roRect is etermine b& anal&zing the a+ter5ta/ cash +lo2s arrive at b& combining +orecasts o+ various variables. It is i++icult to arrive at an accurate an unbiase +orecast o+ each variable. The reliabilit& o+ the 7-( o+ variable un erl&ing the estimates o+ net cash +lo2s. To etermine the reliabilit& i the $roRectNs 7-( or I00G 2e can 2ork out ho2 much i++erence it males in an& o+ these +orecasts goes 2rong. =e can change each o+ the +orecastsG one at a time to at least three valuesF $essimisticG e/$ecte G an o$timistic. The 7-( o+ the $roRect is recalculate un er these i++erent changing each +orecast is calle sensitivit& anal&sis.

%ensitivit& anal&sis is a 2a& o+ anal&zing change in the $roRectNs 7-( Aor I00B +or a given change in one o+ the variables. It in icates ho2 sensitive a $roRectNs 7-( Aor I00B is to changes in $articular variables. The more sensitive the 7-(G the more critical is the variable. The +ollo2ing three ste$s are unsolve in the use or sensitivit& anal&sisF

d I enti+ication o+ all those variablesG 2hich have an in+luence on the $roRectNs 7-( Aor I00B. d .e+inition o+ the un erl&ing AmathematicalB relationshi$ bet2een the variables. d 4nal&sis o+ the im$act o+ the change in each o+ the variables on the $roRectNs 7-(.

The ecision5makerG 2hile $er+orming sensitivit& anal&sisG com$uter the $roRectNs Aor I00B +or each +orecast un er three assum$tionsF AaB $essimisticG AbB e/$ecte G an AcB o$timistic. It allo2s him to ask MN2hat i+N <uestion. )or e/am$leG 2hat Ais the 7-(B i+ volume increase or ecreases> =hat Ais the 7-(B i+ variable cost o+ +i/e cost increases or ecreases> =hat Ais the 7-(B i+ the selling $rice increases or ecreases> That Ais the 7-(B i+ the $roRect is ela&e or out$la& escalate or he <uestions can be ans2ere 2ith the hel$ o+ sensitivit& anal&sis. It e/amines the sensitivit& o+ the variables un erl&ing the com$utation o+ 7-( or I00G rather than attem$ting to <uanti+& risk. It can be a$$lie to an& variableG 2hich is an in$ut +or the a+ter5ta/ cash +lo2s.

%imulation 4nal&sis

%ensitivit& an scenario anal&ses are <uite use+ul to un erstan the uncertaint& o+ the investment $roRects. But both 4$$roaches su++er +rom certain 2eaknesses. 4s 2e have iscussesG the& o not consi er the interactions bet2een variables an alsoG the& o not re+lect on the $robabilit& o+ the changes in variables.

The Monte carol simulation or sim$le the simulation anal&sis consi ers the interactions among variables an $robabilit& o+ the change in variables. It oes not given the $robabilit& istribution o+ 7-(. The simulation anal&sis is an e/tension o+ scenario anal&sis. In simulation anal&sis a com$uter generates a ver& large number o+ scenarios accor ing to the $robabilit& istributions o+ the variables. The simulation anal&sis involves the +ollo2ing ste$sF

d )irstG &ou shoul i enti+& variables that in+luence cash in+lo2s an out+lo2s. )or e/am$leG 2hen a +irm intro uces a ne2 $ro uct in the market these variables are initial investmentG market sizeG market gro2thG market shareG $riceG variable costsG +i/e costs +i/e costsG $ro uct li+e c&cleG an terminal value. d %econ s$eci+& the +ormulas that relate variables. )or e/am$leG revenue e$en s on b& sales volume an $riceF sales volume is given b& market sizeG market share an market gro2th. %imilarl&G o$erating e/$enses e$en on $ro uctionG sales an variable an +i/e costs. d Thir G in icate the $robabilit& istribution +or each variable. %ome variables 2ill have more uncertaint& than others. )or e/am$leG it is <uite i++icult to $re ict or market gro2th 2ith con+i ence. d )ourthG evelo$ a com$uter $rogramme that ran oml& selects on e value +rom the $robabilit& istribution o+ each variable an uses these values to calculate the $roRectNs 7-(. The com$uter generates a largeK number o+ such scenariosG calculates 7-(s an stores them. The store value are $rime as a $robabilit& istribution o+ the $roRectNs 7-(s along 2ith the e/$ecte 7-( an its stan ar eviation the rick5+ree rate shoul be use as the iscount rate to com$uter the $roRectNs cash +lo2sG the iscount rate shoul re+lect onl& the time value o+ mone&.

%imulation anal&sis is a ver& use+ul techni<ue +or risk anal&sis. Pn+ortunatel&. Its $ractical use is limite because o+ a number o+ shortcomings. )irst the mo el becomes <uite com$le/ to use because the variables are interrelate 2ith each other an each variable e$en s on its value in the $recious $erio s as 2ell. I enti+&ing all $ossible relationshi$s an estimating as 2ell as e/$ensive. %econ G the mo el hel$s in generating a $robabilit& istribution o+ the $roRectNs 7-(s. But it oes not in icate 2hether or not the $roRect shoul be acce$te . Thir G simulation anal&sisG like sensitivit& or scenario anal&sisG consi ers the risk o+ an& $roRect in isolation o+ other $roRects. =e kno2 that i+ 2e consi er the $ort+olio o+ $roRectsG the uns&stematic risk can be iversi+ie . 4 risk& $roRect ma& have a negative correlation 2ith the +irmNs other $roRectsG an there+ore acce$ting the $roRect ma& re uce the overall risk o+ the +irm.

INTERNATIONA FINANCE Different types of transactions in the Forei%n $'chan%e Market

Spot and For#ard $'chan%es Spot Market The term spot e.chan e refers to the class of forei n e.chan e transaction which re/uires the immediate deli$er# or e.chan e of currencies on the spot. "n practice the settlement ta%es place within two da#s in most mar%ets. The rate of e.chan e effecti$e for the spot transaction is %nown as the spot rate and the mar%et for such transactions is %nown as the spot mar%et. For#ard Market The forward transactions is an a reement between two parties, re/uirin the deli$er# at some specified future date of a specified amount of forei n currenc# b# one of the parties, a ainst pa#ment in domestic currenc# be the other part#, at the price a reed upon in the contract. The rate of e.chan e applicable to the forward contract is called the forward e.chan e rate and the mar%et for forward transactions is %nown as the forward mar%et. The forei n e.chan e re ulations of $arious countries enerall# re ulate the forward e.chan e transactions with a $iew to curbin speculation in the forei n e.chan es mar%et. "n "ndia, for e.ample, commercial ban%s are permitted to offer forward co$er onl# with respect to enuine e.port and import transactions. 9orward e.chan e facilities, ob$iousl#, are of immense help to e.porters and importers as the# can co$er the ris%s arisin out of e.chan e rate fluctuations be enterin into an appropriate forward e.chan e contract. <ith reference to its relationship with spot rate, the forward rate ma# be at par" discount or pre,iu,) "f the forward e.chan e rate /uoted is e.act e/ui$alent to the spot rate at the time of ma%in the contract the forward e.chan e rate is said to be at par) The forward rate for a currenc#, sa# the dollar, is said to be at pre,iu, with respect to the spot rate when one dollar bu#s more units of another currenc#, sa# rupee, in the forward than in the spot rate on a per annum basis. The forward rate for a currenc#, sa# the dollar, is said to be at discount with respect to the spot rate when one dollar bu#s fewer rupees in the forward than in the spot mar%et. The discount is also usuall# e.pressed as a percenta e de$iation from the spot rate on a per annum basis. The forward e.chan e rate is determined mostl# be the demand for and suppl# of forward e.chan e. +aturall# when the demand for forward e.chan e e.ceeds its suppl#, the forward rate will be /uoted at a premium and con$ersel#, when the suppl# of forward e.chan e e.ceeds the demand for it, the rate will be /uoted at discount. <hen the suppl# is e/ui$alent to the demand for forward e.chan e, the forward rate will tend to be at par. Futures

<hile a focus contract is similar to a forward contract, there are se$eral differences between them. <hile a forward contract is tailor made for the client be his international ban%, a future contract has standardiBed features the contract siBe and maturit# dates are standardiBed. 9utures cab traded onl# on an or aniBed e.chan e and the# are traded competiti$el#. 5ar ins are not re/uired in respect of a forward contract but mar ins are re/uired of all participants in the futures mar%et an initial mar in must be deposited into a collateral account to establish a futures position. *ptions <hile the forward or futures contract protects the purchaser of the contract fro m the ad$erse e.chan e rate mo$ements, it eliminates the possibilit# of ainin a windfall profit from fa$orable e.chan e rate mo$ement. An option is a contract or financial instrument that i$es holder the ri ht, but not the obli ation, to sell or bu# a i$en /uantit# of an asset as a specified price at a specified future date. An option to bu# the underl#in asset is %nown as a call option and an option to sell the underl#in asset is %nown as a put option. 2u#in or sellin the underl#in asset $ia the option is %nown as e.ercisin the option. The stated price paid (or recei$ed) is %nown as the e.ercise or stri%in price. The bu#er of an option is %nown as the lon and the seller of an option is %nown as the writer of the option, or the short. The price for the option is %nown as premium. Types of options <ith reference to their e.ercise characteristics, there are two t#pes of options, American and ,uropean. A ,uropean option cab is e.ercised onl# at the maturit# or e.piration date of the contract, whereas an American option can be e.ercised at an# time durin the contract. S#ap operation (ommercial ban%s who conduct forward e.chan e business ma# resort to a swap operation to ad1ust their fund position. The term swap means simultaneous sale of spot currenc# for the forward purchase of the same currenc# or the purchase of spot for the forward sale of the same currenc#. The spot is swapped a ainst forward. 4perations consistin of a simultaneous sale or purchase of spot currenc# accompanies b# a purchase or sale, respecti$el# of the same currenc# for forward deli$er# are technicall# %nown as swaps or double deals as the spot currenc# is swapped a ainst forward. -rbitra%e Arbitra e is the simultaneous bu#in and sellin of forei n currencies with intention of ma%in profits from the difference between the e.chan e rate pre$ailin at the same time in different mar%ets.

)oreign e/change e/$osure

Transaction e/$osure He ging through invoice currenc&

Translation A4ccountingB e/$osure

O$eratingE*cono mic 5*/$osure

-ositive

7egati ve

4sset

O$eratin g

He ging through invoice currenc&

%electing lo2 cost $ro uctio n sites

)le/ible sourcing $olic&

.iversi+icatio n o+ the market

0 ? . e++orts )inancial an $ro uct he ging i++erentiatio n

Forei%n $'chan%e $'posure Forei%n e'chan%e risk is related to the $ariabilit# of the domestic currenc# $alues of assets, liabilities or operatin income due to unanticipated chan es in e.chan e rates, whereas forei%n e'chan%e e'posure is what is at ris%. 9orei n currenc# e.posures and the attendant ris% arise whene$er a compan# has an income or e.penditure or an asset or liabilit# in a currenc# other than that of the balance*sheet currenc#. "ndeed e.posures can arise e$en for companies with no income, e.penditure, asset or liabilit# in a currenc# different from the balance*sheet currenc#. <hen there is a condition pre$alent where the e.chan e rates become e.tremel# $olatile the e.chan e rate mo$ements destabiliBe the cash flows of a business si nificantl#. -uch destabiliBation of cash flows that affects the profitabilit# of the business is the ris% from forei n currenc# e.posures. 9lassification of $'posures 9inancial economists distin uish between three t#pes of currenc# e.posures L transaction e.posures, translation e.posures, and economic e.posures. All three affect the bottom* line of the business. /) Transaction $'posure Transaction e.posure can be defined as Xthe sensiti$it# of realiBed domestic currenc# $alues of the firm;s contractual cash flows denominated in forei n currencies to une.pected e.chan e rate chan es. Transaction e.posure is sometimes re arded as a short*term economic e.posure. Transaction e.posure arises from fi.ed*price contractin in a world where e.chan e rates are chan in randoml#. -uppose that a compan# is e.portin deutsche mar% and while costin the transaction had rec%oned on ettin sa# 6s.2A per mar%. 2# the time the e.chan e transaction materialiBes i.e. the e.port is affected and the mar% sold for rupees, the e.chan e rate mo$ed to sa# 6s.20 per mar%. The profitabilit# of the e.port transaction can be completel# wiped out b# the mo$ement in the e.chan e rate. -uch transaction e.posures arise whene$er a business has forei n currenc# denominated receipt and pa#ment. The ris% is an ad$erse mo$ement of the e.chan e rate from the time the transaction is bud eted till the time the e.posure is e.tin uished b# sale or purchase of the forei n currenc# a ainst the domestic currenc#. 9urthermore, in $iew of the fact that firms are now more fre/uentl# enterin into commercial and financial contracts denominated in forei n currencies, 1udicious mana ement of transaction e.posure has become an important function of international financial mana ement. So,e strate%y to ,ana%e transaction e'posure
He2)in) t-rou)- in.oice currenc/: =hile such +inancial he ging instruments as +or2ar contractG s2a$G +uture an o$tion contracts are 2ell kno2nG he ging through the choice o+ invoice currenc&G an o$erational techni<ueG has not receive much attention. The +irm can shi+tG share or iversi+& e/change risk b& a$$ro$riatel& choosing the currenc& o+ invoice. )irm can avoi e/change rate risk b& in.oicin) in 2o'estic currenc/G there b& shi+ting e/change rate risk on bu&er. 4s a $ractical matterG ho2everG the +irm ma& not be able to use risk shi+ting or sharing as much as it 2ishes to +or +ear

o+ losing sales to com$etitors. Onl& an e/$orter 2ith substantial market $o2er can use this a$$roach. )urtherG i+ the currencies o+ both the e/$orter an im$orter are not suitable +or settling international tra eG neither $art& can resort to risk shi+ting to eal 2ith e/change e/$osure. He2)in) .i% +e%2 %n2 +%): 4nother o$erational techni<ue the +irm can use to re uce transaction e/$osure is lea ing an lagging +oreign currenc& recei$ts an $a&ments. 6ea means to $a& or collect earl&G 2here as 6ag means to $a& or collect late. The +irm 2oul like to +e%2 so1t currenc/ recei.%,+es an +%) -%r2 currenc/ recei.%,+es to avoi the loss +rom e$reciation o+ the so+t currenc& an bene+it +rom the a$$reciation o+ the har currenc&. )or the same reasonG the +irm 2ill attem$t to +e%2 t-e -%r2 currenc/ 0%/%,+es an +%) so1t currenc/ 0%/%,+es. To the e/tent that the +irm can e++ectivel& im$lement the 6ea E6ag strateg&G the transaction e/$osure the +irm +aces can be re uce .

0) Translation $'posure (-ccountin% $'posures) Translation e.posure is defined as the li%el# increase or decrease in the parent compan#;s net worth caused b# a chan e in e.chan e rates since last translation. This arises when an asset or liabilit# is $alued at the current rate. +o e.posure arises in respect of assets!liabilities $alued at historical rate, as the# are not affected b# e.chan e rate differences. Translation e.posure is measured as the net of the forei n currenc# denominated assets and liabilities $alued at current rates of e.chan e. "f e.posed assets e.ceed the e.posed liabilities, the concern has a Epositi$e; or Elon ; or Easset; translation e.posure, and e.posure is e/ui$alent to the net $alue. "f the e.posed liabilities e.ceed the e.posed assets and results in Ene ati$e; or Eshort; or Eliabilities; translation e.posure to the e.tent of the net difference. Translation e.posure arises from the need to XtranslateY forei n currenc# assets or liabilities into the home currenc# for the purpose of finaliBin the accounts for an# i$en period. A t#pical e.ample of translation e.posure is the treatment of forei n currenc# borrowin s. (onsider that a compan# has borrowed dollars to finance the import of capital oods worth [10000. <hen the import materialiBed the e.chan e rate was sa# 6s C0 per dollar. The imported fi.ed asset was therefore capitaliBed in the boo%s of the compan# for 6s C00000. "n the ordinar# course and assumin no chan e in the e.chan e rate the compan# would ha$e pro$ided depreciation on the asset $alued at 6s C00000 for finaliBin its accounts for the #ear in which the asset was purchased. "f at the time of finaliBation of the accounts the e.chan e rate has mo$ed to sa# 6s C0 per dollar, the dollar loan has to be translated in$ol$in translation loss of 6s00000. The boo% $alue of the asset thus becomes C00000 and conse/uentl# hi her depreciation has to be pro$ided thus reducin the net profit. Thus, Translation loss or gain is measured !y the difference !et%een the value of assets and lia!ilities at the historical rate and current rate. A compan# which has a positi!e e'posure will ha$e translation ains if the current rate for the forei n currenc# is hi her than the historic rate. "n the same situation, a compan# with ne%ati!e e'posure will post translation

loss. The position will be re$ersed if the currenc# rate for forei n currenc# is lesser than its historic rate of e.chan e. The translation ain!loss is shown as a separate component of the shareholders; e/uit# in the balance*sheet. "t does not affect the current earnin s of the compan#. :) $cono,ic $'posure ,conomic e.posure can be defined as the e.tent to which the $alue of the firm would be affected b# unanticipated chan%es in e.chan e rates. An economic e.posure is more a mana erial concept than an accountin concept. A compan# can ha$e an economic e.posure to sa# Den: 6upee rates e$en if it does not ha$e an# transaction or translation e.posure in the 7apanese currenc#. This would be the case for e.ample, when the compan#;s competitors are usin 7apanese imports. "f the Den wee%ends the compan# loses its competiti$eness ($ice*$ersa is also possible). The compan#;s competitor uses the cheap imports and can ha$e competiti$e ed e o$er the compan# in terms of his cost cuttin . Therefore the compan#;s e.posed to 7apanese Den in an indirect wa#. "n simple words, economic e*posure to an e*change rate is the ris that a change in the rate affects the company-s competitive position in the mar et and hence, indirectly the !ottomline. 2roadl# spea%in , economic e.posure affects the profitabilit# o$er a lon er time span than transaction and e$en translation e.posure. &nder the "ndian e.chan e control, while translation and transaction e.posures can be hed ed, economic e.posure cannot be hed ed. $cono,ic e'posure consists of ,ainly t#o types of e'posures)
4sset e/$osure O$erating e/$osure

,.posure to currenc# ris% can be properl# measured b# the sensiti$ities of (1) the future home currenc# $alues of the firm;s assets (and liabilities) (2) the firm;s operatin cash flows to random chan es in e.chan e rates. -sset e'posure :et us discuss the case of asset e.posure. 9or con$enience, assume that dollar inflation is non random. Then, from the perspecti$e of the &.-. firm that owns an asset in 2ritain, the e.posure can be measured b# the coefficient Eb; in re ressin the dollar $alue E3; of the 2ritish asset on the dollar!pound e.chan e rate E-;. P6aDbESDe <here Ea; is the re ression constant and Ee; is the random error term with mean Bero, 3 @ -3I, where 3I is the local currenc# (pound) price of asset. "t is ob$ious from the abo$e e/uation that the re ression coefficient Eb; measures the sensiti$it# of the dollar $alue of asset (3) to the e.chan e rate (-). "f the re ression coefficient is Bero, the dollar $alue of the asset is independent of e.chan e rate mo$ement, impl#in no e.posure. 4n the basis of abo$e anal#sis, one can sa# that e.posure is the re ression coefficient. -tatisticall#, the e.posure coefficient, Eb;, is defined as follows: b 6 9o! (P"S)F Var (S) <here 9o! (P"S) is the co$ariance between the dollar $alue of the asset and the e.chan e rate, and Var (S) is the $ariance of the e.chan e rate. +e.t, we show how to appl# the e.posure measurement techni/ue usin numerical e.amples. -uppose that a &.-. firm has an asset in 2ritain whose local currenc# price is random. 9or

simplicit#, let us assume that there are three states of the world, with each state e/uall# li%el# to occur. The future local currenc# price of this 2ritish asset as well as the future e.chan e rate will be determined, dependin on the realiBed state of the world. *peratin% e'posure 4peratin e.posure can be defined as Xthe e.tent to which the firm;s operatin cash flows would be affected b# random chan es in e.chan e ratesY. 4peratin e.posure ma# affect in two different wa#s to the firm, $iB., co,petiti!e effect and con!ersion effect. Ad$erse e.chan e rate chan e increase cost of import which ma%es firm;s product costl# thus firm;s position becomes less competiti$e, which is competiti$e effect. Ad$erse e.chan e rate chan e ma# reduce $alue of recei$able to the e.portin firm which is called con$ersion effect. So,e strate%y to ,ana%e operatin% e'posure
Se+ectin) +o; cost 0ro2uction sites: =hen the omestic currenc& is strong or e/$ecte to become strongG ero ing the com$etitive $osition o+ the +irmG it can choose to locate $ro uction +acilities in a +oreign countr& 2here costs are lo2 ue to either the un ervalue currenc& or un er $rice +actors o+ $ro uction. 0ecentl&G ;a$anese car makersG inclu ing 7issan an To&otaG have been increasingl& shi+ting $ro uction to P.%. manu+acturing +acilities in or er to mitigate the negative e++ect o+ the strong &en on P.%. sales. ,erman car makers such as .aimler Benz an BM= also eci e to establish manu+acturing +acilities in the P.%. +or the same reason. 4lsoG the +irm can choose to establish an maintain $ro uction +acilities in multi$le countries to eal 2ith the e++ect o+ e/change rate changes. #onsi er 7issanG 2hich has manu+acturing +acilities in the P.%. an Me/icoG as 2ell as in ;a$an. Multi$le manu+acturing sites $rovi e 7issan 2ith great eal o+ +le/ibilit& regar ing 2here to $ro uceG given the $revailing e/change rates. =hen the &en a$$reciate substantiall& against the ollarG the Me/ican $eso e$reciate against the ollar in recent &ears. Pn er this sort o+ e/change rate evelo$mentG 7issan ma& choose to increase $ro uction in the P.%. an es$eciall& in Me/icoG in or er to serve the P.%. market. This isG in +actG ho2 7issan has reacte to the rising &en in recent &ears. Maintaining multi$le manu+acturing sitesG ho2everG ma& $revent the +irm +rom taking a vantage o+ economies o+ scaleG raising its cost o+ $ro uction. The resultant higher cost can $artiall& o++set the a vantages o+ maintaining multi$le $ro uction sites. F+e3i,+e sourcin) 0o+ic/: *ven i+ the +irm manu+acturing +acilities onl& in the omestic countr&G it can substantiall& lessen the e++ect o+ e/change rate changes b& sourcing +rom 2here in$ut costs are lo2. )acing the strong &en in recent &earsG man& ;a$anese +irms are a o$ting the same $ractice. It is 2ell kno2n that ;a$anese manu+acturersG es$eciall& in the car an consumer electronics in ustriesG e$en heavil& on $arts an interme iate $ro ucts +rom such lo2 cost countries as Thailan G Mala&siaG an #hina. )le/ible sourcing nee not be con+ine Rust to materials an $arts. )irms can also hire lo2 cost guest 2orkers +rom +oreign countries instea o+ high cost omestic 2orkers in or er to be com$etitive.

Di.ersi1ic%tion o1 t-e '%r&et: 4nother 2a& o+ ealing 2ith e/change e/$osure is to iversi+& the market +or the +irmNs $ro ucts as much as $ossible. %u$$ose that ,* is selling $o2er generators in Me/ico as 2ell as ,erman&. 0e uce sales in Me/ico ue to the ollar a$$reciation against the $eso can be com$ensate b& increase sales in ,erman& ue to ollar e$reciation against the euro. 4s a resultG ,*Ns overall cash +lo2s 2ill be much more stable than 2oul be the case i+ ,* sol onl& in one +oreign marketG either Me/ico or ,erman&. 4s long as e/change rates o not al2a&s move in the same irectionG the +irm can stabilize its o$erating cash +lo2 b& iversi+&ing its e/$ort market. RBD e11orts %n2 0ro2uct 2i11erenti%tion: Investment in 0?. activities can allo2 the +irm to maintain an strengthen its com$etitive $osition in the +ace o+ a verse e/change rate movements. %uccess+ul 0?. e++orts allo2 the +irm to cut costs an enhance $ro uctivit&. In a itionG 0?. e++orts can lea to the intro uction o+ ne2 an uni<ue $ro ucts +or 2hich com$etitors o++er no close substitutes. %ince the eman +or uni<ue $ro ucts ten to be highl& inelasticG the +irm 2oul be less e/$ose to e/change risk. 4t the same timeG the +irm can strive to create a $erce$tion among consumers that its $ro uct is in ee i++erent +rom those o++ere b& com$etitors. This hel$s +irm to $ass5through an& a verse e++ect o+ e/change rate on to the customers. Fin%nci%+ -e2)in): =hile not a substitute +or the long5termG +inancial he ging can be use to stabilize the +irmNs cash +lo2. )or e/am$leG the +irm can len or borro2 +oreign currencies as a long term basis. OrG the +irm can use currenc& +or2ar o+ o$tions contracts an roll them over i+ necessar&.

6elated posts:
1. )oreign */change 0isk ". *conomics o+ the )oreign */change Market 3. %ettlement o+ Transactions in )oreign */change Markets 4. )le/ible vEs +i/e +oreign e/change rates 5. O++icial actions to in+luence +oreign e/change rates !. Management o+ )oreign */change 0isks '. 0ole o+ )*.4I in )oreign */change 8. )oreign */change Management -olic& in In ia 9. .i++erent t&$es o+ transactions in the )oreign */change Market 11.Merchant 0ate an */change Margin in )oreign */change Markets

C%0it%+ Asset "ricin) Mo2e+ %n2 Ar,itr%)e "ricin) T-eor/ The three $ort+olios 2e looke at in To$ic " hel$e o2n the +oun ation +or man& o+ the asset $ricing mo els commonl& use in the +inancial in ustr& to a&. T2o o+ such mo els are the ca$ital asset $ricing mo el A#4-MB an the arbitrage $ricing theor& A4-TB. =e 2ill +ocus +irst on the ca$ital asset $ricing mo el +or t2o reasonsF AiB man& o+ &ou have seen the #4-M in an intro uctor& +inance courseG an AiiB the a$$roach the #4-M takes to estimate the risk o+ a $ort+olio is ver& similar to the a$$roach o+ the thir $ort+olio 2e anal&ze in To$ic ".

