Free Educational Notes

Capital Structure - Forex Trading

2009-07-11T08:33:00.000-07:00

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include tens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a long term loan etc.

The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it assumes away many important factors in the capital structure decision. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a company's value is affected by the capital structure it employs. These other reasons include bankruptcy costs, agency costs, taxes, information asymmetry, to name some. This analysis can then be extended to look at whether there is in fact an optimal capital structure: the one which maximizes the value of the firm.
Contents
[hide]

* 1 Capital structure in a perfect market
* 2 Capital structure in the real world
o 2.1 Trade-off theory
o 2.2 Pecking order theory
o 2.3 Agency Costs
o 2.4 Other
* 3 Arbitrage
* 4 See also
* 5 Further reading
* 6 References
* 7 External links

[edit] Capital structure in a perfect market
Main article: Modigliani-Miller theorem

Assume a perfect capital market (no transaction or bankruptcy costs; perfect information); firms and individuals can borrow at the same interest rate; no taxes; and investment decisions aren't affected by financing decisions. Modigliani and Miller made two findings under these conditions. Their first 'proposition' was that the value of a company is independent of its capital structure. Their second 'proposition' stated that the cost of equity for a leveraged firm is equal to the cost of equity for an unleveraged firm, plus an added premium for financial risk. That is, as leverage increases, while the burden of individual risks is shifted between different investor classes, total risk is conserved and hence no extra value created.

Their analysis was extended to include the effect of taxes and risky debt. Under a classical tax system, the tax deductibility of interest makes debt financing valuable; that is, the cost of capital decreases as the proportion of debt in the capital structure increases. The optimal structure, then would be to have virtually no equity at all.

[edit] Capital structure in the real world

If capital structure is irrelevant in a perfect market, then imperfections which exist in the real world must be the cause of its relevance. The theories below try to address some of these imperfections, by relaxing assumptions made in the M&M model.

[edit] Trade-off theory
Main article: Trade-off theory of capital structure

Trade-off theory allows the bankruptcy cost to exist. It states that there is an advantage to financing with debt (namely, the tax benefit of debts) and that there is a cost of financing with debt (the bankruptcy costs of debt). The marginal benefit of further increases in debt declines as debt increases, while the marginal cost increases, so that a firm that is optimizing its overall value will focus on this trade-off when choosing how much debt and equity to use for financing. Empirically, this theory may explain differences in D/E ratios between industries, but it doesn't explain differences within the same industry.

[edit] Pecking order theory
Main article: Pecking Order Theory

Pecking Order theory tries to capture the costs of asymmetric information. It states that companies prioritize their sources of financing (from internal financing to equity) according to the law of least effort, or of least resistance, preferring to raise equity as a financing means “of last resort”. Hence: internal debt is used first; when that is depleted, then debt is issued; and when it is no longer sensible to issue any more debt, equity is issued. This theory maintains that businesses adhere to a hierarchy of financing sources and prefer internal financing when available, and debt is preferred over equity if external financing is required. Thus, the form of debt a firm chooses can act as a signal of its need for external finance. The pecking order theory is popularized by Myers (1984)[1] when he argues that equity is a less preferred means to raise capital because when managers (who are assumed to know better about true condition of the firm than investors) issue new equity, investors believe that managers think that the firm is overvalued and managers are taking advantage of this over-valuation. As a result, investors will place a lower value to the new equity issuance.

[edit] Agency Costs

There are three types of agency costs which can help explain the relevance of capital structure.

* Asset substitution effect: As D/E increases, management has an increased incentive to undertake risky (even negative NPV) projects. This is because if the project is successful, share holders get all the upside, whereas if it is unsuccessful, debt holders get all the downside. If the projects are undertaken, there is a chance of firm value decreasing and a wealth transfer from debt holders to share holders.
* Underinvestment problem: If debt is risky (eg in a growth company), the gain from the project will accrue to debtholders rather than shareholders. Thus, management have an incentive to reject positive NPV projects, even though they have the potential to increase firm value.
* Free cash flow: unless free cash flow is given back to investors, management has an incentive to destroy firm value through empire building and perks etc. Increasing leverage imposes financial discipline on management.

[edit] Other

* The neutral mutation hypothesis—firms fall into various habits of financing, which do not impact on value.
* Market timing hypothesis—capital structure is the outcome of the historical cumulative timing of the market by managers.[2]
* accelerated investment effect- even in absence of agency costs, levered firms use to invest faster because of the existence of default risk[3]

[edit] Arbitrage

Similar questions are also the concern of a variety of speculator known as a capital-structure arbitrageur, see arbitrage.

A capital-structure arbitrageur seeks opportunities created by differential pricing of various instruments issued by one corporation. Consider, for example, traditional bonds and convertible bonds. The latter are bonds that are, under contracted-for conditions, convertible into shares of equity. The stock-option component of a convertible bond has a calculable value in itself. The value of the whole instrument should be the value of the traditional bonds plus the extra value of the option feature. If the spread, the difference between the convertible and the non-convertible bonds grows excessively, then the capital-structure arbitrageur will bet that it will converge.

[edit] See also

* Cost of capital
* Corporate finance
* Debt overhang
* Discounted cash flow
* Enterprise value
* Financial modeling
* Financial economics
* Pecking Order Theory
* Weighted average cost of capital

Investment Management - Forex

2009-07-11T08:20:00.000-07:00

Investment management is the professional management of various securities (shares, bonds etc.) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or Exchange Traded Funds) .

The term asset management is often used to refer to the investment management of collective investments, (not necessarily) whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking".

The provision of 'investment management services' includes elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue.

Fund manager (or investment adviser in the U.S.) refers to both a firm that provides investment management services and an individual who directs fund management decisions.

Industry scope

The business of investment management has several facets, including the employment of professional fund managers, research (of individual assets and asset classes), dealing, settlement, marketing, internal auditing, and the preparation of reports for clients. The largest financial fund managers are firms that exhibit all the complexity their size demands. Apart from the people who bring in the money (marketers) and the people who direct investment (the fund managers), there are compliance staff (to ensure accord with legislative and regulatory constraints), internal auditors of various kinds (to examine internal systems and controls), financial controllers (to account for the institutions' own money and costs), computer experts, and "back office" employees (to track and record transactions and fund valuations for up to thousands of clients per institution).

[edit] Key problems of running such businesses

Key problems include:

* revenue is directly linked to market valuations, so a major fall in asset prices causes a precipitous decline in revenues relative to costs;
* above-average fund performance is difficult to sustain, and clients may not be patient during times of poor performance;
* successful fund managers are expensive and may be headhunted by competitors;
* above-average fund performance appears to be dependent on the unique skills of the fund manager; however, clients are loath to stake their investments on the ability of a few individuals- they would rather see firm-wide success, attributable to a single philosophy and internal discipline;
* analysts who generate above-average returns often become sufficiently wealthy that they avoid corporate employment in favor of managing their personal portfolios.

The most successful investment firms in the world have probably been those that have been separated physically and psychologically from banks and insurance companies. That is, the best performance and also the most dynamic business strategies (in this field) have generally come from independent investment management firms.

[edit] Representing the owners of shares

Institutions often control huge shareholdings. In most cases they are acting as fiduciary agents rather than principals (direct owners). The owners of shares theoretically have great power to alter the companies they own via the voting rights the shares carry and the consequent ability to pressure managements, and if necessary out-vote them at annual and other meetings.

In practice, the ultimate owners of shares often do not exercise the power they collectively hold (because the owners are many, each with small holdings); financial institutions (as agents) sometimes do. There is a general belief that shareholders - in this case, the institutions acting as agents—could and should exercise more active influence over the companies in which they hold shares (e.g., to hold managers to account, to ensure Boards effective functioning). Such action would add a pressure group to those (the regulators and the Board) overseeing management.

However there is the problem of how the institution should exercise this power. One way is for the institution to decide, the other is for the institution to poll its beneficiaries. Assuming that the institution polls, should it then: (i) Vote the entire holding as directed by the majority of votes cast? (ii) Split the vote (where this is allowed) according to the proportions of the vote? (iii) Or respect the abstainers and only vote the respondents' holdings?

The price signals generated by large active managers holding or not holding the stock may contribute to management change. For example, this is the case when a large active manager sells his position in a company, leading to (possibly) a decline in the stock price, but more importantly a loss of confidence by the markets in the management of the company, thus precipitating changes in the management team.

Some institutions have been more vocal and active in pursuing such matters; for instance, some firms believe that there are investment advantages to accumulating substantial minority shareholdings (i.e. 10% or more) and putting pressure on management to implement significant changes in the business. In some cases, institutions with minority holdings work together to force management change. Perhaps more frequent is the sustained pressure that large institutions bring to bear on management teams through persuasive discourse and PR. On the other hand, some of the largest investment managers—such as Barclays Global Investors and Vanguard—advocate simply owning every company, reducing the incentive to influence management teams. A reason for this last strategy is that the investment manager prefers a closer, more open and honest relationship with a company's management team than would exist if they exercised control; allowing them to make a better investment decision.

The national context in which shareholder representation considerations are set is variable and important. The USA is a litigious society and shareholders use the law as a lever to pressure management teams. In Japan it is traditional for shareholders to be low in the 'pecking order,' which often allows management and labor to ignore the rights of the ultimate owners. Whereas US firms generally cater to shareholders, Japanese businesses generally exhibit a stakeholder mentality, in which they seek consensus amongst all interested parties (against a background of strong unions and labour legislation).

[edit] Size of the global fund management industry

Assets of the global fund management industry increased for the fourth year running in 2007 to reach a record $74.3 trillion. This was up 14% on the previous year and double from five years earlier. Growth during the past three years has been due to an increase in capital inflows and strong performance of equity markets.

Pension assets totalled $28.2 trillion in 2007, with a further $26.2 trillion invested in mutual funds and $19.9 trillion in insurance funds. Together with alternative assets, such as those of sovereign wealth funds, hedge funds, private equity funds and funds of wealthy individuals, assets of the global fund management industry probably totalled around $110 trillion at the end of 2007.

The US was by far the largest source of funds under management in 2007 with nearly a half of the world total. It was followed by the UK with 9% and Japan with 6%. The Asia-Pacific region has shown the strongest growth in recent years. Countries such as China and India offer huge potential and many companies are showing an increased focus in this region.[1]

[edit] 15 Largest Asset Management Firms

A 1 October 2007 article published in Pensions and Investments details the top 15 (300 listed) asset managers by assets under management (AUM) as of 31 December 2008.[2]
Ranking Manager Assets under management
(US$ billion) Country
1. UBS AG - according to its website (31.03.09) 2059 Switzerland
2. Barclays Global Investors 1,400 UK
3. State Street Global Advisors 1,367 US
4. Fidelity Investments 1,299 US
5. The Vanguard Group 852 US
6. JPMorgan Chase 782 US
7. Capital Group 1200 US
8. Deutsche Bank 723 Germany
9. Northern Trust 598 US
10. AllianceBernstein 516 US
11. Wellington Management Company 484 US
12. Merrill Lynch & Co. 473 US
13. Credit Agricole 461 France
14. Goldman Sachs 452 US
15. Citigroup 437 US

1. ^ Fund Management: City Business Series. International Financial Services, London. 2008-10-14. http://www.ifsl.org.uk/upload/CBS_Fund_Management_2008.pdf. Retrieved on 2008-14-14.
2. ^ P&I/Watson Wyatt World 500: The world's largest managers

[edit] Philosophy, process and people

The 3-P's (Philosophy, Process and People) are often used to describe the reasons why the manager is able to produce above average results.

* Philosophy refers to the over-arching beliefs of the investment organization. For example: (i) Does the manager buy growth or value shares (and why)? (ii) Do they believe in market timing (and on what evidence)? (iii) Do they rely on external research or do they employ a team of researchers? It is helpful if any and all of such fundamental beliefs are supported by proof-statements.
* Process refers to the way in which the overall philosophy is implemented. For example: (i) Which universe of assets is explored before particular assets are chosen as suitable investments? (ii) How does the manager decide what to buy and when? (iii) How does the manager decide what to sell and when? (iv) Who takes the decisions and are they taken by committee? (v) What controls are in place to ensure that a rogue fund (one very different from others and from what is intended) cannot arise?
* People refers to the staff, especially the fund managers. The questions are, Who are they? How are they selected? How old are they? Who reports to whom? How deep is the team (and do all the members understand the philosophy and process they are supposed to be using)? And most important of all, How long has the team been working together? This last question is vital because whatever performance record was presented at the outset of the relationship with the client may or may not relate to (have been produced by) a team that is still in place. If the team has changed greatly (high staff turnover or changes to the team), then arguably the performance record is completely unrelated to the existing team (of fund managers).

[edit] Investment managers and portfolio structures

At the heart of the investment management industry are the managers who invest and divest client investments.

A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments.

[edit] Asset allocation

The different asset class definitions are widely debated, but four common divisions are stocks, bonds, real-estate and commodities. The exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of monies among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices).

[edit] Long-term returns

It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment). For example, over very long holding periods (eg. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash.

[edit] Diversification

Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz and effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), and cross-correlations between the returns.

[edit] Investment styles

There are a range of different styles of fund management that the institution can implement. For example, growth, value, market neutral, small capitalisation, indexed, etc. Each of these approaches has its distinctive features, adherents and, in any particular financial environment, distinctive risk characteristics. For example, there is evidence that growth styles (buying rapidly growing earnings) are especially effective when the companies able to generate such growth are scarce; conversely, when such growth is plentiful, then there is evidence that value styles tend to outperform the indices particularly successfully.

[edit] Performance measurement

Fund performance is the acid test of fund management, and in the institutional context accurate measurement is a necessity. For that purpose, institutions measure the performance of each fund (and usually for internal purposes components of each fund) under their management, and performance is also measured by external firms that specialize in performance measurement. The leading performance measurement firms (e.g. Frank Russell in the USA) compile aggregate industry data, e.g., showing how funds in general performed against given indices and peer groups over various time periods.

In a typical case (let us say an equity fund), then the calculation would be made (as far as the client is concerned) every quarter and would show a percentage change compared with the prior quarter (e.g., +4.6% total return in US dollars). This figure would be compared with other similar funds managed within the institution (for purposes of monitoring internal controls), with performance data for peer group funds, and with relevant indices (where available) or tailor-made performance benchmarks where appropriate. The specialist performance measurement firms calculate quartile and decile data and close attention would be paid to the (percentile) ranking of any fund.

Generally speaking, it is probably appropriate for an investment firm to persuade its clients to assess performance over longer periods (e.g., 3 to 5 years) to smooth out very short term fluctuations in performance and the influence of the business cycle. This can be difficult however and, industry wide, there is a serious preoccupation with short-term numbers and the effect on the relationship with clients (and resultant business risks for the institutions).

An enduring problem is whether to measure before-tax or after-tax performance. After-tax measurement represents the benefit to the investor, but investors' tax positions may vary. Before-tax measurement can be misleading, especially in regimens that tax realised capital gains (and not unrealised). It is thus possible that successful active managers (measured before tax) may produce miserable after-tax results. One possible solution is to report the after-tax position of some standard taxpayer.

[edit] Risk-adjusted performance measurement

Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken. Several other aspects are also part of performance measurement: evaluating if managers have succeeded in reaching their objective, i.e. if their return was sufficiently high to reward the risks taken; how they compare to their peers; and finally whether the portfolio management results were due to luck or the manager’s skill. The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in modern portfolio theory.

Modern portfolio theory established the quantitative link that exists between portfolio risk and return. The Capital Asset Pricing Model (CAPM) developed by Sharpe (1964) highlighted the notion of rewarding risk and produced the first performance indicators, be they risk-adjusted ratios (Sharpe ratio, information ratio) or differential returns compared to benchmarks (alphas). The Sharpe ratio is the simplest and best known performance measure. It measures the return of a portfolio in excess of the risk-free rate, compared to the total risk of the portfolio. This measure is said to be absolute, as it does not refer to any benchmark, avoiding drawbacks related to a poor choice of benchmark. Meanwhile, it does not allow the separation of the performance of the market in which the portfolio is invested from that of the manager. The information ratio is a more general form of the Sharpe ratio in which the risk-free asset is replaced by a benchmark portfolio. This measure is relative, as it evaluates portfolio performance in reference to a benchmark, making the result strongly dependent on this benchmark choice.

Portfolio alpha is obtained by measuring the difference between the return of the portfolio and that of a benchmark portfolio. This measure appears to be the only reliable performance measure to evaluate active management. In fact, we have to distinguish between normal returns, provided by the fair reward for portfolio exposure to different risks, and obtained through passive management, from abnormal performance (or outperformance) due to the manager’s skill, whether through market timing or stock picking. The first component is related to allocation and style investment choices, which may not be under the sole control of the manager, and depends on the economic context, while the second component is an evaluation of the success of the manager’s decisions. Only the latter, measured by alpha, allows the evaluation of the manager’s true performance.

Portfolio normal return may be evaluated using factor models. The first model, proposed by Jensen (1968), relies on the CAPM and explains portfolio normal returns with the market index as the only factor. It quickly becomes clear, however, that one factor is not enough to explain the returns and that other factors have to be considered. Multi-factor models were developed as an alternative to the CAPM, allowing a better description of portfolio risks and an accurate evaluation of managers’ performance. For example, Fama and French (1993) have highlighted two important factors that characterise a company's risk in addition to market risk. These factors are the book-to-market ratio and the company's size as measured by its market capitalisation. Fama and French therefore proposed three-factor model to describe portfolio normal returns (Fama-French three-factor model). Carhart (1997) proposed to add momentum as a fourth factor to allow the persistence of the returns to be taken into account. Also of interest for performance measurement is Sharpe’s (1992) style analysis model, in which factors are style indices. This model allows a custom benchmark for each portfolio to be developed, using the linear combination of style indices that best replicate portfolio style allocation, and leads to an accurate evaluation of portfolio alpha.

[edit] Education or Certification

Increasingly, international business schools are incorporating the subject into their course outlines and some have formulated the title of 'Investment Management' conferred as specialist bachelors degrees (e.g. Cass Business School, London). Due to global cross-recognition agreements with the 2 major accrediting agencies AACSB and ACBSP which accredit over 560 of the best business school programs, the Certification of MFP Master Financial Planner Professional from the American Academy of Financial Management is available to AACSB and ACBSP business school graduates with finance or financial services-related concentrations. For people with aspirations to become an investment manager, further education may be needed beyond a bachelors in business, finance, or economics. A graduate degree or an investment qualification such as theChartered Financial Analyst (CFA) designation may help in having a career in investment management.[citation needed]

There is no evidence that any particular qualification enhances the most desirable characteristic of an investment manager, that is the ability to select investments that result in an above average (risk weighted) long-term performance. The industry has a tradition of seeking out, employing and generously rewarding such people without reference to any formal qualifications.

[edit] See also

* Active management
* Alpha capture system
* Corporate governance
* Exchange fund
* Investment
* List of asset management firms
* Passive management
* Exchange Traded Funds
* Personal information managers
* Portfolio
* Separately managed account
* Transition Management

portfolio Fiance -Forex

2009-07-11T08:12:00.000-07:00

Finance, a portfolio is an appropriate mix of collection of investments held by institutions or a private individual.

Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.

In building up an investment portfolio a financial institution will typically conduct its own investment analysis, whilst a private individual may make use of the services of a financial advisor or a financial institution which offers portfolio management services.

Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions always involve some sort of performance measurement, most typically expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected return from portfolios of different asset bundles are compared.

The unique goals and circumstances of the investor must also be considered. Some investors are more risk averse than others.

Mutual fund have developed particular techniques to optimize their portfolio holdings. See fund management for details.

[edit] Portfolio formation

Many strategies have been developed to form a portfolio.

* equally-weighted portfolio
* capitalization-weighted portfolio
* price-weighted portfolio
* optimal portfolio (for which the Sharpe ratio is highest)
* It is most important for economic developments.

[edit] Models

Some of the financial models used in the process of Valuation, stock selection, and management of portfolios include:

* Maximizing return, given an acceptable level of risk.
* Modern portfolio theory—a model proposed by Harry Markowitz among others.
* The single-index model of portfolio variance.
* Capital asset pricing model.
* Arbitrage pricing theory.
* The Jensen Index.
* The Treynor Index.
* The Sharpe Diagonal (or Index) model.
* Value at risk model.

[edit] Returns

There are many different methods for calculating portfolio returns. A traditional method has been using quarterly or monthly money-weighted returns. A money-weighted return calculated over a period such as a month or a quarter assumes that the rate of return over that period is constant. As portfolio returns actually fluctuate daily, money-weighted returns may only provide an approximation to a portfolio’s actual return. These errors happen because of cashflows during the measurement period. The size of the errors depends on three variables: the size of the cashflows, the timing of the cashflows within the measurement period, and the volatility of the portfolio[1].

A more accurate method for calculating portfolio returns is to use the true time-weighted method. This entails revaluing the portfolio on every date where a cashflow takes place (perhaps even every day), and then compounding together the daily returns.

[edit] Attribution

Performance Attribution explains the active performance (i.e. the benchmark-relative performance) of a portfolio. For example, a particular portfolio might be benchmarked against the S&P 500 index. If the benchmark return over some period was 5%, and the portfolio return was 8%, this would leave an active return of 3% to be explained. This 3% active return represents the component of the portfolio's return that was generated by the investment manager (rather than by the benchmark).

There are different models for performance attribution, corresponding to different investment processes. For example, one simple model explains the active return in "bottom-up" terms, as the result of stock selection only. On the other hand, sector attribution explains the active return in terms of both sector bets (for example, an overweight position in Materials, and an underweight position in Financials), and also stock selection within each sector (for example, choosing to hold more of the portfolio in one bank than another).

An altogether different paradigm for performance attribution is based on using factor models, such as the Fama-French three-factor model.

Outline of Finance

2009-07-11T08:10:00.000-07:00

Essence of finance

The term finance may incorporate any of the following:

* The study of money and other assets
* The management and control of those assets
* Profiling and managing project risks
* As a verb, "to finance" is to provide funds for business.

