ICAEW Summary

Table Of Content
Freewheeling opportunism: ....................................................................................................................... 5
Goals can be related in several ways: ........................................................................................................ 5
Value drivers: .............................................................................................................................................. 5
Financial management decisions: .............................................................................................................. 6
Shareholder Aspects Of Performance ....................................................................................................... 7
Environmental analysis techniques: .......................................................................................................... 8
Porter and Profitability: ............................................................................................................................. 9
Competitor analysis: ................................................................................................................................... 9
Shell Directional Policy Matrix................................................................................................................ 10
Benchmarking and strategic position...................................................................................................... 10
Benchmarking and competitive strategy ................................................................................................ 10
How to achieve overall cost leadership: .................................................................................................. 11
Category of Product on Performance ..................................................................................................... 11
Limitations of porter's generic strategies: .............................................................................................. 11
Acquision ................................................................................................................................................... 12
Consortia: .................................................................................................................................................. 13
Evaluating strategy using SAF model-linking suitability with models: ............................................... 13
Types of due diligence for strategy evaluation: ...................................................................................... 14
Elements to be considered for commercial due diligence: .................................................................... 14
Benefits of big data: .................................................................................................................................. 14
Choosing modes of entry: ......................................................................................................................... 15
Potential impacts of "digital" .................................................................................................................. 15
Porter suggests that potential acquisitions should be assessed against three tests: ............................ 17
Acquisitions and organic growth compared:.......................................................................................... 17
Turnaround strategy ................................................................................................................................ 19
4 v's of operations: .................................................................................................................................... 19
Performance measurement and control: ................................................................................................ 20
Value added networks (VANS):............................................................................................................... 20
Levels of Information strategy: ............................................................................................................... 21
Data analytics: ........................................................................................................................................... 21

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Financial modelling and performance measurement: ........................................................................... 22
Non-financial performance measures ..................................................................................................... 23
Example of balance score card: ............................................................................................................... 23
Aspects of an integrated report................................................................................................................ 24
Marketing audit: ....................................................................................................................................... 24
Market sensing: ......................................................................................................................................... 25
Market analysis: ........................................................................................................................................ 26
Market segments: ...................................................................................................................................... 26
Assessing segment validity: ...................................................................................................................... 28
Micro marketing: ...................................................................................................................................... 28
CRM strategies .......................................................................................................................................... 29
Digital marketing: ..................................................................................................................................... 29
Specific benefits of digital marketing ...................................................................................................... 30
Digital Marketing and CRM .................................................................................................................... 31
Web 2.0 technologies and social media: .................................................................................................. 32
Crowdsourcing: ......................................................................................................................................... 33
Web-based communities ........................................................................................................................... 33
Web 2.0 and social media marketing ...................................................................................................... 35
Brand Identity: .......................................................................................................................................... 35
Brand strategy and marketing strategy .................................................................................................. 37
Sources of brand value: ............................................................................................................................ 40
Branding strategies ................................................................................................................................... 40
Strategic planning and brand development............................................................................................ 41
Offline and online branding ..................................................................................................................... 41
Online brand options ................................................................................................................................ 42
Benefits of brand valuation ...................................................................................................................... 42
Tobin's 'q' .................................................................................................................................................. 42
Cultural influences the risk: .................................................................................................................... 43
Conformance and performance:.............................................................................................................. 43
Risk Manager responsibilities: ................................................................................................................ 44
Risk management function....................................................................................................................... 45
Competition analysis................................................................................................................................. 45
Data analytics: ........................................................................................................................................... 46

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Evaluating enterprise software ................................................................................................................ 47
Cloud computing ....................................................................................................................................... 47
E-commerce strategy ................................................................................................................................ 49
E-business strategies ................................................................................................................................. 49
Quality of Good Information: .................................................................................................................. 50
Managing cyber threats: .......................................................................................................................... 51
Cyber Security and Assurance................................................................................................................. 53
Organizational learning............................................................................................................................ 54
Knowledge management (KM) systems. ................................................................................................. 54
Data Warehouse:....................................................................................................................................... 55
Data mining: .............................................................................................................................................. 56
Business Intelligence: ................................................................................................................................ 57
Bullwhip effect........................................................................................................................................... 57
Vendor-managed inventory (VMI).......................................................................................................... 58
HR and Porter’s five forces analysis: ...................................................................................................... 58
HR and big data ........................................................................................................................................ 59
Remote working (Home working) ........................................................................................................... 59
IT and remote working: ........................................................................................................................... 60
Communication and remote working: .................................................................................................... 60
HR and change agents: ............................................................................................................................. 60
McKinsey 7-5 model ................................................................................................................................. 61
Strategic fund management ..................................................................................................................... 61
Valuation of start-up businesses: ............................................................................................................. 62
Automated trading .................................................................................................................................... 62
Eurobonds or International Bonds.......................................................................................................... 63
Demerger: .................................................................................................................................................. 63
Sell-Offs: .................................................................................................................................................... 64
Spin-offs: .................................................................................................................................................... 65
Carve-outs.................................................................................................................................................. 65
Management buyouts (MBOs) ................................................................................................................. 65
Exit strategies ............................................................................................................................................ 66
Appraisal of MBOS................................................................................................................................... 66
Problems with MBOs ................................................................................................................................ 67

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Leveraged buyouts .................................................................................................................................... 67
Benefits of a share repurchase scheme: .................................................................................................. 68
Issues with a share repurchase scheme: .................................................................................................. 68
Sources of finance for SMEs .................................................................................................................... 68
Enterprise capital funds: .......................................................................................................................... 69
Macro hedging........................................................................................................................................... 70
Benefits and disadvantages of currency swaps: ..................................................................................... 70
Takeover of, or merger with, established firms overseas: ..................................................................... 71
Overseas/Foreign subsidiaries ................................................................................................................. 71
Branches .................................................................................................................................................... 71
Joint Venture ............................................................................................................................................. 72
Borrowing Internationally ....................................................................................................................... 72
Treasury policy.......................................................................................................................................... 73
Centralized or decentralized cash management: ................................................................................... 75
The treasury department as a cost Centre or profit Centre ................................................................. 76
Control of treasury function .................................................................................................................... 76
Global treasury management................................................................................................................... 77
Treasury management .............................................................................................................................. 79
Multicurrency accounts ............................................................................................................................ 79
Taxation Issues .......................................................................................................................................... 79
Working capital financing: ...................................................................................................................... 80
Documentary credits ................................................................................................................................. 80
Forfaiting: .................................................................................................................................................. 81
Credit Insurance: ...................................................................................................................................... 81
Environment, Social, and Governance (ESG): ....................................................................................... 81
The Sustainable Development Goals: ...................................................................................................... 83

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Freewheeling opportunism:
• This approach suggests that firms should not bother with formal plans at all and should simply exploit
opportunities as they arise.
• The advantages of this approach are claimed to be that good opportunities are not lost) it is easier to
adapt to change; and it encourages a more flexible, creative attitude.
• However, the lack of formal planning in freewheeling opportunism means that there is no coordinating
framework for an organization, so that some opportunities get missed anyway.
• This approach can also mean that an organization ends up reacting all the time, rather than developing
its own strategies proactively.

