Name Ashwini N G

Roll No 520950328
Course MBA – Human
Resource
Semester 4th Semester
Assignments
Centre Code 23
Location Bangalore
Submission 20th Nov 2010
Date
Set 1&2 (All Subjects)
 Course Code: MB0036 –
Strategic Management & Business Policy
Set 1 & 2
2
 MB0036 – Strategic Management & Business Policy 3 Credits

1. Explain the different circumstances under which a suitable growth strategy should be
selected by any company to improve its performance (i.e., intensive, integrative or
diversification growth). You may select an example of your choice to substantiate your
views (10 marks).
Answer:
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)
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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

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
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strengths to be successful. In most cases, this is planned with new products that have
technological or marketing synergies with existing businesses to cater to a different group of
customers (Concentric Diversification).
A printing press might shift over to offset printing with computerised content generation to appeal
to higher-end customers and also add new application areas ( Horizontal Diversification ) – or
even sell stationery.
Alternatively, the company might choose new businesses that have nothing to do with the current
technology, products or markets (Conglomerate Diversification).
The classic examples for this would be engineering and textile firms setting up software
development centres or Call Centres with new service clients.

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.

2. What are the components of a good Business Plan and briefly explain the importance of
each.(10 marks).
Answer:
The format of a Business Plan is something that has been developed and refined over the years
and is something that should not be changed. Like a good recipe, a business plan needs to include
certain ingredients to make it work.
When you create a business plan, don't attempt to recreate its format. Those reviewing this type of
document have expectations you must meet. If they do not see those crucial decision-making
components, they'll see no reason to proceed with their review of your business plan, no matter
how great your business idea.

Executive Summary Section

Every business plan must begin with an Executive Summary section. A well-written Executive
Summary is critical to the success of the rest of the document. Here is where you need to capture
the attention of your audience so that they will be compelled to read on. Remember, it's a
summary, so each and every word must be carefully selected and presented.

Use the Executive Summary section of your business plan to accurately describe the nature of
your business venture including the need that you plan to fill. Show the reasons why people need
your product or service. Show this by including a brief analysis of the characteristics of your
potential market.

Describe the organization of your business including your management team. Also, briefly
describe your sales and marketing plan or approach. Finally include the numbers that those
reviewing your business plan want to see - the amount of capital you seek, the carefully calculated
sales projections and your plan to repay the loan.

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If you've captured your audience so far they'll read on. Otherwise, they'll close the document and
add your business plan to the heap of other rejected ideas.
Devote the balance of your business plan to providing details of the items outlined in the

Executive Summary

The Business Section

Be sure to include the legal name, physical address and detailed description of the nature of your
business. It's important to keep the description easy to read using common terminology. Never
assume that those reading your business plan have the same level of technical knowledge that you
do. Describe how you plan to better serve your market than your competition is currently doing.

Market Analysis Section

An analysis of the market shows that you have done your homework. This section is basically a
summary of your Marketing Plan. It needs to show the demand for your product or service, the
proposed market, trends within the industry, a description of your pricing plan and packaging and
a description of your company policies.

Financing Section
The Financing section must show that you are as committed to your business venture as you
expect those reading your business plan to be. Show the amount of personal funds you are
contributing and their source. Also include the amount of capital you need and your plan to repay
this debt. Include all pertinent financial worksheets in this section: annual income projections, a
break-even worksheet, projected cash flow statements and a balance sheet.

Management Section
Outline your organizational structure and management team here. Include the legal structure of
your business whether it is a partnership, corporation or limited liability corporation.

Include resumes and biographies of key players on your management team. Show staffing
projection data for the next few years.

By now you're probably thinking that you don't need Business Plan just yet. Well you do, and
there is business plan building software that can help you through this immense project. These
software packages are easy to use and affordable. Use one today and produce a professional-
quality Business Plan - including all critical components - tomorrow!

3. You wish to start a new venture to manufacture auto components. Explain different
stages in the process of starting this new business. (10 marks).
Answer:
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
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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.
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:

i) Executive Summary
ii) Company and Product Description
iii) Market Description
iv) Equipment and Materials
v) Operations
vi) Management and Ownership
vii) Financial Information and Start-Up Timeline
viii) 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.
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 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 is 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 shopfloor 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.

4. Explain the process of due Diligence and why it is necessary.(10 marks).

Answer
Due diligence
Of course, your commercial partner will need some reassurance about the quality of the offer you
are making to them. If you are involved in licensing technology or seeking commercial support
for your research you are likely to hear of ‘due diligence.’ When a future partner is considering
whether or not to license technology, to buy a share of patent rights, or to support your research,
they will need to satisfy themselves that it is a viable proposition. The process of assessing the
viability, risk, potential liabilities and commercial prospects of a project is known as ‘due
diligence.’ Indeed, if a potential partner seems not to be interested in this kind of issues, it may
actually raise questions about their commitment to the project or the credibility of their business
plan, particularly if the relationship assumes some degree of risk and investment on their part.

Generally, due diligence will involve assessing the overall commercial operations, cash flow,
assets and liabilities of a business that is being purchased or otherwise financially supported. You
would think twice about purchasing a business if you found that it was burdened with debts, or
was about to be involved in difficult litigation, or if there were doubts about whether it really
owned its assets. The same applies to a potential investment involving intellectual property. For
instance, a potential commercial partner would not want to invest in patented technology only to
find out that patent renewal fees have not been paid and the patent has lapsed, or to find out that
the patent was being opposed by another company, or to find that there is prior art available that
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calls into question its validity. It may transpire that a student, a contractor or a visiting researcher
could actually be legally entitled to some or all of the patent rights. Even a serious level of
uncertainty or doubt could be enough to deter a potential partner, especially if they have run into
this kind of difficulty before.

Due diligence may also involve searching for information about the full range of IP rights that
might impact on the relevant technology – for instance, to check whether you have later filed
patent applications on improvements to the original patented technology, that may limit the value
of their investment in the original technology. Other intellectual property rights – such as related
trade mark or design registrations, or key trade secrets or copyright material (such as manuals or
software) – may also need to be identified or located, as these may also affect the commercial
partner’s interests in the technology. For example, they may be unwilling to take out a licence for
your patent without getting access to the software you have developed for a related process. They
may want the right to use your trade mark in association with the patented technology.
So in a due diligence process, your commercial partner may undertake a range of checks and need
various forms of information.

These may include:

· Checks on external records, such as patent registers and patent databases, including foreign
patents;
· Searches of patent databases for conflicting technology;
· Independent advice from patent attorneys on issues such as patent ownership, patent validity and
scope of patent claims;
· Checks on employment contracts, confidentiality arrangements, and contracts with other parties
that may interfere with the exercise of IP rights;
· Details of the patent prosecution such as examiners’ reports and other opinions;
· Details of any legal challenges to the patent, and the way the proceedings were resolved;
· Checks on laboratory notebooks in the event that the validity of US patents is of concern to the
commercial partner (this also provides reassurance as to claims of ownership of the patent);
· Surveys of the activity of competitors and owners of competing technology, and possibilities of
conflict; and
· Analysis of freedom to operate issues.
In preparing to licence your technology, you should consider in advance these kind of due
diligence issues. If you can anticipate and provide comprehensive answers to these questions, you
will be able more effectively to reassure your commercial partner, and you will be in a stronger
negotiating position in negotiating licence terms. It should also speed up the licensing
negotiations, and ultimately the commercialization of your intellectual property.

5. Is Corporate Social Responsibility necessary and how does it benefit a company and its
shareholders? (10 marks).
Answer.
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
9
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 honouring 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.

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
10
act of legislation. The UN has developed the Principles for Responsible Investment as guidelines
for investing entities.

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,[11] 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.

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

A CSR program can be an aid to recruitment and retention,[12] 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, fundraising 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.

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.

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.[14] Several major brands, such as The Co-operative Group, The
Body Shop and American Apparel[15] are built on ethical values. Business service organizations
can benefit too from building a reputation for integrity and best practice.

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
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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.

6. Distinguish between a Financial Investor and a Strategic Investor explaining the role they
play in a Company. (10 marks).
Answer
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.

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.

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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, 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:

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.

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 operations of the firm and with internal
guidelines set from time to time by the Board of Directors of the firm. This is usually
achieved both during a Due Diligence process and later, as financial management is
implemented.
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.
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.
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.
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.
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
13
 accounting, the audits, the budgets and any other matter of a financial nature or which
could or does have a financial implication.
7. 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.
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.
9. 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.
10. 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.

Collection and Credit Assessment

1. 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.
2. 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.

3. To analyse receivables and collectibles on a regular and timely basis.

4. 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.
5. 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.
6. 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:

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:
1. The selection of infrastructure, equipment, raw materials, industrial processes, etc.;
2. Negotiations and agreements with providers and suppliers;
3. Minimizing the costs of infrastructure by deploying proprietary components and planning;
4. The provision of corporate guarantees and letters of comfort to suppliers;
5. The planning and erecting of the various sites, structures, buildings, premises, factories,
etc.;
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 6. The planning and implementation of line connections, computer network connections,
protocols, solving issues of compatibility (hardware and software, etc.);
7. Project planning, implementation and supervision.

Marketing and Sales

1. 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.
2. The strategic investor is usually possessed of a brandname 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 brandname, its recognition and market
awareness, market penetration, co-branding, collaboration with other suppliers – are all
the responsibilities of the strategic investor.
3. The dissemination of the product as a preferred choice among vendors, distributors,
individual users and businesses in the territory.
4. Special events, sponsorships, collaboration with businesses.
5. The planning and implementation of incentive systems (e.g., points, vouchers).
6. The strategic investor usually organizes a distribution and dealership network, a
franchising network, or a sales network (retail chains) including: training, pricing,
pecuniary and quality supervision, network control, inventory and accounting controls,
advertising, local marketing and sales promotion and other network management
functions.
7. 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.
Technology
1. 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.
2. 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.
3. The encouragement of the development of in-house, proprietary, technological solutions
to the needs of the firm, its clients and suppliers.
15
 4. The planning and the execution of an integration program with new technologies in the
field, in collaboration with other suppliers or market technological leaders.
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
1. 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.
2. To run the day to day business of the firm.
3. To oversee the personnel of the firm and to resolve all the personnel issues.
4. To secure the unobstructed flow of relevant information and the protection of confidential
organization.
5. 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.

16
 MB0036- Strategic Management &
Business Policy
Set-2
Note: Each question carries 10 Marks. Answer all the questions.
1. What is the purpose of a Business Plan? Explain the features of the component of the
Plan dealing with the Company and its product description.(10 marks)
Answer:
A good business plan will help attract necessary financing by demonstrating the feasibility of
your venture and the level of thought and professionalism you bring to the task.
The first step in planning a new business venture is to establish goals that you seek to achieve
with the business. You can establish these goals in a number of ways, but an inclusive and
ordered process like an organizational strategic planning session or a comprehensive
neighborhood planning process may be best. The board of directors of your organization should
review and approve the goals, because these goals will influence the direction of the organization
and require the allocation of valuable staff and financial resources. Your goals will serve as a
filter to screen a wide range of possible business opportunities. If you fail to establish clear goals
early in the process, your organization may spend substantial time and resources pursuing
potential business ventures that may be financially viable but do not serve the mission of your
organization in other important ways. A liquor store on the corner may be a clear money-maker;
however, it may not be the retail to assist your community desires.
The following are examples of goals you may seek to achieve through the creation of a new
business venture:

17
Revenue Generation – Your organization may hope to create a business that will generate
sufficient net income or profit to finance other programs, activities or services provided by your
organization.
Employment Creation – A new business venture may create job opportunities for community
residents or the constituency served by your organization.

Neighborhood Development Strategy – A new business venture might serve as an anchor to a

deteriorating neighborhood commercial area, attract additional businesses to the area and fill a
gap in existing retail services. You may need to find a use for a vacant commercial property that
blights a strategic area of your neighborhood. Or your business might focus on the rehabilitation
of dilapidated single family homes in the community.

Whenever possible, goals should have quantifiable outcomes such as “to generate a minimum of
$50,000 of net income or profit within three years”; “to employ at least 15 community residents
within two years in new permanent jobs at a livable wage”; “to occupy and support a minimum of
10,000 square feet of neighborhood commercial space”; or “to rehabilitate 50 single-family
houses over three years.” Clearly defined and quantifiable goals provide objective measurements
to screen potential business opportunities. They also establish clear criteria to evaluate the success
of the business venture.

Establish Goals
Once you have identified goals for a new business venture, the next step in the business planning
process is to identify and select the right business. Many organizations may find themselves
starting at this point in the process. Business opportunities may have been dropped at your
doorstep. Perhaps an entrepreneurial member of the board of directors or a community resident
has approached your organization with an idea for a new business, or a neighborhood business
has closed or moved out of the area, taking jobs and leaving a vacant facility behind. Even if this
is the case, we recommend that you take a step back and set goals. Failing to do so could result in
a waste of valuable time and resources pursuing an idea that may seem feasible, but fails to
accomplish important goals or to meet the mission of your organization.

Depending on the goals you have set, you might take several approaches to identify potential
business opportunities.

Local Market Study: Whether your goal is to revitalize or fill space in a neighborhood
commercial district or to rehabilitate vacant housing stock, you should conduct a local market
study. A good market study will measure the level of existing goods and services provided in the
area, and assess the capacity of the area to support existing and additional commercial or home-
ownership activity. This assessment is based on the shopping and traffic patterns of the area and
the demographic and socio-economic characteristics of the community. A bad or insufficient
market study could encourage your organization to pursue a business destined to fail, with
potentially disastrous results for the organization as a whole.

Through a market study you will be able to identify gaps in existing products and services and
unsatisfied demand for additional or expanded products and services. If your organization does
not have staff capacity to conduct a market study, you might hire a consultant or solicit the
assistance of business administration students from a local college or university. Conducting a

18
solid and thorough market study up front will provide essential information for your final
business plan.

Analysis of Local and Regional Industry Trends: Another method of investigating potential
business opportunities is to research local and regional business and industry trends. You may be
able to identify which business or industrial sectors are growing or declining in your city,
metropolitan area or region. The regional or metropolitan area planning agency for your area is a
good source of data on industry trends.

Internal Capacity: The board, staff or membership of your organization may possess knowledge
and skills in a particular business sector or industry. Your organization may wish to draw upon
this internal expertise in selecting potential business opportunities.

Internal Purchasing Needs / Collaborative Procurement: Perhaps, your organization frequently

purchases a particular service or product. If nearby affiliate organizations also use this service or
product, this may present a business opportunity.

Examples of such products or services include printing or copying services, travel services,
transportation services, property management services, office supplies, catering services, and
other products. You will still need to conduct a complete market study to determine the demand
for this product or service beyond your internal needs or the needs of your partners or affiliates.
Identify Business Opportunities

Buying an Existing Business: Rather than starting a new business, you may wish to consider
purchasing an existing business. Perhaps a local retail or small light manufacturing business that
has been an anchor to the local retail area or a much-needed source of jobs in the neighborhood is
for sale. Its closure would mean the loss of jobs and services for your neighborhood. Your
organization might consider purchasing and taking over the enterprise instead of starting a new
business. If you decide to pursue this option, you still need to go through the steps of creating a
business plan. However, before moving ahead, these are just a few important areas to research in
assessing the business you plan to purchase:

Be sure to conduct a thorough review of the financial statements for the past three to five years to
determine the current fiscal status and recent financial trends, the validity of the accounts
receivable and the status of the accounts payable. Are all the required licenses and permits in
place and can they be transferred to a new owner?

Also look at the quality of key employees who, because of their expertise, may need to remain
with the business.

You will also need to assess the customer or client base and determine whether its members will
remain loyal to the business after it changes hands.

Another area to evaluate is the perception or image of the business. Inspect the facilities and talk
to suppliers, customers and other businesses in the area to learn more about the reputation of the
business.

19
At this early stage of your planning process, be sure to consult an attorney experienced in
corporation law. As a non-profit corporation, engaging in income-generating activities not related
to your mission may affect your tax-exempt status. You may also wish to protect your
organization from any liability issues connected with the proposed business activity. After you
have decided on a particular business activity, have a qualified attorney advise you on the proper
corporate structure for your new venture. In addition to qualified legal counsel, seek the expertise
of an experienced professional in that particular industry. He or she will bring valuable
knowledge and insights regarding the industry that will prove extremely useful during the
business planning process.

Advisory
You have decided on a business opportunity that meets the goals of your organization. Now you
are ready to test the feasibility of the venture and to present your business concept to the world. A
solid business plan will clearly explain the business concept, describe the market for your product
or service, attract investment, and establish operating goals and guidelines.

The first step in writing your business plan is to identify your target audience. Will this be an
internal plan the board will use to assess the feasibility and appropriateness of the business? Or
will this plan be distributed to a larger external audience such as funding sources, commercial
lenders or the community to gain financial backing and political support for the proposed
venture? The content and emphasis of the plan will shift according to the audience.

You will also need to decide who will conduct the necessary research and write the plan. The
following table lists the advantages and disadvantages of several options for getting the work
done. You might consider a combination of the options.

Creating One’s Own Business Plan

It is also important to establish a timeline for completing the plan. A business plan can be
completed by one staff member working full time in as little as a week, although a thorough
market analysis will add several days at least. A committee will probably need much more time.
Combinations of staff, volunteers, consultants and a board committee may lengthen or shorten the
process depending on skill level, available time, experience with planning and research, and the
20
group’s facilitation needs. Now that you have decided who will put together your business plan
and have set a timeline for its completion, you are ready to begin assembling the elements of the
plan. Your business plan should contain the following sections:
· Executive summary
· Company and product description
· Market description
· Operations
· Management and ownership
· Financial information and timeline
· Risks and their mitigation

A solid business plan will clearly explain the business concept, describe the market for your
product or service, attract investment, and establish operating goals and guidelines.

1 Executive Summary
In this section of your business plan, provide a description of your company, the industry you will
be competing in, and the product or service you plan to offer.

Sell your concept! The executive summary may be the first and only section of your business plan
that most of your audience will read. Tell the audience why the business is a great idea. Some
readers will look at this section to determine whether or not they want to learn more about a
business. Other readers will look to the executive summary as a sample of the quality and
professionalism of the overall plan.

The executive summary should be no more than one to three pages long and should answer the
following questions:
· Who are you? (describe your organization)
· What are you planning? (describe the service or product)
· Why are you planning it? (discuss the demand and market for the service or product)
· How will you operate your business?
· When will you be in operation? (overview of timeline)
· What is your expected net profit? (discuss your projected sales and costs)
Although the executive summary is the first part of your business plan, you should write it after
you have written the other sections of the plan in order to include the most important points of
each section.

2 Company and Product Description

In describing your company be sure to include what type of business you are planning
(homeownership development, wholesale, retail, manufacturing or service) and the legal structure
(corporation or partnership). You should discuss why you are creating this new venture,
referencing the goals you set at the beginning of the business planning process. Also include a
description of your non-profit organization, the role it has played in developing this new venture
and the on-going role, if any, it will play in operations. Give the reader a brief overview of the
industry, describing historic and current growth trends.
21
Whenever possible, provide documentation or references supporting your trend analysis such as
articles from business-oriented newspapers and magazines, research journals or other
publications. Include these references in the attachments of your business plan.

Product or Service
After describing your company and its industry context, describe the products or services you
plan to provide. Focus on what distinguishes your product or service from the rest of the market.
Discuss what will attract consumers to your product or service. Provide as much detail as
necessary to inform the reader about the particular characteristics of your product that distinguish
it from its competition – many nonprofits, for example, expect to produce higher-quality housing
than otherwise exists in the area. Mention any distinctive elements in the manufacture of the
product, such as being “hand-made by a particular people from a specific area.” If you are
providing a service, explain the steps you will take to provide a service that is better than your
competition.

Price
Provide a realistic estimate of the price for your product or service, and discuss the rationale
behind that price. An unrealistic price estimate may undermine the credibility of your plan and
raise concerns that your product or service may not be of sufficient quality or that you will not be
able to maintain profitability in the long run. Describe where this price positions you in the
marketplace: at the high end, low end or in the middle of the existing range of prices for a similar
product or service.

In other sections of the plan you will discuss the target market for your product or service and
also provide additional details on how the price of your product fits into the overall financial
projections for the enterprise.

Place
Describe the location where you will produce or distribute your product or provide your service.
Discuss the advantages of the location, such as its accessibility, surrounding amenities and other
characteristics that may enhance your business.

Depending on your anticipated customer base, accessibility to your location via public
transportation could affect the marketability of your product or service.

Customers

In this section of your business plan, you will describe the customer base or market for your
product or service. In addition to providing a detailed description of your customer base, you will
also need to describe your competition (other local developers or nearby businesses providing a
similar service to your potential customer base).

Who will purchase your product or use your service? How large is your customer base? Define
the characteristics of your target market in terms of its:

· Demographics – Measures of age, gender, race, religion and family size.

· Geography – Measures based on location.
22
· Socioeconomic Status – Measures based on individual or household annual income.

Provide statistical data to describe the size of your target market. Sources for this information
may include recent data from the Bureau of Statistics, state or local census data, or information
gathered by your organization, such as membership lists, neighborhood surveys and group or
individual interviews. Be sure to list the sources for your data, as this will further validate your
market assumptions. Include any relevant information regarding the growth potential for your
target market if your business is expected to rely on growth. Cite any research forecasting
population increases in your target market or other trends and factors that may increase the
demand for your product or service.

Competition

Discuss how people identified in your target market currently meet their need for your product or
service. What other businesses exist in your area that are similar to your proposed venture? For
example, for a housing business, what are the local markets for purchase and rental? How much
are people currently paying for similar products or services? Briefly describe what differentiates
your proposed venture from these existing businesses and discuss why you are entering this
market.

Sales Projections
Present an estimate of how many people you expect will purchase your product or service. Your
estimate should be based on the size of your market, the characteristics of your customers and the
share of the market you will gain over your competition. Project how many units you will sell at a
specified price over several years. The initial year should be broken down in monthly or quarterly
increments. Account for initial presentation and market penetration of your product and any
seasonal variations in sales, if appropriate.

3 Market Description
In this section, you will describe how you plan to operate the business. You will present
information on how you plan to create your product or provide your service, describe the staff
required to operate and manage the business, discuss the equipment and materials necessary, and
define the site or facility requirements, if any. A key component of the operation of your business
will be your sales and marketing strategy, so you must describe how you will inform your target
market about your product or service and how you will convince customers to purchase it.

Production Description
Describe the steps for creating your product, from the raw material or initial stage to the finished
product, packaged and ready for distribution and sale. If you plan to provide a service, describe
the process of service deliver (such as the initial interview, for instance, if you are offering
consulting services), assessment, research and design, and final presentation. Provide a
description of any sub-contractors or external services you plan to use in the production process.
The reader of the plan may be unfamiliar with the industry, so avoid using industry jargon to
describe the production process.

Staffing

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Describe the staff required to operate your business: discuss how many people you will need;
describe the tasks they will carry out; and the skills they will need. Prepare a chart outlining the
salaries and benefits you will provide to your workforce. Provide information on how you will
recruit staff and provide initial and ongoing training of employees.

4 Equipment and Materials

To manufacture your product or provide your service, what type of equipment will you need?
Describe any machinery and vehicles necessary in the production, packaging and distribution of
your product, including any office equipment such as computers, copiers, furniture, fixtures and
telephone systems. Also discuss the types of materials you will use in the production process and
describe the source and cost of those materials.

Facility
Describe the type of facility in which you will house your business. Indicate the amount of
building space you will need for production and administration. Also discuss any building
features required for the production process such as high ceilings, specialized ventilation and
heating systems, sanitized laboratory space or vehicular accessibility. If you have already
identified a location and a facility that meets your requirements, describe its features. Even if you
are planning to provide a service instead of manufacturing a product, you need to demonstrate that
you will have adequate space for administrative functions and other activities related to the
service you plan to provide .

Market Description
Describe your strategy for locating your target market, informing or educating customers about
your product or service and convincing them to purchase it. Provide details on the methods you
will use to advertise your product, such as print media (advertisements in newspapers, magazines
or trade journals), electronic media (television, radio and the Internet), direct mail, telemarketing,
individual sales agents or representatives, or other approaches. Discuss the product’s or service’s
features you plan to emphasize to gain the attention of your target market. Also detail how you
will distribute and sell your product or service. Will you use sales agents or existing retail outlets,
or directly distribute your product through a delivery service such as United Parcel Service,
Federal Express or independent trucking company?

5 Operations
In this section of your business plan, describe the senior managers responsible for overseeing the
start-up and operation of your business, their background and their responsibilities in the business.
Be sure to highlight your management team’s experience in managing the production, marketing
and administration of similar businesses or within the selected industry and attach the resumes of
each member to the plan. Be sure to provide a complete job description of any vacancies in your
management team. Describe the responsibilities, the skills, the background required and the steps
you plan to take to fill that key position.

Ownership
What is its relationship to your existing organization? Who is on the board of directors / board of
advisors of the new business and what are their backgrounds and areas of expertise? Potential
investors or lenders will be interested in the ownership stake of the board of directors and also in
what portion of the company’s equity is available. Success is often due to one’s contacts, so fully
24
describe your business relationships with attorneys, accountants and advertising or public
relations agencies, and any industry-specific services such as suppliers and distributors.

6 Management and Ownership

In this section you will describe the financial feasibility of your planned venture and provide
several financial reports and statements to document why your business will be a viable enterprise
and a sound investment. At a minimum, you should provide a brief descriptive narrative for each
of the following financial statements and include a copy in the attachments to your plan:
· Start-up budget
· Cash flow projection
· Income statement
· Balance sheet
In preparing these statements, you may want to seek the advice of a certified public accountant
(CPA).

Start-up Budget
Describe the initial expenses you will incur to get your business up and running. Some items you
might include in your start-up budget research and product design and development expenses,
legal incorporation and licensing expenses, facility purchase or rental, equipment and vehicle
purchase or rental, and initial material or supply purchase. You can use Worksheet B as a sample
format for preparing your start-up budget.
Cash Flow Projection
This statement presents a month-to-month schedule of the estimated cash inflows and outflows of
your business for the first year. This schedule should indicate how much money your business
will have or need and when you will need it. You should describe your sources of income and
capital, detailing your projected sales revenue and indicating your own or investor equity
contribution, lenders, investors and other sources of capital. Itemize your projected expenses,
distinguishing between the cost of goods sold (materials, supplies, production labor), overhead
expenses (rent, utilities, insurance, maintenance, interest, insurance, administrative costs and
salaries, legal and accounting services, marketing, taxes, fees and other ongoing operating
expenses) and capital expenditures (land and buildings, equipment, furniture, vehicles, and
building repair or renovation expenses). In preparing this statement, account for a gradual
increase in sales from initial product introduction and any expected seasonal fluctuations in
revenue projections.