1. 4ssum$tions o+ the #a$ital 4sset -ricing Mo el

Be+ore 2e look at ho2 the #4-M can be use to $rice a $ort+olio Aor an investmentBG it is im$ortant +or &ou to un erstan that it is a+ter all a theoretical mo elG 2hich means that it is base on an i ealistic investment environment i++erent +rom the real 2orl . .es$ite its Lsim$listicO assum$tions about the investment environmentG the #4-M still serves as a valuable tool in un erstan ing the relationshi$ bet2een the risk an return.

The +ollo2ing are the assum$tions o+ the #4-M. Brie+l& e/$lain 2hat each assum$tion means. AaB Investors are $rice takers AbB Investors have i entical single5$erio hol ing horizons AcB Investors have access to all investments an have access to unlimite borro2ing an len ing o$$ortunities at the risk5+ree rate A B The +inancial markets are +rictionless AeB Investors are rational mean5variance o$timizer A+B Investors have homogenous e/$ectations

1. 0elationshi$ Bet2een the #4-M an the #M6

In To$ic "G 2e kno2 that 2hen &ou have access to all the i++erent investments available in the +inancial marketG the Lbest $laceO &ou can be is on the ca$ital market line A#M6B. -ort+olios that are locate on this line 2ill $rovi e &ou the best Aor o$timalB combination o+ risk an return. 4s a resultG the #M6 is a goo measure +or the relationshi$ bet2een risk an return. ;ust in case &ou +orgotG the #M6 is re$resente b& the +ollo2ing +ormulaF

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

=hat is the similarit& an i++erence bet2een the #4-M an the #M6 in measuring the relationshi$ bet2een risk an return> =e nee to +irst re5arrange the +ormula A2hich is $resente belo2B +or the #M6 be+ore 2e 2ill a ress the <uestion.

E (r p ) = rrf +

p m

[ E (r

) rrf

I+ &ou remembere 2hat &ou learne in &our "ntroductory Finance courseG no oubt &ou 2ill recognize the e<uation +or the #4-MF

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

2here is the beta o+ the $ort+olio.

.o &ou begin to see the resemblance bet2een the #M6 an the #4-M> 4ccor ing to the t2o +ormulaeG the return o+ the $ort+olio can be broken o2n into t2o com$onentsF AiB the guarantee risk5+ree rate an AiiB the com$ensation +or taking on risk. In a itionG the com$ensation is etermine b& t2o thingsF AiB a relative measurement o+ the $ort+olioNs risk an AiiB the market risk $remium 8i.e. #+rmr9,r-9.

=hat about the i++erences bet2een the #M6 an the #4-M> #an &ou tell 2hat are the t2o i++erences bet2een the #M6 an #4-M> ". G an %M6_ The #4-MG Beta Ai.e. 7o2 that 2e kno2 more about the similarities an i++erences bet2een the #M6 an the #4-MG 2e nee to go back an look at some o+ the etails relate to the #4-M. *ven though the +ormula $resente earlier +or the #4-M is +or a $ort+olioG the +ormula can easil& be mo i+ie to etermine the return o+ a single investment as +ollo2sF

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

%ince the risk5+ree rate an the market return shoul be the same +or ever& investment in the +inancial marketG the onl& thing that is i++erent +rom investment to investment is the beta o+ the investment. 4s a resultG 2e can claim that the onl& riving +orce behin the etermination o+ an investmentNs return is its beta.

=hat is the beta> It re$resents an investmentNs non5 iversi+iable risk Aan not its total riskB relative to the market risk. In other 2or sG the beta o+ an investment measures the co5movement o+ the investmentNs e/$ecte return 2ith the marketNs e/$ecte return. The +ormula o+ an investmentNs beta is as +ollo2sF

i =

im i m

2here the marketNs return im I correlation bet2een investment iNs return an i I investment iNs non5 iversi+iable risk m I market risk =e kno2 the #4-M can be easil& mo i+ie to etermine the e/$ecte return o+ either a $ort+olio or an in ivi ual investment. The onl& i++erence bet2een the t2o is the betaF beta o+ a $ort+olio an beta o+ an in ivi ual investment. =hat is the relationshi$ bet2een the t2o> The beta o+ a $ort+olio is sim$l& the 2eighte average o+ the betas o+ the investments inclu e in the $ort+olio. The +ormula +or the beta o+ a $ort+olio is as +ollo2sF

p = %i i

;ust as in the case 2ith the ca$ital allocation lineG 2e can also re$resent the #4-M in a gra$hical manner. The straight line that re$resents the relationshi$ bet2een risk an return Aaccor ing to the #4-MB is kno2n as the securit& market line A%M6B.

,(ri)

-5:

,(rm) rrf

1.0

The securit& market line 2ill hel$ &ou etermine i+ an investment is correctl& $rice. In other 2or sG hel$ &ou etermine i+ the investment is o++ering a return that is a$$ro$riate +or its level o+ risk Aas measure b& the betaB. I+ an investmentNs return +alls on the %M6G the investment is consi ere to be correctl& $rice because the e/$ecte return o+ the investment matches the one accor ing to the #4-M Abase on +or its betaB. Ho2everG i+ the e/$ecte return o+ the investment i++ers +rom the one as L$re icte O b& the #4-MG the investment is consi ere to be either un er$rice or over$rice . The i++erence bet2een the investmentNs actual e/$ecte return an its +air return Aas ictate b& the #4-MB is kno2n as the investmentNs al$ha Ai.e. B.

6etNs anal&ze the t2o investments 4 an B as e$icte in the gra$h above. Base on &our anal&sisG 2hat can &ou sa& about the t2o investments> AaB Investment 4 AbB Investment B *stimating the Beta o+ an Investment Psing the In e/ Mo el %ince the riving +orce behin the #4-M in etermining the return o+ an investment is its betaG it is im$ortant that &ou kno2 the $rocess commonl& a o$te to estimate the beta o+ an investment. Be+ore 2e can $rocee 2ith the iscussion on ho2 to estimate betaG &ou nee to +irst un erstan that 2e cannot

im$lement the #4-M in the real 2orl as it is because o+ t2o main issues. )irstG the #4-M assumes that the market $ort+olio A2hich inclu es all investments in the +inancial marketB is available to all investors. %econ G it +ocuses on the e/$ecte return o+ an investment.

In2e3 'o2e+
To a$$l& the #4-M in the real 2orl G 2e nee a resses the above t2o issues as +ollo2sF to use the index modelG 2hich

AaB The in e/ mo el uses a $ro/& such as a market in e/ Ae.g. %?- 511B to re$resents a more relevant market $ort+olio Aan the market riskB. AbB The in e/ mo el uses realize returns Arather than e/$ecte 2hich are not easil& observableB. returnsG

I+ 2e are to estimate the beta o+ an investment using #4-MG 2e 2ill nee to establish the +ollo2ing regression mo elG 2hich is base on the realize e/cess returns o+ the investment in relation to the realize e/cess returns o+ the marketF
E (ri ) rrf = i + i T E (rm ) rrf U

Ho2everG since 2e are using the in e/ mo el Ai.e. using realize regression mo el 2ill look as +ollo2sF
ri rrf = i + i Trm rrf U

returnsBG the

To estimate the beta o+ an investmentG 2e nee +irst to etermine the hol ing $erio returns o+ the investment an the chosen market in e/. Once 2e have i enti+ie the $ro/& +or the risk5+ree rateG 2e can etermine the e/cess returns o+ the investment an the e/cess returns o+ the market in e/. I+ &ou $lot the e/cess returns o+ the investment an the market in e/ as +ollo2sG &ou 2ill have a ver& goo i ea 2hether the beta 2ill be $ositive or negative.

Base on the gra$h aboveG can &ou tell i+ the beta 2ill be $ositive or negative> One thing that is crucial to remember is that because o+ the setu$ o+ the regression mo elG the e/cess returns o+ the investment have to be on the &5a/is an the e/cess returns o+ the market in e/ have to be on the /5a/is. Once &ou have the e/cess returns o+ the investment an the market in e/ $lotte as aboveG &ou 2ant to +in a straight line that Lbest +itO the ata as $resente in the gra$h belo2F

=hat oes it mean to have a straight line that Lbest +itO the ata $oints> The straight lineG 2hich Lbest +itO the ata $ointsG is kno2n as the securit& characteristic line A%#6B. Once againG a straight line is etermine b& its &5 interce$t an its slo$e. Ho2 o &ou etermine the &5interce$t an the slo$e o+ the %#6> Hou can o so b& $er+orming a regression anal&sis using an& statistical $ackages or Microso+t */cel.

-roblems o+ the #a$ital 4sset -ricing Mo el 4lthough the #a$ital 4sset -ricing Mo el is the most $o$ular tool among man& o+ the investors an investment anal&stsG it oes have its $roblems. =e kno2 the #4-M uses 3 variables to etermine the e/$ecte return o+ an assetF the risk5 +ree rateG the e/$ecte return o+ the market $ort+olioG an the beta o+ the asset. 4n error in the estimation o+ an& o+ these variables might lea to a 2rong recommen ation or investment ecision. The +ollo2ing are some o+ the sources o+ error in estimating the 3 variables +or the #4-MF AaB 4lthough a 15&ear T5bill is commonl& use as a re$resentation +or a risk5 +ree assetG it might not be the most a$$ro$riate choice in certain situations. %ome anal&sts have suggeste that a 315&ear T5bon might be a more a$$ro$riate choice because its time horizon closel& matches the investment horizons o+ most investors. In this caseG the choice o+ the re$resentation o+ a risk5+ree asset might lea to a 2rong investment ecision because the return o+ a 15&ear T5bill can i++er signi+icantl& +rom the return o+ a 315&ear T5bon . AbB =e kno2 there are man& re$resentations Aor $ro/iesB +or the marketG 2hich means that there are man& choices to re$resent the market $ort+olioF the .o2 ;ones In ustrial 4verageG the %?- 511 in e/G the 7H%* #om$osite in e/G etc. *ach o+ these choices 2ill $rovi e a i++erent estimate +or the market return. ;ust as in the case o+ the risk5+ree assetG

the choice o+ the re$resentation +or the market $ort+olio 2ill a++ect an investorNs investment ecisions.

AcB It has been $roven em$iricall& that the beta o+ an investment is unstable over time. In other 2or sG the value o+ the beta o+ an investment changes over time. This coul be ue to changes in the com$an&Ns managementG its +inancing $olic&G etc. In a itionG the estimates +or the beta o+ a $articular investment var& among anal&sts an $ublications +or several reasonsF

AiB The $ro/& +or the market can be i++erent among anal&sts an $ublications. )or e/am$leG one anal&st might be using the (alue 6ine in e/ A2hich contains 1'11 stocksBG 2hile another anal&st might be using the %?- 511 in e/. AiiB The time $erio use in estimating the beta o+ a stock can be i++erent among anal&sts an $ublications. )or e/am$leG the beta o+ an investment estimate using 5 &ears o+ return 2ill i++er +rom the one estimate using 11 &ears o+ return. AiiiBThe intervals o+ the measurement o+ the returns 2ill also a++ect the estimates o+ the betas. )or e/am$leG a beta estimate 2ith 2eekl& returns 2ill i++er +rom the one estimate 2ith monthl& returns.

#a$ital 4sset -ricing Mo el an 4rbitrage Theor& The maRor criticism o+ the #4-M is that it uses onl& a single +actor in etermining the return o+ a $ort+olioG namel& the beta o+ the $ort+olio. In other 2or sG the non5 iversi+iable risk o+ the $ort+olio Ain relation to the market riskB is the sole eterminant o+ its return. 7o other +actors 2ill have an& e++ect on the $ort+olioNs return. To a ress this criticism o+ the #4-MG a ne2 mo el has been evelo$e base on the arbitrage $ricing theor& A4-TB. %imilar to the #4-MG the 4-T assumes that there is a relationshi$ bet2een the risk an return o+ a $ort+olio. Ho2everG com$are to the #4-MG the 4-T has +e2er assum$tions. The +ollo2ing assum$tions are re<uire +or the #4-M but not +or the 4-TF AaB 4 single5$erio investment horizon AbB Borro2ing an len ing at the risk5+ree rate

AcB Investors are mean5variance o$timizer

The 4-T is base on the conce$t o+ arbitrage Aor la2 o+ one $riceBG 2hich states that an& t2o i entical investments cannot be sol at a i++erent $rice. In other 2or sG the theor& states that market +orces 2ill a Rust to eliminate an& arbitrage o$$ortunitiesG 2here a zero investment $ort+olio can be create to &iel a risk5 +ree $ro+it.

The ke& thing &ou nee to un erstan is thatG unlike the #4-MG the 4-T oes not assume that the market risk is the onl& +actor that in+luences the return o+ a $ort+olio. The 4-T recognizes that several other +actors Aor risksB can in+luence the return o+ a $ort+olio. The 4-T $reserves the linear relationshi$ bet2een risk an return o+ the #4-M but aban ons the single measure o+ risk b& the beta o+ the $ort+olio. The 4-T mo el is a multi$le +actor mo elG 2hich uses +actors such as the in+lation rateG the gro2th rate o+ the econom&G the slo$e o+ the &iel curveG etc. in a ition to the beta o+ the $ort+olio in etermining the return o+ the $ort+olio. Uee$ in min that Rust as in the case 2ith the #4-MG the 4-T can also be mo i+ie to etermine the return o+ an in ivi ual investment. The +ormula o+ the 4-T can be $resente as +ollo2sF

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

2here 1G "G \G n re$resent the investmentNs return.

i++erent +actors that have im$act over an

The $roblem 2ith the 4-T is that the +actors are not 2ell5s$eci+ie e/5ante. %ome research ha been con ucte to etermine the a$$ro$riate +actors that shoul be inclu e in the mo el. Ho2everG there is no consensus on 2hat the +actors shoul be. One stu & suggeste that the +actors that shoul be inclu e are changes in e/$ecte in+lationG unantici$ate changes in in+lationG unantici$ate changes in in ustrial $ro uctionG unantici$ate changes in the e+ault risk5 $remiumG an unantici$ate changes in the term structure o+ interest rates. On the other han G another stu & suggeste that the +actors shoul be e+ault riskG the term structure o+ interest ratesG in+lation or e+lationG the long5run e/$ecte gro2th rate o+ $ro+its +or the econom&G an resi ual market risk.

=hat oes this all means to an investor like &ou> %houl &ou use the #4-M or the 4-T> The ke& thing &ou nee to remember is that neither o+ the theories ominates the other one. The 4-T is more general because it oes not re<uire as man& assum$tions as the #4-M. Ho2everG the #4-M is more general because it a$$lies to all in ivi ual investments 2ithout reservation A2hereas the 4-T 2orks better 2ith 2ell5 iversi+ie $ort+olioB.

-rbitra%e pricin% theory

-rbitra%e pricin% theory (-PT), in 9inance, is a eneral theor# of asset pricin , that has become influential in the pricin of shares. A3T holds that the e.pected return of a financial asset can be modeled as a linear function of $arious macro*economic factors or theoretical mar%et indices, where sensiti$it# to chan es in each factor is represented b# a factor*specific beta coefficient. The model*deri$ed rate of return will then be used to price the asset correctl# * the asset price should e/ual the e.pected end of period price discounted at the rate implied b# model. "f the price di$er es, arbitra e should brin it bac% into line. The theor# was initiated b# the economist -tephen 6oss in 1)F6.

The -PT ,odel

"f A3T holds, then a ris%# asset can be described as satisf#in the followin relation:

where

E(r4) is the ris%# assetJs e.pected return, $P is the ris% premium of the factor, rf is the ris%*free rate, ' is the macroeconomic factor, !4 is the sensiti$it# of the asset to factor , also called factor loadin , and `4 is the ris%# assetJs idios#ncratic random shoc% with mean Bero.

That is, the uncertain return of an asset 4 is a linear relationship amon n factors. Additionall#, e$er# factor is also considered to be a random $ariable with mean Bero. +ote that there are some assumptions and re/uirements that ha$e to be fulfilled for the latter to be correct: There must be perfect competition in the mar%et, and the total number of factors ma# ne$er surpass the total number of assets (in order to a$oid the problem of matri. sin ularit#),

-rbitra%e and the -PT

Arbitra e is the practice of ta%in ad$anta e of a state of imbalance between two (or possibl# more) mar%ets and thereb# ma%in a ris% free profitK see 6ational pricin .

-rbitra%e in e'pectations
The A3T describes the mechanism whereb# arbitra e b# in$estors will brin an asset which is mispriced, accordin to the A3T model, bac% into line with its e*pected price. +ote that under true arbitra e, the in$estor loc%s*in a guaranteed pa#off, whereas under A3T arbitra e as described below, the in$estor loc%s*in a positi$e e*pected pa#off. The A3T thus assumes Narbitra e in e.pectationsN * i.e. that arbitra e b# in$estors will brin asset prices bac% into line with the returns e.pected b# the model portfolio theor#.

-rbitra%e ,echanics
"n the A3T conte.t, arbitra e consists of tradin in two assets L with at least one bein mispriced. The arbitra eur sells the asset which is relati$el# too e.pensi$e and uses the proceeds to bu# one which is relati$el# too cheap. &nder the A3T, an asset is mispriced if its current price di$er es from the price predicted b# the model. The asset price toda# should e/ual the sum of all future cash flows discounted at the A3T rate, where the e.pected return of the asset is a linear function of $arious factors, and sensiti$it# to chan es in each factor is represented b# a factor*specific beta coefficient. A correctl# priced asset here ma# be in fact a synthetic asset * a portfolio consistin of other correctl# priced assets. This portfolio has the same e.posure to each of the macroeconomic factors as the mispriced asset. The arbitra eur creates the portfolio b# identif#in . correctl# priced assets (one per factor plus one) and then wei htin the assets such that portfolio beta per factor is the same as for the mispriced asset. <hen the in$estor is lon the asset and short the portfolio (or $ice $ersa) he has created a position which has a positi$e e.pected return (the difference between asset return and portfolio return) and which has a net*Bero e.posure to an# macroeconomic factor and is therefore ris% free (other than for firm specific ris%). The arbitra eur is thus in a position to ma%e a ris% free profit: <here toda#Js price is too low: The implication is that at the end of the period the portfolio would ha$e appreciated at the rate implied b# the A3T, whereas the mispriced asset would ha$e appreciated at more than this rate. The arbitra eur could therefore: Toda#: 1 short sell the portfolio 2 bu# the mispriced*asset with the proceeds. At the end of the period: 1 sell the mispriced asset 2 use the proceeds to bu# bac% the portfolio C poc%et the difference. <here toda#Js price is too hi h: The implication is that at the end of the period the portfolio would ha$e appreciated at the rate implied b# the A3T, whereas the mispriced asset would ha$e appreciated at less than this rate. The arbitra eur could therefore: Toda#: 1 short sell the mispriced*asset

2 bu# the portfolio with the proceeds. At the end of the period: 1 sell the portfolio 2 use the proceeds to bu# bac% the mispriced*asset C poc%et the difference.

2elationship #ith the capital asset pricin% ,odel

The A3T alon with the capital asset pricin model ((A35) is one of two influential theories on asset pricin . The A3T differs from the (A35 in that it is less restricti$e in its assumptions. "t allows for an e.planator# (as opposed to statistical) model of asset returns. "t assumes that each in$estor will hold a uni/ue portfolio with its own particular arra# of betas, as opposed to the identical Nmar%et portfolioN. "n some wa#s, the (A35 can be considered a Nspecial caseN of the A3T in that the securities mar%et line represents a sin le*factor model of the asset price, where 2eta is e.posed to chan es in $alue of the 5ar%et. Additionall#, the A3T can be seen as a Nsuppl# sideN model, since its beta coefficients reflect the sensiti$it# of the underl#in asset to economic factors. Thus, factor shoc%s would cause structural chan es in the assetJs e.pected return, or in the case of stoc%s, in the firmJs profitabilit#. 4n the other side, the capital asset pricin model is considered a Ndemand sideN model. "ts results, althou h similar to those in the A3T, arise from a ma.imiBation problem of each in$estorJs utilit# function, and from the resultin mar%et e/uilibrium (in$estors are considered to be the NconsumersN of the assets).

@sin% the -PT

Identifyin% the factors
As with the (A35, the factor*specific 2etas are found $ia a linear re ression of historical securit# returns on the factor in /uestion. &nli%e the (A35, the A3T, howe$er, does not itself re$eal the identit# of its priced factors * the number and nature of these factors is li%el# to chan e o$er time and between economies. As a result, this issue is essentiall# empirical in nature. -e$eral a priori uidelines as to the characteristics re/uired of potential factors are, howe$er, su ested:
1. their impact on asset prices manifests in their une*pected mo$ements ". the# should represent undiversifia!le influences (these are, clearl#, more

li%el# to be macroeconomic rather than firm*specific in nature) C. timel# and accurate information on these $ariables is re/uired A. the relationship should be theoreticall# 1ustifiable on economic rounds (hen, 6oll and 6oss identified the followin macro*economic factors as si nificant in e.plainin securit# returns: surprises in inflationK surprises in '+3 as indicted b# an industrial production inde.K surprises in in$estor confidence due to chan es in default premium in corporate bondsK surprise shifts in the #ield cur$e.

As a practical matter, indices or spot or futures mar%et prices ma# be used in place of macro* economic factors, which are reported at low fre/uenc# (e. . monthl#) and often with si nificant estimation errors. 5ar%et indices are sometimes deri$ed b# means of factor anal#sis. 5ore direct NindicesN that mi ht be used are: short term interest ratesK the difference in lon *term and short term interest ratesK a di$ersified stoc% inde. such as the -=3 000 or +D-, (omposite "nde.K oil prices old or other precious metal prices (urrenc# e.chan e rates

4-%t is C%0it%+ Asset "ricin) Mo2e+? Discuss its %ssu'0tions #a$ital asset $ricing mo el is a mo el that escribes the relationshi$Etra e5o++ bet2een risk an e/$ecte Ere<uire return. It e/$lains the behavior o+ securit& $rices an $rovi es a mechanism to assess the im$act o+ a $ro$ose securit& investment on investorNs overall $ort+olio risk an return. The #4-M $rovi es a +rame2ork +or basic risk5return tra e5o++s in $ort+olio management. It enables ra2ing certain im$lications about risk an the size o+ risk $remium necessar& to com$ensate +or bearing risk. 4ssum$tionsF the basic assum$tions o+ #4-M are relate to AiB The e++icienc& o+ the marketsF In an e++icient ca$ital marketG investors are 2ell in+orme G transaction costs are lo2G there are negligible restrictions on investmentG no investment is large enough to in+luence the market $rice o+ a share an investors are in general agreement about the likel& $er+ormance o+ in ivi ual securities an their e/$ectations are base on a one &ear common o2nershi$ Ahol ingB $erio . Investor $re+erencesF Investors are assume to $ro$er to invest in securities 2ith the highest return +or a given level o+ risk or the lo2est risk +or a given level o+ returnG return an risk being measure in terms o+ e/$ecte value an stan ar eviation relativel&.

AiiB

Net o0er%tin) inco'e %00ro%c- to C%0it%+ Structure The secon a$$roach as $ro$oun e b& .avi .uran the net o$erating income a$$roach e/amines the e++ects o+ changes in ca$ital structure in terms o+ net o$erating income. In the net income a$$roach iscusse above net income available to sharehol ers is obtaine b& e ucting interest on ebentures +orm net o$erating income. Then overall value o+ the +irm is calculate through ca$italization rate o+ e<uities obtaine on the basis o+ net o$erating incomeG it is calle net

income a$$roach. In the secon a$$roachG on the other han overall value o+ the +irm is assesse on the basis o+ net o$erating income not on the basis o+ net income. Hence this secon a$$roach is kno2n as net o$erating income a$$roach.

The 7OI a$$roach im$lies that AiB 2hatever ma& be the change in ca$ital structure the overall value o+ the +irm is not a++ecte . Thus the overall value o+ the +irm is in e$en ent o+ the egree o+ leverage in ca$ital structure. AiiB %imilarl& the overall cost o+ ca$ital is not a++ecte b& an& change in the egree o+ leverage in ca$ital structure. The overall cost o+ ca$ital is in e$en ent o+ leverage.

I+ the cost o+ ebt is less than that o+ e<uit& ca$ital the overall cost o+ ca$ital must ecrease 2ith the increase in ebts 2hereas it is assume un er this metho that overall cost o+ ca$ital is una++ecte an hence it remains constant irres$ective o+ the change in the ratio o+ ebts to e<uit& ca$ital. Ho2 can this assum$tion be Rusti+ie > The a vocates o+ this metho are o+ the o$inion that the egree o+ risk o+ business increases 2ith the increase in the amount o+ ebts. #onse<uentl& the rate o+ e<uit& over investment in e<uit& shares thus on the one han cost o+ ca$ital ecreases 2ith the increase in the volume o+ ebtsK on the other han cost o+ e<uit& ca$ital increases to the same e/tent. Hence the bene+it o+ leverage is 2i$e out an overall cost o+ ca$ital remains at the same level as be+ore. 6et us illustrate this $oint.

I+ +ollo2s that 2ith the increase in ebts rate o+ e<uit& ca$italization also increases an conse<uentl& the overall cost o+ ca$ital remains constantK it oes not ecline.

To $ut the same in other 2or s there are t2o $arts o+ the cost o+ ca$ital. One is the e/$licit cost 2hich is e/$resse in terms o+ interest charges on ebentures. The other is im$licit cost 2hich re+ers to the increase in the rate o+ e<uit& ca$italization resulting +rom the increase in risk o+ business ue to higher level o+ ebts.

