This action might not be possible to undo. Are you sure you want to continue?
1. Explain the different circumstances under which a suitable growth strategy should be selected by any company to improve its performance (i.e., intensive, integrative or diversification growth). You may select an example of your choice to substantiate your views.
a) Intensive Growth: It refers to the process of identifying opportunities to achieve further growth within the company’s current businesses. To achieve intensive growth, the management should first evaluate the available opportunities to improve the performance of its existing current businesses. It may find three options: · To penetrate into existing markets · To develop new markets · To develop new products At times, it may be possible to gain more market share with the current products in their current markets through a market penetration strategy. For instance, SONY introduced TV sets with Trinitron picture tubes into the market in 1996 priced at a premium of Rs.10,000 and above over the market through a niche market capture strategy. They gradually lowered the prices to market levels. However, it also simultaneously launched higher-end products (high-technology products) to maintain its global image as a technology leader. By lowering the prices of TVs with Trinitron picture tubes, the company could successfully penetrate into the markets to add new customers to its customer base. Market Development Strategy is to explore the possibility to find or develop new markets for its current products (from the northern region to the eastern region etc.). Most multinational companies have been entering Indian markets with this strategy, to develop markets globally. However, care should be taken to ensure that these new markets are not low density or saturated markets, which could lead to price pressures. Product Development Strategy involves consideration of new products of potential interest to its current markets (e.g. Gramaphone Records to Musical Productions to CDs)– as part of a Diversification strategy. b) Integrative Growth: It refers to the process of identifying opportunities to develop or acquire businesses that are related to the company’s current businesses. More often, the business processes have to be integrated for linear growth in the profits. The corporate plan may be designed to undertake backward, forward or horizontal integration within the industry. If a company operating in music systems takes over the manufacturing business of its plastic material supplier, it would be able to gain more control over the market or generate more profit. (Backward Integration) Alternatively, if this company acquires some of its most profitably operating intermediaries such as wholesalers or retailers, it is forward integration. If the company MB0036 Page 1
legally takes over or acquires the business of any of its leading competitors, it is called horizontal integration (however, if this competitor is weak, it might be counterproductive due to dilution of brand image). c) Diversification Growth: It refers to the process of identifying opportunities to develop or acquire businesses that are not related to the company’s current businesses. This makes sense when such opportunities outside the present businesses are identified with attractive returns and that industry has business strengths to be successful. In most cases, this is planned with new products that have technological or marketing synergies with existing businesses to cater to a different group of customers (Concentric Diversification). A printing press might shift over to offset printing with computerised content generation to appeal to higher-end customers and also add new application areas ( Horizontal Diversification ) – or even sell stationery. Alternatively, the company might choose new businesses that have nothing to do with the current technology, products or markets (Conglomerate Diversification). The classic examples for this would be engineering and textile firms setting up software development centres or Call Centres with new service clients. 2. What are the components of a good Business Plan and briefly explain the importance of each. Ans: A business plan is a detailed description of how an organization intends to produce, market and sell a product or service. Whether the business is housing, commercial or some other enterprise, a good business plan describes to others and to your own board of directors, management and staff the details of how you intend to operate and expand your business. A solid business plan describes who you are, what you do, how you will do it, your capacity to do it, what financial resources are necessary to carry it out, and how you intend to secure those resources. A well-written plan will serve as a guide through the start-up phase of the business. It can also establish benchmarks to measure the performance of your business venture in comparison with expectations and industry standards. And most important, a good business plan will help to attract necessary financing by demonstrating the feasibility of your venture and the level of thought and professionalism you bring to the task. The components of a good business plan are: Establish Goals Once you have identified goals for a new business venture, the next step in the business planning process is to identify and select the right business. Many organizations may find themselves starting at this point in the process. Business opportunities may have been dropped at your doorstep. Perhaps an entrepreneurial member of the board of directors or a community resident has approached your organization with an idea for a new business, or a neighbourhood business has closed or moved out of the area, taking jobs and leaving a vacant facility behind. Even if this is the case, we recommend that you take a step back and set goals. Failing to do so could result in a waste of valuable MB0036 Page 2
time and resources pursuing an idea that may seem feasible, but fails to accomplish important goals or to meet the mission of your organization. Depending on the goals you have set, you might take several approaches to identify potential business opportunities. Local Market Study: Whether your goal is to revitalize or fill space in a neighbourhood commercial district or to rehabilitate vacant housing stock, you should conduct a local market study. A good market study will measure the level of existing goods and services provided in the area, and assess the capacity of the area to support existing and additional commercial or home-ownership activity. This assessment is based on the shopping and traffic patterns of the area and the demographic and socio-economic characteristics of the community. A bad or insufficient market study could encourage your organization to pursue a business destined to fail, with potentially disastrous results for the organization as a whole. Through a market study you will be able to identify gaps in existing products and services and unsatisfied demand for additional or expanded products and services. If your organization does not have staff capacity to conduct a market study, you might hire a consultant or solicit the assistance of business administration students from a local college or university. Conducting a solid and thorough market study up front will provide essential information for your final business plan. Analysis of Local and Regional Industry Trends: Another method of investigating potential business opportunities is to research local and regional business and industry trends. You may be able to identify which business or industrial sectors are growing or declining in your city, metropolitan area or region. The regional or metropolitan area planning agency for your area is a good source of data on industry trends. Internal Capacity: The board, staff or membership of your organization may possess knowledge and skills in a particular business sector or industry. Your organization may wish to draw upon this internal expertise in selecting potential business opportunities. Internal Purchasing needs / Collaborative Procurement: Perhaps, your organization frequently purchases a particular service or product. If nearby affiliate organizations also use this service or product, this may present a business opportunity. Examples of such products or services include printing or copying services, travel services, transportation services, property management services, office supplies, catering services, and other products. You will still need to conduct a complete market study to determine the demand for this product or service beyond your internal needs or the needs of your partners or affiliates. Identify Business Opportunities Buying an Existing Business: Rather than starting a new business, you may wish to consider purchasing an existing business. Perhaps a local retail or small light manufacturing business that has been an anchor to the local retail area or a muchneeded source of jobs in the neighbourhood is for sale. Its closure would mean the loss of jobs and services for your neighbourhood. Your organization might consider purchasing and taking over the enterprise instead of starting a new business. If you decide to pursue this option, you still need to go through the steps of creating a business plan. However, before moving ahead, these are just a few important areas to research in assessing the business you plan to purchase:
Be sure to conduct a thorough review of the financial statements for the past three to five years to determine the current fiscal status and recent financial trends, the validity of the accounts receivable and the status of the accounts payable. Are all the required licenses and permits in place and can they be transferred to a new owner? Also look at the quality of key employees who, because of their expertise, may need to remain with the business. You will also need to assess the customer or client base and determine whether its members will remain loyal to the business after it changes hands. Another area to evaluate is the perception or image of the business. Inspect the facilities and talk to suppliers, customers and other businesses in the area to learn more about the reputation of the business. At this early stage of your planning process, be sure to consult an attorney experienced in corporation law. As a non-profit corporation, engaging in income-generating activities not related to your mission may affect your tax-exempt status. You may also wish to protect your organization from any liability issues connected with the proposed business activity. After you have decided on a particular business activity, have a qualified attorney advise you on the proper corporate structure for your new venture. In addition to qualified legal counsel, seek the expertise of an experienced professional in that particular industry. He or she will bring valuable knowledge and insights regarding the industry that will prove extremely useful during the business planning process. Advisory You have decided on a business opportunity that meets the goals of your organization. Now you are ready to test the feasibility of the venture and to present your business concept to the world. A solid business plan will clearly explain the business concept, describe the market for your product or service, attract investment, and establish operating goals and guidelines. The first step in writing your business plan is to identify your target audience. Will this be an internal plan the board will use to assess the feasibility and appropriateness of the business? Or will this plan be distributed to a larger external audience such as funding sources, commercial lenders or the community to gain financial backing and political support for the proposed venture? The content and emphasis of the plan will shift according to the audience.
