Professional Documents
Culture Documents
MB0036 - Strategic Management and Business Policy
MB0036 - Strategic Management and Business Policy
MB0036 - Strategic Management and Business Policy
A well-written plan will serve as a guide through the start up phase of the
business. A business plan is a detailed description of how an organization
intends to produce, market and sell a product or service. It can also
establish benchmarks to measure the performance of your business venture
in comparison with expectations and industry standards.
All these aspects are of great significance from the point of view of the
establishment, progress and maintenance of standards of an organization.
1.1 Introduction
The term ‘strategy’ is drawn from the armed forces. It is a strategic plan that
interlocks all aspects of the corporate mission designed to overpower the
Objectives:
After studying this unit, you will be able to:
Explain the meaning and purposes of a strategy.
Explain the key elements of basic investment strategy.
Mention the key strategy initiatives within a firm.
List the stages involved in strategy formulation and implementation.
Explain different forms of strategic alliances.
Explain the importance of evaluation in the strategic management
process.
Strategy is a way of life both at the macro as well as micro levels for
everyone, whether it is a nation or a company. To win over in a given
complex situation, the organisations, even trans-nationals adopt strategies.
They make changes, if necessary, even to their global strategies. An
individual company may formulate its own strategy to bring out the desired
results. The eventual success of the organisation depends upon strategy
formulation and implementation.
Corporate Strategies
Articulate the vision of the company.
Involve staff in the vision.
Be a good motivator.
Focus on human resources by having the right people with the right
thinking in the right jobs.
Empower the staff to take risks and be innovative.
Programmes
Programmes refer to the logical sequence of operations to be performed in
a given project or job. Programmes tell you “what to do “. A programme is
based on a set of goals, policies, procedures, rules and task assignments.
They are used to carry out a given course of action.
To:
Deal with products and services with specific focussed engineering
applications close to their Core Competence.
Become an international player.
Be innovative.
Be profitable.
Provide total business solutions to ensure customer satisfaction.
The above list outlines some of the key issues at every stage of action
illustrating how:
The mission springs out from vision statements
Goals from the mission
Objectives from goals
Strategies from objectives
And programmes from objectives
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.
At times, it may be possible to gain more market share with the current
products in their current markets through a market penetration strategy. For
instance, SONY introduced TV sets with Trinitron picture tubes into the
market in 1996 priced at a premium of Rs.10,000 and above over the
market through a niche market capture strategy. They gradually lowered the
prices to market levels. However, it also simultaneously launched higher-
end products (high-technology products) to maintain its global image as a
technology leader. By lowering the prices of TVs with Trinitron picture tubes,
the company could successfully penetrate into the markets to add new
customers to its customer base.
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.
c) Diversification Growth:
It refers to the process of identifying opportunities to develop or acquire
businesses that are not related to the company’s current businesses. This
makes sense when such opportunities outside the present businesses are
identified with attractive returns and that industry has business strengths to
be successful. In most cases, this is planned with new products that have
technological or marketing synergies with existing businesses to cater to a
different group of customers (Concentric Diversification).
A printing press might shift over to offset printing with computerised content
generation to appeal to higher-end customers and also add new application
areas ( Horizontal Diversification ) – or even sell stationery.
Alternatively, the company might choose new businesses that have nothing
to do with the current technology, products or markets (Conglomerate
Diversification).
The classic examples for this would be engineering and textile firms setting
up software development centres or Call Centres with new service clients.
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.
General Environment
Internal Factors
Strategy Variations
Strategic Choice
Logistic Alliance
Pizza Hut restaurants do not stock more than three days of their
inventory.
The standard for distribution centres or warehouses is a stringent 14
days, to minimise the costs and optimise quality control. This involves
round-the-clock monitoring of pick-ups and truck movements.
Most of the items are perishable and the company’s standards cover
the entire delivery schedules.
For in-city delivery, the truck is monitored from the time it leaves the
distribution centre till it reaches the restaurant. Not just that – the time
taken in offloading is noted too.
The restaurant gives a strict 30 minutes window in which time the
delivery is to be completed.
Innovative practices
HDFC introduced a high degree of innovation in its activities relating
to customer friendliness, technology adaptation (by computerising
operations), slashing loan processing time and so on.
British Airways provided creative interactive video services on the
new Boeing 777s for passengers to report to Customer Relations
Depts. In-flight, order duty-free goods, get the latest news on
business, fashion, etc.
Every company must tailor an appropriate strategy for achieving its goals.
The most generic types to initiate strategic thinking, as suggested by
Michael Porter, are ( a ) Overall cost leadership, ( b ) Differentiation and ( c )
Focus.
The following are the questions in terms of which environmental and internal
conditions are analysed:
What are the main business objectives?
Does the selected strategy contribute to these objectives?
What is the business definition – is it product-based, market-based or
function-based?
Will it be achieved in the future?
When MOTOROLA could not take off with seven varieties of cell phones,
NOKIA struck gold with just two plain models. The secret of success was
that the products were changed or adapted to local conditions. In other
words, the products and services were more Indianised to ensure
survival in the Indian markets. NOKIA could successfully formulate its
strategy around its different customer segments, varying appeals and
affordable technology.
The neat and clean environment of the cement outlets attracted the
customers who were otherwise used to the dirty and dusty environment
of cement outlets. The customers were assured of the availability and
reliability of the quality products. The customer could avail the services of
a civil engineer and also sit in an air-conditioned chamber of the Shoppe
and watch a video film on grade 53.
evident from a rise in demand from 5000 tonnes per month to 45,000
TpM in Pune alone. Even established giants like ACC and LandT had to
follow his footsteps by introducing grade 53 and also developing their
own exclusive outlets like “ACC ki duniya” and “LandT station”.
4. –––––––––––– is the obvious choice when the firm is not doing well in
terms of sales and revenue and finds greater returns elsewhere, or the
product / service is in the finishing stage of the product life cycle.
5. In case of recession, ––––––––––––––– is the most preferred strategy.
The parameters should be, as a part of the checklist, evolved to check the
nature of objectives, environmental assumptions, internal organisation,
resources, attitudes to risk, timing of decisions and actions, feasibility, and
organisational commitment. Managers may consider, in the order of priority,
the changes in parameters, implementation, strategy, and finally, the
objectives themselves, if performance levels are lower than expected.
1.8 Summary
A strategy is an operational tool to achieve the goals, and thus, the
corporate mission.
To win over in a given complex situation, the organisations, even trans-
nationals adopt strategies.
The recently initiated moves such as globalisation, privatisation and
liberalisation are strategies to attain a globally competitive economy.
There are three alternatives to improve the sales performance of a
business unit, to fill the gap between actual sales and targeted sales:
Intensive growth
Integrative growth
Diversification growth
SAQs II
1. The type of strategic alternative
2. Expansion strategy
3. Stability strategy
4. Retrenchment strategy
5. Retrenchment
SAQs III
1. Promotional alliance
2. Logistic alliance
3. Mergers or acquisitions
4. Market share
5. Focus
6. Behavioural approach
7. Evaluation
Answers to TQs:
1. Refer to 1.2
2. Refer to 1.4
3. Refer to 1.5
4. Refer to 1.5
5. Refer to 1.5
6. Refer to 1.7
2.1 Introduction
A business plan is a detailed description of how an organization intends to
produce, market and sell a product or service. Whether the business is
housing, commercial or some other enterprise, a good business plan
describes to others and to your own board of directors, management and
staff the details of how you intend to operate and expand your business.
A solid business plan describes who you are, what you do, how you will do
it, your capacity to do it, what financial resources are necessary to carry it
out, and how you intend to secure those resources. A well-written plan will
serve as a guide through the start-up phase of the business. It can also
establish benchmarks to measure the performance of your business venture
in comparison with expectations and industry standards. And most
important, a good business plan will help to attract necessary financing by
demonstrating the feasibility of your venture and the level of thought and
professionalism you bring to the task.
Objectives:
After studying this unit, you will be able to:
Explain what a business plan is.
Give examples of goals one may seek to achieve through the creation of
a new business venture.
Explain various sections of a business plan.
Explain the steps for developing sales projections.
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:
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.
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.
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.
Advantages Disadvantages
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.
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:
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.
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.
Customers
In this section of your business plan, you will describe the customer base or
market for your product or service. In addition to providing a detailed
description of your customer base, you will also need to describe your
competition (other local developers or nearby businesses providing a similar
service to your potential customer base).
Who will purchase your product or use your service? How large is your
customer base? Define the characteristics of your target market in terms of
its:
Demographics – Measures of age, gender, race, religion and family
size.
Geography – Measures based on location.
Socioeconomic Status – Measures based on individual or household
annual income.
Provide statistical data to describe the size of your target market. Sources
for this information may include recent data from the Bureau of Statistics,
state or local census data, or information gathered by your organization,
such as membership lists, neighborhood surveys and group or individual
interviews. Be sure to list the sources for your data, as this will further
validate your market assumptions. Include any relevant information
regarding the growth potential for your target market if your business is
expected to rely on growth. Cite any research forecasting population
increases in your target market or other trends and factors that may
increase the demand for your product or service.
Competition
Discuss how people identified in your target market currently meet their
need for your product or service. What other businesses exist in your area
that are similar to your proposed venture? For example, for a housing
business, what are the local markets for purchase and rental? How much
are people currently paying for similar products or services? Briefly describe
what differentiates your proposed venture from these existing businesses
and discuss why you are entering this market.
Sales Projections
Present an estimate of how many people you expect will purchase your
product or service. Your estimate should be based on the size of your
market, the characteristics of your customers and the share of the market
you will gain over your competition. Project how many units you will sell at a
specified price over several years. The initial year should be broken down in
monthly or quarterly increments. Account for initial presentation and market
penetration of your product and any seasonal variations in sales, if
appropriate.
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
Staffing
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.
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?
2.3.5 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
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.
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 individual. Describe in your
narrative any assets that will be allocated to the start-up of the business.
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.
For each potential problem, discuss its likelihood and describe possible
solutions or actions you might undertake to mitigate the problem.
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.
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.
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
Rent
Utilities
Insurance
Admin. Exp. (PT Sec.)
Legal & Accounting
Marketing
Equipment Maintenance/Supplies
Facility Maintenance
Fees/Miscellaneous
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 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.
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.
Vision:
The vision of the Network is:
To enable people to find out about the enterprise priorities so that they
can better appreciate, understand and conserve;
To ensure that the Network will provide the most accessible, reliable and
comprehensive source of Business information, whether locally,
regionally or nationally, to which people can turn;
To help individuals and organisations of all kinds to contribute data and
to participate in the Network so that the information is the best available,
keeping pace with changes in wildlife.
In the execution of these tasks, the Promoters shall assign such priorities as
seem most expedient to them in order to establish the Network as rapidly
and effectively as possible and, thereafter, to maintain it in accordance with
the vision of the Network.
Member organisations and other stakeholders will also take forward the
NETWORK’s development as part of their own remits in addition to those
elements for which the Trust is directly responsible.
2.4.2 Approach
The Strategic Review of the NETWORK is designed to move the
development programme of the NETWORK on from its initial ‘proof of
concept’ phase. This early work included:
The identification of barriers to access with the subsequent evolution of
exchange principles, technical standards such as the use of XML and
the development of a species dictionary to enable searching based on
all known synonyms;
Testing both the practicality and utility of mobilising Business data using
an Internet gateway;
The next phase of the Network’s development builds upon this programme
and will concentrate on expanding and enhancing the Network, and on
adding content provided by an increasing assemblage of contributors in
response to user needs. Other aspects of the programme including further
development of Gateway functionality will be subservient to the need to
deliver a service based on the mobilisation of data in response to the
articulated needs of users.
2.4.3 Implementation
Scope
This section translates the aspirational targets of the previous section into a
credible and realisable work programme for the development of a functional
NETWORK based on product related targets. Broadly the work programme
can be organised into three mutually compatible elements that are required
to develop a functioning network offering universal access to Business
information. The elements differ in the degree of influence the Trust may
have upon their advancement or on the priority that might be placed upon
them if resourcing is a significant constraint.
is seen as an integral part of this service, which tends to raise the priority
members place upon the development of this service by the Trust.
Assumptions
Presumptions have not been made as to which member or members of the
Network might adopt parts of the plan, nor have costs been assigned to
particular outputs as all these variables will depend on which partner(s) take
forward the individual elements of the plan. Nevertheless, the work
programme presents a set of benchmarks for the development of the core
elements of the NETWORK over the next three years. The milestones
assigned to the recommended actions are generic in nature and eventually
will be reflected in the individual projects developed to realise the work
programme. In developing the work programme the following assumptions
have been made:
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;
Gateway
The principal target for the development of the Internet Gateway is the
addition of content. The addition of content has hitherto been largely
serendipitous; dependent upon availability, format, quality etc. but with little
attention to the articulated needs of users. Broadly the requirement is to
gain access to geospatially-referenced species and Location data in
response to the principal drivers identified above, but there will also be a
need to react to new opportunities. To meet these changing needs, a set of
criteria are required against which new opportunities can be assessed.