O$timum ca$ital structure

This a$$roach suggests that 2hatever ma& be the egree o+ leverage the market value o+ the +irm remains constant. In s$ite o+ the change in the ratio o+ ebts to e<uit& the market value o+ its e<uit& shares remains constant. This means there oes not e/ist a o$timum ca$ital structure. *ver& ca$ital structure is o$timum accor ing to net o$erating income a$$roach. 4or&in) c%0it%+ '%n%)e'ent =orking ca$ital management involves the relationshi$ bet2een a +irmQs short5 term assets an its short5term liabilities. The goal o+ 2orking ca$ital management is to ensure that a +irm is able to continue its o$erations an that it has su++icient abilit& to satis+& both maturing short5term ebt an u$coming o$erational e/$enses. The management o+ 2orking ca$ital involves managing inventoriesG accounts receivable an $a&ableG an cash. 4-/ Fir's Ho+2 C%sThe +inance $ro+ession recognizes the three $rimar& reasons o++ere b& economist ;ohn Ma&nar Ue&nes to e/$lain 2h& +irms hol cash. The three reasons are +or the $ur$ose o+ s$eculationG +or the $ur$ose o+ $recautionG an +or the $ur$ose o+ making transactions. 4ll three o+ these reasons stem +rom the nee +or com$anies to $ossess li<ui it&. %$eculation *conomist Ue&nes escribe this reason +or hol ing cash as creating the abilit& +or a +irm to take a vantage o+ s$ecial o$$ortunities that i+ acte u$on <uickl& 2ill +avor the +irm. 4n e/am$le o+ this 2oul be $urchasing e/tra inventor& at a iscount that is greater than the carr&ing costs o+ hol ing the inventor&. -recaution Hol ing cash as a $recaution serves as an emergenc& +un +or a +irm. I+ e/$ecte cash in+lo2s are not receive as e/$ecte cash hel on a $recautionar& basis coul be use to satis+& short5term obligations that the cash in+lo2 ma& have been bench marke +or. Transaction )irms are in e/istence to create $ro ucts or $rovi e services. The $rovi ing o+ services an creating o+ $ro ucts results in the nee +or cash in+lo2s an out+lo2s. )irms hol cash in or er to satis+& the cash in+lo2 an cash out+lo2 nee s that the& have. F+o%t

)loat is e+ine as the i++erence bet2een the book balance an the bank balance o+ an account. )or e/am$leG assume that &ou go to the bank an o$en a checking account 2ith _511. Hou receive no interest on the _511 an $a& no +ee to have the account. 7o2 assume that &ou receive &our 2ater bill in the mail an that it is +or _111. Hou 2rite a check +or _111 an mail it to the 2ater com$an&. 4t the time &ou 2rite the _111 check &ou also recor the $a&ment in &our bank register. Hour bank register re+lects the book value o+ the checking account. The check 2ill literall& be Tin the mailT +or a +e2 a&s be+ore it is receive b& the 2ater com$an& an ma& go several more a&s be+ore the 2ater com$an& cashes it. The time bet2een the moment &ou 2rite the check an the time the bank cashes the check there is a i++erence in &our book balance an the balance the bank lists +or &our checking account. That i++erence is +loat. This +loat can be manage . I+ &ou kno2 that the bank 2ill not learn about &our check +or +ive a&sG &ou coul take the _111 an invest it in a savings account at the bank +or the +ive a&s an then $lace it back into &our checking account TRust in timeT to cover the _111 check. Bo ok Bal an ce _5 11 _4 11 _4 11

Time

Bank Balance

Time 1 Amake e$ositB Time 1 A2rite _111 checkB Time " Abank receives checkB

_511 _511 _411

)loat is calculate b& subtracting the book balance +rom the bank balance. )loat at Time 1F _511 5 _511 I _1

)loat at Time 1F _511 5 _411 I _111 )loat at Time "F _411 5 _411 I _1

4%/s to M%n%)e C%s-

)irms can manage cash in virtuall& all areas o+ o$erations that involve the use o+ cash. The goal is to receive cash as soon as $ossible 2hile at the same time 2aiting to $a& out cash as long as $ossible. Belo2 are several e/am$les o+ ho2 +irms are able to o this. -olic& )or #ash Being Hel Here a +irm alrea & is hol ing the cash so the goal is to ma/imize the bene+its +rom hol ing it an 2ait to $a& out the cash being hel until the last $ossible moment. -reviousl& there 2as a iscussion on )loat 2hich inclu es an e/am$le base on a checking account. That e/am$le is e/$an e here.

4ssume that rather than investing _511 in a checking account that oes not $a& an& interestG &ou invest that _511 in li<ui investments. )urther assume that the bank believes &ou to be a lo2 cre it risk an allo2s &ou to maintain a balance o+ _1 in &our checking account.

This allo2s &ou to 2rite a _111 check to the 2ater com$an& an then trans+er +un s +rom &our investment to the checking account in a TRust in timeT A;ITB +ashion. B& em$lo&ing this ;IT s&stem &ou are able to ra2 interest on the entire _511 u$ until &ou nee the _111 to $a& the 2ater com$an&. )irms o+ten have $olicies similar to this one to allo2 them to ma/imize i le cash.

%ales The goal +or cash management here is to shorten the amount o+ time be+ore the cash is receive . )irms that make sales on cre it are able to ecrease the amount o+ time that their customers 2ait until the& $a& the +irm b& o++ering iscounts.

)or e/am$leG cre it sales are o+ten ma e 2ith terms such as 3E11 net !1. The +irst $art o+ the sales term T3E11T means that i+ the customer $a&s +or the sale 2ithin 11 a&s the& 2ill receive a 3D iscount on the sale. The remain er o+ the sales termG Tnet !1GT means that the bill is ue 2ithin !1 a&s. B& o++ering an in ucementG the 3D iscount in this caseG +irms are able to cause their customers to $a& o++ their bills earl&. This results in the +irm receiving the cash earlier. Inventor& The goal here is to $ut o++ the $a&ment o+ cash +or as long as $ossible an to manage the cash being hel . B& using a ;IT inventor& s&stemG a +irm is able to avoi $a&ing +or the inventor& until it is nee e 2hile also avoi ing carr&ing costs on the inventor&. ;IT is a s&stem 2here ra2 materials are $urchase an receive Rust in timeG as the& are nee e in the $ro uction lines o+ a +irm.

>i,itations *f 2atio -nalysis

4lthough ratio anal&sis is ver& im$ortant tool to Ru ge the com$an&Qs $er+ormance G +ollo2ing are the limitations o+ it.

1. 0atios are tools o+ <uantitative anal&sisG 2hich ignore <ualitative $oints o+ vie2.

". 0atios are generall& istorte b& in+lation.

3. 0atios give +alse resultG i+ the& are calculate +rom incorrect accounting ata.

4. 0atios are calculate on the basis o+ $ast ata. There+oreG the& o not $rovi e com$lete in+ormation +or +uture +orecasting.

5. 0atios ma& be mislea ingG i+ the& are base on +alse or 2in o25 resse accounting in+ormation.

-d!anta%es of Financial State,ent -nalysis

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

specific company. .econdly! regulatory authorities li e International )ccounting .tandards Board can ensure whether the company is following accounting standards or not. Thirdly! financial statements analysis can help the government agencies to analy-e the ta%ation due to the company. /oreover! company can analy-e its own performance over the period of time through financial statements analysis.

i'it%tions o1 Fin%nci%+ St%te'ent An%+/sis: A+t-ou)- 1in%nci%+ st%te'ent %n%+/sis is -i)-+/ use1u+ too+< it -%s t;o +i'it%tions8 T-ese t;o +i'it%tions in.o+.e t-e co'0%r%,i+it/ o1 1in%nci%+ 2%t% ,et;een co'0%nies %n2 t-e nee2 to +oo& ,e/on2 r%tios8 Co'0%rison o1 Fin%nci%+ D%t%: Co'0%rison o1 one co'0%n/ ;it- %not-er c%n 0ro.i2e .%+u%,+e c+ues %,out t-e 1in%nci%+ -e%+t- o1 %n or)%ni*%tion8 Un1ortun%te+/< 2i11erences in %ccountin) 'et-o2s ,et;een co'0%nies so'eti'es '%&e it 2i11icu+t to co'0%re t-e co'0%niesI 1in%nci%+ 2%t%8 For e3%'0+e i1 one 1ir' .%+ues its in.entories ,/ IFO 'et-o2 %n2 %not-er 1ir' ,/ t-e %.er%)e cost 'et-o2< t-en 2irect co'0%rison o1 1in%nci%+ 2%t% suc%s in.entor/ .%+u%tions %n2 cost o1 )oo2s so+2 ,et;een t-e t;o 1ir's '%/ ,e 'is+e%2in)8 So'eti'es enou)- 2%t% %re 0resente2 in 1oot notes to t-e 1in%nci%+ st%te'ents to rest%te 2%t% to % co'0%r%,+e ,%sis8 Ot-er;ise< t-e %n%+/st s-ou+2 &ee0 in 'in2 t-e +%c& o1 co'0%r%,i+it/ o1 t-e 2%t% ,e1ore 2r%;in) %n/ 2e1inite conc+usion8 Ne.ert-e+ess< e.en ;it- t-is +i'it%tion in 'in2< co'0%risons o1 &e/ r%tios ;it- ot-er co'0%nies %n2 ;it- in2ustr/ %.er%)e o1ten su))est %.enues 1or 1urt-er in.esti)%tion8 T-e Nee2 to oo& (e/on2 R%tios: An ine30erience2 %n%+/st '%/ %ssu'e t-%t r%tios %re su11icient in t-e'se+.es %s % ,%sis 1or 5u2)'ent %,out t-e 1uture8 Not-in) cou+2 ,e 1urt-er 1ro' t-e trut-8 Conc+usions ,%se2 on r%tios %n%+/sis 'ust ,e re)%r2e2 %s tent%ti.e8 R%tios s-ou+2 not ,e .ie;e2 %s %n en2< ,ut r%t-er t-e/ s-ou+2 ,e .ie;e2 %s st%rtin) 0oint< %s in2ic%tors o1 ;-%t to 0ursue in )re%ter 2e0t-8 t-e/ r%ise '%n/ Fuestions< ,ut t-e/ r%re+/ %ns;er %n/ Fuestion ,/ t-e'se+.es8 In %22ition to r%tios< ot-er sources o1 2%t% s-ou+2 ,e %n%+/*e2 in or2er to '%&e 5u2)'ent %,out t-e 1uture o1 %n or)%ni*%tion8 T-e %n%+/st s-ou+2 +oo&< 1or e3%'0+e< %t in2ustr/ tren2s< tec-no+o)ic%+ c-%n)es< c-%n)es in consu'er t%stes< c-%n)es in ,ro%2 econo'ic 1%ctors< %n2 c-%n)es ;it-in t-e 1ir' itse+18 A recent c-%n)e in % &e/ '%n%)e'ent 0osition< 1or e3%'0+e< 'i)-t 0ro.i2e % ,%sis 1or o0ti'i*%tion %,out t-e

1uture< e.en t-ou)- t-e 0%st 0er1or'%nce o1 t-e 1ir' 6%s s-o;n ,/ its r%tios7 '%/ -%.e ,een 'e2iocre8 Fin%nci%+ St%te'ent An%+/sis i'it%tions

M%n/ t-in)s c%n i'0%ct t-e c%+cu+%tion o1 r%tios %n2 '%&e co'0%risons 2i11icu+t8 T-e +i'it%tions inc+u2e:

T-e use o1 esti'%tes in %++oc%tin) costs to e%c- 0erio28 T-e r%tios ;i++ ,e %s %ccur%te %s t-e esti'%tes8

T-e cost 0rinci0+e is use2 to 0re0%re 1in%nci%+ st%te'ents8 Fin%nci%+ 2%t% is not %25uste2 1or 0rice c-%n)es or in1+%tionJ2e1+%tion8

Co'0%nies -%.e % c-oice o1 %ccountin) 'et-o2s 61or e3%'0+e< in.entor/ IFO .s FIFO %n2 2e0reci%tion 'et-o2s78 T-ese 2i11erences i'0%ct r%tios %n2 '%&e it 2i11icu+t to co'0%re co'0%nies usin) 2i11erent 'et-o2s8

Co'0%nies '%/ -%.e 2i11erent 1isc%+ /e%r en2s '%&in) co'0%rison 2i11icu+t i1 t-e in2ustr/ is c/c+ic%+8

Di.ersi1ie2 co'0%nies %re 2i11icu+t to c+%ssi1/ 1or co'0%rison 0ur0oses8

Fin%nci%+ st%te'ent %n%+/sis 2oes not 0ro.i2e %ns;ers to %++ t-e usersI Fuestions8 In 1%ct< it usu%++/ )ener%tes 'ore FuestionsK Co''on Si*e Fin%nci%+ St%te'ents

Common !ize ratios are use to com$are +inancial statements o+ i++erent5size com$aniesG or o+ the same com$an& over i++erent $erio s. B& e/$ressing the items in $ro$ortion to some size5relate measureG stan ar ize +inancial

statements can be create G revealing tren s an i++erent com$anies com$are.

$rovi ing insight into ho2 the

The common size ratio +or each line on the +inancial statement is calculate +ollo2sF Item Interest #ommon 0atio %ize I 0e+erence Item )or e/am$leG i+ the item o+ interest is inventor& an it is re+erence assets Aas it normall& 2oul beBG the common size ratio 2oul beF Inventor& #ommon %ize 0atio Inventor& +or I Total 4ssets o+

as

to total

The ratios o+ten are e/$resse as $ercentages o+ the re+erence amount. #ommon size statements usuall& are $re$are +or the income statement an balance sheetG e/$ressing in+ormation as +ollo2sF Income statement items 5 e/$resse revenue as a $ercentage o+ total

Balance sheet items 5 e/$resse as a $ercentage o+ total assets

The +ollo2ing e/am$le income statement sho2s both the ollar amounts an the common size ratiosF Co''on Si*e Inco'e St%te'ent Inco'e St%te'ent 0evenue '1G134 Co''on-Si*e Inco'e St%te'ent 111D

#ost %ol

o+

,oo s

44G""1 "5G913 13G531 1"G38" "G8!" 3G'!! 5G'54

!3.1D 3!.9D 19.3D 1'.'D 4.1D 5.4D 8."D

,ross -ro+it %,?4 */$ense O$erating Income Interest */$ense -rovision +or Ta/es 7et Income

)or the balance sheetG the common size $ercentages are re+erence to the total assets. The +ollo2ing sam$le balance sheet sho2s both the ollar amounts an the common size ratiosF Co''on Si*e (%+%nce S-eet (%+%nce S-eet 4%%*T% #ash ? %ecurities Marketable !G1"9 14G3'8 1'G13! 3'G543 ? "G44" 39G985 15.1D 3!.1D 4".9D 93.9D !.1D 111D Co''onSi*e (%+%nce S-eet

4ccounts 0eceivable Inventor& Total #urrent 4ssets -ro$ert&G *<ui$ment Total 4ssets -lantG

6I4BI6ITI*% 47. %H40*HO6.*0%Q *:PITH #urrent 6iabilities 6ong5Term .ebt 14G"51 1"G!"4 35.!D 31.!D

Total 6iabilities %harehol ersQ *<uit& Total 6iabilities ? *<uit&

"!G8'5 13G111 39G985

!'."D 3".8D 111D

The above common size statements are $re$are in a vertical anal&sisG re+erencing each line on the +inancial statement to a total value on the statement in a given $erio . The ratios in common size statements ten to have less variation than the absolute values themselvesG an tren s in the ratios can reveal im$ortant changes in the business. Historical com$arisons can be ma e in a time5series anal&sis to i enti+& such tren s. #ommon size statements also can be use to com$are the +irm to other +irms. Co'0%risons (et;een Co'0%nies 6Cross-Section%+ An%+/sis7 #ommon size +inancial statements can be use to com$are multi$le com$anies at the same $oint in time. 4 common5size anal&sis is es$eciall& use+ul 2hen com$aring com$anies o+ i++erent sizes. It o+ten is insight+ul to com$are a +irm to the best $er+orming +irm in its in ustr& AbenchmarkingB. 4 +irm also can be com$are to its in ustr& as a 2hole. To com$are to the in ustr&G the ratios are calculate +or each +irm in the in ustr& an an average +or the in ustr& is calculate . #om$arative statements then ma& be constructe 2ith the com$an& o+ interest in one column an the in ustr& averages in another. The result is a <uick overvie2 o+ 2here the +irm stan s in the in ustr& 2ith res$ect to ke& items on the +inancial statements. i'it%tions 4s 2ith +inancial statements in generalG the inter$retation o+ common size statements is subRect to man& o+ the limitations in the accounting ata use to construct them. )or e/am$leF .i++erent accounting $olicies ma& be use b& i++erent +irms or 2ithin the same +irm at i++erent $oints in time. 4 Rustments shoul be ma e +or such i++erences. .i++erent +irms ma& use i++erent accounting calen arsG so the accounting $erio s ma& not be irectl& com$arable.

4-%t Is t-e Function o1 % Co'0%r%ti.e (%+%nce S-eet ?

I 2ant to o thisX =hatQs This> 4 com$arative balance sheet is esigne to sho2 +inancial i++erences bet2een several accounting $erio s. 4 balance sheet is a etaile account o+ ever&thing lost an gaine +inanciall& uring a certain timeG containing both $h&sical an abstract ata. 4 com$arative balance sheet is use+ul because a business can instantl& com$are $ro+its an losses bet2een i++erent time $erio s. Most businesses use com$arative balance sheets to hel$ increase $ro+its an +unctionalit& o+ a com$an&. Fe%tures 1. 4 com$arative balance sheet 2ill inclu e several i++erent t&$es o+ accounting ata. )irst there 2ill be the income receive an mone& s$ent. There 2ill also be a list o+ cre its an ebits to the com$an&. 4 list o+ assets an liabilities is also inclu e . 4ll o+ these +actors are necessar& to see 2hat the total 2orth o+ the com$an& is through the balance sheet. The com$arative balance sheet allo2s the com$an& or business to see at a glance ho2 its $ro+its i++er +rom one &ear to another. These com$arative balance sheets are aligne so that business $eo$le can see at a glance the +inancial i++erences +rom &ear to &ear. Function ". 4 balance sheet is esigne to hel$ kee$ a business or com$an& a2are o+ ever& e/$ense an $ro+it that it is receiving. It also allo2s the com$an& to see 2hich times o+ the &ear are most $ro+itableG an 2hich &ears the& i the best. This kno2le ge is im$ortant so that the com$an& can a a$t to the in+ormation to buil the best business $ossible. I+ the business i better three &ears agoG the& can look at that ata an tr& to eci e 2hat it 2as that ma e them o so 2ell that &ear. Then the& can change 2hat the& are oing in the $resent to hel$ boost current $ro+its. (ene1its 3. The main bene+it o+ a com$arative balance sheet is that $ro+its an losses can be seen at a glance. It is also $ossible to see the increase or ecrease o+ assets that the business has. The com$an& 2ill be able to tell 2hat the biggest mone& suckers in the business areG an tr& to think o+ 2a&s to cut o2n losses in that area. Si)ni1ic%nce 4. =ithout a com$arative balance sheetG businesses 2oul not kno2 ho2 to change their strateg& +rom &ear to &ear. 4ll the& 2oul have

to go on 2oul their current balance statements. This 2oul be etrimental to most businesses. It is ver& im$ortant to be able to look at $ast $ro+it in+ormation to Ru ge ho2 to act +or the +uture. E30ert Insi)-t 5. Most businesses an com$anies use com$arative balance sheets. It 2oul be a ver& $oor business ecision not to use them. 4 lot o+ times these com$arative balance sheets are use 2hen $ro$osing ne2 a itions or changes to a business. The com$an& can go back as man& as 11 or "1 &ears to i enti+& tren sG an to Ru ge i+ a ne2 $roRect is right +or the com$an&. #om$arative balance sheets are a necessit& in the business 2orl .

Deri.%ti.e
Deri!ati!es are financial contracts, or financial instruments, whose $alues are deri$ed from the $alue of somethin else (%nown as the underlyin%). The underl#in on which a deri$ati$e is based can be an asset (e. ., commodities, e/uities (stoc%s), residential mort a es, commercial real estate, loans, bonds), an inde. (e. ., interest rates, e.chan e rates, stoc% mar%et indices, consumer price inde. ((3") V see inflation deri$ati$es), or other items (e. ., weather conditions, or other deri$ati$es). (redit deri$ati$es are based on loans, bonds or other forms of credit. The main t#pes of deri$ati$es are forwards, futures, options, and swaps. Deri$ati$es can be used to miti ate the ris% of economic loss arisin from chan es in the $alue of the underl#in . This acti$it# is %nown as hed in . Alternati$el#, deri$ati$es can be used b# in$estors to increase the profit arisin if the $alue of the underl#in mo$es in the direction the# e.pect. This acti$it# is %nown as speculation. 2ecause the $alue of a deri$ati$e is contin ent on the $alue of the underl#in , the notional $alue of deri$ati$es is recorded off the balance sheet of an institution, althou h the mar%et $alue of deri$ati$es is recorded on the balance sheet.

@ses
Hed%in%
Deri$ati$es allow ris% about the $alue of the underl#in asset to be transferred from one part# to another. 9or e.ample, a wheat farmer and a miller could si n a futures contract to e.chan e a specified amount of cash for a specified amount of wheat in the future. 2oth parties ha$e reduced a future ris%: for the wheat farmer, the uncertaint# of the price, and for the miller, the a$ailabilit# of wheat. 8owe$er, there is still the ris% that no wheat will be a$ailable due to causes unspecified b# the contract, li%e the weather, or that one part# will rene e on the contract. Althou h a third part#, called a clearin house, insures a futures contract, not all deri$ati$es are insured a ainst counterpart# ris%. 9rom another perspecti$e, the farmer and the miller both reduce a ris% and ac/uire a ris% when the# si n the futures contract: The farmer reduces the ris% that the price of wheat will fall below the price specified in the contract and ac/uires the ris% that the price of wheat will

rise abo$e the price specified in the contract (thereb# losin additional income that he could ha$e earned). The miller, on the other hand, ac/uires the ris% that the price of wheat will fall below the price specified in the contract (thereb# pa#in more in the future than he otherwise would) and reduces the ris% that the price of wheat will rise abo$e the price specified in the contract. "n this sense, one part# is the insurer (ris% ta%er) for one t#pe of ris%, and the counterpart# is the insurer (ris% ta%er) for another t#pe of ris%. 8ed in also occurs when an indi$idual or institution bu#s an asset (li%e a commodit#, a bond that has coupon pa#ments, a stoc% that pa#s di$idends, and so on) and sells it usin a futures contract. The indi$idual 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 accordin to the futures contract. 4f course, this allows the indi$idual or institution the benefit of holdin the asset while reducin the ris% that the future sellin price will de$iate une.pectedl# from the mar%etJs current assessment of the future $alue of the asset.

Speculation and arbitra%e

Deri$ati$es can be used to ac/uire ris%, rather than to insure or hed e a ainst ris%. Thus, some indi$iduals and institutions will enter into a deri$ati$e contract to speculate on the $alue of the underl#in asset, bettin that the part# see%in insurance will be wron about the future $alue of the underl#in asset. -peculators will want to be able to bu# an asset in the future at a low price accordin to a deri$ati$e contract when the future mar%et price is hi h, or to sell an asset in the future at a hi h price accordin to a deri$ati$e contract when the future mar%et price is low. "ndi$iduals and institutions ma# also loo% for arbitra e opportunities, as when the current bu#in price of an asset falls below the price specified in a futures contract to sell the asset. -peculati$e tradin in deri$ati$es ained a reat deal of notoriet# in 1))0 when +ic% :eeson, a trader at 2arin s 2an%, made poor and unauthoriBed in$estments in futures contracts. Throu h a combination of poor 1ud ment, lac% of o$ersi ht b# the ban%Js mana ement and b# re ulators, and unfortunate e$ents li%e the Hobe earth/ua%e, :eeson incurred a [1.C billion loss that ban%rupted the centuries*old institution.T1U

Types of deri!ati!es
*T9 and e'chan%e-traded
2roadl# spea%in there are two distinct roups of deri$ati$e contracts, which are distin uished b# the wa# the# are traded in mar%et:
O.er-t-e-counter 6OTC7 2eri.%ti.es are contracts that are tra e Aan $rivatel& negotiate B irectl& bet2een t2o $artiesG 2ithout going through an e/change or other interme iar&. -ro ucts such as s2a$sG +or2ar rate agreementsG an e/otic o$tions are almost al2a&s tra e in this 2a&. The OT# erivative market is the largest market +or erivativesG an is largel& unregulate 2ith res$ect to isclosure o+ in+ormation bet2een the $artiesG since the OT# market is ma e u$ o+ banks an other highl& so$histicate $artiesG such as he ge +un s. 0e$orting o+ OT# amounts are i++icult because tra es can occur in $rivateG 2ithout activit& being visible on an& e/change. 4ccor ing to the Bank +or International %ettlementsG the total outstan ing notional amount is _!84 trillion Aas o+ ;une "118B8"9. O+ this total notional amountG !'D are interest

rate contractsG 8D are cre it e+ault s2a$s A#.%BG 9D are +oreign e/change contractsG "D are commo it& contractsG 1D are e<uit& contractsG an 1"D are other. Because OT# erivatives are not tra e on an e/changeG there is no central counter$art&. There+oreG the& are subRect to counter$art& riskG like an or inar& contractG since each counter$art& relies on the other to $er+orm. E3c-%n)e-tr%2e2 2eri.%ti.es A*T.B are those erivatives $ro ucts that are tra e via s$ecialize erivatives e/changes or other e/changes. 4 erivatives e/change acts as an interme iar& to all relate transactionsG an takes Initial margin +rom both si es o+ the tra e to act as a guarantee. The 2orl Qs largest839 erivatives e/changes Ab& number o+ transactionsB are the Uorea */change A2hich lists UO%-I In e/ )utures ? O$tionsBG *ure/ A2hich lists a 2i e range o+ *uro$ean $ro ucts such as interest rate ? in e/ $ro uctsBG an #M* ,rou$ Ama e u$ o+ the "11' merger o+ the #hicago Mercantile */change an the #hicago Boar o+ Tra e an the "118 ac<uisition o+ the 7e2 Hork Mercantile */changeB. 4ccor ing to BI%G the combine turnover in the 2orl Qs erivatives e/changes totalle P%. 344 trillion uring :4 "115. %ome t&$es o+ erivative instruments also ma& tra e on tra itional e/changes. )or instanceG h&bri instruments such as convertible bon s an Eor convertible $re+erre ma& be liste on stock or bon e/changes. 4lsoG 2arrants Aor TrightsTB ma& be liste on e<uit& e/changes. -er+ormance 0ightsG #ash /-0Ts an various other instruments that essentiall& consist o+ a com$le/ set o+ o$tions bun le into a sim$le $ackage are routinel& liste on e<uit& e/changes. 6ike other erivativesG these $ublicl& tra e erivatives $rovi e investors access to riskEre2ar an volatilit& characteristics thatG 2hile relate to an un erl&ing commo it&G nonetheless are istinctive.