Goals can be related in several ways:

• Hierarchically, as in the pyramid structure outlined above
• Functionally as when colleagues collaborate on a project
• Logistically, as when resources must be shared for used in sequence
• In wider organizational senses, as when senior executives make decisions about their operational
priorities

Value drivers:
In general terms, value drivers are crucial organizational capabilities that provide a competitive advantage
to an organization.
Rappaport's value drivers: In relation to the shareholder value approach (as set out by Rappaport) the
value of a company is dependent on seven drivers of value. In effect, the drivers enable management to
estimate the value of an investment discounting forecast cash flows by cost of capital. However, that
strategy also needs to link to those factors that drive value in the business.
Rappaport identified seven value drivers:
a) Increase sales growth
b) Increase operating profit margin
c) Reduce cash tax rate
d) Reduce incremental investment in capital expenditure
e) Reduce investment in working capital
f) Increase time period of competitive advantage
g) Reduce cost of capital

• The first five drivers can be used to prepare cash flow forecasts for a suitable period.
• The length of this period should be defined according to the likely period of a company's competitive
advantage (driver (f)).
• Discounting these cash flows at the cost of capital (driver (g)) leads to the value of the business's
operations.
• In this respect, the drivers should not all be treated equally Different drivers will be more important
than others in different business. For example, for a hotel business, with a high fixed cost base, the most
important driver is sales, meaning that occupancy rates are a key performance measure for hotels. By
contrast, for a bank lending to corporate customers, profits are driven by the margin between the rate
at which the bank borrows and that at which it lends. That margin is usually slim, so for the bank more
value will be created by improving interest margins and reducing operating costs than by increasing the
volume of business.

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• More generally, the choice of generic strategy Interacts with cost and value: strict control of cost is
obviously fundamental to cost leadership, while differentiation will inevitably have cost implications
associated with such matters as brand communications) product quality and customer service.

Financial management decisions:

In seeking to achieve the financial objectives of an organization, a finance manager has to make decisions
on three interrelated topics:
a. Investment
b. Financing
c. Dividends
Investment decisions:

• The financial manager will need to identify investment opportunities, evaluate them and decide on
the optimum allocation of scarce funds available between investments.
• Investment decisions may be focused on the undertaking of new projects within the existing
business, the takeover of, or merger with, another company or the selling off of a part of the
business.
• Managers have to take decisions in the light of strategic considerations such as whether the business
intends to expand internally (through investment in existing operations) or externally (through
expansion).
Financing decisions:

• Financing decisions include those concerned with both the long term (capital structure) and the
short term (working capital management).
• The financial manager will need to determine the source, cost and effect on risk of the possible
sources of long-term finance. A balance between profitability and liquidity (the ready availability
of funds if required) must be taken into account when deciding on the optimal level of short-term
finance.
• Interaction of financing with Investment and dividend decisions When taking financial decisions,
managers will have to fulfil the requirements of the providers of finance, otherwise finance may
not be made available.
• This may be particularly difficult in the case of equity shareholders, since dividends are paid at the
company's discretion.
• However, if equity shareholders do not receive the dividends they want, they are likely to sell their
shares, in which case the share price will fall, and the company will have more difficulty raising
funds from share issues in future.
• Although there may be risks In obtaining extra finance, the long-term risks to the business of failing
to invest may be even greater and managers will have to balance these risks.
• Investment may have direct consequences for decisions involving the management of finance; extra
working capital may be required if Investments are made, and sales expand as a consequence.
Managers must be sensitive to this and ensure that a balance is maintained between receivables and
inventory, and cash.
• A further issue managers will need to consider is the matching of the characteristics of investment
and finance.
• Time is a critical aspect; an investment which earns returns in the long term should be matched
with finance that requires repayment in the long term.

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 • Another aspect is the financing of international Investments.
• A company which expects to receive a substantial amount of income in a foreign currency will be
concerned that this currency may weaken. It can hedge against this possibility by borrowing in the
foreign currency and using the foreign receipts to repay the loan. However, it may be better to
obtain finance on the international markets.
Dividend decisions:

• Dividend decisions may affect the view that shareholders have of the long-term prospects of the
company, and thus the market value of the shares.
• Interaction of dividend with Investment and financing decisions The amount of surplus cash paid
out as dividends will have a direct impact on finance available for Investment.
• Managers have a difficult decision here: how much do they pay out to shareholders each year to
keep them happy, and what level of funds do they retain in the business to Invest in projects that
will yield long-term income? In addition, funds available from retained profits may be needed if
debt finance is likely to be unavailable, or if taking on more debt would expose the company to
undesirable risks.

Shareholder Aspects Of Performance

Individual shareholders have different definitions of shareholder value as different shareholders value
different aspects of performance:
a. Financial returns in the short term
b. Short-term capital gains
c. Long-term returns or capital gains
d. Stability and security
e. Achievements in products produced or services provided
f. Ethical standards
(It is unlikely that the last two alone make a company valuable to an investor.)
Value-based management: A management process which links strategy management and operational
processes with the aim of creating shareholder value.

• VBM consists of three elements.

• Strategy for value creation-ways to increase or generate the maximum future value for an
organization
• Metrics-for measuring value
• Management managing for value, encompassing governance, remuneration, organization structure,
culture and stakeholder relationships.

• VBM starts with the measurement of future cashflows?

• Value is only exceeded when companies invest at capital returns which exceed the cost of capital
• However, VBM focuses on a company's ability to generate future cash flows rather than looking at the
profits the company has earned or will earn in the short-term future. Proponents of VBM argue that
profit has become discredited as a performance measure.
Elements of VBM: A comprehensive VBM program should consider the following:

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a. Strategic planning-Strategies should be evaluated to establish whether they will maximize shareholder
value.
b. Capital allocation - Funds should be allocated to the strategies and divisions that will create most
shareholder value
c. Operating budgets - Budgets should reflect the strategies the organization is using to create value.
d. Performance measurement - The economic performance of the organization needs to lead to Increases
In share prices, because these promote the creation of shareholder wealth.
e. Management remuneration - Rewards should be linked to the value drivers, and how well value-based
targets are achieved.
f. Internal communication - The background to the programmed and how VBM will benefit the business
need to be explained to staff.
g. External communication - Management decisions, and how they are designed to achieve value, must
be communicated to the market. The market's reaction to these decisions will help determine
movements in the organization's share price.

Environmental analysis techniques:

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Porter and Profitability:
Porter argues that the stronger each of the five competitive forces is the lower the profitability of an
industry. For example, if there are a number of competitors of a similar size in an industry, but the industry
is in the mature stage of its life cycle and the rate of market growth Is low, there is likely to be high rivalry
between the competitors. One firm can only grow by obtaining market share at the expense of its
competitors, so firms will be keen to ensure that the price of their products and the quality or features of
their products matches that of their competitors. However, the Intensity of competition between the firms
in this industry is likely to mean that 7 profitability levels are lower than in an industry dominated by a
monopoly producer and, therefore, in which there is no significant competitive rivalry.
However, the majority of Apple's customers are individuals, and the value of their purchases is very small
compared to Apple's total revenues. As such, at the individual level, the bargaining power of customers is
very weak. Nonetheless, the ease of switching (and low switching costs) increases bargaining power. The
threat of new entrants is controlled by getting a patent, copyrights and trademarks.