The Secretariat of the Network will ensure co-ordination and revision of the
Business Priorities through servicing of committees and groups as
required. It will prepare annually a summarised assessment subsequent to
the meetings of the review/steering committees and scrutiny of their reports.
Once approved by the PROMOTERS, the annual summary will be made
available to all members of NETWORK.
The core functions of the Secretariat are:
To support the Promoters and Chairman;
To ensure adherence to jointly agreed objectives;
To resolve conflicting priorities;
To ensure integration across work themes and to identify gaps;
To lead in the promotion of the NETWORK;
To review progress and forward planning;
Communication
The need to communicate effectively underlies the whole work programme.
There is a need to communicate with and between projects, to communicate
between partners in the NETWORK, with funders and, above all, with those
outwith the NETWORK to encourage them to use the service and participate
in it. Each project has a need to communicate either to enhance its
understanding of issues or to make others aware of its successes. This
might be achieved by the development of examples of operational use, or
special interfaces with the NETWORK.
Resourcing Strategy
‘In the absence of any external funding being attracted, the members would
need to redefine their immediate objectives and plan to implement all or part
of the Business Priorities using their own resources. This would
doubtlessly require a scaling down of the plan and difficult internal funding
decisions.
For the purposes of this plan, these supplier organisations are broken down
into three main groups:
The role of the Network in delivering this work is seen as one of ‘facilitator’,
but its role in relation to each principal group will be different.
Recording schemes:
The following selection criteria will be applied:
Subject covered of high/moderate priority for policy etc.;
Data Access:
Species:
The following selection criteria will be applied:
Relevance to the key drivers;
Priority operational need;
Existing quality datasets;
Existing activity including good geographical coverage;
Building on existing initiatives;
Datasets ‘at risk’ of being lost;
Proxy species – relate to other Location/species;
Quick wins.
Project Management:
Each theme will be taken forward by a project or series of projects
dependent upon its complexity. Co-ordination and management will be
achieved for each theme by working groups of active contributors or
funders.
The membership of each working group shall normally not exceed six
members together with an independent chairman who shall not actively
participate in the group’s projects. Members shall be confined to those
who are either involved in and fund, at least in part, the working group’s
approved projects or contribute in other ways to the group’s approved
projects.
Each working group shall determine its own modus operandi, which
shall be reported to and approval sought from the PROMOTERS.
Theme Review:
Each theme will be reviewed annually and its report considered at a
specific meeting.
Duties in respect to this review shall be:
To receive a report from its working group(s) on the progress of the
previous year’s theme work programme
To receive a proposed work schedule for future work to include
projects with milestones and details of funding available
To identify gaps and decide how these might be filled
All members of the working group under review may attend the review
meeting together with such individuals as have a direct or related
interest in the theme. Each review shall be convened by the Programme
Director and shall always include one Trustee.
Promoters’ Approval
In the light of due discussion of both the proposals and their subsequent
reviews the review group shall forward these reports to the Promoters as
a draft summary plan prepared by the secretariat for their consideration,
2.6 Summary
A well-written business plan will serve as a guide through the start-up
phase of the business. It establishes benchmarks to measure the
performance of your business venture in comparison with expectations
and industry standards.
The first step in planning a new business venture is to establish goals
that you seek to achieve with the business.
If one fails to establish clear goals early in the process, the organization
may spend substantial time and resources pursuing potential business
ventures that may be financially viable but do not serve the mission of
the organization in other important ways.
It is also important to establish a timeline for completing the plan.
A good 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 the product or service, attract investment, and establish
operating goals and guidelines.
The business plan is not just a funding tool, but also a blueprint of how
the business should operate.
SAQs II
1. True
2. True
3. True
4. False
Answers to TQs:
1. Refer to 2.2
2. Refer to 2.2
3. Refer to 2.3
4. Refer to 2.4
3.1 Introduction
In the rapidly changing world of global markets, e-commerce and the
internet, the secrets of Complex System evolution provide a basis on which
to reflect on the management of our businesses. Insights gained from
Complex Systems thinking suggest that freedom and creativity count more
than cost reduction and efficiency, as these provide the foundations for
learning and change.
Today, businesses and organizations must deal with the production and
delivery of increasingly complex products and services in a rapidly changing
and uncertain environment. This raises questions concerning the
effectiveness of traditional management methods – focussed on efficiency
Objectives:
After studying this unit, you will be able to:
Explain the meaning of a Complex System.
Describe Complex Systems behaviour.
Explain the concept of creativity in business.
But that was when life was simple and the ‘product’ or ‘service’ to be
produced and delivered only needed to be made at a competitive cost with
adequate quality. Today, we must constantly create new products and
services, with additional and novel attributes, and this creative, adaptive
capacity will be more important to our survival than our level of efficiency,
particularly if, as Complex Systems thinking suggests, efficiency reduces
creativity.
The qualities required for Step 1 are the freedom and ability to move into
uncharted territory and have new thoughts, while those required for Step 2
are the ability to make and act upon rational analyses of the processes and
costs of the system but these are opposite qualities. And, not only that,
pressure for greater measurable accountability, short term share-holder
value and the increasing use of IT makes it increasingly more difficult to
protect the presence of the qualities required for Step 1 against the simpler,
more easily measured qualities for Step 2. Yet without Step 1, there can be
no Step 2.
complete ‘knowledge dynamics’ that drives the company - right through the
creation, evaluation, selection, implementation and discarding of knowledge.
It demonstrates that this is the power behind the competitiveness of new
growth companies and indicates how it can be adopted by businesses and
by whole business networks.
Ultimately, the creativity and imagination of a business will come from the
dynamic interaction of diverse individuals. These individuals that create new
ideas and value may be within one company, but often will span several
within the network, giving rise to winning clusters of activity, capable of
evolving faster than their rivals.
They tell us not to allow optimisation on any single criteria (e.g. cost
minimisation) and to provide freedom and resources to those parts of the
business that must be creative, while regulating closely those parts that are
purely bureaucratic. Making sure that designs and decisions are always
3.5 Creativity
Everyone in business is creative.
Some of most creative people are in manufacturing.
They actually CREATE products that change the world.
Some of the least creative people perhaps are in advertising.
They spend most of their creative energy telling manufacturers that
they…aren’t creative!
Salespeople Are Creative – They are natural born story-tellers.
Accountants are creative.
Brainstorming
Don’t tell people that their ideas are bad, especially if you don’t have a
better one.
Avoid Meetings.
Do not attend more than two meetings a day, or else you will never get any
real creative work done.
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 VARIABLE CALL OPTION
Present value of a project’s operating S Stock price.
cash flows.
Investment costs X Exercise price
Length of time the decision may be t Time to expiry.
deferred.
Time value of money. rf Risk-free interest rate
Risk of the project. 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.
3.6 Summary
Complex System is a system that has more than one possible future. In
other words, it is ‘free’ enough to take more than a single pre-determined
path into the future, and therefore cannot be purely ‘mechanical’.
Answers to TQs:
1. Refer to 3.2
2. Refer to 3.2
3. Refer to 3.3
4. Refer to 3.5
4.1 Introduction
The Business Continuity Guideline is a tool to allow organizations to
consider the factors and steps necessary to prepare for a crisis (disaster or
emergency) so that it can manage and survive the crisis and take all
appropriate actions to help ensure the organization’s continued viability. The
advisory portion of the guideline is divided into two parts: (1) the planning
process and (2) successful implementation and maintenance. Part One
provides step-by-step Business Continuity Plan preparation and activation
guidance, including readiness, prevention, response, and recovery/
resumption. Part Two details those tasks required for the Business
Continuity Plan to be maintained as a living document, changing and
growing with the organization and remaining relevant and executable.
Objectives:
After studying this unit, you will be able to:
Explain what a Business Continuity Plan is.
Explain the purpose of Business Continuity Plan.
Give the meaning of key words and terminology used in connection with
Business Continuity Plan.
Describe how a Business Continuity Plan is developed and
implemented.
4.2.2 Terminology
Alternate Worksite – A work location, other than the primary location, to be
used when the primary location is not accessible.
Contact List – A list of team members and key players in a crisis. The list
should include home phone numbers, pager numbers, cell phone numbers,
etc.
1. Assign Accountability
It is essential that senior leadership of the organization sponsors and takes
responsibility for creating, maintaining, testing, and implementing a
comprehensive Business Continuity Plan (BCP). This will insure that
management and staff at all levels within the organization understand that
the BCP is a critical top management priority. It is equally essential that
senior leadership engage a ‘‘top down’’ approach to the BCP so that
management at all levels of the organization understand accountability for
effective and efficient plan maintenance as part of the overall governance
priorities.
Corporate Policy
In the event of a crisis, an organization-wide BCP Policy committed to
undertaking all reasonable and appropriate steps to protect people,
property, and business interests is essential. Corporate policy should
include a definition of a ‘‘crisis.’’
Planning Team
A Business Continuity Planning Team with responsibility for BCP
development that includes senior leaders from all major organizational
functions and support groups should be appointed to ensure wide-spread
acceptance of the BCP.
Communicate BCP
The BCP should be communicated throughout the organization, to ensure
employees are aware of the BCP structure and their roles within the plan.
Contact Information
Contact information for personnel assigned to crisis management and
response teams should be included in the plans. Personal information such
as unlisted phone numbers and home addresses should be protected. The
organization should establish procedures to ensure that the information is
kept up to date. Consideration should be given to a BCP software tool that
supports effective change management.
6. Mitigation Strategies
The resources that will support the organization to mitigate the crisis should
also be monitored continually to ensure that they will be available and able
to perform as planned during the crisis. Examples of such systems and
resources include, but are not limited to:
Emergency equipment
Types of Notification
Notifications in a crisis situation should be timely and clear and should use a
variety of procedures and technologies, with recognition that devices used
have advantages and limitations.
Declare a Crisis
The point at which a situation is declared to be a crisis should be clearly
defined, documented, and fit very specific and controlled parameters.
Responsibility for declaring a crisis should also be clearly defined and
assigned. First and second alternates to the responsible individual should
be identified.
The activities that declaring a crisis will trigger include, but are not limited to:
Additional call notification
Evacuation, shelter, or relocation
Safety protocol
Response site and alternate site activation
Team deployment
9. Communications
Remember: Effective communication is one of the most important
ingredients in crisis management.
Internal External
Employees and their families
Customers/Clients, present and potential
Business Owners/Partners
Contractors/Vendors
Boards of Directors
Media
Onsite Contractors/Vendors
Government and Regulatory Agencies
Local law enforcement
Emergency responders
Investors/Shareholders
Surrounding communities
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.
Notification of Next-of-Kin
Arrangements should be made for notification of any next-of-kin in case of
injuries or fatalities. If at all possible, notification should take place in person
by a member of senior management. Appropriate training should be
provided.
Family Representatives
The organization should implement a Family Representative program in
case of severe injury or fatality. The Family Representative should be
someone other than the person who performed the notification. This
Representative should act as the primary point of contact between the
family and the organization. Comprehensive training for the Representative
is a necessity.
Crisis Counseling
Crisis counseling should be arranged as necessary. In many cases, such
counseling goes beyond the qualifications and experience of an
Payroll
The payroll system should remain functional throughout the crisis.
Logistics
Logistical decisions made in advance will impact the success or failure of a
good BCP. Among them are the following:
Alternate Worksites
The organization should have alternate worksites identified for business
resumption and recovery. In the absence of other company facilities being
available and/or suitable, access to alternate worksites can be arranged
through appropriate vendors. Planning concerning the identification and
availability of alternate worksites should take place early in the BCP
process. Alternate worksites should provide adequate access to the
resources required for business resumption identified in the BIA.
Offsite Storage
Offsite storage is a valuable mitigation strategy allowing rapid crisis
response and business recovery/resumption. The off-site storage location
should be a sufficient distance from the primary facility so that it is not likely
to be similarly affected by the same event. Items to be considered for off-site
storage include critical and vital records (paper and other media) necessary
to the operations of the business. Procedures should be included in the plan
to ensure the timely deliver of any necessary items from offsite storage to
the Crisis Management Center or the alternate worksites.
Transportation
Transportation in a time of crisis can be a challenge. Provisions should be
arranged ahead of time, if possible. Areas where transportation is critical
include, but are not limited to:
Evacuation of personnel (e.g., from a demolished work-site or from a
satellite facility in another country)
Transportation to an alternate worksite
Supplies into the site or to an alternate site
Transportation of critical data to worksite
Transportation for staff with special needs.