9o,,on deri!ati!e contract types

There are three ma1or classes of deri$ati$es:
1. )uturesE)or2ar s are contracts to bu& or sell an asset on or be+ore a +uture ate at a $rice s$eci+ie to a&. 4 +utures contract i++ers +rom a +or2ar contract in that the +utures contract is a stan ar ize contract 2ritten b& a clearing house that o$erates an e/change 2here the contract can be bought an sol G 2hile a +or2ar contract is a non5stan ar ize contract 2ritten b& the $arties themselves. ". O$tions are contracts that give the o2ner the rightG but not the obligationG to bu& Ain the case o+ a call o$tionB or sell Ain the case o+ a $ut o$tionB an asset. The $rice at 2hich the sale takes $lace is kno2n as the strike $riceG an is s$eci+ie at the time the $arties enter into the o$tion. The o$tion contract also s$eci+ies a maturit& ate. In the case o+ a *uro$ean o$tionG the o2ner has the right to re<uire the sale to take $lace on Abut not be+oreB the maturit& ateK in the case o+ an 4merican o$tionG the o2ner can re<uire the sale to take $lace at an& time u$ to the maturit& ate. I+ the o2ner o+ the

contract e/ercises this rightG the counter$art& has the obligation to carr& out the transaction. 3. %2a$s are contracts to e/change cash A+lo2sB on or be+ore a s$eci+ie +uture ate base on the un erl&ing value o+ currenciesEe/change ratesG bon sEinterest ratesG commo itiesG stocks or other assets.

5ore comple. deri$ati$es can be created b# combinin the elements of these basic t#pes. 9or e.ample, the holder of a swaption has the ri ht, but not the obli ation, to enter into a swap on or before a specified future date.

$'a,ples
-ome common e.amples of these deri$ati$es are:
CONTRACT TY"ES UNDER YI NG E3c-%n) e-tr%2e2 1utures .;I4 In e/ +uture 74%.4: In e/ +uture E3c-%n) e-tr%2e2 o0tions O$tion on .;I4 In e/ +uture O$tion on 74%.4: In e/ +uture O$tion on *uro ollar +uture O$tion on *uribor +uture O$tion on Bon +uture %ingle5 share o$tion OTC s;%0 OTC 1or;%r2 OTC o0tion

EFuit/ In2e3

*<uit& s2a$

Back5to5 back

nEa

Mone/ '%r&et

*uro olla r +uture *uribor +uture

Interes t rate s2a$

)or2ar rate agreemen t

Interest rate ca$ an +loor %2a$tion Basis s2a$

(on2s

Bon +uture

Total return s2a$ *<uit& s2a$

0e$urchas e agreemen t 0e$urchas e agreemen t

Bon o$tion

Sin)+e Stoc&s

%ingle5 stock +uture

%tock o$tion =arrant Turbo

2arrant #re it e+ault s2a$ #re it e+ault o$tion

Cre2it

nEa

nEa

nEa

4ther e.amples of underl#in e.chan eables are:

-ro$ert& AmortgageB erivatives *conomic erivatives that $a& o++ accor ing to economic re$orts 819 as measure an re$orte b& national statistical agencies *nerg& erivatives that $a& o++ accor ing to a 2i e variet& o+ in e/e energ& $rices. Psuall& classi+ie as either $h&sical or +inancialG 2here $h&sical means the contract inclu es actual eliver& o+ the un erl&ing energ& commo it& AoilG gasG $o2erG etc.B #ommo ities )reight erivatives In+lation erivatives Insurance erivatives8citation needed9 =eather erivatives #re it erivatives

9ash flo#
The pa#ments between the parties ma# be determined b#:
the $rice o+ some otherG in e$en entl& tra e asset in the +uture Ae.g.G a common stockBK the level o+ an in e$en entl& etermine in e/ Ae.g.G a stock market in e/ or heating5 egree5 a&sBK the occurrence o+ some 2ell5s$eci+ie event Ae.g.G a com$an& e+aultingBK an interest rateK an e/change rateK or some other +actor.

-ome deri$ati$es are the ri ht to bu# or sell the underl#in securit# or commodit# at some point in the future for a predetermined price. "f the price of the underl#in securit# or commodit# mo$es into the ri ht direction, the owner of the deri$ati$e ma%es mone#K otherwise, the# lose mone# or the deri$ati$e becomes worthless. Dependin on the terms of the contract, the potential ain or loss on a deri$ati$e can be much hi her than if the# had traded the underl#in securit# or commodit# directl#.

Valuation

Total 2orl erivatives +rom 19985"11'849 com$are to total 2orl 2ealth in the &ear "1118citation needed9

Market and arbitra%e-free prices

Two common measures of $alue are:
Market $riceG i.e. the $rice at 2hich tra ers are 2illing to bu& or sell the contract 4rbitrage5+ree $riceG meaning that no risk5+ree $ro+its can be ma e b& tra ing in these contractsK see rational $ricing

Deter,inin% the ,arket price

9or e.chan e*traded deri$ati$es, mar%et price is usuall# transparent (often published in real time b# the e.chan e, based on all the current bids and offers placed on that particular contract at an# one time). (omplications can arise with 4T( or floor*traded contracts thou h, as tradin is handled manuall#, ma%in it difficult to automaticall# broadcast prices. "n particular with 4T( contracts, there is no central e.chan e to collate and disseminate prices.

Deter,inin% the arbitra%e-free price

The arbitra e*free price for a deri$ati$es contract is comple., and there are man# different $ariables to consider. Arbitra e*free pricin is a central topic of financial mathematics. The stochastic process of the price of the underl#in asset is often crucial. A %e# e/uation for the theoretical $aluation of options is the 2lac%L-choles formula, which is based on the assumption that the cash flows from a ,uropean stoc% option can be replicated b# a continuous bu#in and sellin strate # usin onl# the stoc%. A simplified $ersion of this $aluation techni/ue is the binomial options model.

9riticis,s

Deri$ati$es are often sub1ect to the followin criticisms:

Possible lar%e losses

The use of deri$ati$es can result in lar e losses due to the use of le$era e, or borrowin . Deri$ati$es allow in$estors to earn lar e returns from small mo$ements in the underl#in assetJs price. 8owe$er, in$estors could lose lar e amounts if the price of the underl#in mo$es a ainst them si nificantl#. There ha$e been se$eral instances of massi$e losses in deri$ati$e mar%ets, such as:
The nee to reca$italize insurer 4merican International ,rou$ A4I,B 2ith _85 billion o+ ebt $rovi e b& the P% +e eral government859. 4n 4I, subsi iar& ha lost more than _18 billion over the $rece ing three <uarters on #re it .e+ault %2a$s A#.%B it ha 2ritten.8!9 It 2as re$orte that the reca$italization 2as necessar& because +urther losses 2ere +oreseeable over the ne/t +e2 <uarters. The loss o+ _'." Billion b& %ociftf ,fnfrale in ;anuar& "118 through mis5use o+ +utures contracts. The loss o+ P%_!.4 billion in the +aile +un 4maranth 4 visorsG 2hich 2as long natural gas in %e$tember "11! 2hen the $rice $lummete . The loss o+ P%_4.! billion in the +aile +un 6ong5Term #a$ital Management in 1998. The bankru$tc& o+ Orange #ount&G #4 in 1994G the largest munici$al bankru$tc& in P.%. histor&. On .ecember !G 1994G Orange #ount& eclare #ha$ter 9 bankru$tc&G +rom 2hich it emerge in ;une 1995. The count& lost about _1.! billion through erivatives tra ing. Orange #ount& 2as neither bankru$t nor insolvent at the timeK ho2everG because o+ the strateg& the count& em$lo&e it 2as unable to generate the cash +lo2s nee e to maintain services. Orange #ount& is a goo e/am$le o+ 2hat ha$$ens 2hen erivatives are use incorrectl& an $ositions li<ui ate in an un$lanne mannerK ha the& not li<ui ate the& 2oul not have lost an& mone& as their $ositions reboun e .8citation needed9 -otentiall& $roblematic use o+ interest5rate erivatives b& P% munici$alities has continue in recent &ears. %eeG +or e/am$leF8'9 The 7ick 6eeson a++air in 1994

9ounter-party risk
Deri$ati$es (especiall# swaps) e.pose in$estors to counter-party risk. 9or e.ample, suppose a person wantin a fi.ed interest rate loan for his business, but findin that ban%s onl# offer $ariable rates, swaps pa#ments with another business who wants a $ariable rate, s#ntheticall# creatin a fi.ed rate for the person. 8owe$er if the second business oes ban%rupt, it canJt pa# its $ariable rate and so the first business will lose its fi.ed rate and will be pa#in a $ariable rate a ain. "f interest rates ha$e increased, it is possible that the first business ma# be ad$ersel# affected, because it ma# not be prepared to pa# the hi her $ariable rate.

Different t#pes of deri$ati$es ha$e different le$els of ris% for this effect. 9or e.ample, standardiBed stoc% options b# law re/uire the part# at ris% to ha$e a certain amount deposited with the e.chan e, showin that the# can pa# for an# lossesK 2an%s who help businesses swap $ariable for fi.ed rates on loans ma# do credit chec%s on both parties. 8owe$er in pri$ate a reements between two companies, for e.ample, there ma# not be benchmar%s for performin due dili ence and ris% anal#sis.

@nsuitably hi%h risk for s,allFine'perienced in!estors

Deri$ati$es pose unsuitably hi%h a,ounts of risk for small or ine.perienced in$estors. 2ecause deri$ati$es offer the possibilit# of lar e rewards, the# offer an attraction e$en to indi$idual in$estors. 8owe$er, speculation in deri$ati$es often assumes a reat deal of ris%, re/uirin commensurate e.perience and mar%et %nowled e, especiall# for the small in$estor, a reason wh# some financial planners ad$ise a ainst the use of these instruments. Deri$ati$es are comple. instruments de$ised as a form of insurance, to transfer ris% amon parties based on their willin ness to assume additional ris%, or hed e a ainst it. Add 5oral 8aBard spread o$er the ris%.

>ar%e notional !alue

.erivatives t&$icall& have a +%r)e notion%+ .%+ue. 4s suchG there is the anger that their use coul result in losses that the investor 2oul be unable to com$ensate +or. The $ossibilit& that this coul lea to a chain reaction ensuing in an economic crisisG has been $ointe out b& legen ar& investor =arren Bu++ett in Berkshire Hatha2a&Qs annual re$ort. Bu++ett calle them Q+inancial 2ea$ons o+ mass estruction.Q The $roblem 2ith erivatives is that the& control an increasingl& larger notional amount o+ assets an this ma& lea to istortions in the real ca$ital an e<uities markets. Investors begin to look at the erivatives markets to make a ecision to bu& or sell securities an so 2hat 2as originall& meant to be a market to trans+er risk no2 becomes a lea ing in icator.

>e!era%e of an econo,yGs debt

Deri$ati$es massi$el# le!era%e the debt in an econo,y, ma%in it e$er more difficult for the underl#in real econom# to ser$ice its debt obli ations and curtailin real economic acti$it#, which can cause a recession or e$en depression.TGU "n the $iew of 5arriner -. ,ccles, &.-. 9ederal 6eser$e (hairman from +o$ember, 1)CA to 9ebruar#, 1)AG, too hi h a le$el of debt was one of the primar# causes of the 1)20s*C0s 'reat Depression. (-ee 2er%shire 8athawa# Annual 6eport for 2002)

.enefits
+e$ertheless, the use of deri$ati$es also has its benefits:
.erivatives 1%ci+it%te t-e ,u/in) %n2 se++in) o1 ris&G an thus have a $ositive im$act on the economic s&stem8citation needed9. 4lthough someone loses mone& 2hile someone else gains mone& 2ith a erivativeG un er normal circumstancesG tra ing in erivatives shoul not a versel& a++ect the economic s&stem because it is not zero sum in utilit&.

)ormer )e eral 0eserve Boar chairman 4lan ,reens$an commente in "113 that he believe that the use o+ erivatives has so1tene2 t-e i'0%ct o1 t-e econo'ic 2o;nturn at the beginning o+ the "1st centur&.8citation needed9

Definitions
Bilateral nettingF 4 legall& en+orceable arrangement bet2een a bank an a counter5$art& that creates a single legal obligation covering all inclu e in ivi ual contracts. This means that a bankNs obligationG in the event o+ the e+ault or insolvenc& o+ one o+ the $artiesG 2oul be the net sum o+ all $ositive an negative +air values o+ contracts inclu e in the bilateral netting arrangement. #re it erivativeF 4 contract that trans+ers cre it risk +rom a $rotection bu&er to a cre it $rotection seller. #re it erivative $ro ucts can take man& +ormsG such as cre it e+ault s2a$sG cre it linke notes an total return s2a$s. .erivativeF 4 +inancial contract 2hose value is erive +rom the $er+ormance o+ assetsG interest ratesG currenc& e/change ratesG or in e/es. .erivative transactions inclu e a 2i e assortment o+ +inancial contracts inclu ing structure ebt obligations an e$ositsG s2a$sG +uturesG o$tionsG ca$sG +loorsG collarsG +or2ar s an various combinations thereo+. */change5tra e erivative contractsF %tan ar ize erivative contracts Ae.g. +utures contracts an o$tionsB that are transacte on an organize +utures e/change. ,ross negative +air valueF The sum o+ the +air values o+ contracts 2here the bank o2es mone& to its counter5$artiesG 2ithout taking into account netting. This re$resents the ma/imum losses the bankNs counter5$arties 2oul incur i+ the bank e+aults an there is no netting o+ contractsG an no bank collateral 2as hel b& the counter5$arties. ,ross $ositive +air valueF The sum total o+ the +air values o+ contracts 2here the bank is o2e mone& b& its counter5$artiesG 2ithout taking into account netting. This re$resents the ma/imum losses a bank coul incur i+ all its counter5$arties e+ault an there is no netting o+ contractsG an the bank hol s no counter5$art& collateral. High5risk mortgage securitiesF %ecurities 2here the $rice or e/$ecte average li+e is highl& sensitive to interest rate changesG as etermine b& the ))I*# $olic& statement on high5risk mortgage securities. 7otional amountF The nominal or +ace amount that is use to calculate $a&ments ma e on s2a$s an other risk management $ro ucts. This amount generall& oes not change han s an is thus re+erre to as notional.

Over5the5counter AOT#B erivative contracts F -rivatel& negotiate erivative contracts that are transacte o++ organize +utures e/changes. %tructure notesF 7on5mortgage5backe ebt securitiesG 2hose cash +lo2 characteristics e$en on one or more in ices an Eor have embe e +or2ar s or o$tions. Total risk5base ca$italF The sum o+ tier 1 $lus tier " ca$ital. Tier 1 ca$ital consists o+ common sharehol ers e<uit&G $er$etual $re+erre sharehol ers e<uit& 2ith non5cumulative ivi en sG retaine earningsG an minorit& interests in the e<uit& accounts o+ consoli ate subsi iaries. Tier " ca$ital consists o+ subor inate ebtG interme iate5term $re+erre stockG cumulative an long5term $re+erre stockG an a $ortion o+ a bankNs allo2ance +or loan an lease losses.

2isk ,ana%e,ent
The broa $arameters o+ risk management +unction shoul coverF
AaB AbB AcB Organizational structure #om$rehensive risk management a$$roach 0isk management $olicies a$$rove b& the boar G 2hich shoul be consistent 2ith the broa er business strategiesG ca$ital strengthG management e/$ertise an overall 2illingness to assume risk ,ui elines an other $arameters use to govern risk takingG inclu ing etaile structure o+ $ru ential limits %trong MI% or re$ortingG monitoring an controlling risk =ell lai out $roce uresG e++ective control an com$rehensive risk re$orting +rame2ork %e$arate risk management organizationE+rame2ork in e$en ent o+ o$erational e$artments an 2ith clear elineation o+ levels o+ res$onsibilit& +or management o+ risk

A B AeB A+B AgB

AhB

-erio ical revie2 an evaluation

4ccurate an timel& cre it gra ing is one o+ the basic com$onents o+ risk management. Cre2it ris& #re it risk is e+ine as the $ossibilit& o+ losses associate 2ith iminution in the cre it <ualit& o+ borro2ers or counter$arties. M%r&et ris& Market risk takes the +orm o+F AaB 6i<ui it& risk AbB Interest rate risk AcB )oreign e/change rateA+ore/B risk A B #ommo it& $rice risk AeB *<uit& $rice risk O0er%tion%+ ris& Managing o$erational risk is becoming an im$ortant +eature o+ soun risk management $ractices in mo ern +inancial markets in the 2ake o+ $henomenal increase in the volume o+ transactionsG high egree o structural changes an com$le/ su$$ort s&stems. The most im$ortant t&$e o+ o$erational risk involves break o2ns in internal controls an cor$orate governance. %uch break o2ns can lea to +inancial loss through errorG +rau G or +ailure to $er+orm in a timel& manner or cause the interest o+ the banks to be com$romise . ,enerall&G o$erational risk is e+ine as an& riskG 2hich is not categorize as market or cre it risk or the risk o+ loss arising +rom various t&$es o+ human or technical error. It is also s&non&mous 2ith settlement or $a&ments risk an business interru$tionG a ministrative an legal risks. O$erational risk has some +orm o+ link bet2een cre it an market risks. 4n o$erational $roblem 2ith a business transaction coul trigger a cre it or market risk.

Cor0or%te Ris& M%n%)e'ent

Financial risk ,ana%e,ent (F2M) had its ori ins in tradin% floors and the .asel -ccords on ban%in re ulation durin the 1)G0s and 1))0s. "f a unif#in theme emer ed, it was a need to update asset-liability ,ana%e,ent (->M) techni/ues. These tended to define ris%s in terms of their effects on a firmJs accountin resultsYsuch as earningsG net interest incomeG an return on assets. The $roli+eration o+ o++5balance sheet toolsG inclu ing deri$ati$es and securitiBation, were renderin those metrics of performance eas# to manipulate. The solution of financial ris% mana ement was to i nore accountin metrics of $alue and focus e.clusi$el# on mar%et $alues. Till 'uldimann (1))A) captured the new spirit: Across mar%ets, traded securities ha$e replaced man# illi/uid instruments, e. ., loans and mort a es ha$e been securitiBed to permit disintermediation and tradin . 'lobal securities mar%ets ha$e e.panded and both e.chan e traded and o$er*the*counter deri$ati$es ha$e become ma1or components of the mar%ets. These de$elopments, alon with technolo ical brea%throu hs in data processin , ha$e one hand in hand with chan es in mana ement practices: a mo$ement awa# from mana ement based on accrual accountin toward ris% mana ement based on mar%in *to*mar%et of positions. 9inancial ris%s came to be di$ided into three cate ories: Financial risks Market risk 9redit risk *perational risk

+ew techni/ues for assessin and mana in these ris%s all focused on their impact on mar%et $alue. 5ar%et ris%, b# definition, is ris% due to uncertaint# in future mar%et $alues. +ew credit ris% models assessed potential defaults or credit deteriorations in terms of their mar%*to*mar%et impact. 4perational ris% was also assessed in terms of its actual or potential direct costs.

-uch techni/ues pro$ed effecti$e on ban% tradin floors, where mar%et $alues were readil# a$ailable. ,.tendin them to other parts of the ban%, or e$en to non*financial corporations,

pro$ed problematic. This was the realm of boo% $alue accountin . 5ar%et $alues were difficult or impossible to secure for items such as pri$ate e/uit#, pension liabilities, factor# e/uipment, intellectual propert# or natural resource reser$es. (orporate ris% mana ement emer ed as a catch*all phrase for practices that ser$e to optimiBe ris% ta%in in a conte.t of boo% $alue accountin . 'enerall#, this includes ris%s of non* financial corporations, but also those of business lines of financial institutions that are not en a ed in tradin or in$estment mana ement. 6is%s $ar# from one corporation to the ne.t, dependin on such factors as siBe, industr#, di$ersit# of business lines, sources of capital, etc. 3ractices that are appropriate for one corporation are inappropriate for another. 9or this reason, corporate ris% mana ement is a more elusi$e notion than is financial ris% mana ement. "t encompasses a $ariet# of techni/ues drawn from both 965 and A:5. (orporations pic% and choose from these, adaptin techni/ues to suit their own needs. This article is an o$er$iew. 9orporate 2isk Mana%e,ent "n a corporate settin , the familiar di$ision of ris%s into mar%et, credit and operational ris%s brea%s down. 4f these, credit risk poses the least challen es. To the e.tent that corporations ta%e credit ris% (some ta%e a lotK others ta%e little), new and traditional techni/ues of credit risk ,ana%e,ent are easil# adapted. *perational risk lar el# doesnJt appl# to corporations. "t includes such factors as model ris% or bac% office errors. -ome aspects do affect corporations Ysuch as +rau or natural isastersYbut cor$orations have been a ressing these 2ith internal au itG +acilities management an legal e$artments +or decades. Also, corporations face ris%s that are a%in to the operational ris% of financial institutions but are uni/ue to their own business lines. An airline is e.posed to ris%s due to weather, e/uipment failure and terrorism. A power enerator faces the ris% that a eneratin plant ma# o down for unscheduled maintenance. "n corporate ris% mana ement, these ris%sYthose that overla$ 2ith the o$erational risks o+ +inancial +irms an those that are akin to such o$erational risks but are uni<ue to non5+inancial firmsYare calle o$erations risks. The real challen e of corporate ris% mana ement is those ris%s that are a%in to mar%et ris% but arenJt mar%et ris%. An oil compan# holds oil reser$es. Their N$alueN fluctuates with the mar%et price of oil, but what does this meanQ The oil reser$es donJt ha$e a mar%et $alue. A chain of restaurants is thri$in . "ts restaurants are N$aluable,N but it is impossible to assi n them mar%et $alues. -omethin that doesnJt ha$e a mar%et $alue doesnJt pose mar%et ris%. This is almost a tautolo #. -uch ris%s are business ris%s as opposed to mar%et ris%s. "n the realm of corporate ris% mana ement, we abandon the di$ision of ris%s into mar%et, credit and operational ris%s and replace it with a new cate oriBation: 9orporate risk

Market risk risk

.usiness risk

9redit risk

*perations

(orporations do face some mar%et ris%s, such as commodit# price ris% or forei n e.chan e ris%. These are usuall# dwarfed b# business ris%s. "n a nutshell, the challen e of corporate ris% mana ement is the mana ement of business ris%. -ddressin% .usiness 2isk Techni/ues for addressin business ris% ta%e two forms: Those that treat business ris%s as mar%et ris%s, so that techni/ues of 965 can be directl# applied, and Those that address business ris%s from a boo% $alue standpoint, modif#in adaptin techni/ues of 965 and A:5 as appropriate. or

2oth approaches are discussed below. $cono,ic Value Techni/ues of the first form focus on a concept called economic $alue. This is a $a ue notion that eneraliBes the concept of mar%et $alue. "f a ,arket !alue e.ists for an asset, then that mar%et $alue is the assetJs economic $alue. "f a mar%et $alue doesnJt e.ist, then economic $alue is the Nintrinsic !alueB of the assetY2hat the market value o+ the asset 2oul beG i+ it ha a market value. *conomic values can be assigne in t2o 2a&s. 4ne is to start with accountin metrics of $alue and ma%e suitable ad1ustments, so the# are more reflecti$e of some intrinsic $alue. This is the approach emplo#ed with econo,ic !alue added ($V-) anal#ses. The other approach is to construct some model to predict what $alue the asset mi ht command, if a li/uid mar%et e.isted for it. "n this respect, a dero ator# name for economic $alue is ,ark-to-,odel !alue)

4nce some means has been established for assi nin economic $alues, these are treated li%e mar%et $alues. -tandard techni/ues of financial ris% mana ementYsuch as .%+ue-%tris& 6C%R7 or economic ca$ital allocationYare then a$$lie . This economic approach to mana in business ris% is applicable if most of a firmJs balance sheet can be ,arked to ,arket. ,conomic $alues then onl# need to be assi ned to a few items in order for techni/ues of 965 to be applied firm wide. An e.ample would be a commodit# wholesaler. 5ost of its balance sheet comprises ph#sical and forward positions in commodities, which can be mostl# mar%ed to mar%et. 5ore contro$ersial has been the use of economic $aluations in power and natural as mar%ets. The actual ener ies trade and, for the most part, can be mar%ed to mar%et. 8owe$er, producers also hold si nificant in$estments in plants and e/uipmentYan these cannot be marke to market. %u$$ose some energ& tra es s$ot an +or2ar out three &ears. 4n asset that $ro uces the energ& has an e .pected life of 00 #ears, which means that an economic $alue for the asset must reflect a h#pothetical 00*#ear forward cur$e. The forward cur$e doesnJt e.ist, so a model must construct one. (onse/uentl#, assi ned economic $alues are hi hl# dependent on assumptions. 4ften, the# are arbitrar#.

"n this conte.t, it isnJt enou h to assi n economic $alues. Ma6 anal#ses re/uire standard de$iations and correlations as well. Assi nin these to 00*#ear forward prices that are themsel$es h#pothetical is essentiall# meanin lessY&etG those stan ar eviations an correlations etermine the re$orte (a0. These dubious techni/ues were widel# (but not uni$ersall#) adopted b# &- ener # merchants in the late 1))0s and earl# 2000s. The most publiciBed of these was ,nron (orp., which went be#ond usin economic $alues for internal reportin and incorporated them into its financial reportin to in$estors. The 2001 ban%ruptc# of ,nron and subse/uent re$elations of fraud tainted mar%*to*model techni/ues. .ook Value The second approach to addressin business ris% starts b# definin ris%s that are meanin ful in the conte.t of book !alue accountin%. 5ost t#pical of these are: $arnin%s risk, which is ris% due to uncertaint# in future reported earnin s, and

9ash flo# risk, which is ris% due to uncertaint# in future reported cash flows.

