MB0036

SET 1

STRATEGIC MANAGEMENT AND BUSINESS POLICY

Q.1:- Explain how strategies are formulated and implemented?

Ans:- The term ‘strategy’ is drawn from the armed forces. It is a strategic plan that
interlocks all aspects of the corporate mission designed to overpower the enemy or the
competitor. An appropriate strategy is considered to be essential to face adverse situations
such as cut-throat competition.

Strategy may imply general or specific programmes of action outlining how the resources are
deployed to attain goals in a given set of conditions. If these conditions change, the strategy
also changes. Strategies give direction for the achievement of objectives necessary through
the deployment of resources.

Purpose of Strategy

A strategy is an operational tool to achieve the goals, and thus, the corporate mission.
Strategies do not attempt to outline exactly how the enterprise is to accomplish its objectives.
A company may view downsizing as a strategy in a competitive market to render cost-
effective services. Thus, strategy provides a framework to guide thinking and action.
Strategies are very much useful in organisations for guiding, planning and control.

Strategy Formulation and Implementation

It is the crux of the strategic management process. Strategy refers to the course of action
desired to achieve the objectives of the enterprise. Formulation, together with its
implementation, constitutes an integral part of the management activity. Managers use
strategies for different purposes such as to overcome competition, to increase sales, to
increase production, to motivate the employees to provide their best, and so on.
Implementation of a strategy is a crucial task as the formulation of it. There may be a lot of
resistance during the implementation process. It is necessary for the manager to be very
tactful to involve the members of his group in the formulation of strategy to facilitate the
implementation process.

Stages in Strategy Formulation and Implementation

a) Identification of mission and objectives

b) Environment scanning

c) Generic strategy alternatives

d) Strategy variations

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e) Strategic choice

f) Allocation of resources and formulation of organisational structure

g) Formulation of plans, policies, programmes and administration

h) Evaluation and control

Generic Strategy Alternatives

They refer to the strategy alternatives in broader terms. After the nature of the business of the
firm is defined, the next task is to focus on the type of strategic alternative, in general, the
firm should pursue. The strategist seeks to identify the right alternative through questions
such as:

1. Should we get out of this business entirely?

2. Should we try to expand?

There are four strategy alternatives available to a firm or business:

a) To expand

b) To wind up or retrench

c) To stabilize, and

d) To continue its operations pertaining to its products, markets or functions.

a) Expansion strategy can be adopted in the case of highly competitive and volatile industries,
particularly, if they are in the introduction stage of product / service life cycle.

b) Stability strategy is a better choice when the firm is doing well, the environment is
relatively less volatile, and the product / service has reached the stability or maturity stage of
the life cycle.

c) Retrenchment strategy is the obvious choice when the firm is not doing well in terms of
sales and revenue and finds greater returns elsewhere, or the product / service is in the
finishing stage of the product life cycle.

d) Combination strategy is not a new strategy as it combines the other strategies. However, it
is to be noted that it is better to evolve individual strategies and combine them rather than
trying to evolve a complex combination strategy which could be cumbersome with loss of
precious business time. It is best-suited to multiple SBU firms in times of economic transition
and also when changes occur in the product / service life cycle. If a firm realises that some of
its main product lines have outlived their lives, it may not be profitable to continue
investment in the same product or SBU. The firm may choose to withdraw its resources from
this area (or SBU) (Retrenchment strategy) and follow an Expansion strategy in a new
product area. Combination strategy is best suited when the firm finds that its product-wise
performance is uneven, or all or most of its products differ in their future potential.

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Sometimes, a combination of a few or all of these strategies may be necessary. Any change
must be contemplated considering what is to be done (Business definition) and the speed
(Pace) with which it is to be done. Each of these alternatives has to be evaluated on its merits.

Strategic Alliances

Strategic alliances constitute another viable alternative. Companies can develop alliances
with the members of the strategic group and perform more effectively. These alliances may
take any of the following forms:

a) Product and/or service alliance: Two or more companies may get together to synergise
their operations, seeking alliance for their products and/or services. The product or service
alliance may take any of the following forms:

A manufacturing company may grant license to another company to produce its products.
The necessary market and product support, including technical know-how, is provided as part
of the alliance. Coca-cola initially provided such support to Thums Up.

Two companies may jointly market their products which are complementary in nature.
Chocolate companies more often tie up with toy companies. TV Channels tie-up with Cricket
boards to telecast entire series of cricket matches live.

Two companies, who come together in such an alliance, may produce a new product
altogether. Sony Music created a retail corner for itself in the ice-cream parlours of Baskin-
Robbins.

b) Promotional alliance: Two or more companies may come together to promote their
products and services. A company may agree to carry out a promotion campaign during a
given period for the products and/or services of another company. The Cricket Board may
permit Coke’s products to be displayed during the cricket matches for a period of one year.

c) Logistic alliance: Here the focus is on developing or extending logistics support. One
company extends logistics support for another company’s products and services. For
example, the outlets of Pizza Hut, Kolkata entered into a logistic alliance with TDK Logistics
Ltd., Hyderabad, to outsource the requirements of these outlets from more than 30 vendors all
over India – for instance, meat and eggs from Hyderabad etc.

d) Pricing collaborations: Companies may join together for special pricing collaborations. It
is customary to find that hardware and software companies in information technology sector
offer each other price discounts. Companies should be very careful in selecting strategic
partners. The strategy should be to select such a partner who has complementary strengths
and who can offset the present weaknesses. The acid test of an alliance is greater sales at
lesser cost. It is a common practice to develop organisational structures or modify them, if
necessary, to support the alliances and make them successful.

Since strategic choice is a managerial ( business ) decision, care should be taken that
it is not affected by bias, intuition or politics. These constraints, if allowed to prevail, will
limit the choice. Progressive companies hold formal meetings involving all or most of their
managers at the top level while choosing strategy and to record the criteria used. More often,

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a company may not have total freedom in choosing the strategy as it is dependent for its
survival on one or more of the following: owners, competitors, suppliers, the Government
and the community. The strategic choice is also affected by relative volatility of the market
sector wherein the firm chooses to operate. If the sector is more volatile, it needs a flexible
and strategic response to be more effective.

Strategic choice and its effectiveness is often restricted by various factors such as the
strategies earlier followed, the attitudes of the managers to risk (most of the managers are
averse to risk) and lobby for power (some managers wish to be close to the boss to garner
influence) in the organisation, internal and external alliances, and so on. However, overall
commitment to the chosen strategy is extremely important.

Q.2:- Mr. Nandankumar wants to start a business of his own. He is seeking advice
from a consultancy firm on how to go about it. If you were an employee of this
consultancy firm, how would you guide him in preparing a business plan that would suit
Nandankumar’s business?.

Ans:- Every business starts out as an idea. This idea usually involves the invention of a new
product, or revolves around a better way of making and marketing an existing one. While
many would argue that the idea stage is not a stage at all, it is actually a turning point, as
business adviser Mike Pendrith points out. After this, you as a business builder must refine
this idea into a money- making reality. Here in this case supposing we are to start a new
venture of manufacturing auto components and also to market them. We will see here in the
following paragraphs different stages of achieving the same goal.

1. Idea Researching. In this stage, you are researching your idea. The object of your
research is to find out who is marketing the same product or service in your area, and how
successful the marketer has been. You can accomplish this by a Google search on the
Internet, launching a test- marketing campaign, or conducting surveys. Also, you are
attempting to find what the level of interest is in the products (or services) you wish to
market.

Here as the main goal is to start a company that manufactures the auto components,
we are to make a research on all the auto companies which are procuring the spares from the
outside vendors. And also the competitors who are all marketing that, their existence and also
how successful they are.

As part of the initial research process, it is important to consider the legal

requirements of selling your product or service. According to the Biz Ed website, examine
the legal ramifications of your business. Know the tax laws governing your business. If
insurance is a requirement, prepare to budget for it. Also, be aware of any safety laws
governing you as an employer. Hence we are also to make a research on the feasible area
where we can start our organization and licenses that we need to take keeping in mind the
environmental factors as well.

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2. Business Plan Formulation. You must write a business plan. As Pendrith points out,
this is crucial if you want funding, such as a small business loan or grant, or if you wish to
lease a building. At this stage, Pendrith advises, you need to consult with an attorney or
business adviser for assistance. In the business plan you typically include following heads:

(a) Executive Summary.

(b) Company and Product Description.
(c) Market Description.
(d) Equipment and Materials.
(e) Operations.
(f) Management and Ownership.
(g) Financial Information and Start-Up Timeline.
(h) Risks and Their Mitigation.

3. Financial Planning. Financial planning involves thinking about the financial costs
of starting and maintaining your business. According to the Biz Ed website, you should
consider such issues as the costs of running the business; the prices you wish to charge your
customers; cash flow control; and how you wish to set up financial reserves in case of an
emergency or an event causing significant loss to the business. This includes the planning of
whether to take any loans or make personal investments in the company.

4. Advertising Campaign. Decide how you will market your product. Consider
your budget and your target audience. Make up business cards with your logo on it, your
name and the name of your business. Make sure that they are of the most professional quality.
Utilizing print, the newspaper, the Internet, radio or TV is also wise, considering, of course,
the size of your advertising budget.

Here in this case more than TV, a better advertising media will be road side sign
boards placed close to the auto companies for getting the deals to manufacture their spares.
As TV is useful only to reach the common man and he is not our target customer. Hence sign
boards are the feasible solution and also pamphlets circulated across the pioneers. This apart
personal marketing is much more suggested.

5. Preparing for Launch. Advertise for employees. This also requires adequate
planning. Think about what you look for in an employee. Be specific about the requisite skills
and experience you are seeking. Then begin requesting resumes and setting up interviews,
making hiring decisions based on the standards you have set.

In this case we will be looking for a few candidates in managerial position who must
be good in managing things apart from minimal technical knowledge. Lower level people at
the shop floor people. They need to have real time experience in the shop floor activities. The
employees apart, one needs to plan on the plant and machinery as well. Thus these are all the
stages that I would consider performing if incase I plan to start a manufacturing unit
producing automobile components.

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Q.3:- (a) What is the purpose of business continuity plan?
(b) Give a short note on mitigation strategies.

Ans:- (a) The Business Continuity Guideline is a tool to allow organizations to consider
the factors and steps necessary to prepare for a crisis (disaster or emergency) so that it can
manage and survive the crisis and take all appropriate actions to help ensure the
organization’s continued viability. The advisory portion of the guideline is divided into two
parts: (1) the planning process and (2) successful implementation and maintenance. Part One
provides step-by-step Business Continuity Plan preparation and activation guidance,
including readiness, prevention, response, and recovery/ resumption. Part Two details those
tasks required for the Business Continuity Plan to be maintained as a living document,
changing and growing with the organization and remaining relevant and executable.