[edit] Branches of finance

* Personal finance
* Corporate finance
* Public finance
* Project Finance
* Trade finance

[edit] Fundamental financial concepts

* Finance an overview
o Arbitrage
o Capital (economics)
o Capital asset pricing model
o Cash flow
o Cash flow matching
o Debt
+ Default
+ Consumer debt
+ Debt consolidation
+ Debt settlement
+ Credit counseling
+ Bankruptcy
+ Debt diet
+ Debt-snowball method
o Discounted cash flow
o Financial capital
+ Funding
o Financial modeling
o Entrepreneur
+ Entrepreneurship
o Fixed income analysis
o Gap financing
o Hedge
+ Basis risk
o Interest rate
+ Risk-free interest rate
+ Term structure of interest rates
o Short rate model
+ Vasicek model
+ Cox-Ingersoll-Ross model
+ Hull-White model
+ Chen model
+ Black-Derman-Toy model
o Interest
+ Effective interest rate
+ Nominal interest rate
+ Interest rate basis
+ Fisher equation
+ Crowding out
+ Annual percentage rate
+ Interest coverage ratio
o Investment
+ Foreign direct investment
+ Gold as an investment
+ Over-investing
o Leverage
o Locked-in value
o Long (finance)
o Liquidity
o Margin (finance)
o Mark to future
o Mark to market
o Market Impact
o Medium of exchange
o Microcredit
o Money creation
o Money
+ Currency
+ Coin
+ Banknote
+ Counterfeit
o Portfolio
+ Modern portfolio theory
o Reference rate
+ Reset
o Return
+ Absolute return
+ Investment performance
+ Relative return
o Right-financing
o Risk
+ Risk management
+ Risk measure
# Coherent risk measure
# Spectral risk measure
# Value at Risk
o Scenario analysis
o Short (finance)
o Speculation
+ Day trading
o Position trader
o Spread
o Standard of deferred payment
o Store of value
o Time horizon
o Time value of money
+ Discounting
+ Present value
+ Future value
+ Net present value
+ Internal rate of return
+ Modified internal rate of return
+ Annuity
+ Perpetuity
o Unit of account
o Volatility
o Yield
o Yield curve

[edit] History of finance

* Tulip mania 1620s/1630s
* South Sea Bubble & Mississipi Company 1710s; see also Stock market bubble
* Panic of 1837
* Railway mania 1840s
* Erie War 1860s
* Long Depression 1873 to 1896
* Post-WWI hyperinflation; see Hyperinflation and Inflation in the Weimar Republic
* Wall Street Crash 1929
* Great Depression 1930s
* Oil Shock 1973
* 1979 energy crisis
* Notable Bankrupts
* Savings and Loan Crisis 1980s
* Black Monday 1987
* Asian financial crisis 1990s
* Dot-com bubble 1995-2001
* Stock market downturn of 2002
* United States housing bubble 2001-

[edit] Finance terms, by field

[edit] Accounting (financial record keeping)

Main articles: Accounting and List of accounting topics

* Auditing
* Accounting software
* Book keeping
* FASB
* Financial accountancy
o Financial statements
+ Balance sheet
+ Cash flow statement
+ Income statement
* Management accounting
* Philosophy of Accounting
* Working capital

[edit] Banking

* Anonymous banking
* Automatic teller machine
* Deposit
* Deposit creation multiplier
* Loan
o Pre-qualification
o Pre-approval
o Subprime
* Withdrawal

[edit] Corporate finance
Main article: Corporate finance

* Balance sheet analysis
o Financial ratio
* Business plan
* Capital budgeting
o Capital investment decisions
o The investment decision
+ Business valuation
+ Stock valuation
+ Fundamental analysis
+ Real options
+ Valuation topics
+ Fisher separation theorem
o The financing decision
+ Capital structure
+ Cost of capital
+ Weighted average cost of capital
+ Modigliani-Miller theorem
o The Dividend Decision
+ Dividend
+ Dividend tax
+ Dividend yield
+ Modigliani-Miller theorem
* Corporate action
* Managerial finance
o Management accounting
* Mergers and acquisitions
o leveraged buyout
o takeover
o corporate raid
* Real options
* Return on investment
o Return on assets
o Return on equity
o Return on capital
* Working capital management
o cash conversion cycle
o Return on capital
o Economic value added
o Just In Time
o Economic order quantity
o Discounts and allowances
o Factoring (trade)

[edit] Investment management

* Fund management
o Active management
o Efficient market hypothesis
o Portfolio
o Modern portfolio theory
+ Capital asset pricing model
o Arbitrage pricing theory
o Passive management
+ Index fund
o Activist shareholder
o Mutual fund
+ Open-end fund
+ Closed-end fund
+ List of mutual-fund families
o Financial engineering
+ Long-Term Capital Management
o Hedge fund
o Hedge
* Visualization of Financial Implications

[edit] Personal finance
Main article: Personal finance

* 529 plan (college savings)
* Budget
* Coverdell Education Savings Account (Coverdell ESAs, formerly known as Education IRAs)
* Credit and debt
o Credit card
o Debt consolidation
o Mortgage loan
+ Continuous-repayment mortgage
* Debit card
* Direct deposit
* Employment contract
o Commission
o Employee stock option
o Employee or fringe benefit
o Health insurance
o Paycheck
o Salary
o Wage
* Financial literacy
* Insurance
* Predatory lending
* Retirement plan
o 401(a)
o 401(k)
o 403(b)
o 457 plan
o Keogh plan
o Individual Retirement Account
+ Roth IRA
+ Traditional IRA
+ SEP IRA
+ SIMPLE IRA
+ Conduit IRA
o Pension
* Social security
* Tax advantage
* Wealth
* Comparison of accounting software
* Personal financial management
o Comparison of personal financial management online tools
* Investment club
* Collective investment scheme
* Car financing

[edit] Public finance
Main article: Public finance

* Central bank
* Federal Reserve
* Fractional-reserve banking
o Deposit creation multiplier
* Tax
o Income tax
o Payroll tax
o Sales tax
o Tax advantage
o Tax, tariff and trade
* crowding out
* Industrial policy
* Agricultural policy
* Currency union
* Monetary reform

[edit] Insurance
Main article: Insurance

* Actuarial science
* Annuities
* Catastrophe modeling
* Earthquake loss
* Extended coverage
* Insurable interest
* Insurable risk
* Insurance
o Health insurance
+ Injury cover
+ Disability insurance
+ Flexible spending account
+ Health savings account
+ Long term care insurance
+ Medical savings account
o Life insurance
+ Life insurance tax shelter
+ Permanent life insurance
+ Term life insurance
+ Universal life insurance
+ Variable universal life insurance
+ Whole life insurance
o Property insurance
+ Auto insurance
+ Boiler insurance
+ Earthquake insurance
+ Home insurance
+ Title insurance
+ Pet insurance
o Casualty insurance
+ Business continuation insurance
+ Fidelity bond
+ Liability insurance
# Personal umbrella liability policy
# Commercial general liability policy
+ Political risk insurance
+ Surety bond
+ Terrorism insurance
o Credit insurance
o Reinsurance
o Self insurance
o Travel insurance
* Insurance contract
* Risk Retention Group

[edit] Economics and finance

* Economic growth
* Financial economics
* Mathematical economics
* Managerial economics
* Utility theory

[edit] Mathematics and finance

[edit] Time value of money
Main article: Time value of money

* Present value
* Future value
* Discounting
* Net present value
* Internal rate of return
* Annuity
* Perpetuity

[edit] Financial mathematics
Main article: Financial mathematics

[edit] Mathematical tools

* Probability
o Probability distribution
+ Binomial distribution
+ Log-normal distribution
+ Poisson distribution

* Expected value
* Value at risk
o CVaR
o Cash at risk
* Risk-neutral measure

* Stochastic calculus
o Markov process
o Brownian motion
o Itô's lemma
o Girsanov's theorem
o Radon-Nikodym derivative
o Martingale representation theorem
o Feynman-Kac formula
o Dynkin's formula
o Stochastic differential equations

* Monte Carlo methods in finance
o Monte Carlo methods for option pricing
o Quasi-Monte Carlo methods in finance

* Partial differential equations
o Heat equation
o Finite difference method

* Volatility
o ARCH model
o GARCH model

[edit] Derivatives pricing

Main article: Derivatives pricing

* Rational pricing assumptions
o Risk neutral valuation
o Arbitrage free pricing

* Futures
o Futures contract pricing

* Options (and Real options)
o Black-Scholes formula
o Black model
o Binomial options model
o Monte Carlo methods for option pricing
o The Greeks
o Volatility
+ Implied volatility
+ Historical volatility
+ Stochastic volatility
+ Volatility smile
# Volatility surface
# SABR Volatility Model

* Swaps
o Swap Valuation

* Interest rate derivatives
o Short-rate models (used in pricing bond options, swaptions and other interest rate derivatives)
+ Rendleman-Bartter model
+ Vasicek model
+ Ho-Lee model
+ Hull-White model
+ Cox-Ingersoll-Ross model
+ Black-Karasinski model
+ Black-Derman-Toy model
+ Longstaff-Schwartz model
+ Chen model

[edit] Constraint finance

* Creditary economics
* Environmental finance
* Feminist economics
* Green economics
* Islamic economics
* Uneconomic growth
* Value of Earth
* Value of life

[edit] Virtual finance

* Virtual finance

[edit] Financial markets

[edit] Market and instruments

* Capital markets
* Securities
* Financial markets
* Primary market
* Initial public offering
* Aftermarket
* Free market
* Bull market
* Bear market
* Bear market rally
* Market maker
* Dow Jones Industrial Average
* Nasdaq
* List of stock exchanges
* List of stock market indices
* List of corporations by market capitalization

[edit] Equity market
Main article: Equity market

* Stock market
* Stock
* Common stock
* Preferred stock
* Treasury stock
* Equity investment
* Index investing
* Private Equity
* Financial reports and statements
* Fundamental analysis
* Dividend
* Dividend yield
* Stock split

[edit] Equity valuation
Main article: Equity valuation

* Dow Theory
* Elliott Wave Theory
* Economic value added
* Gordon model
* Growth stock
* Mergers and acquisitions
* Leveraged buyout
* Takeover
* Corporate raid
* PE ratio
* Market capitalization
* Income per share
* Stock valuation
* Technical analysis
* Chart patterns
* V-trend

[edit] Investment theory
Main article: Investment theory

* Behavioral finance
* Dead cat bounce
* Efficient market hypothesis
* Market microstructure
* Stock market crash
* Stock market bubble
* January effect
* Mark Twain effect
* Quantitative behavioral finance
* Quantitative analyst
* Statistical arbitrage

[edit] Bond market
Main article: Bond market

* Bond (finance)
* Zero-coupon bond
* Junk bonds
* Convertible bond
* Accrual bond
* Municipal bond
* Sovereign bond
* Bond valuation
o Yield to maturity
o Bond duration
o Bond convexity
* Fixed income

[edit] Money market
Main article: Money market

* Repurchase agreement
* International Money Market
* Currency
* Exchange rate
* International currency codes
* Table of historical exchange rates

[edit] Commodity market
Main article: Commodity market

* Commodity
o Asset
o Commodity Futures Trading Commission
o Day trading
o Drawdowns
o Forfaiting
o Fundamental analysis
o Futures contract
o Fungibility
o Gold as an investment
o Hedging
o Jesse Lauriston Livermore
o List of traded commodities
o MACD
o Ownership equity
o Position trader
o Risk (Futures)
o Seasonal traders
o Seasonal spread trading
o Slippage
o Speculation
o Spread
o Technical analysis
+ Breakout
+ Bear market
+ Bottom (technical analysis)
+ Bull market
+ Moving average
+ Open Interest
+ Parabolic SAR
+ Point and figure charts
+ Resistance
+ RSI
+ Stochastic oscillator
+ Stop loss
+ Support
+ Top (technical analysis)
o Trade
o Trend

[edit] Derivatives market
Main article: Derivatives market

* Derivative (finance)
* (see also Financial mathematics topics; Derivatives pricing)
* Underlying instrument

[edit] Forward markets and contracts
Main article: Forward market

* Forward contract

[edit] Futures markets and contracts
Main article: Futures market

* Backwardation
* Contango
* Futures contract
o Currency futures
o Financial futures
o Interest rate futures
o Futures exchange

[edit] Option markets and contracts
Main article: Option market

* Options
o Stock option
+ Box spread
+ Call option
+ Put option
+ Strike price
+ Put-call parity
+ The Greeks
+ Black-Scholes formula
+ Black model
+ Binomial options model
+ Implied volatility
+ Option time value
+ Moneyness
# At-the-money
# In-the-money
# Out-of-the-money
+ Straddle
+ Option style
# Vanilla option
# Exotic option
# Binary option
# European option
* Interest rate floor
* Interest rate cap
# Bermudan option
# American option
# Quanto option
# Asian option
+ Employee stock option
o Warrants
o Foreign exchange option
o Interest rate options
o Bond options
o Real options
o Options on futures

[edit] Swap markets and contracts
Main article: Swap market

* Swap (finance)
o Interest rate swap
o Basis swap
o Asset swap
o Forex swap
o Stock swap
o Equity swaps
o Currency swap
o Variance swap

see: w:Swap (finance)

[edit] Derivative markets by underlyings

[edit] Equity derivatives
Main article: Equity derivative

* Accelerated Market Participation Securities (AMPS)
* Accelerated Return Equity Securities (ARES)
* Asset Return Obligation Securities (ASTROS)
* Automatic Common Exchange Securities (ACES)
* Basket Adjusting Structured Equity Securities (BASES)
* Basket Opportunity Exchangeable Securities (BOXES)
* Bifurcated Option Note Unit Securities (BONUSES)
* Broad Index Guarded Equity-Linked Securities (BRIDGES)
* Canadian Originated Preferred Securities (COPrS)
* Closed-end fund
* Commodity-Indexed Preferred Securities (ComPS)
* Common-Linked Higher Income Participation Securities (CHIPS)
* Common stock
* Convertible Contingent Debt Securities (CODES)
* Corporate-Backed Trust Securities (CorTS)
* Corporate Obligation Basket Listed Trust Securities (COBALTS)
* Currency Protected Notes (CPNS), (SPNS)
* Currency Protected Securities (CPS)
* Customized Upside Basket Securities (CUBS)
* Debt Exchangeable for Common Stock (DECS)
* Equity Growth Long-Term Strategy (EGLS)
* Enhanced Equity-Linked Debt Securities (ELKS)
* Enhanced Income Securities (EISs)
* Enhanced Stock Index Growth Notes (E-SIGNS)
* Equity Providing Preferred Income Convertible Securities (EPPICS)
* Exchange Preferred Income Cumulative Shares (EPICS)
* Exchange-traded fund (ETF)
* Exchangeable Capital Units (ExCaps)
* Foreign Currency Return Notes (FORENS)
* Global Bond Linked Securities (GLOBELS)
* Hybrid Income Securities Units (HITS)
* Income Deposit Securities (IDS)
* Inverse exchange-traded fund
* Leading Stockmarket Return Securities (LASERS)
* Leveraged Upside Indexed Accelerated Return Securities (LUNARS)
* Liquid Yield Option Notes (Zero Cupon) (LYONS)
* Mandatorily Exchangeable Debt Securities MEDS)
* Mandatory Adjustable Redeemable Convertible Securities (MARCS)
* Market Index Target Term Securities (MITTS)
* Market Participation Securities (MPS)
* Medium Term Equity Related Investment Securities (MERITS)
* Monthly Income Debt Securities (MIDS)
* Monthly Income Preferred Securities (MIPS)
* Participating Index Notes (PINS)
* Performance Equity-Linked Redemption Quarterly Pay Securities (PERQS)
* Performance Equity-Return Linked Securities (PERKS)
* Performance Leveraged Upside Securities (PLUS)
* Principal Accruing Enhanced Return Securities (PACERS)
* Preferred Equity Redemption Cumulative Stock (PERCS)
* Preferred Income Equity Redeemable Shares (PIERS)
* Preferred Redeemable Increased Dividend Equity Securities (PRIDES)
* Preferred stock
* Premium Equity Participating Securities (PEPS)
* Premium Income Equity Securities (PIES)
* Protected Exchangeable Equity-Linked Securities (PEEQS)
* Protected Growth Securities (ProGroS)
* Protected Performance Equity Linked Securities (PROPELS)
* Public Credit & Repackaged Securities (PCARS)
* Public Income Notes (PINES)
* Putable Automatic Rate Reset Securities (PARRS)
* Quarterly Income Capital Securities (QUICS)
* Quarterly Income Debt Securities (QUIDS)
* Quarterly Income Preferred Securities (QUIPS)
* Quarterly Interest Bond (QUIB)
* Real Estate Investment Trust (REIT)
* Reset Put Securities (REPS)
* Return Enhanced Convertible Securities (RECONS)
* Rights
* Risk Adjusting Equity Range Securities (RANGERS)
* Secure Principal Energy Receipts (SPERS)
* Select Equity Indexed Notes (SEQUINS)
* Senior Quarterly Income Debt Securities (SQUIDS)
* Shared Preference Redeemable Securities (SpuRS)
* Shares of Beneficial Interest (SBI)
* Step-Up Increasing Redeemable Equity Notes (SIRENS)
* Step-Up REIT Securities (StREITs)
* Stock Appreciation Income-Linked Securities (SAILS)
* Stock market Annual Reset Term (Notes) (SMART)
* Stock Participation Accreting Redemption Quarterly-pay Securities (SPARQS)
* Stock Return Income Debt Securities (STRIDES)
* Stock Upside Note Securities (SUNS)
* Structured Asset Trust Unit Repackaging (SATURNS)
* Structured Repackaged Asset-Backed Trust Securities (STRATS)
* Structured Yield Product Exchangeable for Common Stock (STRYPES)
* Subordinated Capital Income Securities (SKIS)
* Target Return Investment Growth Securities (TRIGGERS)
* Targeted Efficient Equity Securities (TEES)
* Targeted Growth Enhanced Terms Securities (TARGETS)
* Term Convertible Securities (TECONS)
* Threshold Appreciation Price Securities (TAPS)
* Trust Automatic Common Exchange Securities (TRACES)
* Trust Certificate (TRUC)
* Trust Investment Enhanced Return Securities (TIERS)
* Trust Issued Mandatory Exchange Securities (TIMES)
* Trust Originated Preferred Securities (TOPrS)
* Trust Preferred Stock (TruPs)
* Trust Units Exchangeable for Preference Shares (TrUEPrS)
* Warrants
* Warrants & Income Redeemable Equity Securities (WIRES)
* Yield Enhanced Equity-Linked Debt Securities (YEELDS)
* Yield Enhanced Stock (YES)

[edit] Interest rate derivatives
Main article: Interest rate derivative

* LIBOR
* Forward rate agreement
* Interest rate swap
* Interest rate cap
* Exotic interest rate option
* Bond option
* Forward rate agreement
* Interest rate future
* Money market instruments
* Interest rate swap
* Range accrual Swaps/Notes/Bonds
* In-arrears Swap
* Constant maturity swap (CMS) or constant treasury swap (CTS) derivatives (swaps, caps, floors)
* Interest rate Swaption
* Bermudan swaptions
* Cross currency swaptions
* Power Reverse Dual Currency note (PRDC or Turbo)
* Target redemption note (TARN)
* CMS steepener
* Snowball
* Inverse floater
* Strips of Collateralized mortgage obligation
* Ratchet caps and floors

[edit] Credit derivatives
Main article: Credit derivative

* Credit default swap
* Collateralized debt obligation
* Credit default option
* Total return swap
* Securitization

[edit] Foreign exchange derivative
Main article: Foreign exchange derivative

* Foreign exchange option
* Currency future
* Forex swap
* Foreign exchange hedge
* Binary option: Foreign exchange

[edit] Financial regulation

* Corporate governance
* Financial regulation
o Bank regulation
+ Banking license
* License

[edit] Designations and accreditation

* Certified Financial Planner
* Chartered Financial Analyst
o CFA Institute
* Chartered Financial Consultant
* Canadian Securities Institute
* Independent Financial Adviser
o Chartered Insurance Institute
* Financial Risk Manager
* Chartered Accountant

[edit] Fraud

* Forex scam
* Insider trading
* Legal origins theory
* Petition mill
* Ponzi scheme

[edit] Industry bodies

* International Swaps and Derivatives Association
* National Association of Securities Dealers

[edit] Regulatory bodies

* Autorité des marchés financiers
* Bank for International Settlements
* Canadian securities regulation

[edit] United Kingdom

* Financial Services Authority (UK)

[edit] European Union

* European Securities Committee (EU)
* Committee of European Securities Regulators (EU)

[edit] United States

* Commodity Futures Trading Commission (U.S.)
* Federal Reserve
* Federal Trade Commission
* Municipal Securities Rulemaking Board (US)
* Office of the Comptroller of the Currency (US)
* Securities and Exchange Commission

[edit] United States legislation

* Glass-Steagall Act (US)
* Gramm-Leach-Bliley Act (US)
* Sarbanes-Oxley Act (US)
* Securities Act of 1933 (US)
* Securities Exchange Act of 1934 (US)
* Investment Advisers Act of 1940 (US)
* USA PATRIOT Act

[edit] Actuarial topics

* Actuarial topics

[edit] Asset types

* Real Estate
* Securities
* Commodities
* Futures

[edit] Raising capital

* Debt
* Factor

* Securities
o Initial public offering

[edit] Valuation

* Value (economics)
* Fair value
* Intrinsic value
* "The Theory of Investment Value"

[edit] Discounted cash flow valuation
Main article: Discounted cash flow

* Cash flow
o Operating cash flow
* Time value of money
o Present value
o Future value
o Actualization
o Discounting
* Bond valuation
o Yield to maturity
o Duration
o Convexity
* Equity valuation
o Equivalent Annual Cost
o Net present value
o Discount rate
+ Capital Asset Pricing Model
+ Arbitrage pricing theory
+ Cost of capital
+ Weighted average cost of capital
o Fundamental analysis
o Stock valuation
o Business valuation
o The investment decision

[edit] Relative valuation

* Dividend yield
* Financial ratio
* Market-based valuation
* PE ratio
* Relative valuation
* Stock image
* Stock profile

[edit] Contingent claim valuation

See derivatives pricing below.

[edit] Financial software tools

* Straight Through Processing Software
* Technical Analysis Software
* Algorithmic trading
* List of numerical analysis software
* Comparison of numerical analysis software

[edit] Financial institutions

Financial institutions

* Bank
o List of banks
+ List of banks in Canada
+ List of banks in Hong Kong
+ List of banks in Singapore
+ List of bank mergers in United States
o Advising bank
o Central bank
+ List of central banks
o Commercial bank
o Community development bank
o Cooperative bank
o Custodian bank
o Depository bank
o Investment bank
o Islamic banking
o Merchant bank
o Microcredit
o Mutual bank
o Mutual savings bank
o National bank
o Offshore bank
o Private bank
o Savings bank
o Swiss bank
* Bank holding company
* Building society
* Clearing house
* Commercial lender
* Community development financial institution
* Credit rating agency
* Credit union
* Diversified financial
* Edge Act Corporation
* Export Credit Agencies
* Financial adviser
* Financial intermediary
* Financial planner
* Futures exchange
o List of futures exchanges
* Government sponsored enterprise
* Hard money lender
* Independent Financial Adviser
* Industrial loan company
* Insurance regulatory
* Insurance company
* Investment adviser
* Investment company
* Investment trust
* Large and Complex Financial Institutions
* Mutual fund
* Non-banking financial company
* Prime brokerage
* Retail broker
* Savings and loan association
* Stock broker
* Stock exchange
o List of stock exchanges
* Trust company

[edit] Persons influential in the field of finance

* List of corporate leaders

[edit] Finance scholars

* List of economists

Bond Market

2009-07-11T08:09:00.000-07:00

The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2006, the size of the international bond market is an estimated $44.9 trillion, of which the size of the outstanding U.S. bond market debt was $25.2 trillion.