4f the two, earnin s ris% is more a%in to mar%et ris%. Det, it a$oids the arbitrar# assumptions of economic $aluations. A firmJs accountin earnin s are a well defined notion. A problem with loo%in at earnin s ris% is that earnin s are, well, non*economic. ,arnin s ma# be su esti$e of economic $alue, but the# can be misleadin and are often eas# to manipulate. A firm can report hi h earnin s while its lon term franchise is eroded awa# b# lac% of in$estment or competin technolo ies. 9inancial transactions can boost short*term earnin s at the e.pense of lon *term earnin s. After all, traditional techni/ues of A:5 focus on earnin s, and their shortcomin s remain toda#. (ash flow ris% is less a%in to mar%et ris%. "t relates more to li/uidit# than the $alue of a firm, but this is onl# partl# true. As an#one who has e$er wor%ed with distressed firms can attest, Ncash is %in .N <hen a firm ets into difficult#, earnin s and mar%et $alues donJt pa# the bills. (ash flow is the life blood of a firm. 8owe$er, as with earnin s ris%, cash flow ris% offers onl# an imperfect picture of a firmJs business ris%. (ash flows can also be manipulated, and stead# cash flows ma# hide corporate decline. Techni/ues for mana in earnin s ris% and cash flow ris% draw hea$il# on techni/ues of ->MLes$eciall& scen%rio %n%+/sis an si'u+%tion %n%+/sis. The& also a a$t techni<ues o+ )0M. In this conte/tG value5at5risk A(a0B becomes e%rnin)s-%t-risk ($a2) or cash-flo#-at-risk (9Fa2). 9or e.ample, ,a6 mi ht be reported as the 10a /uantile of this /uarterJs earnin s (which is the same as the )0a /uantile of reported loss, multiplied b# minus one). The actual calculations of ,a6 or (9a6 differ from those for Ma6. These are lon *term ris% metrics, with horiBons of three months or a #ear. Ma6 is routinel# calculated o$er a one*da# horiBon. Also, ,a6 and (9a6 are dri$en b# rules of accountin while Ma6 is dri$en b# financial en ineerin principles. T#picall#, ,a6 or (9a6 are calculated b# first performin a simulation anal#sis. That enerates a probabilit# distribution for the periodJs earnin s or cash flow, which is then used to $alue the desired metric of ,a6 or (9a6.

4ne decision that needs to be made with ,a6 or (9a6 is whether to use a constant or contractin horiBon. "f mana ement wants an ,a6 anal#sis for /uarterl# earnin s, should the anal#sis actuall# assess ris% to the current /uarterJs earnin sQ "f that is the case, the horiBon will start at three months on the first da# of the /uarter and raduall# shrin% to Bero b# the end of the /uarter. The alternati$e is to use a constant three*month horiBon. After the first da# of the /uarter, results will no lon er appl# to that /uarterJs actual earnin s, but to some h#pothetical earnin s o$er a shiftin three*month horiBon. 2oth approaches are used. The ad$anta e of a contractin horiBon is that it addresses an actual concern of mana ementY 2ill 2e hit our earnin s tar et this /uarterQ A disad$anta e is that the ris% metric %eeps chan in Vif reported ,a6 declines o$er a wee%, does this mean that actual ris% has declined, or does it simpl# reflect a shortened horiBonQ (onclusion <hile the two approaches to business ris% mana ementVthat based on economic $alue and that based on boo% $alueVare philosophicall# different, the# can complement each other. -ome firms use them side*b#*side to assess different aspects of business ris%. This article has focused on the uni/ue challen es of corporate ris% mana ement. There is much else about corporate ris% mana ement that o$erlaps with financial ris% mana ementV the need for a ris% mana ement function, the role of corporate culture, technolo # issues, independence, etc. -ee the article 9inancial 6is% 5ana ement for a discussion of these and other topics. Corporate Risk Management :isted below are brief tips that ma# be helpful as an o$er$iew and uidelines for ris% mana ement acti$ities. "f there are /uestions on these ris% mana ement hi hli hts or if more detailed information is needed, please contact 6is% :imited directl#. Please clic on te*t lin s for display of more information7 10. "dentif# and assess ris%s 6is% is e$er#where. -uccess in business often comes down to reco niBin and mana in possible ris%s associated with potential opportunities and returns. The t#pes of ris%s faced in most businesses are /uite $aried and far ran in . 6is%s t#picall# include both financial and ph#sical cate ories. T#pes of ris% include sometimes apparent haBards, such as safet# and health ris%s associated with operations, as well as financial ris%s from e.posures to mar%et price $olatilit#, counter part# credit defaults, and le al liabilities. -ome ris%s are intuiti$el# ob$iousK unfortunatel#, man# are not. 6is% cate ories include: 5ar%et, (redit, :e al, 6e ulator#, 3olitical, 4perational, -trate ic, 6eputational, ,$ent, (ountr# and 5odel 6is%s. -o first identif# possible ris%s throu hout #our business. ). Hnow the numbers -#stematic processes such as a $is $egister : to identif# and ran% ris%s b# order of ma nitude can be a %e# first step, but effecti$e ris% mana ement strate ies t#picall# depend on /uantification of ris%s, often throu h probabilistic modelin techni/ues. -aid another wa#: one must Jmeasure it to mana e it.J 5easurement and $aluation can be one of the most difficult efforts in ris% mana ement and finance, but these are crucial for cost effecti$e ris%

mana ement and informed decision*ma%in . -pend the time and mone# to et the tools and e.pertise to best /uantif# the compan#Js %e# ris%s. A close corollar# is to %now what is in an# Jblac%*bo.J models used for $aluation = reportin . G. 6is%s are interrelated "nteractions and correlations of ris%s are a %e# element of which to be aware in identif#in , /uantif#in and miti atin ris%s. 9or e.ample, e.posure to credit ris%s ma# also affect mar%et price ris%s, whereas operational ris%s such as fraud ma# create le al and reputational ris%s. 6eco nition that ris%s interact between business acti$ities is one of the basis for the Jenterprise*wide ris% mana ementJ approach now widel# practiced b# leadin companies. F. (ontinuall# reassess ris%s Thin s chan e, and so do ris%s. 5ar%et conditions and $olatilit# le$els chan e, financial stren th of counter parties chan e, ph#sical en$ironments chan e, eopolitical situations chan e, and on*and*on. And these chan es can be rather sudden, or the# can be creepin and hidden. ,.posures to ris%s that result from business acti$ities ma# also chan e. ,ffecti$e ris% mana ement re/uires that one ree$aluate ris%s on an on oin basis, and processes such as a $is Audit : should be built into the corporate ris% mana ement framewor% to assess both current and pro1ected ris% e.posures. 9orecastin future e.posures is necessar# since hed e decisions are based on pro1ected ris% le$els. 6. (ommit ade/uate resources ,ffecti$e ris% mana ement also re/uires considerable e.pertise and resources, from basic ris% control, compliance and o$ernance acti$ities, throu h ad$anced /uantitati$e ris% anal#sis. The costs for these resources are usuall# not cheap, but as has been pro$en repeatedl# b# hi h*profile business failures, the cost of losses due to ris% mana ement wea%nesses or lapses can be catastrophicall# hi h. "n$estment in ris% mana ement capabilities for most businesses has a hi h pa#off. Due to the potentiall# e.treme cost of mista%es, ris% mana ers should be especiall# well trained. 0. 6e$iew the cost of ris% miti ation Transferrin ris%s throu h hed e transactions or other acti$ities is often an effecti$e and ad$isable ris% mana ement techni/ue, but ris% miti ation strate # ma# lar el# depend on the hed e costs. 6is% miti ation strate ies also depend on the capacit# of the firm to sustain ris%s and possible losses. Tradin acti$ities that are trul# for hed in should not be a$oided due to concern that tradin could be misconstrued as Jspeculati$eJK howe$er, $arious hed e instruments ma# not ha$e the same cost effecti$eness or appropriateness for e$er# compan# and en$ironment. A. 6educe e.posure 6is%s arise from e.posure. A commonl# accepted definition of ris% is Je.posure to uncertaint#J (at least for that uncertaint# for which one is concerned about the outcome). 6educe the e.posure and #ou li%el# reduce the ris%. The selected approach and structure of

business acti$ities can ha$e a si nificant effect on the e.posure = ris% le$els enerated. (ommercial a reements and transaction structures ma# result in transference or acceptance of ris%s with a counter part#. 6is% awareness in business processes and commercial acti$ities can lead to opportunities to reduce current and future e.posures. 2illin currenc# for international purchases is an e.ample of e.posure effect. C. Assess the 6is%!6eturn 6atio 6is% mana ement does not e/uate to ris% a$ersionK howe$er, decisions dri$en b# ris%!reward assessments usuall# ha$e a hi her probabilit# of successful outcomes. A consideration in such ris%*based business decision*ma%in should also be the capacit# of the firm to sustain ris%s. As in the well de$eloped finance field of portfolio theor# (which in eneral terms focuses on how in$estors can best balance ris%s and rewards in constructin in$estment portfolios), business decisions based on ris%!reward balance should optimiBe returns. 2. 5onitor for /uantum shifts in ris% le$els A %e# $alue of /uantitati$e ris% measures is to hi hli ht si nificant chan es in ris% le$els. Althou h opinions ma# differ on the optimal methodolo # for some $aluation metrics, si nificant chan es or trends in ris% metrics, such as Malue*at*6is% measures, can pro$ide a %e# si nal to mana ement. 2est practices desi ns of mana ement reportin JdashboardsJ pro$ide this ris% monitorin capabilit#, also showin se ment reportin and consolidation to reflect correlations such as offsets in price ris%s between mar%ets. 1. (reate a ris% aware culture ,ducate the or aniBation in practical aspects of ris% mana ement, and that especiall# includes the most senior business e.ecuti$es and the corporate board of directors. 6is% mana ement responsibilities should be clear. <hether it is intuiti$e actions based on e.perience and e.pertise in ris% mana ement or whether it is a result of institutionaliBed ris% policies and procedures, effective ris management is typically a ey factor in successful !usinesses7 Trainin and buildin awareness can lead to a ris% mana ement culture that will dri$e business success.

C%s- '%n%)e'ent
"n &nited -tates ban%in , cash ,ana%e,ent, or treasury ,ana%e,ent, is a mar%etin term for certain ser$ices offered primaril# to lar er business customers. "t ma# be used to describe all ban% accounts (such as chec%in accounts) pro$ided to businesses of a certain siBe, but it is more often used to describe specific ser$ices such as cash concentration, &ero !alance accounting, and automated clearing house facilities. -ometimes, pri$ate ban%in customers are i$en cash mana ement ser$ices.

9ash ,ana%e,ent ser!ices %enerally offered

The followin is a list of ser$ices enerall# offered b# ban%s and utilised b# lar er businesses and corporations:
Account Reconci+e'ent Ser.icesF Balancing a checkbook can be a i++icult $rocess +or a ver& large businessG since it issues so man& checks it can take a lot o+ human monitoring to un erstan 2hich checks have not cleare an there+ore 2hat the com$an&Qs true balance is. To a ress thisG banks have evelo$e a s&stem 2hich allo2s com$anies to u$loa a list o+ all the checks that the& issue on a ail& basisG so that at the en o+ the month the bank statement 2ill sho2 not onl& 2hich checks have cleare G but also 2hich have not. More recentl&G banks have use this s&stem to $revent checks +rom being +rau ulentl& cashe i+ the& are not on the listG a $rocess kno2n as o!itive ay. A2.%nce2 4e, Ser.icesF Most banks have an Internet5base s&stem 2hich is more a vance than the one available to consumers. This enables managers to create an authorize s$ecial internal logon cre entialsG allo2ing em$lo&ees to sen 2ires an access other cash management +eatures normall& not +oun on the consumer 2eb site. Ar'ore2 C%r Ser.ices 6C%s- Co++ection Ser.ices7F 6arge retailers 2ho collect a great eal o+ cash ma& have the bank $ick this cash u$ via an armore car com$an&G instea o+ asking its em$lo&ees to e$osit the cash. Auto'%te2 C+e%rin) HouseF services are usuall& o++ere b& the cash management ivision o+ a bank. The 4utomate #learing House is an electronic s&stem use to trans+er +un s bet2een banks. #om$anies use this to $a& othersG es$eciall& em$lo&ees Athis is ho2 irect e$osit 2orksB. #ertain com$anies also use it to collect +un s +rom customers Athis is generall& ho2 automatic $a&ment $lans 2orkB. This s&stem is criticize b& some consumer a vocac& grou$sG because un er this s&stem banks assume that the com$an& initiating the ebit is correct until $roven other2ise. (%+%nce Re0ortin) Ser.icesF #or$orate clients 2ho activel& manage their cash balances usuall& subscribe to secure 2eb5base re$orting o+ their account an transaction in+ormation at their lea

bank. These so$histicate com$ilations o+ banking activit& ma& inclu e balances in +oreign currenciesG as 2ell as those at other banks. The& inclu e in+ormation on cash $ositions as 2ell as Q+loatQ Ae.g.G checks in the $rocess o+ collectionB. )inall&G the& o++er transaction5s$eci+ic etails on all +orms o+ $a&ment activit&G inclu ing e$ositsG checksG 2ire trans+ers in an outG 4#H Aautomate clearinghouse ebits an cre itsBG investmentsG etc. C%s- Concentr%tion Ser.icesF 6arge or national chain retailers o+ten are in areas 2here their $rimar& bank oes not have branches. There+oreG the& o$en bank accounts at various local banks in the area. To $revent +un s in these accounts +rom being i le an not earning su++icient interestG man& o+ these com$anies have an agreement set 2ith their $rimar& bankG 2hereb& their $rimar& bank uses the 4utomate #learing House to electronicall& T$ullT the mone& +rom these banks into a single interest5bearing bank account. oc&,o3 - Ret%i+: servicesF O+ten com$anies Asuch as utilitiesB 2hich receive a large number o+ $a&ments via checks in the mail have the bank set u$ a $ost o++ice bo/ +or themG o$en their mailG an e$osit an& checks +oun . This is re+erre to as a Tlockbo/T service. oc&,o3 - 4-o+es%+e: servicesF are +or com$anies 2ith small numbers o+ $a&mentsG sometimes 2ith etaile re<uirements +or $rocessing. This might be a com$an& like a entistQs o++ice or small manu+acturing com$an&. "ositi.e "%/F -ositive $a& is a service 2hereb& the com$an& electronicall& shares its check register o+ all 2ritten checks 2ith the bank. The bank there+ore 2ill onl& $a& checks liste in that registerG 2ith e/actl& the same s$eci+ications as liste in the register AamountG $a&eeG serial numberG etc.B. This s&stem ramaticall& re uces check +rau . Re.erse "ositi.e "%/F 0everse $ositive $a& is similar to $ositive $a&G but the $rocess is reverse G 2ith the com$an&G not the bankG maintaining the list o+ checks issue . =hen checks are $resente +or $a&ment an clear through the )e eral 0eserve %&stemG the )e eral 0eserve $re$ares a +ile o+ the checksQ account numbersG serial numbersG an ollar amounts an sen s the +ile to the bank. In reverse $ositive $a&G the bank sen s that +ile to the com$an&G 2here the com$an& com$ares the in+ormation to its internal recor s. The com$an& lets the bank kno2 2hich checks match its internal in+ormationG an the bank $a&s those items. The bank then researches the checks that o not matchG corrects an& misrea s or enco ing errorsG an etermines i+ an& items are +rau ulent. The bank $a&s onl& TtrueT e/ce$tionsG that isG those that can be reconcile 2ith the com$an&Qs +iles. S;ee0 %ccountsF are t&$icall& o++ere b& the cash management ivision o+ a bank. Pn er this s&stemG e/cess +un s +rom a com$an&Qs bank accounts are automaticall& move into a mone&

market mutual +un overnightG an then move back the ne/t morning. This allo2s them to earn interest overnight. This is the $rimar& use o+ mone& market mutual +un s. Mero (%+%nce Accountin)F can be thought o+ as some2hat o+ a hack. #om$anies 2ith large numbers o+ stores or locations can ver& o+ten be con+use i+ all those stores are e$ositing into a single bank account. Tra itionall&G it 2oul be im$ossible to kno2 2hich e$osits 2ere +rom 2hich stores 2ithout seeking to vie2 images o+ those e$osits. To hel$ correct this $roblemG banks evelo$e a s&stem 2here each store is given their o2n bank accountG but all the mone& e$osite into the in ivi ual store accounts are automaticall& move or s2e$t into the com$an&Qs main bank account. This allo2s the com$an& to look at in ivi ual statements +or each store. P.%. banks are almost all converting their s&stems so that com$anies c%n tell 2hich store ma e a $articular e$ositG even i+ these e$osits are all e$osite into a single account. There+oreG zero balance accounting is being use less +re<uentl&. 4ire Tr%ns1erF 4 2ire trans+er is an electronic trans+er o+ +un s. =ire trans+ers can be one b& a sim$le bank account trans+erG or b& a trans+er o+ cash at a cash o++ice. Bank 2ire trans+ers are o+ten the most e/$e ient metho +or trans+erring +un s bet2een bank accounts. 4 bank 2ire trans+er is a message to the receiving bank re<uesting them to e++ect $a&ment in accor ance 2ith the instructions given. The message also inclu es settlement instructions. The actual 2ire trans+er itsel+ is virtuall& instantaneousG re<uiring no longer +or transmission than a tele$hone call. Contro++e2 Dis,urse'entF This is another $ro uct o++ere b& banks un er #ash Management %ervices. The bank $rovi es a ail& re$ortG t&$icall& earl& in the a&G that $rovi es the amount o+ isbursements that 2ill be charge to the customerQs account. This earl& kno2le ge o+ ail& +un s re<uirement allo2s the customer to invest an& sur$lus in intra a& investment o$$ortunitiesG t&$icall& mone& market investments. This is i++erent +rom ela&e isbursementsG 2here $a&ments are issue through a remote branch o+ a bank an customer is able to ela& the $a&ment ue to increase +loat time.

"n the past, other ser$ices ha$e been offered the usefulness of which has diminished with the rise of the "nternet. 9or e.ample, companies could ha$e dail# fa.es of their most recent transactions or be sent (D*645s of ima es of their cashed chec%s. (ash mana ement ser$ices can be costl# but usuall# the cost to a compan# is outwei hed b# the benefits: cost sa$in s, accurac#, efficiencies, etc.

INCENTORY
In!entory means oods and materials, or those oods and materials themsel$es, held a$ailable in stoc% b# a business. This word is also used for a list of the contents of a household and for a list for testamentar# purposes of the possessions of someone who has died. "n accountin , in$entor# is considered an asset. "n business mana ement, in$entor# consists of a list of oods and materials held a$ailable in stoc%.

In!entory Mana%e,ent
"n$entor# refers to the stoc% of resources, that possess economic $alue, held b# an or aniBation at an# point of time. These resource stoc%s can be manpower, machines, capital oods or materials at $arious sta es. "n$entor# mana ement is primaril# about specif#in the siBe and placement of stoc%ed oods. "n$entor# mana ement is re/uired at different locations within a facilit# or within multiple locations of a suppl# networ% to protect the re ular and planned course of production a ainst the random disturbance of runnin out of materials or oods. The scope of in$entor# mana ement also concerns the fine lines between replenishment lead time, carr#in costs of in$entor#, asset mana ement, in$entor# forecastin , in$entor# $aluation, in$entor# $isibilit#, future in$entor# price forecastin , ph#sical in$entor#, a$ailable ph#sical space for in$entor#, /ualit# mana ement, replenishment, returns and defecti$e oods and demand forecastin . 2alancin these competin re/uirements leads to optimal in$entor# le$els, which is an on* oin process as the business needs shift and react to the wider en$ironment. "n$entor# mana ement in$ol$es a retailer see%in to ac/uire and maintain a proper merchandise assortment while orderin , shippin , handlin , and related costs are %ept in chec%. -#stems and processes that identif# in$entor# re/uirements, set tar ets, pro$ide replenishment techni/ues and report actual and pro1ected in$entor# status. 8andles all functions related to the trac%in and mana ement of material. This would include the monitorin of material mo$ed into and out of stoc%room locations and the reconcilin of the in$entor# balances. Also ma# include A2( anal#sis, lot trac%in , c#cle countin support etc. 5ana ement of the in$entories, with the primar# ob1ecti$e of determinin !controllin stoc% le$els within the ph#sical distribution function to balance the need for product a$ailabilit# a ainst the need for minimiBin stoc% holdin and handlin costs. -ee in$entor# proportionalit#.

.usiness in!entory
The reasons for keepin% stock
There are three basic reasons for %eepin an in$entor#:

1. Time 5 The time lags $resent in the su$$l& chainG +rom su$$lier to user at ever& stageG re<uires that &ou maintain certain amounts o+ inventor& to use in this Tlea time.T ". Pncertaint& 5 Inventories are maintaine as bu++ers to meet uncertainties in eman G su$$l& an movements o+ goo s. 3. *conomies o+ scale 5 I eal con ition o+ Tone unit at a time at a $lace 2here a user nee s itG 2hen he nee s itT $rinci$le ten s to incur lots o+ costs in terms o+ logistics. %o bulk bu&ingG movement an storing brings in economies o+ scaleG thus inventor&.

All these stoc% reasons can appl# to an# owner or product sta e.
(u11er stoc& is hel in in ivi ual 2orkstations against the $ossibilit& that the u$stream 2orkstation ma& be a little ela&e in long setu$ or change over time. This stock is then use 2hile that changeover is ha$$ening. This stock can be eliminate b& tools like %M*..

These classifications appl# alon the whole -uppl# chain, not 1ust within a facilit# or plant. <here these stoc%s contain the same or similar items, it is often the wor% practice to hold all these stoc%s mi.ed to ether before or after the sub*process to which the# relate. This JreducesJ costs. 2ecause the# are mi.ed up to ether there is no $isual reminder to operators of the ad1acent sub*processes or line mana ement of the stoc%, which is due to a particular cause and should be a particular indi$idualJs responsibilit# with ine$itable conse/uences. -ome plants ha$e centraliBed stoc% holdin across sub*processes, which ma%es the situation e$en more acute.

Special ter,s used in dealin% #ith in!entory

Stock .ee ing /nit A%UPB is a uni<ue combination o+ all the com$onents that are assemble into the $urchasable item. There+oreG an& change in the $ackaging or $ro uct is a ne2 %UP. This level o+ etaile s$eci+ication assists in managing inventor&. Stockout means running out o+ the inventor& o+ an %UP.819 T7e2 ol stockT Asometimes abbreviate 7O%B is a term use in business to re+er to merchan ise being o++ere +or sale that 2as manu+acture long ago but that has never been use . %uch merchan ise ma& not be $ro uce an&moreG an the ne2 ol stock ma& re$resent the onl& market source o+ a $articular item at the $resent time.

Typolo%y
1. Bu++erEsa+et& stock ". #&cle stock APse in batch $rocessesG it is the available inventor&G e/clu ing bu++er stockB 3. .e5cou$ling ABu++er stock that is hel b& both the su$$lier an the userB 4. 4ntici$ation stock ABuil ing u$ e/tra stock +or $erio s o+ increase eman 5 e.g. ice cream +or summerB

5. -i$eline stock A,oo s still in transit or in the $rocess o+ istribution 5 have le+t the +actor& but not arrive at the customer &etB

In!entory e'a,ples
<hile accountants often discuss in$entor# in terms of oods for sale, or aniBations * manufacturers, ser$ice*pro$iders and not*for*profits * also ha$e in$entories (fi.tures, furniture, supplies, ...) that the# do not intend to sell. 5anufacturersJ, distributorsJ, and wholesalersJ in$entor# tends to cluster in warehouses. 6etailersJ in$entor# ma# e.ist in a warehouse or in a shop or store accessible to customers. "n$entories not intended for sale to customers or to clients ma# be held in an# premises an or aniBation uses. -toc% ties up cash and, if uncontrolled, it will be impossible to %now the actual le$el of stoc%s and therefore impossible to control them. <hile the reasons for holdin stoc% were co$ered earlier, most manufacturin or aniBations usuall# di$ide their N oods for saleN in$entor# into:
0a2 materials 5 materials an com$onents sche ule +or use in making a $ro uct. =ork in $rocessG =I- 5 materials an com$onents that have begun their trans+ormation to +inishe goo s. )inishe goo s 5 goo s rea & +or sale to customers. ,oo s +or resale 5 returne goo s that are salable.

9or e.ample:
Manufacturing

A canned food manufacturerJs materials in$entor# includes the in redients to form the foods to be canned, empt# cans and their lids (or coils of steel or aluminum for constructin those components), labels, and an#thin else (solder, lue, ...) that will form part of a finished can. The firmJs wor% in process includes those materials from the time of release to the wor% floor until the# become complete and read# for sale to wholesale or retail customers. This ma# be $ats of prepared food, filled cans not #et labeled or sub*assemblies of food components. "t ma# also include finished cans that are not #et pac%a ed into cartons or pallets. "ts finished ood in$entor# 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 rocer# stores (retailers), and e$en perhaps to consumers throu h arran ements li%e factor# stores and outlet centers. ,.amples of case studies are $er# re$ealin , and consistentl# show that the impro$ement of in$entor# mana ement has two parts: the capabilit# of the or anisation to mana e in$entor#, and the wa# in which it chooses to do so. 9or e.ample, a compan# ma# wish to install a comple. in$entor# s#stem, but unless there is a ood understandin of the role of in$entor# and its perameters, and an effecti$e business process to support that, the s#stem cannot brin the necessar# benefits to the or anisation in isolation. T#pical "n$entor# 5ana ement techni/ues include 3areto (ur$e A2( (lassificationT2U and ,conomic 4rder >uantit# 5ana ement. A more sophisticated method ta%es these two techni/ues further, combinin certain aspects of each to create The H (ur$e 5ethodolo #TCU. A case stud# of %*cur$eTAU benefits to one compan# shows a successful implementation.

&nnecessar# in$entor# adds enormousl# to the wor%in capital tied up in the business, as well as the comple.it# of the suppl# chain. 6eduction and elimination of these in$entor# JwaitJ states is a %e# concept in :eanT0U. Too bi an in$entor# reduction too /uic%l# can cause a business to be anore.ic. There are well*pro$en processes and techni/ues to assist in in$entor# plannin and strate #, both at the business o$er$iew and part number le$el. 5an# of the bi 563!and ,63 s#stems do not offer the necessar# in$entor# plannin tools within their inte rated plannin applications.