Benefits of Testing
The benefits and necessity for testing, which involves training and
exercises, cannot be overemphasized. Testing can keep Teams and
employees effective in their duties, clarify their roles, and reveal
weaknesses in the BCP that should be corrected. A commitment to testing
lends credibility and authority to the BCP.
complex as the test process evolves. Early tests could include checklists,
simple exercises, and small components of the BCP. As the test schedules
evolve, tests should become increasingly complex, up to a full-scale
activation of the entire BCP, including external participation by public safety
and emergency responders.
Test Monitoring
When feasible, assign observers to take notes during the test. If possible,
arrange to videotape and/or use audiotape devices for further appraisal at
the conclusion of the exercise. If videotape and/or audiotape devices are not
available, then a person should be assigned to document the chronological
list of events during the testing.
crisis. Future testing, as well as the BCP itself, should then be modified as
necessary based on the test results.
6. Have the initial audit, security, and insurance departments reviewed the
BCP?
7. Has the BCP been tested, including a surprise test?
Accountability
1. Does your organization’s policy include a definition of crisis?
2. Has the person responsible for critical systems and business processes
been identified?
3. Has a BCP Team been appointed, and does it include senior business
function leaders?
4. Has the BCP been communicated throughout the organization?
5. Has a person been assigned with the responsibility to update the BCP?
Risk Assessment
1. Has your organization conducted a Risk Assessment?
2. Have the types of risks that may impact your organization been
identified and analyzed?
3. Has the likelihood for each type of risk been rated?
Strategic Plans
1. Have methods to mitigate the risks identified in the Business Impact
Analysis and Risk Assessment been identified?
2. Have plans and procedures to respond to any incident been developed?
3. Have strategies that address short and long term business interruptions
been selected?
4. Are the strategies attainable, tested, and cost effective?
Prevention
Compliance with Corporate Policy & Mitigation Strategies
1. Have compliance audits been conducted to enforce BCP policy and
procedures?
2. Have the systems and resources that will contribute to the mitigation
process been identified, including personnel, facilities, technology, and
equipment?
3. Have the systems and resources been monitored to ensure they will be
available when needed?
Response
Potential Crisis Recognition and Team Notification
1. Will the response program recognize when a crisis occurs and provide
some level of response?
2. Have the danger signals been identified that indicate a crisis is
imminent?
3. Have personnel been trained to observe warning signs of an imminent
crisis?
4. Has a notification system been put in place, including redundant
systems?
5. Is the notification contact list complete and up to date?
Declare a Crisis
1. Have the criteria been established for when a crisis should be declared?
2. Has the responsibility for declaring a crisis been clearly defined and
assigned?
3. Has an alert network for BCP Team members and employees been
established?
4. Is it ensured that there is an alternate means of warning if the alert
network fails?
5. Have the activities that will be implemented in event of a crisis been
identified, including notification, evacuation, relocation, alternate site
activation, team deployment, operational changes, etc?
Communications
1. Has a crisis communications strategy been developed?
2. Are communications timely, honest, and objective?
3. Are communications with all employees occurring at approximately the
same time?
4. Are regular updates provided, including notification of when the next
update will be issued?
5. Has a primary spokesperson and back-up spokespersons been
designated who will manage and disseminate crisis communications to
the media and others?
Testing
1. Are the Business Continuity Plan and appropriate Teams tested to
reveal any weaknesses that require correction?
2. Have goals and expectations of testing and drills been established?
3. Are drills and tabletop exercises conducted on an annual basis?
4. Has responsibility for testing the BCP been assigned with consideration
for establishing a test team?
5. Does test participation include various groups from the organization and
the public sector?
6. Have observers been assigned who will take notes during the test and
critique the test at the conclusion of the exercise?
7. Have tests and drills been evaluated, including assessing how well the
goals and objectives of the tests and drills were met?
4.6 Summary
‘Business Continuity Plan’ is an ongoing process supported by senior
management and funded to ensure that the necessary steps are taken to
identify the impact of potential losses, maintain viable recovery strategies
and plans, and ensure the continuity of operations through personnel
training, plan testing, and maintenance.
SAQs II
1. False
2. True
3. False
4. True
Answers to TQs:
1. Refer to 4.2
2. Refer to 4.2
3. Refer to 4.3
4. Refer to 4.4
5.1 Introduction
Objectives
5.2 What is Small Business Administration (SBA)?
5.3 The Different Phases of a New Business
Self Assessment Questions I
5.4 Stock Options
5.5 Bankruptcy Laws
Self Assessment Questions II
5.6 The Chief Financial Officer (CFO)
5.6.1 Organizational Affiliation
5.6.2 Functions
Self Assessment Questions III
5.7 Summary
5.8 Terminal Questions
5.9 Answers to SAQs and TQs
5.1 Introduction
Everyone is talking about small businesses. In 1993, when it was allowed in
Developing countries, more than 90,000 new firms were registered by
individuals. Now, less than three years later, official figures show that only
40,000 of them still pay their dues and present annual financial statements.
These firms are called "active" - but this is a misrepresentation. Only a very
small fraction really does business and produces income.
Small business is more than a fashion or a buzzword. In the USA, only small
businesses create new jobs. The big dinosaur firms (the "blue-chips") create
negative employment - they fire people. This trend has a glitzy name:
downsizing.
In Israel many small businesses became world class exporters and big
companies in world terms. The same goes, to a lesser extent, in Britain and
in Germany.
Objectives:
After studying this unit, you will be able to:
Describe the valuable services provided by Small Business
Administration.
Explain different phases of a new business.
Explain the benefits of Stock Option Plan.
Explain the Bankruptcy Laws prevailing in the USA.
Describe the functions of Chief Financial Officer.
They help them organize funding for all their needs: infrastructure, capital
goods (machinery and equipment), land, working capital, licence and patent
fees and charges, etc.
The SBAs have access to government funds, to local venture capital funds,
to international and multilateral investment sources, to the local banking
community and to private investors. They act as capital brokers at a fraction
of the costs that private brokers and organized markets charge.
They reduce bureaucracy. They mediate between the small business and
the various tentacles of the government. They become the ONLY address
which the new business should approach, a "One Stop Shop".
But why do new (usually small) businesses need special treatment and
encouragement at all? And if they do need it – what are the best ways to
provide them with this help? This is a question to ponder over.
They are oriented to fill the needs of a market niche (a small group of select
consumers or customers), or to provide an innovative solution to a problem
which bothers many, or to create a market for a totally new product or
service, or to provide a better solution to a problem which is solved in a less
efficient manner.
At this stage, what the entrepreneurs need most is expertise. They need a
marketing expert to tell them if their idea is marketable and viable. They
need a financial expert to tell them if they can get funds in each phase of the
business cycle - and wherefrom and also if the product or service can
produce enough income to support the business, pay back debts and yield a
profit to the investors. They need technical experts to tell them if the idea
can or cannot be realized and what it requires by way of technology
transfers, engineering skills, know-how, etc.
Once the idea has been shaped to its final form by the team of
entrepreneurs and experts – the proper legal entity should be formed. A
bewildering array of possibilities arises:
This costs a lot of money, one thing that entrepreneurs are in short supply of
free legal advice is likely to be highly appreciated by them.
When the firm is properly legally established, registered with all the relevant
authorities and has appointed an accounting firm – it can go on to tackle its
main business: developing new products and services. At this stage the firm
should adopt Western accounting standards and methodology. Accounting
systems in many countries leave too much room for creative playing with
reserves and with amortization. No one in the West will give the firm credits
or invest in it based on domestic financial statements.
A whole host of problems faces the new firm immediately upon its formation.
On top of that, markets do not always react the way entrepreneurs expect
them to react. Markets are evolving creatures: they change, develop,
disappear and re-appear. They are exceedingly hard to predict. The sales
projections of the firm could prove to be unfounded. Its contingency funds
can evaporate.
In one office, he will find the representatives of all the relevant government
offices, authorities, agencies and municipalities.
He will present his case and the business that he wishes to develop. In a
matter of few weeks he will receive all the necessary permits and licences
without having to go to each office separately.
Having obtained the requisite licences and permits and having registered
with all the appropriate authorities – the entrepreneur will move on to the
next room in the same building. Here he will receive a list of all the sources
of capital available to him both locally and from foreign sources. The terms
and conditions of the financing will be specified for each and every source.
Example: EBRD – loans of up to 10 years – interest between 6.5% to 8% –
grace period of up to 3 years – finances mainly industry, financial services,
environmental projects, infrastructure and public services.
The entrepreneur will select the sources of funds most suitable for his needs
– and proceed to the next room.
The next room will contain all the experts necessary to establish the
business, get it going – and, most important, raise funds from both local and
international institutions. For a symbolic sum they will prepare all the
documents required by the financing institutions as per their instructions.
The solution is simple: a tutor or a mentor will be attached to each and every
entrepreneur. This tutor will escort the entrepreneur from the first phase to
the last.
He will be employed by the "One Stop Shop" and his role will be to ease life
for the novice businessman. He will transform the person to a businessman.
And then they will wish the entrepreneur: "Bon Voyage" – and may the best
ones win.
In publicly traded companies, the former wish to maximize the value of the
stocks (short term), the latter might have a longer term view of things. In the
USA, shareholders place emphasis on the appreciation of the stocks
(the result of quarterly and annual profit figures). This leaves little room for
technological innovation, investment in research and development and in
infrastructure. The theory is that workers who also own stocks avoid these
cancerous conflicts which, at times, bring companies to ruin and, in many
cases, dilapidate them financially and technologically. Whether reality lives
up to theory, is an altogether different question.
Stock options have many uses: they are popular investments and
speculative vehicles in many markets in the West, they are a way to hedge
(to insure) stock positions (in the case of put options which allow you to sell
your stocks at a pre-fixed price). With very minor investment and very little
risk (one can lose only the money invested in buying the option) – huge
profits can be realized.
Dividends that the workers receive on the shares that they hold can be
reinvested by them in additional shares of the firm (some firms do it for them
automatically and without or with reduced brokerage commissions). Many
companies have wage "set-aside" programs: employees regularly use a part
of their wages to purchase the shares of the company at the market prices
at the time of purchase. Another well-known structure is the Employee Stock
Ownership Plan (ESOP) whereby employees regularly accumulate shares
and may ultimately assume control of the company.
It all began with Ronald Reagan. His administration passed in Congress the
Economic Recovery Tax Act (ERTA – 1981) under which certain kinds of
stock options ("qualifying options") were declared tax-free at the date that
they were granted and at the date that they were exercised. Profits on
shares sold after being held for at least two years from the date that they
were granted or one year from the date that they were transferred to an
employee were subject to preferential (lower rate) capital gains tax. A new
class of stock options was thus invented: the "Qualifying Stock Option".
Such an option was legally regarded as a privilege granted to an employee
of the company that allowed him to purchase, for a special price, shares of
its capital stock (subject to conditions of the Internal Revenue – the
American income tax – code). To qualify, the option plan must be approved
by the shareholders, the options must not be transferable (i.e., cannot be
sold in the stock exchange or privately – at least for a certain period of time).
Additional conditions: the exercise price must not be less than the market
price of the shares at the time that the options were issued and that the
employee who receives the stock options (the grantee) may not own stock
representing more than 10% of the company's voting power unless the
option price equals 110% of the market price and the option is not
exercisable for more than five years following its grant. No income tax is
payable by the employee either at the time of the grant or at the time that he
converts the option to shares (which he can sell at the stock exchange at a
profit) – the exercise period. If the market price falls below the option price,
another option, with a lower exercise price can be issued. There is a
100,000 USD per employee limit on the value of the stock covered by
options that can be exercised in any one calendar year.
work rules related concessions in return for ownership privileges – but only if
the company is otherwise liable to close down ("marginal facility").
How much of its stock should a company offer to its workers and in which
manner?
There are no rules (except that ownership and control need not be
transferred). A few of the methods:
1. The company offers packages of different sizes, comprising shares and
options and the employees bid for them in open tender.
2. The company sells its shares to the employees on an equal basis
(all the members of the senior management, for instance, have the right
to buy the same number of shares) – and the workers are then allowed
to trade the shares between them.
3. The company could give one or more of the current shareholders the
right to offer his shares to the employees or to a specific group of them.
As time goes by, the creditors gear up and litigate in a court of law or in a
court of arbitration. This leads to a “technical or equity insolvency” status.
But this is not the only way a company can be rendered insolvent. It could
also run liabilities which outweigh its assets. This is called “bankruptcy
insolvency”. True, there is a debate raging as to what is the best method to
appraise the firm’s assets and the liabilities. Should these appraisals be
based on market prices - or on book value?
If the negotiations with the creditors of the company (as to how to settle the
dispute arising from the company’s default) fails, the company itself can file
(=ask the court) for bankruptcy in a "voluntary bankruptcy filing".
Enter the court. It is only one player (albeit, the most important one) in this
unfolding, complex drama. The court does not participate directly in the
script.
Court officials are appointed. They work hand in hand with the
representatives of the creditors (mostly lawyers) and with the management
and the owners of the defunct company.