Income Statement
Prepare a multiyear (three- to five – year) statement of projected revenue, expenses, capital
expenditures and cost of goods sold. If you make assumptions about the growth of your business,
provide supporting documentation such as growth patterns of similar companies or studies that
forecast an industry-wide growth rate. This statement should indicate to the reader the potential of
your business to generate cash and its profitability over time. For an existing business, also submit
an income statement for at least three prior consecutive years. Lenders may look at this statement
to determine whether your business can support the additional debt you are requesting.

Balance Sheet
A start-up business probably will not have any assets or liabilities at the time you are drafting the
business plan. Provide a copy of the balance sheet of the business’s sponsoring organization or
25
individual. Describe in your narrative any assets that will be allocated to the start-up of the
business.

7 Financial Information and Start up Timeline

Capital Requirements

Describe the amount and type of financing you are seeking for your business. Are you looking for
debt from a lender or equity from an investor? Refer to your start up budget and cash flow
statement presented earlier. Discuss how and when you will draw on these funds and how they
will affect the bottom line. Also describe any commitments or investments that you may have
already secured.

If you are seeking investors, such as venture capitalists, describe what they will receive in return
for their capital. What is the repayment period and the expected return on investment? Also
discuss the nature of their ownership share and how it may change with future investments.
Equity investors are looking for rates of return higher than rates offered by banks or other
business lenders. The level of risk in your business and industry will help to determine the actual
market rate, as will the availability of equity dollars. Check with other businesses (although not
direct competitors) to see what return on investment their investors demanded. Be prepared to
negotiate.

And make sure you research the investment market carefully; several socially minded investment
pools exist and more are in development. or lenders, describe the type of financing you are
seeking:

· Seed Capital – Short-term financing to cover start-up costs.

· Fixed Asset Financing – Longer-term financing for property, building improvements, equipment
or vehicles. The asset being purchased is usually pledged as security for the loan.
· Working Capital – Short-term financing to cover operating expenses and to bridge gaps in cash
flow.
Initial Start-up Timeline

Provide a timeline of tasks and events necessary to get your business operational. Be sure to
describe the current stage you are in and what steps you have taken to date. Include deadlines for
task completion. Set realistic deadlines according to your capacity to complete these tasks. The
following is a list of some of the steps you may wish to include:
· Filing legal incorporation documents
· Identifying and securing suitable space
· Designing and developing the product
· Obtaining required licenses or permits
· Securing necessary financing
· Leasing or purchasing equipment
· Hiring key staff
· Hiring and training of production or support staff
· Purchasing materials and production supplies
· Beginning marketing activities
· Opening

26
Although it is impossible to know exactly what will go wrong in starting and running your
business, thinking about different challenges will strengthen your plan. Potential problems could
include:
· Insufficient public subsidy available to new home owners or residents
· The competition drops its prices
· Not enough customers
· Production costs exceed estimates
· Difficulty in finding qualified employees
· Environmental or governmental changes such as tax increases, additional regulations or
population changes

For each potential problem, discuss its likelihood and describe possible solutions or actions you
might undertake to mitigate the problem.

Risks and their Mitigation

Although it is impossible to know exactly what will go wrong in starting and running your
business, thinking about different challenges will strengthen your plan.
After you have completed all of the elements of your business plan, you should focus its
presentation. A well-organized plan will assist you in communicating the most important
elements of your business plan to the reader, and a persuasive plan will help you to convince the
reader to invest in your business.

Executive Summary

As mentioned earlier, this section should be written last. However, if you have already written the
executive summary, review it to make sure it embodies the following characteristics. Because it is
the first and possibly the only section of the plan that many readers may see, the executive
summary should provide an overview of the plan and entice the reader to read the whole plan or
to agree to meet with you. The executive summary should be no more than three pages and should
briefly describe the most important elements of the plan. Review the Executive Summary section
of this manual for more tips on this critical introduction to your business.

2. Write short notes on :

a) sales projections (10 marks).
Answer
Sales Projections
Present an estimate of how many people you expect will purchase your product or service. Your
estimate should be based on the size of your market, the characteristics of your customers and the
share of the market you will gain over your competition. Project how many units you will sell at a
specified price over several years. The initial year should be broken down in monthly or quarterly
increments. Account for initial presentation and market penetration of your product and any
seasonal variations in sales, if appropriate.

Steps for Developing Sales Projections

Your business plan is not just a funding tool, but also a blueprint for how your business should
operate. The following are steps for developing sales projections.
27
Step I:
Estimate
For each product or service, estimate the number of people who are likely to buy and when they
will buy it. You can get this information from asking your likely customers about their possible
use of your business, or you can base your estimates on your knowledge of the market.

Step 2:
Use a Calendar
Estimate your sales and number of customers served during one week. Using the totals for a
week, make projections for each month. For the first few months, keep in mind that business will
start off slowly before people become more aware of your business. Use will most likely increase
as people learn about your products and services. Seasonal variations may affect your business as
well. You will use these numbers to project your equipment, supply and staffing needs, as well as
income.

Cost Account Heads:

· Organizational Start up Costs
· Product Design/Development
· Research & Development
· Legal/Licensing Expenses
· Property & Facilities
· Land/Building Purchase
· Initial Lease Deposit
· Building Repairs/Improvements
· Equipment/Machinery
· Production-related
· Administrative/Office Equip.
· Materials & Supplies
· Personnel
· Key Employees
· Contract Labour/Temps
· Training Expenses
· Marketing Expenses
· Advertisements
· Brochures/Literature/Other
· Insurance Premiums
· Distributor Contracts
· Contingency (5%)

Expenses:
Costs of Goods Sold
· Materials/Supplies
· Labor
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· Rent
· Utilities
· Insurance
· Admin. Exp. (PT Sec.)
· Legal & Accounting
· Marketing
· Equipment Maintenance/Supplies
· Facility Maintenance
· Fees/Miscellaneous

Debt / Equity Investment:

· Equipment Loan
· Building Rehabilitation Loan
· Grants
· Owner Equity

Expenses
· Cost of Goods Sold
· Wages & Benefits
· Materials
· Supplies

Overhead Expenses:
· Rent
· Utilities
· Building Maintenance/Security
· Marketing
· Accounting
· Legal
· Administrative Expense
· Interest Expense
· Depreciation

The Business Priorities are based upon six top-level objectives; these are:
· To make Business data available both to decision-makers and as much as possible available in
the public domain;
· To ensure all holders of Business information are able to participate.
· To ensure that the data available through the NETWORK are of known quality;
· To ensure that the NETWORK Gateway gives access to data on Location and species used to
inform decisions affecting Business at local, regional, national and international levels;
· To promote knowledge, use and awareness of the NETWORK;
· To enhance the skills base and expertise needed to support and develop the NETWORK.

i) The objectives have cross-cutting themes which are:

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A. Infrastructure development
B. Data standards and tools
C. Capacity building
D. Working with the wider public
E. Co-ordination and promotion
i) In addition, the partners will contribute to the overall realisation of the objectives through work
that they initiate on their own account, but which does not necessarily fall under the focussed
objectives for the Network.
ii) A series of assumptions have been made in formulating the Business Priorities and their
associated work programme. These are:
· It is assumed that the present way of working, i.e. a lead partner approach for each project will
be retained;
· The plan is not intended to represent all the work that could be undertaken;
· It is anticipated that other work towards the principal aim of adding content and providing a
fully functional gateway will be adopted by the NETWORK as part of its programme, but this
work would have to be prioritised against this core activity and separately resourced;
To give additional focus to the challenging nature of the task that the NETWORK is setting itself,
a series of principle drivers have been recognised.

The drivers are:

Processes
This driver relates to facilitated targeted action on the ground through providing knowledge of
resource location, extent, pattern of distribution, data quality and gaps. It also has the potential for
engaging more partners in the NETWORK;
· Environmental Impact Assessment (EIA) and Strategic Environmental Assessment – This driver
is concerned with providing ready access to data on location, extent, pattern and quality of
Business.
· Data contributor engagement – This driver is concerned with accessing sources of data for the
NETWORK enabling the assessment of actions and continual improvement in the targeting of
actions from the two previous drivers;
· Operational use – This relates to the use of the NETWORK within the day to day business of
agencies as a source of data relevant to local reporting or casework;
· Generic enhancement – This driver encompasses capacity building and Recording Schemes and
other contributing organisations and user groups, in order to ensure the continued and enhanced
supply and use of information.
These lead naturally to three broad areas of work:
· Developing the recording network;
· Enhancing the Internet Gateway in terms of its functionality and the data it accesses;
· Ensuring that the benefits already secured through the earlier work are maintained.
The plan also acknowledges the need to co-ordinate activity between the members of the
NETWORK and their partners, and to communicate the progress and successes of the work
programme.

b) importance of creativity in Business

Answer
Creativity
Everyone in business is creative.
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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.
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”.

2 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?
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.

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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.
It’s just been mystified – Own your creativity.
Facts and observations
Giga-investments made in the paper and pulp industry, in the heavy metal industry and in other
base industries, today face scenarios of slow growth (2-3 % p.a.) in their key markets and a
growing over-capacity in Europe.

The energy sector faces growing competition with lower prices and cyclic variations of demand.
Productivity improvements in these industries have slowed down to 1-2 % p.a .

Global financial markets make sure that capital cannot be used non-productively, as its owners are
offered other opportunities and the capital will move (often quite fast) to capture these
opportunities.

The capital markets have learned “the American way”, i.e. there is a shareholder dominance
among the actors, which has brought (often quite short-term) shareholder return to the forefront as
a key indicator of success, profitability and productivity.

There are lessons learned from the Japanese industry, which point to the importance of
immaterial investments. These lessons show that investments in buildings, production technology
and supporting technology will be enhanced with immaterial investments, and that these are even
more important for re-investments and for gradually growing maintenance investments.

The core products and services produced by giga-investments are enhanced with life-time service,
with gradually more advanced maintenance and financial add-on services.

New technology and enhanced technological innovations will change the life cycle of a giga-
investment.

Technology providers are involved throughout the life cycle of a giga-investment.

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Giga-investments are large enough to have an impact on the market for which they are positioned:
A 3,00,000 ton paper mill will change the relative competitive positions; smaller units are no
longer cost effective.

A new technology will redefine the CSF:s for the market.

Customer needs are adjusting to the new possibilities of the giga-investment.
The proposition that we can describe future cash flows as stochastic processes is no longer valid;
neither can the impact be expected to be covered through the stock market.

Types of options
· Option to Defer
· Time-to-Build Option
· Option to Expand
· Growth Options
· Option to Contract
· Option to Shut Down/Produce
· Option to Abandon
· Option to Alter Input/Output Mix

Table of Equivalences:
INVESTMENT OPPORTUNITY
Present value of a project’s operating
cash flows.
Investment costs
Length of time the decision may be
deferred.
Time value of money.
Risk of the project.
VARIABLE CALL OPTION
S Stock price.
X Exercise price
t Time to expiry.
rf Risk-free interest rate
σ Standard deviation of
returns on stock

Fuzzy numbers (fuzzy sets) are a way to express the cash flow estimates in a more realistic way.
This means that a solution to both problems (accuracy and flexibility) is a real option model using
fuzzy sets.

3. What factors are to be taken into account in a crisis communications strategy?

Answer
The following items should be taken into account in the crisis communications strategy:
· Communications should be timely and honest.
· To the extent possible, an audience should hear news from the organization first.
· Communications should provide objective and subjective assessments.
· All employees should be informed at approximately the same time.
· Give bad news all at once – do not sugarcoat it.
· Provide opportunity for audiences to ask questions, if possible.
· Provide regular updates and let audiences know when the next update will be issued.
· Treat audiences as you would like to be treated.
· Communicate in a manner appropriate to circumstances:
– Face-to-face meetings (individual and group)
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– News conferences
– Voice mail/email
– Company Intranet and Internet sites
– Toll-free hotline
– Special newsletter
– Announcements using local/national media.
Preplanning for communications is critical. Drafts of message templates, scripts, and statements
can be crafted in advance for threats identified in the Risk Assessment.

Procedures to ensure that communications can be distributed at short notice should also be
established, particularly when using resources such as Intranet and Internet sites and toll-free
hotlines.

Official Spokesperson

The organization should designate a single primary spokesperson, with back-ups identified, who
will manage/disseminate crisis communications to the media and others. This individual should
be trained in media relations prior to a crisis. All information should be funneled through a single
source to assure that the messages being delivered are consistent.
It should be stressed that personnel should be informed quickly regarding where to refer calls
from the media and that only authorized company spokespeople are authorized to speak to the
media. In some situations, an appropriately trained site spokesperson may also be necessary.

4. What elements should be included in a Marketing Plan under Due Diligence while seeking
investment in for your Company? (10 marks).
Answer
The Process of Due Diligence
A business which wants to attract foreign investments must present a business plan. But a
business plan is the equivalent of a visit card. The introduction is very important – but, once the
foreign investor has expressed interest, a second, more serious, more onerous and more tedious
process commences: Due Diligence.

"Due Diligence" is a legal term (borrowed from the securities industry). It means, essentially, to
make sure that all the facts regarding the firm are available and have been independently verified.
In some respects, it is very similar to an audit. All the documents of the firm are assembled and
reviewed, the management is interviewed and a team of financial experts, lawyers and
accountants descends on the firm to analyze it.

First Rule:
The firm must appoint ONE due diligence coordinator. This person interfaces with all outside due
diligence teams. He collects all the materials requested and oversees all the activities which make
up the due diligence process.

The firm must have ONE VOICE. Only one person represents the company, answers questions,
makes presentations and serves as a coordinator when the DD teams wish to interview people
connected to the firm.

Second Rule:
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Brief your workers. Give them the big picture. Why is the company raising funds, who are the
investors, how will the future of the firm (and their personal future) look if the investor comes in.
Both employees and management must realize that this is a top priority. They must be instructed
not to lie. They must know the DD coordinator and the company’s spokesman in the DD process.
The DD is a process which is more structured than the preparation of a Business Plan. It is
confined both in time and in subjects: Legal, Financial, Technical, Marketing, Controls.

The Marketing Plan

Must include the following elements:
· A brief history of the business (to show its track performance and growth)
· Points regarding the political, legal (licences) and competitive environment
· A vision of the business in the future
· Products and services and their uses
· Comparison of the firm’s products and services to those of the competitors
· Warranties, guarantees and after-sales service
· Development of new products or services
· A general overview of the market and market segmentation
· Is the market rising or falling (the trend: past and future)
· What customer needs do the products / services satisfy
· Which markets segments do we concentrate on and why
· What factors are important in the customer’s decision to buy (or not to buy)
· A list of the direct competitors and a short description of each
· The strengths and weaknesses of the competitors relative to the firm
· Missing information regarding the markets, the clients and the competitors
· Planned market research
· A sales forecast by product group
· The pricing strategy (how is pricing decided)
· Promotion of the sales of the products (including a description of the sales force, sales-related
incentives, sales targets, training of the sales personnel, special offers, dealerships, telemarketing
and sales support). Attach a flow chart of the purchasing process from the moment that the client
is approached by the sales force until he buys the product.
· Marketing and advertising campaigns (including cost estimates) – broken by market and by
media
· Distribution of the products
· A flow chart describing the receipt of orders, invoicing, shipping.
· Customer after-sales service (hotline, support, maintenance, complaints, upgrades, etc.)
· Customer loyalty (example: churn rate and how is it monitored and controlled).
Legal Details
· Full name of the firm
· Ownership of the firm
· Court registration documents
· Copies of all protocols of the Board of Directors and the General Assembly of Shareholders
· Signatory rights backed by the appropriate decisions
· The charter (statute) of the firm and other incorporation documents
· Copies of licences granted to the firm
· A legal opinion regarding the above licences
· A list of lawsuit that were filed against the firm and that the firm filed against third parties
(litigation) plus a list of disputes which are likely to reach the courts
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· Legal opinions regarding the possible outcomes of all the lawsuits and disputes including their
potential influence on the firm
Financial Due Diligence
· Last 3 years income statements of the firm or of constituents of the firm, if the firm is the result
of a merger. The statements have to include:
· Balance Sheets
· Income Statements
· Cash Flow statements
· Audit reports (preferably done according to the International Accounting Standards, or, if the
firm is looking to raise money in the USA, in accordance with FASB)
· Cash Flow Projections and the assumptions underlying them
Controls
· Accounting systems used
· Methods to price products and services
· Payment terms, collections of debts and ageing of receivables
· Introduction of international accounting standards
· Monitoring of sales
· Monitoring of orders and shipments
· Keeping of records, filing, archives
· Cost accounting system
· Budgeting and budget monitoring and controls
· Internal audits (frequency and procedures)
· External audits (frequency and procedures)
· The banks that the firm is working with: history, references, balances
Technical Plan
· Description of manufacturing processes (hardware, software, communications, other)
· Need for know-how, technological transfer and licensing required
· Suppliers of equipment, software, services (including offers)
· Manpower (skilled and unskilled)
· Infrastructure (power, water, etc.)
· Transport and communications (example: satellites, lines, receivers, transmitters)
· Raw materials: sources, cost and quality
· Relations with suppliers and support industries
· Import restrictions or licensing (where applicable)
· Sites, technical specification
· Environmental issues and how they are addressed
· Leases, special arrangements
· Integration of new operations into existing ones (protocols, etc.)
A successful due diligence is the key to an eventual investment. This is a process much more
serious and important than the preparation of the Business Plan.

5. Distinguish between Joint Ventures and Licensing, explaining the relative advantages and
disadvantages of each.(10 marks).

Answer
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
36
principle, make different choices in different countries for exploiting IP rights for the same
underlying invention. If you are based in Malaysia, you could in theory decide to exploit your
patent yourself in the East Asian region, grant a licence a Canadian company to use the invention
in North America, and sell or assign the rights in Europe to a Danish company – whether or not
this is the best approach in practice is a different matter, of course.

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

The patent right normally includes the right to exclude others from making, using, selling or
importing the patented product, and similar rights concerning patented processes. The license can
therefore cover the use of the patented invention in many different ways.
For instance, licences can be exclusive or non-exclusive. If a patent owner grants a non-exclusive
licence to Company A to make and sell their patented invention in Malaysia, the patent owner
would still be able to also grant Company B another non-exclusive for the same rights and the
same time period in Malaysia. In contrast, if a patent owner granted an exclusive licence to
Company A to make and sell the invention in Malaysia, they would not be able to give a licence
to anyone else in Malaysia while the licence with Company A remained in force.

Licenses are normally confined to a particular geographical area – typically, the jurisdiction in
which particular IP rights have effect. You can grant different exclusive licences for different
territories at the same time. For example, a patent owner can grant an exclusive licence to make
and sell their patented invention in Malaysia for the term of the patent, and grant a separate
exclusive licence to manufacture and sell their patented invention in India for the term of the
patent.

Separate licences can be granted for different ways of using the same technology. For example, if
an inventor creates a new form of pharmaceutical delivery, she could grant an exclusive licence to
one company to use the technology for an arthritis drug, a separate exclusive licence to another
company to use it for relief of cold symptoms, and a further exclusive licence to a third company
to use it for veterinary pharmaceuticals.

A licence is merely the grant of permission to undertake some of the actions covered by
intellectual property rights, and the patent holder retains ownership and control of the basic
patent.

An assignment of intellectual property rights is the sale of a patent right, or a share of the patent.
It should be remembered that the person who makes an invention can be different to the person
who owns the patent rights in that invention. If an inventor assigns their patent rights to someone
else they no longer own those rights. Indeed, they can be in infringement of the patent right if
they continue to use it.

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

37
Licences are often limited to specific rights, territories and time periods. For example, a patent
owner could exclusively licence only their importation right to a company for the territory of
Indonesia for 12 months. If an inventor owns patents on the same invention in five different
countries, they could assign (or sell) these patents to five different owners in each of those
countries. Portions of a patent right can also be assigned – so that in order to finance your
invention, you might choose to sell a half-share to a commercial partner.

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

Licensing Advantages
• 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
commercialisation of technology, especially when your institute has a public interest focus or an
educational role; or
– you need to attract financial support from those prepared to take a risk with an unproven
technology (‘angel investors’ or ‘venture capitalists’), and they will only take on a long-term risk
if they can get a share of future profits of the technology.

38
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 commercial partners are consistent
with your objectives. In the joint venture agreement, the partners typically agree to share the
benefits, as well as the risks and liabilities, in a specified way.
But this kind of partnership isn’t normally able in itself to enter legal commitments, or own IP in
its own right, so that the partners remain directly legally responsible for any losses or other
liabilities that the partnership’s operations create.

In other words, a partnership which is not a corporation, a company or a specific institution

doesn’t really separately exist as a legal entity.

By contrast, a company is a new legal entity (a ‘legal person’ recognised by the law as having its
own legal identity) which can own and license IP and enter into legal commitments in its own
right.

A spin-off company is an independent company created from an existing legal body – for
example, if a research institute decided to turn its licensing division or a particular laboratory into
a separate company.

A start-up company is a general term for a new company in its early stages of development. If a
company is defined as a limited liability company, the partners or investors normally cannot lose
more than their investment in the company (but officeholders in the company might be personally
responsible for their actions in the way they manage the company).

This separate legal identity means that a start-up company can be a useful way of developing and
commercialising a new technology based on original research, while keeping the main research
effort of an institute focussed on broader scientific and public objectives, and insulated from the
commercial risks and pressures of the commercialisation process.

At the same time, the research institute can benefit from the commercialisation of its research,
through receiving its share of the profits and growth in assets of the spin-off company, thus
strengthening the institute’s capacity to do scientific research.

39
The company is normally owned through shares (its ‘equity’). These effectively represent a
portion of the assets and entitlement to profits of the company. Investors can purchase shares in
the company, which is one way of bringing in new financial resources to support the development
of the technology – in exchange, the investors stand to benefit from the growth in the company’s
worth, as their shares proportionately rise in value, and to receive a portion of any profits
produced by the company’s operations, commensurate with the number of shares they own. If it is
a public company, shares in the company can be bought and sold on the open stock market. An
initial public offering is when the shares in a start up company are first made available to the
public to purchase.

A private company’s shares, by contrast, are not traded on the open market (but can still be
bought and sold).

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

Which model of commercialisation is best for you?

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

There are many possible variations on each of these general models, and in practice they can
overlap. In deciding which model of commercialisation is best for you, it is always a good idea to
seek commercial or legal advice.

Remember that IPRs alone do not guarantee you a financial return on your invention. You need to
make good commercial decisions to benefit financially from your intellectual property rights.
Properly managed, intellectual property rights should not be a burden but should yield a return
from your hard work in creating an invention.

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

40
 • 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.

6. You wish to commercialize your invention. What factors would you weigh in choosing an
appropriate course? (10 marks).
Answer
Following are the ways to commercialize my invention.
Licensing and Assignment - Defined
The difference between licensing and selling your invention is comparable to leasing vs. selling
house. When you sell your house, you transfer your title, making someone else in charge of and
liable for the house from that point on. When you sell your invention, the scenario is the same,
except that the process is called “assigning” rather than selling. You, the inventor would be the
“assignor” and the person receiving the title or ownership of the patent would be the “assignee.”
Instead of selling, though, you may choose to rent out your house. In this case, you retain the title
to the house and give someone permission to use it for a limited period of time.

In consideration for this, they pay you on a monthly, yearly or other basis. The terms of this lease
are entirely up to you and the person leasing your house. It is up to you to negotiate within the
boundaries of the law.

When you license an invention, it’s nearly the same as leasing. You’re offering a manufacturer,
for example, the right to manufacture and sell your invention for a period of time, and in
consideration for this they pay you on a quarterly basis. In this case you are the “licensor” and the
company is the “licensee.” It is up to the parties to negotiate the terms of the license within the
boundaries of antitrust laws and other regulations that would affect licenses and similar business
arrangements.

Should I Sell or License?

You will generally have a better chance of licensing your invention instead of assigning (selling)
your rights for two reasons:

First, it is initially hard to ascertain what the eventual value of an invention will be. This will
almost invariably result in a win/lose situation. If the value is estimated high, the inventor wins
and the company loses. On the other hand, if the estimates are low, the inventor loses out.

Second, companies don’t like to pay cash up front unless they absolutely have to. Generally,
when a company makes a commitment to manufacture and promote an invention, they are already
anticipating a substantial financial commitment for tooling, manufacturing setup, engineering
expenses, advance purchases of raw materials, marketing, and promotional expenses. A company
that is savvy with licensing negotiations will state that the more money they pay the inventor up
front, the fewer resources they will have available to put into the promotion. This is a hard point

41
to argue against, particularly if you’re interested in the long-range commercial success of your
invention
.
At this point, Inventors have often already incurred substantial initial expenses for patenting,
prototyping and research, and need to be reimbursed as soon as possible. Therefore, the inventor
can argue that the potential licensees should at least reimburse them for these out-of-pocket
expenses. After all, these are expenses the company would have normally paid if they had
developed such a product on their own. At that point, the company may very well come back to
the table and agree to reimburse you for such initial expenses. However, they may want to make it
an advance against future royalties. Bear in mind that all negotiations are unique and this is just an
example.

When you assign (sell) your invention, you will typically lose control of it. Although you may
have cash in hand from the sale of your invention, the company has the prerogative to ditch your
technology and simply “sit on it” unless you’ve made other arrangements. In some cases it is just
as important to the inventor to see his invention commercialized as it is to receive the cash from
it. Having an invention commercialized can give an inventor a substantial head start in attracting
interest in his additional inventions. This may eventually be worth more to an inventor than the
initial cash he would receive from his first commercialized invention.

Should I Go It Alone?
Some inventors prefer to keep their inventions close and go into business for themselves, which
comes with its own set of risks and rewards.

There are several different elements at play during the commercialization of an invention: the
company, the management, the technology, the market, and the marketing team. Each of these is a
variable. The more variables you introduce, the greater the risk of failure. If you start with a new
company under new management with a new product, your chance of success is obviously much
slimmer than an existing company already in the field with experience and knowledge in a similar
product line. Even when you look at an experienced company like 3-M, which brings many new
products to market, you’ll find that the company’s new products fail often.

With all its resources, 3-M’s success rate is said to be only 30%. Unless you have greater
resources, your success rate may be even less.

Because there are significant startup risks, it’s important to seriously investigate the distinct
advantages of having your invention introduced by an existing company with experience in your
field can promote your product effectively and already has a skilled sales force with an existing
client base. These factors can greatly reduce the amount of time it takes to introduce your
invention to the marketplace. What you lose in control when you license can be gained tenfold
from a timing standpoint, and in reducing your risk.