Nearly all of the $923 billion average daily trading volume (as of early 2007) in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges.

References to the "bond market" usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.
Contents
[hide]

* 1 Market structure
* 2 Types of bond markets
* 3 Bond market participants
* 4 Bond market size
* 5 Bond market volatility
* 6 Bond market influence
* 7 Bond investments
* 8 Bond indices
* 9 See also
* 10 References
* 11 External links

[edit] Market structure

Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger.

However, the New York Stock Exchange (NYSE) is the largest centralized bond market, representing mostly corporate bonds. The NYSE migrated from the Automated Bond System (ABS) to the NYSE Bonds trading system in April 2007 and expects the number of traded issues to increase from 1000 to 6000.[1]

[edit] Types of bond markets

The Securities Industry and Financial Markets Association classifies the broader bond market into five specific bond markets.

* Corporate
* Government & agency
* Municipal
* Mortgage backed, asset backed, and collateralized debt obligation
* Funding

[edit] Bond market participants

Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both.

Participants include:

* Institutional investors
* Governments
* Traders
* Individuals

Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is currently held by private individuals.

[edit] Bond market size

Amounts outstanding on the global bond market increased 6% in 2008 to $83 trillion. Domestic bonds accounted for 71% of this and international bonds the remainder. Domestic bond market stocks increased 7% during the year, largely due to an increase in government bonds. The US was the largest market for domestic bonds in 2008 accounting for 43% of amounts outstanding followed by Japan with 16%. A quarter of amounts outstanding in the US were in mortgage backed bonds, a fifth in corporate debt and 18% in Treasury bonds with most of the remainder in Federal Agency securities and municipal bonds. In Europe, public sector debt is substantial in Italy (103% of GDP), Germany (61%), and France (58%) with government borrowing set to increase in the next few years. International bond issuance fell 19% in 2008 with international mortgage-backed bond issuance hitting record levels. The UK overtook the US in 2008 to become the leading centre globally for amounts issued with 30% of the global total. Amounts outstanding on the international bond market increased 5% in 2008 to $23.9 trillion. [2]

[edit] Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.

Economists' views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of "in-line" data. If the economic release differs from the consensus view the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after an economic release. Economic releases vary in importance and impact depending on where the economy is in the business cycle.

[edit] Bond market influence

Bond markets determine the price in terms of yield that a borrower must pay in able to receive funding. In one notable instance, when President Clinton attempted to increase the US budget deficit in the 1990s, it led to such a sell-off (decreasing prices; increasing yields) that he was forced to abandon the strategy and instead balance the budget. [3][4]
“ I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody. ”

— James Carville, political advisor to President Clinton, Bloomberg [4]

[edit] Bond investments

Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unit-investment trusts. In 2006 total bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8 billion in 2006.[5] Exchange-traded funds (ETFs) are another alternative to trading or investing directly in a bond issue. These securities allow individual investors the ability to overcome large initial and incremental trading sizes.

[edit] Bond indices
Main article: Bond market index

A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Barclays Aggregate, Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity and/or sector for managing specialized portfolios.

History of financial services

2009-07-11T08:07:00.000-07:00

In the United States

The term "financial services" became more prevalent in the United States partly as a result of the Gramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies operating in the U.S. financial services industry at that time to merge.[citation needed] Companies usually have two distinct approaches to this new type of business. One approach would be a bank which simply buys an insurance company or an investment bank, keeps the original brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings. Outside the U.S. (e.g., in Japan), non-financial services companies are permitted within the holding company. In this scenario, each company still looks independent, and has its own customers, etc. In the other style, a bank would simply create its own brokerage division or insurance division and attempt to sell those products to its own existing customers, with incentives for combining all things with one company.

[edit] Banks
Main article: Bank

A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used to distinguish it from an "investment bank", a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity).

[edit] Banking services

The primary operations of banks include:

* Keeping money safe while also allowing withdrawals when needed
* Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post
* Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business)
* Issuance of credit cards and processing of credit card transactions and billing
* Issuance of debit cards for use as a substitute for checks
* Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)
* Provide wire transfers of funds and Electronic fund transfers between banks
* Facilitation of standing orders and direct debits, so payments for bills can be made automatically
* Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account.
* Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.
* Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check.
* Notary service for financial and other documents

[edit] Other types of bank services

* Private banking - Private banks provide banking services exclusively to high net worth individuals. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services.[2] Private banks often provide more personal services, such as wealth management and tax planning, than normal retail banks.[3]

* Capital market bank - bank that underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured finance products.

* Bank cards - include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards.[citation needed]

* Credit card machine services and networks - Companies which provide credit card machine and payment networks call themselves "merchant card providers".

[edit] Foreign exchange services

Foreign exchange services are provided by many banks around the world. Foreign exchange services include:

* Currency Exchange - where clients can purchase and sell foreign currency banknotes
* Wire transfer - where clients can send funds to international banks abroad
* Foreign Currency Banking - banking transactions are done in foreign currency

[edit] Investment services

* Asset management - the term usually given to describe companies which run collective investment funds.

* Hedge fund management - Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades.

* Custody services - Custody services and securities processing is a kind of 'back-office' administration for financial services. Assets under custody in the world was estimated to $65 trillion at the end of 2004.[4]

[edit] Insurance

* Insurance brokerage - Insurance brokers shop for insurance (generally corporate property and casualty insurance) on behalf of customers. Recently a number of websites have been created to give consumers basic price comparisons for services such as insurance, causing controversy within the industry.[5]

* Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property & casualty insurance.

* Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses.

[edit] Other financial services

* Intermediation or advisory services - These services involve stock brokers (private client services) and discount brokers. Stock brokers assist investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now have branch offices to assist clients. These brokerages primarily target individual investors. Full service and private client firms primarily assist execute trades and execute trades for clients with large amounts of capital to invest, such as large companies, wealthy individuals, and investment management funds.

* Private equity - Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private, or taken private once acquired. Private equity funds often use leveraged buyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can generate returns significantly higher than provided by the equity markets

* Venture capital - Venture capital is a type of private equity capital typically provided by professional, outside investors to new, high-potential-growth companies in the interest of taking the company to an IPO or trade sale of the business.

* Angel investment - An angel investor or angel (known as a business angel or informal investor in Europe), is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.

* Conglomerates - A financial services conglomerate is a financial services firm that is active in more than one sector of the financial services market e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc. A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital is for the sum of its parts.

[edit] Financial crime

[edit] UK

Fraud within the financial industry costs the UK an estimated £14bn a year and it is believed a further £25bn is laundered by British institutions.[6]

[edit] Market share

The financial services industry constitutes the largest group of companies in the world in terms of earnings and equity market cap. However it is not the largest category in terms of revenue or number of employees. It is also a slow growing and extremely fragmented industry, with the largest company (Citigroup), only having a 3 % US market share.[7] In contrast, the largest home improvement store in the US, Home Depot, has a 30 % market share, and the largest coffee house Starbucks has a 32 % market share.

Brand Equity

2009-07-05T08:26:00.001-07:00

Brand equity refers to the marketing effects or outcomes that accrue to a product with its brand name compared with those that would accrue if the same product did not have the brand name [1][2][3][4]. And, at the root of these marketing effects is consumers' knowledge. In other words, consumers' knowledge about a brand makes manufacturers/advertisers respond differently or adopt appropriately adept measures for the marketing of the brand [5][6]. The study of brand equity is increasingly popular as some marketing researchers have concluded that brands are one of the most valuable assets that a company has[7].
Contents
[hide]
• 1 Measurement
• 2 Positive Equity Only?
• 3 Examples
• 4 References
• 5 See also

[edit] Measurement
There are many ways to measure a brand. Some measurements approaches are at the firm level, some at the product level, and still others are at the consumer level.
Firm Level: Firm level approaches measure the brand as a financial asset. In short, a calculation is made regarding how much the brand is worth as an intangible asset. For example, if you were to take the value of the firm, as derived by its market capitalization - and then subtract tangible assets and "measurable" intangible assets- the residual would be the brand equity.[7] One high profile firm level approach is by the consulting firm Interbrand. To do its calculation, Interbrand estimates brand value on the basis of projected profits discounted to a present value. The discount rate is a subjective rate determined by Interbrand and Wall Street equity specialists and reflects the risk profile, market leadership, stability and global reach of the brand[8].
Product Level: The classic product level brand measurement example is to compare the price of a no-name or private label product to an "equivalent" branded product. The difference in price, assuming all things equal, is due to the brand[9]. More recently a revenue premium approach has been advocated [4].
Consumer Level: This approach seeks to map the mind of the consumer to find out what associations with the brand that the consumer has. This approach seeks to measure the awareness (recall and recognition) and brand image (the overall associations that the brand has). Free association tests and projective techniques are commonly used to uncover the tangible and intangible attributes, attitudes, and intentions about a brand[5]. Brands with high levels of awareness and strong, favorable and unique associations are high equity brands[5].
All of these calculations are, at best, approximations. A more complete understanding of the brand can occur if multiple measures are used.
[edit] Positive Equity Only?
An interesting question is raised- can brands have negative brand equity? From one perspective, brand equity cannot be negative. Positive brand equity is created by effective marketing including via advertising, PR and promotion. A second perspective is that negative equity can exist. Looking at a political "brand" example, the "Democrat" brand may be negative to a Republican, and vice versa.
The greater a company's brand equity, the greater the probability that the company will use a family branding strategy rather than an individual branding strategy. This is because family branding allows them to leverage the equity accumulated in the core brand. Aspects of brand equity includes: brand loyalty, awareness, association, and perception of quality .
[edit] Examples
In the early 2000s in North America, the Ford Motor Company made a strategic decision to brand all new or redesigned cars with names starting with "F". This aligned with the previous tradition of naming all sport utility vehicles since the Ford Explorer with the letter "E". The Toronto Star quoted an analyst who warned that changing the name of the well known Windstar to the Freestar would cause confusion and discard brand equity built up, while a marketing manager believed that a name change would highlight the new redesign. The aging Taurus, which became one of the most significant cars in American auto history would be abandoned in favor of three entirely new names, all starting with "F", the Five Hundred, Freestar and Fusion. By 2007, the Freestar was discontinued without a replacement. The Five Hundred name was thrown out and Taurus was brought back for the next generation of that car in a surprise move by Alan Mulally. "Five Hundred" was recognized by less than half of most people, but an overwhelming majority was familiar with the "Ford Taurus".

Product Lining

2009-07-05T08:25:00.000-07:00

Product lining is the marketing strategy of offering for sale several related products. Unlike product bundling, where several products are combined into one, lining involves offering several related products individually. A line can comprise related products of various sizes, types, colors, qualities, or prices. Line depth refers to the number of product variants in a line. Line consistency refers to how closely related the products that make up the line are. Line vulnerability refers to the percentage of sales or profits that are derived from only a few products in the line.
The number of different product lines sold by a company is referred to as width of product mix. The total number of products sold in all lines is referred to as length of product mix. If a line of products is sold with the same brand name, this is referred to as family branding. When you add a new product to a line, it is referred to as a line extension. When you add a line extension that is of better quality than the other products in the line, this is referred to as trading up or brand leveraging. When you add a line extension that is of lower quality than the other products of the line, this is referred to as trading down. When you trade down, you will likely reduce your brand equity. You are gaining short-term sales at the expense of long term sales.
Image anchors are highly promoted products within a line that define the image of the whole line. Image anchors are usually from the higher end of the line's range. When you add a new product within the current range of an incomplete line, this is referred to as line filling.
Price lining is the use of a limited number of prices for all your product offerings. This is a tradition started in the old five and dime stores in which everything cost either 5 or 10 cents. Its underlying rationale is that these amounts are seen as suitable price points for a whole range of products by prospective customers. It has the advantage of ease of administering, but the disadvantage of inflexibility, particularly in times of inflation or unstable prices.
There are many important decisions about product and service development and marketing. In the process of product development and marketing we should focus on strategic decisions about product attributes, product branding, product packaging, product labeling and product support services. But product strategy also calls for building a product line.

Resource-Based View

2009-07-05T08:24:00.000-07:00

The resource-based view (RBV) is an economic tool used to determine the strategic resources available to a firm. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal (Wernerfelt, 1984, p172; Rumelt, 1984, p557-558). To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile (Barney, 1991, p105-106; Peteraf, 1993, p180). Effectively, this translates into valuable resources that are neither perfectly imitable nor substitutable without great effort (Hoopes, 2003, p891; Barney, 1991, p117). If these conditions hold, the firm’s bundle of resources can assist the firm sustaining above average returns. The VRIN model also constitutes a part of RBV.
Contents
[hide]
• 1 Concept
• 2 Definitions
o 2.1 What constitutes a "resource"?
o 2.2 What constitutes "competitive advantage"?
• 3 History of the resource-based view
o 3.1 Barriers to imitation of resources
o 3.2 Developing resources for the future
o 3.3 Complementary work
• 4 Criticisms
• 5 Further reading
• 6 See also
• 7 References

[edit] Concept
The key points of the theory are:
1. Identify the firm’s potential key resources.
2. Evaluate whether these resources fulfill the following (VRIN) criteria:
o Valuable - A resource must enable a firm to employ a value-creating strategy, by either outperforming its competitors or reduce its own weaknesses (Barney, 1991, p99; Amit and Shoemaker, 1993, p36). Relevant in this perspective is that the transaction costs associated with the investment in the resource cannot be higher than the discounted future rents that flow out of the value-creating strategy (Mahoney and Prahalad, 1992, p370; Conner, 1992, p131).
o Rare - To be of value, a resource must be by definition rare. In a perfectly competitive strategic factor market for a resource, the price of the resource will be a reflection of the expected discounted future above-average returns (Barney, 1986a, p1232-1233; Dierickx and Cool, 1989, p1504; Barney, 1991, p100).
o In-imitable - If a valuable resource is controlled by only one firm it could be a source of a competitive advantage (Barney, 1991, p107). This advantage could be sustainable if competitors are not able to duplicate this strategic asset perfectly (Peteraf, 1993, p183; Barney, 1986b, p658). The term isolating mechanism was introduced by Rumelt (1984, p567) to explain why firms might not be able to imitate a resource to the degree that they are able to compete with the firm having the valuable resource (Peteraf, 1993, p182-183; Mahoney and Pandian, 1992, p371). An important underlying factor of inimitability is causal ambiguity, which occurs if the source from which a firm’s competitive advantage stems is unknown (Peteraf, 1993, p182; Lippman and Rumelt, 1982, p420). If the resource in question is knowledge-based or socially complex, causal ambiguity is more likely to occur as these types of resources are more likely to be idiosyncratic to the firm in which it resides (Peteraf, 1993, p183; Mahoney and Pandian, 1992, p365; Barney, 1991, p110). Conner and Prahalad go so far as to say knowledge-based resources are “…the essence of the resource-based perspective” (1996, p477).
o Non-substitutable - Even if a resource is rare, potentially value-creating and imperfectly imitable, an equally important aspect is lack of substitutability (Dierickx and Cool, 1989, p1509; Barney, 1991, p111). If competitors are able to counter the firm’s value-creating strategy with a substitute, prices are driven down to the point that the price equals the discounted future rents (Barney, 1986a, p1233; Conner, 1991, p137), resulting in zero economic profits.
3. Care for and protect resources that possess these evaluations because doing so can improve organizational performance (Crook, Ketchen, Combs, and Todd, 2008).
The characteristics mentioned under 2 are individually necessary, but not sufficient conditions for a sustained competitive advantage (Dierickx and Cool, 1989, p1506; Priem and Butler, 2001a, p25). Within the framework of the resource-based view, the chain is as strong as its weakest link and therefore dependent on the resource displaying each of the four characteristics to be a possible source of a sustainable competitive advantage (Barney, 1991, 105-107).
[edit] Definitions
[edit] What constitutes a "resource"?
Jay Barney (1991, p101) referring to Daft (1983) "citation needed" says: "...firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc; controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness (Daft,1983)."
A subsequent distinction made by Amit & Schoemaker (1993, p35) is that the encompassing construct previously called resources can be split up into resources and capabilities. In this respect resources are tradable and non-specific to the firm, while capabilities are firm-specific and used to utilize the resources within the firm, such as implicit processes to transfer knowledge within the firm (Makadok, 2001, p388-389; Hoopes, Madsen and Walker, 2003, p890). This distinction has been widely adopted throughout the resource-based view literature (Conner and Prahalad, 1996, p477; Makadok, 2001, p338; Barney, Wright and Ketchen, 2001, p630-31).
[edit] What constitutes "competitive advantage"?
A competitive advantage can be attained if the current strategy is value-creating, and not currently being implemented by present or possible future competitors (Barney, 1991, p102). Although a competitive advantage has the ability to become sustained, this is not necessarily the case. A competing firm can enter the market with a resource that has the ability to invalidate the prior firm's competitive advantage, which results in reduced (read: normal) rents (Barney, 1986b, p658). Sustainability in the context of a sustainable competitive advantage is independent with regards to the time-frame. Rather, a competitive advantage is sustainable when the efforts by competitors to render the competitive advantage redundant have ceased (Barney, 1991, p102; Rumelt, 1984, p562). When the imitative actions have come to an end without disrupting the firm’s competitive advantage, the firm’s strategy can be called sustainable. This is contrary to other views (e.g. Porter) that a competitive advantage is sustained when it provides above-average returns in the long run. (1985).
[edit] History of the resource-based view
Some aspects of theories are thought of long before they are formally adopted and brought together into the strict framework of an academic theory. The same could be said with regards to the resource-based view.
While this influential body of research within the field of Strategic Management was named by Birger Wernerfelt in his article A Resource-Based View of the Firm (1984), the origins of the resource-based view can be traced back to earlier research. Retrospectively, elements can be found in works by Coase (1937), Selznick (1957), Penrose (1959), Stigler (1961), Chandler (1962, 1977), and Williamson (1975), where emphasis is put on the importance of resources and its implications for firm performance (Conner, 1991, p122; Rumelt, 1984, p557; Mahoney and Pandian, 1992, p263; Rugman and Verbeke, 2002). This paradigm shift from the narrow neoclassical focus to a broader rationale, and the coming closer of different academic fields (industrial organization economics and organizational economics being most prominent) was a particular important contribution (Conner, 1991, p133; Mahoney and Pandian, 1992).
Two publications closely following Wernerfelt’s initial article came from Barney (1986a, 1986b). Even though Wernerfelt was not referred to, the statements made by Barney about strategic factor markets and the role of expectations can, looking back, clearly be seen within the resource-based framework as later developed by Barney (1991). Other concepts that were later integrated into the resource-based framework have been articulated by Lippman and Rumelt (uncertain imitability, 1982), Rumelt (isolating mechanisms, 1984) and Dierickx and Cool (inimitability and its causes, 1989). Barney’s framework proved a solid foundation for other to build on, which was provided with a stronger theoretical background by Conner (1991), Mahoney and Pandian (1992), Conner and Prahalad (1996) and Makadok (2001), who positioned the resource-based view with regards to various other research fields. More practical approaches were provided for by Amit and Shoemaker (1993), while later criticism came from among others from Priem and Butler (2001a, 2001b) and Hoopes, Madsen and Walker (2003).
The resource based view has been a common interest for management researchers and numerous writings could be found for same. Resource based view explains a firms ability to reach sustainable competitive advantage when different resources are employed and these resources can not be imitated by competitors which ultimately creates a competitive barrier (Mahoney and Pandian 1992 cited by Hooley and Greenley 2005, p.96 , Smith and Rupp 2002, p.48). RBV explains that a firm’s sustainable competitive advantage is reached by virtue of unique resources which these resources have the characteristics of being rare, valuable, inimitable, non-tradable, non-substitutable as well as firm specific (Barney 1999 cited by Finney et al.2004, p.1722, Makadok 2001, p. 94). These authors write about the fact that a firm may reach a sustainable competitive advantage through unique resources which it holds, and these resources can not be easily bought, transferred, copied and simultaneously they add value to a firm while being rare. It also highlights the fact that all resources of a firm may not contribute to a firm’s sustainable competitive advantage. Varying performance between firms is a result of heterogeneity of assets (Lopez 2005, p.662, Helfat and Peteref 2003, p.1004) and RBV is focused on the factors that cause these differences to prevail (Grant 1991, Mahoney and Pandian 1992, Amit and Shoemaker 1993, Barney 2001 cited by Lopez 2005, p.662).
Fundamental similarity in these writings is that unique value creating resources will generate a sustainable competitive advantage to the extent no competitor has the ability to use same type of resources either through acquisition or imitation. Major concern in the RBV is focused on the ability of the firm to maintain a combination of resources that can not be possessed or build up in a similar manner by competitors. Further such writings provide us the base to understand that the sustainability strength of competitive advantage depends on the ability of competitors to use identical or similar resources that makes the same implications on a firm’s performance. This ability of a firm to avoid imitation of their resources should be analysed in depth to understand the sustainability strength of a competitive advantage.
[edit] Barriers to imitation of resources
Resources are the inputs or the factors available to a company which helps to perform its operations or carry out its activities (Amit and Shoemaker 1993, Black and Boal 1994, Grant 1995 cited by Ordaz et al.2003, p.96). Also these authors state that resources, if considered as isolated factors doesn’t result in productivity hence coordination of resources is important. The ways a firm can create a barrier to imitation is known as “isolating mechanisms” and are reflected in the aspects of corporate culture, managerial capabilities, information asymmetries and property rights (Hooley and Greenlay 2005, p.96, Winter 2003,p. 992). Further, they mention that except for legislative restrictions created through property rights, other three aspects are direct or indirect results of managerial practises.
King (2007, p.156) mentions inter-firm causal ambiguity may results in sustainable competitive advantage for some firms. Causal ambiguity is the continuum that describes the degree to which decision makers understand the relationship between organisational inputs and outputs (Ghinggold and Johnson 1998,p.134,Lippman and Rumlet 1982 cited by King 2007, p.156, Matthyssens and Vandenbempt 1998, p.46). Their argument is that inability of competitors to understand what causes the superior performance of another (inter-firm causal ambiguity), helps to reach a sustainable competitive advantage for the one who is presently performing at a superior level. What creates this inability to understand the cause for superior performance of firm? Is it the intended consequence of a firm’s action? Holley and Greenley (2005, p.96) state that social context of certain resource conditions act as an element to create isolating mechanisms and further mentions that three characteristics of certain resources underpins the causal ambiguity scenario which are tacitness (accumulated skill-based resources acquired through learning by doing) complexity (large number of inter-related resources being used) and specificity (dedication of certain resources to specific activities) and ultimately these three characteristics will consequent in a competitive barrier.
Referring back to the definitions stated previously regarding the competitive advantage that mentions superior performance is correlated to resources of the firm (Christensen and Fahey 1984, Kay 1994, Porter 1980 cited by Chacarbaghi and Lynch 1999, p.45) and consolidating writings of King (2007, p.156) stated above we may derive the fact that inter-firm causal ambiguity regarding resources will generate a competitive advantage at a sustainable level. Further, it explains that the extent to which competitors understand what resources are underpinning the superior performance, will determine the sustainability strength of a competitive advantage. In a scenario that a firm is able to overcome the inter-firm causal ambiguity it does not necessarily result in imitating resources. As to Johnson (2006, p.02) and Mahoney (2001, p.658), even after recognising competitors valuable resources, a firm may not imitate due to the social context of these resources or availability of more pursuing alternatives. Certain resources like company reputation are path dependent that are accumulated over time and a competitor may not be able to perfectly imitate such (Zander and Zandre 2005, p.1521 , Santala and Parvinen 2007, p.172).
They argue on the base that certain resources, even imitated may not bring the same impact since the maximum impact of same is achieved over longer periods of time. Hence, such imitation will not be successful. In consideration of the reputation fact as a resource, does this imply that a first mover to a market always holds a competitive advantage? Can a late entrant exploit any opportunity for a competitive advantage? Kim and Park (2006, p.45) mentions three reasons new entrants may be outperformed by early entrants. First, early entrants have a technological know how which helps them to perform at a superior level. Secondly, early entrants have developed capabilities with time that enhances their strength to perform above late entrants. Thirdly, switching costs incurred to customers if decided to migrate, will help early entrants to dominate the market evading the late entrants opportunity to capture market share. Customer awareness and loyalty is a rational benefit early entrants enjoy (Liberman and Montgomery 1988, Porter 1985, Hill 1997, Yoffie 1990 cited by Ma 2004, p.914, Agrawal et al. 2003, p. 117).
However, first mover advantage is active in evolutionary technological transitions which are technological innovations based on previous developments (Kim and Park 2006, p, 45, Cottam et al. 2001, p. 142). Same authors further argue that revolutionary technological changes (changes that significantly disturb the existing technology) will eliminate the advantage of early entrants. Such writings elaborate that though early entrants enjoy certain resources by virtue of the forgone time periods in the markets, rapidly changing technological environments may make those resources obsolete and curtail the firm’s dominance. Late entrants may comply with the technological innovativeness and increase pressure of competition, hence, seek for a competitive advantage through making the existing competences and resources of early entrants invalid or outdated. In other words innovative technological implications will significantly change the landscape of the industry and the market, making early mover’s advantage minimum. However, in a market where technology does not play a dynamic role, early mover advantage may prevail.
Analysing the above developed framework for Resource Based View, it reflects a unique feature which is, sustainable competitive advantage is achieved in an environment where competition doesn’t exist. According to the characteristics of the Resource based view rivalry firms may not perform at a level that could be identified as a considerable competition for the incumbents of the market since they do not possess the required resources to perform at a level that creates a threat hence create competition. Through barriers to imitation incumbents ensure that rivalry firms do not reach a level to perform in a similar manner to them. In other words, the sustainability of the winning edge is determined by the strength of not letting other firms compete in the same level. The moment competition becomes active competitive advantage becomes ineffective since two or more firms begins to perform at a superior level evading the possibility of single firm dominance hence no firm will enjoy a competitive advantage. Ma (2003, p.76) agrees stating that by definition, the sustainable competitive advantage discussed in the Resource based view is ant-competitive. Further such sustainable competitive advantage could exist in the world of no competitive imitation (Barney 1991, Petref 1993 cited by Ma 2003, p.77, Ethiraj et al., 2005, p. 27).
For further discuission of causal ambiguity see causal ambiguity.
[edit] Developing resources for the future
Based on the empirical writings stated above RBV provides us the understanding that certain unique existing resources will result in superior performance and ultimately build a competitive advantage. Sustainability of such advantage will be determined by the ability of competitors to imitate such resources. However, the existing resources of a firm may not be adequate to facilitate the future market requirement due to volatility of the contemporary markets. There is a vital need to modify and develop resources in order to encounter the future market competition. An organisation should exploit existing business opportunities using the present resources while generating and developing a new set of resources to sustain its competitiveness in the future market environments, hence an organisation should be engaged in resource management and resource development (Chaharbaghi and Lynch 1999, p.45, Song et al., 2002, p.86). Their writings explain that in order to sustain the competitive advantage, it’s crucial to develop resources that will strengthen their ability to continue the superior performance. Any industry or market reflects high uncertainty and in order to survive and stay ahead of competition new resources becomes highly necessary. Morgan (2000 cited by Finney et al.2004, p.1722) agrees stating that, need to update resources is a major management task since all business environments reflect highly unpredictable market and environmental conditions. The existing winning edge needed to be developed since various market dynamics may make existing value creating resources obsolete. (" Achieving a sustainable competitive advantage in the IT industry through hybrid business strategy:A contemporary perspective"- Tharinda Jagathsiri (MBA-University of East London)
[edit] Complementary work
Building on the RBV, Hoopes, Madsen & Walker (2003) suggest a more expansive discussion of sustained differences among firms and develop a broad theory of competitive heterogeneity. “The RBV seems to assume what it seeks to explain. This dilutes its explanatory power. For example, one might argue that the RBV defines, rather than hypothesizes, that sustained performance differences are the result of variation in resources and capabilities across firms. The difference is subtle, but it frustrates understanding the RBV’s possible contributions (Hoopes et al., 2003: 891).
“The RBV’s lack of clarity regarding its core premise and its lack of any clear boundary impedes fruitful debate. Given the theory’s lack of specificity, one can invoke the definition-based or hypothesis-based logic any time. Again, we argue that resources are but one potential source of competitive heterogeneity. Competitive heterogeneity can obtain for reasons other than sticky resources (or capabilities)” (Hoopes et al. 2003: 891). Competitive heterogeneity refers to enduring and systematic performance differences among close competitors (Hoopes et al., 2003: 890).
[edit] Criticisms
Priem and Butler (2001) made four key criticisms:
• The RBV is tautological, or self-verifying. Barney has defined a competitive advantage as a value-creating strategy that is based on resources that are, among other characteristics, valuable (1991, p106). This reasoning is circular and therefore operationally invalid (Priem and Butler, 2001a, p31). For more info on the tautology, see also Collins, 1994
• Different resource configurations can generate the same value for firms and thus would not be competitive advantage
• The role of product markets is underdeveloped in the argument
• The theory has limited prescriptive implications
However, Barney (2001) provided counter-arguments to these points of criticism.
Further criticisms are:
• It is perhaps difficult (if not impossible) to find a resource which satisfies all of the Barney's VRIN criterion.
• There is the assumption that a firm can be profitable in a highly competitive market as long as it can exploit advantageous resources, but this may not necessarily be the case. It ignores external factors concerning the industry as a whole; Porter’s Industry Structure Analysis ought also be considered.
• Long-term implications that flow from its premises: A prominent source of sustainable competitive advantages is causal ambiguity (Lippman & Rumelt, 1982, p420). While this is undeniably true, this leaves an awkward possibility: the firm is not able to manage a resource it does not know exists, even if a changing environment requires this (Lippman & Rumelt, 1982, p420). Through such an external change the initial sustainable competitive advantage could be nullified or even transformed into a weakness (Priem and Butler, 2001a, p33; Peteraf, 1993, p187; Rumelt, 1984, p566).
• Premise of efficient markets: Much research hinges on the premise that markets in general or factor markets are efficient, and that firms are capable of precisely pricing in the exact future value of any value-creating strategy that could flow from the resource (Barney, 1986a, p1232). Dierickx and Cool argue that purchasable assets cannot be sources of sustained competitive advantage, just because they can be purchased. Either the price of the resource will increase to the point that it equals the future above-average return, or other competitors will purchase the resource as well and use it in a value-increasing strategy that diminishes rents to zero (Peteraf, 1993, p185; Conner, 1991, p137).
• The concept ‘rare’ is obsolete: Although prominently present in Wernerfelt’s original articulation of the resource-based view (1984) and Barney’s subsequent framework (1991), the concept that resources need to be rare to be able to function as a possible source of a sustained competitive advantage is unnecessary (Hoopes, Madsen and Walker, 2003, p890). Because of the implications of the other concepts (e.g. valuable, inimitable and nonsubstitutability) any resource that follows from the previous characteristics is inherently rare.
• Sustainable: The lack of exact definition with regards to the concept sustainable makes its premise difficult to test empirically. Barney’s statement (1991, p102-103) that the competitive advantage is sustained if current and future rivals have ceased their imitative efforts is versatile from the point of view of developing a theoretical framework, but a disadvantage from a more practical point of view as there is no explicit end-goal.