Principle of in!entory proportionality

Purpose
"n$entor# proportionalit# is the oal of demand*dri$en in$entor# mana ement. The primar# optimal outcome is to ha$e the same number of da#sJ (or hoursJ, etc.) worth of in$entor# on hand across all products so that the time of runout of all products would be simultaneous. "n such a case, there is no Ne.cess in$entor#,N that is, in$entor# that would be left o$er of another product when the first product runs out. ,.cess in$entor# is sub*optimal because the mone# spent to obtain it could ha$e been utiliBed better elsewhere, i.e. to the product that 1ust ran out. The secondar# oal of in$entor# proportionalit# is in$entor# minimiBation. 2# inte ratin accurate demand forecastin with in$entor# mana ement, replenishment in$entories can be scheduled to arri$e 1ust in time to replenish the product destined to run out first, while at the same time balancin out the in$entor# suppl# of all products to ma%e their in$entories more proportional, and thereb# closer to achie$in the primar# oal. Accurate demand forecastin also allows the desired in$entor# proportions to be d#namic b# determinin e.pected sales out into the futureK this allows for in$entor# to be in proportion to e.pected short*term sales or consumption rather than to past a$era es, a much more accurate and optimal outcome. "nte ratin demand forecastin into in$entor# mana ement in this wa# also allows for the prediction of the Ncan fitN point when in$entor# stora e is limited on a per*product basis.

-pplications
The techni/ue of in$entor# proportionalit# is most appropriate for in$entories that remain unseen b# the consumer. As opposed to N%eep fullN s#stems where a retail consumer would li%e to see full shel$es of the product the# are bu#in so as not to thin% the# are bu#in somethin old, unwanted or staleK and differentiated from the Ntri er pointN s#stems where product is reordered when it hits a certain le$elK in$entor# proportionalit# is used effecti$el# b# 1ust*in*time manufacturin processes and retail applications where the product is hidden from $iew. 4ne earl# e.ample of in$entor# proportionalit# used in a retail application in the &nited -tates is for motor fuel. 5otor fuel (e. . asoline) is enerall# stored in under round stora e tan%s. The motorists do not %now whether the# are bu#in asoline off the top or bottom of the tan%, nor need the# care. Additionall#, these stora e tan%s ha$e a ma.imum capacit# and cannot be o$erfilled. 9inall#, the product is e.pensi$e. "n$entor# proportionalit# is used to balance the in$entories of the different rades of motor fuel, each stored in dedicated tan%s, in proportion to the sales of each rade. ,.cess in$entor# is not seen or $alued b# the consumer, so it is simpl# cash sun% (literall#) into the round. "n$entor# proportionalit# minimiBes the amount of e.cess in$entor# carried in under round stora e tan%s. This

application for motor fuel was first de$eloped and implemented b# 3etrolsoft (orporation in 1))0 for (he$ron 3roducts (ompan#. 5ost ma1or oil companies use such s#stems toda#.T6U

2oots
The use of in$entor# proportionalit# in the &nited -tates is thou ht to ha$e been inspired b# 7apanese 1ust*in*time parts in$entor# mana ement made famous b# To#ota 5otors in the 1)G0s.TCU

Hi%h-le!el in!entory ,ana%e,ent

"t seems that around 1GG0TFU there was a chan e in manufacturin practice from companies with relati$el# homo eneous lines of products to $erticall# inte rated companies with unprecedented di$ersit# in processes and products. Those companies (especiall# in metalwor%in ) attempted to achie$e success throu h economies of scope * the ains of 1ointl# producin two or more products in one facilit#. The mana ers now needed information on the effect of product*mi. decisions on o$erall profits and therefore needed accurate product*cost information. A $ariet# of attempts to achie$e this were unsuccessful due to the hu e o$erhead of the information processin of the time. 8owe$er, the bur eonin need for financial reportin after 1)00 created una$oidable pressure for financial accountin of stoc% and the mana ement need to cost mana e products became o$ershadowed. "n particular, it was the need for audited accounts that sealed the fate of mana erial cost accountin . The dominance of financial reportin accountin o$er mana ement accountin remains to this da# with few e.ceptions, and the financial reportin definitions of JcostJ ha$e distorted effecti$e mana ement JcostJ accountin since that time. This is particularl# true of in$entor#. 8ence, hi h*le$el financial in$entor# has these two basic formulas, which relate to the accountin period:
1. #ost o+ Beginning Inventor& at the start o+ the $erio g inventor& $urchases 2ithin the $erio g cost o+ $ro uction 2ithin the $erio I cost o+ goo s available ". #ost o+ goo s available h cost o+ en ing inventor& at the en o+ the $erio I cost o+ goo s sol

The benefit of these formulae is that the first absorbs all o$erheads of production and raw material costs into a $alue of in$entor# for reportin . The second formula then creates the new start point for the ne.t period and i$es a fi ure to be subtracted from the sales price to determine some form of sales*mar in fi ure. 5anufacturin mana ement is more interested in inventory turnover ratio or average days to sell inventory since it tells them somethin about relati$e in$entor# le$els.
Inventor& turnover ratio Aalso kno2n as inventor& turnsB I cost o+ goo s sol E 4verage Inventor& I #ost o+ ,oo s %ol E AABeginning Inventor& g *n ing Inventor&B E "B

and its in$erse

4verage .a&s to %ell Inventor& I 7umber o+ .a&s a Hear E Inventor& Turnover 0atio I 3!5 a&s a &ear E Inventor& Turnover 0atio

This ratio estimates how man# times the in$entor# turns o$er a #ear. This number tells how much cash! oods are tied up waitin for the process and is a critical measure of process reliabilit# and effecti$eness. -o a factor# with two in$entor# turns has si. months stoc% on hand, which is enerall# not a ood fi ure (dependin upon the industr#), whereas a factor# that mo$es from si. turns to twel$e turns has probabl# impro$ed effecti$eness b# 100a. This impro$ement will ha$e some ne ati$e results in the financial reportin , since the J$alueJ now stored in the factor# as in$entor# is reduced. <hile these accountin measures of in$entor# are $er# useful because of their simplicit#, the# are also frau ht with the dan er of their own assumptions. There are, in fact, so man# thin s that can $ar# hidden under this appearance of simplicit# that a $ariet# of Jad1ustin J assumptions ma# be used. These include:
%$eci+ic I enti+ication =eighte 4verage #ost Moving54verage #ost )I)O an 6I)O.

"n$entor# Turn is a financial accountin tool for e$aluatin in$entor# and it is not necessaril# a mana ement tool. "n$entor# mana ement should be forward loo%in . The methodolo # applied is based on historical cost of oods sold. The ratio ma# not be able to reflect the usabilit# of future production demand, as well as customer demand. 2usiness models, includin 7ust in Time (7"T) "n$entor#, Mendor 5ana ed "n$entor# (M5") and (ustomer 5ana ed "n$entor# ((5"), attempt to minimiBe on*hand in$entor# and increase in$entor# turns. M5" and (5" ha$e ained considerable attention due to the success of third*part# $endors who offer added e.pertise and %nowled e that or aniBations ma# not possess.

-ccountin% for in!entory

,ach countr# has its own rules about accountin for in$entor# that fit with their financial* reportin rules. 9or e.ample, or aniBations in the &.-. define in!entory to suit their needs within &'enerall# Accepted Accountin 3ractices ('AA3), the rules defined b# the 9inancial Accountin -tandards 2oard (9A-2) (and others) and enforced b# the &.-. -ecurities and ,.chan e (ommission (-,() and other federal and state a encies. 4ther countries often ha$e similar arran ements but with their own 'AA3 and national a encies instead. "t is intentional that financial accountin uses standards that allow the public to compare firmsJ performance, cost accountin functions internall# to an or aniBation and potentiall# with much reater fle.ibilit#. A discussion of in$entor# from standard and Theor# of (onstraints*based (throu hput) cost accountin perspecti$e follows some e.amples and a discussion of in$entor# from a financial accountin perspecti$e. The internal costin !$aluation of in$entor# can be comple.. <hereas in the past most enterprises ran simple, one*process factories, such enterprises are /uite probabl# in the minorit# in the 21st centur#. <here Jone processJ factories e.ist, there is a mar%et for the oods created, which establishes an independent mar%et $alue for the ood. Toda#, with multista e*process companies, there is much in$entor# that would once ha$e been finished oods which is now held as Jwor% in processJ (<"3). This needs to be $alued in the accounts,

but the $aluation is a mana ement decision since there is no mar%et for the partiall# finished product. This somewhat arbitrar# J$aluationJ of <"3 combined with the allocation of o$erheads to it has led to some unintended and undesirable results.
Financial accounting

An or aniBationJs in$entor# can appear a mi.ed blessin , since it counts as an asset on the balance sheet, but it also ties up mone# that could ser$e for other purposes and re/uires additional e.pense for its protection. "n$entor# ma# also cause si nificant ta. e.penses, dependin on particular countriesJ laws re ardin depreciation of in$entor#, as in Thor 3ower Tool (ompan# $. (ommissioner. "n$entor# appears as a current asset on an or aniBationJs balance sheet because the or aniBation can, in principle, turn it into cash b# sellin it. -ome or aniBations hold lar er in$entories than their operations re/uire in order to inflate their apparent asset $alue and their percei$ed profitabilit#. "n addition to the mone# tied up b# ac/uirin in$entor#, in$entor# also brin s associated costs for warehouse space, for utilities, and for insurance to co$er staff to handle and protect it from fire and other disasters, obsolescence, shrin%a e (theft and errors), and others. -uch holdin costs can mount up: between a third and a half of its ac/uisition $alue per #ear. 2usinesses that stoc% too little in$entor# cannot ta%e ad$anta e of lar e orders from customers if the# cannot deli$er. The conflictin ob1ecti$es of cost control and customer ser$ice often pit an or aniBationJs financial and operatin mana ers a ainst its sales and mar%etin departments. -alespeople, in particular, often recei$e sales*commission pa#ments, so una$ailable oods ma# reduce their potential personal income. This conflict can be minimised b# reducin production time to bein near or less than customersJ e.pected deli$er# time. This effort, %nown as N:ean productionN will si nificantl# reduce wor%in capital tied up in in$entor# and reduce manufacturin costs (-ee the To#ota 3roduction -#stem).

2ole of in!entory accountin%

2# helpin the or aniBation to ma%e better decisions, the accountants can help the public sector to chan e in a $er# positi$e wa# that deli$ers increased $alue for the ta.pa#er;s in$estment. "t can also help to incenti$ise pro ress and to ensure that reforms are sustainable and effecti$e in the lon term, b# ensurin that success is appropriatel# reco niBed in both the formal and informal reward s#stems of the or aniBation. To sa# that the# ha$e a %e# role to pla# is an understatement. 9inance is connected to most, if not all, of the %e# business processes within the or aniBation. "t should be steerin the stewardship and accountabilit# s#stems that ensure that the or aniBation is conductin its business in an appropriate, ethical manner. "t is critical that these foundations are firml# laid. -o often the# are the litmus test b# which public confidence in the institution is either won or lost. 9inance should also be pro$idin the information, anal#sis and ad$ice to enable the or aniBations; ser$ice mana ers to operate effecti$el#. This oes be#ond the traditional preoccupation with bud ets L how much ha$e we spent so far, how much do we ha$e left to spendQ "t is about helpin the or aniBation to better understand its own performance. That means ma%in the connections and understandin the relationships between i$en inputs L

the resources brou ht to bear L and the outputs and outcomes that the# achie$e. "t is also about understandin and acti$el# mana in ris%s within the or aniBation and its acti$ities.

FIF* !s) >IF* accountin%

<hen a merchant bu#s oods from in$entor#, the $alue of the in$entor# account is reduced b# the cost of oods sold ((4'-). This is simple where the (o' has not $aried across those held in stoc%K but where it has, then an a reed method must be deri$ed to e$aluate it. 9or commodit# items that one cannot trac% indi$iduall#, accountants must choose a method that fits the nature of the sale. Two popular methods that normall# e.ist are: 9"94 and :"94 accountin (first in * first out, last in * first out). 9"94 re ards the first unit that arri$ed in in$entor# as the first one sold. :"94 considers the last unit arri$in in in$entor# as the first one sold. <hich method an accountant selects can ha$e a si nificant effect on net income and boo% $alue and, in turn, on ta.ation. &sin :"94 accountin for in$entor#, a compan# enerall# reports lower net income and lower boo% $alue, due to the effects of inflation. This enerall# results in lower ta.ation. Due to :"94Js potential to s%ew in$entor# $alue, &H 'AA3 and "A- ha$e effecti$el# banned :"94 in$entor# accountin .

Standard cost accountin%

-tandard cost accountin uses ratios called efficiencies that compare the labour and materials actuall# used to produce a ood with those that the same oods would ha$e re/uired under NstandardN conditions. As lon as similar actual and standard conditions obtain, few problems arise. &nfortunatel#, standard cost accountin methods de$eloped about 100 #ears a o, when labor comprised the most important cost in manufactured oods. -tandard methods continue to emphasiBe labor efficienc# e$en thou h that resource now constitutes a ($er#) small part of cost in most cases. -tandard cost accountin can hurt mana ers, wor%ers, and firms in se$eral wa#s. 9or e.ample, a polic# decision to increase in$entor# can harm a manufacturin mana erJs performance e$aluation. "ncreasin in$entor# re/uires increased production, which means that processes must operate at hi her rates. <hen (not if) somethin oes wron , the process ta%es lon er and uses more than the standard labor time. The mana er appears responsible for the e.cess, e$en thou h s!he has no control o$er the production re/uirement or the problem. "n ad$erse economic times, firms use the same efficiencies to downsiBe, ri htsiBe, or otherwise reduce their labor force. <or%ers laid off under those circumstances ha$e e$en less control o$er e.cess in$entor# and cost efficiencies than their mana ers. 5an# financial and cost accountants ha$e a reed for man# #ears on the desirabilit# of replacin standard cost accountin . The# ha$e not, howe$er, found a successor.

Theory of constraints cost accountin%

,li#ahu 5. 'oldratt de$eloped the Theor# of (onstraints in part to address the cost* accountin problems in what he calls the Ncost world.N 8e offers a substitute, called throu hput accountin , that uses throu hput (mone# for oods sold to customers) in place of output ( oods produced that ma# sell or ma# boost in$entor#) and considers labor as a fi.ed rather than as a $ariable cost. 8e defines in$entor# simpl# as e$er#thin the or aniBation owns that it plans to sell, includin buildin s, machiner#, and man# other thin s in addition to the cate ories listed here. Throu hput accountin reco niBes onl# one class of $ariable

costs: the trul# $ariable costs, li%e materials and components, which $ar# directl# with the /uantit# produced. 9inished oods in$entories remain balance*sheet assets, but labor*efficienc# ratios no lon er e$aluate mana ers and wor%ers. "nstead of an incenti$e to reduce labor cost, throu hput accountin focuses attention on the relationships between throu hput (re$enue or income) on one hand and controllable operatin e.penses and chan es in in$entor# on the other. Those relationships direct attention to the constraints or bottlenec%s that pre$ent the s#stem from producin more throu hput, rather than to people * who ha$e little or no control o$er their situations.

?ational accounts
"n$entories also pla# an important role in national accounts and the anal#sis of the business c#cle. -ome short*term macroeconomic fluctuations are attributed to the in$entor# c#cle.

Distressed in!entory
Also %nown as distressed or e.pired stoc%, distressed in$entor# is in$entor# whose potential to be sold at a normal cost has passed or will soon pass. "n certain industries it could also mean that the stoc% is or will soon be impossible to sell. ,.amples of distressed in$entor# include products that ha$e reached their e.pir# date, or ha$e reached a date in ad$ance of e.pir# at which the planned mar%et will no lon er purchase them (e. . C months left to e.pir#), clothin that is defecti$e or out of fashion, and old newspapers or ma aBines. "t also includes computer or consumer*electronic e/uipment that is obsolete or discontinued and whose manufacturer is unable to support it. 4ne current e.ample of distressed in$entor# is the M8- format.TGU "n 2001, (isco wrote off in$entor# worth &- [2.20 billion due to duplicate orders T)U. This is one of the bi est in$entor# write*offs in business histor#.

In!entory credit
"n$entor# credit refers to the use of stoc%, or in$entor#, as collateral to raise finance. <here ban%s ma# be reluctant to accept traditional collateral, for e.ample in de$elopin countries where land title ma# be lac%in , in$entor# credit is a potentiall# important wa# of o$ercomin financin constraints. This is not a new conceptK archaeolo ical e$idence su ests that it was practiced in Ancient 6ome. 4btainin finance a ainst stoc%s of a wide ran e of products held in a bonded warehouse is common in much of the world. "t is, for e.ample, used with 3armesan cheese in "tal#.T10U "n$entor# credit on the basis of stored a ricultural produce is widel# used in :atin American countries and in some Asian countries. T11U A precondition for such credit is that ban%s must be confident that the stored product will be a$ailable if the# need to call on the collateralK this implies the e.istence of a reliable networ% of certified warehouses. 2an%s also face problems in $aluin the in$entor#. The possibilit# of sudden falls in commodit# prices means that the# are usuall# reluctant to lend more than about 60a of the $alue of the in$entor# at the time of the loan.

.-SI9 -99*@?TS 2$9$IV-.>$ M-?-4$M$?T

This article will outline some of the basic components for mana in accounts recei$able, ran in from policies and measurement to outsourcin options. 5ana in accounts recei$ables

3olicies options

Trac%in

5easurement

outsourcin

The foundation behind account recei$ables is #our policies and procedures for sales. 9or e.ample, do #ou ha$e a credit polic#Q <hen and how do #ou e$aluate a customer for creditQ "f #ou loo% at past pa#ment histories, #ou should be able to ascertain who should et credit and who shouldnJt. Additionall#, #ou need to establish sales terms. 9or e.ample, is it beneficial to offer discounts to speed*up cash collectionsQ <hat is the industr# standard for sales termsQ There are se$eral /uestions that ha$e to be answered in buildin the foundation for mana in accounts recei$ables. A s#stem must be in place to trac% accounts recei$ables. This will include balance forwards, listin of all open in$oices, and eneration of monthl# statements to customers. An a in of recei$ables will be used to collect o$erdue accounts. Dou must act /uic%l# to collect o$erdue accounts. -tart b# ma%in phone calls followed b# letters to upper*le$el mana ers for the (ustomer. Tr# to ne otiate settlement pa#ments, such as installments or asset donations. "f #our collection efforts fail, #ou ma# want to use a collection a enc#. Also remember that the collection process is the art of %nowin the customer. A ps#cholo ical understandin of the customer i$es #ou insi hts into what buttons to push in collectin the account. 4ne of the bi est mista%es made in the collection process is a Nstic%s onl#N approach. 9or some customers, usin a carrot can wor% wonders in collectin the o$erdue account. 9or e.ample, in one case the compan# mailed a set of football tic%ets to a customer with a friendl# note and within wee%s, the# recei$ed full pa#ment of the outstandin account. M$-S@2$M$?T 5easurement is another component within account recei$able mana ement. Traditional ratios, such as turno$er will measure how man# times #ou were able to con$ert recei$ables o$er into cash.

,.ample: 5onthl# sales were [ 00,000, the be innin monthl# balance for recei$ables was [ F0,000 and the endin monthl# balance was [ )0,000. The turno$er ratio is: .620 ([ 00,000 ! (([F0,000 R [ )0,000)!2)). Annual turno$er is .620 . C60 ! C0 or F.0 times. "f #ou di$ide C60 (ban%ers #ear) b# F.0, #ou et AG da#s on a$era e to collect #our account recei$ables. Dou can also measure #our in$estment in recei$ables. This calculation is based on the number of da#s it ta%es #ou to collect recei$ables and the amount of credit sales. ,.ample: Annual credit sales are [ 100,000. Dour in$oice terms are net C0 da#s. 4n a$era e, most accounts are 1C da#s past due. Dour in$estment in accounts recei$able is: (C0 R 1C) ! C60 . [ 100,000 or [ 11,FG1. ,.ample: A$era e monthl# sales are [ 10,000. 4n a$era e, accounts recei$able are paid 60 da#s after the sales date. The product costs are 00a of sales and in$entor#*carr#in costs are 10a of sales. Dour in$estment in accounts recei$able is: 2 months . [ 10,000 @ [ 20,000 of sales . .60 @ [ 1G,000. 5easurements ma# need to be modified to account for wide fluctuations within the sales c#cle. The use of wei hts can help ensure comparable measurements. ,.ample: <ei hted A$era e Da#s to 3a# @ -um of ((Date 3aid * Due Date) . Amount 3aid) ! Total 3a#ments ,.ample: 2est 3ossible Da#s 4utstandin @ ((urrent A!6 . b of Da#s in 3eriod) ! (redit -ales for 3eriod 6ecei$able 5ana ement also in$ol$es the use of specialist. After*all, #ou need to spend most of #our time tr#in to lower #our losses and not tr#in to collect o$erdue accounts. A wide ran e of specialist can help: * (redit 2ureau ser$ices to re$iew and appro$e new customers. * Deduction and collection a encies * (omplete mana ement of billin s and collections

C%s- con.ersion c/c+e

"n mana ement accountin , the 9ash 9on!ersion 9ycle (999) measures how lon a firm will be depri$ed of cash if it increases its in$estment in resources in order to e.pand customer sales. "t is thus a measure of the li/uidit# ris% entailed b# rowth. 8owe$er, shortenin the ((( creates its own ris%s: while a firm could e$en achie$e a ne ati$e ((( b# collectin from customers before pa#in suppliers, a polic# of strict collections and la. pa#ments is not alwa#s sustainable.

Definition
CC C N O 2%/s ,et;een 2is,ursin) c%s- %n2 co++ectin) c%s- in connection ;it- un2ert%&in) % 2iscrete unit o1 o0er%tions8

In.entor/ con.ersion 0erio2

Recei.%,+es con.ersion 0erio2

"%/%,+es con.ersion 0erio2

A.)8 In.entor/ COGS J P9Q

A.)8 Accounts Recei.%,+e # Cre2it S%+es J P9Q $

A.)8 Accounts "%/%,+e COGS J P9Q

Deri!ation
9ashflo#s insufficient) The term Ncash con$ersion c#cleN refers to the timespan between a firmJs disbursin and collectin cash. 8owe$er, the ((( cannot be directl# obser$ed in cashflows, because these are also influenced b# in$estment and financin acti$itiesK it must be deri$ed from -tatement of 9inancial 3osition data associated with the firmJs operations. $(uation describes retailer) Althou h the term Ncash con$ersion c#cleN technicall# applies to a firm in an# industr#, the e/uation is enericall# formulated to appl# specificall# to a retailer. -ince a retailerJs operations consist in bu#in and sellin in$entor#, the e/uation models the time between
A1B isbursing cash to satis+& the accounts $a&able create b& sale o+ a unit o+ inventor&G an A"B collecting cash to satis+& the accounts receivable generate b& that sale.

$(uation describes a fir, that buys H sells on account) Also, the e/uation is written to accommodate a firm that !uys and sells on account. 9or a cash-only firm, the e/uation would onl# need data from sales operations (e. . chan es in in$entor#), because dis!ursing cash would be directl# measurable as purchase of inventory, and collecting cash would be directl# measurable as sale of inventory. 8owe$er, no such 1:1 correspondence e.ists for a firm that !uys and sells on account: "ncreases and decreases in in$entor# do not occasion cashflows but accountin $ehicles (recei$ables and pa#ables, respecti$el#)K increases and decreases in cash will remo$e these accountin $ehicles (recei$ables and pa#ables, respecti$el#) from the boo%s. Thus, the ((( must be calculated b# tracin a chan e in cash throu h its effect upon recei$ables, in$entor#, pa#ables, and finall# bac% to cashVthus, the term cash conversion cycle, and the obser$ation that these four accounts NarticulateN with one another.
Lab el Transaction Accounting 6use 2i11erent %ccountin) .e-ic+es i1 t-e tr%ns%ctions occur in % 2i11erent or2er7 O$erations Aincreasing inventor& b& _`B i#reate accounting vehicle Aincreasing accounts $a&able b& _`B O$erations A ecreasing inventor& b& _`B i#reate accounting vehicles Abooking T#O,%T e/$ense o+ _`K accruing revenue an increasing accounts receivable o+ _HB

-uppliers (a ree to) deli$er in$entor#

4 i)irm o2es _` cash A ebtB to su$$liers

(ustomers (a ree to) ac/uire that in$entor#

B i)irm is o2e _H cash Acre itB +rom customers

9irm disburses [? cash to suppliers

# i)irm removes its ebts to its su$$liers

#ash+lo2s A ecreasing cash b& _`B i0emove accounting vehicle A ecreasing accounts $a&able b& _`B

9irm collects [D cash from customers

. i)irm removes its cre it +rom its customers.

#ash+lo2s Aincreasing cash b& _HB i0emove accounting vehicle A ecreasing accounts receivable b& _H.B

Ta%in these four transactions in pairs, anal#sts draw attention to fi$e important inter$als, referred to as con!ersion cycles (or con!ersion periods):
the C%s- Con.ersion C/c+e emerges as interval #i. Ai.e. di!bur!ing ca!hicollecting ca!hB. the 0%/%,+es con.ersion 0erio2 Aor T.a&s $a&ables outstan ingTB emerges as interval 4i# Ai.e. o%ing ca!hidi!bur!ing ca!hB the o0er%tin) c/c+e emerges as interval 4i. Ai.e. o2ing cashicollecting cashB the in.entor/ con.ersion 0erio2 or T.a&s inventor& outstan ingT emerges as interval 4iB Ai.e. o%ing ca!hibeing o%ed ca!hB the recei.%,+es con.ersion 0erio2 Aor T.a&s sales outstan ingTB emerges as interval Bi. Ai.e.being o%ed ca!hicollecting ca!h

Hnowled e of an# three of these con$ersion c#cles permits deri$ation of the fourth (lea$in aside the operating cycle, which is 1ust the sum of the inventory conversion period and the receiva!les conversion period.) 8ence,
inter.%+ RC S DT CCC 6in 2%/s7 N inter.%+ RA S (T In.entor/ con.ersion 0erio2 # inter.%+ R( S DT Recei.%,+es con.ersion 0erio2 $ inter.%+ RA S CT "%/%,+es con.ersion 0erio2

"n calculatin each of these three constituent (on$ersion (#cles, we use the e/uation T"5, @:,M,:!6AT, (since each inter$al rou hl# e/uals the T"5, needed for its :,M,: to be achie$ed at its correspondin 6AT,).
=e estimate its 6*(*6 T uring the $erio in <uestionT as the average o+ its levels in the t2o balance5sheets that surroun the $erio F A6t1g6t"BE". To estimate its 04T*G 2e note that 4ccounts 0eceivable gro2s onl& 2hen revenue is accrue K an Inventor& shrinks an 4ccounts -a&able gro2s b& an amount e<ual to the #O,% e/$ense Ain the long runG since #O,% actuall& accrues sometime a+ter the inventor& eliver&G 2hen the customers ac<uire itB. "%/%,+es con.ersion 0erio2F 0ate I 8inventor& increase g #O,%9G since these are the items +or the $erio that can increase Ttra e accounts $a&ablesGT i.e. the ones that gre2 its inventor&.