Licensing offers another strong advantage when it is time to sell your manufactured invention to
customers. Manufacturers who introduce only one invention or a very small product line often
have a hard time selling to large accounts. Large retail outlets prefer to deal with companies
42
where they can do one-stop shopping. Buyers (or purchasing agents) for the big outlets want to
reduce the number of bills they get and the number of vendors they see each week. This is why
the introduction of a new invention to retailers by a new company is particularly challenging.

Licensing also has advantages over starting your own company because few products have an
unlimited life cycle. In time, your invention may be replaced by new technology. What will your
company sell then? Most single-item companies that are still around after five years have done so
by introducing new products and expanding their product line. Companies need new products to
survive.

Sometimes starting your own company is the only way to go. If you’ve attempted the licensing
route and no manufacturer is interested in your invention at its current stage of development, you
may need to do a small market test with a limited production run to prove your invention has sales
potential. Then if your sales results are positive, you may pique the interest of a potential licensee
who can take your invention to the next step.

It is easy to get ‘upside down’ financially with invention projects. This is especially true since
inventors have a tendency to overestimate the ultimate value of their inventions. Get some
realistic market research as early in the game as possible. If you find that you must make a
substantial investment to actually manufacture an invention to prove its commercial viability and
to interest potential licensees, keep careful track of your expenses and constantly weigh these
expenses against any royalty potential that may result.
There are too many sad stories of inventors pouring money into inventions that can never provide
a return on their investment. Inventors always take a risk when they spend time and money on an
idea and if they’re lucky, it’ll pay off quite well. The lesson is to minimize your risks so you can
bail out or put the project on hold if warranted. It will save you time, money, and the personal
energy you’ll need for future successes.

43
 Course Code: MB0037 –
International Business Management
Set 1 & 2

44
 MB0037 – International Business
Management
Q.1 a. How has liberalizing trade helped international business? (6 marks)
Answer
The Benefits of Trade Liberalization
Policies that make an economy open to trade and investment with the rest of the world are needed
for sustained economic growth. The evidence on this is clear. No country in recent decades has
achieved economic success, in terms of substantial increases in living standards for its people,
without being open to the rest of the world. In contrast, trade opening (along with opening to
foreign direct investment) has been an important element in the economic success of East Asia,
where the average import tariff has fallen from 30 percent to 10 percent over the past 20 years.

Opening up their economies to the global economy has been essential in enabling many
developing countries to develop competitive advantages in the manufacture of certain products. In
these countries, defined by the World Bank as the "new globalizers," the number of people in
absolute poverty declined by over 120 million (14 percent) between 1993 and 1998.

There is considerable evidence that more outward-oriented countries tend consistently to grow
faster than ones that are inward-looking. Indeed, one finding is that the benefits of trade
liberalization can exceed the costs by more than a factor of 10. Countries that have opened their
economies in recent years, including India, Vietnam, and Uganda, have experienced faster growth
and more poverty reduction. On average, those developing countries that lowered tariffs sharply
in the 1980s grew more quickly in the 1990s than those that did not.
45
Freeing trade frequently benefits the poor especially. Developing countries can ill-afford the large
implicit subsidies, often channeled to narrow privileged interests that trade protection provides.
Moreover, the increased growth that results from free trade itself tends to increase the incomes of
the poor in roughly the same proportion as those of the population as a whole. New jobs are
created for unskilled workers, raising them into the middle class. Overall, inequality among
countries has been on the decline since 1990, reflecting more rapid economic growth in
developing countries, in part the result of trade liberalization.

The potential gains from eliminating remaining trade barriers are considerable. Estimate of the
gains from eliminating all barriers to merchandise trade range from US$250 billion to US$680
billion per year. About two-thirds of these gains would accrue to industrial countries. But the
amount accruing to developing countries would still be more than twice the level of aid they
currently receive. Moreover, developing countries would gain more from global trade
liberalization as a percentage of their GDP than industrial countries, because their economies are
more highly protected and because they face higher barriers.

Although there are benefits from improved access to other countries’ markets, countries benefit
most from liberalizing their own markets. The main benefits for industrial countries would come
from the liberalization of their agricultural markets. Developing countries would gain about
equally from liberalization of manufacturing and agriculture. The group of low-income countries,
however, would gain most from agricultural liberalization in industrial countries because of the
greater relative importance of agriculture in their economies.

b. What are the merits and demerits of international trade? (4 marks)

Answer
Advantages and Disadvantages of International Trade
Advantages to consider:
• Enhance your domestic competitiveness
• Increase sales and profits
• Gain your global market share
• Reduce dependence on existing markets
• Exploit international trade technology
• Extend sales potential of existing products
• Stabilize seasonal market fluctuations
• Enhance potential for expansion of your business
• Sell excess production capacity
• Maintain cost competitiveness in your domestic market

Disadvantages to keep in mind:

• You may need to wait for long-term gains
• Hire staff to launch international trading
• Modify your product or packaging
• Develop new promotional material

46
 • Incur added administrative costs
• Dedicate personnel for traveling
• Wait long for payments
• Apply for additional financing
• Deal with special licenses and regulations

Q. 2 Discuss the impact of culture on International Business. (10 marks)

Answer
The following can be looked as the various aspects of the cultural dichotomies.

Table 2.1: Cultural Dichotomies

In this new millennium, few executives can afford to turn a blind eye to global business
opportunities. Japanese auto-executives monitor carefully what their European and Korean
competitors are up to in getting a bigger slice of the Chinese auto-market. Executives of
Hollywood movie studios need to weigh the appeal of an expensive movie in Europe and Asia as
much as in the US before a firm commitment. The globalizing wind has broadened the mindsets
of executives, extended the geographical reach of firms, and nudged international business (IB)
research into some new trajectories. One such new trajectory is the concern with national culture.

Whereas traditional IB research has been concerned with economic/ legal issues and
organizational forms and structures, the importance of national culture – broadly defined as
values, beliefs, norms, and behavioural patterns of a national group – has become increasingly
important in the last two decades, largely as a result of the classic work of Hofstede (1980).
National culture has been shown to impact on major business activities, from capital structure
(Chui et al., 2002) to group performance (Gibson, 1999). For reviews, see’ Boyacigiller and
Adler’ (1991) and ‘Earley and Gibson’ (2002).

The purpose of this Unit is to provide a state-of-the-art review of several recent advances in
culture and IB research, with an eye toward productive avenues for future research. It is not our
purpose to be comprehensive; our goal is to spotlight a few highly promising areas for
leapfrogging the field in an increasingly boundary-less business world. We first review the issues
surrounding cultural convergence and divergence, and the processes underlying cultural changes.

We then examine novel constructs for characterizing cultures, and how to enhance the precision
of cultural models by pinpointing when the effects of culture are important. Finally, we examine
the usefulness of experimental methods, which are rarely employed in the field of culture and IB.
A schematic summary of our coverage is given in Table 2.1, which suggests that the topics
reviewed are loosely related, and that their juxtaposition in the present paper represents our
attempt to highlight their importance rather than their coherence as elements of an integrative
framework.

47
1 Cultural change, convergence and divergence in an era of partial globalization
An issue of considerable theoretical significance is concerned with cultural changes and
transformations taking place in different parts of the world. In fact, since the landmark study of
Haire et al. (1966) and the publication of Industrialism and Industrial Man by Kerr et al. (1960),
researchers have continued to search for similarities in culture-specific beliefs and attitudes in
various aspects of work related attitudes and behaviours, consumption patterns, and the like. If
cultures of the various locales of the world are indeed converging (e.g., Heuer et al., 1999), IB-
related practices would indeed become increasingly similar. Standard, culture-free business
practices would eventually emerge, and inefficiencies and complexities associated with divergent
beliefs and practices in the past era would disappear. In the following section, we review the
evidence on the issue and conclude that such an outlook pertaining to the convergence of various
IB practices is overly optimistic.

2 Evolution of partial globalization

Globalization refers to a ‘growing economic interdependence among countries, as reflected in the
increased cross-border flow of three types of entities: goods and services, capital, and know-how’
(Govindarajan and Gupta, 2001, 4). Few spoke of ‘world economy’ 25 years ago, and the
prevalent term was ‘international trade’ (Drucker, 1995). However today, international trade has
culminated in the emergence of a global economy, consisting of flows of information, technology,
money, and people, and is conducted via government international organizations such as the
North American Free Trade Agreement (NAFTA) and the European Community; global
organizations such as the International Organization for Standardization (ISO); multinational
companies (MNCs); and cross – border alliances in the form of joint ventures, international
mergers, and acquisitions. These inter – relationships have enhanced participation in the world
economy, and have become a key to domestic economic growth and prosperity (Drucker, 1995,
153).

Yet, globalization is not without its misgivings and discontents (Sassan, 1998). A vivid image
associated with the G8 summits is the fervent protests against globalization in many parts of the
world, as shown in television and reported in the popular media. Strong opposition to
globalization usually originates from developing countries that have been hurt by the destabilizing
effects of globalization, but in recent times we have also seen heated debates in Western
economies triggered by significant loss of professional jobs as a result of off shoring to low –
wage countries.

Indeed, workers in manufacturing and farming in advanced economies are becoming increasingly
wary of globalization, as their income continues to decline significantly. In parallel to the angry
protests against globalization, the flow of goods, services, and investments across national borders
has continued to fall after the rapid gains of the 1990s. Furthermore, the creation of regional trade
blocs, such as NAFTA, the European Union, and the Association of Southeast Asian Nations,
have stimulated discussions about creating other trade zones involving countries in South Asia,
Africa, and other parts of the world.

Although it is often assumed that countries belonging to the World Trade Organization (WTO)
have embraced globalization, the fact is that the world is only partially globalized, at best
(Schaeffer, 2003). Many parts of Central Asia and Eastern Europe, including the former republics
of the Soviet Union, parts of Latin America, Africa, and parts of South Asia, have been sceptical
of globalization (Greider, 1997). In fact, less than 10% of the world’s population is fully
48
globalized (i.e., being active participants in the consumption of global products and services)
(Schaeffer, 2003). Therefore, it is imperative that we analyze the issues of cultural convergence
and divergence in this partially globalized world.

‘Universal culture’ often refers to the assumptions, values, and practices of people in the West
and some elites in non-Western cultures. Huntington (1996) suggested that it originates from the
intellectual elites from a selected group of countries who meet annually in the World Economic
Forum in Davos, Switzerland. These individuals are highly educated, work with symbols and
numbers, are fluent in English, are extensively involved with international commitments, and
travel frequently outside their country.

They share the cultural value of individualism, and believe strongly in market economics and
political democracy. Although those belonging to the Davos group control virtually all of the
world’s important international institutions, many of the world’s governments, and a great
majority of the world’s economic and military capabilities, the cultural values of the Davos group
are probably embraced by only a small fraction of the six billion people of the world.

Popular culture, again mostly Western European and American in origin, also contributes to a
convergence of consumption patterns and leisure activities around the world. However, the
convergence may be superficial, and have only a small influence on fundamental issues such as
beliefs, norms, and ideas about how individuals, groups, institutions, and other important social
agencies ought to function. In fact, Huntington (1996, 58) noted that ‘The essence of Western
civilization is the Magna Carta, not the Magna Mac. The fact that non-Westerners may bite into
the latter has no implications for their accepting the former’.
This argument is obvious if we reverse the typical situation and put Western Europeans and
Americans in the shoes of recipients of cultural influence. For instance, while Chinese Kung Fu
dominates fight scenes in Hollywood movies such as Matrix Reloaded, and Chinese restaurants
abound in the West, it seems implausible that Americans and Europeans have espoused more
Chinese values because of their fondness of Chinese Kung Fu and food. A major argument
against cultural convergence is that traditionalism and modernity may be unrelated (Smith and
Bond, 1998). Strong traditional values, such as group solidarity, interpersonal harmony,
paternalism, and feminism, can co-exist with modern values of individual achievement and
competition.

A case in point is the findings that Chinese in Singapore and China indeed endorsed both
traditional and modern values (Chang et al., 2003; Zhang et al., 2003). It is also conceivable that,
just as we talk about Westernization of cultural values around the world, we may also talk about
Easternization of values in response to forces of modernity and consumption values imposed by
globalization (Marsella and Choi, 1993).

Although the argument that the world is becoming one culture seems untenable, there are some
areas that do show signs of convergence. We explore in the following the roles of several factors
that simultaneously cause cultures of the world to either converge or diverge, in an attempt to
identify several productive avenues for future research.

3 Role of multiculturalism and cultural identity

The broad ideological framework of a country, corporation, or situation is the most important
determinant of the cultural identity that people develop in a given locale (Triandis, 1994). The
49
‘melting pot’ ideology suggests that each cultural group loses some of its dominant characteristics
in order to become the mainstream: this is assimilation, or what Triandis (1994) calls subtractive
multiculturalism.

In contrast, when people from a cultural group add appropriate skills and characteristics of other
groups, it may be called integration, or additive multiculturalism. Both of these processes are
essential for cultural convergence to proceed. However, if there is a significant history of conflict
between the cultural groups, it is hard to initiate these processes, as in the case of Israelis and
Palestinians. In general, although there has been some research on the typology of animosity
against other nations (e.g., Jung et al., 2002), we do not know much about how emotional
antagonism against other cultural groups affects trade patterns and intercultural cooperation in a
business context. The issues of cultural identity and emotional reactions to other cultural groups
in an IB context constitute a significant gap in our research effort in this area.

4 Implications of convergence and divergence issues

One message is clear: while convergence in some domains of IB activity is easily noticeable,
especially in consumer values and lifestyles, significant divergence of cultures persists. In fact,
Hofstede (2001) asserts that mental programs of people around the world do not change rapidly,
but remain rather consistent over time. His findings indicate that cultural shifts are relative as
opposed to absolute.

Although clusters of some countries in given geographical locales (e.g., Argentina, Brazil, Chile)
might indicate significant culture shifts towards embracing Anglo values, the changes do not
diminish the absolute differences between such countries and those of the Anglo countries (i.e.,
US, Canada, UK). Huntington, in his ‘The Clash of Civilizations’ (1996), presents the view that
there is indeed a resurgence of non-Western cultures around the world, which could result in the
redistribution of national power in the conduct of international affairs.

The attempt by the Davos group to bring about uniform practices in various aspects of IB and
work culture, thereby sustaining the forces of globalization, is certainly worthwhile. However, our
analysis suggests that there is no guarantee that such convergence will come about easily, or
without long periods of resistance.

IB scholars need to understand that although some countries might exhibit strong tendencies
toward cultural convergence, as is found in Western countries, there are countries that will reject
globalization, not only because of its adverse economic impacts (Greider, 1997) but also because
globalization tends to introduce distortions (in their view) in profound cultural syndromes that
characterize their national character.

Furthermore, reactions to globalization may take other forms. Bhagat et al. (2003) have recently
argued that adaptation is another approach that could characterize the tendencies of some cultures
in the face of mounting pressures to globalize. Other approaches are rejection, creative synthesis,
and innovation (Bhagat et al., 2003). These different approaches highlight once again the complex
dynamics that underlie cultural convergence and divergence in a partially globalized world. Also,
in discussing issues of convergence and divergence, it is necessary to recognize that the shift in
values is not always from Western society to others, but can result in the change of Western
50
cultural values as well. For example, the emphasis on quality and teamwork in the West is partly a
result of the popularity of Japanese management two decades ago.

Scholars of IB should recognize that the issue of convergence and divergence in this era of partial
globalization will remain as a persistent and complex issue whose direction might only be
assessed on a region-by-region basis. It is also wise to adopt an interdisciplinary perspective in
understanding the forces that create both convergence and divergence of cultures in different parts
of the world. For instance, in Understanding Globalization, Schaeffer (2003) has provided an
insightful discussion of the social consequences of political, economic and other changes, which
have significant implications for IB.

The cause-effect relationships of globalization and its various outcomes, especially the cultural
outcomes, are not only characterized by bi-directional arrows, but are embedded in a complex
web of relationships. How these complex relationships and processes play out on the stage of IB
remains to be uncovered by IB researchers.

5 Processes of cultural changes

In the previous section, we make the point that, through the process of globalization, cultures
influence each other and change, but whether or not these changes will bring about cultural
convergence is yet to be seen. In this section, we delineate a general model that describes and
explains the complex processes underlying cultural changes. As explained before, IB is both an
agent and a recipient of cultural change, and for international business to flourish it is important to
understand its complex, reciprocal relationships with cultural change.
In line with the view of Hofstede (2001) that culture changes very slowly, culture has been treated
as a relatively stable characteristic, reflecting a shared knowledge structure that attenuates
variability in values, behavioral norms, and patterns of behaviours (Erez and Earley, 1993).
Cultural stability helps to reduce ambiguity, and leads to more control over expected behavioural
outcomes (Weick and Quinn, 1999; Leana and Barry, 2000). For instance, most existing models
of culture and work behaviour assume cultural stability and emphasize the fit between a given
culture and certain managerial and motivational practices (Erez and Earley, 1993).

High fit means high adaptation of managerial practices to a given culture and, therefore, high
effectiveness. The assumption of cultural stability is valid as long as there are no environmental
changes that precipitate adaptation and cultural change. Yet, the end of the 20th century and the
beginning of the new millennium have been characterized by turbulent political and economical
changes, which instigate cultural changes.

In line with this argument, Lewin and Kim (2004), in their comprehensive chapter on adaptation
and selection in strategy and change, distinguished between theories driven by the underlying
assumption that adaptation is the mechanism to cope with change, and theories driven by the
underlying assumption of selection and the survival of the fittest, suggesting that ineffective
forms of organization disappear, and new forms emerge. However, although organizational
changes as a reaction to environmental changes have been subjected to considerable conceptual
analyses, the issue of cultural change at the national level has rarely been addressed.

There are relatively few theories of culture that pertain to the dynamic aspect of culture. One
exception is the eco-cultural model by Berry et al. (2002), which views culture as evolving
adaptations to ecological and socio-political influences, and views individual psychological
51
characteristics in a population as adaptive to their cultural context, as well as to the broader
ecological and socio-political influences. Similarly, Kitayama (2002) proposes a system view to
understanding the dynamic nature of culture, as opposed to the entity view that sees culture as a
static entity.

This system view suggests that each person’s psychological processes are organized through the
active effort to coordinate one’s behaviours with the pertinent cultural systems of practices and
public meanings. Yet, concurrently, many aspects of the psychological systems develop rather
flexibly as they are attuned to the surrounding socio-cultural environment, and are likely to be
configured in different ways across different socio-cultural groups.

These adaptive views of culture are supported by empirical evidence. For example, Van de Vliert
et al. (1999) identified curvilinear relationships between temperature, masculinity and domestic
political violence across 53 countries. Their findings showed that masculinity and domestic
violence are higher in moderately warm countries than in countries with extreme temperatures.
Inglehart and Baker (2000) examined cultural change as reflected by changes in basic values in
three waves of the World Values Surveys, which included 65 societies and 75% of the world’s
population.

Their analysis showed that economic development was associated with shifts away from
traditional norms and values toward values that are increasingly rational, tolerant, trusting, and
participatory. However, the data also showed that the broad cultural heritage of a society, whether
it is Protestant, Roman Catholic, Orthodox, Confucian, or Communist, leaves an enduring imprint
on traditional values despite the forces of modernization.

The process of globalization described before has introduced the most significant change in IB,
with its effects filtering down to the national, organizational, group and individual levels.
Reciprocally, changes at micro-levels of culture, when shared by the members of the society,
culminate into macro level phenomena and change the macro-levels of culture. In the absence of
research models that can shed light on this complex process of cultural change, Erez and Gati
(2004) proposed that the general model of multi-level analysis (Klein and Kozlowski, 2000) could
be adopted for understanding the dynamics of culture and cultural change.

6 The dynamics of culture as a multi-level, multi-layer construct

The proposed model consists of two building blocks. One is a multi-level approach, viewing
culture as a multi-level construct that consists of various levels nested within each other from the
most macro-level of a global culture, through national cultures, organizational cultures, group
cultures, and cultural values that are represented in the self at the individual level, as portrayed in

Figure 2.1. The second is based on Schein’s (1992) model viewing culture as a multi – layer
construct consisting of the most external layer of observed artefacts and behaviours, the deeper
level of values, which is testable by social consensus, and the deepest level of basic assumption,
which is invisible and taken for granted.

52
The present model proposes that culture as a multi – layer construct exists at all levels – from the
global to the individual – and that at each level change first occurs at the most external layer of
behaviour, and then, when shared by individuals who belong to the same cultural context, it
becomes a shared value that characterizes the aggregated unit (group, organizations, or nations).
In the model, the most macro-level is that of a global culture being created by global networks
and global institutions that cross national and cultural borders. As exemplified by the effort of the

Davos group discussed earlier, global organizational structures need to adopt common rules and
procedures in order to have a common ‘language’ for communicating across cultural borders
(Kostova, 1999; Kostova and Roth, 2003; Gupta and Govindarajan, 2000).

Figure 2.1: The dynamic of top-down–bottom-up processes across

levels of culture.
Given the dominance of Western MNCs, the values that dominate the global context are often
based on a free market economy, democracy, acceptance and tolerance of diversity, respect of
freedom of choice, individual rights, and openness to change (Gupta and Govindarajan, 2000).

Below the global level are nested organizations and networks at the national level with their local
cultures varying from one nation or network to another. Further down are local organizations, and
although all of them share some common values of their national culture, they vary in their local
organizational cultures, which are also shaped by the type of industry that they represent, the type
of ownership, the values of the founders, etc.

Within each organization are sub-units and groups that share the common national and
organizational culture, but that differ from each other in their unit culture on the basis of the
differences in their functions (e.g., R&D vs manufacturing), their leaders’ values, and the
professional and educational level of their members. At the bottom of this structure are
individuals who through the process of socialization acquire the cultural values transmitted to
them from higher levels of culture.

Individuals who belong to the same group share the same values that differentiate them from
other groups and create a group – level culture through a bottom-up process of aggregation of
shared values. For example, employees of an R&D unit are selected into the unit because of their
creative cognitive style and professional expertise. Their leader also typically facilitates the
display of these personal characteristics because they are crucial for developing innovative
products. Thus, all members of this unit share similar core values, which differentiate them from
other organizational units. Groups that share similar values create the organizational culture
through a process of aggregation, and local organizations that share similar values create the
national culture that is different from other national cultures.

53
Both top-down and bottom-up processes reflect the dynamic nature of culture, and explain how
culture at different levels is being shaped and reshaped by changes that occur at other levels,
either above it through top-down processes or below it through bottom-up processes. Similarly,
changes at each level affect lower levels through a top-down process, and upper levels through a
bottom-up process of aggregation. The changes in national cultures observed by Inglehart and
Baker (2000) could serve as an example for top-down effects of economic growth, enhanced by
globalization, on a cultural shift from traditional values to modernization. However, in line with
Schein (1992), the deep basic assumptions still reflect the traditional values shaped by the broad
cultural heritage of a society.

Global organizations and networks are being formed by having local-level organizations join the
global arena. That means that there is a continuous reciprocal process of shaping and reshaping
organizations at both levels. For example, multinational companies that operate in the global
market develop common rules and cultural values that enable them to create a synergy between
the various regions, and different parts of the multinational company.

These global rules and values filter down to the local organizations that constitute the global
company, and, over time, they shape the local organizations. Reciprocally, having local
organizations join a global company may introduce changes into the global company because of
its need to function effectively across different cultural boarders. A study by Erez-Rein et al.
(2004) demonstrated how a multinational company that acquired an Israeli company that develops
and produces medical instruments changed the organizational culture of the acquired company.
The study identified a cultural gap between the two companies, with the Israeli company being
higher on the cultural dimension of innovation and lower on the cultural dimension of attention to
detail and conformity to rules and standards as compared with the acquiring company.

The latter insisted on sending the Israeli managers to intensive courses in Six – Sigma, which is
an advanced method of quality improvement, and a managerial philosophy that encompasses all
organizational functions. Upon returning to their company, these managers introduced quality
improvement work methods and procedures to the local company, and caused behavioural
changes, followed by the internalization of quality – oriented values. Thus, a top-down process of
training and education led to changes in work behaviour and work values. Sharing common
behaviours and values by all employees of the local company then shaped the organizational
culture through bottom–up processes.

The case of cultural change via international acquisitions demonstrated the two building blocks of
our dynamic model of culture: the multi-level structure explains how a lower-level culture is
being shaped by top-down effects, and that the cultural layer that changes first is the most external
layer of behaviour. In the long run, bottom – up processes of shared behaviours and norms shape
the local organizational culture.

7 Factors that facilitate cultural change

Culture itself influences the level of resistance or acceptance of change. Harzing and Hofstede
(1996) proposed that certain cultural values facilitate change, whereas others hinder it. The values
of low power distance, low uncertainty avoidance, and individualism facilitate change. Change
threatens stability, and introduces uncertainty, and resistance to change will therefore be higher in
cultures of high rather than low uncertainty avoidance (Steensma et al., 2000). Change also
54
threatens the power structure, and therefore will be avoided in high power distance cultures.
Finally, change breaks the existing harmony, which is highly valued in collectivistic cultures, and
therefore will not be easily accepted by collectivists (Levine and Norenzayan, 1999).

A recent study by Erez and Gati (2004) examined the effects of three factors on the change
process and its outcomes:
· the cultural value of individualism – collectivism;
· the reward structure and its congruence with the underlying cultural values; and
· the degree of ambiguity in the reward structure.
The change process examined was a shift from choosing to work alone to a behavioural choice of
working as part of a team, and vice versa. Working alone is more prevalent in individualistic
cultures, whereas working in teams dominates the collectivistic ones.

8 Understanding when culture matters: increasing the precision of cultural models

Beyond exploring new cultural constructs and the dynamic nature of culture, we also argue for the
importance of examining contingency factors that enhance or mitigate the effect of national
culture. Consider the following scenario. A senior human resource manager in a multinational
firm is charged with implementing an integrative training program in several of the firm’s
subsidiaries around the globe. Over the term of her career, the manager has been educated about
differences in national culture and is sensitive to intercultural opportunities and challenges. At the
same time, she understands the strategic need to create a unified global program that serves to
further integrate the firm’s basic processes, creating efficiencies and synergies across the remote
sites. She approaches the implementation with trepidation. A key challenge is to determine
whether the program should be implemented in the same manner in each subsidiary or modified
according to the local culture at each site. Put another way, in this complex circumstance, does
culture matter?