Purpose of Business Continuity Plan

Recent world events have challenged us to prepare to manage previously unthinkable

situations that may threaten an organization’s future. This new challenge goes beyond the
mere emergency response plan or disaster management activities that we previously
employed. Organizations now must engage in a comprehensive process best described
generically as Business Continuity. It is no longer enough to draft a response plan that
anticipates naturally, accidentally, or intentionally caused disaster or emergency scenarios.

Today’s threats require the creation of an on-going, interactive process that serves to assure
the continuation of an organization’s core activities before, during, and most importantly,
after a major crisis event.

In the simplest of terms, it is good business for a company to secure its assets. CEOs and
shareholders must be prepared to budget for and secure the necessary resources to make this
happen. It is necessary that an appropriate administrative structure be put in place to
effectively deal with crisis management. This will ensure that all concerned understand who
makes decisions, how the decisions are implemented, and what the roles and responsibilities
of participants are. Personnel used for crisis management should be assigned to perform these
roles as part of their normal duties and not be expected to perform them on a voluntary basis.
Regardless of the organization – for profit, not for profit, faith-based, non-governmental – its
leadership has a duty to stakeholders to plan for its survival. The vast majority of the national
critical infrastructure is owned and operated by private sector organizations, and it is largely
for these organizations that this guideline is intended. ASIS, the world’s largest organization
of security professionals, recognizes these facts and believes the BC Guideline offers the
reader a user-friendly method to enhance infrastructure protection.

Key Words

Business Continuity Plan, Business Impact Analysis, Crisis Management Team, Critical
Functions, Damage Assessment, Disaster, Evaluation and Maintenance, Mitigation
Strategies, Mutual Aid Agreement, Prevention, Readiness, Recovery/Resumption, Resource
Management, Response, Risk Assessment, Testing and Training.

Terminology

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Alternate Worksite – A work location, other than the primary location, to be used when the
primary location is not accessible.

Business Continuity – A comprehensively managed effort to prioritize key business

processes, identify significant threats to normal operation, and plan mitigation strategies to
ensure effective and efficient organizational response to the challenges that surface during
and after a crisis.

Business Continuity Plan (BCP) – An ongoing process supported by senior management

and funded to ensure that the necessary steps are taken to identify the impact of potential
losses, maintain viable recovery strategies and plans, and ensure the continuity of operations
through personnel training, plan testing, and maintenance.

Business Impact Analysis (BIA) – A management level financial analysis that identifies the
impacts of losing an organization’s resources. The analysis measures the effect of resource
loss and escalating losses over time in order to provide reliable data upon which to base
decisions on mitigation, recovery, and business continuity strategies.

Contact List – A list of team members and key players in a crisis. The list should include
home phone numbers, pager numbers, cell phone numbers, etc.

Crisis – Any global, regional, or local natural or human-caused event or business interruption
that runs the risk of (1) escalating in intensity,
(2) adversely impacting shareholder value or the organization’s financial position, (3) causing
harm to people or damage to property or the environment, (4) falling under close media or
government scrutiny,
(5) interfering with normal operations and wasting significant management time and/or
financial resources, (6) adversely affecting employee morale, or (7) jeopardizing the
organization’s reputation, products, or officers, and therefore negatively impacting its future.

Crisis Management – Intervention and co-ordination by individuals or teams before, during,

and after an event to resolve the crisis, minimize loss, and otherwise protect the organization.

Crisis Management Center – A specific room or facility staffed by personnel charged with
commanding, controlling, and coordinating the use of resources and personnel in response to
a crisis.

Crisis Management Planning – A properly funded ongoing process supported by senior

management to ensure that the necessary steps are taken to identify and analyze the adverse
impact of crisis events, maintain viable recovery strategies, and provide overall coordination
of the organization’s timely and effective response to a crisis.

Crisis Management Team – A group directed by senior management or its representatives

to lead incident/event response comprised of personnel from such functions as human
resources, information technology facilities, security, legal, communications/media relations,
manufacturing, warehousing, and other business critical support functions.

Critical Function – Business activity or process that cannot be interrupted or unavailable for
several business days without having a significant negative impact on the organization.

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Critical Records – Records or documents that, if damaged, destroyed, or lost, would cause
considerable inconvenience to the organization and/or would require replacement or
recreation at a considerable expense to the organization.

Damage Assessment – The process used to appraise or determine the number of injuries and
human loss, damage to public and private property, and the status of key facilities and
services resulting from a natural or human-caused disaster or emergency.

Disaster – An unanticipated incident or event, including natural catastrophes, technological

accidents, or human-caused events, causing widespread destruction, loss, or distress to an
organization that may result in significant property damage, multiple injuries, or deaths.

Disaster Recovery – Immediate intervention taken by an organization to minimize further

losses brought on by a disaster and to begin the process of recovery, including activities and
programs designed to restore critical business functions and return the organization to an
acceptable condition.

Emergency – An unforeseen incident or event that happens unexpectedly and demands

immediate action and intervention to minimize potential losses to people, property, or
profitability.

Evacuation – Organized, phased, and supervised dispersal of people from dangerous or

potentially dangerous areas.

Evaluation and Maintenance – Process by which a business continuity plan is reviewed in

accordance with a predetermined schedule and modified in light of such factors as new legal
or regulatory requirements, changes to external environments, technological changes,
test/exercise results, personnel changes, etc.

Exercise – An activity performed for the purpose of training and conditioning team members
and personnel in appropriate crisis responses with the goal of achieving maximum
performance.

Mitigation Strategies – Implementation of measures to lessen or eliminate the occurrence or

impact of a crisis.

Mutual Aid Agreement – A pre-arranged agreement developed between two or more

entities to render assistance to the parties of the agreement.

Prevention – Plans and processes that will allow an organization to avoid, preclude, or limit
the impact of a crisis occurring. The tasks included in prevention should include compliance
with corporate policy, mitigation strategies, and behavior and programs to support avoidance
and deterrence and detection.

Readiness – The first step of a business continuity plan that addresses assigning
accountability for the plan, conducting a risk assessment and a business impact analysis,
agreeing on strategies to meet the needs identified in the risk assessment and business impact
analysis, and forming Crisis Management and any other appropriate response teams.

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Recovery/Resumption – Plans and processes to bring an organization out of a crisis that
resulted in an interruption. Recovery/resumption steps should include damage and impact
assessments, prioritization of critical processes to be resumed, and the return to normal
operations or to reconstitute operations to a new condition.

Response – Executing the plan and resources identified to perform those duties and services
to preserve and protect life and property as well as provide services to the surviving
population. Response steps should include potential crisis recognition, notification, situation
assessment, and crisis declaration, plan execution, communications, and resource
management.

Risk Assessment – Process of identifying internal and external threats and vulnerabilities,
identifying the likelihood of an event arising from such threats or vulnerabilities, defining the
critical functions necessary to continue an organization’s operations, defining the controls in
place or necessary to reduce exposure, and evaluating the cost for such controls.

Shelter-in-Place – The process of securing and protecting people and assets in the general
area in which a crisis occurs.

Simulation Exercise – A test in which participants perform some or all of the actions they
would take in the event of plan activation. Simulation exercises are performed under
conditions as close as practicable to ‘‘real world’’ conditions.

Tabletop Exercise – A test method that presents a limited simulation of a crisis scenario in a
narrative format in which participants review and discuss, not perform, the policy, methods,
procedures, coordination, and resource assignments associated with plan activation.

Testing – Activities performed to evaluate the effectiveness or capabilities of a plan relative

to specified objectives or measurement criteria. Testing usually involves exercises designed
to keep teams and employees effective in their duties and to reveal weaknesses in the
Business Continuity Plan.

Training – An educational process by which teams and employees are made qualified and
proficient about their roles and responsibilities in implementing a Business Continuity Plan.

Vital Records – Records or documents, for legal, regulatory, or operational purposes, that if
irretrievably damaged, destroyed, or lost, would materially impair the organization’s ability
to continue business operations.

(b) Mitigation Strategies

Devise Mitigation Strategies

Cost effective mitigation strategies should be employed to prevent or lessen the impact of
potential crises. For example, securing equipment to walls or desks with strapping can
mitigate damage from an earthquake; sprinkler systems can lessen the risk of a fire; a strong
records management and technology disaster recovery program can mitigate the loss of key
documents and data.

Resources Needed for Mitigation

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The various resources that would contribute to the mitigation process should be identified.
These resources, including essential personnel and their roles and responsibilities, facilities,
technology, and equipment should be documented in the plan and become part of ‘‘business
as usual.’’

Monitoring Systems and Resources

Systems and resources should be monitored continually as part of mitigation strategies. Such
monitoring can be likened to simple inventory management.

The resources that will support the organization to mitigate the crisis should also be
monitored continually to ensure that they will be available and able to perform as planned
during the crisis. Examples of such systems and resources include, but are not limited to:

· Emergency equipment

· Fire alarms and suppression systems

· Local resources and vendors

· Alternate worksites

· Maps and floor plans updated/changed due to construction and internal moves

· System backups and offsite storage.

Q.4:- Distinguish between a Financial Investor and a Strategic Investor.

Ans:- In the not so distant past, there was little difference between financial and strategic
investors. Investors of all colors sought to safeguard their investment by taking over as many
management functions as they could. Additionally, investments were small and shareholders
few. A firm resembled a household and the number of people involved – in ownership and in
management – was correspondingly limited. People invested in industries they were
acquainted with first hand. As markets grew, the scales of industrial production (and of
service provision) expanded. A single investor (or a small group of investors) could no longer
accommodate the needs even of a single firm. As knowledge increased and specialization
ensued – it was no longer feasible or possible to micro-manage a firm one invested in.
Actually, separate businesses of money making and business management emerged. An
investor was expected to excel in obtaining high yields on his capital – not in industrial
management or in marketing. A manager was expected to manage, not to be capable of
personally tackling the various and varying tasks of the business that he managed.

Thus, two classes of investors emerged. One type supplied firms with capital. The
other type supplied them with know-how, technology, management skills, marketing
techniques, intellectual property, clientele and a vision, a sense of direction.