3. You wish to start a new venture to manufacture auto components. Explain different stages in the process of starting this new business. Ans: The Different Phases of a New Business A new business goes through phases in the business cycle (very similar to the stages of human life).
The first phase – is the formation of an idea. A person – or a group of people join forces, centred around one exciting invention, process or service. These crystallizing ideas have a few hallmarks: They are oriented to fill the needs of a market niche (a small group of select consumers or customers), or to provide an innovative solution to a problem which bothers many, or to create a market for a totally new product or service, or to provide a better solution to a problem which is solved in a less efficient manner. At this stage, what the entrepreneurs need most is expertise. They need a marketing expert to tell them if their idea is marketable and viable. They need a financial expert to tell them if they can get funds in each phase of the business cycle – and wherefrom and also if the product or service can produce enough income to support the business, pay back debts and yield a profit to the investors. They need technical experts to tell them if the idea can or cannot be realized and what it requires by way of technology transfers, engineering skills, know-how, etc. Once the idea has been shaped to its final form by the team of entrepreneurs and experts – the proper legal entity should be formed. A bewildering array of possibilities arises: A partnership? A corporation – and if so, a stock or a non-stock company? A research and development (RND) entity? A foreign company or a local entity? And so on. This decision is of cardinal importance. It has enormous tax implications and in the near future of the firm it greatly influences the firm’s ability to raise funds in foreign capital markets. Thus, a lawyer must be consulted who knows both the local applicable laws and the foreign legislation in markets which could be relevant to the firm. This costs a lot of money, one thing that entrepreneurs are in short supply of free legal advice is likely to be highly appreciated by them. When the firm is properly legally established, registered with all the relevant authorities and has appointed an accounting firm – it can go on to tackle its main business: developing new products and services. At this stage the firm should adopt Western accounting standards and methodology. Accounting systems in many countries leave too much room for creative playing with reserves and with amortization. No one in the West will give the firm credits or invest in it based on domestic financial statements. A whole host of problems faces the new firm immediately upon its formation. Good entrepreneurs do not necessarily make good managers. Management techniques are not a genetic heritage. They must be learnt and assimilated. Today’s modern management includes many elements: manpower, finances, marketing, investing in the firm’s future through the development of new products, services, or even whole new business lines. That is quite a lot and very few people are properly trained to do the job successfully. On top of that, markets do not always react the way entrepreneurs expect them to react. Markets are evolving creatures: they change, develop, disappear and re-appear.
They are exceedingly hard to predict. The sales projections of the firm could prove to be unfounded. Its contingency funds can evaporate. Sometimes it is better to create a product mix: well-recognized brands which sell well – side by side with innovative products. This is a brief – and by no way comprehensive – taste of what awaits the new business and its initiator, the entrepreneur. You see that a lot of money and effort are needed even in the first phases of creating a business. How can the Government help? It could set up an "Entrepreneur’s One Stop Shop". A person wishing to establish a new business will go to a government agency. In one office, he will find the representatives of all the relevant government offices, authorities, agencies and municipalities. He will present his case and the business that he wishes to develop. In a matter of few weeks he will receive all the necessary permits and licences without having to go to each office separately. Having obtained the requisite licences and permits and having registered with all the appropriate authorities – the entrepreneur will move on to the next room in the same building. Here he will receive a list of all the sources of capital available to him both locally and from foreign sources. The terms and conditions of the financing will be specified for each and every source. Example: EBRD – loans of up to 10 years – interest between 6.5% to 8% – grace period of up to 3 years – finances mainly industry, financial services, environmental projects, infrastructure and public services. The entrepreneur will select the sources of funds most suitable for his needs – and proceed to the next room. The next room will contain all the experts necessary to establish the business, get it going – and, most important, raise funds from both local and international institutions. For a symbolic sum they will prepare all the documents required by the financing institutions as per their instructions. But entrepreneurs in many developing countries are still fearful and uninformed. They are intimidated by the complexity of the task facing them. The solution is simple: a tutor or a mentor will be attached to each and every entrepreneur. This tutor will escort the entrepreneur from the first phase to the last. He will be employed by the "One Stop Shop" and his role will be to ease life for the novice businessman. He will transform the person to a businessman. And then they will wish the entrepreneur: "Bon Voyage" – and may the best ones win. There is an inherent conflict between owners and managers of companies. The former want, for instance, to minimize costs – the latter to draw huge salaries as long as they are in power. MB0036 Page 6
In publicly traded companies, the former wish to maximize the value of the stocks (short term), the latter might have a longer term view of things. In the USA, shareholders place emphasis on the appreciation of the stocks (the result of quarterly and annual profit figures). This leaves little room for technological innovation, investment in research and development and in infrastructure. The theory is that workers who also own stocks avoid these cancerous conflicts which, at times, bring companies to ruin and, in many cases, dilapidate them financially and technologically. Whether reality lives up to theory, is an altogether different question. 4. Explain the process of due Diligence and why it is necessary. Ans: A business which wants to attract foreign investments must present a business plan. But a business plan is the equivalent of a visit card. The introduction is very important – but, once the foreign investor has expressed interest, a second, more serious, more onerous and more tedious process commences: Due Diligence. "Due Diligence" is a legal term (borrowed from the securities industry). It means, essentially, to make sure that all the facts regarding the firm are available and have been independently verified. In some respects, it is very similar to an audit. All the documents of the firm are assembled and reviewed, the management is interviewed and a team of financial experts, lawyers and accountants descends on the firm to analyze it. First Rule: The firm must appoint ONE due diligence coordinator. This person interfaces with all outside due diligence teams. He collects all the materials requested and oversees all the activities which make up the due diligence process. The firm must have ONE VOICE. Only one person represents the company, answers questions, makes presentations and serves as a coordinator when the DD teams wish to interview people connected to the firm. Second Rule: Brief your workers. Give them the big picture. Why is the company raising funds, who are the investors, how will the future of the firm (and their personal future) look if the investor comes in. Both employees and management must realize that this is a top priority. They must be instructed not to lie. They must know the DD coordinator and the company’s spokesman in the DD process. The DD is a process which is more structured than the preparation of a Business Plan. It is confined both in time and in subjects: Legal, Financial, Technical, Marketing, Controls. 5. Is Corporate Social Responsibility necessary and how does it benefit a company and its shareholders? Ans: CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.