Competitor analysis:
• As the name suggests, competitor analysis is an assessment of the strengths and weaknesses of
current and potential competitors.
• This is an important strategic tool - it helps management to understand their competitive advantages
or disadvantages relative to competitors and provides an Informed basis on which to develop
strategies that create or strengthen future competitive advantage.
• The main challenge with competitor analysis is determining how to obtain critical information that
is reliable, up to date and available legally!
Key questions for competitor analysis

• One of the first questions that an organization needs to ask is: Who are the competitors?
• Once it has established this, an organization then has to determine:
• What drives the competitor?
• What are its goals or strategic objectives (e.g., maintaining profitability, building market share and
entering new markets)?
• What assumptions does it hold about itself and the Industry (e.g., trends in the market, products
and consumers)?
• What Is the competitor doing and what can it do?
• What strategies Is the competitor currently pursuing?
• What are the competitor's strengths and weaknesses? What key resources and capabilities does the
competitor have (or not have)?
Competitor response profiles
Once an organization has analyzed its competitors' future goals, assumptions, current strategies and
capabilities, it can begin to ask the crucial questions about how a competitor is likely to respond to any
competitive strategy that the organization might pursue.
Trying to assess what the competitors' responses are likely to be is a major consideration in making any
strategic or tactical decision.
However, if an organization's strategic capabilities are going to deliver competitive advantage for it, then
those capabilities must have four qualities:

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 a. Valuable to buyers - They must produce effects or benefits that are valuable to buyers.
b. Rarity - If a resource or competence is available to an organization's competitors in the
same way as it is to the organization then it does not confer any advantage to the
organization over its rivals.
c. Robustness- In order for a resource or competence to confer a sustainable benefit to an
organization, it must be difficult for competitors to Imitate or acquire.
d. Non-substitutability- A resource or competence is no longer a source of competitive
advantage if the product or service it underpins comes under threat from substitutes.

Shell Directional Policy Matrix

The matrix (developed by Shell in the 1970s) resembles the BCG matrix but measures the attractiveness of
the market (based on its potential profitability) and a company's strength to pursue It (based on the
company's competitive capabilities).
Recommendations based on the position of these two elements are shown below:

Benchmarking and strategic position

• In this respect, benchmarking can be useful in helping an organization assess its current strategic
position (as in a SWOT analysis).
• For example, if an organization believes that one of its strengths is the reliability of its products,
how can it be sure of this unless it has tested the reliability of its' products against the reliability of
other organizations' products?
• Equally, however, If a benchmarking exercise identifies that the organization's products are more
reliable than a competitor's products, the organization could use these findings as the basis for an
advertising campaign.

Benchmarking and competitive strategy

• Benchmarking could also be useful for assessing an organization's generic competitive strategy
(cost leadership or differentiation).
• For example, before an organization decides to implement a cost leadership strategy it would be
useful for the organization to know what its competitors' costs are, and therefore whether it can
beat them.
• If the organization cannot produce a product or service at a lower cost (or at least the same cost) as
its competitors, then it would not seem to be sensible for it to implement a cost leadership strategy.
• The same logic applies to differentiation. Whatever an organization wants its differentiating factor
to be, it needs to measure its performance in that area against its competitors before deciding
whether or not to use it as the basis for its competitive strategy.

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How to achieve overall cost leadership:
• Set up production facilities to obtain economies of scale
• Use technology and high-tech systems to reduce costs and/or enhance productivity
• (Supply chain management and business process re-engineering, which can both be used to help
achieve cost leadership, are discussed in Chapter 3.)
• Exploit the learning curve effect Minimize overhead costs Get favorable access to sources of supply
and buy in bulk wherever possible (to obtain discounts for bulk purchases)
• Product relatively standardized product's
• Relocate to cheaper areas (possibly in a different country)?

Category of Product on Performance

Products may be divided into three categories.
a. Breakthrough products offer a radical performance advantage over competition, perhaps at a
drastically lower price'.
b. Improved products are not radically different from their competition but are obviously superior
in terms of better performance at a competitive price.
c. Competitive products derive their appeal from a particular compromise of cost and performance.
For example, cars are not all sold at rock-bottom prices, nor do they all provide immaculate comfort
and performance. They compete with each other by trying to offer a more attractive compromise
than rival models.
How to differentiate.
a. Build up a brand image (e.g., Pepsi's blue cans are supposed to offer different 'psychic benefits' to
Coke's red ones).
b. Give the product special features to make it stand out (e.g., Mercedes fingerprint recognition
security system on its cars).
c. Exploit other activities of the value chain (e.g., quality of after-sales service and speed of delivery).

Limitations of porter's generic strategies:

Problems with cost leadership
Internal focus. Cost refers to internal measures, rather than the market demand. It can be used to gain
market share, but it is the market share that is important, not cost leadership as such. Economies of scale
are an effective way to achieve low costs, but they depend on high volumes. In turn, high volumes may
depend on low prices which, in turn, require low costs. There is a circular argument here.
Only one firm. If cost leadership applies across the whole industry, only one firm will pursue this strategy
successfully. However, more than one firm might aspire to cost leadership, especially in dynamic markets
where new technologies are frequently introduced. Firms competing across the industry as a whole might
have different competences or advantages that confer cost leadership in different segments.
Sustainability of competitive advantage Even if a company manages to reduce costs below those of its
competitors in the short term, it is debatable whether this will enable it to achieve a sustainable competitive
advantage. Unless the company has an inherent cost advantage over its competitors, they respond to a
company becoming the cost leader by trying to reduce their own costs.

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Higher margins can be used for differentiation. Having low costs does not mean you have to charge
lower prices or compete on price. A cost leader can choose to 'invest higher margins in R&D or marketing'.
Being a cost leader arguably gives producers more freedom to choose other competitive strategies.
There is often confusion about what cost leadership actually means. In particular, cost leadership is often
assumed to also mean low price. However, 'cost leadership' and 'low price' are not necessarily the same
thing?
Problems with differentiation. Porter assumes that a differentiated product will always be sold at a
higher price.
a. However, a differentiated product may be sold at the same price as competing products in order to
increase market share
b. Choice of competitor. Differentiation from whom? Who are the competitors? Do they serve other
market segments? Do they compete on the same basis?
c. Source of differentiation. This includes all aspects of the firm's offer, not only the product.
For example, restaurants try to distinguish themselves from their competitors? through their ambience and
the quality of their service as well as by serving high- quality food.
Focus strategy probably has fewer conceptual difficulties, as it ties in very neatly with ideas of market
segmentation. In practice, most companies pursue this strategy to some extent, by designing
products/services to meet the needs of particular target markets.
'Stuck in the middle' is therefore what many companies actually pursue quite successfully. Any number
of strategies can be pursued, with different approaches to price and the perceived added value (i.e., the
differentiation factor) In the eyes of the customer.
In this way, Porter's model no longer reflects the full range of competitive strategies an organization can
choose from.

Acquision
Purpose and their effect on operations:
1. Marketing advantages
• Reduce Cost By Combining admin and management staff
• Buy in a new (or extended) product range
• Buy a market presence (especially true if acquiring a company overseas)
• Unify sales departments or rationalize distribution and advertising
• Eliminate competition or protect an existing market
• Combine adjoining markets
2. Production advantages
• Economies of scale; increasing capacity utilization of production facilities
• Buy in technology and skills
• Obtain greater production capacity
• Safeguard future supplies of raw materials
• Improve purchasing by buying in bulk and negotiate better term
3. Finance and management
• Buy a high-quality management team, which exists in the acquired company
• Obtain cash resources where the acquired company is very liquid

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 • Obtain assets, including intellectual property,
• Gain undervalued assets or surplus assets that can be sold off
• Turnaround opportunities
• Obtain tax advantages (e.g., purchase of a tax loss company)
4. Risk spreading – diversification
5. Independence: A company threatened by a takeover might take over another company, just to make
itself bigger and so a more expensive target for the predator company.
Problems with acquisition and mergers:

• Cost: They might be too expensive, especially if resisted by the directors of the target company.
• Proposed acquisitions might be referred to the Government under the terms of anti-monopoly
legislation.
• Customers. of the target company might resent a sudden takeover and consider going to other
suppliers for their goods.
• Incompatibility. In general, the problems of assimilating new products, customers, suppliers,
markets, employees and different systems of operating might create 'indigestion' and management
overload in the acquiring company.
• Culture. Culture is one of the main barriers to effective integration following an acquisition.
Companies with different cultures find it difficult to make decisions quickly and correctly, and to
operate effectively. Culture affects decision-making style, leadership style, ability and willingness
to change, and how people work together (e.g., formal structures and informal relationships).
• Poor success record of acquisitions. Takeovers often benefit the shareholders of the acquired
company more than the acquirer. According to the Economist Intelligence Unit, there is a consensus
that fewer than half of all acquisitions are successful.
• Driven by the personal goals of the acquiring company's managers, as a form of sport, perhaps,
rather than as a result of underlying business benefits.
• Public opinion and reaction. For example, the value produced from anger of Kraft's acquisition
of Cadbury In 2010, and Kraft reversing its pledge to keep open a Cadbury plant at Somerdale,
near Bristol.