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 In many cases, the strategic investor also provided the necessary funding. But, more
and more, a separation was maintained. Venture capital and risk capital funds, for instance,
are purely financial investors. So are, to a growing extent, investment banks and other
financial institutions. The financial investor represents the past. Its money is the result of past
- right and wrong - decisions. Its orientation is short term: an "exit strategy" is sought as soon
as feasible. For "exit strategy" read quick profits. The financial investor is always on the
lookout, searching for willing buyers for his stake. The stock exchange is a popular exit
strategy. The financial investor has little interest in the company's management. Optimally,
his money buys for him not only a good product and a good market, but also a good
management. But his interpretation of the rolls and functions of "good management" are very
different to that offered by the strategic investor. The financial investor is satisfied with a
management team which maximizes value. The price of his shares is the most important
indication of success. This is "bottom line" short termism which also characterizes operators
in the capital markets. Invested in so many ventures and companies, the financial investor has
no interest, nor the resources to get seriously involved in any one of them. Micro-
management is left to others - but, in many cases, so is macro-management. The financial
investor participates in quarterly or annual general shareholders meetings. This is the extent
of its involvement.

The strategic investor, on the other hand, represents the real long term accumulator of
value. Paradoxically, it is the strategic investor that has the greater influence on the value of
the company's shares. The quality of management, the rate of the introduction of new
products, the success or failure of marketing strategies, the level of customer satisfaction and
the education of the workforce all depend on the strategic investor. That there is a strong
relationship between the quality and decisions of the strategic investor and the share price is
small wonder. The strategic investor represents a discounted future in the same manner that
shares do. Indeed, gradually, the balance between financial investors and strategic investors is
shifting in favour of the latter. People understand that money is abundant and what is in short
supply is good management.

Given the ability to create a brand, to generate profits, to issue new products and to
acquire new clients - money is abundant.

These are the functions normally reserved to financial investors:

1. Financial Management. The financial investor is expected to take over the

financial management of the firm and to directly appoint the senior management and,
especially, the management echelons, which directly deal with the finances of the firm.

(a) To regulate, supervise and implement a timely, full and accurate set of accounting
books of the firm reflecting all its activities in a manner commensurate with the
relevant legislation and regulation in the territories of operations of the firm and with
internal guidelines set from time to time by the Board of Directors of the firm. This is

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 usually achieved both during a Due Diligence process and later, as financial
management is implemented.
(b) To implement continuous financial audit and control systems to monitor the
performance of the firm, its flow of funds, the adherence to the budget, the
expenditures, the income, the cost of sales and other budgetary items.
(c) To timely, regularly and duly prepare and present to the Board of Directors financial
statements and reports as required by all pertinent laws and regulations in the
territories of the operations of the firm and as deemed necessary and demanded from
time to time by the Board of Directors of the Firm.
(d) To comply with all reporting, accounting and audit requirements imposed by the
capital markets or regulatory bodies of capital markets in which the securities of the
firm are traded or are about to be traded or otherwise listed.
(e) To prepare and present for the approval of the Board of Directors an annual budget,
other budgets, financial plans, business plans, feasibility studies, investment
memoranda and all other financial and business documents as may be required from
time to time by the Board of Directors of the Firm.
(f) To alert the Board of Directors and to warn it regarding any irregularity, lack of
compliance, lack of adherence, lacunas and problems whether actual or potential
concerning the financial systems, the financial operations, the financing plans, the
accounting, the audits, the budgets and any other matter of a financial nature or which
could or does have a financial implication.
(g) To collaborate and coordinate the activities of outside suppliers of financial services
hired or contracted by the firm, including accountants, auditors, financial consultants,
underwriters and brokers, the banking system and other financial venues.
(h) To maintain a working relationship and to develop additional relationships with
banks, financial institutions and capital markets with the aim of securing the funds
necessary for the operations of the firm, the attainment of its development plans and
its investments.
(i) To fully computerize all the above activities in a combined hardware-software and
communications system which will integrate into the systems of other members of the
group of companies.
(j) Otherwise, to initiate and engage in all manner of activities, whether financial or of
other nature, conducive to the financial health, the growth prospects and the
fulfillment of investment plans of the firm to the best of his ability and with the
appropriate dedication of the time and efforts required.

2. Collection and Credit Assessment. To construct and implement credit risk

assessment tools, questionnaires, quantitative methods, data gathering methods and venues in
order to properly evaluate and predict the credit risk rating of a client, distributor, or supplier.

(a) To constantly monitor and analyse the payment morale, regularity, non-payment
and non- performance events, etc. – in order to determine the changes in the credit
risk rating of said factors.
(b) To analyse receivables and collectibles on a regular and timely basis.

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 (c) To improve the collection methods in order to reduce the amounts of arrears and
overdue payments, or the average period of such arrears and overdue payments.
(d) To collaborate with legal institutions, law enforcement agencies and private
collection firms in assuring the timely flow and payment of all due payments,
arrears and overdue payments and other collectibles.
(e) To coordinate an educational campaign to ensure the voluntary collaboration of
the clients, distributors and other debtors in the timely and orderly payment of
their dues.

The strategic investor is, usually, put in charge of the following:

3. Project Planning and Project Management. The strategic investor is uniquely

positioned to plan the technical side of the project and to implement it. He is, therefore, put in
charge of:

(a) The selection of infrastructure, equipment, raw materials, industrial processes, etc.
(b) Negotiations and agreements with providers and suppliers;
(c) Minimizing the costs of infrastructure by deploying proprietary components and
planning;
(d) The provision of corporate guarantees and letters of comfort to suppliers;
(e) The planning and erecting of the various sites, structures, buildings, premises,
factories, etc.;
(f) The planning and implementation of line connections, computer network connections,
protocols, solving issues of compatibility (hardware and software, etc.);
(g) Project planning, implementation and supervision.

4. Marketing and Sales. The presentation to the Board an annual plan of sales
and marketing including: market penetration targets, profiles of potential social and economic
categories of clients, sales promotion methods, advertising campaigns, image, public relations
and other media campaigns. The strategic investor also implements these plans or supervises
their implementation.

(a) The strategic investor is usually possessed of a brand name recognized in many
countries. It is the market leaders in certain territories. It has been providing goods
and services to users for a long period of time, reliably. This is an important asset,
which, if properly used, can attract users. The enhancement of the brand name, its
recognition and market awareness, market penetration, co-branding, collaboration
with other suppliers – are all the responsibilities of the strategic investor.
(b) The dissemination of the product as a preferred choice among vendors, distributors,
individual users and businesses in the territory.
(c) Special events, sponsorships, collaboration with businesses.
(d) The planning and implementation of incentive systems (e.g., points, vouchers).
(e) The strategic investor usually organizes a distribution and dealership network, a
franchising network, or a sales network (retail chains) including: training, pricing,

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 pecuniary and quality supervision, network control, inventory and accounting
controls, advertising, local marketing and sales promotion and other network
management functions.
(f) The strategic investor is also in charge of "vision thinking": new methods of
operation, new marketing ploys, new market niches, predicting the future trends and
market needs, market analyses and research, etc.
The strategic investor typically brings to the firm valuable experience in marketing
and sales. It has numerous off the shelf marketing plans and drawer sales promotion
campaigns. It developed software and personnel capable of analysing any market into
effective niches and of creating the right media (image and PR), advertising and sales
promotion drives best suited for it. It has built large databases with multi-year profiles
of the purchasing patterns and demographic data related to thousands of clients in
many countries. It owns libraries of material, images, sounds, paper clippings,
articles, PR and image materials, and proprietary trademarks and brand names. Above
all, it accumulated years of marketing and sales promotion ideas which crystallized
into a new conception of the business.

5. Technology.

(a) The planning and implementation of new technological systems up to their fully
operational phase. The strategic partner's engineers are available to plan,
implement and supervise all the stages of the technological side of the business.
(b) The planning and implementation of a fully operative computer system (hardware,
software, communication, intranet) to deal with all the aspects of the structure and
the operation of the firm. The strategic investor puts at the disposal of the firm
proprietary software developed by it and specifically tailored to the needs of
companies operating in the firm's market.
(c) The encouragement of the development of in-house, proprietary, technological
solutions to the needs of the firm, its clients and suppliers.
(d) The planning and the execution of an integration program with new technologies
in the field, in collaboration with other suppliers or market technological leaders.

6. Education and Training. The strategic investor is responsible to train all the
personnel in the firm: operators, customer services, distributors, vendors, sales personnel. The
training is conducted at its sole expense and includes tours of its facilities abroad.

The entrepreneurs – who sought to introduce the two types of investors, in the first
place – are usually left with the following functions: ‘Administration and Control’

(a) To structure the firm in an optimal manner, most conducive to the conduct of its
business and to present the new structure for the Board's approval within 30 days
from the date of the GM's appointment.
(b) To run the day to day business of the firm.
(c) To oversee the personnel of the firm and to resolve all the personnel issues.

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 (d) To secure the unobstructed flow of relevant information and the protection of
confidential organization.
(e) To represent the firm in its contacts, representations and negotiations with other
firms, authorities, or persons.
This is why entrepreneurs find it very hard to cohabitate with investors of any kind.
Entrepreneurs are excellent at identifying the needs of the market and at introducing
technological or service solutions to satisfy such needs. But the very personality traits which
qualify them to become entrepreneurs – also hinder the future development of their firms.
Only the introduction of outside investors can resolve the dilemma. Outside investors are not
emotionally involved. They may be less visionary – but also more experienced.
They are more interested in business results than in dreams. And – being well
acquainted with entrepreneurs – they insist on having unmitigated control of the business, for
fear of losing all their money. These things antagonize the entrepreneurs. They feel that they
are losing their creation to cold-hearted, mean spirited, corporate predators. They rebel and
prefer to remain small or even to close shop than to give up their cherished freedoms. This is
where nine out of ten entrepreneurs fail - in knowing when to let go.

Q.5:- Give a note on enforcement of intellectual property rights?

Ans:- Intellectual property rights can be very valuable commercial rights for inventors,
creators and researchers. Intellectual property rights are legal rights to do certain things in
relation to an invention or creation. In general terms, intellectual property rights are infringed
if someone exercises an intellectual property right without the permission of the owner of the
right. In order to protect the value of intellectual property rights effective legal remedies must
be available if intellectual property rights are infringed.

One needs to make good commercial decisions to benefit from one’s intellectual property
rights.

This unit throws light on intellectual property rights and the ways in which they need to be
protected.

Intellectual property rights are of limited value unless they are effectively enforced. Without
enforcement, there are no real deterrents for infringers or

remedies for those whose rights are infringed. The legal authorities do have some role in
enforcing intellectual property rights, but this is often limited, and for infringement of rights
such as patents, plant breeders rights and trade secrets, you would normally have to take
action yourself to take the infringing party to court. The same practical commercial
considerations that apply to obtaining and managing IP rights also apply to enforcement – in
some cases, the possibility of taking court action could act to encourage the infringing party
to take out a licence to use your technology. This would save you the expense and the
uncertainty of a protracted court case, and could provide you with a good financial return.