7OTI#* that 2e make an e/ce$tion 2hen calculating this intervalF although 2e use a $erio average +or the 6*(*6 o+ inventor&G 2e also consi er an& increase in inventor& as contributing to its 04T* o+ change. This is because the $ur$ose o+ the ### is to measure the e++ects o+

inventor& gro2th on cash outla&s. I+ inventor& gre2 uring the $erio G 2e 2ant to kno2 about it. In.entor/ con.ersion 0erio2F 0ate I #O,%G since this is the item that Aeventuall&B shrinks inventor&. Recei.%,+es con.ersion 0erio2F 0ate I revenueG since this is the item that can gro2 receivables AsalesB.

Inventor& 4ccount receivable #ash conversion c&cle #ash

4ccounts $a&able

Restricti.e tr%2e 0r%ctices

The term restrictive tra e $ractice is use +or an& strateg& use b& $ro ucers to restrict com$etition 2ithin a given market. #ollusion resulting in the +ormation o+ a cartel is one such $ractice. Other $ractices that +all short o+ the +ormation o+ a cartel but are nonetheless against the $ublic interest an illegal inclu eF AaB the setting o+ minimum $ricesK AbB agreements to share marketsK AcB the re+usal to su$$l& retailers that stock the $ro ucts o+ other com$etitorsK A B setting i++erent $rices +or i++erent bu&ers A iscriminator& $ricingBK AeB e/changing in+ormation. The aim o+ restrictive $ractices is to raise $rices an restrict out$ut to the bene+it o+ the com$anies $racticing them.

5onopolies and 6estricti$e Trade 3ractices (ommission (56T3() An important or an of the Department of (ompan# Affairs is the 5onopolies and 6estricti$e Trade 3ractices (ommission (56T3 (ommission) a /uasi*1udicial bod#. The 56T3 (ommission established under -ection 0 of the 5onopolies and 6estricti$e Trade 3ractices Act, 1)6), dischar e functions as per the pro$isions of the Act. The main function of the 56T3 (ommission is to en/uire into and ta%e appropriate action in respect of unfair trade practices and restricti$e trade practices. "n re ard to monopolistic trade practices the (ommission is empowered under section 10(b) to in/uire into such practices (i) upon a reference made to it b# the (entral 'o$ernment or (ii) upon its own %nowled e or information and submit its findin s to (entral 'o$ernment for further action.

Question ,%n&
Mangement $a$er5ll 7oteF This $a$er contains +i+t& A51B multi$le5choice <uestionsG each carr&ing t2o A"B marks. 4ttm$t all o+ them. 1. The eman curve o+ a mono$olisticall& com$etitive +irm isK a. Highl& though not $er+ectl& elastic b. -er+ectl&5inelastic c. Uink& eman curve . .eman curve 2ill be a straight line ". 4 ecision maker has to remember the $roverbG L4 bir in han is 2orth t2o in the bushOG 2hile he e/aminesF a. O$$ortunit& cost $rinci$le b. .iscounting an com$oun ing $rinci$le c. Marginal or incremental $rinci$le . *<ui5marginal $rinci$le 3. Market 2ith one bu&er an one seller is calle F a. Mono$son& b. Bilateral monol$o& c. Mono$ol& . .uo$ol& 4. #ar inal measure o+ utilit& is re<uire inF a. Ptilit& theor& b. In i++erence curve anal&sis c. 0eveale $re+erence . In+erior goo s 5. In case o+ gi++en goo sG $rice e++ect isF a. 7egative b. Vero c. -ositive . 51 !. =hich o+ the +ollo2ing theories state that Lem$lo&ees make com$arisions o+ their e++orts an re2ar s 2ith those o+ others in similar 2ork situationsO> a. (roomNs */$ectanc& theor& b. 4 amNs e<uit& theor& c. 4l er+erNs *0, theor& . HertzbergNs T2o )actor Theor&

'. =hich o+ the +ollo2ings is a metho o+ in icating the +eeling o+ acce$tance or reRection among members o+ a grou$> a. Mutualit& b. %imulation c. T5grou$ . %ociometr& 8. =hich o+ the +ollo2ing statements correctl& escribe Me/tinctionN>=hen a $reviousl& rein+orce behaviorF a. Is rein+orce imme iatel& b. Is rein+orce +or a short $erio c. Is not rein+orce +or a long time . Both AbB an AcB above 9. In 2hich o+ the +ollo2ing $rocesses a $erson reRects his o2n +eelings about the other $erson> a. %el+5anal&sis b. -roRection c. *m$ath& . .enial 11.=hich o+ the +ollo2ing metho s avoi a 2in5lose attitu e> a. Integration b. .omination c. #om$romise . 4ll o+ the above 11.In Transactional anal&sis the LI am okG &ou are not okO li+e $osition is also re+erre to asF a. Bossing b. 4voi ant c. .i++i ent . Bohemian 1".The main obRective o+ 3!1 egree a$$raisal is to bringK a. %ubRectivit& b. ObRectivit& c. Pni+ormit& o+ stan ar s . 7one o+ these 13.4t 2hich level o+ -#MM the conce$t o+ com$etenc& management is brought into 2ork+orce $racticesF a. One b. T2o c. Three . )our 14.The total e ication o+ continuous im$rovement so that customerNs nee s are met is kno2n asF a. Theor& ` b. Theor& H

c. Total :ualit& Management . #hange Management 15.The *m$lo&ee %tock O2nershi$ -lanA*%O-B 2as evelo$e b&F a. Michael -orter b. Ua$lan c. -.)..rucker . 6ouis Uelso 1!.=hen monoton& in 2ork is re uce b& giving a 2i er variet& o+ uties to em$lo&ees this is kno2n asF a. ;ob rotation b. ;ob re esign c. ;ob enlargement . ;ob enrichment 1'.The book LH0 #ham$ionsO is authore b&K a. Mintzberg b. ;. -+e++er c. M. -orter . .ave Plrich 18.The central tra e union #ITP is associate 2ithF a. #ongress $art& o+ In ia b. #ommunist $art& o+ In ia Mar/ist c. #ommunist $art& o+ In ia . %hiv sena 19.One o+ the goals o+ +inancial management isF a. =ealth ma/imization b. Hostile take5over c. To raise +un s +rom outsi ers . 7one o+ the above "1.I+ bon sells at iscountG the $rice is less than $ar value an F a. HTMI cou$on rate b. HTMb cou$on rate c. HTMJ cou$on rate . 7one o+ the above "1.The iscount rate that e<uates the $resent value o+ the +uture net cash+lo2s +rom an investment $roRect 2ith the $roRectNs initial cash out+lo2 is kno2n asF a. 4verage rate o+ return b. Internal rate o+ return c. #ost o+ ca$ital . Hur le rate "".4s $er $ecking or er theor& o+ ca$ital structureF a. Internal e<uit& is $re+erre over e/ternal ebt b. */ternal ebt is $re+erre over internal e<uit& c. */ternal e<uit& is $re+erre over e/ternal ebt

. 7one o+ the above "3.4 +ormal legal commitment to e/ten cre it u$to some ma/imum amount over a state $erio o+ time is kno2n asF a. 6ine o+ cre it b. 0evolving cre it agreement c. #ommitment charge . %ecure term loan "4.*conomics realize in a merger 2here the $er+ormance o+ the combine +orm e/cee s that o+ its $reviousl& se$arate $arts is kno2n asF a. *conomics o+ scale b. %&nerg& c. Horizontal integration . 6everage bu&5out "5.Macro marketing environment re+ers toF a. Internal to the com$an& b. *m$lo&ees an sharehol ers o+ a com$an& c. */ternal to the com$an& . %take hol ers "!.*nvironment scanning involvesF a. =eather +orecasting b. %tu &ing e$ression in a sea c. I enti+&ing threats an o$$ortunities . I enti+&ing strengths an 2eaknesses "'.-ro uct mi/ re+ers toF a. The ingre ients use +or making a $ro uct b. )eatures o+ a $ro uct c. Marketing mi/ element . 4 grou$ o+ $ro ucts "8.=hich o+ the +ollo2ing is not a stage in the ne2 $ro uct evelo$ment> a. ,eneration o+ i eas b. %creening c. Market segmentation . #ommercialization "9.In ustrial marketing involvesF a. Business to business b. #ustomer to customer c. Online marketing . #ustomer to business 31.=hich o+ the +ollo2ing is not inclu e in the ' $s o+ the services marketing a. -eo$le b. -ro ucts c. -h&sical evi ence . -ublic relations

Econo'ics:*/$lain the conce$t o+ consumerNs sur$lus .e+ine oligo$ol& an e/$lain $rice rigi it& un er oligo$ol& in terms o+ Uinke eman curve */$lain $ro uction +unction an 2hat are its managerial uses> .istinguish bet2een micro an macro environments an e/$lain the relationshi$ bet2een the t2o. =hat are the salient +eatures o+ Monolo$listic com$etition =hat o &ou mean b& circular +lo2 o+ national income .escribe the incentive an concessions available to the %%I in In ia =hat are im$ortant measures +or rehabilitation o+ sick enter$rises in In ia> =hat are the +actors gui ing the activities o+ cor$orate social res$onsibilit&> LThe short5run cost curves are erive +rom $ro uction +unctionOG *valuate =hat are the obRectives o+ human resource $lanning> =hat are the 2eaknesses o+ In ian tra e unions> =hat are the metho s o+ segmentation o+ market> .istinguish bet2een a vertising an $ublicit& =hat o &ou un erstan b& testing o+ h&$othesis> %tate the a$$lication i+ t5tests in testing o h&$othesis. .escribe the $ro$erties o+ correlation coe++icient. .istinguish bet2een Internet an intranet. .escibe their a$$lication in business. Ho2 is the strategic ecision i++erent +rom other kin s o+ ecisions> %tate the reasons +or the sickness in small enter$rises. */$lain the social res$onsibilities sho2n b& In ian Business Houses. =hat is meant b& a Mtrans$ortation $roblemN> )ormulate the t&$ical trans$ortation $roblem as a linear $rogramming $roblem.

.escribe the ste$s o+ M(ogelsN a$$ro/imation metho +or obtaining an initial basic +easible solution to a trans$ortation $roblem. %ummarize the salient +eature o+ realistic a$$roach to risk =hat are the economics o+ scale o+ o$eration> =hat is Business #&cle an 2hat are the i++erent $hases o+ Business #&cle> Or)%ni*%tion%+ (e-%.ior:.iscuss .ouglas Mc,regorMs theor& o+ motivation */amine the o$inion o+ $eter )..rucker on scienti+ic management =hat is the essence o+ scienti+ic management Ho2 can the ivorce o+ $lanning an e++ectiveness o+ 2orkE oing im$rove the $ro uctivit& an

=h& 2as there resistance against acce$tance o+ scienti+ic management b& the 2orkers. =hat is the engineering $art o+ scienti+ic management> Ho2 oes it com$liment the $hiloso$h& $art o+ it> */$lain. */$lain the Maslo2Ns theor& o+ motivation Ma/ =eber Bureaucrac& Theor& */$lain the contribution o+ ).=. Ta&lor to the scienti+ic management. Bring out the limitations o+ ).=.Ta&lor contribution .o &ou think in the light o+ the Ha2thorne e/$eriment that there e/ists a relationshi$ bet2een 2orking con itions an $ro uctivit&E 4tttitu e is more im$ortant than 2orking con ition. .iscuss the above statement in the light o+ H2thorne e/$eriment. #om$are an contrast the contribution o+ ).=.Ta&lor 2ith that o+ *lton Ma&o. Ho2 o emotional states an $reRu ices a++ect $erce$tion #om$are an contrast bet2een trait an t&$e a$$roaches to -ersonalit& %election tests reveal more but that is suggeste . The& conceal less but that is vitalO#riticall& evaluate the statement.

=hat is $otential a$$raisal> Ho2 oes it i++er +rom -er+ormance a$$raisal> .iscuss. */$lain (ictor (roomNs */$ectanc& theor& an $oint out its limitations =hat is a balance score car > =hat is skills inventor&> =hat is MOrganisational BehaviourN> .iscuss its signi+icance =hat is Rob anal&sis> .iscuss its metho s =hat is the current relevance o+ Mc#lellan Ns contribution to the un erstan ing o+ motivationE #riticall& e/amine the contributions o+ Mc#lelan to the conce$t o+ motivation .etermine the Rob suitabilit& o+ the $eo$le 2ho have high nee +or $o2er =h& o some o+ the $eo$le avoi the $ain o+ being reRecte b& a social grou$> The ten enc& to +eel reRection as an acute $ain ma& have evelo$e in humans as a e+ensive mechanism +or the s$eciesG she sai . TBecause 2e have such a long time as in+ants an nee to be taken care o+G it is reall& im$ortant that 2e sta& close to the social grou$. I+ 2e onQt 2eQre not going to surviveGT sai *isenberger. TThe h&$othesis is that the social attachment s&stem that makes sure 2e onQt stra& too +ar +rom the grou$ $igg&backe onto the $ain s&stem to hel$ our s$ecies survive.T This suggests that the nee to be acce$te as $art o+ a social grou$ is as im$ortant to humans as avoi ing other t&$es o+ $ainG she sai . ;ust as an in+ant ma& learn to avoi +ire b& +irst being burne G humans ma& learn to stick together because reRection causes istress in the $ain center o+ the brainG sai *isenberger. TI+ it hurts to be se$arate +rom other $eo$leG then it 2ill $revent us +rom stra&ing too +ar +rom the social grou$GT she sai .

-ocial 'roups A social roup consists of two or more people who interact with one another and who reco niBe themsel$es as a distinct social unit. The definition is simple enou h, but it has

si nificant implications. 9re/uent interaction leads people to share $alues and beliefs. This similarit# and the interaction cause them to identif# with one another. "dentification and attachment, in turn, stimulate more fre/uent and intense interaction. ,ach roup maintains solidarit# with all to other roups and other t#pes of social s#stems. 'roups are amon the most stable and endurin of social units. The# are important both to their members and to the societ# at lar e. Throu h encoura in re ular and predictable beha$ior, roups form the foundation upon which societ# rests. Thus, a famil#, a $illa e, a political part# a trade union is all social roups. These, it should be noted are different from social classes, status roups or crowds, which not onl# lac% structure but whose members are less aware or e$en unaware of the e.istence of the roup. These ha$e been called /uasi* roups or roupin s. +e$ertheless, the distinction between social roups and /uasi* roups is fluid and $ariable since /uasi* roups $er# often i$e rise to social roups, as for e.ample, social classes i$e rise to political parties. 3rimar# 'roups "f all roups are important to their members and to societ#, some roups are more important than others. ,arl# in the twentieth centur#, (harles 8. (oole# a$e the name, primar# roups, to those roups that he said are characteriBed b# intimate face*to*face association and those are fundamental in the de$elopment and continued ad1ustment of their members. 8e identified three basic primar# roups, the famil#, the childJs pla# roup, and the nei hborhoods or communit# amon adults. These roups, he said, are almost uni$ersal in all societiesK the# i$e to people their earliest and most complete e.periences of social unit#K the# are instrumental in the de$elopment of the social lifeK and the# promote the inte ration of their members in the lar er societ#. -ince (oole# wrote, o$er 60 #ears a o, life in the &nited -tates has become much more urban, comple., and impersonal, and the famil# pla# roup and nei hborhood ha$e become less dominant features of the social order. -econdar# roups, characteriBed b# anon#mous, impersonal, and instrumental relationships, ha$e become much more numerous. 3eople mo$e fre/uentl#, often from one section of the countr# to another and the# chan e from established relationships and promotin widespread loneliness. Doun people, particularl#, turn to dru s, see% communal li$in roups and adopt de$iant lifest#les in attempts to find meanin ful primar#* roup relationships. The social conte.t has chan ed so much so that primar# roup relationship toda# is not as simple as the# were in (oole#Js time. -econdar# 'roups An understandin of the modern industrial societ# re/uires an understandin of the secondar# roups. The social roups other than those of primar# roups ma# be termed as secondar# roups. The# are a residual cate or#. The# are often called special interest roups.5acl$er and 3a e refers to them as reat associations. The# are of the opinion that secondar# roups ha$e become almost ine$itable toda#. Their appearance is mainl# due to

the rowin cultural comple.it#. 3rimar# roups are found predominantl# in societies where life is relati$el# simple. <ith the e.pansion in population and territor# of a societ# howe$er interests become di$ersified and other t#pes of relationships which can be called secondar# or impersonal become necessar#. "nterests become differentiated. The ser$ices of e.perts are re/uired. The new ran e of the interests demands a comple. or aniBation. ,speciall# selected persons act on behalf of all and hence arises a hierarch# of officials called bureaucrac#. These features characteriBe the rise of the modern state, the reat corporation, the factor#, the labor union, a uni$ersit# or a nationwide political part# and so on. These are secondar# roups.4 burn and +im%off defines secondar# roups as roups which pro$ide e.perience lac%in in intimac#. 9ran% D. <atson writes that the secondar# roup is lar er and more formal ,is specialiBed and direct in its contacts and relies more for unit# and continuance upon the stabilit# of its social or aniBation than does the primar# roup. 9haracteristics of secondary %roup Dominance of secondar# relations: -econdar# roups are characteriBed b# indirect, impersonal, contractual and non*inclusi$e relations. 6elations are indirect because secondar# roups are bi er in siBe and members ma# not sta# to ether. 6elations are contractual in the sense the# are oriented towards certain interests >ar%eness of the si+e -econdar# roups are relati$el# lar er in siBe. (it#, nation, political parties, trade unions and corporations, international associations are bi er in siBe. The# ma# ha$e thousands and la%hs of members. There ma# not be an# limit to the membership in the case of some secondar# roups. Me,bership 5embership in the case of secondar# roups is mainl# $oluntar#. "ndi$iduals are at libert# to 1oin or to o awa# from the roups. 8owe$er there are some secondar# roups li%e the state whose membership is almost in$oluntar#. ?o physical basis -econdar# roups are not characteriBed b# ph#sical pro.imit#. 5an# secondar# roups are not limited to an# definite area. There are some secondar# roups li%e the 6otar# (lub and :ions (lub which are international in character. The members of such roups are scattered o$er a $ast area. -pecific ends or interest: -econdar# roups are formed for the realiBation of some specific interests or ends. The# are called special interest roups. 5embers are interested in the roups because the# ha$e specific ends to aim at. "ndirect communication: (ontacts and communications in the case of secondar# roups are mostl# indirect. 5ass media of communication such as radio, telephone, tele$ision, newspaper, mo$ies, ma aBines and post and tele raph are resorted to b# the members to ha$e communication. (ommunication ma# not be /uic% and effecti$e e$en. "mpersonal nature of social relationships in secondar# roups is both the cause and the effect of indirect communication.

?ature of %roup control "nformal means of social control are less effecti$e in re ulatin the relations of members. 5oral control is onl# secondar#. 9ormal means of social control such as law, le islation, police, court etc are made of to control the beha$ior of members. The beha$ior of the people is lar el# influenced and controlled b# public opinion, propa anda, rule of law and political ideolo ies. 'roup structure: The secondar# roup has a formal structure. A formal authorit# is set up with desi nated powers and a clear*cut di$ision of labor in which the function of each is specified in relation to the function of all. -econdar# roups are mostl# or aniBed roups. Different statuses and roles that the members assume are specified. Distinctions based on caste, colour, reli ion, class, lan ua e etc are less ri id and there is reater tolerance towards other people or roups. >i,ited influence on personality -econdar# roups are specialiBed in character. 3eople in$ol$ement in them is also of limited si nificance.5embersJs attachment to them is also $er# much limited. 9urther people spend most of their time in primar# roups than in secondar# roups. 8ence secondar# roups ha$e $er# limited influence on the personalit# of the members. 6eference 'roups Accordin to 5erton reference roups are those roups which are the referrin points of the indi$iduals, towards which he is oriented and which influences his opinion, tendenc# and beha$iour.The indi$idual is surrounded b# countless reference roups. 2oth the memberships and inner roups and non memberships and outer roups ma# be reference roups.
=hat +actors are consi ere 2hile $re$aring -*0T chart> =hat is the status o+ im$lementation o+ =TO gui elines in In ia> .iscuss the measures taken b& government +or the $romotion o+ small an tin& enter$rises in the 2ake o+ globalization> =hat is cor$orate governance> HRM:*/$lain some t&$ical on5the Rob training techni<ues .iscuss +uture o+ tra e unions in In ia =ho are calle Mrate bustersN an M#hristersN> 0ate busterF 4n em$lo&ee 2ho is highl& $ro uctive an e/cee s the +ormall& agree rate o+ out$ut +or the $articular task. =hilst this is a vantageous +or managementG rate5busters are usuall& islike b& their colleagues because their action $rovi es managers 2ith the e/cuse to raise the rate o+ out$ut +or all the other em$lo&ees. T&$icall&G there is in+ormal social regulation o+ 2ork in most 2orkgrou$s 2here rate5busting is eeme antisocial behaviour an $otential

rate5busters are brought into line b& their 2ork colleagues through a mi/ture o+ $ersuasion an coercion. .e+ine M%electionN. =hat is $otential assessmentN>

Fin%nce:.iscuss the utilit& o+ common size anal&sis an in e/ anal&sis )or anal&zing the risk involve in ca$ital bu geting ecisionG simulation is su$erior to sensitivit& anal&sis. .e+ine iscounte an non5 iscounte a$$roaches +or a$$raising ca$ital bu geting ecision. %tate bon valuation theorems. %tate the meaning an rationale o+ +un amental anal&sis 2ith re+erence to valuation o+ securities =hat is M4 Ruste rate o+ .iscountN metho +or incor$orating risk in ca$ital bu geting> =hat is consi eration o+ time im$ortant in +inancial ecision making> Ho2 can time be a Ruste > */$lain brie+l& cost o+ ca$ital M#ombine leverage is the $ro uct o+ egree o+ o$erating leverage an egree o+ +inancial leverageN.#omment L4ccor ing to Mo igilliani5Miller a$$roachG the value o+ the +irm is a++ecte b& the ebt5e<uit& mi/O. .iscuss

The +inancial goal o+ a +irm shoul be to ma/imize $ro+it an 2ealthO. .o &ou agree 2ith the statement> #omment */$lain brie+l&F *<uit& sharehol ers $rovi e risk ca$ital =eighte average cost o+ ca$ital o+ the +irm Ho2 is merger evaluate as a ca$ital bu geting $ro$osal> %tate the metho o+ risk anal&sis 2ith re+erence to ca$ital bu geting ecision %tate the reason +or merger MTra ing on e<uit& is a ouble5e ge 2ea$onN eluci ate. L)inancial statements re+lect a combination o+ recor e +actsG accounting conventions an $ersonal Ru gementO e/$lain .iscuss arbitrage $ricing theor& +or valuation o+ securities. Ho2 is it i++erent +rom ca$ital asset $ricing mo el> =hat is cash +lo2 statement> =hat $ur$ose oes it serve> =hat is he ging> .iscuss its utilit&. =hat is 2orking ca$ital> Ho2 2oul &ou assess the 2orking ca$ital re<uirement o+ a +irm> */$lain 4rbitrage -ricing Theor& 2ith re+erence to ca$ital market .iscuss Mo igliani5Miller a$$roach +or ca$ital structure .iscuss =alter5mo el an ,or on5mo el or ivi en $olic& an valuation. .iscuss Black5scholes o$tion valuation mo el .iscuss tools o+ +inancial anal&sis. */$lain its role in inter$retation an signaling o+ cor$orate health. */$lain the conce$t an measurement o+ risk an return o+ single asset an a $ort+olio. %ensitivit& anal&sis as a tool o+ risk5anal&sis is su$erior to simulation techni<ue o+ risk5anal&sis +or ca$ital bu geting ecision.O #omment. =hat is the relationshi$ bet2een an investorNs re<uire rate o+ return an the value o+ a securit&> */$lain 2ith e/am$le

.iscuss the $ur$ose o+ the statements o+ changes in +inancial $osition 2hen $re$are on 2orking ca$ital basis an cash basis Ho2 is cost o+ ebt similar to cost o+ $re+erence ca$italE .escibe the uses an limitations o+ cost o+ ca$ital to a +inancial manager. =hat are the basic +inancial erivatives> .escribe the +unction o+ economic nature as $er+orme b& $artici$ants in erivative market. =hat are the i++erent con+licting vie2s on ca$ital structure> .escribe the Mo iglianni an Miller theor& on relationshi$ bet2een ca$ital structure an value o+ +irm. .escribe the im$ortant elements o+ +or2ar contractsG +utures aan o$tions. Ho2 can the& be use as risk management tools> .escribe the strategies to be a o$te to e/$e ite the recover& o+ receivables. The +inal im$lication o+ both =alter5mo el an ,or on5mo el are same +or ivi en istributionO .iscuss an comment. */$alin the +actors etermining the value o+ an o$tion L*/$osure o+ cor$orate to risk has increase over a $erio o+ time.O */$lain in brie+ the main gui elines +or risk5management. -ro$er +inancial anal&sis can $rovi e earl& 2arning signals about the health o+ the organization.O *laborate. =hat is the relationshi$ bet2een risk an return as $er #4-M> Ho2 is risk5return relationshi$ e/$laine b& #a$ital 4sset -ricing Mo elA#4-MB> Ho2 oes 4rbitrage $ricing Theor& A4$tB overcome the shortcomings o+ #4-M> =hat are the t2o im$ortant characteristics o+ current assets> %tate their im$lications +or =orking #a$ital Management */$lain transaction e/$osureG translation e/$osure an o$erating e/$osure 2ith re+erence to International )inance. L)inancing ecision is irrelevant to 2ealth ma/imizationO */$lain in the conte/t o+ M.M.h&$othesis. L0e ucing rate o+ interest on loans an ebts has le to ebt restructuringO */$lain this in the conte/t o+ rising rate o+ in+lation an cost o+ ca$ital o+ the +irm.