They face a tough decision: should they liquidate the company? In other
words, should they terminate its business life by (among other acts) selling
its assets?
The proceeds of the sale of the assets are divided (as "bankruptcy
dividend") among the creditors. It makes sense to choose this route only if
the (money) value yielded by liquidation exceeds the money the company,
as a going concern, as a living, functioning, entity, can generate.
Once the assets of the company are sold, the first to be fully paid off are the
secured creditors. Only then, the priority creditors are paid (wholly or
partially).
And only if any money left after all these payments is it proportionally doled
out to the unsecured creditors.
Each State has modified the Federal Law to fit its special, local conditions.
Still, a few things – the spirit of the law and its philosophy are common to all
the versions. Arguably, the most famous procedure is named after the
chapter in the law in which it is described, Chapter 11. Following is a brief
discussion of chapter 11 intended to demonstrate this spirit and this
philosophy.
The American legislator set the following goals in the bankruptcy laws:
a. To provide a fair and equitable treatment to the holders of various
classes of securities of the firm (shares of different kinds and bonds of
different types).
Examples of such new claims: owners of debentures of the firm can receive,
instead, new, long term bonds (known as reorganization bonds, whose
interest is payable only from profits).
The chapter dealing with reorganization (the famous "Chapter 11") allows
for "arrangements" to be made between debtor and creditors: an extension
or reduction of the debts.
A more in-depth study of the bankruptcy laws shows that they prescribe
three ways to tackle a state of malignant insolvency which threatens the well
being and the continued functioning of the firm:
By filing a bond, the debtor (really, the owners of the debtor) is able to
regain possession of the business from the trustee.
Chapter 11 – Reorganization
Unless the court rules otherwise, the debtor remains in possession and in
control of the business and the debtor and the creditors are allowed to work
together flexibly. They are encouraged to reach a settlement by compromise
and agreement rather than by court adjudication.
And so, chapter 11 allows the debtor and creditors to be in direct touch, to
negotiate payment schedules, the restructuring of old debts, even the
granting of new loans by the same disaffected creditors to the same
irresponsible debtor.
Chapter 10
Is sort of a legal hybrid, the offspring of chapters 7 and 11:
the court – and for verifying strict adherence to them by both debtor and
creditors.
Despite its clarity and business orientation, many countries found it difficult
to adapt to the pragmatic, non sentimental approach which led to the virtual
elimination of the absolute priority rule.
The receiver takes possession (but not title) of the assets and the affairs of
a business in a receivership. He collects rents and other income on behalf of
the firm.
So, British Law is much more in favour of the creditors. It recognizes the
supremacy of their claims over the property claims of the owners. Honouring
obligations – in the eyes of the British legislator and their courts – is the
cornerstone of efficient, thriving markets. The courts are entrusted with the
protection of this moral pillar of the economy.
But the law itself is toothless and lackadaisically applied by the incestuous
web of institutions in the country. Between 3/93 – 9/93 there were 1000
filings for insolvency, which resulted in only 30 commenced bankruptcy
procedures. There hasn’t been a single major bankruptcy in the Czech
Republic since then – and not for lack of candidates.
Bad debts are transferred to base portfolios and have one of three fates:
No one is certain what is the best model. The reason is that no one knows
the answers to the questions: Are the rights of the creditors superior to the
rights of the owners? Is it better to rehabilitate than to liquidate?
Until such time as these questions are answered and as long as the
corporate debt crisis deepens – we will witness a flowering of versions of
bankruptcy laws all over the world.
3. A company can run liabilities which outweigh its assets. This is called
––––––––––––––––––––.
4. Once the assets of the company are sold, the first to be fully paid off are
––––––––––––––––– .
The job of the Chief Financial Officer is composed of many elements. Here
is a universal job description which is common throughout the West.
Despite the above said, the CFO can report directly to the Board of
Directors through the person of the Chairman of the Board of Directors or by
direct summons from the Board of Directors.
The same procedures are applied: the Board can summon a worker to
testify – the same way that the Senate holds hearings and cross-questions
workers in the administration. Lately, however, the delineation became
fuzzier with managers serving on the Board or, worse, colluding with it.
Ironically, Europe, where such incestuous practices were common hitherto –
is reforming itself with zeal (especially Britain and Germany).
Developing countries are still after the cosy, outdated European model.
Boards of Directors are rubber stamps, devoid of any will to exercise their
powers. They are staffed with cronies and friends and family members of
the senior management and they do and decide what the General Managers
tell them to do and to decide. General Managers – unchecked – get involved
in colossal blunders (not to mention worse). The concept of corporate
governance is alien to most firms in developing countries and companies
5.6.2 Functions
(1) To regulate, supervise and implement a timely, full and accurate set
of accounting books of the firm reflecting all its activities in a manner
commensurate with the relevant legislation and regulation in the
territories of operation of the firm and subject to internal guidelines set
from time to time by the Board of Directors of the firm.
This is somewhat difficult in developing countries. The books do not reflect
reality because they are "tax driven" (i.e., intended to cheat the tax
authorities out of tax revenues). Two sets of books are maintained: the real
one which incorporates all the income – and another one which is presented
to the tax authorities. This gives the CFO an inordinate power. He is in a
position to blackmail the management and the shareholders of the firm. He
becomes the information junction of the firm, the only one who has access
to the whole picture. If he is dishonest, he can easily enrich himself. But he
cannot be honest: he has to constantly lie and he does so as a life long
habit.
where. Managers in developing countries still feel that they are being
supervised and followed, that they have quotas to complete, that they have
to act as though they are busy (even if they are, in reality, most of the time,
idle). So, they engage in the old time central planning and they do it through
the budget. This is wrong.
A budget in a firm is no different than the budget of the state. It has exactly
the same functions. It is a statement of policy, a beacon showing the way to
a more profitable future. It sets the strategic (and not the tactical) goals of
the firm: new products to develop, new markets to penetrate, new
management techniques to implement, possible collaborations, identification
of the competition, of the relative competitive advantages. Above all, a
budget must allocate the scarce resources of the firm in order to obtain a
maximum impact (=efficiently). All this, unfortunately, is missing from
budgets of firms in developing countries.
No less important are the control and audit mechanisms which go with the
budget. Audit can be external but must be complemented internally. It is the
job of the CFO to provide the management with a real time tool which
informs them what is happening in the firm and where are the problematic,
potential problem areas of activity and performance.
(3) To timely, regularly and duly prepare and present to the Board of
Directors financial statements and reports as required by all pertinent
laws and regulations in the territories of the operations of the firm and
as deemed necessary and demanded from time to time by the Board of
Directors of the Firm.
The warning signs and barbed wire which separate the various organs of
the Western firm (management from Board of Directors and both from the
shareholders) – have yet to reach developing countries. As I said: the Board
Because discipline and transparency make the life of a CFO easier in the
long run. Just think how much easier it is to maintain one set of books
instead of two or to avoid conflicts with tax authorities on the one hand and
your management on the other.
(5) To prepare and present for the approval of the Board of Directors
an annual budget, other budgets, financial plans, business plans,
feasibility studies, investment memoranda and all other financial and
business documents as may be required from time to time by the
Board of Directors of the firm.
The primal sin in developing countries was so called “privatization”. The
laws were flawed. To mix the functions of management, workers and
ownership is detrimental to a firm, yet this is exactly the path that was
chosen in numerous developing countries. Management takeovers and
employee takeovers forced the new, impoverished, owners to rob the firm in
order to pay for their shares. Thus, they were unable to infuse the firm with
new capital, new expertise, or new management. Privatized companies are
dying slowly.
One of the problems thus wrought was the total confusion regarding the
organic structure of the firm. Boards were composed of friends and cronies
of the management because the managers also owned the firm – but they
could be easily fired by their own workers, who were also owners and so
on. These incestuous relationships introduced an incredible amount of
insecurity into management ranks (see previous point).
more than on the basis of analysis or rational decision making. This "old boy
network" substitutes for the orderly collection of data and credit rating of
borrowers. This also allows for favouritism and corruption in the banking
sector. A CFO who is unable to participate in these games is deemed by the
management to be "weak", "ineffective" or "no-good". The lack of non-bank
financing options and the general squeeze on liquidity make matters even
worse for the finance manager. He must collaborate with the skewed
practices and decision making processes of the banks – or perish.
2. The CFO can report directly to the Board of Directors through the person
of ––––––––––––––– .
5.7 Summary
Virtually every Western country has a "Small Business Administration"
(SBA). SBAs provide many valuable services to small businesses. They
assist the entrepreneur in the preparation of business plans, while providing
A new business goes through phases in the business cycle which have
discussed in brief in this unit.
SAQs I
1. True
2. False
3. True
4. True
5. True
6. False
SAQs II
1. Stock Option Plan
2. Employee Stock Ownership Plan
3. Bankruptcy insolvency
4. The secured creditors
SAQs III
1. The Chief Executive Officer
2. The Chairman of the Board of Directors
Answers to TQs:
1. Refer to 5.2
2. Refer to 5.3
3. Refer to 5.4
4. Refer to 5.5
5. Refer to 5.6
6.1 Introduction
Many companies in developing countries have a very detailed reporting
system going down to the level of a single product, a single supplier, a
single day. However, these reports – which are normally provided to the
General Manager – should not be used by them at all. They are too detailed
and, thus, tend to obscure the true picture. A General Manager must have a
bird's eye view of his company. He must be alerted to unusual happenings,
disturbing financial data and other irregularities.
Sikkim Manipal University Page No. 159
Strategic Management and Business Policy Unit 6
Objectives:
After studying this unit, you will be able to:
State the outcome of the detailed reporting system.
Explain the levels of reporting and flows of data.
Explain the method of valuation of stocks.
Explain the process of Due Diligence.
Distinguish between the ‘strategic investor’ and the ‘financial investor’.
Explain the steps involved in a typical credit card transaction.
The first level is the annual budget of the company which is really a
business plan. The budget allocates amounts of money to every activity
and/or department of the firm.
Put together, these four documents are the formal edifice of the firm's
finances. However, they can not serve as day-to-day guides to the General
Manager.
The second tier of financial audit and control is when the finance department
(equipped with proper software – Solomon IV is the most widely used in the
West) is able to produce pro forma financial statements monthly.
But the Manager should be able to open this computer daily and receive two
kinds of data, fully updated and fully integrated:
1. Daily financial statements
2. Daily ratios report.
These pro forma financial statements should include all the future flows of
money - whether invoiced or not. This way, the Manager will be able to type
a future date into his computer and get the financial reports and statements
relating to that date.
In other words, the Manager will not be able to see only a present situation
of his company, but its future situation, fully analysed and fully updated.
The Manager can review these financial and production ratios. Where there
is a strong deviation from historical patterns, or where the ratios warn about
problems in the future – management intervention may be required.
As a result of all the above effects, the value of the company grows and its
shares appreciate.
So, the establishment of a decision system does not hinder the functioning
of the company in any way and does not interfere with the authority and
functioning of the financial department.
Greenspan testifies in the Senate, economic figures are released - and the
rumour mill starts working: interest rates might go up. The stock market
reacts with frenzily - it crashes. Why?
A top executive is asked how profitable will his firm be this quarter. He
winks, he grins - this is interpreted by Wall Street to mean that profits will go
up. The share price surges: no one wants to sell it, everyone wants to buy it.
The result: a sharp rise in its price. Why?
We say that the stocks of the two companies have different elasticity (their
prices move up and down differently), probably the result of different
sensitivities to changes in interest rates and in earnings estimates. But this
is just to rename the problem. The question remains: Why do the shares of
similar companies react differently?
publicly, in stock exchanges. They are not very useful in trying to attach a
value to the stock of a private firm. The latter type (fundamental) models can
be applied more broadly.
The value of a stock (a bond, a firm, real estate, or any asset) is the sum of
the income (cash flow) that a reasonable investor would expect to get in the
future, discounted at the appropriate rate. The discounting reflects the fact
that money received in the future has lower (discounted) purchasing power
than money received now. Moreover, we can invest money received now
and get interest on it (which should normally equal the discount). Put
differently: the discount reflects the loss in purchasing power of money
deferred or the interest lost by not being able to invest the money right
away. This is the time value of money.
The rate that we use to discount future cash flows is the prevailing interest
rate. This is partly true in stable, predictable and certain economies. But the
discount rate depends on the inflation rate in the country where the firm is
located (or, if a multinational, in all the countries where it operates), on the
projected supply of and demand for its shares and on the aforementioned
risk of non-payment. In certain places, additional factors must be taken into
account (for example: country risk or foreign exchange risks).
The supply of a stock and, to a lesser extent, the demand for it determine its
distribution (how many shareowners are there) and, as a result, its liquidity.
Liquidity means how freely one can buy and sell it and at which quantities
sought or sold do prices become rigid.