Finance

2009-07-05T08:23:00.003-07:00

Finance is the science of funds management.[1] The general areas of finance are business finance, personal finance, and public finance.[2] Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money and risk and how they are interrelated. It also deals with how money is spent and budgeted.

Finance works most basically through individuals and business organizations depositing money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment, and charges interest on the loans.

Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank or directly from a corporation. Bonds are debt sold directly to investors from corporations, while That investor can then hold the debt and collect the interest or sell the debt on a secondary market. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt. Financial assets, known as investments, are financially managed with careful attention to financial risk management to control financial risk. Financial instruments allow many forms of securitized assets to be traded on securities exchanges such as stock exchanges, including debt such as bonds as well as equity in publicly-traded corporations.[dubious – discuss]

Central banks act as lenders of last resort and control the money supply, which affects the interest rates charged. As money supply increases, interest rates decrease.[3]
Contents
[hide]

* 1 The main techniques and sectors of the financial industry
* 2 Personal finance
* 3 Corporate finance
o 3.1 Capital
o 3.2 The desirability of budgeting
+ 3.2.1 Capital budget
+ 3.2.2 Cash budget
o 3.3 Management of current assets
+ 3.3.1 Credit policy
# 3.3.1.1 Advantages of credit trade
# 3.3.1.2 Disadvantages of credit trade
# 3.3.1.3 Forms of credit
# 3.3.1.4 Factors which influence credit conditions
# 3.3.1.5 Credit collection
* 3.3.1.5.1 Overdue accounts
* 3.3.1.5.2 Effective credit control
* 3.3.1.5.3 Sources of information on creditworthiness
* 3.3.1.5.4 Duties of the credit department
+ 3.3.2 Stock
+ 3.3.3 Cash
# 3.3.3.1 Reasons for keeping cash
# 3.3.3.2 Advantages of sufficient cash
o 3.4 Management of fixed assets
+ 3.4.1 Depreciation
+ 3.4.2 Insurance
* 4 Shared Services
* 5 Finance of states
* 6 Financial economics
* 7 Financial mathematics
* 8 Experimental finance
* 9 Behavioral finance
* 10 Intangible Asset Finance
* 11 Related professional qualifications
* 12 See also
* 13 References
* 14 External links

[edit] The main techniques and sectors of the financial industry
Main article: Financial services

An entity whose income exceeds their expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.

A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.

A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the stock, the company receives cash, which it uses to expand its business; this process is known as "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.

Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration to their institutional setting.

Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.

[edit] Personal finance
Main article: Personal finance

Questions in personal finance revolve around

* How much money will be needed by an individual (or by a family), and when?
* Where will this money come from, and how?
* How can people protect themselves against unforeseen personal events, as well as those in the external economy?
* How can family assets best be transferred across generations (bequests and inheritance)?
* How does tax policy (tax subsidies or penalties) affect personal financial decisions?
* How does credit affect an individual's financial standing?
* How can one plan for a secure financial future in an environment of economic instability?

Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement.

Personal financial decisions may also involve paying for a loan, or debt obligations.

[edit] Corporate finance
Main article: Corporate finance

Managerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock.

Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these forms the company's capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.

Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management – in choosing a portfolio – one has to decide what, how much and when to invest. To do this, a company must:

* Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;
* Identify the appropriate strategy: active v. passive – hedging strategy
* Measure the portfolio performance

Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.

[edit] Capital
Main article: Financial capital

Capital, in the financial sense, is the money that gives the business the power to buy goods to be used in the production of other goods or the offering of a service.

[edit] The desirability of budgeting

Budget is a document which documents the plan of the business. This may include the objective of business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost, growth, required investment to achieve the planned sales, and financing source for the investment. Also budget may be long term or short term. Long term budgets have a time horizon of 5–10 years giving a vision to the company; short term is an annual budget which is drawn to control and operate in that particular year.

[edit] Capital budget

This concerns proposed fixed asset requirements and how these expenditures will be financed. Capital budgets are often adjusted annually and should be part of a longer-term Capital Improvements Plan.

[edit] Cash budget

Working capital requirements of a business should be monitored at all times to ensure that there are sufficient funds available to meet short-term expenses.

The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The cash budget has the following six main sections:

1. Beginning Cash Balance - contains the last period's closing cash balance.
2. Cash collections - includes all expected cash receipts (all sources of cash for the period considered, mainly sales)
3. Cash disbursements - lists all planned cash outflows for the period, excluding interest payments on short-term loans, which appear in the financing section. All expenses that do not affect cash flow are excluded from this list (e.g. depreciation, amortisation, etc)
4. Cash excess or deficiency - a function of the cash needs and cash available. Cash needs are determined by the total cash disbursements plus the minimum cash balance required by company policy. If total cash available is less than cash needs, a deficiency exists.
5. Financing - discloses the planned borrowings and repayments, including interest.
6. Ending Cash balance - simply reveals the planned ending cash balance.

[edit] Management of current assets

[edit] Credit policy

Credit gives the customer the opportunity to buy goods and services, and pay for them at a later date.

[edit] Advantages of credit trade

* Usually results in more customers than cash trade.
* Can charge more for goods to cover the risk of bad debt.
* Gain goodwill and loyalty of customers.
* People can buy goods and pay for them at a later date.
* Farmers can buy seeds and implements, and pay for them only after the harvest.
* Stimulates agricultural and industrial production and commerce.
* Can be used as a promotional tool.
* Increase the sales.
* Modest rates to be filled.

[edit] Disadvantages of credit trade

* Risk of bad debt.
* High administration expenses.
* People can buy more than they can afford.
* More working capital needed.
* Risk of Bankruptcy.

[edit] Forms of credit

* Suppliers credit:
* Credit on ordinary open account
* Installment sales
* Bills of exchange
* Credit cards
* Contractor's credit
* Factoring of debtors
* Cash credit
* Cpf credits

[edit] Factors which influence credit conditions

* Nature of the business's activities
* Financial position
* Product durability
* Length of production process
* Competition and competitors' credit conditions
* Country's economic position
* Conditions at financial institutions
* Discount for early payment
* Debtor's type of business and financial positions

[edit] Credit collection

[edit] Overdue accounts

* Attach a notice of overdue account to statement.
* Send a letter asking for settlement of debt.
* Send a second or third letter if first is ineffectual.
* Threaten legal action.

[edit] Effective credit control

* Increases sales
* Reduces bad debts
* Increases profits
* Builds customer loyalty
* Builds confidence of financial industry
* increase company capitlisation

[edit] Sources of information on creditworthiness

* Business references
* Bank references
* credit agencies
* Chambers of commerce
* Employers
* Credit application forms
* Credit repair companies

[edit] Duties of the credit department

* Legal action
* Taking necessary steps to ensure settlement of account
* Knowing the credit policy and procedures for credit control
* Setting credit limits
* Ensuring that statements of account are sent out
* Ensuring that thorough checks are carried out on credit customers
* Keeping records of all amounts owing
* Ensuring that debts are settled promptly
* Timely reporting to the upper level of management for better management.

[edit] Stock

Purpose of stock control

* Ensures that enough stock is on hand to satisfy demand.
* Protects and monitors theft.
* Safeguards against having to stockpile.
* Allows for control over selling and cost price.

Stockpiling

Main article: Cornering the market

This refers to the purchase of stock at the right time, at the right price and in the right quantities.

There are several advantages to the stockpiling, the following are some of the examples:

* Losses due to price fluctuations and stock loss kept to a minimum
* Ensures that goods reach customers timeously; better service
* Saves space and storage cost
* Investment of working capital kept to minimum
* No loss in production due to delays

There are several disadvantages to the stockpiling, the following are some of the examples:

* Obsolescence
* Danger of fire and theft
* Initial working capital investment is very large
* Losses due to price fluctuation

Rate of stock turnover

This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level.

Determining optimum stock levels

* Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness.
* Minimum stock level refers to the point below which the stock level may not go.
* Standard order refers to the amount of stock generally ordered.
* Order level refers to the stock level which calls for an order to be made.

[edit] Cash

[edit] Reasons for keeping cash

* Cash is usually referred to as the "king" in finance, as it is the most liquid asset.
* The transaction motive refers to the money kept available to pay expenses.
* The precautionary motive refers to the money kept aside for unforeseen expenses.
* The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities.

[edit] Advantages of sufficient cash

* Current liabilties may be catered for.
* Cash discounts are given for cash payments.
* Production is kept moving
* Surplus cash may be invested on a short-term basis.
* The business is able to pay its accounts timeously, allowing for easily-obtained credit.
* Liquidity

[edit] Management of fixed assets

[edit] Depreciation

Depreciation is the allocation of the cost of an asset over its useful life as determined at the time of purchase. It is calculated yearly to enforce the matching principle.

[edit] Insurance
Main article: Insurance

Insurance is the undertaking of one party to indemnify another, in exchange for a premium, against a certain eventuality.

Uninsured risks

* Bad debt
* Changes in fashion
* Time lapses between ordering and delivery
* New machinery or technology
* Different prices at different places

Requirements of an insurance contract

* Insurable interest
o The insured must derive a real financial gain from that which he is insuring, or stand to lose if it is destroyed or lost.
o The item must belong to the insured.
o One person may take out insurance on the life of another if the second party owes the first money.
o Must be some person or item which can, legally, be insured.
o The insured must have a legal claim to that which he is insuring.
* Good faith
o Uberrimae fidei refers to absolute honesty and must characterise the dealings of both the insurer and the insured.

[edit] Shared Services

There is currently a move towards converging and consolidating Finance provisions into shared services within an organization. Rather than an organization having a number of separate Finance departments performing the same tasks from different locations a more centralized version can be created.

[edit] Finance of states
Main article: Public finance

Country, state, county, city or municipality finance is called public finance. It is concerned with

* Identification of required expenditure of a public sector entity
* Source(s) of that entity's revenue
* The budgeting process
* Debt issuance (municipal bonds) for public works projects

[edit] Financial economics
Main article: Financial economics

Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance.

It studies:

* Valuation - Determination of the fair value of an asset
o How risky is the asset? (identification of the asset appropriate discount rate)
o What cash flows will it produce? (discounting of relevant cash flows)
o How does the market price compare to similar assets? (relative valuation)
o Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation)

* Financial markets and instruments
o Commodities - topics
o Stocks - topics
o Bonds - topics
o Money market instruments- topics
o Derivatives - topics

* Financial institutions and regulation

Financial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise the relationships.

[edit] Financial mathematics
Main article: Financial mathematics

Financial mathematics is a main branch of applied mathematics concerned with the financial markets. Financial mathematics is the study of financial data with the tools of mathematics, mainly statistics. Such data can be movements of securities—stocks and bonds etc.—and their relations. Another large subfield is insurance mathematics.

[edit] Experimental finance
Main article: Experimental finance

Experimental finance aims to establish different market settings and environments to observe experimentally and provide a lens through which science can analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanisms, and returns processes. Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions, and attempt to discover new principles on which such theory can be extended. Research may proceed by conducting trading simulations or by establishing and studying the behaviour of people in artificial competitive market-like settings.

[edit] Behavioral finance
Main article: Behavioral finance

Behavioral Finance studies how the psychology of investors or managers affects financial decisions and markets. Behavioral finance has grown over the last few decades to become central to finance.

Behavioral finance includes such topics as:

1. Empirical studies that demonstrate significant deviations from classical theories.
2. Models of how psychology affects trading and prices
3. Forecasting based on these methods.
4. Studies of experimental asset markets and use of models to forecast experiments.

A strand of behavioral finance has been dubbed Quantitative Behavioral Finance, which uses mathematical and statistical methodology to understand behavioral biases in conjunction with valuation. Some of this endeavor has been lead by Gunduz Caginalp (Professor of Mathematics and Editor of Journal of Behavioral Finance during 2001-2004) and collaborators including Vernon Smith (2002 Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira Ilieva, Ahmet Duran, Huseyin Merdan). Studies by Jeff Madura, Ray Sturm and others have demonstrated significant behavioral effects in stocks and exchange traded funds. Among other topics, quantitative behavioral finance studies behavioral effects together with the non-classical assumption of the finiteness of assets.

[edit] Intangible Asset Finance
Main article: Intangible asset finance

Intangible asset finance is the area of finance that deals with intangible assets such as patents, trademarks, goodwill, reputation, etc.

Core Competency

2009-07-05T08:23:00.001-07:00

A core competency is a specific factor that a business sees as being central to the way it, or its employees work. It fulfils three key criteria:
1. It provides consumer benefits
2. It is not easy for competitors to imitate
3. It can be leveraged widely to many products and markets.
A core competency can take various forms, including technical/subject matter know-how, a reliable process and/or close relationships with customers and suppliers.[1] It may also include product development or culture, such as employee dedication.
Core competencies are particular strengths relative to other organizations in the industry which provide the fundamental basis for the provision of added value. Core competencies are the collective learning in organizations, and involve how to coordinate diverse production skills and integrate multiple streams of technologies. It is communication, an involvement and a deep commitment to working across organizational boundaries. Few companies are likely to build world leadership in more than five or six fundamental competencies.
The value chain is a systematic approach to examining the development of competitive advantage. It was created by M. E. Porter in his book, Competitive Advantage (1980). The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organization. The 'margin' depicted in the diagram is the same as added value. The organization is split into 'primary activities' and 'support activities'.