Q.3. a. Explain the brief structure of WTO. (5 marks)

Answer
Structure of World Trade Organization (WTO)
The WTO’s overriding objective is to help trade flow smoothly, freely, fairly and predictably.
It does this by:
· Administering trade agreements
· Acting as a forum for trade negotiations
· Settling trade disputes
· Reviewing national trade policies
· Assisting developing countries in trade policy issues, through technical assistance and training
programs
· Cooperating with other international organizations

Structure
The WTO has nearly 150 members, accounting for over 97% of world trade. Around 30 others
are negotiating membership.
Decisions are made by the entire membership. This is typically by consensus. A majority vote is
also possible but it has never been used in the WTO, and was extremely rare under the WTO’s
predecessor, GATT. The WTO’s agreements have been ratified in all members’ parliaments.
The WTO’s top level decision-making body is the Ministerial Conference which meets at least
once every two years.
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Below this is the General Council (normally ambassadors and heads of delegation in Geneva, but
sometimes officials sent from members’ capitals) which meets several times a year in the Geneva
headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute
Settlement Body.

At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS)
Council report to the General Council.
Numerous specialized committees, working groups and working parties deal with the
individual agreements and other areas such as the environment, development, membership
applications and regional trade agreements.

Secretariat
The WTO Secretariat, based in Geneva, has around 600 staff and is headed by a director-general.
Its annual budget is roughly 160 million Swiss francs. It does not have branch offices outside
Geneva. Since decisions are taken by the members themselves, the Secretariat does not have the
decision-making role that other international bureaucracies are given with. The Secretariat’s main
duties are to supply technical support for the various councils and committees and the ministerial
conferences, to provide technical assistance for developing countries, to analyze world trade, and
to explain WTO affairs to the public and media.
The Secretariat also provides some forms of legal assistance in the dispute settlement process and
advises governments wishing to become members of the WTO.

Figure 5.1: Structure of WTO

The WTO is ‘member-driven’, with decisions taken by consensus among all member
governments.
The WTO is run by its member governments. All major decisions are made by the membership as
a whole, either by ministers (who meet at least once every two years) or by their ambassadors or
delegates (who meet regularly in Geneva). Decisions are normally taken by consensus.
In this respect, the WTO is different from some other international organizations such as the
World Bank and International Monetary Fund. In the WTO, power is not delegated to a board of
directors or the organization’s head.

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When WTO rules impose disciplines on countries’ policies, that is the outcome of negotiations
among WTO members, the rules are enforced by the members themselves under agreed
procedures that they negotiated, including the possibility of trade sanctions. But those sanctions
are imposed by member countries, and authorized by the membership as a whole. This is quite
different from other agencies whose bureaucracies can, for example, influence a country’s policy
by threatening to withhold credit.

Reaching decisions by consensus among some 150 members can be difficult. Its main advantage
is that decisions made this way are more acceptable to all members. And despite the difficulty,
some remarkable agreements have been reached. Nevertheless, proposals for the creation of a
smaller executive body – perhaps like a board of directors each representing different groups of
countries – are heard periodically. But for now, the WTO is a member-driven, consensus-based
organization.

Highest authority: the Ministerial Conference

So, the WTO belongs to its members. The countries make their decisions through various
councils and committees, whose membership consists of all WTO members. Topmost is the
ministerial conference which has to meet at least once every two years. The Ministerial
Conference can take decisions on all matters under any of the multilateral trade agreements.
Second level: General Council in three guises
Day-to-day work in between the ministerial conferences is handled by three bodies:
· The General Council
· The Dispute Settlement Body
· The Trade Policy Review Body
All three are in fact the same – the Agreement Establishing the WTO states they are all the
General Council, although they meet under different terms of reference. Again, all three consist of
all WTO members. They report to the Ministerial Conference.
The General Council acts on behalf of the Ministerial Conference on all WTO affairs. It meets as
the Dispute Settlement Body and the Trade Policy Review Body to oversee procedures for
settling disputes between members and to analyze members’ trade policies.
Third level: councils for each broad area of trade, and more

Three more councils, each handling a different broad area of trade, report to the General Council:
· The Council for Trade in Goods (Goods Council)
· The Council for Trade in Services (Services Council)
· The Council for Trade – Related Aspects of Intellectual Property Rights (TRIPS Council)
As their names indicate, the three are responsible for the workings of the WTO agreements
dealing with their respective areas of trade. Again they consist of all WTO members. These three
also have the subsidiary bodies.

Six other bodies report to the General Council. The scope of their coverage is smaller, so they are
“committees”. But they still consist of all WTO members. They cover issues such as trade and
development, the environment, regional trading arrangements, and administrative issues. The
Singapore Ministerial Conference in December 1996 decided to create new working groups to
look at investment and competition policy, transparency in government procurement, and trade
facilitation.

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Two more subsidiary bodies dealing with the plural-lateral agreements (which are not signed by
all WTO members) keep the General Council informed of their activities regularly.
Fourth level: down to the nitty-gritty

Each of the higher level councils has subsidiary bodies. The Goods Council has 11 committees
dealing with specific subjects (such as agriculture, market access, subsidies, anti-dumping
measures and so on). Again, these consist of all member countries. Also reporting to the Goods
Council is the Textiles Monitoring Body, which consists of a chairman and 10 members acting in
their personal capacities, and groups dealing with notifications (governments informing the WTO
about current and new policies or measures) and state trading enterprises.

The Services Council’s subsidiary bodies deal with financial services, domestic regulations,
GATS rules and specific commitments.

At the General Council level, the Dispute Settlement Body also has two subsidiaries: the dispute
settlement “panels” of experts appointed to adjudicate on unresolved disputes, and the Appellate
Body that deals with appeals.

Heads of Delegations and other boards: the need for informality

Important breakthroughs are rarely made in formal meetings of these bodies, least of all in the
higher level councils. Since decisions are made by consensus, without voting, informal
consultations within the WTO play a vital role in bringing a vastly diverse membership round to
an agreement.

One step away from the formal meetings is informal meetings that still include the full
membership, such as those of the Heads of Delegations (HOD). More difficult issues have to be
thrashed out in smaller groups. A common recent practice is for the chairperson of a negotiating
group to attempt to forge a compromise by holding consultations with delegations individually, in
twos or threes, or in groups of 20 – 30 of the most interested delegations.

These smaller meetings have to be handled sensitively. The key is to ensure that everyone is kept
informed about what is going on (the process must be “transparent”) even if they are not in a
particular consultation or meeting, and that they have an opportunity to participate or provide
input (it must be “inclusive”).

One term has become controversial, but more among some outside observers than among
delegations. The “Green Room” is a phrase taken from the informal name of the director-
general’s conference room. It is used to refer to meetings of 20 – 40 delegations, usually at the
level of heads of delegations. These meetings can take place elsewhere, such as at Ministerial
Conferences, and can be called by the minister chairing the conference as well as the director-
general. Similar smaller group consultations can be organized by the chairs of committees
negotiating individual subjects, although the term Green Room is not usually used for these.

In the past delegations have sometimes felt that Green Room meetings could lead to compromises
being struck behind their backs. So, extra efforts are made to ensure that the process is handled
correctly, with regular reports back to the full membership.

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The way countries now negotiate has helped somewhat. In order to increase their bargaining
power, countries have formed coalitions. In some subjects such as agriculture virtually all
countries are members of at least one coalition – and in many cases, several coalitions. This
means that all countries can be represented in the process if the coordinators and other key players
are present. The coordinators also take responsibility for both “transparency” and “inclusiveness”
by keeping their coalitions informed and by taking the positions negotiated within their alliances.
In the end, decisions have to be taken by all members and by consensus. The membership as a
whole would resist attempts to impose the will of a small group. No one has been able to find an
alternative way of achieving consensus on difficult issues, because it is virtually impossible for
members to change their positions voluntarily in meetings of the full membership.

Market access negotiations also involve small groups, but for a completely different reason. The
final outcome is a multilateral package of individual countries’ commitments, but those
commitments are the result of numerous bilateral, informal bargaining sessions, which depend on
individual countries’ interests. (Examples include the traditional tariff negotiations, and market
access talks in services.)

So, informal consultations in various forms play a vital role in allowing consensus to be reached,
but they do not appear in organization charts, precisely because they are informal.

They are not separate from the formal meetings, however. They are necessary for making formal
decisions in the councils and committees. Nor are the formal meetings unimportant. They are the
forums for exchanging views, putting countries’ positions on the record, and ultimately for
confirming decisions. The art of achieving agreement among all WTO members is to strike an
appropriate balance, so that a breakthrough achieved among only a few countries can be
acceptable to the rest of the membership.

b. Highlight the drawbacks of GATT. (5 marks)

Answer
Given its provisional nature and limited field of action, the success of GATT in promoting and
securing the liberalization of much of world trade over 47 years is incontestable. Continual
reductions in tariffs alone helped spur very high rates of world trade growth – around 8 per cent a
year on average during the 1950s and 1960s. And the momentum of trade liberalization helped
ensure that trade growth consistently out-paced production growth throughout the GATT era. The
rush of new members during the Uruguay Round demonstrated that the multilateral trading
system, as then represented by GATT, was recognized as an anchor for development and an
instrument of economic and trade reform.

The limited achievement of the Tokyo Round, outside the tariff reduction results, was a sign of
difficult times to come. GATT’s success in reducing tariffs to such a low level, combined with a
series of economic recessions in the 1970s and early 1980s, drove governments to devise other
forms of protection for sectors facing increased overseas competition. High rates of
unemployment and constant factory closures led governments in Europe and North America to
seek bilateral market-sharing arrangements with competitors and to embark on a subsidies race to

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maintain their holds on agricultural trade. Both these changes undermined the credibility and
effectiveness of GATT.

Apart from the deterioration in the trade policy environment, it also became apparent by the early
1980s that the General Agreement was no longer as relevant to the realities of world trade as it
had been in the 1940s. For a start, world trade had become far more complex and important than
40 years before: the globalization of the world economy was underway, international investment
was exploding and trade in services – not covered by the rules of GATT – was of major interest to
more and more countries and, at the same time, closely tied to further increases in world
merchandise trade. In other respects, the GATT had been found wanting: for instance, with
respect to agriculture where loopholes in the multilateral system were heavily exploited – and
efforts at liberalizing agricultural trade met with little success – and in the textiles and clothing
sector where an exception to the normal disciplines of GATT was negotiated in the form of the
Multi-fibre Arrangement. Even the institutional structure of GATT and its dispute settlement
system were giving cause for concern.

Together, these and other factors convinced GATT members that a new effort to reinforce and
extend the multilateral system should be attempted. That effort resulted in the Uruguay Round.

.4. a. Give a short note on the regional economic integration. (5 marks)

Answer
Regional Economic Integration
Regional integration can take many forms, and nowhere is this more evident than in the vastly
different integration processes taking place in the regions of Europe and East Asia. The subject of
this paper is regional integration as it has developed in East Asia with a focus on the drivers of
that integration. While the paper is not intended as a direct comparison of integration in East Asia
and Europe, it will include some comparisons between the two regions.

Integration in East Asia has progressed very slowly and is still in an early stage despite that the
process has continued for decades. In fact, it could be said that the process began centuries ago –
even as far back as the 15th century. By comparison, European integration has progressed steadily
and has gradually deepened over the last 50 years to reach an advanced stage today with a
common currency and well-developed regional institutions. Thus, the speed of progression and
the level of integration attained in the two regions are quite dissimilar.

In addition to these differences, the drivers behind the integration process in each region are
different. In Europe, the origins of integration have been institutional in nature, and the
development of institutions has been prominent throughout the process. Thus, regional institutions
have been the driving force behind integration in Europe. In East Asia, the development of
regional institutions has also occurred; however, progress in this area has been slow and the few
existing institutions are fairly weak and ineffective. Nevertheless, regional integration is taking
place in East Asia, but the driving force is the market rather than policy or institutions.

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Corporations and the production networks they have established are driving integration in East
Asia.

b. Mention the benefits of WTO. (5 marks)

Answer
Ten Benefits of WTO
1. The system helps to keep the peace
2. The system allows disputes to be handled constructively
3. A system based on rules rather than power makes life easier for all
4. Freer trade cuts the cost of living
5. It gives consumers more choice and a broader range of qualities to choose from
6. Trade raises incomes
7. Trade stimulates economic growth and that can be good news for employment
8. The basic principles make the system economically more efficient, and they cut costs
9. The system shields governments from narrow interests
10. The system encourages good government

Q. 5 a. Explain five-element product wave model. (7 marks)

Answer
The Five-Element Product Wave
As illustrated in Figure 4.5, the wave model employs design engineering, process engineering,
product marketing, production, and end-of-life activities as elements. The first wave is associated
with the "A" version of a product or service, and survives through the traditional PLC
introduction and growth phases. A second wave begins with the "B" version, the markedly
improved second model. It starts just before the traditional life cycle maturity stage and lives until
sales decline to a point at which an EOL decision must be made.

Note that design engineering has a peak of activity level at each upgrade. Process engineering
activity shadows that of design engineering, as system changes will be contemplated and made to
facilitate the changes made in the product or service. Product marketing also has activity level
spikes that closely match engineering design activity, lagged somewhat for product introduction.
Production has one activity peak that results from demand management and production planning
through master production scheduling.

Finally, the EOL curve peaks at each redesign. The last wave begins shortly before original
production ceases and ends when the product is no longer manufactured or supported by the EOL
Company or division. The EOL element requires that a decision be made about the preceding
version at each major redesign: continue production, make a short-term run of spares, keep

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blueprints active so that parts can be made as ordered, enter into a manufacturing and support
agreement with another entity, or discontinue production.

For the sake of parsimony, shows only a two-product model ("A" and "B" versions). In reality,
there may be hundreds of significant redesigns. The wave effect comes from the fact that the
process repeats for the successful firm, forming swells in design engineering, process engineering,
product marketing, and manufacturing curves before the final crest at EOL activity.
The five-element product wave, or FPW, uses trigger points, rather than time, as the horizon over
which the element curves vary.

Changes in magnitude, represented by the vertical axis, result from differing activity levels within
the five elements. Simple changes in levels of dollar or unit product sales, in and of themselves,
do not necessarily determine the trigger points. Rather, the varying activity levels are a direct
result of product introductions and redesigns that, from the outset, must take into account
company strategy, core capabilities, and the state of the competitive environment. For example, a
product with strong sales may be redesigned in a preemptive strike against competitors, further
distancing that product from the competition, such as with Caterpillar’s innovative high-drive
bulldozers.

That the five-element wave is grounded in reality becomes apparent when considering the recent
research that suggests product introduction cycles are being compressed. Bayus (1994) claims that
knowledge is being applied faster, resulting in increasing levels of new product introductions. Yet
since product removals are not keeping pace with introductions, there are an increasing number of
product variations on the market. Slater (1993) observes that product life cycles are growing
shorter and shorter. Vesey (1992) reports that the strategy for the 1990s is speed to market and
discusses the pressures the market is exerting to shorten product introduction lead times.
Regardless of whether life cycles are actually being compressed or knowledge is simply being
applied faster, it is apparent that firms are increasing the speed with which they bring their
products to market. The effect of this is a compression of the design engineering, process
engineering, production, and product marketing elements of the wave model. (The EOL curve
may remain unchanged because accelerated introductions do not necessarily affect EOL efforts.)

The five-element wave clearly shows the inefficiency of traditional "over-the-wall" systems as
speed to market increases. As the elements compress, more and more information is thrown over
the wall. Recipients find themselves with less and less time to take action. Taken to the extreme,
in-baskets, phone lines, conference rooms, desks, and floors are soon gridlocked and littered with
unanswered correspondence and things to do. Forget quality; production itself grinds to a halt.
The solution is to maximize the advantage of the relationships within the five-element wave and
work in concurrent teams. That way, responsibility is shared throughout the system. Members
from each discipline optimize the system. The method tears down barriers between departments
and speeds the introduction process, thus decreasing costs. The focal point becomes the customer,
rather than the task. The system is totally interactive and bound together. Each element is
connected to all of the others and is focused on the customer. (Note that the authors have taken a
great deal of artistic license here!

What is the recent experience with teams? There is evidence that using concurrent design teams
speeds the product to market and provides substantial savings. Boeing expects that concurrent
design will save some $4 billion in the development of its 777 airliner. Westinghouse recently
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suggested that concurrent engineering would eliminate 200 duplicate processes in a project that
consisted of 600 using traditional over-the-wall approaches. Ford’s Team Taurus was able to cut a
full year out of model turnaround. In addition, design changes required after initial production
began were reduced by some 76 percent.
The strength of the five-element product wave is the fact that it illuminates critical decision points
in the life of a product or service. The interrelationships of the elements clearly illustrate the
benefit of working product introductions, design changes, and end-of-life decisions in teams. This
is particularly true in today’s rapidly compressing environment of speeding products to market.
Furthermore, the model is flexible and may be expanded or contracted to include those functional
areas relevant to the production team. Thus, whether a given firm’s product is a service or a
manufactured good, the five-element wave is a powerful tool that can be deployed to accelerate
effective decision making in markets demanding ever-increasing levels of speed and agility.

b. What do you mean by globalization? (3 marks)

Answer
Economic "globalization" is a historical process, the result of human innovation and technological
progress. It refers to the increasing integration of economies around the world, particularly
through trade and financial flows. The term sometimes also refers to the movement of people
(labor) and knowledge (technology) across international borders. There are also broader cultural,
political and environmental dimensions of globalization that are not covered here.

At its most basic, there is nothing mysterious about globalization. The term has come into
common usage since the 1980s, reflecting technological advances that have made it easier and
quicker to complete international transactions – both trade and financial flows. It refers to an
extension beyond national borders of the same market forces that have operated for centuries at
all levels of human economic activity – village markets, urban industries, or financial centers.

Markets promote efficiency through competition and the division of labor – the specialization that
allows people and economies to focus on what they do best. Global markets offer greater
opportunity for people to tap into more and larger markets around the world. It means that they
can have access to more capital flows, technology, cheaper imports, and larger export markets.
But markets do not necessarily ensure that the benefits of increased efficiency are shared by all.
Countries must be prepared to embrace the policies needed, and in the case of the poorest
countries may need the support of the international community as they do so.

Q. 6. Give some examples of companies doing international business and discuss how they
have they have managed their business in the international markets. (10 marks) Fall 2010
Answer
A PERSPECTIVE OF THE NORTHEN ISLAND SOFTWARE COMPANIES, RAPD M–
UP
Within six months of announcing it would invest $4.5 million to establish its new software
development center in Northern Ireland, IMR was up and running with more than one-third its
target staff.

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"The fast start-up of the Belfast facility reaffirms our confidence to locate in Northern Ireland,"
said Sanan. "The success to date in building a quality work force has surpassed our expectations
and opens up new ambitions for our interests in Northern Ireland."

According to Arthur "Bro" McFerran, president of IMR (NI) Ltd., the company is hiring 12 to 18
programmers a month in Northern Ireland and is well on its way to meeting its staffing goal of
300 by 1999. McFerran credited Northern Ireland’s Training & Employment Agency (T&EA)
with helping place the company’s staffing on the fast track.

"The T&EA not only has helped us to identify and recruit qualified software graduates from
Northern Ireland’s universities, it is also assisting us with a unique initiative to bring additional
sources of high quality talent to the company," McFerran said.

Innovation In Training
Impressed by the number and quality of information technology graduates from the region’s
universities, IMR recognized an untapped resource in the well-educated, versatile graduates of
other fields in Northern Ireland. Working with the T&EA, IMR developed "IMR Academy," an
intensive

20-week training program at the Belfast Institute of Further and Higher Education, to expand the
skills of qualified applicants who are not computer software graduates, but who are equally well-
educated in other

Disciplines and who have demonstrated aptitude for learning computer software programming.
Tom Scott of the T&EA said IMR applicants are assessed throughout the program and those who
successfully complete the course are awarded a National Computing Certificate and full-time
employment with IMR. Approximately 40 trainees have already participated in the program.

"IMR is extremely pleased with the T&EAs ability to design and deliver a training program
customized to our needs, and one that is delivering us an impressive pool of incremental
programming talent," McFerran said.

Smart And Available

"The recent software investments by IMR and other companies provide a new opportunity for
Northern Ireland’s computer graduates," McFerrin said. Recruitment research by IMR indicates
that traditionally, nearly half of the region’s computer graduates have been forced to seek jobs
outside Northern Ireland due to the lack of available information technology positions.

Now IT graduates have the chance to find good jobs in Northern Ireland, and graduates from
other fields can take advantage of the IMR Academy training program to get a head start on a
career in the growing software sector.

McFerrin said. Recruitment research by IMR indicates that traditionally, nearly half of the
region’s computer graduates have been forced to seek jobs outside Northern Ireland due to the
lack of available information technology positions.

Competitive Advantage
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Northern Ireland recently has attracted information technology – based investments from other
multinational companies such as BT, Fujitsu, Liberty Mutual Group, Seagate Technology, STB
Systems and UniComp. These companies cite Northern Ireland’s work force and favorable cost
base in their decisions to locate in the region.

"The availability of high-quality graduates combined with the region’s competitive operating
costs and attractive incentives made Northern Ireland the best possible location for STB," said
Richard W. Cooke, STB’s director of engineering operations.

With salaries and fringe costs for well trained software engineers in Northern Ireland
approximately 50 percent lower than costs for US engineers, and low employee turnover and
favorable rates for office space, the overall annual per capita operational costs to develop high
quality software can be significantly less compared with these same costs in the United States.

Typical starting salaries for IT graduates in Northern Ireland are $22,000 to $25,000 annually. At
less than three percent annually, Northern Ireland’s employee turnover rate is a fraction of the
rates typically experienced in other parts of Europe and the United States. Annual costs per square
foot for office space, exclusive of property taxes and service charges, range from as low as $5 per
square foot in some development areas, to approximately $14 in Belfast. These costs can be as
much as 50 percent lower than office space costs in other European cities.

MB0036- International Business

Management
Set-2

Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Evaluate the monetary system and currency markets in international business
management. (10 marks)
Answer
The IMF is an international organization of 185 member countries. It was established to promote
international monetary cooperation, exchange stability, and orderly exchange arrangements; to
foster economic growth and high levels of employment; and to provide temporary financial
assistance to countries to help ease balance of payments adjustment.

The International Monetary Fund (IMF) is the intergovernmental organization that oversees
the global financial system by following the macroeconomic policies of its member countries, in
particular those with an impact on exchange rate and the balance of payments. It is an
organization formed with a stated objective of stabilizing international exchange rates and
facilitating development through the enforcement of liberalising economic policies on other
countries as a condition for loans, restructuring or aid. It also offers highly leveraged loans,
mainly to poorer countries. Its headquarters is in Washington, D.C., United States.

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Organization and purpose
IMF "Headquarters 1" in Washington, D.C.
The International Monetary Fund was created in July 1945, originally with 45 members,with a
goal to stabilize exchange rates and assist the reconstruction of the world's international payment
system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by
countries with payment imbalances (Condon, 2007). The IMF was important when it was first
created because it helped the world stabilize the economic system. The IMF works to improve the
economies of its member countries.

The IMF describes itself as "an organization of 187 countries (as of July 2010), [6][7] working to
foster global monetary cooperation, secure financial stability, facilitate international trade,
promote high employment and sustainable economic growth, and reduce poverty". With the
exception of Cuba (left in 1964), Taiwan (expelled in 1980),[9] North Korea, Andorra, Monaco,
Liechtenstein, Tuvalu and Nauru, all UN member states participate directly in the IMF. Member
states are represented on a 24-member Executive Board (five Executive Directors are appointed
by the five members with the largest quotas, nineteen Executive Directors are elected by the
remaining members), and all members appoint a Governor to the IMF's Board of Governors.[1

Data dissemination systems

In 1995, the International Monetary Fund began work on data dissemination standards with the
view of guiding IMF member countries to disseminate their economic and financial data to the
public. The International Monetary and Financial Committee (IMFC) endorsed the guidelines for
the dissemination standards and they were split into two tiers: The GDDS and the SDDS.
The International Monetary Fund executive board approved the SDDS and GDDS in 1996 and
1997 respectively and subsequent amendments were published in a revised "Guide to the General
Data Dissemination System". The system is aimed primarily at statisticians and aims to improve
many aspects of statistical systems in a country. It is also part of the World Bank Millennium
Development Goals and Poverty Reduction Strategic Papers.
The IMF established a system and standard to guide members in the dissemination to the public
of their economic and financial data. Currently there are two such systems: General Data
Dissemination System (GDDS) and its superset Special Data Dissemination System (SDDS), for
those member countries having or seeking access to international capital markets.
The primary objective of the GDDS is to encourage IMF member countries to build a framework
to improve data quality and increase statistical capacity building. This will involve the preparation
of meta data describing current statistical collection practices and setting improvement plans.
Upon building a framework, a country can evaluate statistical needs, set priorities in improving
the timeliness, transparency, reliability and accessibility of financial and economic data.

Q.2 a. Mention the different entry strategies to enter international markets. (4 marks)
Answer
Entry Strategies
Methods of entry
With rare exceptions, products just don’t emerge in foreign markets overnight – a firm has to
build up a market over time. Several strategies, which differ in aggressiveness, risk, and the
amount of control that the firm is able to maintain, are available:

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· Exporting is a relatively low risk strategy in which few investments are made in the new
country. A drawback is that, because the firm makes few if any marketing investments in the new
country, market share may be below potential. Further, the firm, by not operating in the country,
learns less about the market (What do consumers really want? Which kinds of advertising
campaigns are most successful? What are the most effective methods of distribution?) If an
importer is willing to do a good job of marketing, this arrangement may represent a "win-win"
situation, but it may be more difficult for the firm to enter on its own later if it decides that larger
profits can be made within the country.

· Licensing and franchising are also low exposure methods of entry – you allow someone else to
use your trademarks and accumulated expertise. Your partner puts up the money and assumes the
risk. Problems here involve the fact that you are training a potential competitor and that you have
little control over how the business is operated. For example, American fast food restaurants have
found that foreign franchisees often fail to maintain American standards of cleanliness. Similarly,
a foreign manufacturer may use lower quality ingredients in manufacturing a brand based on
premium contents in the home country.

· Contract manufacturing involves having someone else manufacture products while you take on
some of the marketing efforts yourself. This saves investment, but again you may be training a
competitor.