Consortia:
Organizations cooperate on specific business areas such as purchasing and research-alternate to
merger and acquisition, other alternate Includes forming joint venture, licensing and sub-
contracting. (Joint Venture ka Bhai ha Page 95)

Evaluating strategy using SAF model-linking suitability with models:

Suitability-

• Porter's generic strategies- For example, if an organization is currently employing a cost

leadership strategy and the basis of a proposed strategy is differentiation, this might not be suitable.
• Value chain-Similar Issues could be identified in relation to the activities in the organization's
value chain: will the activities required for the proposed strategy 'fit' with the nature of the activities
in the organization's current value chain.
• BCG matrix How will any new products or business units fit with the existing ones In an
organization's portfolio? Will they improve the balance of the portfolio?

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 • Ansoff's matrix-is the choice of product-market strategy suitable? For example, in order for a
market development strategy to be suitable, there have to be unsaturated markets available which
the organization could move into. At the same time, the organization's product or service has to be
more attractive to customers than any existing competitor offerings so that the customers in the
new market will want to switch to the organization's product.

Types of due diligence for strategy evaluation:

• Financial due diligence-financial position, financial risk and projections
• Commercial due diligence
• Operational due diligence- operational risk and possible improvements
• Technical due diligence- whether success depends on successful new technologies (Industry
specific like IT, pharma.)
• IT and cyber security due diligence
• Legal due diligence and Human resource due diligence-valuation, acquisition process
• Tax due diligence- tax risks and benefits.

Elements to be considered for commercial due diligence:

The information that is relevant to commercial due diligence is likely to include the following:

• Analysis of main competitors

• Marketing history/tactics
• Competitive advantages
• Analysis of resources Strengths and weaknesses
• Integration issues
• Supplier analysis
• Market growth expectations
• Ability to achieve forecasts
• Critical success factors (CSFs)
• Key performance Indicators (KPIs)
• Exit potential
• Management appraisal
• Strategic evaluation

Benefits of big data:

• In terms of decisions:
Faster decisions: Big data can provide more frequent, and more accurate, analysis which helps to speed
up strategic decision making
Better decisions: Big data can estimate the impact of decisions using cross- organizational analysis and
can help to quantify the Impact of decisions Proactive decisions: Use predictive analytics to forecast
customer and market dynamics, which could be used to help shape the decisions.

• Competitive advantage
Customer insight: The amount of data available to organizations about customers (for example, from
interactive websites and other social media platforms (such as Facebook), combined with internal data such

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as customer contact Information and transaction histories) allows organizations to develop new insights
into their customers. In effect, 'big data puts the customer at the heart of corporate strategy
Product Innovation: As well as tailoring products and services more effectively to their customers' needs,
big data can also help companies to improve their products.
Collecting data: The process of gathering data could, in itself, be a source of business, for companies
which collate and organize data from many sources. Companies like Acxiom specialize in gathering data,
which it then sells on to client companies-for example, to Insurance companies who use a range of
Consumer data to assess premiums.

• Marketing
Customer engagement: Big data can provide insight into not only who an organization’s customers are,
but where they are, what they want, how they want to be contacted and when.
Customer retention and loyalty: Big data can help organizations Identify what factors influence customer
loyalty, and what encourages them (or discourages them) to continue to purchase from an organization.
Marketing optimization: Big data, and analytics derived from it, can help organizations determine their
optimal marketing spend across different channels. Analytics can also help organizations measure, in detail,
the Impact of marketing programs.

Choosing modes of entry:

The most suitable mode of entry varies

• Among firms in the same industry (e.g., a new exporter as opposed to a long- established exporter)
• According to the market (e.g., some countries limit imports to protect domestic manufacturers, whereas
others promote free trade)
• Over time (e.g., as some countries become more, or less, hostile to direct inward investment by foreign
companies)

Potential impacts of "digital"

Unconstraint supply: Digital technology has reduced transaction costs and therefore Sources of supply
that were previously impossible (or at least uneconomic) to provide now become accessible.
Remove distortions in demand: Digitization removes distortions in demand by giving customers complete
Information about products, and by unbundling aspects products and services that were previously
combined by necessary convenience.
For example, consumers might always have preferred to buy Individual songs. Digital formats allow them
to download or listen Individual tracks, but previously they had to buy whole albums because that was the
most valuable and cost-effective way for providers to distribute music (on CDs).
Alternatively, In some cases, digitization may lead to re-bundling products or services which were
previously kept separate.
Make new markets: Digitization facilitates new (cheaper and easier) ways to connect supply and demand,
In the light of supply constraints and distortions In demand being removed.

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Airbnb has not constructed new buildings; It has brought people spare bedrooms Into the market. In the
process, It uncovered consumer demand for greater variety in accommodation choice prices and lengths of
stay.
More generally, as constraints over supply and demand are removed, in order for organizations to remain
competitive, they need to give customers what they want, in new, more efficient ways
Create new and enhanced value propositions: As markets evolve, customers’ expectations increase.
Companies meet those heightened expectations with new value propositions – extending product and
services through digital features, digital or automated delivery and distribution models.
In some cases, the new value propositions include giving people what they didn’t even realize they wanted.
For example, few people could have explicitly wished to have the internet in their pockets – until
smartphones presented that possibility.
Many of these new propositions, linking the digital and physical worlds, exploit connectivity and the
abundance of data. For example, Google’s Nest enables people to control their home thermostats from their
smartphones; FedEx gives customers real-time insights into the progress of their deliveries.
Reimagined business systems: Delivering the new value proposition requires companies to rethink, or
reimagine, the business systems underlying them. New entrants can surprise incumbents by introducing
completely different ways to make money.
For example, for many years, hard-drive makers sought to develop increasingly efficient ways to build and
sell storage. Then Amazon (among others) entered the market, and transformed storage from a product to
a service, and Dropbox exacerbated the change by offering free online storage – thereby disrupting the
established value structure of the storage industry.
Hyperscale platforms: Companies like Amazon, Apple, Tencent, Google, Alibaba and Rakuten Ichiba
blur traditional Industry definitions by spanning product categories and customer segments.
By offering a range of different products and services, these companies are able to offer customers a unified
value proposition that extends beyond what they could previously obtain from one Interface."
However, the scale of their operations also enables these companies to gather more information about their
customers. Building up enterprise-wide Information about their customers enables them to optimize the
products and services they provide and helps them offer an Integrated digital experience.
However, the companies can potentially also use this data to identify opportunities to move into new sectors
(for example, Amazon moving Into the grocery market, with Amazon Go). Moreover, these data-driven
companies may, potentially, already have more Information about the customers in a sector they are moving
Into than some of the existing companies in that sector.
The emergence of hyperscale companies across different Industries and markets also means that incumbents
in a particular market need to be prepared for potential moves by players outside their own industries. For
example, camera makers suffered as a result of the smartphone revolution.
One of the potential consequences of the 'hyperscale' model Is that- In future companies may define their
business models, not in terms of how they perform against traditional Industry peers, but by how effective
they are in competing within wider 'ecosystems' comprising a variety of businesses from different sectors.
Examples of platform-based businesses include Airbnb, Amazon, Facebook, Google, Uber

16
Porter suggests that potential acquisitions should be assessed against three tests:
Better off test: Will the company being acquired be better off after the acquisition? Will it gain competitive
advantage from being in the group?"
Attractiveness test: Is the target Industry structurally attractive? (Porter originally developed his tests in
relation to diversification, and so was looking at companies making acquisitions in unrelated Industries.
However, the point about 'attractiveness' could be applied more generally to look at target companies, or
countries)
Cost of entry: The cost of the acquisition (or the cost of entering a new market) must not capitalize all
future profits from that acquisition (or market). In other words, will the future cash flows from the
acquisition be greater than the amounts paid to acquire it?