The main function of an enterprise is to create value through producing goods and services that society demands, thereby generating profit for its owners and shareholders as well as welfare for society, particularly through an ongoing process of job creation. However, new social and market pressures are gradually leading to a change in the values and in the horizon of business activity. There is today a growing perception among enterprises that sustainable business success and shareholder value cannot be achieved solely through maximising shortterm profits, but instead through market-oriented, yet responsible behaviour. Companies are aware that they can contribute to sustainable development by managing their operations in such a way as to enhance economic growth and increase competitiveness whilst ensuring environmental protection and promoting social responsibility, including consumer interests. In this context, an increasing number of firms have embraced a culture of CSR. Despite the wide spectrum of approaches to CSR, there is large consensus on its main features: · CSR is behaviour by businesses over and above legal requirements, voluntarily adopted because businesses deem it to be in their long-term interest; · CSR is intrinsically linked to the concept of sustainable development: businesses need to integrate the economic, social and environmental impact in their operations; · CSR is not an optional "add-on" to business core activities – but about the way in which businesses are managed. Socially responsible initiatives by entrepreneurs have a long tradition in Europe. What distinguishes today’s understanding of CSR from the initiatives of the past is the attempt to manage it strategically and to develop instruments for this. It means a business approach, which puts stakeholder’s expectations and the principle of continuous improvement and innovation at the heart of business strategies. What constitutes CSR depends on the particular situation of individual enterprises and on the specific context in which they operate, be it in Europe or elsewhere. In view of the EU enlargement, it is however important to enhance common understanding both in Member States and candidate countries. There are various theoretical perspectives on the concept of Corporate Responsibility: ranging from a traditional view of the firm (e.g. Friedman, 1962; Walley and Whitehead, 1994) to a call for a complete paradigm shift in business practice (e.g. Dyllick and Hockerts, 2002; Gladwin et al, 1995). However, all views on corporate responsibility are based on the same premise: that there is a corporate strategic approach to environmental and social issues (c.f. Banerjee et al, 2003; Lyon, 2004). Hence, it contains both corporate environmentalism and corporate social responsibility (Dyllick and Hockerts, 2002), leading to the current construct that Corporate Responsibility includes any initiative that reduces the environmental impact and/or contributes to the improvement of the social conditions beyond the firm’s legal obligations (Roome, 2006). As such, it is considered a key development in connecting corporate practices with the societal goal of sustainable development, as firms can “contribute to more sustainable patterns of production and consumption within society” (Roome,2006:p. 137). Corporate Responsibility can be considered as encompassing two components (Banerjee, 2002; Bansal and Roth, 2000; van Marrewijk, 2004): a strategy focus (i.e. how strategically important environmental and social issues are perceived by management), and an orientation aspect (i.e. a set of underlying corporate values that MB0036 Page 8
provide an internal ‘compass’ to which the company can orient its environmental and social actions). The orientation of an organisation has significant strategic power in terms of shaping the organisational direction (Chen et al, 1997; Keogh and Polonsky, 1998; Shrivastava, 1995c). As such, the ‘responsible’ orientation not only influences the overall responsibility of a firm, it also affects the extent and form that actual responsible strategies will take, as well as the ethical behaviour standards and the environmental protection commitment of the organisation (Shrivastava, 1995b). Therefore, the responsible orientation within a firm needs to be studied in more detail to provide additional insights into organisational attitudes towards the environment and society. Various researchers (e.g. Bansal and Roth, 2000; McKay, 2001; Prakash, 2001) found that a multi-theoretical perspective explained some organisational responses to a greater extent than single theories in isolation, and could explain the seemingly ad hoc choices of firms to go beyond legal compliance. Since this paper aims to propose two complementary multidisciplinary approaches, none of the existing theories is judged or favoured above others. Instead, the different theories are used in combination to draw out more comprehensive notions of the role of values in corporate responsibility. Assuming that organisations are open systems (Katz and Kahn, 1966), and as such become interdependent with those elements of the environment with which they transact (Pfeffer, 1982), organisations work within such interdependencies to reduce uncertainty and ensure survival (DiMaggio, 1988; McKay, 2001). Based on this, the central premise of resource dependence is that power relations among actors are commonly asymmetrical and that organisations strive to obtain power, maintain autonomy, and reduce uncertainty in the context of external pressures and demands. Control over resources is critical in maintaining power and is therefore pursued by organisations (McKay, 2001). As such, an organisation-wide dedication to a compelling long-range vision (a shared vision) is the key to generating the internal pressure and enthusiasm needed for [responsible] innovation and change (Hamel and Prahalad, 1989; Hart, 1995). Given the difficulty of generating a consensus about a purpose, shared vision is a rare (firm-specific) resource, and few companies have been able to establish or maintain a widely shared or enduring sense of mission (Hamel and Prahalad, 1989). Starik and Rands (1995) extended this idea to include values, as these act as a mechanism to unify and orient organisational units toward sustainability. Norms and shared values are essential to understand the sustainability of organisations, and provide links between the organisation and the environment and society (Starik and Rands, 1995). Institutional theory is also based on the open systems assumption as described above. However, the central premise of institutional theory is that survival arises out of conformity to external rules and norms. Thus, the theory examines how external social and regulatory pressures influence organisational actions (Scott 1987). Due to the powerful nature of environmental influences, organisations seek to conform to environmental pressures as a way to secure stability, legitimacy and access to resources. Those organisations that are responsive to such institutional pressures are assumed to be more likely to survive (DiMaggio and Powell, 1983; McKay, 2001). In setting environmental strategy and structure, firms may choose action from a repertoire of possible options. However, the internal structure and culture of the firm reflect the dominant institutions of the organisational field, hence the range of that repertoire is bound by the rules, norms, and beliefs of the organisational field (Hoffman, 1997). Based on the ‘systems’ view of organisations, the central premise of stakeholder theory is that there are specific interest groups in the outside environment, which have a stake in the behaviour and effectiveness of that organisation (Freeman, 1984). Although MB0036 Page 9