Market Segement

2009-07-05T08:18:00.000-07:00

A market segment is a group of people or organizations sharing one or more characteristics that cause them to have similar product and/or service needs. A true market segment meets all of the following criteria: it is distinct from other segments (different segments have different needs), it is homogeneous within the segment (exhibits common needs); it responds similarly to a market stimulus, and it can be reached by a market intervention. The term is also used when consumers with identical product and/or service needs are divided up into groups so they can be charged different amounts. These can broadly be viewed as 'positive' and 'negative' applications of the same idea, splitting up the market into smaller groups.
Contents
[hide]
• 1 "Positive" market segmentation
• 2 Successful Segmentation
o 2.1 Variables Used for Segmentation
• 3 Top-Down and Bottom-Up
• 4 Using Segmentation in Customer Retention
o 4.1 Process for tagging customers
• 5 Price Discrimination
• 6 See also
• 7 References

[edit] "Positive" market segmentation
Market segmenting is the process that a company divides the market into distinct groups who have distinct needs, wants, behaviour or who might want different products & services <(Aminjonov Mirhabibjon, "Marketing Introduction"(2009))> Broadly, markets can be divided according to a number of general criteria, such as by industry or public versus private although industrial market segmentation is quite different from consumer market segmentation, both have similar objectives. All of these methods of segmentation are merely proxies for true segments, which don't always fit into convenient demographic boundaries.
Consumer-based market segmentation can be performed on a product specific basis, to provide a close match between specific products and individuals. However, a number of generic market segment systems also exist, e.g. the Claritas Prizm system provides a broad segmentation of the population of the United States based on the statistical analysis of zip codes.
The process of segmentation is distinct from targeting (choosing which segments to address) and positioning (designing an appropriate marketing mix for each segment). The overall intent is to identify groups of similar customers and potential customers; to prioritize the groups to address; to understand their behaviour; and to respond with appropriate marketing strategies that satisfy the different preferences of each chosen segment. Revenues are thus improved.
Improved segmentation can lead to significantly improved marketing effectiveness. Distinct segments can have different industry structures and thus have higher or lower attractiveness (Michael Porter). With the right segmentation, the right lists can be purchased, advertising results can be improved and customer satisfaction can be increased leading to better reputaion.
[edit] Successful Segmentation
• homogeneity within the segment
• heterogeneity between segments
• segments are measurable and substantial
• segments are differentiable
• segments are accessible and actionable
• target segment is large enough to be profitable
[edit] Variables Used for Segmentation
• Geographic variables
o region of the world or country, East, West, South, North, Central, coastal, hilly, etc.
o country size/country size : Metropolitan Cities, small cities, towns.
o Density of Area Urban, Semi-urban, Rural.
o climate Hot, Cold, Humid, Rainy.
• Demographic variables
o age
o gender Male and Female
o family size
o family life cycle
o education Primary, High School, Secondary, College, Universities.
o income
o occupation
o socioeconomic status
o religion
o nationality/race (ethnic marketing)
o language
• Psychographic variables
o personality
o life style
o value
o attitude
• Behavioral variables
o benefit sought
o product usage rate
o brand loyalty
o product end use
o readiness-to-buy stage
o decision making unit
o profitability
o income status
• Technographic variables [1]
o motivations
o usage patterns
o attitudes about technology
o fundamental values
o lifestyle perspective
o standard of living
o profit is there in business from the existing clients
When numerous variables are combined to give an in-depth understanding of a segment, this is referred to as depth segmentation. When enough information is combined to create a clear picture of a typical member of a segment, this is referred to as a buyer profile. When the profile is limited to demographic variables it is called a demographic profile (typically shortened to "a demographic"). A statistical technique commonly used in determining a profile is cluster analysis. Other techniques used to identify segments are algorithms such as CHAID and regresion-based CHAID and discriminant analysis. Alternatively, segments can be modelled directly from consumer preferences via discrete choice methodologies such as choice-based conjoint and maximum difference scaling
[edit] Top-Down and Bottom-Up
George Day (1980) describes model of segmentation as the top-down approach: You start with the total population and divide it into segments. He also identified an alternative model which he called the bottom-up approach. In this approach, you start with a single customer and build on that profile. This typically requires the use of customer relationship management software or a database of some kind. Profiles of existing customers are created and analysed. Various demographic, behavioural, and psychographic patterns are built up using techniques such as cluster analysis. This process is sometimes called database marketing or micro-marketing. Its use is most appropriate in highly fragmented markets. McKenna (1988) claims that this approach treats every customer as a "micromajority". Pine (1993) used the bottom-up approach in what he called "segment of one marketing". Through this process mass customization is possible.
[edit] Using Segmentation in Customer Retention
Segmentation is commonly used by organizations to improve their customer retention programs and help ensure that they are:
• Focused on retaining their most profitable customers
• Employing those tactics most likely to retain these customers
The basic approach to retention-based segmentation is that a company tags each of its active customers with 3 values:
Tag #1: Is this customer at high risk of canceling the company's service? (Or becoming a non-user)
One of the most common indicators of high-risk customers is a drop off in usage of the company's service. For example, in the credit card industry this could be signaled through a customer's decline in spending on his card.
Tag #2: Is this customer worth retaining?
This determination boils down to whether the post-retention profit generated from the customer is predicted to be greater than the cost incurred to retain the customer.[2]
Tag #3: What retention tactics should be used to retain this customer?
For customers who are deemed “save-worthy”, it’s essential for the company to know which save tactics are most likely to be successful. Tactics commonly used range from providing “special” customer discounts to sending customers communications that reinforce the value proposition of the given service.
[edit] Process for tagging customers
The basic approach to tagging customers is to utilize historical retention data to make predictions about active customers regarding:
• Whether they are at high risk of canceling their service
• Whether they are profitable to retain
• What retention tactics are likely to be most effective
The idea is to match up active customers with customers from historic retention data who share similar attributes. Using the theory that “birds of a feather flock together”, the approach is based on the assumption that active customers will have similar retention outcomes as those of their comparable predecessors.[3]
From a technical perspective, the segmentation process is commonly performed using a combination of predictive analytics and cluster analysis.

Illustration of retention-based segmentation process:

[edit] Price Discrimination
Where a monopoly exists, the price of a product is likely to be higher than in a competitive market and the quantity sold less, generating monopoly profits for the seller. These profits can be increased further if the market can be segmented with different prices charged to different segments (referred to as price discrimination), charging higher prices to those segments willing and able to pay more and charging less to those whose demand is price elastic. The price discriminator might need to create rate fences that will prevent members of a higher price segment from purchasing at the prices available to members of a lower price segment. This behaviour is rational on the part of the monopolist, but is often seen by competition authorities as an abuse of a monopoly position, whether or not the monopoly itself is sanctioned. Examples of this exist in the transport industry (a plane or train journey to a particular destination at a particular time is a practical monopoly) where Business Class customers who can afford to pay may be charged prices many times higher than Economy Class customers for essentially the same service. Microsoft and the Video industry generally also price very similar products at widely varying prices depending on the market they are selling to.
[edit] See also
• Cluster analysis
• Consumer behaviour
• Customer attrition
• Demographics
• Fast moving consumer goods
• Marketing
• Market Segmentation Index
• Personalization
• Personalized marketing
• Predictive analytics
• Target market
• Target audience
• Terms for market segments

Competitor Analysis

2009-07-05T08:14:00.000-07:00

Competitor analysis
Competitor analysis in marketing and strategic management is an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context through which to identify opportunities and threats. Competitor profiling coalesces all of the relevant sources of competitor analysis into one framework in the support of efficient and effective strategy formulation, implementation, monitoring and adjustment.[1]
Given that competitor analysis is an essential component of corporate strategy, it is argued that most firms do not conduct this type of analysis systematically enough. Instead, many enterprises operate on what is called “informal impressions, conjectures, and intuition gained through the tidbits of information about competitors every manager continually receives.” As a result, traditional environmental scanning places many firms at risk of dangerous competitive blindspots due to a lack of robust competitor analysis [2].
•
[edit] Competitor array
One common and useful technique is constructing a competitor array. The steps include:
• Define your industry - scope and nature of the industry
• Determine who your competitors are
• Determine who your customers are and what benefits they expect
• Determine what the key success factors are in your industry
• Rank the key success factors by giving each one a weighting - The sum of all the weightings must add up to one.
• Rate each competitor on each of the key success factors
• Multiply each cell in the matrix by the factor weighting.
• Sum columns for a weighted assessment of the overall strength of each competitor relative to each other.
This can best be displayed on a two dimensional matrix - competitors along the top and key success factors down the side. An example of a competitor array follows:[3]
Key Industry
Success Factors Weighting Competitor
#1 rating Competitor
#1 weighted Competitor
#2 rating Competitor
#2 weighted
1 - Extensive distribution .4 6 2.4 3 1.2
2 - Customer focus .3 4 1.2 5 1.5
3 - Economies of scale .2 3 .6 3 .6
4 - Product innovation .1 7 .7 4 .4
Totals 1.0 20 4.9 15 3.7
In this example competitor #1 is rated higher than competitor #2 on product innovation ability (7 out of 10, compared to 4 out of 10) and distribution networks (6 out of 10), but competitor #2 is rated higher on customer focus (5 out of 10). Overall, competitor #1 is rated slightly higher than competitor #2 (20 out of 40 compared to 15 out of 40). When the success factors are weighted according to their importance, competitor #1 gets a far better rating (4.9 compared to 3.7).
Two additional columns can be added. In one column you can rate your own company on each of the key success factors (try to be objective and honest). In another column you can list benchmarks. They are the ideal standards of comparisons on each of the factors. They reflect the workings of a company using all the industry's best practices.
[edit] Competitor profiling
The strategic rationale of competitor profiling is powerfully simple. Superior knowledge of rivals offers a legitimate source of competitive advantage. The raw material of competitive advantage consists of offering superior customer value in the firm’s chosen market. The definitive characteristic of customer value is the adjective, superior. Customer value is defined relative to rival offerings making competitor knowledge an intrinsic component of corporate strategy. Profiling facilitates this strategic objective in three important ways. First, profiling can reveal strategic weaknesses in rivals that the firm may exploit. Second, the proactive stance of competitor profiling will allow the firm to anticipate the strategic response of their rivals to the firm’s planned strategies, the strategies of other competing firms, and changes in the environment. Third, this proactive knowledge will give the firms strategic agility. Offensive strategy can be implemented more quickly in order to exploit opportunities and capitalize on strengths. Similarly, defensive strategy can be employed more deftly in order to counter the threat of rival firms from exploiting the firm’s own weaknesses [2].
Clearly, those firms practicing systematic and advanced competitor profiling have a significant advantage. As such, a comprehensive profiling capability is rapidly becoming a core competence required for successful competition. An appropriate analogy is to consider this advantage as akin to having a good idea of the next move that your opponent in a chess match will make. By staying one move ahead, checkmate is one step closer. Indeed, as in chess, a good offense is the best defense in the game of business as well[2].
A common technique is to create detailed profiles on each of your major competitors. These profiles give an in-depth description of the competitor's background, finances, products, markets, facilities, personnel, and strategies. This involves:
• Background
o location of offices, plants, and online presences
o history - key personalities, dates, events, and trends
o ownership, corporate governance, and organizational structure
• Financials
o P-E ratios, dividend policy, and profitability** various financial ratios, liquidity, and cash flow
o Profit growth profile; method of growth (organic or acquisitive)
• Products.
o products offered, depth and breadth of product line, and product portfolio balance
o new products developed, new product success rate, and R&D strengths
o brands, strength of brand portfolio, brand loyalty and brand awareness
o patents and licenses
o quality control conformance
o reverse engineering
• Marketing
o segments served, market shares, customer base, growth rate, and customer loyalty
o promotional mix, promotional budgets, advertising themes, ad agency used, sales force success rate, online promotional strategy
o distribution channels used (direct & indirect), exclusivity agreements, alliances, and geographical coverage
o pricing, discounts, and allowances
• Facilities
o plant capacity, capacity utilization rate, age of plant, plant efficiency, capital investment
o location, shipping logistics, and product mix by plant
• Personnel
o number of employees, key employees, and skill sets
o strength of management, and management style
o compensation, benefits, and employee morale & retention rates
• Corporate and marketing strategies
o objectives, mission statement, growth plans, acquisitions, and divestitures
o marketing strategies
[edit] Media scanning
Scanning competitor's ads can reveal much about what that competitor believes about marketing and their target market. Changes in a competitor's advertising message can reveal new product offerings, new production processes, a new branding strategy, a new positioning strategy, a new segmentation strategy, line extensions and contractions, problems with previous positions, insights from recent marketing or product research, a new strategic direction, a new source of sustainable competitive advantage, or value migrations within the industry. It might also indicate a new pricing strategy such as penetration, price discrimination, price skimming, product bundling, joint product pricing, discounts, or loss leaders. It may also indicate a new promotion strategy such as push, pull, balanced, short term sales generation, long term image creation, informational, comparative, affective, reminder, new creative objectives, new unique selling proposition, new creative concepts, appeals, tone, and themes, or a new advertising agency. It might also indicate a new distribution strategy, new distribution partners, more extensive distribution, more intensive distribution, a change in geographical focus, or exclusive distribution. Little of this intelligence is definitive : additional information is needed before conclusions should be drawn.
A competitor's media strategy reveals budget allocation, segmentation and targeting strategy, and selectivity and focus. From a tactical perspective, it can also be used to help a manager implement his own media plan. By knowing the competitor's media buy, media selection, frequency, reach, continuity, schedules, and flights, the manager can arrange his own media plan so that they do not coincide.
Other sources of corporate intelligence include trade shows, patent filings, mutual customers, annual reports, and trade associations.
Some firms hire competitor intelligence professionals to obtain this information. The Society of Competitive Intelligence Professionals [1] maintains a listing of individuals who provide these services.
[edit] New competitors
In addition to analyzing current competitors, it is necessary to estimate future competitive threats. The most common sources of new competitors are ==
• Companies competing in a related product/market
• Companies using related technologies
• Companies already targeting your prime market segment but with unrelated products
• Companies from other geographical areas and with similar products
• New start-up companies organized by former employees and/or managers of existing companies
The entrance of new competitors is likely when:
• There are high profit margins in the industry
• There is unmet demand (insufficient supply) in the industry
• There are no major barriers to entry
• There is future growth potential
• Competitive rivalry is not intense
• Gaining a competitive advantage over existing firms is feasible

Strategic Planning

2009-07-05T08:13:00.000-07:00

Organizational culture
Organizational culture is an idea in the field of Organizational studies and management which describes the psychology, attitudes, experiences, beliefs and Values (personal and cultural values) of an organization. It has been defined as "the specific collection of values and norms that are shared by people and groups in an organization and that control the way they interact with each other and with stakeholders outside the organization."[1]
This definition continues to explain organizational values also known as "beliefs and ideas about what kinds of goals members of an organization should pursue and ideas about the appropriate kinds or standards of behavior organizational members should use to achieve these goals. From organizational values develop organizational norms, guidelines or expectations that prescribe appropriate kinds of behavior by employees in particular situations and control the behavior of organizational members towards one another."[1]
Organizational culture is not the same as corporate culture. It is wider and deeper concepts, something that an organization 'is' rather than what it 'has' (according to Buchanan and Huczynski)[citation needed].
Corporate culture is the total sum of the values, customs, traditions and meanings that make a company unique. Corporate culture is often called "the character of an organization" since it embodies the vision of the company’s founders. The values of a corporate culture influence the ethical standards within a corporation, as well as managerial behavior.[2]
Senior management may try to determine a corporate culture. They may wish to impose corporate values and standards of behavior that specifically reflect the objectives of the organization. In addition, there will also be an extant internal culture within the workforce. Work-groups within the organization have their own behavioral quirks and interactions which, to an extent, affect the whole system. Roger Harrison's four-culture typology, and adapted by Charles Handy, suggests that unlike organizational culture, corporate culture can be 'imported'. For example, computer technicians will have expertise, language and behaviors gained independently of the organization, but their presence can influence the culture of the organization as a whole.
Contents
[hide]
• 1 Strong/weak cultures
• 2 Classificaton schemes
o 2.1 Geert Hofstede
o 2.2 Deal and Kennedy
o 2.3 Charles Handy
o 2.4 Edgar Schein
o 2.5 Arthur F Carmazzi
• 3 Elements
• 4 Organizational culture and change
• 5 Entrepreneurial culture
o 5.1 Elements of Entrepreneurial Culture
• 6 Critical views
• 7 Organizational communication perspective on culture
o 7.1 Schema
• 8 Mergers, organizational culture, and culutral leadership
• 9 See also
• 10 Notes
• 11 References
• 12 External links

Strong/weak cultures
Strong culture is said to exist where staff respond to stimulus because of their alignment to organizational values. In such environments, strong cultures help firms operate like well-oiled machines, cruising along with outstanding execution and perhaps minor tweaking of existing procedures here and there.[3]
Conversely, there is weak culture where there is little alignment with organizational values and control must be exercised through extensive procedures and bureaucracy.
Where culture is strong—people do things because they believe it is the right thing to do—there is a risk of another phenomenon, Groupthink. "Groupthink" was described by Irving L. Janis. He defined it as "...a quick and easy way to refer to a mode of thinking that people engage when they are deeply involved in a cohesive ingroup, when members' strivings for unanimity override their motivation to realistically appraise alternatives of action." This is a state where people, even if they have different ideas, do not challenge organizational thinking, and therefore there is a reduced capacity for innovative thoughts. This could occur, for example, where there is heavy reliance on a central charismatic figure in the organization, or where there is an evangelical belief in the organization’s values, or also in groups where a friendly climate is at the base of their identity (avoidance of conflict). In fact group think is very common, it happens all the time, in almost every group. Members that are defiant are often turned down or seen as a negative influence by the rest of the group, because they bring conflict.
Innovative organizations need individuals who are prepared to challenge the status quo—be it groupthink or bureaucracy, and also need procedures to implement new ideas effectively.
[edit] Classificaton schemes
Several methods have been used to classify organizational culture. Some are described below:
[edit] Geert Hofstede
Geert Hofstede[4] demonstrated that there are national and regional cultural groupings that affect the behavior of organizations.
Hofstede looked for national differences between over 100,000 of IBM's employees in different parts of the world, in an attempt to find aspects of culture that might influence business behavior.
Hofstede identified five dimensions of culture in his study of national influences:
• Power distance - The degree to which a society expects there to be differences in the levels of power. A high score suggests that there is an expectation that some individuals wield larger amounts of power than others. A low score reflects the view that all people should have equal rights.
• Uncertainty avoidance reflects the extent to which a society accepts uncertainty and risk.
• Individualism vs. collectivism - individualism is contrasted with collectivism, and refers to the extent to which people are expected to stand up for themselves, or alternatively act predominantly as a member of the group or organization. However, recent researches have shown that high individualism may not necessarily mean low collectivism, and vice versa[citation needed]. Research indicates that the two concepts are actually unrelated. Some people and cultures might have both high individualism and high collectivism, for example. Someone who highly values duty to his or her group does not necessarily give a low priority to personal freedom and self-sufficiency
• Masculinity vs. femininity - refers to the value placed on traditionally male or female values. Male values for example include competitiveness, assertiveness, ambition, and the accumulation of wealth and material possessions.
• Long vs. short term orientation - describes a society's "time horizon," or the importance attached to the future versus the past and present. In long term oriented societies, thrift and perseverance are valued more; in short term oriented societies, respect for tradition and reciprocation of gifts and favors are valued more. Eastern nations tend to score especially high here, with Western nations scoring low and the less developed nations very low; China scored highest and Pakistan lowest.
[edit] Deal and Kennedy
Deal and Kennedy[5] defined organizational culture as the way things get done around here. They measured organizations in respect of:
• Feedback - quick feedback means an instant response. This could be in monetary terms, but could also be seen in other ways, such as the impact of a great save in a soccer match.
• Risk - represents the degree of uncertainty in the organization’s activities.
Using these parameters, they were able to suggest four classifications of organizational culture:
• The Tough-Guy Macho Culture. Feedback is quick and the rewards are high. This often applies to fast moving financial activities such as brokerage, but could also apply to a police force, or athletes competing in team sports. This can be a very stressful culture in which to operate.
• The Work Hard/Play Hard Culture is characterized by few risks being taken, all with rapid feedback. This is typical in large organizations, which strive for high quality customer service. It is often characterized by team meetings, jargon and buzzwords.
• The Bet your Company Culture, where big stakes decisions are taken, but it may be years before the results are known. Typically, these might involve development or exploration projects, which take years to come to fruition, such as oil prospecting or military aviation.
• The Process Culture occurs in organizations where there is little or no feedback. People become bogged down with how things are done not with what is to be achieved. This is often associated with bureaucracies. While it is easy to criticize these cultures for being overly cautious or bogged down in red tape, they do produce consistent results, which is ideal in, for example, public services.
[edit] Charles Handy
Charles Handy[6] (1985) popularized the 1972 work of Roger Harrison of looking at culture which some scholars have used to link organizational structure to Organizational Culture. He describes Harrison's four types thus:
• a Power Culture which concentrates power among a few. Control radiates from the center like a web. Power Cultures have few rules and little bureaucracy; swift decisions can ensue.
• In a Role Culture, people have clearly delegated authorities within a highly defined structure. Typically, these organizations form hierarchical bureaucracies. Power derives from a person's position and little scope exists for expert power.
• By contrast, in a Task Culture, teams are formed to solve particular problems. Power derives from expertise as long as a team requires expertise. These cultures often feature the multiple reporting lines of a matrix structure.
• A Person Culture exists where all individuals believe themselves superior to the organization. Survival can become difficult for such organizations, since the concept of an organization suggests that a group of like-minded individuals pursue the organizational goals. Some professional partnerships can operate as person cultures, because each partner brings a particular expertise and clientele to the firm.
[edit] Edgar Schein
Edgar Schein,[7] an MIT Sloan School of Management professor, defines organizational culture as:
"A pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way you perceive, think, and feel in relation to those problems".
According to Schein, culture is the most difficult organizational attribute to change, outlasting organizational products, services, founders and leadership and all other physical attributes of the organization. His organizational model illuminates culture from the standpoint of the observer, described by three cognitive levels of organizational culture.
At the first and most cursory level of Schein's model is organizational attributes that can be seen, felt and heard by the uninitiated observer. Included are the facilities, offices, furnishings, visible awards and recognition, the way that its members dress, and how each person visibly interacts with each other and with organizational outsiders.
The next level deals with the professed culture of an organization's members. At this level, company slogans, mission statements and other operational creeds are often expressed, and local and personal values are widely expressed within the organization. Organizational behavior at this level usually can be studied by interviewing the organization's membership and using questionnaires to gather attitudes about organizational membership.
At the third and deepest level, the organization's tacit assumptions are found. These are the elements of culture that are unseen and not cognitively identified in everyday interactions between organizational members. Additionally, these are the elements of culture which are often taboo to discuss inside the organization. Many of these 'unspoken rules' exist without the conscious knowledge of the membership. Those with sufficient experience to understand this deepest level of organizational culture usually become acclimatized to its attributes over time, thus reinforcing the invisibility of their existence. Surveys and casual interviews with organizational members cannot draw out these attributes--rather much more in-depth means is required to first identify then understand organizational culture at this level. Notably, culture at this level is the underlying and driving element often missed by organizational behaviorists.
Using Schein's model, understanding paradoxical organizational behaviors becomes more apparent. For instance, an organization can profess highly aesthetic and moral standards at the second level of Schein's model while simultaneously displaying curiously opposing behavior at the third and deepest level of culture. Superficially, organizational rewards can imply one organizational norm but at the deepest level imply something completely different. This insight offers an understanding of the difficulty that organizational newcomers have in assimilating organizational culture and why it takes time to become acclimatized. It also explains why organizational change agents usually fail to achieve their goals: underlying tacit cultural norms are generally not understood before would-be change agents begin their actions. Merely understanding culture at the deepest level may be insufficient to institute cultural change because the dynamics of interpersonal relationships (often under threatening conditions) are added to the dynamics of organizational culture while attempts are made to institute desired change.
[edit] Arthur F Carmazzi
Main article: Arthur F Carmazzi
[citation needed]

