MBA Summary

1
Contents
Section title Page

1 Marketing Management 
2 International Marketing 
3 Marketing Research 
4 Seminar in Marketing Management -------
5 Promotion & Advertising 
6 Consumer Behavior 
7 Management of Information System 
8 Channels of Distributions 
9 Applied statistics 
10 Managerial Accounting 
11 Managerial Finance 
12 Managerial Economics 
13 Operations Management 
14 Contemporary Management 
15 Human Resources Management 
16 Strategic Management
Prepared by: Saied Ibrahim

Marketing Management
Marketing
Management

Marketing is the ability to identify and satisfy customer needs at a profit.
Sales: is trying to get the customer to want what the company produces.
While Marketing: is trying to get the company produce what the customer wants.
The analysis, planning, implementation, and control of programs designed to create, build, and maintain
beneficial exchanges with target buyers for the purpose of achieving organizational objectives.
→ The marketing manager is considered to be the bridge that connects the company with the customer.
→ His functions are four: ( APIC )
Analysis, Planning, Implementing & Control
What is marketed?
Goods Services Events Experiences Persons
Places Properties Organizations Information Ideas
Marketing management philosophies ( Concepts):
Company Concepts ( Company orientation towards Marketplace )

The The product The selling The marketing The societal marketing concept
production concept concept concept • Determining needs, wants and
concept Focuses on Undertakes Determining interests of the target markets
Focuses on quality, large-scale needs and • Delivering desired satisfactions
production performance selling and wants of the more effectively & efficiently than
and and promotion target markets competitors
distribution innovation efforts • Maintaining or improving
consumers’ and society’s well
being

Marketplaces, Marketspaces & Metamarkets:

 Marketplace : is physical such as a store you shop in.
 Marketspace : is digital as when you shop on the internet.
 Metamarket : cluster of complementary products & services closely related in the minds of
consumers, but spread across a diverse set of industries.
e.g. The automobile metamarket consists of automobile manufacturers, new & user car dealers,
financing companies, insurance companies, mechanics, spare parts dealer, service shops, auto
magazines, classified auto ads in newspapers & auto sites on the internet.
 Needs, Wants & Demands :

Needs - are the basic human requirements such as for air, food, water, clothing & shelter.
Wants - the needs become wants when they are directed to specific objects that might satisfy the need.
- e.g. A person in Afghanistan needs food but may want rice, lamb, & carrots while A U.S
Consumer needs food but may want a Philly Cheese steak & ice tea.
Demands - are wants for specific products backed by an ability to pay.

- e.g. many people wants a Mercedes; only a few are able to buy one.
۩ Eight demand states are possible:
1. Negative demand—consumers dislike the product and may even pay a price to
avoid it.
2. Non-existent demand—consumers may be unaware or uninterested in the product.
3. Latent demand—consumers may share a strong need that cannot be satisfied by an
existing product.
4. Declining demand—consumers begin to buy the product less frequently or not at
all.
5. Irregular demand—consumer purchases vary on a seasonal, monthly, daily, or even
an hourly basis.
6. Full demand—consumers are adequately buying all product put into the
marketplace.
7. Overfull demand—too many consumers would like to buy the product
8. Unwholesome demand—consumers may be attracted to products that have
undesirable social consequences.
CRM – Customer relationship management

“is the overall process of building and maintaining profitable customer relationships by delivering
superior customer value and satisfaction.”
• It costs 5 to 10 times MORE to attract a new customer than it does to keep a current customer
satisfied.
• Marketers must be concerned with the lifetime value of the customer.

Marketing plan
1) Executive summary
2) Situational analysis
3) Objectives
4) Strategies
5) Tactics
6) Marketing mix
7) S.T.P.
8) Budget
9) Implementation
10) Control
1 - Executive Summary
- The executive summary of a marketing plan is a brief overview of the entire plan.
- It introduces your company or business to the reader and highlights the main points of your
marketing plan.
- Many people, especially those in positions of authority, are too busy to read an entire marketing
plan; the executive summary allows them to have a basic understanding of your plan without
having to read through a lengthy document.
- Components: (6 vital components)
1. Market Overview.
2. Competitive Overview.
3. Product Overview.
4. Goals and Objectives.
5. Strategies.
6. Action Plan and Implementation Schedule.
Section I: Market Overview

- Your market overview section should consist of a succinct (brief) overview of your business
market.
- More importantly, you must lay-out your most crucial facts which should answer the following
questions:
 How great is your market possibilities?
 What changes are taking place? Is the market slow, steady, or fast?
 How is the market sectioned? By pricing, age, quality, product usage, or income?
 Clearly distinguish your target market.
 Describe your competitors.
Section II: Competitive Overview

- The section includes clearly defined information on your key competitors.
- The Competitive Overview section will include information pertaining to your direct and indirect
competitors.

- In example, if you own a coffee shop, then your indirect competitor could be the small sandwich
shop down the street.
- As you are laying-out the details in this section, you should answer the following questions:
 List both your product's strengths and weaknesses?
 What are the main differences between your merchandise and theirs?
 What are their pricing structures?
 List any other products that are being advertised.
 How are their products advertised?
 What are their goals?
 What are they doing to satisfy their goals?
Section III: Product Overview

- The Product Overview section details information about your product. Therefore you must
include the following:
 The purpose of the products.
 Key features.
 Pricing structure.
 Marketing position.
 Distribution channels.
 Advertising and promotions tactics.
 Current packaging details.
Section IV: Goals and Objectives

- Basically, the goals and objectives section will give the reader information on what your
business intends to achieve within a five year period.
- Your goals should be challenging, measurable, set on a timescale, and affiliated with projected
profits.
Section V: Strategies
- Your strategy is going to be the means to which you achieve all of your goals and objectives.
- Basically, this is accomplished by formulating a marketing mix.
- The marketing mix exemplifies the entire marketing process thus aiding you in getting to your
goals.
- Moreover it is composed of 4 key elements which include: product, price, place, and promotion.
Section VI: Action Plan and Implementation Schedule

- The action plan and implementation schedule is also referred to as the Media Plan.
- The Media Plan details aspect of how you decide to market your business products or services.
- Such as:
 Which media will you use? Internet, magazines, newspapers, etc.
 Offer details on why you choose such media.
 Describe your budget for each type of media.

2 – Situational Analysis
The situation analysis consists of several methods of analysis:
1. The 5Cs Analysis
2. SWOT analysis
3. Porter five forces analysis
4. PESTEL
 The 5Cs Analysis

 Consumer (characteristics & trends)
 Company (Resources)
 Competitors (Current and potential)
 Collaborators (Current and potential)
 Context (environmental factors)
 SWOT Analysis
( Strengths, Weaknesses, Opportunities, Threats )
SWOT Analysis is…
A strategic planning tool that separates influences on a business’s future success into
internal and external factors
SWOT Analysis allows businesses to…
- Define realistic goals
- Improve capability
- Overcome weaknesses with strengths
- Identify threats than can be turned into opportunities
Strength can be a competitive advantage like… A weakness can be a disadvantage such as…
- Superior product quality - A tired brand
- Lowest price - Inferior location
- Best expertise - High overheads
- Location - A lack of R&D
An opportunity can be… A threat can be…

- A regulatory or tax change - Unfavourable regulation changes
- A high-profile event (marketing - A new entrant into the market
opportunity) - Problems with the economy
- An untapped market - Market shrinkage
- A gap left by a failed competitor

Strategies that can come from SWOT Analysis…

S-O W-O S-T W-T
Matching strengths to opportunities Matching strengths to threats
Otherwise known as: Otherwise known as:
S-O or Maxi-Maxi strategy S-T or Maxi-Mini strategy
Using a strength to maximise an opportunity Minimising a threat with a strength
Matching weaknesses to opportunities Matching weaknesses to threats

Otherwise known as: Otherwise known as:
W-O or Mini-Maxi strategy W-T or Mini-Mini strategy
Improving capability to maximise an Minimising weaknesses and threats at same
time
opportunity
(often last choice)
 Porter 5 forces analysis
1. Threat of entry
 More likely when
 Economies of scale are possible
 Capital requirements of entry are low
 Easy access to distribution channels
 No dominant “player”
 Little expected retaliation
 Little government/legislative intervention
 Low levels of differentiation
 Important issues
 What barriers exist?
 What is our position?

2. Buyer power
 High concentration of buyers
 Large number of small suppliers
 Little risk/low cost of switching
 Alternative sources of supply
i. Low differentiation
ii. High levels of competition
 High risk of backward integration
3. Supplier power
 High concentration of suppliers
 Cost of switching suppliers is high
 Risk of switching suppliers is high
 Supplier has powerful brand
 Supplier dominates market
 High risk of forward integration
4. Threat of substitutes
 Product for Product
 Post replaced by fax replaced by email
 Substitution of need
 Better quality castings reduces need for machine tools
 Generic substitution
 Holiday or a new TV?
 Do without!
5. Competitive rivalry
 Rivalry between competing organisations
 Issues :–
 What is it based on?
 Increasing or decreasing?
 How is it affecting us?
 What can we do about it?
 Balance of rivalry
 Lots of small, balanced competitors?
 Market domination?
 Market growth rates
 Product life cycle?
 Global markets?
 High fixed costs
 High cost of extra capacity
 Level of differentiation
 High exit barriers
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 PESTEL analysis
 Political
 Consumer protection
 Government’s attitude
 Competition regulation
 Advertising standards
 Economic
 Economic growth
 Taxation international trade
 Exchange Rate
 Employment law
 Health and Safety law
 Inflation
 Social
 Income distribution
 Demographics
 Labour & Social mobility
 Lifestyle changes
 Attitudes to work and leisure
 Education
 Fashion and Fads
 Health & Welfare
 Living conditions
 Technological
 Changes in physical sciences
 Internet
 Energy use and costs
 Rates of technological obsolescence
 New discoveries
 Government and Industry focus on tech
 Government spending on research
 Environmental
 How people’s perception and reaction to environmental issues can affect a
business.
 Legal
 Employment law
 Health and Safety
 Taxation both corporate and consumer
 Other regulations
 International trade barriers
 Strength of the rule of law
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3 - Objective
SMART objectives ( Specific, Measurable, Agreeable, Realistic, and Timely )
 Increasing sales by 20% in the next six months.
 Increasing market share by 20% in the IT business during the next 8 months.
4 - Strategies
Porter’s Generic Strategy
Target Scope Advantage Advantage
(Low Cost) (Product Uniqueness)
Broad Cost Leadership Differentiation
(Industry wide)
Narrow Focus Strategy Focus Strategy
(Market wide) (low cost) (differentiation)
①OVERALL COST LEADERSHIP STRATEGY

The company tries to maintain low cost of its operation and thus can have two advantages:
1) Can get better/high profit margin.
2) Can charge low price and beat the competitors and thus enable the company to gain
large market share.
There are five approaches that the company can take in order to achieve low cost:
1. Through the company’s operation and production.
o Use technology.
o Use cheaper labor.
o Use just in time system.
o Operate in low rental area.
o Get the government subsidies or tax reduction.
2. Through Experience Curve

o Here the company train its employees to make one unit of product in much shorter
time compared to before.
o Provide them with new knowledge so that they can improve on their jobs.
o Provide them new technology so that the technology can assist them to make
products much faster.
3. Through offering no frill products/services

o Here the company only offers basic products/services to the customers. No
added/extra services and no accessories.
o Example: Air Asia only offers basic air transportation to its customers. No free meal
and drink and also the customers have to walk through open pathway to board the
plane.
o Another example Toyota offer Toyota Vios Basic which did not include accessories,
manual transmission, and only in white color.
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4. Through offering simple product design, smaller size or use different ingredients.
o The company can achieve low cost by using cheaper ingredients such as making cake
by using cheaper flour, grade C eggs and etc.
o The company also can reduce the size of the products to cut the cost. For example
chocolate maker reduce the size of chocolate bar.
o The company also can reduce the cost by using low cost container, not so colorful
packaging and etc.
5. The company can also achieve low cost by getting economies of scale.
o This mean the company able to produce more quantity and able to sell more quantity
of its products.
o This way the company can reduce its fix cost and thus will reduce the total cost.
The company can also achieve low cost by creating the low cost culture in its organization.
o Low cost culture is where everybody in the company participates to safe and lower
down the cost of the company.
o This includes do not wasting paper, electricity, working time, foods and
entertainment, traveling and etc.
o The company also has to create low cost process to execute its activities.
Disadvantage of Cost Leadership Strategies:

1. Lower customer loyalty 2. A reputation for low quality
3. Ends up in price wars 4. Non sustainable
②FOCUS STRATEGY
This strategy is also known as Niche Strategy.
It is where the company only focuses to produce one specific product/service or one specific
market segment.
Example (product): Specialty Store which sell sport shoes only, child apparel only, women
apparel only, Proton which manufacture car only, and etc.
Example (market segment): Ferrari which sells premium or luxury sports cars, Rolex sells luxury
watch, and etc.
The focus strategy concentrates on a narrow segment and within that segment attempts to
achieve either a cost advantage or differentiation.
The premise is that the needs of the group can be better serviced by focusing entirely on it.
A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched
loyalty discourages other firms from competing directly.
Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and
therefore less bargaining power with their suppliers
However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on
to customers since close substitute products do not exist.
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The advantages of this strategy are such as:

1) Can compete with limited resources.
2) Can provide clear positioning. Example: Exclusive image, quality image and specialty
image.
3) Avoid strategy dilution or distraction (because focus on one product line the company can
stay focus).
Example: When UUM focus its program on Business Administration during 9184-1994
UUM were known as one of the best Business University. But after that UUM lost its
status due to distraction to offer other programs including education, mathematics,
counseling and language.
4) Can become expert in producing that particular product. Example Ferrari is known as the
best sport car producer in the world and the company is known as expert in car racing
(formula1).
5) Due to its expertise the products/services are always perceived as high quality
products/services. The company also can sell at higher/premium price. This will translate
into very good profit.
6) Avoid competing with large companies head to head and thus provide less competitive
pressure.
③DIFFERENTIATION STRATEGY
This strategy is where a company tries to be different from its competitors.
The company offers a product which is different from the competitors’ products.
A differentiation strategy calls for the development of a product or service that offers unique
attributes that are valued by customers.
Customers perceive the product to be different and better than that of rivals.
The value added by the uniqueness of the product may allow the firm to charge a premium price
for it.
Differentiation can be based on product image or durability, after-sales, quality, additional
features.
It requires flair, research capability and strong marketing.
There are many ways to create this product differentiation.
Those are such as:
 Using different ingredients (example: RFC uses organic chicken compared to KFC which
uses ordinary chicken; Mercedes uses different interior compared to Proton’s).
 Offering different packaging. For example: Pringles uses cylinder packaging compared to
other potato chips makers.
 Offering better quality products. For example Rolex watch build its watch with very
good quality. 5 Star hotel such as Hilton Hotel offer quality service compared to budget
hotel.
 Using different brand name. The company can build differentiation through using its own
brand name. Example; Proton uses its own brand name, UUM also has its brand name,
and etc.
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 Offer added services. MAS say that it is different from Air Asia due to its additional
services such as free drink, on board movie and other services; Pizza Hut offer free
delivery which is guaranteed within 20 minutes.
 Offering a very different design. Example: Nokia design its mobile phone with big screen; I
Phone designs its mobile phone with many accessories and gadgets; Dell design slim lap
top, and etc.
 Some companies build differentiation through offering wide product lines. Example:
Toyota has many product lines which cover passenger car, trucks and pick-up, MPV, Van,
sport car and SUV. Nestle also market many different product lines which cover food,
sauces, chocolate, drink and etc.
In order to ensure the differentiation strategy can be successful, the strategy must have three
characteristics:
1. Provide Perceived Value.
The differentiation that the company build must be valued by the target customers. For example
in automobile industry economical segment/section the customer value simple design and
affordable price. PRTON must build its cars with simple design, if PROTON tries to build its cars
with complicated design and thus charge high price this will not be accepted or valued by the
customers. Thus differentiation choose by PROTON is wrong and will not be successful
2. Generate Customer Value

The differentiation that the company creates must also able generates customer value. For
example Pizza Hut try to be different from its competitors by offering free delivery service
guaranteed within 20 minutes. This added service can generates interest from customers who
prefer convenience.
3. Be Difficult to Copy
The differentiation that the company creates is very hard to be copied by others.
It is very hard to be copied because it is legally protected by Trademark or Patent. Example:
Coca Cola, Proton, Honda and Nokia are protected by trademark.
It is also very hard to be copied because the company uses latest technology, secret
ingredients, unique skills, and unique process.
Keys to Successful Differentiation

• Understanding customer needs and preferences
• Commitment to customers
• Knowledge of company's capabilities
• Innovation
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THE KEY IS CREATING VALUE FOR THE CUSTOMER
TANGIBLE DIFFERENTIATION INTANGIBLE DIFFERENTIATION

Observable product characteristics:
• size, color, materials, etc. Unobservable and subjective
• performance characteristics relating to image
• packaging status, exclusively, identity.
• complementary services
TOTAL CUSTOMER RESPONSIVENESS: Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
Achieving Differentiation Advantage

How one goes about obtaining a differentiation advantage depends upon whether or not a product is an
observable good, an experience good, or a communication good.
• Observable Goods: the buyers can easily form accurate judgments about the quality of a
product.
• Experience Goods: the buyer finds it difficult and/or costly to determine the quality of the
product prior to purchase and use.
• Communication Goods: the value to the buyer rises as the number of buyers and users
increases.
Stuck in the middle

 A company’s failure to make a choice between cost leadership and differentiation essentially
implies that the company is stuck in the middle.
 There is no competitive advantage for a company that is stuck in the middle and the result is
often poor financial performance .
 However, companies like Toyota and Benetton have adopted more than one generic strategy.
Both these companies used the generic strategies of differentiation and low cost
simultaneously, which led to the success of the companies.
Product-Market Growth Matrix
The Ansoff Product-Market Growth Matrix is a

marketing tool created by Igor Ansoff and first
published in his article "Strategies for Diversification" in
the Harvard Business Review (1957). The matrix allows
marketers to consider ways to grow the business via
existing and/or new products, in existing and/or new
markets – there are four possible product/market
combinations. This matrix helps companies decide
what course of action should be taken given current
performance. The matrix consists of four strategies:
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Market penetration (existing markets, existing products): Market penetration occurs when a company
enters/penetrates a market with current products. The best way to achieve this is by gaining
competitors' customers (part of their market share). Other ways include attracting non-users of your
product or convincing current clients to use more of your product/service, with advertising or other
promotions. Market penetration is the least risky way for a company to grow.
Product development (existing markets, new products): A firm with a market for its current products
might embark on a strategy of developing other products catering to the same market (although these
new products need not be new to the market; the point is that the product is new to the company). For
example, McDonald's is always within the fast-food industry, but frequently markets new burgers.
Frequently, when a firm creates new products, it can gain new customers for these products. Hence,
new product development can be a crucial business development strategy for firms to stay competitive.
Market development (new markets, existing products): An established product in the marketplace
can be tweaked or targeted to a different customer segment, as a strategy to earn more revenue for the
firm. For example, Lucozade was first marketed for sick children and then rebranded to target athletes.
This is a good example of developing a new market for an existing product. Again, the market need not
be new in itself; the point is that the market is new to the company.
Diversification (new markets, new products): Virgin Cola, Virgin Megastores, Virgin Airlines, Virgin
Telecommunications are examples of new products created by the Virgin Group of UK, to leverage the
Virgin brand. This resulted in the company entering new markets where it had no presence before.
The matrix illustrates, in particular, that the element of risk increases the further the strategy moves
away from known quantities - the existing product and the existing market. Thus, product development
(requiring, in effect, a new product) and market extension (a new market) typically involve a greater risk
than `penetration' (existing product and existing market); and diversification (new product and new
market) generally carries the greatest risk of all. In his original work, which did not use the matrix form,
Igor Ansoff stressed that the diversification strategy stood apart from the other three.
While Ansoff are usually followed with the same technical, financial, and merchandising resources which
are used for the original product line, diversification usually requires new skills, new techniques, and
new facilities. As a result it almost invariably leads to physical and organizational changes in the
structure of the business which represent a distinct break with past business experience.
For this reason, most marketing activity revolves around penetration.
5 – Tactics
- Detailed steps to achieve a certain strategy.
- Means by which a strategy is carried out; planned and ad hoc activities meant to deal with the
demands of the moment, and to move from one milestone to other in pursuit of the overall
goal(s).
- In an organization, strategy is decided by the board of directors, and tactics by the department
heads for implementation by the junior officers and employees.
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6 – Marketing Mix
Factors affecting pricing : ( 4Cs )
Consumer Products : 1 - Cost
1- Convenience products: → Cigarettes, bread, candy 2 - Customer
2- Shopping products: → Clothes 3 – Competitor
3- Specialty products: → Diamond, Rolex 4 – Company Objectives
4- Unsought products: → Life insurance
Product Life Cycle:
Pricing Strategies :
1- Introduction 2- Growth
1- Skimming → high price for new product
3- Maturity 4- Decline
2- Penetration → Low price for new product
3- Cost Plus → adding a margin to the total cost
Branding Strategies:
4- Psychological → • Prestige • Odd even
 Line extension : Dannon
5- Captive → Printer & Cartridge
 Brand extension : Honda
6- One Coin → Same Price for all products
 Multi-brands: Arial, Tide, Bounex
7- Loss leader → Low price for essential products
 New brands: Pledge, Glade, Raid
& high price for others
 Family branding: Heinz, Mustard, Ketchup
8- Every Day Low Price ( EDLP )
 Generic branding: Cola, Aspirin, Kleenex
→ Very low price throughout the year
 Co-branding: Sony-Ericson
People
Physical evidence ( Consideration )
( Confirmation ) How your staff &/or clients are
different from those in a
how your service becomes competitor’s organization
tangible.
For example: tickets, policies &
Process
brochures create something
( Coordination )
the customer can touch & hold
Keep it simple & Straight (KISS)
Promotional tools Distribution Channels:

1- Advertising Wholesaler → any intermediary who sells to
→ TV, Radio, Outdoors, Press, Online other intermediaries, usually to retailers.
2- Direct Marketing Retailer → any intermediary who sells to consumer
→ Mail, E-mail, Phone, Catalog Agent → any intermediary with legal authority to
3- Sales promotion act on behalf of the manufacturer
→ Discounts, Buy one get one free, Gift with purchase,
Sample, Contest, Sweepstakes, Loyalty cards
4- Public relation Distribution System:
→ Sponsorship, Exhibition, Press release, Press Conventional → independent intermediaries
conference, CSR, Events Vertical → interdependent intermediaries
5- Personal selling Horizontal → cooperation of 2 intermediaries on
the same level of different industries
Promotional Strategies:
Distribution Strategies:
 Push → Targeting intermediaries
 Intensive → Huge number of retails
 Pull → Targeting end users
 Selective → Few number of retails
 Strategy → Mix Push + Pull
 Exclusive → Very few number of retails 18
 Profile → Promoting company name
7 – S.T.P
 Segmentation, Targeting and Positioning (STP)
Segmentation Targeting
STP
→ Determining distict groups of buyers ( → Evaluating each segment’s
segments ) with different needs, attractiveness & selecting one or
characteristics or behaviors Positioning more segments to enter
→ how the customer perceive Undifferentiated

❶Demographic Factors:
the product or the service One product to all segments
•Age • Gender • Income
• Job • Religion • Ethnicity
Differentiated
❷Geographic Factors: Positional Criteria:
“ according to “ Different products to
• Region • city size
• Climate • market density 1• Specific product features different segments
❸Psychographic Factors: e.g. price, speed & ease of use
2• Benefits, problems, solutions Concentrated
• Personality • Life style
or needs One product to one segment
❹Behavioristic Factors: 3• User Category e.g. age, gender
• Benefits expected 4• Specific usage occasion
• Volume of usage 5• Against another product
e.g. comparison with market
leader
* Requirements for effective market 6• Hybrid basis:
→ A combination of any of the
segmentation:
above
1- Measurability: e.g. positioning a brand of
→ can information related to the factor toilet issue according to
that the market is to be segmented on, be perceptions of softness &
obtained & measured strength, by male & female
e.g. if you segment the market users compared to competing
according to personality traits of brands
buyers can you measure the data
related to that factor. Repositioning:
Sometimes marketers want to reposition the product in the marketplace
2- Accessibility: due to some reasons:
Segments can be effectively reached  The current position may become very competitive
& served  Trying to show that products are fashionable & of higher quality
 Change in customer needs
e.g. Marlboro cigarettes were positioned as a women’s cigarette when it
3- Substantiality:
was first introduced – complete with a red-tipped filter to hide lipstick stain
Are the segments large or profitable the brand really took off, however when Marlboro adjusted its image as a
enough to serve male product complete with the “macho” Marlboro cowboy.
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Identifying Market Segments and Targets (STP)
 Market Segment
A group of individuals or organisations that share one or more similar characteristics
which lead them to have similar product needs.
 Target Market
A group for whom a firm creates an offering (through marketing mix elements) that
specifically fits their needs and preferences.
 Product Positioning
The place the product occupies in consumers’ minds relative to other competing
products in terms of important (consumer-defined) attributes.
Market segmentation
→ It is the process that companies use to divide large heterogeneous markets into small markets that
can be reached more efficiently and effectively with products and services that match their unique
needs.
Segmenting consumer markets

1) Geographic segmentation
-Divides the market into different geographical units such as nations, regions, states,
counties, or cities.
2) Demographic segmentation
→ divides the market into groups based on variables such as age, gender, family size,
family life cycle, income, occupation, education, religion, race, generation, and
nationality
Age and life-cycle stage segmentation
→ is the process of offering different products or using different marketing
approaches for different age and life-cycle groups
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Gender segmentation
→ divides the market based on sex (male or female)
- Men often need to be invited to touch a product, whereas women are likely to pick
it up without promoting.
- Men were found to be more loyal to companies than to service providers
(hairdresser), but women were found to be more loyal to service providers than to
the company.
- Men were found to have double the ability of women in recalling advertisements.
Income segmentation
→ divides the market into affluent or low-income consumers.
3) Psychographic segmentation
→ divides buyers into different groups based on social class, lifestyle, or personality traits.
 The best-known psychographic segmentation is called VALS
- Based on two dimensions
o Vertical dimension
- Based on the degree to which they are innovative and have resources
o Horizontal dimension
- Motivated primarily by ideals
- Motivated primarily by achievement
- Motivated primarily by self-expression
VALS™ Framework and Segments
21

 Innovator. These consumers are on the leading edge of change, have the highest incomes, and
such high self-esteem and abundant resources that they can induldge in any or all self-
orientations. They are located above the rectangle. Image is important to them as an expression
of taste, independence, and character. Their consumer choices are directed toward the "finer
things in life."
 Thinkers. These consumers are the high-resource group of those who are motivated by ideals.
They are mature, responsible, well-educated professionals. Their leisure activities center on
their homes, but they are well informed about what goes on in the world and are open to new
ideas and social change. They have high incomes but are practical consumers and rational
decision makers.
 Believers. These consumers are the low-resource group of those who are motivated by ideals.
They are conservative and predictable consumers who favor American products and established
brands. Their lives are centered on family, church, community, and the nation. They have
modest incomes.
 Achievers. These consumers are the high-resource group of those who are motivated by
achievement. They are successful work-oriented people who get their satisfaction from their
jobs and families. They are politically conservative and respect authority and the status quo.
They favor established products and services that show off their success to their peers.
 Strivers. These consumers are the low-resource group of those who are motivated by
achievements. They have values very similar to achievers but have fewer economic, social, and
psychological resources. Style is extremely important to them as they strive to emulate people
they admire.
 Experiencers. These consumers are the high-resource group of those who are motivated by self-
expression. They are the youngest of all the segments, with a median age of 25. They have a lot
of energy, which they pour into physical exercise and social activities. They are avid consumers,
spending heavily on clothing, fast-foods, music, and other youthful favorites, with particular
emphasis on new products and services.
 Makers. These consumers are the low-resource group of those who are motivated by self-
expression. They are practical people who value self-sufficiency. They are focused on the
familiar-family, work, and physical recreation-and have little interest in the broader world. As
consumers, they appreciate practical and functional products.
 Survivors. These consumers have the lowest incomes. They have too few resources to be
included in any consumer self-orientation and are thus located below the rectangle. They are
the oldest of all the segments, with a median age of 61. Within their limited means, they tend to
be brand-loyal consumers.
4) Behavioral segmentation
→ divides buyers into groups based on their knowledge, attitudes, uses, or responses to a product
o Occasions
o Benefits sought
o Buyer-readiness stage (Aware, ever tried, recent tried, occasional user, regular user,
most often used)
o User status
o Usage rate
o Loyalty status (Hard-core loyal, split loyal, shifting loyal, switchers)
22

5) Multiple segmentation
→ is used to identify smaller, better-defined target groups
6) Geodemographic segmentation
→ is an example of multivariable segmentation that divides groups into consumer lifestyle patterns
Segmenting business markets

 Demographic (industry, company size, location)
 Operating variable (technology, customer capabilities)
 Purchasing approaches (centralized vs decentralized purchasing, purchasing criteria, power
structure, nature of existing relationship)
 Situational factors (urgency, size of order)
 Personal characteristics ( buyer-seller similarity, attitude toward risk, loyalty)
Intermarket segmentation → divides consumers into groups with similar needs and buying
behaviors even though they are located in different countries
Market Targeting
→ Target market consists of a set of buyers who share common needs or characteristics that the
company decides to serve.
Target Marketing Strategies

 Undifferentiated marketing targets the whole market with one offer
o Mass marketing
o Focuses on common needs rather than what’s different
 Differentiated marketing targets several different market segments and designs separate offers
for each
o Goal is to achieve higher sales and stronger position
o More expensive than undifferentiated marketing
 Concentrated marketing targets a small share of a large market
o Knowledge of the market
o More effective and efficient
 Micromarketing is the practice of tailoring products and marketing programs to suit the tastes
of specific individuals and locations
o Local marketing
o Individual marketing
 Individual marketing involves tailoring products and marketing programs to the needs and
preferences of individual customers - Also known as:
 One-to-one marketing
 Mass customization
 Markets-of-one marketing
23

Differentiation and Positioning

→ Product position is the way the product is defined by consumers on important attributes—the place
the product occupies in consumers’ minds relative to competing products
 Perceptions
 Impressions
 Feelings
Differentiation
 Variety of ways in which products can be differentiated
 Some products offer little scope for differentiation (E.g. Chicken, Aspirin)
 Some products capable of high differentiation (E.g. cars, furniture)
 Helpful to look at the 4Ps as a starting point for ways to differentiate product
 How to differentiate ??
1- Product Specific Differentiation
 Form  Quality (performance, conformance durability etc.)  Style  Design.
2- Non-product Specific Differentiation
 Personnel (skills, service delivery, attitude)
 Channel (extent of coverage, type, innovation)
 Image (build confidence, emotional significance)
 Support (repair, installation, advice etc.).
3- In relation to competition
Three Major Positing Errors

 Underpositioning or failing ever to positioning the company at all.
 Overpositioning
 Confused Positioning
For example Burger king
- “It just tastes better”
- “The right food for right times”
- “Get your burger’s Worth”
- “The fire is ready”
- “Have it your way”
Positioning and the Marketing Mix

 Once a position has been chosen, steps must be taken to deliver and communicate the desired
position to target consumers
 Marketing mix must be developed to ensure that this position is achieved and maintained
 Need to maintain position through consistent performance and communication
 Closely monitor and adapt position over time to match changing consumer needs and competition
 KFC : “Kitchen Fresh Chicken” versus “Finger Lickin’ Good”
 Positioning is enhanced and supported by creating memorable customer experiences.
24

8 - Budget
1- Task Method ( Most Logic )
•Tasks to be achieved are determined
• Estimating the cost of these tasks sets the budget
• e.g. Salaries of staff 5000000
Advertising expenses 10000 X,00000
Market research 2000
Selling & agency commission 1500
2- Percentage of sales
• It is the most widely used method
• The marketing costs should relate directly to either total turnover or profits
3- Competitive parity
• Setting the budget according to the budget of the competitor
4- All you can afford
• Unscientific – simplest way but commonly used
5- S.A.L.T
(Same As Last Time)
6- Profit Maximization Method :
- Used when market is saturated and plateau & when no or weak competition
‫ أصرف أقل رقم جاب أعلً سعر‬- ‫ تستخدم هذه الطرٌقة لما ماٌكونش فً منافسة‬-
 Marketing budgets, especially in small and mid-sized businesses, are often arbitrarily set as
either x% of planned revenue or y% over the prior year's marketing budget.
 Use targeted budgeting to more intelligently set your budget based on company objectives.
 Answer the following questions:
– What previous marketing methods have been most effective?
– What are your costs compared to sales?
– What is your cost per customer?
– What marketing methods will you use to attract new customers?
– What percentage of profits can you allocate to your marketing campaign?
– What marketing tools (i.e. - newspapers, magazines, Internet, direct mail,
telemarketing, event sponsorships) can you implement within your budget?
– What methods are you using to test your marketing ideas?
– What methods are you using to measure results of your marketing campaign?
9 - Implementation
Execution of the marketing plan.
10 - Control
1. Develop marketing objectives
2. Establish performance measures
3. Evaluate actual performance against established standards
4. Take corrective actions
25

Market Trends
• Market Trends Are a reflection of environmental competitive variables.
• Victors trends: stand over sites, visitor demographics, spending habits, length of stay and so on.
• Competitive trends: numbers, location, type of products offered, occupancy levels, average
rates and so on.
• Related industry trends: new airport constructions and new highways…etc
Strategic Business Unit

• It is a single business or collection of related businesses, that can be planned separately from
the rest of the company.
• It has its own competitors.
• It has a manager responsible for strategic planning and profit performance, who controls most
of the factors affecting profit.
BCG MATRIX
• Market-Growth/Market-Share Matrix
– A strategic planning tool based on the philosophy that a product’s market growth rate
and market share are important in determining marketing strategy
– Factors determining SBU/product’s position within a matrix
• Product-market growth rate
• Relative market share
Star
- high growth market, dominant market share
- requires additional resources for continued
growth
Cash cow
- low growth, dominant market share
- generates surplus resources for allocation to
other SBUs
Dog
- low/declining market, subordinate market
share
- has diminished prospects and represents a
drain on the portfolio
Question mark
- high growth market, low market share
- represents a high-risk/cost opportunity
requiring a large commitment of resources to
build market share
26

Setting Product Strategy

Components of the Market Offering
- Marketing planning begins with formulating an offering to meet
target customers’ needs or wants.
- The customer will judge the offering by three basic elements:
1- Product features & quality
2- Services mix & quality
3- Price
Product Levels
1- Core benefit
→ It is the fundamental level
→It is the service or benefit the customer is really buying
e.g. a hotel guest is buying rest & sleep
2- Basic product
→ e.g. a hotel room includes a bed, bathroom, towels, desk,
dresser, & closet.
3- Expected product
→ a set of attributes & conditions buyer normally expect when
they purchase this product
→ e.g. hotel guests expect a clean bed, fresh towels, working lamps,
& a relative degree of quiet.
4- Augmented product
→ it exceeds customers expectations.
5- Potential product
→ it encompasses all the possible augmentations & transformations the product or offering
might undergo in the future.
- Here is where companies search for new ways to satisfy customers & distinguish their offering.
Product Classification Schemes

- Marketers classify products on the basis of
 Durability
 Tangibility
 Use
Durability and Tangibility, we have 3 groups:

1. Nondurable goods
2. Durable goods
3. Services
27

Consumer Goods Classification

1) Convenience goods
→ the consumer purchase such goods frequently, immediately, & with minimal effort.
e.g. soft drinks, soaps & newspaper
2) Shopping goods
→ those the consumer compares on such bases as suitability, quality, price & style.
e.g. furniture, clothing, & major appliances
3) Specialty goods
→ have unique characteristics or brand identification for which enough buyers are willing to
make a special purchasing effort.
e.g. cars, stereo components, & men’s suits
4) Unsought goods
→ those the consumer doesn’t know about or normally think of buying
e.g. smoke detectors
-example of known but unsought good is life insurance
→ Unsought goods requires advertising & personal-selling support.
Industrial Goods Classification

1) Materials & parts
→ goods that enter the manufacturer’s product completely.
→ they classified into:
a) Raw materials
I. Farm products ( wheat, cotton, fruits )
II. Natural products ( fish, lumber, crude petroleum )
b) Manufactured materials & parts
I. Component materials ( iron, cement, wires )
II. Component parts ( small motors, tires, castings )
2) Capital items
→ long-lasting goods that facilitate developing or managing the finished product
→ they classified into:
a) Installation
I. Buildings ( factories, offices )
II. Heavy equipment ( generators, elevators)
b) Equipment
I. Portable factory equipment & tools ( hand tools, lift trucks )
II. Office equipment ( personal computers, desks )
28

3) Supplies & business services

→ short-term goods & services that facilitate developing or managing the finished product.
→ Supplies are of 2 kinds
A. Maintenance & repair items ( paint, nails, brooms )
B. Operating supplies ( lubricants, writing paper, pencils )
→ Business services include:

A. Maintenance & repair services ( window cleaning, copier repair )
B. Business advisory services ( legal, management consulting, advertising )
Product Differentiation
• Product form
• Features
• Customization
• Performance quality
• Conformance quality
• Durability
• Reliability
• Repairability
• Style
Service Differentiation
• Ordering ease
• Delivery
• Installation
• Customer training
• Customer consulting
• Maintenance and repair
• Returns
Design Differentiation
→ As holistic marketers recognize the emotional power of design & the importance to consumers of
how things look and feel as well as work, design is exerting a stronger influence in categories where it
once played a smaller role.
29

Product Systems and Mixes

 Product system
→ a group of diverse but related items that function in a compatible manner.
e.g. iPod product system includes; headphones and headsets ,cables and docks, power and car
accessories, & speakers.
 Product mix ( Product assortment )
→ the set of all products & items a particular sellers offer for sale.
→ it consists of various product lines
→ A company product mix has a certain width, length, depth, & consistency.
 Width
- How many different product lines the company carries.
 Length
- total number of items in the mix
 Depth
- how many variants are offered of each product in the line.
 Consistency
- how closely related the various product lines are in end use, production requirements,
distribution channel, or some other ways.
Line Stretching
→ occurs when a company lengthens its product line beyond its current range.
→ 3 types of stretching:
 Down-Market Stretch
 Up-Market Stretch
 Two-Way Stretch
e.g. Two-Way Product-Line Stretch: Marriott Hotels
****************************************************************************
30

What is the Fifth P?

Packaging, sometimes called the fifth P, is all the activities of designing and producing the container for
a product.
Factors Contributing to the Emphasis on Packaging

 Self-service
 Consumer affluence
 Company/brand image
 Innovation opportunity
Packaging Objectives
• Identify the brand
• Convey descriptive and persuasive information
• Facilitate product transportation and protection
• Assist at-home storage
• Aid product consumption
Functions of Labels
 Identifies
 Grades
 Describes
 Promotes
Warranties and Guarantees

 Warranties
- formal statement of expected product performance by the manufacturer.
- Products under warranty can be returned to the manufacturer or designated repair center for
repair, replacement, or refund.
 Guarantees
- it reduces the buyer’s perceived risk
- A company such as Procter & Gamble promises general or complete satisfaction without being
more specific – “ if you are not satisfied for any reason, return for replacement, exchange or
refund.
31

Analyzing Consumer Markets
What Influences Consumer Behavior?

Cultural Factors
A. Culture
-The influence of culture on buying behavior varies from country to country therefore
marketers have to be very careful in analyzing the culture of different groups, regions
or even countries.
B. Subculture
- Nationalities
- Religions
- Racial groups
- Geographic regions
C. Social Class
-Social class not only determined by income but there are various other factors as well
such as: wealth, education, occupation etc.
Social Factors
1. Reference groups
Membership Primary groups Secondary Aspirational Dissociative Opinion leader
group groups groups groups
all groups with whom the religious, are those a are those a person offers
that have a person professional person whose informal advice
direct or interacts fairly and trade- hopes to values or or information
indirect continuously union join behaviour about a specific
influence on and informally, groups, an product or
their such as family, which tend individual product category
attitudes or friends, to be more rejects such as which of
behaviour neighbours formal and several brands is
require less best
continuous
interaction
2. Family 3. Social roles 4. Statuses
Personal Factors
Self-concept Lifestyle Wealth
Occupation Life cycle stage Age
Personality : Personality can be a useful variable in analysing consumer brand choices.
Consumers often choose and use brands with a brand personality consistent with:
- Their actual self-concept (how we view ourselves)
- Ideal self-concept (how we would like to view ourselves)
- Others’ self-concept (how we think others see us)
32

Key Psychological Processes

 Motivation
1. Freud’s Theory
→ Behavior is guided by subconscious motivations
2. Maslow’s Hierarchy of Needs
→ Behavior is driven by lowest, unmet need
3. Herzberg’s Two-Factor Theory
→ Behavior is guided by motivating and hygiene factors
• It distinguishes dissatisfiers (factors that case dissatisfaction) from satisfiers (
factors that cause satisfaction.
• A computer that does not come with the warranty does would be dissatisfier. Yet
the presence of warranty is not enough to cause satisfaction.
• Marketers need to :
- Avoid dissatisfiers (poor manuals, bad air conditions)
- Identify major satisfiers or motivators of purchase
 Learning
 Perception
a. Selective Attention
b. Selective Retention
c. Selective Distortion
 Memory
Consumer Buying Process
1. Problem Recognition 2. Information Search 3. Evaluation

4. Purchase Decision 5. Post purchase 6. Behavior
Successive Sets Involved in Consumer Decision Making
33

Stages between Evaluation of Alternatives and Purchase
Purchase Decision
• It consists of five decisions:
1. Time (weekend) 2. Store (Hypermarket) 3. Brand (Sony)
4. Type (Laptop) 5. Quantity (one computer)
Perceived Risk
• Functional risk: the product does not perform as expectations.
• Physical risk: it causes threat to the physical well-being.
• Financial risk: the product is not worth the price paid.
• Social risk: the product results in embarrassment in front of others.
• Psychological risk: it may affects mental-well being of customers.
• Time risk: the failure of the product results in an opportunity cost in finding another satisfactory
product.
Post purchase Satisfaction

• Performance > expectations (extermely satisfied)
• Performance = expectations (satisfied)
• Performance < expectations ( dissatisfied)
Post Purchase Actions

 Satisfied customers:  Dissatisfied customers:
- Buy again - Complain
- Spread positive word of mouth - Spread negative word of mouth
- Switch to competitors
- Go to court
- Revenge
34

International Marketing
International
Marketing
35

 International Marketing is:
 Satisfying customer needs across national borders
 Why Go International?
1. Market Saturation ‫حدث تشبع للسوق الداخلً لذلك نلجؤ للتصدٌر كما ٌحدث فً الوالٌات المتحدة‬
Ex: cigarettes, entertainment, fast food, consumer electronics.
2. Foreign Competition
Ex: cars, copying machines, photographic, construction
3. Emergence of new markets
Ex: China, India, Eastern Europe, NICs
4. Globalization of Markets
5. Opportunities via Foreign Aid programs
6. Other reasons
a. Economies of scale
(What Does Economies Of Scale Mean?
The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies
of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods.
There are two types of economies of scale:
-External economies - the cost per unit depends on the size of the industry, not the firm.
-Internal economies - the cost per unit depends on size of the individual firm.
* Economies of scale give big companies access to a larger market by allowing them to operate with greater geographical reach. For the
more traditional (small to medium) companies, however, size does have its limits. After a point, an increase in size (output) actually causes
an increase in production costs. This is called "diseconomies of scale".
b. Labor cost
c. Tax incentives
d. The desire to test products overseas
e. The desire to have access to technological advances
 Stages of International Marketing Expansion
1. Domestic
2. Regional Exporter → to closer countries ‫للدول القرٌبة‬
3. Exporter
4. International
5. International to Global
6. Global
 Framework of International Marketing
36

 MNE ( Multinational Enterprise )

Definition
 Is a firm that owns, manages, and controls income generating assets in more than one
country. ‫مإسسة تملك وتدٌر وتتحكم فً األصول المدرة للدخل فً أكثر من بلد‬
Number of nations
 In more than 6 countries.
Ratio of Foreign (F) to total (T) operations

 At least 25% of its sales, assets, and profits are generated outside the home base.
Management Attitude ‫مهم‬
 Ethnocentric  Polycentric  Geocentric

(Standardization ) ( Globalization ) ( Global Model )
( Market Extension Model) ( Multi-domestic Model )
→ Are home country oriented →Are host country oriented → Are world-wide oriented
- It is international - It is Multinational - It is Global

e.g. IT e.g. Personal Care as Henkel e.g. Pharmaceutical companies
MNE Characteristics
a. Economic Power.
b. Oligopolistic Market structure.
c. Large percentage of sales, assets, and profits are generated outside the home base.
d. The product of developed nations.
37

 International Marketing Entry Strategies ‫مهم جدا‬
Direct ‫شركة أجنبٌة‬

‫تشتري شركة‬
‫محلٌة وتنسبها لٌها‬
Indirect
Starting from scratch
‫أبدأ من األول أبنً مصنع وخالفه‬
Nestle - L’Oreal
 Decision Criteria for Entry Method

1. Number of Markets.
2. Penetration within Markets.
3. Markets feedback.
4. Learning by experience.
5. Level of control.
6. Incremental Marketing costs.
7. Profit possibilities
8. Investment requirements.
9. Administrative requirements.
10. Personnel requirement
11. Exposure to foreign problems
12. Flexibility
13. Risk
38

 Indirect Exporting “ Active “

→ Not more than a domestic sales
The firm is an indirect exporter when its products are sold in foreign markets but no special
activity for this purpose is carried on within the firm. i.e. the exporting of products is carried
abroad by others (home based exporters).
Examples:
1. Export management companies Sogo shosha.
‫وكذلك شركة الوادي لتصدٌر الحاصالت الزراعٌة‬
2. Piggy backing exporting
→ Deal between 2 firms

e.g.1 - Gillette ( carrier ) & Willekinson ( rider )
takes the responsibility to export
e.g.2 – PEPSI & Lipton Ice tea
as well as it doesn’t present in its portfolio.
e.g.3 – Mazda & Ford
e.g.4 – GSK & Merck ‫مٌرك تسوق الزنتاك فً السوق المحلً طالما انها ماعندهاش حاجة زٌه‬
 Direct Exporting “ Casual “

 In direct exporting the task of analyzing markets, selecting target markets, export
documentation and transportation are all done within the firm.
Contractual Agreement
 A long term agreement whereby technology and know-how are transferred from the first
party to the second party without any investments in tangible assets made by the first party.
 Manufacturing Agreements ‫أبسط شكل‬

‫ فً التسوٌق ولٌس الصناعة‬Know how ‫ٌقوم الطرف األول بالتسوٌق ومشاركة الـ‬
 Manufacturing agreement is manufacturing in a foreign market through an agent while
retaining the marketing responsibility for the first party.
‫منتشرة فً مجالً الصناعات الدوائٌة و صناعة المالبس‬
: ‫مثال‬
Levi’s NMC (Nile Manufacturing Company )
Have know how in industry
‫وتتولً تسوٌقها هً فً الخارج‬ NMC ‫تصنع فً شركة‬ Levi’s ‫ شركة‬-
‫ وبعد ذلك‬, ‫ شركة النٌل تقوم بتصنٌع المنتج تحت اشراف شركة لٌفٌس وتضع لها الخطوط العرٌضة التً تحدد جودة المنتج‬-
‫ ٌعنً استغلت مصنع الشركة النتاج ما تحتاجه‬-- ‫تقوم شركة لٌفٌس بشراء انتاج شركة النٌل وتسوقه داخلٌا وخارجٌا‬
‫ والكل كسبان‬-- ‫بمواصفات عالٌة وبتكلفة منخفضة‬
Rebook & Nike ‫نفس المثال ٌطبق مع شركات أخري مثل‬ ***
39

 Licensing ( the most common form )

 A contractual agreement whereby a multinational marketer (the licensor) makes available
intangible assets – such as patents, trade secrets, know-how, trademarks, and company name-
to foreign companies in return for royalties or other form of payments.
‫ٌقوم الطرف الثانً بالتصنٌع والتسوٌق وكل حاجة فً مقابل استغالل اسم الطرف األول‬
*** Common in the following fields :

1 – Pharmaceuticals 2 – Cigarettes
3 – Personal Care 4 – Chocolate
5 – Soft Drinks
Intangible Assets Production

Licensor Licensee
Patents, trade secrets, know-how,
trademarks, and company name
Marketing
Royalty ( 5 – 10 % )
Specific Geographical area
As Egypt
‫أعطً حقوق تسوٌق فً مكان واحد‬
‫لوجود وكٌل آخر فً البلدان األخري‬
Advantages:-
1. Quick and easy way to enter the market.
2. Could be the only way to open the market.
3. Provides life extension for products in the maturity stage of their life cycles.
4. Is a good alternative for foreign productions and marketing.
5. Royalties are guaranteed and periodic.
6. Licensing can overcome high transportation costs which make some exports non
competitive in export market.
7. Licensing is immune to expropriation.
Disadvantages
1. No full control over production and marketing.
2. Royalties are negligible compared with equity investment potential. (Royalty rates seldom
exceed 5% of gross sales)
3. There is a danger of creating competition in third country, or even home country markets if
the licensee violates territorial agreement.
‫ تبٌع فً مصر وممكن ٌكون فٌه فائض‬- ‫شركة كادبوري فً مصر واخدة ترخٌص من شركة كادبوري فً المملكة المتحدة‬
‫فً األنتاج تقوم ببٌعه لشركة أخري " حتً ال تعرض نفسها للمساءلة القانونٌة " وٌقوم هذا الطرف الثالث بتصدٌر كادبوري مرة‬
‫أخري إلً المملكة المتحدة _ مما ٌضر بالصناعة المحلٌة هناك‬
40

 Franchising Agreements
A contractual agreement whereby a multinational marketer ( the franchisor) grants the right
to another company (the franchisee) to do business in a specific place in a specific way for a
period of time.
: ‫ ولكن الفرق بٌنهم‬licensing ‫مثل الـ‬
1- In Franchising agreement the type of business is “ Services “ not Tangible as in licensing
e.g /McDonalds & Hardees are classified as services not goods.
2 – in Franchising , You will do all jobs – while in Licensing , you will do a certain jobs.
‫ وهكذا‬........ ‫مثال شركة نوفارتس عاملة الترخٌص لشركة تانٌة فً منتج واحد او اتنٌن زي الفولتارٌن والكتافالم‬
 Turnkey Contracts
A contractual agreement whereby an MNE takes the responsibility of constructing a project
in return for a fixed-fee or cost plus arrangement.
...... ‫ مرتبط بمشروعات كبٌرة وحكومات‬-
‫ شركة أوروبٌة تعطً تصرٌح للمقاولٌن العرب عشان تعمله‬: ‫ مثل مشروع مترو األنفاق‬-
........ ‫ أجٌب مهندس والمهندس ٌجٌب مقاول وعمال‬, ‫ زي لما آجً أبنً بٌت‬: ‫ مشارٌع تسلٌم مفتاح‬-
 Management Contract
A contractual agreement whereby an MNE provides key personnel to operate the foreign
enterprise for a fee until local people acquire the knowledge to manage the business
independently.
- Common in Hotel Business
- Technology
- Know How Government
Hilton
Manager Payment Owner
 Joint Ventures ( Marriage )

A long term partnership between two or more companies sharing equity and risk with the
purpose of making profits in a target market.
Advantages
1. Potential for higher profits.
2. More control over production and marketing.
3. Better market feedback.
4. More experience in international marketing.
Disadvantages
1. Great investment of capital.
2. Higher level of risk.
3. Potential conflicts between partners.
41

 Foreign Direct Investment (FDI)

FDI means 100 percent ownership by the international firm in foreign markets.
Advantages
1. Maximum profits.
2. Full control over production and marketing.
3. Better market feedback.
4. Great experience in international marketing.
5. Integration of operations on a worldwide basis.
Disadvantages
1. High capital and management resources requirements.
2. Higher risk of expropriation.
 Strategic Alliances ( Marriage with a purpose ) ‫زواج متعة‬

Strategic Alliances cover a wide range of usually non equity partnership agreements “not a
contract“ between a number of firms in a number of markets.
e.g/ Chrysler → doesn’t has a market in Luxury cars only in weak field
Daimbler – Benz → has a market in Luxury cars only not in weak field
‫ وبقوا شركة واحدة باسم‬Merge ‫حصل بٌنهم‬
‫ وبعد ما المنفعة خلصت بٌنهم حدث انفصال لكل شركة عن األخري‬Daimbler – Chrysler
Objectives
1. Enter a new market.
2. Develop a new technology.
3. Share risk.
4. Achieve economies of scale.
5. Obtain complementary assets.
Criteria
1. The competitor should have a competitive advantage.
2. The contribution of each partner should be balanced.
3. The partners should agree on the global strategy to be followed.
4. The risk that the partner will become a future competitor should be low.
5. There should be a pre-emptive value in having the firm as a partner than as a rival.
6. There should be a compatibility of organizations at the top level.
Note :
* All joint ventures are alliances, however not all alliances are not joint venture only when equity is
involved.
42

** Examples of Non equity partnership:

1- Star alliances
2- Sky team Air lines
3- One World
4- Coca-Cola – McDonalds - Disney
5- Starbucks - Barlis & Nobel “ book store “
6- Mazda - Ford
7- PEPSI - Unilever
8- Exxon Mobil - Lapoire
9- Vodafone - Radioshack
10- Nestle - Lor’eal → technological based
11- Chelsea football club - Samsung
** Examples of Equity partnership:

1- Fuji – Simens
2- Sony - Ericson
→ Sony is strong in software technology while, it is weak in mobile phone business
3- Nokia - Simens
------------------------------------------------------------------------------------------------------------------------------------------
43

International Trade Theories & Commercial Policies
The Theory of Comparative Advantage Why trade takes place between nations ?
The Theory of comparative advantage states that even if a country is able to produce all
its goods at lower costs than another country can, trade still benefits both countries,
based on comparative, not absolute, costs.
Vernon Theory:
In other words, countries should concentrate its efforts on producing goods that have a
comparative advantage compared to other countries and then should export those
goods in exchange for goods that command advantage in their native countries.
4
2
1
The Product Life Cycle Theory
Phase 1: U.S. exports strength builds.

Phase 2: Foreign production starts.
Phase 3: foreign production becomes competitive in export markets.
Phase 4: Import competition begins in domestic U.S. markets.
During Phase 1, the product is manufactured in the U.S. for a high – income market and
afterwards introduced into foreign markets through exports.
During Phase 2, as the product becomes popular, entrepreneurs in other advanced

countries, perhaps in Western Europe, venture into producing the same product
In Phase 3, the foreign producers begin to compete against U.S. exports in third world
countries.
Phase 4 occurs when the foreign firms , strong in their home and export markets, achieve
economies of scale and then begin to invade the U.S. home market.
The theory has been helpful in explaining the history of a number of products particularly: textiles,
shoes, bicycles, radios, televisions.
44

The Competitive Advantage of Nations
Determinants of National Competitive Advantage:

1. Factor conditions.
2. Demand conditions.
3. Related and supporting industries.
4. Firm strategy, structure and rivalry ( ability to compete ).
Porter Notes
⌂ National prosperity is created not inherited. It does not grow out of a country’s natural resources, its
labor force as classical economists indicate.
⌂ Companies gain advantage against the world's best competitors because of pressure and challenge.
They benefit from having strong domestic rivals, aggressive home based suppliers, and demanding local
customers.
⌂ However some countries have a very good favorable conditions & can’t have any advantage in
competition as Egypt, Nigeria & Mexico
1. Factor conditions
Porter notes that although these factors are very important in the determination of trade, they
are not the only source of competitiveness as classical economist indicate. Most importantly for
Porter, it is the ability of a nation to continually create and upgrade its factor that is important,
not the initial endowment.
Resources include : ( land – labor – capital – entrepreneur )
2. Demand conditions
Firms that can survive and flourish in highly competitive and demanding local markets are much
likely to gain the competitive edge. Porter notes that it is the character of the market, not its
size, that is paramount in promoting continual competitiveness of the firms. Porter translates
character as demanding customers ‫علً سبٌل المثال الٌابان وفنلندا دول مساحتها صغٌرة‬
- Japan started from the scratch ‫بدأوا من الصفر بعد الدمار الشامل‬
Note that Japanese market is the most competitive market in the world.
3. Related and supporting industries ‫الصناعات المغذٌة أو المكملة‬
A firm that is operating within a mass of related firms and supporting industries gains and
maintains advantage through close working relationships, proximity to suppliers and timeliness
of product and information flows.
‫عشان أطور صناعة الزم أطور الصناعات اللً بتغذٌها‬
‫ كونوا مستعمرة‬: ‫مثل الصناعات المكملة لصناعة السٌارات فً توٌوتا‬
( Cluster)
45

4. Firm strategy, structure and rivalry
The conditions on the home-nation that either hinder or aid in the firm's creation and sustaining
international competitiveness. Porter notes that no one managerial, ownership, or operational
strategy is universally appropriate. ً‫اللً ٌنفع فً مكان ماٌنفعش فً مكان تان‬
- It depends on the fit and flexibility of what works for that industry in that country at that time.
▀ In addition to the previous 4 factors , there are 2 additional catalysts

5. Government
6. Incidence of chance
Commercial Policy
‫تفرض الحكومة بعض المعوقات علً التجارة األجنبٌة ألنها غٌر مجزٌة لها وذلك بغرض تنشٌط التجارة المحلٌة‬
Commercial Policy is the term used to refer to government regulations bearing on foreign trade.
Commercial policy tools include: Tariff Barrier
Tariffs ‫ممكن حد ٌدفعها مافٌهاش مشكلة‬
Quotas
Exchange Control Non Tariff Barrier
Administrative regulations → it blocks the market
1.Tariffs
A tariff is a tax on products imported from other countries.
Government may have 2 purposes form imposing taxes (tariffs):
Earn revenue.
Make foreign goods more expensive to protect national producers.
‫غرٌبة لما تفرض جمارك علً السٌارات وانت معندكش صناعة محلٌة منها – المفروض ٌكون علً حاجات فً المجال الزراعً مثال‬
2.Quotas
A quota sets an absolute limit on the amount of goods that may enter the country.
‫ سٌارة‬10 ‫مثال ممنوع ٌدخل أكتر من‬
* Government’s goals from imposing quotas are:
1. Conservation of scarce foreign exchange.
2. The protection of local production in the product lines affected.
3.Exchange control
Exchange control is the government monopoly of all dealings in foreign exchange.
4.Administrative regulations
Administrative regulations are hard to classify. They include such things as customer’s
documentation, marks of origin, food and drugs laws, and labeling laws.
46

International Organizations & Economic Blocks
Ω International institutions in the world economy

1. GATT-WTO ‫ االتفاق العام بشؤن التعرٌفات الجمركٌة والتجارة‬/ ‫منظمة التجارة العالمٌة‬
General Agreement on Tariffs and Trade (GATT) / World Trade Organization (WTO)
2. UNCTAD ‫مإتمر األمم المتحدة للتجارة والتنمٌة‬
United Nations Conference on Trade and Development
3. IMF ً‫صندوق النقد الدول‬
International Monetary Fund
4. IBRD ‫البنك الدولً لإلنشاء والتعمٌر‬
International Bank for Reconstruction and Development
5. OECD ‫منظمة التعاون والتنمٌة‬
Organization for Economic Co-operation and Development
Ω Regional Economic Integration (Economic blocks )

( Levels of Economic Integration )
1) Free Trade Area
»» In free trade areas member countries remove all tariffs among them.
e.g. / Canada + Mexico + USA
2) Customs Union
»» In addition to the characteristics of a free trade area, member countries set the same
customs policy towards non-members.
‫ ده مش معناه إن باقً الدول تلتزم نفس التزاماتها تجاه هذه الدولة‬Free trade area ‫ بترتبط مع دولة أخري بـ‬USA ‫ٌعنً مثال‬
3) Common Market
»» In addition to the characteristics of a customs union, member countries agree upon the free
movement of labor and capital.
4) Economic Union
»» In addition to the characteristics of a common market, member countries harmonize
economic policies. They are expected to pursue common monetary and fiscal policy,
synchronize taxes, and develop a common agricultural policies, same currency, and central
parliament.
e.g. / European Union
5) Political Union
»» In effect, it means nations merging together to form a new nation.
‫ بتاعة أوروبا‬Plan ‫ ولكنها فً الـ‬Real Life ‫لسه محصلتش فً الـ‬
47

Products Same Customs Labor Capital Harmonization One Nation

Free Trade Area √ X X X X X
Customs Union √ √ X X X X
Common Market √ √ √ √ X X
Economic Union √ √ √ √ √ X
Political Union √ √ √ √ √ √
Principal Regional Groupings
European Union (EU) “ Google site : europa.eu “
Six in ‘58
1- France 2- Italy 3- Germany Founding Members
4- Netherlands 5- Belgium 6- Luxemburg ‫األعضاء المإسسٌن‬
Nine in ’73
7- Denmark 8- U.K. 9- Ireland
Ten in ’81
10- Greece
Twelve in ’86
11- Spain 12- Portugal
Fifteen in ’95
13- Austria 14- Finland 15- Sweden
Twenty Five in’04
16- Czech 17- Bulgaria 18- Slovakia
19- Slovenia 20- Romania 21- Estonia
22- Hungary 23- Lithuania 24- Poland
25- Latvia
Twenty seven in ‘07
26- Cyprus 27- Malta
 All these 27 countries have the same currency except Denmark, UK & Sweden
Candidate Countries ‫ لكن لسه ماتوافقش علٌهم‬، ً‫دول عاٌزة تبقً أعضاء فً االتحاد األوروب‬
1- Croatia 2- Former Yugoslav Republic of Macedonia 3- Iceland
4- Montenegro 5- Turkey
Refused Countries ‫دول حاولت تبقً أعضاء فً االتحاد األوروبً لكن تم رفضها‬
As Morocco
Countries that are not members in EU (17 countries )
Albania, Andorra, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Georgia,
Liechtenstein, Moldova, Monaco, Norway, Russia, San Marino, Serbia, Switzerland, Ukraine,
& Vatican City State
48

European Free Trade Area ( EFTA )
1- Switzerland 2- Norway 3- Iceland 4- Liechtenstein

Austria, Finland & Sweden :‫ وهم‬EU ‫ فٌه ثالثة سابوهم وراحوا الـ‬, ‫ سبع دول‬1995 ‫كان عددهم لغاٌة سنة‬
North America Free Trade Area ( NAFTA )
1- U.S.A 2- Canada 3- Mexico
Association of South East Asian Nations ( ASEAN )
1- Brunei 2- Myanmar 3- Indonesia

4- Malaysia 5- Philippines 6- Singapore
7- Thailand 8- Vietnam 9- Laos 10- Cambodia
ASEAN + 4 → ASEAN + Japan, China, India & Southern Korea

preferential treatment ‫ ولكنهم ٌعاملوا معاملة تفضٌلٌة‬ASEAN ً‫هذه الدول األربعة لٌسوا أعضاءا ف‬
Common Market for Eastern & Southern Africa ( COMESA )
1- Burundi 2- Comoros 3- D.R. Congo 4- Djibouti

5- Egypt 6- Eritrea 7- Ethiopia 8- Kenya
9- Libya 10- Madagascar 11- Malawi 12- Mauritius
13- Rwanda 14- Seychelles 15- Sudan 16- Swaziland
17- Uganda 18- Zambia 19- Zimbabwe.
Caribbean Community ( CARICOM )
→ They give preferential treatment to Egypt.
AMU “ The Arab Maghreb Union “ ) ً‫األتحاد المغاربً ( إتحاد المغرب العرب‬
- Is a trade agreement aiming for economic and some sort of future political unity in North Africa
between the countries Morocco, Algeria, Tunisia, Libya, and Mauritania
Gulf Cooperation Council ( GCC ) ً‫مجلس دول التعاون الخلٌج‬
1- Saudi Arabia 2- Emirates 3-Bahrain 4- Qatar 5- Kuwait 6- Oman

* Now they are common market
* They are planning to be an economic union by having one unified currency with a name “ khaliji ”
49

Export Processing Zone ( EZP )

→ An area within a country exempted from taxes provided that the output of the companies
based there is exported overseas. ‫مثل بورسعٌد فً مصر وكذلك المنطقة الحرة بمدٌنة نصر‬
Benefits from Economic Integration

1. Faster economic growth: by joining together, members nations get larger resources, larger
markets, and economies of scale for their industries.
2. Countervailing power: for example. EU seeks a stronger position against the power of the US
and Japan
3. Dynamism: Sluggish national firms or monopolize lose their protective walls and are forced to
change in a more competitive direction.
Costs of economic integration

- A nation joining a regional grouping loses some of its sovereignty in economic matters.
ً‫ كل حاجة ٌتم تقرٌرها فً البرلمان األوروب‬-
‫ الدول الفقٌرة تسٌطر علً الوظائف فً الدول الغنٌة‬-
50

International Marketing Economic Environment 51
Economic Environment
Size of the market → Population + Income
Population
(1) Population size
→ Excellent indicator for the size of the market e.g. high volume low price products as tea, milk,
chocolate
→ 2 websites are important to know about population:
 CIA.gov
 World bank.org
(2) Population Growth Rate

- 2 patterns
Developed Developing
Countries Countries
Population 0.2% increase annually 2.2% increase annually
Growth Rate (very low) (very high)
Age 00 – 15 → 20% 00 – 15 → 40%
15 – 65 → 65% 15 – 65 → 55%
65 + → 15% 65 + → 05%
- Life expectancy of female more than male worldwide.
(3) Distribution of population
Income
→ It is not enough to count head, but also to count income they have.
(1) Distribution of Income
 Dual Economy ( Bi-model Income Distribution ) ( 80 / 20 Model ) Rich & Poor without
- 80% of people receive 20% of income modest income
- 20% of people receive 80% of income ‫أغنٌاء وفقراء بدون طبقة‬
‫متوسطة‬
(2) Per Capita Income ‫متوسط دخل الفرد‬

 The most widely used statistics to deliver economic development
1. World bank classification
I. High income economies
II. Upper middle income economies
III. Lower middle income economies
IV. Low income economies
2. Economies magazine
multiplier ‫ عشان أحسب الـ‬statistics & economies ‫ماعجبهاش الكالم بتاع البنك الدولً ألنك هتحتاج ناس بتوع‬
Big Mac Index ‫اخترعوا ما ٌسمً بـالـ‬
51

‫ فً المتوسط‬USA ‫ وقارنوا بٌن السعرٌن وخللوا الـ‬,‫ فً أعلً دولة وأقل سعر لٌه فً دولة أخري‬Big Mac ‫سعر الـ‬
7 $ ‫ بٌنما سعره فً النروٌج‬3.5 $ =USA ً‫ ف‬Big Mac ‫سعر الـ‬
3. Starbucks tall latte index
Big Mac Index ‫نفس فكرة الـ‬
 Per Capita Income can be criticized due to:
a) Purchasing power may not be reflected
b) Sales may not be related to per capita income
c) Lack of comparability
e.g. Japan 50,000 ‫مش هقدر أقول إن دخل الفرد فً الٌابان أعلً من مصر‬
Egypt 10,000 ‫ مرة ألن فٌه فرق فً األسعار‬50
So, World bank indicator can be given by 2 figures to each country:
- Before adjustment ‫قبل أن نؤخذ فً االعتبار فارق األسعار‬
- After adjustment ‫بعد أن نراعً فارق األسعار‬
(3) Gross National Income ( GNI ) ً‫إجمالً الدخل القوم‬

- If you are aiming to sell low volume high priced product
→ Look at per capita ( Kuwait )
- If you are aiming to sell low volume high priced product
→ Look at GNI ( India )
(4) Gross Domestic Product ( GDP )
(5) Gross National Product ( GNP )
Nature of the economy:

Physical endowment of nations
(1) Natural resources
(2) Topography
Characteristics of surface land ‫مصر دولة مسطحة‬
(3) Climate
Nature of economic activity

(1) Rostow’s view
→ Countries in their journey of economic development, move through 5 stages;
1- Traditional economy e.g. banking in Egypt
2- Recondition to take off
3- Take off e.g. IT in Egypt
4- Maturity
5- Mass production & consumption
52

(2) Farm or factory or services

‫هل هً بالد زراعٌة وال اقتصادٌة وال خدمٌة‬
Infrastructure
(1) Transportation
(2) Energy
(3) Communication
(4) Commercial infrastructure
Urbanization
→ Farm or city
“ percentage of population living in farms to percentage of population living in cities “
Other dimensions of foreign economies

(1) Inflation
(2) Role of government
(3) Foreign investment in the economy
Market potential index for emerging markets ‫االقتصاديات الناشئة‬

 Emerging countries now about 26 countries
 Egypt no. 16
53

International Marketing Cultural Environment 54
Cultural Environment
 Culture → everything around us including tangible & intangible assets