· Direct entry strategies, where the firm either acquires a firm or builds operations "from scratch"
involve the highest exposure, but also the greatest opportunities for profits. The firm gains more
knowledge about the local market and maintains greater control, but now has a huge investment.
In some countries, the government may expropriate assets without compensation, so direct
investment entails an additional risk. A variation involves a joint venture, where a local firm puts
up some of the money and knowledge about the local market.

b. How has E-commerce helped in international marketing? (6 marks)

Answer
Electronic Commerce
1 Prospects for electronic commerce
Electronic commerce – usually in the form of sales, promotion, or support through the Internet –
is a hot topic at the moment, evidenced by the high market capitalization of firms involved in this
kind of business. Growth rates have been considerable over the last two years and are expected to
persist, at least to some extent, for at least the next several years. Yet, it should be recognized that
so far, sales over the Internet account for only a small portion of sales – especially outside the
U.S.

2 Obstacles to diffusion
Obstacles to the diffusion of Internet trade come both from enduring sources and temporary
roadblocks which may be overcome as consumer attitudes change and technology is improved.
Currently, Internet connections are slower than desired so that downloading pictures and other
information may take longer than consumers are willing to wait. "Glitches" in online ordering
systems may also frustrate consumers, who are unable to place their orders at a given time or have
difficulty navigating through a malfunctioning site. The lack of non-English language sites in
some areas may also be off-putting to consumers, and registering domain names in some
countries is difficult. Further, shipping small packages across countries may be inefficient due to
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high local postage rates and inefficiencies in customs processing. Most of these obstacles may be
overcome within next few years.

Other obstacles may, however, have considerably greater staying power. First, there are legal
problems, as several different countries may seek to impose their jurisdiction on advertising and
laws of product assortment and business practices. Further, the maintenance of databases, which
are essential to delivering on the promises of e-commerce, may conflict with the privacy rules of
some countries – this is currently a hot issue of contention between the United States and the
European Union. Finally, there are issues of taxation and collection.

While the Clinton Administration has sought to get the WTO to go along with a three year tax
"moratorium" on Internet purchases much like the one observed in the U.S., strong opposition is
expected. A great attraction of e-commerce in Europe is that people may order from other
countries and thus evade local sales taxes, which can be prohibitive (e.g., 25% in Denmark and
16% in Germany). Some firms will ship to customers in neighbouring countries without
collecting sales taxes or duties, with the responsibility of paying falling on the consumer.
Although most consumers who order and do not arrange to pay for these taxes get away with it,
fines for those caught through random checks can be severe.

3 Locus of the site

Some firms have chosen to maintain a global site, with reference only to local sales or support
offices; others, in contrast, have unique sites for each country. In some cases, global sites will
hyperlink surfers to a country or region relevant to the site. Note that some confusion exists since
many sites outside the U.S. maintain the ".com" designation rather than their countries’ respective
suffix (e.g., ".de" for Germany, ".se" for Sweden, and ".au" for Australia). Some firms have
experienced problems getting their banks to accept credit card charges in more than one currency,
and thus it may be difficult to indicate precise prices in more than one denomination (one site
based in Britain offered its American customers to be as accurate as possible, based on current
exchange rates, although the charge could be off "by a few pennies.")

4 Lifecycle stages across the World

It has been suggested that Europe runs some five years behind the U.S. in electronic commerce,
but some sources dispute this, suggesting that lack of success among American retailers may have
other origins, such as inadequate adaptation (for example, some British users are put off by
American English). There are, however, some factors which cause most countries run behind.
Even in Europe, Internet access penetration rates are lower than they are in the U.S., and the
slower speed associated with downloading Asian characters is discouraging. In some countries,
credit card penetration is lower, and even in European countries with high penetration rates,
consumers are reluctant to use them. Further, the fact that consumers in most countries have to
pay a per minute phone charge discourages the essential casual and relaxed browsing common in
the U.S. so long as unlimited cable or hardwired access is not offered.

Q.3 a. Explain Bill of Lading and Letters of credit. (8 marks)

Sol.
A bill of lading (sometimes referred to as a BOL,or B/L) is a document issued by a carrier to a
shipper, acknowledging that specified goods have been received on board as cargo for
conveyance to a named place for delivery to the consignee who is usually identified. A thorough
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bill of lading involves the use of at least two different modes of transport from road, rail, air, and
sea. The term derives from the verb "to lade" which means to load a cargo onto a ship or other
form of transportation.

A bill of lading can be used as a traded object. The standard short form bill of lading is evidence
of the contract of carriage of goods and it serves a number of purposes:
• It is evidence that a valid contract of carriage, or a chartering contract, exists, and it may
incorporate the full terms of the contract between the consignor and the carrier by
reference (i.e. the short form simply refers to the main contract as an existing document,
whereas the long form of a bill of lading (connaissement intégral) issued by the carrier
sets out all the terms of the contract of carriage);
• It is a receipt signed by the carrier confirming whether goods matching the contract
description have been received in good condition (a bill will be described as clean if the
goods have been received on board in apparent good condition and stowed ready for
transport); and

• It is also a document of transfer, being freely transferable but not a negotiable instrument
in the legal sense, i.e. it governs all the legal aspects of physical carriage, and, like a
cheque or other negotiable instrument, it may be endorsed affecting ownership of the
goods actually being carried. This matches everyday experience in that the contract a
person might make with a commercial carrier like FedEx for mostly airway parcels, is
separate from any contract for the sale of the goods to be carried; however, it binds the
carrier to its terms, irrespectively of who the actual holder of the B/L, and owner of the
goods, may be at a specific moment.

• A standard, commercial letter of credit is a document issued mostly by a financial

institution, used primarily in trade finance, which usually provides an irrevocable payment
undertaking.

• The letter of credit can also be source of payment for a transaction, meaning that
redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in
international trade transactions of significant value, for deals between a supplier in one
country and a customer in another. They are also used in the land development process to
ensure that approved public facilities (streets, sidewalks, storm water ponds, etc.) will be
built.

The parties to a letter of credit are usually a beneficiary who is to receive the money, the
issuing bank of whom the applicant is a client, and the advising bank of whom the
beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended
or canceled without prior agreement of the beneficiary, the issuing bank and the
confirming bank, if any. In executing a transaction, letters of credit incorporate functions
common to giros and Traveler's cheques.

Typically, the documents a beneficiary has to present in order to receive payment include
a commercial invoice, bill of lading, and documents proving the shipment was insured
against loss or damage in transit. However, the list and form of documents is open to

69
 imagination and negotiation and might contain requirements to present documents issued
by a neutral third party evidencing the quality of the goods shipped, or their place of
origin.

b. What is UNCITRAL and what it does? (2 marks)

Answer
The United Nations Commission on International Trade Law (UNCITRAL) was established
by the United Nations General Assembly by its Resolution 2205 (XXI) of 17 December 1966 "to
promote the progressive harmonization and unification of international trade law.
When world trade began to expand dramatically in the 1960s, national governments began to
realize the need for a global set of standards and rules to harmonize national and regional
regulations, which until then governed

Q.4. Explain the importance of STP in international markets. (10 marks)

Answer
The importance of STP
Segmentation is the cornerstone of marketing – almost all marketing efforts in some way relate to
decisions on who to serve or how to implement positioning through the different parts of the
marketing mix. For example, one’s distribution strategy should consider where one’s target
market is most likely to buy the product, and a promotional strategy should consider the target’s
media habits and which kinds of messages will be most persuasive. Although it is often tempting,
when observing large markets, to try to be "all things to all people," this is a dangerous strategy
because the firm may lose its distinctive appeal to its chosen segments.

In terms of the "big picture," members of a segment should generally be as similar as possible to
each other on a relevant dimension (e.g., preference for quality vs. low price) and as different as
possible from members of other segments. That is, members should respond in similar ways to
various treatments (such as discounts or high service) so that common campaigns can be aimed at
segment members, but in order to justify a different treatment of other segments, their members
should have their own unique response behaviour.

Q. 5 a. Write a short note on branding and trademarks. (6 marks)

Answer
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Branding and trademarks
As mentioned in chapter four, it is difficult to protect a trademark or brand, unless all countries
are members of a convention. Brand "piracy" is widespread in many developing countries.
Other aspects of branding include the promotional aspects. A family brand of products under the
Zeneca (ex ICI) label or Sterling Health are likely to be recognised worldwide, and hence enhance
the "subjective" product characteristics.

Warranty
Many large value agricultural products like machinery require warranties. Unfortunately not
everyone upholds them. It is common practice in Africa that if the original equipment has not
been bought through an authorized dealer in the country, that dealer refuses to honour the
warranty. This is unfortunate, because not only may the equipment have been legitimately bought
overseas; it also actually builds up consumer resistance to the dealer. When the consumer is
eventually offered with a choice, the reticent dealer will suffer, for example, with the new dealers
coming up.

Cotton Production/Marketing Interface

Spinners
Machines are highly flexible, that is they can usually switch to a variety of yarn requirements. The
machines are geared to high production, are automated and are of a precision for constant quality
provision. There are strict process controls and built – in quality control. Poor raw material,
especially when contaminated with metal particles, damages opening mills, grid knives, fans and
card clothing. Previous devices employed to remove these (magnets) are becoming less effective.
The consequences are damage in the blow room and carding and danger of fire. Quality is
therefore defined as properties of the end use (clothing etc.), efficiency of weaving and knitting
and the efficient running of the spinning plant.

Spinners require raw cotton which is free of trash; dust, sugar and honey dew contamination, seed
coats, bark and foreign fibres and, will not nep the cloth. Further requirements are a certain length
(could be short, medium or long), uniformity of length, strength, fineness, maturity and a certain
elongation and colour.

Suppliers
In order to meet these high quality demands, the growers have to ensure that the production,
picking and ginning is of a very high standard.

Cotton grading
The Liverpool Cotton exchange, for one, relied on the skills of its experts to manually classify
raw fibre purchases for its clients. It still holds the "standards" for length, colour and trash
content. As well as the demands of modem machinery, the lack of standardised measuring and
cotton classification procedures has resulted in commercial conflict and legal disputes about the
true nature of traded cotton.

Now, computer based high volume instrument listing systems of raw cotton (HVI systems) are
available. The system can handle large numbers of bales, reduce variation in classification and the
need for highly trained bate classifiers.

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For cotton exporters the system offers the following advantages:
· enhanced objectivity in classification
· improve communication if similar systems are used by sellers or buyers
· reduced conflict and need for arbitration
· enhanced competitiveness against synthetic fibres
· improved integration with modern spinning machines
· reduced costs on training of experts and in measuring time.

The system can process 2000 bales per day and give a printout on the seven parameters of
grading. These include length and length uniformity, strength and elongation, micronaire or
fineness, leaf and colour. Manufacturers include SPINLAR INC. of Knoxville, USA.

Service
In agricultural machinery, processing equipment and other items which are of substantial value
and technology, service is a prerequisite. In selling to many developing countries, manufacturers
have found their negotiations at stake due to the poor back-up service. Often, this is no fault of the
agent, distributor or dealer in the foreign country, but due to exchange regulations, which make
obtaining spare parts difficult. Many organisations attempt to get around this by insisting that a
Third World buyer purchases a percentage of parts on order with the original items. Allied to this
problem is the poor quality of service due to insufficient training.

Good original equipment manufacturers will insist on training and updating as part of the agency
agreement. In order to illustrate the above points, cotton can be used as an example. Cotton is a
major foreign exchange earner for Zimbabwe. In 1990/91, 52,000 tons were sold overseas at a
value of Zim $ 238 million.

As the spinners, particularly those in the export market are in a highly competitive industry, it is
essential that the raw material is as clean as possible. Also today’s spinning equipment is highly
technical and the spinner wishes to avoid costly breakdowns by all means.

Product strategies
There are five major product strategies in international marketing.

Product communications extension

This strategy is very low cost and merely takes the same product and communication strategy into
other markets. However it can be risky if misjudgements are made. For example, CPC
International believed the US consumer would take to dry soups, which dominate the European
market. It did not work.

Extended product – communications adaptation

If the product basically fits the different needs or segments of a market it may need an adjustment
in marketing communications only. Again this is a low cost strategy, but different product
functions have to be identified and a suitable communications mix developed.

Product adaptation – communications extension

The product is adapted to fit usage conditions but the communication stays the same. The
assumption is that the product will serve the same function in foreign markets under different
usage conditions.
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Product adaptation – communications adaptation
Both product and communication strategies need attention to fit the peculiar need of the market.

Product invention
This needs a totally new idea to fit the exclusive conditions of the market. This is very much a
strategy which could be ideal in a Third World situation. The development costs may be high, but
the advantages are also very high.

Table 9.2 summarizes the strategic alternatives with examples.

The choice of strategy will depend on the most appropriate product/market analysis and is a
function of the product itself defined in terms of the function or need it serves, the market defined
in terms of the conditions under which the product is used, the preferences of the potential
customers and the ability to buy the product in question, and the costs of adaptation and
manufacture to the company considering these product – communications approaches.

Table 9.2 International strategic alternatives

Product Communications Product/ Conditions Examples
strategy strategy functions of product
Met use
1. Extension Extension Same Same Pepsi
2. Extension Adaptation Different Same Soups
3. Adaptation Extension Same Different Agriculture
chemicals
4. Adaptation Adaptation Different Different Farm
implements
5. Invention New Same – Tyson turbine
water pump
Thailand tuna

b. What are the features of exchange and currency markets? (4 marks)

Answer
The exchange rate regimes adopted by countries in today’s international monetary and financial
system, and the system itself, are profoundly different from those envisaged at the 1944 meeting
at Bretton Woods establishing the IMF and the World Bank. In the Bretton Woods system:
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· exchange rates were fixed but adjustable. This system aimed both to avoid the undue volatility
thought to characterize floating exchange rates and to prevent competitive depreciations, while
permitting enough flexibility to adjust to fundamental disequilibrium under international
supervision;
· private capital flows were expected to play only a limited role in financing payments
imbalances, and widespread use of controls would prevent instability in such flows;
· temporary official financing of payments imbalances, mainly through the IMF, would smooth
the adjustment process and avoid unduly sharp correction of current account imbalances, with
their repercussions on trade flows, output, and employment.

In the current system, exchange rates among the major currencies (principally the U.S. dollar, the
euro, and Japanese yen) fluctuate in response to market forces, with short-run volatility and
occasional large medium-run swings Some medium-sized industrial countries also have market –
determined floating rate regimes, while others have adopted harder pegs, including some
European countries outside the euro area. Developing and transition economies have a wide
variety of exchange rate arrangements, with a tendency for many but by no means all countries to
move toward increased exchange rate flexibility
This variety of exchange rate regimes exists in an environment with the following characteristics:
· partly for efficiency reasons, and also because of the limited effectiveness of capital controls,
industrial countries have generally abandoned such controls and emerging market economies have
gradually moved away from them. The growth of international capital flows and globalization of
financial markets has also been spurred by the revolution in telecommunications and information
technology, which has dramatically lowered transaction costs in financial markets and further
promoted the liberalization and deregulation of international financial transactions;
· international private capital flows finance substantial current account imbalances, but the
changes in these flows appear also sometimes to be a cause of macroeconomic disturbances or an
important channel through which they are transmitted to the international system;

· developing and transition countries have been increasingly drawn into the integrating world
economy, in terms of both their trade in goods and services and of financial transactions.

Lessons from the recent crises in emerging markets are that for such countries with important
linkages to global capital markets, the requirements for sustaining pegged exchange rate regimes
have become more demanding as a result of the increased mobility of capital. Therefore, regimes
that allow substantial exchange rate flexibility are probably desirable unless the exchange rate is
firmly fixed through a currency board, unification with another currency, or the adoption of
another currency as the domestic currency (dollarization).

Flexible exchange rates among the major industrial country currencies seem likely to remain a
key feature of the system. The launch of the euro in January 1999 marked a new phase in the
evolution of the system, but the European Central Bank has a clear mandate to focus monetary
policy on the domestic objective of price stability rather than on the exchange rate. Many
medium-sized industrial countries, and developing and transition economies, in an environment of
increasing capital market integration, may also continue to maintain market-determined floating
rates, although more countries could may adopt harder pegs over the longer term. Thus, prospects
are that:

74
· exchange rates among the euro, the yen, and the dollar are likely to continue to exhibit volatility,
and schemes to reduce volatility are neither likely to be adopted, nor to be desirable as they
prevent monetary policy from being devoted consistently to domestic stabilization objectives;
· several of the transition countries of central and eastern Europe, especially those preparing for
membership in the European Union, are likely to seek to establish over time the policy disciplines
and institutional structures required to make possible the eventual adoption of the euro.

The approach taken by the IMF continues to be to advise member countries on the implications of
adopting different exchange rate regimes, to consider the choice of regime to be a matter for each
country to decide and to provide policy advice that is consistent with the maintenance of the
chosen regime (Box 3).

Q. 6 Discuss the various International product and pricing decisions. (10 marks)
Answer
Production decisions
In decisions on producing or providing products and services in the international market it is
essential that the production of the product or service is well planned and coordinated, both within
and with other functional area of the firm, particularly marketing. For example, in horticulture, it
is essential that any supplier or any of his "out grower" (sub-contractor) can supply what he says
he can. This is especially vital when contracts for supply are finalized, as failure to supply could
incur large penalties. The main elements to consider are the production process itself,
specifications, culture, the physical product, packaging, labelling, branding, warranty and service.

International Pricing In New Open-Economy Models

Recent developments in open-economy macroeconomics have progressed under the paradigm of

nominal price rigidities, where monetary disturbances are the main source of fluctuations.
Following developments in closed-economy models, new open-economy models have combined
price rigidities and market imperfections in a fully micro founded inter-temporal general
equilibrium setup. This framework has been used extensively to study the properties of the
international transmission of shocks, as well as the welfare implications of alternative monetary
and exchange rate policies.

Imperfect competition is a key feature of the new open-economy framework. Because agents have
some degree of monopoly power instead of being price takers, this framework allows the explicit
75
analysis of pricing decisions. The two polar cases for pricing decisions are producer-currency
pricing and local-currency pricing. The first case is the traditional approach, which assumes that
prices are preset in the currency of the seller. In this case, prices of imported goods change
proportionally with unexpected changes in the nominal exchange rate, and the law of one price
always holds.’ In contrast, under the assumption of local-currency pricing, prices are preset in the
buyer’s currency. Here, unexpected movements in the nominal exchange rate do not affect the
price of imported goods and lead to short-run deviations from the law of one price.

Empirical evidence using disaggregated data suggests that international markets for tradable
goods remain highly segmented and that deviations in the law of one price are large, persistent,
and highly correlated with movements in the nominal exchange rate, even for highly tradable
goods. Moreover, there is strong evidence that the large and persistent movements that
characterize the behaviour of real exchange rates at the aggregate level are largely accounted for
by deviations in the law of one price for tradable goods.

In this article I make use of a simplified version of a two-country model where the two markets
are segmented, allowing firms to price discriminate across countries, and where prices are preset
in the consumer’s currency. This model generates movements in the real exchange rate in
response to unexpected monetary shocks, which are a result of the failure of the law of one price
for tradable goods. I then compare this model to a version in which prices are preset in the
producer’s currency and examine the implications of these two alternative price-setting regimes
for several key issues.

The price-setting regime determines the currency of denomination of imported goods and the
extent to which changes in exchange rates affect the relative price of imported to domestic goods
and the international allocation of goods in the short run. That is, different pricing regimes imply
different roles for the exchange rate in the international transmission of monetary disturbances.
As we shall see, this assumption has very striking implications for several important questions,
namely real exchange rate variability, the linkage between macroeconomic volatility and
international trade, and the welfare effects of alternative exchange rate regimes, among others.

While generating deviations from the law of one price that are absent from models assuming
producer-currency pricing, the assumption of local-currency pricing still leaves important features
of the data unexplained. The key role of this assumption in the properties of open-economy
models suggests that it is necessary to keep exploring the implications of alternative pricing
structures in open-economy models.

In Section 1, I review the empirical evidence on the behaviour of real exchange rates and on
international market segmentation and pricing. In Section 2, I present the model with local-
currency pricing and explore the main implications of this pricing assumption. The final section
concludes.

1 Some Evidence on Real Exchange Rates

I first review some empirical evidence on the behaviour of real exchange rates using aggregate
data. I then turn to a review of the evidence on the sources of movements in real exchange rates.

76
The real exchange rate between two countries represents the relative cost of a common reference
basket of goods. For two countries, say the United States and Japan, the real exchange rate is
given by where P^sub US^ and P^sub JP^ represent the American and Japanese price levels
(measured in terms of dollars and yen, respectively) and where e denotes the nominal exchange
rate (defined as the dollar price of one yen).

The theory of purchasing power parity (PPP) predicts that real exchange rates should equal one,
or at least show a strong tendency to quickly return to one when they differ from this value. The
fundamental building block of PPP is the law of one price: due to arbitrage in goods markets, and
absent barriers to trade, similar products should sell in different countries for the same price
(when converted in the same currency). Large international price differentials would be only
temporary, as profit-maximizing traders would quickly drive international goods prices back in
line. Therefore, if arbitrage in goods markets ensures that the law of one price holds for a
sufficiently broad range of individual goods, then aggregate price levels (when expressed in a
common currency) should be highly correlated across countries.

Because aggregate prices are reported as indices rather than levels, most empirical work has
tested the weaker hypothesis of relative PPP, which requires only that the real exchange rate be
stable over time. show the log changes in the CPI-based dollar-yen real and nominal exchange
rates and the relative price level. Typical for countries with floating exchange rates and moderate
inflation, it clearly stands out that short-run deviations from PPP are large and volatile.(Delete) In
the short run, movements in the real exchange rate mimic those in the nominal exchange rate,
with no offsetting movements in the relative price level. Not surprisingly, early empirical work
based on simple tests of short-run PPP produced strong rejections of this hypothesis for moderate
inflation countries. However; these studies did not allow for any dynamics of adjustment to PPP
and therefore did not address the validity of PPP as a medium- or long-run proposition.
The conventional explanation for the failure of short-run PPP is the presence of nominal price
rigidities. If the short-term volatility of nominal exchange rates were due mostly to monetary and
financial disturbances, then nominal price stickiness would translate these disturbances into short-
run fluctuations in the real exchange rate.

If this were true, however, we should observe a substantial convergence to PPP in one to two
years, as the adjustment of prices and wages takes place. Purchasing power parity, therefore,
would be re-established in the medium to long run.

An extensive body of empirical literature has tested the hypothesis of long run PPP by looking at
the mean-reverting properties of real exchange rates. As is well known, it has proved rather
difficult to find evidence supporting convergence of real exchange rates to PPP even in the long
run.

Earlier empirical studies, which used only post-Bretton Woods data, found it difficult to reject the
hypothesis that bilateral real exchange rates for industrialized countries follow a random walk
under floating exchange rates. But if PPP deviations are very persistent, then it may be difficult to
distinguish empirically between a random walk model and a slow mean-reversion model for the
real exchange rate, especially when this variable is highly volatile. As shown in Frankel (1986),
the post-Bretton Woods period may simply be too short to reliably reject the random walk
hypothesis.

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To overcome this problem of low power in tests of the random walk hypothesis, Frankel used an
extended data set (annual data for the dollar-pound exchange rates from 1869 to 1984) and
rejected the random walk model in favour of a mean-reverting model for the real exchange rate.
His point estimate for the rate of decay of real exchange rate deviations was 14 percent per year,
which implies a half-life of PPP deviations of 4.6 years. Other studies that test convergence to
PPP using long-horizon data sets tend to find values for the half-life of PPP deviations between
three to five years.

An alternative way to increase the power of unit root tests is to expand the number of countries in
the sample and to perform panel tests of convergence to PPP. Frankel and Rose (1996), for
example, use a panel set of annual data from 1948 to 1992 for 150 countries. They estimate half-
lives for PPP deviations of about four years. Other studies using panel data sets report similar
estimates. Interestingly, these estimates are also similar to those obtained using long-time series
data sets.

In brief, studies using aggregate data provide strong evidence that deviations from PPP are highly
volatile and persistent. Consensus estimates suggest that the speed of convergence to PPP is
roughly 15 percent per year, implying a half-life of PPP deviations of about four years. As we
shall see next, a look at disaggregated data will provide us with a much richer analysis of the
sources of PPP deviations.

The Law of One Price: Market Segmentation and International Pricing

As I pointed out earlier, the idea underlying PPP is that the law of one price holds for a wide
range of individual goods. It has long been recognized, however, that even for highly tradable
goods and at different levels of aggregation, deviations in the law of one price are large,
persistent, and highly correlated with movements in the nominal exchange rate.
One possible explanation for the failure of the law of one price is that international markets are
segmented by physical distance, like different markets within a country. Engel and Rogers (1996),
however, show that both the distance and the physical border between countries are significant in
explaining the variation in prices of similar goods across different U.S. and Canadian cities. They
find that price dispersion is much higher for two cities located in different countries than for two
equidistant cities in the same country.

In fact, the effect of the border is estimated to be equivalent to a distance of 1780 miles between
cities within one country. Engel and Rogers also show that nominal price stickiness accounts for a
large portion of the border effect, suggesting that prices are sticky in the local currency and that
changes in the exchange rate lead to deviations in the law of one price.

Not only are failures of the law of one priced significant but, as recent evidence suggests, they
also play a dominant role in explaining the behaviour of real exchange rates. Engel (1999)
measures the proportion of U.S. real exchange rate movements that can be accounted for by
movements in the relative prices of non-traded goods. Engel decomposes the CPI real exchange
rate into two components: a weighted difference of the relative price of non-traded to traded-
goods prices in each country, and the relative price of traded goods between the countries. If
tradable, as a category, closely followed the law of one price, then all variability in the real
exchange rate would be explained by movements in the first component. However, Engel finds
that movements in the relative price of non-traded goods appear to account for almost none of the
movement in U.S. real exchange rates, even at long time horizons.
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 Instead, nearly all the variability can be attributed to movements in the relative price of tradable.
This finding strongly suggests that consumer markets for tradable goods are highly segmented
internationally and that movements in the international relative price of consumer tradable are
very persistent. Moreover, given the high volatility of nominal exchange rates, these findings
indicate that consumer prices of most goods (either imported or domestically produced) seem to
be sticky in domestic currency terms.

An alternative approach to studying the relationship between exchange rates and goods prices is
examining how firms in an industry (or country) pass through changes in exchange rates to export
prices. Knetter (1989, 1993) measures the degree of price discrimination across export
destinations that is associated with exchange rate changes for U.S., U.K., German, and Japanese
industry-level data.

He finds that the amount of exchange rate pass-through differs considerably depending on the
country and industry. Goldberg and Knetter (1997) provide an extensive survey of the literature
and find that local currency prices of foreign products do not respond fully to exchange rate
changes. While the response varies by industry, on average exchange rate pass-through to U.S.
import prices is only about 50 percent after one year, mainly reflecting changes in destination-
specific markups on exports.