The Blame culture This culture cultivates distrust and fear, people blame each other to avoid being reprimanded or put down, this results in no new ideas or personal initiative because people don’t want to risk being wrong.
Multi-directional culture This culture cultivates minimized cross-department communication and cooperation. Loyalty is only to specific groups (departments). Each department becomes a clique and is often critical of other departments which in turn creates lots of gossip. The lack of cooperation and Multi-Direction is manifested in the organization's inefficiency.
Live and let live culture This culture is Complacency, it manifests Mental Stagnation and Low Creativity. People here have little future vision and have given up their passion. There is Average cooperation and communication and things do work, but they do not grow. People have developed their personal relationships and decided who to stay away from, there is not much left to learn.
Brand congruent culture People in this culture believe in the product or service of the organization, they feel good about what their company is trying to achieve and cooperate to achieve it. People here are passionate and seem to have similar goals in the organisation. They use personal resources to actively solve problems and while they don’t always accept the actions of management or others around them, they see their job as important. Most everyone in this culture is operating at the level of Group.
Leadership enriched culture People view the organisation as an extension of themselves, they feel good about what they personally achieve through the organisation and have exceptional Cooperation. Individual goals are aligned with the goals of the organisation and people will do what it takes to make things happen. As a group, the organisation is more like family providing personal fulfillment which often transcends ego so people are consistently bringing out the best in each other. In this culture, Leaders do not develop followers, but develop other leaders. Most everyone in this culture is operating at the level of Organisation.
Carmazzi's model requires application of his Directive Communication psychology to evolve the culture. While the idea of having a Leadership Enriched organisation is inspirational, it would require substantial Leadership resources to develop. The concept of Evolving the culture assumes that "Every Individual in the organisation wants to do a good job", and the behaviours that result in poor performance are manifestations of psychology the group or organisation has created through policies, leadership and poor communication.
[edit] Elements
G. Johnson[8] described a cultural web, identifying a number of elements that can be used to describe or influence Organizational Culture:
• The Paradigm: What the organization is about; what it does; its mission; its values.
• Control Systems: The processes in place to monitor what is going on. Role cultures would have vast rulebooks. There would be more reliance on individualism in a power culture.
• Organizational Structures: Reporting lines, hierarchies, and the way that work flows through the business.
• Power Structures: Who makes the decisions, how widely spread is power, and on what is power based?
• Symbols: These include organizational logos and designs, but also extend to symbols of power such as parking spaces and executive washrooms.
• Rituals and Routines: Management meetings, board reports and so on may become more habitual than necessary.
• Stories and Myths: build up about people and events, and convey a message about what is valued within the organization.
These elements may overlap. Power structures may depend on control systems, which may exploit the very rituals that generate stories which may not be true.
Organizational culture and change
There are a number of methodologies specifically dedicated to organizational culture change such as Peter Senge’s Fifth Discipline and Arthur F Carmazzi's Directive Communication. These are also a variety of psychological approaches that have been developed into a system for specific outcomes such as the Fifth Discipline’s “learning organization” or Directive Communication’s “corporate culture evolution.” Ideas and strategies, on the other hand, seem to vary according to particular influences that affect culture.
Burman and Evans (2008) argue that it is 'leadership' that affects culture rather than 'management', and describe the difference[9]. When one wants to change an aspect of the culture of an organization one has to keep in consideration that this is a long term project. Corporate culture is something that is very hard to change and employees need time to get used to the new way of organizing. For companies with a very strong and specific culture it will be even harder to change.
Cummings & Worley (2005, p. 491 – 492) give the following six guidelines for cultural change, these changes are in line with the eight distinct stages mentioned by Kotter (1995, p. 2)3:
1. Formulate a clear strategic vision (stage 1,2 & 3 of Kotter, 1995, p. 2)
In order to make a cultural change effective a clear vision of the firm’s new strategy, shared values and behaviours is needed. This vision provides the intention and direction for the culture change (Cummings & Worley, 2005, p.490).
2. Display Top-management commitment (stage 4 of Kotter, 1995, p. 2)
It is very important to keep in mind that culture change must be managed from the top of the organization, as willingness to change of the senior management is an important indicator (Cummings & Worley, 2005, page 490). The top of the organization should be very much in favour of the change in order to actually implement the change in the rest of the organization. De Caluwé & Vermaak (2004, p 9) provide a framework with five different ways of thinking about change.
3. Model culture change at the highest level (stage 5 of Kotter, 1995, p. 2)
In order to show that the management team is in favour of the change, the change has to be notable at first at this level. The behaviour of the management needs to symbolize the kinds of values and behaviours that should be realized in the rest of the company. It is important that the management shows the strengths of the current culture as well, it must be made clear that the current organizational does not need radical changes, but just a few adjustments. (See for more: (Deal & Kennedy, 1982; Sathe, 1983; Schall; 1983; Weick, 1985; DiTomaso, 1987)
4. Modify the organization to support organizational change
The fourth step is to modify the organization to support organizational change.
5. Select and socialize newcomers and terminate deviants (stage 7 & 8 of Kotter, 1995, p. 2)
A way to implement a culture is to connect it to organizational membership, people can be selected and terminate in terms of their fit with the new culture (Cummings & Worley, 2005, p. 491).
6. Develop ethical and legal sensitivity
Changes in culture can lead to tensions between organizational and individual interests, which can result in ethical and legal problems for practitioners. This is particularly relevant for changes in employee integrity, control, equitable treatment and job security (Cummings & Worley, 2005, p. 491).
Change of culture in the organizations is very important and inevitable. Culture innovations is bound to be because it entails introducing something new and substantially different from what prevails in existing cultures. Cultural innovation[10] is bound to be more difficult than cultural maintenance. People often resist changes hence it is the duty of the management to convince people that likely gain will outweigh the losses. Besides institutionalization, deification is another process that tends to occur in strongly developed organizational cultures. The organization itself may come to be regarded as precious in itself, as a source of pride, and in some sense unique. Organizational members begin to feel a strong bond with it that transcends material returns given by the organization, and they begin to identify with in. The organization turns into a sort of clan.
Entrepreneurial culture
Stephen McGuire[11] defined and validated a model of organizational culture that predicts revenue from new sources. An Entrepreneurial Organizational Culture (EOC) is a system of shared values, beliefs and norms of members of an organization, including valuing creativity and tolerance of creative people, believing that innovating and seizing market opportunities are appropriate behaviors to deal with problems of survival and prosperity, environmental uncertainty, and competitors’ threats, and expecting organizational members to behave accordingly.
Elements of Entrepreneurial Culture
• People and enpowerment focused • Value creation through innovation and change • Attention to the basics • Hands-on management • Doing the right thing • Freedom to grow and to fail • Commitment and personal responsibility • Emphasis on the future[12]
Critical views
Writers from Critical management studies have tended to express skepticism about the functionalist and unitarist views of culture put forward by mainstream management thinkers. Whilst not necessarily denying that organizations are cultural phenomena, they would stress the ways in which cultural assumptions can stifle dissent and reproduce management propaganda and ideology. After all, it would be naive to believe that a single culture exists in all organizations, or that cultural engineering will reflect the interests of all stakeholders within an organization. In any case, Parker[13] has suggested that many of the assumptions of those putting forward theories of organizational culture are not new. They reflect a long-standing tension between cultural and structural (or informal and formal) versions of what organizations are. Further, it is perfectly reasonable to suggest that complex organizations might have many cultures, and that such sub-cultures might overlap and contradict each other. The neat typologies of cultural forms found in textbooks rarely acknowledge such complexities, or the various economic contradictions that exist in capitalist organizations.
One of the strongest and widely recognised criticisms of theories that attempt to categorise or 'pigeonhole' organisational culture is that put forward by Linda Smircich. She uses the metaphor of a plant root to represent culture, describing that it drives organisations rather than vice versa. Organisations are the product of organisational culture, we are unaware of how it shapes behaviour and interaction (also recognised through Scheins (2002) underlying assumptions) and so how can we categorise it and define what it is?
Organizational communication perspective on culture
The organizational communication perspective on culture is divided into three areas:
• Traditionalism: Views culture through objective things such as stories, rituals, and symbols
• Interpretivism: Views culture through a network of shared meanings (organization members sharing subjective meanings)
• Critical-Interpretivism: Views culture through a network of shared meanings as well as the power struggles created by a similar network of competing meanings
There are many different types of communication that contribute in creating an organizational culture:
• Metaphors such as comparing an organization to a machine or a family reveal employees’ shared meanings of experiences at the organization.
• Stories can provide examples for employees of how to or not to act in certain situations.
• Rites and ceremonies combine stories, metaphors, and symbols into one. Several different kinds of rites that affect organizational culture:
o Rites of passage: employees move into new roles
o Rites of degradation: employees have power taken away from them
o Rites of enhancement: public recognition for an employee’s accomplishments
o Rites of renewal: improve existing social structures
o Rites of conflict reduction: resolve arguments between certain members or groups
o Rites of integration: reawaken feelings of membership in the organization
• Reflexive comments are explanations, justifications, and criticisms of our own actions. This includes:
o Plans: comments about anticipated actions
o Commentaries: comments about action in the present
o Accounts: comments about an action or even that has already occurred
Such comments reveal interpretive meanings held by the speaker as well as the social rules they follow.
• Fantasy Themes are common creative interpretations of events that reflect beliefs, values, and goals of the organization. They lead to rhetorical visions, or views of the organization and its environment held by organization members.
Schema
Schemata (plural of schema) are knowledge structures a person forms from past experiences allowing them to respond to similar events more efficiently in the future by guiding the processing of information. Schemata are created through interaction with others and thus inherently involve communication.
Stanley G. Harris argues that five categories of in-organization schemata are necessary for organizational culture:
• Self-in-organization schemata: a person’s concept of themselves within the context of the organization, including their personality, roles, and behavior
• Person-in-organization schemata: a person’s memories, impressions and expectations of other individuals within the organization
• Organization schemata: subset of person schemata, a person’s generalized perspective on others as a whole in the organization
• Object/concept-in-organization schemata: knowledge an individual has of organization aspects other than other people
• Event-in-organization schemata: a person’s knowledge of social events within an organization
All of these categories together represent a person’s knowledge of an organization. Organizational culture is created when the schemata’s of individuals within an organization come to resemble each other. This is primarily done through organizational communication as individuals directly or indirectly share knowledge and meanings.
Mergers, organizational culture, and culutral leadership
One of the biggest obstacles in the way of the merging of two organizations is organizational culture. Each organization has its own unique culture and most often, when brought together, these cultures clash. When mergers fail employees point to issues such as identity, communication problems, human resources problems, ego clashes, and inter-group conflicts, which all fall under the category of “cultural differences”. One way to combat such difficulties is through cultural leadership. Organizational leaders must also be cultural leaders and help facilitate the change from the two old cultures into the one new culture. This is done through cultural innovation followed by cultural maintenance.
• Cultural innovation includes:
o Creating a new culture: recognizing past cultural differences and setting realistic expectations for change
o Changing the culture: weakening and replacing the old cultures
• Cultural maintenance includes:
o Integrating the new culture: reconciling the differences between the old cultures and the new one
o Embodying the new culture: Establishing, affirming, and keeping the new culture

Organizational Culture

2009-07-05T07:53:00.000-07:00

Organizational culture
Organizational culture is an idea in the field of Organizational studies and management which describes the psychology, attitudes, experiences, beliefs and Values (personal and cultural values) of an organization. It has been defined as "the specific collection of values and norms that are shared by people and groups in an organization and that control the way they interact with each other and with stakeholders outside the organization."[1]
This definition continues to explain organizational values also known as "beliefs and ideas about what kinds of goals members of an organization should pursue and ideas about the appropriate kinds or standards of behavior organizational members should use to achieve these goals. From organizational values develop organizational norms, guidelines or expectations that prescribe appropriate kinds of behavior by employees in particular situations and control the behavior of organizational members towards one another."[1]
Organizational culture is not the same as corporate culture. It is wider and deeper concepts, something that an organization 'is' rather than what it 'has' (according to Buchanan and Huczynski)[citation needed].
Corporate culture is the total sum of the values, customs, traditions and meanings that make a company unique. Corporate culture is often called "the character of an organization" since it embodies the vision of the company’s founders. The values of a corporate culture influence the ethical standards within a corporation, as well as managerial behavior.[2]
Senior management may try to determine a corporate culture. They may wish to impose corporate values and standards of behavior that specifically reflect the objectives of the organization. In addition, there will also be an extant internal culture within the workforce. Work-groups within the organization have their own behavioral quirks and interactions which, to an extent, affect the whole system. Roger Harrison's four-culture typology, and adapted by Charles Handy, suggests that unlike organizational culture, corporate culture can be 'imported'. For example, computer technicians will have expertise, language and behaviors gained independently of the organization, but their presence can influence the culture of the organization as a whole.
Contents
[hide]
• 1 Strong/weak cultures
• 2 Classificaton schemes
o 2.1 Geert Hofstede
o 2.2 Deal and Kennedy
o 2.3 Charles Handy
o 2.4 Edgar Schein
o 2.5 Arthur F Carmazzi
• 3 Elements
• 4 Organizational culture and change
• 5 Entrepreneurial culture
o 5.1 Elements of Entrepreneurial Culture
• 6 Critical views
• 7 Organizational communication perspective on culture
o 7.1 Schema
• 8 Mergers, organizational culture, and culutral leadership
• 9 See also
• 10 Notes
• 11 References
• 12 External links

Strong/weak cultures
Strong culture is said to exist where staff respond to stimulus because of their alignment to organizational values. In such environments, strong cultures help firms operate like well-oiled machines, cruising along with outstanding execution and perhaps minor tweaking of existing procedures here and there.[3]
Conversely, there is weak culture where there is little alignment with organizational values and control must be exercised through extensive procedures and bureaucracy.
Where culture is strong—people do things because they believe it is the right thing to do—there is a risk of another phenomenon, Groupthink. "Groupthink" was described by Irving L. Janis. He defined it as "...a quick and easy way to refer to a mode of thinking that people engage when they are deeply involved in a cohesive ingroup, when members' strivings for unanimity override their motivation to realistically appraise alternatives of action." This is a state where people, even if they have different ideas, do not challenge organizational thinking, and therefore there is a reduced capacity for innovative thoughts. This could occur, for example, where there is heavy reliance on a central charismatic figure in the organization, or where there is an evangelical belief in the organization’s values, or also in groups where a friendly climate is at the base of their identity (avoidance of conflict). In fact group think is very common, it happens all the time, in almost every group. Members that are defiant are often turned down or seen as a negative influence by the rest of the group, because they bring conflict.
Innovative organizations need individuals who are prepared to challenge the status quo—be it groupthink or bureaucracy, and also need procedures to implement new ideas effectively.
[edit] Classificaton schemes
Several methods have been used to classify organizational culture. Some are described below:
[edit] Geert Hofstede
Geert Hofstede[4] demonstrated that there are national and regional cultural groupings that affect the behavior of organizations.
Hofstede looked for national differences between over 100,000 of IBM's employees in different parts of the world, in an attempt to find aspects of culture that might influence business behavior.
Hofstede identified five dimensions of culture in his study of national influences:
• Power distance - The degree to which a society expects there to be differences in the levels of power. A high score suggests that there is an expectation that some individuals wield larger amounts of power than others. A low score reflects the view that all people should have equal rights.
• Uncertainty avoidance reflects the extent to which a society accepts uncertainty and risk.
• Individualism vs. collectivism - individualism is contrasted with collectivism, and refers to the extent to which people are expected to stand up for themselves, or alternatively act predominantly as a member of the group or organization. However, recent researches have shown that high individualism may not necessarily mean low collectivism, and vice versa[citation needed]. Research indicates that the two concepts are actually unrelated. Some people and cultures might have both high individualism and high collectivism, for example. Someone who highly values duty to his or her group does not necessarily give a low priority to personal freedom and self-sufficiency
• Masculinity vs. femininity - refers to the value placed on traditionally male or female values. Male values for example include competitiveness, assertiveness, ambition, and the accumulation of wealth and material possessions.
• Long vs. short term orientation - describes a society's "time horizon," or the importance attached to the future versus the past and present. In long term oriented societies, thrift and perseverance are valued more; in short term oriented societies, respect for tradition and reciprocation of gifts and favors are valued more. Eastern nations tend to score especially high here, with Western nations scoring low and the less developed nations very low; China scored highest and Pakistan lowest.
[edit] Deal and Kennedy
Deal and Kennedy[5] defined organizational culture as the way things get done around here. They measured organizations in respect of:
• Feedback - quick feedback means an instant response. This could be in monetary terms, but could also be seen in other ways, such as the impact of a great save in a soccer match.
• Risk - represents the degree of uncertainty in the organization’s activities.
Using these parameters, they were able to suggest four classifications of organizational culture:
• The Tough-Guy Macho Culture. Feedback is quick and the rewards are high. This often applies to fast moving financial activities such as brokerage, but could also apply to a police force, or athletes competing in team sports. This can be a very stressful culture in which to operate.
• The Work Hard/Play Hard Culture is characterized by few risks being taken, all with rapid feedback. This is typical in large organizations, which strive for high quality customer service. It is often characterized by team meetings, jargon and buzzwords.
• The Bet your Company Culture, where big stakes decisions are taken, but it may be years before the results are known. Typically, these might involve development or exploration projects, which take years to come to fruition, such as oil prospecting or military aviation.
• The Process Culture occurs in organizations where there is little or no feedback. People become bogged down with how things are done not with what is to be achieved. This is often associated with bureaucracies. While it is easy to criticize these cultures for being overly cautious or bogged down in red tape, they do produce consistent results, which is ideal in, for example, public services.
[edit] Charles Handy
Charles Handy[6] (1985) popularized the 1972 work of Roger Harrison of looking at culture which some scholars have used to link organizational structure to Organizational Culture. He describes Harrison's four types thus:
• a Power Culture which concentrates power among a few. Control radiates from the center like a web. Power Cultures have few rules and little bureaucracy; swift decisions can ensue.
• In a Role Culture, people have clearly delegated authorities within a highly defined structure. Typically, these organizations form hierarchical bureaucracies. Power derives from a person's position and little scope exists for expert power.
• By contrast, in a Task Culture, teams are formed to solve particular problems. Power derives from expertise as long as a team requires expertise. These cultures often feature the multiple reporting lines of a matrix structure.
• A Person Culture exists where all individuals believe themselves superior to the organization. Survival can become difficult for such organizations, since the concept of an organization suggests that a group of like-minded individuals pursue the organizational goals. Some professional partnerships can operate as person cultures, because each partner brings a particular expertise and clientele to the firm.
[edit] Edgar Schein
Edgar Schein,[7] an MIT Sloan School of Management professor, defines organizational culture as:
"A pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way you perceive, think, and feel in relation to those problems".
According to Schein, culture is the most difficult organizational attribute to change, outlasting organizational products, services, founders and leadership and all other physical attributes of the organization. His organizational model illuminates culture from the standpoint of the observer, described by three cognitive levels of organizational culture.
At the first and most cursory level of Schein's model is organizational attributes that can be seen, felt and heard by the uninitiated observer. Included are the facilities, offices, furnishings, visible awards and recognition, the way that its members dress, and how each person visibly interacts with each other and with organizational outsiders.
The next level deals with the professed culture of an organization's members. At this level, company slogans, mission statements and other operational creeds are often expressed, and local and personal values are widely expressed within the organization. Organizational behavior at this level usually can be studied by interviewing the organization's membership and using questionnaires to gather attitudes about organizational membership.
At the third and deepest level, the organization's tacit assumptions are found. These are the elements of culture that are unseen and not cognitively identified in everyday interactions between organizational members. Additionally, these are the elements of culture which are often taboo to discuss inside the organization. Many of these 'unspoken rules' exist without the conscious knowledge of the membership. Those with sufficient experience to understand this deepest level of organizational culture usually become acclimatized to its attributes over time, thus reinforcing the invisibility of their existence. Surveys and casual interviews with organizational members cannot draw out these attributes--rather much more in-depth means is required to first identify then understand organizational culture at this level. Notably, culture at this level is the underlying and driving element often missed by organizational behaviorists.
Using Schein's model, understanding paradoxical organizational behaviors becomes more apparent. For instance, an organization can profess highly aesthetic and moral standards at the second level of Schein's model while simultaneously displaying curiously opposing behavior at the third and deepest level of culture. Superficially, organizational rewards can imply one organizational norm but at the deepest level imply something completely different. This insight offers an understanding of the difficulty that organizational newcomers have in assimilating organizational culture and why it takes time to become acclimatized. It also explains why organizational change agents usually fail to achieve their goals: underlying tacit cultural norms are generally not understood before would-be change agents begin their actions. Merely understanding culture at the deepest level may be insufficient to institute cultural change because the dynamics of interpersonal relationships (often under threatening conditions) are added to the dynamics of organizational culture while attempts are made to institute desired change.
[edit] Arthur F Carmazzi
Main article: Arthur F Carmazzi
[citation needed]