Ho2 are the values o+ $er$etual bon s an $re+erence shares etermine > Bring out the similarit& o+ this $rocess 2ith that use to value a zero gro2th share Bring out the i++erence bet2een a common5size balance sheet an com$arative balance sheet. .iscuss the $rocess +or calculating the cost o+ retaine earnings. 4lso bring out the theoretical an $ractical i++iculties associate 2ith this calculation. */$lain the relationshi$ bet2een ca$ital structure an value o+ the +irm. */$lain the net o$erating income a$$roach Brie+l& escribe the maRor t&$es o+ )inancial Management .ecisions that a +irm takes. */$lain the com$utation o+ o$erating c&cle +or a manu+acturing unit. =hat is meant b& technical anal&sis 2ith re+erence to valuation o+ securities> =hat is tra ing on e<uit&>

Trading on e8uity is sometimes referred to as financial leverage or the leverage factor. Tradin on e/uit# occurs when a corporation uses bonds, other debt, and preferred stoc% to increase its earnin s on common stoc%. 9or e.ample, a corporation mi ht use lon term debt to purchase assets that are e.pected to earn more than the interest on the debt. The earnin s in e.cess of the interest e.pense on the new debt will increase the earnin s of the corporation;s common stoc%holders. The increase in earnin s indicates that the corporation was successful in tradin on e/uit#. "f the newl# purchased assets earn less than the interest e.pense on the new debt, the earnin s of the common stoc%holders will decrease.
tr%2in) on t-e eFuit/ Borro2ing +un s to increase ca$ital investment 2ith the ho$e that the business 2ill be able to generate returns in e/cess o+ the interest charges. SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS .o ivi en have a bearing on share valuation> .iscuss the mo els 2hich assume that investment an ivi en ecisions are relate 2ith each other. L.ivi en announcement has signaling e++ect on the $rice o+ the e<uit& shares an henceG on the 2ealth o+ the sharehol erO. .iscuss the ivi en $olic& o+ In ian com$anies in this conte/t.

$erio s. Both the stocks are currentl& selling +or 0s. 51 $er share. The ru$ee return A ivi en $lus $riceB o+ these stocks +or the ne/t &ear 2oul be as +ollo2sF

*conomic con ition High gro2th -robabilit& 0eturn o+ 6t . stock 0eturn o+ : 6t . stock 1."8 55 '5 6o2 gro2th 1.3" 51 !5 %tagnati on 1."" !1 51 eviation o+F 0ecessi on 1.18 '1 41

#alculate the e/$ecte return an stan ar 0s.1111 in the e<uit& stock o+ - 6t K 0s.1111 in the e<uit& stock o+ : 6t K

0s.511 in the e<uit& stock o+ - 6t an 0s.511 in the e<uit& stock o+ : 6t K 0s.'11 in the e<uit& stock o+ - 6t an 0s.311 in the e<uit& stock o+ : 6t =hich o+ the above +our o$tions 2oul &ou chose> =h&> In 2hat i++erent 2a&s are the investmentG +inancing an ivi en ecisions interrelate > ,ive arguments in su$$ort o+ the $osition that ivi en s are relevant to stock valuation an that ivi en $olic& is an active ecision variable. L.ivi en $olic& is base on the goal o+ sharehol erNs 2ealth ma/imizationN. #riticall& e/amine the statement. */$lain brie+l& the +actors 2hich are in+luencing ivi en $olic& o+ a com$an& L)inancial Management is concerne 2ith solution o+ three maRor ecisions a +irm must makeF the investment ecisionG the +inancing ecision an the ivi en ecisionsO. */$lain this statement highlighting the interrelationshi$ amongst these ecisions. SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS Brie+l& e/$lain 2h& one $re+er 7-( metho over the I00 metho as $roRect evaluation techni<ue

.e+ine M#a$ital Bu getingN an

iscuss its +eatures

Pn er 2hat con itions o the 7-( an I00 metho s con+lict> =hich o+ these t2o metho s shoul be use to take ca$ital bu geting ecision un er such con+licting situationE #oma$re the 7-(metho 2ith the I00 metho . =hat are the ste$s involve in the calculation o+ I00 in the case o+ uneven cash in+lo2s> */$lain the criterion +or Ru ging the acce$tabilit& o+ investments 2hen bene+it Zcost ration is use . =hat is the BE# ration o+ an investment 2hen its 7-( is zero> SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS =hat is the basic $ur$ose o+ hol ing inventor&> .escribe the risk5return tra e o++s associate 2ith inventor& management. In 2hat i++erent 2a&s is accounts receivable management i++erent +rom cash management an inventor& management> Ho2 2ill &ou evaluate the risk o+ e/ten ing cre it to an a$$licant> .iscuss =hat are the costs associate 2ith inventor& management> Illustrate the use o+ *conomic Or er :uantit& Brie+l& e/$lain the conce$t o+ +actor $ro uctivit&G +actor intensit& an returns to scale un er $ro uction anal&sis. .iscuss eterminants o+ 2orking ca$ital re<uirement

M%r&etin):%tate the i++erent techni<ues use in sales $romotion */$lain the role o+ segmentation in marketing .iscuss the metho s a o$te +or gathering o+ $rimar& ata in marketing research. =hat is linear $rogramming $roblem an 2hat are its com$onents> .iscuss the sco$e an role o+ linear $rogramming in solving management $roblems. .iscuss the i++erent t&$es o+ variations in the manu+acturing $ur$ose. Ho2 oes %:# hel$ to i enti+& i++erent t&$es o+ variations> =hat is %&stem 6i+e #&cle> =hat are the im$ortant ste$s involve in the s&stem anal&sis> Illustrate &our ans2er 2ith re+erence to a real li+e situation. Is there an& value creation in retailing on net> I+ &esG .iscuss. =hen is +amil& bran ing $re+erre > O0er%tions:-oint out the bene+its o+ :ueuing theor& Trace out the subse<uent evelo$ments to the Henr& ,nattNs #hart Ho2 ,antt #hart can be use in 2ork sche uling .escribe the 7orth =est #orner 0ule +or solving a trans$ortation $roblem. LThe business $lanning i++ers +rom $roRect $lanningO. */$lain Brie+l& escribe the $rinci$les $ro$oun e b& )rank ,ilberth +or im$roving the 2ork e++icienc&. Bring out the contributions o+ 6illian ,ilberth I enti+& management thinker o+ &our interest an com$are his contributions 2ith the an& o+ the above mentione thinkers .escribe -orterNs a$$roach to In ustr& anal&sis. #riticall& anal&se the issue covere in the last three Ministerial con+erence o+ 2orl tra e organization.

St%tistics:The 2eekl& 2ages o+ "111 2orkers in the +actor& is normall& istribute 2ith a mean o+ 0s. "11 an a stan ar eviation o+ 0s. "1. *stimate the lo2est 2eekl& 2ages o+ the "11 highest $ai 2orkers an the highest 2eekl& 2ages o+ "11 lo2est $ai 2orkers Agiven hiA1."8B I1.91B .i++erentiate bet2een correlation an regression anal&sis an give their $ro$erties */$lain the metho o+ testing the signi+icance o+ correlation coe++icient =hat +actors etermine market structure> */$lain a +e2 i++iculties in the estimation o+ national income =hat o &ou un erstan b& trait theor& o+ lea ershi$> L%election is a $rocess o+ reRectionO Ho2> =hat is the role o+ com$etence ma$$ing in $er+ormance management> .e+ine mo ern conce$t o+ marketing */$lain $ro uct mi/ */$lain the gra$hical metho o+ solving an 6-- involving t2o variables */$lain the terms 6ea timeG re5or er $ointG stock5out cast an set5u$ cast in inventor& management =hat is the signi+icance o+ regression anal&sis> =h& 2e have t2o regression e<uations. .erive the correlation coe++icient +rom the t2o regression coe++icients. =rite a short note on management in+ormation s&stem .escribe the strategic management $rocess =hat is meant b& accounting ratios> .istinguish bet2een li<ui it& an leverage ratios. .iscuss the conce$t o+ o$erating $ro+it. Ho2 is it i++erent +rom net $ro+itE

=hat is ivi en gro2th mo el a$$roach to the cost o+ e<uit& > .iscuss its rationale. .iscuss the basic +inancial erivatives =hat is the +un s +lo2 statement base on 2orking ca$ital conce$t> =hat $ur$ose oes it serve> .iscuss the metho s +or ranking investment $ro$osals. =hat are the metho s commonl& use +or incor$orating risk in ca$ital bu geting ecisions> =hat is Balance %core #ar > =rite maRor +unction o+ a Tra e Pnion. %tate erivation o+ cost o+ ebt a a$ting both book5value an market value a$$roach .e+ine +unctions o+ +inancial management .istinguish bet2een marketing in+ormation s&stem an marketing research 6ist out i++erent istribution channels .escribe brie+l& the basic ste$s to be +ollo2e in evelo$ing -*0TE#-M $rogramme. Hoe oes -*0T i++er +rom #-M> =hat is rank correlation> Ho2 is it measure > =h& rank correlation is use > .e+ine a sim$le ran om sam$le. .escribe brie+l& some $ractical metho s o+ ra2ing a ran om sam$le +rom a +inite $o$ulation. */$lain generic strategies. Ho2 these strategies can be use to gain com$etitive a vantageE .iscuss the basic +eatures o+ small enter$rises I enti+& the ethical issues involve in gen er relate $roblems in organisatons. .istinguish bet2een com$lete enumeration an sam$le surve&. =hat are the a vantages o+ sam$ling over com$lete enumeration. .escribe in brie+ i++erent sam$ling metho s. LIm$lementing em$o2erment calls +or organization 2i e revolution an i+ $ursue religiousl& can eliver un$arallel results.O *laborate this statement an reason out &our ans2er. =hat are the $re5re<uisites +or im$lementing em$o2erment $rogramme in an organization.

.iscuss the signi+icance o+ Mcultural )itNGlea ershi$ an total <ualit& in the $rocess o+ em$o2erment at organizational level. #riticall& evaluate ho2 is Mmanagement b& stressNa$$roach being e<uate 2ith em$o2erment. =hat are the critical +actors res$onsible +or +ailure o+ em$o2erment. .e+ine -ro uction )unction. =hat are its managerial a$$lications> 6ist out MH&giene +actorsN an MmotivatorsN o+ the HertzbergNs T2o )actor Theor& Ho2 o &ou segment a market or Health Beverage> */$lain i++erent $ositioning strategies a o$te b& i++erent sham$oo bran s in the market. =hat +actors are consi ere in -lant location .e+ine a stu ent t5statistic an state its uses. .escribe in brie+ the ste$s involve in esigning the ata base +or an in+ormation s&stem o+ the Mangement .e$artment o+ &our Pniversit&EInstitute. =hat is the structural anal&sis o+ In ustr&> Ho2 -orterNs +ive +orce mo el can be use in in ustr& anal&sis> I enti+& the ste$s involve in the business $lan $re$aration =hat environmental an ecological issues can cro$ u$ as ethical challenge to business> =hat is meant b& Mtrans$ortation $roblemN> )ormulate the t&$ical trans$ortation $roblem as a linear $rogramming $roblem. .iscuss the ste$s o+ M(ogelNs 4$$ro/iamtion Metho N +or obtaining an initial basic +easible solution to a trans$ortation $roblem. =hat is the current relevance o+ managerial roles a$$roachE 4re classical managerial +unctions inclusive in natureE =hat are the roles o+ managers in a ition to their classical +unctions>

On 2hat groun the contribution o+ Mintzberg has been criticize > Is sources allocation a $lanning e/ercise> I+ &esG ho2> =hat is a kinke eman curve an 2hat is the $oint o+ kink>

=hat is the basis on 2hich a vertising bu get is etermine >

*/$lain 4braham Maslo2Ns theor& o+ hierarch& o+ nee s .istinguish bet2een ;ob enlargement an Rob enrichment =hat is o2nsizing an rightsizing> Ho2 oes $ackaging 2ork as means o+ marketing communicationE Ho2 is customer relationshi$ management use+ul in aggregate marketing e++orts> .iscuss the im$ortance o+ $ro uction management =hat is M0-> */$lain its signi+icance. .e+ine chi5s<uare. #ite some statistical $roblems 2here &ou can a$$l& chi s<uare +or testing h&$othesis. .istinguish bet2een cor$orate strateg& an Business strateg& */amine the causes +or the sickness in small enter$rises. =hat are the #or$orate %ocial res$onsibilities $ractice b& In ian com$aniesE =hat is organizational behavior> *numerate its elements =hat are the challenges be+ore the Human 0esource Mangement in In ia> 7ame +ive social securit& legislations o+ our countr& .iscuss an& t2o im$ortant elements o+ $romotional mi/ =hat o &ou mean b& MmarketingO an ho2 oes it i++er +or L%ellingO> #om$are an contrastF M-ro uct la&outN vs M-rocess la&outN. .iscuss brie+l& the basic ste$s to be +ollo2e in evelo$ing -*0T $rogramme +or a $roRect. T2o ran om sam$les gave the +ollo2ing resultsF %am$ le 1 " %iz e 11 1" %am$le mean 15 14 %um o+ s<uares o+ eviations +rom the means 91 118

Test 2hether the sam$le come +rom the same normal $o$ulation at 5D level o+ signi+icance. jgivenFk =hat is a M.ata )lo2 .iagram A.).B an a .ata .ictionar&> .ra2 a .). +or $a&roll $rocessing o+ an organization */$lain the B#, matri/. Bring out its use+ulness in cor$orate level strateg& +ormulation. *luci ate the characteristics o+ an *ntre$reneur =hat is M*cological #onsciousnessN> ,ive illustrations =hat are the main +eatures o+ the scienti+ic management> =hat is the im$ortance o+ time an motion stu & in scienti+ic management =hat are the main bene+it o+ s$ecialization =hat are the main +eature o+ the In ustrial age Ho2 2ill the business 2orl change in the in+ormation age> %tate the la2 o+ variable $ro$ortion .iscuss the relevance o+ 7ee Hierarch& LTheor& o+ MotivationO in evelo$ing economics Ho2 3!1 egree a$$raisal is an im$rove techni<ue o+ $er+ormance a$$raisal> In 2hat 2a&s have the +unctions o+ Human 0esource Manager change in the $ost globalistion scenario =hat is customer orientation in marketing .e+ine bran ing .e+ine an e/$lain the +ollo2ing terms O$timum solutionG +easible solutionG unrestricte variables .erive the *O: in the inventor& control metho ,ive the classical an +re<uenc& e+inition o+ $robabilit&. =hat are the obRections raise in these e+initions> =rite o2n the 7ormal .istribution unction an the characteristics o+ the 7ormal -robabilit& #urve

=h& has strategic management become so im$ortant to to a&Ns business organizations =hat are essentials o+ a success+ul entre$reneur> =hat is the sco$e o+ cor$orate governance> .istinguish bet2een marketing in+ormation s&stem an marketing research =hat are the obRectives o+ -ro uction management> .iscuss the 5 $Ns $+ $ro uction management .iscuss the ste$s involve in the selection o+ best strateg& */amine the conce$t o+ cor$orate governanace. ,ive the e/am$le o+ cor$orate governance */$lain the contribution o+ *lton Ma&o in the area o+ Management Ho2 can $ro uctivit& be increase accor ing to Ma&oNs e/$erimentsE =here an un er 2hat con itions i *lton Ma&o con uct his e/$erimentsE =hat is the e/$eriment regar ing 2ork incentive $a& $aln> Str%te)/:.iscuss the im$ortance o+ a clear business strateg& .e+ine the M-*%TN anal&sis an escribe ho2 to carr& one out

-ro$er =orking ca$ital management is the backbone +or success o+ the organization. .iscuss various as$ects o+ ca$ital management +rom angle o+ $ro+itabilit& an li<ui it&. Entre0reneurs-i0:.iscuss the role $la&e b& government in the $romotion o+ small business */amine the $rocess o+ business o$$ortunit& i enti+ication Econo'ics:=hat is meant b& *lasticit& o+ .eman > L,ross 7ational -ro uct A,7-B measures national 2el+areO.#omment */$lain the signi+icance o+ or ering an carr&ing cost o+ inventories.

.istinguish bet2een the $er+ectl& com$etitive market an mono$olistic com$etition. -rove that $er+ectl& com$etitive market is more e++icient than the mono$olistic com$etition.

Et-ics %n2 cor0or%te )o.ern%nce:*/$lain ethical issues involve in cor$orate governance #or$orate governanceF5 In the conte/t o+ cor$orate governanceG iscuss the role o+ Boar o+ .irectors un er 4genc& Theor& an %te2ar shi$ theor& $ers$ective. .iscuss the role o+ in e$en ent irectors in the conte/t o+ #*O ualit&.

;ust in timeG lean manu+acturing

Go, enric-'ent
Iob enrich,ent is an attempt to moti$ate emplo#ees b# i$in them the opportunit# to use the ran e of their abilities. "t is an idea that was de$eloped b# the American ps#cholo ist 9rederic% 8ertBber in the 1)00s. "t can be contrasted to 1ob enlar ement which simpl# increases the number of tas%s without chan in the challen e. As such 1ob enrichment has been described as J$ertical loadin J of a 1ob, while 1ob enlar ement is JhoriBontal loadin J. An enriched 1ob should ideall# contain:
4 range o+ tasks an challenges o+ var&ing i++iculties A-h&sical or MentalB 4 com$lete unit o+ 2ork 5 a meaning+ul task )ee backG encouragement an communication

9ontents
8hi e9 1 Techni<ues " 6iterature 3 0e+erences 4 %ee also

3edit8 Techni(ues
7ob enrichment, as a mana erial acti$it# includes a three steps techni/ue:Tcitation neededU 1. Turn emplo#eesJ effort into performance:
*nsuring that obRectives are 2ell5 e+ine an un erstoo b& ever&one. The overall cor$orate mission statement shoul be communicate to all. In ivi ualQs goals shoul also be clear. *ach em$lo&ee shoul kno2 e/actl& ho2 heEshe +its into the overall

$rocess an be a2are o+ ho2 im$ortant their contributions are to the organization an its customers. -rovi ing a e<uate resources +or each em$lo&ee to $er+orm 2ell. This inclu es su$$ort +unctions like in+ormation technolog&G communication technolog&G an $ersonnel training an evelo$ment. #reating a su$$ortive cor$orate culture. This inclu es $eer su$$ort net2orksG su$$ortive managementG an removing elements that +oster mistrust an $oliticking. )ree +lo2 o+ in+ormation. *liminate secrec&. -rovi e enough +ree om to +acilitate Rob e/cellence. *ncourage an re2ar em$lo&ee initiative. )le/time or com$resse hours coul be o++ere . -rovi e a e<uate recognitionG a$$reciationG an other motivators. -rovi e skill im$rovement o$$ortunities. This coul inclu e $ai e ucation at universities or on the Rob training. -rovi e Rob variet&. This can be one b& Rob sharing or Rob rotation $rogrammes. It ma& be necessar& to re5engineer the Rob $rocess. This coul involve re esigning the $h&sical +acilit&G re esign $rocessesG change technologiesG sim$li+ication o+ $roce uresG elimination o+ re$etitivenessG re esigning authorit& structures. #lear e+inition o+ the re2ar is a must */$lanation o+ the link bet2een $er+ormance an re2ar is im$ortant Make sure the em$lo&ee gets the right re2ar i+ $er+orms 2ell I+ re2ar is not givenG e/$lanation is nee e 4sk them Pse surve&sA checklistG listingG <uestionsB

2. :in% emplo#ees performance directl# to reward:Tcitation neededU

C. 5a%e sure the emplo#ee wants the reward. 8ow to find outQTcitation neededU

Jhat are Mana%e,ent Infor,ation Syste,sK

Management in+ormation s&stems AMI%B are a combination o+ har 2are an so+t2are use to $rocess in+ormation automaticall&. #ommonl&G MI% are use 2ithin organizations to allo2 man& in ivi uals to access an mo i+& in+ormation. In most situationsG the management in+ormation s&stem mainl& o$erates behin the scenesG an the user communit& is rarel& involve or even a2are o+ the $rocesses that are han le b& the s&stem. 4 com$uter s&stem use to $rocess or ers +or a business coul be consi ere a management in+ormation s&stem because it is assisting users in automating $rocesses relate to or ers. Other e/am$les o+ mo ern management in+ormation s&stems are 2ebsites that $rocess transactions +or an organization or even those that serve su$$ort re<uests to users. 4 sim$le e/am$le o+ a management in+ormation s&stem might be the su$$ort 2ebsite +or a $ro uctG because it automaticall& returns in+ormation to the en user a+ter some initial in$ut is $rovi e . Online bill $a& at a bank also <uali+ies as a management in+ormation s&stem Y 2hen a bill is sche ule to be $ai G the user has $rovi e in+ormation +or the s&stem to act against. The management in+ormation s&stem then $rocesses the $a&ment 2hen the ue ate a$$roaches. The automate action taken b& the online s&stem is to $a& the bill as re<ueste . %ince the bills 2ithin an online bill $a& s&stem can be sche ule to be automaticall& $ai month a+ter monthG the user is not re<uire to $rovi e +urther in+ormation. Man& timesG the bill $a& s&stem 2ill also $ro uce an email +or the user to let him kno2 that the action has occurre an 2hat the outcome o+ the action 2as. Management in+ormation s&stems t&$icall& have their o2n sta++ 2hose +unction it is to maintain e/isting s&stems an im$lement ne2 technologies 2ithin a com$an&. These $ositions are o+ten highl& s$ecialize G allo2ing a team o+ $eo$le to +ocus on i++erent areas 2ithin the com$uter s&stem. In recent &earsG colleges an universities have begun o++ering entire $rograms evote to management in+ormation s&stems. In these $rogramsG stu ents learn ho2 to manage large interconnecte com$uter s&stems an troubleshoot the automation o+ these management in+ormation s&stems. Man& $eo$le use management in+ormation s&stems ever& a& 2ithout thinking about the actual s&stem the& are using. The in ivi ual 2ill see a 2ebsite an enter in+ormation 2ith the e/$ectation that a s$eci+ic action 2ill ha$$enK these 2ebsitesG Rust like the accounting s&stems use b& large cor$orationsG act as management in+ormation s&stems to automate the $rocess.

Definition Management #nformation Systems /M#S3 is the term given to the discipline focused on the integration of computer systems %ith the aims and o!4ectives on an organisation7 The de$elopment and mana ement of information technolo # tools assists e.ecuti$es and the eneral wor%force in performin an# tas%s related to the processin of information. 5"- and business s#stems are especiall# useful in the collation of business data and the production of reports to be used as tools for decision ma%in . -pplications of MIS

=ith com$uters being as ubi<uitous as the& are to a&G thereQs har l& an& large business that oes not rel& e/tensivel& on their IT s&stems. Ho2everG there are several s$eci+ic +iel s in 2hich MI% has become invaluable. S %trateg& %u$$ort =hile com$uters cannot create business strategies b& themselves the& can assist management in un erstan ing the e++ects o+ their strategiesG an hel$ enable e++ective ecision5making. MI% s&stems can be use to trans+orm ata into in+ormation use+ul +or ecision making. #om$uters can $rovi e +inancial statements an $er+ormance re$orts to assist in the $lanningG monitoring an im$lementation o+ strateg&. MI% s&stems $rovi e a valuable +unction in that the& can collate into coherent re$orts unmanageable volumes o+ ata that 2oul other2ise be broa l& useless to ecision makers. B& stu &ing these re$orts ecision5makers can i enti+& $atterns an tren s that 2oul have remaine unseen i+ the ra2 ata 2ere consulte manuall&. MI% s&stems can also use these ra2 ata to run simulations Z h&$othetical scenarios that ans2er a range o+ M2hat i+N <uestions regar ing alterations in strateg&. )or instanceG MI% s&stems can $rovi e $re ictions about the e++ect on sales that an alteration in $rice 2oul have on a $ro uct. These .ecision %u$$ort %&stems A.%%B enable more in+orme ecision making 2ithin an enter$rise than 2oul be $ossible 2ithout MI% s&stems. S .ata -rocessing 7ot onl& o MI% s&stems allo2 +or the collation o+ vast amounts o+ business ataG but the& also $rovi e a valuable time saving bene+it to the 2ork+orce. =here in the $ast business in+ormation ha to be manuall& $rocesse +or +iling an anal&sis it can no2 be entere <uickl& an easil& onto a com$uter b& a ata $rocessorG allo2ing +or +aster ecision making an <uicker re+le/es +or the enter$rise as

:1. 4 311 meter long train $asses a $ole in 1" secon s. =hat is its s$ee in kilometer $er hour> :". :3. :4. In an e/amination 41D stu ents +ail in mathsG 31D in *nglish an 15D in both. )in the $ass $ercentage. I+ the han s o+ a clock are in $er$en icular $osition 2hat 2ill be the time 2hen the& are in the 859 $osition> In the +igure O0 an -0 are ra ii o+ circles. The length o+ O- is 4. I+ O0I"G 2hat is -0>A-0 is tangent to circle 2ith centre OB 0 O :5. -

4B#. is a s<uareG *-,H is a rectangleG 4B I3 *)I4G ),I! 2hat is the area o+ the region outsi e o+ 4B#. an insi e *),H>

) B #

4 *

. H

:!.

4 train com$letes a Rourne& 2ith a +e2 sto$$ages in bet2een at an average s$ee o+ 41 km $er hour. I+ the train ha not sto$$e an&2hereG it 2oul have com$lete the Rourne& at an average s$ee o+ !1 km $er hour on average ho2 man& minutes $er hour oes the train sto$ uring the Rourne&>

:'.

In the +igureG #. is $arallel to *)G 4.I.)G #.I4 an .)I3G 2hat is *)> * #