Or → it is the integrated sum total of learned behavioral traits that are shared by members of
a society
 Characteristics
 Culture is learned
 Culture is interrelated → they can’t be studied isolated
 Culture is shared by significant no. of people
“Culture is that complex whole which includes knowledge, belief, art, morals, law, custom, and
any other capabilities and habits acquired by individuals as members of society”
 Culture is dynamic not static as it develops, shifts, & changes over the time
 Culture divided into
 Core ( Religion, Language )
 Secondary ( music, eating habits, shift overtime )
 Language is the visible element of culture

 Language is the mirror of culture
 In high context
- Words may have more than one meaning according to context & situation
 In low context
- Words have only one meaning regardless the context & situation
- Explicit, direct, & clear meaning of the word
Culture & the time
Monochronic culture Polychronic culture

( M-Time ) ( P- Time )
Time is fixed Time is flexible
one thing at the time more than one job at the time
multi-tasking - multi jobs
time is lake ‫تعمل حاجة واحدة فً وقت واحد‬ time is a river ‫لٌس له حدود‬
e.g. the average time to check money in Japan is e.g. the average time to check the money in
about 1 min middle east is 25 min
e.g. people walk faster e.g. people don’t have sense of urgency
54

Cultural values four dimensions Hofestede culture

❶ Individualism/Collective Index (IDV)
The individual is more important than the group e.g. in USA , in contrast to Japan & Arabs.
❷ Power Distance Index (PDI)

High PD Low PD
You have uneven or unequal distribution of power The people are the same
‫إلخ‬... ‫الناس مش زي بعض – فٌه اختالف فً التعلٌم والثقافة‬ ‫الناس زي بعض‬
‫مثل الدول العربٌة‬ ‫مثل الوالٌات المتحدة االمرٌكٌة‬
❸ Uncertainty Avoidance Index (UAI)

High UA Low UA
Society with high tendency to avoid the unknown Society that would like to progress, advance &
‫ اللً تعرفه أحسن من اللً ماتعرفوش‬change
❹ Masculinity/Feminity Index (MAS)

‫لٌها دخل بالقٌم السائدة فً المجتمع‬
❺ Long Term Orientation ( LTO )
‫ ناس بتبص لقدام وداٌما عاملة حساب للمستقبل مثل الٌابان‬-
‫ وناس بتبص تحت رجلٌها – عٌش ٌومك بالطول والعرض مثل أمرٌكا‬-
Self reference criterion

→Self Reference Criterion is the unconscious reference to one’s own culture values and is the root of
most international business problems
Lee said: avoid judging others by own values
Acculturation
Acculturation is the process of adjusting and adapting to a specific culture other than one’s own. It is
one of the keys to success in international operations
Elements of Culture
Material Life Aesthetics
Language Elements of
Education
Culture
Religion Social Organizations
Attitudes & Values
55

1.Language
 Language is the most visible element of culture.
 Language is the mirror of culture.
 Language defines culture, if a country has several spoken languages, it has several cultures. e.g.
Belgium, Switzerland, India.
 When the same language is used in different
 U.K.  U.S.A.
countries, the spoken language sets the
 Lorry  truck
difference.
 Petrol  gasoline
 Biscuits  cookies
Non Verbal Language
Role of checking hand Friendship

& kissing from culture
to other
Space ( Distance ) Non verbal Time

language
Business Material
Agreements Possessions
2.Material Life
Material Life refers to the results of technology and is directly related to how a society organizes
its economic activity.
It is manifested in the availability and adequacy of the basic economic, social, financial, and
marketing infrastructure for the international business in a market.
3.Aesthetics ً‫الحس الجمال‬

Good taste is expressed through, color, design, form and music.
The meanings of colors and symbols vary from country to country.
4.Education
Education, either formal or informal, plays a major role in the passing on and sharing of culture.
International firms need to understand the varying emphases on particular skills and the overall
level of education provided.
56

5.Religion
 Religious holidays vary greatly among countries.
 Consumption patterns may be affected by religious requirements or taboos.
 The economic role of women varies from culture to culture, and is greatly affected by
religious beliefs.
 Religious institutes can play a very important role in economic matters.
6.Attitudes and Values

 Our values and attitudes help determine what we think is right, important or desirable .
 In some cultures marketing is neglected and undeveloped.
 While the U.S has been called “the affluent society, ‘the achieving society”, and the
“acquisitive society”, other societies focus on “ spiritual values” where nirvana or
“wantlessness” is more acceptable.
 While Americans in general accept change and risk taking, other societies are more
tradition-oriented and reluctant to take risks.
7.Social Organizations
 Social organization refers to the way people relate to each other.
 In the U.S, the key unit is the nuclear family. In other societies, the family unit is larger
including more relatives.
 While in the U.S. the common territory can be the neighborhood or the city, in other
countries, it is the tribal grouping
57

International Marketing Political/Legal Environment 58
Political/Legal Environment
Political Environment
I. Host country political environment
 National sovereignty  National Security  National Prestige  Entry Restrictions
 Price controls  Quotas and tariffs  Exchange control  Expropriation
II. Home country political environment

 It may limit or restrict countries the firm may enter.
III. International political environment

 It involves political relations between two or more countries.
The Legal Environment

I. Home country legal environment
1.Export Controls (U.S. Laws)
 Country destination
 Nature of the product
2.Antitrust controls
If U.S. firm activities overseas produce consequences within the U.S., these activities may be prohibited
 When a U.S. firm acquires a foreign firm.
 When it engages in a joint venture overseas.
 When it makes some overseas marketing agreements with another firm.
3.Foreign corrupt practices Act
II. Host Country legal Environment

o Common Law → tradition oriented (U.S. and U.K.) 26
o Civil or Code Law → based on extensive and comprehensive written code 70
o Islamic law 27
III. International Legal Environment

- IMF : EU (279 measures) - GATT (WTO) - ISO
Trademark Conventions:
Paris Union: allows a 6 months protection period in the case of trademarks and one year for patents.
Madrid Arrangement: It permits a registration in just one member country to qualify as registration in
all other member countries.
Foreign Laws and The Marketing Mix:
Product , Promotion, Price, Place
Political-Risk Assessment
To evaluate the level of political and economic risk in the host country, independent institutes provide
ranking to countries around the world based on some criteria.
Prepared by: Saied Ibrahim 58

International Marketing Global Marketing Strategy 59
Global Marketing Strategy
The Shift Towards Globalization

 Economist Robert Reich
- No national products
It is very difficult to separate
- No national technologies
American economy from
- No national corporations
International economy
- No national industries
- No national economies.
 Kenihi Ohmae
- A “borderless world” with companies Is Sony Japanese?
without countries. No
Is Philips Dutch?
 Theodore Levitt
- A" global village” with single converging demand driven by mass communication
Globalization Index
→ Ranking countries around the world according to economy
(1) Foreign Policy Magazine
- 4 dimensions
1. Economic dimension
a) The share of the country in world trade
b) The share of the country in world FDI
2. Personal dimension
3. Technological dimension
4. Political dimension
(2) KOF
What is globalization?
 “A truly global company looks at the whole world as one market. It manufactures, conducts
research, raises capital, and buys supplies, wherever it can do the job best”.
 “A stage of development in a firm's strategy, structure, and culture whereby it allocates
resources with global objectives in mind to access the desired market with the highest quality
product and lowest cost”.
Forces driving companies to globalize America

1. Customers s
Triad markets
2. Markets
3. Technology
4. Competition Asia/Pacific European
Each one of them 1/3 of world income & economy 59

International Marketing Global Marketing Strategy 60
Dimensions of a global strategy

1. Building global market participation.
2. Designing global products and services.
e.g. Digital camera: worldwide people need high quality picture, easy to use, minimal
knowledge to operate it. As Canon & Fuji did.
3. Creating global marketing.
Around the world; one slogan, one product, one promotion
e.g. MacDonald’s → I’m loving it
Gillette → Best man can get
Nokia → Connecting people
4. Locating global activities.
Where to do what, where to locate especially manufacturing and R & D
I’m trying to avoid –ve perception of customer toward country of origin or manufacturer
image ‫ األنسب اللً مش هٌؤثر علً الـ‬location ‫الزم أختار الـ‬
‫ فً كل مكان‬R & D ‫ ألنً مش هصنع‬R & D ‫كمان الـ‬
5. Making global competitive moves.
Willing to transfer resources ( people, money ) across national borders
Global Integration and local adaptation of corporate functions
 New product development  Pricing

 Raising capital  Packaging
 R&D  Promotion
 Production  Human resources Management
 Sourcing
Global Integration Local Variation
Balance
Think Global, Act Local
● Japanese stated “The best globalization strategy is glocalization strategy”
60

International Marketing International Product Strategy 61
International Product Strategy

International Product Strategies
Straight Extension Product Adaptation Product Innovation
The firm adopts the The company caters to The firm designs a product
same policy used in its the needs and wants of from scratch for foreign
home market. its foreign customers. customers.
These Three Basic Strategies Can Be Further Broken Down Into 5 Options
International Product Policy

Standardization Vs. Adaptation
Factors encouraging Standardization Factors encouraging Adaptation

1. Economies of scale in production. 1. Differing use condition.
2. Economies of scale in R&D. 2. Other market factors.
3. Economies of scale in Marketing. 3. Influence of government.
4. Consumer mobility (Customer retention & Loyalty 4. Company history and operations.
Ex. American Express, Kodak). 5. Extent of urbanization
5. The home –country image (Ex. US jeans, French
Perfumes).
6. Industrial products.
7. Operating via exports.
61

McDonald’s Product Adaptation

Customises menus to local tastes:
 France – Croque McDo
 India – Chicken Maharajah Mac
 Japan – Teriyaki Burger
 New Zealand – Kiwi Burger
 Middle East – McArabia Sandwich
 Greece – Greek Mac
Factors favoring product

Standardization Adaptation
1. High cost of adaptation 1. Difference in technical standards.
e.g. voltage 220 & 110
right hand side of road & left side in cars
2. Primarily industrial products. 2. Primarily consumer and personal use products.
e.g. food & clothing tend to be adapted to
different markets
3. Convergence &similar tastes in diverse country 3. Variations in culture.
markets
4. Predominant use in urban areas. 4. Variations in conditions of use
e.g. European kitchen vs. American kitchen
(bigger)
5. Marketing to predominantly similar countries 5. Variations in ability to buy ”Purchasing Power”
(i.e. the triad economies) - difference in income levels
6. Ethnocentric management attitude. 6. Multi-domestic → Management attitude
“Polycentric”
7. Strong country of origin effect and image. 7. Strong culture differences, language affecting
e.g. French perfume purchase.
Standard product,
Swiss chocolate because if you e.g. Barbie in Japan, India
American jeans adapt, you will “ Challenge among international marketers is
Japanese electronics lose identity & not to beat competition but to beat culture”
image
Italian cheese
8. Scale of economies in production, marketing 8. Local environment induced adaptation.
and R&D. → cheaper & easier e.g. Noise, safety, food standard differ from
one county to another, So I have to adapt &
adjust
9. Competitors are standing their products & 9. Competitors are adapting, so I have to adapt as
succeed, so I as will can stand. will.
62

A Perspective on Branding
→Should I adapt name to country or standardize name worldwide ?!
Advantages Disadvantages
Local Brands
1. Meaningful names. 1. Higher marketing costs.
e.g. Orascom Telecom → adapt local brands/names
in each & every country
2. Local identification. 2. Higher inventory costs
e.g. Mobinil
3. Quick market penetration by acquiring local brands 3. Loss of economies of scale.
→ when I acquire local market, must prefer to
retain name
e.g. Sanbawlo acquired Alex. Bank
Harro (Swiss comp.) acquired Vitrac
4. Variations of quantity and quality across markets 4. Diffused image.
allowed Identity is diluted, image is diffused →
→ obvious in car industry confusion
e.g. Kia Cerato → Kia Forte in American market e.g. Norvasc → Amlor
“ I changed specifications & quality, I might as Zoloft → Lustral
will change the name” Arava → Avara
e.g. Lancer → Mirage “Increased options” Slice → Mirinda
Worldwide brands
1. Maximum marketing efficiency. 1. Market homogeneity assumed.
2. Reduction of advertising costs. 2. Possibility of negative connotation.
3. Elimination of brand confusion. 3. Quality and quantity consistency
required.
4. Advantage for culture-free products. 4. LDCs opposition and resentment.
5. Advantage for prestigious products.
6. Easy identification recognition for international
brand.
7. Uniform worldwide image
Worldwide Name
Vodafone Click → Egypt
Baharati → India
Visa-Vis → Italy ( Face to face )
Detu → Germany
63

Brand Piracy
 Imitation ‫أغير حرف‬
 Imitation → Levis
 Original → Levi’s
 Faking
→ An identical copy to the original
 Pre-emption
→ A person registers in his or her name a large number of well known brand names and sell
them to those interested.
e.g.
1- Metro Supermarket → is this original German chain ?
- They bought it from local name
- Then change their own name to >> Macromarket
2- National when enters American market from years ago → National Panasonic → Panasonic
Country of Origin Effect

 Consumers evaluate a product not only by its quality and brand name but also by the country in
which it was produced.
 This is the country of origin effect.
 If a firm is producing a product in a country that does not have a favorable image for that
product, it will have a hard task marketing it.
Examples of country of Origin Effect

France Perfume Chanel
Cosmetics Guerlain
Scarves Hermés
Italy Fashion Gucci,
Dolce & Gabbana
Scotland Whisky Glenmorangie
64

International Marketing International Promotion Strategy 65
International Promotion Strategy: Advertising
Constraints on International Advertising
1.Language
→ language understood by receiver
* Word to word translation sometimes kills the meaning
International
Coded
* Use language people used in way to way
Marketer
Message communication
( Sender )
2.Role of advertising in society
→ U.S. : people used to advertise
→ North Africa : Adv. Not exists as it is illegal
** I have to find different ways to communicate with
people
International → Other African countries : One TV station owned by
Decoded
Customer
message government
( Receiver )
3.Government controls.
→ Over message, media, product
4.Media availability.
5.Agency availability.
6.Competition
Advertising Decisions Facing the International Marketer

1. Selecting the agency
Selection Criteria
 Market coverage
 Quality of coverage
 Marketing research, public relations and other services.
 Communication and control
 International coordination
 Image
 Relative role of company advertising department and agency
 Size of company's international business
 Company organization
 Level of involvement
65

International Marketing International Promotion Strategy 66
2. Selecting the Advertising Message

Localized or standardized
 Similarity of buying needs
e.g. Coca-cola
 Language overlap
Saudi Arabia, Egypt
 International market segments
 Global product introductions
 Media development
 Government regulations
 Economies
As standard campaigns are much cheaper
 Industrial products
e.g. United color of Benetton
3.Selecting the media

 Magazines/ radio/ television/other.
4.International advertising budget

 Percentage of sales method
 Competitive-parity method
 Objective-and-task method
 Comparative-analysis method
5. Evaluation of International advertising effectiveness
6. Organizing for International Advertising
7. Cooperative advertising
66

Marketing Research
Marketing
research
67

Marketing Research
Introduction
Redefining Marketing Research

»»» The American Marketing Association (AMA) redefined Marketing Research as:
“The function that links the consumer, the customer, and public to the marketer through INFORMATION”
Definition of Marketing Research

Marketing research is the systematic and objective
• identification • collection • analysis • dissemination • and use of information
For the purpose of improving decision making related to the
• identification , • solution of problems and • opportunities in marketing.
‫التعرف علً المشاكل وحلها واكتشاف الفرص الموجودة بالسوق‬
 From this definition it can be concluded the following:

 Marketing research is systematic. It uses the scientific method, in that data are collected and
analyzed to test hypotheses.
 Marketing research is objective. It attempts to provide accurate information that reflects a true
state of affairs. Researcher should be free from personal or biases in the research project.
Classification of Marketing Research

Problem-Identification Research Problem-Solving Research
Research undertaken to help identify problems which Research undertaken to help solve specific marketing
are not necessarily apparent on the surface and yet problems
exist or are likely to arise in the future
Examples: Examples:
1- Market potential Research 1- Segmentation Research
2- Market share Research 2- Product Research
3- Market characteristics Research 3- Pricing Research
4- Sales analysis Research 4- Promotion Research
5- Forecasting Research 5- Distribution Research
6- Business trends research
Marketing Research Suppliers & Services
68

Marketing Research
Management Information Systems Vs. Decision Support Systems
Management Decision Problem Vs. Marketing Research Problem

Management Decision Problem Marketing Research Problem
Should a new product be introduced? To determine consumer preferences and purchase intentions
for the proposed new product.
Should the advertising campaign be To determine the effectiveness of the current advertising
changed? campaign.
Should the price of the brand be To determine the price elasticity of demand and the impact
increased? on sales and profits of various levels of price changes.
Notes
 Hypothesis : Unproven statement , needs to be validated by quantitative research

H node Or
H null
H0 : There’s no significant relationship between independent & dependent variables
H alternate H0 : There’s a significant relationship between independent & dependent variables
 There are 2 types of information:

- Nice to know information
- Must know information
 Assumption ‫االفتراضات البحثٌة‬

 Limitation ‫الحاجات اللً انا هدرسها فقط‬
 Difference between Hypothesis & Model
- Hypothesis : ‫نظرٌة‬
- Model : ‫فً مكان ما‬ test ‫النظرٌة بعد ما عملتلها‬
69

Marketing Research
Defining the Marketing Research Problem and Developing an Approach
The Problem Definition Process

Task Involved
Discussion with Interviews with Secondary data Qualitative

decision maker(s) experts analysis research
Environmental context of the problem
1 Step 1 : Problem Definition
Management Decision Problem
Marketing Research Problem
2 Step 2 : Approach to the problem

Objective/Th Analytical Model : Research Hypotheses Specification of
eoretical Verbal, Graphical, Questions information needed
foundation Mathematical
3 Step 3 : Research Design
The Problem Audit

The problem audit is a comprehensive examination of a marketing problem with the purpose of
understanding its origin and nature.
1. The events that led to the decision that action is needed, or the history of the problem.
2. The alternative courses of action available to the DM.
3. The criteria that will be used to evaluate the alternative courses of action.
4. The potential actions that are likely to be suggested based on the research findings.
5. The information that is needed to answer the DM's questions.
6. The manner in which the DM will use each item of information in making the decision.
7. The corporate culture as it relates to decision making.
70

Marketing Research
The Role of Theory in Applied Marketing Research

Research Task Role of Theory
1. Conceptualizing and Provides a conceptual foundation and understanding of the basic processes
identifying key variables underlying the problem situation. These processes will suggest key
‫ تصور وتحدٌد المتغٌرات‬dependent and independent variables.
‫الرئٌسٌة‬
2. Operationalizing Theoretical constructs (variables) can suggest independent and dependent

key variables variables naturally occurring in the real world.
‫تفعٌل المتغٌرات الرئٌسٌة‬
3. Selecting a research Causal or associative relationships suggested by the theory may

design indicate whether a causal or descriptive design should be adopted.
4. Selecting a sample The theoretical framework may be useful in defining the population and
suggesting variables for qualifying respondents, imposing quotas, or
stratifying the population
5. Analyzing and The theoretical framework (and the models, research questions and
interpreting data hypotheses based on it) guide the selection of a data analysis strategy and
the interpretation of results
6. Integrating findings The findings obtained in the research project can be interpreted in the light
of previous research and integrated with the existing body of knowledge.
Models
1- An analytical model is a set of variables and their interrelationships designed to represent, in
whole or in part, some real system or process.
2- In verbal models, the variables and their relationships are stated in prose form.
Such models may be mere restatements of the main tenets of a theory.
3- Graphical models are visual. They are used to isolate variables

and to suggest directions of relationships but are not designed
to provide numerical results.  
4- Mathematical models explicitly specify the relationships among

variables, usually in equation form.
Research Questions and Hypotheses

 Research questions (RQs) are refined statements of the specific components of the problem.
 A hypothesis (H) is an unproven statement or proposition about a factor or phenomenon that is
of interest to the researcher. Often, a hypothesis is a possible answer to the research question.
71

Marketing Research
Research Design
Exploratory & Conclusive Research Differences

Exploratory Conclusive
Objective To provide insights and To test specific hypotheses and examine
understanding. relationships.
Characteristics  Information needed is  Information needed is clearly defined.
defined only loosely.
 Research process is  Research process is formal and
flexible and unstructured. structured.
 Sample is small and non-  Sample is large and representative.
representative.
 Analysis of primary data  Data analysis is quantitative.
is qualitative.
Findings/ Tentative. Conclusive.
Results
Outcome Generally followed by further Findings used as input into decision making.
exploratory or conclusive
research.
72

Marketing Research
A Comparison of Basic Research Designs

Exploratory Descriptive Causal
Objective Discovery of ideas and Describe market Determine cause and
insights characteristics or functions effect relationships
Characteristics 1- Flexible, versatile 1- Marked by the prior 1- Manipulation of one

formulation of specific or more independent
hypotheses variables
2- Often the front end of 2- Preplanned and 2- Control of other
total research design structured design mediating variables
Methods Survey of experts o Secondary data Experiments

Pilot surveys analyzed in a
Secondary data quantitative as
analyzed in a opposed to a
qualitative way qualitative manner
Qualitative research o Surveys
o Panels
o Observational and
other data
Use 1. Formulate a problem or 1. To describe the 1. To understand

define a problem more characteristics of which variables are
precisely relevant groups, such the cause
2. Identify alternative as consumers, (independent
courses of action salespeople, variables) and which
3. Develop hypotheses organizations, or variables are the
4. Isolate key variables market areas. effect (dependent
and relationships for 2. To estimate the variables) of a
further examination percentage of units in phenomenon
5. Gain insights for a specified population 2. To determine the
developing an exhibiting a certain nature of the
approach to the behavior. relationship
problem 3. To determine the between the causal
6. Establish priorities for perceptions of variables and the
further research product effect to be
characteristics. predicted
4. To determine the
degree to which
marketing variables
are associated.
5. To make specific
predictions.
73

Marketing Research
Cross-sectional Designs Longitudinal Designs

 Involve the collection of information from any A fixed sample (or samples) of population
given sample of population elements only once. elements is measured repeatedly on the same
variables
 In single cross-sectional designs, there is only A longitudinal design differs from a cross-
one sample of respondents and information is sectional design in that the sample or samples
obtained from this sample only once. remain the same over time
 In multiple cross-sectional designs, there are

two or more samples of respondents, and
information from each sample is obtained only
once. Often, information from different
samples is obtained at different times.
 Cohort analysis consists of a series of surveys

conducted at appropriate time intervals, where
the cohort serves as the basic unit of analysis.
A cohort is a group of respondents who
experience the same event within the same
time interval.
Relative Advantages and Disadvantages of Cross-sectional vs. Longitudinal

Longitudinal and Cross-Sectional Designs
74

Marketing Research
Exploratory Research Design: Secondary Data
Primary Vs. Secondary Data

 Primary data are originated by a researcher for the specific purpose of addressing the problem
at hand. The collection of primary data involves all six steps of the marketing research process
 Secondary data are data that have already been collected for purposes other than the problem
at hand. These data can be located quickly and inexpensively.
Primary Data Secondary Data
Collection purpose For the problem at hand For other problems
Collection process Very involved Rapid & easy
Collection cost High Relatively low
Collection time Long Short
Uses of Secondary Data

1) Identify the problem
2) Better define the problem
3) Develop an approach to the problem
4) Formulate an appropriate research design (for example, by identifying the key variables)
5) Answer certain research questions and test some hypotheses
6) Interpret primary data more insightfully
Criteria for Evaluating Secondary Data

Criteria Issues Remarks
Specifications & Data collection method, response rate, Data should be reliable, valid,
Methodology quality & analysis of data, sampling & generalizable to the
(Methodology Used to Collect the technique & size, questionnaire design, problem.
Data ) fieldwork.
Error & Accuracy Examine errors in approach, research Assess accuracy by comparing
(Accuracy of the Data) design, sampling, data collection & data from different sources.
analysis, & reporting.
Currency Time lag between collection & Census data are updated by
(When the Data Were Collected ) publication, frequency of updates. syndicated firms.
Objective Why were the data collected? The objective determines the
(The Purpose for Which the Data relevance of data.
Were Collected )
Nature Definition of key variables, units of Reconfigure the data to
(The Content of the Data ) measurement, categories used, increase their usefulness.
relationships examined.
Dependability Expertise, credibility, reputation, and Data should be obtained from
(Overall, How Dependable Are trustworthiness of the source an original source.
the Data)
75

Marketing Research
Exploratory Research Design: Qualitative Research
A Classification of Marketing Research Data
Qualitative Vs. Quantitative Research

Qualitative Research Quantitative Research
Objective To gain a qualitative understanding of the To quantify the data and generalize the
underlying reasons and motivations results from the sample to the
population of interest
Sample Small number of non-representative Large number of representative cases
cases
Data Collection Unstructured Structured
Data Analysis Non-statistical Statistical
Outcome Develop an initial understanding Recommend a final course of action
A Classification of Qualitative Research Procedures
76

Marketing Research
Characteristics of Focus Groups Advantages Disadvantages

Group Size 8-12 1. Synergism 1. Misuse
Group Homogeneous, respondents, 2. Snowballing 2. Misjudge
Composition prescreened 3. Stimulation 3. Moderation
Physical Setting Relaxed, informal atmosphere 4. Security 4. Messy
5. Spontaneity 5. Misrepresentation
Time Duration 1-3 hours
Recording Use of audiocassettes and 6. Serendipity
videotapes videotapes 7. Specialization
Moderator Observational, interpersonal, and 8. Scientific
communication skills of the 9. scrutiny
moderator 10. Structure
11. Speed
Key Qualifications of Focus Group Moderators

1. Kindness with firmness: The moderator must combine a disciplined detachment with understanding
empathy so as to generate the necessary interaction.
2. Permissiveness: The moderator must be permissive yet alert to signs that the group’s cordiality or
purpose is disintegrating.
3. Involvement: The moderator must encourage and stimulate intense personal involvement.
4. Incomplete understanding: The moderator must encourage respondents to be more specific about
generalized comments by exhibiting incomplete understanding.
5. Encouragement: The moderator must encourage unresponsive members to participate.
6. Flexibility: The moderator must be able to improvise and alter the planned outline amid the
distractions of the group process.
7. Sensitivity: The moderator must be sensitive enough to guide the group discussion at an intellectual
as well as emotional level.
Variations in Focus Groups

1) Two-way focus group. This allows one target group to listen to and learn from a related group.
For example, a focus group of physicians viewed a focus group of arthritis patients discussing the
treatment they desired.
2) Dual-moderator group. A focus group conducted by two moderators: One moderator is responsible for
the smooth flow of the session, and the other ensures that specific issues are discussed.
3) Dueling-moderator group. There are two moderators, but they deliberately take opposite
positions on the issues to be discussed.
4) Respondent-moderator group. The moderator asks selected participants to play the role of
moderator temporarily to improve group dynamics.
5) Client-participant groups. Client personnel are identified and made part of the discussion group.
6) Mini groups. These groups consist of a moderator and only 4 or 5 respondents.
7) Tele-session groups. Focus group sessions by phone using the conference call technique.
8) Online Focus groups. Focus groups conducted online over the Internet.
77

Marketing Research
Depth Interview Techniques:

Laddering Hidden Issue Questioning Symbolic Analysis
The line of questioning proceeds The focus is not on socially it attempts to analyze the
from product characteristics to shared values but rather on symbolic meaning of objects by
user characteristics. personal “sore spots;” not on comparing them with their
general lifestyles but on deeply opposites.
This technique allows the felt personal concerns. The logical opposites of a
researcher to tap into the e.g. product that are investigated
consumer's network of fantasies, work lives, and social are: non-usage of the product,
meanings. lives attributes of an imaginary
e.g. “non-product,” and opposite
Wide body aircrafts historic, elite, “masculine- types of products.
(product characteristic) camaraderie,” competitive (product characteristic)
activities “What would it be like if you
I can get more work done could no longer use airplanes?”
Advertising theme:
I accomplish more communicate aggressiveness, “Without planes, I would have
high status, and competitive to rely on letters and long-
I feel good about myself heritage of the airline. distance calls.”
(user characteristic) (user characteristic)
Airlines sell to the managers
Advertising theme: You will feel face-to-face communication.
good about yourself when flying Advertising theme: The airline
our airline. “You're The Boss.” will do the same thing for a
manager as Federal Express
does for a package.
Focus Groups Versus Depth Interviews

Characteristic Focus Groups Depth Interviews
Group synergy and dynamics + -
Peer pressure/group influence - +
Client involvement + -
Generation of innovative ideas + -
In-depth probing of individuals - +
Uncovering hidden motives - +
Discussion of sensitive topics - +
Interviewing competitors - +
Interviewing professional respondents - +
Scheduling of respondents - +
Amount of information + -
Bias in moderation and interpretation + -
Cost per respondent + -
78

Marketing Research
Definition of Projective Techniques

 An unstructured, indirect form of questioning that encourages respondents to project their underlying
motivations, beliefs, attitudes or feelings regarding the issues of concern.
 In projective techniques, respondents are asked to interpret the behavior of others.
 In interpreting the behavior of others, respondents indirectly project their own motivations, beliefs, attitudes,
or feelings into the situation.
Advantages of Projective Disadvantages of Projective Guidelines for Using Projective
Techniques Techniques Techniques
1) They may elicit responses 1) Suffer from many of the 1. Projective techniques should be
that subjects would be disadvantages of unstructured used because the required
unwilling or unable to give if direct techniques, but to a information cannot be accurately
greater extent. obtained by direct methods.
they knew the purpose of the
2) Require highly-trained 2. Projective techniques should be
study. interviewers. used for exploratory research to
2) Helpful when the issues to be 3) Skilled interpreters are also gain initial insights and
addressed are personal, required to analyze the understanding.
sensitive, or subject to strong responses. 3. Given their complexity, projective
social norms. 4) There is a serious risk of techniques should not be used
3) Helpful when underlying interpretation bias. naively
5) They tend to be expensive.
motivations, beliefs, and
6) May require respondents to
attitudes are operating at a engage in unusual behavior.
subconscious level.
Word Association Completion Techniques

In word association, respondents are presented with a list of In sentence completion, respondents are given
words, one at a time, and asked to respond to each with the incomplete sentences and asked to complete
first word that comes to mind. The words of interest, called them. Generally, they are asked to use the first
test words, are interspersed throughout the list which also word or phrase that comes to mind.
contains some neutral, or filler words to disguise the purpose
of the study. Responses are analyzed by calculating:  A person who shops at Sears is ________
(1) the frequency with which any word is given as a response;
(2) the amount of time that elapses before a response  A person whoisreceives
given; and
a gift certificate good
(3) the number of respondents who do not respond at for Sak's Fifth Avenue would be __________
all to a test word within a reasonable period of time.
EXAMPLE  J. C. Penney isMRS.
mostCliked by ________
STIMULUS MRS. M MRS. C
washday everyday ironing  When I think of shopping in a department
fresh and sweet clean store, I ________
pure air soiled
scrub don't; husband does clean A variation of sentence completion is paragraph
filth this neighborhood dirt completion, in which the respondent completes a
bubbles bath soap and water paragraph beginning with the stimulus phrase.
family squabbles children
towels dirty wash In story completion, respondents are given part
of a story – enough to direct attention to a w
particular topic but not to hint at the ending.a
They are required to give the conclusion in their
s
own words. h
79

Marketing Research
Construction Techniques Expressive Techniques

With a picture response, the respondents are In expressive techniques, respondents are
asked to describe a series of pictures of ordinary as presented with a verbal or visual situation and
well as unusual events. The respondent's asked to relate the feelings and attitudes of other
interpretation of the pictures gives indications of people to the situation.
that individual's personality. Role playing Respondents are asked to play the
role or assume the behavior of someone else.
In cartoon tests, cartoon characters are shown in a
specific situation related to the problem. The Third-person technique The respondent is
respondents are asked to indicate what one presented with a verbal or visual situation and the
cartoon character might say in response to the respondent is asked to relate the beliefs and
comments of another character. Cartoon tests are attitudes of a third person rather than directly
simpler to administer and analyze than picture expressing personal beliefs and attitudes. This
response techniques. third person may be a friend, neighbor, colleague,
or a “typical” person.
Comparison of Focus Groups, Depth Interviews, and Projective Techniques

Criteria Focus Groups Depth Interviews Projective Techniques
1. Degree of Structure Relatively high Relatively medium Relatively low
2. Probing of individual Low High Medium
respondents
3. Moderator bias Relatively medium Relatively high Low to high
4. Interpretation bias Relatively low Relatively medium Relatively high
5. Uncovering subconscious Low Medium to high High
information
6. Discovering innovative High Medium Low
information
7. Obtaining sensitive information Low Medium High
8. Involve unusual behavior or No To a limited extent Yes
questioning
9. Overall usefulness Highly useful Useful Somewhat useful
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Measurement and Scaling
Measurement
→ Assigning numbers or other symbols to characteristics of objects according to certain pre-specified
rules.
 One-to-one correspondence between the numbers and the characteristics being measured.
 The rules for assigning numbers should be standardized and applied uniformly.
 Rules must not change over objects or time.
Scaling
→ involves creating a continuum upon which measured objects are located
Consider an attitude scale from 1 to 100.
Each respondent is assigned a number from 1 to 100,
( with 1 = Extremely Unfavorable, and 100 = Extremely Favorable ).
Measurement is the actual assignment of a number from 1 to 100 to each respondent.

Scaling is the process of placing the respondents on a continuum with respect to their attitude toward
department stores.
Primary Scales of Measurement

Scale Basic Characteristics Common Marketing
Examples Examples
Nominal  The numbers serve only as labels or tags for identifying and Social Security Brand nos.,
classifying objects. nos., numbering of store types
 The numbers do not reflect the amount of the characteristic football players
possessed by the objects.
 The only permissible operation on the numbers in a nominal scale is
counting
Ordinal  A ranking scale in which numbers are assigned to objects to indicate Quality rankings, Preference
the relative extent to which the objects possess some characteristic. rankings of teams rankings,
 Can determine whether an object has more or less of a characteristic in a tournament market
position, social
than some other object, but not how much more or less.
class
 Any series of numbers can be assigned that preserves the ordered
relationships between the objects
Interval  Numerically equal distances on the scale represent equal values in Temperature Attitudes,
the characteristic being measured. (Fahrenheit) opinions, index
 It permits comparison of the differences between objects. Celsius) nos.
 The location of the zero point is not fixed. Both the zero point and
the units of measurement are arbitrary.
Ratio  Possesses all the properties of the nominal, ordinal, and interval Length, weight Age, sales,
scales. income, costs
 It has an absolute zero point.
 It is meaningful to compute ratios of scale values.
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A Classification of Scaling Techniques
Non-comparative Scaling Techniques

 Respondents evaluate only one object at a time,
and for this reason non-comparative scales are often
referred to as monadic scales.
 Non-comparative techniques consist of continuous
and itemized rating scales
۩ Continuous Rating Scale

Respondents rate the objects by placing a mark at the appropriate position
on a line that runs from one extreme of the criterion variable to the other.
The form of the continuous scale may vary considerably.
e.g.
Probably the worst - - - - - - -I - - - - - - - - - - - - - - - - - - - - - --Probably the best
0 10 20 30 40 50 60 70 80 90 100
۩ Itemized Rating Scales

 The respondents are provided with a scale that has a number or brief description associated
with each category.
 The categories are ordered in terms of scale position, and the respondents are required to select
the specified category that best describes the object being rated.
 The commonly used itemized rating scales are the Likert, semantic differential, and Stapel
scales.
 Likert Scale
The Likert scale requires the respondents to indicate a degree of agreement or disagreement with each
of a series of statements about the stimulus objects.
Strongly Disagree Neither agree Agree Strongly
disagree nor disagree agree
1. Sears sells high quality merchandise. 1 2X 3 4 5
2. Sears has poor in-store service. 1 2X 3 4 5
3. I like to shop at Sears. 1 2 3X 4 5
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Sampling
Sample vs. Census
Type of Study Conditions Favoring the Use
Sample Census
1. Budget Small Large
2. Time available Short Long
3. Population size Large Small
4. Variance in the characteristic Small Large
5. Cost of sampling errors Low High
6. Cost of non-sampling errors High Low
7. Nature of measurement Destructive Nondestructive
8. Attention to individual cases Yes No
Define the Target Population

The target population is the collection of elements or objects that possess the information sought by the
researcher and about which inferences are to be made. The target population should be defined in
terms of elements, sampling units, extent, and time.
 An element is the object about which or from which the information is desired, e.g., the
respondent.
 A sampling unit is an element, or a unit containing the element, that is available for selection at
some stage of the sampling process.
 Extent refers to the geographical boundaries.
 Time is the time period under consideration.
Important qualitative factors in determining the sample size are:

 the importance of the decision
 the nature of the research
 the number of variables
 the nature of the analysis
 sample sizes used in similar studies
 incidence rates
 completion rates
 resource constraints
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Questionnaire & Form Design
Questionnaire Definition
 A questionnaire is a formalized set of questions for obtaining information from respondents.
Questionnaire Objectives
1) It must translate the information needed into a set of specific questions that the respondents
can and will answer.
2) A questionnaire must uplift, motivate, and encourage the respondent to become involved in the
interview, to cooperate, and to complete the interview.
3) A questionnaire should minimize response error.
Questionnaire Design Process
1 Specify the Information Needed
2 Specify the Type of Interviewing Method
3 Determine the Content of Individual Questions
4 Design the Question to Overcome the Respondent’s Inability and Unwillingness to Answer
5 Decide the Question Structure
6 Determine the Question Wording
7 Arrange the Questions in Proper Order
8 Identify the Form and Layout
9 Reproduce the Questionnaire
10 Eliminate Bugs by Pre-testing
Effect of Interviewing Method on Questionnaire Design

Mail Questionnaire
 Please rank order the following department stores in order of your preference to shop at these
stores. Begin by picking out the one store that you like most and assign it a number 1. Then
find the second most preferred department store and assign it a number 2. Continue this
procedure until you have ranked all the stores in order of preference. The least preferred store
should be assigned a rank of 10. No two stores should receive the same rank number.
Store Rank Order
1. Parisian ____________
2. Macy's ____________
.
10. Wal-Mart ____________
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Marketing Research
Telephone Questionnaire
 I will read to you the names of some department stores. Please rate them in terms of your
preference to shop at these stores. Use a ten-point scale, where 1 denotes not so preferred and
10 denotes greatly preferred. Numbers between 1 and 10 reflect intermediate degrees of
preference. Again, please remember that the higher the number, the greater the degree of
preference. Now, please tell me your preference to shop at .......(READ ONE STORE AT A TIME)
Store Not So Greatly

Preferred Preferred
1. Parisian 1 2 3 4 5 6 7 8 9 10
2. Macy's 1 2 3 4 5 6 7 8 9 10
.
.
.
10. Wal-Mart 1 2 3 4 5 6 7 8 9 10
Personal Questionnaire
 (HAND DEPARTMENT STORE CARDS TO THE RESPONDENT). Here is a set of department store
names, each written on a separate card. Please examine these cards carefully. (GIVE
RESPONDENT TIME). Now, please examine these cards again and pull out that card which has
the name of the store you like the most, i.e., your most preferred store for shopping. (RECORD
THE STORE NAME AND KEEP THIS CARD WITH YOU). Now, please examine the remaining nine
cards. Of these remaining nine stores, what is your most preferred store for shopping? (REPEAT
THIS PROCEDURE SEQUENTIALLY UNTIL THE RESPONDENT HAS ONLY ONE CARD LEFT)
Store Rank Name of the Store

1. 1 __________________
2. 2 __________________
.
10. 10 __________________
Electronic Questionnaire
 This question for e-mail and Internet questionnaires will be very similar to that for the mail
questionnaire.
 In all these methods, the questionnaire is self-administered by the respondent.
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Individual Question Content

1- Is the Question Necessary?
If there is no satisfactory use for the data resulting from a question, that question should be
eliminated.
2- Are Several Questions Needed Instead of One?

Sometimes, several questions are needed to obtain the required information in an
unambiguous manner. Consider the question:
“Do you think Coca-Cola is a tasty and refreshing soft drink?” (Incorrect)
Such a question is called a double-barreled question, because two or more questions are
combined into one. To obtain the required information, two distinct questions should be asked:
“Do you think Coca-Cola is a tasty soft drink?” and
“Do you think Coca-Cola is a refreshing soft drink?” (Correct)
Overcoming Inability To Answer

1- Is the Respondent Informed?
In situations where not all respondents are likely to be informed about the topic of interest,
filter questions that measure familiarity and past experience should be asked before
questions about the topics themselves.
A “don't know” option appears to reduce uninformed responses without reducing the
response rate.
2- Can the Respondent Remember?

 How many gallons of soft drinks did you consume during the last four weeks? (Incorrect)
 How often do you consume soft drinks in a typical week? (Correct)
1. ___ Less than once a week
2. ___ 1 to 3 times per week
3. ___ 4 to 6 times per week
4. ___ 7 or more times per week
3- Can the Respondent Articulate?

Respondents may be unable to articulate certain types of responses
e.g., describe the atmosphere of a department store.
Respondents should be given aids, such as pictures, maps, and descriptions to help them
articulate their responses.
4- Effort Required of the Respondents

Most respondents are unwilling to devote a lot of effort to provide information.
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Overcoming Unwillingness to Answer

Please list all the departments from which you purchased merchandise on your most recent shopping
trip to a department store. (Incorrect)
In the list that follows, please check all the departments from which you purchased merchandise on
your most recent shopping trip to a department store.
1. Women's dresses ____
2. Men's apparel ____
3. Children's apparel ____
4. Cosmetics ____
.
.
.
16. Jewelry ____
17. Other (please specify) ____ (Correct)
Overcoming Unwillingness To Answer

Context
 Respondents are unwilling to respond to questions which they consider to be inappropriate for
the given context.
 The researcher should manipulate the context so that the request for information seems
appropriate.
Legitimate Purpose
 Explaining why the data are needed can make the request for the information seem legitimate
and increase the respondents' willingness to answer.
Sensitive Information
 Respondents are unwilling to disclose, at least accurately, sensitive information because this
may cause embarrassment or threaten the respondent's prestige or self-image.
Increasing the Willingness of Respondents

 Place sensitive topics at the end of the questionnaire.
 Preface the question with a statement that the behavior of interest is common.
 Ask the question using the third-person technique (see Chapter 5): phrase the question as if it
referred to other people.
 Hide the question in a group of other questions which respondents are willing to answer. The
entire list of questions can then be asked quickly.
 Provide response categories rather than asking for specific figures.
 Use randomized techniques.
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Marketing Research
Choosing Question Structure

1- Unstructured Questions
 Unstructured questions are open-ended questions that respondents answer in their own words.
- What is your occupation?
- Who is your favorite actor?
- What do you think about people who shop at high-end department stores?
2- Structured Questions
 Structured questions specify the set of response alternatives and the response format.
A structured question may be multiple-choice, dichotomous, or a scale.
3- Multiple-Choice Questions
 In multiple-choice questions, the researcher provides a choice of answers and respondents are
asked to select one or more of the alternatives given.
Do you intend to buy a new car within the next six months?
____ Definitely will not buy
____ Probably will not buy
____ Undecided
____ Probably will buy
____ Definitely will buy
____ Other (please specify)
4- Dichotomous Questions
 A dichotomous question has only two response alternatives: yes or no, agree or disagree, and so on.
 Often, the two alternatives of interest are supplemented by a neutral alternative, such as “no
opinion,” “don't know,” “both,” or “none.”
_____ Yes
_____ No
_____ Don't know
5- Scales
Definitely will not buy Probably will not buy Undecided Probably will buy Definitely will buy
1 2 3 4 5
6- Define the Issue

 Define the issue in terms of who, what, when, where, why, and way (the six Ws). Who, what,
when, and where are particularly important.
- Which brand of shampoo do you use? (Incorrect)
- Which brand or brands of shampoo have you personally used at home during the last month?
In case of more than one brand, please list all the brands that apply. (Correct)
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Choosing Question Wording

The W's Defining the Question
Who The Respondent
It is not clear whether this question relates to the individual respondent or the
respondent's total household.
What The Brand of Shampoo
It is unclear how the respondent is to answer this question if more than one brand is used.
When Unclear
The time frame is not specified in this question. The respondent could interpret it as
meaning the shampoo used this morning, this week, or over the past year.
Where At home, at the gym, on the road?
1- Use Ordinary Words

“Do you think the distribution of soft drinks is adequate?” (Incorrect)
“Do you think soft drinks are readily available when you want to buy them?” (Correct)
2- Use Unambiguous Words

 In a typical month, how often do you shop in department stores?
_____ Never
_____ Occasionally
_____ Sometimes
_____ Often
_____ Regularly (Incorrect)
 In a typical month, how often do you shop in department stores?

_____ Less than once
_____ 1 or 2 times
_____ 3 or 4 times
_____ More than 4 times (Correct)
3- Avoid Leading or Biasing Questions

 A leading question is one that clues the respondent to what the answer should be, as in the following:
 Do you think that patriotic Americans should buy imported automobiles when that would put
American labor out of work?
_____ Yes
_____ No
_____ Don't know (Incorrect)
 Do you think that Americans should buy imported automobiles?

_____ Yes
_____ No
_____ Don't know (Correct)
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4- Avoid Implicit Alternatives

 An alternative that is not explicitly expressed in the options is an implicit alternative.
1. Do you like to fly when traveling short distances? (Incorrect)
2. Do you like to fly when traveling short distances, or would you rather drive? (Correct)
5- Avoid Implicit Assumptions

 Questions should not be worded so that the answer is dependent upon implicit assumptions
about what will happen as a consequence.
1. Are you in favor of a balanced budget? (Incorrect)

2. Are you in favor of a balanced budget if it would result in an increase in the personal income
tax? (Correct)
6- Avoid Generalizations and Estimates

“What is the annual per capita expenditure on groceries in your household?” (Incorrect)
“What is the monthly (or weekly) expenditure on groceries in your household?”

and
“How many members are there in your household?” (Correct)
7- Dual Statements: Positive and Negative

 Questions that are in the form of statements should be worded both positively and negatively.
Determining the Order of Questions

1- Opening Questions
The opening questions should be interesting, simple, and non-threatening.
2- Type of Information
As a general guideline, basic information should be obtained first, followed by classification,
and, finally, identification information.
3- Difficult Questions
Difficult questions or questions which are sensitive, embarrassing, complex, or dull, should be
placed late in the sequence.
4- Effect on Subsequent Questions

General questions should precede the specific questions (funnel approach).
Q1: “What considerations are important to you in selecting a department store?”

Q2: “In selecting a department store, how important is convenience of location?”
(Correct)
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5- Logical Order
The following guidelines should be followed for branching questions:
The question being branched (the one to which the respondent is being directed) should be
placed as close as possible to the question causing the branching.
The branching questions should be ordered so that the respondents cannot anticipate what
additional information will be required.
Flow Chart for Questionnaire Design
Form and Layout

 Divide a questionnaire into several parts.
 The questions in each part should be numbered, particularly when branching questions are used.
 The questionnaires should preferably be pre-coded.
 The questionnaires themselves should be numbered serially.
Example of a Pre-coded Questionnaire

Considering all the times you pick it up, about how much time, in total, do you spend reading or looking
through a typical issue of THE AMERICAN LAWYER?
1) Less than 30 minutes
2) 30 to 59 minutes
3) 1 hour to 1 hour 29 minutes
4) 11/2 hours to 1 hour 59 minutes
5) 2 hours to 2 hours 59 minutes
6) 3 hours or more
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Reproduction of the Questionnaire

 The questionnaire should be reproduced on good-quality paper and have a professional
appearance.
 Questionnaires should take the form of a booklet rather than a number of sheets of paper
clipped or stapled together.
 Each question should be reproduced on a single page (or double-page spread).
 Vertical response columns should be used for individual questions.
 Grids are useful when there are a number of related questions they use the same set of
response categories.
 The tendency to crowd questions together to make the questionnaire look shorter should be avoided.
 Directions or instructions for individual questions should be placed as close to the questions as
possible.
Pretesting
Pretesting refers to the testing of the questionnaire on a small sample of respondents to identify and
eliminate potential problems.
 A questionnaire should not be used in the field survey without adequate pretesting.
 All aspects of the questionnaire should be tested, including question content, wording,
sequence, form and layout, question difficulty, and instructions.
 The respondents for the pretest and for the actual survey should be drawn from the same
population.
 Pretests are best done by personal interviews, even if the actual survey is to be conducted by
mail, telephone, or electronic means, because interviewers can observe respondents' reactions
and attitudes.
 After the necessary changes have been made, another pretest could be conducted by mail,
telephone, or electronic means if those methods are to be used in the actual survey.
 A variety of interviewers should be used for pretests.
 The pretest sample size varies from 15 to 30 respondents for each wave.
 Protocol analysis and debriefing are two commonly used procedures in pretesting.
 Finally, the responses obtained from the pretest should be coded and analyzed.
Observational Forms
Department Store Project
Who: Purchasers, browsers, males, females, parents with children, or children alone.
What: Products/brands considered, products/brands purchased, size, price of package
inspected, or influence of children or other family members.
When: Day, hour, date of observation.
Where: Inside the store, checkout counter, or type of department within the store.
Why: Influence of price, brand name, package size, promotion, or family members on the
purchase.
Way: Personal observer disguised as sales clerk, undisguised personal observer, hidden camera,
or obtrusive mechanical device.
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Questionnaire Design Checklist
Step 1 Specify The Information 1. Ensure that the information obtained fully addresses all
Needed the components of the problem. Review components of
the problem and the approach, particularly the research
questions, hypotheses, and specification of information
needed.
2. Prepare a set of dummy tables.
3. Have a clear idea of the target population.
Step 2 Type of Interviewing 1. Review the type of interviewing method determined

Method based on considerations discussed in Chapter 6.
Step 3 Individual Question 1. Is the question necessary?

Content 2. Are several questions needed instead of one to obtain the
required information in an unambiguous manner?
3. Do not use double-barreled questions.
Step 4 Overcome Inability and 1. Is the respondent informed?

Unwillingness to Answer 2. If respondents are not likely to be informed, filter
questions that measure familiarity, product use, and past
experience should be asked before questions about the
topics themselves.
3. Can the respondent remember?
4. Avoid errors of omission, telescoping, and creation.
5. Questions which do not provide the respondent with cues
can underestimate the actual occurrence of an event.
6. Can the respondent articulate?
Step 4. Overcoming Inability and Unwillingness to Answer
7. Minimize the effort required of the respondents.
8. Is the context in which the questions are asked
appropriate?
9. Make the request for information seem legitimate.
10. If the information is sensitive:
a. Place sensitive topics at the end of the
questionnaire.
b. Preface the question with a statement that the
behavior of interest is common.
c. Ask the question using the third-person
technique.
d. Hide the question in a group of other questions
which respondents are willing to answer.
e. Provide response categories rather than asking
for specific figures.
f. Use randomized techniques, if appropriate.
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Step 5 Choose Question 1. Open-ended questions are useful in exploratory research

Structure and as opening questions.
2. Use structured questions whenever possible.
3. In multiple-choice questions, the response alternatives
should include the set of all possible choices and should
be mutually exclusive.
4. In a dichotomous question, if a substantial proportion of
the respondents can be expected to be neutral, include a
neutral alternative.
5. Consider the use of the split ballot technique to reduce
order bias in dichotomous and multiple-choice questions.
6. If the response alternatives are numerous, consider using
more than one question to reduce the information
processing demands on the respondents.
Step 6 Choose Question 1. Define the issue in terms of who, what, when, where,
Wording why, and way (the six Ws).
2. Use ordinary words. Words should match the vocabulary
level of the respondents.
3. Avoid ambiguous words: usually, normally, frequently,
often, regularly, occasionally, sometimes, etc.
4. Avoid leading questions that clue the respondent to what
the answer should be.
5. Avoid implicit alternatives that are not explicitly
expressed in the options.
6. Avoid implicit assumptions.
7. Respondent should not have to make generalizations or
compute estimates.
8. Use positive and negative statements.
Step 7 Determine the Order of 1. The opening questions should be interesting, simple, and
Questions non-threatening.
2. Qualifying questions should serve as the opening
questions.
3. Basic information should be obtained first, followed by
classification, and, finally, identification information.
4. Difficult, sensitive, or complex questions should be placed
late in the sequence.
5. General questions should precede the specific questions.
6. Questions should be asked in a logical order.
7. Branching questions should be designed carefully to cover
all possible contingencies.
8. The question being branched should be placed as close as
possible to the question causing the branching, and (2)
the branching questions should be ordered so that the
respondents cannot anticipate what additional
information will be required.
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Step 8 Form and Layout 1. Divide a questionnaire into several parts.

2. Questions in each part should be numbered.
3. The questionnaire should be pre-coded.
4. The questionnaires themselves should be numbered
serially.
Step 9 Reproduce the 1. The questionnaire should have a professional

Questionnaire appearance.
2. Booklet format should be used for long questionnaires.
3. Each question should be reproduced on a single page (or
double-page spread).
4. Vertical response columns should be used.
5. Grids are useful when there are a number of related
questions which use the same set of response categories.
6. The tendency to crowd questions to make the
questionnaire look shorter should be avoided.
7. Directions or instructions for individual questions should
be placed as close to the questions as possible.
Step 10 Pretest 1. Pretesting should be done always.

2. All aspects of the questionnaire should be tested,
including question content, wording, sequence, form and
layout, question difficulty, and instructions.
3. The respondents in the pretest should be similar to those
who will be included in the actual survey.
4. Begin the pretest by using personal interviews.
5. Pretest should also be conducted by mail or telephone if
those methods are to be used in the actual survey.
6. A variety of interviewers should be used for pretests.
7. The pretest sample size is small, varying from 15 to 30
respondents for the initial testing.
8. Use protocol analysis and debriefing to identify problems.
9. After each significant revision of the questionnaire,
another pretest should be conducted, using a different
sample of respondents.
10. The responses obtained from the pretest should be coded
and analyzed.
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Seminar in Marketing Management
Seminar in
Marketing
Management
96

Seminar in Marketing Management
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Advertising
&
Promotion
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Advertising & Promotion
Promotional Tools
Personal selling Advertising Direct Marketing Public relation Sales promotion
① Personal selling
→ It is personal paid promotional tool in which there is a face to face contact between a company representative
and a customer
Major Steps in Effective Selling
1- Audience control 1- Credibility
Pre-call
2- Customization 2- Lack of control: depends on
3- Interactive communication mood & skills of the person
4- Body language 3- Cost / head
5- Using visual elements During call Sales force salaries & training
6- Handling objections
7- Testing response
8- Feedback Post-call
② Advertising
1- TV
2- Radio Media
3- Press ( Magazines & Newspaper )
4- Online = Internet
5- Outdoor as Billboard
Television Pros and Cons Radio Pros and Cons
Advantages Disadvantages Advantages Disadvantages

High prestige Low selectivity Local coverage Audio only
Favorable image Short message life Low cost Clutter
Sight, sound, motion High absolute cost High frequency Low attention getting
Attention getting High production cost Flexible Fleeting message
High reach Clutter Low production cost ‫ سرٌع‬,‫خاطف – زائل‬
Mass coverage Well-segmented
Low cost per exposure audience

Magazine Pros and Cons Newspaper Pros and Cons

Segmentation potential Long lead time for ad High coverage Short life
placement
Quality reproduction Visual only Low cost Clutter
High information content Lack of flexibility Short lead time for Low attention getting
placing ads
Longevity Ads can be placed in Poor reproduction
interest sections quality
Multiple readers Timely (current ads) Selective reader
Reader controls exposure exposure
Can be used for coupons
Internet Pros and Cons Outdoor Pros and Cons

User selects product Limited creative Location specific Short exposure time
information capability
User attention and Popularity High repetition Short ads
involvement
Interactive relationship Technology limitations Easily noticed Poor image
Direct selling potential Few measurement Local restrictions
techniques
Flexible message platform Limited reach
③ Direct Marketing
The planned recording ,analysis and tracking of customer behavior to develop relational marketing strategies
-It creates and develop direct one to one relationships
-To carry out direct marketing you need Databases
Includes:
1- Mail 2- E-Mail 3- Phone/ SMS 4- Catalogue
1- Easy to measure the communication response 1- Regarded as intrusive by many
2- Reasonable cost 2- Data Processing costs can be high
3- Can be customized 3- Direct response mechanisms require costly
4- Short lead-time: to develop the campaign & inform services to cope with customers
customers
Direct Mail Pros and Cons

High selectivity High cost per contact
Reader controls exposure Poor image (junk mail)
High information content Clutter
Repeat exposure opportunities

④ Public Relation ( PR )
Includes:
1) Sponsorship
It is an agreement between a company and an event organizer where the company gives money in
exchange for rights to associate the company name with the event
Objectives:
-Awareness creation -Media coverage by the sponsored event
-Association with prestigious event -Opportunity for corporate hospitality
-Internal employee motivation
2) Press Release & video news release

3) Newsworthy
 Interesting (relevant to readers)
 Local (relevant to the area/region )
 Topical (happening now)
 Important (have an impact on readers)
4) Press Conference
 Used for very high profile product launches
 Also it can be used as a tool for crisis management
5) Exhibition
-Here customers come to see the supplier
-Visitors are usually from the same industry
-Are hold in large halls with large stands
-Its cost is rising
Purposes
1. Public relations
2. Promotion and selling
3. Networking
4. Testing the response
6) CSR (Corporate social responsibility)

→ It is the obligation of the organization to increase its positive effects and decrease its negative effects
on the society
→ Should be related to the field of business in which we operate
e.g. Avon & its campaign in breast cancer
7) Events
8) Corporate literature
9) Corporate hospitality
10) Website
11) Special events “celebrity store openings”
** PR is also important when the company’s image is at risk due to negative publicity.
For example few years ago Pepsi Co was rocked by claims that hypodermic needles has been found in diet Pepsi cans
Pepsi developed a crisis team who had a video footage of its bottling process showing that foreign objects could
not find their way into cans before they were sealed.

Public relations
Corporate image Corporate identity Corporate people
How a company is perceived by its publics Relates to logos , preferred colors -It is good to select them from a field
 Development of corporate image ….. relevant to the character of the industry
- Includes logo , branding , corporate e.g. Proctor & Gamble and Dr Mohamed
badge ... Refaat
- It is a tool for differentiation
between competing companies
e.g. Cadbury “The first name in chocolate”
Planning an effective PR campaign

PASS model (Planning, Attention, Simultaneous, and Successive) + Budget + Evaluation
Measuring PR activities
Haywood suggested commonly used measures of results:
1-Budget:
An assessment of whether the planned PR activity has been achieved within the budget or not
2-Awareness:
Through a range of marketing research activities
3-Attitude
⑤ Sales Promotion
It is one of the promotional tools used to add value for a product or service on the short run
Rapid Growth of Sales Promotion
 Sales promotion can take the form of consumer promotions, business promotions, trade promotions, or
sales force promotions.
 Rapid growth in the industry has been achieved because:
 Product managers are facing more pressure to increase their current sales,
 Companies face more competition,
 Advertising efficiency has declined,
 Consumers have become more deal oriented.
Sales Promotion Objectives

1- Consumer Promotions:
Increase short-term sales or help build long-term market share.
2- Trade Promotions: get retailers to:
 carry new items and more inventory,
 advertise products,
 give products more shelf space, and
 Buy product ahead.
Developing the Sales Promotion Program

 Decide on the Size of the Incentive
 Set Conditions for Participation
 Determine How to Promote and Distribute the Promotion Program
 Determine the Length of the Program
 Evaluate the Program
Evaluation of sales promotion

1-Consumer audits:
This will indicate if there has been a change in consumer behavior
2-Retail audits:
Change in stock levels , distribution & market share
3-Sales force feedback
4-Sales information
Types Sales Promotion Pros and Cons
Consumer sales promotion Trade sales Advantages Disadvantages
Promotion
1- Competitions/free prize draws Discount on Can provide a If overused consumers
2- Price reductions ( discounts ) bulk orders quick increase in only purchase, if there is
3- Coupons sales a promotion on especially
4- Free goods/samples in low interest products
5- Gift with purchase Free prize Can generate Promotion led customers
6- Buy one get one free (BOGOF) draw good quality often have low brand
7- Price packs( reduced prices marked on package) competitions customer loyalty.
8- Guarantees or extended warranties information
9- Reward points ( e.g. Air miles )
10- Refunds
11- Contests & sweepstakes
12- Loyalty cards
Types of messages in advertising ( Advertising Execution Techniques )

Rational Emotional
1) Fear
1- Factual ‫نعرض مجموعة من الحقائق عن المنتج‬ Usually used with :
2- Comparison toothpaste, shampoo, deodorant, mouth wash
→ Competition Types -Mild ً‫مش بٌسمع فً دماغ الزبون بتاع‬
‫تقارن نفسك بالمنافس‬ -Moderate ‫أفضلهم‬
* Advertisements using -Severe ‫ٌخللً المشاهد ٌترعب وٌقفل من المنتج‬
comparison are 2) Humor ‫مثل إعالن مصلحة الضرائب‬
subject to regulation by the FTC - Used obligatory with sensitive products as Viagra.
(Federal Trade Commission ) - has some disadvantages:
1) Lose of attraction after first or second watching
2) Cross-cultural difference
Or → Status of consumer
3) ↓ Credibility ( ↓ Seriousness)
‫توضح حالة المستهلك قبل وبعد‬
3) Animation “ attractive even if you watch several times “
3- Demonstration
‫مثل رٌري – كوفرتٌنا – سفن أب‬
-How the product works
- Sometimes we use demonstration with animation
‫مثل إعالن برسٌل وهوه بٌفتت البقع‬
‫ والسوسة وهً بتاكل فً االسنان‬Signal ‫مثل إعالن‬
‫ فً الرادٌو‬demonstration ‫ مقدرش أعمل‬-
4) Sex ‫مثل إعالن مشروب فٌروز وعصٌر إٌزي موزو‬
4- Slice of life
5) Fantasy
-Not a common strategy
6) Music ‫مثل إعالن كادبوري وانسٌاب الشٌكوالته‬
‫مشاكل تحدث فً الحٌاة وكٌف ٌتغلب علٌها المنتج‬
7) Life style
ً‫بتاع‬
Listerene ‫مثل إعالن‬ 8) Celebrity endorsement/ Testimonials ‫لو الشخص مش مشهور‬
Used in high involvement Products Used in low involvement Products
Which characterized by : Which characterized by :
- Expensive - Cheap
‫مثل البدلة‬ ‫مثل البٌجاما‬
- Socially visible - Socially invisible

Product Involvement 2011

* Depends on - Importance
- Consequences of buying decision ً‫تبعات القرار الشرائ‬
High involvement Products Low involvement Products
The advertising should be rational The advertising should be emotional
* Sometimes we can use emotional advertising
‫وده فً حالة لما البراند ٌقدم فً السوق والناس تعرفه‬
Fill Criteria ( 4 Cs )
1- Communication 2- Credibility
3- Cost 4- Control
Personal Advertising Direct Public Sales

selling Marketing Relation Promotion
Communication
Ability to deliver a personal message High Low High Low Low
Ability to reach a large audience Low High Medium Medium Medium
Level of interaction High Low High Low Low
Credibility
Given by the target audience Medium Low Medium High Medium
Costs
Absolute costs High High Medium Low Medium
Cost per contact High Low High Low Medium
Wastage Low High Low High Medium
Size of investment High High Medium Low Medium
Control
Over Audience Medium Medium High Low High
Over Message Medium Medium High Low High

The Main Promotional Tools
Below the line Through the line Above the line
* Characterized by: → Direct Marketing ( D. Mktg ) * Characterized by:

- Secondary media - Primary media
- Narrowcast - Broadcast
→ Sales Promotion → Mass media advertising

→ Public Relation ( PR )
→ Personal Selling
Communication strategies
2011
( Promotional Strategy )
Push strategy Pull strategy Strategy Mix Profile Strategy
→Targeting intermediaries →Targeting end users

→ the company stimulates → the company uses advertising → Push + Pull →Promoting
intermediaries to carry, promote & & promotion to induce company name
sell its products through the use of consumers to ask intermediaries * It is the ideal
→ used in cases
trade sales promotion. for the product. strategy
of :
* Techniques: * Techniques: -New company
- personal selling - TV -Crisis
- trade advertising - sales promotion
- trade exhibition - point of sales display ( POS )
Producer marketing activities Reseller marketing activities

( Personal selling, trade ( Personal selling, advertising
promotion, others ) sales promotion, others )
Producer Reseller & Consumers
Wholesalers
Push Strategy
Producer Reseller & Consumers

Wholesalers
Producer marketing activities ( consumer advertising, sales promotion, others )
Pull Strategy

Notes :
1- Integrated Marketing Communications ( IMC )

→ Use a lot of advertising tools in harmony
* IMC = synergy → 1+1 = 3
2- Disadvantages which can be added to ads to increase their credibility:

- Non essential disadvantage
- Universal disadvantage
- disadvantage which can be managed
3- Word of mouth ( WOM ) → Personal

Word of mouse → electronic WOM = Viral marketing
‫مثل ما حدث مع دجاج كنتاكً بتصوٌر الفراخ من غٌر رٌش‬
Word of Mouth ( WOM ) = Buzz
Advantages:
rd
1- Credibility “ as it comes from 3 party “ 2- Unpaid
BUZZ Techniques:
a* Handing out product samples
b* Providing products to influential people & encouraging them to talk up the brand
c* Building web communities so customers can chat about their product experiences online
d* Hiring actors to talk up a brand in public places
4- Key opinion leader ( KOL ) → Leading people by his personal experience ‫مجرب‬
Key opinion former ( KOF ) → Leading people by his experience as a specialist ‫طبٌب‬
→ Easily reachable
5- Slogan → Short message Message → Long
6- Clutter
 Half of the average magazine’s pages contain ads and in some publications the ratio of ads to
editorial content is even higher.
 On average, around a quarter of a broadcast hour on TV is devoted to commercials
 While most radio stations carry an average of 10 to 12 minutes of commercial time per hour.
7- Bait-and-Switch Advertising → illegal & unethical ‫أعمل إعالن عن حاجة مش موجودة‬

First, customers are "baited" ( attracted ) by advertising for a product or service at a low price;
second, the customers discover that the advertised good is not available and are "switched" to a costlier
product.
8- Promotional puffery document ‫تحط جملة علً المنتج بتاعك تبٌن إنه حاجة محصلتش من غٌر ما ٌكون عندك‬
Puffery as a legal term refers to promotional statements and claims that express subjective rather than
objective views, which no "reasonable person" would take literally.
Puffery serves to "puff up" an exaggerated image of what is being described and is especially featured in
testimonials
9- Sleeper effect → Publicity

‫ ألنه بقً واضح وسط اإلعالنات‬clutter ً‫شخص غتٌت ٌمثل إعالن ٌثبت فً دماغ الناس – وتغلبت عل‬

10- Corporate spokespersons

- Some research suggests the use of a company president or CEO can improve attitudes and increase the
likelihood that consumers will inquire about a company’s product or service.
11- Ethics & promotion:

Ethics is the science of determining what is right & what is wrong
Products can be classified:
1) Ethical & legal ( ideal )
2) Ethical & illegal ( sales promotion in Germany )
3) Unethical & legal ( smoking & alcohol )
4) Unethical & illegal ( drugs )
12- Ethics & marketing mix:

 Product: should be valuable & beneficial
 Prices: should be reasonable & avoid price discrimination
 Promotion: should be honest without exaggeration or use of sex in advertising
 Place: selling products or services in both up & down markets with on discrimination
13- Unethical ads:

o Mention advantages that not available in my product
o Attack the competitor by non ethical ways
o Exaggerated or incomplete data
o Promoting harmful products as cigarette & alcohol
o Use of sex
14- Advertising to children

 Sweden and Canada prohibit any advertising aimed at children;
 France and Japan limit the use of cartoon characters in advertising to children; and the
major networks have strict guidelines for children’s ads.
 In the United States the Federal Trade Commission has taken a much less aggressive
stance on this subject.
 R.J. Reynolds has been accused by critics of using its “Joe Camel” cartoon character, as
shown in this 1988 ad, to target children for cigarette consumption.
- Advertising aimed at children is scrutinized both legally and ethically
15- Product Life Cycle stages
 Promotional objective during introduction Customer Loyalty

→ Awareness ( Detailed Message )
 Promotional objective during Growth Differentiation
→ Differentiation ( Comparative Message )
Remind
 Promotional objective during Maturity
→ Customer Loyalty Awareness
 Promotional objective during Decline

→ Remind
: ‫ هما‬sales promotion ‫ نستخدم معها الـ‬2 phases ‫أشهر‬
Introduction & Maturity

16- Innovative Product Life Cycle:
200 ‫ باٌع‬2008 ً‫ فً ألمانٌا لٌلة رأس السنة ف‬3G ‫الـ‬ Decline

‫ألف وحدة‬ Growth
- Growth then Decline Star Dog
17- Types of messages:

 Abstract ً‫استنباط‬
e.g. We deliver parcels very fast → subjective → promotional puffery
 Concrete ( solid )
e.g. we deliver parcels within 24 hrs → objective →much better “ but needs document “
18- Promotional Planning Elements

 Receiver Comprehension : Can the receiver comprehend the ad?
 Channel Presentation : Which media will increase presentation?
 Message Yielding : What type of message will create favorable attitudes?
 Source Attention : Who will be effective in getting consumers’ attention?
19- Advertising Campaigns Use a Series of Coordinated Advertisements with a Similar Look, Feel, and
Message
20- Advertising Risks of Using Celebrities

The celebrity may overshadow the product being endorsed ( Overshadowing )
The celebrity may be overexposed, reducing his or her credibility ( Overexposure )
The target audience may not be receptive to celebrity endorsers
The celebrity’s behavior may pose a risk to the company e.g. with Mike Tyson, after his
wife accused him of beating her ( Negative behavior )
21- Media Terminology

 Media Vehicle → The specific carrier within a medium category ( Vehicle = Carrier )
 Reach → Number of different audience members exposed at least once in a time period
 Frequency → Number of times the receiver is exposed to the media vehicle in a time period
22- Brand Laddering
→ How to build a brand

23- Difference between Market share & Relative Market share

e.g.
Mobinil 45 Million
 Market share = My share versus total market Vodafone 35 Million
 Relative Market share = My share versus market leader Etisalat 25 Million
** The Market Leader has no Rel. MS MS of Etisalat = 25 / 100 = 25 %

Rel. MS of Etisalat = = 25 / 45 = 57 %
24- IMS = Intercontinental Marketing Services

→ It is an international company that supplies the pharmaceutical industry
with sales data and consulting services
25- The Communications Plans:

Media plan ( Gantt Chart ) Media Selection
26- Communication Budget:

1- Task Method ( Most Logic )
•Tasks to be achieved are determined
• Estimating the cost of these tasks sets the budget
• e.g. Salaries of staff 5000000
Advertising expenses 10000 X,00000
Market research 2000
Selling & agency commission 1500
2- Percentage of sales
• It is the most widely used method
• The marketing costs should relate directly to either total turnover or profits
3- Competitive parity
• Setting the budget according to the budget of the competitor
4- All you can afford
• Unscientific – simplest way but commonly used
5- S.A.L.T
(Same As Last Time)
6- Profit Maximization Method :
- Used when market is saturated and plateau & when no or weak competition
‫ أصرف أقل رقم جاب أعلً سعر‬- ‫ تستخدم هذه الطرٌقة لما ماٌكونش فً منافسة‬-

27- SOM = Share of voice → It is the market share

SOV = Share of Market → It is the advertising expenditure
e.g.
Turnover SOM Promotional expenses SOV
Mobinil 45 Mio 45 % 800 LE 80 %
Vodafone 35 Mio 35 % 120 LE 12 %
Etisalat 20 Mio 20 % 80 LE 8%
100 Mio 1000 LE
Total Promotional Expenses ‫ أخدت كام فً المٌة من الـ‬SOV
* During Introduction phase: → SOV > SOM ‫اللً اتصرفت فً السوق‬
* During Maturity phase: → SOV < SOM % 45 ‫بتاعها‬ market share ‫والـ‬ % 80 ‫ صرفت‬Mobinil
* During Decline phase: → SOV < SOM ‫← غٌر مقبول‬
%35 ‫ بتاعها‬MS ‫ والـ‬%12 ‫ صرفت‬Vodafone
% 20 ‫ بتاعها‬MS ‫ والـ‬%8 ‫صرفت‬ Etisalat
SOV & SOM budget setting

 Zero-based brands - Niche No advertising spend
 Growth brands - SOV>SOM heavy advertising
 Milking brands - SOV<SOM token advertising → Market is saturated with low competition
 Profit-taking brands- SOV<SOM relaxed advertising
 Equilibrium brands-SOM=SOV maintenance advertising → Market is saturated with tough competition
Strategies for advertising spend
28- Steps in Developing Effective Communications

1. Identify target audience
2. Determine objectives
3. Design communications
4. Select channels
5. Establish budget
6. Decide on media mix
7. Measure results/ manage IMC
29- Point of sale display ( POS)

It refers to the in store display that can influence consumers to purchase products in shops
It includes:
-Shop layout and design
-The way goods are presented
-In store display materials

30- Flash mob ‫عربٌة تلف ع الناس وتوزع هداٌا‬

→ Is a group of people who assemble suddenly in a public place, perform an unusual and sometimes
seemingly pointless act for a brief time, then disperse, often for the purposes of entertainment or
advertising
→ Flash mobs are organized via telecommunications, social media, or viral emails.
→ Coca-Cola conducted a flash mob in Dandy Mall which brought everything home
31- Advertising jingle → Slogan + Music

 A jingle is a short tune used in advertising and for other commercial uses.
 The jingle contains one or more hooks and lyrics that explicitly promote the product being advertised,
usually through the use of one or more advertising slogans.
 Ad buyers use jingles in radio and television commercials
 Jingles are a form of sound branding.
32- Advertising Wears Out ‫االعالن اتحرق‬

→ One of the challenges facing marketers is determining the most effective level of advertising
exposure for a brand, while maintaining a given budget.
→ Conceptually, the media planner could choose continuous advertising or follow a strategy of pulsing .
→ The decision is important because the wrong one will considerably affect customer response.
→ When advertisements are run at a low frequency (very few times), they run a risk of going unnoticed.
→ The first time customers view an advertisement, a majority of the time, the message doesn't even
process in their minds.
→ On the other hand, when an advertisement is run at a high frequency, advertising wear-out may
occur. Therefore, the task at hand is finding just the right frequency for a positive response.
33- Advertising Awards:

 Cannes Lion
 Clio
 Dubai Lyrics
34- Ad evaluation :
 Message / Target Audience
 Advertising Copy → verbal content of the ad = script in serials ‫السٌنارٌو‬
copy ‫إعالن بٌبسً وفودافون شكرا السنة دي من أسوأ اإلعالنات فً الـ‬
My look ‫ بدال من‬Looky ‫نالقً فً إعالن بٌبسً كلمة‬
 Jingle ‫الموسٌقً مع الكلمات اللً بتتكرر غالبا‬
→ as in Panda ad “ Just you know why, why you & I “
 Source ‫أحسن حاجة فً إعالن بٌبسً السنة دي كان الـ‬
 Execution Strategy ‫مثل إعالن فودافون بتاع السلعوة‬
35- Packaging
5 key functions:
1. Protection
2. Distribution
3. User convenience
4. Promotion
5. compliance

36- Advertising evaluation :

 Pre-testing
- Focus Group
 Post-testing
- Recall ( Aided or Unaided )
- Recognition
37- Media Scheduling Methods:

Continuity ‫ٌتكرر كل ٌوم‬
Flighting ‫ٌتكرر بصورة غٌر منتظمة‬
Pulsing ‫ٌوم آه وٌوم أل‬
38- Logo:
-Basic tool for building corporate image
-Must have attractive colors
Objectives
-Attractive attention -Create impression
-Give information -Create recognition
Mechanism / message of logo
1-Symbolic - Representing the activity , name of the organization e.g. Shell - Hyundai
2-Expressive: - Creating impression relevant to the organization e.g. Nike
3-Recognizable - Creating identification e.g. Vodafone
39- Publicity
Unpaid communication about an organization appearing in the mass media
 Non personal paid ------ advertising
 Personal non paid ------- personal selling
 Non personal non paid ----- publicity

Structure - It is an advantage in
Can be doneAdvertising
in & Promotion
Can’t be done in 1- Beginning ( primary effect ) advertising, while in
press ads press ads 2- Middle interviews it is disadvantage
Emotional 3- End ( Recency effect ) Rational
1- Verbal 3- Musical
Personal
*Spoken Word *Arrangement Abstract e.g. We deliver parcels very
fast → Subjective → Promotional - Word of Mouth ( Buzz )
*Written Word *Instrumentation puffery
2- Graphic *Voices To increase Concrete ( Solid ) e.g. We deliver - Personal selling
parcels within 24 hrs → Objective →
*Pictures 4- Animation the interest Much better “ but needs documents “
*Drawings *Action/ Motion of customer Non Personal
*Charts *Pace/ Speed
Sender’s Receiver’s - Print Media
*Shape/ Form
field of field of - Broadcast Media
Direct experience experience Internalization

Spokesperson who delivers a message &/or endorses a product Channel Receiver adopts the position
or service. source ‫فٌه كالم بٌتقال علً لسان الـ‬ Source/ Encoding Decoding advocated by the source
Receiver
Sender Message
because it is perceived as
accurate & makes it part of his
Indirect belief system
Spokesperson who doesn’t actually deliver a message, but draws Noise

attention to &/Or enhances the appearance of the ad Feedback Identification
Response
‫صورة شخص ومش مكتوب كالم علً لسانه‬
Individual is motivated to seek
some type of relationship with
the source & thus adopts
Internalization Credibility Communication Process similar beliefs, attitudes or
behaviors
1- Ethical 4- Unbiased 7- Skillful
2- Trustworthy 5- Honest 8- Knowledgeable Marketing Objectives Communications Objectives
Compliance
3- Experienced 6- Believable
- Generally stated in the - Derived from the Receiver accepts the position
Return On Investment = ROI
firm’s marketing plan overall marketing plan advocated by the source to receive
Identification - Achieved through the - More narrow than rewards or avoid punishment
Attractiveness
overall marketing plan marketing objectives Receiver Processing
1- Similarity 2- Familiarity 3- Likeability - Quantifiable, such as - Based on particular
Modes
‫تحس إنه واحد مننا‬ ‫حد معروف‬ = acceptance sales, market share, ROI communications tasks
- To be accomplished in a - Designed to deliver
Resemblance Knowledge of Physical It is a complex & often unsuccessful
given period of time appropriate messages
between the the source appearance, - Must be realistic & - Focused on a specific Steps of successful
source & through behavior , SMART attainable to be effective target audience communication process
recipient of the repeated or personal traits,
message prolonged charisma, Overshadowing the product :
exposure sense of humor Consumers may focus their attention on the celebrity & fail to 1- Select appropriate source
notice the brand 2- Develop properly encoded message
Overexposure : → ↓↓ credibility 3- Select appropriate channel for 113
Compliance Power Consumers are often skeptical of endorsements because they
Prepared by: Saied Ibrahim target audience
Receiver Processing Modes Source Attributes know the celebrities are being paid 4- Receive feedback
Consumer
Behavior

Consumer behavior

Consumer behavior
Consumer behavior
Customer: the purchaser of a product or a service (intermediary) ,e.g. retailer
Mainly; B2B
Consumer: the end user of a product or a service
Mainly; B2C
Factors which influences the consumer behavior
External influences Internal influences

- Culture - Perception & Merchandising
- Subculture - Learning
- Demographics - Memory
- Social status - Motives
- Reference groups - Personality
- Family - Emotions
- Marketing activities - Attitudes
Merchandising:
How the organization is placing the product over the shelf.
e.g. placing the products in Carrefour
- Eye level : More effective for adults
- Foot level : More effective for children as Kinder surprise chocolate
- On the counter beside the cashier, we put gum & chocolate
‫ألنك بتبقً داخل تشتري المنتجات األساسٌة وانت طالع بتحاسب بٌقولك أنا بفكرك إن فٌه حاجة اسمها لبان وشوكوالتة‬
Any supermarket contains:

1- Hot spots (eye level)
Used in placing new product, accessory, prestigious product…etc.
2- Client spots (foot level)
Used in placing essential & basic products as; oil, butter, tea, sugar…etc.
Social class:
 It determines: the needs + purchasing power
‫ تحدد احتٌاجات الشخص وكذلك قدرته علً الشراء‬-
‫ لكنه مش محتاج‬، ‫ عنده عالٌة‬purchasing power ‫ ٌعنً مثال ممكن ٌكون واحد فالح معاه فلوس كتٌر أوي فبالتالً الـ‬-
I-pad ‫ٌشتري تلٌفون حدٌث زي الـ‬
 It determined by:
1- Income
2- Occupation
3- Education
low social class ً‫ – لو وقعت واحدة ٌبق‬high social class ‫الزم الثالثة ٌبقوا موجودٌن عشان أقدر أقول إنه‬

Consumer behavior
۩ All industries in the world affected by the social class, so it is a common segmentation factor in all
marketing plans for any industry.
International classification of social class:

Class name Social status Examples
A Upper part of the society Ministers
(top management)
B Middle management Product manager, supervisors
C1 Lower management Governmental employees
C2 Skilled ً‫الحرف‬
D Unskilled ً‫األرزق‬
E Unemployed ‫العاطل‬
Reference group:
3 types:
1- Primary reference group: Informal → KOL ‫مجرب‬
e.g. friends, family, neighbors….etc.
2- Secondary reference group: Formal →KOF ‫طبٌب‬
e.g. religious groups, professional societies.
3- Aspirational group: ً‫ملهم‬
cans ‫ إن هما ٌحطوا اللوجو بتاع هاري بوتر علً الـ‬، ً‫ ملٌون استرلٌن‬110 ‫ مع هاري بوترفً أوربا بـ‬deal ‫كوكاكوال عملت‬
‫ عملته كوكاكوال فً حٌاتها‬deal ‫ وده كان أكبر‬، ً‫ ملٌون استرلٌن‬110 ‫ دفعوا فً القصة دي‬-
ً‫ ملٌون استرلٌن‬130 ← ‫ شهور‬6 ً‫ دولة وجاب لكوكاكوال زٌادة فً البٌع ف‬200 ً‫ لغة واتباع ف‬47 ‫ اللوجو ده اترجم إلى‬-
‫ أو سٌاسة القطٌع‬conformity ‫ بتعتمد علً قصة مشورة جدا اسمها الـ‬reference group ‫ فكرة الـ‬-
- High conformity → high reference group
- Low conformity → low reference group
WOM “Word Of Mouth” ‫ فً األخر خالص بتتكلم عن حاجة اسمها الـ‬reference group ‫ الـ‬-
* Word of mouth : face to face
* Word of mouse : electronic
Note:
PLC = Product Life Cycle
plc = public limited company ‫شركة مساهمة‬
- Limited company → ‫مالهاش أسهم فً البورصة‬
- Public limited company → ‫لٌها أسهم فً البورصة‬
Limited Company Unlimited Company
‫ ٌعنً لو شركة حصل كارثة فٌها وفً تعوٌضات‬، ‫ذات مسإولٌة محدودة‬ – ‫ لو المرٌض جراله حاجة‬، ً‫الدكتور وهوه بٌعمل عملٌة داخل مستشف‬
‫← تطلع من راس مال الشركة – ماتطلعش من راس مال أصحاب الشركة‬ ‫الدكتور ٌدفع التعوٌض من جٌبه الخاص‬
‫ ٌعنً فٌه‬-
separation between personal wealth & business wealth
‫مثال شركة المقاولون العرب‬

Consumer behavior
Family Life Cycle (FLC):

1- Single, unmarried
2- Married, no children
3- Married, dependent children ‫ٌعول‬
4- Empty nesters ‫أوالده اتجوزوا‬
How can FLC affects any industry?

e.g.1 / in purchasing a car
❶ if you Single, unmarried  sport car
❷ if you married, no children  any car
❸ if you Married, dependent children  family car or van
❹ if you Empty nesters  comfort & durable
e.g.2 / Levi-Strauss
- Levis → Fashion  for ❶ & ❷
- Dockers → Comfort  for ❸ & ❹
 FLC is determined by : age + marital status
Decision making process (DMP)

1- Need recognition ( Problem recognition )
 make a comparison between:
a- Current status ‫ بتاعتها‬negativity ‫نحاول نزود الـ‬
&
b- Desired status ‫ بتاعتها‬positivity ‫نقلل الـ‬
ً‫ بٌنهم عشان نخلق حاجة لدى المستهلك للمنتج بتاع‬gap ‫نحاول نزود الـ‬ -
‫ شامبو الشعر‬، ‫ اللبان‬، ‫ مزٌل العرق‬، ‫ معجون األسنان‬:‫مثال‬ -
2- Information search
We try to disseminate the information about our product in all sources
• Push → supplying the intermediaries by information
• Pull → by advertising to consumers
3- Evaluation of alternatives
 According to competitive advantage
 So we have to differentiate our product to create a competitive advantage
4- Purchase → Process ( KISS )
5- Post purchase evaluation expectation
a- Follow up b- Assurance ‫طمنً علٌك‬
Customer will be either: Dissonance = gap ‫فراغ‬
I- Satisfied → expectation = actual
II- Dis-satisfied → expectation ≠ actual
actual

Consumer behavior
Pressure group ‫جماعات الضغط‬

‫مثل جماعات حقوق اإلنسان وغٌرها‬
Kennedy said that the consumer has 4 rights:

1- Right to know
2- Right to be heard
3- Right to choose
4- Right of safety
Law of tôrt = Law of negligence ‫قانون اإلهمال‬

‫ الخ‬... ‫الزم اكتبلك تحذٌرات خاصة علً المنتج مثل لالستعمال الخارجى او التدخٌن ضار بالصحة أو دكتور عمل عملٌة غلط لمرٌض‬
‫ اللً الناس‬product ‫ لقٌوا إن من أعلى الـ‬، products ‫بتاعة الناس للـ‬loyalty ‫ علً الـ‬survey worldwide ‫عملوا كده زي‬
‫ لٌها هً السجاٌر‬loyal ً‫بتبق‬
- Cigarettes 71 % - coffee 58 % - headache remedy 56 % - garbage 23 %
monoploy ‫ وده لٌه عالقة بالـ‬، ‫ تبقى أصعب‬customer ‫ كل ما الطرٌقة اللً تقدر تشد بٌها الـ‬product ‫ تزٌد للـ‬loyalty ‫كل ما الـ‬
1- Monopoly  one player
2- Oligopoly  more than two players
- there is a market leader
- Products are homogenous → differences are minor, so loyalty is weak
3- Pure (perfect) competition  e.g. grocery, farm products
- The cause of loyalty in this case is the convenience “ when you purchase a small amount “
- But if you intend to purchase a large amount, the loyalty will be to the fewer prices as
Careefour & Spinneys
* Market leader should be 25% or more , e.g. Air Lines

1- Market leader → 40%  British airways
2- Challenger → 30%  Lufthansa
3- Follower → 20%  Egypt air
4- Nicher → 10%  Private airlines
۩ Need : a non specific desire ‫احتياج غير محدد‬

۩ Want : specific desire
۩ Demand : specific desire supported by purchasing power
American Marketing Association (AMA)

 AMA Said, we cannot create a need – but we can convert unconscious need to conscious as
telecommunication in Egypt

Consumer behavior
Market Segmentation:
1- Demographic Factors:
→ study of population size & other criteria “age, gender, race, ethnicity, income, education,
occupation, family size, family life cycle, religion & social class”
e.g. Nescafe 3X1 (coffee mate) (sugary with milk)  targeted African Americans “ use the
race in segmentation”
2- Geographic Factors:
→ • Region • City size • Climate • Market density
3- Psychographic Factors:
a) Personality attributes “ not a common segmentation factor “
e.g. life insurance → obsessive personality
b) Motives
c) Life style  the way people spend their money & time
e.g. 4 X 4 car → outdoor, young, social, & adventure-some
Prosperity/Boom
New life styles recently appear: ‫قمة االنتعاش االقتصادي‬
1- Coastal areas ‫المناطق الساحلٌة‬
2- One stop shopping Recovery
‫تروح أي مكان تجٌب اللً عاٌزه‬
3- Café bar phenomena Slowdown
4- Money-rich time poor
→ due to double jobs which appears
Recession
as a result of recession
‫ركود‬
-Recession enforced the companies

to what we call “underemployment” Depression
‫أقلل ساعات العمل وأقلل المرتب‬
Business Cycle
4- Behavioristic Factors:
a) volume of usage → e.g. points & ‫أبونٌه‬
b) benefit expectation → e.g. toothpaste
c) brand loyalty
d) price sensitivity
e) end use
Marketing Mix & Extended Marketing Mix:

4 Ps → Product, Price, Place, Promotion.
7 Ps → Product, Price, Place, Promotion, Process, Physical evidence & People.

Consumer behavior
Culture & Cultural influences on consumer behavior

Culture is the complex whole that includes knowledge, belief, art, law, morals, customs, and
any other capabilities and habits acquired by humans as members of society.
Cultural factors:
1- Language
2- Demographics
3- Values
4- Non verbal communications
 Aesthetics ‫المدلوالت‬
‫الورد األبٌض ٌدل على المحبة فً دولة وعلى الجنازة فً دولة أخري‬
Usage & attitude study ( U & A study ) ‫ أي حد قبل ما ٌنزل سوق معٌن الزم ٌعمل دراسة اسمها‬-
- DOCs ( Drivers of Choices ) ً‫معاٌٌر المستهلك الختٌار المنتج بتاع‬
Hofstede ‫ عمله واحد اسمه‬culture ‫ بٌتكلم عن الـ‬model ‫* أشهر‬

Hofstede’s Cultural Classification Scheme
1- Power distance
 The degree of inequality among people that is viewed as being equitable
 What creates power ?
Power = Authority + Money
 People today are either powerful or powerless, the gap between them may be wide or
narrow
- When the gap is narrow → More powerful & less powerful
- When the gap is wide → Powerful & powerless
 Inflation makes the rich more richer & the poor more poorer.
 Society or industry with high power distance is unhealthy.

Consumer behavior
2- Uncertainty avoidance:
The extent to which people in a given culture prefer structured situations with clear rules over
unstructured ones  risk avoidance ‫واحد مابٌحبش المجهول‬
 Decision making situations:
Certainty Risk Uncertainty Ambiguity

All data are known 10 – 20 % of data
Limited data
Calculated Uncalculated are known
- sometimes I know
But I know my
Almost 80 % of 50 % of data are what I need &
preference
data are known known sometimes I don’t
know
 High conformity → high uncertainty avoidance

 Low conformity → Low uncertainty avoidance
 Innovators → Low uncertainty avoidance

 Laggards ‫ → الحثالة‬high uncertainty avoidance
 Inner directed ‫ → ٌعنً هوه اللً بٌحرك نفسه‬Low uncertainty avoidance

 Outer directed → High uncertainty avoidance
3- Individualism ً‫هل المجتمع فرم جماع‬

The degree to which people prefer to act as individuals rather than group members.
 U.S. is no. 1 in individualism
 Cost Rica is no. 1 in collectivism
4- Masculinity
The importance of “male” values (assertiveness, success, competitive drive, achievement)
versus “female” values (solidarity, quality of life).
 Sweden is no. 1 in Feminity
 Japan is no. 1 in Masculinity
Applications in Consumer Behavior

 Socio-cultural environment
 During the 1994 soccer world cup both McDonald’s and Coca-Cola made a mistake of reprinting
the Saudi Arabian flag (which includes sacred words from the Koran ) on disposable packaging
used in promotions

Consumer behavior
 Cultural environment
-In 1970 P&G introduced Pampers diapers in Japan
-Although successful in USA this product did not sell well in Japan because P&G neglected some
important cultural differences between American and Japanese parents
-The Japanese mom changes her baby’s diaper about 14 times a day twice as often as her American
counterpart
-Pampers were too expensive for a Japanese mother to use so many
McDonald’s sells a vegetarian Maharaja Mac instead of Big Mac in India
Humor in Translations
Named in honor of GM’s famed fiasco in trying to market the Chevrolet Nova in Central and South
America
In Spanish, No Va, or Nova, simply means No Go -- or this car won’t go!
Components of culture:
1-Beliefs & values ‫مثل الحالل والحرام‬
-The way we feel anything
2-Customs
-e.g. division of labor in a household
‫أشٌاء متعارف علٌها مثل اهتمام الزوجة بالمنزل والزوج بالعمل‬
3-Mores
-Customs with strong moral overtone e.g. prostitution
Is legal in Dubai & illegal in Egypt
4-Conventions ‫جزء من الثقافة المرتبط باإلتٌكٌت‬

-Norms regarding every day conduct e.g. etiquette ‫عٌب تحط رجل علً رجل قدام أبوك‬
 Etiquette
 Meishi is an important aspect of Japanese business etiquette…”a man without a Meishi has no
identity in Japan.”
 What is Meishi? It is the exchange of business cards!
5-Artefacts ‫الجزء الملموس من الثقافة‬

-Physical evidence of the culture e.g. dress codes , logo, use of typewriter instead of computer…etc.
6-Rituals ‫الطقوس‬
-Symbolic meaning e.g. greeting behaviors, burning the dead people in India, Cycle meeting in Turkey
& group breakfast in Ramadan

Consumer behavior
 Gift-Giving Rituals
 Gift-giving ritual: consumers procure the perfect object, meticulously remove price tag, carefully
wrap it, then deliver it to recipient
 Gift giving is a form of:
 Economic exchange ● Symbolic exchange ● Social expression
 Every culture prescribes certain occasions and ceremonies for giving gifts
 Christmas
 Myths/rituals: Santa’s adventures
 Santa = champion of materialism
 Appears in stores and shopping malls
 Socializes children to expect a reward when they are good (we get what we deserve)
 Halloween
 Its rituals are unusual:
 Involves nonfamily members
 Celebrates evil and death
 Encourages “tricks” for treats
 Halloween is an antifestival: distorts symbols associated with other holidays
 Witch = inverted mother figure; resurrection of ghosts; evil jack-o-lantern
 We act out uncharacteristic behaviors and try on new roles
7-Heros ‫القدوة‬
- e.g. Microsoft & Bill Gates - Arab contractors & Othman Ahmed Othman
‫ فبالتالً الزم أدرسلك وانت داخل الشركة تارٌخ الناس دي عامل إزاي‬organization ‫ بتاع الـ‬culture ‫تارٌخهم جزء من الـ‬
Tailgating at football games:

- Common behavior in America
- Americans are cost oriented so, they eat outside the stadium before they going inside to watch
the game
Subcultures
 Maybelline's Garnier uses Spanish-language ads to target the Hispanic market.
Gender-Based Marketing
Gender roles in the U.S. are shifting, both genders making many purchase decisions.
Example: Today, women influence 80% of all vehicles sold.

Consumer behavior
Homogamy ‫تكافإ بٌن الزوجٌن‬

We even tend to marry people in similar social class
Class Structure Around the World

 China: rise of middle class
 Japan: status- and brand-conscious society
 Arab cultures: women enjoy shopping with their families/friends
The Nouveau Riches ‫مستحدث نعمة‬

 The working wealthy…“rags to riches”
 Newcomers to the world of wealth
 Status anxiety leading to symbolic self-completion
Completion theory ‫نظرٌة التكامل‬

‫تحاول تعوض النقص اللً جواك‬
Status Symbols
Status-seeking: motivation to obtain products that will let others know that you have “made it”
Status-symbol products vary across cultures and locales

 Brazil: owning a private helicopter to get around horrible traffic
 China: showing off pampered only child
 Russia: cell phones with gems
 Indonesia: retro cell phone the size of a brick
Parody Display: (opposite of The Nouveau Riches to say I’m different)

Parody display: deliberately avoiding status symbols
Examples:
 Ripped jeans
 Sports utility vehicles
 Red Wing boots

Consumer behavior
Perception
Definition:
→It is the process by which people select, organize and interpret stimuli into a meaningful picture.
Types of perception:
1- True perception
2- False perception
 Depending on color
 Depending on name, with the change of one or more letter
Adidas → Adidos
Sony → Sonai
Process of perception:
1- Exposure
 Occurs when a stimulus is placed within a person’s

relevant environment and comes within range of
their sensory receptor nerves.
‫ حواس – كل حاسة فٌهم أو أكتر من حاسة ٌحصلها‬5 ‫ٌعنً عندي‬
some sort of stimulation
‫بتفرج على إعالن فً التلٌفزٌون ← ٌبقى الحواس اللً هتتحرك عندي‬
hearing & vision ً‫ه‬
 Exposure provides the opportunity for attention

but in no way guarantees it.
 Problems of exposure & how to avoid it:

I. Tolerance – exposure to the ad for a long time leads to tolerance
 I have to change the site of ad periodically to avoid the tolerance.
II. Zapping--involves switching channels when a commercial appears ‫أقلب القناة‬
III. Zipping--occurs when one fast-forwards through a commercial on a prerecorded
program
IV. Muting--is turning the sound off during commercial breaks. ‫أقفل الصوت‬
 Make isolation
 In TV: Product placement
→ place the ad inside the program or movie or on the screen while the movie or
serial is playing.
 In Radio
→ Few seconds of silence before or after the ads.

Consumer behavior
2- Attention
 Occurs when the stimulus activates one or more sensory receptor nerves, and the resulting
sensations go to the brain for processing.
 Attention requires consumers to allocate limited mental resources toward information
processing.
 Attention is determined by three factors:
a) Individual Factors
Are characteristics which distinguish one individual from another.
b) Situational Factors (Environmental)
Include stimuli in the environment other than the focal stimulus and temporary
characteristics of the individual that are induced by the environment
‫ مش هٌقدر ٌشوف إعالنً على الطرٌق – فمش هقدر أعمله حاجة‬، ‫واحد ماشً بسرعة عالٌة والدنٌا مطر وفٌه شبورة‬
c) Stimulus Factors
Are physical characteristics of the stimulus itself.
1- Size
 Includes font & total size of ad
 Avoid information overload as in billboard.
2- Contrast
 Color on opposite background to attract vision.
3- Attractive visuals
 Use attractive visuals, but avoid overshadow
 Sexual ads are very attractive to men, but the recall is very weak.
4- Novelty
 Put ad in unusual places
 Stimuli that appear in unexpected ways or places tend to grab our attention
The unconventional places include the back of shopping carts, walls of tunnels,
and even public restrooms
‫أحط اإلعالن فً مكان مافٌهوش إعالنات كتٌرة‬
5- Isolation The use of
 TV  product placement white space
----------
 Radio  silence
----------
----------
----------
--------
 Retails  Booth, Kiosk, On shelf

 Press  white space
 Isolation is separating a stimulus object from other objects.

 Examples of isolation include:
In store use of a stand-alone kiosk
In an advertisement, the use of “white space”
In a radio commercial, surrounding a key part with a brief moment of
silence.

Consumer behavior
6- Color
 Two colored pages are more better than one colored page
 One colored page is more better than two white & black pages
 Two white & black pages are more better than one white & black page
 The white & black ad can be more attractive, if it is placed between a lot of
colored ads
 The most industry uses the white & black in its ads is charity, to avoid decrease
expenses to the lowest degree.
7- Position
 Position is the placement of an object in physical space or time.
 In retail stores, items that are easy to find or stand out are more likely to attract
attention, such as end-caps and kiosks.
 High impact zones in print ads in the U.S. tend to be toward the top left portion
of the ad
 Three roles for print ads which increase the attention:
i. Left pages are better than right pages
ii. Early pages are better than late pages
iii. Opposite important topic ‫أحط إعالن قصاد موضوع مهم‬
8- Movement
 Moving objects are very strong in attracting attention
Stimulus organization
1- The closure principle—people tend to perceive an incomplete picture as complete. We fill in the
blanks.
e.g. Land Rover ad illustrates the use of the principle of closure, in which people participate in
the ad by mentally filling in the gaps in the sentence
- People tend to perceive an incomplete picture as complete
2- The principle of similarity—consumers tend to group objects that share similar physical
characteristics.
3- The figure-ground principle—one part of a stimulus will dominate (the figure) while other parts
recede into the backdrop (the ground).
e.g. Australian postal service ad

Consumer behavior
Nonfocused Attention
Hemispheric Lateralization
refers to activities that take place on each side of the brain.
Subliminal Stimuli
A message presented so fast, softly or masked by other messages that one is not aware of seeing or
hearing it is called a subliminal stimulus.
A subliminal ad “hides” key persuasive information within the ad by making it so weak that it is difficult
or impossible for someone to physically detect.
Subliminal advertising has been the focus of intense study and public concern.
 Subliminal perception
Subliminal perception refers to the ability to perceive a stimulus that is below the level of conscious
awareness.
-Psychologists generally agree it is possible to perceive things without being consciously aware of them.
3- Interpretation
4- Memory
Short term ‫ افتكره شوٌة وانساه‬- ‫إعالن شوفته مرتٌن تالتة‬

Long term ‫ زي إعالن رٌري وكوفرتٌنا‬- ‫إعالن بقالً سنٌن بشوفه فعمري ما هنساه‬
Perceptual filters ‫مهم‬

1. Perceptual vigilance—consumers are more likely to be aware of stimuli that relate to their
current needs.
 A consumer who rarely notices car ads will become very much aware of them when he is in
the market for a new car
‫لو مش معاك فلوس تشتري عربٌة وجه اعالن لعربٌة مش هتركز معاه – اما لما ٌبقً معاك فلوس هتبدأ تركز‬
2. Perceptual defense —people see what they want to see and vice versa.
 For example a heavy smoker may block out images of cancer-scarred lungs
‫تحط علبة السجاٌر داخل جراب لتخفً صورة الراجل اللً علٌه‬
 People see what they want to see, and they don’t see what they don’t want to see.
3. Adaptation —the degree to which consumers notice a stimulus over time

 The process of adaptation occurs when no longer pay attention to stimulus because it is so
familiar
 For example a consumer en route to work might read a billboard message when it is first
installed but after few days it just become part of the passing scenery

Consumer behavior
Perception and senses

 Vision and perception
 Saturated colors such as green, yellow, and orange are considered the best hues ‫االلوان اللً جوه‬
‫ االعالن ولٌس خلفٌته‬to capture attention.
 Color is a key issue in package design.
 Lower-income consumers prefer simple colors (grass green, blue sky); higher-income people like
complex colors (gray-green with a hint of blue); and the wealthiest 3 percent like forest green
and burgundy.
 The color red is arousing ‫ مثٌر‬, but this quality may be only in the eye of the beholder ‫ الناظر‬.
 Avoid using red as a background
 The better color as a background is white & blue sky
Types of vision
1-Central (or foveal) vision - This is the sharp, straight-ahead vision which enables us to read, drive, and
perform other activities that require fine, sharp, straight-ahead vision
2-Peripheral vision - This extends an additional 30 degrees either side of our central vision
 Shopping is actually by peripheral vision
 Women's wider peripheral vision means never getting caught
 Men's Tunnel Vision means always getting caught
Vision and Gender

 Women have better peripheral vision than men
 For millions of years men have been the hunters and women the nurturers.
 Men needed good forward focussed vision to see prey and kill it.
 Women in the nurturing role needed to look after the offspring – see what they are doing and
watch out for any approaching danger.
 Heard the expression ‘She’s got eyes in the back of her head’. Well, it’s almost true, because a
women’s field of vision is can be up to 180 degrees
 Smell and Perception

 Fragrance is processed by the limbic system, the most primitive part of the brain and the
place where immediate emotions are experienced.
 Smell is a direct line to feelings of happiness, hunger, and even memories of happy times
(such as childhood years).
 Odors can stir emotions or create a calming feeling.
 Odors create mood and promote memories:
- Coffee = childhood, home
- Cinnamon buns = sex
- Cigarettes = socialization
- Vanilla = happiness & celebration

Consumer behavior
Touch and perception

 People associate the textures of fabrics and other surfaces with product qualities (e.g., smooth,
rough, silky, etc.).
 Men often prefer roughness, whereas females prefer smoothness and softness.
 Mazda Miata designers discovered that making the stick shift (shown on the right) exactly 9.5
cm long conveys the optimal feeling of sportiness and control.
Taste and Perception

 “Plain” vanilla has become a flavorful marketing concept. Vanilla-flavored or vanilla-scented
coffees, and ice cream—are currently big sellers for the flavor industry.
 One industry executive explains that the flavor’s popularity is because vanilla “evokes memories
of home warmth and cuddling
Halo effect: → First impression

Consumer behavior
Motivation
Motivation : is the reason for behavior
Creates Translated
Need Motive Behavior
into
Maslow’s Hierarchy of Needs
extraordinary ‫ واحد بٌعمل حاجة‬-

‫ اللً عندها‬talent ‫ فقط من الـ‬%20 ‫ الناس بتستعمل‬-
Self
Actualization
1- Recognition: need to be well-known person
Self esteem needs 2- Status: need to feel that you have a role in the life
e.g. Antiques
Social needs
‫الحاجة أن تحب وأن تصٌر محبوبا‬ Safety is the priority for everyone, but it is a top priority for
e.g. clubs some people:
Safety needs 1- Negative experience (acquired), can convert to phobia
2- Skeptic (genetic)
e.g. insurance
* Safety has two types:
Physiological needs 1- Physical safety ً‫ – األمان الشخص‬e.g.to live safely in a private house
( e.g. food, drink, sleep) 2- Job safety – e.g. to work safely in a stable position
Classification of motives: :‫محتوي الالشعور ٌظهر فً هذه الحاالت‬

‫ األحالم‬-1
1. Conscious vs. Unconscious
‫ تحت التخدٌر‬-2
2. High vs. Low Urgency
‫ تحت تؤثٌر الكحول‬-3
3. Positive vs. Negative Polarity
ً‫ التنوٌم المغناطٌس‬-4
4. Intrinsic vs. Extrinsic
‫ ذالت اللسان‬-5
5. Rational vs. Emotional
Psycho analysis ‫ الـ‬-6
 Conscious vs. unconscious motives
 Conscious motives are motives we are aware of, the reasons for our behavior are clear, and
these motives do not need to be aroused
 Sometimes we are unaware of the reason why a particular behavior was undertaken; our
motivation is unconscious
 Discovering Purchase Motives

 Manifest motives are motives that are known and freely admitted.
 Latent motives are either unknown to the consumer or are such that he/she is reluctant to
admit them.
 Projective techniques are designed to provide information on latent motives.

Consumer behavior
Latent and Manifest Motives
Projective techniques:
Used in: 1- In-depth Interview (IDI)
2- Focus group
Types : safe
‫ناخد‬
1) Word association → TOM (Top Of Mind) ‫المتوسط‬
2) Sentence completion ‫بتاعهم‬
3) Story completion Cheap
4) Cartoon completion
expensive
5) Brand personality
→ make reflection on animal or celebrity
6) Brand perception
7) Brand CV unsafe
Volvo is male , its logo is Ơ Volvo car perception
8) TAT (Thematic Apperception Test)
Motivational conflict
 Occurs when multiple needs arise and fulfilling one goal conflicts with another
 The end result is frustration
 Three types of motivational conflict:
1. Approach-approach conflicts ( the 2 motives are positive )
2. Avoidance-avoidance conflicts ( the 2 motives are negative )
3. Approach-avoidance conflicts ( one motive is positive & the other one is negative)

Consumer behavior
1. Approach-approach conflicts
 Arise when consumers face a choice among desirable option—i.e., two positive goals or
motivations
 The more equal the positives, the greater the conflict
 Example :Buying a new car vs. going on an expensive vacation
 Marketers can use tactics designed to ease the conflict by making one option more attractive or
creating conditions where consumers can have both
 Restaurant menu: combination plates help consumer who can’t decide what he wants
Special rates, sales, deals, etc. can make one more attractive (e.g., buy a full fare seat, get
second free)
2. Avoidance-avoidance conflicts
 Arise when consumers must choose between two options with unfavorable consequences
 Examples: Paying to fix up the old car or buying another one
 Life insurance is a classic example: paying premiums vs. leaving your family unprotected
 Marketers seek ways to minimize the negative aspects of purchasing their product
 Marketers may also emphasize the negatives related to avoiding the purchase of the product
 Examples:
-Car: low-rate financing, rebates, payment plans, etc.
-Insurance: turn it into an investment
3. Approach-avoidance conflicts
 Consumers only purchase products when they believe the benefits outweigh the costs
It is the job of marketers to convince consumers that their product’s value exceeds its costs

Consumer behavior
Personality & lifestyle

Personality treats:
 Psychological traits that make you to behave the same behavior in the same situation.
Traits ‫سمة‬ Psychiatric disease ‫مرض‬

1- Obsessive ‫وسواس‬ → Obsessive Compulsive Neurosis
‫ النظافة‬- ‫ الكهرباء – األقفال – الغاز‬: ‫منتشرة أوي فً الحاجات المتعلقة بـ‬
2- Hysterical
 very common in ladies
 Characters like to get attention of others
3- Schizoid
‫ → مابٌحبش الناس – بٌحب الوحدة‬Schizophrenia ‫فصام فً الشخصٌة‬
4- Avoidant
‫ بٌحب الناس بس خاٌف من الرفض‬- ‫ * الشخصٌة المتجنبة‬Neurosis ‫األمراض النفسٌة‬
5- Paranoid personality ‫حاجة طبٌعٌة بس زادت شوٌة‬
‫ * الشخصٌة الشكاكة‬Psychosis ‫األمراض العقلٌة‬
6- Borderline personality
‫ مارلٌن مونرو و هتلر‬: ‫متؤرجح بٌن االنبساط واالكتئاب مثل‬
Personality:
→ A person’s unique psychological makeup and how it consistently influences the way a person
responds to his/her environment
Freudian Theory
Personality is composed of 3 components:
1. The id ‫ → مبدأ الغرائز‬responsible for satisfaction of instincts → pleasure principle → ‫موروث‬
2. The ego → reality principle, inhibits internal conflict
id ‫ٌمنع الصراع الداخلً بٌن الضمٌر والـ‬
‫الجزء المسإول عن التصرف بواقعٌة وعقالنٌة – وٌبدأ فً الظهور بعد سن العاشرة‬
3. The superego → ‫مكتسب → الضمٌر‬
We have 3 Scenarios:
1- id > superego
id ego superego
 ego will support the id
2- id < superego 1-
 ego will support the superego 2- A
In case B ‫الضمٌر هنا بقً سكٌنة بتدبحه‬ B
‫شخص متزمت جدا وبٌلوم نفسه كتٌر أوي علً أي تصرف خاطئ‬
3-
‫عاٌز ٌبقً معصوم من الخطؤ‬
3- id = superego compromise
I. in same situation; make compromise

superego ‫ ٌقوله عاكسها – أما الـ‬id ‫ الـ‬، ‫حل وسط – واحد شاف واحده حلوة‬
‫ٌقوله حرام – فٌقولك طب هبص بصة وخالص‬
II. ‫واحد اتحط فً موقف ٌتصرف تصرف معٌن – وبعدٌها بفترة‬
)‫ٌتحط فً نفس الموقف ٌتصرف تصرف مختلف تماما ( عكس االول‬

Consumer behavior
Motivational theory: (Projective techniques)

 to show unconscious motives of customers
Motivational studies:
 Coffee → companionship
 Prunes (‫ → ) القراصٌا‬old age
 Cake → process of giving birth
 Ice cream → nurturing mother ‫الرضاعة ولبن السرسوب‬
Trait theory of personality:

Specific personality traits:
1- Innovativeness
→ Willingness to try new products, services or practices
Diffusion / adoption
13.5% 34% 34%

Early
Early majority Late majority 16%
2.5% adaptor
Innovators Laggards
1- Risk taker
1- Risk avoider
2- Open minded
2- closed minded
3- Non skeptic
3- Skeptic
4- Low conformity
4- High conformity
5- Inner directed
5- Outer directed
6- Good financial status
6- Bad financial status
7- Young age
7- Old age
2- Dogmatism
 Measures the degree of rigidity vs. openness individuals display toward the unfamiliar and
toward information that is contrary to their own established beliefs
 An indicator of how consumers respond to unfamiliar products or features
 Highly dogmatic (closed-minded) consumers are more likely to choose established, rather
than innovative, product alternatives
 Pragmatic  down to earth ً‫شخص عمل‬
 Dogmatic  flexibility or rigidity
3- Social character
 Personality trait that ranges on a continuum from inner-directedness to other-directedness
 Inner-directed consumers rely on their own “inner” values in evaluating new products and
are likely to be innovators
 Outer-directed consumers tend to look to others for direction on what is right and wrong
and thus less likely to be innovators

Consumer behavior
4- Materialism
 It distinguishes between individuals who regard possessions as essential to their identities
and their lives, and those for whom possessions are secondary
 Research indicates that characteristics of materialistic persons include:
o They value acquiring and showing off possessions
o Self-centered and selfish
o They seek lifestyles full of possessions
o Their possessions do not give them greater personal satisfaction
5- Compulsiveness
 Compulsive activities include alcoholism, gambling, and various food disorders
 Compulsive buying can be included in the list
 Often requires some type of therapy or clinical treatment
 Evidence suggests that some consumers use self-gifting and compulsive buying as a way to
influence or manage their moods
 E.g., I’m feeling depressed; I think I’ll go shopping

Consumer behavior
The Self
You are what you consume
Dimensions of a Consumer’s Self-Concept

e.g. body weight
1- Private actual How I actually see myself 95 Kg
2- Private ideal How I’d like to see myself 65 Kg
3- Social actual How others actually see me Obese
4- Social ideal How I’d like others to see me Smart
* Diet products → ‫( تلعب علً االتنٌن‬socially & privately)
Extended self: ( how to compensate your defect )

1- Individual level
→ you are what you wear.
2- Family level
→ includes your house and furniture
3- Community level
→ includes your neighborhood and home town.
4- Group level
→ includes your religion, flag, sports team, etc.
Tattooing and the extended self

Tattoos have meanings of:
1- Non conventional
2- Non conformist ‫عامل تاتوو‬
3- Risk taker ‫لو التاتوو ظاهر‬
4- Communicate a message ‫الرسمة نفسها‬
Sex typed products

Masculine Feminine
 Pocket knife  Baby oil
 Shaving cream  Hand lotion
 Stereo system  Clothes dryer
 Wall paint  Facial tissue
 Tool kit ‫شنطة العدة‬  Scarf
 Briefcase  Bedroom slipper ‫الشبشب‬
 Scotch ً‫الوٌسك‬

Consumer behavior
Attitude
Attitude: a lasting, general evaluation of people, objects, advertisements, or issues
Attitude composed of 3 components:
1- Cognition → Knowledge (Thinking)
Conation
2- Affect → Emotions
3- Conation → Actions (behavior)
Cognition Affect
Cognition Affect (emotions)

Wrong idea Delusion Emotions are:
)‫الفكرة الخاطئة (مرحلة خفٌفة‬ )‫الضاللة (مرحلة متقدمة‬ 1- Fear → mostly –ve or +ve
can be corrected, 1- wrong idea
2- Happiness → +ve
but difficulty 2- fixed 3- Sadness →-ve
because: 3- can’t be
1- you are not the 4- Surprise →+ve or -ve
corrected by logic 5- Disgust →-ve
right source
2- you are biased ( not credible) 6- Anger →-ve
‫ ** عشان كده بعض الشركات بتعمل‬jealousness is associated with sadness at females & with anger at males
RTD (Round Table Discussion) Factors which can affect emotions:
‫ وٌقعده مع مجموعة من الـ‬customer ‫ ٌجٌب الـ‬1- Classical conditioning ‫األفعال المشروطة‬
‫للشركة وٌكونوا‬very loyal ً‫الل‬customers ً‫كل دقٌقة عل‬، ‫ الحٌاة بقت أورجانٌك‬، ‫استخدام الموسٌقً مع كادبوري‬:‫مثال‬
ً‫أساتذته وأكبر منه فً السن فٌكون لٌهم تؤثٌر إٌجاب‬ ‫موبٌنٌل لفعل الخٌر‬
‫علٌه‬ advertising ‫الـ‬ ً‫* عادة تتعمل ف‬
2- repeated message used with
3- likeability personal selling
*Likeability based on:
Charisma, facial features, sense of humor  genetic
& smile  acquired
Customers can be classified into 4 types:

1- Driver
2- Expressive Low assertiveness:
3- Analytical → skeptic & low assertiveness 1- Late decision making
4- Amiable ‫ → ودود‬low assertiveness 2- Very low risk taking
How to deal with analytical & amiable customers?

1- Samples 2- Donation 3- Money back ‫تحت التصرٌف‬
4- Sales promotion 5- Trialability
* Cash rebate is type of sales promotion while Money back is not a sales promotion
)‫مشكلة التبرع بالدم فً الفكرة الخاطئة ( انتقال االمراض و االضرار بالصحة‬

‫ولٌس تصحٌح الفكرة الخاطئة‬emotions ‫فً االعالنات عن التبرع بالدم بٌلعبوا علً الـ‬

Consumer behavior
Types of attitude & how to deal with every type:

Type How to deal
1- Enthusiastic ً‫حماس‬ → Thank / Maintain
2- Positive ً‫إٌجاب‬ → Thank / Maintain
3- Indifferent ‫متعادل‬ → Investigate → change
4- Negative ً‫سلب‬ → Investigate
5- Hostile (very bad experience) ً‫عدائ‬ → Neglect
Attitudes are learned

 We are not born with attitudes
 Attitudes relative to purchase behavior are formed as a result of: (Sources of Attitudes):
1. direct experience with the product
→ can be increased by using the samples
2. word-of-mouth
→Family and friends are a major influence on our values, beliefs and attitudes
- We carry over into adulthood many of the attitudes we developed as children
- Our peer and social groups also influence our attitudes
- Reference groups
a- Primary → KOL
b- Secondary → KOF
c- Aspirational
 One study shows that over 40 per cent of Americans seek the advice of family or friends
when shopping for doctors, lawyers, and auto mechanics.
 Word of mouth is also important with respect to restaurants, entertainment, banking,
and personal services.
 And young adults are more willing to seek referrals than are older people
3. Mass Media
→Television, radio, newspapers and magazines provide marketers with unlimited
opportunities to create positive attitudes towards their products
Sleeper effect → Publicity

‫ ألنه بقً واضح وسط اإلعالنات‬clutter ً‫شخص غتٌت ٌمثل إعالن ٌثبت فً دماغ الناس – وتغلبت عل‬
-Explanations of the sleeper effect include:
a) The dissociative cue hypothesis—
→ over time the message and the source become disassociated in the consumer’s mind.
b) The availability-valence hypothesis—
→ emphasizes the selectivity of memory owing to the limited capacity
Halo effect → the first impression is the lasting impression

Management of
Information
System
(MIS)

MIS – Chapter 1 & 2
Foundation Concepts of IT & I
Information Technology ( IT ) Information Systems ( IS )

→ A wide variety of items & abilities used in the → A set of interrelated components that collect,
creation, storage & dispersal ( scattering / process, store & distribute information to support
distribution ) of data & information. decision making & control in an organization
* it has 3 main components: * IS contain information about significant people,

1- computers places & things within the organization or in the
2- communications networks environment surrounding it
3- know-how
→ the capability to do something well.
* Advantages of IT:
* IT can improve your personal performance 1- creates opportunities
( quality, speed & efficiency ) 2- produces results
3- improves existing process
Difference between Data, Information & Knowledge:
Data Information Knowledge

→ Streams of raw facts representing → An organized, → An awareness &
events occurring in organizations or the meaningful & useful understanding of a set of
environment before they have been interpretation of data information & how that
organized & arranged into a form that → it is data after information can be put to the
people can understand & use. processing best use
→ Data are raw facts, figures & details
Inputs Data Processing Outputs IS

( Data ) ( Information ) Activities
* Computers only do what they are told to do. We often use the saying “garbage in, garbage out”
(GIGO for short ) : what it means is that if incorrect data is put into a computer, the computer won’t
realize that it is incorrect so it will produce a strange answer. If the computer is given a right
information, then provided the hardware and software are working correctly, it will always produce
the right output.
Definitions:
Outputs Productivity
* Productivity = ‫ـــــــــــــــــــــــــــــــ‬ * Efficiency = ‫ــــــــــــــــــــــــــــــــــ‬ * Effectiveness
Inputs ( resources ) Unit of time → extent of the achieved result
»» to improve the productivity : to the desired result
1-  resources
2-  time
3-  tools

* Reengineering:
→ the reshaping of business processes to remove barriers that prohibit an organization from providing
better products & services & to help the organization capitalize on its strengths.
Business Process Reengineering ( BPR ) Business Process Improvement ( BPI )
→ happened once or twice → happened more frequently
→ dramatic change → very smooth change
→ high cost → very little cost
Organization Levels that IS should support :
External
External
Factors -  Reports & Paper
-  External factors Sources
Of Data
-  Data
Decision
Un-structural
Decision
Semi-structural
Awareness &
Decision
Analysis
Structural
Decision
IS ‫* الزم لبناء الهرم نبدأ من القاعدة ثم القمة – وكذلك الحال لبناء‬

MIS & TPS ً‫ – معناه فً العرف إنً عاٌز أبن‬MIS ً‫* لو عاٌز أبن‬
Pure DSS ً‫ معناه إنً عاٌز أبن‬- DSS ً‫* لو عاٌز أبن‬
‫ قبل كده‬TPS & MIS ً‫ معنً كده إن الشركة عندها أصال‬-
* DSS by 99% give multiple options for decision & it doesn’t give the only solution as it affected by external factors.
Difference between Use, Utilize & Exploit:

»» Use : use of one option (use of up to 20% of feature) ‫اشترٌت جهاز له مواصفات متعددة وال أستعمل سوي مٌزة واحدة فٌه‬
»» Utilize : use up to 80% of features.
»» Exploit : use more than 80% of the features.
States of the Products :

- State of the market products. - State of the industry products. - State of research ( art )
‫منتج موجود فً السوق‬ ‫منتج فً المصنع‬ ‫منتج ما زال فً طور األبحاث‬

The World Wide Web
»» It is a system with universally accepted standards for storing, retrieving, formatting & displaying
information in a networked environment.
- Information is stored & displayed as electronic “ pages “ that can contain text, graphics, animations, sound
& video.
1- Stand-Alone Architecture
- Each PC has the same data base (DB) & App. ‫برنامج‬
* But it has disadvantages:
1- Redundancy )‫(التكرارٌة‬ ‫عشان أعدل بٌان الزم أعدله فً جمٌع األجهزة‬
2- Inconsistency
3- Data sharing doesn’t exist.
4- Maintainability ‫ٌجب صٌانة جمٌع األجهزة‬
2- Client/Server Architecture
2.1- Ring Topology
DB Response One Hub

Server
Request
More in Process, Power &
Memory
‫عٌوبه‬
App. App.
Ring
Client
Client Topology Two Hubs
App.
App.
Client Client
* Advantages: * Disadvantages:
1- No redundancy 1- Single point of failure -‫لوحدث خلل فً مكون واحد‬
2- No inconsistency "‫ٌنتقل هذا الخلل لباقً األجهزة “توصٌل علً التوالً والتوازي‬
3- There’s data sharing 2- Dependency of the speed of data transmission
4- Maintainability decreases by 50%. on the distance between the server & client.
‫كل ما المسافة بٌنهم زادت كل ما كانت سرعة التوصٌل بٌنهم بطٌئة‬
2.2- Bus Topology Server
Client client client client client
* Advantages: ‫تغلب علً العٌوب السابقة كلها‬

Broadcast advantage ‫أبعت رسالة واحدة ٌستقبلها الجمٌع‬
* Disadvantages
Narrow band width ‫عٌبها صغر سعة الشبكة‬
2.3- Star Topology
Floor switch
Core switch
Server

Node
** LAN = Local Area Network
LAN LAN LAN
LAN + LAN + LAN + LAN ……………… = WAN “ Wide Area Network “

** MAN = Metropolitan Area Network
3- Web Based Solutions/ Architecture ( Multi-tier Architecture ) ( (Three tier Architecture )
Third Tier Data Base Server

(Data base tier) IP address
(Rear tier)
Internet Protocol
Web-based
‫برنامج آخـر‬
Technology
Second tier ‫برنامج معٌن‬ Application Server IP address
(Application tier ) ‫محاسبة مثال‬
( Middle tier )
First tier Web

( Thin client tier ) Browser
( Front tier )
Thin clients
* Advantage :
Available accessibility from anywhere of the world
‫ تدخل علٌه مباشرة من أي مكان‬www. ……… ‫مثال تكتب عنوان‬
4- web-enabled
ً‫قعد فترة وانته‬
E-Market
→Information system that links many buyers & sellers to exchange information, products, services &
payments
- It can be Full or Partial
E-Commerce
→ Process of buying & selling through the internet

- It can be : full‫تشتري وتدفع عن طرٌق اإلنترنت‬
Or Partial ‫تشتري عن طرٌق النت وتدفع فً البٌت لما تستلم السلعة‬
buyer Market seller
E-Market
‫ٌمكن أي بائع أو مشتري فً العالم من التواصل مع‬
‫بعضهم عبر األنترنت‬
Buyer’s bank Intermediate banks Seller’s bank
* Parts involved in E-Commerce:

1- Seller 2- Buyer 3- E-Market
4- Seller’s bank 5- Buyer’s bank 6- Intermediate banks
Q. What is the minimal number of parts involved in E-Commerce ?

→ 4 parts ( seller, buyer, e-market & common bank )
E-Services
→ services which can be done through the internet
G G
- the partners in these services include :
Government ( G ) - Business ( B ) - Consumer, Customer Or Citizen ( C )
→ Types of E-Services: B B
1- G2C 4-B2G 7- C2G
2- G2G 5- B2B 8- C2B
3- G2B 6- B2C 9- C2C C C
E-Business
→ Use of internet for organization communication & coordination & the management of the firm.
Definitions:
* Intranet * Extranet * Internet
Within the same organization Connectivity between 2 or more From anywhere of the world
intranet

Major Components of IS
1- Hard ware
2- Soft ware
- Basic Soft ware ( Operating system; Windows , Linux , Unix , ………)
- Utilities soft ware
- Tools
3- Communication “ sending & receiving data “
4- Networking
- Hard ware
- Soft ware
5- Security 6- Application 7- Data Sources 8- Trained Stuff
Benefits of IT
1- Increase of speed
2- Increase of precision ( accuracy + effectiveness )
3- Consistency ( you do something repeated a lot of times with the same quality )
4- Reliability
5- Increase the productivity 6- efficiency 7-  effectiveness.
Principles of IT :
1) The first principle describes The Purpose of IT : IT aids in solving problems, unlocking creativity
& making people more effective.
2) The second principle describes High-Tech / High-Touch : the more “ high-tech” the IT you are
considering, the more important it is to consider the “ high-touch” aspects of the matter - that is, “
the people side “ ‫كلما زادت التكنولوجٌا كلما احتاجت التكنولوجٌا لمستخدم جٌد لها‬
- In other words, always fit IT to people rather than asking people to adjust to IT.
3) The third principle describes The safeguard of information : people who use IT have the obligation (
responsibility ) to consider the upside & the downside of introducing IT into any situation.
The six functions of IT :

6. Information
Transmitting
Data
3. Information ( Distribution )
2. Data ( spreading )
1. Data Capturing Processing Generation
4. Storing 5. Retrieving

The responsibility of using IT :

1. To be informed: Know how computers & networks can be applied in different situations
2. To make the proper use of IT : employ IT in desirable & ethical way to help people not to harm them
3. To safeguard : user must protect data & information that are in computer or transmitted over a
network against damage or loss
Career of IT :
9 IT Consultant
Con
8 Project
sult
Manager
Highly ants
Professional
Related 7 Analyst
To each
other 6 Designers
5 Programmers / Developers
4 Knowledgeable Non
User Professional
3 Non-knowledgeable
2 Technical support
1 Data Entry
* If the developer think, the system will sink ‫ٌعنً ٌركز فً شغله وبس‬
– ‫ وتطلب مثال أكل بدون ملح عشان عندك الضغط‬menu ‫ ٌعطٌك ال‬waiter ( Analyst ) ‫ لو دخلت مطعم ٌٌجً ال‬:‫مثال‬
– ‫ فٌقوم بعمل الوصفة للطباخ وٌعلقهاله‬chief ( designer ) ‫ للـ‬request ‫ ٌعطً ال‬waiter ‫ٌروح ال‬
ً‫ طب وهللا ألزود األكل شوٌة ملح عشان ٌبق‬، ‫ ٌقول إزاي الراجل ده هٌاكل من غٌر ملح‬cooker ( developer ) ‫ٌٌجً الدور علً الطباخ‬
‫لٌه طعم‬
‫ تٌجً تاكل ← ضغطك ٌعال ← ممكن تموت فٌها‬-
. ‫ ألنه ممكن ٌعمل مصاٌب وهو مش حاسس‬، ‫ مٌفكرش أو ٌزود حاجات من عنده‬developer ‫ عشان كده المفروض الـ‬-
* To be a good Analyst, you must have at least 2-5 years experience as designer.
* To be a good designer, you must have at least 3-8 years experience as a developer.
--- these were a general roles, but of course there are exceptions.
The seven phases of the systems development Life Cycle

1. Identifying problems of customers “ by users “, Opportunities of success “ by IT staff “ & Objectives of
organization “ by both of them “
** Not all the problems can be solved by soft ware. ‫أشتغل علً المنطقة المشتركة بٌنهم‬
) ‫( العمٌل وفرٌق العمل والشركة‬
2. Determining information requirements
1) H/W 2) S/W 3) Networking 4) Communications
5) Security 6) Data Source 7) Trained staff 8) Application
3. Analyzing System needs
3.1- Data gathering
* Data gathering approaches:
1- by conducting interviews
2- by conducting questionnaires
3- Sampling of hard data ‫وبنً آدمٌن كمان‬
4- Observing decision makers ( Observation )
5- Prototyping ‫ وأستنتج متطلباته منه‬،‫نجٌب نموذج جاهز وأعرضه علً العمٌل وأشوف رأٌه فٌه‬
3.2- Analysis of the gathered data
3.3- Identify the system inputs, outputs & functions ( Writing system description ).
* Functions = Processes = Business roles
3.4- Writing the detailed analysis report
3.5- get the users comments/ Approval of the analysis report.
3.6- conduct the needed changes on the analysis report & repeat step 3.5 again.
4. Designing the recommended system
4.1- Design effective system outputs external
( reports, statistics, graphs & key performance indicators “ KPI “ ) design
4.2- Design effective system inputs ‫ٌراه‬
( Screens, forms, …..) ‫المستخدم‬
4.3- Design effective system GUI “ graphical user interface “
4.4- Design effective system data base internal
4.5- Design effective system program specifications ( Specs. / Business rules ) design
5. Developing ( Programming ) & documenting software
‫ ألنً ممكن أعدل فٌه فٌما بعد‬، ‫بدل ما أهد النظام وأبنٌه من أول وجدٌد‬
- Don’t approve any solutions without documentations
6. Testing & maintaining the system
- it has a lot of steps:
1) Unit testing ‫أختبر كل وحدة علً حده‬
2) Integration testing ‫الزم الوحدات كلها تسمع فً الوحدة الرئٌسٌة‬
3) system testing ‫كل النظام الزم ٌسمع مع بعضه‬
4) stress test ‫أجرب النظام ببٌانات كتٌرة أوي عشان أتؤكد من كفاءته‬
Cost ‫ كلما زاد الخطؤ وزادت التكلفة‬، ‫كلما تؤخر الوقت فً اكتشاف الخطؤ‬
Maintenance
Phase of detecting errors

** WHY we need maintenance ?????
1- to fix software errors
2- to enhance existing software features
3- to add new capabilities of software
4- to cope with the changes in the system overtime.( thus we will have updated system )
7. Implementing & evaluating the system

7.1- Installation
7.2- Training
7.3- Operational supervision ( support )
** Implementation approaches:
1) Cut-off Implementation ‫أتوقف عن تنفٌذ النظام الحالً وأبدأ فً تنفٌذ االنظام الجدٌد‬
) ‫ له ممٌزات وعٌوب ( تطبٌق سرٌع بس لو طلع النظام مش فعال هٌفقد الثقة‬-
2) Parallel Implementation
* has 2 disadvantages; double work & double effort.
3) Pilot ‫ استرشادي‬Project Implementation ً‫أختار محافظة معٌنة أو مكان معٌن أطبق فٌه النظام ولما ٌنجح أنفذه فً الباق‬
3.1- Pilot Parallel
3.2- Pilot Cut-off
1- Identifying problems, 2- Determining information

Opportunities & Objectives requirements
3- Analyzing
system need
7- Implementing & The 7 phases of the

evaluating the system systems development 4- Designing the
Life cycle recommended system
6- Testing & maintaining the 5- Developing &

system documenting software
* When we say systems development, we mean “ initiation, building & development “
* SDLC Methodology ( Software Development Life Cycle methodology )

- It has a lot of derivatives:
1- RAD ( Rapid Application Design )
2- JAD
3- SDM
4- Prototyping ‫نماذج أولٌة‬
5- Iterative ‫مكرر‬
6- Spiral

 Why IS & MIS projects succeed or fail ??

No Top five reasons for success Top five reasons for failure
1 User involvement Lock of input
2 Executive management support Incomplete requirements & specifications
3 Clear statement of requirements Changing requirements & specifications
4 Proper planning Lock of executive support
5 Realistic expectations Technological incompetence

‫‪MIS – Chapter 1 & 2‬‬
‫) ‪Categories of IS ( 6 categories‬‬
‫‪Operational Support‬‬
‫‪Management Support‬‬ ‫‪Knowledge‬‬ ‫‪Office‬‬
‫) ‪Systems ( OSS‬‬
‫) ‪Systems ( MSS‬‬ ‫‪Management‬‬ ‫‪Automation‬‬
‫) ‪Systems ( KMS‬‬ ‫‪Systems‬‬
‫‪3‬‬ ‫) ‪( OAS‬‬
‫‪1‬‬ ‫‪2‬‬
‫‪DSS‬‬ ‫‪MIS‬‬ ‫‪EIS‬‬
‫‪ECS‬‬ ‫‪- as Patient‬‬
‫‪TPS‬‬ ‫‪PCS‬‬ ‫‪Decision‬‬ ‫‪Management‬‬ ‫‪Executive‬‬ ‫كلنا بنستعمل‬
‫‪Enterprise‬‬ ‫‪history‬‬
‫‪Transaction‬‬ ‫‪Process‬‬ ‫‪Support‬‬ ‫‪Information‬‬ ‫‪Information‬‬ ‫‪- word‬‬
‫‪Collaborative‬‬ ‫الدكتور بٌاخد بٌاناتك‬
‫‪Processing‬‬ ‫‪Control‬‬ ‫‪Systems‬‬ ‫‪Systems‬‬ ‫‪Systems‬‬ ‫‪- excel‬‬
‫‪Systems‬‬ ‫من الممرضة وٌعمل‬
‫‪Systems‬‬ ‫‪Systems‬‬ ‫‪Or ESS‬‬ ‫تقرٌر عنك وٌطلب‬ ‫‪- power point‬‬
‫‪ -‬مثال لو زاد مستوي المٌاه‬ ‫‪Executive‬‬ ‫تحالٌل وأشعة وٌحولك‬
‫فً السد العالً والقناطر ‪,‬‬ ‫‪Support Systems‬‬ ‫إلستشارٌٌن ‪ ....‬إلخ‬
‫‪ -‬شئون العاملٌن‬ ‫‪ -‬الحدٌد والصلب‬ ‫‪ -‬بهدف ‪sharing‬‬
‫‪ -‬مرتبات‬ ‫ومصانعها‬ ‫& ‪of resources‬‬ ‫نختار نغرق الصعٌد وال الدلتا‬ ‫ٌعنً هرم اتبنً علً‬
‫‪ -‬مخازن‬ ‫‪ -‬بطاطس‬ ‫‪distributing‬‬ ‫”‪- C.F “Certainty Factor‬‬ ‫‪ -‬له كل صالحٌات ‪TPS‬وكذلك ‪MIS‬‬ ‫المعرفة وكل واحد‬
‫‪ -‬مشترٌات‬ ‫الشٌبسً‬ ‫‪80 %, 90 %‬‬ ‫‪ٌ -‬اخد قرار ٌإثر فً ال ‪project‬‬ ‫ٌحط اللً عنده‬
‫‪them all over‬‬
‫‪ -‬مبٌعات‬ ‫‪ -‬جمٌع أنواع‬ ‫‪the company‬‬ ‫ممكن آخد األصغر اعتمادا‬ ‫ولٌس فً ال ‪company‬‬
‫‪ -‬حسابات عمالء‬ ‫المصانع‬ ‫مثل شركات‬ ‫علً الـ ‪external factors‬‬ ‫‪ -‬عكس ال ‪ٌ top level‬اخد قرار متعلق‬ ‫‪Artificial Intelligent‬‬
‫‪ -‬حسابات موردٌن‬ ‫‪ -‬السد العالً‬ ‫المقاوالت ٌكون فٌها‬ ‫بمستقبل الشركة‬ ‫‪Systems & Expert‬‬
‫‪ -‬حسابات عامة‬ ‫والتحكم فً‬ ‫عدد محدود من‬ ‫) ‪systems ( AI & ES‬‬
‫‪ -‬موازنة‬ ‫مستوي المٌاه فٌه‬ ‫المعدات الثقٌلة‬
‫‪ -‬مٌزانٌة‬
‫‪ -‬تسوٌق‬ ‫مثال‪ :‬عادل ٌلعب الكرة – محمد ٌلعب مع عادل‬
‫‪ -‬شئون قانونٌة‬ ‫‪ ...‬ماذا ٌلعب محمد‬
‫) ‪Group Decision Support Systems ( GDSS‬‬
‫← لو جبت الـ ‪ super computer‬وجبت عٌل‬
‫** الزم يكون‬ ‫_ العٌل ٌجاوب والكمبٌوتر ماٌقدرش‬
‫موجود في أي‬ ‫‪ -‬علٌه ‪ debate‬شوٌة ‪ ،‬مثال عشان أعمل مٌزانٌة لمصر أبعت للوزارات وأشوف احتٌاجاتهم – فكل وزارة تبدأ تبعت ال ‪ Budget‬بتاعها – وتحصل‬
‫مؤسسة‬ ‫خناقة بٌن الوزارات علً الموازنة – ألن كل واحد شاٌف من وجهة نظره إن قراره األفضل ( مثال وزٌر التعلٌم ٌقولك الزم التعلٌم والبحث العلمً ٌكون لٌهم‬ ‫* للتغلب علً ذلك الزم نبنً ذكاء اصطناعً‬
‫أعلً مٌزانٌة ألن العلم هو اللً هٌرفع مستوي البلد ‪ٌ ,‬رد علٌه وزٌر الصناعة ٌقوله اننا الزم نزود استثماراتنا فً الصناعة عشان نكون دولة صناعٌة كبري )‬ ‫للكمبٌوتر ‪ -‬بؤننا نضع له هذه االحتماالت ‪.‬‬
‫‪ -‬اللً ٌتحكم فً الموضوع ده رئٌس مجلس الوزراء وٌاخد القرار بناءا علً الموقف اللً قدامه – ممكن ٌخلً للقوات المسلحة أعلً ‪ Budget‬حسب رإٌته‬
‫← فٌإخذ قرار جماعً اننا نشٌل من مٌزانٌة وزارة ونزودها للتانٌة‬ ‫‪- Super Computer :‬‬
‫‪ -‬مشكلته إنه ‪ very complicated System‬ونادرا ما ٌستخدم فً بلدنا‬ ‫‪→ it is the fastest machine in its era‬‬
‫‪ -‬مثال آخر ‪ Annual meeting :‬أجمع كل مدٌرٌن الفروع وأناقشهم‬ ‫‪→ it is fastest in memory & Processor‬‬
‫‪Prepared by: Saied Ibrahim‬‬ ‫‪153‬‬

MIS – Chapter 3
The seven phases of the systems development Life Cycle
8. Identifying problems of customers “ by users “, Opportunities of success “ by IT staff “ & Objectives of

organization “ by both of them “
** Not all the problems can be solved by soft ware. ‫أشتغل علً المنطقة المشتركة بٌنهم‬
) ‫( العمٌل وفرٌق العمل والشركة‬
9. Determining information requirements
1) H/W 2) S/W 3) Networking 4) Communications
5) Security 6) Data Source 7) Trained staff 8) Application
10. Analyzing System needs
3.1- Data gathering
* Data gathering approaches:
3- Sampling of hard data ‫وبنً آدمٌن كمان‬
4- Observing decision makers ( Observation )
5- Prototyping ‫ وأستنتج متطلباته منه‬،‫نجٌب نموذج جاهز وأعرضه علً العمٌل وأشوف رأٌه فٌه‬
3.2- Analysis of the gathered data
3.3- Identify the system inputs, outputs & functions ( Writing system description ).
* Functions = Processes = Business roles
3.4- Writing the detailed analysis report
3.5- get the users comments/ Approval of the analysis report.
3.6- conduct the needed changes on the analysis report & repeat step 3.5 again.
11. Designing the recommended system
4.1- Design effective system outputs external
( reports, statistics, graphs & key performance indicators “ KPI “ ) design
4.2- Design effective system inputs ‫ٌراه‬
( Screens, forms, …..) ‫المستخدم‬
4.3- Design effective system GUI “ graphical user interface “
4.4- Design effective system data base internal
4.5- Design effective system program specifications ( Specs. / Business rules ) design
12. Developing ( Programming ) & documenting software
‫ ألنً ممكن أعدل فٌه فٌما بعد‬، ‫بدل ما أهد النظام وأبنٌه من أول وجدٌد‬
- Don’t approve any solutions without documentations
13. Testing & maintaining the system
- it has a lot of steps:
1) Unit testing ‫أختبر كل وحدة علً حده‬
2) Integration testing ‫الزم الوحدات كلها تسمع فً الوحدة الرئٌسٌة‬
3) System testing ‫كل النظام الزم ٌسمع مع بعضه‬
4) Stress test ‫أجرب النظام ببٌانات كتٌرة أوي عشان أتؤكد من كفاءته‬
Cost ‫ كلما زاد الخطؤ وزادت التكلفة‬، ‫كلما تؤخر الوقت فً اكتشاف الخطؤ‬
Maintenance
Prepared by: Saied Ibrahim Phase of detecting errors 154

MIS – Chapter 3
** WHY we need maintenance ?????