In brief, there is strong evidence that international markets for tradable goods remain highly
segmented and that deviations from PPP are largely accounted for by movements in the relative
price of tradable goods across countries. At the consumer level, exchange rate pass-through to
import prices is virtually zero (suggesting that consumer prices are sticky in domestic currency).
At the producer level, however, exchange rate pass-through is generally positive, but substantially
below one.

Transaction Costs and the Adjustment of PPP and Law of One Price Deviations
Some recent empirical tests of long-run PPP and the law of one price have abandoned the
conventional framework, which assumes a linear autoregressive process for the price differential.
Instead, these studies have started to look into nonlinear models of price adjustment, where the
speed at which price differentials die out depends on the size of the deviation itself.

This alternative framework for the empirical analysis of price differentials is motivated by the
observation that commodity trade is not costless. Persistent deviations from the law of one price
are implied as an equilibrium feature of models with transaction costs, for deviations will be left
uncorrected as long as they are sufficiently small relative to the shipping cost.

The simplest econometric model that implements the notion of a nonlinear adjustment for price
differentials assumes that the process is well described by a random walk for small deviations
(that is, when deviations are within a "band of inaction") and an autoregressive process for large
deviations (that is, when deviations are outside the band). Taylor (2001) shows that the improper
use of linear models when the true model is nonlinear may produce a large bias towards finding a
low speed of convergence.

Intuitively, a linear model will fail to support convergence to PPP if the true model is nonlinear
and the process spends most of the time in the random-walk band. Using both monthly data from
79
the 1920s and annual data spanning two centuries, Michael, Nobay, and Peel (1997) reject the
linear adjustment model in favour of a nonlinear model and provide strong evidence of mean-
reverting behaviour for PPP deviations for every exchange rate considered.

2 International Pricing in New Open-Economy Macroeconomic Models

The common starting point for most of the recent research in open-economy models with price
rigidities is the model developed in Obstfeld and Rogoff (1995). This model explores the
international monetary transmission mechanism in a general equilibrium setup characterized by
nominal price rigidities, imperfect competition, and incomplete asset markets.

Obstfeld and Rogoff’s model does not generate deviations from the CPI– based purchasing power
parity. This feature reflects the fact that preferences are identical across countries and that all
goods are freely tradable, with prices set in the seller’s currency. In this model, there is complete
pass-through of exchange rate changes to import prices, implying that the law of one price always
holds for all goods and that the real exchange rate is constant.

Motivated by the empirical evidence on the sources of real exchange rate fluctuations, several
recent papers have extended Obstfeld and Rogoff’s framework in order to allow for pricing-to-
market and deviations from the law of one price. This class of models assumes that home and
foreign markets are segmented, which allows imperfectly competitive firms to price discriminate
between home and foreign consumers.

Consumers’ inability to arbitrage price differentials between countries is exogenous, possibly

reflecting arbitrarily high transportation costs at the consumer level. In addition to market
segmentation, this class of models also assumes that prices are sticky in each country’s local
currency. That is, firms set prices in advance in the buyer’s currency, as opposed to the standard
assumption that prices are set in the seller’s currency.

I, next outline a basic model in which firms set prices in advance in the local currency of the
buyer (or pricing-to-market). The model is then used to explore the main implications of pricing-
to-market.

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Course Code: MU0006
81
 Compensation Benefits
Set 1 & 2

MU0006 -Compensation Benefits

Q-1: Explain the objective of a sound compensation planning.

Ans: The most important objective of any pay system is fairness or equity. The team equity has
three dimensions:

a) Internal equity: This ensures that more difficult jobs are paid more.
b) External equity: This ensures that jobs are fairly compensated in comparison to similar
jobs in the labour market.
c) Individual equity: It ensures equal pay for equal work, i.e. each individual’s pay is fair in
comparison to others doing the same jobs.

In addition, there are other objectives as well. The ultimate goal of compensation administration
(the process of managing a company’s compensation program) is to reward desired behaviors and
encourage people to do well in there jobs. Some of the important objectives that are sought to be
achieved through effective compensation management are listed below:

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 a) Attract Talent: compensation needs to be high enough to attract talented people. Since
many firms compete to hire the services of competent people, the salaries offered must be
high enough to motivate them to apply.
b) Retain Talent: If compensation levels fall below the expectations of employees or are not
competitive, employees may quit in frustration.
c) Ensure Equity: Pay should equal the worth of a job. Similar jobs should get similar pay.
Like wise, more qualified people should get better wages.
d) New and Desired Behavior: pay should reward loyalty, commitment, experience, risk-
taking, initiative and other desired behaviours. Where the company fails to reward such
behaviour, employee may go in search of greener pastures outside.
e) Control costs: The cost of hiring people should not be too high. Effective compensation
management ensures that workers are neither overpaid nor underpaid.
f) Comply with legal rules: Compensation programs must invariably satisfy governmental
rules regarding minimum wages, bonus, allowances, benefits, etc.
g) Ease of operation: The compensation management system should be easy to understand
and operate. Then only will it promote understanding regarding pay related matters
between employees, unions and managers.

Q-2: Apex is an ITES service provider Company. It is startup (new) company, which is
trying to woo talent from the market. Being a new company it might face difficulty in hiring
highly talented candidates. As remuneration plays an important role, what will be the
strategic incentives plans organization can offer to persuade talented employees besides
providing good salary?

Ans: An Incentive Program is a formal scheme used to promote or encourage specific actions or
behavior by a specific group of people during a defined period of time. Incentive Programs are
particularly used in business management to motivate employees, and in sales in order to attract
and retain customers. The scientific literature also refers to this concept as Pay for Performance.

Types

Points program

Points-based incentive programs are a type of program where participants collect and redeem
points for awards. Depending on the program type and the organizational objectives, points can
be awarded on a number of criteria including positive employee behavior, the demonstration of
organizational values, repeat customer purchases, the sale of new products, increased overall
sales, or even the use of proper safety precautions. In addition to point awarding, the levels at
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which points can be redeemed can be customized by the organization and set at virtually any
level. Points programs are a way for organizations to motivate behavior over time while
improving the organizations’ overall performance.

Employee

Employee incentive programs are programs used to increase overall employee performance.
Employee programs are often used to reduce turnover, boost morale and loyalty, improve
employee wellness, increase retention, and drive daily employee performance.

Consumer

Consumer incentive programs are programs targeting the customers and consumers of an
organization. In a recent study conducted by Bain & Company’s research, researchers found that a
simple 5% increase in a company’s customer retention rates will increase the average lifetime
profits per customer. Consumer programs are becoming more widely used as more companies
realize that existing customers cost less to reach, cost less to sell, are less vulnerable to attacks
from the competition, and buy more over the long term.

Dealer/channel

Dealer incentive programs are used to improve performance for dealer and channel resellers using
sales incentive programs. It can motivate the staff which in turn only helps business. These
programs help companies capture market share, launch new products, reduce cost of sales,
increase product adoption, and ultimately drive sales.

Sales

These programs are primarily used to drive sales, reduce sales costs, increase profitability,
develop new territory, and enhance margins. Sales incentive programs have the most direct
relationship to outcomes.

A Sales Incentive Plan (SIP) is a business tool used to motivate and compensate a sales
professional (or sales agent) to meet goals or metrics over a specific period of time, usually
broken into a plan for a fiscal quarter or fiscal year. A SIP is very similar to a commission plan;
however, a SIP can incorporate sales metrics other than goods sold(or value of goods sold), which
is traditionally how a commission plan is derived. Sales metrics used in a SIP are typically in the
form of sales quotas (sometimes referred to as point of sale or POS shipments), new business
opportunities and/or management by objectives (MBOs) independent action of the sales
professional and is usually used in conjunction with a base salary.

SIPs are used to incentives sales professionals where total dollars sold is not a precise measure of
sales productivity. This is usually due to the complexity or length of the sales process or where a
sale is completed not by an individual but by a team of people, each contributing unique skills to
the sales process. SIPs are used to encourage and compensate each member of the sales team as
he/she contributes to the team's ability to sell. It is not uncommon for the members of such teams
to be located in different physical locations (often working in different countries) and for the

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product introduction to happen in one location and the purchase of such a product to occur in
another location.

Online programs

When first emerging in 1996, the use of online incentive programs was extremely rare. According
to the Online Incentive Council (OIC, defunct), since its emergence, the number of online
programs has almost doubled in size every year. At present, nearly every traditional incentive
company offers an online component in programs including employee motivation and
recognition, sales performance, channel programs, and consumer promotions. Companies that run
their programs online experience efficient communication, reporting, and awards fulfillment.
Online incentive programs pose an attractive alternative to traditional offline programs since
online programs save money and time and allow organizations to have much greater control.

Monetary rewards

Selecting the appropriate rewards is vital to any programs success. The goal in choosing rewards
is to select items that will spark the participant’s interest or feelings, and support the program’s
objectives. Effective rewards will both motivate short-term behavior and provide motivation over
time. There are several types of rewards.

Cash

While incentive program participants often state that they prefer cash to non-cash rewards,
research has shown that cash is a poor motivator due to its lack of “trophy value.” In a recent
study conducted by the Center for Concept Development, three of five respondents agree that a
cash payment is perceived to be part of an employee’s total compensation package and not as part
of an incentive program. Additionally, cash is quickly forgotten as many participants tend to
spend it on everyday items or use it to pay bills. Given that most people do not generally talk
about cash awards, cash programs do little to generate the interest required to create an effective
incentive program.

Non-cash rewards

Merchandise and other non-cash rewards are more often perceived as separate from
compensation. Accordingly, non-cash rewards tend to stand out as rewards for performance,
which enhances their long-term effect. Branded merchandise and other non-cash rewards have
high trophy value, bringing greater recognition to the recipient at the time of the award and
possessing a long-term lasting effect that can result in increased engagement in the organizations
goals.

Gift cards/certificates

Gift cards/certificates are prepaid retail cards or certificates which are redeemed at a later time at
checkout. In general, they are available in two types: (1) cards which carry a major credit card
brand, commonly referred to as universal gift cards (UGC), and are redeemable at all merchants
accepting the credit card brand; and (2) retailer-specific cards, issued by well-known merchants,
redeemable only through the issuing retailer. In the 2005 Incentive Federation Study of
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Motivation and Incentive Applications, gift cards were ranked as the most frequently used type of
corporate reward.

Merchandise

Merchandise rewards can range anywhere from small branded key chains to high-end electronics.
In a 2005 study conducted by the Center for Concept Development, 73% of respondents agreed
that more stimulating, memorable incentive programs can be built around merchandise as
opposed to cash rewards.

Travel

Travel rewards can best be defined as a face-to-face event designed to motivate, either directly or
indirectly. In a 2005 study conducted by the Center for Concept Development, 51% of
respondents perceived that travel is remembered longer than other incentive rewards.

Experiential

Experiential rewards provide program participants with an experience. This form of reward gives
organizations the ability to offer their employees and customers interesting experiences as
incentives. Examples might include a seaplane flight and lunch, a two hour horse ride on the
beach, a day of sailing for two, a chance to meet a star athlete, or the use of a party planner for an
occasion of the recipient’s choice. Experiential rewards allow participants to share their
experiences with others and reinforce the reward and the behavior that led to the giving of the
reward.

Non-monetary rewards

Non-monetary incentives are used to reward participants for excellent behavior through
opportunities. Non-monetary incentives may include flexible work hours, payroll or premium
contributions, training, health savings or reimbursement accounts, or even paid sabbaticals. If it
comes to environmental behavior, often labeling and recognition certificates are used. This may
include stickers, T-shirts with banner logo etc.A good example of non-monetary rewards is
exempting business students from doing AB213 Research Methods.

A caution on incentive programs

At its core, an incentive program is designed to lift the performance outputs of a group of people
engaged in some activity by increasing their motivation. There is nothing wrong with this
approach, but it should be part of a broader Quality Management system.

W. Edwards Deming, a leading Quality Management scholar and consultant, taught and
demonstrated that motivation efforts are a form of tampering because they try to make
improvements to individual components of what is largely common cause variation. He argued
that the overall performance of a unit was much more a function of the quality of materials,
process design and management, quality specifications and machine performance – in other
words, the “system.” Deming went on to demonstrate that the result of an improvement strategy
based on trying to lift the performance of each worker one-at-a-time would be no system
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improvement; rather, it would simply be increased variation in performance. He encouraged
management to find ways to lift the performance of the whole system.

Q-3: Explain the steps involved in designing a Remuneration Plan.

Ans: Designing a remuneration plan involves the followings:

1. Job Analysis: The main purpose of conducting job analysis is to prepare job description and job
specification which in turn helps to hire the right quality of workforce into the organization.

It helps to understand the qualities needed by employees, defined through behavioral descriptors,
to provide optimum work performance.

It obtains answers to such questions such as: 1. Why does job exists? 2. What physical and mental
activities does the worker undertake? 3. When is the job to be performed? 4. Where is the job to
be performed? 5. How does the worker do the job? 6. What qualifications are needed to perform
the job? 7. What are the working conditions (such as levels of temperature, noise, offensive
fumes, light) 8. What machinery or equipment is used in the job? 9. What constitutes successful
performance?

There are several ways to conduct a job analysis, including: interviews with incumbents and
supervisors, questionnaires (structured, open-ended, or both), observation, critical incident
investigations, and gathering background information such as duty statements or classification
specifications. In job analysis conducted by HR professionals, it is common to use more than one
of these methods.

2. Job Documentation: To evaluate job content, it provide objective criteria for making pay
comparison, ensure that jobs are classified according to content as opposed to individual
personalities, effectively communicate the job duties to both supervisor and employees and help
the organization defend it self against charges and discrimination.

3. Development of a job worth hierarchy: It is a result of job evaluation. There are six major
methods which are divided in two groups according to their nature.

a) Whole job evaluation and are non-quantitative in nature

i- Ranking
ii- Classification
iii- Slotting

b) Factor evaluation and are quantitative in nature

i- Point factor
ii- Factor comparison
iii- Scored questionnaires

4. Pay survey: Wages and salary surveys ensure external equity. A wage and salary survey
provides information as to what other organizations that compete for employees are paying. The
survey could cover all jobs within an organization or limited to benchmark jobs.

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The benchmark jobs have the following basic characteristics
i- Many workers in other companies have these jobs.
ii- They will not be changing in the immediate future in terms of tasks, responsibilities
etc.
iii- They represent the full range in term of salary such that some are among the lowest
paid in the group of jobs, others are in the middle range and some are at the high end
of the pay scale.

Formal and informal surveys could be undertaken to collect data on benefits like insurance,
medical leave, vacation pay etc. and offer a basis on which to take decision regarding employee
benefits. Published sources also provide valuable information. Published sources also provide
valuable information regarding industry-wise trends in salary structures in and around the
country.
The published sources in India include:

i. Reports published by the Ministry of Labour

ii. Pay Commission Reports
iii. Reports of wage Bonds appointed by Government
iv. Reports of employee and employer’s organization
v. Trade journals of specific Industry

5. Pricing the Job: Establishment of pay Ranges:

In order to actually establish a pay structure, an organization needs to set rates of pay for the jobs
in the job hierarchy. This will depend on the number of different levels of relative job value that
are recognized by the organization and the difference in pay between the highest and lowest paid
jobs in the pay structure. The focal point pf the pay range is the midpoint, an organization can
determine the range minimum and maximum.

6. Pay rates and Pay Increases: This means deciding how to pay new employees, how and when
to give employee increases, including how to move existing employees from minimum to
maximum of their assigned pay grades, how to determine the pay increase for an employee being
promoted from one job to another and what influence, if any, cost of labour increases will have on
the determination of pay increases for employees.

7. Starting pay for new Employees: In order to avoid paying new employees the same as more
experienced employees, most employers choose to start new employees closer to the minimum of
the pay range. In general, an employee with minimum qualifications should be paid the minimum
of the range. This general rule is not true when a new hire has skills which are in great demand or
has skills or other expertise substantially above the minimum.

8. Employee Increases: There are several different types of base pay increases: General (across
the board) increases, cost of living/ labour increases, promotion increases, step increases (based
on longevity) and merit increases.

9. Performance appraisal: A performance appraisal, employee appraisal, performance review, or

(career) development discussion[1] is a method by which the job performance of an employee is
evaluated (generally in terms of quality, quantity, cost, and time) typically by the corresponding
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manager or supervisor[2]. A performance appraisal is a part of guiding and managing career
development. It is the process of obtaining, analyzing, and recording information about the
relative worth of an employee to the organization. Performance appraisal is an analysis of an
employee's recent successes and failures, personal strengths and weaknesses, and suitability for
promotion or further training. It is also the judgement of an employee's performance in a job
based on considerations other than productivity alone.

10. Maintaining and Auditing a Compensation plan: Changes in the external market or internally
within the organization can cause one or more parts of a compensation plan to become outdated.
Part of the challenge in creating a compensation plan is to build in mechanisms that facilitate
change when necessary, yet maintain control on a regular basis. Some actions an organization can
take to maintain an updated compensation plan include regular review of job descriptions,
monitoring of compensation levels versus companies with which there is competition for
employees, and regular review of the pay structure including pay ranges and pay increase budgets.
An audit is an excellent means to ensure that a compensation plan is being properly administered
and maintained.

When planning to audit a compensation plan, an organization needs to consider the following:
Process measures - Are procedures and practices in place to ensure the compensation plan is
being administered smoothly and efficiently?

Policy compliance - Are there procedures or other mechanisms in place to ensure that the
compensation plan is being administered in accordance with policy?

Documentation adequacy - Is there adequate documentation in place to ensure that the

administration of the compensation plan and compliance issues can be audited?

Overall results - Are there measures that can assess how well the compensation plan is achieving
its goals and objectives?

After reviewing audit results, management can make recommendations on any improvements that
may be necessary, allocate the necessary resources and follow-up to make sure the work is
completed.

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 MU0006 - Compensation Benefits
Set 2
Q.1) Fringe benefits are the important components of remuneration, though most of the
organizations face confusion when it comes to administering fringe benefits program. Design the
steps needed to administer Fringe Benefits to avoid problem in administering indirect
remuneration plan.
Ans. Steps in administering fringe benefits
Establish benefit objectives

In establishing objectives management must consider several factors like employee preference for
benefits, attendance, length of service, performance etc. The benefits accomplish four objectives:
Fostering external competitiveness

Increasing cost effectiveness

Meeting individual employee’s needs and preferences.

Complying with legal compulsions

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 Whatever the objectives, they must reflect the organizations ability to pay.

Assessing environment

External as well as internal factors influence company’s indirect remuneration programs, the
external factors are aspects like govt. policies and regulations, union and economic factors. The
major govt. factors that influence employee benefits and services are wage regulations, tax
policies, and specific benefit laws. In addition to govt. policies, unions are dominant force to
improve benefits and services. When union and the management sit for the wage negotiation,
benefits and services figure prominently in their discussion and the settlement reached invariably
cover the indirect remuneration to the benefit of the employees.
Competitiveness

Generally organizations offer benefits to match or outstrip those matched by the competitors.
These are assessed through market surveys conducted by professional associations and
consultants. These surveys provide data on the various benefit offered, their coverage, eligibility
and costs. The data allow employers to assess the competitiveness of their benefits and costs with
those offered by others.

Communicating the benefits

Fringe benefit program must be communicated to the employees through booklets, brochures, slide
presentations and regular employee meetings. An effective technique is to use employee calendars, which
communicate the total remuneration components. Each month of the calendar shows employee receiving
the benefit. Communication help remove ignorance of the employee about indirect remuneration. Further
employers must be able to increase the productivity and the advantage of good employee benefits by
making the employee aware of what the company does for them that does not appear on their pay slip.

Evaluation and control

One way assessing the usefulness of fringes is to ascertain how far the advantages claimed in
favor of indirect monetary schemes have really benefited the employees. Employee benefit costs
are computed on the following lines:
a) Total cost of benefits annually for all the employees
b) Cost per employee per year
c) Percentage to annual payroll
d) Cost per employee per hour
Q.2 Explain the different types of incentive plan offered by organizations.
Ans. Types of incentive plans:

Time-based individual incentive schemes

a) Hasley or Wier plan

This plan devised by F.A.Hasley recognizes individual efficiency and pays bonus on the
basis of time saved. The main features of this plan are :
1) Standard time is fixed for each job or operation.

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 2) Time rate is guaranteed and the worker receives the guaranteed wages irrespective of
whether he completes the work in the time allowed or takes more time to do the same.

3) If the job is completed in less than the standard time, the worker is paid a bonus of
50% of time saved at time rate in addition to his normal time wages.

Total Earnings= Time taken X Hourly rate plus bonus

Bonus = 50% of the time saved
b) The Rowan Plan

This plan was introduced by D. Rowan. As in Hasley plan the bonus is paid on the basis of time
saved. But unlike a fixed % in case of Hasley plan it takes into account the proportion as follows:
Time Saved
-------------------
Time Allowed
Thus, under this plan the bonus is that proportion of the wages of time taken which the time saved
bears to the standard time.
Bonus= Time saved
-------------------------------------- X Time taken X Hourly Rate + Bonus
Standard time or Time allowed

c) Emerson Efficiency Plan

Under this plan the standard time for the job is determined scientifically and a minimum time
wage is guaranteed to all workers. Bonus is given at an increasing %beyond the prescribed level
of efficiency. Efficiency is measured by comparing the actual time taken with the standard time.
Total Wages=( Time taken X Time wage) +( % of bonus X Time taken X Time wages)

d) Bedeaux Point Plan

Under this plan the standard time is fixed scientifically and is expressed in terms of ‘B’. In
determining the B’s the time of operation and the rest time both are taken into account. Minimum
time wage is guaranteed to all the workers. The workers who complete their job within or more
than the standard time are paid at the normal time rate. Those who complete the job in less than
the standard time are paid bonus for the time saved.
Total wages= Standard time X Rate of Wages +75% of Rate of wage( Standard time-Actual time
taken)

Output based individual incentive schemes:

a) Taylor’s differential piece rate system

The main features of this plan are:

1) There shall be two piece work rates, one is lower and other is higher.

2) The standard of efficiency is determined either in terms of time or output based on time
and motion study.
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 3) If a worker finishes work in standard time he will be given high piece rate.

4) This system penalizes the slow worker by paying low rate because of low production,
rewards an efficient worker by giving high rate because of higher production.

b) Merrick’s Differential Piece rate system

There are three piece rates under this instead of two and workers producing below the standard
output are not penalized by low piece rate. Since the earnings increase with increased efficiency
the performance above the standard will be rewarded by more than one higher differential piece
rate. The basic features are:
1) Up to 83% of the standard output workers are paid at the ordinary piece rate.

2) 83% to 100% at 110% of the ordinary piece rate.

3) Above 100% at 120% of the ordinary piece rate.

c) Gantt task and Bonus Plan

This plan combines time piece and bonus systems. The main features are:

1) Day wages are guaranteed.

2) Standard time for task is fixed and both time wages as well as a high rate per piece are
determined.

3) A worker who cannot finish the work on standard time are paid according to time basis.

4) If the worker reaches the standard time he will be paid the time wage plus the bonus at a
fixed % of normal time wage.

5) If the worker exceeds the standard he is paid a higher piece rate.

Accelerated Premium Bonus Plan

This plan is also known as sliding scale bonus plan because the premium is paid at varying rate of
increasing efficiency. As the efficiency of the worker increases his earnings would increase at
greater proportions. This plan is most suitable for foreman and supervisors because it will
stimulate them to get higher proportions from workers under their supervision but it is not
advisable to use it for the machine operators who may rush through work to earn more,
disregarding quality of production.

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Q3. Write short notes on:
 The Minimum Wages Act, 1948
 Payment of Wages Act, 1936

Ans. The Minimum Wages Act, 1948

Object of the act

To provide for fixing minimum rates of wages in certain employments.
Fixation of minimum rates of wages
1. The appropriate government to fix minimum rates of wages. The employee employed in
para 1 or B of schedule either at 2 or either part of notification u/s 27.

2. To make review at such intervals not exceeding 5 years the minimum rates and revise the
minimum rates.

Government can also fix minimum wages for

1. Time work

2. Piecework at piece rate

3. Piecework for the purpose of securing to such employees on a timework basis.

4. Overtime work done by employees for piece work or time rate workers.

Sec.3
Minimum rates of wages
Such as basic rates of wages etc. Variable DA and value of other concessions etc.

Sec. 4
Procedure for fixing and revising minimum rates of wages
Appointing committee, issuing notifications etc.

Sec. 5
Overtime
1) To be fixed by the hour, by the day or by such a longer wage period works on any day in
excess of the number of hours constituting normal working days.

2) Payment for every hour or for part of an hour so worked in excess at the overtime rate
double of the ordinary rate.

Sec. 5
Composition of committee
Representation of employer and employee in schedule. Employer in equal number and
independent persons not exceeding 1/3rd or its total number. One such person to be appointed by
the chairman.

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Sec. 9
Payment of minimum rates of wages.
Employer to pay to every employee engaged in schedule employment at the rate not less than
minimum rate of wages as fixed by Notification by not making deduction other than prescribed.

Sec. 12
Fixing hours for normal working
1) Shall constitute a normal working day inclusive of one or more specified intervals.

2) To provide for a day of rest in every period of seven days with remuneration.

3) To provide for payment for work on a day of rest at a rate not less than the overtime rate.
Sec. 13

4) Wages of workers who work for less than normal working days same as otherwise herein
after provided, be entitled to receive wages in respect of work done by him on that day as
if he had worked for a full normal working day.

Sec. 12
Fixing hours for normal working
1) Shall constitute a normal working day inclusive of one or more specified intervals.

2) To provide for a day of rest in every period of seven days with remuneration.

3) To provide for payment for work on a day of rest at a rate not less than the overtime rate.
Sec 13

4) Wages of workers who work for less than normal working days same as otherwise
hereinafter provided, be entitled to receive wages in respect of work done by him on that
day as if he had worked for a full normal working day.

Sec. 15
Wages for two class of work
Where an employee does two or more classes of work to each of which a different minimum rate
of wages is applicable, wages at not less than the minimum rate in respect of each such class.

Sec. 16
Minimum time rate wages for piece work
Not less than minimum rates wages as fixed.

Sec.17
Claims by employees
1) To be filed by before authority constituted under the act within 6 months.

2) Compensation up to 10 times on under- payment or nonpayment of wages.

Sec.16
Maintenance of registers and records

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Register of fines- form 1 rule 21(4)
Annual returns- form 3 rule 21(4- A)
Register for overtime- form 4 rule 25
Register of wages – form X, wages slip- form XI, muster roll- form V rule 26
Representation of register – for 3 years rule 26-A
Sec. 18
Penalties

Payment of Wages Act, 1936

Object of the act
To regulate the payment of wages of certain classes of employed persons
Coverage of employees
Drawing average wage up to Rs. 6500 p.m. as amended w.e.f. 6.9.05
Time of payment of wages
The wages of every person employed be paid. When less than 1000 persons are employed, wages
should be paid before expiry of the 7th day of the following month. When more than 1000
workers, before the expiry of the 10th day of the following month.