According to it, the discount rate is the risk-free rate plus a coefficient (called
beta) multiplied by a risk premium general to all stocks (in the USA it was
calculated to be 5.5%). Beta is a measure of the volatility of the return of the
stock relative to that of the return of the market. A stock's Beta can be
obtained by calculating the coefficient of the regression line between the
weekly returns of the stock and those of the stock market during a selected
period of time.
Still, with all its shortcomings and disputed assumptions, the CAPM should
be used to determine the discount rate. But to use the discount rate we must
have future cash flows to discount.
The only relatively certain cash flows are dividends paid to the shareholders.
So, Dividend Discount Models (DDM) were developed.
Still, DDM’s require, as input, the ultimate value of the stock and growth
models are only suitable for mature firms with a stable, low dividend growth.
Two-stage models are more powerful because they combine both
emphases, on dividends and on growth. This is because of the life-cycle of
firms. At first, they tend to have a high and unstable dividend growth rate
(the DDM tackles this adequately). As the firm matures, it is expected to
have a lower and stable growth rate, suitable for the treatment of Growth
Models.
But how many years of future income (from dividends) should we use in our
calculations? If a firm is profitable now, is there any guarantee that it will
continue to be so in the next year, or the next decade? If it does continue to
be profitable - who can guarantee that its dividend policy will not change and
that the same rate of dividends will continue to be distributed?
The number of periods (normally, years) selected for the calculation is called
the "price to earnings (P/E) multiple". The multiple denotes by how much we
multiply the (after tax) earnings of the firm to obtain its value. It depends on
the industry (growth or dying), the country (stable or geopolitically perilous),
on the ownership structure (family or public), on the management in place
(committed or mobile), on the product (new or old technology) and a myriad
of other factors. It is almost impossible to objectively quantify or formulate
this process of analysis and decision making. In telecommunications, the
range of numbers used for valuing stocks of a private firm is between 7 and
10, for instance. If the company is in the public domain, the number can
shoot up to 20 times net earnings.
While some companies pay dividends (some even borrow to do so), others
do not. So in stock valuation, dividends are not the only future incomes you
would expect to get. Capital gains (profits which are the result of the
appreciation in the value of the stock) also count. This is the result of
expectations regarding the firm's free cash flow, in particular the free cash
flow that goes to the shareholders.
The free cash flow of a firm that is debt-financed solely by its shareholders
belongs solely to them. Free cash flow to equity (FCFE) is:
FCFE = Operating Cash Flow MINUS Cash needed for meeting growth
targets
Where
Operating Cash Flow = Net Income (NI) PLUS Depreciation and
Amortization
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.
First Rule:
The firm must appoint ONE due diligence coordinator. This person
interfaces with all outside due diligence teams. He collects all the materials
requested and oversees all the activities which make up the due diligence
process.
The firm must have ONE VOICE. Only one person represents the company,
answers questions, makes presentations and serves as a coordinator when
the DD teams wish to interview people connected to the firm.
Second Rule:
Brief your workers. Give them the big picture. Why is the company raising
funds, who are the investors, how will the future of the firm (and their
personal future) look if the investor comes in. Both employees and
management must realize that this is a top priority. They must be instructed
not to lie. They must know the DD coordinator and the company's
spokesman in the DD process.
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
Legal opinions regarding the possible outcomes of all the lawsuits and
disputes including their potential influence on the firm
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)
Sikkim Manipal University Page No. 174
Strategic Management and Business Policy Unit 6
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.
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
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 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.
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.
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.
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.
The Banks
1. The government provides a last resort guarantee to the commercial
banks. This guarantee can be used ONLY AFTER the banks have
exhausted all other legal means of materializing a collateral or seizing
the assets of a delinquent debtor in default.
2. Against this guarantee, the commercial banks issue 10 years mortgages
(=lend money with a repayment period of 120 months) to the private
Buyers of residential property.
3. The money lent to the Buyers (=the mortgages) REMAINS in the bank. It
is NOT be given to the Buyers.
4. The mortgage loan covers a maximum of 75% of the final value of the
property to be constructed according to appraisals by experts.
5. A lien in favour of the bank is placed on the land and property on it – to
be built using the Bank’s money and the Buyers’ equity. Each Buyer
pledges only HIS part of the property (for instance, ONLY the apartment
being constructed for HIM). This lien is an inseparable part of the
mortgage (loan) contract each and every buyer signs. It is registered in
the Registrar of Mortgages and the Courts.
3. The Buyers then approach the Bank for additional money to be taken
from the mortgage loans deposited at the Bank (=the money that the
Bank lent the Buyers).
4. The Bank verifies that the construction is progressing according to
schedule and according to quality standards set in the construction
contract.
5. If everything is according to contract, the Bank releases the next tranche
(lot) of financing to the Buyers, who then forward it to the construction
firm.
6. The funds that the Buyers borrowed from the Banks are released in a
few tranches according to the progress of the construction work. When
the construction is finished – the funds should be completely exhausted
(=used).
4. The Banks can securitize the mortgage pool and sell units or mortgage
backed bonds to the public. This means that the Banks can sell to the
public pass-through certificates - securities backed by an underlying
pool of mortgages of various maturities and interest rates. This way the
Banks can replenish their capital stock and re-enter the mortgage
market.
6.8 Banking
Banks are institutions where miracles happen regularly. We rarely entrust
our money to anyone but ourselves – and our banks. Despite a very
chequered history of mismanagement, corruption, false promises and
representations, delusions and behavioural inconsistency – banks still
succeed to motivate us to give them our money. Partly it is the feeling that
there is safety in numbers. The fashionable term today is "moral hazard".
The implicit guarantees of the state and of other financial institutions move
us to take risks which we would, otherwise, have avoided. Partly it is the
sophistication of the banks in marketing and promoting themselves and their
products. Glossy brochures, professional computer and video presentations
and vast, shrine-like, real estate complexes all serve to enhance the image
of the banks as the temples of the new religion of money.
But what is behind all this? How can we judge the soundness of our banks?
In other words, how can we tell if our money is safely tucked away in a safe
haven?
The reflex is to go to the bank's balance sheets. Banks and balance sheets
have been both invented in their modern form in the 15th century. A balance
sheet, coupled with other financial statements is supposed to provide us
with a true and full picture of the health of the bank, its past and its long-
term prospects. The surprising thing is that – despite common opinion – it
does.
Banks are rated by independent agencies. The most famous and most
reliable of the lot is Fitch Ratings. Another one is Moody’s. These agencies
assign letter and number combinations to the banks that reflect their
stability. Most agencies differentiate the short term from the long term
prospects of the banking institution rated. Some of them even study (and
rate) issues, such as the legality of the operations of the bank (legal rating).
Ostensibly, all a concerned person has to do, therefore, is to step up to the
bank manager, muster courage and ask for the bank's rating. Unfortunately,
life is more complicated than rating agencies would have us believe.
They base themselves mostly on the financial results of the bank rated as a
reliable gauge of its financial strength or financial profile. Nothing is further
from the truth.
Admittedly, the financial results do contain a few important facts. But one
has to look beyond the naked figures to get the real – often much less
encouraging – picture.
The net assets themselves are always misstated: the figure refers to the
situation on 31/12. A 48-hour loan given to a collaborating client can inflate
the asset base on the crucial date. This misrepresentation is only mildly
ameliorated by the introduction of an "average assets" calculus. Moreover,
some of the assets can be interest earning and performing – others, non-
performing. The maturity distribution of the assets is also of prime
importance. If most of the bank's assets can be withdrawn by its clients on a
very short notice (on demand) – it can swiftly find itself in trouble with a run
on its assets leading to insolvency.
There are a few key ratios to observe. A relevant question is whether the
bank is accredited with international banking agencies. These issue
regulatory capital requirements and other mandatory ratios. Compliance
with these demands is a minimum in the absence of which, the bank should
be regarded as positively dangerous.
The return on the bank's equity (ROE) is the net income divided by its
average equity. The return on the bank's assets (ROA) is its net income
divided by its average assets. The (tier 1 or total) capital divided by the
bank's risk weighted assets – a measure of the bank's capital adequacy.
Most banks follow the provisions of the Basel Accord as set by the Basel
Committee of Bank Supervision (also known as the G10). This could be
misleading because the Accord is ill equipped to deal with risks associated
with emerging markets, where default rates of 33% and more are the norm.
Finally, there is the common stock to total assets ratio. But ratios are not
Still, these ratios should be taken with more than a grain of salt. Not even
the bank's profit margin (the ratio of net income to total income) or its asset
utilization coefficient (the ratio of income to average assets) should be relied
upon. They could be the result of hidden subsidies by the government and
management misjudgement or understatement of credit risks.
In the main financial results page of a bank's books, special attention should
be paid to provisions for the devaluation of securities and to the unrealized
difference in the currency position. This is especially true if the bank is
holding a major part of the assets (in the form of financial investments or of
Separately, a bank can be trading for its own position (the Nostro), either as
a market maker or as a trader. The profit (or loss) on securities trading has
to be discounted because it is conjectural and incidental to the bank's main
activities: deposit taking and loan making.
Most banks deposit some of their assets with other banks. This is normally
considered to be a way of spreading the risk. But in highly volatile
economies with sickly, underdeveloped financial sectors, all the institutions
in the sector are likely to move in tandem (a highly correlated market). Cross
deposits among banks only serve to increase the risk of the depositing bank
(as the recent affair with Toko Bank in Russia and the banking crisis in
South Korea have demonstrated).
Further closer to the bottom line are the bank's operating expenses:
salaries, depreciation, fixed or capital assets (real estate and equipment)
and administrative expenses. The rule of thumb is: the higher these
expenses, the weaker the bank. The great historian Toynbee once said that
great civilizations collapse immediately after they bequeath to us the most
impressive buildings. This is doubly true with banks. If you see a bank
fervently engaged in the construction of palatial branches – stay away from
it.
Banks are risk arbitrageurs. They live off the mismatch between assets and
liabilities. To the best of their ability, they try to second guess the markets
and reduce such a mismatch by assuming part of the risks and by engaging
in portfolio management. For this they charge fees and commissions,
interest and profits – which constitute their sources of income.
Just in case they misread the market risks and these turned into credit risks
(which happens only too often), banks are supposed to put aside amounts
of money which could realistically offset loans gone sour or future non-
performing assets. These are the loan loss reserves and provisions. Loans
are supposed to be constantly monitored, reclassified and charges made
against them as applicable. If you see a bank with zero reclassifications,
charge offs and recoveries – either the bank is lying through its teeth, or it is
not taking the business of banking too seriously, or its management is no
less than divine in its prescience. What is important to look at is the rate of
provision for loan losses as a percentage of the loans outstanding. Then it
should be compared to the percentage of non-performing loans out of the
loans outstanding. If the two figures are out of kilter, either someone is
pulling your leg – or the management is incompetent or lying to you. The
first thing new owners of a bank do is, usually, improve the placed asset
quality (a polite way of saying that they get rid of bad, non-performing loans,
whether declared as such or not). They do this by classifying the loans.
Most central banks in the world have in place regulations for loan
classification and if acted upon, these yield rather more reliable results than
any management's "appraisal", no matter how well intentioned.
In some countries the Central Bank (or the Supervision of the Banks) forces
banks to set aside provisions against loans at the highest risk categories,
even if they are performing. This, by far, should be the preferable method.
Of the two sides of the balance sheet, the assets side is the more critical.
Within it, the interest earning assets deserve the greatest attention. What
Gaps (especially in the short term category) between the bank's assets and
its liabilities are a very worrisome sign. But the bank's macroeconomic
environment is as important to the determination of its financial health and of
its creditworthiness as any ratio or micro-analysis. The state of the financial
markets sometimes has a larger bearing on the bank's soundness than
other factors. A fine example is the effect that interest rates or a devaluation
have on a bank's profitability and capitalization. The implied (not to mention
the explicit) support of the authorities, of other banks and of investors
(domestic as well as international) sets the psychological background to any
Perhaps the single most important factor is the general level of interest rates
in the economy. It determines the present value of foreign exchange and
local currency denominated government debt. It influences the balance
between realized and unrealized losses on longer-term (commercial or
other) paper. One of the most important liquidity generation instruments is
the repurchase agreement (repo). Banks sell their portfolios of government
debt with an obligation to buy it back at a later date. If interest rates shoot
up – the losses on these repos can trigger margin calls (demands to
immediately pay the losses or else materialize them by buying the securities
back).
But high interest rates, as we mentioned, also strain the asset side of the
balance sheet by applying pressure to borrowers. The same goes for a
In the past, the thinking was that some of the risk could be ameliorated by
hedging in forward markets (=by selling it to willing risk buyers). But a hedge
is only as good as the counterparty that provides it and in a market besieged
by knock-on insolvencies, the comfort is dubious. In most emerging
markets, for instance, there are no natural sellers of foreign exchange
(companies prefer to hoard the stuff). So forwards are considered to be a
variety of gambling with a default in case of substantial losses a very
plausible way out.