The procedures for enforcement of IP rights differ widely between countries, because they
have much more to do with the general legal system than other aspects of IP rights, such as
examination and grant of rights by a patent office. The TRIPS Agreement has established

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some general principles for IP enforcement which are reflected in the laws of many countries,
so this discussion will focus on the TRIPS provisions to give an overall picture of how
enforcement operates.

One basic distinction in enforcement lies between more those IP infringements which tend to
be infringed widely, potentially by many different people and on a large commercial scale,
and general IP rights. In the first category are pirated copyright works and counterfeit trade
mark goods.

TRIPS, for instance, specifies that the government or legal authorities need to have a more
active role in dealing with these infringements than, say, for patents and plant breeders’
rights. So the state often has an active role in tracking down and prosecuting those who
infringe copyright and trademark rights on a commercial scale, whereas for patents it is
normally up to the patent holder or licensee to take an infringer to court.

Q.6:- Give a note on complex systems behavior and creativity?

Ans:- A Complex System is a system that has more than one possible future. In other words,
it is ‘free’ enough to take more than a single pre-determined path into the future, and
therefore cannot be purely ‘mechanical’. Clearly, we are all complex systems by this
definition, and so are the organizations, communities, economic sectors, regional economies,
ecologies and global systems to which we belong and interact with. Indeed, mechanical
systems really only exist as abstractions in our minds, and the systems we inhabit and try to
manage are not mechanical. Yet all our science and our way of thinking about problems is
based on the assumption that a company or organization comprises a set of functional
components with connecting flows of goods and information. In this view, better
management is often seen as simply running the ‘machine’ faster or more efficiently.

But that was when life was simple and the ‘product’ or ‘service’ to be produced and delivered
only needed to be made at a competitive cost with adequate quality. Today, we must
constantly create new products and services, with additional and novel attributes, and this
creative, adaptive capacity will be more important to our survival than our level of efficiency,
particularly if, as Complex Systems thinking suggests, efficiency reduces creativity.

Traditionally, decision making and strategy have been based on a rational set of assumptions
such as:

· We know our options.

· We know and can evaluate the (single) outcome of implementing each of them.
· We can ignore effects that we do not know.
· The environment in the future ‘after’ the decision is known.
· There was a situation ‘before’ our decision, and that there will be a situation ‘after’ our
decision, and that we can therefore examine the differences between them.

Such reflections are typical of a cost/benefit analysis, for example, by which the outcomes of
different possible decisions are compared. Yet, in a world of rapid change and uncertainty,
the assumptions relied upon by this kind of ‘reasonable’ behaviour are simply not true. In
reality, we do not necessarily know all our options, the path the system may take, the possible
dimensions that might be affected by resulting changes, or how circumstances may have
changed in the mean time. In short, our view of our organisation as a machine, sitting in a

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fixed or at any rate predictable environment, is totally inadequate. We must instead turn to
new ideas – we must harness the ideas arising from Complex Systems.

Complex Systems Behaviour

In studying Complex Systems, initially in physics and chemistry, it became clear that the key
properties of ‘open’ systems, where flows of matter, energy and information can occur across
their boundaries, were that they could undergo spontaneous transformations of structure and
functionality. Instead of a ‘fixed’ mechanical system, this showed how systems came into
being, and evolved over time, changing structurally, gaining, and sometimes shedding,
complexity and qualities.

The study of Complex Systems therefore revealed a co-evolutionary process of a system and
its environment in which successive change and adaptation each involved two separate steps:

· Discovering what to do (exploration and evaluation).

· Doing what has been decided (implementation).

And these two steps are radically different in nature.

In Complex Systems, the first step is ‘taken’ by the ‘non-average’ underlying elements within
the system, while the second – the emergence of a transformed, functioning system –
concerns new, effective ‘average’ behaviour of the elements. The successful co-evolution of a
system with its environment therefore occurs through the dynamic interplay of the average
and non-average behaviours within it. Successive instabilities occur each time that existing
structure and organisation fail to withstand the impact of some new circumstance or
behaviour. When this occurs, the system re-structures and becomes a different system,
subjected in its turn to the disturbances from its own non-average individuals and situations.
It is this dialogue between successive ‘systems’ and their own inner ‘richness’ that provides
the capacity for continuous adaptation and change.

Creativity

Everyone in business is creative.

Some of most creative people are in manufacturing.

They actually CREATE products that change the world.

Some of the least creative people perhaps are in advertising.

They spend most of their creative energy telling manufacturers that they…aren’t creative!

Salespeople Are Creative – They are natural born story-tellers.

Accountants are creative.

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Best Creative Exercise Ever

Write down your ideas.

You have a ton every day.

But most of the time, you can’t remember them by the day’s end.

Don’t let spelling and grammar issues or relentless self-editing stop you.

Get your ideas on paper (Let someone else edit it.)

Go retro: Carry a notebook, pen, and calendar into your meetings.

Look up at people.

Story First, Technology Last.

Don’t invest in a presentation class called “How to Use PowerPoint”….

…until you’ve taken a class called “How to Tell Stories and Connect with Your Audience”.

A Simple Creative Exercise

Simplify everything. Your life, your home, your office, your desk, your processes, vision,
policy, procedures. Everything.

Fixing Problems is Creative.

Your job is to fix problems, not to complain.

Brainstorming

Don’t tell people that their ideas are bad, especially if you don’t have a better one.

It’s only your life’s work.

Never say, “It’s not my job to be creative.”

How to Lose an Audience…

· Show your audience slides with columns of numbers.

· Refuse to tell them a story about the meaning of the numbers.

· Do not read your speech or presentation.

· Instead, read your audience.

How about a Show?

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Try “giving a performance” instead of merely “giving a presentation.”

Everyone in Sales Knows…

· Tell stories.

· Don’t just provide data.

Avoid Meetings.

Do not attend more than two meetings a day, or else you will never get any real creative work
done.

Get Fresh Ideas.

Leave the office building at least once a day.

Another Lame Excuse…

Designers should put more of their passion into designing great work, instead of endless
(boring) discussions about the superiority of the Macintosh over the PC!

The Lame Excuse …

“I can’t [write/design/create] because I don’t have the latest

[software/hardware/ upgrade]….”

You can’t let a machine take credit for your creativity.

And you can’t blame a machine for your creative failures, either.

Don’t Blame the Tool!

The more you become a master of your particular creative form….

….the fewer tools you will use.

Master carpenters use fewer tools than novices.

So do cooks.

Use what works.

Creativity: Use it or Lose it.

Create something every day.

Creativity takes place every day, not once in a while.

It’s not rare.

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It’s just been mystified – Own your creativity.

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 MB0036

SET 2

STRATEGIC MANAGEMENT AND BUSINESS POLICY

Q.1:- Explain the importance of licensing and assigning IP rights?

Ans:- Licensing and Assigning IP rights. One basic choice is whether you
should actively exploit your IP rights yourself, or to keep your IP rights and license
them to others to use, or sell or assign the rights to another person. You can, in
principle, make different choices in different countries for exploiting IP rights for the
same underlying invention. If you are based in Malaysia, you could in theory decide to
exploit your patent yourself in the East Asian region, grant a license a Canadian
company to use the invention in North America, and sell or assign the rights in Europe
to a Danish company – whether or not this is the best approach in practice is a
different matter, of course.

A license is a grant of permission made by the patent owner to another to

exercise any specified rights as agreed. Licensing is a good way for an owner to
benefit from their work as they retain ownership of the patented invention while
granting permission to others to use it and gaining benefits, such as financial royalties,
from that use. However, it normally requires the owner of the invention to invest time
and resources in monitoring the licensed use, and in maintaining and enforcing the
underlying IP right.

The patent right normally includes the right to exclude others from making,
using, selling or importing the patented product, and similar rights concerning
patented processes. The license can therefore cover the use of the patented invention
in many different ways.

For instance, licenses can be exclusive or non/exclusive. If a patent owner grants

a nonexclusive license to Company A to make and sell their patented invention in
Malaysia, the patent owner would still be able to also grant Company B another
non/exclusive for the same rights and the same time period in Malaysia. In contrast,
if a patent owner granted an exclusive license to Company ‘A’ to make and sell the
invention in Malaysia; they would not be able to give a license to anyone else in
Malaysia while the license with Company A remained in force.

Licenses are normally confined to a particular geographical area – typically, the

jurisdiction in which particular IP rights have effect. You can grant different
exclusive licenses for different territories at the same time. For example, a patent
owner can grant an exclusive license to make and sell their patented invention in

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Malaysia for the term of the patent, and grant a separate exclusive license to
manufacture and sell their patented invention in India for the term of the patent.
Separate licenses can be granted for different ways of using the same technology.
For example, if an inventor creates a new form of pharmaceutical delivery, she could
grant an exclusive license to one company to use the technology for an arthritis drug,
a separate exclusive license to another company to use it for relief of cold symptoms,
and a further exclusive license to a third company to use it for veterinary
pharmaceuticals.

A license is merely the grant of permission to undertake some of the actions

covered by intellectual property rights, and the patent holder retains ownership and
control of the basic patent.

An assignment of intellectual property rights is the sale of a patent right, or a

share of the patent.

It should be remembered that the person who makes an invention can be

different to the person who owns the patent rights in that invention. If an inventor
assigns their patent rights to someone else they no longer own those rights.
Indeed, they can be in infringement of the patent right if they continue to use it.

Patent licenses and assignments of patent rights do not have to cover all
patent rights together.

Licenses are often limited to specific rights, territories and time periods. For
example, a patent owner could exclusively license only their importation right to a
company for the territory of Indonesia for 12 months. If an inventor owns patents on
the same invention in five different countries, they could assign (or sell) these patents
to five different owners in each of those countries. Portions of a patent right can also be
assigned – so that in order to finance your invention, you might choose to sell a
half/share to a commercial partner.

If you assign your rights, you normally lose any possibility of further
licensing or commercially exploiting your intellectual property rights. Therefore, the
amount you charge for an assignment is usually considerably higher than the royalty
fee you would charge for a patent license. When assigning the rights, you might seek
to negotiate a license from the new owner to ensure that you can continue to use your
invention. For instance, you might negotiate an arrangement that gives you license to
use the patented invention in the event that you come up with an improvement on your
original invention and this falls within the scope of the assigned patent. Equally, the
new owner of the assigned patent might want to get access to your subsequent
improvements on the invention.