The Blame culture This culture cultivates distrust and fear, people blame each other to avoid being reprimanded or put down, this results in no new ideas or personal initiative because people don’t want to risk being wrong.
Multi-directional culture This culture cultivates minimized cross-department communication and cooperation. Loyalty is only to specific groups (departments). Each department becomes a clique and is often critical of other departments which in turn creates lots of gossip. The lack of cooperation and Multi-Direction is manifested in the organization's inefficiency.
Live and let live culture This culture is Complacency, it manifests Mental Stagnation and Low Creativity. People here have little future vision and have given up their passion. There is Average cooperation and communication and things do work, but they do not grow. People have developed their personal relationships and decided who to stay away from, there is not much left to learn.
Brand congruent culture People in this culture believe in the product or service of the organization, they feel good about what their company is trying to achieve and cooperate to achieve it. People here are passionate and seem to have similar goals in the organisation. They use personal resources to actively solve problems and while they don’t always accept the actions of management or others around them, they see their job as important. Most everyone in this culture is operating at the level of Group.
Leadership enriched culture People view the organisation as an extension of themselves, they feel good about what they personally achieve through the organisation and have exceptional Cooperation. Individual goals are aligned with the goals of the organisation and people will do what it takes to make things happen. As a group, the organisation is more like family providing personal fulfillment which often transcends ego so people are consistently bringing out the best in each other. In this culture, Leaders do not develop followers, but develop other leaders. Most everyone in this culture is operating at the level of Organisation.
Carmazzi's model requires application of his Directive Communication psychology to evolve the culture. While the idea of having a Leadership Enriched organisation is inspirational, it would require substantial Leadership resources to develop. The concept of Evolving the culture assumes that "Every Individual in the organisation wants to do a good job", and the behaviours that result in poor performance are manifestations of psychology the group or organisation has created through policies, leadership and poor communication.
[edit] Elements
G. Johnson[8] described a cultural web, identifying a number of elements that can be used to describe or influence Organizational Culture:
• The Paradigm: What the organization is about; what it does; its mission; its values.
• Control Systems: The processes in place to monitor what is going on. Role cultures would have vast rulebooks. There would be more reliance on individualism in a power culture.
• Organizational Structures: Reporting lines, hierarchies, and the way that work flows through the business.
• Power Structures: Who makes the decisions, how widely spread is power, and on what is power based?
• Symbols: These include organizational logos and designs, but also extend to symbols of power such as parking spaces and executive washrooms.
• Rituals and Routines: Management meetings, board reports and so on may become more habitual than necessary.
• Stories and Myths: build up about people and events, and convey a message about what is valued within the organization.
These elements may overlap. Power structures may depend on control systems, which may exploit the very rituals that generate stories which may not be true.
[edit] Organizational culture and change
There are a number of methodologies specifically dedicated to organizational culture change such as Peter Senge’s Fifth Discipline and Arthur F Carmazzi's Directive Communication. These are also a variety of psychological approaches that have been developed into a system for specific outcomes such as the Fifth Discipline’s “learning organization” or Directive Communication’s “corporate culture evolution.” Ideas and strategies, on the other hand, seem to vary according to particular influences that affect culture.
Burman and Evans (2008) argue that it is 'leadership' that affects culture rather than 'management', and describe the difference[9]. When one wants to change an aspect of the culture of an organization one has to keep in consideration that this is a long term project. Corporate culture is something that is very hard to change and employees need time to get used to the new way of organizing. For companies with a very strong and specific culture it will be even harder to change.
Cummings & Worley (2005, p. 491 – 492) give the following six guidelines for cultural change, these changes are in line with the eight distinct stages mentioned by Kotter (1995, p. 2)3:
1. Formulate a clear strategic vision (stage 1,2 & 3 of Kotter, 1995, p. 2)
In order to make a cultural change effective a clear vision of the firm’s new strategy, shared values and behaviours is needed. This vision provides the intention and direction for the culture change (Cummings & Worley, 2005, p.490).
2. Display Top-management commitment (stage 4 of Kotter, 1995, p. 2)
It is very important to keep in mind that culture change must be managed from the top of the organization, as willingness to change of the senior management is an important indicator (Cummings & Worley, 2005, page 490). The top of the organization should be very much in favour of the change in order to actually implement the change in the rest of the organization. De Caluwé & Vermaak (2004, p 9) provide a framework with five different ways of thinking about change.
3. Model culture change at the highest level (stage 5 of Kotter, 1995, p. 2)
In order to show that the management team is in favour of the change, the change has to be notable at first at this level. The behaviour of the management needs to symbolize the kinds of values and behaviours that should be realized in the rest of the company. It is important that the management shows the strengths of the current culture as well, it must be made clear that the current organizational does not need radical changes, but just a few adjustments. (See for more: (Deal & Kennedy, 1982; Sathe, 1983; Schall; 1983; Weick, 1985; DiTomaso, 1987)
4. Modify the organization to support organizational change
The fourth step is to modify the organization to support organizational change.
5. Select and socialize newcomers and terminate deviants (stage 7 & 8 of Kotter, 1995, p. 2)
A way to implement a culture is to connect it to organizational membership, people can be selected and terminate in terms of their fit with the new culture (Cummings & Worley, 2005, p. 491).
6. Develop ethical and legal sensitivity
Changes in culture can lead to tensions between organizational and individual interests, which can result in ethical and legal problems for practitioners. This is particularly relevant for changes in employee integrity, control, equitable treatment and job security (Cummings & Worley, 2005, p. 491).
Change of culture in the organizations is very important and inevitable. Culture innovations is bound to be because it entails introducing something new and substantially different from what prevails in existing cultures. Cultural innovation[10] is bound to be more difficult than cultural maintenance. People often resist changes hence it is the duty of the management to convince people that likely gain will outweigh the losses. Besides institutionalization, deification is another process that tends to occur in strongly developed organizational cultures. The organization itself may come to be regarded as precious in itself, as a source of pride, and in some sense unique. Organizational members begin to feel a strong bond with it that transcends material returns given by the organization, and they begin to identify with in. The organization turns into a sort of clan.
[edit] Entrepreneurial culture
Stephen McGuire[11] defined and validated a model of organizational culture that predicts revenue from new sources. An Entrepreneurial Organizational Culture (EOC) is a system of shared values, beliefs and norms of members of an organization, including valuing creativity and tolerance of creative people, believing that innovating and seizing market opportunities are appropriate behaviors to deal with problems of survival and prosperity, environmental uncertainty, and competitors’ threats, and expecting organizational members to behave accordingly.
[edit] Elements of Entrepreneurial Culture
• People and enpowerment focused • Value creation through innovation and change • Attention to the basics • Hands-on management • Doing the right thing • Freedom to grow and to fail • Commitment and personal responsibility • Emphasis on the future[12]
[edit] Critical views
Writers from Critical management studies have tended to express skepticism about the functionalist and unitarist views of culture put forward by mainstream management thinkers. Whilst not necessarily denying that organizations are cultural phenomena, they would stress the ways in which cultural assumptions can stifle dissent and reproduce management propaganda and ideology. After all, it would be naive to believe that a single culture exists in all organizations, or that cultural engineering will reflect the interests of all stakeholders within an organization. In any case, Parker[13] has suggested that many of the assumptions of those putting forward theories of organizational culture are not new. They reflect a long-standing tension between cultural and structural (or informal and formal) versions of what organizations are. Further, it is perfectly reasonable to suggest that complex organizations might have many cultures, and that such sub-cultures might overlap and contradict each other. The neat typologies of cultural forms found in textbooks rarely acknowledge such complexities, or the various economic contradictions that exist in capitalist organizations.
One of the strongest and widely recognised criticisms of theories that attempt to categorise or 'pigeonhole' organisational culture is that put forward by Linda Smircich. She uses the metaphor of a plant root to represent culture, describing that it drives organisations rather than vice versa. Organisations are the product of organisational culture, we are unaware of how it shapes behaviour and interaction (also recognised through Scheins (2002) underlying assumptions) and so how can we categorise it and define what it is?
[edit] Organizational communication perspective on culture
The organizational communication perspective on culture is divided into three areas:
• Traditionalism: Views culture through objective things such as stories, rituals, and symbols
• Interpretivism: Views culture through a network of shared meanings (organization members sharing subjective meanings)
• Critical-Interpretivism: Views culture through a network of shared meanings as well as the power struggles created by a similar network of competing meanings
There are many different types of communication that contribute in creating an organizational culture:
• Metaphors such as comparing an organization to a machine or a family reveal employees’ shared meanings of experiences at the organization.
• Stories can provide examples for employees of how to or not to act in certain situations.
• Rites and ceremonies combine stories, metaphors, and symbols into one. Several different kinds of rites that affect organizational culture:
o Rites of passage: employees move into new roles
o Rites of degradation: employees have power taken away from them
o Rites of enhancement: public recognition for an employee’s accomplishments
o Rites of renewal: improve existing social structures
o Rites of conflict reduction: resolve arguments between certain members or groups
o Rites of integration: reawaken feelings of membership in the organization
• Reflexive comments are explanations, justifications, and criticisms of our own actions. This includes:
o Plans: comments about anticipated actions
o Commentaries: comments about action in the present
o Accounts: comments about an action or even that has already occurred
Such comments reveal interpretive meanings held by the speaker as well as the social rules they follow.
• Fantasy Themes are common creative interpretations of events that reflect beliefs, values, and goals of the organization. They lead to rhetorical visions, or views of the organization and its environment held by organization members.
[edit] Schema
Schemata (plural of schema) are knowledge structures a person forms from past experiences allowing them to respond to similar events more efficiently in the future by guiding the processing of information. Schemata are created through interaction with others and thus inherently involve communication.
Stanley G. Harris argues that five categories of in-organization schemata are necessary for organizational culture:
• Self-in-organization schemata: a person’s concept of themselves within the context of the organization, including their personality, roles, and behavior
• Person-in-organization schemata: a person’s memories, impressions and expectations of other individuals within the organization
• Organization schemata: subset of person schemata, a person’s generalized perspective on others as a whole in the organization
• Object/concept-in-organization schemata: knowledge an individual has of organization aspects other than other people
• Event-in-organization schemata: a person’s knowledge of social events within an organization
All of these categories together represent a person’s knowledge of an organization. Organizational culture is created when the schemata’s of individuals within an organization come to resemble each other. This is primarily done through organizational communication as individuals directly or indirectly share knowledge and meanings.
[edit] Mergers, organizational culture, and culutral leadership
One of the biggest obstacles in the way of the merging of two organizations is organizational culture. Each organization has its own unique culture and most often, when brought together, these cultures clash. When mergers fail employees point to issues such as identity, communication problems, human resources problems, ego clashes, and inter-group conflicts, which all fall under the category of “cultural differences”. One way to combat such difficulties is through cultural leadership. Organizational leaders must also be cultural leaders and help facilitate the change from the two old cultures into the one new culture. This is done through cultural innovation followed by cultural maintenance.
• Cultural innovation includes:
o Creating a new culture: recognizing past cultural differences and setting realistic expectations for change
o Changing the culture: weakening and replacing the old cultures
• Cultural maintenance includes:
o Integrating the new culture: reconciling the differences between the old cultures and the new one
o Embodying the new culture: Establishing, affirming, and keeping the new culture

Marketing Strategies

2009-07-05T07:52:00.000-07:00

A marketing strategy[1][2] is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage[3]. A marketing strategy should be centered around the key concept that customer satisfaction is the main goal.
Contents
[hide]
• 1 Key part of the general corporate strategy
• 2 Tactics and actions
• 3 Types of strategies
• 4 Strategic models
• 5 See also
• 6 References
• 7 Further reading

A marketing strategy is a written plan which combines product development, promotion, distribution, and pricing approach, identifies the firm's marketing goals, and explains how they will be achieved within a stated timeframe. Marketing strategy determines the choice of target market segment, positioning, marketing mix, and allocation of resources. It is most effective when it is an integral component of firm strategy, defining how the organization will successfully engage customers, prospects, and competitors in the market arena. Corporate strategies, corporate missions, and corporate goals. As the customer constitutes the source of a company's revenue, marketing strategy is closely linked with sales. A key component of marketing strategy is often to keep marketing in line with a company's overarching mission statement[4].
Basic theory:
1. Target Audience
2. Proposition/Key Element
3. Implementation
Tactics and actions
A marketing strategy can serve as the foundation of a marketing plan. A marketing plan contains a set of specific actions required to successfully implement a marketing strategy. For example: "Use a low cost product to attract consumers. Once our organization, via our low cost product, has established a relationship with consumers, our organization will sell additional, higher-margin products and services that enhance the consumer's interaction with the low-cost product or service."
A strategy consists of a well thought out series of tactics to make a marketing plan more effective. Marketing strategies serve as the fundamental underpinning of marketing plans designed to fill market needs and reach marketing objectives[5]. Plans and objectives are generally tested for measurable results.
A marketing strategy often integrates an organization's marketing goals, policies, and action sequences (tactics) into a cohesive whole. Similarly, the various strands of the strategy , which might include advertising, channel marketing, internet marketing, promotion and public relations can be orchestrated. Many companies cascade a strategy throughout an organization, by creating strategy tactics that then become strategy goals for the next level or group. Each one group is expected to take that strategy goal and develop a set of tactics to achieve that goal. This is why it is important to make each strategy goal measurable.
Marketing strategies are dynamic and interactive. They are partially planned and partially unplanned. See strategy dynamics.
Types of strategies

Marketing strategies may differ depending on the unique situation of the individual business. However there are a number of ways of categorizing some generic strategies. A brief description of the most common categorizing schemes is presented below:
• Strategies based on market dominance - In this scheme, firms are classified based on their market share or dominance of an industry. Typically there are three types of market dominance strategies:
o Leader
o Challenger
o Follower
• Porter generic strategies - strategy on the dimensions of strategic scope and strategic strength. Strategic scope refers to the market penetration while strategic strength refers to the firm’s sustainable competitive advantage. The generic strategy framework (porter 1984) comprises two alternatives each with two alternative scopes. These are Differentiation and low-cost leadership each with a dimension of Focus-broad or narrow.
o Product differentiation
o Market segmentation
• Innovation strategies - This deals with the firm's rate of the new product development and business model innovation. It asks whether the company is on the cutting edge of technology and business innovation. There are three types:
o Pioneers
o Close followers
o Late followers
• Growth strategies - In this scheme we ask the question, “How should the firm grow?”. There are a number of different ways of answering that question, but the most common gives four answers:
o Horizontal integration
o Vertical integration
o Diversification
o Intensification
A more detailed scheme uses the categories [6]:
• Prospector
• Analyzer
• Defender
• Reactor
• Marketing warfare strategies - This scheme draws parallels between marketing strategies and military strategies.
Strategic models

Marketing participants often employ strategic models and tools to analyze marketing decisions. When beginning a strategic analysis, the 3Cs can be employed to get a broad understanding of the strategic environment. An Ansoff Matrix is also often used to convey an organization's strategic positioning of their marketing mix. The 4Ps can then be utilized to form a marketing plan to pursue a defined strategy.
Marketing in Practice
The Consumer-Centric Business
There are a many companies especially those in the Consumer Package Goods (CPG) market that adopt the theory of running their business centered around Consumer, Shopper & Retailer needs. Their Marketing departments spend quality time looking for "Growth Opportunities" in their categories by identifying relevant insights (both mindsets and behaviors) on their target Consumers, Shoppers and retail partners. These Growth Opportunities emerge from changes in market trends, segment dynamics changing and also internal brand or operational business challenges.The Marketing team can then prioritize these Growth Opportunities and begin to develop strategies to exploit the opportunities that could include new or adapted products, services as well as changes to the 7Ps.
Real-life marketing primarily revolves around the application of a great deal of common-sense; dealing with a limited number of factors, in an environment of imperfect information and limited resources complicated by uncertainty and tight timescales. Use of classical marketing techniques, in these circumstances, is inevitably partial and uneven.
Thus, for example, many new products will emerge from irrational processes and the rational development process may be used (if at all) to screen out the worst non-runners. The design of the advertising, and the packaging, will be the output of the creative minds employed; which management will then screen, often by 'gut-reaction', to ensure that it is reasonable.
For most of their time, marketing managers use intuition and experience to analyze and handle the complex, and unique, situations being faced; without easy reference to theory. This will often be 'flying by the seat of the pants', or 'gut-reaction'; where the overall strategy, coupled with the knowledge of the customer which has been absorbed almost by a process of osmosis, will determine the quality of the marketing employed. This, almost instinctive management, is what is sometimes called 'coarse marketing'; to distinguish it from the refined, aesthetically pleasing, form favored by the theorists.

Marketing & Its Techniques

2009-07-05T07:48:00.000-07:00

Marketing is an integrated communications-based process through which individuals and communities discover that existing and newly-identified needs and wants may be satisfied by the products and services of others.
Marketing is defined by the American Marketing Association as the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. [1] The term developed from the original meaning which referred literally to going to market, as in shopping, or going to a market to buy or sell goods or services.
The Chartered Institute of Marketing, which is the world's largest marketing body, defines marketing as "The management process responsible for identifying, anticipating and satisfying customer requirements profitably."[2]
Marketing practice tended to be seen as a creative industry in the past, which included advertising, distribution and selling. However, because marketing makes extensive use of social sciences, psychology, sociology, mathematics, economics, anthropology and neuroscience, the profession is now widely recognised a science, allowing numerous universities to offer Master-of-Science (MSc) programmes. The overall process starts with marketing research and goes through market segmentation, business planning and execution, ending with pre and post-sales promotional activities. It is also related to many of the creative arts. The marketing literature is also infamous for re-inventing itself and its vocabulary according to the times and the culture.

Seen from a systems point of view, sales process engineering views marketing as a set of processes that are interconnected and interdependent with other functions[3], whose methods can be improved using a variety of relatively new approaches. http://en.wikipedia.org/w/index.php?title=Marketing&action=edit
Contents
[hide]
• 1 The marketing concept
• 2 Marketing orientations
o 2.1 Product orientation
o 2.2 Sales orientation
o 2.3 Production orientation
o 2.4 Marketing orientation
 2.4.1 Customer orientation
 2.4.2 Organisational orientation
 2.4.3 Mutually beneficial exchange
• 3 Four Ps
• 4 Product
o 4.1 Branding
• 5 Marketing communications
o 5.1 Personal sales
o 5.2 Sales promotion
• 6 Customer focus
• 7 Product focus
• 8 Areas of marketing specialization
• 9 See also
• 10 Related lists
• 11 References
• 12 External links

[edit] The marketing concept
The term marketing concept pertains to the fundamental premise of modern marketing. This can be laid out as recognising consumer needs/wants, and making products that correlate with consumer desires.
[edit] Marketing orientations
An orientation, in the marketing context, relates to a perception or attitude a firm holds towards its product or service, essentially concerning consumers and end-users. There exist several common orientations:
[edit] Product orientation
A firm employing a product orientation is chiefly concerned with the quality of its own product, and not in necessarily ascertaining consumer desires. A firm would also assume that as long as its product was of a high standard, persons would buy and consume the product.
However, utilising a product orientation has a prime disadvantage of making a firm lose out to competitors, who may produce technologically superior goods that engender higher consumer demand and thus market share. A product orientation may perhaps work best in a monopolistic market form, due to the inherent high barriers to entry within a monopoly.
[edit] Sales orientation
A firm using a sales orientation focuses primarily on the selling/promotion of a particular product, and not determining new consumer desires as such. Consequently, this entails simply selling an already existing product, and using promotion techniques to attain the highest sales possible.
Such an orientation may suit scenarios in which a firm holds dead stock, or otherwise sells a good that is in high demand, with little likelihood of changes in consumer tastes diminishing demand.
[edit] Production orientation
A firm focusing on a production orientation specialises in producing as much as possible of a given good. Thus, this signifies a firm exploiting economies of scale, until the minimum efficient scale is reached.
A production orientation may be deployed when a high demand for a good exists, coupled with a good certainty that consumer tastes do not rapidly alter (similar to the sales orientation).
[edit] Marketing orientation
The marketing orientation is perhaps the most common orientation used in contemporary marketing. It involves a firm essentially basing its marketing plans around the marketing concept, and thus forging products to suit new consumer tastes.
As an example, a firm would employ market research to gauge consumer desires, use R&D to develop a good attuned to the revealed information, and then utilise promotion techniques to ensure persons know the good exists. The marketing orientation often has three prime facets, which are:
[edit] Customer orientation
A firm in the market economy survives by producing goods that persons are willing and able to buy. Consequently, ascertaining consumer demand is vital for a firm's future viabilty and even existence as a going concern.
[edit] Organisational orientation
All departments of a firm should be geared to satisfying consumer wants/needs.
[edit] Mutually beneficial exchange
In a transaction in the market economy, a firm gains revenue, which thus leads to more profits/market share/sales. A consumer on the other hand gains a need/want that is satisfied, utility, reliability and value for money from the purchase of a good. As no one has to buy goods from any one supplier in the market economy, firms must entice consumers to buy goods, and thus seek to satisfy consumers' utility. If an exchange is not mutually beneficial in nature, it is not consistent with contemporary marketing ideals.
[edit] Four Ps
Main article: Marketing mix
In the early 1960s, Professor Neil Borden at Harvard Business School identified a number of company performance actions that can influence the consumer decision to purchase goods or services. Borden suggested that all those actions of the company represented a “Marketing Mix”. Professor E. Jerome McCarthy, also at the Harvard Business School in the early 1960s, suggested that the Marketing Mix contained 4 elements: product, price, place and promotion.
• Product: The product aspects of marketing deal with the specifications of the actual goods or services, and how it relates to the end-user's needs and wants. The scope of a product generally includes supporting elements such as warranties, guarantees, and support.
• Pricing: This refers to the process of setting a price for a product, including discounts. The price need not be monetary; it can simply be what is exchanged for the product or services, e.g. time, energy, or attention. Methods of setting prices optimally are in the domain of pricing science.
• Placement (or distribution): refers to how the product gets to the customer; for example, point-of-sale placement or retailing. This third P has also sometimes been called Place, referring to the channel by which a product or service is sold (e.g. online vs. retail), which geographic region or industry, to which segment (young adults, families, business people), etc. also referring to how the environment in which the product is sold in can affect sales.
• Promotion: This includes advertising, sales promotion, publicity, and personal selling. Branding refers to the various methods of promoting the product, brand, or company.
These four elements are often referred to as the marketing mix,[4] which a marketer can use to craft a marketing plan.
The four Ps model is most useful when marketing low value consumer products. Industrial products, services, high value consumer products require adjustments to this model. Services marketing must account for the unique nature of services.
Industrial or B2B marketing must account for the long term contractual agreements that are typical in supply chain transactions. Relationship marketing attempts to do this by looking at marketing from a long term relationship perspective rather than individual transactions.
As a counter to this, Morgan, in Riding the Waves of Change (Jossey-Bass, 1988), suggests that one of the greatest limitations of the 4 Ps approach "is that it unconsciously emphasizes the inside–out view (looking from the company outwards), whereas the essence of marketing should be the outside–in approach".
[edit] Product
Main article: New Product Development
[edit] Branding
Main article: Brand
A brand is a name, term, design, symbol, or other feature that distinguishes products and services from competitive offerings. A brand represents the consumers' experience with an organization, product, or service. A brand is more than a name, design or symbol. Brand reflects personality of the company which is organizational culture.
A brand has also been defined as an identifiable entity that makes a specific value based on promises made and kept either actively or passively.
Branding means creating reference of certain products in mind.
Co-branding involves marketing activity involving two or more products.
[edit] Marketing communications
Marketing communications breaks down the strategies involved with marketing messages into categories based on the goals of each message. There are distinct stages in converting strangers to customers that govern the communication medium that should be used.
[edit] Personal sales
Oral presentation given by a salesperson who approaches individuals or a group of potential customers:
• Live, interactive relationship
• Personal interest
• Attention and response
• Interesting presentation
• Clear and thorough.
[edit] Sales promotion
Short-term incentives to encourage buying of products:
• Instant appeal
• Anxiety to sell
An example is coupons or a sale. People are given an incentive to buy, but this does not build customer loyalty or encourage future repeat buys. A major drawback of sales promotion is that it is easily copied by competition. It cannot be used as a sustainable source of differentiation.
[edit] Customer focus
Many companies today have a customer focus (or market orientation). This implies that the company focuses its activities and products on consumer demands. Generally there are three ways of doing this: the customer-driven approach, the sense of identifying market changes and the product innovation approach.
In the consumer-driven approach, consumer wants are the drivers of all strategic marketing decisions. No strategy is pursued until it passes the test of consumer research. Every aspect of a market offering, including the nature of the product itself, is driven by the needs of potential consumers. The starting point is always the consumer. The rationale for this approach is that there is no point spending R&D funds developing products that people will not buy. History attests to many products that were commercial failures in spite of being technological breakthroughs.[5]
A formal approach to this customer-focused marketing is known as SIVA[6] (Solution, Information, Value, Access). This system is basically the four Ps renamed and reworded to provide a customer focus.
The SIVA Model provides a demand/customer centric version alternative to the well-known 4Ps supply side model (product, price, place, promotion) of marketing management.
Product → Solution
Promotion → Information
Price → Value
Placement → Access
The four elements of the SIVA model are:
1. Solution: How appropriate is the solution to the customer's problem/need?
2. Information: Does the customer know about the solution? If so, how and from whom do they know enough to let them make a buying decision?
3. Value: Does the customer know the value of the transaction, what it will cost, what are the benefits, what might they have to sacrifice, what will be their reward?
4. Access: Where can the customer find the solution? How easily/locally/remotely can they buy it and take delivery?
This model was proposed by Chekitan Dev and Don Schultz in the Marketing Management Journal of the American Marketing Association, and presented by them in Market Leader, the journal of the Marketing Society in the UK.
[edit] Product focus
In a product innovation approach, the company pursues product innovation, then tries to develop a market for the product. Product innovation drives the process and marketing research is conducted primarily to ensure that profitable market segment(s) exist for the innovation. The rationale is that customers may not know what options will be available to them in the future so we should not expect them to tell us what they will buy in the future. However, marketers can aggressively over-pursue product innovation and try to overcapitalize on a niche. When pursuing a product innovation approach, marketers must ensure that they have a varied and multi-tiered approach to product innovation. It is claimed that if Thomas Edison depended on marketing research he would have produced larger candles rather than inventing light bulbs. Many firms, such as research and development focused companies, successfully focus on product innovation. Many purists doubt whether this is really a form of marketing orientation at all, because of the ex post status of consumer research. Some even question whether it is marketing.
• An emerging area of study and practice concerns internal marketing, or how employees are trained and managed to deliver the brand in a way that positively impacts the acquisition and retention of customers (employer branding).
• Diffusion of innovations research explores how and why people adopt new products, services and ideas.
• A relatively new form of marketing uses the Internet and is called Internet marketing or more generally e-marketing, affiliate marketing, desktop advertising or online marketing. It tries to perfect the segmentation strategy used in traditional marketing. It targets its audience more precisely, and is sometimes called personalized marketing or one-to-one marketing.
• With consumers' eroding attention span and willingness to give time to advertising messages, marketers are turning to forms of permission marketing such as branded content, custom media and reality marketing.
• The use of herd behavior in marketing.
The Economist reported a recent conference in Rome on the subject of the simulation of adaptive human behavior.[7] It shared mechanisms to increase impulse buying and get people "to buy more by playing on the herd instinct." The basic idea is that people will buy more of products that are seen to be popular, and several feedback mechanisms to get product popularity information to consumers are mentioned, including smart-cart technology and the use of Radio Frequency Identification Tag technology. A "swarm-moves" model was introduced by a Florida Institute of Technology researcher, which is appealing to supermarkets because it can "increase sales without the need to give people discounts."
Marketing is also used to promote business' products and is a great way to promote the business.
Other recent studies on the "power of social influence" include an "artificial music market in which some 14,000 people downloaded previously unknown songs" (Columbia University, New York); a Japanese chain of convenience stores which orders its products based on "sales data from department stores and research companies;" a Massachusetts company exploiting knowledge of social networking to improve sales; and online retailers who are increasingly informing consumers about "which products are popular with like-minded consumers" (e.g., Amazon, eBay).
[edit] Areas of marketing specialization
• agricultural marketing
• advertising and branding
• communications
• CRM, Customer Relationship Management
• database marketing
• professional selling
• direct marketing
• event organization
• experiential marketing
• field marketing
• global marketing
• guerilla marketing
• international marketing
• internet marketing
• industrial marketing
• market research
• marketing strategy
• marketing plan
• political marketing
• product marketing
• proximity marketing
• public marketing
• retailing
• search engine marketing
• segmentation
• social media marketing
• sponsorship