Banks depend on lending for their survival. The lending base, in turn,
depends on the quality of lending opportunities. In high-risk markets, this
depends on the possibility of connected lending and on the quality of the
collaterals offered by the borrowers. Whether the borrowers have qualitative
collaterals to offer is a direct outcome of the liquidity of the market and on
how they use the proceeds of the lending. These two elements are
intimately linked with the banking system. Hence the penultimate vicious
But is it?
It is definitely not. To understand why, we should first review the intricate
procedure involved.
In principle, the best and safest thing to do is call the authorization centre of
the bank that issued your card (the issuer bank). Calling the number
published in the media is second best because it connects the cardholder to
a "volunteer" bank, which caters for the needs of all the issuers of a given
card. Some service organizations (such as IAPA – the International Air
Passengers Association) provide a similar service.
The "catering bank" accepts the call, notes down the details of the
cardholder and prepares a fax containing the instruction to cancel the card.
The cancellation fax is then sent on to the issuing bank.
The details of all the issuing banks are found in special manuals published
by the clearing and payments associations of all the banks that issue a
specific card. All the financial institutions that issue Mastercards, Eurocards
and a few other more minor cards in Europe are members of Europay
International (EPI). Here lies the first snag: the catering bank often mistakes
the identity of the issuer. Many banks share the same name or are branches
of a network. Banks with identical names can exist in Prague, Budapest and
Frankfurt, or Vienna, for instance. Should a fax cancelling the card be sent
to the wrong bank – the card will simply not be cancelled until it is too late.
By the time the mistake is discovered, the card is usually thoroughly abused
and the financial means of the cardholder are exhausted.
Some credit card companies in some territories prefer to work directly with
the cardholders. In such a case, they issue a monthly statement, which the
cardholder has to pay directly to them by money order or by bank transfer.
The cardholder will be required to provide a security to the credit card
company and his spending limits will be tightly related to the level and
quality of the security provided by him. The very issuance of the card is
almost always subject to credit history and to an approval process.
In some countries - mainly in Central and Eastern Europe, the Middle East,
Africa, and Asia - credit card companies sometimes work directly with their
cardholders who pay the companies via money order or bank transfer. The
cardholder is often required to provide a security to the credit card company
and his spending limits are tightly supervised. Credit history, collateral, and
background checks are rigorous. Even then, the majority of the cards issued
are debit - rather than credit - cards.
6.10 Summary
The Manager of a firm should have access to continuously updated
statements of income, cash flow, and a balance sheet.
The pro forma financial statements should include all the future flows of
money - whether invoiced or not.
SAQs II
1. True
2. True
3. True
4. False
5. True
6. False
7. True
Answers to TQs:
1. Refer to 6.2
2. Refer to 6.4
3. Refer to 6.5
4. Refer to 6.6
5. Refer to 6.8
6. Refer to 6.9
7.1 Introduction
Intellectual property rights can be very valuable commercial rights for
inventors, creators and researchers. Intellectual property rights are legal
This unit throws light on intellectual property rights and the ways in which
they need to be protected.
Objectives:
By the end of this unit, you will be able to:
List out some ways to exploit one’s intellectual property rights so as to
get financial benefits from them.
Explain the ways of protecting the intellectual property rights.
Give reasons why intellectual property rights need to be protected.
Explain the civil remedies and criminal procedures in relation to the
protection of intellectual property rights.
cases, the inventor lacked the resources or skills to take the invention to the
next step.
One constant factor in the development of new technologies has been the
cost and difficulty of the process of putting new technologies on the market.
The technical merit or scientific brilliance of an invention is only one aspect
of actually bringing a new technology to the public in a useful practical form.
This can be a costly and complex process. Normally, it is not possible
without a range of different partnerships and relationships – as sources of
funding, expertise and other resources.
The problems of getting worthwhile benefits from the patent system - even
for the patent owner – are not new ones, as this quotation from 120 years
ago makes clear: Patenting was unnecessarily and unwisely expensive, and
the poor patentee was left almost without any aid or guidance. Intellectual
property rights recognize innovative and creative activities, and are intended
to reward useful and valuable contributions to society. But they are not
direct rewards in themselves. All they do is to create an opportunity for the
inventor or creative person to seek rewards for their invention or returns
from their investment in the research. A patent can be expensive to obtain,
especially if it is applied for in many countries, and costs money to keep in
force, as annual renewal fees are required in many countries. In addition,
patents can be very expensive to enforce if it becomes necessary to go to
court to prevent infringement. Patents recognise inventiveness, but they are
neutral on the commercial value of the invention. Many patented inventions
will prove to be technologically unsuccessful, or commercially unviable. In
many other cases, patented inventions which could be very successful fail to
Many patent systems are run on a ‘cost recovery’ basis – so that the fees
charged to patent applicants are sufficient to cover the costs of
administering the patent office, or even to create a surplus. The Patent
Co-operation Treaty (PCT) system administered by the World Intellectual
Property Organisation returns a surplus from the fees charged to private
applicants, and these resources are used in many ways, especially in
providing technical support and assistance to developing countries. So
society does not reward inventors directly for making a patented invention –
instead, it requires the patentee to pay his or her way in getting a patent,
and then leaves it to them to see whether they can make money in a
commercial way from the patented invention.
Much depends on the number of countries you seek patents in, and whether
any difficulties are found in getting a patent (for example, complex
objections by patent examiners requiring significant amendments to the
The case is similar for other intellectual property rights, like plant breeders’
rights, trade marks, and industrial designs, although these normally cost
less overall than patents. The applicant takes a risk and invests time and
money in the process of obtaining an IP right. The hope is that the IP right
will improve their capacity to develop a new product and gain the benefits
from their research and innovation. But when the costs are unpredictable
and potentially high, and the future benefits from the IP right are uncertain
and may only be realized after a number of years, it can be difficult to work
out whether it is worth making the investment. Unregistered rights, like trade
secrets and copyright, do not incur direct costs in the same way, but may
involve investment in physical security, preparation of confidentiality
agreements, and monitoring and enforcement costs.
experience quite apart from technological and scientific skills. Often the
most difficult aspect of putting a new
technology to work, and of making it available to the public, lies not in the
patenting process, but in finding a suitable commercial vehicle to gain
suitable returns from the invention, including through commercial use of the
patent. Commercialising inventions can involve a great deal of commercial
risk, which small companies and research institutes might not be able to
accept and manage. Because of these considerations, in many cases
institutions and companies choose not to commercialise their invention at
all, but elect to sell (‘assign’) or license their rights to the invention to other
companies for them to take the invention to the marketplace.
There are various ways of exploiting your intellectual property rights; these
generally involve balancing immediate financial interests, risks, resources,
and longer-term strategic and technology management interests. It is
comparatively rare, particularly for research institutions, to bear all the risk
and financial cost of bringing a new technology to market. At some stage,
research partners or commercial partners need to be brought in. The
relationship with a partner will depend very much on:
You will need to make fundamental choices about the path you take to
commercialise the invention. This will entail first working out:
1. Your overall objectives for commercialising the technology – what do
you ultimately want to achieve? What benefits do you want from your
research?
2. Your level of confidence in the technical utility of your invention, its
commercial viability and the strength and range of IP rights – do you
want to bear the risks, or do you want another institution or company to
carry some or all of the risk?
3. The financial resources and kinds of expertise you will need.
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.
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.
Patent licences and assignments of patent rights do not have to cover all
patent rights together.
Licences are often limited to specific rights, territories and time periods. For
example, a patent owner could exclusively licence only their importation
right to a company for the territory of Indonesia for 12 months. If an inventor
owns patents on the same invention in five different countries, they could
assign (or sell) these patents to five different owners in each of those
countries. Portions of a patent right can also be assigned – so that in order
to finance your invention, you might choose to sell a half-share to a
commercial partner.
If you assign your rights, you normally lose any possibility of further
licensing or commercially exploiting your intellectual property rights.
Therefore, the amount you charge for an assignment is usually considerably
higher than the royalty fee you would charge for a patent licence. When
assigning the rights, you might seek to negotiate a licence from the new
owner to ensure that you can continue to use your invention. For instance,
you might negotiate an arrangement that gives you licence to use the
patented invention in the event that you come up with an improvement on
your original invention and this falls within the scope of the assigned patent.
Equally, the new owner of the assigned patent might want to get access to
your subsequent improvements on the invention.
These options require much more work on your part than licensing or
assigning your intellectual property rights. This could be a desirable choice
in cases where:
– you want to keep your institute’s research activities separate from the
development and commercialisation of technology, especially when your
institute has a public interest focus or an educational role; or
– you need to attract financial support from those prepared to take a risk
with an unproven technology (‘angel investors’ or ‘venture capitalists’),
and they will only take on a long-term risk if they can get a share of
future profits of the technology.
In working out the right vehicle for your technology, you will normally need
specific legal advice from a commercial lawyer, preferably one with
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.
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.
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.
The choice should not just be based on willingness to pay a higher royalty.
A partner who has a convincing business plan and establishes a good
working relationship with you is likely to be more valuable. If you are
selecting a licensee, you may need to consider a host of factors, including:
Does the company have experience and proven success in developing
new technologies and bringing products to market?
What kind of R&D and business plan does the company have? Are there
realistic plans for developing and distributing the product based on your
technology? Do these plans have well-defined milestones that could be
built into a license agreement?
Do you want to favour development of the technology in your own
country? Is the company willing and able to invest locally in facilities for
exploiting the technology?
Are the resources, expertise and reputation of a large, established
company needed, or are the flexibility and lower costs of a smaller, start-
up company more appropriate for the technology?
Are you planning to export your technology or otherwise develop
overseas markets? Is your potential partner established overseas, or
have experience in foreign markets?
Is your commercial partner likely to be able to take up new applications
and improvements on the technology that your research is working
towards? Are they able to apply the technology in all the potential areas
of use?
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.
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.
Details of any legal challenges to the patent, and the way the
proceedings were resolved;
purposes. You might need to get a separate licence to install the software
on a network, or to make numerous copies of the software to distribute
within your organisation.
in its own right – either the individuals concerned have to sign the licence
and become legally bound by it as individuals, or the licence has to be
signed on behalf of the overall organization or company.
In some cases, the licence is not directly signed (think of the ‘I Agree’ block
which you are often asked to click when installing a software package on a
computer), and in the national law of many countries, contractual obligations
can arise even without a formal signed document.
Following are some of the basic provisions you will find in many technology
licenses.
The basic idea of the licence is that the person granting the licence (the
‘licensor’) is giving another person (the ‘licensee’) the right to do something
that they could otherwise prevent them from doing, in exchange for some
kind of benefit (this may be financial, but may be other forms of benefit). So
the licensor might permit the licensee to use a technology that is covered by
a patent – and if there was no license, the licensor could take legal action
under the patent to prevent this use of the technology.
In effect, the legal purpose of the license is to guarantee the licensee that
they can use the patented technology confident that there will be no legal
challenge from the licensor on the basis of the patent right. Normally, the
licensee will get other less specific non-legal benefits that flow from a
cooperative relationship with the people who created the technology,
including technical advice and know how.
The definition could define the subject matter in some detail as ‘licensed
rights’ or a ‘technology package,’ or it might just refer to specific patents by
number. If the technology is at an early stage – for instance, if patent
applications are still in process, the definition might have to make clear that
the scope includes any patents granted on the basis of those applications,
or only those patents which relate to a specific use of the technology
covered in the applications. It could also apply to any derivative patents,
such as continuations of the original patent application.
(e.g. the licensed use for a new chemical entity covered by a patent might
be defined as only for agricultural use or only for human pharmaceutical
use). It might limit the use to research or non-commercial use.
It might also clarify what rights are not being licensed – for instance, the
patented technology, but not the associated trade mark. It might specifically
reserve certain rights, such as the right to use patented improvements of the
licensed technology.
While these are distinct categories, there is considerable scope for moving
between the categories. For instance, a licence might be exclusive for only a
certain period, after which it becomes non-exclusive.
Sub-licences
A ‘sub-licence’ is a further licence, when the licensee of the original licence
itself grants a licence to a third party. The sub-licence may extend to some
or all of the rights granted under the original licence. The original licence
may need to make clear whether sub-licences can be granted, and if so, to
who, and on what terms or conditions. There may be issues such as
protecting the confidentiality of licensed material, liability for use of the
technology, or the interests of the licensor in granting direct licenses to the
same third parties.