1- to fix software errors
2- to enhance existing software features
3- to add new capabilities of software
4- to cope with the changes in the system overtime.( thus we will have updated system )
14. Implementing & evaluating the system

7.1- Installation
7.2- Training
7.3- Operational supervision ( support )
** Implementation approaches:
1) Cut-off Implementation ‫أتوقف عن تنفٌذ النظام الحالً وأبدأ فً تنفٌذ االنظام الجدٌد‬
) ‫ له ممٌزات وعٌوب ( تطبٌق سرٌع بس لو طلع النظام مش فعال هٌفقد الثقة‬-
2) Parallel Implementation
* has 2 disadvantages; double work & double effort.
3) Pilot ‫ استرشادي‬Project Implementation ً‫أختار محافظة معٌنة أو مكان معٌن أطبق فٌه النظام ولما ٌنجح أنفذه فً الباق‬
3.1- Pilot Parallel
3.2- Pilot Cut-off
1- Identifying problems, 2- Determining information

Opportunities & Objectives requirements
3- Analyzing
system need
7- Implementing & The 7 phases of the

evaluating the system systems development 4- Designing the
Life cycle recommended system
6- Testing & maintaining the 5- Developing &

system documenting software
* When we say systems development, we mean “ initiation, building & development “
* SDLC Methodology ( Software Development Life Cycle methodology )

- It has a lot of derivatives:
1- RAD ( Rapid Application Design )
2- JAD ( Joint Application Design)
3- SDM ( Software Development Methodology )
4- Prototyping ‫نماذج أولٌة‬
5- Iterative ‫مكرر‬
6- Spiral
155
MIS – Chapter 3
* Types of Software:
1) Tailor software ‫تفصٌل زي ما أنا عاٌز‬
2) Readymade software ‫جاهز‬
3) Customized software
‫ عشان أشوف أكتر حاجة الناس محتاجاها وأصممها‬tailor ‫ الزم أكون صممت قبل كده‬readymade ‫عشان أصمم‬
So, Problem solving approach methodology has 5 steps only not 7 as I don’t need either analysis or
testing step.
Problem-solving approach: → customized software

1- Define the problem using system thinking
2- Develop alternative solutions ( Identify the best alternative solutions )
3- Select the best solution
4- Design ( customize ) the solution
5- Implement ( use ) the solution
System thinking: see the forest and trees in any situation by:-
Seeing interrelationships among system rather than linear cause-and effect chains whenever
events occur
Seeing processes of change among systems rather than discrete snapshots of change whenever
change occur
Where do alternate solutions come from ?

1. Experiences
2. Solutions that have worked or at least been considered in the past
3. Advice from the others as consultants & experts
4. Use your intuition & ingenuity ‫استخدام الحدس‬
5. Do nothing
How to select the best solution ?

1) Develop an evaluation criteria
2) Compare all alternative solutions against each other using the same evaluation criteria
3) Rank the alternative solutions based on individual criteria or overall scores
The role of the system analyst:

1. System Analyst as a consultant
2. System Analyst as a Supporting expert
3. System Analyst as an Agent of change → develop a plan for change & acts with others in
facilitating that change

156
MIS – Chapter 3
Feasibility study ‫دراسة الجدوي‬
❶Definition:
→ Study which investigates the information needs of prospective users & determines the resource requirements,
costs benefits, & feasibility of a proposed project.
❷Ways to conduct feasibility study = Ways to gather information

3- Examination of documents
4- Personal Observation
5- Development, simulation & observation of a model of the work activities
❸Categories:
Organizational F. Economic F. Technical F. Operational F.

How will the proposed Is concerned with Can be demonstrated if It is the willingness &
system supports the whether: reliable H/W & S/W are ability of:
strategic objectives of the • Expected cost saving capable of meeting the • Management
organization • Increased revenue needs of the proposed • Employees
‫مدي استعداد البٌئة المحٌطة داخلٌا‬ • Increased profits system or can be acquired • Customers
system ‫وخارجٌا الستٌعاب الـ‬ • Reduction in required or even developed by the • Suppliers & others
‫والعمل به‬ investment business in the required
And time »»» to operate, use &
≠ other types of benefits ‫ فً العالم‬H/W ‫اشترٌت أحسن‬ support a proposed
will exceed the costs of Windows ً‫ولكن ٌعمل عل‬ system
developing & operating a Unix ‫ وأنا عندي‬Unix ‫ولٌس‬ S/W ‫الزم ناس تعرف تستخدم ال‬
proposed system
Economic feasibility: »» Cost – benefit analysis
* Cost → tangible or intangible

Tangible »» ‫ جنٌه‬5000 ‫ بـ‬S/W ‫هشتري‬ -
Intangible »» cost ‫هتاخد من عندي ناس وتدربهم شهرٌن »» ٌعنً مش هٌشتغلوا معاٌا لمدة شهرٌن »» ماحسبتش الـ‬ -
* Cost → initial & running cost

initial cost ‫ اللً هشتري بٌها اسمها الـ‬-
running cost ‫ المتطلبات بعد كده زي مثال الحبر للطابعة والورق وخالفه اسمه الـ‬-
‫ من ثمن الحاجة نحسبها صٌانة‬%20 *
* Benefit → tangible or intangible

‫ ج مثال‬3000 ‫ » عدد العمالء ٌزٌد فً البنك وبنكسب من كل عمٌل‬tangible -
‫ العمالء هٌطفشوا‬, ‫ كوٌس‬S/W ‫ ألن مثال لو فً البنك مش عندي‬cost-benefit ‫ مش بحسبها‬Information system ‫ فً الـ‬-
tangible ‫ أكتر منه‬intangible ً‫ بٌبق‬S/W ‫ عندي فً الـ‬benefit ‫عشان كده الـ‬
157
MIS – Chapter 3
CASE Tools
What is meant by CASE tools ?
→ CASE = Computer Aided Software Engineering
Definition of CASE tools

→ Productivity automated support tools that have been created explicitly to improve the analysis, design,
development, & all other software life cycle phases’ activities.
Benefits of CASE tools

1. Increasing analyst productivity
2. Improving Analyst-user communication
3. Integrating Life Cycle Activities
4. Accurately assessing maintenance changes
Types of CASE tools

A. Upper CASE tools → used in system requirements, analysis & design phases
B. Lower CASE tools → generate computer source code, eliminating the need for programming the system
C. Integrated CASE tools ( I CASE tools ) → integrating the upper & lower CASE tools
Program Program Bugs

Design Installation
specification & errors
Questions Bugs
questions
Analysis Design Program Design & Program Installation

Coding testing
Requirements Program specs. Program source Completed

code system
Traditional System development life Cycle “ Before using CASE tools ‘

Design Design Flaws &
Questions Inconsistencies
Analysis Design Program Design & Program Installation

Coding testing
Requirements CASE design CASE repository Error free

entities computer system
CASE System development life Cycle “ After using CASE tools ‘

158
MIS – Chapter 3
Note:
1- Identifying problems, Opportunities & Objectives
2- Determining information requirements Engineering Upper CASE
3- Analyzing system need Phases tools
4- Designing the recommended system
5- Developing & documenting software

Constructions Lower CASE
6- Testing & maintaining the system
Phases tools
7- Implementing & evaluating the system

159
MIS – Chapter 4
The computer system concept

1) Input devices:
→ They convert data into electronic machine-readable form.
→ They include:
• Keyboards • Touch Screen
• Pens • Electronic Mice
• Optical Scanners
2) Processing :
 The Central Processing Unit ( CPU ) is the main processing component of a computer system.
 Its Arithmetic Logic Unit ( ALU ) performs all arithmetic & logic functions required in computer
processing
3) Output devices:
→They convert electric information produced by computer system into human- readable form.
→They include:
• Video display units • Printers
• Speakers • Plotters
4) Storage:
- It is the computer memory.
- It can be either Primary storage (RAM) or Secondary storage devices such as Magnetic disk
& Tape units
- These devices store data & program instructions needed for processing
5) Control :
- The control unit of the CPU is the control component of a computer system.
1. It interprets computer program instructions.
2. It transmits directions to the other components of the computer system.
6) Registers :
 They are small high-speed storage elements in a CPU .
 They used to temporary store parts of an instruction or data elements during the
execution of an instruction.

MIS – Chapter 4
Input Units CPU: Central Processing Unit

Output Units
Enter data & Communicate
instructions to CU: ALU:
& record
Interprets Performs Arithmetic
the CPU information
instructions & operations & Makes
directs processing Comparisons
 Keyboard
 Visual display
 Mouse
unit
 Touch screens Special Cache Primary Storage
- Store data &  Speakers
 Optical Purpose Memory
Registers program  Physical
Scanner
Instructions control
 Voice during
devices
recognition processing
Secondary Storage Devices
Magnetic disk, Tape units & Optical Disks ( CDs )
The computer system concept
Layers of a computer system:
Application Programs
Operating System
H/W
Software utilities
Computer User
Computer User

MIS – Chapter 4
Different buses connecting computer hardware
CPU Primary Storage
DATA BUS
ADDRESS BUS
CONTROL BUS
Input devices Output devices Secondary storage
Primary storage:
RAM ROM
Random Access Memory Read Only Memory
Volatile(non permanent) Non-volatile
Stores: user programs & Data Stores: Manufacturer software ( BIOS )
(Basic Input Output System)
Types : ROM, PROM, EPROM
* Non volatile storage = 2ry storage +ROM
Computer Speed
1) MIPS : ( Mega Instruction Per Second )
- GIPS : ( Gega Instruction Per Second )
2) FLOP : Floating Point Operation

-MFLOPS: Mega Floating Point Operation
-GFLOPS: Gega Floating Point Operation
3) Word size (Data Bus Size)

4) RAM Size
5) Cache Size
6) MHZ/ GHZ /THZ
Mega, Hertiz , Gega, Tera

MIS – Chapter 4
A coupled Processor :
 Some configuration provides a fault-tolerant capability in which multiple CPUs provide
a built-in backup to each other if one of them fails.
Parallel Processors :
 Tens, Hundreds, or even thousands of processors are organized in clusters or networks in
massively parallel processing ( MPP ) computers to execute several program instructions at the
same time.
RISC Processors :
 Many advanced technical workstations & other computers rely on a processor design called RISC
( Reduced Instruction Set Computer ), in contrasts with most current computers that use CISC
( Computer Instruction Set Computer ).

MIS –
Capabilities of the internet

1) Communication:
1.1- Electronic Mail ( e-mail ) : you can send or receive messages through the e-mail.
1.2- Usenet : A system of worldwide discussion groups, not on actual physical network.
1.3- Chat Session : A live interactive discussion where all parties are actually on the network,
interacting through their computers.
1.4- Mail list: is a collection of names and addresses used by an individual or an organization
to send material to multiple recipients.
1.5- Telnet : enables the user to communicate with their own system through the internet
when they are away from their home location
2) Retrieve :
1.1- FTP ( File Transfer Protocol )
 An Internet method that allows you to use a password to connect to another computer
on the Net & transfer its files to your computer.
 You can login as anonymous user with no password to get the public information
available on that machine.
 Anonymous FTP Site: A public FTP Site that doesn’t require using a special password to
gain access.
1.2- Archive: A server that lists the contents of anonymous FTP Sites.
1.3- Gopher : A server that organizes descriptions of information located on the internet in the
form of easy-to-use hierarchical menus.
1.4- Veronica : An Internet program that uses keywords to search Gopher menus.
1.5- WAIS ( Wide Area Information Servers )
» A retrieval method that searches databases on the internet & creates a menu of articles &
manuscripts containing the keywords provided
1.6- WWW ( World Wide Web )
» a set of interconnected electronic documents linked together over the internet.
Browser Software:
1. Web Browser :
→ Client computer program designed to locate & display information on the WWW.
2. Text-Based Browser :
→ A type of browser used with Web that displays only text information, either a line at a time or
a full screen at once.
3. Graphical Browser :
→ A type of browser used with Web that displays both text & images within a page
→ It includes:
• Title bar • Menu bar • Tool bar
• Status bar • Scroll bar • Net site
• Activity indicator • Hyperlinks • In-line image

MIS –
Origin of the Internet

A. Computers on the Internet
I. Client computer
» The computer that accesses the information stored on a computer server.
II. Server computer
» The computer that contains data & information that can be accessed by a client computer.
III. Client-Server Computing
» A type of computing in which all data & information retrieval requests & responses pass
over a network.
B. Internet Addresses → Who owns the internet ?

itaha@pegasus.utexas.edu
Individual name Host Computer Institution or Domain

( personal ID )
organization
* gov = governmental organization * edu = Educational institution
* com = Commercial Organization * eg= Country code for Egypt
Definitions :
Web Pages
→Interconnected electronic documents
Home Pages
→The first page of a web site, which identifies the site & provides information about the
contents of electronic documents that are part of the site.
Hyperlinks
→Words &/or symbols highlighted by blinking, color, or underline that connect one document
to another related documents on the web.
HTML ( Hyper Text Markup Language )

→ A set of commands that specify:
- The position, size, & color of text.
- The location of graphic information.
- The incorporation of sound & video.
→It also identify the words or images that will serve as hyperlinks to other documents.

MIS –
WWW’s URL Address

Method://host/path
Language used to manage Host computer Location of the page

the communication
or file ( directory )
process: http
URL ( Uniform Resource Locator )

→ A document address on the WWW.
HTTP ( Hyper Text Transfer Protocol )

→ The communication language employed by the WWW clients & servers and used by the
browser to connect to the URL address
Search engine
→ Program invoked from within the browser that scans the network by using a keyword or
phrase.
Web directory
→ Listing of information by category
→ Yahoo! is one of the most widely used directories.
→ List of directories in Yahoo! includes:
- Art - Business - Economy - Computer & Internet
- Education - Entertainment - Health ……….etc.
Surfing
→ Moving among a number of networks that are linked together or internetworked.
Internetworking
→ The linking of several networks.

Applied Statistics
Channels
of
Distribution

Applied Statistics
The Channels of Distribution
Product Strategy
 Product - bundle of physical, service, and symbolic attributes.
 Convenience products - items the consumer seeks to purchase frequently, immediately,
and with little effort.
 Shopping products - typically purchased only after the buyer has compared competing
products in competing stores.
 Specialty products - items that a purchaser is willing to make a special effort to obtain.
Product Classification
Classifying Business Goods

• Installations - major capital items, such as new factories, heavy equipment and
machinery, and custom-made equipment.
• Accessory equipment - includes less expensive and shorter-lived capital items than
installations and involves fewer decision makers.
• Component parts and materials - become part of a final product.
• Raw materials - farm and natural products used in producing other final products.
• Supplies - expense items used in a firm’s daily operation that do not become part of the
final product.

Applied Statistics
Marketing Strategy Implications

 In B2B, greater emphasis on personal selling for installations and many component
parts.
 May involve customers in new-product development.
 Advertising more commonly used to sell supplies and accessory equipment.
 Also a greater emphasis on competitive pricing strategies.
Product Lines and Product Mix

Product line - group of related products that are physically similar or are intended for the same
market.
Product mix – a company’s assortment of product lines and individual offerings.
Product Life Cycle
Stages of the Product Life Cycle

• Introduction stage – firm promotes demand for its new offering, informs the market
about it, gives free samples to entice consumers to make a trial purchase, and explains
its features, uses, and benefits.
• Growth stage - sales climb quickly as new customers join early users who are
repurchasing the item. Company begins to earn profits on the new product.
• Maturity stage - industry sales eventually reach a saturation level at which further
expansion is difficult.
• Decline stage - sales fall and profits decline.

Applied Statistics
Implications of the Product Life Cycle

• Marketer’s objective is to extend the life cycle as long as product is profitable.
Marketers’ goals:
– Increasing customers’ frequency of use
– Adding customers
– Finding new uses for product
– Changing package sizes, labels, and product designs
Stages in New Product Development

• Expensive, time-consuming, and risky.
• Only 1/3 of new products become success stories.
• Each step requires a “go or no-go” decision.
Product Development Stages

 Stage 1: Generating ideas for new offerings
 Stage 2: Screening
 Stage 3: Concept development and business analysis phase
 Stage 4: Product development
 Stage 5: Test marketing
 Stage 6: Commercialization

Applied Statistics
Product Failures
Product Identification
• Brand - name, term, sign, symbol, design, or some combination that identifies the
products of one firm and differentiates them from competitors’ offerings.
• Brand name - part of the brand consisting of words or letters included in a name used
to identify and distinguish the firm’s offerings from those of competitors.
• Trademark - brand that has been given legal protection granted solely to the brand’s owner.
Brand Categories
• Manufacturer’s brand - brand offered and promoted by a manufacturer. Examples:
Tide, Jockey, Gatorade, Swatch, and Reebok.
• Private or store brand - brand that is not linked to the manufacturer but instead carries
a wholesaler’s or retailer’s label. Examples: Sears’ DieHard batteries and Wal-Mart’s
Ol’Roy dog food & Member’s Mark brand
• Family branding strategy - a single brand name used for several related products.
Examples: KitchenAid, Johnson & Johnson, Hewlett-Packard, and Dole
• Individual branding strategy - giving each product within a line a different name.
Examples: Procter & Gamble products Tide, Cheer, and Dash.
Brand Loyalty
• Brand recognition - consumer is aware of the brand but does
not have a preference for it over other brands.
• Brand preference - consumer chooses one firm’s brand over
a competitor’s.
• Brand insistence - consumer will seek out preferred brand and
accept no substitute for it.

Applied Statistics
Brand Equity
• Brand equity - added value that a respected and successful name gives to a product.
• Brand awareness - product is the first one that comes to mind when a product
category is mentioned.
Valuable Brands
Packages and Labels

 Important in product identification and play an important role in a firm’s overall
product strategy.
 Choosing right package is especially important in international marketing.
 Must meet legal requirements of all countries in which product is sold.
 Universal Product Code - bar code read by optical scanner.
Distribution Strategy
Distribution channel - path through which products—
and legal ownership of them—flow from producer
to consumers or business users.
Physical distribution -actual movement of products
from producer to consumers or business users.

Applied Statistics
What is distribution?
– The process of deciding how to get goods in customer’s hands.
– One of the 4 P’s of marketing-place.
Distribution Channels
 A distribution channel is a set of independent organizations involved in the process
of making a product or service available to the consumer or business user .
 Used to move the customer towards the product
Why Use Marketing Intermediaries?

• Selling through wholesalers and retailers usually is much more efficient and cost
effective than direct sales
Distribution Channel Functions

1. Information: gathering and distributing marketing research and intelligence
information about the marketing environment.
2. Promotion: developing and spreading persuasive communications about an offer .
3. Contact: finding and communicating with prospective buyers .
4. Matching: shaping and fitting the offer to the buyer’s needs, including such activities as
manufacturing, grading, assembling, and packaging .
5. Negotiation: agreeing on price and other terms of the offer so that ownership or
possession can be transferred .
6. Physical distribution: transporting and storing goods .
7. Financing: acquiring and using funds to cover the costs of channel work.
8. Risk taking: assuming financial risks such as the inability to sell inventory at full margin .
The Two Components of Distribution

1. Selecting, developing and managing distribution channels.
2. Physically distributing goods and services through those channels.
Problems in doing these things:

- Which channel to select? Advantages and Disadvantages.
- Logistics – how does the product physically get there.
Number of Channel Levels

• Channel level can be described as distribution channels
• Direct marketing channel
• Retailer
• Wholesaler

Applied Statistics
Different options
Types of Channels
1. Direct Channels
- Product goes directly from producer to the consumer
Producer Consumer
Examples
- Trade Services - “Lemonade stand” - Integrated distribution
- Marketing agents
2. Indirect Channels
- Use distribution intermediaries who make a profit off holding on to the product
Producer Retailer Consumer
Producer Importer and/or Wholesaler Retailer Consumer
Examples
- Importers
 Foreign made product goes to exclusive importer who sells to retail outlets in a
geographical area
- Wholesaler
 Buy products from domestic manufacturers and sell them to retail stores and
other businesses
- Retailers
 Sell product to consumers

Applied Statistics
Advantages of the Wholesaler for the Retailer

1. Buy in bulk – lower costs per unit
2. Warehousing – hold on to greater amount of product in case needed
3. Risk bearing – retailer has less risk for owning large quantitiy of a product with
unknown or changing demand
4. Financing – retailers don’t have to borrow money to pay for extra stock, they can use
previous sales of smaller quantities to buy more
5. Buying – saves the time and effort of finding mulitple suppliers
6. Transporting – Wholesalers usually deliver without charge (in the price of the product)
7. Managing – Wholesalers will provide advice on inventory management and play a
major role in controlling inventory levels for their customers
8. Promoting – wholesalers pass on free promotional materials
9. Providing market information – they know whats hot, what not and what is on the
horizon
Retailer success
 The five “Rights”
1. The Right Merchandise
2. The Right Price
3. The Right Time
4. The Right Place
5. The Right Quantities
3. Specialty Channels
Any distribution that does involve a retail store
Producer Specialty Channel Consumer
Channel
Types of Specialty channels
1. Vending machines
2. The Internet
3. Catalogues
4. Telemarketing
5. Television Sales

Applied Statistics
Marketing Intermediaries
Channel Behavior
• Channel members are dependent upon one another and must work together for the
channel to operate successfully
• Members should understand and accept their roles, coordinate their goals and
activities, and cooperate to attain overall channel goals
Channel Conflict
Horizontal conflict is conflict between firms at the same level of the channel
 i.e. retailer to retailer
Vertical conflict, which is more common, refers to conflicts between different levels of
the same channel
 i.e. retailer to wholesaler
Channel Organization
A vertical marketing system (VMS)
 consists of producers, wholesalers, and retailers acting as a unified system
 One channel member either owns the others, has contracts with them, or wields so
much power that they all cooperate
• Corporate VMS combines successive stages of production and distribution
under single ownership
• Administered VMS coordinates successive stages of production and
distribution through the size and power of the parties
• Contractual VMS consists of independent firms at different levels of production
and distribution who join through contracts to obtain economies or sales
impact

Applied Statistics
Vertical Marketing Systems Focus on Final Customers
Level of Market Exposure

• Intensive
– selling through all responsible and suitable wholesalers and retailers who will
stock and/or sell the product
• Selective
– selling through only those middlemen who will give the product special
attention
• Exclusive
– selling through only one middleman in a particular geographic region

Applied Statistics
Intensive Distribution
- try to get the product sold in as many different places as possible
 Advantages
- Increase sales
- Increase recognition
 Disadvantages
- Lack of control of retail locations
- Intensive competition
 Product examples: Coke, Gum.
Selective Distribution
Try to control the distribution of product but not exclusively
 Advantages
- Some control over where product is sold
- Can still cover a large area
 Disadvantages
- Legal implications – purchase minimums
- Missing out on possible sales
Exclusive Distribution
Exclusive distribution contracts with one or two businesses in a certain area
 Advantages
- Control over image
- Favourable agreements
 Disadvantages
- Can severly limit sales
- Geographical problems

Applied Statistics
Integrated Distribution
When business owns both distribution and manufacturing
 Advantage
- Total control of product
- Keep sales revenue
 Disadvantage
- Handle all expenses
- Handle all difficulties
HORIZONTAL INTEGRATION
For example - Whole Foods buys Wild Oats to gain a bigger share of the health food market
Problem is monopoly creation, so governments watch these sales closely
Franchising
• Granting the right to engage in offering, selling, or distributing goods or services under
a marketing format which is designed by the franchisor
• The franchisor permits the franchisee to use its trademark, name, and advertising
• Higher survival rates
Disadvantages – Franchiser
• Distribution system – other systems can add conflict, Little Caesars going into K-marts
cases conflict with other Little Caesars in the area.
• Consistency
• Changing operation – Pizza Hut adding delivery
• Advertising expenditures
Franchisee – Advantages
Brand Name Value of brand name determined by
franchiser
Contracts Introduction of new products determined by
franchiser
Plans and Systems Your reliability tied to the rest of the system
Marketing Support
Reservation systems-Customers

Applied Statistics
A Franchise is Only as Strong as –
Franchise Organizations
• Powerful force in U.S. Retail (40%+ of all sales)
• Franchise Structures
• Compensation Arrangements
• Advantages
– Brand Name Recognition
– Standardized Processes and Procedures
– Avoids startup hassles – safer bet
– Quick access to capital and huge expansion potential
– Disadvantages
– Over-saturation and territorial issues
– Marketing fund disputes
– Quality (vs. Company-owned)
– Little room for “entrepreneurial creativity”
Channel Efficiency:
How Intermediaries Reduce the Number of Channel Transactions

Applied Statistics
Channel Cooperation & Conflict

• Channels are most effective when:
– Each member performs the tasks it does best.
– Channel members cooperate to attain overall channel goals.
• Channel Conflict
– Horizontal Conflict: conflict among firms at the same level of the channel (e.g.,
retailer to retailer).
• Example: Two retailers compete to carry a supplier’s “exclusive”
product.
– Vertical Conflict: conflict between different levels of the same channel (e.g.,
wholesaler to retailer).
• Example: Manufacturer competes with retailer in selling product to
target market.
• Some conflict can be healthy competition.
Channel Innovations
• Horizontal Marketing System
– Two or more companies at one channel level join together to achieve a
marketing goal.
• Joint Ventures
• Alliances and Partnerships
• Co-Marketing, Co-Distribution and Co-Branding
• Multichannel Distribution System
– Reaching customer segments through multiple marketing channels. (i.e. hybrid
system)
• Example: You can buy Starbucks coffee from Starbucks’ stores or from
the Supermarket
• Problems with MDSs?
Disintermediation
 Occurs when producers sidestep intermediaries and sell directly to final buyers, or
when radically new types of channel intermediaries displace traditional ones.
 The Internet has made the disintermediation of many traditional retailers possible.
 Disintermediation Example
Calyx & Corolla sells fresh flowers and plants direct to consumers over the phone and
via the Web, drastically reducing the time it takes flowers to reach consumers via
conventional retail channels.
(Non-) Disintermediation Example

Black & Decker chose to avoid disintermediation by not using the Internet to sell their products.
Instead B&D directs consumers to stores that carry its products.

Applied Statistics
Outsourcing Distribution
• Company sales force vs. Manufacturer’s Rep
– Company sales force
• Employed directly by the firm in outside or inside sales capacity.
– Manufacturer’s agency/representative
• Independent firms whose sales people handle several companies’
products simultaneously
Primarily a question of size and life cycle stage.
International Channel Decisions

• Every country has its own unique distribution system that has evolved over time.
• Examples
– Japan:
• complex, multi-layered distribution systems
• hard for Western firms to penetrate.
– India and China:
• inefficient distribution systems despite their enormous size.
• “separate countries” within a country
• Poorer but improving transportation infrastructures
Public Policy and Distribution

• Exclusive distribution & dealing (“upstream” or “downstream”)
• Exclusive territorial agreements (franchising)
• Tying agreements (illegal)
Marketing Logistics
• Definition: The physical flow of goods, services, and related information from points of
origin to points of consumption.
• Includes:
– Inbound distribution
– Outbound distribution
– Reverse distribution
Inventory Management
• Must strike a balance between
– too much and too little inventory
– buffers and shortages
– carrying costs and ordering/setup costs
• Just-in-time inventory systems
• RFID or Smart Tag technology

Applied Statistics
RFID – The Wave of the Future?

Key benefits
• fewer stock-outs
• reduced logistics labor costs
• more accurate inventory information
• more efficient flow of goods
• happier customers
Retailers may soon mandate supplier use of RFID.
Transportation
• Trucks
• Railroads
• Ships
• Pipelines
• Air
• Internet
• Intermodal transportation
Intermodal Transportation
Intermodal transportation combines two or more modes of transportation. Fishyback = water
and trucks; Piggyback = trucks and rail; Trainship = water and rail; Airship = air and water.
Third-Party Logistics
Most small and medium size companies outsource transportation to UPS or other logistics
providers.

Applied Statistics
Applied
Statistics

Applied Statistics
Applied statistics
What is the aim of statistics?
You have a problem “as consumption, import, export,….etc.”  collect data about this
problem ( historical data )  make a model to summarize all data  analyze & evaluate this
data 
predict the future
If the problem is solved → right policy so, proceed your policy If the problem is not solved → change your policy
So, evaluate your recent policy
What is the difference between statistics & math?

Math Statistics
model Y = a + b x (straight line equation) Y = a + b x + Ui
e.g. Y = 200 + 0.8 x Where Ui = error
where Y = consumption & x = income e.g. Y = 200 + 0.8 x + Ui
if x = zero  minimum consumption
Error The equation contains no error factor The equation contains error factor
But; we have to minimize the error as we can
Bias Biased Not biased
( we make mixed solution & take a sample expresses the population)
Fluctuation No fluctuation. So, not applicable There is a fluctuation. So, it is applicable
Sources of error:
1- Gap between sample & population
 Sample can mostly expresses the population but not by 100 % , so the gap is found.
2- Sample doesn’t gather all factors affecting the problem
e.g. consumption is affected by income, kids, consumer behavior & position.
Sources of data:
1- Population 2- Published data 3- Sample 4- Quota
❶ Population
 collect the data from all individual in the population
e.g. to know the average salary in Egypt, you have to ask everyone in Egypt about his salary
 advantage : accurate result
( but not by 100 % due to wrong time of collecting data )
 disadvantage: consumes cost & time

Applied Statistics
❷ Published data
 From different sources as;
o Central Agency for Public Mobilization and Statistics ‫الجهاز المركزي للتعبئة العامة واالحصاء‬
o Central Bank ‫البنك المركزي‬
o The Council of Ministers Information Center ‫مركز معلومات مجلس الوزراء‬
o FAO Library ‫مكتبة الفاو‬
o Investment Authority‫هٌئة االستثمار‬
 Advantage: save cost & time
 Disadvantage: less accurate than population due to:
A) Difference in definitions of variable
e.g. definitions of Unemployment variable
1- Working-age: from 18 to 60 years
2- Ability to work
3- Looking for work for 3 months
B) low income of employees working in this survey, which lead to biased result & not accurate
data.
❸ Sample:
 the most important source of data
Sampling techniques:
Simple random Stratified ‫ طبقية‬random sample Systematic ‫المنتظمة‬ Cluster ‫( عنقودية‬multi-stage)
sample random sample random sample
If the individual in the If the population is divided to If the variable If the population under
condition
population are different groups. There’s a under the study is study is extended (huge)
equally likely (have homogeneity inside each group & a periodic
the same chance to be heterogeneity between groups (repeated after
chosen) specific time)
‫الجائزة الكبري‬ e.g. People in Egypt = 10,000 e.g. temperature e.g. Prevention of female to
‫وجمال الشاعر‬ - Businessmen = 1500 drive cars in KSA.
- Professionals = 3000 To know the reasons, we
- Employed = 5000 make the following:
- Unemployed = 500
)‫فقٌر‬، ً‫تبوك(غن‬
‫جدة‬ N
example
Sample of B = 1500/10000 X200=30

Sample of P = 3000/10000 X 200 = 60 )‫فقٌر‬، ً‫(غن‬
Sample of E = 5000/10000 X 200 =100 W M E ‫الظهران‬
Sample of U = 500/10000 X 200 = 10 )‫فقٌر‬، ً‫الرٌاض (غن‬ )‫فقٌر‬، ً‫(غن‬
--------
200 S
‫جٌزان‬
)‫فقٌر‬، ً‫(غن‬

Applied Statistics
❹ Quota:
 used for rare phenomena
‫باخد اللً اٌدي بتقع علٌه – بستخدمها لما بتكلم عن ظاهرة نادرا ما تحدث‬
- Quota is : selected, not random & not accurate
- Note that random means that I don’t share in selecting the individuals
Comparison between sample & quota:

Sample Quota
Has a frame There’s no frame
Random Not random
Accurate Not accurate
Types of data:
1- Descriptive (Qualitative)
 can’t enter mathematical operations & if enters, the result will have no meaning.
e.g. ID no. , Phone no. , nationality, ……etc.
2- Quantitative
 can enter mathematical operations
Types of variables:
Discrete variable (not differentiable ) Continuous variable (differentiable)
Definition It is a countable variable It is a variable which we obtain by

Or: it is a variable whose value measuring
doesn’t change in a very short period Or: It is a variable whose value is
of time. changeable within a short period of time
Or: It is a variable whose value Or: It is a variable which takes many values
doesn’t take any value between two between two successive numbers
successive numbers
e.g. - Absence days - Age - Height - Weight

- No. of kids in the family - Marks - Speed - level of rain
- No. of registered courses in fall
Academy

Applied Statistics
So;
Data
Descriptive Quantitative
Discrete variable Discrete continuous

e.g. nationality e.g. no. of kids in family e.g. height
Central measures (position measures) (location measures) (Averages)

Purpose: to summarize a large no. of data with one value which is the central value.
Central measures are:
1- Mode ‫المنوال‬
2- Mean ً‫الوسط الحساب‬
3- Median ‫الوسٌط‬
Mode
 It is a value which is the most frequentile (repeated more than the others)
e.g. Eye color
 Notes:
1- The mode is the only statistical measure which may have more than one value i.e.
mode1 , Mode2 ,…. etc.
2- The mode is used for the descriptive data & we don’t prefer to apply this measure on
the quantitative data because it may be misleading.
e.g. student marks : 26, 27, 30, 2, 28, 22, 23, 2, 21, 24
Mode is 2  which doesn’t reflect the fact that most of students have good marks
So, it is not accurate & give misleading results.
Mean ( x̅ ) “ only with quantitative data”
 It is the sum of all values divided by its numbers.
X1 + X2 + X3 + ………. Xn
x̅ =
n
Notes:
1- The mean is considered to be the best central measure when the data is quantitative &
symmetric
2- The mean is affected by the extreme value, therefore we don’t prefer to apply the
mean when the data contains any extremes – but in this case it is recommended to
apply the median.

Applied Statistics
Def. of extreme value (extreme outliers)

 it is the value which is out of the other values & the no. of its repetition is very few.
Median It is a value on a distance 50% from the beginning after arranging the data in a
ascending or descending order
Steps:
1- arrange the data
𝑛+1
2- order of the median = 2
3- the value of the median is the value in the order obtained in step 2.
General Notes:
1- the most accurate measure is the mean, but in case of extreme it is not preferred.
2- Median can be used with descriptive ordered data, but must be odd number.
Types of Quantitative data:
Skewed to the left Symmetric skewed to the right

50% 50%
Mean ≈ Median ≈
Mean < Median < Mode Mode < Median < Mean
Mode
- if the skewed data is closed to zero (up to +1 or -1)  symmetric

Symmetric
- Exceeds +1  skewed to the right
- Less than -1  skewed to left. -1 +1
0
Skewed to left Skewed to right
۩ If the data contains an extreme value, then we are sure that the data is skewed & the best
central measure will be the median
- But if the data doesn’t contain any extremes, it doesn’t mean that it is symmetric – but it
may be symmetric or skewed & to find that we have to use the help of Stem & Leaf
- Stem & leaf : used to differentiate between symmetric & skewed data.
Conditions to apply the stem & leaf:
1- The sample size must be large (not less than 25 observations)
2- The data must be spread on large scale to find many intervals (at least 5
intervals)

Applied Statistics
The dispersion measures

 Statistical measures which used to measure the distance between the observation &
the central measures.
 It must be +ve value
 It can’t be applied on descriptive data “doesn’t contain distance”  applied only on
Quantitative data.
 It is equal to zero when all data are equals ( no distance between them )
Types of dispersion measures
Absolute dispersion measure Relative dispersion measure
Used to describe the data only. Used to compare between different
- include: groups to find which group is the most
1- Range homogenous.
2- IQR  used with skewed data - include:
3- Average deviation CV1 & CV 2
4- variance
5- standard deviation  with symmetric
data
Range:
= maximum value – minimum value
Disadvantages:
1- It doesn’t satisfy the definition of the dispersion measure
2- It doesn’t take all values into consideration
3- It influenced by the extreme values
Inter-quartile range ( IQR )

= Q3 – Q1
- The first quartile
 It is a value on a distance 25 % from the beginning after arranging the data in an
ascending order.
- The third quartile
 It is a value on a distance 75 % from the beginning after arranging the data in an
ascending order.
Disadvantages:
Not used with symmetric data
Box-Plot:
Used to find if a specific value is considered to be extreme or not.
Lower fence (LF) = Q1 – 1.5 IQR

Upper fence (UF) = Q3 + 1.5 IQR
LF UF
Q1 Q3
F

Applied Statistics
Why we are not using the Variance in comparing the homogeneity between two symmetric
groups?
 Because:
1- The variance changes the unit measures
2- & affected by the difference between the values of means
 In comparing between different groups we always depend on CV2 in making this

comparison unless one case when all groups are symmetric we have to depend on CV1 .

Applied Statistics
Regression
→ It is used to find the function form of the relation between the dependent variable ( Y ) & the
independent variable ( X ) to use this functional form to predict the value of “Y” in the future
corresponding to a specific value of “X” .
Types of regression:
1- Simple regression
Contain 1 independent variable e.g. consumption & income
Y = β0 + β1X + U
Model of population
But we act on a sample
2- Multiple regression
Contain more than 1 independent variable e.g.
Y = β0 + β1 X1 + β2 X2 + ……… + βk Xk + U
consumption & income, prices, consumer behavior.
Where;
Y = dependent variable
β0 = constant ( Y- intercept )
X = independent variable
β1 = regression coefficient → ( elasticity in economics ) ( slope in math )
U = random error
In math Y = m X + C
Deterministic model
→ it is the math model which doesn’t contain any errors
Y=mX + C
Stochastic ( Probabilistic ) model
→ it is the statistic model which contains the error term
Y = β0 + β1X + U
Error:
Consumption
= actual value – estimated value
* sum of errors always must equal to zero. Estimated value
Sources of error term:

Actual value
1- The gap between the sample & the population
2- The effect of the excluded variables Actual value
3- The error in measurement ‫لو سؤلت واحد عن مرتبه مش هٌقولك بؤمانة‬

Estimated value
4- The error in the functional form ‫الوحٌد اللً انت مسإول عنه‬
“ we assumed that the relation is linear” Income

Applied Statistics
Sample model:
Y=a+bX +e
- We derive the role of a & b in the regression line by minimizing the sum square of the errors (
𝑒 2 ) not the sum of errors ( 𝑒 ) ……………… why ?
→ Because the sum of errors always equal to zero
Least squares:
𝑐𝑜𝑣 ( 𝑋1 𝑌 ) 1 1
①b= 𝑣𝑎𝑟 ( 𝑋 )
cov ( X1 Y ) = 𝑛−1 𝑋 − 𝑋 (𝑌 − 𝑌) = 𝑛−1 [ 𝑋𝑌 −
𝑛𝑋 𝑌]
1 1
Var (X) = 𝑛−1 (𝑋 − 𝑋 ′ )2 = 𝑛−1 [ X2 – n 𝑋 2
]
𝑋−𝑋 (𝑌−𝑌 )
b= (𝑋−𝑋 ) 2
②a=𝑌–b𝑋
b ً‫ بتعتمد عل‬a ‫ أوال ألن‬b ‫الزم أجٌب‬
e.g.
Experience (X-𝑿) (X – 𝑿)2 No. of units (Y – 𝒀) (X-𝑿)(Y-𝒀)
(X) sold
(Y)
7 2.8 7.84 13 3.4 9.52
2 -2.2 4.84 6 -3.6 7.92
1 -3.2 10.24 7 -2.6 8.32
5 0.8 0.64 10 0.4 0.32
6 1.8 3.24 12 2.4 4.32
21 48
𝑋 = 5 = 4.2 𝑌= 5
= 9.6
Total 26.80 30.40
𝑋−𝑋 (𝑌−𝑌 ) 30.4

b= (𝑋−𝑋 ) 2
= 26.8 = 1.13
a = Y’ – b 𝑋 = 9.6 – (1.13)(4.2) = 4.854
∴ 𝑙𝑒𝑎𝑠𝑡 𝑠𝑞𝑢𝑎𝑟𝑒 𝑟𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝑙𝑖𝑛𝑒:

No. of units sold = 4.854 + 1.13 experience
Comment:

Applied Statistics
Notes:
𝑐𝑜𝑣 (𝑋1𝑌) 𝑐𝑜𝑣 (𝑋1𝑌)
r= b= 𝑣𝑎𝑟 (𝑥)
𝑣𝑎𝑟 𝑋 𝑣𝑎𝑟 (𝑌)
r b
-1 +1 -∞ +∞
1- r & b must have the same sign then to find if the relation is direct or inverse we can
depend on the sign of r or the sign of b
2- To find if the relation is weak or strong, we have to depend on r only because the value
of b is limited from -∞ to +∞ .
3- To predict the value of Y according to a specific value of X, we have to depend on b
only.
Problem:
n=8 𝑥 = 920 X2 =124500 Y = 885 Y2 = 115075
b = 0.94
920 885
→𝑋= 8
= 115 𝑌= 8
= 110.625
𝑐𝑜𝑣 (𝑋1𝑌) 1 1
∵b= 𝑣𝑎𝑟 (𝑋)
= 0.94 & var (x) = 𝑛−1 ( X2 - n𝑋) = 7 [ 124500 – 8 (115)2 ] =
2671.43
∴ cov (X1Y) = 0.94 X 2671.43 = 2511.14
𝑐𝑜𝑣 (𝑋1𝑌) 1 1
∵ r= & var(Y) = ( Y2 – n𝑌2) = [ 115075 – 8 (110.625)2 ] = 4201.4
𝑣𝑎𝑟 𝑋 𝑣𝑎𝑟 (𝑌) 𝑛−1 7
2511 .14
∴r= 2671 .43 𝑋 4201 .4
= 0.75
There is a linear direct strong relationship between ……….
a=𝑌–b𝑋
= 110.625 – 0.94 (115) = 2.525
∴ Y = 2.525 + 0.94 X
𝑌x=10 = 2.525 + 0.94 (10) = 51.935
Comment:

Applied Statistics
Determinant coefficient ( R2 )
→ It measures the percentage change in ( Y ) which can be explained by the independent
variables (X’s).
* In simple regression model:

R2 = (r)2
R2 r
0 +1 -1 +1
e.g (Problem 12 )
𝑥 = 63 𝑦 = 210 𝑥𝑦 = 2084 𝑦 2 = 6820 R2 = 0.7921
n=7
There is an inverse relation between X & Y
↓
2
r = - 𝑅 = - 0.7921 = - 0.89
there is a linear inverse strong relation between …………..
𝑋𝑌 − 𝑛𝑋𝑌
b= 2
𝑋 –n𝑋
2
𝑐𝑜𝑣 (𝑋1𝑌) 1
r= cov (X1 Y) = 𝑛−1 ( 𝑋𝑌 - n 𝑋 𝑌 )
1
= [ 2084 – 7( 9 )( 30 ) ] = - 32.33
6
1
var (Y) = ( Y2 - n 𝑌2)
𝑛−1
1
= 6 [ 6820 – 7 (30)2 ] = 86.67
−32.33 −32.33 (−32.33)
∵ r= = - 0.89 ∴ (- 0.89 )2 = 𝑉 (86.69)
∴ Vvar(X) = 15.23
𝑉 (86.69)
𝑐𝑜𝑣 (𝑋1𝑌) −32.33

b= 𝑣𝑎𝑟 (𝑋)
= 15.23
= - 2.123
a=𝑌- b𝑋
= 30 – (-2.123)(9) = 49.107
Y = 49.107 – 2.123 X , minus sign indicates inverse relationship

Applied Statistics
Probability
Axioms of probability:
1- 0 ≤ P (A) ≤ 1
 If P (A) = 0 → impossible event
‫الزم تتحقق التالت شروط معا عشان اقدر‬
 If P (A) = 1 → sure event
Probability ‫احسب الـ‬
𝑛
2- 𝑖=1 P (Ai) =1
3- P (𝐴) = 1 – P (A)
In probability: Only: OR = U = addition

- No subtraction - Addition AND = U = Multiplication
- No division - Multiplication
Sample space :
→ It is a set of all possible outcomes when we make an experiment.
𝑛 ( 𝑓𝑒𝑚𝑎𝑙𝑒𝑠 )
e.g. P ( female ) =
𝑛 (𝑆)
e.g. when you flip a coin , S = { H , T } → 2
e.g. when you flip 2 coins , S = { HH , HT , TH , TT } → 4
e.g. when you flip 3 coins , S = { HHH , HHT , HTH , THH , HTT , THT , TTH , TTT } → 8
* Number of events in a sample space n ( s )

n ( s ) = ( no. of faces ) no. of trials
e.g. when you flip a coin , n ( s ) = ( 2 ) 1 = 2

e.g. when you flip 2 coins , n ( s ) = ( 2 ) 2 = 4
e.g. when you flip 3 coins , n ( s ) = ( 2 ) 3 = 8

Applied Statistics
Standard Normal Distribution Table
0 z
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
0.0 .0000 .0040 .0080 .0120 .0160 .0199 .0239 .0279 .0319 .0359
0.1 .0398 .0438 .0478 .0517 .0557 .0596 .0636 .0675 .0714 .0753
0.2 .0793 .0832 .0871 .0910 .0948 .0987 .1026 .1064 .1103 .1141
0.3 .1179 .1217 .1255 .1293 .1331 .1368 .1406 .1443 .1480 .1517
0.4 .1554 .1591 .1628 .1664 .1700 .1736 .1772 .1808 .1844 .1879
0.5 .1915 .1950 .1985 .2019 .2054 .2088 .2123 .2157 .2190 .2224
0.6 .2257 .2291 .2324 .2357 .2389 .2422 .2454 .2486 .2517 .2549
0.7 .2580 .2611 .2642 .2673 .2704 .2734 .2764 .2794 .2823 .2852
0.8 .2881 .2910 .2939 .2967 .2995 .3023 .3051 .3078 .3106 .3133
0.9 .3159 .3186 .3212 .3238 .3264 .3289 .3315 .3340 .3365 .3389
1.0 .3413 .3438 .3461 .3485 .3508 .3531 .3554 .3577 .3599 .3621
1.1 .3643 .3665 .3686 .3708 .3729 .3749 .3770 .3790 .3810 .3830
1.2 .3849 .3869 .3888 .3907 .3925 .3944 .3962 .3980 .3997 .4015
1.3 .4032 .4049 .4066 .4082 .4099 .4115 .4131 .4147 .4162 .4177
1.4 .4192 .4207 .4222 .4236 .4251 .4265 .4279 .4292 .4306 .4319
1.5 .4332 .4345 .4357 .4370 .4382 .4394 .4406 .4418 .4429 .4441
1.6 .4452 .4463 .4474 .4484 .4495 .4505 .4515 .4525 .4535 .4545
1.7 .4554 .4564 .4573 .4582 .4591 .4599 .4608 .4616 .4625 .4633
1.8 .4641 .4649 .4656 .4664 .4671 .4678 .4686 .4693 .4699 .4706
1.9 .4713 .4719 .4726 .4732 .4738 .4744 .4750 .4756 .4761 .4767
2.0 .4772 .4778 .4783 .4788 .4793 .4798 .4803 .4808 .4812 .4817
2.1 .4821 .4826 .4830 .4834 .4838 .4842 .4846 .4850 .4854 .4857
2.2 .4861 .4864 .4868 .4871 .4875 .4878 .4881 .4884 .4887 .4890
2.3 .4893 .4896 .4898 .4901 .4904 .4906 .4909 .4911 .4913 .4916
2.4 .4918 .4920 .4922 .4925 .4927 .4929 .4931 .4932 .4934 .4936
2.5 .4938 .4940 .4941 .4943 .4945 .4946 .4948 .4949 .4951 .4952
2.6 .4953 .4955 .4956 .4957 .4959 .4960 .4961 .4962 .4963 .4964
2.7 .4965 .4966 .4967 .4968 .4969 .4970 .4971 .4972 .4973 .4974
2.8 .4974 .4975 .4976 .4977 .4977 .4978 .4979 .4979 .4980 .4981
2.9 .4981 .4982 .4982 .4983 .4984 .4984 .4985 .4985 .4986 .4986
3.0 .4987 .4987 .4987 .4988 .4988 .4989 .4989 .4989 .4990 .4990
3.1 .4990 .4991 .4991 .4991 .4992 .4992 .4992 .4992 .4993 .4993
3.2 .4993 .4993 .4994 .4994 .4994 .4994 .4994 .4995 .4995 .4995
3.3 .4995 .4995 .4995 .4996 .4996 .4996 .4996 .4996 .4996 .4997
3.4 .4997 .4997 .4997 .4997 .4997 .4997 .4997 .4997 .4997 .4998
3.5 .4998 .4998 .4998 .4998 .4998 .4998 .4998 .4998 .4998 .4998

Applied Statistics
Rules
r=  cov (X1Y) = ( X − 𝑋 )( Y − 𝑌 )
𝑛−1
𝑣𝑎𝑟 𝑋 𝑣𝑎𝑟 (𝑌) 1
= 𝑛−1 𝑋𝑌 − 𝑛 𝑋𝑌
𝑋− 𝑋 𝑌−𝑌
r = 1 2
𝑥 −𝑋
2
𝑌− 𝑌
2  var (X) = 𝑛−1 𝑋−𝑋
1
= 𝑛−1 𝑥 2 - n𝑋 2
𝑋𝑌−𝑛 𝑋 𝑌 1
r=  var (Y) = 𝑌−𝑌 2
𝑥 2− 𝑛 𝑋2 𝑌2− 𝑛 𝑌2 𝑛−1
1
= 𝑛−1 𝑌 2 - n𝑌 2
6 𝐷2
rs =1– where;
𝑛 ( 𝑛 2 −1 )
D : difference between corresponding ranks
Exact (Perfect) - 1 - 0.7 - 0.4 0 0.4 0.7 +1 Exact

inverse Strong Weak Weak (Perfect) Direct
Moderate Moderate Strong
inverse inverse direct direct
There is no linear relationship
Y = 𝛽0 + 𝛽1X + U
Where;
U = random error
Y=a+bX +e
Least squares: 1 b
 cov ( X1 Y ) = 𝑋 − 𝑋 (𝑌 − 𝑌)
𝑐𝑜𝑣 ( 𝑋1 𝑌 ) 𝑛−1
① b = 𝑣𝑎𝑟 ( 𝑋 ) 1
= 𝑛−1 𝑋𝑌 − 𝑛 𝑋 𝑌
𝑋−𝑋 (𝑌−𝑌 )
b= -∞ +∞
(𝑋−𝑋 )2
1 2
𝑋𝑌−𝑛 𝑋𝑌  Var (X) = 𝑛−1 (𝑋 − 𝑋)
b= 𝑥 2− 𝑛 𝑋2 1
= 𝑛−1 X2 – n 𝑋 2
②a=𝑌–b𝑋

Applied Statistics
R2 = (r)2
R2
0 +1
𝑛 (𝑋)
P (X) = 𝑛(𝑆)
n(s) = ( No. of faces )no. of trials
E (X) = 𝜇 = 𝑋 . Pr 𝑋
* var (X) = 𝜎 2 = E (𝑋 2 ) – 𝐸 (𝑋) 2
= E (𝑋 2 ) - 𝜇2
Note: E (𝑋 2 ) ≠ 𝐸 (𝑋) 2
E (𝑿𝒓 ) = 𝑿𝒓. Pr (X)
* Normal distribution (X): ( Systematic , normal , bell shaped )
(1) Pr ( - ∞ < 𝑋 < ∞ ) = 1

(2) Pr ( - ∞ < 𝑋 < 𝜇 ) = Pr ( 𝜇 < 𝑋 < ∞ )
σ σ
(3) It has a symmetric property
‫خاصٌة التماثل‬
-∞ -𝜇 𝜇 𝜇 ∞
Standard Normal ( Z )
(1) Pr ( - ∞ < 𝑍 < ∞ ) = 1 𝜎 𝜎

(2) Pr ( - ∞ < 𝑍 < 0 ) = Pr ( 0 < 𝑍 < ∞ ) = 0.5
(3) It has a symmetric property
-∞ −1 0 +1 ∞
* Standard Normal Distribution ( Z ):
𝑛𝑜𝑟𝑚𝑎𝑙 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 –𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑣𝑎𝑙𝑢𝑒 "𝑚𝑒𝑎𝑛 "
Z=
𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛
𝑿− 𝝁
Z=
𝝈
1 2
var (X) = 𝑛−1 𝑋− 𝜇

Applied Statistics
Theoretical Questions
Define the following terms briefly:

4- The central tendency measures
 Statistical measures which used to summarize a large no. of data with one value which is the
central value.
5- The dispersion measures

 Statistical measures which used to measure the distance between the observation & the
central measures.
6- The first quartile

 It is a value on a distance 25 % from the beginning after arranging the data in an ascending
order.
7- The continuous random variable. State some examples

 It is a variable which we obtain by measuring
Or: It is a variable whose value is changeable within a short period of time
Or: It is a variable which takes many values between two successive numbers
e.g. - Age - Height - Weight - Marks - Speed - level of rain fall
8- The discrete variable. State some examples

 It is a countable variable
Or: it is a variable whose value doesn’t change in a very short period of time.
Or: It is a variable whose value doesn’t take any value between two successive numbers
e.g. - Absence days
- No. of kids in the family
- No. of registered courses in Academy
9- The third quartile

 It is a value on a distance 75 % from the beginning after arranging the data in an ascending
order.

Applied Statistics
State whether the following statements are true or false and give a brief explanation ( Note that no marks
will be given for
a simple true/false answer )
(1) If the distribution of the data is skewed, then the best central measure is the mean and the
best dispersion measure is the variance.
Wrong Correct Reason
- Mean - Median - Because the mean is affected by the
extreme value
- Variance - Inter-quartile range - Because the variance changes the unit
measure & affected by the difference
between values of the means
(2) The standard deviation can have a negative value and can’t be zero
- Negative value - Positive value - Because SD measures the distance which
always being positive
- Can’t be zero - Can be zero  SD can equal zero if all variables are
equals, so no distance will be found.
(3) We always depend on the value of the variance in comparing the homogeneity between the
different groups
- Variance - CV2 & CV1 - Because the variance changes the unit
measures & affected by the difference
between the values of means
(4) The first quartile is the value on the distance 25 % from the beginning after arranging the data
in the descending order
- Descending - Ascending - It is a value on a distance 25 % from the
beginning after arranging the data in an
ascending order.
25% (1st Q) Ascending

Applied Statistics
(5) If the value of the mean is greater than the value of the median, and the value of the median
is greater than the value of the mode and there is a great difference between their values,
then the data is skewed to the left.
- Left - Right 50%
Mode < Median < Mean
Skewed to the right
(6) The first quartile is the value on the distance 25 % from the beginning.
- Incomplete - after arranging the
definition data in an ascending
order. 25% (1st Q) Ascending
(7) In the descriptive data which is not ordered, the best central measure is the mode and the
best dispersion measure is the quartile range.
- The quartile range - No dispersion - The descriptive data doesn’t contain a
measure distance to be measured, so no
dispersion measure will be available.
(8) If the data doesn’t contain any extreme value then the distribution of this data is symmetric.
- Symmetric - May be symmetric - If the data doesn’t contain any extreme
or skewed value then the distribution of this data
can be symmetric or skewed
* And to find that we have to use the
help of Stem & Leaf.

Applied Statistics
Answer the following questions briefly:

(1) What are the characteristics of a set of data for which the mean, median and mode are
identical?

Symmetric
Mean = Median =
Mode
(2) Which of the central tendency measures can assume more than one value for a data set? And
which can be calculated for quantitative data only ?
 The mode is the only statistical measure which may have more than one value i.e. mode1 ,
Mode2 ,…. etc.
 The mean is the central measure which can be calculated for quantitative data only.
(3) What is the difference between the absolute and relative dispersion measures?

Absolute dispersion measure Relative dispersion measure
Used to describe the data only. Used to compare between different groups to
- include: find which group is the most homogenous.
Range, IQR, Average deviation, variance, & - include:
standard deviation CV1 & CV 2
(4) What are the four sampling techniques? What are the suitable conditions to apply each of
them?

Simple random sample Stratified random sample Systematic random Cluster (multi-
sample stage) random
sample
If the individual in the If the population is divided If the variable under If the population
condition
population are to different groups. There’s the study is periodic under study is
equally likely (have the a homogeneity inside each (repeated after extended (huge)
same chance to be group & a heterogeneity specific time)
chosen) between groups

Applied Statistics
(5) Explain the relationship between the mean, median and mode for symmetric and skewed
data. Illustrate these relationships with graphs

Skewed to the left Symmetric skewed to the right
50% 50%
Mean ≈ Median ≈
Mean < Median < Mode Mode < Median < Mean
Mode
(6) Why we are not using the standard deviation in comparing the homogeneity between two
symmetric groups?
 Because:
3- The standard deviation changes the unit measures
4- & affected by the difference between the values of means
(7) What are the roles of the Box-plot and the Stem-Leaf?

Box-plot Stem-Leaf
Role To find if a specific value is considered to To differentiate between symmetric &
be extreme or not. skewed data.

Applied Statistics
Problems
Problem (1)
If the age of a sample of seven employees of a fast-food outlet (X) are as follows:
19, 19, 65, 20, 21, 18, 20
1) Compute the best central measure and the best absolute dispersion measure
2) If the oldest employee is retired, compute the best central measure and the best absolute
dispersion measure
(1)  Data seems to contain high extreme value, so the data is skewed to the right.
Therefore;
- The best central measure is the median
- The best absolute dispersion measure is the IQR
 First we have to arrange the data as follow;

18 , 19, 19, 20, 20, 21, 65
 To calculate the median

𝑛+1 7+1 8
- Order of the median = 2
= 2
= 2
=4
- Value of median = 20 year
 To calculate the IQR = Q3 – Q1

3 3 3
 Order of Q3 = 4 𝑛 + 1 = 4
7+1 = 4
8 =6
 Value of Q3 =21
1 1
 Order of Q1 = 4 𝑛+1 = 4
8 =2
 Vale of Q1 = 19
∴ IQR = Q3 – Q1 = 21 – 19 = 2
20
-2 +2
18 year 22 year
We notice that all values of ages occurs between 18 & 22 except that of extreme value

Applied Statistics
(2) When the oldest employee is retired , the data will be:
18, 19, 19, 20, 20, 21
 Data seems to be closed to each other  symmetric
∴ The best central measure  Mean
The best absolute dispersion measure  Standard deviation
18+19+19+20+20+21
 Value of mean = 6
= 19.5
Xi 2
1 2 Xi - x̅ ( Xi - x̅ )
 S= 𝑛−1
(Xi − x) 19 - 0.5 0.25
19 - 0.5 0.25
20 0.5 0.25
∴ S = 5.5/5 = 1.048
21 1.5 2.25
18 - 1.5 2.25
20 0.5 0.25
Mean = 19.5 5.5
-1 +1
18.5 20.5
We notice that most of data ranges between 18.5 & 20.5

Applied Statistics
Problem (2)
If the person enters a gym-club he must pay L.E. 20 and he has to pay L.E. 10 for each game he plays.
From the experience of the owner of the club he found that the distribution of the number of games
played by the players was as follows:
No. of games played 1 2 3 4 5 6
No. of players 7 8 15 9 6 5
Calculate the average payment of any player.
- Entry fees = 20 L.E

- Charge per game = 10 L.E
No. of games No. of players Total no. of games
1 7 7
2 8 16
3 15 45
4 9 36
5 6 30
6 5 30
Total 50 164
x̅ = 164
50
= 3.28
Y = 20 + 10 (3.28 ) = 20 + 32.8 = 52.8 LE

Or
Payment per player No. of players Total payment
30 7 210
40 8 320
50 15 750
60 9 540
70 6 420
80 5 400
total 2730
2730
x̅ = = 𝟓𝟐. 𝟖 𝐋. 𝐄
50
Problem (3)
Suppose a sample of 10 books gave a mean price of $48 and a sample of 8 mathematics books gave a
mean price of $49 . Find the mean price of a book of statistics or mathematics.
x1 +x2 48+49
 Mean price (x)̅ = = = 5.388 $
𝑛1+𝑛2 10+8

Applied Statistics
Problem (4)
The following data represents the marks of 12 students in group (A)
14, 20, 17, 16, 18, 19, 15, 13, 2, 20, 14, 12
a) Compute the best central and dispersion measures
b) If the central and dispersion measures for the marks of the students in group (B) are as follows:
n mean median mode s.d min max Q1 Q3
40 14 13.9 14.1 4.12 12 16 13.43 15.1
Where s.d  standard deviation
Which group is better in the sense of homogeneity, group (A) or Group (B) ? State the reason of
your answer.
(A)  First we will arrange the data:

2, 12, 13, 14, 14, 15, 16, 17, 18, 19, 20, 20
Data seems to contain extreme low value  skewed to the left
- The best central measure is the median
- The best absolute dispersion measure is the IQR
 To calculate the median
𝑛+1 12+1
- Order of median = 2
= 2
= 6.5
𝑣𝑎𝑙𝑢𝑒 6+𝑣𝑎𝑙𝑢𝑒 7 15+16
- Value of the median = 2
= 2 = 15.5 𝑚𝑎𝑟𝑘
 To calculate the IQR = Q3 – Q1

3 3 3
Order of Q3 = 4 𝑛+1 = 4
12 + 1 = 4
13 = 9.75
- Q3 = n9 + 0.75 (n10 – n9 ) = 18 + 0.75 (1) = 18 + 0.75 = 18.75
1 1
Order of Q1 = 4 𝑛+1 = 4
13 = 3.25
- Q1 = n3 + 0.25 (n4 – n3 ) = 13 + 0.25 (1) = 13 + 0.25 = 13.25
∴ IQR = Q3 – Q1 = 18.75 – 13.25 = 5.5
(B)
Group (1)
𝑄3−𝑄1 18.75−13.25 5.5
 CV2 = 𝑋 100 = 𝑋 100 = 𝑋 100 = 𝟏𝟕. 𝟏𝟖𝟕𝟓
𝑄3+𝑄1 18.75+13.25 32
Group (2)
15.1−13.43 1.67
 CV2 = 𝑋 100 = 𝑋 100 = 𝟓. 𝟖𝟓
15.1+13.43 28.53
Since CV2 of group (2) is < CV2 of group (1)

∴ 𝐺𝑟𝑜𝑢𝑝 2 𝑖𝑠 𝑀𝑜𝑟𝑒 𝐻𝑜𝑚𝑜𝑔𝑒𝑛𝑜𝑢𝑠 𝑡𝑕𝑎𝑛 𝑔𝑟𝑜𝑢𝑝 1

Applied Statistics
Problem (5)
If the marks of a group of 10 female students in an exam of probability and statistics are as follows:
11, 15, 17, 14, 16, 16, 14, 18, 17, 12
And the marks of another group of 12 male students in the same exam are as follows:
12, 15, 14, 18, 17, 16, 15, 2, 15, 16, 13, 12
Which group is more homogenous, the males or females? Give the reason of your answer.
Female group Male Group

n = 10 n = 12
Arrange the data Arrange the data
11, 12, 14, 14, 15, 16, 16, 17, 17, 18 2, 12, 12, 13, 14, 15, 15, 15, 16, 16, 17, 18
Data seems to be closed to each other Data contains an extreme low value
∴ Data is symmetric ∴ data is skewed to the left
Apply CV2 to compare the homogeneity between them
𝑄3−𝑄1 𝑄3−𝑄1
CV2 = 𝑋 100 CV2 = 𝑋 100
𝑄3+𝑄1 𝑄3+𝑄1
3 3 3 3
Order of Q3 = 4 𝑛 + 1 = 4 11 = 8.25 Order of Q3 = 4 𝑛 + 1 = 4 13 = 9.75
Q3 = n8 + 0.25 (n9 – n8 ) = 17 + 0 = 17 Q3 = n9 + 0.75 (n10 – n9 ) = 16 + 0 = 16
1 1 1 1
Order of Q1 = 4 𝑛 + 1 = 4 11 = 2.75 Order of Q1 = 4 𝑛 + 1 = 4 13 = 3.25
Q1 = n2 + 0.75 ( n3 – n2 ) = 12 + 0.75 (2) = 12 + 1.5 Q1 = n3 + 0.25 ( n4 – n3 ) = 12 + 0.25 (1) = 12.25
= 13.5
17−13.5 3.5 16−12.25 3.75

∴ CV2 = 𝑋 100 = 𝑋 100 = 11.475 ∴ CV2 = 𝑋 100 = 𝑋 100 = 13.274
17+13.5 30.5 16+12.25 28.25
Since CV2 of female group is < CV2 of male group

∴ 𝐹𝑒𝑚𝑎𝑙𝑒 𝐺𝑟𝑜𝑢𝑝 𝑖𝑠 𝑀𝑜𝑟𝑒 𝐻𝑜𝑚𝑜𝑔𝑒𝑛𝑜𝑢𝑠 𝑡𝑕𝑎𝑛 𝑚𝑎𝑙𝑒 𝑔𝑟𝑜𝑢𝑝

Applied Statistics
Problem (6)
If a sample of 30 students of the Academy, we obtained the following data which represents the weights
of these students:
65, 59, 47, 67, 56, 50, 74, 45, 83, 72, 71, 53, 82, 58, 64,
79, 55, 88, 56, 69, 50, 68, 66, 62, 59, 52, 72, 63, 56, 91
Answer the following questions without calculation:
1) What is the best central measure and the best dispersion measure? Give reason for your
answer.
2) Are the three central measures have approximately equal values or not? If not what is the
central measure which will have the greatest value and which will have the smallest value? Give
reason for your answer
We will apply the stem & leaf method to determine the type of data first
1
2
3
4 7 5
5 9 6 0 3 8 5 6 0 9 6 2
6 5 7 4 9 8 6 2 3
7 4 2 1 9 2
8 3 2 8
9 1
Mode < Median < Mean
Skewed to the right

1) Since the data is skewed ,
so the best central measure is the median & the best absolute dispersion measure is the IQR
2) Data is skewed to the right,

So, Mode < Median < Mean  thus Mean will have the greatest value.