stakeholder theory shares notions of power with both previously discussed theories, neither resource dependence theory nor institutional theory appears to suffice to explain the full range of stakeholder power. Both theories offer explanations of reactions to economic or formal/legal pressures, but fail to account for political pressures (Jonker and Foster, 2002): where environmental or social stakeholders are involved, there is neither resource dependency nor formal/legal pressure to conform (Frooman, 1999). The perception of the responsible managers influences the approach to stakeholders (e.g. Collison et al, 2003; Cormier et al, 2004; Sharma and Henriques, 2005), and it is argued that “responses to environmental pressures can vary widely among firms depending on managerial perceptions of environmental risks and opportunities … on their interpretation of the importance and relationship of the natural environment to their business activity” (Banerjee, 1998: p. 148). In explicitly describing the values and responsibilities of a firm, business codes can help by providing a framework for managers to guide their decisions, and simultaneously informing external stakeholders (Kaptein, 2004). A number of scholars argue that current research and practice in corporate environmentalism may be limited by the assumptions under which much is carried out (Porter, 2005). These authors therefore call for a revolutionary way of thinking about business regarding environment and society (e.g. Dyllick and Hockerts, 2002; Gladwin et al, 1995; Peattie, 2000; Shrivastava (1995a); Stern et al. (1995)). A variety of authors (e.g. Banerjee, 2001; Gladwin et al. 1995; Hoffman, 2000) have demonstrated how using traditional management theories (in particular institutional theory, strategic choice, transformational leadership) can hinder efforts to change to a more ‘green’ state of doing business at the institutional as well as the organisational level. Therefore, new perspectives, preferably from new domains, are required to challenge current assumptions and facilitate the transition of developing appropriate organisational values (Starkey and Crane, 2003). From the above, we could conclude that shared values are a key component in attaining a shared vision of the Corporate Responsibility of an organisation and to guide interactions with stakeholders, and are formed by rules, norms and ethical behaviour standards from both inside and outside of the organisation. However, there is academic and anecdotal evidence that the integration of corporate responsibility throughout the hierarchy of organisations is marginal, and even absent in some cases (e.g. Barakat, 2006b; Knox et al, 2005). A recent study by Barakat (2006b) suggested that among employees in three UK case studies there was a general absence of shared meaning with regards to key environmental themes and issues (although smaller clusters around hierarchical levels and some functional groups shared some experiences on some issues). There was no system for the identification and definition of environmental concepts, no explicit means by which concepts could be shared and discussed, and no mechanism to indicate to employees the concepts and definitions that would be acceptable and those that would not. Hence, employees experienced their firm’s corporate environmentalism predominantly in an individual manner. The perceived corporate orientation towards environmentalism followed this, and this study therefore offers some evidence that corporate environmental orientation can be perceived and experienced differently within the same organisation. Furthermore, many researchers and practitioners in the Corporate Responsibility field (e.g. Banerjee et al, 2003; Juholin, 2004; Murphy, 1988) have argued (or assumed) that the vision and commitment of senior management is communicated clearly, and understood and incorporated by all staff within the organisation in the manner as it was initially intended (Preston, 2001; Ramus, 2001). Yet, there is little evidence that this MB0036 Page 10
assumption is grounded in practice (Barakat, 2006a; Knox et al, 1995). Even more so, there is evidence that (mainly lower-level) employees do not perceive their firm to be pro-active in its environmental and social responsibilities (e.g. Barakat, 2006a; Lingard et al, 2000; Ramasamy and Woan-Ting, 2004). Research suggests that since employees are not oblivious to the ethical climate of the company, this interaction affects the trust that employees have of their organisations and affects their commitment to it (Van Dyne et al, 1994; Fritz et al, 1999; Gross and Etzioni, 1985). Also, the employees’ experience of Corporate Responsibility appears to be significantly affected by their perception of the behaviours and attitudes of management, especially if an employee perceives an inconsistency between the immediate manager and the corporate policy (Ramus, 2001). The resultant dissatisfaction and lack of engagement could potentially impact the success of responsible initiatives (e.g. Preston, 2001; Ramus, 2001). Hence, it has become important to understand how Corporate Responsibility is interpreted by decision-makers (Banerjee, 2002) and decision implementers. 6. Distinguish between a Financial Investor explaining the role they play in a Company. and a Strategic Investor
Ans: Within the not so distant past, there was little difference among financial and strategic investors. Investors of all colours sought to safeguard their investment by taking over as many management functions as they could. Additionally, investments were small and shareholders few. A firm resembled a household and the number of individuals involved - in ownership and in management - was correspondingly limited. People invested in industries they were acquainted with initial hand. As markets grew, the scales of industrial production (and of service provision) expanded. A single investor (or a small group of investors) could no longer accommodate the needs even of a single firm. As knowledge increased and specialization ensued - it was no longer feasible or possible to micro-manage a firm one invested in. In fact, separate businesses of money making and business management emerged. An investor was expected to excel in obtaining high yields on his capital - not in industrial management or in marketing. A manager was expected to manage, not to become capable of personally tackling the various and varying tasks of the business that he managed. Thus, two classes of investors emerged. One type supplied firms with capital. The other type supplied them with know-how, technology, management skills, marketing methods, intellectual property, clientele and a vision, a sense of direction. In many cases, the strategic investor also provided the necessary funding. But, a lot more and much more, a separation was maintained. Venture capital and risk capital funds, for instance, are purely financial investors. So are, to a growing extent, investment banks and other financial institutions. The financial investor represents the past. Its funds could be the result of past - right and wrong - decisions. Its orientation is short term: an "exit strategy" is sought as soon as feasible. For "exit strategy" read quick profits. The financial investor is always on the lookout, searching for willing buyers for his stake. The stock exchange can be a popular exit method. The financial investor has little interest inside the company's management. Optimally, his money buys for him not only a great product and a great industry, but also an excellent management. But his interpretation with the rolls and functions of "good management" are really diverse to that offered by the strategic investor. The financial investor is satisfied having a management team which maximizes value. The cost of his shares is probably the most essential indication of success. This really is MB0036 Page 11