Acquisitions and organic growth compared:

Advantages of acquisition

• Acquisitions are probably only desirable If organic growth alone cannot achieve the targets for
growth that a company has set for itself.
• Acquisitions can be made to enter new product or geographical areas, markets, much more quickly
• Acquisitions can avoid barriers to entry, If there are significant barriers to entry Into a market (or
there is already Intense competitive rivalry), then it might not be possible for a new entrant to join
the market in its own right. However, acquiring an existing player in the market would enable a
group to join that market.
• Acquisitions can be made without cash If share exchange transactions are acceptable to the
company.
• When an acquisition is made to diversify Into new product areas, the company will be buying
technical expertise, goodwill and customer contracts.
Disadvantages (or risks) of acquisitions

• Cost: They might be too expensive and will involve high Initial capital costs to acquire
shareholdings In the target company. If the acquisition is resisted by the directors and shareholders
of the target company, this may force the offer price to be Increased further.
• Valuation Issues: The management of the target company are likely to know more about its true
value than the acquiring company, and so it could be difficult to arrive at a fair price for the sale
• Customers of the target company might consider going to other suppliers for their goods.
• Incompatibility: In general, the problems of assimilating new products, customers, suppliers,
markets, employees and different systems of operating might create 'Indigestion' and management
overload in the acquiring company. One of the main reasons why acquisitions and mergers fall
because of the lack of 'fit' between the two companies.
• Post-acquisition costs, Even If the acquisition goes ahead, there will be significant costs involve
Integrating the acquired company's systems (production systems, IT systems etc.) with those of the
parent company.
• Lack of Information: Commentators have suggested that the 'acquisitions' market for compared
rarely efficient, This means that companies making an acquisition do not have perfect informed
about the company they are acquiring. This could mean that the price they pay for the acquisition
is too high and/or the future value the company brings to the group is lower than they had
anticipated.

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 • Cultural differences: There may be clashes if the culture and management style of the acquired
company is different to the acquiring one. There Is potential for human relations problems too after
the acquisition.
• Rationalization costs: As the parent organization looks to benefit from synergies after an
acquisition, they often streamline the workforce, leading to redundancy costs, but possibly also
damaging morale among the workforces.
It is worth considering the stakeholders in the acquisition process:

• Some acquisitions are driven by the personal goals of the acquiring company’s managers. For
example, some managers may want to make the acquisition and increase the size of the firm as a
means of increasing their own status and power. Alternatively, other managers may view an
acquisition as a means of preventing their own company being taken over, thereby making their
job safer.
• Corporate financiers and banks also have a stake in the acquisitions process, as they can charge
fees for advice.
Takeovers often benefit the shareholders of the acquired company more than the acquirer. According to the
Economist Intelligence Unit, there is a consensus that fewer than half of all acquisitions are successful. One
of the reasons for failure is that firms rarely take into account nonfinancial factors:

• All acquirers conduct financial audits of target companies, but many do not conduct anything
approaching a management audit.
• Some major problems of implementation relate to human resources and personnel issues such as
morale, performance assessment and culture. If key managers or personnel leave, the business will
suffer.
Another common problem following a merger or acquisition is that the post-acquisition phase is not
properly managed, so the two component companies are never properly integrated. In this way, the
potential benefits of the deal cannot be fully realized.
It may also be the case that an acquisition cannot be pursued due to a likely refusal by government
competition grounds.
Types of change:

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Turnaround strategy
When a business is in terminal decline and faces closure or takeover, there is a need for rapid and extensive
change in order to achieve cost reduction and revenue generation. This is a turnaround strategy.
There are seven elements of this strategy:

• Crisis stabilization: Emphasis is on reducing cost and Increasing revenue

• Leadership strategies: need to change senior management e.g., CEO
• Communication with stakeholders: stakeholders’ analysis should be carried out
• Attention to target markets: A clear focus on the company's core business and appropriate target
market segments
• Concentration of efforts: Resources should be concentrated on the best opportunities to create
value. It will almost certainly be appropriate to review products and the market segments currently
served and eliminate any distractions and poor performers. This may well result in downsizing
• Organizational change: In addition to changes to the senior management team, there may also
need to be changes to the organizational structure and staffing model throughout the company as a
whole. 'People problems' (for example, resistance to change; demoralized staff; and high staff
turnover) are often signs of struggling companies.
• Critical process improvements: The company's strategic focus (and attempts to reduce costs and
increase revenue) will need to be supported by process improvements-for example, through
business process re-engineering.
• Financial restructuring: Some form of financial restructuring is likely to be required. In the worst
case, this may involve trading out of insolvency.
• Prioritization: The eventual success of a turnaround strategy depends, in part, on management's
ability to priorities necessary activities, such as those noted above.

4 v's of operations:

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Performance measurement and control:
All systems of control can be analyzed using the cybernetic model. The essence of this model is the
feedback of control action to the controlled process; the control action itself being generated from the
comparison of actual results with what was planned.
Performance measurement has become such an accepted part of business life that sometimes we lose sight
of its purpose.

• Performance measurement is part of the overall cybernetic (or feedback) control system, providing the
essential feedback spur to any necessary control action.
• It is a major input into communications to stakeholder groups, including the widening field of corporate
reporting.
• It is intimately linked to Incentives and performance management systems, providing evidence of
results against agreed objectives.
• Motivation may be enhanced since managers will seek to achieve satisfactory performance in areas that
are measured. However, when considering feedback loops, It is important to distinguish between
single loop feedback and double loop feedback.
In single loop feedback, changes are made to the system's behavior in order to try to meet the plan. By
contrast, double loop feedback can result in changes being made to the plan itself.
Using a simple example, if an organization's operating profit is below budget, managers could be asked to
identify ways to reduce costs in order to help bring profits back in line with budget. This is single loop
feedback.

Value added networks (VANS):

• VANS are networks that facilitate the adding of value to products and (particularly) to services by the
strategic use of information. Typically, VANS will link separate organizations together through
electronic data Interchanges (EDIs), contributing to the development of business networks.
• VANS give mutual competitive advantage to all their subscribers, but only so long as some competitors
are left outside the system.

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• As soon as membership of the VAN (or a competing VAN) becomes a standard feature of the industry,
the original competitive advantage is lost.
• Competitive advantage based on VAN membership can then only exist if there is more than one VAN
and each VAN in the industry offers a different degree of benefit in terms of cost reduction or
differentiation.