Sec. 5
Wages to be paid in current coins or currency note
1) All wages shall be paid in current coins or currency notes or in both.

2) After obtaining the authorization either by cheque or by crediting the wages to employees
bank account.

Sec.6
Deduction made from wages
Deductions such as fine, deduction for amenities and services supplied by the employer, advances
paid, over payment of wages, loan, granted for house building or other purposes etc.

Sec. 7
Fines as prescribed
Not to be imposed unless the employer is given an opportunity to show cause.
To be recorded in the register.

Sec. 8
Deduction for absence from duties for unauthorized absence
Absence for whole or any part of the day
If ten or more persons remain absent without reasonable cause, deduction of wages up to 8 days.

Sec.9
Deduction for damage or loss
For default or negligence of an employee resulting in loss, a show cause notice has to be given to
the employee.

Sec. 10
Deduction for service rendered
When accommodation amenity or service has been accepted by the employee.
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Course Code: MU0007
97
Performance Management and Appraisal
Set 1 & 2

MU0007 -Performance Management and

Appraisal
Q1. Define Performance Management? Explain the principles of developing a performance
management plan.
Ans. Performance Management is an ongoing, continuous process of communicating and
clarifying job responsibilities, priorities and performance expectations in order to ensure mutual
understanding between supervisor and employee. It is a philosophy which values and encourages
employee development through style of management which provides frequent feedback and
fosters teamwork. It emphasizes teamwork and focuses on adding value to the organization by
promoting improved job performance and encouraging skill development. Performance
management involves clarifying the job duties, defining performance standards and documenting,
evaluating and discussing performance with each employee.
The objectives of performance management are :

1. Increased two way communications between supervisors and employees.

2. Clarify mission, goals, responsibilities, priorities and expectations.

3. Recognize quality performance.

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 4. Provide a basis for administrative decisions such as promotions, succession and strategic
planning and pay for performance.

Principles of developing a performance management plan.

Development of performance management plan should be consistent with the following
principles:
1. Performance Management is considered a process, not an event. It follows good
management practice in which continual coaching, feedback and communication are
integral to success.

2. The performance management plan is primarily a communication tool to ensure mutual

understanding of work responsibilities, priorities and performance expectations.

3. Elements for discussion and evaluation should be job specific- not generalized personality
traits. The major duties and responsibilities of specific job should be defined and
communicated.

4. Employee involvement is encouraged in identifying major duties and defining

performance standards.

5. Professional development should be an important component of the plan.

6. The formal evaluation period should be long enough to allow for full performance and to
establish a history such that evaluations are fir and meaningful. One year is common
evaluation period.

7. Documentation of performance will occur as often as needed to record the continuum of

dialogue between supervisor and employee.

8. If formal ratings are included, they should reflect the incumbent’s actual performance in
relation to the performance standard for that major duty.

9. The supervisor should be evaluated on the successful administration of the plan and
ongoing performance management responsibilities.

10. Training for supervisors and employees is encouraged.

11. The performance management plan should be consistent with federal and state laws
which address non-discrimination.

Q2. Letts, Ryan and Grossman suggested four key capacities for organizational
effectiveness.-Elucidate.
Ans. Letts, Ryan and Grossman suggested four key capacities for organizational effectiveness.
These capacities were suggested for non-profit organizations. However they also apply to
organizations in general and thus their descriptions are modified in the following paragraphs to
apply to organizations in general.

1. Adaptive Capacity
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 It is the ability of an organization to maintain focus on external environment of the
organization, particularly on performing while continually adjusting and aligning itself to
respond to those needs and influences. Adaptive capacity is cultivated through attention to
assessments, collaborating and networking, assessments and planning.
2. Leadership capacity

It is the ability to set direction for the organization and its resources and also guide
activities to follow that direction. Leadership capacity is cultivated through attention to
vision, establishing goals, directing, motivating, making decisions and solving problems.
3. Management Capacity

It is the ability to ensure effective and efficient use of the resources in the organization.
Management capacity is accomplished through careful development and coordination of
resources including people, money and facilities.
4. Technical Capacity

It is the ability to design and operate products and services to customers. The nature of
that technical capacity depends on the particular type of products and services provided by
the organization.

5. Generative Capacity

It is the ability of the of the organization to positively change its external environment.
This capacity is exercised by engaging in activities to inform, educate and persuade policy
makers, community leaders and other stakeholders.

Q.3 Explain the process of performance management

Ans. Performance Management is a systematic process by which the agency involves its
employees, as individuals and members of a group in improving organizations
effectiveness in the accomplishment of an agency mission and goals.

Performance Management process involves 5 steps

1. Planning

In an effective organization work is planned out in advance. Planning refers to setting

performance expectations and goals for groups and individuals to channelize their efforts
towards achieving organizational objectives. Getting employees involved in planning
process will help them understand the goals of the organization, what needs to be done,
why it needs to be done, and how well it should be done.
The regularity requirements for planning employee’s performance include establishing the
elements and standards of their performance appraisal plans. Performance elements and
standards should be measurable, understandable, verifiable, equitable, and achievable.
Through critical elements, employees are held accountable as individuals for work
assignments and responsibilities. Employee performance plans should be flexible so that
they can be adjusted for changing program objectives and job requirements. When used
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effectively these plans can be beneficial working documents that are discussed often and
not merely paperwork that is filed in a drawer and seen only when ratings of record are
required.
2. Monitoring

In an effective organization assignments and projects are monitored continually.

Monitoring well means consistently measuring performance and providing ongoing
feedback to employees and work groups for their progress toward reaching their goals.
Regulatory requirements for monitoring performance includes conducting progress
reviews with employees where their performance is compared against their elements
and standards. Ongoing monitoring provides the opportunity to check how well
employees are meeting predetermined standards and to make changes to unrealistic
and problematic standards. By monitoring continually unexpected performance can be
identified at any time during the appraisal period and assistance provided to address
such performance rather than wait until the end of the period when summary rating
levels are assigned.

3. Developing

In an effective organization, employee developmental needs are evaluated and

addressed. Developing in this instance means increasing the capacity to perform
through training, giving assignments that introduce new skills or higher levels of
responsibility, improving work processes or other methods. Providing employees with
training and developmental opportunities encourages good performance, strengthens
job related skills and competencies, and helps employees keep up with changes in the
workplace, such as the introduction of new technologies.
Carrying out process of performance management provides an excellent opportunity to
identify developmental needs. During planning and monitoring of work, deficiencies
in performance become evident and can be addressed. Areas of improving good
performance also stand out, and action can be taken to help successful employees
improve even further.
4. Rating

From time to time organizations find it useful to summarize employee performance.

This can be helpful for looking at and comparing performance overtime or among
various employees. Organizations need to know who their best performers are.
Within the context of the formal performance appraisal requirements, rating means
evaluating employee or group performance against the elements and standards in an
employee’s performance plan and assigning a summary rating of the record. The rating
of record is assigned according to procedures included in the organizations appraisal
program. It is based on work performed during entire appraisal period. The rating of
record has a bearing on other personal actions, such as granting within grade pay
increases and determining additional retention service credit in a reduction in force.
5. Rewarding

In an effective organization, rewards are used well. It means recognizing employees,

individually and as members of groups, for their performance and acknowledging their
contributions to the agencies mission. A basic principle of effective management is
that all behavior is controlled by its consequences. Those consequences should be both
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 formal and informal and both positive and negative.
Good performance is recognized without waiting for nominations for formal awards to
be solicited. Recognition is an ongoing, natural part of day to day experience. A lot of
actions that reward good performance don’t require a specific regulatory authority.

MU0007 - Performance Management and

Appraisal
Set 2
Q.1 Explain the role of ethics in performance appraisal.

Ans. Ethics has a very important role to play in performance management. To abandon
the performance appraisal process is a breach of business ethics. The ethical
ramifications of performance review have caused managers and employees at all the
levels to become frustrated, cynical and withdrawn. Many managers talk about ethics
but do not act upon ethical issues in day to day managerial responsibilities. Most
ethical questions arise from people’s relationship with the organization. Managers
must realize that ethics is the process of deciding and acting. Employees have a big
stake in the way managers evaluate and operate. Managers and non supervisory
employees alike cite concern about politics and lack of fair treatment, honesty and
truthfulness in connection with the performance review.

Sometimes major miscommunications occur in performance review sessions due to

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basic differences in ethical orientation. Unless the employee and the reviewer are
successful in negotiating an ethical balance each may review other as taking unfair
shots.

The overall objective of high ethics performance review should be to provide an

honest assessment of performance and to mutually develop a plan to improve
individual’s effectiveness. That requires telling people where they stand and being
straight with them.

Some managers feel that being legal in performance review is enough. If they comply
with rules and regulations and are careful about their documentations they feel they are
secure enough and have a defensible position. However being legal does not always
equate to being ethical. A perfunctory review is an ethical strike out- without taking a
swing. If the person being reviewed feels ignored, his feelings of personal worth will
suffer. In the worst scenario low ethics managers use the performance review process
as a form of forced humility for individuals reporting to them. Performance appraisal
must be recognized and treated as an ethical issue of high pay off and peril.
When a performance review helps the individual recognize that his or her objectives
are closely assigned with the organizations, the individual is more likely to perform at
a higher level and the organization is less likely to lose a valuable employee. The
objective of the performance review is to develop the person, not to threaten self
esteem. Treatment of people is the most fundamental ethical issue. Performance
review as a matter of ethics.

Q.2 Mr. Sunil is a manager in a manufacturing company. He thinks that his

subordinates are inherently lazy, avoid work and they needs supervision to perform
tasks and therefore he shows authority over his subordinates’. According to McGregor
theory, what assumptions Mr. Sunil is having of his subordinates. And also elucidate
McGregor both the theories.

Ans. According to McGregor’s theory Mr. Sunil follows theory X, an authoritarian

style of leadership. The assumptions that Mr. Sunil has on his subordinates are :
1. The average person dislikes work and will avoid it.

2. Therefore most people must be forced with the threat of punishment to work
towards organizational objectives.

3. The average person prefers to be directed; to avoid responsibility is relatively not

ambitious and wants security above all else.

4. Employees shirk responsibilities and seek formal direction whenever needed.

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McGregor’s X-Y theory
Douglas McGregor proposed two different sets of assumptions as to what motivates people –
theory X and theory Y.
In theory X McGregor proposes that management assumes employees are inherently lazy and will
avoid work if they can. Due of this workers need to be closely supervised and comprehensive
systems of control developed. A hierarchical system is needed with arrow span of control at each
level. According to this theory employees will show little ambition without an enticing incentive
program and will avoid responsibility whenever they can. Usually managers feel the sole purpose
of employees interest in job is money. They will blame the person first in most situations, without
questioning whether it may be the system, policy or lack of training that deserves the blame.
In theory Y McGregor proposes that management assumes employees may be ambitious, self
motivated, anxious to accept greater responsibility and exercise self control, self direction,
autonomy and empowerment. It is believed that employees enjoy their mental and physical work
duties. It is also believed that if given the chance employees have the desire to be creative and
forward thinking in the workplace. There is a chance of greater productivity by giving employees
the freedom to perform at the best of their abilities without being bogged down by rules.
Assumptions under theory Y (participative management style)
1. Effort in work is as natural as work and play.

2. People will apply self control and self direction in pursuit of organizational objectives,
without external control or the threat of punishment.

3. Commitment to objectives is a function of rewards associated with their achievement.

4. People usually accept and often seek responsibility.

5. The capacity to use a higher degree of imagination, ingenuity and creativity in solving
organizational problems is widely not narrowly distributed in the population.

6. In industry the intellectual potential of the average person is only partly utilized.

Q.3 Write notes on:

 Management by Objectives
 Behavioral Anchored Rating Scales
 Graphic Rating scale
 Behavioral checklist

Ans. 1. Management by Objectives

It evaluates how well an employee has accomplished objectives determined to be critical in the
job performance. The method aligns objectives with quantitative performance measures such as
sales, profits, zero defect units produced.

2. Behavioral Anchored Rating Scales( BARS)

This combines elements from critical incident and graphic rating scale approaches. The supervisor
rates employees according to items on the numerical scale.

3. Graphic Rating scale

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This method lists a set of performance factors such as job knowledge, work quality, cooperation
that the supervisor uses to rate employee performance using an incremental scale.

4. Behavioral checklist
The rater is given a checklist of descriptions of the behavior of the employee on the job.
The checklist contains a list of statements on the basis of which the rater describes the on the job
performance of the employees.

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 Course Code: MU0008
Talent Management and Employee
Retention
Set 1 & 2

MU0008 -Talent Management and

Employee Retention
Question1: Explain the talent Management imperative
Answer 1:
Competent businesses are adept at hiring and firing workers. Great businesses
however are skilled at developing and deploying talent in ways that continuously
grow their experience, stretch their abilities and enable their achievements. Creating
work environments that promote people agility across jobs and organizational
boundaries is the next imperative for companies seeking competitive advantage
through their talent.

It is surprising how few companies develop and move their talent around the
organization. They know how to recruit stars, fire failures and replace leavers – but
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few seem to know how to provide one of the most important factors in retaining
talent – opportunities to achieve, move and grow – within the company. Ever hire a
star only to see them leave in frustration 9-18 months later because they felt stuck?
Or experience shock when an outstanding performer leaves your company after 5
years because they were ‘too valuable’ in their current job to be allowed to move to
a different position or department? So instead, they moved to a different company.

There are many organizational and cultural reasons why companies constrain talent.
Performance obsessed managers are often reluctant to give up the people resources
they feel are needed to achieve ever more challengingly goals and performance
objectives. This short sighted behavior is reinforced by management and incentive
systems that reward business results but not development of people.

HR and line managers often lack the tools and information to understand and
manage the supply and demand of people and skills dynamically. Thus they are
likely to be slow and reactive in responding to shifts in skill requirements and
opportunities to grow new competencies. They may also be prone to rely on
traditional hiring and firing processes as a means of matching skills demand and
supply rather than more complex retraining and redeployment of existing resources.

Some leading edge companies however are beginning to tackle the talent agility
challenge. For example, in “Cisco Systems: Developing a Human Capital Strategy”,
California Management Review, Winter 2005,
http://www.haas.berkeley.edu/News/cmr/contents.html, Jennifer Chatman, Charles
O’Reilly and Victoria Chang describe how this Silicon Valley legend has refocused its
approach to talent from external acquisition to internal development and
deployment. For years Cisco was the poster child for how to identify, attract and hire
talent. But beneath the surface, it was buying talent through acquisition and keeping
it through high-priced equity stakes distributed to employees. Not much talent
management acumen was required. But when the company’s marketplace and stock
price tanked, Cisco had to learn a different set of skills for attracting and keeping
talent. It also realized that it needed to better utilize the talent it already had.

According to CEO John Chambers, “We made progress in developing employees, but
in our industry, I want the majority of us not to be in the same job – or even the
same function – three to five years from now. I want us to create an environment of
continuous learning and challenge, that will allow us to move from one business unit
to another in engineering, or from sales to customer advocacy, or from financial to
IT.”

Companies like Cisco that compete in dynamic industries, where technologies,

products and markets are in a continuous state of change must learn how to develop
and redeploy their talent in an agile manner. The company recast its Pathfinder
software application originally developed to support external recruiting and used it
to create an internal job matching system. Pathfinder’s corresponding online
database, I-Profiler, allows employees to voluntarily enter their resumes for
consideration. The profiles capture employees’ work and educational experience,
skills, and technical qualifications and detail their career aspirations for development
discussions with their managers. Line managers have access to each of their
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employees’ profiles to assess existing skills on their teams.

But these moves represented only part of the solution. The company also chartered
Cisco University to lead a company-wide cross-functional effort to create a
‘development culture’ within the organization. The university does not operate as a
centralized place to go for learning, but as a set of distributed capabilities for
everyone to tap across the organization. This learning and development capability is
built upon the ‘3E Model’:

-Experience through assignments, on-the-job learning, and traditional learning

-Exposure developed through on-line learning, mentoring, shadowing, periodic

forums and talent reviews

-Education through a series of customized and focused programs that include

significant teaching and involvement of senior Cisco executives as well as outside
faculty

The impetus for shifting Cisco’s talent management strategy came from the top of
the organization. John Chambers asked in a company meeting prior to starting these
initiatives, “How many people think we are good at moving resources (people) and
retraining? (No hands were raised). It’s not even in our vocabulary. But we’ve got to
get dramatically better at moving resources around the company. Our top
leadership….I keep moving them around. We’ve got to learn how to retrain people
effectively as a part of our culture, to keep up with the market transitions.” This is
good advice for any company.

How good is your organization at moving and retraining staff to anticipate and
respond to changes in your business? Not very good you say? If so, it’s time for a
change. Because companies that find ways to grow and move their talent within
their organizational boundaries will not only substantially reduce recruiting and
termination costs but will better attract and keep top talent as well. Indeed, those
companies that can master talent agility will have a leg up on their competition in
both the quality of their people and their performance.

Question 2: Describe Pre -Employment testing

Answer 2:

Employers often use tests and other selection procedures to screen applicants for
hire. The types of tests and selection procedures utilized include cognitive tests,
personality tests, medical examinations, credit checks, and background checks.

Companies can legally use these tests, as long as they don't use to them to
discriminate based on race, color, sex, national origin, religion, disability, or age (40
or older). Employment tests must be validated for the jobs they are being used to
hire for and for the purposes for which they are being used.

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Online Pre-Employment Tests

Depending on the type of test, employment testing can be conducted online or in

the employer's office. Online employment tests are often used for pre-employment
testing and assessment. Utilizing online testing eliminates the need for the
candidate to visit the company's office or for the company to have to administer the
test.

Types of Employment Tests

Personality Tests
Personality tests assess the degree to which a person has certain traits or
dispositions or predict the likelihood that a person will engage in certain conduct.

Talent Assessment Tests

Talent assessments, also called pre-employment tests or career tests, are used to
help an employer identify candidates that will be a good fit for jobs. Talent
assessments help predict a new hire’s performance and retainability.

Pre-Employment Physical Exams

Employers may require a pre-employment physical examination to determine the
suitability of an individual for a job.

Drug Tests
There are several types of drugs tests that candidates for employment may be asked
to take. The types of drug tests which show the presence of drugs or alcohol include
urine drug screen, hair drug or alcohol testing, saliva drug screen, and sweat drug
screen.

Cognitive Tests
Cognitive tests measure a candidate's reasoning, memory, perceptual speed and
accuracy, and skills in arithmetic and reading comprehension, as well as knowledge
of a particular function or job.

Emotional Intelligence Testing

Emotional intelligence (EI) is the ability of an individual to understand his or her own
emotions and the emotions of others. Testing job applicants for their emotional
intelligence (in the form of psychological-based tests) is a growing employment
trend.

Physical Ability Tests

Physical ability tests measure the physical ability of an applicant to perform a
particular task or the strength of specific muscle groups, as well as strength and
stamina in general.

Sample Job Tasks

Sample job tasks, including performance tests, simulations, work samples, and
realistic job previews, assess a candidate's performance and aptitude on particular
tasks.
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Background and Credit Checks
Criminal background checks provide information on arrest and conviction history.
Credit checks provide information on credit and financial history.

English Proficiency Tests

English proficiency tests determine the candidate's English fluency.

Lie Detector Tests

The Employee Polygraph Protection Act (EPPA) prohibits most private employers
from using lie detector tests, either for pre-employment screening or during the
course of employment.

1. Manager Retention Practices

Our research consistently validated the reality that the manager plays a significant
role in influencing the employee's commitment level and retention. There are a
number of manager retention practices which will increase the probability that an
employee will remain committed to an organization over time.
These retention practices represent the manager's actual behaviors on the job. This
often has little to do with the amount of classroom training they have received.
Furthermore, the best retention practices are not the same as the standard menu for
good organizational management. Most organizations ask their managers to place
productivity as the highest priority, underscored by the pressures to fulfill "our
obligations to our investors."
Good retention practices focus not only on what the employee is contributing to the
company, but also focus on how the manager can create a climate so that the
employee is retained and committed on a long term basis. While enlightened leaders
balance the needs of the organization with the needs of the employee, the truth is
that these leaders are rare. Though managers play a very crucial role in retention,
they do not control all of the factors that can affect attrition. Therefore, the second
component represents the organization's responsibility in the retention equation.

2. Organizational Retention Systems

There are a number of organizational systems and processes that influence
retention. Some of them are evident, such as the equity of pay scales. Other systems
are less obvious, and their impact on retention is often unrecognized. For example,
there is evidence that an organization's recruiting systems and processes can
significantly impact retention ratios. These systems support the Manager Retention
Practices, but they also increase the likelihood that employees are committed on a
long term basis and are performing at their best.

3. Measurement and Accountability

Closely linked to the other components, this component ensures that retention
becomes an on-going priority. Many organizations do not even know what their
attrition rates are. And those that do often lack enough data to pinpoint where the
problem is most severe, or to uncover the specific causes of attrition.
For example, those organizations that measure attrition sometimes do not track it by
length of service. The tenure patterns of the departing employees can reveal
valuable information concerning the potential causes for attrition.
Additionally, many organizations do not track attrition by occupational group other
than by "manager" or "no manager."

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This simple segmentation is often a crude one that does not provide the organization
the refined information it needs

Question 3: Apex is a firm facing high attrition rate. The Management is

highly concerned about the attrition. They are investing on the candidates
by training them and after some time employees are leaving the
organization. There are costs associated with hiring besides talent crunch.
Mr. Ravi the HR Manager has given the responsibility to design strategies
for retention.
Suggest few components and strategies to achieve retention

Answer 3: The implications for employers should be clear. It is now more important
than ever to retain the team members an organization currently has and to choose
the right team members when hiring decisions are made. The following is a
short list of useful tips and hints to help increase levels of employee retention in
your organization. Put them to work for you!

 Get the right people on the bus - in his book, Good to Great, Jim Collins talks
about the importance of having the right talent on the organizational bus. Hiring
individuals who are truly fit to succeed in the position for hire will dramatically
increase the chances of that employee being satisfied with his or her work and
remaining with the company for an extended period of time.

By far, we have found this to be the biggest predictor of future employee retention.

 Communication, communication, communication - communication has

become so heavily stressed in the workplace that it almost seems cliche. However
communication couldn't be more important in the effort to retain employees. Be sure
that team members know their roles, job description, and responsibilities within the
organization. Communicate any new company policies or initiatives to all employees
to be sure that everyone is on the same page. Nobody wants to feel that they are
being left out of the loop.

 Include employees in decision making - it is incredibly important to include

team members in the decision making process, especially when decisions will effect
an individual's department or work team. This can help to create a culture of
employee involvement and will generate new ideas and perspectives that top
management might never have thought of.

 Allow team members to share their knowledge with others - the highest
percentage of information retention occurs when one shares that information with
others. Having team members share what they have learned at a recent conference
or training workshop will not only increase the amount of information they will retain,
but also lets a team member know that he is a valuable member of the organization.
Facilitating knowledge sharing through an employee mentoring program can be
equally beneficial for the team member being mentored as well as the mentor.

 Shorten the feedback loop - do not wait for an annual performance evaluation
to come due to give feedback on how an employee is performing. Most team
members enjoy frequent feedback about how they are performing. Shortening the
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feedback loop will help to keep performance levels high and will reinforce positive
behavior. Feedback does not necessarily need to be scheduled or highly structured;
simply stopping by a team member's desk and letting them know they are doing a
good job on a current project can do wonders for morale and help to increase
retention.

 Offer a competitive compensation package - any team member wants to

feel that he or she is being paid appropriately and fairly for the work he or she does.
Be sure to research what other companies and organizations are offering in terms of
salary and benefits. It is also important to research what the regional and national
compensation averages are for that particular position. You can be sure that if your
compensation package is not competitive, team members will find this out and look
for employers who are willing to offer more competitive compensation packages.

 Balance work and personal life - family is incredibly important to team

members. When work begins to put a significant strain on one's family no amount of
money will keep an employee around. Stress the importance of balancing work and
one's personal life. Small gestures such as allowing a team member to take an
extended lunch once a week to watch his son's baseball game will likely be repaid
with loyalty and extended employment with an organization.

 Provide opportunities for growth and development - offer opportunities for

team members to acquire new skills and knowledge useful to the organization.

If an employee appears to be bored or burned out in a current position offer to train

this individual in another facet of the organization where he or she would be a good
fit. Nobody wants to feel stuck in their position will no possibility for advancement or
new opportunities.

 Recognize team members for their hard work and let them know they
are appreciated - this can be one of the single greatest factors
affecting employee retention. Everybody, in all levels of an organization, wants to
know that their efforts are appreciated and recognized. This can be as simple
or as extravagant as a supervisor may desire. Often time a short e-mail or quickly
stopping by a team member's desk and saying "thanks" can do wonder for morale.
Other options might include a mention in the company newsletter for outstanding
performance or gift certificates to a restaurant or movie theatre - the possibilities are
endless.

 Clearly define what is expected of team members - nothing can be more

frustrating or discouraging for an employee than the lack of a clear understanding of
what is expected of him on the job. In a performance driven workplace a lack of
clarity regarding job duties and expectations can cause fear and anxiety among
employees who are unclear of what is expected of them. Even worse outright anger
can occur when a team member receives a negative performance evaluation based
on expectations and job duties that he or she was unaware of or unclear about.

 The quality of supervision and mentorship - it has been said so often that it
is almost cliche, but people leave people, not their jobs. Supervisors play the
largest role in a team member's development and ultimate success within an
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organization. All employees want to have supervisors who are respectful, courteous,
and friendly - that is a given. But more importantly team members want supervisors
who set clear performance expectations, deliver timely feedback on performance,
live up to their word and promises, and provide an environment where the employee
can grow and succeed. Failure by supervisors and management to provide this can
cause an employee to start looking for greener pastures.

 Fair and equitable treatment of all employees - one of the surest ways to
create animosity and resentment in an organization is to allow favoritism and
preferential treatment of individual team members. The so-called "good ole' boys
club" can create a noxious organization culture and foster resentment among team
members. This culture will only get worse and can create a devastating exodus of
valued team members. Be sure to treat all employees equally and avoid favoritism
at all costs.

MU0008 -Talent Management and

Employee Retention
Set 2
Q.1Write down the steps for compensation based talent management.

Organizations have integrated most of the key human capital functions - like recruiting, employee
development and succession planning – into their talent management strategy.