Applied Statistics
Problem (7)
If the following data is the ages of a sample 15 students as follows:
28, 25, 30, 32, 33, 29, 27, 25, 24, 49, 35, 31, 36, 35 and 34
a) Is the value 49 can be considered as an extreme value? Justify your answer with a suitable test.
b) Calculate the best central and dispersion measure according to your conclusion in part (a)
(A)
 First arrange the data:

24, 25, 25, 27, 28, 29, 30, 31, 32, 33, 34, 35, 35, 36, 49
n = 15
 To determine if the value 49 is extreme or not, we will use Box-Plot test
LF UF
Q1 Q3
F
1 1
 Order of Q1 = 4 𝑛 + 1 = 4
16 = 4
 Q1 = 27
3 3
 Order of Q3 = 4 𝑛 + 1 = 4
16 = 12
 Q3 = 35
 IQR = Q3 – Q1 = 35 – 27 = 8
 LF = Q1 – 1.5 (IQR) = 27 – 1.5 (8) = 15
 UF = Q3 + 1.5 (IQR) = 35 + 1.5 (8 ) = 47
15 47
27 35
∴ 49 is considered as an extreme value as it is higher than UF  49 > 47

Applied Statistics
(B)
According to that; the data will be skewed to the right
The best central measure is the median & the best absolute dispersion measure will be the IQR
24, 25, 25, 27, 28, 29, 30, 31, 32, 33, 34, 35, 35, 36, 49
n = 15
𝑛+1 15+1
 Order of Median = 2
= 2
= 8th value
 Median = 31
 IQR = Q3 – Q1 = 35 – 27 = 8
Median = 31
-8 +8
23 39
We notice that all vale is occurring between 23 & 39 except extreme value.

Applied Statistics
Problem (8)
The following table represents the absent days of a sample of students in the statistics course:
Absent days 0 1 2 3 4
Number of students 10 5 8 Y 3
Determine the value of Y if the median of the absent days is 1.5 day
Absent days Number of students

0 10
1 5
Median = 1.5 2 8
3 Y
4 3
Since the median is split the data into 2 equal halves
∴ 10 + 5 = 8 + Y + 3
∴ 15 – 11 = Y
∴Y=4

Applied Statistics
Theoretical questions
(Q1) State whether the following statements are true or false and give a brief explanation:
1. If the value of the linear correlation coefficient is zero, then these two variables are
independent.
→ False
If the correlation coefficient is equal to zero, it means that there is no linear relationship.
And if the correlation equals to zero it doesn’t mean that the 2 variables are independent, but it
means that there is a relation of any other order rather than linear relation.
*****************************************************************************
2. Any probability table for a discrete variable is called the probability distribution.
→ False;
To be a probability distribution it must satisfy all 3 axioms of probability distribution which are:
1. The random variable must contain all the possible outcomes
2. The probability of each outcome must be a value between 0 & 1
3. The sum of all probabilities must equal to 1
******************************************************************************
3. The least square regression line minimizes the sum of errors.
→ False;
The least square regression line minimizes the sum of squared errors not the sum of
errors as sum of errors always must equal to zero.
******************************************************************************
4. The covariance between any two variables decides the strength of their relation.
→ False;
Covariance between any two variables decides whether this relation is direct or
inverse
𝑐𝑜𝑣 (𝑋1𝑌)
- From the equation of correlation coefficient: r =
The denominator always must be positive “ due to the root and also because the variance
measures the distance which must be positive”, while the numerator (covariance) can be
positive or negative.
- If covariance has a positive value → direct relation between the two variable.
- If covariance has a negative value → inverse relation between the two variable.

Applied Statistics
Or
The value of correlation coefficient (r) between any two variables decides the strength of their relation
As follow:
r
Exact (Perfect) - 1 - 0.7 - 0.4 0 0.4 0.7 +1 Exact

inverse Strong Weak Weak (Perfect) Direct
Moderate Moderate Strong
inverse inverse direct direct
There is no linear relationship
******************************************************************************
5. The regression coefficient decides the trend and the strength of the relation between the
dependent and the independent variables.
→ False;
The regression coefficient can decide the trend of the relation between the dependent &
independent variables
To decide the strength of this relation we have to depend on the correlation coefficient.
⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂

Applied Statistics
(Q2) Define the following terms briefly:
1. The sample space and the complementary events.

 Sample space :
→ It is a set of all possible outcomes when we make an experiment.
𝑛 (𝐴)
P (A) = 𝑛 (𝑆)
 The complement of an event A is the set of all outcomes in the sample space that are not
included in the outcomes of event A.
P( ) = 1 - P(A)
Or:
the probability of one event equals 1 minus the probabilities of other events as the sum of
all probabilities equals 1.
P( ) = 1 - P(A)
𝑛
𝑖=1 P (Ai) =1
*************************************************************************************
2. The determinant coefficient.
→ It measures the percentage change in ( Y ) which can be explained by the independent
variables (X’s).
* In simple regression model: R2 = (r)2
******************************************************************************
3. The deterministic model and the probabilistic model.
 Deterministic model
→ it is the math model which doesn’t contain any errors
Y=mX + C
 Stochastic ( Probabilistic ) model
→ it is the statistic model which contains the error term
Y = β0 + β1X + U
⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂⌂

Applied Statistics
(Q3) Answer the following questions briefly:
1. Explain the meaning of independent and dependent variables for a regression model. Explain
the difference between a simple and a multiple regression model.
 Independent variable:
→ It is a variable which is decided from outside the model- e.g. experience
 Dependent variable:
→ It is a variable which is decided from inside the model – e.g. No. of unit solds.
 Simple regression
Contain 1 independent variable e.g. consumption & income
Y = β0 + β1X + U
Model of population
But we act on a sample
 Multiple regression
Contain more than 1 independent variable e.g.
Y = β0 + β1 X1 + β2 X2 + ……… + βk Xk + U
consumption & income, prices, consumer behavior.
Where;
U = random error
******************************************************************************
2. Compare between the roles of both the regression coefficient and the correlation coefficient.
Can the values of regression coefficient and the correlation coefficient have different signs?
Explain.
correlation coefficient regression coefficient
r= b= 𝑣𝑎𝑟 (𝑥)
r b
-1 +1 -∞ +∞
For both r & b they have the same numerator, which means the same sign in the numerator
While the denominator of r must be positive because it is a root & the denominator of b must be
positive because it is the variance which measure the distance
Thus the result that the denominator of both r & b must be positive and the numerator is the same sign
in each of them
So, the values of the regression coefficient and the correlation coefficient must have the same signs
******************************************************************************

Applied Statistics
3. The similarities and the difference between the normal and the standard normal.
Differences Similarities
1- mean of the normal can take any real 1- in both of them , all the area under the
value but, mean of the standard normal curve equals to 1.
always equal to zero 2- Both has a symmetric property
2- the variance & the standard deviation of 3- If we drop a column from the highest
the normal can take any positive value point, it will divide the curve into 2 equal
but, the variance & the standard deviation halves.
of the standard normal always equal to 1.
*************************************************************************************
4. Can the values of the regression coefficient and the correlation coefficient have different
signs? Explain
The values of the regression coefficient ( b ) and the correlation coefficient ( r ) must have the
same sign – as follow:
r= b=
𝑣𝑎𝑟 𝑋 𝑣𝑎𝑟 (𝑌) 𝑣𝑎𝑟 (𝑥)
r b
-1 +1 -∞ +∞
For both r & b they have the same numerator, which means the same sign in the numerator
While the denominator of r must be positive because it is a root & the denominator of b must be
positive because it is the variance which measure the distance
Thus the result that the denominator of both r & b must be positive and the numerator is the same in
each of them
So, the values of the regression coefficient and the correlation coefficient must have the same signs
*************************************************************************************
5. If the correlation coefficient between two variables equals zero, then the two variables are
independent. Comment
If the correlation coefficient is equal to zero, it means that there is no linear relationship, which
means that the 2 variables are independent
e.g. the relation between the price of tomatoes & the level of student.
- Each of these two variables doesn’t depend on each other i.e. the two variables are
independent & no linear relation between them
*************************************************************************************
6. Why is the random error included in a regression model?
There are a lot of sources of error in regression model, which are;
5- The gap between the sample & the population
6- The effect of the excluded variables
7- The error in measurement
8- The error in the functional form “ we assumed that the relation is linear”
******************************************************************************

Applied Statistics
Applied problems
Question (1):
The following table gives the experience (in years) and the number of computers sold during the
previous three months by seven salespersons.
Experience (Years) 4 12 9 6 10 16 7
Computers sold (Unit) 19 42 28 31 39 35 21
a) Construct a scatter diagram for these data. Does the scatter diagram exhibit a linear relationship
between the two variables?
b) Find the suitable test squares regression line.
c) Give a brief interpretation of the values of the Y-intercept and slope calculated in the previous
part.
d) Calculate the correlation coefficient and the determinant coefficient. Explain what they mean.
e) Predict the number of computers sold during the past three months by salesperson with eleven
years experience.
Answer
a)
From the scattered

45
diagram we notice a 42
40 39
linear relationship
between the two 35 35
Computers sold ( Units )
variables 30 31
28
25
20 21
19
15
10
5
0
0 2 4 6 8 10 12 14 16 18
Experience ( Years )

Applied Statistics
b)
n=7
Experience (X-𝑿) (X – 𝑿)2 No. of units sold (Y – 𝒀) (Y – 𝒀)2 (X-𝑿)(Y-𝒀)
(X) (Y)
4 -5.1 26.01 19 -11.7 136.89 59.67
12 2.9 8.41 42 11.3 127.69 32.77
9 -0.1 0.01 28 -2.7 7.29 0.27
6 -3.1 9.61 31 0.3 0.09 -0.93
10 0.9 0.81 39 8.3 68.89 7.47
16 6.9 47.61 35 4.3 18.49 29.67
7 -2.1 4.41 21 -9.7 94.09 20.37
𝟔𝟒 𝟐𝟏𝟓
𝑿 = 64 𝑿= 𝟕
= 9.1 𝒀 = 215 𝒀= = 30.7
𝟕
Total 96.87 453.43 149.29
𝑋−𝑋 (𝑌−𝑌 ) 149.29

b= = = 1.54
(𝑋−𝑋 ) 2 96.87
a = 𝑌 – b 𝑋 = 30.7 – (1.54)(9.1) = 16.686
∴ 𝑙𝑒𝑎𝑠𝑡 𝑠𝑞𝑢𝑎𝑟𝑒 𝑟𝑒𝑔𝑟𝑒𝑠𝑠𝑖𝑜𝑛 𝑙𝑖𝑛𝑒:

Comment:
The minimum no. of units sold will be about 17 unit per salesperson “ this is in case of zero experience”
And this number will be exceeding by 1.54 unit regarding years of experience.
For example: for 1 year experienced salesperson → 16.686 + 1.54 X 1 = 18.226 ≈ 18 𝑢𝑛𝑖𝑡
for 2 year experienced salesperson → 16.686 + 1.54 X 2 = 19.7666 ≈ 20 𝑢𝑛𝑖𝑡
c)
* Y-intercept (a) : it represents the constant no. of computers sold per each salesperson.
This no. will not depend on the experience, which means that it is a fixed target which
have to be sold by every salesperson regardless of the years of experience.
* Slope (b) : the increase of units sold for salesperson & it depends on years of experience.
The target will exceed by 1.54 per every year of experience.

Applied Statistics
d)
* Correlation coefficient (r) :
𝑋− 𝑋 𝑌−𝑌 149.29
r = =
2 2 96.87 (453.43 )
𝑥−𝑋 𝑌− 𝑌
149.29
= 209.58
= 0.71
∴ There is a linear direct & strong relationship between the no. of computers sold & the experience.
* Determinant coefficient ( R2 ) = r2 = (0.71)2 = 0.5041

- it means that 50 % of the total variation in Y can be explained by the linear relation between X & Y
( as described by the regression equation, in part “b” )
e)
No. of units sold = 16.686 + 1.54 (11) = 33.6 ≈ 34 unit
*************************************************************************************

Applied Statistics
Question (2):
A jeans manufacturer knows that a large budget for television advertising (x) of his product will create a
demand (y) for it among department store buyers. In a sample of eight years we obtain the following
data:
𝑥 = 920 𝑥 2 = 124500 𝑦 = 885 𝑦 2 = 115075
The regression coefficient of y on x (b) = 0.94
Using the previous information, calculate:

(1) The correlation coefficient (r) and comment on the result.
(2) The determinant coefficient (R2) and comment on the result.
(3) Predict the demand (y) when the budget for television advertising (x) equals 10.
Answer:
(1)
n=8 b = 0.94
920 885
→𝑋= 8
= 115 𝑌= 8
= 110.625
𝑐𝑜𝑣 (𝑋1𝑌) 1 1
∵b= = 0.94 & var (x) = ( X2 - n𝑋) = [ 124500 – 8 (115)2 ] = 2671.43
𝑣𝑎𝑟 (𝑋) 𝑛−1 7
∴ cov (X1Y) = 0.94 X 2671.43 = 2511.14
𝑐𝑜𝑣 (𝑋1𝑌) 1 1
∵ r= & var(Y) = ( Y2 – n𝑌2) = [ 115075 – 8 (110.625)2 ] = 2453.125
𝑣𝑎𝑟 𝑋 𝑣𝑎𝑟 (𝑌) 𝑛−1 7
2511 .14
∴r= 2671 .43 𝑋 2453 .125
= 0.98
There is a linear, direct, strong relationship between the budget for television advertising & the demand.
(2)
2 2 2
Determinant coefficient (R ) = ( r ) = ( 0.98 ) = 0.96
It means that 96% of the total variation in the demand can be explained by the linear relationship
between X & Y ( as described by the regression equation )
(3)
a=𝑌–b𝑋
= 110.625 – 0.94 (115) = 2.525
∴ Y = 2.525 + 0.94 X
𝑌x=10 = 2.525 + 0.94 (10) = 11.925
*************************************************************************************

Applied Statistics
Question (4)
A charity believes that when it puts out an appeal for charitable donations, the donations it receives will
normally distributed with a mean $ 50 and a standard deviation $ 6, and it is assumed that donations
will be independent of each other
1) Find the probability that the first donation it receives will be greater than $ 60.
Answer:
𝜇𝑥 = $ 50 𝜎𝑥 = $ 6
Pr ( X > 60 )
𝑥− 𝜇 60− 𝜇
Pr ( > )
𝜎 𝜎
60−50
Pr ( Z> 6 )
Pr ( Z > 1.667 ) 0 1.667
= 0.5 – Pr ( 0 < Z < 1.667 )
= 0.5 – 0.4515
= 0.0485
∴ The probability that the first donation it receives will be greater than $ 60 = 0.0485
*************************************************************************************

Applied Statistics
Question (5)
The management of a supermarket wants to adopt a new promotional policy of giving free gift to every
customer who spends more than a certain amount per visit at his supermarket. The expectation of the
management is that after this promotional policy is advertised, the expenditure for all customers at this
supermarket will be normally distributed with mean $ 95 and a standard deviation of $ 21.
a) In a sample of 100 customers, what are the number of customers whose expenditure is between
$ 74 and 137 $?
b) In a sample of 25 customers, what is the probability of choosing a customer whose mean of
expenditure is between $ 90 and 101 $?
Answer:
(a)
𝜇 = 95 𝜎 = 21 n = 100
Pr ( 74 < X < 137 )

74− 𝜇 𝑋− 𝜇 137− 𝜇 74−95 137−95
Pr ( < < ) = Pr ( < 𝑍 < )
𝜎 𝜎 𝜎 21 21
= Pr ( -1 < Z < 2 )
= Pr ( -1 < Z < 0 ) + Pr ( 0 < Z < 2 )
Using symmetric property:
= Pr ( 0 < Z < 1 ) + Pr ( 0 < Z < 2 ) 0 1 2
= 0.3413 + 0.4772
= 0.8185
 Number of customers = 0.8185 X 100 = 81.85
≈ 82 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠
*****************************************
(b)
𝜇 = 95 𝜎 = 21 n = 25
Pr ( 90 < X < 101 )

90− 𝜇 𝑋− 𝜇 101− 𝜇 90−95 101−95
Pr ( 𝜎
< 𝜎
< 𝜎
) = Pr ( 21
< 𝑍 < 21
)
= Pr ( -0.238 < Z < 0.286 )
= Pr ( -0.238 < Z < 0 ) + Pr ( 0 < Z < 0.286 )
Using symmetric property:
= Pr ( 0 < Z < 0.238 ) + Pr ( 0 < Z < 0.286 ) -0.238 0 0.286
= 0.0910 + 0.1103
= 0.2013
 Number of customers = 0.2013 X 25 = 5.0325
≈ 5 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠
*************************************************************************************

Applied Statistics
Question (6):
The following data represents the grades of a sample of 12 students in math & economics as follows:
Math Grade A C B B D B F F D C B C
Economic Grade B F C B C A C F B B A C
Calculate the correlation between the student’s grade in math and economics. What its type and
strength.
Answer
Math grade Economics grade Rank of math. Rank of Economics
① A ③ B 1 4.5
⑥ C ⑪ F 7 11.5
② B ⑦ C 3.5 8.5
③ B ④ B 3.5 4.5
⑨ D ⑧ C 9.5 8.5
④ B ① A 3.5 1.5
⑪ F ⑨ C 11.5 8.5
⑫ F ⑫ F 11.5 11.5
⑩ D ⑤ B 9.5 4.5
⑦ C ⑥ B 7 4.5
⑤ B ② A 3.5 1.5
⑧ C ⑩ C 7 8.5
Rank of Rank of D D2
n = 12 𝐷 2 = 110 math economics
1 4.5 -3.5 12.25
𝟔 𝑫𝟐 7 11.5 -4.5 20.25
r s = 1 – 𝒏 ( 𝒏𝟐 −𝟏 ) 3.5 8.5 -5 25
3.5 4.5 -1 1
6 ( 110 ) 9.5 8.5 1 1
rs = 1- 12 ( 12𝑋12 −1 )
3.5 1.5 2 4
660
= 1 - 1716 = 0.615 11.5 8.5 3 9
11.5 11.5 0 0
9.5 4.5 5 25
Relation is linear, direct & moderate
7 4.5 2.5 6.25
3.5 1.5 2 4
7 8.5 -1.5 2.25
𝑫 2 = 110
*************************************************************************************

Applied Statistics
Question (7):
In a study of the relation between the expanding budget of advertisement on a specific product (X) in
thousands of pounds and the quantity sold (Y), in tons , of a product. A sample of the advertising budget
and the quantity sold in eight successive months is drawn from of the companies which are dealing in
such a product and the following information is obtained:
8 8 2 8 8 2
𝑖=1 𝑋1 = 130 𝑖=1 𝑥 = 2150 𝑖=1 𝑌 i =110 𝑖=1 𝑌𝑖 = 1650
8
𝑖=1 𝑋𝑖 𝑌𝑖 = 1850
Using the previous information calculate;

1) The correlation coefficient (r) and the determinant coefficient (R2). Comment on result.
2) Find the regression line of Y on X and interpret the meaning of its intercept and regression
coefficient.
3) Predict the number of tones sold from this product if the expended advertising budget in one
month is 25 thousand pounds.
Answer:
n=8 𝑥 = 130 X2 =2150 Y = 110 Y2 = 1650 𝑋𝑌 = 1850
130 2 110 2
→𝑋= = 16.25 𝑋 = 264.0625 𝑌= = 13.75 𝑌 = 189.0625
8 8
1)
𝑿𝒀−𝒏 𝑿𝒀
r=
𝒙𝟐 − 𝒏 𝑿𝟐 𝒀𝟐 − 𝒏 𝒀𝟐
1850 −8( 16.25 )( 13.75 )
r=
2150 −8 ×264.0625 1650 −8×189.0625
62.5
= = 0.87
37.5 137.5
There is a linear direct strong relationship between the budget of advertisement and the quantity sold.
Determinant coefficient R2 = ( r )2 = ( 0.87 )2 = 0.7569

It means that 75% of the total variation in the quantity sold can be explained by the linear relationship
2)
𝑿𝒀−𝒏 𝑿𝒀
b= 𝒙𝟐 − 𝒏 𝑿𝟐
1850 −8 (16.25)(13.75) 62.5
b= 2150 −8 (16.25)(16.25)
= 37.5 = 1.667
a = 𝑌 – b 𝑋 = 13.75 – 1.667 (16.25) = -13.339

Y = a +bX → Y = -13.339 + 1.667 X

Applied Statistics
* Y-intercept (a) : it represents the constant no. of product sold according to the budget of
advertisement.
This no. will not depend on the budget of advertisement, which means that it is a fixed
number which have to be sold regardless of the budget of advertisement.
* Slope (b) : the increase of units sold & it depends on budget of advertisement.
The product sold will exceed by 1.667 .
3)
∴ Y = -13.339+ 1.667 X
𝑌x=25 = -13.339+ 1.667 (25) = 28.336
*************************************************************************************

Applied Statistics
Question (10):
The balances of all saving accounts at a local bank have a normal distribution with its mean equal to $
12450 and standard deviation equal to $ 4160. Find the probability that the balance in a sample of 50
saving accounts selected from this bank will be:
(a) More than $ 11500

(b) Within $ 1500 of the population mean
(c) Find the number of accounts which will have an account of more than the population mean by at
least $ 1000
Answer:
Normal distribution: X → balance of the saving accounts
𝜇𝑥 = 12450 𝜎𝑥 = 4160 n = 50
(a)
𝑥− 𝜇
Pr ( X > 11500 ) Z= 𝜎
11500 −12450
Pr ( Z > 4160
)
= Pr ( Z > - 0.23 )
= Pr ( - 0.23 < Z < 0 ) + 0.5
- 0.23 0
= Pr ( 0 < Z < 0.23 ) + 0.5 “Using symmetric property”
= 0.01910 + 0.5
= 0.5910
No. of accounts = 0.5910 X 50
= 29.55 ≈ 30 accounts - 0.23 0 0.23
( b)
Within $ 1500 of the population mean
−1500 𝑋− 𝜇 1500
Pr ( - 1500 < X – 𝜇 < 1500 ) = Pr ( 𝜎
< 𝜎
< 𝜎
)
− 1500 1500
= Pr ( 4160
<𝑍< 4160
= Pr ( - 0.36 < Z < 0.36 )
= Pr ( - 0.36 < Z < 0.36 ) + Pr ( 0 < Z < 0.36 ) - 0.36 0 + 0.36

= 2 Pr ( 0 < Z < 0.36 ) “ using symmetric property “
= 2 ( 0.1406 )
= 0.2806
Number of accounts = 0.2806 X 50 = 14.03

Applied Statistics
(c) ‫أحسب دي‬

Pr ( X > 13450 ) ‫واطرحها من‬
Or 0.5
Pr ( X – 𝜇 > 1000 )
1000
Pr ( Z > 4160 ) = Pr ( Z > 0.24 )
= 0.5 – Pr ( 0 < Z < 0.25 ) 0 + 0.25

= 0.5 – 0.0948
= 0.4052
Number of accounts = 0.4052 X 50
= 20.26 ≈ 20 accounts
************************************************************************************

Applied Statistics
Question (12):
In a study of the relation between the experience (in years) (X) and the number of computers sold (y)
during the last three months, we draw a sample of seven salespersons and obtain the following results:
𝑋𝑖 = 63 𝑌𝑖 = 210 𝑋𝑖 𝑌𝑖 = 2084 𝑌𝑖2 = 6820
The correlation coefficient ( r ) = 0.89
a) Find the suitable least squares regression line

b) Give a brief interpretation of the values of the Y-intercept and slope calculated in the previous
part.
c) Calculate the determinant coefficient and interpret its value.
d) Predict the number of computers sold during the past three months by salespersons with
twenty years experience.
Answer:
a)
n =7 𝑋 = 63 𝑌 = 210 𝑋 𝑌 = 2084 𝑌 2 = 6820

63 210
𝑋 = 7
=9 𝑌 = 7
=30 r = 0.89
𝑋𝑌−𝑛 𝑋 𝑌
b=
𝑥 2− 𝑛 𝑋2
r= cov (X1 Y) = 𝑛−1 ( 𝑋𝑌 - n 𝑋 𝑌 )
1
= 6 [ 2084 – 7( 9 )( 30 ) ] = 32.33
1
var (Y) = 𝑛−1 ( Y2 - n 𝑌2)
1
= 6 [ 6820 – 7 (30)2 ] = 86.67
32.33 32.33 2
∵ r= = 0.89 ∴ ( 0.89 )2 = 𝑉 (86.67) ∴ Vvar(X) = 15.23
𝑉 (86.67)
𝑐𝑜𝑣 (𝑋1𝑌) 32.33

b= 𝑣𝑎𝑟 (𝑋)
= 15.23 = 2.123
a=𝑌- b𝑋
= 30 – (2.123)(9) = 10.893
Y = 10.893 + 2.123 X

Applied Statistics
b)
* Y-intercept (a) : it represents the constant no. of computers sold per each salesperson.
This no. will not depend on the experience, which means that it is a fixed target which
have to be sold by every salesperson regardless of the years of experience.
* Slope (b) : the increase of units sold for salesperson & it depends on years of experience.
The target will exceed by 2.123 per every year of experience.
c)
R2 = (r)2
R2 = ( 0.89)2 = 0.7921
It means that 79% of the total variation in the quantity sold can be explained by the linear relationship
d)
Y = 10.893 + 2.123 X
𝑌x=20 =10.893 + 2.123 ( 20 ) = 53.353 ≈ 53 𝑢𝑛𝑖𝑡
*************************************************************************************

Applied Statistics
Question (13):
An investor is considering three strategies for a $ 1,000 investment. The probable returns are estimated
as follows:
- Strategy 1 : A profit of $ 10,000 with probability 0.15 and a loss of $ 1,000 with probability 0.85
- Strategy 2 : A profit of $ 1,000 with probability 0.50, a profit of $ 500 with probability 0.30 and a
loss of $ 500 with probability 0.20.

- Strategy 3 : A certain profit of $ 400.
Which strategy has the highest expect profit? Would you necessarily advise the investor to adopt this
strategy?
Answer:
 Strategy (1):
E (profit) = 10,000 X 0.15 – 1,000 X 0.85
= 650
 Strategy (2):
E (profit) = 1,000 X 0.50 + 500 X 0.30 – 500 X 0.2
= 550
 Strategy (3):
E (profit) = 400 X 1
= 400
 Strategy 1 is most profitable. However, it is too risky because all money can be lost with a high
probability.
 I think strategy 2 is better.
*************************************************************************************

Applied Statistics
Question (14):
Two boxes, each contains three balls numbered from 1 to 3. A ball is chosen at random from each box.
The random variable X denotes “the product of the two numbers on the two selected balls”. Find:
1) The probability distribution of X.
2) The expected value and the standard deviation of the random variable X.
Answer:
1)
1
1
3 2
3 2
X Pr (X) X. Pr (X) X2. Pr (X)

1 ( 1,1 ) 1/3 X 1/3 = 1/9 1/9 1/9
2 ( 1,2 ) or ( 2,1 ) 1/9 + 1/9 = 2/9 4/9 8/9
3 ( 1,3 ) or ( 3,1 ) 1/9 + 1/9 = 2/9 6/9 18/9
4 ( 2,2 ) 1/3 X 1/3 = 1/9 4/9 16/9
6 ( 2,3 ) or ( 3,2 ) 1/9 + 1/9 = 2/9 12/9 72/9
9 ( 3,3 ) 1/3 X 1/3 = 1/9 9/9 81/9
1 36/9 = 4 169/9
E (X2) = 𝐱 𝟐 . 𝐏𝐫 (𝐗) = 169/9 = 21.78

 E (X) = 𝜇 = 𝑋.Pr (X) = 4
2)
 var (X) = 𝜎 2 = E (X2) – (4)2

= 21.78 – 16 = 5.78
 s.d (X) = 𝜎 = 5.78 = 2.4
*************************************************************************************

Applied Statistics
Question (15):
A box contains 6 balls numbered from 1 to 6. Another box contains 4 balls numbered from 1 to 4. A ball
is chosen at random from each box. The random variable X denotes “the largest number of the two
numbers which appear on the two selected balls”.
Calculate the mean and the standard deviation of X.
Answer:
1 2 5 2
1
4
3 4 6 3
X Pr (X) X . Pr (X) X2.Pr (X)

1 ( 1,1 ) 1/6 X 1/4 = 1/24 1/24 1/24
2 ( 1,2 ) or ( 2,1 ) or ( 2,2 ) 3/24 6/24 24/24
3 ( 1,3 ) or ( 3,1 ) or ( 2,3 ) or 5/24 15/24 45/24
( 3,2 ) or ( 3,3 )
4 ( 1,4 ) or ( 4,1 ) or ( 4,2 ) or 7/24 28/24 112/24
(2,4) or ( 3,4 ) or ( 4,3 ) or (4,4)
5 ( 5,1) or ( 5,2 ) or ( 5,3 ) or (5,4) 4/24 20/24 100/24
6 ( 6,1 ) or ( 6,2 ) or ( 6,3 ) or ( 6,4 ) 4/24 24/24 144/24
1 94/24 = 3.9 414/24 = 17.25
E (X2) = 𝐱 𝟐 . 𝐏𝐫 (𝐗) = 17.75

 E (X) = 𝜇 = 𝑋.Pr (X) = 3.9
 var (X) = 𝜎 2 = E (X2) – (3.9)2
= 17.25 – 15.21 = 2.04
 s.d (X) = 𝜎 = 2.04 = 1.428
**********************************************************************************

Applied Statistics
Question (16):
In a particular game, one of the players tosses a fair coin two consecutive times. If two heads appear, he
wins 10 pounds, if exactly one head in any order appears he wins 5 pounds, and if two tails appears he
loses 15 pounds. What are the mean and the standard deviation amount of win or loss?
Answer:
Fair coin : Pr (H) = Pr (T) = ½
n (S) = 4
X Pr (X) X . Pr (X) X2. Pr (X)
10 ( H,H ) 1/2 X 1/2 = 1/4 2.5 25
5 ( H,T ) or ( T,H ) 1/4 + 1/4 = 2/4 2.5 12.5
-15 ( T,T ) 1/2 X 1/2 = 1/4 - 3.75 56.25
1 1.25 93.75
var (X) = 93.75 – ( 1.25 )2 = 92.1875

s.d (X) = 92.1875 = 9.60
*************************************************************************************

Managerial Accounting
Managerial
Accounting

Financial Statements and Business Decisions

The Business Operations
1. Purchase parts and labor
2. Manufacture product
3. Sell products to customers
4. Collect cash from customers and pay creditors
The Accounting System
The Four Basic Financial Statements

1. BALANCE SHEET – reports the amount of assets, liabilities, and stockholders’ equity of an
accounting entity at a point in time.
2. INCOME STATEMENT – reports the revenues less the expenses of the accounting period.
3. STATEMENT OF RETAINED EARNINGS – reports the way that net income and distribution of
dividends affected the financial position of the company during the accounting period.
4. STATEMENT OF CASH FLOWS – reports inflows and outflows of cash during the accounting
period in the categories of operating, investing, and financing.
The Accounting Equation

The Balance Sheet

Financial ratio analysis

It is a useful tool for users of financial statement.
Advantages
1. It simplifies the financial statements.
2. It helps in comparing companies of different size with each other.
3. It helps in trend analysis which involves comparing a single company over a period.
4. It highlights important information in simple form quickly. A user can judge a company by just
looking at few numbers instead of reading the whole financial statements.
Limitations
1. Different companies operate in different industries each having different environmental
conditions such as regulation, market structure, etc. Such factors are so significant that a
comparison of two companies from different industries might be misleading.
2. Financial accounting information is affected by estimates and assumptions. Accounting
standards allow different accounting policies, which impairs comparability and hence ratio
analysis is less useful in such situations.
3. Ratio analysis explains relationships between past information while users are more concerned
about current and future information.
① Return On Equity:
Annual Net Income
ROE =
Average Stockholders' Equity
 It is an important measure of the profitability of a company.

 Higher values are generally favorable meaning that the company is efficient in generating
income on new investment.
 Investors should compare the ROE of different companies and also check the trend in ROE over
time.
 However, relying solely on ROE for investment decisions is not safe.
 It can be artificially influenced by the management, for example, when debt financing is used to
reduce share capital there will be an increase in ROE even if income remains constant.
 Here ROE of EIPICO = 8.5 %

② Return on assets:
Annual Net Income
ROA =
Average Total Assets
 It indicates the number of cents earned on each dollar of assets.

 Thus higher values of return on assets show that business is more profitable.
 This ratio should be only used to compare companies in the same industry.
 The reason for this is that companies in some industries are most asset-insensitive i.e. they
need expensive plant and equipment to generate income compared to others, their ROA will
naturally be lower than the ROA of companies which are low asset-insensitive.
 An increasing trend of ROA indicates that the profitability of the company is improving.
 Conversely, a decreasing trend means that profitability is deteriorating.
 ROA of EIPICO = 5.84 %
③ Financial Leverage Percentage:

 Common ways to attain leverage are borrowing money, buying fixed assets and using
derivatives.
 Positive financial leverage indicates that the company has borrowed money at a low rate of
interest and employed the borrowed funds at a higher rate of return
 EIPICO Financial leverage = 8.5 % – 5.8 % = 2.7 %
④Earnings Per Share (EPS ) :

Net Income − Dividends on Preferred Shares
(EPS) =
Weighted Average Number of Common Shares Outstanding
 It is a measure of the company’s ability to produce income for each common share outstanding.
 EIPICO EPS = LE 4.46
⑤ Quality of Income Ratio:
 This ratio indicates the proportion of income that has been realized in cash.
 As with quality of sales, high levels for this ratio are desirable.
 The quality of income ratio can provide an overall indication of how liberal a firm’s accounting
judgments have been.

⑥ Profit margin:
 The profit margin is mostly used for internal comparison.

 It is difficult to accurately compare the net profit ratio for different entities.
 Individual businesses' operating and financing arrangements vary so much that different entities
are bound to have different levels of expenditure, so that comparison of one with another can
have little meaning.
 A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase
profits and result in a net loss, or a negative margin.
 Profit margin is an indicator of a company's pricing strategies and how well it controls costs.
 Differences in competitive strategy and product mix cause the profit margin to vary among
different companies
 EIPICO Profit margin = 0.4 %
Benefits of profit margin

 Net profit margin is calculated for making future price policy. The margin can be decreased for
reducing product prices in hopes of increasing sales.
 After calculating the net profit margin, it can be compared to the net profit margin of other
competitors. This can be used to overtake competitors via a pricing war.

⑦ Fixed Asset Turnover Ratio

Net Sales Revenue
Fixed Asset Turnover =
Average Net Fixed Assets
 It is an efficiency ratio which tells how successfully the company is using its assets to generate
revenue.
 Net fixed assets→ property, plant, and equipment, net of accumulated depreciation
 If a company can generate more sales revenue with fewer assets it has a higher turnover ratio
which tells it is a good company because it is using its assets efficiently.
 A lower turnover ratio tells that the company is not using its assets optimally.
 EIPICO fixed asset ratio = 0.844
⑧ Cash ratio :
Cash + Cash Equivalents
Cash Ratio =
Current Liabilities
 A cash ratio of 1.00 and above means that the business will be able to pay all its current
liabilities in immediate short term.
 Therefore, creditors usually prefer high cash ratio.
 But businesses usually do not plan to keep their cash and cash equivalent at level with their
current liabilities because they can use a portion of idle cash to generate profits.
 This means that a normal value of cash ratio is somewhere below 1.00.
 EIPICO cash ratio = 0.996 to 1
⑨ Current Ratio:
Current Assets
Current Ratio =
Current Liabilities
 Current ratio matches current assets with current liabilities and tells us whether the current
assets are enough to settle current liabilities.
 Current ratio below 1 shows critical liquidity problems because it means that total current
liabilities exceed total current assets.
 General rule is that higher the current ratio better it is but there is a limit to this.
 A current ratio higher than 2 might indicate existence of idle or underutilized resources in the
company.
 EIPICO current ratio = 1.856 to 1

⑩ Inventory turnover:
Cost of Goods Sold
Inventory Turnover =
Average Inventory
 Inventory turnover ratio is used to measure the inventory management efficiency of a business.
 In general, a higher value indicates better performance and lower value means inefficiency in
controlling inventory levels.
 A lower inventory turnover ratio may be an indication of overstocking which may pose risk of
obsolescence and increased inventory holding costs.
 However, a very high turnover may result in loss of sales due to inventory shortage.
 Inventory turnover is different for different industries.
 Businesses which trade in perishable goods have very higher turnover with comparison to those
dealing in durables.
 A comparison would be fair only if made between businesses of same industry.
 EIPICO inventory turnover = 0.536 Times
⑪ Debt-to-Equity Ratio:
Total Liabilities
Debt-to-Equity =
Shareholders' Equity
 Lower values of debt-to-equity ratio are favorable indicating less risk.
 Higher debt-to-equity ratio is unfavorable because it means that the business relies more on
external lenders thus it is at higher risk, especially at higher interest rates.
 A debt-to-equity ratio of 1.00 means that half of the assets of a business are financed by debts
and half by shareholders' equity.
 A value higher than 1.00 means that more assets are financed by debt that those financed by
money of shareholders' and vice versa.
 An increasing trend in of debt-to-equity ratio is also alarming because it means that the
percentage of assets of a business which are financed by the debts is increasing.
 EIPICO Debt-to-Equity Ratio = 0.465
⑫ Price/Earnings (P/E) Ratio:

Current Market Price Per Share
P/E Ratio =
Earnings per Share
 Current share price is obtained from secondary markets like NYSE, NASDAQ, etc. while EPS is
calculated as (net income minus preferred dividends)/weighted average number of shares
outstanding.
 EIPICO P/E = 6.6
ً‫ سنة عشان أرجع فلوس‬6.6 ‫ٌعنً محتاج‬

⑬Dividend Yield Ratio:

Dividend per Share
Dividend Yield =
Market Price Per Share
 Dividend yield is a measure of investor return.

 Dividend yield ratio provides a comparison of amount of dividend in relation to investment
needed to purchase its share.
 A company might be paying out 50% of its earnings but if the company's current share price is
too high the investors might not be attracted by even the high payout ratio.
 A high share price will lead to low dividend yield and vice versa.
 Investors are interested in the amount of income that they will receive in the form of dividends.
 One comparison that investors make is based on dividend yield.
 During 2012, EIPICO paid dividends of LE 0.30 per common share of stock outstanding.
 Dividing LE 0.30 by the share price of LE 29.4 , we find that EIPICO dividend yield is 1.02 % .
The Operating Cycle

Time Period: The long life of a company can be reported over a series of shorter time periods.
Recognition Issues : When should the effects of operating activities be recognized (recorded)?
Measurement Issues: What amounts should be recognized?
Elements on the Income Statement

Revenues: Increases in assets or settlement of liabilities from ongoing operations.
Expenses: Decreases in assets or increases in liabilities from ongoing operations.
Gains: Increases in assets or settlement of liabilities from external transactions.
Losses: Decreases in assets or increases in liabilities from external transactions.


Q1 : Matching Elements with Financial Statements M1-1

Match each element with its financial statement by entering the appropriate
letter in the space provided.
Element Financial Statement
----B----- (1) Expenses A. Balance sheet

----D----- (2) Cash flow from investing activities
----A------ (3) Assets B. Income statement
----C---- (4) Dividends
----B---- (5) Revenues C. Statement of retained earning
----D----- (6) Cash flow from operating activities
----A---- (7) Liabilities D. Statement of cash flow
----D---- (8) Cash flow from Financial activities
*************************************************************************************
Q2: Matching Financial Statement Items to Financial statement Categories M1-2

Mark each item in the following list as an asset ( A ) , Liability ( L ), or
Stockholders’ equity ( SE ) item that would appear on the balance sheet or a
revenue ( R ) or expense ( E ) that would appear on the income statement
SE (1) Retained earnings

A (2) Accounts receivable
R (3) Sales Revenue
A (4) Property, plant and equipment
E (5) Cost of goods sold expense
A (6) Inventories
E (7) Interest expense
L (8) Accounts payable
A (9) Land
*************************************************************************************

Q3 : Preparing a Balance Sheet E1-4

Honda Motor Corporation of Japan is a leading international manufacturer of automobiles, motorcycles ,
all-terrain vehicles, and personal watercraft. As a Japanese company, it follows Japanese GAAP and
reports its financial statements in billions of yen (the sign for yen is ¥). Its recent balance sheet
contained the following items (in billions).Prepare a balance sheet as at March 31, 2009, solving for the
missing amount.
Cash and cash equivalents ¥ 690

Contributed capital 259
Accounts payable and other current liabilities 4,237
Long-term debt 1,933
Net property, plant, and equipment 2,148
Other assets 6,244
Other liabilities 1,519
Retained earnings 3,871
Total assets 11,819
Total liabilities and stockholders’ equity ?
Trade accounts, notes, and other receivables 854
Balance Sheet
Assets
Cash and cash equivalents ¥ 690
Trade accounts, notes, and other receivables 854
Inventories 1,244
Investments 639
Net property, plant, and equipment 2,148
Other assets 6,244
Total assets 11,819
Liabilities
Accounts payable and other current liabilities 4,237
Long-term debt 1,933
Other liabilities 1,519
Total liabilities 7,689
Stockholders’ Equity
Contributed capital 259
Total stockholders’ equity 4,130
Total liabilities and stockholders ’ equity 11,819
*************************************************************************************

Q4 : Inferring Values Using the Income Statement and Balance Sheet Equations
E1-9
Review the chapter explanations of the income statement and the balance sheet
equations. Apply these equations in each independent case to compute the two
missing amounts for each case. Assume that it is the end of 2014, the first full
year of operations for the company.(Hint: Organize the listed items as they are
presented in the balance sheet and income statement equations and then
compute the missing amounts.)
Independent Total Total Net Total Total Shareholders’

Cases Revenues00,00 Expenses Income Assets Liabilities Equity
(Loss)
A $73,590 $54, 820 $18,770 $163,760 $89,130 $74,630
B 79,170 67,730 11,440 123,380 49,070 74,310
C 64,260 80,940 (16,680) 105,580 83,280 22,300
D 97,140 63,670 33,470 108,930 22,190 86,740
E 57,780 49,990 7,790 122,110 37,980 84,130
*************************************************************************************

Q5 : Preparing an Income Statement and Balance Sheet E1-11

Henshelwood limited was organized by five individuals on January 1, 2013. At the end of
January 2013, the following monthly financial data are available:
Total revenues $448,500

Total expenses (excluding income taxes) 283,500
Income tax expense (all unpaid as at January 31) 51,750
Cash balance, January 31, 20013 97,725
Receivables from customers (all considered collectable) 51,750
Merchandise inventory (by inventory count at cost) 144,900
Payables to suppliers for merchandise purchased from them 39,675
( will be paid during February 2008)
Contributed capital (2,600 shares) 89,700
No dividends were declared or paid during 2013

Required: Complete the following three statements:
HENHELWOOD LIMITED
Income Statement
For the Month of January 2013
Total revenues $448,500

Less: Total expenses (excluding income tax) 285,500
Income before income tax 165,000
Less: Income tax expense 51,750
Net income $113,250
HENHELWOOD LIMITED
Balance Sheet
At January 31, 2013
Assets
Cash $97,725
Receivables from customers 51,750
Merchandise inventory 144,900
Liabilities
Payables to suppliers $39,675
Income taxes payable 51,750
Stockholders’ Equity
Contributed capital $89,700
Total shareholders’ equity 202,950
Total liabilities and stockholders’ equity $294,375

E 2-4 Determining Financial Statement Effects of Several Transactions

The following events occurred for Sanchez Company:
a. Received investment of $ 102,000 cash by organizers and distributed stock to them.
b. Purchased $ 24,000 of equipment, paying $ 3,000 in cash and signing a note for the rest.
c. Borrowed $ 27,000 cash from a bank.
d. Loaned $ 1,500 to an employee who signed a note.
e. Purchased $ 45,000 of land; paid $ 12,000 in cash and signed a mortgage note for the balance.
Required:
For each of the events (a) through (e), perform transaction analysis and indicate the account, amount,
and direction of the effect ( + for increase and – for decrease ) on the accounting equation. Check that
the accounting equation remains in balance after each transaction. Use the following headings:
Events Assets = Liabilities + Stockholders’ equity
Answer
Step 1 : Identify and classify accounts and effects
a 1. Investment (+A) $ 102,000 2. Cont. Capital ( + SE ) $ 102,000
b 1. Equipment (+A) $ 24,000 2. Cash (-A) $ 3,000 3. N.P. (+ L) $ 21,000
c 1. Cash (+A) $ 27,000 2. N.P ( + L ) $ 27,000
d 1. Cash ( - A ) $ 1,500 2. N.R ( + A) $ 1,500
e 1. Cash ( - A ) $ 12,000 2. N.P ( + L ) $ 33,000 3. Land ( + A ) $ 45,000
Step 2: Is the accounting equation in balance?

Cash Investment Equip. Land Notes Notes Contributed Retained
Receivable Payable Capital Earnings
(a) 102,000 102,000
(b) (3,000) 24,000 21,000
(c) 27,000 27,000
(d) (1,500) 1,500
(e) (12,000) 45,000 33,000
Effect 183,000 = 183,000
********************************************************************

E 2-5 Determining Financial Statement Effects of Several Transactions

Nike, Inc., with headquarters in Beaverton, Oregon, is one of the world’s leading manufacturers of
athletic shoes and sport apparel. The following activities occurred during a recent year. The amounts are
rounded to millions of dollars.
a. Purchased additional buildings for $ 212 and equipment for $ 30.4; paid $ 43.2 in cash and
signed a long-term note for the rest.
b. Issued $ 186.6 in additional stock for cash.
c. Declared $ 121.4 dividends to be paid in the following year.
d. Purchased additional short-term investments for $ 2,908.7 cash.
e. Several Nike investors sold their own stock to other investors on the stock exchange for $ 53.
f. Sold $ 2,390 in short-term investments for cash.
Required:
1. For each of the events (a) through (e), perform transaction analysis and indicate the account,
amount, and direction of the effect on the accounting equation. Check that the accounting
equation remains in balance after each transaction. Use the following headings:
Events Assets = Liabilities + Stockholders’ equity
2. Explain your response to event (e)
Answer
Step 1 : Identify and classify accounts and effects
(a) 1. Buildings (+ A) $ 212 2. Equip. (+ A) $ 30.4 3. Cash (-A) $ 43.2 4. N.P (- L) $ 199.2
(b) 1. Cash ( + A ) $ 186.6 2. Cont. Capital ( + SE ) $ 186.6
(c) 1. Dividends payable ( + L ) $ 121.4 2. Retained earnings ( - SE ) $ 121.4
(d) 1. Cash ( -A) $ 2,908.7 2. Investment ( + A ) $ 2,908.7
(e) No change
(f) 1. Cash ( + A ) $ 2,390 2. Investment ( -A) $ 2,390
Step 2: Is the accounting equation in balance?

Cash Investment Equip. Buildings Dividends Notes Contributed Retained
payable Payable Capital Earnings
(a) (43.2) 30.4 212 199.2
(b) 186.6 186.6
(c) 121.4 (121.4)
(d) (2,908.7) 2,908.7
(e)
(f) 2,390 (2,390)
Effect 385.8 = 385.8
2. No effect on transactions , the only change is in names of owners – but no change in stock.
*********************************************************************************

E 2-6 Recording Investing and Financing Activities

Refer to E 2-4
Required :
For each of the events (a) though (e) in E 2-4, prepare journal entries, checking that debits equal credits.
Answer
Date Explanation Debit Credit
(a) Cash 102,000
Capital 102,000
(b) Equipments 24,000
Cash 3,000
N/P 21,000
(c) Cash 27,000
N/P 27,000
(d) N/R 1,500
Cash 1,500
(e) Land 45,000
Cash 12,000
N/P 33,000
*******************************************************************

E 2-7 Recording Investing and Financing Activities

Refer to E 2-5
Required :
1. For each of the events (a) though (f) in E 2-5, prepare journal entries, checking that debits equal
credits.
2. Explain your response to event (e).
Answer
Date Explanation Debit Credit
(a) Buildings 212
Equipments 30.4
Cash 43.2
N/P 199.2
(b) Cash 186.6
Capital 186.6
(c) Retained earnings 121.4 121.4
Dividends payable
(d) Investment 2,908.7 2,908.7
Cash
(e) No need for Journal entries – no new stock added
(f) Cash 2390
Investment 2390
2. No change in stock – so no need for journal entries.
*******************************************************************************

Managerial Finance
Managerial
Finance

Managerial Finance
Financial statement analysis

 Financial statement :
→The figures published & reported by the company in what we call Annual report.
 Users of Financial Statement:
Investors
- To evaluate the company performance to decide whether to invest in this company or not
- They are interested in the fair value of the price of that company.
- Stockholders to estimate future cash flows and risk.
Creditors
- People who provide the company with loans (debt).
- Creditors include; bank & bond holders.
- When the company takes a loan, it will receive the money now & pay in the future.
- If you are a creditor, you will give a loan to borrower.
- As a lender I have to look at the financial statement historical performance to make sure
that these people will be able to pay in the future.
- It calls IMF ( International Monetary Fund ) ً‫صندوق النقد الدول‬
Managers
- To identify areas of weakness and strength.
- Financial managers; to decide the dividends & retained earnings.
Government
- To determine the taxes.
Employees
- To make sure that the company is stable & profitable for their future in the company.
Customers/consumers
- Consumers are interested to see the company performance & does the company can
provide products with high quality & maintenance after sales.
 Ratio:
→the relationship between 2 figures taken from the financial statement of a particular company
Income Statement
2010 2011E
Sales $5,834,400 $7,035,600
COGS (Cost Of Goods Sold) 4,980,000 5,800,000
Other expenses 720,000 612,960
Depreciation 116,960 120,000
Tot. op. costs 5,816,960 6,532,960
(Operating Profit) EBIT (Earnings Before Interest & Tax) 17,440 502,640
Int. expense 176,000 80,000
EBT (Earnings Before Tax) (158,560) 422,640
Taxes (40%) (63,424) 169,056

Managerial Finance
Net income ($ 95,136) $ 253,584

Tax saving – (tax credit) by government “until 5 years” ‫ويخصم المبلغ من الضرايب لما احقق مكسب‬
Balance Sheets: Assets Balance Sheets: Liabilities & Equity
2010 2011E 2010 2011E
Cash $ 7,282 $ 14,000 Accts. payable $ 324,000 $ 359,800
S-T invest. 20,000 71,632 Notes payable 720,000 300,000
AR 632,160 878,000 Accruals 284,960 380,000
Inventories 1,287,360 1,716,480 Total CL 1,328,960 1,039,800

Long-term debt 1,000,000 500,000
Total CA 1,946,802 2,680,112
Common stock 460,000 1,680,936
Net FA 939,790 836,840
Ret. earnings 97,632 296,216
Total assets $2,886,592 $3,516,952
Total equity 557,632 1,977,152
Total L&E $2,886,592 $3,516,952
Other Data
2010 2011E
Stock price $6.00 $12.17
# of shares 100,000 250,000
EPS -$0.95 $1.01
DPS $0.11 $0.22
Book val. per sh. (BVPS) $5.58 $7.91
Lease payments (rent) $40,000 $40,000
Tax rate 0.4 0.4
Current liabilities: are those liability will be paid within one year
Long term debt: more than one year
𝑁𝐼 $ 253.6
Retained Earnings (RE) = DPS – EPS EPS =
𝑁𝑜 .𝑜𝑓 𝑆𝑕𝑎𝑟𝑒𝑠 𝑂𝑢𝑡 .
=
250
= $ 1.01
Liquidity Ratios
Can the company meet its short-term obligations using the resources it currently has on hand?
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 (𝐶𝐴) $ 2,680

Current Ratio (CR) = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 (𝐶𝐿)
= $ 1,040 = 2.58

Managerial Finance
𝐶𝐴−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 $ 2,680−$ 1,716

Quick Ratio (QR) = 𝐶𝐿
= $ 1,040
= 0.93
Comments on CR and QR
2011E 2010 2009 Ind.
CR 2.58 1.46 2.3 2.7
QR 0.93 0.5 0.8 1.0
 Expected to improve but still below the industry average.

 Liquidity position is weak.
Asset Management Ratios
 How efficiently does the firm use its assets?

 How much does the firm have tied up in assets for each dollar of sales?
𝑆𝑎𝑙𝑒𝑠
Inventory Turnover Ratio = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
$ 7,036
= $ 1,716
= 4.10
2011E 2010 2009 Ind.
Inv. T. 4.1 4.5 4.8 6.1
Comments on Inventory Turnover

 Inventory turnover is below industry average.
 Firm might have old inventory, or its control might be poor.
 No improvement is currently forecasted.
Days Sales Outstanding (DSO) (Average Collection Period)

→How many days does it take the company to collect its account receivables from customers
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
DSO = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦
= 𝑆𝑎𝑙𝑒𝑠 /365
$ 878
= $ 7,036/365
= 45.5 𝑑𝑎𝑦𝑠
Appraisal of DSO
 Firm collects too slowly, and situation is getting worse.

Managerial Finance
 Poor credit policy.
2011 2010 2009 Ind.

DSO 45.5 39.5 37.4 32
Fixed Assets turnover (Physical) – You don’t sale Fixed Assets

𝑆𝑎𝑙𝑒𝑠 $ 7,036
= 𝑁𝑒𝑡 𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
= $ 837
= 8.41
How much in term of sales you generate for every one dollar invested in fixed assets
How many dollars of sales you generate for every one dollar invested in fixed assets
Total Assets Turnover Ratios

𝑆𝑎𝑙𝑒𝑠 $ 7,036
= 𝑇𝑜𝑡𝑎 𝑎𝑠𝑠𝑒𝑡𝑠
= $ 3,517 = 2.00
 FA turnover is expected to exceed industry average. Good.
 TA turnover not up to industry average. Caused by excessive current assets (A/R and inventory).
2011E 2010 2009 Ind.

FA TO 8.4 6.2 10 7
TA TO 2 2 2.3 2.5
Debt Management Ratios
 Does the company have too much debt?

 Can the company’s earnings meet its debt servicing requirements?
Debt is very attractive due to:
1- Low cost of debt (cheaper)
2- Interest of debt is considered as expense ( pay less taxes)
3- No control “No voting rights” ( by bond holders or creditors ) ‫ال ٌتدخلوا فً شئون الشركة‬
Problem of debt is being very risky →if don’t pay at time, it will be declared by court: it can lead to bankruptcy
Debt ratio
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖 𝑡𝑖𝑒𝑠 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 +𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 $ 1,040+$ 500
= 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
= 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
= $ 3,517
= 43.8%
Time Interest Earned (TIE) ‫عدد مرات تغطٌة الفوائد‬

𝐸𝐵𝐼𝑇 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 ً‫الربح التشغٌل‬ $ 502.6
= 𝐼𝑛𝑡𝑒𝑟𝑠𝑒𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
= $ 80
= 6.3
Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) Coverage (EC)

Managerial Finance
𝐸𝐵𝐼𝑇 +𝐷𝑒𝑝𝑟 .& 𝐴𝑚𝑜𝑟𝑡 .+𝐿𝑒𝑎𝑠𝑒 𝑝𝑎𝑦 𝑚𝑒𝑛𝑡𝑠 $502.6+$ 120+$ 40

EC = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑒𝑥𝑝𝑒𝑛𝑠𝑒 +𝐿𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 +𝐿𝑜𝑎𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
= $ 80+$ 40+$ 0
= 5.5
Debt Management Ratios vs. Industry Averages
2011E 2010 2009 Ind.

D/A 43.80% 80.70% 54.80% 50.00%
TIE 6.3 0.1 3.3 6.2
EC 5.5 0.8 2.6 8
Recapitalization improved situation, but lease payments drag down EC.
Profitability ratios
- Profitability is a primary measure of the overall success of a company.
- In accounting; profit is called accrual
- Accrual means when you sell something on credit, you give it on account receivable → credit sales
revenue
- First we have to differentiate between liquidity & profitability
Liquidity : means cash
Profitability : When you sell something, you
- Debit → receivable
Credit Sales
- Credit → sales revenue
- Income statement is debit
When you collect account receivable, you
- Debit → cash
- Credit → account receivable
When you sell more on credit , you will generate more sales revenue → More Profitable
1- Profit Margin (PM)

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 $ 353.6
𝑃𝑀 = 𝑆𝑎𝑙𝑒𝑠
e.g. 𝑃𝑀 = $ 7,036
= 3.6%
Sales (100%) = cost & expenses (96.4%) + Net Income (3.6%)
There are 2 ways to improve the profit margin:

1- Increase sales without increasing cost → difficult due to competition
2- Let the sale as it is & reduce the cost →much easier
Our government now has a deficit in budget ‫ = عجز فً الموازنة‬156,000,000,000 LE

From where we can compensate this deficit:
1- Increase taxes → it faces social resistance
2- Reduce our expenditures → much easier
. Postpone some projects
. Reduce salaries & wages

Managerial Finance
2- Operating Margin (OM)

𝐸𝐵𝐼𝑇 $ 503
𝑂𝑀 = 𝑆𝑎𝑙𝑒𝑠
e.g. 𝑂𝑀 = $ 7,036
= 7.1 %
- Revenue – Operating cost = EBIT (Operating Profit)

- Earnings Before Interest & Taxes (EBIT) – Interest (I) = EBT
- EBT – T = Earnings After Taxes (EAT) = Net Income (NI)
Operating margin is greater than profit margin because all of them divided by sales.
And the net income is less than the EBIT (profit margin).
3- Gross Margin (GM) “ gross profit”

𝑆𝑎𝑙𝑒𝑠 −𝐶𝑂𝐺𝑆 $7,036 − $5,800
𝐺𝑀 = e.g. 𝐺𝑀 = = 17.6%
𝑆𝑎𝑙𝑒𝑠 $ 7,036
GM deals with Cost Of Goods Sold (COGS)
Profit Margins vs. Industry Averages

2011E 2010 2009 Ind.
PM 3.60% -1.60% 2.60% 3.60%
OPM 7.1 0.3 6.1 7.1
GPM 17.6 14.6 16.6 15.5
Very bad in 2010, but projected to meet or exceed industry average in 2011.
“Negative PM in 2010 means that we have a loss”
4- Basic Earning Power (BEP)

𝐸𝐵𝐼𝑇 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑀𝑎𝑟𝑔𝑖𝑛
𝐵𝐸𝑃 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
$502.6
e.g. 𝐵𝐸𝑃 = = 14.3%
$ 3,517
i.e. for every 100 dollar as Assets we generate 14.3% as operating profit
Basic Earning Power vs. Industry Average

 BEP removes effect of taxes and financial leverage. Useful for comparison.
 Projected to be below average.
 Room for improvement.
2011E 2010 2009 Ind.
BEP 14.30% 0.60% 14.20% 17.80%

Managerial Finance
5- Return on Assets
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 (𝑁𝐼) $253.6
𝑅𝑂𝐴 = e.g. 𝑅𝑂𝐴 = = 7.2%
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 (𝑇𝐴) $3,517
i.e. for every 100 dollar as Assets we generate 7.2% as net income
6- Return on Equity
Net Income $253.6
𝑅𝑂𝐸 = Common Equity
e.g. 𝑅𝑂𝐸 = $1,977 = 12.8%
ROA and ROE vs. Industry Averages
2011E 2010 2009 Ind.
ROA 7.20% -3.30% 6.00% 9.00%
ROE 12.80% -17.10% 13.30% 18.00%
Both below average but improving

Effects of Debt on ROA and ROE
 ROA is lowered by debt--interest expense lowers net income, which also lowers ROA.
 However, the use of debt lowers equity, and if equity is lowered more than net income,
ROE would increase.
Total Assets Debt Equity Net Income ROA ROE
Company A 100 50 50 10 10% 20%
Company B 100 70 30 8 8% 26.6%
So debt →↓ ROA & ↑ ROE
Some financial managers tend to take a loan at the end of the year to increase ROE
But the problem that the debt will decrease ROA & increase the risk factor.
 ROE should be higher than or equal to ROA

Note: A = L + E
Does ROA can equal to ROE ?
Yes, but very rare – in case that the company has no liabilities
Market value ratios
 Market value ratios incorporate the:

o High current levels of earnings and cash flow increase market value ratios
o High expected growth in earnings and cash flow increases market value ratios
o High risk of expected growth in earnings and cash flow decreases market value ratios
 Stock Price
Price
Supply
15
ً‫لو السعر زاد الناس الل‬
Fair value 12.17
– ‫بتشتري عددهم هٌقل‬
261
11 ‫والعكس‬
Demand
Quantity
Managerial Finance
250
Share
Cash flow = Net Income + Depreciation
‫ فً المستقبل‬Assets ‫ فلوسها موجودة فً الشركة وتشتري بٌها‬Depreciation expense
‫ اللً بتدفعها وبتطلع برة الشركة‬Interest expense ‫عكس الـ‬
EPS
4
More profitable
3
2 Time
1 year 2 3
Price Earning (P/E) Ratio:
Price Earning = Payback period ً‫عدد السنوات اللً هرجع فٌها فلوس‬
Shares Outstanding:
Shares that already issued
Price = $12.17
𝑁𝐼 $ 253.6
‫ سهم‬100,000 ‫األسهم المصدرة بالفعل مثال‬
EPS = = = $ 1.01
𝑁𝑜.𝑜𝑓 𝑆𝑕𝑎𝑟𝑒𝑠 𝑂𝑢𝑡 . 250
Shares Authorized
P/E =
𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆𝑕𝑎𝑟𝑒
=
$ 12.17
= 12 ‫ سنة‬12 ‫هرجع فلوسً فً خالل‬ ‫ سهم‬1000,000 ‫األسهم المصرح بها مثال‬
𝐸𝑃𝑆 $ 1.01
‫ بدل ما بحسب االصول وابٌع علً اساسها وهو ماٌحدث األن‬- ‫ أقدر استخدمها فً تحدٌد سعر السهم للشركة لو هتتباع‬P/E
‫فً خصخصة الشركات بسبب الفساد والرشاوي‬
e.g. Swiss Cement
P/E = 12
Forecast EPS (2013) = 3
∴ P (estimated Price) = 12 X 3 = 36
If no. of shares = 10,000,000
∴ Value of company = Price per share X No. of shares
= 36 X 10,000,000 = 360,000,000 LE → company price
Industry P/E Ratios

Industry Ticker* P/E
Banking STI 1.32
Software MSFT 6.14
Drug PFE 5.87

Managerial Finance
Electric Utilities DUK 10.14

Semiconductors INTC 4.01
Steel NUE 0.33
Tobacco MO 1.30
S&P 500 14.22
Market Based Ratios

Cash flow per share
𝑁𝐼+𝐷𝑒𝑝𝑡 . $ 253.6 +$ 120.0
= 𝑆𝑕𝑎𝑟𝑒𝑠 𝑂𝑢𝑡 .
= 250
= $ 1.49
Note: CF/share can be equal to EPS in case of no depreciation
P/CF
𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠𝑕𝑎𝑟𝑒 $ 12.17
= = = 8.2
𝐶𝑎𝑠 𝑕 𝑓𝑙𝑜𝑤 𝑝𝑒𝑟 𝑠𝑕𝑎𝑟𝑒 $ 1.49
Book value per share (BVPS)

𝐶𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 $ 1,977
BVPS = 𝑁𝑜 .𝑜𝑓 𝑠𝑕𝑎𝑟𝑒𝑠 𝑜𝑢𝑡 .
= 250
= $ 7.91
BVPS is a hypothetical price in case of liquidation
If we assume that the company is dissolved
1- First you have to pay liabilities
2- E = A-L
3- Common equity / shares = BVPS
Market Book (M/B)

𝑀𝑘𝑡 .𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠𝑕𝑎𝑟𝑒 $ 12.17
M/B = 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠𝑕𝑎𝑟𝑒
= $ 7.91
= 1.54
‫فً هذه الحالة المستثمر ممكن ٌدفع اكتر من القٌمة الدفترٌة للسهم الن القٌمة السوقٌة له مرتفعة‬

Managerial Finance
As the M/B ratio increase as the confidence increase
If the market price is less than the book value so, it is better to dissolve the company
Interpreting Market Based Ratios

 P/E: How much investors will pay for $1 of earnings. Higher is better.
 M/B: How much paid for $1 of book value. Higher is better.
 P/E and M/B are high if ROE is high, risk is low.
Comparison with Industry Averages
2011E 2010 2009 Ind.