"bottom line" short termism which also characterizes operators in the capital markets. Invested in so numerous ventures and firms, the financial investor has no interest, nor the resources to obtain seriously involved in any a single of them. Micro-management is left to others - but, in several cases, so is macro-management. The financial investor participates in quarterly or annual general shareholders meetings. This is the extent of its involvement. The strategic investor, on the other hand, represents the actual lengthy term accumulator of value. Paradoxically, it is the strategic investor that has the greater influence on the value with the company's shares. The quality of management, the rate from the introduction of new products, the success or failure of marketing methods, the level of customer satisfaction, the education of the workforce - all depend on the strategic investor. That there is a strong relationship in between the quality and decisions from the strategic investor and the share price is small wonder. The strategic investor represents a discounted future inside the same manner that shares do. Indeed, gradually, the balance among financial investors and strategic investors is shifting in favour with the latter. People understand that money is abundant and what is in short supply is good management. Given the ability to create a brand, to generate profits, to issue new products and to acquire new clients - money is abundant.
MB0036 – Strategic Management & Business Policy Assignment Set- 2
1. What is the purpose of a Business Plan? Explain the features of the component of the Plan dealing with the Company and its product description. Ans: A business plan is a detailed description of how an organization intends to produce, market and sell a product or service. Whether the business is housing, commercial or some other enterprise, a good business plan describes to others and to your own board of directors, management and staff the details of how you intend to operate and expand your business. A solid business plan describes who you are, what you do, how you will do it, your capacity to do it, what financial resources are necessary to carry it out, and how you intend to secure those resources. A well-written plan will serve as a guide through the start-up phase of the business. It can also establish benchmarks to measure the performance of your business venture in comparison with expectations and industry standards. And most important, a good business plan will help to attract necessary financing by demonstrating the feasibility of your venture and the level of thought and professionalism you bring to the task. A good business plan will help attract necessary financing by demonstrating the feasibility of your venture and the level of thought and professionalism you bring to the task. Product or Service: After describing your company and its industry context, describe the products or services you plan to provide. Focus on what distinguishes your product MB0036 Page 12
or service from the rest of the market. Discuss what will attract consumers to your product or service. Provide as much detail as necessary to inform the reader about the particular characteristics of your product that distinguish it from its competition – many nonprofits, for example, expect to produce higher-quality housing than otherwise exists in the area. Mention any distinctive elements in the manufacture of the product, such as being “hand-made by a particular people from a specific area.” If you are providing a service, explain the steps you will take to provide a service that is better than your competition. Price: Provide a realistic estimate of the price for your product or service, and discuss the rationale behind that price. An unrealistic price estimate may undermine the credibility of your plan and raise concerns that your product or service may not be of sufficient quality or that you will not be able to maintain profitability in the long run. Describe where this price positions you in the marketplace: at the high end, low end or in the middle of the existing range of prices for a similar product or service. In other sections of the plan you will discuss the target market for your product or service and also provide additional details on how the price of your product fits into the overall financial projections for the enterprise. Place: Describe the location where you will produce or distribute your product or provide your service. Discuss the advantages of the location, such as its accessibility, surrounding amenities and other characteristics that may enhance your business. Depending on your anticipated customer base, accessibility to your location via public transportation could affect the marketability of your product or service. Customers: In this section of your business plan, you will describe the customer base or market for your product or service. In addition to providing a detailed description of your customer base, you will also need to describe your competition (other local developers or nearby businesses providing a similar service to your potential customer base). Who will purchase your product or use your service? How large is your customer base? Define the characteristics of your target market in terms of its: · Demographics – Measures of age, gender, race, religion and family size. · Geography – Measures based on location. · Socioeconomic Status – Measures based on individual or household annual income. Provide statistical data to describe the size of your target market. Sources for this information may include recent data from the Bureau of Statistics, state or local census data, or information gathered by your organization, such as membership lists, neighborhood surveys and group or individual interviews. Be sure to list the sources for your data, as this will further validate your market assumptions. Include any relevant information regarding the growth potential for your target market if your business is expected to rely on growth. Cite any research forecasting population increases in your target market or other trends and factors that may increase the demand for your product or service.
Competition: Discuss how people identified in your target market currently meet their need for your product or service. What other businesses exist in your area that are similar to your proposed venture? For example, for a housing business, what are the local markets for purchase and rental? How much are people currently paying for similar products or services? Briefly describe what differentiates your proposed venture from these existing businesses and discuss why you are entering this market. Sales Projections: Present an estimate of how many people you expect will purchase your product or service. Your estimate should be based on the size of your market, the characteristics of your customers and the share of the market you will gain over your competition. Project how many units you will sell at a specified price over several years. The initial year should be broken down in monthly or quarterly increments. Account for initial presentation and market penetration of your product and any seasonal variations in sales, if appropriate. 2. Write short notes on: a) sales projections b) importance of creativity in Business.