Yet, most are missing one other function: compensation. I believe that the most common
disadvantage of talent management programs is that they exclude compensation as a prominent
factor in employee development and retention.
Is there something fundamentally different about compensation that sets it apart from other
strategic HR areas?

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Talent Management vs. Compensation Management

I’d argue that there is – compensation management is job-centric whereas all other talent
management functions are employee-centric. Think about it for a moment. Your talent
management strategy is all about recruiting employees, training employees, aligning employee
performance plans with corporate goals, planning employee growth and development, and
identifying employees with potential then charting a course to help them realize it.
Compensation management, by contrast, is all about jobs: what they are worth in the marketplace,
how they stack up against one another internally, what grades or bands they fall into, and what
target incentives and equity compensation are associated with varying levels of jobs within the
company.
That said, it doesn’t mean that’s the only role compensation can or should play. There is no
reason why employee market valuation must be done exclusively on a job-centric basis. Given the
mandate of attracting and maintaining top talent, it is imperative that employee market valuations
also be done for individual employees. This, of course, requires good compensation data.
The Benefits of Using Compensation Data in a Talent Management Strategy
Many of the components that make up a talent management strategy – acquisition and mastery of
knowledge, skills, abilities and competencies – are important influencers of compensation. Once
organizations know how to build a talent management strategy that takes compensation data into
account, they can place a market value on knowledge, skills and abilities. A talent management
strategy based on compensation data means:
• Job offers tailored to the specific value an individual brings to the organization
• Career paths within and across job families that are anchored to actual market valuation of
the knowledge, skills and abilities that differentiate one level in the career hierarchy from
the next
• Merit systems that are based on the target market value of the employee so managers can
determine the right competitive compensation package, and not simply merit increases
from a matrix
• A talent management system that monitors the pay competitiveness of high potential
employees, helping to identify flight-risk potential before a competitor attempts to lure
your future talent away

Bringing Talent Management and Compensation Management Together

If compensation data has the potential to play such a vital role in talent management, why have so
few companies taken the steps necessary to bring it about? One of the primary reasons is that
market valuation of individual employees requires more compensation data about each employee:
their skills, specialties, education, experience beyond the current job or even the current
employer, and new certifications they’ve earned. Talent management strategies are our friends,
here: HRIS and emerging talent management software applications allow us to collect and store
this information – if we take the time to collect it.
Market valuation of individual employees is a companion process, not a replacement for, more
traditional job-centric compensation management processes. Without the employee-centric
market valuations, however, compensation data is relegated to the sidelines of the talent
management systems. At the same time, without the valuation component offered by employee-
centric approaches, a talent management strategy will lack a critical financial metric for making
pragmatic decisions.

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Q.2What are the 5 steps to strategic talent planning? Elaborate

Recruiting rarely is based on any sort of strategic plan. For most organizations, recruiting is a
tactical operation ? a series of things that take place that result in qualified people getting hired. It
is mostly reactive, and few recruiters have the time or charter to look forward more than a few
weeks.

To ensure that your organization has a chance at hiring the best people ? and to successfully
operate in a global, competitive environment, organizations ? you will need a strategic plan
coupled to appropriate resources and tactics.

Here's a quick overview of the five essential first steps needed to put this plan together and to
begin making it operational:

The five key steps in strategic talent planning

Step 1: Talent Plan

Workforce or talent planning is the first and hardest step. It means deeply understanding the
organization's business goals and the competitive environment the organization functions in. It is
a combination of understanding and predicating demand, while at the same time being educated
and aware of the talent supply situation from all the sources that are available.

This step needs to be far more than simply listing the jobs projected in the annual budgeting
process and factoring in turnover. It is an evolving process, as opposed to an annual event, and is
the most dynamic and critical stage of any strategic process.

Step 2: Image and Brand

It is not true that if you build a great strategy or a great organization, people will necessarily flock
to your doors. Getting people aware of your organization is a tough job. It requires having a
consistent communication process as well as a plan to raise general awareness through
advertisements, promotions, or by getting listed as a "best place to work." You have to be able to
answer questions like, "What makes your company different or unique?" or "Why would I want to
come work for you?" Not only should you have answers to these questions, but you should also
make sure your advertising, web presence (which is essential), and overall corporate advertising
support this image.

This has to be an organization-wide effort. It takes time and an accumulation of messages to be

effective. One or two advertisements or a handful of posters won't do it.

Step 3: Sourcing Methods

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Develop a multi-faceted sourcing strategy. Embrace active candidates who are responding to your
brand and image-building messages, but maintain the capacity and skills to tap passive
candidates. Decide based on past experience what works best for you in locating candidates, and
then build those sourcing channels to the max. Make sure you are using referrals from current
employees, your network of professionals, web-based search, your own web site and also develop
methods to keep in touch with potential candidates that you have no current position for but might
have at some later time.

Step 4: Screening and Assessing Candidates

Are you going to invest heavily in educating managers in behavioral interviewing? Are the
recruiters going to be the main screeners, or will you use testing and other tools? What role will
the Internet play, if any? Are you going to look into using web-based tests? How much will you
rely on candidates screening themselves out or in? What role does the hiring managers play in
screening and assessing, and what are the differences between what you do and they do?

This is an area where there can be great improvement with reasonable effort, but where things are
still done mostly the way they have always been done. A focus on automating screening to some
degree reduces the volume of candidates and actually raises candidate satisfaction.

Step 5: Market and Communicate!

Candidates want to be in the know about their status and prospects. They seek out feedback and
information. Your organization's website is an invaluable tool, but you will also need to develop
systems to communicate with candidates personally and to send out newsletters and emails.

Probably all the people you need at one time or another sent a resume or expressed interest. They
were most likely told that there were no current openings. Wouldn't it be wonderful if you could
actually stay in touch with those people and let them know when there is an open position? That's
what CRM (candidate relationship management) systems can do. Unfortunately, they are not yet
generally available or optimized for recruiting. But ask your ATS vendor what they doing about
this and urge them to provide you the tools you need to effectively keep qualified candidates
interested in you. Make sure that whatever systems you choose fit your strategy and make
economic sense

A few other things to keep in mind:

• Make sure all managers and recruiters have a simple system for deciding on a candidate.
As you know, speed is the real differentiator today, and the recruiter/manager who moves
the most quickly will usually get the candidate. Eliminate unnecessary approvals, and
make sure your selection criteria are clear to avoid slowing down the process.
• If you are a decentralized firm, work out a system for who owns what. If you all agree
together then the areas of dispute will be limited. The rule I use is that the central or
corporate function should set standards and establish corporate-wide systems. Local
offices should participate in that process and have great autonomy on the day-to-day stuff.
They can supplement broad image and branding activities with local advertising within the
bounds of an agreement you all make with one another.

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These initial steps and processes are what enable the back-end activities of scheduling,
interviewing, making offers, and on-boarding.

Q.3 Think of a situation in which you as team leader have to explain why HRIS or IT is important in
talent management and how it helps an organization. Supplement your answer with suitable
examples.

Talent management refers to the process of developing and integrating new workers, developing
and retaining current workers, and attracting highly skilled workers to work for a company.
Talent management in this context does not refer to the management of entertainers. The term was
coined by David Watkins of Softscape published in an article in 1998. The process of attracting
and retaining profitable employees, as it is increasingly more competitive between firms and of
strategic importance, has come to be known as "the war for talent."

A talent management strategy is no longer a nice to have, but an imperative to drive business
performance. More and more companies today are taking a holistic approach to talent
management -– from attracting and selecting wisely, to retaining and developing leaders, to
helping employees transition out of the company.

A Human Resource Management System (HRMS, EHRMS), Human Resource Information

System (HRIS), HR Technology or also called HR modules, or simply "Payroll", refers to the
systems and processes at the intersection between human resource management (HRM) and
information technology. It merges HRM as a discipline and in particular its basic HR activities
and processes with the information technology field, whereas the programming of data processing
systems evolved into standardized routines and packages of enterprise resource planning (ERP)
software. On the whole, these ERP systems have their origin on software that integrates
information from different applications into one universal database. The linkage of its financial
and human resource modules through one database is the most important distinction to the
individually and proprietary developed predecessors, which makes this software application both
rigid and flexible.

Presented by Jason Averbook, CEO of Knowledge Infusion, the April 11 event will feature an in
depth review and analysis of the 2007 Talent Management Survey Results including:

- What Talent Management initiatives organizations are investing in the next year,

- Satisfaction levels of current solutions, and

- Business drivers of talent management practices.

Join us to learn:

- Where your company is on the Talent Management continuum,

- Why buying software in 2007 is different than buying software in 2002,

- Why performance management isnÂ’t what you think it is,

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- The growing importance of HRIS in meeting the needs of strategic talent management, and

- A 10-step action plan for achieving maximum success with your talent management initiatives.

Human resource executives, HRIS professionals, learning and organizational development leaders
and talent management professionals will gain the most by attending -– and this program has been
approved for 1.50 recertification credit hours toward PHR and SPHR recertification through the
Human Resource Certification Institute (HRCI).

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 Course Code: MU0009
Change Management
Set 1 & 2

MU0009 -Change Management

Question 1: Discuss culture driven change

Answer 1:
Bringing about significant change in the way an organization works, frequently
necessary in our current environment of major technological innovation and
globalization, is a tremendous challenge. On the technical side, it may be relatively
easy (although costly) to introduce new technology, work processes and structures.
Experience tells us, however, that getting people to enthusiastically support such
change is a more complex and difficult task.

The Myth of Resistance

Understanding why change is frequently difficult for people can help us build in

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methods for easing the process and increasing the likelihood that it will succeed.
Many people talk about "resistance" as if it were an irrational response to be
overcome with rational persuasion. In fact, it is always the case that, from an
individual's point of view, one's own behavior is rational.

Generally, when people have worked in an organization for very long, they have
absorbed a set of norms and expectations about what is expected, what is rewarded
and what is least approved. They have "learned" the way to behave that will, at the
very least, keep them out of trouble. This set of widely shared beliefs about what is
"right" and "wrong", "true" or "false", "good" or "bad", is the organization's culture.

What Is Organizational Culture?

An organization's culture is multi-layered, consisting of assumptions, values, beliefs,
norms and behaviors that have developed gradually and may have become
relatively unconscious. It can explain much about how an organization functions,
both internally and in relation to its external environment. When there is a need to
change the way an organization works, it may become necessary to make this
implicit set of beliefs explicit as they may no longer be consistent with the actions
and behaviors that are now required.

Managing Change
Whether or not it is possible to fully "manage change", we believe that being very
clear about what changes are required and being very intentional about building a
culture that supports the new mission, goals, strategies and practices increases the
probability of success exponentially. This necessarily involves a large cross section
of the organization in assessing the current system of norms and beliefs,
determining what changes are needed, and designing an implementation plan.

An Example of "Managed" Culture Change

A classic example involves a regulated utility for which de-regulation meant a
change in how they do business. Assumptions about customer expectations in a
regulated environment led utilities in general to attend more to being a "good
neighbor" than to providing low cost service. Those assumptions often meant that
"good neighbor" behavior, i.e., courtesy to customers, was rewarded more than
efficiency and this value was reinforced by training programs, performance reviews,
and the company newspaper along with more subtle forms of communication.

These beliefs and resulting behaviors needed to be elevated to a conscious level so

that the company could choose how it needed to modify its practices. New
assumptions and values were articulated and systematically communicated through
every vehicle and reinforced at every opportunity. (One would hope that the utility
would not throw out the original intent to be a good neighbor, but only reassign
priorities.)

As people at every level of the organization participated in meetings and activities to

identify new goals and practices, they also created inventories of all the old ways of
thinking and doing that would have to change. They actually developed a humorous
system for "catching" each other in the old ways and rewarding the new. In this way,
what might have become the source of serious resistance became a source of
comraderie and com mitment to the new way of doing business.
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Question 2: Write the techniques for managing change effectively
Answer 2:
The effects of change impact morale, productivity, interpersonal relationships and
even financial success. Change management thus is a big concern, especially in
the business world. Controlling the effects of change means that a person has to find
techniques by which to manage change effectively. If people use such techniques in
a systematic way, then transitions at home or in the workplace may be much easier
because the anxiety or ill feelings change produces are lessened.

Readiness
1. According to change-management.com, readiness assessments are one of the
primary techniques for managing change effectively. Readiness assessments
measure how prepared employees and administrators are to handle
modifications. These assessments may include evaluations of inventory or
other resources, but they also may include interviews with employees and
administrators to analyze what is needed to accommodate the change.

Resistance Management
2. Resistance management basically means that you prepare yourself for
anything anyone might do in order to stop the change. For example, you
might set up a policies and procedures manual that clearly states what the
consequences of not following the changes are. Another resistance
management option is to place strong leaders who are accepting of changes
as project managers.

Feedback and Progress

3. Evancarmichael.com states that feedback and progress are important for
change management. People may be more likely to accept change if they
have a chance to tell leaders their thoughts and concerns. Feedback also
gives administrators a chance to monitor progress and determine whether
action plans related to the change are working properly.

Success
4. According to Evancarmichael.com, effective change management involves
rewarding success. Simple acknowledgment or thanks for what someone has
done well can make a lot of difference in the attitude of employees regarding
change. Other forms of celebrating success might be announcing positive
outcomes on a bulletin board or holding a company picnic if a goal related to
the change is met. The key here is consistency--if a leader points out
successes of only certain people, employees will end up divided.

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Explanation
5. People may be more receptive to change or handle it more appropriately if
they have a logical understanding of why the change is happening. Thus, an
effective change management technique is to hold formal or informal
meetings in which leaders can explain why the change is taking place, the
potential impacts of the change, and the goals related to the change. Such
explanations, when done in an open forum, give the impression that all
members of the group are valued equally, which creates a sense of unity. This
sense of unity may help the group turn toward the change with a common
purpose.

Training
6. One of the biggest complaints people have about change is that they are not
equipped for it. For example, a computer programmer might resist a
requirement to write code in Java if he has dealt primarily with HTML.
Providing adequate training lets individuals meet the challenges the change
requires and eliminates the excuse that the change cannot be implemented
for lack of knowledge or preparedness.

Question 3: Discuss the employee involvement in change management

Answer 3:

In any change, especially ones that affect a complete organization, it is impossible to

involve every employee in each decision. Respondents to my change management
questions over the years suggested, however, that when change works, the
organization has gone out of its way to try employee involvement.

Employee Involvement for Effective Change Management

• Create a plan for involving as many people as possible, as early as possible, in

the change process.
• Involve all stakeholders, process owners, and employees who will feel the impact
of the changes, as much as possible, in the learning, planning, decisions, and
implementation of the change. Often, in change management, a small group of
employees learns important information about change and change management.
If they fail to share the information with the rest of the employees, the remaining
employees will have trouble catching up with the learning curve.
If a small group makes the change management plans, employees affected by the
decisions will not have had needed time to analyze, think about, and adjust to the
new ideas. If you leave employees behind, at any stage of the process, you open
the door in your change management process, for misunderstanding, resistance,
and hurt.

• Even if employees cannot affect the overall decision about change, involve each
employee in meaningful decisions about their work unit and their work.

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 • Build measurement systems into the change process that tell people when they
are succeeding or failing. Provide consequences in either case. Employees who are
positively working with the change need rewards and recognition. After allowing
some time for employees to pass through the predictable stages of change,
negative consequences for failure to adopt the changes, are needed.

You cannot allow the nay-sayers to continue on their negative path forever; they
sap your organization of time, energy, and focus, and eventually, affect the morale
of the positive many. The key is to know, during your change management
process, when to say, enough is enough.
Help employees feel as if they are involved in a change management process that is
larger than themselves by taking these actions to effectively involve employees in
change management.

MU0009 -Change Management

Set 2
1. Discuss types of organizational teams?

Team

One of the newest organizational structures developed in the 20th century is team. In small
businesses, the team structure can define the entire organization. Teams can be both horizontal
and vertical. While an organization is constituted as a set of people who synergize individual
competencies to achieve newer dimensions, the quality of organizational structure revolves
around the competencies of teams in totality.[12] For example, every one of the Whole Foods
Market stores, the largest natural-foods grocer in the US developing a focused strategy, is an
autonomous profit centre composed of an average of 10 self-managed teams, while team leaders
in each store and each region are also a team. Larger bureaucratic organizations can benefit from
the flexibility of teams as well. Xerox, Motorola, and DaimlerChrysler are all among the
companies that actively use teams to perform tasks.

Network

Another modern structure is network. While business giants risk becoming too clumsy to proact
(such as), act and react efficiently, the new network organizations contract out any business
function, that can be done better or more cheaply. In essence, managers in network structures
spend most of their time coordinating and controlling external relations, usually by electronic
means. H&M is outsourcing its clothing to a network of 700 suppliers, more than two-thirds of
which are based in low-cost Asian countries. Not owning any factories, H&M can be more
flexible than many other retailers in lowering its costs, which aligns with its low-cost strategy.
The potential management opportunities offered by recent advances in complex networks theory
have been demonstrated including applications to product design and development, and
innovation problem in markets and industries.

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Virtual

A special form of boundaryless organization is virtual. It works in a network of external alliances,

using the Internet. This means while the core of the organization can be small but still the
company can operate globally be a market leader in its niche. According to Anderson, because of
the unlimited shelf space of the Web, the cost of reaching niche goods is falling dramatically.
Although none sell in huge numbers, there are so many niche products that collectively they make
a significant profit, and that is what made highly innovative Amazon.com so successful

Types of Organizational teams

Teams perform various functions which include making products, providing services, negotiating
deals, coordinating projects and making decisions.

There are four main types of teams which are

Problem-solving teams; self managed teams, cross functional teams and virtual teams.

Problem-solving teams involve people of around five to twelve employees of the same
department work together for few hours each week and discuss ways to improve the quality,
efficiency and the work environment.

Self managed teams are teams of 10-15 people who take on the responsibility of their supervisors
which involves planning, work scheduling, assigning tasks, sorting out problems and making
decisions accordingly with the help of suppliers and customers.

Employees of same rank of different departments combine together to perform a particular task
are called cross functional team.

The team which involves the use of computer technology to bind together the dispersed members
to accomplish a common goal is called virtual team. These four teams are necessary for the
growth of an organization.

Jon Katzenbach and Douglas Smith, in an article The Discipline of Teams, published in the
Harvard Business Review July –August 2005 - The High Performance Organisation provide some
insight into this by identifying three broad types of teams:

1. Recommender Teams: those that recommend things – task forces or project groups
2. Doer Teams: those that make or do things – manufacturing, operations, or marketing
groups
3. Managing Teams: those that run things – groups that oversee some significant functional
activity

Team Type affects team collaboration strategy

If you are not clear on what type of team you are dealing with then you are unlikely to have the
right focus in your team collaboration strategy.
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For example:

Recommender Teams are often part-time; great for reviewing work but can lack a “team
engine” for getting detailed work done.

Managing Teams are often staffed with senior executives who have serious time management
challenges and are unlikely to engage with traditional team communication and meeting
approaches.

Doer teams are great for doing things but their networks may be limited to their own functional
areas which can blind them to some innovation and cross-functional opportunities.

Q.2 Mr. Ram is working in ‘United India’ a public sector company for last 15 years. The organization is
facing competition from various private and Multinational companies. To meet the challenges,
management has decided to update their information system by integrating information technology in
every sphere of functioning. Mr. Ram is accustomed to manual working system. He finds the new
technology and its working difficult to cope up with. To him the new technology is a threat for his job
performance. His professional and personal life is badly affecting due to his new found job stress. After
listening to his problem his friend suggest him to develop self mastery.

• What nature of problem Mr. Ram is facing?

Answer Stress

• What is self mastery?

Answer: Self Mastery, alone, sounds like a selfish term; but if you cannot help yourself, you will
have limited ability to help others. Self mastery is the ability to make the most out of your
physical, mental, and spiritual health. In other words, to be the best you can be.
As a result of your efforts, you will be able to help everyone around you. In order for you
to change the world around you, for the better, you have to change yourself for the better,
along the way.
You cannot sit on a mountain top waiting for perfection before you help your fellow man.
The time to help is now, and we must look at ourselves as works in progress. Appreciate
yourself for who you are, what you are, and what you have accomplished so far.
Appreciate your friends, family, and associates for who they are. Accept them, as they are,
without expecting perfection. This is a common mistake for parents to make with their
children, but it also happens in a variety of relationships. So, let go of demands on others -
especially unrealistic demands.
Where do we start learning the secrets of self mastery? If you accept things around you,
without demand, you already have taken the first step. There are two important factors
here.
1. Once you accept people, and situations, for what they are, you won’t waste time and
energy with frustration. This causes inner frustration, emotional turmoil, worries, and
depression.
2. Once you change yourself, through positive self mastery, the world around you will
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 change for the better, without much effort on your part.
You will not be able to make all of the changes to mind, body, and spirit, at once, but they
are connected.

• Explain the various spheres of self mastery that Ram should follow to cope up the
situation?

There are three kinds of anger.

A momentary and present time expression of anger triggered by an event is the most pure form.
Even though there are plenty of other ways to express pain, anger has an important and very
specific quality. It assists us in standing up for ourselves by drumming up power from within to
draw boundaries when we need them.

This type of anger is different because it is proactive and causal, often righteous. To stop or go
against the flow of anger before the energy is alchemized into a higher state of consciousness,
actually suppresses it.

Anger about being at the effect of everything in the world is bred from a victim mind-set and is
based in blame and regret. It is often the resultant aftermath of a lifetime of negative beliefs and
self-abasement that have never been addressed. Clearly, this type of anger will drag us deeper into
our traumas and story, rendering us unable to stand up for ourselves, yet it also has the potential
to motivate us to blast our way out of the muck. Again, suppressing it here could mean a drop
down the ladder into apathy.

Then there is the type of anger and rage that presents from angst and resentment. This fear-based
varietal comes from seeds soaked in annihilation and is coupled with an undercurrent of dread and
terror. Stuck in this place, a person often fights like a caged wild animal to defend. Positioned
between victim anger and proactive anger, standing up for ourselves while caught in this place is
almost always destructive, though not necessarily wholly negative.

My personal breed of anger is the latter, though I did not come to fully embrace this in myself
until fairly recently because I needed it to survive.

It took a lot of tenacity, willingness and courage to see the destructive side of my programming.
The side that feels as though it is being annihilated by many people, in most situations, and by the
rogue negative energies of the world, certainly did not want to be uncovered because it protected
me in my most vulnerable moments. It's been my armor.

Most of us have at least one nagging and addictive emotion we fall back on. And if it's not an
emotion, it's a state of mind or body related to an emotion. They are all the same, in a way, and
one is just as harmful as the next. Anger just looks more obvious and it's so much less politically
correct to walk around angry than it is to walk around sad or discouraged!

Q.3 Explain stages of organizational change.

Stages
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The progression of states is:

Denial – "I feel fine."; "This can't be happening, not to me."

Denial is usually only a temporary defense for the individual. This feeling is generally replaced
with heightened awareness of positions and individuals that will be left behind after death.

1. Anger – "Why me? It's not fair!"; "How can this happen to me?"; "Who is to blame?"
Once in the second stage, the individual recognizes that denial cannot continue. Because
of anger, the person is very difficult to care for due to misplaced feelings of rage and envy.
Any individual that symbolizes life or energy is subject to projected resentment and
jealousy.
2. Bargaining – "Just let me live to see my children graduate."; "I'll do anything for a few
more years."; "I will give my life savings if..."
The third stage involves the hope that the individual can somehow postpone or delay
death. Usually, the negotiation for an extended life is made with a higher power in
exchange for a reformed lifestyle. Psychologically, the individual is saying, "I understand
I will die, but if I could just have more time..."
3. Depression – "I'm so sad, why bother with anything?"; "I'm going to die... What's the
point?"; "I miss my loved one, why go on?"
During the fourth stage, the dying person begins to understand the certainty of death.
Because of this, the individual may become silent, refuse visitors and spend much of the
time crying and grieving. This process allows the dying person to disconnect oneself from
things of love and affection. It is not recommended to attempt to cheer up an individual
who is in this stage. It is an important time for grieving that must be processed.
4. Acceptance – "It's going to be okay."; "I can't fight it, I may as well prepare for it."
In this last stage, the individual begins to come to terms with his mortality or that of his
loved one.

Kübler-Ross originally applied these stages to people suffering from terminal illness, later to any
form of catastrophic personal loss (job, income, freedom). This may also include significant life
events such as the death of a loved one, divorce, drug addiction, the onset of a disease or chronic
illness, an infertility diagnosis, as well many tragedies and disasters.

Kübler-Ross claimed these steps do not necessarily come in the order noted above, nor are all
steps experienced by all patients, though she stated a person will always experience at least two.
Often, people will experience several stages in a "roller coaster" effect—switching between two
or more stages, returning to one or more several times before working through it.

Significantly, people experiencing (or caretakers observing) the stages should not force the
process. The grief process is highly personal and should not be rushed, nor lengthened, on the
basis of an individual's imposed time frame or opinion. One should merely be aware that the
stages will be worked through and the ultimate stage of "Acceptance" will be reached.

However, there are individuals who struggle with death until the end. Some psychologists believe
that the harder a person fights death, the more likely they will be to stay in the denial stage. If this
is the case, it is possible the ill person will have more difficulty dying in a dignified way. Other
psychologists state that not confronting death until the end is adaptive for some people. Those

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who experience problems working through the stages should consider professional grief
counseling or support groups.

Cultural relevance

A dying individual's approach to death has been linked to the amount of meaning and purpose a
person has found throughout his lifetime. A study of 160 people with less than three months to
live showed that those who felt they understood their purpose in life or found special meaning,
faced less fear and despair in the final weeks of their lives than those who had not. In this and
similar studies, spirituality helped dying individuals deal with the depression stage more
aggressively than those who were not spiritual.

Criticism

According to a book by Professor George Bonanno at Columbia University, as well as several

rigorous scientific studies which he and others have carried out over 20-plus-year period and
which were supported by major research organizations, such as NIH, NIMH, and the National
Science Foundation, the preponderance of evidence shows that no stages of grief exist and that the
Kubler-Ross theory of stages theory is invalid. Resilience, as first postulated by Bonanno, is the
accurate description of the human grief experience and grief can take any of four trajectories.

A 2000–2003 study of bereaved individuals conducted by Yale University obtained some findings
that were consistent with the five-stage theory and others that were inconsistent with it. Several
letters were also published in the same journal criticizing this research and arguing against the
stage idea. Skeptic Magazine published the findings of the Grief Recovery Institute, which
contested the concept of stages of grief as they relate to people who are dealing with the deaths of
people important to them.

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