Licensing Advantages

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 • An Inventive Incentive
• "Licensing", tried and true
• Fair and Balanced
• Product Exclusivity
• Inventions of interest to you
• You are free to view our inventions
• An informed business decision
• A production head start
• We are vitally committed to your
success A resource for future projects

Joint Venture Agreements and Start-up Companies

Rather than simply exploit your IP rights by licensing or assignment, you

might choose to set up a new legal mechanism to exploit your technology.
Typically this can be a partnership expressed through a joint venture agreement or a
new corporation, such as a start/up or spin/off company.

These options require much more work on your part than licensing or
assigning your intellectual property rights. This could be a desirable choice in cases
where:
you want to keep your institute’s research activities separate from the
development and commercialization of technology, especially when your institute has
a public interest focus or an educational role; or

you need to attract financial support from those prepared to take a risk with an
unproven technology (‘angel investors’ or ‘venture capitalists’), and they will only take
on a long/term risk if they can get a share of future profits of the technology.

In working out the right vehicle for your technology, you will normally need
specific legal advice from a commercial lawyer, preferably one with experience in
technology and commercialisation in your jurisdiction. The laws governing
partnerships and companies differ considerably from one country to another, and this
discussion is only intended to give a general flavour of the various options.

A joint venture agreement involves a formal, legally binding commitment

between two or more partners to work together on a shared enterprise. It is normally
created for a specific purpose (for example, to commercialise a specific new
technology) and for a limited duration. For instance, you might sign a partnership
agreement with a manufacturing company to develop and market a product based on
your invention. Before entering into a joint venture agreement, you need to check out
possible commercial partners and make sure that the objectives of your potential

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commercial partners are consistent with your objectives. In the joint venture
agreement, the partners typically agree to share the benefits, as well as the risks and
liabilities, in a specified way.

But this kind of partnership isn’t normally able in itself to enter legal
commitments, or own IP in its own right, so that the partners remain directly legally
responsible for any losses or other liabilities that the partnership’s operations create.
In other words, a partnership which is not a corporation, a company or a specific
institution doesn’t really separately exist as a legal entity.

By contrast, a company is a new legal entity (a ‘legal person’ recognized by the

law as having its own legal identity) which can own and license IP and enter
into legal commitments in its own right. A spin/off company is an independent
company created from an existing legal body – for example, if a research institute
decided to turn its licensing division or a particular laboratory into a separate
company. A start/up company is a general term for a new company in its early stages
of development. If a company is defined as a limited liability company, the partners or
investors normally cannot lose more than their investment in the company (but
officeholders in the company might be personally responsible for their actions in
the way they manage the company). This separate legal identity means that a
start/up company can be a useful way of developing and commercialising a new
technology based on original research, while keeping the main research effort of an
institute focused on broader scientific and public objectives, and insulated from the
commercial risks and pressures of the commercialisation process. At the same time, the
research institute can benefit from the commercialisation of its research, through
receiving its share of the profits and growth in assets of the spin/off company, thus
strengthening the institute’s capacity to do scientific research.

The company is normally owned through shares (its ‘equity’). These effectively
represent a portion of the assets and entitlement to profits of the company. Investors
can purchase shares in the company, which is one way of bringing in new financial
resources to support the development of the technology – in exchange, the investors
stand to benefit from the growth in the company’s worth, as their shares
proportionately rise in value, and to receive a portion of any profits produced by the
company’s operations, commensurate with the number of shares they own. If it is a
public company, shares in the company can be bought and sold on the open stock
market. An initial public offering is when the shares in a startup company are first made
available to the public to purchase. A private company’s shares, by contrast, are not
traded on the open market (but can still be bought and sold).

The option of starting up your own company to manufacture and market your
patented invention requires you to have business skills, marketing skills, management
skills and substantial capital to draw on for factory premises, hiring staff and so on.
But it also can offer a mechanism for attracting financial backing for research,

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 development and marketing, which can improve access to the necessary resources
and expertise.

Which model of commercialisation is best for you?

Each new technology and associated package of IP rights is potentially

difference, and the mechanism you choose for commercialisation should take into
account the particular features of the technology. One basic consideration is to what
extent you, as originator of the technology, wish to be involved and to invest in the
subsequent development of the technology. You will need to compare the advantages
and disadvantages of each model of Commercialization. Generally speaking, the
highest degree of risk and commitment of finance and resources you can invest, the
higher the degree of control you can secure over exploitation of the technology
invention, and the higher the financial return to your institution may be.

There are many possible variations on each of these general models, and in
practice they can overlap. In deciding which model of commercialisation is best for
you, it is always a good idea to seek commercial or legal advice.
Remember that IPRs alone do not guarantee you a financial return on your
invention. You need to make good commercial decisions to benefit financially from
your intellectual property rights.

Properly managed, intellectual property rights should not be a burden but

should yield a return from your hard work in creating an invention.

Advantages of Joint ventures:

• Provide companies with the opportunity to gain new capacity and expertise
• Allow companies to enter related businesses or new geographic markets or gain new
technological knowledge
• access to greater resources, including specialised staff and technology
• sharing of risks with a venture partner
• Joint ventures can be flexible. For example, a joint venture can have a limited life
span and only cover part of what you do, thus limiting both your commitment and the
business' exposure.
• In the era of divestiture and consolidation, JV’s offer a creative way for
companies to exit from non/core businesses.
• Companies can gradually separate a business from the rest of the organisation, and
eventually, sell it to the other parent company. Roughly 80% of all joint ventures
end in a sale by one partner to the other.

Q.2:- Assess the need for Corporate Social Responsibility with supporting instances?

Ans:- CSR is “a concept whereby companies integrate social and environmental concerns in
their business operations and in their interaction with their stakeholders on a voluntary basis”

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as they are increasingly aware that responsible behaviour leads to sustainable business
success. CSR is also about managing change at company level in a socially responsible
manner. This happens when a company seeks to set the trade-offs between the requirements
and the needs of the various stakeholders into a balance, which is acceptable to all parties. If
companies succeed in managing change in a socially responsible manner, this will have a
positive impact at the macro-economic level.

CSR can make a contribution to achieving the strategic goal of becoming, by 2010, “the most
competitive and dynamic knowledge-based economy in the world, capable of sustainable
economic growth with more and better jobs and greater social cohesion" as adopted by the
Lisbon Summit of March 2000, and to the European Strategy for Sustainable Development.

The consultation process on the Green Paper has supported Community action in the field of
CSR. In the present Communication, which constitutes a follow-up to last year’s Green
paper, the Commission presents an EU strategy to promote CSR. The Communication is
addressed to the European institutions, Member States, Social Partners as well as business
and consumer associations, individual enterprises and other concerned parties, as the
European strategy to promote CSR can only be further developed and implemented through
their joint efforts. The Commission invites enterprises and their stakeholders as well as Social
Partners in candidate countries to join this initiative.

Corporate social responsibility (CSR), also known as corporate responsibility, corporate

citizenship, responsible business, sustainable responsible business (SRB), or corporate social
performance, is a form of corporate self-regulation integrated into a business model.

Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby

business would monitor and ensure its support to law, ethical standards, and international
norms. Consequently, business would embrace responsibility for the impact of its activities
on the environment, consumers, employees, communities, stakeholders and all other
members of the public sphere. Furthermore, CSR-focused businesses would proactively
promote the public interest by encouraging community growth and development, and
voluntarily eliminating practices that harm the public sphere, regardless of legality.
Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making,
and the honoring of a triple bottom line: people, planet, profit.

The practice of CSR is much debated and criticized. Proponents argue that there is a
strong business case for CSR, in that corporations benefit in multiple ways by operating with
a perspective broader and longer than their own immediate, short-term profits. Critics argue
that CSR distracts from the fundamental economic role of businesses; others argue that it is
nothing more than superficial window-dressing; others yet argue that it is an attempt to pre-
empt the role of governments as a watchdog over powerful multinational corporations.
Corporate Social Responsibility has been redefined throughout the years. However, it
essentially is titled to aid to an organization's mission as well as a guide to what the company
stands for and will uphold to its consumers.

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 Development business ethics is one of the forms of applied ethics that examines
ethical principles and moral or ethical problems that can arise in a business environment.

In the increasingly conscience-focused marketplaces of the 21st century, the demand

for more ethical business processes and actions (known as ethicism) is increasing.
Simultaneously, pressure is applied on industry to improve business ethics through new
public initiatives and laws (e.g. higher UK road tax for higher-emission vehicles).

Business ethics can be both a normative and a descriptive discipline. As a corporate

practice and a career specialization, the field is primarily normative. In academia, descriptive
approaches are also taken. The range and quantity of business ethical issues reflects the
degree to which business is perceived to be at odds with non-economic social values.
Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s,
both within major corporations and within academia. For example, today most major
corporate websites lay emphasis on commitment to promoting non-economic social values
under a variety of headings (e.g. ethics codes, social responsibility charters). In some cases,
corporations have re-branded their core values in the light of business ethical considerations
(e.g. BP's "beyond petroleum" environmental tilt).

The term "CSR" came in to common use in the early 1970s, after many multinational
corporations formed, although it was seldom abbreviated. The term stakeholder, meaning
those on whom an organization's activities have an impact, was used to describe corporate
owners beyond shareholders as a result of an influential book by R Freeman in 1984.

ISO 26000 is the recognized international standard for CSR (currently a Draft
International Standard). Public sector organizations (the United Nations for example) adhere
to the Triple Bottom Line (TBL). It is widely accepted that CSR adheres to similar principles
but with no formal act of legislation. The UN has developed the Principles for Responsible
Investment as guidelines for investing entities.

1. Potential business benefits. The scale and nature of the benefits of CSR for an
organization can vary depending on the nature of the enterprise, and are difficult to quantify,
though there is a large body of literature exhorting business to adopt measures beyond
financial ones (e.g. Deming's Fourteen Points, balanced scorecards). Orlitzky, Schmidt, and
Rynes found a correlation between social/environmental performance and financial
performance. However, businesses may not be looking at short-run financial returns when
developing their CSR strategy. The definition of CSR used within an organization can vary
from the strict "stakeholder impacts" definition used by many CSR advocates and will often
include charitable efforts and volunteering. CSR may be based within the human resources,
business development or public relations departments of an organization, or may be given a
separate unit reporting to the CEO or in some cases directly to the board. Some companies
may implement CSR-type values without a clearly defined team or program.