Ans: a) Sales Projections present an estimate of how many people you expect will
purchase your product or service. Your estimate should be based on the size of your market, the characteristics of your customers and the share of the market you will gain over your competition. Project how many units you will sell at a specified price over several years. The initial year should be broken down in monthly or quarterly increments. Account for initial presentation and market penetration of your product and any seasonal variations in sales, if appropriate. b) Importance of creativity in Business: Logical thinking progresses in a series of steps, each one dependent on the last. This new knowledge is merely an extension of what we know already, rather than being truly new. The need for creative problem solving has arisen as a result of the inadequacies of logical thinking. It is a method of using imagination along with techniques which use analogies, associations and other mechanisms to help produce insights into problems which might not otherwise be obtained through conventional, traditional methods of problem solving. In management, problems arise as different or new situations present themselves and they often require novel solutions. Frequently, it is difficult to see solutions to problems by thinking in a conventional fashion. Logical thinking takes our existing knowledge and uses rules of inference to produce new knowledge. However, because logical thinking progresses in a series of steps, each one dependent on the last, this new knowledge is merely an extension of what we know already, rather than being truly new. It would seem, therefore, that logical thinking has only a limited role to play in helping managers to be creative. The need for creative problem solving has arisen as a result of the inadequacies of logical thinking. It is a method of using imagination along with techniques which use analogies, associations and other mechanisms to help produce insights into problems. Over the past few decades creativity has become a highly fashionable topic in both the academic and business worlds. That is not to say that creativity did not exist before, but its importance to the continued success of an organisation had yet to be recognised. Many management problems require creative insights in order to find satisfactory solutions. Nowadays, the majority of organisations are fully aware of just how vital creativity is to their prosperity. Over time, considerable research has been undertaken which enables us to obtain a better understanding of creativity and become more innovative ourselves. MB0036 Page 14
3. What factors are to be taken into account in a crisis communications strategy?
Crisis Communication is also sometimes considered a sub-speciality of the Business Continuity area of modern business. The aim of crisis communication in this context is to assist organisations to achieve continuity of critical business processes and information flows under crisis, disaster or event driven circumstances. Responding quickly, efficiently, effectively and in a premeditated way are the primary objectives of an effective crisis communication strategy and/or solution. Harnessing technology and people to ensure a rapid and co-ordinated response to a range of potentially crippling scenarios distinguishes a well thought out and executed plan from a poorly or ill-considered one. The inherent lag time in marshalling responses to a crisis can result in considerable losses to company revenues, reputation as well as substantially impacting on costs. Effective crisis communication strategies will typically consider achieving most, if not all, of the following objectives:
• • • • • • • • • •
Maintain connectivity Be readily accessible to the news media Show empathy for the people involved Allow distributed access Streamline communication processes Maintain information security Ensure uninterrupted audit trails Deliver high volume communications Support multi-channel communications Remove dependencies on paper based processes
By definition a crisis is an unexpected and detrimental situation or event. Crisis communication can play a significant role by transforming the unexpected into the anticipated and responding accordingly. 4. What elements should be included in a Marketing Plan under Due Diligence while seeking investment in for your Company? Ans: A business which wants to attract foreign investments must present a business plan. But a business plan is the equivalent of a visit card. The introduction is very important – but, once the foreign investor has expressed interest, a second, more serious, more onerous and more tedious process commences: Due Diligence. "Due Diligence" is a legal term (borrowed from the securities industry). It means, essentially, to make sure that all the facts regarding the firm are available and have been independently verified. In some respects, it is very similar to an audit. All the documents of the firm are assembled and reviewed, the management is interviewed and a team of financial experts, lawyers and accountants descends on the firm to analyze it.
First Rule: The firm must appoint ONE due diligence coordinator. This person interfaces with all outside due diligence teams. He collects all the materials requested and oversees all the activities which make up the due diligence process. The firm must have ONE VOICE. Only one person represents the company, answers questions, makes presentations and serves as a coordinator when the DD teams wish to interview people connected to the firm. Second Rule: Brief your workers. Give them the big picture. Why is the company raising funds, who are the investors, how will the future of the firm (and their personal future) look if the investor comes in. Both employees and management must realize that this is a top priority. They must be instructed not to lie. They must know the DD coordinator and the company’s spokesman in the DD process. The DD is a process which is more structured than the preparation of a Business Plan. It is confined both in time and in subjects: Legal, Financial, Technical, Marketing, Controls. The Marketing Plan Must include the following elements: · A brief history of the business (to show its track performance and growth) · Points regarding the political, legal (licences) and competitive environment · A vision of the business in the future · Products and services and their uses · Comparison of the firm’s products and services to those of the competitors · Warranties, guarantees and after-sales service · Development of new products or services · A general overview of the market and market segmentation · Is the market rising or falling (the trend: past and future) · What customer needs do the products / services satisfy · Which markets segments do we concentrate on and why · What factors are important in the customer’s decision to buy (or not to buy) · A list of the direct competitors and a short description of each · The strengths and weaknesses of the competitors relative to the firm · Missing information regarding the markets, the clients and the competitors · Planned market research · A sales forecast by product group · The pricing strategy (how is pricing decided) · Promotion of the sales of the products (including a description of the sales force, sales-related incentives, sales targets, training of the sales personnel, special offers, dealerships, telemarketing and sales support). Attach a flow chart of the purchasing process from the moment that the client is approached by the sales force until he buys the product. · Marketing and advertising campaigns (including cost estimates) – broken by market and by media · Distribution of the products · A flow chart describing the receipt of orders, invoicing, shipping. · Customer after-sales service (hotline, support, maintenance, complaints, upgrades, etc.) · Customer loyalty (example: churn rate and how is it monitored and controlled). Legal Details · Full name of the firm · Ownership of the firm · Court registration documents MB0036 Page 16