Levels of Information strategy:

IS STRATEGY:

• An IS strategy is concerned with specifying the system's (in the widest meaning of the word) that will
best enable the use of information to support the overall business strategy and to deliver tangible
benefits to the business (for example, through increased productivity, or enhanced profits).
• In this context, a 'system' will include all the activities, procedures, records and people involved in a
particular, aspect of the organization's work, as well as the technology used.
• The IS strategy is focused on business requirements, the demands they make for information of all
kinds and the nature of the benefits that Information system are expected to provide.
• This strategy is very much demand-led and business-driven: each strategic business unit (SBU) in a
large organization is likely to have its own IS strategy.
• The IS strategy is supported by:
IT STRATEGY

• The IT strategy, by contrast, is technology focused and looks at the resources technical solutions and
systems architecture required to enable an organization to Implement it IS strategy,
• IT strategies are likely to look at the hardware and software used by the organization to produce and
process Information.
• They may also include aspects of data capture and data storage, as well as the transmission and
presentation of Information."
IM STRATEGY

• Earl subsequently also highlighted the need for an IM strategy.

• The emphasis here is on management: managing the role and structure of IT activities within an
organization and managing the relationships between its specialists and the users of Information.
• In this respect, a key feature of IM strategy is its focus on roles and relationships
• IM strategy also plays an important part in ensuring that information can be accessed by all the people
who need it but, at the same time, access to Information is restricted to those people who need access
to It:

Data analytics:
Data analytics

• One of the most significant recent developments which has influenced decision-making in
organizations has been the increased importance of data analytics. As ICAEW’s publication ‘Audit
Insights: Data analytics ‘highlights, data analytics covers a wide range of activities including:
o The review of full data sets to find exceptions, and then drilling down into the detail
o The development of meaningful linkages between different data sets and other information

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 o Predictive analytics, including complex modelling, which supports the optimization of decision
making
• As the ICAEW publication notes, data analytics also involves the use of algorithms, visualization and
modelling techniques. “The greatly reduced cost of data storage, efficient algorithms, and better
software generally – visualization software in particular–have made the retrieval and analysis of data,
and its high-quality presentation, much cheaper and faster than was previously possible.”
• Although the speed with which data is available (in real- or near-time) is a major benefit for decision
making, perhaps the most significant benefit of analytics is the level of detail (or ‘granularity’) it can
provide. Granularity can be critical in understanding and managing performance.
• For example, instead of monitoring stock-outs at an aggregate level, analytics could allow a retailer to
identify more detailed patterns – for example, to individual products or suppliers, or to individual stores,
and at specific times. As a result, it can manage inventory and its supply chain more effectively; for
example, if it can identify that many of the stock-outs have been caused by problems with a particular
supplier, or in a particular region, it could investigate the reasons for this – and, if necessary, take steps
to replace suppliers.
• Similarly, the predictive element of analytics can reduce the need for guesswork in decision-making.
For example, instead of using guesswork or intuition – “halve the price and see what happens; this
usually shifts any excess stock” – retailers can use mark-down algorithms to predict the sensitivity of
sales to price reductions much more accurately.

Financial modelling and performance measurement:

Financial modelling might assist in performance evaluation in the following ways.

• Identifying the variables Involved in performing tasks and the relationships between them.
This is necessary so that the model can be built in the first place. Model building therefore shows
what should be measured, helps to explain how a particular level of performance can be achieved,
and Identifies factors in performance that the organization cannot expect to control.
• Setting targets for future performance: The most obvious example of this is the traditional
budgetary control system.
• Monitoring actual performance: A flexible budget is a good example of a financial model that is
used in this way.
• Coordinating long-term strategic plans with short-term operational actions: Modelling can
reflect the dynamic nature of the real world and evaluate how likely it is that short-term actions
will achieve the longer-term plan, given new conditions.

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Non-financial performance measures

Example of balance score card:

• Financial perspective:
o Increase monthly turnover
o Increase monthly operating profit (by division)
o Improve asset utilization
o Increase market share
o Increase ROI
o Increase cash flow
• Customer perspective:
o Increase market share
o Number of new customers attracted
o Extend product range
o Customer satisfaction rating
o Number of recommendations or referrals
o Customer retention rates
o Level of returns/refunds
o On-time delivery
o Percentage of sales from new products (introduced in the last two years)
• Internal business processes:
o Reduce Inventory levels
o Reduce lead times
o Minimize wastage/errors
o Actual delivery dates of new products/services in line with plan
o Reliability and usability (for websites in online business)
o Security of transactions and credit card handling

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 • Innovation and learning perspective (learning and growth):
o Develop new products
o Time to market (time taken for new product Ideas to become 'live')
o Percentage of sales from new products (Introduced in the last two years)
o Number of new products Introduced (< last two years) compared to competitors Ideas from
employees
o Adaptability and flexibility of staff
o Reward and recognition structure for staff

Aspects of an integrated report

In addition to the broad objectives IR should fulfil, the IIRC has suggested that an integrated report should
answer the following questions in general terms:

• Organizational overview and external environment: What do the organization do, and what are
the circumstances under which it operates?
• Governance: How does the organization’s governance structure support its ability to create value
In the short, medium and long term?
• Business model: What is the organization’s business model, and to what extent is it resilient?
• Risks and opportunities: What are the specific opportunities and risks which affect the
organization’s ability to create value over the short, medium and long term; and how is the
organization dealing with them?
• Strategy and resource allocation: Where does the organization want to go, and how does it Intend
to get there?
• Performance: To what extent has the organization achieved its strategic objectives and what are
the outcomes in terms of effects on the six capitals?
• Future outlook: What challenges and uncertainties are the organization likely to encounter in
pursuing its strategy, and what are the potential Implications for its business model and its future
performance?

Marketing audit:
Jobber identifies five aspects of a marketing audit

• Market analysis: This looks at:

• Market size: Market growth and trends
• Customer analysis and buyer behavior
• Competitor analysis: Competitors objectives and strategies; market shares and profitability;
competitors' strengths and weaknesses; barriers to entry
• Analysis of different distribution channels (e.g., in-house vs outsourced; online vs offline)
and their relative strengths and weaknesses
• Supplier analysis: Trends in the supply chain; power of suppliers; strengths and weaknesses
of key suppliers.
• Strategic issues analysis: This involves considering the suitability of an organization’s marketing
objectives in relation to the marketplace and any changes in the market. Points to consider are
likely to include market segmentation; basis of competitive advantage; core competences;
positioning; and product portfolio.
• Review of marketing mix effectiveness: looking at product, price, promotion and distribution.

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 • Marketing structure, including marketing organization (does the organization of the marketing
department fit with the strategy and the market?); marketing training; and intra- and
interdepartmental communication (for example, how well does the marketing department
communicate with production departments?).
• Marketing systems: Three different types of system are considered:
o Marketing information systems: What information about current performance is provided?
Is it sufficient?
o Marketing planning systems: Where are we heading, and how do we get there?
o Marketing control systems: Can the systems provide an evaluation of marketing campaigns
(accurately and on a timely basis)? Do the systems evaluate the key variables affecting
company performance?
We can expand on some elements of the market analysis section of the marketing audit:

• Market size: Refers to both actual and potential (forecast) size. A company cannot know whether
its market share objectives are feasible unless it knows the market’s overall size and the position
of competitors. Forecasting areas of growth and decline is also important (e.g., what stage is a
product at in its life cycle? how durable is the market?).
• Customers: The analysis needs to identify who a company’s (or a brand’s) customers are, what
they need, and characteristics of their buying behavior (where, when and how they purchase
products or services. For example, are there significant geographical variations in customer
requirements or product usage?). This kind of customer analysis could help to point out
opportunities for a company – for example, to expand further into areas where product usage is
currently low.
Companies need to monitor changing customer tastes, lifestyles, behaviors, needs and expectations
so that they can continue to meet existing customer needs effectively, as well as seeking out new
customer needs which have not yet been met.
• Distribution channels: The company will need to evaluate its current arrangements for delivering
goods or services to the customer. Changes in distribution channels can open up new fields of
opportunity (most notably in the growth of e-commerce facilitated by the internet).