P/E 12 -6.3 9.7 14.2
P/CF 8.2 27.5 8 7.6
M/B 1.5 1.1 1.3 2.9
P/CF is more than the Ind. Average due to depreciation
Potential Problems and Limitations of Ratio Analysis

1) Comparison with industry averages is difficult if the firm operates many different
divisions.
e.g. Bahgat company
2) Seasonal factors can distort ratios.
e.g. ‫ٌامٌش رمضان‬
Inventory turnover will change all over the year
Inventory turnover will increase in the season & will be less in other months.
3) Window dressing techniques ‫ تجميل القوائم المالية‬can make statements and ratios look
better.
e.g. XYZ company
CA = 4000 & CL = 4000
CR = CA/CL = 4000/4000 = 1:1
On 30-December → the company took 3000 $ long term debt ( not a current liability )
Thus nominator will increase while dominator will still the same – hence the ratio will
increase
CR (after loan) = (4000+3000)/4000 = 1.75:1
4) Different accounting and operating practices can distort comparisons.
e.g. Gulf company
On Jan. : bought 100 unit with a price 10 $/unit
On Feb. : bought 150 unit with a price 12 $/unit
On Mar. : Sold 130 unit

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*Based on FIFO (First In First Out)

100 X10 + 30X12
Thus the inventory will be 120 X12 = 1440 “ending inventory”
*Based on LIFO (Last In First Out)
130 X12
Thus the inventory will be 20X12 +100X10 = 1240 “ending inventory”
This will affect 6 ratios; inventory turnover, total assets containing ration, net income
containing ratios, ROA……etc.
‫لذلك ٌجب استخدام نفس الحسابات للمقارنة بٌن الشركات‬
Qualitative Factors ‫العناصر الوصفية‬
 There is greater risk if:
o revenues tied to a single customer
o revenues tied to a single product
o Reliance on a single supplier
o High percentage of business is generated overseas
‫سعر الدوالر – سعر الصرف – الظروف االقتصادٌة‬
 What is the competitive situation?
 What products are in the pipeline? ‫تتطور نفسك دائما‬
 What are the legal and regulatory issues? ‫شركات االدوٌة‬

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Financial Ratios
Liquidity Asset Debt Management Profitability Market Value Ratio

Ratios Management Ratios Ratios
Ratios
① ③ DSO ⑦ Debt ratio ⑩ PM ⑯ P / E Ratio
𝑇𝐿 𝑁𝐼 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆𝑕𝑎𝑟𝑒
Current = = 𝑇𝐴 = = 𝑆𝑎𝑙𝑒𝑠 =
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝐸𝑃𝑆
ratio 𝐶𝐿+𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡
𝐶𝐴 𝑆𝑎𝑙𝑒𝑠 /365
= 𝐶𝐿 𝑇𝐴
② ④ FATO ⑧ TIE ⑪ OM ⑰ EPS

𝑆𝑎𝑙𝑒𝑠 𝐸𝐵𝐼𝑇
Quick = 𝑁𝑒𝑡 𝐹𝐴 = = 𝑆𝑎𝑙𝑒𝑠 =
𝐸𝐵𝐼𝑇 (𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 ) 𝑁𝐼
ratio
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑁𝑜.𝑜𝑓 𝑆𝑕𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
=
𝐶𝐴−𝐼𝑛𝑣 . = 𝐷𝑃𝑆 − 𝑅𝐸
𝐶𝐿
⑤ TATO ⑨ EBITDA (EC) ⑫ GM ⑱ Price Per Cash
𝑆𝑎𝑙𝑒𝑠 = = Flow
= 𝑇𝐴
𝐸𝐵𝐼𝑇+𝐷𝐴+𝐿𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑆𝑎𝑙𝑒𝑠 −𝐶𝑂𝐺𝑆 =
𝐼𝑛 .𝑒𝑥𝑝 .+𝑙𝑒𝑎𝑠𝑒 𝑝𝑡 .+𝑙𝑜𝑎𝑛 𝑝𝑡 𝑆𝑎𝑙𝑒𝑠 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆𝑕𝑎𝑟𝑒
𝐶𝑎𝑠𝑕 𝐹𝑙𝑜𝑤 𝑃𝑒𝑟 𝑆𝑕𝑎𝑟𝑒
⑥ Inv. TO ⑬ ROA ⑲ CF / Share
𝑆𝑎𝑙𝑒𝑠 𝑁𝐼
= 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 𝑇𝐴 =
𝑁𝐼+𝐷𝑒𝑝𝑟 .
𝑁𝑜.𝑂𝑓 𝑆𝑕𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
 Net Income = Sales – Cost ⑭ROE ⑳ BVPS

 EBIT = Revenue – Operating Cost = =
𝑁𝐼 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦
 EBT = EBIT – Interest (I)
𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 𝑁𝑜.𝑂𝑓 𝑆𝑕𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
 Net Income = EBT – Tax (Earning After Tax
“EAT”) ⑮BEP (21) M / B
 Cash flow = Net Income + Depreciation 𝐸𝐵𝐼𝑇
=
= 𝑇𝐴
 Cash Flow Per Share = ( NI + Depr. ) / No. of 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆𝑕𝑎𝑟𝑒
Shares Outstanding 𝐵𝑉𝑃𝑆
ROI >> return on investment (%) = Net profit / Investment × 100

Or return on investment = (gain from investment - cost of investment) / cost of
investment

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Bonds, Bond Valuation, and Interest Rates

Key Features of a Bond
1) Par value: ‫القٌمة االسمٌة‬
- Face amount; paid at maturity. Assume $1,000.
- Bond holder is lender & has no voting rights.
- Issuer is borrower.
- Treasury bill ‫أذون الخزانة‬ short term
- Treasury bond  long term
2) Coupon interest rate: Stated interest rate. Multiply by par value to get dollars of interest.
Generally fixed.
3) Maturity: Years until bond must be repaid. Declines.
4) Issue date: Date when bond was issued.
5) Default risk: Risk that issuer will not make interest or principal payments.
Call Provision ( provision ‫) ٌعنً نص فً العقد‬

 Issuer can refund if rates decline. That helps the issuer but hurts the investor.
% 8 ‫ ونزل لـ‬%10 ‫ لو سعر الفاٌدة قل فً السوق مثال لو كان‬-
 Therefore, borrowers are willing to pay more, and lenders require more, on callable bonds.
 Most bonds have a deferred call and a declining call premium.
‫ أعوض المستثمر وأدٌله فاٌدة سنة مقابل االستدعاء‬call premium -

‫ عشان أقلل‬call ‫ أو أعمله‬refund ‫ سنوات مثال وبعدٌن أعمل‬5 ‫ ٌعنً أنا سبت المستثمر ٌستمتع بالفاٌدة العالٌة لمدة‬deferred call -
interest rate ‫الـ‬
Sinking fund (sinking bond)

o Provision to pay off a loan over its life rather than all at maturity.
o Similar to amortization on a term loan.
o Reduces risk to investor, shortens average maturity.
o But not good for investors if rates decline after issuance.
‫ دفتر توفٌر للشركة‬-
‫ كل سنة ناخد جزء من االرباح ونحطه فً الصندوق ده وأبدأ اشتري المدٌونٌات اللً علٌا منه‬-
‫ اللً علٌا‬bond ‫ معٌن اختٌار عشوائً واتصل بٌه أقوله تعالً هسددلك الـ‬lender ‫ الشركة تختار‬-
Ex.1
IBM bond has 3 years till maturity, coupon rate is 8%, par value is $1000, current market rate of interest
on similar bond is 10 % - compute the bond price.
>> Determine the coupon payment in dollars = coupon rate X par value = 8% X 1000 = $80 per year.
C1 C2 C3
80 80 80
0 1 2 3
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𝐶1 𝐶2 𝐶3 𝑃𝑎𝑟
Bond Price = 1+𝑟 1
+ 1+𝑟 2 + 1+𝑟 3 + 1+𝑟 3
80 80 80 1000
= (1+0.1) 1
+ 1+0.1 2 + 1+0.1 3 + 1+0.1 3
= 72.72 + 66.11 + 60.1 + 751.3
= $950 >>>>>>>>> Discount (Capital gain)
Ex.2
IBM bond has 3 years till maturity, coupon rate is 8%, par value is $1000, current market rate of interest
on similar bond is 6 % - compute the bond price.
>> Determine the coupon payment in dollars = coupon rate X par value = 8% X 1000 = $80 per year.
C1 C2 C3
80 80 80
0 1 2 3
𝐶1 𝐶2 𝐶3 𝑃𝑎𝑟
Bond Price = 1+𝑟 1
+ 1+𝑟 2 + 1+𝑟 3 + 1+𝑟 3
80 80 80 1000
= + + +
(1+0.06) 1 1+0.06 2 1+0.06 3 1+0.06 3
= 75.5 + 71.2 + 67.2 + 839.62
= $1054 >>>>>>>>> Premium (Capital loss)
⌂ Bond Price rules:

1) Coupon rate (8%) < market rate (10%) → Bond Price ($950) < Par value ($1000 )
 Discount
2) Coupon rate (8%) = market rate (8%) → Bond Price ($1000) = Par value ($1000 )
 Par
3) Coupon rate (8%) < market rate (6%) → Bond Price ($1054) >Par value ($1000 )
 Premium
Note:
- Coupon rate is fixed
- Par value is fixed
- Market rate is changeable
Ex.3
If bond price = $ 950 , coupon rate = 8% , Par = $1000 , n = 3 years.
What is the yield to maturity on the bond (r)
→
𝐶1 𝐶2 𝐶3 𝑃𝑎𝑟 80 80 80 1000
Bond Price (BP) = 1+𝑟 1
+ 1+𝑟 2
+ 1+𝑟 3
+ 1+𝑟 3
= (1+𝑟) 1
+ 1+𝑟 2
+ 1+𝑟 3
+ 1+𝑟 3
) 10%, 8%, 6% ( ‫فً هذه الحالة هدٌك خٌارات عشان تختار منها‬

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Sinking funds are generally handled in 2 ways

 Call x% at par per year for sinking fund purposes.
o Call if rd is below the coupon rate and bond sells at a premium.
 Buy bonds on open market.
o Use open market purchase if rd is above coupon rate and bond sells at a discount.
****************************************************************************
Price & r ‫ ده إننا نعرف نحسب الـ‬chapter ‫أهم حاجة فً الـ‬

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Ch 6 Risk, Return, and the Capital Asset Pricing Model
What are investment returns?

 Investment returns measure the financial results of an investment.
 Returns may be historical or prospective (anticipated).
 Returns can be expressed in:
 Dollar terms.
 Percentage terms.
e.g.
An investment costs $1,000 and is sold after 1 year for $1,100.
Dollar return:
$ Received - $ Invested  $1,100 - $1,000 = $100.
Percentage return:
$ Return / $ Invested  $100/$1,000 = 0.10 = 10%.
What is investment risk?

Typically, investment returns are not known with certainty.
Investment risk pertains to the probability of earning a return less than that expected.
The greater the chance of a return far below the expected return, the greater the risk.
Probability Distribution: Which stock is riskier? Why?
Consider the Following Investment Alternatives

Econ. Prob. T-Bill Alta Repo Am F. MP
Bust 0.10 8.0% -22.0% 28.0% 10.0% -13.0%
Below avg. 0.20 8.0 -2.0 14.7 -10.0 1.0
Avg. 0.40 8.0 20.0 0.0 7.0 15.0
Above avg. 0.20 8.0 35.0 -10.0 45.0 29.0
Boom 0.10 8.0 50.0 -20.0 30.0 43.0
What is unique about the T-bill return?

 The T-bill will return 8% regardless of the state of the economy.
 Is the T-bill riskless? Explain.

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Alta Inds. and Repo Men vs. the Economy

 Alta Inds. moves with the economy, so it is positively correlated with the economy. This is the
typical situation.
 Repo Men moves counter to the economy. Such negative correlation is unusual.
Calculate the expected rate of return on each alternative.

𝑟 = expected rate of return.
𝑟 = 𝑛𝑟=1 𝑟𝑖𝑃𝑖
𝑟 Alta = 0.10(-22%) + 0.20(-2%) + 0.40(20%) + 0.20(35%) + 0.10(50%) = 17.4%.
Alta has the highest rate of return. Does that make it best?
Alta 17.4%
Market 15.0
Am. Foam 13.8
T-bill 8.0
Repo Men 1.7
What is the standard deviation of returns for each alternative?

σ = Standard deviation
σ= 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = 𝜎2 =
Standard Deviation of Alta Industries

 = [(-22 - 17.4)20.10 + (-2 - 17.4)20.20 + (20 - 17.4)20.40 + (35 - 17.4)20.20 + (50 - 17.4)20.10]1/2
= 20.0%.
Standard Deviation of Alternatives
T-bills = 0.0%.
 Alta = 20.0%.
 Repo = 13.4%.
 Am Foam = 18.8%.
Market = 15.3%.
Stand-Alone Risk
 Standard deviation measures the stand-alone risk of an investment.

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 The larger the standard deviation, the higher the probability that returns will be far below the
expected return.
Expected Return versus Risk

Security Expected Return Risk, s
Alta Inds. 17.4% 20.0%
Market 15.0 15.3
Am. Foam 13.8 18.8
T-bills 8.0 0.0
Repo Men 1.7 13.4
Coefficient of Variation (CV)

 CV = Standard deviation / Expected return
 CVT-BILLS = 0.0% / 8.0% = 0.0.
 CVAlta Inds = 20.0% / 17.4% = 1.1.
 CVRepo Men = 13.4% / 1.7% = 7.9.
 CVAm. Foam = 18.8% / 13.8% = 1.4.
 CVM = 15.3% / 15.0% = 1.0.
Expected Return versus Coefficient of Variation

Security Expected Return Risk: s Risk: CV
Alta Inds 17.4% 20.0% 1.1
Market 15.0 15.3 1.0
Am. Foam 13.8 18.8 1.4
T-bills 8.0 0.0 0.0
Repo Men 1.7 13.4 7.9
Return vs. Risk (Std. Dev.): Which investment is best?
Portfolio Risk and Return

Assume a two-stock portfolio with $50,000 in Alta Inds. and $50,000 in Repo Men.
Calculate 𝑟p and p.

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Portfolio Expected Return

𝑟p is a weighted average (wi is % of portfolio in stock i):
𝑟p = 𝑛𝑖−1 𝑊𝑖 𝑟i
𝑟p = 0.5(17.4%) + 0.5(1.7%) = 9.6%.
Alternative Method: Find portfolio return in each economic state

Economy Prob. Alta Repo Port.= 0.5(Alta) + 0.5(Repo)
Bust 0.10 -22.0% 28.0% 3.0%
Below avg. 0.20 -2.0 14.7 6.4
Average 0.40 20.0 0.0 10.0
Above avg. 0.20 35.0 -10.0 12.5
Boom 0.10 50.0 -20.0 15.0
Use portfolio outcomes to estimate risk and expected return

𝑟p = (3.0%)0.10 + (6.4%)0.20 + (10.0%)0.40 + (12.5%)0.20 + (15.0%)0.10 = 9.6%
p = ((3.0 - 9.6)20.10 + (6.4 - 9.6)20.20 +(10.0 - 9.6)20.40 + (12.5 - 9.6)20.20 + (15.0 - 9.6)20.10)1/2 = 3.3%
CVp = 3.3%/9.6% = .34
Portfolio vs. Its Components

 Portfolio expected return (9.6%) is between Alta (17.4%) and Repo (1.7%) returns.
 Portfolio standard deviation is much lower than:
o either stock (20% and 13.4%).
o average of Alta and Repo (16.7%).
 The reason is due to negative correlation (r) between Alta and Repo returns.
Two-Stock Portfolios
 Two stocks can be combined to form a riskless portfolio if r = -1.0.
 Risk is not reduced at all if the two stocks have r = +1.0.
 In general, stocks have r ≈ 0.35, so risk is lowered but not eliminated.
 Investors typically hold many stocks.
 What happens when r = 0?
Adding Stocks to a Portfolio

 What would happen to the risk of an average 1-stock portfolio as more randomly selected stocks
were added?
 𝜎p would decrease because the added stocks would not be perfectly correlated, but the
expected portfolio return would remain relatively constant.
𝝈1 stock ≈ 35%
𝝈Many stocks ≈ 20%

Managerial Finance
Risk vs. Number of Stock in Portfolio
Stand-alone risk = Market risk + Diversifiable risk

 Market risk is that part of a security’s stand-alone risk that cannot be eliminated by
diversification.
 Firm-specific, or diversifiable, risk is that part of a security’s stand-alone risk that can be
eliminated by diversification.
Conclusions
 As more stocks are added, each new stock has a smaller risk-reducing impact on the portfolio.
 𝜎p falls very slowly after about 40 stocks are included. The lower limit for 𝜎p is about 20% = 𝜎M .
 By forming well-diversified portfolios, investors can eliminate about half the risk of owning a
single stock.
Can an investor holding one stock earn a return commensurate with its risk?
 No. Rational investors will minimize risk by holding portfolios.
 They bear only market risk, so prices and returns reflect this lower risk.
 The one-stock investor bears higher (stand-alone) risk, so the return is less than that required by
the risk.
How is market risk measured for individual securities?

 Market risk, which is relevant for stocks held in well-diversified portfolios, is defined as the
contribution of a security to the overall riskiness of the portfolio.
 It is measured by a stock’s beta coefficient. For stock i, its beta is:
 bi = (𝜌i,M 𝜎i) / 𝜎M
How are betas calculated?

Managerial Finance
In addition to measuring a stock’s contribution of risk to a portfolio, beta also measures the
stock’s volatility relative to the market.
Using a Regression to Estimate Beta

 Run a regression with returns on the stock in question plotted on the Y axis and returns on the
market portfolio plotted on the X axis.
 The slope of the regression line, which measures relative volatility, is defined as the stock’s beta
coefficient, or b.
Use the historical stock returns to calculate the beta for PQU.
Year Market PQU
1 25.7% 40.0%
2 8.0% -15.0%
3 -11.0% -15.0%
4 15.0% 35.0%
5 32.5% 10.0%
6 13.7% 30.0%
7 40.0% 42.0%
8 10.0% -10.0%
9 -10.8% -25.0%
10 -13.1% 25.0%
What is beta for PQU?

The regression line, and hence beta, can be found using a calculator with a regression function
or a spreadsheet program. In this example, b = 0.83.
Calculating Beta in Practice

 Many analysts use the S&P 500 to find the market return.
 Analysts typically use four or five years’ of monthly returns to establish the regression line.
 Some analysts use 52 weeks of weekly returns.
How is beta interpreted?

 If b = 1.0, stock has average risk.
 If b > 1.0, stock is riskier than average.
 If b < 1.0, stock is less risky than average.
 Most stocks have betas in the range of 0.5 to 1.5.
 Can a stock have a negative beta?
Expected Return versus Market Risk: Which investment is best?

Security Expected Return (%) Risk, b
Alta 17.4 1.29
Market 15.0 1.00

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Am. Foam 13.8 0.68

T-bills 8.0 0.00
Repo Men 1.7 -0.86
Use the SML to calculate each alternative’s required return.

 The Security Market Line (SML) is part of the Capital Asset Pricing Model (CAPM).
 SML: ri = rRF + (RPM)bi .
 Assume rRF = 8%; rM = rM = 15%.
 RPM = (rM - rRF) = 15% - 8% = 7%.
Required Rates of Return

 rAlta = 8.0% + (7%)(1.29) = 17%.
 rM = 8.0% + (7%)(1.00) = 15.0%.
 rAm. F. = 8.0% + (7%)(0.68) = 12.8%.
 rT-bill = 8.0% + (7%)(0.00) = 8.0%.
 rRepo = 8.0% + (7%)(-0.86) = 2.0%.
Expected versus Required Returns (%)
Exp. r Req. r
Alta 17.4 17.0 Undervalued
Market 15.0 15.0 Fairly valued
Am. Foam 13.8 12.8 Undervalued
T-bills 8.0 8.0 Fairly valued
Repo 1.7 2.0 Overvalued
SML: ri = rRF + (RPM) bi

ri = 8% + (7%) bi
Calculate beta for a portfolio with 50% Alta and 50% Repo
bp = Weighted average
= 0.5(bAlta) + 0.5(bRepo) = 0.5(1.29) + 0.5(-0.86) = 0.22.

Managerial Finance
Required Return on the Alta/Repo Portfolio?

rp = Weighted average r = 0.5(17%) + 0.5(2%) = 9.5%.
Or use SML:
rp = rRF + (RPM) bp = 8.0% + 7%(0.22) = 9.5%.
Has the CAPM been completely confirmed or refuted?

No. The statistical tests have problems that make empirical verification or rejection virtually
impossible.
o Investors’ required returns are based on future risk, but betas are calculated with
historical data.
o Investors may be concerned about both stand-alone and market risk.

Managerial Finance
Stocks, Stock Valuation, and Stock Market Equilibrium
Dividends Voting right

Common stock  
Classified stock X 
(Founders’ shares)
New shares  X
(Class A shares)
Tracking stock From particular division in company X
Preferred stock Receive a fixed dividend which must be paid X
(Hybrid security) before dividends can be paid on common
stock (Similar to bonds)
Unlike bonds, preferred stock dividends can be omitted without fear of pushing
the firm into bankruptcy
Facts about common stock

• Represents ownership
• Ownership implies control
• Stockholders elect directors
• Directors elect management
• Management’s goal: Maximize the stock price
Preferred Stock Characteristics

• Unlike common stock, no ownership interest
• Second to debt holders on claim on company’s assets in the event of bankruptcy.
• Annual dividend yield as a percentage of par value
• Preferred dividends must be paid before common dividends
• If cumulative preferred, all missed past dividends must be paid before common dividends can be
paid.
Intrinsic Value and Stock Price

• Outside investors, corporate insiders, and analysts use a variety of approaches to estimate a
stock’s intrinsic value (P0).
• In equilibrium we assume that a stock’s price equals its intrinsic value.
▫ Outsiders estimate intrinsic value to help determine which stocks are attractive to buy
and/or sell.
▫ Stocks with a price below (above) its intrinsic value are undervalued (overvalued).

Managerial Finance
What do investors in common stock want?

• Periodic cash flows: dividends, and…
• To sell the stock in the future at a higher price
• Management to maximize their wealth
Stock Valuation: Dividend Patterns

For Valuation: we will assume stocks fall into one of the following dividend growth patterns.
▫ Constant growth rate in dividends
▫ Zero growth rate in dividends, like preferred stock
▫ Variable (non-constant) growth rate in dividends
Different Approaches for Valuing Common Stock

* Stock Value = PV (present value) of Dividends
𝐷1 𝐷2 𝐷3 𝐷
𝑃0 = + + + ….. + rs >> required return
1+𝑟𝑠 1 1+𝑟𝑠 2 1+𝑟𝑠 3 1+𝑟𝑠 
For a constant growth stock:

D1 = D0(1 + g)1
D2 = D0(1 + g)2
Dt = D0(1 + g)t
If g is constant and less than rs, then:

𝐷0 (1+𝑔) 𝐷1
𝑃0 = =
𝑟𝑠−𝑔 𝑟𝑠−𝑔
What happens if g > rs?

𝐷0 (1+𝑔) 1 𝐷0 (1+𝑔) 2 𝐷0 (1+𝑔) 3 𝐷0 (1+𝑟𝑠) 
𝑃0 = 1+𝑟𝑠 1
+ 1+𝑟𝑠 2
+ 1+𝑟𝑠 3
+ ….. + 1+𝑟𝑠 
(1+𝑔) 𝑡
If g > rs, then > 1 and 𝑷0 = 
1+𝑟𝑠 𝑡
So g must be less than rs for the constant growth model to be applicable!!
Required rate of return (rs) :

beta = 1.2, rRF = 7%, and RPM = 5%.
Use the SML to calculate rs:
rs = rRF + (RPM)bFirm
= 7% + (5%)(1.2) = 13%.
Projected Dividends

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D0 = $2 and constant g = 6%
 D1 = D0(1 + g) = $2(1.06) = $2.12
 D2 = D1(1 + g) = $2.12(1.06) = $2.2472
 D3 = D2(1 + g) = $2.2472(1.06) = $2.3820
Intrinsic Stock Value:

𝐷0 (1+𝑔) 𝐷1
𝑃0 = =
𝑟𝑠−𝑔 𝑟𝑠−𝑔
$ 2.12 $ 2.12
= 0.13−0.06
= 0.07
=$30.29
Expected value one year from now:
D1 will have been paid, so expected dividends are D2, D3, D4 and so on.
𝐷2 $2.2472
𝑃1 = 𝑟𝑠−𝑔
= 0.07
= $32.10
Expected Dividend Yield and Capital Gains Yield (Year 1)

𝐷1 $ 2.12
Dividend yield = = = 7.0 %
𝑃0 $ 30.29
𝑃1−𝑃𝑜 32.10−30.29
CG Yield = = = 6.0%
𝑃0 30.29
Total Year 1 Return

 Total return = Dividend yield + Capital gains yield.
 Total return = 7% + 6% = 13%.
 Total return = 13% = rs.
 For constant growth stock:
o Capital gains yield = 6% = g.
Rearrange model to rate of return form:

𝐷1 𝐷1
𝑃0 = 𝑟𝑠−𝑔
 𝑟s = 𝑃𝑜
+g
Then, 𝑟s= $2.12/$30.29 + 0.06

= 0.07 + 0.06 = 13%.
Supernormal Growth Stock

 Supernormal growth of 30% for Year 0 to Year 1, 25% for Year 1 to Year 2, 15% for Year 2 to Year 3,
and then long-run constant g = 6%.
 Can no longer use constant growth model.
 However, growth becomes constant after 3 years.
Non-constant growth followed by constant growth (D0 = $2):
0 rs = 13 % 1 2 3 4
Managerial Finance
g = 30 % g = 25 % g = 15 % g=6%
D0 = $ 2 D1 = $ 2.6000 D2 = $ 3.2500 D3 = $ 3.7375 D3 = $ 3.9618
1
/ (1+rs)
2.3009 = 2.6/(1.13)1
/ (1+rs)2
2.5452 = 3.25/(1.13)2
/ (1+rs)3
3
2.5903 = 3.7375/(1.13)
/ (1+rs)3
39.2246 = 56.5971/(1.13)3 Ṕ3 = 3.9618 / (13% - 6%) = $56.5971
46.6610= Ṕ0
Expected return,
given Vps = $50 and annual dividend = $5
$5
Vps = $50 = 𝑟 𝑝𝑠
$5
𝑟ps = $ 50 = 0.10 = 10.0%
What is market equilibrium?

 In equilibrium, the intrinsic price must equal the actual price.
 If the actual price is lower than the fundamental value, then the stock is a “bargain.” Buy orders will
exceed sell orders, the actual price will be bid up. The opposite occurs if the actual price is higher
than the fundamental value.
Stock Market Equilibrium

Managerial Finance
• In equilibrium, stock prices are stable and there is no general tendency for people to buy versus
to sell.
• In equilibrium, two conditions hold:
▫ The current market stock price equals its intrinsic value (P0 = P0).
▫ Expected returns must equal required returns.
^ D1
rs  g  rs  rRF  (rM  rRF )b
P0
How is market equilibrium established?

• If price is below intrinsic value …
▫ The current price (P0) is “too low” and offers a bargain.
▫ Buy orders will be greater than sell orders.
▫ P0 will be bid up until expected return equals required return.
Non-constant Growth Model

- The constant growth model is the simplest and most popular valuation model for estimating the
expected value of common stocks. For instance, it is used by almost all security analysts. Yet, in
a more practical setting, we know that many firms experience a large variation in their sales,
costs, and incomes.
- In particular, during a recessionary environment or an economic boom, we may want to

incorporate the volatility of a firm's earnings in our price estimation. In this case, we can modify
Equation 5 to obtain a better estimate.
- We can divide the future periods into two time periods--a period of foreseeable abnormal
economic conditions (non-constant environment), followed by a period of normal, constant
growth. Under this assumption, the price of common stock would be calculated as follows:
- Many firms enjoy periods of rapid growth. These periods may result from the introduction of a
new product, a new technology, or an innovative marketing strategy. However, the period of
rapid growth cannot continue indefinitely. Eventually, competitors will enter the market and
catch up with the firm.
- These firms cannot be valued properly using the Constant Growth Stock Valuation approach.

Managerial Finance
- This section presents a more general approach which allows for the dividends/growth rates
during the period of rapid growth to be forecast. Then, it assumes that dividends will grow from
that point on at a constant rate which reflects the long-term growth rate in the economy.
- Stocks which are experiencing the above pattern of growth are called nonconstant,
supernormal, or erratic growth stocks.
- The value of a nonconstant growth stock can be determined using the following equation:
Where
 P0 = the stock price at time 0,
 Dt = the expected dividend at time t,
 T = the number of years of nonconstant growth,
 gc = the long-term constant growth rate in dividends, and
 r = the required return on the stock, and
 gc < r.
Nonconstant Growth Stock Valuation Example

The current dividend on a stock is $2 per share and investors require a rate of return of 12%. Dividends
are expected to grow at a rate of 20% per year over the next three years and then at a rate of 5% per
year from that point on. Find the price of the stock.
Solution:
There are 3 years of nonconstant growth, thus, T = 3. Before substituting into the formula given above it
is necessary to calculate the expected dividends for years 1 through 4 using the provided growth rates.

Managerial Finance
The Cost of Capital

What types of long-term capital do firms use?
1. Long-term debt
2. Preferred stock
3. Common equity
Capital Components
 Capital components are sources of funding that come from investors.
 Accounts payable, accruals, and deferred taxes are not sources of funding that come from
investors, so they are not included in the calculation of the cost of capital.
Component Cost of Debt

 Interest is tax deductible, so the after tax (AT) cost of debt is:
rd AT = rd BT(1 – T)
rd AT = 10%(1 – 0.40) = 6%.
 Use nominal rate.
 Flotation costs small, so ignore.
Cost of preferred stock:

Pps = $116.95; 10%Q; Par = $100; F (‫ = )عمولة االصدار‬5%
Use this formula:

𝐷𝑝𝑠 0.1 ($100) $ 10
rps = = = = 0.090 = 9.0 %
𝑃𝑝𝑠 (1−𝐹) $116.95 (1−0.05) $ 111.10
Is preferred stock more or less risky to investors than debt?

 More risky; company not required to pay preferred dividend.
 However, firms want to pay preferred dividend. Otherwise, (1) cannot pay common dividend,
(2) difficult to raise additional funds, and (3) preferred stockholders may gain control of firm.
Why is yield on preferred lower than rd?

o Corporations own most preferred stock, because 70% of preferred dividends are nontaxable to
corporations.
o Therefore, preferred often has a lower B-T yield than the B-T yield on debt.
o The A-T yield to investors and A-T cost to the issuer are higher on preferred than on debt, which
is consistent with the higher risk of preferred.
What are the two ways that companies can raise common equity?
 Directly, by issuing new shares of common stock.
 Indirectly, by reinvesting earnings that are not paid out as dividends (i.e., retaining earnings).

Managerial Finance
Three ways to determine the cost of equity, rs:

1. CAPM: rs = rRF + (rM – rRF)b
= rRF + (RPM)b.
2. DCF: rs = D1/P0 + g.
3. Own-Bond-Yield-Plus-Judgmental-Risk Premium: rs = rd + Bond RP.
CAPM Cost of Equity: rRF = 5.6%, RPM = 6%, b = 1.2

rs = rRF + (RPM )b
= 5.6% + (6.0%)1.2 = 12.8%.
DCF Cost of Equity, rs: D0 = $3.26; P0 = $50; g = 5.8%

𝐷1 𝐷0 (1+𝑔)
rs = 𝑃0 + g = 𝑃0 + g
$3.12(1.058)
= + 0.058 = 6.6% + 5.8% = 12.4%
$ 50
Estimating Weights for the Capital Structure

 If you don’t know the targets, it is better to estimate the weights using current market values
than current book values.
 If you don’t know the market value of debt, then it is usually reasonable to use the book values
of debt, especially if the debt is short-term.
 Suppose the stock price is $50, there are 3 million shares of stock, the firm has $25 million of
preferred stock, and $75 million of debt.
o Vs = $50(3 million) = $150 million.

o Vps = $25 million.
o Vd = $75 million.
o Total value = $150 + $25 + $75 = $250 million.
o ws = $150/$250 = 0.6
o wps = $25/$250 = 0.1
o wd = $75/$250 = 0.3
The target weights for this company are the same as these market value weights, but often market
weights temporarily deviate from targets due to changes in stock prices.
What’s the WACC using the target weights?

WACC = wdrd(1 – T) + wpsrps + wsrs
WACC = 0.3(10%)(1 − 0.4) + 0.1(9%) + 0.6(12.8%)
WACC = 10.38% ≈ 10.4%

Managerial Finance
Financial Planning and Forecasting Financial Statements
Why do sales increase?

1- Growth in population
2- Change in life style
Balance Sheet, Hatfield, 12/31/10 Income Statement, Hatfield, 2010

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Notes payable = bank loans EBIT = operating profit

I forecast to increase sales by 15% - and I have full capacity
So, I have to increase assets by 15% also
To increase assets I need funds ( finance ), which comes from :
1- Accounts payable & accruals
2- RE
3- External finance
I can calculate increase in acc. Payable & accruals as well as RE ( all will increase by 15%)
Then subtracting them from total money that I need to calculate AFN from bank or stocks
① Sales 2010 = 2000$ (S0)

Sales 2011 = 2000 + (0.15 X 2000) = 2300 $ (S1)
S1 = S0 X (1+ growth) = 2000 (1+0.15) = 2300 $
②A0 : current level of total assets (1200$)

S0 : current level of total sales (2000$)
𝐴0 1200
= = 60% >>>> 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦
𝑆0 2000
) 1 ‫ ( االفضل تكون اقل من‬- sales ‫ بتاعتك تمثل أد اٌه من الـ‬asset ً‫ ٌعن‬- ‫الكثافة االنتاجٌة للشركة‬
sales ‫ دوالر‬100 ً‫ٌجٌبول‬assets ‫ دوالر‬60 ‫مما ٌعنً ان كل‬
Comparison of Hatfield to Industry Using DuPont Equation
ROE = NI/S × S/TA × TA/E
o Profitability ratios lower because of higher interest
NI/S = $24/$2,000 = 1.2%
expense.
S/TA = $2,000/$1,200 = 1.67
o Lower asset management ratios due to high levels
TA/E = $1,200/$500 = 2.4
of receivables and inventory.
ROEHatfield = 1.2% × 1.67 × 2.4 = 4.8%.
o Higher leverage than industry.
ROEIndustry = 2.74% × 2.0 × 2.13 = 11.6%.
Full capacity: No unused machines so, I need to increase fixed assets

Excess capacity: there’re unused machines so, I don’t need to increase fixed assets
Managers have to utilize all resources they have → full capacity

& don’t leave anything without utilization → excess capacity

Managerial Finance
Additional Funds needed (AFN):

 To increase your sales, you need to increase your assets
 Increasing assets needs money (funds)
 Sources of finance:
1- Suppliers : accounts payable & accruals
2- Internal financing : Retained earnings
3- External financing: bank loan or common stock issuance or both of them
AFN (Additional Funds Needed) Equation: Key Assumptions

 Operating at full capacity in 2010.
 Sales are expected to increase by 15% ($300 million).
 Asset-to-sales ratios remain the same.
 Spontaneous-liabilities-to-sales ratio remains the same.
 2010 profit margin ($24/$2,000 = 1.2%) and payout ratio (35%) will be maintained.
Definitions of Variables in AFN

o A0*/S0: Assets required to support sales: called capital intensity ratio.
A0*/S0 = 1200/2000
o S: Increase in sales.
S= g X S0 = 15% X 2000 = 300
o L0*/S0: Spontaneous liabilities ratio.
L0*/S0 = 100 / 2000
o M: Profit margin (Net income/Sales)
M = 24 / 2000 = 1.2 % = 0.012
o POR: Payout ratio (Dividends/Net income) ‫نسبة التوزٌع‬
POR = 9 / 24 = 0.375
Hatfield’s AFN Using AFN Equation

 AFN = (A0*/S0)∆S −(L0*/S0)∆S −M(S1)(1−POR) ‫الزم اعرفها‬
 AFN = ($1,200/$2,000)($300)
− ($100/$2,000)($300)

Managerial Finance
− 0.012($2,300)(1 - 0.375)
 AFN = $180 − $15 − $17.25
 AFN = $147.75 million.
180 ‫ تساوي‬assets ‫ عشان يبقي معاها‬147.75 ‫يعني الشركة محتاجة‬

17.25 ‫ مقدارها‬retained earning ‫ والـ‬15 ‫الموردين هيدوها‬
Key Factors in AFN Equation

 Sales growth (g): The higher g is, the larger AFN will be
 Capital intensity ratio (A0*/S0): The higher the capital intensity ratio, the larger AFN will be
 Spontaneous-liabilities-to-sales ratio (L0*/S0): The higher the firm’s spontaneous liabilities, the
smaller AFN will be
 Profit margin (Net income/Sales): The higher the profit margin, the smaller AFN will be
 Payout ratio (DPS/EPS): The lower the payout ratio, the smaller AFN will be
True or false
(Projected financial statement )

Inputs for Steady Scenario and Target Scenario

Managerial Finance
interest ‫كل حاجة تزٌد ما عدا الـ‬

Forecasted Financial Statements: Balance Sheets for Steady Scenario
‫ حسبناها كنسبة‬RE ‫خللً بالك فً طرٌقة حساب الـ‬

RE ‫ عشان ٌطلع الـ‬net income ‫ ثم اطرحه من الـ‬- dividends ‫ ٌطلعلً الـ‬9/24 = 37.5%

Managerial Finance
(6-4)
A stock’s return has the following distribution:
Demand for the Company’s Probability of this demand Rate of return if this demand
products occurring occurs
Weak 0.1 (50%)
Below average 0.2 (5)
Average 0.4 16
Above average 0.2 25
strong 0.1 60
1.0
Calculate the stock’s expected return, standard deviation, and coefficient of variation.
>>>>>>>>>>>>>>>>>>>
rp = (-50 %)0.10 + (-5%)0.20 + (16%)0.40 + (25%)0.20 + (60%)0.10
= 11.4%
p = ((-50 – 11.4)20.10 + (-5 – 11.4)20.20 +(16 – 11.4)20.40 + (25 – 11.4)20.20 + (60 – 11.4)20.10)1/2
= 26.7%
CVp = 26.7%/11.4% = 2.34
***********************************************************************************
(6-5)
The market and Stock J have the following probability distributions:
Probability rM rJ
0.3 15% 20%
0.4 9 5
0.3 18 12

Managerial Finance
a. Calculate the expected rates of return for the market and Stock J.
b. Calculate the standard deviations for the market and Stock J.
c. Calculate the coefficients of variation for the market and Stock J.
>>>>>>>>>>>>>>>>>>>>>>>
Market
rp = (15%)0.30 + (9%)0.40 + (18%)0.30 = 13.5%
p = ((15– 13.5)20.30 + (9– 13.5)20.40 +(18 – 13.5)20.30 )1/2 = 3.85%
CVp = 3.85%/13.5% = 0.285
Stock J
rp = (20%)0.30 + (5%)0.40 + (12%)0.30 = 11.6%
p = ((20– 11.6)20.30 + (5 – 11.6)20.40 + (12 – 11.6)20.30 )1/2

= 38.64%
CVp = 38.64%/11.6% = 3.33
**********************************************************************************
(6-6)
Suppose rRF = 5%, rM = 10%, and rA = 12%
a. Calculate Stock A’s beta
b. If Stock A’s beta were 2.0, then what would be A’s new required rate of return?
>>>>>>>>>>>>>>>>>>>
A)
rA = Risk-free rate + (Market risk premium)(Beta of Stock A)
rA = rRF + (RPM) bA
12 = 5 + (rM – rRF) bA
12 – 5 = (10 – 5) bA
7 = 5 bA
7/5 = bA
1.40 = bA
B)
bA = 2.0
RA = 5 + (5)2.0
RA = 5 + 10
RA = 15%

Managerial Finance
************************************************************************************
*******************************************************
*******************************

Managerial Finance
(8-3)
Woidtke Manufacturing’s stock currently sells for $20 a share. The stock just paid a dividend of $ 1.00
a share (i.e. D0 = $ 1.00). The dividend is expected to grow at a constant rate of 10% a year. What
stock price is expected 1 year from now ? What is the required rate of return on the company’s stock?
>>>>>>>>
P0 = $ 20 D0 = $ 1 g = 10 % Ṕ1 = ? rs = ?
* Ṕ1 = P0 (1+g) = 20 (1.1)
Ṕ1 = $ 22
* P0 = D1 / (rs -g)
20 = 1.1 / (rs – 0.1)
20 rs – 2 = 1.1
rs = 3.1 / 20
rs = 0.155 = 15.5 %
********************************************************************************
(8-5)
A company currently pays a dividend of $2 per share. It is estimated that the company’s dividend will
grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The
company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market premium is 4%. What is
your estimate of the stock’s current price?
>>>>>
rRF = 7.5 % rs = rRF + (RPm)b
RPm = 4% = 7.5% + (4%) 1.2 = 0.123 = 12.3 %
D0 = 2$
g = 20% → Supernormal growth stock i.e. g > rs
g = 7% → Constant growth model i.e. g < rs
b = 1.2
rRF = 7.5 %
RPm = 4%
 D0 =$ 2 g = 0.2
 D1 = D0 (1+g) = 2 (1.2) = 2.4
 D2 = D1 (1+g) = 2.4 (1.2) = 2.88
 D3 = D2 (1+g) = 2.88 (1.2) = 3.456

Managerial Finance
Or
 D0 =$ 2 g = 0.2
 D1 = D0 (1+g) = 2 (1.2)1 = 2.4
1
 D2 = D0 (1+g)2 = 2 (1.2)2 = 2.88

 D3 = D0 (1+g)3 = 2 (1.2)3 = 3.456
Ṕ0 = D1 / (1+rs)1 + D2 / (1+rs)2 + D3 / (1+rs)3
In these cases rs < g In this case rs > g So, we will calculate first D3 / (rs-g) to
→ Supernormal growth → Constant growth model obtain Ṕ3 then calculate Ṕ0
Ṕ0 = [D1 / (1+rs)1 ] + [D2 / (1+rs)2 ]+ [(D3 / (rs – g) ) / (1+rs)3 ]
0 rs = 12.3 % 1 2 3
g = 20 % g = 20 % g=7%
D0 = $ 2 D1 = $ 2.4 D2 = $ 2.88 D3 = $ 3.456

1
1
/ (1+rs)
2.1371 = 2.4/(1.123)
/ (1+rs)2
2.2836 = 2.88/(1.123)2
/ (1+rs)3
46.0424 = 65.2075 /(1.123)3 Ṕ3 = 3.456 / (12.3% - 7%) = 65.2075
50.4631 = Ṕ0
Ṕ0 = 50.4631
******************************************************************

Managerial Finance
(8-7)
You are considering an investment in the common stock of Crisp’s Cookware. The stock is expected to
pay a dividend of $2 a share at the end of the year (D1 = $2.00). The stock has a beta equal to 0.9. The
risk-free rate is 5.6%, and the market risk premium is 6%. The stock’s dividend is expected to grow at
some constant rate g. The stock currently sells for $ 25 a share. Assuming the market is in equilibrium,
what does the market believe will be the stock price at the end of 3 years? (That is, what Ṕ3?)
>>>>>>
D1 = $2.00 b = 0.9 rRF = 5.6%
g = ?? RPM = 6% P0 = $ 25
Market is equilibrium , so Ṕ = P Ṕ3 = ??
We first calculate the growth rate g

P0 = D1 / (rs - g)
Here
P0 = current market price = $25
rs = rRF + (RPM) b = 5.6% + 6%X0.9 = 11%
D1 = $2.00
We get
25 = 2/(11%-g)
Solving gives g = 3%
Price at the end of three years

P3 = P0 X (1+g)3
= 25 X (1+3%)3 = $27.32 $
***********************************************************************************

Managerial Finance

Managerial Economics
Managerial
Economics

Economics
Definition:
 It is a social science (dealing with people & societies).
 It is the social science that deals with better standards of living to make people live better.
Economic problem:
Limited Resources, to satisfy Unlimited Wants.
Scarcity:
How can we use limited resources to satisfy the unlimited wants.
 Example: Most underdeveloped nations have natural resources, but do not have capital or
skilled labor to develop them.
 Scarcity develops choices that will add more complications to the problem:
1- Who will set the priorities of these choices?
“ In order to answer, I have to be responsible for the resources; based on the economic
system of the country”
2- Once I make a choice, I will sacrifice other choices.
Three Economic Questions:

We must answer three basic questions when deciding how to use the limited resources.
1) What to produce?
2) How to produce?
3) For whom shall we produce?
Resources (Factors of Production)

 Resources are all the things used in producing goods and services
1. Land:
- Everything on the earth that is in its natural state, or the Earth’s natural resources.
- E.g. rain, oil, land, …. etc.
2. Labor :
- All the people who work in the economy
• Skilled labor vs. Unskilled labor or
• Mental workers vs. physical workers or
• White collar vs. blue collar
3. Capital :
- Technology, Know how, machines, & assets.
- Factories, office buildings, computers, and tools are all capital resources.
4. Entrepreneurship:
- Ability of the person who have the innovation.
- Human effort depends on education & training.

Opportunity Cost: (Trade-off)

 Second best alternative forgone (missed)
 Example I
The opportunity cost of college attendance includes: the cost of tuition, books, and supplies,
foregone income (this is usually the largest cost associated with college attendance), and
psychic costs. What about room and board?
 Example II:
Opportunity cost of attending a movie:
- Opportunity cost of tickets - Opportunity cost of time
 Example III:
‫إنً عشان أعمل كام مدرسة – فؤنا ضحٌت بعمل مستشفً وسراٌر فٌها‬
ً‫ ولكن بناء المدارس منعن‬، ‫ هنا مش الفلوس – ولكن مستوي الخدمة الصحٌة اللً كنت ممكن أقدمه للناس‬cost ‫فتمن الـ‬
‫ألن التعلٌم فً مقدمة أولوٌاتً قبل الصحة‬
‫ اللً هتٌجً من التعلٌم أعلً من إنً أصلح المستشفٌات‬benefits ‫ٌبقً الزم تكون الـ‬
.‫ عالٌة‬opportunity cost ‫وإال هتكون فً الحالة دي الـ‬
Remember
We have to minimize the opportunity cost as we can.
Types of Economic Systems

1. Command Economy ( Socialism ) ‫االشتراكٌة‬
2. Market Economy ( Capitalism ) ‫الرأسمالٌة‬
3. Mixed Economy
Command Economy ( Centrally Planned Economy ).

All resources are owned & allocated by government.
One person (dictator) or a group of officials decide WHAT products are needed.
The government runs all businesses, controls all employment, and decides HOW goods and
services will be produced.
The government decides WHO receives the products that are produced.
Examples of a command economy

- In the former Soviet Union the government killed small property owners and redistributed their
land to workers.
- In Cuba all residents are given rations of foods. Instead of purchasing food in a market Cubans
go to government food supply centers.
- Cuba’s Fidel Castro and Che Guevarra established a command economy by expelling Cuba’s
small business and land owners
Problems

- Consumers get low priority.

- Little freedom of choice – few products.
- Resources owned by the state are often wasted – individuals don’t care if they don’t own it.
Market Economy
NO government involvement in economic decisions.
Private firms account for all production.
Consumers decide WHAT should be produced.
They do this through the purchases they make.
Businesses determine HOW the products will be produced.
They must be competitive.
WHO buys the products? The people with the most money are able to buy more goods and
services.
Examples of Market Economies

o To a large extent the US has a market economy. Compared to the rest of the world taxes are
low and supply is determined by demand
o Singapore is also an example of a market economy. In Singapore there are very few taxes and
businesses can decide on how and what to produce.
o In reality there is no such thing as a true market economy because the government in almost
every nation around the world plays a significant role in the economy including the US
Problems
- Difficulty enforcing property rights - no laws.
- Some people have few resources to sell - no minimum income.
- Some firms try to monopolize markets - conspiring and price fixing.
- No public goods. - national defense?
Mixed Economy
Most economies in the world today are mixed.
Classification is based on how much government intervention there is.
In the U.S. the government accounts for about 1/3 of all U.S. economic activity.
Traits of a Mixed Economy

- The government controls large industries, while private individuals control small businesses.
- Citizens are taxed heavily to provide all citizens a social safety net such as welfare, free
university tuition and free health care.
- Property is controlled by both the government and private individuals.
- Workers tend to be somewhat less productive than those in market economies, but less product
then those in command economies.
- Consumers generally have wide variety choices.

- John Maynard Keynes claimed that economies would benefit from deficit spending if it led to
higher employment rates.
- President Franklin Roosevelt introduced the principles of a mixed economy to the US by
expanding the government, providing welfare and establishing Social Security for the elderly.
Examples of a Mixed Economy

- In France health care is free, university costs very little if you get in (many do not) and taxes are
high. However, there are also private industries based out of France like Air France and
Peugeot.
- In United Kingdom health care is free, university is cheap, but citizens can purchase private
health insurance and attend private universities if they choose.
- In the United States the federal government owns much land in the West and private ranchers
are allowed to graze their cattle on that land.
Criticism of Mixed Economies

- Critics of mixed economies claim that they often result in unproductive workers because there is
not as much incentive to work hard as there is in a market economy. As a result mixed
economies often suffer from higher unemployment rates and lack the same number of
entrepreneurs as market economies.
- Mixed economies often must raise taxes in order to sustain all of the social services such as
welfare, free health care, low cost university education and pension systems for the elderly
which can lead to a stagnant economy.
- In essence, critics claim that mixed economies enable irresponsible behavior.
Government Philosophies
- Countries also have different philosophies of government which reflect not only the laws and
rules, but how individuals are treated.
- There are three political philosophies:
1. Capitalism
2. Socialism
3. Communism
Capitalism
 Features private ownership of businesses and marketplace competition.
 It is the same as a free enterprise system.
 The political system most frequently associated with capitalism is democracy.
Socialism
 The main goal of socialism is to keep prices low for all people and to provide employment for
many.

 The government runs key industries, generally in telecommunications, mining, transportation,

and banking.
 Socialist countries tend to have more social services.
Communism
 Have a totalitarian form of government; this means that the government runs everything and
makes all decisions.
 Theoretically, there is no unemployment in communist countries.
 The government decides the type of schooling people will receive and also tells them where to
live.
Which Economic System Is Best?
Market system has proven to be best because it promotes the goals of growth, freedom, & efficiency
Citizens are free to own their own property and use it in the most efficient and profitable way
Command and Traditional systems sometimes offer more security, but are not nearly as strong in
efficiency, growth, freedom, and environmental quality
Economies in Transition
Many countries are in transition from either communism or socialism to capitalism.
Privatization
o It is a common aspect of transition from a command economy to free enterprise system.
o Privatization means state-owned industries are sold to private individuals and companies.
Socialism:
All resources are owned & allocated by the government.
Communism: (Karl Marx “economist”)

All resources are owned & allocated by everyone.
Communist manifesto:
Societies are struggling in order to achieve the utopia of communism, which can’t be achieved in the
current life but in the afterlife.
5 steps to reach communism: ( ‫) فٌلم البداٌة لصلح أبو سٌف‬

1) Primitive society ً‫المجتمع البدائ‬
 everyone has an access to resources
 utilize resources
 divide resources

 by the time, we will have two categories:

- People owning resources ( bourgeoisie ) ‫الطبقة الوسطى‬
- People don’t own resources (Proletariat) ‫طبقة العمال‬
revolution ‫الفكر الماركسً قائم علً الصراع بٌن الطبقات ولذلك ٌحدث‬
..... ‫ " صراع طبقً " فٌنتج نظام آخر‬class struggle ‫ فٌحصل‬resources ‫لكن البرجوازٌٌن هم األقوي ألن معاهم الـ‬
2) Agrarian society ً‫المجتمع الزراع‬

 An agrarian society is a society in which the majority of the economy and jobs directly involve
agriculture production.
3) Petite bourgeoisie
bourgeoisie ‫ بعد ما اتعلموا وقربوا من طبقة الـ‬proletariat ‫أبناء الـ‬ -
bourgeoisie ‫ ضد الـ‬proletariat ‫ مع طبقة الـ‬Petite bourgeoisie ‫تتحالف طبقة الـ‬ -
Petite ‫ ٌكونوا بدأوا ٌتجهوا نحو الصناعة ) ٌعنً ما زالوا االقوي ( فتحدث ثورة من تحالف الـ‬bourgeoisie ‫ولكن طبقة الـ‬ -
class struggle ‫ وٌحصل‬bourgeoisie ‫ ضد الـ‬proletariat ‫ مع الـ‬bourgeoisie
capitalism ‫فً اآلخر تظهر الـ‬ -
4) Socialism
The 4th step in Marxist thought ً‫الفكر الماركس‬
5) Communism
The 5th step in Marxist thought ً‫الفكر الماركس‬
******************************************
Economic prospective:
1. Opportunity cost
2. Rational behavior
 If I’m thinking rationally, it means that I have to define what my objective (goal) is.
 Rationality depends on the shoe we are wearing:
o As a customer; my goal is to maximize my satisfaction.
o As a producer; my goal is to maximize the profit.
 Selfishness & rationality
3. Other things are held constant
‫افتراض بقاء األشٌاء األخري أو العوامل األخري علً حالها‬
‫عشان أدرس عامل ٌإثر علً حاجة الزم أثبت باقً العوامل‬
4. Marginal analysis
- In economics; Marginal means extra or additional
- We concern about the extra step (the next step) we made
o If extra benefits > extra cost of the step  take it.
o If extra benefits = extra cost of the step  take it “to squeeze the benefits”.

o If extra benefits < extra cost of the step  don’t take it.
Different types of economics:

❶ Microeconomics
- From the individual prospective of society e.g. single industry.
❷ Macroeconomics
- Economy as a whole e.g. inflation which affects all industries.
❸ Managerial economics
- Deals with both Macro & Microeconomics >> to be decision maker
❹ International economics
- Deals with economics all over the world.
- International trade + international finance.
❺ Economics of education
❻ Health economics
❼ Financial economics
❽ Labor economics
❾ Sports economics
Sports economics ‫صفر الموندٌال نتٌجة لعدة وجود‬
Pitfalls in economic thinking (reasoning):

1. Fallacy (wrong) of composition
- What is true for the part might not necessarily be true for the whole.
e.g. saving money is good for individual in future, but bad if all people done as it will lead to
decline in consumption   economy.
2. Ad Hoc Fallacy (post hoc fallacy)
event A event B
If event A occurred before event B , this doesn’t mean that A has caused B
Correlation ‫العالقة االرتباطٌة‬

- Two events going parallel
Causal relation ‫العالقة السببٌة‬
- One event causes the other
3 main corners in economics:

1- Verbal explanation (intuition)
2- More scientific (mathematically)
3- Represented graphically

Production Possibilities Frontier (PPF)
→A graph that shows the maximum amount of two commodities produced in an economy when all
resources are used & the best available technology is applied.
On the graph; each of X & Y axis are independent
e.g. Pizza (Consumer good) & computer (producer good)
→It used to illustrate:

– Scarcity
– Choices
– Opportunity cost
Economic problem → Scarcity → Choice → Opportunity cost
→ Assumption:
1- Only two commodities ( goods - services ) are produced
2- All resources are being utilized
3- Best available technology is applied >>> max. production
The production possibility curve demonstrates that:

o There is a limit to what you can achieve, given the existing institutions, resources, and
technology.
o Every choice made has an opportunity cost—you can get more of something only by
giving up something else.
Why does the production possibility curve not a straight line?

 The principle of increasing marginal opportunity cost states that opportunity costs increase the
more you concentrate on an activity.

 In order to get more of something, one must give up ever-increasing quantities of something
else.
For simplicity, Let’s use computer and pizza,
A typical PPF has the following shape:- All points on the curve correspond to
The curve has a negative slope. full use of resources.
The curve is concave to the origin.
Points outside the PPF are not feasible Periods of unemployment or inefficiency in
with existing resources. production correspond to points under the PPF.
Shape of the PPF - Why Concave?

If PPF a straight line, we have constant opportunity costs

If PPF concave, we have increasing opportunity costs
Consider a straight line PPF Concave shape, increasing opportunity costs.
What is the Law of Increasing Costs?

The opportunity cost of producing a good increases as more of the good is produced
Why does the Law of Increasing Opportunity costs hold?

Because resources are not perfectly adaptable to all products
How do we have more of everything?

By increasing our resources
Economic growth indicates an increase in the total output of an economy.
Causes of rightward shifts in PPF’s?

Increase in resources
Increased productivity
Improved technology
Can a PPF shift inward (to the left)?

YES!! For just the opposite reasons as an outward shift such as a loss of resources
Economic growth and the Capital

Consumer goods tradeoff:
What should a country specialize in producing?

In those goods and services that it has a comparative advantage
What is Comparative Advantage?

A country’s ability to produce a good at a lower opportunity cost than the country which it trades
What is Absolute Advantage?

A country’s ability to produce a good using fewer resources than the country with which it trades
Example, 2 people, 2 jobs, time required

Job A Job B
Judy 60 min. 75 min
Sam 90 min 150 min
In the table, Judy is absolutely advantaged at both tasks, but what is her comparative advantage? What
is Sam’s comparative advantage?
Judy’s comparative advantage is at job B, and Sam’s comparative advantage is at job A
To see why, look at the ratios in the table- Judy can do job A in 2/3 the time of Sam, but she can do job B
in ½ the time, so she is relatively more efficient at job B.

Change Assumptions
1. increase quantity &/or quality of resources  growth
» PPF shifts to the right
2. improve technology  growth
» PPF shifts to the right
3. decrease quantity &/or quality of resources  negative growth
» PPF shifts to the left
4. technology decrease  negative growth
» PPF shifts to the left
Efficiency
𝑂𝑢𝑡𝑝𝑢𝑡
 Efficiency = 𝐼𝑛𝑝𝑢𝑡
 No waste & the least opportunity cost
Opportunity Cost
• The “price you pay” for each decision you make is called the OPPORTUNITY COST.
• Opportunity cost is vital to the understanding of economics.
• “The amount of a product or service that must be forgone (given up) in order to obtain more of
the next best alternative product or service”

Marginal Benefit vs. Marginal cost

Marginal cost (MC)
Extra cost added to total cost as a result of increasing output by one unit.
Marginal Benefit (MB)
Extra benefit added to total benefit as a result of increasing output by one unit.
MC
Optimal allocation of resources
MB
Q1 Q2
For Q1 → MB > MC
For Q2 → MB > MC
When MB = MC → Optimal allocation of resources
Application of PPF
 On individual level
 Inside PPF → Inefficient
 On PPF → Efficient
 Beyond PPF → By self-development (training – education – experience )
 On country level
- Egypt ( Inside PPF )
 We have unutilized resources >>> Burden
 We have to allow trade with other countries >>> thus we will have more resources
‫لو خلٌت فً تبادل تجاري بٌنً وبٌن بلد تانٌة – ممكن أنتج أنا سلعة وهً تنتج السلعة األخرى ونتبادل السبع‬
( ‫بس أي المنتجات أنا هصنعها ) بٌتزا وال كمبٌوتر‬
my choice will depend on the least opportunity cost ←
Theories of International Trade

①Absolute advantage - Adam Smith (Scottish economist)
→ Trade between countries should be based on Absolute advantage
Assumptions of the theory

 Trade is between two countries

 Only two commodities are traded
 Free trade exists between the countries
 They only element of cost of production is labour.
Example.
Two countries: England and Portugal.
Two commodities: Wheat and Wine.
Country Specialization Maximal Output

England Wheat 10 units
England Wine 8 units
Portugal Wheat 9 units
Portugal Wine 7 units
Thus;
- England should specialize in wheat production exchange
- Portugal should specialize in wine production between each other
Problem with absolute advantage

 If there is one country that does not have an absolute advantage in the production of any
product, will there still be benefit to trade, and will trade even occur?
 The answer may be found in the extension of absolute advantage, the theory of comparative
advantage.
②Comparative advantage – David Ricardo ( Student of Adam Smith )

 The most basic concept in the whole of international trade theory is the principle of
comparative advantage, first introduced by David Ricardo in 1817.
 The principle of comparative advantage states that a country should specialize in producing and
exporting those products in which is has a comparative, or relative cost, advantage compared
with other countries and should import those goods in which it has a comparative disadvantage.
 Law of comparative advantage refers to the ability of a country to produce a particular good or
service at a lower opportunity cost than another party.
Ricardo’s Idea of Comparative Advantage

 Ricardo's Law of Comparative Advantage improved upon the earlier Law of Absolute
Advantage. How?
 If A (Advanced land) is more productive than B (Backward land) in every productive activity,
would both countries benefit from trade?
 The law of absolute advantage has no answer to this question.

 Ricardo's law of comparative advantage showed that the answer is yes.
 A country has a comparative advantage in the production of a good or service that it produces
 The theory of comparative costs argues that, put simply, it is better for a country that is
inefficient at producing a good or service to specialise in the production of that good it is least
inefficient at, compared with producing other goods.
Example
 In his example Ricardo imagined two countries, England and Portugal, producing two goods,
cloth and wine, using labor as the sole input in production.
 He assumed that the productivity of labor varied between industries and across countries.
 Ricardo assumed that Portugal was more productive in both goods.
Country Wheat Wine

Cost Per Unit In Man Hours Cost Per Unit In Man Hours
England 15 30
Portugal 10 15
 Portugal is relatively better at producing wine than wheat: so Portugal is said to have a
COMPARATIVE ADVANTAGE in the production of wine.
 England is relatively better at producing wheat than wine: so England is said to have a
comparative advantage in the production of wheat.
Country Production
Before Trade After Trade
Wheat Wine Wheat Wine
England 8 5 18 0
Portugal 9 6 0 12
Total 17 11 18 12
 England is assumed to have 270 man hours available for production.

Before trade takes place it produces and consumes 8 units of wheat and 5 units of wine.
 Portugal has fewer labour resources with 180 man hours of labour available for production.
Before trade takes place it produces and consumes 9 units of wheat and 6 units of wine.
 Total production between the two economies is 17 units of wheat and 11 units of wine

 If both countries now specialise, Portugal producing only wine and England producing only
wheat, total production is 18 units of wheat and 12 units of wine. Specialisation has enabled the
world economy to increase production by 1 unit of wheat and 1 unit of wine.
Comparative advantage:
Competitive advantage:
= Lower opportunity cost
Higher quality with lower
price
Comparative advantage of Egypt:
1- Location (we are in corner of Africa)
Zero deviation of trade “ Perfect location “
2- Human Resources ( Population ) ….. 40 % of population < 40 years old
Thus; we have to specialize in services “ related to trade” which stick to location.

Our comparative advantage never in agriculture.
If we would like to spend in Egypt, we have to spend on :
- Education
- Training
The ideal investment for Egypt is in Suez canal.
- Its revenue = 5 billion $ “ very bad “ ……. No any kind of services
- We have to do;
 Logistic parks
 Maintenance .
 Services USA has the
- We need; rules, regulations, & knowledge by training highest level of
We lack infrastructure & investment water all over
Egypt has a scarcity of water ( under the poverty line of water ) – the world
so we have a problem in water.
Wheat, rice & raising cattle take too much water , so it is preferred to export from outside.
Competitive advantage of India is IT

Dell ( American company for computer ) …. If they produce everything of computer from A to Z
from America → high price → no competitive advantage
So they start to do outsourcing to reduce the cost, thus can compete against other companies as
Sony & Toshiba.
To sell its product, it used e- marketing, but the problem is that the customer can scare to buy
through the internet
To overcome this problem, Dell offered 24 hrs. / 7 days customer service.
But the cost of call in America is high, in addition to sometime customer can call the company at
night ….. all of these will be burden on Dell
They searched about people that can speak English fluently & with accent similar to the native
citizen

Also cost of call in India is less than in America

The lowest price of call is in Egypt, so we can compete against India to be the call center of Dell – but
we need training about American accent & culture.
Macroeconomics
– Study of large organizations and countries and the economy.
Goals (objective) (tools):

i. Maximize the output in the economy
- GDP ( Gross Domestic Product )
- GDP / Capita ( = GDP ÷ population )

- HDI ( Human Development Index )

- Inequality of income
ii. Unemployment
iii. Inflation
• Increasing the general price level
• We would like to stabilize the prices
iv. Balance of payment ‫ميزان المدفوعات‬
 Current account ( export & import )
 Reserves ً‫االحتٌاطً النقدي االجنب‬
 Exchange rate ‫سعر الصرف‬
v. Government policies
- Fiscal policy ‫السٌاسة المالٌة‬
- Monetary policy. ‫السٌاسة النقدٌة‬
What is gross domestic product (GDP)? ‫الناتج المحلي اإلجمالي‬

→ Total market value of all goods and services produced within the borders of the country for a given
period of time.
• It can be measured as all the EXPENDITURES to buy the goods and services produced.
• It can also be measured as all the INCOME earned from producing the goods and services.
• Since every dollar spent is someone’s income, the two measures give the same result.
Value = quantity X Price = P X Q

- In economy we concentrate more on quantity.
- We need to multiply by price to unify the measure unit.
‫ عشان أقدر أقارن‬money value ً‫عاٌز أقارن بٌن الزراعة والصناعة الزم أحولها إل‬
Within the borders of the country >>> as GDP is domestic
.‫ بتاع مصر ولكن أحسبها تبع البلد اللً عاٌشٌن فٌها‬GDP ‫عشان كده الناس اللً مسافرة برة مش بحسبها فً الـ‬
Given period of time >> as GDP is calculated annually
- In some cases we can calculate GDP per quarter or semester
What does GDP indicate for?

𝐺𝐷𝑃 2013 − 𝐺𝐷𝑃 2012
→ Growth ( G ) G=
𝐺𝐷𝑃 2012
Why do we need GDP?

1- To show my growth
2- To compare myself to the rest of the world.
Example of GDP : (Rank )

Country Rank Value ($)

USA 1 15 trillion
China 2 7 trillion
Germany 3 6.9 trillion
Japan 4 6.7 trillion
Brazil 7
Turkey 13
Egypt 52 270 billion
Growth rate in Egypt = 1.2 % ( very bad )

At least it must be 6 %
GNP = Gross National Product (GNI = Gross National Income)

 Total value of goods & services produced by nation
e.g. Egyptians working in Kuwait
GDP of Kuwait GNP of Egypt

There is no double counting as the factors are different in different countries
GDP  GNP in most cases.

GNP of Egypt  GDP of Egypt. And this can be changed
GDP of Qatar  GNP of Qatar. with the time.
Recession: ‫ركوض‬ Depression: ‫كساد‬

 Slowdown in growth rate of economy  Recession lasts for more than 6 months
 Real GDP
 GDP measured at constant price
GDP 2013 = Q2013 X P2013 = …….. GDP 2013 = Q2013 X P2013 = ……..
GDP 2012 = Q2012 X P2012 = ……… x GDP 2012 = Q2012 X P2013 = ……… 
2013 ‫ أو‬2012 ‫ فٌعلً السعر عشان كده الزم أثبت سعر سواء آخد بتاع‬inflation ‫ممكن ٌكون حصل‬
Base year:
 The year that I’m using its price in calculating the GDP.
e.g. if I want to compare GDP of Egypt for ten years, I can select price in any year (but must be constant
as a base price).
 Nominal GDP
 GDP measured at current price. “ I need the nominal price to measure the rate of inflation”.

Note:
1. Any country does growth more than 6% for successive ten years → it can duplicate its
GDP/capita.
2. China has the highest growth rate all over the world then Turkey.
(( but it doesn’t mean that neither China nor Turkey achieved the welfare which is the main
objective of economy ))
𝐺𝐷𝑃
GDP / Capita: = 𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
 Average share of citizens from GDP.
Rank Country GDP / capita population Notes
1 Qatar 170,000 $ 350,000 Population growth rate in Egypt is 2.4 %
12 USA 48,000 $ While GDP is 1.2
China 4,000 $ 1,250,000,000 Thus the value of income is coming down
121 Egypt 2,000 $ 90,000,000 >>> less welfare
Human Development Index (HDI): >>>> developed by UN

 Calculation of HDI based on 3 main criteria:
1. GDP/capita
2. Life expectancy at birth
Expected age of people in this country
- In USA 72 years while in Egypt is 74 years (but it doesn’t guarantee the quality of life)
3. Literacy rate ‫مستوي التعلٌم‬
Determined by the basic level of education ( in Egypt it is the preparatory stage ‫)المرحلة االعدادٌة‬
0  HDI  1 “ closer to 1 is better “
Rank Country Notes
1 Norway
2 Finland & other Scandinavians
8 USA
30 Qatar Literacy rate is very bad
The lowest score in math all over the world is in males of Qatar
118 Egypt Decrease infant mortality (death of infants before 2 years) & decrease of
chronic diseases → leads to increase the life expectancy at birth
Egypt in no. 1 in hepatitis C.
We have to invest in the young people education
(40 % of population  40 years old )
Income inequality:
- The higher the inequality, the worst the welfare.
- Perfect equality is unfair.
- We don’t looking forward perfect equality, but we need to justify inequality.
‫ٌعنً الزم أوضح أنا لٌه مش بساوي بٌن الناس – وإال ٌعتبر تفرقة وتمٌٌز‬

Gini coefficient:
0 G 1 the closer to zero is the better
- Before development; most of people has equality.
- After development; inequality increases until reach the peak, then more development will cause
inequality to go down.
‫ألن االستثمارات فً قطاع معٌن بعد ما ٌحصل تشبع فٌه تبدأ تنتقل للقطاعات األخري حتً تشمل جمٌع المجتمع‬
Early stages of development →  inequality
- The role of government here is to redistribute the income.
Successive years of development →  inequality
 Latin America has the highest Gini coefficient

 Former Soviet Union had the lowest Gini coefficient ( due to communism ).
 Gulf area → no ranking “as there are inequality with no justification”
‫ أضعاف‬3 ً‫الدكتورة كان متقدملها عرض من السعودٌة – ولما بعتت الباسبور األمرٌكً تم زٌادة العرض ال‬
Calculation of GDP:
❶ Income Approach:
GDP = W + R + r + Profit
Where;
W  Wages R  Rent r  interest rate
❷ Expenditure Approach:
GDP = C + I + G + Xn
Where;
C  Consumption I  Investment G  Government expenditure
Xn  Net export = X – M where “X” is export & “M” is import
If I would like to increase my GDP, I have to increase C, I, G & Xn
Consumption has the highest weight between all of these factors (it weighs about 70%).
GDP of USA is 15 trillion $ , 11 trillion $ comes from consumption
Consumption depends on the disposable income ( income – tax )
After financial crisis; the income decreased so, USA government responded to that by
decreasing the taxes.
- Growth rate of USA in 2007 is 4%
- Growth rate in 2008 is 0 %
- First decision of Obama is tax cut on November 2008
(Why on November ? because it is the largest shopping month around the year)
- On March 2009 → end of recession
Japan work hard but consumes less >>>> stagnation.
2 years ago; Amr Adeeb said “ purchase the Egyptian product”
But it is more better to say “ purchase from Egypt “

Drawbacks of GDP:
1) Formally registered in economy
Thus informal activities will not being seen
‫ جنٌه بس اللً بٌاخدهم مع‬300 ‫ أنا هحسب الـ‬..... ‫ جنٌه من الحكومة – بس بٌدي دروس خصوصٌة‬300 ‫ مدرس بٌاخد‬-
‫إن دخله أكتر من كده‬
% 40 ‫ أكتر من‬informal activities ‫ فً مصر نسب الـ‬-
- Informal sector → legal
- Undergrounded economy → illegal & can’t be declared.
2) Never measure the quality of production
(only quantity)
3) Pollution is not taking into consideration
‫ تقل‬Quality of life ‫ ولكن الـ‬GDP ‫المصانع تشتغل أكتر عشان تصنع أكتر – فٌتحسن الـ‬
4) Home production
) ‫ تصلح عربٌتك بنفسك من غٌر ما تدفع حاجة بدل ما تودٌها للمٌكانٌكً ( وفرت فكؤنك زودت دخلك‬-
‫ تزرع طماطم فً حدٌقة منزلك‬-
**************************************************
Market

Market : is an interaction between buyers & sellers (or between supply & demand )
If you teach a parrot demand & supply , you taught that parrot 90% of economic analysis.
There’s a rationality (objective) for the consumer → to maximize his satisfaction.