If you are licensing out, especially to one licensee only, and you are relying
on that licensee to produce the returns that will pay for your research, then
you may need to structure the license to ensure they have an incentive
actively to use the technology – if they are simply committed to paying a
royalty if and when they choose to use your technology, they might not have
an incentive to invest immediately in producing your technology, and they
could leave it in the bottom drawer while they exploit other opportunities. As
a stimulus to diligence, the licensee may have to pay a certain minimum
royalty payment whether or not actual sales or use reaches that level.
high if the product is only produced in low volumes, but so they decrease if
the licensee produces high volumes of the product. It might also be
necessary to clarify when royalties fall due – when the licensee issues an
invoice for the product, or when the licensee is actually paid by the
purchaser of the product. There may also be provisions to allow for the
royalty structure or level to be reviewed in the light of changing market
conditions or other factors.
The need to monitoring the use of the invention and to ensure that royalties
are paid, as well as checking on milestones and diligence obligations, can
lead to requirements for record-keeping, access to accounts and records,
and independent auditing of accounts concerning the payment of royalties
and related data.
Confidentiality:
There may be a requirement under the licence to keep certain know-how
protected, and this may translate into specific obligations on the part of the
licensee to provide protection and to restrict access to confidential
information, in the same manner as a distinct non-disclosure agreement.
Copyright:
Apart from copyright protecting the licensed subject-matter (for example, if it
includes computer software), the licence may clarify the copyright provisions
covering manuals, data sheets or other documentation that are received and
used as part of a licensed technology package.
Term
The license should specify how long the licensed right runs for. It could
include an initial term, with option for renewal, subject to negotiations certain
Termination
The license may provide for termination before its expiry. This may arise in
the event of breach of a license provision, or the bankruptcy, dissolution or
insolvency of the licensee. The license could provide for termination in the
event of the lapse or invalidation of the licensed patent right. There may be
provision for termination by the licensee with due notice to the licensor,
potentially subject to a termination fee.
Assignment
The license may need to set out on what terms the licensor or licensee can
assign its rights and obligations under the license (for instance, clarifying
what happens if a licensor sells its patent portfolio to a third party, and how
the interests of an exclusive licensee can be preserved). It may provide for
the licensee to give prior written consent before the licensor’s rights can be
assigned or transferred to a third party. It may also clarify whether, and
under what conditions, the licensee can assign the licensed rights to a third
party.
Cross-licence
This kind of agreement involves an exchange of different entitlements – in a
sense, each party is both licensor and licensee. So A grants B a licence to
use A’s intellectual property, and B grants A a licence to use B’s intellectual
property. This is one way of resolving complex patent litigation or competing
claims to ownership of overlapping intellectual property rights.
Required performance
If you are licensing out your IP-protected technology, you need to consider
what level of performance you are expecting from the licensee, and what
kind of guaranteed performance you would like to build into the licence
agreement. To some extent, this is covered by the structure you choose for
licence fees and royalties (discussed above), but there may be additional
performance targets that can be set – for instance, minimum sales levels
(potentially compared to previous years’ levels), or relative to other markets
or to competitors, such as a particular market share. This is especially
relevant if you are contemplating granting an exclusive licence. You need to
be clear whether the licence is really just an agreement to pay you a royalty
when and if your technology is used, without any real obligation to exploit
the technology; or whether the licence is meant to create positive obligations
on the licensee to take active steps – or even their ‘best endeavours’ – to
make sure the technology is fully exploited for your benefit and for the public
benefit, and even to ensure that the technology is improved and refined as it
is exploited.
The licensor may also have obligations to perform. The licensee may be
expecting more than just a legal right to use the technology, and may be
looking for more substantial assistance to exploit the technology effectively.
So the license might involve obligations on the licensor to provide a certain
level of training and technical support and advice, and to assist in the
process of gaining regulatory approval to use the technology (for instance,
assisting in providing the data necessary for the approval of a new
pharmaceutical formulation). The licensor might also be required to advise
the licensee of any research developments or improvements, or any new
research outcomes that could adversely affect the viability of the licensed
technology.
Publication of research
Licenses may contain conditions on the publication of research relating to
the licensed technology, both to monitor developments in the technology
and the licensed activities, and to ensure that prior publication does not
destroy any future patent rights.
Maintaining IPRs
Licenses may cover obligations on maintaining a patent, especially in
ensuring that an application is prosecuted to grant, and then ensuring that
renewal fees are paid to keep the patent in force. Typically, an annual fee or
some form of regular payment must be paid to the patent office to keep the
patent in force – if it is not paid, then the patent lapses. These fees often
increase during the life of a patent, and if a patent is held in different
countries, the payments can become very considerable.
Because the licensee is gaining benefits from the patent – especially under
an exclusive licence – they may be asked to contribute to, or to be totally
responsible for, keeping the patent in force by paying these fees. In theory,
a licence could provide that either party is responsible for paying renewal
fees, although the licensor (and patent holder) may feel more comfortable
ensuring payment, as it can be difficult (or after a certain time impossible) to
reinstate a patent that has lapsed due to failure to pay renewal fees. The
license can stipulate that the licensee pay a proportion of the IPR
maintenance costs.
Enforcing IPRs
The licensee of IP rights is often in a better position to monitor what its
competitors are doing, and might be the first to find out about other parties
infringing the patent or other IP right. Any licensee will be interested in
preventing this activity, because it represents a competitor gaining an
advantage over them, because they are avoiding licensing costs and other
conditions on use of the licensed technology. Yet the licensor, as the owner
of the IP, also has a fundamental interest in avoiding damage to the value of
their IP caused by the infringing activities. IP litigation is expensive and time-
consuming. Licenses can therefore clarify the respective roles and
responsibilities of the licensor and licensee in enforcing the licensed IP
rights.
alternative to litigation. And it will normally specify which law applies to the
contract – such as the law of Indonesia or the law of Singapore, or in the
case of a federal system such as the United States or Canada, it may be a
state law, such as the law of the Province of Ontario.
The license may cover such issues as marketing products produced by the
licensed technology and requirements for the licensor’s trade mark or
certification mark to be applied. The license may also include undertakings
as to compliance with ethical standards, environmental protection
measures, and government regulations.
that the future negotiations on the details of a licence have a solid basis of
understanding. Even the commitment of resources to engage in negotiations
on a licence requires some level of confidence that it is a worthwhile
investment.
use only the licensor’s products in other areas as a condition of the license –
stating, for instance, that a technology can only be licensed on the condition
that the licensee purchases raw materials from the licensor).
Compulsory licences
A compulsory licence comes about when the holder of a patent is unwilling
to license the technology or is otherwise viewed as failing to ‘work’ or exploit
the patent for the benefit of the community. Under the patent law of many
countries, there is provision for a court or similar legal authority to step in
and issue a licence to permit a third party to make use of the patented
invention. Because the licence is issued without the authorization of the
patent holder it is known as a ‘compulsory’ licence. A compulsory licence
may be required to deal with anti-competitive behaviour regarding patented
technologies, to enable a patent holder of a dependent patent (a patent for a
subsequent invention falling within the scope of an earlier patent) to exploit
the invention, and for other general public policy reasons. Typically,
compulsory licences are granted for limited purposes, are essentially
restricted to the domestic (non-export) market, are nonexclusive, and are
subject to payment of compensation to the patent holder.
license," and comments that ‘the university also sought to keep the buy-in
modest so many companies were able to pick up the license.’ At the same
time, the patent was able to generate a very considerable amount of income
to support further research.
In the ongoing debate over how companies and universities should best
profit from research tools, it's understandable that licensors would review
how past research tools have been treated.
Part of the confusion is that unlike some of the research tools today which
are a true intermediary step in the process, Cohen-Boyer is technically
The other interesting question that arises over Cohen-Boyer is how different
the development of the biotech industry might have been if Stanford and UC
had licensed it exclusively. One version of the story says that Stanford
University, which owned the patent with UC, offered it on an exclusive basis
to Genentech, Inc. of South San Francisco and decided to go the non-
exclusive route only when Genentech didn't offer enough money. The other
version of the story is that
Genentech wanted exclusive rights, but Stanford, which was handling the
negotiations of the two schools, never offered them.
TRIPS, for instance, specifies that the government or legal authorities need
to have a more active role in dealing with these infringements than, say, for
patents and plant breeders’ rights. So the state often has an active role in
tracking down and prosecuting those who infringe copyright and trademark
rights on a commercial scale, whereas for patents it is normally up to the
patent holder or licensee to take an infringer to court.
For example, imagine that you own a patent for house paint that dries very
quickly. It took you 8 years to develop the process and cost you thousands
of dollars to patent your invention in Australia, the US and Indonesia. Just
as you started to distribute the paint yourself in Australia you found out that
your paint is being sold cheaply to the painting trade in Sydney by a
company trading as Cheap Paints. You also suspect that Cheap Paints are
exporting tins of infringing paint overseas. Obviously you need to take legal
action against Cheap Paints to enforce your rights, otherwise, there would
be no market left for you to get any financial return on your invention. The
kinds of remedies you could take against Cheap Paints are set out in this
unit.
Injunctions
TRIPS requires that courts be capable of ordering injunctions. An injunction
is a court order compelling a party to stop infringements, or prevents it from
infringing in the first place.
In this case, an effective remedy for you to use against Cheap Paints is an
injunction – a definitive order issued by the court, which the infringer is
bound to follow. An injunction could order Cheap Paints to stop selling the
infringing paint and give you back the market for selling your patented paint.
Damages
TRIPS requires that courts must be able to order an infringer, at least if he
or she acted in bad faith, to pay adequate damages to the intellectual
property right owner (TRIPS Article 45(1)). Damages compensate the
intellectual property owner for the damage caused by an infringement.
Courts must also be authorised to order the infringer to pay the right owner’s
court costs, including lawyers’ fees (TRIPS Article 45(2)). In appropriate
cases, the courts may allow the plaintiff to recover profits made by the
Sikkim Manipal University Page No. 247
Strategic Management and Business Policy Unit 7
This enabled you to sell your patented paint yourself and get the financial
benefits from sales of your patented invention. However, you could also take
an action against Cheap Paints for damages to compensate you for the loss
that you suffered because of their infringing sales of your patented paint. For
example, you could get damages to compensate you for lost profits during
the time that the infringing paint was sold. You may also be able to obtain
compensation for any loss of reputation that Cheap Paints may have caused
you if, for example, its paints were of an inferior quality and consumers
believed that you produced it. Cheap Paints may cause you serious financial
damage if consumers have stopped buying your products.
Other remedies
TRIPS provides for other remedies in addition to injunctions and damages.
In order to create an effective deterrent to infringement, TRIPS requires
judicial authorities to have the authority to order infringing goods to be
disposed of outside the channels of commerce, or, where possible under
domestic law, destroyed. Similarly, it must be possible to dispose of
materials and instruments predominantly used in the production of the
infringing goods.
Provisional measures
As noted above, TRIPS requires that enforcement procedures must permit
effective action against infringements and include timely remedies.
However, as complete judicial procedures can take a quite a long time,
TRIPS requires that judicial authorities be able to provide provisional relief
for intellectual property owners in order to stop an alleged infringement
immediately while the case is fully considered. This may mean that a judge
can grant an injunction almost straight away, which may prevent the
defendant trading in the allegedly infringing goods until the final trial decision
is handed down. It is imperative that swift (and in some cases pre-emptive)
action can be taken to prevent infringements or stop them quickly.
You may think that these procedures are unfair on the defendant and that
the presumption of innocence is discarded because he or she is punished
before the trial has taken place. This has been a concern in national legal
systems, and TRIPS requires that provisional measures must contain
safeguards against abuse of such measures. For example, the judicial
authority may require the applicant to provide a security or equivalent
assurance sufficient to protect the defendant and to prevent abuse. This
may be payable to the defendant if the plaintiff loses the case. Some
countries have made injunctions more difficult to obtain by, for example,
requiring that the plaintiff prove that the defendant has a serious case to
answer and to establish that damages will be an inadequate remedy if the
injunction is not granted.
There are other provisional measures which TRIPS does not mention, but
which are provided for under the laws of many countries. For example, if a
plaintiff is afraid that defendant will move its assets out of the jurisdiction to
avoid paying compensation, he or she may be able to convince the court to
freeze the assets of the defendant for the duration of the trial. This is called
a Mareva Injunction in some countries.
to court, and the court imposes a penalty such as a fine or, in extreme
cases, imprisonment.
3. The person granting the licence is the ––––––––––– and the person
receiving the licence is the ––––––––––– .
4. A ––––––––––– means that the licensor grants a licence to only one
licensee.
5. A ––––––––––– is a further licence, when the licensee of the original
licence itself grants a licence to a third party.
7.14 Summary
One needs to make good commercial decisions to benefit from one’s
intellectual property rights.
SAQs II
1. Due diligence
2. Parties
3. Licensor; licensee
4. Sole licence
5. Sub-licence
Answers to TQs:
1. Refer to 7.2
2. Refer to 7.3
3. Refer to 7.4
4. Refer to 7.5
5. Refer to 7.9
8.1 Introduction
CSR is “a concept whereby companies integrate social and environmental
concerns in their business operations and in their interaction with their
stakeholders on a voluntary basis” as they are increasingly aware that
Sikkim Manipal University Page No. 256
Strategic Management and Business Policy Unit 8
Objectives:
After studying this unit, you will be able to:
Explain the meaning of CSR.