Market sensing:
In order to maximize the benefit an organization can get from external appraisal, the organization and its
managers to be skilled in market sensing.
Definition

• Market sensing: How the people within a company understand and react to the external market and
the way it is changing
• Market sensing does not relate primarily to the gathering and processing of Information about
"market (market research) but instead to how this information is Interpreted and understood by the
makers in a company, so that that company can fulfil customers' requirements more successfully
to competitors.
• For example, some market signals may be hard to pick up, even though they may be of long-term
significance. However, companies that are able to identify those signals should be in a better post
respond to them than companies which have failed to pick up the signals.

25
Market analysis:
Aaker and McLoughlin suggest some questions that companies could ask to help them analyses potential
markets, and by so doing, help them decide which markets to enter:

• Submarkets: What submarkets are there within the market; defined by different price points, or
niches for example?
• Size and growth: What are the size and growth characteristics of the market and submarkets within
It? What are the driving forces behind trends in sales? What are the major trends in the market?
• Profitability: How profitable in the market and its submarkets now, and how profitable are they
likely to be in the future? How intense is the competition between existing firms in the market?
How severe are the threats from potential new entrants of substitute products? What is the
bargaining power of suppliers and customers?
• Cost structure: What are the major cost components for various types of competitors, and how do
they add value for customers?
• Distribution channels: What distribution channels are currently available? How are they
changing?
• Key success factors: What are the key success factors, assets and competences needed to compete
successfully? How are these likely to change in the future? Can the organization neutralize
competitors' assets and competences?

Market segments:
Simple segmentation could be on any of the bases below:

Lifestyle segmentation:
Lifestyle segmentation or psychographics seeks to classify people according to their values, opinions,
personality, characteristics and interests.
Importantly, lifestyle segmentation deals with the person as opposed to the product or service being sold
and attempts to discover the particular lifestyle patterns of customers, as reflected in their activities,
interests and opinions. This offers a richer insight into customers' preferences for various products and
services, and hence their propensity to buy them. For example, in marketing its television channels, Sky
has used lifestyle segmentation to target groups with different Interests: such as sports enthusiasts (Sky
Sports), film fans (Sky Movies) and those people who want to keep up to date with news and current affairs
(Sky News).

26
Database marketing, which is becoming much more Important in identifying and targeting market
segments for direct selling, relies heavily on the theories underlying psychographic segmentation.
However, a potential issue that arises with lifestyle segmentation is the extent to which general lifestyle
patterns can predict purchasing behavior in specific markets,
Behavioral segmentation:
Jobber's definition of behavioral segmentation highlights the different bases which could be used,
Definition
Behavioral segmentation seeks to classify people and their purchases according to the benefits sought; the
purchase occasion; purchase behavior; usage; and perception, beliefs and values. (Jobber, D. (2010)
Principles and Practice of Market)
We will look at each of these bases for segmentation In turn:
Bases for behavioral segmentation

27
Assessing segment validity:
Evaluating market segments:
A market segment will only be valid if it is worth designing and developing a unique marketing mix for
that specific segment. The following questions are commonly asked to decide whether or not the segment
can be used for developing marketing plans.
Criteria for assessing segment validity.

Micro marketing:
Segmentation, as part of target marketing, looks likely to play an increasingly important role in the
marketing strategies of consumer organizations in the years ahead. The move from traditional mass
marketing to micromarketing is rapidly gaining ground as marketers explore more cost-effective ways to
recruit new customers. This has been brought about by a number of trends:

• The ability to create large, numbers of product variants without the need for corresponding Increases
in resources is causing markets to become overcrowded.
• The growth in minority lifestyles is creating opportunities for niche brands aimed at consumers with
very distinct purchasing habits.
• The fragmentation of the media to service ever more specialist and local audiences is denying mass
media the ability to assure market dominance for major brand advertisers.
• The advance in information technology is enabling information about individual customers to be
organized in ways that enable highly selective and personal communications.
We will revisit this fourth point in more detail later in this chapter when we look at digital marketing and
the characteristics of Internet and social media marketing. This idea of increasingly detailed market
segmentation is one of the benefits of big data and analytics which we will discuss in Chapter 8.

28
CRM strategies

Digital marketing:
• Digital marketing involves the application of the technologies which form online channels--such
as the internet, email, smartphones, tablets, digital televisions and games consoles-to achieve
marketing objectives.

29
Key marketing functions the Internet can perform,

• Creating company and product awareness: Communicating essential Information about the
company and its brands. Such information may have a financial orientation to help attract potential
Investors, or it may focus on the unique features and benefits of its product lines.
• Branding: With the amount of advertising being devoted to the internet increasing each year, the
frequency of visits to a site will also increase. Consequently, a company's website will play a more
prominent role in building Its brand image. Online communications should therefore be similar in
appearance and style to communications In the traditional media so as to present a consistent brand
Image. Similarly, any dealings a customer has with the online brand should be consistent in terms
of positioning with the traditional (offline) brand.
• Offering Incentives: Many sites offer discounts for purchasing online. Electronic coupons, bonus
offers and contests are now quite common. Such offers are intended to stimulate immediate
purchase before a visitor leaves a website, and also to encourage repeat visits.
• Lead generation: The internet is an Interactive medium. Visitors to a site provide useful
Information about themselves when they fill in boxes requesting more Information from a company
(e.g., name, address, telephone number and email address). A site may also ask for demographic
Information that can be added to the company's database. This information is retained for future
mailings about similar offers, or they can be turned over to a sales force for follow-up if it is a
business-to-business marketing situation.
• Customer service: In any form of marketing, customer service Is Important. Satisfied customers
hold positive attitudes about a company and are therefore more likely to return to buy more goods.
Customer service is often perceived as a weak link in Internet marketing. Customers are concerned
about who they should call for technical assistance or what process to follow, should goods need
to be returned.
Some customer service tactics commonly used Include FAQs and return email systems. However,
if a potential customer registers interest on a company's website and asks to be contacted, if the
company does not respond to that request, the potential customer may take their business elsewhere.
• Email databases: Organizations retain visitor Information in a database. Emailing useful and
relevant information to prospective and existing customers helps build stronger relationships. An
organization must be careful that it does not distribute spam (unsolicited/unwanted email) on the
Internet.
• Online transactions: Organizations are capable of selling online if the website is user friendly.
The ability to sell online could potentially be the most important benefit the internet provides for a
company. However, if a company website is hard to navigate, and it proves difficult for customers
to make a purchase online, this will reduce the company's ability to generate online sales.

Specific benefits of digital marketing

• Global reach: A website can reach anyone in the world who has internet access. This allows
organizations to find new markets and compete globally with only a small investment required.
• Lower cost: A property planned, and effectively targeted digital marketing campaign can reach the
right customers at a much lower cost than traditional marketing methods.
• The ability to track and measure results: Marketing by email or banner advertising makes it
easier for companies to establish how effective their campaigns have been. You can obtain detailed
information about customers' responses to your advertising.