· Copies of all protocols of the Board of Directors and the General Assembly of Shareholders · Signatory rights backed by the appropriate decisions · The charter (statute) of the firm and other incorporation documents · Copies of licences granted to the firm · A legal opinion regarding the above licences · A list of lawsuit that were filed against the firm and that the firm filed against third parties (litigation) plus a list of disputes which are likely to reach the courts · Legal opinions regarding the possible outcomes of all the lawsuits and disputes including their potential influence on the firm Financial Due Diligence · Last 3 years income statements of the firm or of constituents of the firm, if the firm is the result of a merger. The statements have to include: · Balance Sheets · Income Statements · Cash Flow statements · Audit reports (preferably done according to the International Accounting Standards, or, if the firm is looking to raise money in the USA, in accordance with FASB) · Cash Flow Projections and the assumptions underlying them Controls · Accounting systems used · Methods to price products and services · Payment terms, collections of debts and ageing of receivables · Introduction of international accounting standards · Monitoring of sales · Monitoring of orders and shipments · Keeping of records, filing, archives · Cost accounting system · Budgeting and budget monitoring and controls · Internal audits (frequency and procedures) · External audits (frequency and procedures) · The banks that the firm is working with: history, references, balances Technical Plan · Description of manufacturing processes (hardware, software, communications, other) · Need for know-how, technological transfer and licensing required · Suppliers of equipment, software, services (including offers) · Manpower (skilled and unskilled) · Infrastructure (power, water, etc.) · Transport and communications (example: satellites, lines, receivers, transmitters) · Raw materials: sources, cost and quality · Relations with suppliers and support industries · Import restrictions or licensing (where applicable) · Sites, technical specification · Environmental issues and how they are addressed · Leases, special arrangements · Integration of new operations into existing ones (protocols, etc.) A successful due diligence is the key to an eventual investment. This is a process much more serious and important than the preparation of the Business Plan. MB0036 Page 17
5. Distinguish between Joint Ventures and Licensing, explaining the relative advantages and disadvantages of each. Ans: Licensing: One basic choice is whether you should actively exploit your IP rights yourself, or to keep your IP rights and license them to others to use, or sell or assign the rights to another person. You can, in principle, make different choices in different countries for exploiting IP rights for the same underlying invention. If you are based in Malaysia, you could in theory decide to exploit your patent yourself in the East Asian region, grant a licence a Canadian company to use the invention in North America, and sell or assign the rights in Europe to a Danish company – whether or not this is the best approach in practice is a different matter, of course. A licence is a grant of permission made by the patent owner to another to exercise any specified rights as agreed. Licensing is a good way for an owner to benefit from their work as they retain ownership of the patented invention while granting permission to others to use it and gaining benefits, such as financial royalties, from that use. However, it normally requires the owner of the invention to invest time and resources in monitoring the licensed use, and in maintaining and enforcing the underlying IP right. The patent right normally includes the right to exclude others from making, using, selling or importing the patented product, and similar rights concerning patented processes. The license can therefore cover the use of the patented invention in many different ways. For instance, licences can be exclusive or non-exclusive. If a patent owner grants a nonexclusive licence to Company A to make and sell their patented invention in Malaysia, the patent owner would still be able to also grant Company B another non-exclusive for the same rights and the same time period in Malaysia. In contrast, if a patent owner granted an exclusive licence to Company A to make and sell the invention in Malaysia, they would not be able to give a licence to anyone else in Malaysia while the licence with Company A remained in force. Licenses are normally confined to a particular geographical area – typically, the jurisdiction in which particular IP rights have effect. You can grant different exclusive licences for different territories at the same time. For example, a patent owner can grant an exclusive licence to make and sell their patented invention in Malaysia for the term of the patent, and grant a separate exclusive licence to manufacture and sell their patented invention in India for the term of the patent. Separate licences can be granted for different ways of using the same technology. For example, if an inventor creates a new form of pharmaceutical delivery, she could grant an exclusive licence to one company to use the technology for an arthritis drug, a separate exclusive licence to another company to use it for relief of cold symptoms, and a further exclusive licence to a third company to use it for veterinary pharmaceuticals. A licence is merely the grant of permission to undertake some of the actions covered by intellectual property rights, and the patent holder retains ownership and control of the basic patent. An assignment of intellectual property rights is the sale of a patent right, or a share of the patent.
It should be remembered that the person who makes an invention can be different to the person who owns the patent rights in that invention. If an inventor assigns their patent rights to someone else they no longer own those rights. Indeed, they can be in infringement of the patent right if they continue to use it. Patent licences and assignments of patent rights do not have to cover all patent rights together. Licences are often limited to specific rights, territories and time periods. For example, a patent owner could exclusively licence only their importation right to a company for the territory of Indonesia for 12 months. If an inventor owns patents on the same invention in five different countries, they could assign (or sell) these patents to five different owners in each of those countries. Portions of a patent right can also be assigned – so that in order to finance your invention, you might choose to sell a half-share to a commercial partner. If you assign your rights, you normally lose any possibility of further licensing or commercially exploiting your intellectual property rights. Therefore, the amount you charge for an assignment is usually considerably higher than the royalty fee you would charge for a patent licence. When assigning the rights, you might seek to negotiate a licence from the new owner to ensure that you can continue to use your invention. For instance, you might negotiate an arrangement that gives you licence to use the patented invention in the event that you come up with an improvement on your original invention and this falls within the scope of the assigned patent. Equally, the new owner of the assigned patent might want to get access to your subsequent improvements on the invention. Joint Venture: Rather than simply exploit your IP rights by licensing or assignment, you might choose to set up a new legal mechanism to exploit your technology. Typically this can be a partnership expressed through a joint venture agreement or a new corporation, such as a start-up or spin-off company. These options require much more work on your part than licensing or assigning your intellectual property rights. This could be a desirable choice in cases where: – you want to keep your institute’s research activities separate from the development and commercialisation of technology, especially when your institute has a public interest focus or an educational role; or – you need to attract financial support from those prepared to take a risk with an unproven technology (‘angel investors’ or ‘venture capitalists’), and they will only take on a long-term risk if they can get a share of future profits of the technology. In working out the right vehicle for your technology, you will normally need specific legal advice from a commercial lawyer, preferably one with experience in technology and commercialisation in your jurisdiction. The laws governing partnerships and companies differ considerably from one country to another, and this discussion is only intended to give a general flavour of the various options. A joint venture agreement involves a formal, legally binding commitment between two or more partners to work together on a shared enterprise. It is normally created for a specific purpose (for example, to commercialise a specific new technology) and for a limited duration. For instance, you might sign a partnership agreement with a MB0036 Page 19