Account for the growing recognition of CSR.
Describe the global dimension of CSR.
First, the OECD Guidelines for Multinational Enterprises are the most
comprehensive, internationally endorsed set of rules governing the activities
of multinationals. In promoting CSR in developing countries, EU businesses
should demonstrate and publicise their world-wide adherence to them.
At the same time, identifying common frameworks for the global dimension
of CSR is challenging due to the diversity in domestic policy frameworks,
protection of workers and environmental regulation. A number of initiatives
in which European companies participate, such as Investors for Africa,
World Business Council for Sustainable Development, and the UN Global
Compact have sought to identify basic principles and practices. The
underlying approach should be that, at global level, just as at European, the
1
COM(2001)416
implementation of CSR principles should also go over and above the legal
requirements that businesses need to comply with, and approaches should
involve consultation with local stakeholders.
8.3.1 Abstract
Over the last decades, corporate environmentalism, sustainability initiatives
and management systems have resulted in a plethora of business practices
to increase corporate responsibility. Stakeholder dialogue is seen as a major
instrument in the involvement of the external stakeholders as well as for
communicating the corporate vision and commitment regarding these
initiatives internally. Until recently, many researchers and practitioners have
argued (or assumed) that the vision and commitment of senior management
is communicated clearly, and understood and incorporated by all staff within
the organisation in the manner as it was initially intended.
Introduction
Corporate Responsibility2 is considered a key development in connecting
corporate practices with the societal goal of sustainable development, as
firms can “contribute to more sustainable patterns of production and
consumption within society” (Roome, 2006: p. 137). This has been
supported by research about business and the natural environment and
society, which has over the last decade predominantly focused on the
business case for sustainability and the competitive advantages of
environmental responsibility (e.g. Aragon-Correa and Sharma, 2003; Berry
and Rondinelli, 1998; Maignan and Ferrell, 2001; Porter and Van der Linde,
1995; Simpson et al, 2004). Within this field, various scholars have argued
for integration of corporate responsibility into established business routines
(e.g. Banerjee, 2001; Menon and Menon, 1997), yet in practice that does
not appear to be the case (e.g. Knox et al, 2005).
2
Corporate Responsibility contains both corporate environmentalism and corporate social
responsibility, and includes any initiative that reduces the environmental impact and/or
contributes to the improvement of the social conditions beyond the firm’s legal
obligations (Dyllick and Hockerts, 2002; Roome, 2006).
1962; Walley and Whitehead, 1994) to a call for a complete paradigm shift
in business practice (e.g. Dyllick and Hockerts, 2002; Gladwin et al, 1995).
However, all views on corporate responsibility are based on the same
premise: that there is a corporate strategic approach to environmental and
social issues (c.f. Banerjee et al, 2003; Lyon, 2004). Hence, it contains both
corporate environmentalism and corporate social responsibility (Dyllick and
Hockerts, 2002), leading to the current construct that Corporate
Responsibility includes any initiative that reduces the environmental impact
and/or contributes to the improvement of the social conditions beyond the
firm’s legal obligations (Roome, 2006). As such, it is considered a key
development in connecting corporate practices with the societal goal of
sustainable development, as firms can “contribute to more sustainable
patterns of production and consumption within society” (Roome, 2006:
p. 137).
Various researchers (e.g. Bansal and Roth, 2000; McKay, 2001; Prakash,
2001) found that a multi-theoretical perspective explained some organisa-
tional responses to a greater extent than single theories in isolation, and
could explain the seemingly ad hoc choices of firms to go beyond legal
compliance. Since this paper aims to propose two complementary
multidisciplinary approaches, none of the existing theories is judged or
favoured above others. Instead, the different theories are used in
combination to draw out more comprehensive notions of the role of values in
corporate responsibility.
Assuming that organisations are open systems (Katz and Kahn, 1966), and
as such become interdependent with those elements of the environment
with which they transact (Pfeffer, 1982), organisations work within such
interdependencies to reduce uncertainty and ensure survival (DiMaggio,
1988; McKay, 2001). Based on this, the central premise of resource
dependence is that power relations among actors are commonly
asymmetrical and that organisations strive to obtain power, maintain
autonomy, and reduce uncertainty in the context of external pressures and
demands. Control over resources is critical in maintaining power and is
therefore pursued by organisations (McKay, 2001). As such, an organi-
sation-wide dedication to a compelling long-range vision (a shared vision) is
the key to generating the internal pressure and enthusiasm needed for
[responsible] innovation and change (Hamel and Prahalad, 1989; Hart,
1995). Given the difficulty of generating a consensus about a purpose,
shared vision is a rare (firm-specific) resource, and few companies have
been able to establish or maintain a widely shared or enduring sense of
mission (Hamel and Prahalad, 1989). Starik and Rands (1995) extended
this idea to include values, as these act as a mechanism to unify and orient
organisational units toward sustainability. Norms and shared values are
essential to understand the sustainability of organisations, and provide links
between the organisation and the environment and society (Starik and
Rands, 1995).
(e.g. Collison et al, 2003; Cormier et al, 2004; Sharma and Henriques,
2005), and it is argued that “responses to environmental pressures can vary
widely among firms depending on managerial perceptions of environmental
risks and opportunities … on their interpretation of the importance and
relationship of the natural environment to their business activity” (Banerjee,
1998: p. 148). In explicitly describing the values and responsibilities of a
firm, business codes can help by providing a framework for managers to
guide their decisions, and simultaneously informing external stakeholders
(Kaptein, 2004).
From the above, we could conclude that shared values are a key
component in attaining a shared vision of the Corporate Responsibility of an
organisation and to guide interactions with stakeholders, and are formed by
rules, norms and ethical behaviour standards from both inside and outside
of the organisation.
commitment to it (Van Dyne et al, 1994; Fritz et al, 1999; Gross and Etzioni,
1985). Also, the employees’ experience of Corporate Responsibility appears
to be significantly affected by their perception of the behaviours and
attitudes of management, especially if an employee perceives an
inconsistency between the immediate manager and the corporate policy
(Ramus, 2001). The resultant dissatisfaction and lack of engagement could
potentially impact the success of responsible initiatives (e.g. Preston, 2001;
Ramus, 2001). Hence, it has become important to understand how
Corporate Responsibility is interpreted by decision-makers (Banerjee, 2002)
and decision implementers (Ramus and Steger, 2001).
Corporate identity research has the power to “probe into the quintessence of
an organisation's existence and … can propel to the fore issues of great
sensitivity and political importance” (Balmer, 2001b: p. 269). As such,
Corporate Identity provides a relevant framework for researching shared
values among employees, as “at its core is the mix of employees’ values
which are expressed in terms of their affinities to corporate, professional,
national and other identities” (Balmer, 2001: 280). Furthermore, every
organisation has an organisational (Albert and Whetten, 1985) and
corporate identity (Van Rekom, 1997), and as such provides a reliable
structure in which the salience and sharedness of other value systems can
be used as a reference. Finally, understanding the place and role of
corporate responsibility within a firm’s identity could offer insights into the
requirements for attaining more embedded responsibility in business
practice (e.g. Gray and Balmer, 2004).
agents in the process towards a more responsible firm (Starik and Rands,
1995). However, it has been argued that “each individual carries around
within his or her head a subjectively valid set of beliefs. The potential for
individual subjectivity within organisations, therefore, means that
acceptance of an idea is contingent on the idea’s consistency with an
individual’s belief system – not the ideology of the organisation as a whole”
(Floyd and Wooldridge, 2000: p. 112). Therefore, personal values can also
influence a firm’s responses to environmental issues (Bansal and Roth,
2000), and can influence the individual’s perceptions of environmental
issues (Daft and Weick, 1984), behaviour (Dutton, 1997) and receptiveness
to change (Andersson and Bateman, 2000). This means that a complex
relationship exists between employees, their values and perceptions, and
the organisation, its values and the success of its responsible initiatives
(Beaumont et al, 1993; Cordano and Frieze, 2000).
The outcomes of the above would further the understanding of the role of
individuals in their responses to social and environmental issues within their
organisation. This could have implications for the engagement of
employees’ perceptions towards the management of responsible initiatives.
The identification of the different positions available within an organisation
has the potential to provide a platform from which shared meaning and
experiences could be developed. Furthermore, the study could provide a
direction in which to develop practices to promote or mitigate the available
personal attributes towards a constructive asset of the firm.
Community action in the field of CSR has to build on the core principles laid
down in international agreements and should be developed in full respect of
subsidiarity principles. Within this scope, there are at least two reasons
pointing to the opportunity and the need for Community Action in the field of
CSR. Firstly, CSR may be a useful instrument in furthering Community
policies. Secondly, the proliferation of different CSR instruments (such as
management standards, labelling and certification schemes, reporting, etc.)
that are difficult to compare, is confusing for business, consumers,
investors, other stakeholders and the public and this, in turn, could be a
source of market distortion. Therefore, there is a role for Community action
to facilitate convergence in the instruments used in the light of the need to
ensure a proper functioning of the internal market and the preservation of a
level playing field.
CSR practices and instruments will be more effective if they are part of a
concerted effort by all those concerned towards shared objectives. They
CSR policies can also boost the societal benefit that enterprises create with
regard to innovation. Innovative practices aiming at better jobs, safer and
employee-friendly workplaces, gender mainstreaming and the innovation or
technology transfer to local communities and developing countries, leading
to a more equitable North-South economic and social development, are
The effectiveness of existing fora for the exchange of good practice and
experience at local, regional, national and EU level, could be reinforced
through better networking and co-ordination of their activities.
Several Member states have developed CSR policies, which differ because
they reflect national traditions, situations and challenges. In order to
facilitate the exchange of information about national policies and to support
its work in the area of CSR, the Commission has gathered together a group
of High-Level Social Representatives from the Member States that has met
on a regular basis.
50% of recently surveyed3 European SMEs indicate that they already carry
out socially and environmentally responsible activities for the benefit of their
external stakeholders. Their community and social engagement could be
characterised as being local in scope, occasional in nature, and unrelated to
business strategy. The main driver would be the ethical consideration of the
owner/manager, even though a significant number of SMEs also recognise
business benefits such as improved relations with consumers and the local
community. Furthermore, a positive correlation between SME's strategic
focus and their socially responsible activities can be established: SMEs
focussing on innovation, quality and growth also score higher on current or
future social engagement. Lack of awareness seems to be the most
significant obstacle to social engagement, especially among the smallest
SMEs, followed by resource constraints. Small business associations,
support organisations and networks have an important role to play in raising
awareness through the provision of information, user-friendly tools and the
dissemination of good practices cases.
Since SMEs do not draw value from their engagement in the same way as a
large company, it is important to assist SMEs in adopting a more strategic
approach. Collecting evidence on the business case for different types of
SMEs operating in diverse cultural backgrounds is key to a better
understanding and increased SME participation. In the future, the most
significant pressure on SMEs to adopt CSR practices is likely to come from
their large business customers, which in return could help SMEs cope with
these challenges through the provision of training, mentoring schemes and
other initiatives.
3 The 2001 ENSR survey of over 7,000 SMEs in: European SMEs and Social and
Environmental Responsibility, report published in the 7th Observatory of European
SMEs, 2002, European Commission, Enterprise DG
(http://europa.eu.int/comm/enterprise/enterprise_policy/analysis/observatory.htm)
4
Greater transparency also prevents companies from being used by organised crime, and
terrorist groups to launder or generate money for their benefit.
The biggest challenge related to codes is to ensure that they are effectively
implemented, monitored and verified. In this respect, the Commission
promotes business widespread adherence to codes of conducts developed
Enterprise policy
Only competitive and profitable enterprises are able to make a long-term
contribution to sustainable development by generating wealth and jobs
without compromising the social and environmental needs of society. In fact,
only profitable firms are sustainable and have better chances to
adopt/develop responsible practices.
Consumer Policy
CSR has partly evolved in response to consumer demands and
expectations. Consumers, in their purchasing behaviour, increasingly
require information and reassurance that their wider interests, such as
environmental and social concerns, are being taken into account.
Enterprises are increasingly sensitive to these demands both to retain
existing customers and to attract new customers.
8.4 Summary
CSR is a concept whereby companies integrate social and environmental
concerns in their business operations and in their interaction with their
stakeholders on a voluntary basis.
CSR is not an optional "add-on" to business core activities - but about the
way in which businesses are managed.
SAQs II
1. False
2. True
3. True
4. True
Answers to TQs:
3. Refer to 8.2
4. Refer to 8.3
5. Refer to 8.3
6. Refer to 8.3
Reference:
Lawrence R. Jauch & William F. Glueck, Business Policy & Strategic
Management _ McGraw-Hill
–––––––––––––––––––––