Good things: the more I consume, the more I have satisfied.
Bad things: the less I consume, the more I have satisfied.
(( so, consume more good & less bad ))
Consumer  maximize satisfaction
Qx Px
Where;
Qx → Quantity of specific commodity
Px → Price of the same commodity
Demand: Willingness & ability of the consumer to buy a certain product

o Finance  can create the ability only but not the willing
o Marketing  can create the willing to buy not the ability
o Economics study both the ability & willing
o Economics is the oldest business science
o Philip Kotler was an economist then create the science of marketing
Generally; Price is an independent variable & Quantity is a dependent variable

Exception in the pharmaceutical field where the quantity also is an independent.
The law of demand:
Inverse relationship between Qx & Px
 Specific consumer Px
 Specific commodity P1 a
 Specific period of time b
P2
Dx
Negatively Sloped
Q1 Q2 Qx

❶ Income effect: It is a feeling

- Price is going up while income is constant  feeling that I got poorer  my purchasing power
going down.
- Price is going down while income is constant  feeling that I got richer  my purchasing
power going up.
❷ Substitution effect:
- Two different commodities give you the same satisfaction
- So, I will choose the cheapest price commodity & leave the other which has a higher price
- E.g. switch from beef to chicken.
- Yes, with luxury goods
Types of goods:
1) Normal goods
2) Inferior goods ‫السلع الردٌئة‬

- Once the person got richer, he will change to the better.
- E.g. bean for Egyptians
- E.g. Public transportation.
3) Luxurious goods ( Snob effect )

- Consumer get satisfied from buying an expensive good e.g. luxurious cars.
- E.g. La coste
T-shirt of La coste was sold for 20 $ in eightieth (very expensive)
The comment of the product manager about this expensive price was
“ you pay 1 $ for T-shirt & 19 $ for the crocodile “
The exception of – ve slope of demand curve is in 2 goods:

( i.e. there’s a + ve slope )
I. High luxurious goods ( Snob effect )
II. Very inferior goods ( Giffen goods )
e.g. bread & bean
- if the bread price is 5 pt. & bean price is 5 pt. and I have 10 pt. , I will buy bread & bean
- in case of increasing the bread price to 9 or 10 pt. & still my income is constant at 10 pt.
so in this case I will buy bread only with all of 10 pt.
- the bread has no substitute ( substitution effect is zero)

Whole demand
Px Qx Px
a
10
10 2 b
8 4 8
6 6
4 8
D1
Q2 Q xd
Q1
 Change in price only change the quantity demanded, not the whole demand
On the whole demand line; I’m still on the line - just moving from one point to another.
 Change in price will never shift the demand curve of the same commodity
Change in price only make me to swing or transport from point to another on the whole
demand curve.
 True or false:
If the price of chicken is going up, the demand of chicken will go down
(X)
The quantity demanded ( not the demand ) will go down.
Note
Competition: Perfect or Otherwise

 Perfectly Competitive:
 Homogeneous Products
 Buyers and Sellers are Price Takers
 Monopoly:
 One Seller, controls price
 Oligopoly:
 Few Sellers, not aggressive competition
 Monopolistic Competition:
 Many Sellers, differentiated products

1. Income.
2. Preferences (taste) ) ‫تفضٌالت المستهلك ( ذوق المستهلك‬
3. Prices of related commodities.
4. Expectation.
5. Number of consumers or population density.
1- Income
 As income increases the demand for a normal  As income increases the demand for an
good will increase. inferior good will decrease.
→ shift the demand curve to the right. → shift the demand curve to the left.
2- Preferences (Taste)
 What shapes (determines) my taste ?

» Culture e.g ↑ sugar demand in Ramadan
» Experience
» Gender
» Income group
» Location (geography)
» Season e.g. ↑ fishing tools in summer
 Examples
‫ قرش – للطبقات االخري االهتمام بالمالبس والحفاظ علً ألوانها‬25 ‫إعالنات برسٌل – للطبقة الشعبٌة وفري‬
‫إعالنات بٌرٌل – استرجل‬
‫ عمو فإاد و بوجً وطمطم وفطوطة – لمخاطبة جمٌع االجٌال‬: ‫إعالنات بٌبسً وشٌبسً فً رمضلن‬
 Branding is the most important factor shaping the preferences

BMW >> move from zero to hero ( speed, stability & safety )
“70 % of BMW price depends on the brand name”
La coste >> T-shirt of La coste was sold for 20 $ in eightieth (very expensive)

The comment of the product manager about this expensive price was “ you pay 1 $ for T-
shirt & 19 $ for the crocodile “
 Avian flu → affects negatively on my preferences →↓ chicken consumption
3- Prices of related commodities
Substitute goods Complementary goods

A substitute is a product that can be used in the A compliment is a good that goes well with another
place of another. good.
• The price of the substitute good and demand for • When goods are complements, there is an inverse
the other good are directly related relationship between the price of one and the
• For example, Coke Price↑ Pepsi Demand ↑ demand for the other
• For example, DVD ↑ DVD players↓
Price of coffee rises Price of DVDs rises
4- Expectation
» A higher expected future price will increase current demand.
» A lower expected future price will decrease current demand.
» A higher expected future income will increase the demand for all normal goods.
» A lower expected future income will reduce the demand for all normal goods.
5- No. of consumers
 An increase in the number of buyers

results in an increase in demand.

supply
 Supplier’s rationality is to maximize the profit
 Profit = Total Revenue (TR) – Total Cost (TC)
 TR = Price X Quantity = P.Q Px
Sx
o Why does the Quantity go down when the Price goes down ?
→ due to reduction of the profit
o P 𝛼 Q
Qx
 Note
Change in the price only affects the quantity supplied not the supply.
1. Prices of factors of production

Land Labor Capital Entrepreneurship
Rent Wages Interest rate % of profit
 ↑ prices of factors of production → ↑ cost & ↓ profit

→ ↓ supply
 High unemployment rate → ↓ wages → good for investors.
2. Technology
 Improvement of technology → ↑ Productivity
→ ↑ supply
 Deterioration of technology → ↓ Productivity
→ ↓ supply
3. Government policies (taxes or subsidies ‫) إعانات‬

 ↑ taxes → ↑ cost → ↓ supply
 ↑ subsidies→ ↓ cost → ↑ supply
4. Expectations
» Expecting that $ price will be go down → ↓ supply
» Expecting that tax will be reduced → I will wait & don’t produce right now

5. No. of suppliers
↑ Suppliers → ↑ supply
e.g. after /nestle mineral water disaster
>>>> they were taking 40% of market share.
Market equilibrium
 ( Blades of scissors )
 At equilibrium; Quantity demanded = Quantity supplied
( i.e. Qd = Qs )
 At equilibrium; x
e
- The consumer is willing & able to pay this price to P‛
buy this quantity & the producer can achieve his profit
i.e. both of them are satisfied.
 Once we achieve equilibrium, we have to examine the x
stability of equilibrium
( whatever happens, this equilibrium will not be affected) Q‛
We can prove this by logic: (contradiction method)

 At P1  Qd > Qs
Px
→ No equilibrium – distortion of market Sx
→ Shortage of quantity or excess demand
e Shortage
- People willing & able to buy more than the
P‛
Producers produce.
P1
- This distortion will lead to  Price
Dx
Till reach the equilibrium.
Qx
(market mechanism)
Qs Q‛ Qd
 At P2  Qd < Qs
→ No equilibrium – distortion of market Surplus
→Surplus or excess in supply Px
Sx
- Producers produce more than the people need.
P2
- This distortion will lead to  Price e
Till reach the equilibrium. P‛
(market mechanism)
Dx
Thus we will have stable equilibrium Qx
((Note : in currency change market, no stable equilibrium)) Qd Q‛ Qs

Thus we will have 3 scenarios :

1. D > S  P  & Q
2. D < S  Px  & Q In all cases Q will increase
3. D = S  Px = & Q
 means shift
**************************************************************

Operation Management
Operation
Management

Introduction to Operations Management
OPERATIONS MANAGEMENT
It is the management of that part of an organization that is responsible for producing goods and or services
Value-Added & Product Packages

 Value-added is the difference between the cost of inputs and the value or price of outputs.
 Product packages are a combination of goods and services.
 Product packages can make a company more competitive.
Value-Added
o The essence of the operation function is to add value during the transformation process.
o The value added in a for-profit organization is the difference between cost of inputs and price of output.
o Value added could be applied in a non-profit organization and as their value to society.
o Value added used in firm for research, improvement, salaries and investment.
Goods vs Service
Characteristic Goods Service
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Scope of Operations Management

 Operations Management includes:
1. Forecasting 2. Capacity planning 3. Supply chain management
4. Scheduling 5. Managing inventories 6. Motivating employees
7. Assuring quality 8. Deciding where to locate
facilities
Types of Operations
Operations Examples
Goods Producing Farming, mining, construction, manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail service, moving, taxis, buses, hotels, airlines
Exchange Retailing, wholesaling, banking, renting, leasing, library loans
Entertainment Films, radio and television, concerts, recording
Communication Newspapers, radio and television, newscasts, telephone, satellites

Decision Making
 A primary function of an operation manager is to guide the system by decision making
 Decision either affect design of the system or affect the operation of the system
System design System operation
capacity personnel
location inventory
arrangement of departments scheduling
product and service planning project management
acquisition and placement of equipment quality control
Key Decisions of Operations Managers

The chief role of the operations manager is that of planner and decision maker
 What >> What resources/what amounts
 When >> Needed/scheduled/ordered
 Where >> Work to be done
 How >> Designed
 Who >>To do the work
Decision Making tools

 Models
 Quantitative approaches
 Analysis of trade-offs
 Systems approach
 Establishing priorities
Models
 An abstraction of reality, a simplified representation of something. (Physical, Schematic,
Mathematical).
What are the pros and cons of models?

Models Are Beneficial Limitations of Models
1. Easy to use, less expensive 1. Quantitative information may be emphasized
2. Require users to organize over qualitative
3. Increase understanding of the problem 2. Models may be incorrectly applied and results
4. Enable “what if” questions misinterpreted
5. Consistent tool for evaluation and 3. Nonqualified users may not comprehend the
standardized format rules on how to use the model
6. Power of mathematics 4. Use of models does not guarantee good decisions
Quantitative Approaches
An attempt to obtain mathematically optimal solution to managerial problems
• Linear programming • Queuing Techniques • Inventory models
• Project models • Statistical models

Analysis of Trade-Offs
 What are the pros and cons of models?
 What are the advantage and disadvantage of models?
 Decision on the amount of inventory to stock
 Increased cost of holding inventory Vs Level of customer service
Systems Approach
“The whole is greater than the sum of the parts.”
The objectives of the organization as a whole take precedence over those of any one subsystem
>> Sub optimization
Establishing Priority
Certain few factors are more important than the others, recognizing this enables the managers to direct
their efforts to where they will do good and avoid wasting time and energy on insignificant factors
Pareto Phenomenon
 A few factors account for a high percentage of the occurrence of some event(s).
 80/20 Rule - 80% of problems are caused by 20% of the activities.
• Search for the few factors that will have the greatest impact
• Give them the highest priority
• Use them for achieving the objective or solving the problem
Simple Product Supply Chain
Supply Chain:
A sequence of activities And organizations involved in producing And delivering a good or service
A Supply Chain for Bread
Stage of Production Value Added Value of Product
Farmer produces and harvests wheat $0.15 $0.15

Wheat transported to mill $0.08 $0.23
Mill produces flour $0.15 $0.38
Flour transported to baker $0.08 $0.46
Baker produces bread $0.54 $1.00
Bread transported to grocery store $0.08 $1.08
Grocery store displays and sells bread $0.21 $1.29
Total Value-Added $1.29

Forecasting
FORECASTING IS:
 A statement about the future value of a variable of interest such as demand.
 Forecasting is used to make informed decisions.
 Long-range (several years, country, organization, town, city …….).
 Short-range (several weeks, days, operation).
 People make and use forecasts all the time both in their jobs and in everyday life.
Forecasts affect decisions and activities throughout an organization

1. Accounting, finance 2. Human resources 3. Marketing
4. MIS 5. Operations 6. Product / service design
Uses of Forecasts
( long term ) ( short term )
Help managers plan the system Help managers plan the use of the system
 Types of products to offer  Planning inventory
 Facilities and equipment to have, to  Work force level
locate  Planning purchasing and production
 Budgeting and scheduling
Accounting Cost/profit estimates

Finance Cash flow and funding
Human Resources Hiring/recruiting/training
Marketing Pricing, promotion, strategy
MIS IT/IS systems, services
Operations Schedules, MRP, workloads
Product/service design New products and services
Features of Forecasts
1. Assumes causal system past ==> future 2. Forecasts rarely perfect because of randomness
3. Forecasts more accurate for groups vs. 4. Forecast accuracy decreases as time horizon
individuals increases
Elements of a Good Forecast

1. Timely 2. Reliable 3. Accurate 4. Cost-effective
5. Meaningful 6. Written 7. Easy to use
Steps in the Forecasting Process

Step 1 Determine purpose of forecast Step 4 Obtain, clean and analyze data
Step 2 Establish a time horizon Step 5 Make the forecast
Step 3 Select a forecasting technique Step 6 Monitor the forecast

Approaches to forecasting
Qualitative Quantitative
 Consists of subjective inputs  Consists of objective inputs
 Includes soft information (human factors,  Involve hard data (projection of historical
personal opinion) data, analyzing objectives)
Types of forecasting techniques

Judgmental Uses subjective inputs 1. Executive opinions
obtained from various 2. Sales force opinions
resources 3. Consumer surveys
4. Outside opinion
5. Delphi method
- Opinions of managers and staff
- Achieves a consensus forecast
Time series Uses historical data Plotting the past data and visually examining the
assuming the future will be appeared pattern:
like the past 1. Trend - long-term movement in data
2. Seasonality - short-term regular variations
in data
3. Cycle – wavelike variations of more than
one year’s duration
4. Irregular variations - caused by unusual
circumstances
5. Random variations - caused by chance
Associative models Uses explanatory variables to predict the future
Judgmental techniques
Executive opinions
estimation probability Est. * prob.
Production manager 125 40% 50
marketing manager 160 35% 56
Financial manager 100 25% 25
General manager 131

Delphi method
Session 1 Session 2 Session 3 Session 4
Expert 1 5 4.5 4 4
Expert 2 3 3.5 3.5 3.5
Expert 3 4.5 4 4.5 4
Expert 4 6 5 4.5 4
Naive Forecasts
The forecast for any period equals the previous period’s actual value.
1. Simple to use
2. Virtually no cost
3. Quick and easy to prepare
4. Data analysis is nonexistent
5. Easily understandable
6. Cannot provide high accuracy
7. Can be a standard for accuracy
Uses for Naïve Forecasts

1. Stable time series data
F(t) = A(t-1)
2. Seasonal variations
F(t) = A(t-n)
3. Data with trends
F(t) = A(t-1) + (A(t-1) – A(t-2))
Averaging
 White noise and unimportant factors
 Minor variation and large variation
 Random variation and Real variation
 Averaging to smooth data fluctuation
 Three types of data changes

Techniques for Averaging

 Moving average
 Weighted moving average
 Exponential smoothing
① Moving Averages
A technique that averages a number of recent actual values, updated as new values become available.
Ft = forecast for time period t

MAn = n period moving average
At-1 = actual value in period t-1
n = number of periods ( data points )
Example :
Compute a 3-period moving average forecast given demand for shopping carts for the last five periods
as shown:
period 1 2 3 4 5 6
demand 42 40 43 40 41 ???
t=6
t=7

Moving Averages
 Decreasing the number of data points in a moving average technique, increase the weight of
more recent values
 As data points in a moving average technique increased, the sensitivity ( responsiveness ) of
the average to new values decreased.
 If responsiveness is required, average with few data points should be used,
Pros Cons
It is easy to compute All values in the average are weighted equally, the oldest
It is easy to understand value has the same weight as the most recent value
② Weighted Moving Averages

 More recent values in a series are given more weight in computing the forecast.
 Trial and error used to find the suitable weighting scheme
 The sum of all weights must be = 1
 Weighted average technique is more reflective of the most recent occurrences.

Example : Compute a 4-period weighted moving average forecast given demand for shopping
carts for the last periods values and weights as shown:
period 1 2 3 4 5 6
demand 42 40 43 40 41 ???
weight 0 0.1 0.2 0.3 0.4
Ft = Wt-1*A t-1 + W t-2*A t-2 + W t-3*A t-3 + W t-n*A t-n

F6 = W5*A5 + W4*A4 + W3*A3 + W2*A2
F6 = 0.4(41) + 0.3(40) + 0.2(43) + 0.1(40) = 41
If the actual value of F6 is 39 then
F7 = 0.4(39) + 0.3(41) + 0.2(40) + 0.1(43) = 40.2
③ Exponential Smoothing
• The most recent observations might have the highest predictive value.
• Therefore, we should give more weight to the more recent time periods when forecasting.
• Weighted averaging method based on previous forecast plus a percentage of the forecast error
Ft = Ft-1 + α (At-1 - Ft-1)
Example 3 - Exponential Smoothing

Period Actual Alpha = 0.1 Error Alpha = 0.4 Error
1 42
2 40 42 -2.00 42 -2
3 43 41.8 1.20 41.2 1.8
4 40 41.92 -1.92 41.92 -1.92
5 41 41.73 -0.73 41.15 -0.15
6 39 41.66 -2.66 41.09 -2.09
7 46 41.39 4.61 40.25 5.75
8 44 41.85 2.15 42.55 1.45
9 45 42.07 2.93 43.13 1.87
10 38 42.36 -4.36 43.88 -5.88
11 40 41.92 -1.92 41.53 -1.53
12 41.73 40.92
Picking a Smoothing Constant
Selecting a smoothing constant α is a matter of judgment or trial and error

Time series techniques
Techniques for Trend

Nonlinear Trends Linear Trends
Linear Trend Equation

Ft = a + bt
 Ft = Forecast for period t
 t = Specified number of time periods
 a = Value of Ft at t = 0
 b = Slope of the line
Calculating a and b
𝑛 𝑡𝑦 − 𝑡 𝑦 𝑦−𝑏 𝑡
b= 𝑛 𝑡 2 − ( 𝑡)2
a= 𝑛
Linear Trend Equation Example
Linear Trend Calculation

5 2499 − 15(812) 12495 −12180
b= = = 6.3
5 55 − 225 275−225
812−6.3 (15)
a= 5
= 143.5
y = 143.5 + 6.3t
Techniques for Seasonality

 Seasonal variations
 Regularly repeating movements in series values that can be tied to recurring events.
 It is applied to monthly, weekly, daily and other regularly recurring patterns in data.
 Seasonality is
 The amount that the actual values deviate from the average value of a series.
 Seasonal relative
 Percentage of average or trend
 Centered moving average
 A moving average positioned at the center of the data that were used to compute it.

MODELS for Seasonality

1- Additive model:
seasonality is expressed as quantity (e.g., 20 units), which is added to or subtracted from the
series average (or trend).
2- Multiplicative model:
seasonality is expressed as percentage to be multiplied by the average of the series (OR TREND),
it is always called seasonal relatives or seasonal index.
Seasonality and average models
Seasonality and trend models

Seasonal relatives
Seasonal relatives are used in two different ways in forecasting to:
• Incorporate seasonality in a forecast
• Deseasonalize the data
Incorporating seasonality into forecast

Incorporating seasonality into forecast is useful when demand has both trend (or average) and seasonal
components, which is conducted as following:
1. Obtain trend estimates for the desired periods using trend equation.
2. Add seasonality to the trend by multiplying (assuming multiplicative model is appropriate) these
trend estimates by the corresponding seasonal relative.
 Example
A furniture manufacturer wants to predict quarterly demand for certain seats for periods 15 and 16,
which happen to be the second and the third quarters for a particular year. The series consists of both
trend and seasonality. The trend portion of the demand is projected using the trend equation Ft = 124 +
7.5 t. Quarter relatives are Q1 = 1.2 , Q2 = 1.1, Q3 = 0.75 and Q4 = 0.95. use this information to predict
demand for periods 15 and 16.
 Solution
The trend values at t = 15 and t = 16 are:
F15 = 124 + 7.5 (15) = 236.5
F16 = 124 + 7.5 (16) = 244.0
Multiplying the trend value by the appropriate quarter relatives yield a forecast that includes both trend
and seasonality. Given that t = 15 is a second quarter and t = 16 is a third quarter, the forecast will be:
Period 15: 236.5 (1.1) = 260.15 Period 16: 244.0 (0.75) = 183.00
Use the following information to deseasonalize sales for quarters 1 through 8

Calculating seasonal relatives

 Example
The manager of a parking lot has computed daily relatives for the number of cars per day in the lot. The
computations are repeated here (about three weeks are shown for illustration). A seven period centered
moving average is used because there are seven days (seasons) per week
Day Cars Centered MA7 Cars/MA7
Tues 67
Wed 75
Thur 82
Fri 98 71.86 1.36
Sat 90 70.86 1.27
Sun 36 70.57 0.51
Mon 55 71 0.77
Tues 60 71.14 0.84
Wed 73 70.57 1.03
Thur 85 71..14 1.19
Fri 99 70.71 1.4
Sat 86 71.29 1.21
Sun 40 71.71 0.56
Mon 52 72 0.72
Tues 64 71.57 0.89
Wed 76 71.86 1.06
Thur 87 72.43 1.2
Fri 96 72.14 1.33
Sat 88
Sun 44
Mon 50
The estimated relatives will be:

 Monday: (0.77 + 0.72)/2 = .745
 Tuesday: (0.84 + 0.89)/2 = .865
 Wednesday: (1.03 + 1.06)/2 = 1.045
 Thursday: (1.19 + 1.2)/2 = 1.195
 Friday: (1.36 + 1.4 + 1.33)/3 = 1.36
 Saturday: (1.27 + 1.21)/2 = 1.24
 Sunday: (0.51 + 0.56)/2 = 0.535
Note
The sum of the relatives must equal the number of periods (i.e., 7 in this example). If it is not, you have
to multiply by a correction factor. In this example the sum is 6.985, therefore you have to multiply each
factor by (7/6.985)

Seasonal Relatives
The number of periods needed in a centered moving average is equal to the number of “seasons”
involved
 With monthly data, a 12-period moving average is needed.
 With daily data, a 7-period moving average is needed.
 With quarterly data, a 4-period moving average is needed
Note:
When the number of period is even, one additional step is needed, because the middle of an even
period falls between two periods. The additional step requires taking two-period moving average of the
even-numbered centered moving average. (See the following example)
Example (even period)
Obtain estimates of quarter relatives for these data:
Year 1 2 3 4
Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1
Demand 14 18 35 46 28 36 60 71 45 54 84 88 58
Note:
The number of seasons is 4 (an even number); therefore, a 4-centered moving average will be taken and
then a 2-centered moving average is calculated to adjust the data.
Year Quarter Demand (D) MA4 MA2 D/MA2

1 1 14
2 18
3 35 30 1.17
4 46 34 1.35
2 1 28 39.38 0.71
2 36 45.63 0.79
3 60 50.88 1.18
4 71 55.25 1.29
3 1 45 60.50 0.74
2 54 65.63 0.82
3 84 69.38 1.21
4 88
4 1 58
Average relatives
Quarter1 = (0.71+0.74)/2 = 0.725 Quarter2 = (0.79+ 0.82)/2 = 0.805
Quarter3 = (1.17 + 1.18 + 1.21)/3 = 1.187 Quarter4 = (1.35 + 1.29)/2 = 1.32
The sum of these relatives is 4.037. Multiplying each by 4/4.037 will standardize relatives making their
total equal 4. The resulting relatives are:
Quarter1 = 0.718, Quarter2 = 0.798
Quarter3 = 1.176, Quarter4 = 1.308

Deseasonalize the data

 To deseasonalize the data, divide the demand of each period by the corresponding seasonal
relatives.
 For a good forecast, use the deseasonalized data to fit the trend equation instead of the original
data. Then multiply the trend by the associated relative of the period.
Associative model
Associative models assume that there is a causational relationship between the variable of interest and
other variables called predictors
Examples:
• Price of beef and price of chicken
• Crop yields and soil condition
• Crop yields and timing of water application
• Profits and sales
• Price of products and energy cost
Def.
 Predictor variables - used to predict values of variable of interest
 Regression - technique for fitting a line to a set of points
 Least squares line - minimizes sum of squared deviations around the line

Simple Linear Regression

 The simplest and most widely used form of regression involves a linear relationship between
two variables.
 The objective in linear regression is to obtain an equation of a straight line that minimizes the
sum of squared vertical deviations of data points from the line (i.e., the least squares criterion)
This least squares line has the form Y = a + bX
Where:
Y = predicted (dependent or response) variable
X = predictor (independent or explanatory) variable
a = intercept b = slope (change rate)
𝑛 𝑥𝑦 − 𝑥 𝑦 𝑦−𝑏 𝑥
b= 2 a=
𝑛 𝑥 2 − ( 𝑥) 𝑛
n = number of paired observations
Sales Profits
7 15
2 10
6 13
4 15
14 25
15 27
16 24
12 20
14 27
20 44
15 34
7 17
X Y xy x2 𝑛 𝑥𝑦 − 𝑥 𝑦
b= 2
7 15 105 49 𝑛 𝑥 2 − ( 𝑥)
2 10 20 4
6 13 78 36 b = 1.72870662
4 15 60 16
14 25 350 196
𝑦−𝑏 𝑥
15 27 405 225 a= 𝑛
16 24 384 256
12 20 240 144 a = 3.5675563
14 27 378 196
20 44 880 400
15 34 510 225
7 17 119 49
132 271 3529 1796 Y = 3.567 + 1.728X

Profit = 3.567 + 1.728(sales)

If you want to predict profit at sales point = 10.3
Profit = 21.365
PREDICTORES
Three conditions are required for predictor to be valid:
1. The relationship between movements of an indicator and movements of the variable
should have a logical explanation.
2. Movements of the indicator must precede movements of the dependent variable by
enough time so that the forecast isn’t outdated before it can be acted upon.
3. A fairly high correlation should exist between the two variables.
CORRELATION
A measure of the strength and direction of relationship between two variables
𝑛 𝑥𝑦 − 𝑥 𝑦
r=
((𝑛 𝑥 2 − ( 𝑥)2 ) ( 𝑛 𝑦 2 − ( 𝑦 )2 ))
-1< r < +1
 Correlation r close to zero indicate weak linear relationship between two variables
 Correlation r close to +1 indicate strength linear relationship between two variables (directly change)
 Correlation r close to -1 indicate strength linear relationship between two variables (inversely change)
Simple Regression Analysis

 Assumptions
 Variations around the line are random
 Deviations around the line normally distributed
 Predictions are being made only within the range of observed values
 For best results:
 Always plot the data to verify linearity
 Check for data being time-dependent
 Small correlation may imply that other variables are important
 Weakness of regression
 Simple linear regression applies only to linear relationship with one independent
variable .
 One needs a considerable amount of data to establish the relationship – in practice, 20
or more observations.
 All observations are weighted equally.

EXAMPLE:
Sales of new houses and three-month lagged unemployment are shown in the following table.
Determine if unemployment levels can be used to predict demand for new houses.
If so, derive a predictive equation.
period units sold Unemp. rate
1 20 7.2
2 41 4
3 17 7.3
4 35 5.5
5 25 6.8
6 31 6
7 38 5.4
8 50 3.6
9 15 8.4
10 19 7
11 14 9
Check for data being time-dependent Check for data being time-dependent

Check for data linearity
t y x XY X² Y²
1 20 7.2 144 51.84 400
2 41 4 164 16 1681
3 17 7.3 124.1 53.29 289
4 35 5.5 192.5 30.25 1225
5 25 6.8 170 46.24 625
6 31 6 186 36 961
7 38 5.4 205.2 29.16 1444
8 50 3.6 180 12.96 2500
9 15 8.4 126 70.56 225
10 19 7 133 49 361
11 14 9 126 81 196
305 70.2 1750.8 476.3 9907
ΣY ΣX ΣXY ΣX² ΣY²
r = ((11*1750.8)-(305*70.2))/(SQRT(((11*476.3)-(70.2*70.2))*((11*9907)-(305*305))))
r = - 0.97 >>>>>> High Negative Relationship
𝑛 𝑥𝑦 − 𝑥 𝑦 𝑦− 𝑏 𝑥
b= 𝑛 𝑥 2 − ( 𝑥)2
a= 𝑛
b =((11*1750.8)-(305*70.2))/(((11*476.3)-(70.2*70.2)))
b = - 6.91
a = 305 – ( - 6.91 ) / 11
a = 71.85
The regression equation will be
(Unit sold) = 71.85 - 6.91*(unemp. rate)

Forecast Accuracy
 Error - difference between actual value and predicted value
 Mean Absolute Deviation (MAD)
 Average absolute error
 Mean Squared Error (MSE)
 Average of squared error
 Mean Absolute Percent Error (MAPE)
 Average absolute percent error
Ӏ Actual −forecast Ӏ
MAD = 𝑛
(𝐴𝑐𝑡𝑢𝑎𝑙 −𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 )2
MSE = 𝑛 −1
( Ӏ Actual −forecast Ӏ / Actual ∗100 )
MAPE = 𝑛
MAD
 Easy to compute
 Weights errors linearly
MSE
 Squares error
 More weight to large errors
MAPE
 Puts errors in perspective
Example 10
Period Actual Forecast (A-F) |A-F| (A-F)^2 (|A-F|/Actual)*100
1 217 215 2 2 4 0.92
2 213 216 -3 3 9 1.41
3 216 215 1 1 1 0.46
4 210 214 -4 4 16 1.90
5 213 211 2 2 4 0.94
6 219 214 5 5 25 2.28
7 216 217 -1 1 1 0.46
8 212 216 -4 4 16 1.89
-2 22 76 10.26
MAD = 2.75
MSE = 10.86
MAPE = 1.28
Sources of Forecast errors

 Model may be inadequate
 Irregular variations
 Incorrect use of forecasting technique

Controlling the Forecast

 Control chart
 A visual tool for monitoring forecast errors
 Used to detect non-randomness in errors
 Forecasting errors are in control if
 All errors are within the control limits
 No patterns, such as trends or cycles, are present
Control chart
 The upper control limit
UCL = 0 + z . 𝑀𝑆𝐸
 Lower Control Limit
LCL = 0 – z. 𝑀𝑆𝐸
Where:
z is the number of standard deviations. For 95% confidence use z = 2, for 99% confidence use z = 3
Tracking Signal
• Tracking signal
The ratio of cumulative error to MAD
𝐴𝑐𝑡𝑢𝑎𝑙 t −𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 t
Tracking signalt =
𝑀𝐴𝐷 t
• The tracking signal is computed period by period and it can be positive or negative, a value of
zero would be ideal; limits of ± 4 or ± 5 are often used for a range of acceptable values of
tracking signal. If a value is out of the range, then there is a bias in the forecast.
• Bias – Persistent tendency for forecasts to be Greater or less than actual values.
 The following table shows the calculation of the tracking signal (TS). Note that all values are
within ± 4

Month Sales Forecast e =A-F IeI Cumulative Cumulative MAD TS

t
(A) (F) (Error) Error IeI
1 43 47 -4 4 -4 4 4 -1
2 51 44 7 7 3 11 5.5 0.55
3 54 50 4 4 7 15 5 1.4
4 51 50 1 1 8 16 4 2
5 49 54 -5 5 3 21 4.2 0.71
6 46 48 -2 2 1 23 3.8 0.26
Choosing a Forecasting Technique

 No single technique works in every situation
 Two most important factors
 Cost
 Accuracy
 Other factors include the availability of:
 Historical data
 Computers
 Time needed to gather and analyze the data
 Forecast horizon
Operations Strategy
 Forecasts are the basis for many decisions
 Work to improve short-term forecasts
 Accurate short-term forecasts improve
 Profits
 Lower inventory levels
 Reduce inventory shortages
 Improve customer service levels
 Enhance forecasting credibility
Supply Chain Forecasts

 Sharing forecasts with supply chain can
 Improve forecast quality in the supply chain
 Lower costs
 Shorter lead times

Capacity Planning FOR Products and Services
Capacity :
The upper limit or ceiling on the load that an operating unit can handle
Operating units might be:

• Plant • Department • Machine
• Store • worker
Capacity planning aims to:

Achieve a match between supply capabilities and the predicted level of demand
Strategic capacity planning:

It is a long-term capacity planning
Reasons of capacity planning

• Changes in demand
• Opportunity
• Perceived threats
• Changes in technology
• Changes in environment
Capacity gap
It is the gap between current capacity (supply) and desired capacity (demand) if the capacity is out of
balance
• Current capacity < desired Capacity  under capacity  Strained resources and loss of customer
• Current capacity > desired Capacity  over capacity  Operating costs too high
The basic questions in capacity handling

• How much is needed?
• What kind of capacity is needed?
• When is it needed?
When capacity planning ?

It is made very infrequently and in others, it is made regularly depends on the following factors :
 The stability of demand
 The rate of technological change of Equipment and product design
 Competitive factors
 Others factors
• The type of product and services
• Whether styles changes are important

Importance of Capacity Decisions

1. Impacts ability to meet future demands
2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment of resources
5. Affects competitiveness
6. Affects ease of management
7. Globalization adds complexity
8. Impacts long range planning
Capacity terminology
• Design capacity
– maximum output rate or service capacity an operation, process, or facility is designed
for.
– Under ideal conditions
• Effective capacity
– Design capacity minus allowances such as personal time, maintenance, and scrap.
– Under ideal conditions
• Actual output
– rate of output actually achieved--cannot
exceed effective capacity.
Measuring capacity
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
Efficacy = 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦
Utilization = 𝐷𝑒𝑠𝑖𝑔𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦
Both measures expressed as percentages
Efficiency/Utilization
Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 𝟑𝟔 𝒖𝒏𝒊𝒕𝒔/𝒅𝒂𝒚

Efficacy = 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦
= 𝟒𝟎 𝒖𝒏𝒊𝒕𝒔/ 𝒅𝒂𝒚 = 90%
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 𝟑𝟔 𝒖𝒏𝒊𝒕𝒔/𝒅𝒂𝒚

Utilization = 𝐷𝑒𝑠𝑖𝑔𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦
= 𝟓𝟎 𝒖𝒏𝒊𝒕𝒔/𝒅𝒂𝒚 = 72%

Determinants of Effective Capacity

• Facilities (size, location, layout, heating, lighting, ventilations)
• Product and service factors (similarity of products)
• Process factors (productivity, quality)
• Human factors (training, skills, experience, motivations, absenteeism, turnover)
• Policy factors (overtime system, no. of shifts)
• Operational factors (scheduling problems, purchasing requirements, inventory shortages)
• Supply chain factors (warehousing, transportation, distribution)
• External factors (product standards, government agencies, pollution standard)
Strategy Formulation
Capacity strategy based on assumptions and prediction about long-term demand patterns,
Technological changes and Behavior of competitors
This is involve:
• Growth rate and variability of demand
• Cost of building and operating facilities
• Rate and direction of technology changes
• Behavior of competitors
• Availability of capital and other inputs
Steps for Capacity Planning

1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
Calculating Processing Requirements

A necessary piece of information is the capacity requirements of products, to get this you have to
forecast for the demand of each product and know:
• The standard processing time / unit of product
• The number of workdays / year
• The number shifts that will be used

A dept. works 8-hour shift, 250 days/year

Product Annual Standard processing Processing time needed
Demand time per unit (hr.) (hr.)
#1 400 5.0 2,000
#2 300 8.0 2,400
#3 700 2.0 1,400
5,800
annual capacity is 250*8 = 2000 hours,

number of machines required = 5,800 hours/2,000 hours = 2.90 machines
then we need three machines to handle the required volume
Planning Service Capacity

• Need to be near customers
– Capacity and location are closely tied
• Inability to store services
– Capacity must be matched with timing of demand
• Degree of volatility of demand
– Peak demand periods
Developing Capacity Alternatives

• Design flexibility into systems
• Take stage of life cycle into account
(initial phase, growth phase, maturity phase, decline phase)
• Take a “big picture” approach to capacity changes (bottleneck)
• Prepare to deal with capacity “chunks”
(capacity increase in fairly large chunks than smooth increments)
• Attempt to smooth out capacity requirements
• Identify the optimal operating level
Bottleneck Operation
Bottleneck operation: An operation
in a sequence of operations whose
capacity is lower than that of the
other operations

Bottleneck Operation
Economies of Scale
• Economies of scale
– If the output rate is less than the optimal level, increasing output rate results in
decreasing average unit costs
• Diseconomies of scale
– If the output rate is more than the optimal level, increasing the output rate results in
increasing average unit costs
Optimal Rate of Output Economies of Scale

Production units have an optimal rate Minimum cost & optimal operating rate are
of output for minimal cost. functions of size of production unit.
Evaluating Alternatives
• Cost-volume analysis
– Break-even point
• Financial analysis
– Cash flow
– Present value
• Decision theory
• Waiting-line analysis

Cost-Volume Relationships
Break-Even Problem with Step Fixed Costs Break-Even Problem with Step Fixed Costs
Cost-Volume Analysis
Total Profit(TP) = Total Revenue(TR) – Total Cost(TC)
Total Revenue(TR) = Quantity(Q) * Unit Price (p)
Total Cost(TC) = Fixed Cost(FC) + Variable Cost(VC)
Variable Cost = Quantity(Q) * Unit Cost(c)

At breakeven point
Breakeven Analysis
EX: The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which
will appear leasing new equipment for a monthly payment of $6000. variable costs would be $2 per pie,
and pies would retail for $7 each.
I. How many pies must be sold in order to break even ?
II. What would be profit (loss) be if 1000 pies are made and sold in a month?
III. How many pies must be sold to realize a profit of $4000 ?
IV. If 2000 can be sold, and a profit target is $5000, what price should be charged per pie ?
FC = $6000 c = $2 p = $7
Qbep = FC / ( p - c ) = 6000 / ( 7 – 2 ) = 1200 pies / month
For Q = 1000 TP = TR – TC = p*Q - FC - c*Q
TP = Q(p – c ) - FC = 1000*(7 – 2 ) - 6000 = - 1000 $ loss
For TP = 4000 Q = (TP + FC ) / (p – c) = (4000 + 6000) / ( 7 - 2 ) = 2000 pies
For Q = 2000 and TP = 5000 TP = Q(p – c ) - FC
5000 = 2000 ( p - 2 ) - 6000
p = 7.5 $
EX: A manager has the option of purchasing one, two, or three machines. Fixed costs and potential
volumes are as follows:
Number of machines Total annual fixed cost $ Corresponding range of output
1 9600 000 To 300
2 15000 301 To 600
3 20000 601 To 900
Variable cost is $ 10 per unit, and revenue is $ 40 per unit
I. Determine the break even point for each range
II. If projected annual demand is between 580 and 660 units, how many machines should the
manager purchase

Solution
a. Compute the break even point for each range
For one machine: Q = 9600/(40 – 10) = 320 units (not in the range, so there is no break even point)
For two machines: Q = 15000/(40-10) = 500 units
For three machines: Q = 20000/(40-10) = 666.67 units
b. Comparing the projected demand to the two ranges for which a break even point occurs, you can see
that the break point is 500, which is in the range 301 to 600. this means that even if demand is at the
low end of the range, it would be above the break even point and thus yield a profit. That is not true of
range 601 to 900. at the top end of projected demand, the volume would still be less than break even
point for that range, so there would be no profit. Hence, the manager should choose two machines
Make or Buy
In-House or Outsourcing
Outsource: obtain a good or service from an external provider
1. Available capacity (equip.,skills,time)
2. Expertise
3. Quality considerations (labs, inspect.)
4. Nature of demand (high, steady)
5. Cost (fixed, savings)
6. Risk

Break even point and make or by decision
Example: Make or Buy

• A computer company buy monitors for $1000 each. The company thinking about building a new
production line for monitors with $150,000 fixed cost and $250 as a variable cost per unit.
Determine if it is better to make or buy the monitors.
Solution
Break even point is:
150,000 + 250 Q = 1000 Q
750 Q = 150,000
Q = 200 monitors
This means, if the company need more than 200 monitors a year, it is better to make it, otherwise it is
better to buy.
Assumptions of Cost-Volume Analysis

1. One product is involved
2. Everything produced can be sold
3. Variable cost per unit is the same regardless of volume
4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per unit
Financial Analysis
• Cash Flow - the difference between cash received from sales and other sources, and cash
outflow for labor, material, overhead, and taxes.
• Present Value - the sum, in current value, of all future cash flows of an investment proposal.

Decision Theory
• Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty
• Suited to capacity decisions
• See Chapter 5 Supplement
Waiting-Line Analysis
• Useful for designing or modifying service systems
• Waiting-lines occur across a wide variety of service systems
• Waiting-lines are caused by bottlenecks in the process
• Helps managers plan capacity level that will be cost-effective by balancing the cost of having
customers wait in line with the cost of additional capacity

Location Decision
Need for Location Decisions
 Change of geographic distribution of demand
 New communities that attract investors because of investment incentives
 Marketing Strategy
 Cost of Doing Business
 Growth: supply less than demand
 Depletion of Resources
 Fire or earthquake, ….
Nature of Location Decisions

Strategic Importance Objectives Options
 It affect the project for a long time  Profit potential  Expand
 It affect the practice of other functions of the  No single location existing
project may be better than facilities
 It affect the daily operating cost others  Add new
 Long term commitment of resources/costs  Identify several facilities
 Impact on investments, revenues, and operations locations from which  Move
 It impact the Supply chains to choose
Making Location Decisions

 Decide on the criteria
 Identify the important factors
 Develop location alternatives
 Evaluate the alternatives
 Make selection
Location Decision Factors

Regional Factors Community Multiple Plant Site-related Factors
Considerations Strategies
 Location of raw  Quality of life  Product plant  Land
materials  Services strategy  Transportation
 Location of  Attitudes  Market area plant  Environmental
markets  Taxes strategy  Legal
 Labor factors  Environmental  Process plant
 Climate and taxes regulations strategy
 Utilities
 Developer support

Comparison of Service and Manufacturing Considerations

Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus
Transportation modes/costs Demographics: age,income,etc
Energy availability, costs Population/drawing area
Labor cost/availability/skills Competition
Building/leasing costs Traffic volume/patterns
Customer access/parking
A checklist of potential issues for decisions on foreign locations
Foreign Government a. Policies on foreign ownership of production facilities

Local Content
Import restrictions
Currency restrictions
Environmental regulations
Local product standards
b. Stability issues
Cultural Differences
Living circumstances for foreign workers / dependents
Religious holidays/traditions
Customer Preferences
Possible buy locally sentiment
Labor
Level of training and education of workers
Work practices
Possible regulations limiting number of foreign employees
Language differences
Resources Availability and quality of raw materials, energy, transportation
Evaluating Locations
1. Cost-Profit-Volume Analysis
2. Transportation Model
 Decision based on movement costs of raw materials or finished goods
3. Factor Rating
 Decision based on quantitative and qualitative inputs
4. Center of Gravity Method
 Decision based on minimum distribution costs

❶ Location Cost-Volume Analysis

 Determine fixed and variable costs
 Plot total costs
 Determine lowest total costs
Assumptions
 Fixed costs are constant
 Variable costs are linear
 Output can be closely estimated
 Only one product involved
Example 1: Fixed and variable costs for four potential locations are:
Location Fixed Cost Variable Cost
A $250,000 $11
B 100,000 30
C 150,000 20
D 200,000 35
Solution
Fixed Costs Variable Costs Total Costs
A $250,000 $11(10,000) $360,000
B 100,000 30(10,000) 400,000
C 150,000 20(10,000) 350,000
D 200,000 35(10,000) 550,000
The break-even output level can be determined as follows:

For B and C For A and C
100000 + 30 Q1 = 150000 + 20 Q1 250000 + 11 Q2 = 150000 + 20 Q2
Solving for Q1,you find Q1 = 5000 units per year Solving for Q2, you find Q2 = 11000 units per year.
Therefore, if Q < 5000, B is superior
If 5000 < Q < 11000, C is superior
If Q > 11000, A is superior

❷ Transportation Model
 Transportation costs sometimes play an important role in location decisions.
 When a problem involves shipment of goods from multiple receiving points, and a new location
(sending or receiving) is added to the system, the company should undertake, a separate
analysis of transportation.
 Transportation model is a special case of linear programming model that used to minimize the
total transportation cost.
 Transportation model is used to minimize the transportation cost if a new location is added to
an existing system.
Requirements for Transportation Model

 List of origins and each one’s capacity
 List of destinations and each one’s demand
 Unit cost of shipping
Transportation Model Assumptions

 Items to be shipped are homogeneous
 Shipping cost per unit is the same
 Only one route between origin and destination
The Transportation Problem
A Transportation Table

Special Problems
 Unequal supply and demand (unbalanced)
 Dummy: Imaginary number added equal to the difference between supply and demand when
these are unequal
 Degeneracy: The condition of too few completed cells to allow all necessary paths to be
constructed
Using transportation to solve location problem

Example
 A company owns two factories, one in Al-Sadat city and the other in Port said. The company
distribute its product in three markets; Cairo, Alexandria, and Asyoute .the following table
shows the supply, demand and cost of transportation per unit from each source to each
destination.
Alex. Cairo Asyoute supply
Al-Sadat 6 10 17 30
Port said 8 12 14 20
demand 25 10 40
Due to the shortage of supply to satisfy the demand, the company is thinking in building a new factory.
Two suggested locations are considered; Alamraya and Tanta The following table shows the
transportation cost from each factory to the three markets. Determine the best location.
Alex. Cairo Asyoute

Alamraya 10 8 15
Tanta 12 13 5
Solution
1.Use DS for windows software to solve two transportation problems; which are:
a. The first one includes Alamraya as a third source
b. The second one includes Tanta as a third source
2. Choose the location that has the minimum transportation cost.
Summary of Procedure
 Make certain that supply and demand are equal
 Develop an initial solution using intuitive, low-cost approach
 Check that completed cells = R+C-1
 Evaluate each empty cell
 Repeat until all cells are zero or positive

❸ Factor rating
 General approach to evaluating locations that includes quantitative and qualitative inputs.
 Factor rating enables the decision makers to incorporate their personal opinions and
quantitative information in the decision process.
Factor rating procedure

1. Determine which factors are relevant (e.g., location of market, water supply, parking facility,
revenue,…, ect.,)
2. Assign a weight to each factor that indicates its relevant importance compared with all other
factors, typically, weights sum to 1.00.
3. Decide on a common scale for all factors (e.g., 0 to 100)
4. Score each location alternative.
5. Multiply the factor weight by the score for each factor, and sum the results for each location
alternative.
6. Choose the alternative that has the highest composite score
Example
 A photo-processing company intends to open a new branch store. The table below contains
information on two potential locations. Which is the better alternative?
Factor weight Alt.1 Alt.2

Proximity to existing store .10 100 60
Traffic volume .05 80 80
Rental cost .40 70 90
Size .10 86 92
Layout .20 40 70
Operating cost .15 80 90
Solution: Calculate the weighted scores by multiplying the weights by the score of each alternative.
Factor Alternative 1 Alternative 2
Proximity to existing store 10 6
Traffic volume 4 4
Rental cost 28 36
Size 8.6 9.2
Layout 8 14
Operating cost 12 13.5
Sum 70.6 82.7 (best)

❹ Center of Gravity method

 The method is used to determine the location of a distribution center that will minimize the
distribution cost
 It treats distribution costs as a linear function of the distance and the quantity shipped.
 The quantity to be shipped to each destination is assumed to be constant.
 The method includes the use of a map that shows the locations of destinations. The map must
be accurate and drawn to scale.
 The location of the (0,0) point of the coordinate system, and its scale, is unimportant.
Center of gravity procedure

 If the quantities to be shipped to every location are equal, you can find the coordinates of the
center of gravity by finding the average of the x coordinates and the average of the Y
coordinates.
 When the number of units to be shipped is not the same for all destinations (usually the case), a
weighted average should be used to determine the center of gravity; with the weights being the
quantities to be shipped.
Example
Suppose that one of the companies is thinking about building a new central warehouse to supply four
distribution centers; A, B, C, and D. The following table shows the coordinates of the four location to a
hypothesized point (0,0):
Location X coordinate Y coordinate
A 40 50
B 30 30
C 20 20
D 10 40
The following table shows the yearly requirements of each location: find the location of the new warehouse
Location Quantity
A 35
B 15
C 15
D 85
Solution
Location x y Q x .Q y .Q
i i i i i i i
A 40 50 35 1400 1750
B 30 30 15 450 450
C 20 20 15 300 300
D 10 40 85 850 3400
Total 3000 5900
The center of gravity coordinates will be
X coordinate = sum (xi.Qi)/sum (Qi)  3000/150 = 20
Y coordinate = sum (yi.Qi)/sum (Qi)  5900/150 = 39

Contemporary Management
Contemporary
Management

Change & Innovation

Types of organization change:
- Restructuring (Minor) ‫إعادة هٌكلة‬
- Reengineering (Major) ‫إعادة هندسة‬
e.g. Nokia “ from paper manufacturing to cellular phones “
 Technology
- How
- Know how → the ways of doing things
→ how to operate the system
‫مٌن أقوي فً الطاقة النووٌة مصر أم إٌران ؟‬ -
‫ كمان‬Know how ‫ لكن مع الوقت ممكن توصل للـ‬...... ‫ فقط ولٌس العقول‬machines ‫← إٌران عندها الـ‬
‫) فقط‬well( ‫ تنقصنا االرادة‬.... Z ً‫ إل‬A ‫ولكن مصر عندها العقول اللً تعمل المفاعل النووي من‬
e.g. catalogue with machines → Know how
 Innovation
→any idea, object, program, process, product, service, system which is new for the adaptor & can
add value for him
** Product from scratch:
1- Generating idea
Creativity (Mindset) >>> creative person
2- Studying idea
3- Blue print (sketch)
4- Feasibility study Invention >>> inventor
5- Prototype ً‫النموذج المبدئ‬ ‫اخترعت حاجة بس لسه محدش استفاد بٌها‬
6- Experimentation ‫التجارب‬
 To check reliability, durability, continuity & safety
7- Marketing (wide use) Innovation >>> innovator
‫الناس بدأت تستفٌد منها‬
ً‫ كان بٌشتغل بالزنبلك ← معجبش الناس وكمان كان سعره غال‬power supply ‫ اخترعوا رادٌو مالوش‬: 1 ‫مثال‬ -
invention ‫← وقف عند مرحلة الـ‬
‫ أول ما المٌه تغلً ٌتحول لونه الً االخضر ← الناس خافت منه‬.... ‫ لونه الً االبٌض‬cattle ‫ الـ‬: 2 ‫مثال‬ -
‫ محدش رضً ٌستعمله‬... circular ‫ موتور بٌمشً فً خط مستقٌم ولٌس‬:3 ‫مثال‬ -
‫ فتحول من‬another use ‫( ← ٌعنً عمله‬short hand) ‫جه واحد مصري مع فرٌق ابحاث استخدمه فً االلة الكاتبة‬
innovation ‫ إلً الـ‬invention ‫مرحلة الـ‬
invention ‫ ← وقفت عند مرحلة الـ‬failure ‫ ← حصلها‬boiled water in Egypt ← Rogers -
Note :
Vision can be declared or not
e.g. Kodak & Fuji
- Kodak declared that it wants to be the first company to produce a single use camera within 5 years
- Fuji >>> produced it within 4 years

 Innovation could be new idea in new context Or an old idea in new context
e.g.1 TQM ( in Japan → old idea “ not innovation” )
while ( in Egypt it was an innovation ) → old idea with new context
e.g. 2 Nanotechnology in Europe → new idea with new context
 innovation has 2 sides
Provider (Manufacturer) Adaptor (User)

Which are more innovators? - can be classified to:
→ it depends on: 1) Pioneers
1- No of innovations 2) Early adaptors
2- Speed (rate) 3) Majority
4) Late adaptors
No. of people
Time
Innovator Early Early Majority Late Laggards

Adaptor Majority Majority
** Imitation is a part of innovation

e.g. Korea >> starts as an imitator for Europe in cars manufacturing, then got innovator
 innovation can be either:

- open ‫أي حد ٌقدر ٌاخد الفكرة وٌطبقها‬
- close : it is a secret ‫عشان الملكٌة الفكرٌة‬
Turbulent Times and the Changing Work Place

 Today’s organizations need to continuously adapt to new situations
 Today’s successful companies are continually innovating
 Organizations that change successfully are both profitable and admired
- Daft : Change or die
- Birmingham University : innovate or die

Organizational Change
The adoption of a new idea or behavior by an organization
innovation ‫ هو‬change ‫هنا اعتبر ان كل الـ‬
Types of Organizational Change
New Products and Technologies

New Product
Product development
Saturation
Product
Maturity development
Decline
Introduction Growth
Of new
product
R&D
Changing People and Culture

Structural changes involve the hierarchy of authority, goals, structural characteristics,
administrative procedures, and management systems.
People Change – a change in attitudes and behaviors of a few employees in the organization
Culture Change – a major shift in the norms, values, attitudes, and mind-set of the entire organization

Two Types of Planned Change

1. Incremental Change: based on efforts to improve basic work and organizational processes.
2. Transformational Change (dramatic) (radical): involves redesign and renewal of the total
organization.
Innovation Strategies
Exploration Cooperation Entrepreneurship
• Creativity • Horizontal coordination mechanisms • Idea champions

• Experimentation • Customers, partners • New venture teams
• Idea Incubators • Open innovation • Skunkworks
• New venture fund
Coordination Model for Innovation
Internal and External Organization
Generating Ideas
 Open Innovation:
→Extending the search for and Commercialization of new ideas beyond the boundaries of the
Organization.
 Idea Champion:
→a person who sees the need for and champions productive change within the organization
 Idea generator → ‫واحد ٌطلع الفكرة‬

 Idea champion → ‫واحد ٌقتنع بالفكرة‬
 Idea sponsor → ‫واحد ٌمول الفكرة‬

What is entrepreneurship?
 Entrepreneurship
– Strategic thinking and risk-taking behavior that results in the creation of new
opportunities for individuals and/or organizations.
 Entrepreneurs
– Risk-taking individuals who take actions to pursue opportunities and situations others
may fail to recognize or may view as problems or threats
 Entrepreneurs are …
– Founders of businesses that become large-scale enterprises.
– People who: > Buy a local franchise outlet
> Open a small retail shop
> Operate a self-employed service business
– People who introduce a new product or operational change in an existing organization.
Fostering Entrepreneurship
• New-venture team: separate unit responsible for developing and initiating innovation
• Skunkworks ( devil party ) ( bad party ) >>>> intelligence ‫ الجاسوسٌة‬: informal and secretive
group focused on breakthrough ideas
• New-venture fund: a fund providing resources for new ideas, products or businesses.
Four Roles in Organizational Change
Organizational Development
… is a planned, systematic process of change that uses behavioral science knowledge and techniques to
improve an organization’s health and effectiveness through its ability to adapt to the environment,
improve internal relationships, and increase learning and problem-solving capabilities.

What is organization development?

 Organization development goals:
– Outcome goals focus on task accomplishments.
– Process goals focus on the way people work together.
– OD seeks to develop the organization members’ capacity for self-renewal.
– OD endorses freedom of choice, shared power, and self-reliance.
– OD takes advantage of knowledge about human behavior.
e.g.1 training
e.g.2 360 degree system ‫نظام بٌخللً الموظف ٌقٌم نفسه بنفسه‬
90 Boss
Subordinate
(employee 360 180 Customer
himself)
270 Colleagues
e.g.3 HR employee evaluation
L H
3 H 4 H
Potential
‫القدرات‬
L H
ً‫الكامنة الت‬
1 L 2 L
‫لم تستغل بعد‬
Performance
2
16 % 16 %
Extreme Extreme
68 %
1 4
Where is 3 ?

① → Job rotation >> transformation training

② → on job training
④ → green house (‫)الصوب الزجاجٌة‬
- 2nd staff - future people
e.g. 4 KAI (Kirton Adaptive Innovation)
Organizational Development Approaches to Cultural Change
Model of Change Sequence of Events
Environmental
Forces
Monitor global
competition, customers, Need for Initiate Implement
competitors, and other Change Change Change
factors.
Evaluate problems and Facilitate search, Use force-field

Internal Forces opportunities, define creativity, idea analysis, tactics for
needed changes in champions, overcoming
Consider plans, goals, technology, products, skunkworks, resistance.
company problems, structure, and culture. and idea incubators.
and needs.

Loin - Three Stages for Achieving Change

 Unfreezing ‫التهٌئة والتحلل من القدٌم‬
 Diagnosis stage.
 Participants are made aware of problems in order to increase their willingness to change
their behavior.
 Changing ‫التغٌٌر‬
 Intervention stage.
 Individuals experiment with new workplace behavior.
 Refreezing ‫التثبٌت‬
 Reinforcement stage.
 Individuals acquire a desired new skill or attitude and are rewarded for it by the
organization.
e.g. boiled frog

As (Polard, 2004) mentioned, If you take a frog and put it in a pot of extremely hot water, it's obvious
that frog will jump and try to get out of the water. However, if you put that same frog in a pot of water
that is tepid, and turn the heat on very low, that frog will lay there very quietly; and as the water
gradually heats up the frog will calmly fall in a state of unconsciousness; and eventually allow itself to be
boiled to death.
Disadvantages of Loin :
1- Linearity
2- Vocabularies (unfreeze, refreeze, …. ) can’t express well
Force-Field Analysis ‫تحلٌل القوي المٌدانٌة‬

The process of determining which forces drive and which resist a proposed change
Driving Forces Restraining Forces (Barriers)
• Thought of as problems or opportunities • Lack of resources
that provide motivation for change • Resistance from middle managers
• Inadequate employee skills
Current
Situation Desired
Morale ‫البٌروقراطٌة‬
‫زٌادة المرتبات‬ ‫المركزٌة‬
‫الحوافز‬ ‫المٌزانٌة‬
‫التدرٌب‬ Supportive Impeding
‫رحالت اجتماعٌة‬ Forces Forces

Traditional vs. Just-In-Time Inventory Systems
Resistance to Change
 Self-Interest: fear of personal loss is perhaps the biggest obstacle to organizational change
 Lack of Understanding and Trust: do not understand the intended purpose of a change or
distrust the intentions
 Uncertainty: lack of information about future events
 Different Assessments and Goals: people who will be affected by innovation may assess the
situation differently
‫الترتيب مهم‬
Tactics for Overcoming Resistance to Change
1- Communication and Education 2- Participation 3- Negotiation
4- Top Management Support 5- Coercion

The Environment and Corporate Culture

Strategic management:
All decisions which are responsible for transforming organization from one current situation to another
future better one
Means
Current Future
Situation Plans Situation
SWOT & TOWS
Bench mark:
→ The best of the best of your competitors
* Bench mark is not only in the same industry, you may utilize experience of others
e.g.1 / Delta company : refilling of planes within 30 min instead of 45 min by help of Formula 1
from 45 min. to 25 min.
Simplicity is the secret of creativity ‫نشٌل االسفلت اللً تحت الكوبري عشان العربٌات تقدر تعدي من تحته‬
e.g.2 / Xerox has a problem in money collection (25%) – by help of American express bank in Japan
it becomes 70 %.
You can convert threats into opportunities:

e.g.1/ NAFDA ; Canada, U.S, Mexico → no quotes between these countries.
Toyota built a car factory in America
e.g.2/ Petrol in Sudan
Chevron American company - and China
Organizational Environment
• All elements existing outside the boundary of the organization that have the potential to affect
the organization And inside
Organizational Environment
External Internal
elements outside the organization’s boundaries elements inside the organization’s
General Task boundaries
Affects the organization Directly influences
indirectly operations and performances
PESTEL factors Customers – labor market – Employees – HR management
suppliers - competitors

• Labor Market Forces Affecting Organizations today

 Growing need for computer literate information technology workers
 Necessity for ongoing investment in human resources – recruitment, education, training
 Effects of international trading blocks, automation, outsourcing, shifting facility locations upon
labor dislocations
Trading blocks: ‫تكتالت‬

‫ ج فً مصر‬300 ‫ االف دوالر بدال من‬6 ‫شركة أدوٌة عالمٌة لٌها فرع فً مصر – تفرض علٌها تاخد المادة الخام منها بسعر الطن‬
labor dislocations
‫انتقال الصناعة من الشمال للجنوب نتٌجة النخفاض التكلفة‬
International (Global) Dimension

Portion of the external environment that represents events originating in foreign countries as well as
opportunities for companies in other countries.
Technological Dimension
• Scientific and technological advances • Impact
– Specific industries • Competition
– Society at large • Relationship with Customers
• Medical advances
• Nanotechnology advances
Communication between head office & the field in Petroleum companies
Socio-Cultural Dimension
 Demographic characteristics of the general population
teenage ‫بيبسي كوال فً االتحاد السوفٌتً بعد تفككه – معظم السكان كانوا من الـ‬
– Norms - Customs - Values
‫ ماكدونالدز فً الهند‬-
‫ لٌس بالخبز وحده ٌحٌا االنسان‬-‫ احدي المعارض الفنٌة فً الهند‬-
 Examples:
– Increased globalization/diversity
– Longer stay in workforce
ً‫االمرٌكً ٌحب ٌغٌر شغله كل شوٌه – عكس الٌابان‬
Economic Dimension
 Economic health
• Consumer purchasing power
• Unemployment rate
- It is threat for company & opportunity for café
• Interest rates

 Recent Trends
• Frequency of mergers and acquisitions
If you can’t beat it, eat it
Merge (‫ → )اندماج‬Sony-Ericson Exxon-Mobil
Acquisition (‫ → )استٌالء‬General Motors & Daewoo
‫داٌو النوس بقت شٌفرولٌه النوس‬
• Small business sector vitality
SME’s : Small & Medium Enterprises
Legal-Political Dimension
Dimension of the general environment that includes federal, state, and local government regulations
and political activities designed to influence company behavior.
Pressure Groups – interest group that works within the legal-political framework to influence
companies to behave in socially responsible ways.
e.g. : ً‫اللوبً الصهٌون‬
e.g. : Harry Belton → War in Iraq
e.g. : ‫ تحظر تملك االسلحة النووٌة‬- ‫حزب الخضر‬
External Environment and Uncertainty

Decision making situations:
Certainty Risk Uncertainty Ambiguity

All data are known 10 – 20 % of data
Limited data
Calculated Uncalculated are known
- sometimes I know
But I know my
Almost 80 % of 50 % of data are what I need &
preference
data are known known sometimes I don’t
know
Adapting to the Environment

 Boundary-spanning ‫أوسع محٌط المنظمة‬
• Internet
• Business Intelligence Inter-organization : between 2 organizations
 Inter-organizational partnerships Intra-organization: within the organization
• From Adversary to Partnerships
 Mergers and joint ventures
Joint venture : Temporary
• Beyond Strategic Partnerships
Merging : Forever
Shift to a Partnership Paradigm

From Adversarial (‫ )تناقض‬Orientation → To Relationship Orientation
• Suspicion, competition, arm’s length • Trust, value added to both sides
• Price, efficiently, own profits • Equity, fair dealing, everyone profits
• Information and feedback limited • E-business links to share information and
• Lawsuits to resolve conflict conduct digital transactions
• Minimal involvement and up-front • Close coordination; virtual teams and
investment people onsite
• Short-term contracts • Involvement in partner’s product design
• Contracts limit the relationship and production

Culture
→The set of key values, beliefs, understandings, and norms ‫ معاٌٌر‬that members of an organization
share. (internal environment)
Levels of Corporate Culture
Talk the talk ‫أنا بتكلم كوٌس بس مابنفذش‬

Walk the talk ‫اللً بقوله بعمله وبنفذه‬
Management support doesn’t affect adoption of innovation

‫رسالة الدكتوراة‬
Penny Idea (every penny counts)

Cost cutting → high profit margin
e.g. Chrysler : CEO; Aya Koka “Japanese person”
‫قال انا هشتغل لغاٌة ما نخرج من االزمة بدوالر واحد – ثم تبعه المدٌرٌن اللً تحته – وكذلك العاملٌن قالوا هنشتغل بربع المرتب‬
‫فعملوا مبٌعات وارباح عالٌة‬
e.g. Dell (Europe) → Mass production & custom sales ≈ Customized computers
→ save show room , energy , work people , ……etc.
→ achieve high sales & profits
Cost cutting
1- Decrease cost with fixed price → high profit margin
2- Decrease cost & reduce the price → competitive advantage

Underlying assumptions & deep beliefs

→ X & Y theory
Visible Manifestations
• Symbols
• Stories
Knowledge management
Knowledge by stories ‫ٌوصلك المعلومة عن طرٌق الحكاٌات‬
• Heroes
Aya Koka – ‫ محمدٌن فً الدخٌلة‬/ ‫م‬
• Slogans
• Ceremonies ‫الحفالت‬
Environment and Culture

• A big influence on internal corporate culture is the external environment
• Cultures can vary widely across organizations
• Organizations within same industry reveal similar cultural characteristics
Corporate Culture Adaptability
Adaptive Culture Un-adaptive Culture

Visible Behavior Managers pay close attention Managers tend to behave somewhat
to all their communities, insularly ‫انفرادٌة‬, politically, and
especially customers, and bureaucratically. As a result, they do not
initiate change when needed to change their strategies quickly.
serve their legitimate interests.
Expressed Values Managers care deeply about Managers care mainly about
customers, stockholders, and themselves, their immediate work
employees. group, or some product (or technology)
They strongly value people and associated with that work group.
processes that can create They value the orderly and risk-reducing
useful change. management process.
Four Types of Corporate Cultures
‫حكم‬
‫المكاتب‬

 Adaptability culture : Nokia

)cellular phone ‫( بدأت شركة تصنٌع منادٌل ورق للجٌش الروسً فً الحرب العالمٌة ثم االحذٌة الرٌاضٌة وأخٌرا التكنولوجٌا‬
we are mad (we allow mistakes) ‫كان شعارهم‬
 Achievement culture : Pepsi
mass production ‫أطلع كمٌات كبٌرة من المنتج‬
 Bureaucratic culture : Army ‫الجٌش‬
 Involvement culture : ‫الشرطة – الشهر العقاري – خدمة التوصٌل‬
I have to involve & share our employees in decision making & taking
High-Performance Culture
• Based on a solid organizational mission or purpose

• Embodies shared adaptive values that guide decisions and business practices
• Encourages individual employee ownership of both bottom-line results and the organization’s
cultural backbone ‫أعامل الموظف علً انه صاحب العمل‬
Combining Culture and Performance
Cultural Leadership
• Articulates a vision that employees can believe in

 Communicates values
 Values are tied to a clear and compelling mission, or core purpose
• Heeds the day-to-day activities that reinforce the cultural vision
 Work procedures and reward systems match and reinforce the values

Planning and Goal Setting
 Organization:
→ Group of people working together to achieve certain purpose
Vision
The reason why I’m existing

What I’m
‫الرسالة‬
- It is continuous, not temporary Mission seeking to be in
- Must be concentrated the future
Goals Achieves
Strategic Plans
‫ الرئٌسٌة‬/ ‫االهداف العامة‬
Objectives Achieves
Tactical Plans
‫االهداف الفرعٌة‬
Targets Achieves
Operational Plans
‫االهداف التفصٌلٌة‬ (Action Plans)
Mission Strategic plans

 Nature of organization  Scope → for whole organization
 Product / service  Time → 5 years or more
 Customers Or: 3 years or more
 Quality
 Means
 Values
Tactical plans Action plans
 Scope → for each department  Scope → for each division
 Time → 1-5 or 1- 3 years  Time → Less than 1 year
 Plan
→ Statement of tasks, actions, … to achieve certain goal
 Planning → Process
1- Setting goals
2- Formulating plans
3- Implementation & follow up

‫‪Contemporary Management‬‬
‫‪Top Management‬‬
‫االنتاج‬ ‫التسوٌق‬ ‫‪HR‬‬
‫التشغٌل‬ ‫الصٌانة‬
‫االنتاج والتسوٌق والـ ‪ٌ HR‬قعدوا مع الـ ‪ top management‬وٌطلعوا الـ ‪ goals‬مثل‪ :‬زٌادة النصٌب السوقً بنسبة ‪.%35‬‬ ‫‪‬‬
‫ٌقوم بتاع االنتاج ٌقعد مع الناس اللً تحته عشان ٌطلع الـ ‪objective‬‬ ‫‪‬‬
‫مثل‪ :‬زٌادة االنتاج بنسبة ‪ ، %18‬زٌادة االنتاجٌة بنسبة ‪ ، % 12‬إضافة خط انتاجً جدٌد‬
‫بتاع التسوٌق ٌقعد مع الناس بتوعه عشان ٌحط الـ ‪objective‬‬ ‫‪‬‬
‫مثل‪ :‬زٌادة المبٌعات بنسبة ‪ ، %15‬زٌادة عدد رجال البٌع بنسبة ‪ ، %3‬فتح ‪ 4‬منافذ توزٌع جدٌدة‬
‫الـ ‪ٌ HR‬قعد مع الناس بتوعه‬ ‫‪‬‬
‫مثل‪ :‬زٌاجة القوي العاملة بنسبة ‪ ، %12‬زٌادة برامج التدرٌب بنسبة ‪ ، %20‬تحدٌث بطاقات الوصف الوظٌفً‬
‫بتاع التشغٌل ٌقعد مع الـ ‪ employees‬بتوعه عشان ٌطلع الـ ‪targets‬‬
‫مثل‪ :‬تخفٌض وقت االعداد بنسبة ‪ ، %2‬زٌادة معدل رجل‪/‬ساعة بنسبة ‪ ، %9‬تشغٌل عدد نوبتٌن مدة كل منها ‪ 8‬ساعات‬
‫الصٌانة‬
‫مثل‪ :‬زٌادة الصٌانة الوقائٌة بنسبة ‪ ، %3‬زٌادة كفاءة االالت بنسبة ‪ ، %50‬تخفٌض وقت االعطال بنسبة ‪%1‬‬
‫‪ ‬االنشطة )‪(plan‬‬
‫‪ .1‬تحدٌد االحتٌاجات التدرٌبٌة‬
‫‪ .2‬تحدٌد الفئات المستهدفة من التدرٌب‬
‫‪ .3‬تحدٌد أهداف البرامج التدرٌبٌة‬
‫‪ .4‬االتصال بمراكز الخبرة‬
‫‪ .5‬تلقً العروض‬
‫‪ .6‬اختٌار المركز التدرٌبً المناسب‬
‫‪ .7‬تلقً المادة الترٌبٌة – ثم تقٌٌمها‬
‫‪Goals‬‬ ‫‪Strategic/corporate goals‬‬ ‫‪Strategic/corporate Objectives‬‬ ‫‪Strategic/corporate Targets‬‬

‫‪Objectives‬‬ ‫‪Tactical goals‬‬ ‫‪Tactical objectives‬‬ ‫‪Tactical targets‬‬
‫‪Targets‬‬ ‫‪Operational/functional‬‬ ‫‪Operational/functional‬‬ ‫‪Operational/functional‬‬
‫‪goals‬‬ ‫‪Objectives‬‬ ‫‪targets‬‬
‫‪Prepared by: Saied Ibrahim‬‬ ‫‪387‬‬

Decision making
Decision making vs. decision taking

 Problem : a gap between what you want & what you have
 Problem can be +ve or –ve
 Decision - choice made from available alternatives
 Decision Making – the process of Identifying problems and opportunities and then resolving them.
Problem solving :
1- Feeling the problem (symptoms)
2- Identifying the problem (main causes)
>> Big John doesn’t pay
3- Collecting data & analysis Decision Making
4- Generating alternatives
Preferred by group
5- Evaluating alternatives
- Cost benefit analysis
- Advantage & disadvantage
- suitability
6- Choosing suitable alternatives & report it (recommend)
“in the light of available information”
Decision Taking
7- Implementing alternatives
8- Following up Decision taker can take the
recommended alternative
or other decision
 Brain Storming
 Field Force Analysis
 Fishbone analysis
What is it?
• The Fishbone diagram (sometimes called the Ishikawa diagram) is used to identify and list all
the factors that are conditioning the problem at hand
• This is primarily a group problem analysis technique, but can be used by individuals as well
• The process is called Fishbone Analysis because of the way in which the information gathered is
arranged visually – like the skeleton of a fish

Categories of Decisions
• Programmed Decisions
– Rules developed from frequent occurrences
– Response to frequent organizational problems
• Non-programmed Decisions
– Unique, poorly defined and unstructured
– Important consequences
Certainty, Risk, Uncertainty, Ambiguity

1. Certainty (Programmed) (Structured) (Routine) ‫موظف عاٌز ٌاخد اجازة – لو ظروف العمل واجازاته تسمح‬
– all the information is fully available
2. Risk (Semi-Programmed) (Semi-Structured) (Semi-Routine) (Adaptive)
– decision has clear goals
– information is available
– future outcomes are subject to chance
3. Uncertainty (Non-Programmed) (Un-Structured) (Innovative) >> use my intuition
– managers know which goals they wish to achieve
– information is incomplete
– may need to develop creative alternatives
4. Ambiguity
– goals to be achieved or the problem to be solved is unclear
– alternatives are difficult to define
– information about outcomes is unavailable
Conditions that Affect the Possibility of Decision Failure

Three Decision-Making Models
Classical Model Administrative Model Political Model

Certainty Risk >> uncertainty Uncertainty >> ambiguity
Assumptions: How managers make Closely resembles the real
 Operates to accomplish “difficult” decisions environment in which most
goals that are known and  Bounded rationality: people managers and decision makers
agreed upon have limits or boundaries on operate
 Strives for condition of how rational they can be Useful in making non-
certainty – gathers complete  Satisficing: means that programmed decisions
information decision makers choose the Decisions are complex and
 Criteria for alternatives are first solution alternative that involve people and information
known satisfies minimal decision Disagreement and conflict over
 Decision maker is rational criteria problems and solutions are
‫ رشٌد‬and uses logic normal
 Decision goals often are
vague, conflicting and lack
consensus among managers
 Rational procedures are not
always used
 Managers’ searches for
alternatives are limited
 Managers settle for a
satisficing rather than a
maximizing solution
Normative - describes how a Descriptive is how managers Coalition ‫ تحالف‬- informal alliance
manager should and provides actually make decisions--not among manages who support a
guidelines for reaching an ideal how they should. specific goal
decision Intuition is when managers
lean on past experiences.
Characteristics of Classical, Political, and Administrative Decision Making Models

Six Steps in the Managerial Decision Making Process
Diagnosis and Analysis of Causes

Diagnosis - analyze underlying causal factors
Managers make a mistake if they jump into generating alternatives without first exploring the cause of
the problem more deeply
Underlying Causes Kepner /Tregoe

 What is the state of disequilibrium affecting us?
 When did it occur?
 Where did it occur?
 How did it occur?
 To whom did it occur?
 What is the urgency of the problem?
 What is the interconnectedness of events?
 What result came from which activity?
Selection of Desired Alternatives

• Evaluate Risk Propensity - willingness to undertake risk with the opportunity of gaining an
increased payoff
• Implement Alternative - using managerial, administrative, and persuasive abilities to translate
alternative into action
• Evaluation and Feedback – how well was the decision implemented? Was it effective in
achieving the goal?