manufacturing company to develop and market a product based on your invention. Before entering into a joint venture agreement, you need to check out possible commercial partners and make sure that the objectives of your potential commercial partners are consistent with your objectives. In the joint venture agreement, the partners typically agree to share the benefits, as well as the risks and liabilities, in a specified way. But this kind of partnership isn’t normally able in itself to enter legal commitments, or own IP in its own right, so that the partners remain directly legally responsible for any losses or other liabilities that the partnership’s operations create. In other words, a partnership which is not a corporation, a company or a specific institution doesn’t really separately exist as a legal entity. By contrast, a company is a new legal entity (a ‘legal person’ recognised by the law as having its own legal identity) which can own and license IP and enter into legal commitments in its own right. A spin-off company is an independent company created from an existing legal body – for example, if a research institute decided to turn its licensing division or a particular laboratory into a separate company. A start-up company is a general term for a new company in its early stages of development. If a company is defined as a limited liability company, the partners or investors normally cannot lose more than their investment in the company (but officeholders in the company might be personally responsible for their actions in the way they manage the company). This separate legal identity means that a start-up company can be a useful way of developing and commercialising a new technology based on original research, while keeping the main research effort of an institute focussed on broader scientific and public objectives, and insulated from the commercial risks and pressures of the commercialisation process. At the same time, the research institute can benefit from the commercialisation of its research, through receiving its share of the profits and growth in assets of the spin-off company, thus strengthening the institute’s capacity to do scientific research. The company is normally owned through shares (its ‘equity’). These effectively represent a portion of the assets and entitlement to profits of the company. Investors can purchase shares in the company, which is one way of bringing in new financial resources to support the development of the technology – in exchange, the investors stand to benefit from the growth in the company’s worth, as their shares proportionately rise in value, and to receive a portion of any profits produced by the company’s operations, commensurate with the number of shares they own. If it is a public company, shares in the company can be bought and sold on the open stock market. An initial public offering is when the shares in a start up company are first made available to the public to purchase. A private company’s shares, by contrast, are not traded on the open market (but can still be bought and sold). The option of starting up your own company to manufacture and market your patented invention requires you to have business skills, marketing skills, management skills and substantial capital to draw on for factory premises, hiring staff and so on. But it also can offer a mechanism for attracting financial backing for research, development and marketing, which can improve access to the necessary resources and expertise. Which model of commercialisation is best for you? Each new technology and associated package of IP rights is potentially difference, and the mechanism you choose for commercialisation should take into account the particular features of the technology. One basic consideration is to what extent you, as MB0036 Page 20
originator of the technology, wish to be involved and to invest in the subsequent development of the technology. You will need to compare the advantages and disadvantages of each model of commercialisation. Generally speaking, the higher degree of risk and commitment of finance and resources you can invest, the higher the degree of control you can secure over exploitation of the technology invention, and the higher the financial return to your institution may be. There are many possible variations on each of these general models, and in practice they can overlap. In deciding which model of commercialisation is best for you, it is always a good idea to seek commercial or legal advice. Remember that IPRs alone do not guarantee you a financial return on your invention. You need to make good commercial decisions to benefit financially from your intellectual property rights. Properly managed, intellectual property rights should not be a burden but should yield a return from your hard work in creating an invention. 6. You wish to commercialize your invention. What factors would you weigh in choosing an appropriate course?
The cost of going through the patenting process in a number of countries is typically beyond the resources of all but the largest companies and research establishments, and most enterprises and institutions require some kind of commercial partnership or financial support to gain, and to keep in force, the patent rights. The case is similar for other intellectual property rights, like plant breeders’ rights, trademarks, and industrial designs, although these normally cost less overall than patents. The applicant takes a risk and invests time and money in the process of obtaining an IP right. The hope is that the IP right will improve their capacity to develop a new product and gain the benefits from their research and innovation. But when the costs are unpredictable and potentially high, and the future benefits from the IP right are uncertain and may only be realized after a number of years, it can be difficult to work out whether it is worth making the investment. Unregistered rights, like trade secrets and copyright, do not incur direct costs in the same way, but may involve investment in physical security, preparation of confidentiality agreements, and monitoring and enforcement costs. In short, obtaining registered intellectual property rights can be expensive, and do not in themselves make you any returns for your investment. Patents can be costly liabilities to you, your business or your research institute, unless you can find a way to apply your invention commercially or can get other forms of financial support. This calls for a range of skills and experience quite apart from technological and scientific skills. Often the most difficult aspect of putting a new technology to work, and of making it available to the public, lies not in the patenting process, but in finding a suitable commercial vehicle to gain suitable returns from the invention, including through commercial use of the patent. Commercialising inventions can involve a great deal of commercial risk, which small companies and research institutes might not be able to accept and manage. Because of these considerations, in many cases institutions and companies choose not to commercialise their invention at all, but elect to sell (‘assign’) or license their rights to the invention to other companies for them to take the invention to the marketplace. MB0036 Page 21
Because intellectual property rights can be so costly to obtain, to keep in force and to enforce, they should not be pursued for their own sake. Patenting your invention may be worthless, and in fact could waste resources, unless you have a commercial strategy in which your patenting program has a logical place. And this strategy will usually involve some form of partnership – this may be a bank or venture capitalist providing you with the funds you need, a company with access to technology or a product that is needed for the success of your invention, or a commercial enterprise with product development and marketing skills. When you are weighing up whether to commercialise your invention yourself, or whether you should find commercial partners or another way of developing your invention, you should consider: 1. Your overall objectives: Are you looking just to fund further research, or to create a new industry particularly for the benefit of your own country, or to build up a capital asset, or simply to disseminate the fruits of your research as broadly as possible, with some control over the way the technology is used? 2. Your financial position: Can you accept the cost and financial risk of investing in patents and other IPRs, and other aspects of commercialisation; do you have the reserves to defend and enforce your IPRs, potentially in several countries; will financial constraints keep you out of some of the major potential markets for the invention? 3. The skills and resources available: Do you, or your organization, have the capacity to develop and implement a product development and marketing program for a new product? What are the focus and core expertise of your organization? 4. Regulatory requirements for getting onto the market: Do you have access to sufficient expertise and resources to undertake the kind of testing and approval processes that might be required for a new product, such as a new pharmaceutical, a new pesticide or a genetically modified crop? Can you deal with labelling and certification requirements in different countries? Are there joint ventures or local participation obligations to enter some markets? 5. Your options for overseas production or export: Do you have the capacity to produce, export and market your invention in major foreign markets? 6. The nature of the technology: The invention may require access to other IPprotected technologies or know-how for it to be produced; and particular manufacturing technologies might be required for it to be made in an economic manner, so that the product is competitively priced. 7. The strength of the competition: Does your product need to find a place in a crowded market with strong competition, requiring the backing and resources of a major company in the field? 8. The range of possible uses for your invention: Do you have the capacity to put it to work in all the areas it could be used, or do you need partnership with others to make sure your invention achieves its full potential?
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.