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 The business case for CSR within a company will likely rest on one or more of these
arguments:

2. Human resources. A CSR program can be an aid to recruitment and retention,

particularly within the competitive graduate student market. Potential recruits often ask about
a firm's CSR policy during an interview, and having a comprehensive policy can give an
advantage. CSR can also help improve the perception of a company among its staff,
particularly when staff can become involved through payroll giving, fund raising activities or
community volunteering. See also Corporate Social Entrepreneurship, whereby CSR can also
be driven by employees' personal values, in addition to the more obvious economic and
governmental drivers.

3. Risk management. Managing risk is a central part of many corporate strategies.

Reputations that take decades to build up can be ruined in hours through incidents such as
corruption scandals or environmental accidents. These can also draw unwanted attention from
regulators, courts, governments and media. Building a genuine culture of 'doing the right
thing' within a corporation can offset these risks.

4. Brand differentiation. In crowded marketplaces, companies strive for a unique

selling proposition that can separate them from the competition in the minds of consumers.
CSR can play a role in building customer loyalty based on distinctive ethical values. Several
major brands, such as The Co-operative Group, The Body Shop and American Apparel are
built on ethical values. Business service organizations can benefit too from building a
reputation for integrity and best practice.

5. License to operate. Corporations are keen to avoid interference in their business

through taxation or regulations. By taking substantive voluntary steps, they can persuade
governments and the wider public that they are taking issues such as health and safety,
diversity, or the environment seriously as good corporate citizens with respect to labour
standards and impacts on the environment.

6. Stakeholder priorities. Increasingly, corporations are motivated to become

more socially responsible because their most important stakeholders expect them to
understand and address the social and community issues that are relevant to them.
Understanding what causes are important to employees is usually the first priority because of
the many interrelated business benefits that can be derived from increased employee
engagement (i.e. more loyalty, improved recruitment, increased retention, higher
productivity, and so on). Key external stakeholders include customers, consumers, investors
(particularly institutional investors), and communities in the areas where the corporation
operates its facilities, regulators, academics, and the media.

Q.3:- What are the obstacles faced by small business units? Explain with examples?

Ans:- Virtually every Western country has a "Small Business Administration" (SBA).

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These agencies provide many valuable services to small businesses:

They help them organize funding for all their needs: infrastructure, capital goods (machinery
and equipment), land, working capital, licence and patent fees and charges, etc.

The SBAs have access to government funds, to local venture capital funds, to international
and multilateral investment sources, to the local banking community and to private investors.
They act as capital brokers at a fraction of the costs that private brokers and organized
markets charge.

They assist the entrepreneur in the preparation of business plans, feasibility studies,
application forms, questionnaires – and any other thing which the new start-up venture might
need to raise funds to finance its operations. This saves the new business a lot of money.

They reduce bureaucracy. They mediate between the small business and the various tentacles
of the government. They become the ONLY address which the new business should
approach, a "One Stop Shop".

But why do new (usually small) businesses need special treatment and encouragement at all?
And if they do need it – what are the best ways to provide them with this help? This is a
question to ponder over.
A new business goes through phases in the business cycle (very similar to the stages of
human life).

The first phase – is the formation of an idea. A person – or a group of people join forces,
centred around one exciting invention, process or service.

These crystallizing ideas have a few hallmarks:

They are oriented to fill the needs of a market niche (a small group of select consumers or
customers), or to provide an innovative solution to a problem which bothers many, or to
create a market for a totally new product or service, or to provide a better solution to a
problem which is solved in a less efficient manner.

At this stage, what the entrepreneurs need most is expertise. They need a marketing expert to
tell them if their idea is marketable and viable. They need a financial expert to tell them if
they can get funds in each phase of the business cycle – and wherefrom and also if the
product or service can produce enough income to support the business, pay back debts and
yield a profit to the investors. They need technical experts to tell them if the idea can or
cannot be realized and what it requires by way of technology transfers, engineering skills,
know-how, etc.

Once the idea has been shaped to its final form by the team of entrepreneurs and experts – the
proper legal entity should be formed. A bewildering array of possibilities arises:

A partnership? A corporation – and if so, a stock or a non-stock company? A research and

development (RND) entity? A foreign company or a local entity? And so on.

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This decision is of cardinal importance. It has enormous tax implications and in the near
future of the firm it greatly influences the firm’s ability to raise funds in foreign capital
markets. Thus, a lawyer must be consulted who knows both the local applicable laws and the
foreign legislation in markets which could be relevant to the firm.

This costs a lot of money, one thing that entrepreneurs are in short supply of free legal advice
is likely to be highly appreciated by them.

When the firm is properly legally established, registered with all the relevant authorities and
has appointed an accounting firm – it can go on to tackle its main business: developing new
products and services. At this stage the firm should adopt Western accounting standards and
methodology. Accounting systems in many countries leave too much room for creative
playing with reserves and with amortization. No one in the West will give the firm credits or
invest in it based on domestic financial statements.

A whole host of problems faces the new firm immediately upon its formation.

Good entrepreneurs do not necessarily make good managers. Management techniques are not
a genetic heritage.

They must be learnt and assimilated. Today’s modern management includes many elements:
manpower, finances, marketing, investing in the firm’s future through the development of
new products, services, or even whole new business lines. That is quite a lot and very few
people are properly trained to do the job successfully.

On top of that, markets do not always react the way entrepreneurs expect them to react.
Markets are evolving creatures: they change, develop, disappear and re-appear. They are
exceedingly hard to predict. The sales projections of the firm could prove to be unfounded.
Its contingency funds can evaporate.
Sometimes it is better to create a product mix: well-recognized brands which sell well – side
by side with innovative products.

This is a brief – and by no way comprehensive – taste of what awaits the new business and its
initiator, the entrepreneur. You see that a lot of money and effort are needed even in the first
phases of creating a business.

How can the Government help?

It could set up an "Entrepreneur’s One Stop Shop".

A person wishing to establish a new business will go to a government agency.

In one office, he will find the representatives of all the relevant government offices,
authorities, agencies and municipalities.

He will present his case and the business that he wishes to develop. In a matter of few weeks
he will receive all the necessary permits and licences without having to go to each office
separately.

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Having obtained the requisite licences and permits and having registered with all the
appropriate authorities – the entrepreneur will move on to the next room in the same building.
Here he will receive a list of all the sources of capital available to him both locally and from
foreign sources. The terms and conditions of the financing will be specified for each and
every source. Example: EBRD – loans of up to 10 years – interest between 6.5% to 8% –
grace period of up to 3 years – finances mainly industry, financial services, environmental
projects, infrastructure and public services.

The entrepreneur will select the sources of funds most suitable for his needs – and proceed to
the next room.

The next room will contain all the experts necessary to establish the business, get it going –
and, most important, raise funds from both local and international institutions. For a symbolic
sum they will prepare all the documents required by the financing institutions as per their
instructions.

But entrepreneurs in many developing countries are still fearful and uninformed. They are
intimidated by the complexity of the task facing them.

The solution is simple: a tutor or a mentor will be attached to each and every entrepreneur.
This tutor will escort the entrepreneur from the first phase to the last.

He will be employed by the "One Stop Shop" and his role will be to ease life for the novice
businessman. He will transform the person to a businessman.

And then they will wish the entrepreneur: "Bon Voyage" – and may the best ones win.

There is an inherent conflict between owners and managers of companies. The former want,
for instance, to minimize costs – the latter to draw huge salaries as long as they are in power.

In publicly traded companies, the former wish to maximize the value of the stocks (short
term), the latter might have a longer term view of things. In the USA, shareholders place
emphasis on the appreciation of the stocks
(the result of quarterly and annual profit figures). This leaves little room for technological
innovation, investment in research and development and in infrastructure. The theory is that
workers who also own stocks avoid these cancerous conflicts which, at times, bring
companies to ruin and, in many cases, dilapidate them financially and technologically.
Whether reality lives up to theory, is an altogether different question.

Q.4:- Are decision support systems beneficial in strategic management and business
policies? Justify your answer.

Ans:- Many companies in developing countries have a very detailed reporting system going
down to the level of a single product, a single supplier, a single day. However, these reports –
which are normally provided to the General Manager – should not be used by them at all.
They are too detailed and, thus, tend to obscure the true picture. A General Manager must
have a bird’s eye view of his company. He must be alerted to unusual happenings, disturbing
financial data and other irregularities.

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As things stand now, the following phenomena could happen:

· That the management will highly leverage the company by assuming excessive debts
burdening the cash flow of the company.

· That a false Profit and Loss (PNL) picture will emerge – both on the single product level –
and generally. This could lead to wrong decision-making, based on wrong data.

· That the company will pay excessive taxes on its earnings.

· That the inventory will not be fully controlled and appraised centrally.

· That the wrong cash flow picture will distort the decisions of the management and lead to
wrong (even to dangerous) decisions.

The Effects of Using a Decision System

A decision system has great impact on the profits of the company. It forces the management
to rationalize the depreciation, inventory and inflation policies. It warns the management
against impending crises and problems in the company. It specially helps in following areas:

· The management knows exactly how much credit it could take, for how long (for which
maturities) and in which interest rate. It has been proven that without proper feedback,
managers tend to take too much credit and burden the cash flow of their companies.
A decision system allows for careful financial planning and tax planning. Profits go up, non
cash outlays are controlled, tax liabilities are minimized and cash flows are maintained
positive throughout.

As a result of all the above effects, the value of the company grows and its shares appreciate.

The decision system is an integral part of financial management in the West. It is completely
compatible with western accounting methods and derives all the data that it needs from
information extant in the company.

So, the establishment of a decision system does not hinder the functioning of the company in
any way and does not interfere with the authority and functioning of the financial department.

Decision Support Systems cost as little as 20,000 USD (all included: software, hardware, and
training). They are one of the best investments that a firm can make.

Valuing Stocks

The debate rages all over Eastern and Central Europe, in countries in transition as well as in
Western Europe. It raged in Britain during the 80s.

Is privatization really the robbery in disguise of State assets by a select few, cronies of the
political regime? Margaret Thatcher was accused of it – and so were privatizers in developing
countries. What price should State-owned companies have fetched? This question is not as
simple and straightforward as it sounds.

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There is a stock pricing mechanism known as the Stock Exchange. Willing buyers and
willing sellers meet there to freely negotiate deals of stock purchases and sales. New
information, macro-economic and micro-economic, determines the value of companies.

Greenspan testifies in the Senate, economic figures are released – and the rumour mill starts
working: interest rates might go up. The stock market reacts with frenzily – it crashes. Why?

A top executive is asked how profitable will his firm be this quarter. He winks, he grins – this
is interpreted by Wall Street to mean that profits will go up. The share price surges: no one
wants to sell it, everyone wants to buy it. The result: a sharp rise in its price. Why?