Marketing Management

2009-07-05T07:43:00.000-07:00

Marketing management

Marketing management is a business discipline which is focused on the practical application of marketing techniques and the management of a firm's marketing resources and activities. Marketing managers are often responsible for influencing the level, timing, and composition of customer demand accepted definition of the term. In part, this is because the role of a marketing manager can vary significantly based on a business' size, corporate culture, and industry context. For example, in a large consumer products company, the marketing manager may act as the overall general manager of his or her assigned product ^[1]

From this perspective, the scope of marketing management is quite broad. The implication of such a definition is that any activity or resource the firm uses to acquire customers and manage the company's relationships with them is within the purview of marketing management. Additionally, the Kotler and Keller definition encompasses both the development of new products and services and their delivery to customers.

Marketing expert Regis McKenna expressed a similar viewpoint in his influential 1991 Harvard Business Review article "Marketing is Everything." McKenna argued that because marketing management encompasses all factors that influence a company's ability to deliver value to customers, it must be "all-pervasive, part of everyone's job description, from the receptionists to the Board of Directors." ^[2]

This view is also consistent with the perspective of management guru Peter Drucker, who wrote: "Because the purpose of business is to create a customer, the business enterprise has two--and only these two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business."^[3]

But because many businesses operate with a much more limited definition of marketing, such statements can appear controversial, or even ludicrous to some business executives. This is especially true in those companies where the marketing department is responsible for little more than developing sales brochures and executing advertising campaigns.

The broader, more sophisticated definitions of marketing management from Drucker, Kotler and other scholars are therefore juxtaposed against the narrower operating reality of many businesses. The source of confusion here is often that inside any given firm, the term marketing management may be interpreted to mean whatever the marketing department happens to do, rather than a term that encompasses all marketing activities -- even those marketing activities that are actually performed by other departments, such as the sales, finance, or operations departments.^[4] If, for example, the finance department of a given company makes pricing decisions (for deals, proposals, contracts, etc.), that finance department has responsibility for an important component of marketing management – pricing.

[hide]

1 Activities and functions

Activities and functions

The marketing process model based on the publications of Philip Kotler. It consists of 5 steps, beginning with the market & environment research. After fixing the targets and setting the strategies, they will be realised by the marketing mix in step 4. The last step in the process is the marketing controlling.

Marketing management therefore encompasses a wide variety of functions and activities, although the marketing department itself may be responsible for only a subset of these. Regardless of the organizational unit of the firm responsible for managing them, marketing management functions and activities include the following:

[edit] Marketing research and analysis

In order to make fact-based decisions regarding marketing strategy and design effective, cost-efficient implementation programs, firms must possess a detailed, objective understanding of their own business and the market in which they operate.^[5] In analyzing these issues, the discipline of marketing management often overlaps with the related discipline of strategic planning.

Traditionally, marketing analysis was structured into three areas: Customer analysis, Company analysis, and Competitor analysis (so-called "3Cs" analysis). More recently, it has become fashionable in some marketing circles to divide these further into certain five "Cs": Customer analysis, Company analysis, Collaborator analysis, Competitor analysis, and analysis of the industry Context.

The focus of customer care department analysis is to develop a schematic diagram for market segmentation, breaking down the market into various constituent groups of customers, which are called customer segments or market segmentations. Marketing managers work to develop detailed profiles of each segment, focusing on any number of variables that may differ among the segments: demographic, psychographic, geographic, behavioral, needs-benefit, and other factors may all be examined. Marketers also attempt to track these segments' perceptions of the various products in the market using tools such as perceptual mapping.

In company analysis, marketers focus on understanding the company's cost structure and cost position relative to competitors, as well as working to identify a firm's core competencies and other competitively distinct company resources. Marketing managers may also work with the accounting department to analyze the profits the firm is generating from various product lines and customer accounts. The company may also conduct periodic brand audits to assess the strength of its brands and sources of brand equity.^[6]

The firm's collaborators may also be profiled, which may include various suppliers, distributors and other channel partners, joint venture partners, and others. An analysis of complementary products may also be performed if such products exist.

Marketing management employs various tools from economics and competitive strategy to analyze the industry context in which the firm operates. These include Porter's five forces, analysis of strategic groups of competitors, value chain analysis and others.^[7] Depending on the industry, the regulatory context may also be important to examine in detail.

In Competitor analysis, marketers build detailed profiles of each competitor in the market, focusing especially on their relative competitive strengths and weaknesses using SWOT analysis. Marketing managers will examine each competitor's cost structure, sources of profits, resources and competencies, competitive positioning and product differentiation, degree of vertical integration, historical responses to industry developments, and other factors.

Marketing management often finds it necessary to invest in research to collect the data required to perform accurate marketing analysis. As such, they often conduct market research (alternately marketing research) to obtain this information. Marketers employ a variety of techniques to conduct market research, but some of the more common include:

Qualitative marketing research, such as focus groups
Quantitative marketing research, such as statistical surveys
Experimental techniques such as test markets
Observational techniques such as ethnographic (on-site) observation

Marketing managers may also design and oversee various environmental scanning and competitive intelligence processes to help identify trends and inform the company's marketing analysis.

[edit] Marketing strategy

Main article: Marketing strategy

Once the company has obtained an adequate understanding of the customer base and its own competitive position in the industry, marketing managers are able to make key strategic decisions and develop a marketing strategy designed to maximize the revenues and profits of the firm. The selected strategy may aim for any of a variety of specific objectives, including optimizing short-term unit margins, revenue growth, market share, long-term profitability, or other goals.

To achieve the desired objectives, marketers typically identify one or more target customer segments which they intend to pursue. Customer segments are often selected as targets because they score highly on two dimensions: 1) The segment is attractive to serve because it is large, growing, makes frequent purchases, is not price sensitive (i.e. is willing to pay high prices), or other factors; and 2) The company has the resources and capabilities to compete for the segment's business, can meet their needs better than the competition, and can do so profitably.^[5] In fact, a commonly cited definition of marketing is simply "meeting needs profitably." ^[8]

The implication of selecting target segments is that the business will subsequently allocate more resources to acquire and retain customers in the target segment(s) than it will for other, non-targeted customers. In some cases, the firm may go so far as to turn away customers that are not in its target segment. The doorman at a swanky nightclub, for example, may deny entry to unfashionably dressed individuals because the business has made a strategic decision to target the "high fashion" segment of nightclub patrons.

In conjunction with targeting decisions, marketing managers will identify the desired positioning they want the company, product, or brand to occupy in the target customer's mind. This positioning is often an encapsulation of a key benefit the company's product or service offers that is differentiated and superior to the benefits offered by competitive products.^[9] For example, Volvo has traditionally positioned its products in the automobile market in North America in order to be perceived as the leader in "safety", whereas BMW has traditionally positioned its brand to be perceived as the leader in "performance."

Ideally, a firm's positioning can be maintained over a long period of time because the company possesses, or can develop, some form of sustainable competitive advantage.^[10] The positioning should also be sufficiently relevant to the target segment such that it will drive the purchasing behavior of target customers.^[9]

[edit] Implementation planning

Main article: Marketing plan

The Marketing Metrics Continuum provides a framework for how to categorize metrics from the tactical to strategic.

After the firm's strategic objectives have been identified, the target market selected, and the desired positioning for the company, product or brand has been determined, marketing managers focus on how to best implement the chosen strategy. Traditionally, this has involved implementation planning across the "4Ps" of marketing: Product management, Pricing, Place (i.e. sales and distribution channels), and Promotion.

Taken together, the company's implementation choices across the 4Ps are often described as the marketing mix, meaning the mix of elements the business will employ to "go to market" and execute the marketing strategy. The overall goal for the marketing mix is to consistently deliver a compelling value proposition that reinforces the firm's chosen positioning, builds customer loyalty and brand equity among target customers, and achieves the firm's marketing and financial objectives.

Ngalax said that,

In many cases, marketing management will develop a marketing plan to specify how the company will execute the chosen strategy and achieve the business' objectives. The content of marketing plans varies from firm to firm, but commonly includes:

An executive summary
Situation analysis to summarize facts and insights gained from market research and marketing analysis
The company's mission statement or long-term strategic vision
A statement of the company's key objectives, often subdivided into marketing objectives and financial objectives
The marketing strategy the business has chosen, specifying the target segments to be pursued and the competitive positioning to be achieved
Implementation choices for each element of the marketing mix (the 4Ps)

[edit] Project, process, and vendor management

Once the key implementation initiatives have been identified, marketing managers work to oversee the execution of the marketing plan. Marketing executives may therefore manage any number of specific projects, such as sales force management initiatives, product development efforts, channel marketing programs and the execution of public relations and advertising campaigns. Marketers use a variety of project management techniques to ensure projects achieve their objectives while keeping to established schedules and budgets.

More broadly, marketing managers work to design and improve the effectiveness of core marketing processes, such as new product development, brand management, marketing communications, and pricing. Marketers may employ the tools of business process reengineering to ensure these processes are properly designed, and use a variety of process management techniques to keep them operating smoothly.

Effective execution may require management of both internal resources and a variety of external vendors and service providers, such as the firm's advertising agency. Marketers may therefore coordinate with the company's Purchasing department on the procurement of these services.

[edit] Organizational management and leadership

Marketing management usually requires leadership of a department or group of professionals engaged in marketing activities. Often, this oversight will extend beyond the company's marketing department itself, requiring the marketing manager to provide cross-functional leadership for various marketing activities. This may require extensive interaction with the human resources department on issues such as recruiting, training, leadership development, performance appraisals, compensation, and other topics.

Marketing management may spend a fair amount of time building or maintaining a marketing orientation for the business. Achieving a market orientation, also known as "customer focus" or the "marketing concept", requires building consensus at the senior management level and then driving customer focus down into the organization. Cultural barriers may exist in a given business unit or functional area that the marketing manager must address in order to achieve this goal. Additionally, marketing executives often act as a "brand champion" and work to enforce corporate identity standards across the enterprise.

In larger organizations, especially those with multiple business units, top marketing managers may need to coordinate across several marketing departments and also resources from finance, research and development, engineering, operations, manufacturing, or other functional areas to implement the marketing plan. In order to effectively manage these resources, marketing executives may need to spend much of their time focused on political issues and inte-departmental negotiations.

The effectiveness of a marketing manager may therefore depend on his or her ability to make the internal "sale" of various marketing programs equally as much as the external customer's reaction to such programs.^[8]

[edit] Reporting, measurement, feedback and control systems

Marketing management employs a variety of metrics to measure progress against objectives. It is the responsibility of marketing managers – in the marketing department or elsewhere – to ensure that the execution of marketing programs achieves the desired objectives and does so in a cost-efficient manner.

Marketing management therefore often makes use of various organizational control systems, such as sales forecasts, sales force and reseller incentive programs, sales force management systems, and customer relationship management tools (CRM). Recently, some software vendors have begun using the term "marketing operations management" or "marketing resource management" to describe systems that facilitate an integrated approach for controlling marketing resources. In some cases, these efforts may be linked to various supply chain management systems, such as enterprise resource planning (ERP), material requirements planning (MRP), efficient consumer response (ECR), and inventory management systems.

Measuring the return on investment (ROI) of and marketing effectiveness various marketing initiatives is a significant problem for marketing management. Various market research, accounting and financial tools are used to help estimate the ROI of marketing investments. Brand valuation, for example, attempts to identify the percentage of a company's market value that is generated by the company's brands, and thereby estimate the financial value of specific investments in brand equity. Another technique, integrated marketing communications (IMC), is a CRM database-driven approach that attempts to estimate the value of marketing mix executions based on the changes in customer behavior these executions generate.^[11]

PARALLELOGRAM LAW OF VECTOR ADDITION

2009-06-07T04:13:00.000-07:00


	Acccording to the parallelogram law of vector addition:
	"If two vector quantities are represented by two adjacent sides or a parallelogram then the diagonal of parallelogram will be equal to the resultant of these two vectors."
	EXPLANATION
	Consider two vectors . Let t he vectors have the following orientation

	parallelogram of these vectors is :

	According to parallelogram law:

	MAGNITUDE OF RESULTANT VECTOR
	Magintude or resultant vector can be determined by using either sine law or cosine law.

Addition of vectors by Head to Tail method (Graphical Method)

2009-06-07T02:55:00.000-07:00

Head to Tail method or graphical method is one of the easiest method used to find the resultant vector of two of more than two vectors.

DETAILS OF METHOD

Consider two vectors A and B acting in the directions as shown below:

In order to get their resultant vector by head to tail method we must follow the following steps:

STEP # 1

Choose a suitable scale for the vectors so that they can be plotted on the paper.

STEP # 2

Draw representative line of vector
Draw representative line of vector such that the tail of coincides with the head of vector .

STEP # 3
Join 'O' and 'B'.
represents resultant vector of given vectors and i.e.

STEP # 4

Measure the length of line segment and multiply it with the scale choosen initially to get the magnitude of resultant vector.
STEP # 5

The direction of the resultant vector is directed from the tail of vector to the head of vector .

SCALARS & VECTORS

2009-06-07T02:35:00.000-07:00

SCALAR QUANTITIES

Physical quantities which can completely be specified by a number (magnitude)
having an appropriate unit are known as "SCALAR QUANTITIES".

Scalar quantities do not need direction for their description.
Scalar quantities are comparable only when they have the same physical dimensions.
Two or more than two scalar quantities measured in the same system of units are equal if they have the same magnitude and sign.
Scalar quantities are denoted by letters in ordinary type.
Scalar quantities are added, subtracted, multiplied or divided by the simple rules of algebra.

EXAMPLE

Work, energy, electric flux, volume, refractive index, time, speed, electric potential, potential difference, viscosity, density, power, mass, distance, temperature, electric charge etc.

VECTORS QUANTITIES

VECTOR QUANTITIES

Physical quantities having both magnitude and direction
with appropriate unit are known as "VECTOR QUANTITIES".

We can't specify a vector quantity without mention of deirection.
vector quantities are expressed by using bold letters with arrow sign such as:

vector quantities can not be added, subtracted, multiplied or divided by the simple rules of algebra.
vector quantities added, subtracted, multiplied or divided by the rules of trigonometry and geometry.

EXAMPLE

Velocity, electric field intensity, acceleration, force, momentum, torque, displacement, electric current, weight, angular momentum etc.

REPRESENTATION OF VECTORS

On paper vector quantities are represented by a straight line with arrow head pointing the direction of vector or terminal point of vector. A vector quantity is first transformed into a suitable scale and then a line is drawn with the help of the scale choosen in the given direction.

What is the right to education?

2009-06-04T07:47:00.001-07:00

Education is both a human right in itself and an indispensable means of realising other human rights. Education is essential for the development of human potential, the enjoyment of the full range of human rights and respect for the rights of others.

It is the primary vehicle by which economically and socially marginalised adults and children can lift themselves out of poverty and obtain the means to participate fully in their communities. Throughout the world, education is seen as one of the best financial investments that a State can make. The importance of education is not just practical. A well-educated, enlightened and active mind, able to wander freely and widely, is one of the joys and rewards of human existence (UN Economic & Social Council, 1999).

The right to education straddles civil and political rights, and economic, social and cultural rights. Core elements of the right to education, as specified in international treaties, include:

Entitlement to free and compulsory primary education.
Availability of different forms of secondary education.
Access to higher education on the basis of capacity and on non-discriminatory terms.
Availability of accessible educational and vocational information.
Measures developed by the State to ensure full participation in education.
Availability of some form of basic education for those who may not have received or completed primary education.
Protection and improvement of conditions for teachers.
Respect for the right of parents/legal guardians to choose for their children schools other than those established and funded by the State, and to ensure the religious and moral education of their children conforms with their own convictions.
Respect for academic freedom and institutional autonomy. This includes the freedom of, and accompanying obligations on, individuals to express opinions about the institution or system in which they work, to fulfil their functions without discrimination or fear of sanction, and to participate in professional or representative academic bodies.

Katarina Toma s evski , United Nation's Special Rapporteur on the right to education, proposes a set of four broad standards (the 4-A scheme) as the basis for assessing the achievement of the right to education. The standards include:

availability: ensuring free and compulsory education for all children and respect for parental choice of their child's education
accessibility: eliminating discrimination of access to education as mandated by international law
acceptability: focusing on the quality of education and its conformity to minimum human rights standards
adaptability: ensuring that education responds and adapts to the best interest and benefit of the learner in their current and future contexts.

These standards have been adapted for use in the New Zealand context in the form of a Right to Education Framework, He Whare Tāpapa Mātauranga ( Figure 1 ).

Figure 1: The right to education framework: He Whare T āpapa M ātauranga

The right to education involves three key factors: the Government as the regulator, provider and funder of schooling; the student as the bearer of the right to education and the duty to comply with compulsory education requirements; and the child's parents, who are the 'first educators'

Definitions of education

2009-05-23T08:31:00.000-07:00

the activities of educating or instructing; activities that impart knowledge or skill; "he received no formal education"; "our instruction was ...
knowledge acquired by learning and instruction; "it was clear that he had a very broad education"
the gradual process of acquiring knowledge; "education is a preparation for life"; "a girl's education was less important than a boy's"
the profession of teaching (especially at a school or college or university)
the result of good upbringing (especially knowledge of correct social behavior); "a woman of breeding and refinement"
Department of Education: the United States federal department that administers all federal programs dealing with education (including federal aid to educational institutions and students); created 1979
wordnet.princeton.edu/perl/webwn
Education is a stained-glass window commissioned from Louis Comfort Tiffany's Tiffany Glass Company during the building of Yale University's Chittenden Hall (now Linsley-Chittenden Hall, after being connected to a nearby building), funded by Simeon Baldwin Chittenden. ...
en.wikipedia.org/wiki/Education_(Chittenden_Memorial_Window)
The Additional Support for Learning Act is a Scottish law enacted in 2004. It seeks to redefine the area of providing special education to ...
en.wikipedia.org/wiki/Education_(Additional_Support_for_Learning)_(Scotland)_Act_2004
The 1907 Education (Administrative Provisions) Act was an Act of Parliament passed by the Liberal government as part of their Liberal reforms package of welfare reforms. The Act set up school medical services run by local government
en.wikipedia.org/wiki/Education_(Administrative_Provisions)_Act_1907
The French educational system is highly centralized, organised, and ramified. It is divided into three different stages: * primary education (enseignement primaire); * secondary education (enseignement secondaire); * higher education (enseignement supérieur).
en.wikipedia.org/wiki/Education_(France)
An Education is an upcoming coming-of-age drama film directed by Lone Scherfig, written by Nick Hornby, and featuring an ensemble cast headed by newcomer Carey Mulligan. It is currently in post-production, and no official release dates have been announced.
en.wikipedia.org/wiki/An_Education
Education encompasses both the teaching and learning of knowledge, proper conduct, and technical competency. It thus focuses on the cultivation of skills, trades or professions, as well as mental, moral & aesthetic development.
en.wikipedia.org/wiki/Education
The Education (Provision of Meals) Act 1906 is an Act of the Parliament of the United Kingdom (6 Edw. VII c. 57).
en.wikipedia.org/wiki/Education_(Provision_of_Meals)_Act_1906
The process or art of imparting knowledge, skill and judgment; Facts, skills and ideas that have been learnt, either formally or informally
en.wiktionary.org/wiki/education
educate - give an education to; "We must educate our youngsters better"
wordnet.princeton.edu/perl/webwn