Personal Decision Framework
Directive Style Analytical Style Conceptual Style Behavioral Style

Certain – Risk – adaptive - semi Uncertainty – non Non programmed –
programmed - programmed ambiguity - political
classical
 People who  Complex solutions  More socially  Deep concern for
prefer simple, based on as much oriented others
clear-cut data as they can  Consider others  Talk to people one-
solutions to gather about the problem on-one
problems  Carefully consider and possible  Understand individual
 Make decisions alternatives solutions feelings about the
quickly  Base decision on  Consider many problem and possible
 May consider objective, rational broad alternatives effects
only one or two data and information  Concerned with the
alternatives  Search for best  Rely on information personal
 Efficient and possible decision from people and development of
rational based on systems others
 Prefer rules or information  Solve problems  Decisions to help
procedures available creatively others achieve their
goals
Transactional analysis :
How to manage your manager (How to supervise your supervisor) – from manager to leader
‫انتقادي‬ ‫انتقادي‬
‫األب‬ ‫األب‬
ً‫راع‬ ً‫راع‬
‫أفضل تحاور‬
‫البالغ‬ ‫البالغ‬
ً‫أذك‬
)ً‫برئ (طبٌع‬ )ً‫برئ (طبٌع‬ ‫نمط‬
‫الطفل‬ ‫الطفل‬
‫متنمر‬ ‫متنمر‬

Participation in Decision Making

Vroom-Jago Model - Helps gauge the appropriate amount of participation for subordinates
in process
Autocratic
Employee
Boss
Democratic
Managers Managers Take Make & take Employees Employees

make & take make & take suggestions decision make make & take
decision decision & then make & which is decisions & decision
then then justify take changeable managers
announce decisions (trial) ً‫تجرٌب‬ take the
decision
Vroom-Jagon Diagnostic Questions

 Decision Significance
 Importance of Commitment
 Leader Expertise
 Likelihood of Commitment
 Group Support of Goals
 Group Expertise
 Team Competence
Leader Participation Styles

• Five levels of subordinate participation in decision making
New Decision Approaches for Turbulent Times

Leadership
The Nature of Leadership
• There is no topic more important to business success than leadership
 leadership occurs among people
 involves the use of influence
 is used to attain goals
Leadership
→ The ability to influence people toward the attainment of organizational goals.
Leadership versus Management
Extra

Leadership Traits
• Traits - personal characteristics
• Great man approach - early research focused on leaders who had achieved a level of greatness
– Find out what made them great
– Find people with same traits
Personal Characteristics of Leaders

1. Physical Characteristics Energy Physical stamina
2. Personality - Self-confidence - Honesty & integrity - Enthusiasm - Desire to lead
- Independence
3. Work-related Characteristics - Achievement drive - Drive to excel - carefulness - Persistence, tenacity
4. Intelligence and Ability Judgment, decisiveness – Knowledge - Intelligence, cognitive ability
5. Social Characteristics Interpersonal skills - Cooperativeness -Ability to enlist cooperation
- Tact, diplomacy
6. Social Background Education Mobility
Behavioral Approaches Ohio State Studies

Consideration ( people-oriented behavior ) Initiating Structure ( task-oriented behavior )
– Is mindful of subordinates – Directs subordinate work activities toward goal
– Establishes mutual trust – Typically gives instructions, spends time
– Provides open communication planning, and emphasizes deadlines
Develops teamwork – Provides explicit schedules of work activities
Task oriented
(consideration)
(structured)
People oriented
Behavioral Approaches Michigan Studies

University of Michigan compared the behavior of effective and ineffective supervisors
 Employee-centered leaders
 Job-centered leaders
Job-
Employee-
centered
centered

Contingency Approaches
1) Situational Theory
2) Path Goal Theory
3) Contingency Theory
1) Situational Theory of Leadership
2) Path-Goal Theory
( Leader Behaviors)
 Supportive leadership:
- Leader behavior shows concern for subordinates
- Open, friendly, and approachable
- Creates a team climate
- Treats subordinates as equals
 Directive leadership:
- Tells subordinates exactly what to do
- Planning, setting performance goals, and behavior standards
 Participative leadership:
- Consults with his or her subordinates about decisions
 Achievement-oriented leadership:
- Sets clear and challenging goals for subordinates
- Behavior stresses high-quality performance

Path-Goal Situations & Preferred Leader Behavior
Leading Change:
Transactional Leaders Charismatic Leaders Transformational Leaders
• Clarify the role and task • The ability to inspire • Similar to charismatic
requirements of • Motivate people to do more leaders
subordinates • Less predictable than • Special ability to bring
• Initiate structure transactional leaders about innovation and
• Provide appropriate • Create an atmosphere of change by
rewards change – Recognizing followers’
• Display consideration for • May be obsessed by needs and concerns
subordinates visionary ideas – Look at old problems in
• Meet the social needs of new ways
subordinates – Question the status quo
Sources of Power Interpersonal Influence Tactics

(related to manager) (related to leader)
 Legitimate Power  Use rational persuasion
 Reward Power  Make people like you
 Coercive Power  Rely on the rule of reciprocity
 Expert Power  Develop allies
 Referent Power  Be assertive – ask for what you want
 Make use of higher authority
 Reward the behaviors you want

Motivation in Organizations
Motivation
→ Refers to the forces either internal or external to a person that arouse enthusiasm and persistence to
pursue a certain course of action.
A Simple Model of Motivation
NEED- Creates desire to fulfill needs (food, BEHAVIOR- Results in actions to

friendship, recognition, achievement). fulfill needs.
FEEDBACK- Reward informs person REWARDS- Satisfy needs; intrinsic or

whether behavior was appropriate and extrinsic rewards.
should be used again.
Types of Rewards
 Intrinsic rewards--satisfactions a person receives in the process of performing a particular
action.
 Extrinsic rewards--given by another person.
Foundations of Motivation
1. Contemporary • Content theories
• Process theories
• Reinforcement theories
2. Human Resources • The whole person
• Employees are complex and motivated by many factors
3. Human Relations • Noneconomic rewards
• Workers studied as social people
4. Traditional • Systematic analysis of an employee’s job
• Economic rewards for high performance
Content Theories
→ A group of theories that emphasize the needs that motivate people.
 Hierarchy of Needs Theory
 ERG Theory
 Two-Factor Theory
 Acquired Needs Theory

1) Maslow’s Hierarchy of Needs
2) ERG Theory

3) Herzberg’s Two-Factor Theory
4) Acquired Needs Theory
Process Theories of Motivation

→ A group of theories that explain how employees select behaviors with which to meet their needs and
determine whether their choices were successful.
1- Equity Theory
2- Expectancy Theory
3- Goal Setting Theory

1. Equity Theory
 Focuses on individuals’ perceptions of how fairly they are treated compared with others.
 Motivated to seek social equity in the rewards they expect for performance.
2. Expectancy Theory
 Motivation depends on individuals’ expectations about their ability to perform tasks and
receive desired rewards.
 Concerned not with identifying types of needs but with the thinking process that individuals
use to achieve rewards.
 Based on the effort, performance, and desirability of outcomes.
Major Elements of Expectancy Theory
3. Goal Setting Theory

 Challenging goals increase motivation and performance
 Goals are accepted by subordinates
 Subordinates receive feedback to indicate their progress toward goal achievement
Reinforcement Perspective on Motivation

Reinforcement Tools
Positive reinforcement Avoidance learning is Punishment is the Extinction is the
in the administration of the removal of an imposition of withdrawal of a positive
a pleasant and unpleasant unpleasant outcomes reward; behavior is no
rewarding consequence following on an employee. longer reinforced and
consequence. a desired behavior. hence is less likely to
occur in the future.

Changing Behavior with Reinforcement
Job Design for Motivation

 Job design - application of motivational theories to the structure of work
 Job simplification - job design whose purpose is to improve task efficiency
 Job Rotation - rotate employees to provide stimulation
 Job Enlargement - combination of tasks into broader job to increase challenge
 Job Enrichment - incorporating achievement and recognition into jobs
Types of Job Design

The Job Characteristics Model
Innovative Ideas for Motivating

 Pay for Performance  Gain Sharing  Employee stock Ownership
 Lump-sum Bonuses  Flexible Work Schedule  Team-based Compensation
 Lifestyle Awards
Empowering People to Meet Higher Needs

 Information – Employees receive company information
 Knowledge - Employees need knowledge and skills to contribute
 Power - Employees have the power to make substantive decisions
 Rewards - Employees are rewarded based on the company performance
A Continuum of Empowerment

Teamwork
What is a Team?
 Unit of 2 or more people
 Interact or coordinate their work
 To accomplish a specific goal
Differences between Groups and Teams

Groups Teams
Designated leader Shares/rotates leader
Individual accountability Accountable to each other
Identical purpose for group & organization Specific team vision or purpose
Individual work products Collective work products
Runs efficient meetings Encourages open-ended discussions
Effectiveness=influence on business Effectiveness=value of collective work
Discusses, decides, delegates work to Discusses, decides, shares work
individuals
Work Team Effectiveness Model
Formal Teams
 Vertical - composed of a manager and subordinates, sometimes called functional or command
teams.
 Horizontal - composed of employees from the same hierarchical level but from different areas
of expertise. Cross-functional team, task force or committee.
 Special-Purpose - created outside the formal organization for special projects and disband once
project is completed. Fast-cycle teams.

Horizontal and Vertical Teams
Self-Directed Teams
 Employees with several skills and functions
 Given access to various resources
 Empowered with decision making authority
Size of Teams
 Ideal size is thought to be 7
 Variations of from 5 to 12 typically are associated with good team performance
 Small teams (2-4 members) show more agreement, ask more questions
 Large teams (12 or more) tend to have more disagreements; subgroups form, conflicts among
them occur
Member Roles in Teams

Task specialist role Socio-emotional role
Initiate ideas Encourage
Give opinions Harmonize
Seek information Reduce tension
Summarize Follow
Energize Compromise

Team Member Roles
Stages of Team Development

Determinants of Team Cohesiveness

 Team interaction - the more time spent together, the more cohesive the team
 Shared goals - members agree on goals, they will be more cohesive
 Personal attraction to the team - similar attitudes and values and enjoy being together
Consequences of Team Cohesiveness

• Morale
– Increased communication among members
– Friendly team climate
– Maintenance of membership
• Productivity
– Cohesive team members’ productivity tends to be uniform
– Non-cohesive teams have wider variation in member productivity
Productivity and Team Cohesiveness
Causes of Team Conflict

 Scarce Resources
 Communication breakdown
 Personality clashes
 Goal differences
Balancing Conflict and Cooperation

Model of Styles to Handle Conflict
Rules for Reaching a Win-Win Solution

 Separate the people from the problem
 Focus on interests, not current demands
 Generate many alternatives for mutual gain
 Insist that results be based on objective standards

Human Resources Management
Human
Resources
Management

(Manpower Planning) HR Planning (Employee Planning)
→ It is the process of determining HR needs (HR demand) & how to secure such needs (HR supply).
 HR supply includes; internal supply & external supply

 HR Planning level includes:
- Micro-level → level of organization
- Macro-level → all the country ً‫المستوي القوم‬
 HR planning is performed on centralized base ‫علً مستوي االقسام أوال ثم تدمج معا‬
 HR planning done on strategic level
‫ ٌقعد مع الناس فً الشركة وٌحددوا المطالب‬HR ‫الزم مدٌر الـ‬
Input 1. Organization strategy needs ‫لتحدٌد الـ‬

2. Personal records ‫عشان أشوف الناس اللً هتطلع معاش أو هتاخد أجازة‬
3. Organization chart ‫لتحدٌد عدد األفراد‬
4. Job description ‫لتحدٌد مإهالنهم‬
5. Performance appraisal
6. Development plan
Process I. Determine HR needs (HR demands)

(A) Identify causes of HR demand
- Environmental/External - Organizational - Workforce
(B) Forecast HR demand
- Quantity - Quality
II. Determine HR supply

(A) Identify INTERNAL HR supply
1. Conduct HR audit & develop qualifications inventory
2. Develop succession plans ‫خطط التعاقب‬
→through replacement charts ‫ & خرائط االحالل‬replacement summaries
Current Elham (regional manager)
Determination based on:

Successors
Osama 1 ,1 1- Performance
Rana 1,2 2- Potential for promotion
Ahmed Ahmed Rana2 , 3 Osama
……… ……… ………
……… ……… ………

(B) Identify EXTERNAL HR supply
→ conduct labor / employee market survey

III. Match HR demand with internal HR supply

Case (1) HR demand = HR internal supply → Equilibrium → No action to be taken
Case (2) HR demand > HR supply → HR shortage → Recruitment
Case (3) HR demand < HR supply → HR surplus
 Freeze “don’t hire” & attrition (‫مش هوظف ناس جدٌدة )تآكل‬
 Retraining & transfer ‫أحولهم ألقسام تانٌة‬
 Leave of absence ‫أجازة بدون مرتب‬
 Lease / outsource ‫أصدر الموظفٌن لشركات أخرى‬
 Job sharing ( under-employment )
 Early retirement ‫معاش مبكر‬
macro-level ‫بس الزم تتعمل صح – ألنها ممكن تإثر على الـ‬
 Lay off (downsizing) ‫ طالق رجعة‬/ termination ‫طالق بائن‬
 Dumping
‫ساعات الناس بتوافق إنهم ٌاخدوا مرتبات أقل‬
Output → HR plans
 Determine shortage
 Determine internal or external hiring
HR Planning terms:
1- Long term → make me to be proactive
2- Medium term
3- Short term
4- Immediate term ‫فوري‬

Job analysis
 Job description is the output of job analysis
The job is: a pattern of duties, tasks, & responsibilities performed for a pay
- Pattern >>> repetition - For a pay >>> not volunteer
Job analysis: is the process by which we determined what the job entitles & what are the requirements
of the job holder.
No. of job description equals no. of jobs

Job description is characterized by centralization
Job description is done by HR in cooperation with managers
Input 1. Organization charts

2. Process charts (that describes activities within the organization)
3. Payroll records
4. Previous job description
Process 1) Determine purpose (objective) of job analysis & communicate it within the
organization
2) Identify the job
3) Select representative positions (samples) for job families ‫مسمٌات مختلفة لنفس المهام الوظٌفٌة‬
4) Develop job questionnaire
5) Collect job information / data form ……….. follow below the table
- Managers - Employees
6) Analyze the job, based on:
- Criticality - Date
st
7) Develop 1 draft of job description
8) Verify job description
9) Develop job description
- Signed by manager & job analyst - Date
Output 1- Job description → describes the job

2- Job specification → describes the job holder Job description
Methods of collecting data:

1- Observation 5- Interviews
Or by performing the same job (HR)  Structured
2- Surveys  Unstructured
3- Participants log/diary ‫سجل الٌومٌات‬  Semi-structured
- Disadvantage:
4- Experts “either within the organization or from out the organization” > Time cost > Take long time
- You may refer to ads by the competitor company 6- Combination

Characters of job description:

1- Known to the employee
2- Specific “not general ”
3- Up to date
Sections of job description:

1- Job identification
“ Job title – job grade – job position – job date – reporting – department - ….. “
2- Work summary (what is the job )
One or two paragraphs → main objective of jobs & main duties.
3- Duties & responsibilities
4- Authority
5- Relationships
6- Job standards
7- Working conditions
8- Job specification (skills, experience, …. etc.)
Multi-phases of job analysis:
Recruitment
HR planning Selection
Health & safety Job Analysis

↓
Orientation
Person compensations Job description &
job specification
Performance appraisal Training & development
Career development
Job morphing (de jobbing )

 No specific job description
 Related more to the person , to increase his specification
Flat organization:
 Decrease layers of organization ( 5→7 or 4→6 layers )
 Requires more competency (cluster of Knowledge, Skills, Attitude)

Job design:
Approaches to job design
Mechanistic Organic
→ Design an efficient job → Design a satisfactory job
(less time, less effort, less money)
(cost effective) Characteristics of satisfactory job
↓ 1- Job significance
Underspecialized (division of labor) 2- Task identity (overspecialization)
Small tasks 3- Autonomy ‫االستقاللٌة‬
4- Skills variety
1- ↑ productivity 5- Feedback
2- ↓ satisfaction Techniques to design satisfactory job
1- Job enlargement (Horizontal loading)
2- Job enrichment (vertical loading)
3- Job rotation (cross training)
4- Autonomous work team/groups ‫فرق العمل المستقلة‬
Job satisfaction:
Factors of job satisfaction:

1- Job itself
2- Supervisor
3- Co-workers
4- Pay
5- Promotion
Working conditions:
1- Flexible schedule
Flexible hours, compressed week
2- Job sharing
shift ً‫ سكرتٌرة كل واحدة بتغط‬2 ‫واحد عنده‬
3- Tele-commuting ‫العمل من المنزل‬
Preferred by female more than male
O star net.com
Cycle plan – promotional plan

31 January

Recruitment ‫استقطاب‬
→ It is the process of finding & attracting qualified candidates for the job opening.
Factors affecting recruitment:

A) Factors from the applicant or the candidate prospective
1. Organization reputation (image)
2. Working condition
3. Compensation (salary & benefits)
4. Development opportunities
5. Job itself
6. Job title & position
7. Economic conditions
B) From the organization perspective
1- Cost or budget of recruitment (and salaries)
2- Availability of candidates in employee market
3- Urgency ‫(أنا محتاج ناس بسرعة) السرعة‬
4- Organization policy
5- Unions ‫االتحادات والنقابات‬
6- Governmental regulations e.g. 5% handicaps
Input 5. HR plans
6. Job description
7. Performance appraisal
Process 10) Determine internal recruitment channels
 Job position ً‫إعالن داخل‬
 Referrals (recommendation) → can violate the law.
 Succession plans ‫خطط التعاقب‬
 Departing employees
 Rehiring ً‫اللً مشً ٌرجع تان‬
11) Determine external recruitment channels
 Referrals
 Employment ads (want ads )
 Blind ad ‫ال ٌذكر اسم الشركة‬
 Job fairs / Employment fairs
 Employment agencies
 Executive agency (head hunting) → for top position ‫عاٌز حد بعٌنه‬
 Schools & Universities
 Internships (summer training) : give good image about the organization
 Outsourcing
 Unions & syndicates
 Military
12) Select most appropriate recruitment channel (s)
Output A pool (group of people) of qualified candidate who submit CV &/or fill job application

Selection
→ It is the process through which the organization determines which recruits are to be hired.
* Don’t be bias during the selection
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎𝑝𝑝𝑙𝑖𝑐𝑎𝑛𝑡𝑠 𝑕𝑖𝑟𝑒𝑑 " 𝑔𝑖𝑣𝑒𝑛 𝑡𝑕𝑎𝑡 𝑡𝑕𝑒𝑦 𝑎𝑟𝑒 𝑞𝑢𝑎𝑙𝑖𝑓𝑖𝑒𝑑
Selection Ratio =
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑎𝑝𝑝𝑙𝑖𝑐𝑎𝑛𝑡𝑠
2 2
e.g. which is better : or
5 10
Input 1- Job description

2- HR Plans → Vacant position
3- Recruits (CVs & application forms)
Process (( External Selection ))

1. Preliminary reception of applicants (Courtesy ‫ لباقة‬interview )
→ avoid misfit ‫نتخلص من الناس اللً مش متالئمة مع الشركة‬
Note:
- As I’m selecting my employee, employee also selecting me.
- Applicant can be one of my customers.
2. Employment tests it’s a fad ‫تقلٌعة‬

a- Cognitive test
b- Psychological test
c- Medical test
d- Drug test
3. Interviews → conversation between 2 parties

Can be classified based on:
a- Who conducts the interview
I. Employment / selection interview
→ Conducted by HR.
II. Supervisory interview (technical)
→ Conducted by managers.
b- Number of people within the interview
i. Individual interview
→ (one to one interview)
ii. Group interview
 Panel interview
→ group of interviewer vs. one applicant
 Mass interview
→ one “or more” interviewers vs. group of applicants

c- Format of the questions

I. Structured interview ‫أسئلة محددة‬
II. Unstructured interview
III. Semi-structured (mixed) interview
d- Content of the interview
I. Behavior interview
→ common with managers
II. Stress interview
→ make rapid firing question
4. Background & reference checks

‫الورق ٌروح أمن الدولة والشهادات تكون سلٌمة‬
* Reference:
- Personal reference ‫تشمل كذلك الفٌش والتشبٌه‬
- Employment reference
* If we don’t check reference & background → leads to negligence hiring ‫دكتور ومعاه اعدادٌة‬
Conditional
job offer
5. Medical examination
6. Realistic Job Preview (RJP) ….. it resembles the orientation
7. Hiring decision
→ By managers or HR.
Notes:
Any of previous steps should be:
- Valid : testing what do you want to test “ not just a fad”.
- Reliable : if the test is repeated, it will give the same score.
When discussing salary:

- Preferred to give hint about salary at first.
- Ask about expectation of salary, not the current salary.
(( Internal Selection ))
1- Employment tests
2- Interviews
3- Background (sometimes )
4- Realistic Job Preview (RJP)
5- Hiring decision
Output Hirees (employees)
Notes:
 If you didn’t accept the applicant, you have to apology to maintain a good relation
 Don’t forget to determine a specific time to reply the applicant.

Strategic Management
Strategic
Management

What is Strategy means?

→ Long term vision or long term plan & how to achieve objectives.
To define the term strategy

We should know that in any organization, we have two types of decisions:
1- Operational decisions.
2- Strategic decisions.
o Operational decision characteristics:

● Day to day ● Short-term ● Routine ● Functional
o Strategic decisions characteristics:

1. It deals with the long-term direction of the organization.
2. Concerns with scope or the area of activity of the organization, single area or diversified
/portfolio Ex: Bahgat group.
3. You should gain/create a competitive advantage, some edge over your competitors.
4. Should fit into dynamic/changing environment, it has to be flexible to fit into.
5. You need to utilize the organizational resources or competencies.
6. Outcome meets value/objectives of stake-holders, fulfill the aim of stake-holder of the
organization.
Strategy term:
→ It is the direction and the scope of the organization over the long term in a way helps the organization
to gain competitive advantage in a dynamic environment using competences and resources to meet the
values and the objective of its stakeholders.
Framework of strategic management
It is based on four different stages:
1. Environmental scanning: organization surrounded by internal and external environment
First layer of the external environment: society or mega environment: general factors or
PEST factors (political, economic, social, technological)
- Outreach of this layer/outcome of scanning the first layer: opportunities and threats
Second layer: TASK environment, industry factors: suppliers, consumers, competitors,
Stakeholders, labor union In the external environment
- The outreach: opportunities and threats
last layer: internal environment
You get to scan all the recourses structure and the competencies inside the boundary of
the organization.
- Outcome: Strengths and weakness.
2. Stage two: After defining SWOT, it is time to formulate strategy

Strategy formulation or planning
- Anatomy of strategic planning: VMOSA stands for the following
- To go for the strategic planning you should have vision, mission, and objectives from
mission, to achieve it you should have strategy, through actions and tactics.

3. Stage three Action stage Strategy implementation:

Easy to keep planning but hard to implement.
Introduce new strategy to change so it will pump into resistance
4. Stage four: corrective action

Evaluating and comparing the actual result with the plan
- It is an art and science of studying the organizational environments and formulating and
implementing and evaluating the proper strategy that would help to achieve the organization's
long-term objectives.
Following the model is not a full guaranteed success; it is only to avoid deviation out
Bernard show
Some people see things as they are and they ask why, I dream things never were and I say why not.
Examples:
BMW vision:
"we will be the standard." … what do we want to be?
They are tackling the future time
Mercedes vision: "we are the standard."… We already are and we are looking for more
Management
Functions of Management
1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling

The Internal Assessment
Organizational Culture
Pattern of behavior developed by an organization as it learns to cope with its problem of
external adaptation and internal integration…is considered valid and taught to new members
Cultural products:
1. Values 2. Beliefs 3. Rites 4. Rituals
5. Myths 6. Symbols 7. Heroes 8. Legends
Mission
→ Refers to one question "what is our business?" it describes what the org. is doing now?
Vision:
→ Refers to one question "what is the org. will become?" "What do we want to become?".
a dream
Importance of Mission , Benefits from a strong mission

1. Unanimity of Purpose
2. Resource Allocation
3. Organizational Climate
4. Focal point for work structure
Effective Missions
1. Broad in scope
2. Generate strategic alternatives
3. Not overly specific
4. Reconciles interests among diverse stakeholders
5. Finely balanced between specificity & generality
6. Arouse positive feelings & emotions
7. Motivate readers to action
8. Generate favorable impression of the firm
9. Reflect future growth
10. Provide criteria for strategy selection
11. Basis for generating & evaluating strategic options
12. Are dynamic in nature
Mission elements
1. Markets 2. Technology 3. Survival growth profit
4. Philosophy 5. Self-concept 6. Public image
7. Employees 8. Customers 9. Products/Services

CIA Vision
• We will provide knowledge and take action to ensure the national security of the United States
and the prevention of American life and ideals.
CIA Mission
• We are the eyes and ears of the nation and at times its hidden hand. We accomplish this mission
by:
• Collecting intelligence that matters.
• Providing relevant, timely, and objective all-source analysis.
• Conducting covert action at the direction of the president to preempt threats or achieve United
states policy objectives.
CIA Values
• In pursuit of our country’s interests, we put Nation Before Agency, Agency before unit, and all
before self. What we do matters.
• Our success depends on our ability to act with total discretion and an ability to protect sources
and methods.
• We provide objective, unbiased information and analysis.
• Our mission requires complete personal integrity and personal courage, physical and
intellectual.
• We accomplish things other than cannot, often at great risk. When the stakes are highest and
dangers greatest, we are there and there first.
• We stand by one another and behind one another. Service, sacrifice, flexibility, teamwork, and
quiet patriotism (loyalty) are our hallmarks.

It is not the strongest of the species that survive, nor the most intelligent,
but the one most responsive to change. Charles Darwin
The external environment

 It includes all external factors which affect the organizational performance (positively or
negatively) both in the short and long terms.
 Short term = Task environment
 Long term = Societal environment.
 The starting point for all types of organizations (Inputs).
 The ending point for all types of organizations (Outputs).
 Most of the external factors are uncontrollable by the organization. (Great source of
uncertainty).
Industrial Organization (I/O) View

- Industry factors more important than internal factors
- Performance determined by industry forces
I/O Perspective Firm Performance

Industry Properties
1. Economies of Scale 2. Barriers to market entry
3. Product differentiation 4. Level of competitiveness
 The purpose of External Strategic Management Audit is to identify both Opportunities & Threats
Key External Forces & the Organization
 Communities  Competitors
 Managers  Suppliers
Key Opportunities
 Stockholders  Distributors
External &
 Labor Unions  Creditors
Forces Threats
 Special Interest  Customers
Groups  Employees
 Products  Services
Sources of Information of External Audit:

- Internet - Libraries - Suppliers - Distributors - Customers - Competition
External Factors
1. Long-term orientation 2. Measurable
3. Applicable to competing firms 4. Hierarchical

Key External Forces

• Social, cultural, demographic & environmental forces
• Technological forces
• Economic forces
• Political, governmental & legal forces
• Competitive forces
① Political, Government & Legal Forces

A. Government Regulation
o Antitrust legislation
o Tax rates
o Lobbying efforts
o Patent laws
B. Increasing Global Interdependence

Political variables impact –
o Formulation of strategies
o Implementation of strategies
Strategists in a global economy --
o Forecast political climates
o Legalistic skills
o Diverse world cultures
Globalization of Industry
o Worldwide trend toward similar consumption patterns
o Global buyers and sellers
o E-commerce
o Technology for instant currency transfers
②Economic Forces
• Availability of credit
• Level of disposable income
• Interest rates
• Inflation rates
• Money market rates
• Fed Government deficits
• GDP trend
• Consumption patterns

③Social, Cultural, Demographic & Environmental Forces

Major Impact –
• Products
• Services
• Markets
• Customers
Monitor Key Variables

1. Actuarial rates 11. Attitudes toward customer service
2. Per capita income 12. Attitudes toward quality
3. Attitudes toward business 13. Energy conservation
4. Avg. disposable income 14. Social responsibility
5. Consumer behavior 15. Leisure time values
6. Ethical concerns 16. Recycling
7. Attitudes toward saving 17. Waste management
8. Racial equality 18. Air & water pollution
9. Avg. educational level 19. Ozone depletion
10. Governmental regulation 20. Endangered species
Key Political, Governmental, Key Economic Variables Key Social, Cultural,

& Legal Variables Demographic &
Environmental Variables
 Regulation/deregulation  Unemployment trends  Childbearing rates
 Tax law changes  Worker productivity levels  Number of special
 Special tariffs  Value of the dollar in interest groups
 Political parties world markets  Number of marriages &
 Voter participation rates  Stock market trends divorces
 Number of patents  Foreign economic  Number of births &
 Changes in patent laws conditions deaths
 Environmental protection  Import/Export factors  Immigration &
laws  Demand shifts for emigration rates
 Equal employment goods/services
legislation  Income differences by
 Government subsidies region/customer
 Anti-trust enforcement  Price fluctuations
 Global relationships  Exportation of labor and
 Import/export regulations capital
 Political conditions  Monetary policies
 Location and severity of  Fiscal policies
terrorist activity  Tax rates
 OPEC policies
 ECC policies

④Technological Forces
Major Impact : – ● Internet ● Communications ● Semiconductors
⑤Competitive Forces
 Collection & evaluation of data on competitors is essential for successful strategy formulation
 Key Questions Concerning Competitors
1. Their strengths 9. Key factors for our current position in
2. Their weaknesses industry
3. Their objectives and strategies 10. Sales/profit rankings of competitors
4. Their responses to external variables over time
5. Their vulnerability to our alternative 11. Nature of supplier & distributor
strategies relationships
6. Our vulnerability to strategic 12. The threat of substitute
counterattack products/services
7. Our product/service positioning 13. Should we keep our strategies secret
8. Entry and exit of firms in the industry from employees and stakeholders?
Competitive Forces
7 Characteristics of most Competitive U.S. Firms:
1. Market share matters 4. Innovate or evaporate
2. Understand what business you are in 5. Acquisition is essential to growth
3. Broke or not, fix it 6. People make a difference
7. No substitute for quality
Egypt in Transition
1950 – 1975 1975 - 2011
Socialism ----- Communism Capitalism
State ownership Private ownership
Public sector Private and business sector
Protected markets Open markets
Limited competition Severe competition
Low quality High quality
Low customer & market focus High customer & market focus
Price control limited price control
No punishment systems Punishment & reward systems
Low income Moderate to high income
Machine technology / Eastern Digital technology/ Western

The Five-Forces Model of Competition
Potential development
of substitute products
Bargaining power Rivalry among Bargaining power

of suppliers Competing firms of consumers
Potential entry of new

competitors
(1) Potential entry of new competitors

New entrants bring to the industry new capacity, a desire to gain market share, and
substantial resources.
Entry barriers are obstructions that make it difficult for a company to enter an industry.
Some possible barriers to entry are:
a. Economies of scale.
b. Product differentiation.
c. Capital requirements.
d. Switching costs.
e. Access to distribution channels.
f. Disadvantages independent of size.
g. Government policy.
(2) Rivalry among competing firms

Number of competitors.
Rate of industry growth.
Product or service characteristics.
Amount of fixed costs.
Capacity.
Height of exit barriers.
Diversity of rivals.

(3) Potential development of substitute products

Substitute products are those products that appear to be different but can satisfy the same
need as another products (Fax vs. Fedex).
(4) Bargaining power of consumers

A Buyer or a group of buyers is powerful if some of the following factors hold true:
1. A buyer purchase a large proportion of the seller’s product or service.
2. A buyer has the potential to integrate backward by producing the product itself.
3. Alternative suppliers are plentiful because the product is standard or undifferentiated.
4. Changing suppliers costs very little.
5. The purchase product represents a high percentage of a buyer’s costs, thus providing
incentive to shop around for a lower price.
6. A buyer earns low profits and is thus very sensitive to costs and service differentiation.
The purchased product is unimportant to the final quality or price of a buyer’s products or
service.
(5) Bargaining power of Suppliers

A Buyer or a group of buyers is powerful if some of the following factors apply:
1. The supplier industry is dominated by few companies.
2. Its product or service is unique and /or it has built up, but it sells to many.
3. Substitutes are not readily available.
4. Suppliers are able to integrate forward and compete directly with their present
customers.
5. A purchasing industry buys only a small portion of the supplier group’s goods and
services and is thus unimportant to the supplier.

The first basic strategic question: where are we now?

The answer of this question is through stage one of the strategic management models: strategic
model/environmental scanning or strategy analysis and we talked about the strategic audit from two
different perspectives:
1. The first perspective is the analysis of external environment (Mega and Task environments) and
to be able to do the general analysis of the mega environment we used the PEST analysis tool
and to be able to analyze the industry factors/TASK environment we go through the Porter's
five forces model and the outcomes in terms of factors are the opportunity and threats.
2. The second perspective is the analysis of the internal environment: we talked about the
cultural/structural/resources/competencies and so forth and this is what we call the
organizational analysis and the outcome from the assessment of organizational analysis is to
know what are the organization's strengths and weakness
The second strategic question: Where do we want to go?
Stage two: Strategy formulation or strategic planning:

The strategic planning consists of three sub stages:
1) The first sub stage: the input stage: the inputs (foundation) for the planning stage are the
outputs from stage one in the strategic model
2) The second sub stage: the matching stage: this is the stage when you get to match the different
SWOT factors together in order to develop different strategies (solutions) ,the following are the
techniques or the matching tools:
SWOT analysis/Tows analysis
SPACE matrix
BCG matrix
IE matrix
GRAND strategy matrix
3) The third sub stage: the Decision stage: this stage when you get to decide which strategy you
are going to implement
To decide which strategies to use I need to define my objectives first "what do I want in my
organization".
Two basic types of objectives: Financial objectives and strategic objectives
There is a relation between financial objectives and strategic objectives, because the achievement of
one objective leads to the other
(Example increasing the revenues by 5% on the long run, this is financial objective, achieved by the
strategic objective which is maximizing the market share "market penetration")
And a tradeoff could happen between the two objectives,
For example: my financial objective is to improve the overall financial position of my organization by
increasing prices, the trade off happens between the revenues increasing in the short run (financial obj.)
and the shrinkage of my market share over the long run.
That is why whenever you get to define the objectives it has to be SMART objectives
(Specific, measurable, achievable, relevant and time bounded).

Now we need to define the strategies that we use to achieve the objectives:
We have two families of strategies: Corporate/Grand strategies and business strategies or competitive
strategies:
A. Corporate/Grand strategy: defines the scope of the organization in terms of which industry are
you competing in, what market are you targeting. We are talking about a portfolio level; it
answers the question of what industries and markets should we be in?
B. Business strategy/competitive strategy: it helps each business unit to gain competitive
advantage against its relative competitor: what kind of strategy should I have in each business
unit to gain competitive advantage against its relative competitor. It answers a question: How
should a biz unit compete?
Strategies
Corporate (Grand) Strategies Business (competitive) strategies
Integrative Intensive Diversification Defensive
1. Forward 1. Market 1. Related 1. Shrinkage

vertical penetration 2. Unrelated 2. Partial
integration 2. Market 3. New Liquidation
3. Liquidation
2. Backward development related
vertical 3. Product
integration development
3. Horizontal
integration
Low Cost Dimension Differentiation Dimension Competitive scope
Cost leadership Differentiation Focus
Cost Differentiation
Focus focus

Corporate strategies
It consists of four groups: integration strategies, intensive strategies, diversification strategies and
defensive strategies.
1. The integrative strategies:

 Integration means when the company decides to expand its activities on different points at the
same value chain/production path, either to move one-step forward or backward (vertical
integration) or around itself (horizontal integration).
 The main motives behind integration are cost and control.
 An integration strategy consists of three types:

1.1. Forward vertical integration: taking control over the distributor or the retailer.
Ex: Olympic group made B-tech stores to distribute their products, e-selling, franchising.
Motive behind forward integration: expensive distributor or unreliable distributor or
inefficient distribution challenges so the company decides to take control over the
distributors.
1.2. Backward vertical integration: gaining control over the supplier, increase power over
the supplier on the same value chain.
Example: Diwan initiates Shrouk publishing house.
Motive behind backward integration: expensive suppliers or poor material of
suppliers.
NB: outsourcing is not an example of backward integration.
Outsourcing could be as a result of a certain service is expensive to the company so it
buys it from an external provider but this external provider is not standing on the
company's same value chain.
Outsourcing is de-integration activity,
For example: Microsoft Company bought the service of the call centers from Exceed
Company. Exceed in not on Microsoft same value chain.
1.3. Horizontal integration: gaining control over my competitors.

Examples: joint ventures, acquisitions, strategic alliance.
Motive behind the horizontal integration: sever competition, competing in a very fast
growing market, or weak competitor to be acquired.
2. The Intensive strategies :

 It is all about a company wants to improve its competitive position using its "existing" products
or services.
 Key term of these strategies: existing/ current products or services.
 It consists of three types of strategies:

2.1. Market penetration: increasing the market share of the "current" product in the
"same" market, it is an aggressive strategy because it means increasing market shares
by taking away customers from my competitors.

- Market penetration techniques are mass advertising, increasing sales people or relying
on celebrities, etc.
The motive behind the market penetration is group of customers that are still
unsaturated with my products or may be my competitors are providing the same
products at more competitive prices, it is all about competition.
2.2. Market Development: it is introducing the "same/ existing" product to a "new"

market in terms of all the segmentation variables (demographic, physiographic,
geographic, and behavioral).
Example: Evian water, previously segmented as a sport mineral water introduced to the
general mineral water section, i.e. introduced to a new physiographic segment.
2.3. Product Development: it is when you change one or two attributes in the existing
product and then you re-introduce it again in the market, given that you still have your
original product, I create a "differentiated" version of my product and I introduce it to
the market along with my "standardize" product.
Example: Coca and Coca-zero. The main condition to be able to do product
development strategy is a high capacity of R&D.
Motive behind the product development: increasing the customer base relying on the
brand loyalty.
3. Diversification Strategies :
 The key word in these strategies is "New" products or service, and this new product either
related to my current product or unrelated product
 it consists of the following three strategies:

3.1. Concentric "new related" diversification:
It means two products having the same core, introducing a new related product to the
same customers to increase the customer's base and adding new customers.
Example: Delma Company main activity was tires production only then it introduced
new related product :squash balls (same raw material of tires), and then it targeted not
only the car owners but also the squash players which means: the company by related
diversification strategy added new customers and the same time increased its
customer's base.
The motive behind this strategy: excess resources, to increase revenues, or the
current product's life cycle has reached the maturity stage so I introduce a new
product with a new life cycle.
NB: Similarity "related" comes from same technology, raw materials, same know how,
or same manufacturing processes.
3.2. Horizontal "new unrelated" diversification: adding a new product that unrelated to my
current product, to increase customer base and attract new customers,
For example: Zara Egypt main biz was clothing then it introduced leather products and
cosmetics line. Motive behind this strategy: increase market share, increase revenue,
basic product reached the maturity phase and entered the decline phase, excess
resources and reliable distribution channels.

3.3. Conglomerate "lateral/new unrelated" diversification:

It is based on introducing new unrelated products to new customers, but practically
speaking this strategy not only attracting new customers but also increasing the
customer's base.
Example: Philip Morris main activity was tobacco then he bought Kraft foods.
The motive behind this strategy: to increase customers base, to enter new market, but
the basic reason is: because the existing industry is a slowly growing industry and
the company has excess capacity enables it to enter a new market with a new
product.
NB: horizontal diversification and conglomerate diversification got merged together into
one strategy: new unrelated diversification.
4. Defensive Strategies:
 When the company is defending its situation in the market
 It has three ways/strategies to defend its situation:

4.1. Retrenchment or shrinkage or reorganizational strategies:
- It means the company undergoes cutting costs or costs reduction strategy
or redundancy for some employees.
- Its objective is cost reduction.
The motive behind this strategy is: the company is acting as a weak competitor in a
profitable business. If this strategy didn’t work go for the next strategy.
4.2. Divesture or partial liquidation strategies:

Sell off the unprofitable biz division that could be behind the company's poor
performance and use its money to invest in other divisions.
If it didn’t work, move to the third strategy.
4.3. Liquidation strategy:

Selling off the company's asset for its tangible worth because it is much better to cease
operating than continue using sum of money and exit the market bankrupted.

Business strategies
o Its objective is to gain competitive advantage in terms of position.

o In order to gain a competitive advantage in terms of position, the company chooses to deal with
either one of two perspectives: low cost dimension of perspective or differentiation perspective.
1. low cost dimension perspective: means the ability of delivering products or services exactly like
the competitors but at the lowest possible price, and this lowest price is as result of the
economist of scale and that will make the company gains a cost advantage.
2. Differentiation dimension perspective: Gaining competitive advantage in terms of

differentiation means delivering a differentiated products or service exceeding those of the
competitors at the best value, thus company gains differentiation advantage.
The company through using one of the previous perspectives gained superiority over its
competitors thus became a market leader.
How you get strategies out of these two dimensions? Michael Porter proposed that to be able
to extract strategies out of these two dimensions, there is a third dimension that has to be
defined, which is
3. The competitive scope (the size of the market) which is either broad range of customers or
narrow (niche) range of customers.
Niche means a group of customers with unsatisfied needs; the needs may be in terms of lowest
possible price or the best value.
By mingling these four terms of lowest possible price, best value, broad range of customers and
narrow range of customers we will come up with the following four different competitive
strategies:
3.1. Cost leadership:
Introducing standardized product or service to a broad range of customers who are price
sensitive at the lowest possible price, it means the price is an issue.
What kind of competitive advantage that the company could achieve out of this strategy?
The company will gain a high market share, which is a strength that will make the company
be able to benefit from the following opportunities: having a high power of supplier and no
threat of a substitute. Another competitive advantage the company could gain is a good
financial position or high profitability, which will act as an entry barrier.
Enough strength will make me able to capture the external opportunities.
Q: which grand strategy will help the company to benefit from cost leadership strategy?
Integration strategies (basically vertical integration and may be also horizontal integration in
terms of merge) is the basic strategy.
3.2. Differentiation:
It means introducing differentiated product/service to broad range of customers who are
price insensitive with the best value ever. In this strategy there is a tradeoff between the
market share and the profitability, what are the competitive advantages that the company
could gain out of this strategy?
The company may have low market share but yet a good profitability which is a competitive
advantage, another competitive advantage is the brand loyalty out of offering a
differentiated product to a broad segment,

example: Apple's Ipod "which defined as differentiated product offered to a board range of
customers who are price insensitive and seeking the best quality ever. " and of course these
CA (high profitability and brand loyalty) will act as entry barriers and no threat of substitute.
Q: which grand strategy will help the company to benefit from differentiation strategy?
Basically; product development strategy.
3.3. Cost Focus:

Introducing standardized products to a narrow range of customers who are price sensitive
and seeking the lowest possible price, focusing on a segment with unsatisfied needs, i.e.
niche segment.
Example: IKEA home furnishings, it targets a narrow segment who are the foreigner
residents in the country; it offers a moderate quality with the lowest possible price.
How did IKEA provide the lowest possible prices?
First; not using the best quality of raw materials (MDF), only the quality that serves the
purpose.
Second, not hiring a salesperson but using the explanatory sheets, reduces the shipment
cost by offering easy to carry products , that could be packed in minivans, and not hiring
installation technicians by offering easy installation manuals.
3.4. Differentiation Focus:

Introducing extremely differentiated (unique) products to a narrow range (niche) of
customers who are price insensitive seeking for the best value,
Example: customized Ferrari or customized Bentley.
Q: which grand strategy will help the company to benefit from cost focus and differentiation
focus strategy?
All Intensive strategies would help to give the company the benefit of focus strategies.
NB: In strategy planning (matching) stage, we only look for the grand strategies/global
organization.

Leadership & culture
The relationship between leadership & responsible action.

- Leadership → The ability to influence people toward the attainment of organizational goals.
- In the Arab world; certain Arab corporations led by thoughtful leaders, are positioned among
the best in the global marketplace (e.g. National Bank of Kuwait, SABIC, Etisalat, Orascom
Construction Industries)
- Leadership plays a vital role in formulating and executing strategies
- Without leadership , corporations will cease to perform at the highest level and their market
competitiveness will be in peril.
- So it is crucial to study the role that leadership in a company plays because it can affect the
direction, the path, and the actual outcome of a strategy.
- Responsible leaders understand that strategy has two main objectives:
1. To differentiate their corporation from the rest in the marketplace
2. To achieve competitive advantage,
Both involve an ability to make change happen
The needed leadership qualities for future generations.

1. Farsighted vision:
 A long term outlook that recognizes the importance of building sustainable institutions for
future generations.
2. Practical (pragmatic) openness
 A willingness to seek ideas from around the world and customize them.
3. Regional & global perspective:
 Recognition of the fact that the leaders are not just building their own organizations but are also
acting in concert to establish the region as a global player.
The varying roles of executives in organizational life and strategy execution.

 Executives differ in their orientations & in their strategy implementation.
 There are 4 forms of leadership; Autocratic, Benevolent, Tradition-guided, & spiritually
enlightened.
 These leaders are found in most of the Arab world.
 Seven Leadership Styles of Decision Making
Head Centered Leadership Teacher centered leadership

Use of authority by the Head Area of freedom for teachers
Head makes Head Head Head presents Head presents Head defines Head permits
decision and "sells" the presents tentative problem, gets limits, asks teachers to
announces it decision ideas and decision suggestions, group to function within
invites subject to makes decision make limits defined by
questions change decision herself
tell sell consult share
1 2 3 4 5 6 7

Executive’s Orientations and Strategy Execution

Autocratic Benevolent Group Oriented Spiritually
(Sheikocratic) (Tradition- Enlightened
Driven)
Formulation Centralized and Informal and Informal with Deliberation and
formalized primarily an input from those based on practical
procedures intuitive exercise who are affected assessment of
internal and
external
conditions
Articulation Seldom understood Vaguely stated Contingent on the Highly articulated
by those engaging in degree of and practical
performance involvement and
participation by
employees at
different levels.
Deployment of Unorganized and Contingent upon Coordinated and Timely performed
resources may not be provided requests and the a group and is taken
in a timely manner nature/cost of responsibility seriously
required
resources
Control Rules and Primarily using General Mixture of norms
procedures norms guidelines and and rules
cultural norms
Execution Centralized General guidance Engage Equal attention to
command and strict and parental subordinates and formulation and
order coaching ensure two-way execution,
feedback energize
subordinates.
Evolving role of the CEO.

Strategic managerial roles Operations-related Managerial roles
1. Strategy formulation 1. Operational roles center on strategy
2. Innovation activities implementation
3. Making critical information 2. Fair & efficient division of labor
available 3. Effective control system
4. Setting long-term 4. Reward systems
objectives 5. Providing feedback
5. Articulating an 6. Anticipation of problems
organizational vision
6. Securing scarce resources Leadership roles
(financial and otherwise) 1. Motivating and inspiring others to action
7. Enhancing the image of the 2. Providing critical information & guidance
corporation 3. Clarifying cultural norms & values
4. Fostering cooperative environments
5. Resolving conflicts among others

The succession process is important for survival and performance

 Among the most useful indicators of effective leadership is having a succession plan in place for
next CEO.
 Companies that want to increase their chances for finding a suitable CEO should pursue three
activities:
1. There must be a pool of internal candidates who have broad experience, are well
trained and have gone through a leadership development process.
2. The board of directors must have an updated succession plan.
3. The board of directors considering outside candidates should be actively involved in the
executive search process.
Rules for successful CEO transitions

 There are a few rules for successful CEO transitions:
1. Make it clear who is in charge.
2. Use the interim period wisely.
o The period between the announcement of the appointment and the actual
“changing of the guard” should be considered a honeymoon period for the new
CEO.
3. Stay confident but remember how much there is to learn
o The new CEO has to learn independently while keeping spirit and confidence up,
even in times of adversity.
Organizational culture can effectively influence implementation of strategy.

 Culture represents the shared values and beliefs across an organization.
 Strong culture has the main characteristics:
1. The existence of values among members of the organization
2. Adaptability
3. Ease of absorbing change
Example; Dallah Albarakah stated values:
Category Articulation
Society  Good corporate citizen
 Jobs creation
 Care for the environment
Customers  Quality product & service
Partners  Maintaining assets
 Maximum returns
 Efficiency
Employees  Suitable work conditions
 One family
 Enhance creativity
 Equal opportunities
 Human resource development

The forces that enhance and strengthen culture.

1. Reiterating the roots of the organization, how it is started & evolved, and the role of the founder
2. Emphasize ethical standards
3. Acknowledge the contribution of others to the progress and achievement of the firm
4. Highlight important norms and themes
5. Communicate & promote company legends
6. Make sure that there is no place within the company for those who break cultural standards.
7. Reorient members of the organization to guiding values and top priorities and introduce new
employees to themes, stories, & norms
8. Senior managers must reinforce important values and norms through their actions within and
outside the organization
The nature of organizational culture.

 Organizational culture: shared values and beliefs enabling members to understand their roles
and the norms of the organization, including:
- Observed behavioral regularities, typified by common language, terminology, rituals
- Norms, reflected by things such as amount of work to do and degree of cooperation
between management and employees
- Dominant values organization advocates and expected participants to share (e.g., low
absenteeism, high efficiency)
 Other values and beliefs:

- Philosophy set forth regarding how to treat employees and customers
- Rules dictating do’s and don’ts of employee behavior pertaining to productivity
intergroup cooperation…
- Organizational climate as reflected by way participants interact with each other, treat
customers, and feel about how treated by senior level management
The nature of strategy-culture fit and relations to strategy execution.

 A strategy-culture fit helps a company’s strategy execution in three ways:
1. Culture that encourages actions, behaviors, and work practices supportive of effective
strategy execution provides personnel with clear guidance on how to get things done
and its members consciously exercise pressure on each other to confirm to acceptable
behaviors and norms
2. Deeply rooted culture directs organizational energy towards effective strategy
implementation. That is, in organizations where employees are committed to shared values
and beliefs, deployment of resources is easily carried out.
3. A culture grounded in many of the needed strategy-execution behaviors helps
employees feel better about their jobs, the company they work for, and the merits of
what the company is attempting to achieve.

Strategy & culture relationships
High Engage in a major Link to reward system and

overhaul of existing staff underscore identifying with
& restructuring the organization
Degree of
required Low Avoid clashing with Strengthen culture
changes existing culture
Low High
Compatibility with Organizational culture

Implementing Strategies
Pretend that every single person you meet has a sign around his or her neck that says,
“Make me feel important” – Mary Kay Ash, CEO of Mary Kay, Inc.
The Nature of Strategy Implementation

Successful strategy formulation does not guarantee successful strategy implementation
Formulation vs. Implementation

Formulation Implementation
Formulation positions forces before the action Implementation manages forces during the action
Formulation focuses on effectiveness Implementation focuses on efficiency
Formulation primarily an intellectual process Implementation primarily an operational process
Formulation requires good intuitive & Implementation requires special motivational &
analytical skills leadership skills
Formulation requires coordination among a Implementation requires coordination among
few individuals many individuals
Strategy Implementation
 Varies among different types & sizes of organizations
Implementation Activities
Altering sales territories
Adding new departments
Closing facilities
Hiring new employees
Cost-control procedures
Modifying advertising strategies
Building new facilities
Management Perspectives
o Shift in responsibility
Strategists → Division or Functional Managers

Management Issues
1. Annual Objectives 7. Resistance to Change

2. Policies 8. Natural Environment
3. Resources 9. Supportive Culture
4. Organizational structure 10. Production/Operations
5. Restructuring 11. Human Resources
6. Rewards/Incentives
❶ Annual Objectives :
1. Decentralized activity
2. Directly involve all managers in the organization
Purpose of Annual Objectives

1) Basis for resource allocation
2) Mechanism for management evaluation
3) Metric for gauging progress on long-term objectives
4) Establish priorities (organizational, division, & departmental)
Consistency of Annual Objectives

 Across hierarchical levels
 Horizontally consistent
 Vertically consistent
Consistency of Annual Objectives

 Across hierarchical levels
 Horizontally consistent
 Vertically consistent
Requirements of Annual Objectives

 Measurable  Reasonable  Clear
 Consistent  Challenging  Understood
 Timely
Annual Objectives Should State

 Quantity
 Quality
 Cost
 Time
 Be Verifiable

❷Policies:
Policies
Facilitate the solving or recurring problems & guide implementation of strategy
Policies Establish
o Boundaries
o Constraints
o Limits
❸ Resources:
Resource Allocation
Central management activity that allows for the execution of strategy
4 Types of Resources
1. Financial resources
2. Physical resources
3. Human resources
4. Technological resources
Managing Conflict
Disagreement between two more parties on one or more issues
 Conflict not always “bad”
 No conflict may signal apathy (Lack of concern).
 Can energize opposing groups to action
 May help managers identify problems
Conflict Management & Resolution

 Avoidance
 Diffusion
 Confrontation
❹ Organizational structure:
Matching Structure w/ Strategy
Changes in strategy = Changes in structure
Structure & Strategy

Structure dictates how objectives & policies will be established
Structure dictates how resources will be allocated

Chandler’s Strategy-Structure Relationship
New strategy is New administrative Organizational

formulated problems emerge performance declines
Organizational New organizational

Performance improves structure is established
Basic Forms of Structure

1. Functional Structure
2. Divisional Structure
3. Strategic Business Unit Structure (SBU)
4. Matrix Structure
❺ Restructuring:
Restructuring
Reducing the size of the firm – # of employees, divisions, and/or units, # of hierarchical levels
Restructuring
 Downsizing
 Rightsizing
 Delayering
Reengineering
Reconfiguring or redesigning work, jobs, & processes to improve cost, quality, service, & speed.
Reengineering
 Process management
 Process innovation
 Process redesign
❻ Rewards/Incentives: Tests for Performance-Pay Plans

Linking Pay/Performance to Strategies
Pay for performance systems 1) Does the plan capture attention?
o Dual bonus systems 2) Do employees understand the plan?
o Profit sharing systems 3) Is the plan improving communication?
o Gain Sharing systems 4) Does the plan pay out when it should?
5) Is the company or unit performing
better?

❼ Resistance to Change
Resistance to Change
Single greatest threat to successful strategy implementation
Raises anxiety; fear concerning

Economic loss
Inconvenience
Uncertainty
Break in status-quo
Change Strategies
 Force Change Strategy
 Educative Change Strategy
 Rational or Self-Interest Change Strategy
❽ Natural Environment:
Natural Environment
Wide appreciation for firms that “mend” rather than “harm” the environment
Natural Environment – Environmental Strategies

 Develop/acquire “green” businesses
 Divesting environmental-damaging business
 Low-cost producer through waste minimization & energy conservation
❾ Supportive Culture:
Strategy-Supportive Culture
Preserve, emphasize, & build upon aspects of existing culture that support new strategies
Elements linking culture to strategy:
1. Formal statements of philosophy, charters, etc. used for recruitment and selection, and
socialization
2. Designing of physical spaces, facades, buildings
3. Deliberate role modeling, teaching and coaching
4. Explicit reward and status system, promotion criteria
5. Stories, legends, myths about key people and events
6. What leaders pay attention to, measure and control
7. Leader reactions to critical incidents and crises
8. How the organization is designed and structured
9. Organizational systems and procedures
10. Criteria used for recruitment, selection, promotion, retirement

⑴ Production/Operations
Production/Operations Concerns
Production processes typically constitute more than 70% of firm’s total assets
Production/Operations Decisions
 Plant size  Inventory/Inventory control  Quality control
 Cost control  Technological innovation
⑵ Human Resources
Human Resource Concerns
HR manager position has strategic responsibility & has changed dramatically as companies continue to
reorganize, outsource, etc.
Human Resource Strategic Responsibilities

 Assessing staffing needs/costs
 Developing performance incentives
 ESOP’s
 Child-care policies
 Work-life balance issues
Strategy Review, Evaluation, & Control
Strategy Review, Evaluation & Control

Strategies become obsolete
Internal environments are dynamic
External environments are dynamic
Strategy Evaluation
o Vital to the organization’s well-being
o Alert management to potential/actual problems in a timely fashion
o Erroneous strategic decisions can have severe negative impact on organizations
3 Basic Activities
1. Examine the underlying bases of a firm’s strategy
2. Compare expected to actual results
3. Identify corrective actions to ensure that performance conforms to plans
Strategy Evaluation
o Complex & sensitive undertaking
o Overemphasis can be costly & counterproductive

Appraisal of Strategic Performance

 Have assets increased
 Increase in profitability
 Increase in sales
 Increase in productivity
 Profit margins, ROI, & EPS ratios increased
Rummelt’s 4 Criteria
1. Consistency 2. Coherence 3. Feasibility 4. Advantage
Strategy should not Need for strategies Neither overtax Creation or
present inconsistent to examine sets of resources or create maintenance of
goals & policies trends unsolvable sub-problems competitive advantage
Difficulties in Strategy Evaluation

1. Increase in environment’s complexity
2. Difficulty predicting future with accuracy
3. Increasing number of variables
4. Rate of obsolescence of plans
5. Domestic and global events
6. Decreasing time span for planning certainty
Strategy Evaluation Should --

Initiate managerial questioning
Trigger review of objectives & values
Stimulate creativity in generating alternatives
Review of underlying bases of strategy --

Develop revised EFE Matrix
Develop revised IFE Matrix
Review effectiveness of strategy --

1. Competitors’ reaction to strategy
2. Competitors’ change in strategy
3. Competitors’ changes in strengths & weaknesses
4. Reasons for competitors’ strategic change
5. Reasons for competitors’ successful strategies
6. Competitors’ present market positions & profitability
7. Potential for competitor retaliation
8. Potential for cooperation with competitor

Monitor Strengths & Weaknesses; Opportunities & Threats

o Are strengths still strengths?
o Have we added additional strengths?
o Are weaknesses still weaknesses?
o Have we developed other weaknesses?
o Are opportunities still opportunities?
o Other opportunities develop?
o Are threats still threats
o Other threats emerged?
o Are we vulnerable to hostile takeover?
Evaluation Framework
Measuring Organizational Performance

o Compare expected to actual results
o Investigate deviations from plan
o Evaluate individual performance
o Progress toward stated objectives
Quantitative Criteria for Strategy Evaluation

Financial Ratios Key Financial Ratios
 Compare performance over different  Return on investment (ROI)
periods  Return on equity (ROE)
 Compare performance to  Profit margin
competitors  Market Share
 Compare performance to industry  Debt to equity
averages  Earnings per share (EPS)
 Sales growth
 Asset growth

Qualitative Evaluation of Strategy

 Internal consistency of strategy
 Consistency with environment
 Appropriateness in view of resources
 Acceptable degree of risk
 Appropriate time frame
 Workability of the strategy
Balanced Scorecard
Evaluate strategies from 4 perspectives:
1. Financial performance
2. Customer knowledge
3. Internal business processes
4. Learning & growth
Measure or Time Primary

Area of Objectives
Target Expectation Responsibility
Customers
Managers/Employees
Operations/Processes
Community/Social
Responsibility
Business
Ethics/Natural
Environment
Financial
Characteristics of strategy evaluation

1. Economical
2. Meaningful
3. Generates useful information
4. Timely information
5. Provides accurate picture of even

Strategy-Evaluation Assessment Matrix

Have major changes Have major changes Has the firm Result
occurred in the firm’s occurred in the firm’s progressed
internal strategic external strategic satisfactorily toward
position? position? achieving its stated
objectives?
No No No Corrective actions
Yes Yes Yes Corrective actions
Yes Yes No Corrective actions
Yes No Yes Corrective actions
Yes No No Corrective actions
No Yes Yes Corrective actions
No Yes No Corrective actions
No No Yes Continue course
Contingency Planning
Alternative plans that can be put into effect if certain key events do not occur as expected
Auditing
 Financial audits determine correspondence between assertions based on strategic plan &
established criteria
 Environmental audits insure sound and safe practices
21st Century Challenges in Strategic Management

o Process is more an “art” than “science”
o Should strategies be visible or hidden from stakeholders
o Should process be more top-down or bottom up

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1

Section title Page

Prepared by: Saied Ibrahim

Prepared by: Saied Ibrahim

Marketing management philosophies ( Concepts):

Company Concepts ( Company orientation towards Marketplace )

Prepared by: Saied Ibrahim

Marketplaces, Marketspaces & Metamarkets:

 Needs, Wants & Demands :

Demands - are wants for specific products backed by an ability to pay.

CRM – Customer relationship management

Prepared by: Saied Ibrahim

Section I: Market Overview

Section II: Competitive Overview

Prepared by: Saied Ibrahim

Section III: Product Overview

Section IV: Goals and Objectives

Section VI: Action Plan and Implementation Schedule

Prepared by: Saied Ibrahim

 The 5Cs Analysis

An opportunity can be… A threat can be…

Prepared by: Saied Ibrahim

Strategies that can come from SWOT Analysis…

Matching weaknesses to opportunities Matching weaknesses to threats

 Porter 5 forces analysis

Prepared by: Saied Ibrahim

Prepared by: Saied Ibrahim

Prepared by: Saied Ibrahim

①OVERALL COST LEADERSHIP STRATEGY

2. Through Experience Curve

3. Through offering no frill products/services

Prepared by: Saied Ibrahim

Disadvantage of Cost Leadership Strategies:

Prepared by: Saied Ibrahim

The advantages of this strategy are such as:

Prepared by: Saied Ibrahim

2. Generate Customer Value

Keys to Successful Differentiation

Prepared by: Saied Ibrahim

THE KEY IS CREATING VALUE FOR THE CUSTOMER

TANGIBLE DIFFERENTIATION INTANGIBLE DIFFERENTIATION

Achieving Differentiation Advantage

Stuck in the middle

Product-Market Growth Matrix

The Ansoff Product-Market Growth Matrix is a

Prepared by: Saied Ibrahim

Prepared by: Saied Ibrahim

Promotional tools Distribution Channels:

 Segmentation, Targeting and Positioning (STP)

→ how the customer perceive Undifferentiated

Prepared by: Saied Ibrahim

Identifying Market Segments and Targets (STP)

Segmenting consumer markets

Prepared by: Saied Ibrahim

VALS™ Framework and Segments

Prepared by: Saied Ibrahim

Prepared by: Saied Ibrahim

Segmenting business markets

Target Marketing Strategies

Prepared by: Saied Ibrahim

Differentiation and Positioning

Three Major Positing Errors

Positioning and the Marketing Mix