Moreover, the share price of a company of an identical size, similar financial ratios (and in
the same industry) barely budges. Why not?

We say that the stocks of the two companies have different elasticity (their prices move up
and down differently), probably the result of different sensitivities to changes in interest rates
and in earnings estimates. But this is just to rename the problem. The question remains: Why
do the shares of similar companies react differently?

Economy is a branch of psychology and wherever and whenever humans are involved,
answers don’t come easily. A few models have been developed and are in wide use but it is
difficult to say that any of them has real predictive or even explanatory powers. Some of
these models are "technical" in nature: they ignore the fundamentals of the company. Such
models assume that all the relevant information is already incorporated in the price of the
stock and that changes in expectations, hopes, fears and attitudes will be reflected in the
prices immediately. Others are fundamental: these models rely on the company’s
performance and assets. The former models are applicable mostly to companies whose shares
are traded publicly, in stock exchanges. They are not very useful in trying to attach a value to
the stock of a private firm. The latter type (fundamental) models can be applied more
broadly.

The value of a stock (a bond, a firm, real estate, or any asset) is the sum of the income (cash
flow) that a reasonable investor would expect to get in the future, discounted at the
appropriate rate. The discounting reflects the fact that money received in the future has lower
(discounted) purchasing power than money received now. Moreover, we can invest money
received now and get interest on it (which should normally equal the discount). Put
differently: the discount reflects the loss in purchasing power of money deferred or the
interest lost by not being able to invest the money right away. This is the time value of
money.

Another problem is the uncertainty of future payments, or the risk that we will never receive
them. The longer the payment period, the higher the risk. A model exists which links time,
the value of the stock, the cash flows expected in the future and the discount (interest) rates.

The rate that we use to discount future cash flows is the prevailing interest rate. This is partly
true in stable, predictable and certain economies. But the discount rate depends on the
inflation rate in the country where the firm is located (or, if a multinational, in all the
countries where it operates), on the projected supply of and demand for its shares and on the
aforementioned risk of non-payment. In certain places, additional factors must be taken into
account (for example: country risk or foreign exchange risks).

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The supply of a stock and, to a lesser extent, the demand for it determine its distribution (how
many shareowners are there) and, as a result, its liquidity. Liquidity means how freely one
can buy and sell it and at which quantities sought or sold do prices become rigid.

Example: If a controlling stake is sold – the buyer normally pays a "control premium".
Another example: In thin markets, it is easier to manipulate the price of a stock by artificially
increasing the demand or decreasing the supply ("cornering" the market). In a liquid market
(no problems to buy and to sell), the discount rate is comprised of two elements: one is the
risk-free rate (normally, the interest payable on government bonds), the other being the risk-
related rate (the rate which reflects the risk related to the specific stock).

But what is this risk-related rate?

The most widely used model to evaluate specific risks is the Capital Asset Pricing Model
(CAPM).

According to it, the discount rate is the risk-free rate plus a coefficient (called beta)
multiplied by a risk premium general to all stocks (in the USA it was calculated to be 5.5%).
Beta is a measure of the volatility of the return of the stock relative to that of the return of the
market. A stock’s Beta can be obtained by calculating the coefficient of the regression line
between the weekly returns of the stock and those of the stock market during a selected
period of time.

Unfortunately, different betas can be calculated by selecting different parameters (for

instance, the length of the period on which the calculation is performed). Another problem is
that betas change with every new datum. Professionals resort to sensitivity tests which
neutralize the changes that betas undergo with time.

Still, with all its shortcomings and disputed assumptions, the CAPM should be used to
determine the discount rate. But to use the discount rate we must have future cash flows to
discount.

The only relatively certain cash flows are dividends paid to the shareholders. So, Dividend
Discount Models (DDM) were developed.

Other models relate to the projected growth of the company (which is supposed to increase
the payable dividends and to cause the stock to appreciate in value).

Still, DDM’s require, as input, the ultimate value of the stock and growth models are only
suitable for mature firms with a stable, low dividend growth. Two-stage models are more
powerful because they combine both emphases, on dividends and on growth. This is because
of the life-cycle of firms. At first, they tend to have a high and unstable dividend growth rate
(the DDM tackles this adequately). As the firm matures, it is expected to have a lower and
stable growth rate, suitable for the treatment of Growth Models.

But how many years of future income (from dividends) should we use in our calculations? If
a firm is profitable now, is there any guarantee that it will continue to be so in the next year,
or the next decade? If it does continue to be profitable – who can guarantee that its dividend
policy will not change and that the same rate of dividends will continue to be distributed?

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The number of periods (normally, years) selected for the calculation is called the "price to
earnings (P/E) multiple". The multiple denotes by how much we multiply the (after tax)
earnings of the firm to obtain its value. It depends on the industry (growth or dying), the
country (stable or geopolitically perilous), on the ownership structure (family or public), on
the management in place (committed or mobile), on the product (new or old technology) and
a myriad of other factors. It is almost impossible to objectively quantify or formulate this
process of analysis and decision making. In telecommunications, the range of numbers used
for valuing stocks of a private firm is between 7 and 10, for instance. If the company is in the
public domain, the number can shoot up to 20 times net earnings.

While some companies pay dividends (some even borrow to do so), others do not. So in stock
valuation, dividends are not the only future incomes you would expect to get. Capital gains
(profits which are the result of the appreciation in the value of the stock) also count. This is
the result of expectations regarding the firm’s free cash flow, in particular the free cash flow
that goes to the shareholders.

There is no agreement as to what constitutes free cash flow. In general, it is the cash which a
firm has after sufficiently investing in its development, research and (predetermined) growth.
Cash Flow Statements have become a standard accounting requirement in the 80s (starting
with the USA). Because "free" cash flow can be easily extracted from these reports, stock
valuation based on free cash flow became increasingly popular and feasible. Cash flow
statements are considered independent of the idiosyncratic parameters of different
international environments and therefore applicable to multinationals or to national, export-
orientated firms.

Q.5:- Mr. Kevin is a CFO of a multinational company. What would be his role and
responsibilities in the company?

Ans:- The CFO (Chief Financial Officer) is fervently hated by the workers. He is thoroughly
despised by other managers, mostly for scrutinizing their expense accounts. He is dreaded by
the owners of the firm because his powers that often outweigh theirs. Shareholders hold him
responsible in annual meetings. When the financial results are good – they are attributed to
the talented Chief Executive Officer (CEO). When they are bad – the Chief Financial Officer
gets blamed for not enforcing budgetary discipline. It is a no-win, thankless job. Very few
make it to the top. Others retire, eroded and embittered.

The job of the Chief Financial Officer is composed of many elements. Here is a universal job
description which is common throughout the West.

Organizational Affiliation

The Chief Financial Officer is subordinated to the Chief Executive Officer, answers to him
and regularly reports to him.

The CFO is in charge of:

1. The Finance Director

2. The Financing Department

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 3. The Accounting Department which answers to him and regularly reports to him.

Despite the above said, the CFO can report directly to the Board of Directors through the
person of the Chairman of the Board of Directors or by direct summons from the Board of
Directors.

In many developing countries, this would be considered treason – but, in the West every
function holder in the company can – and regularly is – summoned by the (active) Board. A
grilling session then ensues: debriefing the officer and trying to spot contradictions between
his testimony and others’. The structure of business firms in the USA reflects its political
structure. The Board of Directors resembles Congress, the Management is the Executive
(President and Administration), the shareholders are the people. The usual checks and
balances are applied: the authorities are supposedly separated and the Board criticizes the
Management.

The same procedures are applied: the Board can summon a worker to testify – the same way
that the Senate holds hearings and cross-questions workers in the administration. Lately,
however, the delineation became fuzzier with managers serving on the Board or, worse,
colluding with it. Ironically, Europe, where such incestuous practices were common hitherto
– is reforming itself with zeal (especially Britain and Germany).

Developing countries are still after the cosy, outdated European model. Boards of Directors
are rubber stamps, devoid of any will to exercise their powers. They are staffed with cronies
and friends and family members of the senior management and they do and decide what the
General Managers tell them to do and to decide. General Managers – unchecked – get
involved in colossal blunders (not to mention worse). The concept of corporate governance is
alien to most firms in developing countries and companies are regarded by most general
managers as milking cows – fast paths to personal enrichment.

Functions

(1) To regulate, supervise and implement a timely, full and accurate set of accounting books
of the firm reflecting all its activities in a manner commensurate with the relevant legislation
and regulation in the territories of operation of the firm and subject to internal guidelines set
from time to time by the Board of Directors of the firm.

This is somewhat difficult in developing countries. The books do not reflect reality because
they are "tax driven" (i.e., intended to cheat the tax authorities out of tax revenues). Two sets
of books are maintained: the real one which incorporates all the income – and another one
which is presented to the tax authorities. This gives the CFO an inordinate power. He is in a
position to blackmail the management and the shareholders of the firm. He becomes the
information junction of the firm, the only one who has access to the whole picture. If he is
dishonest, he can easily enrich himself. But he cannot be honest: he has to constantly lie and
he does so as a lifelong habit.

He (or she) develops a cognitive dissonance: I am honest with my superiors – I only lie to the
state.

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(2) To implement continuous financial audit and control systems to monitor the performance
of the firm, its flow of funds, the adherence to the budget, the expenditures, the income, the
cost of sales and other budgetary items.

In developing countries, this is often confused with central planning. Financial control does
not mean the waste of precious management resources on verifying petty expenses. Nor does
it mean a budget which goes to such details as how many tea bags will be consumed by
whom and where. Managers in developing countries still feel that they are being supervised
and followed, that they have quotas to complete, that they have to act as though they are busy
(even if they are, in reality, most of the time, idle). So, they engage in the old time central
planning and they do it through the budget. This is wrong.

A budget in a firm is no different than the budget of the state. It has exactly the same
functions. It is a statement of policy, a beacon showing the way to a more profitable future. It
sets the strategic (and not the tactical) goals of the firm: new products to develop, new
markets to penetrate, new management techniques to implement, possible collaborations,
identification of the competition, of the relative competitive advantages. Above all, a budget
must allocate the scarce resources of the firm in order to obtain a maximum impact (=
efficiently). All this, unfortunately, is missing from budgets of firms in developing countries.

No less important are the control and audit mechanisms which go with the budget. Audit can
be external but must be complemented internally. It is the job of the CFO to provide the
management with a real time tool which informs them what is happening in the firm and
where are the problematic, potential problem areas of activity and performance.

Additional functions of the CFO include:

(3) To timely, regularly and duly prepare and present to the Board of Directors financial
statements and reports as required by all pertinent laws and regulations in the territories of the
operations of the firm and as deemed necessary and demanded from time to time by the
Board of Directors of the Firm.

The warning signs and barbed wire which separate the various organs of the Western firm
(management from Board of Directors and both from the shareholders) – have yet to reach
developing countries. As I said: the Board in these countries is full with the cronies of the
management. In many companies, the General Manager uses the Board as a way to secure the
loyalty of his cronies, friends and family members by paying them hefty fees for their
participation (and presumed contribution) in the meetings of the Board. The poor CFO is
loyal to the management – not to the firm. The firm is nothing but a vehicle for self
enrichment and does not exist in the Western sense, as a separate functional entity which
demands the undivided loyalty of its officers. A weak CFO is rendered a pawn in these get-
rich-quick schemes – a stronger one becomes a partner. In both cases, he is forced to
collaborate, from time to time, with stratagems which conflict with his conscience.

It is important to emphasize that not all the businesses in developing countries are like that. In
some places the situation is much better and closer to the West. But geopolitical insecurity
(what will be the future of developing countries in general and my country in particular),
political insecurity (will my party remain in power), corporate insecurity (will my company
continue to exist in this horrible economic situation) and personal insecurity (will I continue
to be the General Manager) combine to breed short-sightedness, speculative streaks, a drive

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to get rich while the going is good (and thus rob the company) – and up to criminal
tendencies.

(4) To comply with all reporting, accounting and audit requirements imposed by the capital
markets or regulatory bodies of capital markets in which the securities of the firm are traded
or are about to be traded or otherwise listed.

The absence of a functioning capital market in many developing countries and the inability of
developing countries firms to access foreign capital markets – make the life of the CFO
harder and easier at the same time. Harder – because there is nothing like a stock exchange
listing to impose discipline, transparency and long-term, management-independent strategic
thinking on a firm. Discipline and transparency require an enormous amount of investment by
the financial structures of the firm: quarterly reports, audited annual financial statements,
disclosure of important business developments, interaction with regulators (a tedious affair) –
all fall within the remit of the CFO. Why, therefore, should he welcome it?

Because discipline and transparency make the life of a CFO easier in the long run. Just think
how much easier it is to maintain one set of books instead of two or to avoid conflicts with
tax authorities on the one hand and your management on the other.

(5) To prepare and present for the approval of the Board of Directors an annual budget, other
budgets, financial plans, business plans, feasibility studies, investment memoranda and all
other financial and business documents as may be required from time to time by the Board of
Directors of the firm.

The primal sin in developing countries was so called “privatization”. The laws were flawed.
To mix the functions of management, workers and ownership is detrimental to a firm, yet this
is exactly the path that was chosen in numerous developing countries. Management takeovers
and employee takeovers forced the new, impoverished, owners to rob the firm in order to pay
for their shares. Thus, they were unable to infuse the firm with new capital, new expertise, or
new management. Privatized companies are dying slowly.

One of the problems thus wrought was the total confusion regarding the organic structure of
the firm. Boards were composed of friends and cronies of the management because the
managers also owned the firm – but they could be easily fired by their own workers, who
were also owners and so on. These incestuous relationships introduced an incredible amount
of insecurity into management ranks (see previous point).

(6) To alert the Board of Directors and to warn it regarding any irregularity, lack of
compliance, lack of adherence, lacunas and problems whether actual or potential concerning
the financial systems, the financial operations, the financing plans, the accounting, the audits,
the budgets and any other matter of a financial nature or which could or does have a financial
implication.

The CFO is absolutely aligned and identified with the management. The Board is
meaningless. The concept of ownership is meaningless because everyone owns everything
and there are no identifiable owners (except in a few companies). Absurdly, Communism (the
common ownership of means of production) has returned in full vengeance, though in
disguise, precisely because of the ostensibly most capitalist act of all, privatization.

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(7) To collaborate and co-ordinate the activities of outside suppliers of financial services
hired or contracted by the firm, including accountants, auditors, financial consultants,
underwriters and brokers, the banking system and other financial venues.

Many firms in developing countries (again, not all) are interested in collusion – not in
consultancy. Having hired a consultant or the accountant – they believe that they own him.
They are bitterly disappointed and enraged when they discover that an accountant has to
comply with the rules of his trade or that a financial consultant protects his reputation by
refusing to collaborate with shenanigans of the management.

(8) To maintain a working relationship and to develop additional relationships with banks,
financial institutions and capital markets with the aim of securing the funds necessary for the
operations of the firm, the attainment of its development plans and its investments.

One of the main functions of the CFO is to establish a personal relationship with the firm’s
bankers. The financial institutions which pass for banks in developing countries lend money
on the basis of personal acquaintance more than on the basis of analysis or rational decision
making. This "old boy network" substitutes for the orderly collection of data and credit rating
of borrowers. This also allows for favouritism and corruption in the banking sector. A CFO
who is unable to participate in these games is deemed by the management to be "weak",
"ineffective" or "no-good". The lack of non-bank financing options and the general squeeze
on liquidity make matters even worse for the finance manager. He must collaborate with the
skewed practices and decision making processes of the banks – or perish.

(9) To fully computerize all the above activities in a combined hardware-software and
communications system which integrates with the systems of other members of the group of
companies.

(10) Otherwise, to initiate and engage in all manner of activities, whether financial or other,
conducive to the financial health, the growth prospects and the fulfillment of investment
plans of the firm to the best of his ability and with the appropriate dedication of the time and
efforts required.

It is this point that occupies the working time of Western CFOs. It is their brain that is valued
– not their connections or cunning acts.

Q.6:- Give a note on strategies that improve sales?

Ans:- The term ‘strategy’ is drawn from the armed forces. It is a strategic plan that
interlocks all aspects of the corporate mission designed to overpower the enemy or the
competitor. An appropriate strategy is considered to be essential to face adverse situations
such as cut-throat competition.

Strategy may imply general or specific programmes of action outlining how the resources are
deployed to attain goals in a given set of conditions. If these conditions change, the strategy
also changes. Strategies give direction for the achievement of objectives necessary through
the deployment of resources.

In this unit, we would attempt to understand the meaning and purpose of strategy, its
formulation, implementation and evaluation.

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Strategies to Improve Sales

There are three alternatives to improve the sales performance of a business unit, to fill the gap
between actual sales and targeted sales:

a) Intensive growth

b) Integrative growth

c) Diversification growth

a) Intensive Growth:

It refers to the process of identifying opportunities to achieve further growth within the
company’s current businesses. To achieve intensive growth, the management should first
evaluate the available opportunities to improve the performance of its existing current
businesses.

It may find three options:

· To penetrate into existing markets

· To develop new markets

· To develop new products

At times, it may be possible to gain more market share with the current products in their
current markets through a market penetration strategy. For instance, SONY introduced TV
sets with Trinitron picture tubes into the market in 1996 priced at a premium of Rs.10,000
and above over the market through a niche market capture strategy. They gradually lowered
the prices to market levels. However, it also simultaneously launched higher-end products
(high-technology products) to maintain its global image as a technology leader. By lowering
the prices of TVs with Trinitron picture tubes, the company could successfully penetrate into
the markets to add new customers to its customer base.

Market Development Strategy is to explore the possibility to find or develop new markets for
its current products (from the northern region to the eastern region etc.). Most multinational
companies have been entering Indian markets with this strategy, to develop markets globally.
However, care should be taken to ensure that these new markets are not low density or
saturated markets, which could lead to price pressures.

Product Development Strategy involves consideration of new products of potential interest to

its current markets (e.g. Gramaphone Records to Musical Productions to CDs)– as part of a
Diversification strategy.

Study the following example to understand what Product Development Strategy is.

MICROSOFT’s New Strategy

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It is called PC-plus. It has three elements:

a) Providing computer power to the most commonly used devices such as cell phone,
personal computer, toaster oven, dishwasher, refrigerator, washing machines and so on.

b) Developing software to allow these devices to communicate.

c) Investing heavily to help build wireless and high-speed internet access throughout the
world to link it all together.

Microsoft envisions a home where everyday appliances and electronics are smart. According
to Bill Gates, ‘In the near future, PC-based networks will help us control many of our
domestic matters with devices that cost no more than $ 100 each ‘.

It is also said at Microsoft that VCRs can be programmed via e-mail, laundry washers can be
designed to send an instant message to the home computer when the load is done and
refrigerators can be made to send an e-mail when there’s no more milk. Microsoft plans to
give these appliances ‘brains‘ and provide them the means to talk to each other through their
Windows CE Operating System.

b) Integrative Growth:

It refers to the process of identifying opportunities to develop or acquire businesses that are
related to the company’s current businesses. More often, the business processes have to be
integrated for linear growth in the profits. The corporate plan may be designed to undertake
backward, forward or horizontal integration within the industry.

If a company operating in music systems takes over the manufacturing business of its plastic
material supplier, it would be able to gain more control over the market or generate more
profit. (Backward Integration)

Alternatively, if this company acquires some of its most profitably operating intermediaries
such as wholesalers or retailers, it is forward integration. If the company legally takes over or
acquires the business of any of its leading competitors, it is called horizontal integration
(however, if this competitor is weak, it might be counter-productive due to dilution of brand
image).

c) Diversification Growth:

It refers to the process of identifying opportunities to develop or acquire businesses that are
not related to the company’s current businesses. This makes sense when such opportunities
outside the present businesses are identified with attractive returns and that industry has
business strengths to be successful. In most cases, this is planned with new products that have
technological or marketing synergies with existing businesses to cater to a different group of
customers (Concentric Diversification).

A printing press might shift over to offset printing with computerised content generation to
appeal to higher-end customers and also add new application areas ( Horizontal
Diversification ) – or even sell stationery.

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Alternatively, the company might choose new businesses that have nothing to do with the
current technology, products or markets (Conglomerate Diversification).

The classic examples for this would be engineering and textile firms setting up software
development centres or Call Centres with new service clients.

Situation Analysis

Sales Improvement Strategies:

a) A supplier of computer stationery invests in a computer stationery manufacturing unit.

b) A vendor supplying engine boxes to Maruti decides to supply the same with modifications
to Hyundai.
c) A company dealing in computer floppies plans to set up a Software Technology Park.

Downsizing Older Businesses – as part of Operating Plans

It is necessary to reduce the scale of operations of an unprofitable business to ensure that the
resources are optimally utilised. A weak business requires higher degree of managerial
attention. The management should focus on the company’s growth opportunities, not fritter
away energy and resources trying to revive tired and old businesses.

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