30
 • 24-hour marketing: With a website customers can find out about a company's products even its
physical shops or offices are closed.
• Personalization: If the customer database is linked to the website, then whenever someone visits
the site, they can be greeted with targeted offers. The more they buy from an organization, the more
the organization can refine the customer profile and market effectively to them. (One to one
marketing - Digital marketing helps to reach people who want to know about the products and
services instantly. For example, many people take their smartphones, tablets or Blackberry hand-
held devices with them wherever they go. If they combine this instant communication with the
personalized aspect of digital marketing, companies can create very powerful, targeted campaigns.
• More interesting campaigns: Digital marketing helps to create interactive campaigns using music,
graphics and videos. For example, sending customers a game or quiz-whatever will interest them.
• Better conversion rate: Customers are only ever a few clicks away from completing a purchase.
In contrast to other media which require people to get up and make a phone call, post a letter or go
to a shop, digital marketing is seamless.

Digital Marketing and CRM

• Earlier in this chapter, we discussed the concept of CRM, and the three elements of customer
acquisition, retention and extension,
• The Internet and online techniques can play an important role in these, perhaps most extensively in
relation to customer acquisition.
• The internet offers a number of methods for acquiring customers:
• Search engines: Search engines (such as Google) mean that when users search for relevant key words
or phrases, links to the company's website will appear in their search results. In turn, SEO can be used
as a technique for improving the company's position in the search engine listings.
• Pay per click (or cost per click) advertising Companies can pay other websites to display a banner on
their website, with the hope that potential customers will click on the banner, which then links through
to the company's own website.
• Affiliate marketing: A company rewards affiliates for each visitor or customer who comes to the
company's website through the affiliate's own marketing efforts. Amazon is probably the best-known
example of an affiliate network; with an extensive range of sites directing customers to Amazon to buy
books or music tracks that the affiliates have mentioned on their web pages.
• Comparison sites: Comparison sites (such as [Link]) allow potential
customers to compare the price and features of different products, and If a product compares favorably
to competitor products, this should encourage potential customers to buy It.
• Viral marketing: Social networks are used to increase brand awareness, for example through video
clips or Images being passed from one user to another, A marketer creates the initial promotion (e.g., a
video clip) but then relies on people to distribute it voluntarily across their social network. Therefore,
marketers need to make the promotion appeal to the people who have the highest propensity to pass it
on.
• Business blogs: Companies can use blogs to showcase the knowledge and expertise of their employees,
thereby hopefully attracting new customers. Blog marketing follows a similar logic to viral marketing.
If a business can get itself or its products mentioned on different blogs, that will help generate interest
among prospective customers. However, it Is Important that marketers concentrate their efforts on blogs
covering topics which are relevant to their product or service offering.

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• Retention: The Internet can also be useful for helping to retain customers, for example through the
use of personalized reminder emails, possibly with discount codes or other Incentives, to customers
who. have not made any purchases recently.
• Online communities: The creation of online communities and forums could also help retain customers'
Interest in a product or service. However, these forums can also have an additional benefit for
companies. By reading customers' feedback and comments, businesses can improve their understanding
of customer needs, and can take steps to improve their products or services to address any issues which
are currently attracting criticism on the forums.

Web 2.0 technologies and social media:

The phrase Web 2.0 has become synonymous not only with a new generation of web technologies
software’s, but also with changes in the ways users interact with content, applications and each other One
of the key benefits of Web 2.0 technologies is that they increase opportunities for collaboration with the
sharing of knowledge.
The most commonly used technologies-such as blogs, microblogs (e.g., Twitter), wikis and podcasts can
help companies strengthen their links to customers, especially with the use of automatic Information feeds
such as RSS (Really Simple Syndication). Not only do Web 2.0 technologies allow companies to distribute
information about their products or services but, perhaps more critically, they also invite customer feedback
and even customer participation in the creation of products and services." Earlier in the chapter, we
highlighted the Importance of viewing marketing as a customer-centric process. By enabling marketers and
sales staff to develop better insights into markets, or to interact with consumers, Web 2.0 technologies can
be seen as being Integral to a customer-centric process such as marketing.
Web 2.0 technologies and networked companies
Interestingly, a podcast by McKinsey Quarterly In March 2013 (How companies are benefiting from Web
2.0) suggested that Web 2.0 deployments are not confined to companies' relationships with customers but
can also contribute to workflows and knowledge sharing between employees and help create more
'networked' companies-strengthening the links between companies and their supplies and other business
partners.
If Web 2.0 technologies improve knowledge sharing and access to knowledge within and across companies,
this may also be able to help companies Innovate more effectively.
The potential Impact of Web 2.0 technologies and business strategy
Web 2.0 technologies can provide firms with opportunities in a range of activities-from market research to
marketing, collaboration, Innovation and design.
The importance of user experience and participation
Web 2.0 allows internet users (and potential customers for businesses) no longer simply to be recipients of
information, but also to participate in the creation, sharing and evaluation of content. In other words, users
can actively take part in ‘many to many’ communications. A crucial aspect of Web 2.0 is that it focuses on
user experience and participation.
This is important for businesses. Web 2.0 allows firms of all sizes to engage with customers, staff and
suppliers in new ways. In particular, it allows firms to have a more customer-focused approach to new
product development – because customers can be involved in the design of the new products.

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Web 2.0 has highlighted the significance of dynamic social interactions in the environment, rather than
considering business and business transactions as a set of static business processes.
We have already identified the importance of knowledge to businesses, and Web 2.0 plays an important
role in this ‘knowledge economy’ through supporting collaboration, knowledge sharing and, ultimately,
innovation.
The idea of collaboration is also very important when considering how Web 2.0 technologies could affect
business strategies. The potential impact could be significant if organizations find it becomes as efficient
to do business through collaborating outside the organization’s structure, rather than doing business within
the organization’s own structure.
In effect, collaboration is an extension of the idea of outsourcing, although whereas with outsourcing,
specific processes are outsourced to specific companies, in the case of collaboration, anybody can
contribute to the discussion in progress. (The collaborative online encyclopedia – Wikipedia – is probably
the best-known illustration of this, but Procter & Gamble has also promoted the idea of collaborative
innovation through its ‘Connect + Develop’ programme, in which external innovators form partnerships
with Procter & Gamble to develop new products.)
Companies can also extend this idea of collaboration to involve members of online communities in the
product development process, through crowdsourcing.

Crowdsourcing:
The process by which an entity takes a function previously performed by employees and outsources it to
an undefined and large community of people In the form of an open call.
We will now look at some of the other key aspects of Web 2.0.

Web-based communities
Probably the most popular aspect of Web 2.0 has been social networking sites, such as Facebook, which
now has more than one billion unique visitors.
Web-based communities are enhanced by:

• Social networking-Social networks (such as Facebook) allow users to make contact with other
users. As well as mass market social networks, a number of smaller, more focused niche social
networks have begun to emerge. The value of these sites is that they allow users to connect with
others whom they share a common interest with. For example, LinkedIn is a network for
businesspeople looking to build business contacts, and also to advertise their skills and experience
to potential employers or clients.
• Blogs-Blogs provide an easy way for users to publish their own content. Blogs are usually text
based. Users can publish audio and visual content as podcasts, and the growth of sites such as
YouTube illustrates how popular podcasts have become. The microblogging site Twitter provides
a platform for people who want to publish very short blogs (tweets').
• Wikis-Wikis allow user groups to collaborate in contributing and editing educational or reference-
based content. Wikipedia, the collaborative online encyclopedia, is the best-known example of this.
• Instant messaging-This allows real-time conversations between two or more participants using.
pop-up dialogue boxes (e.g., Instant messaging is now available In Skype).

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These web-based communities mean that web users are now participants in the web experience, rather than
simply being observers. Moreover, these communities allow people to get to know each other and to
Interact, regardless of their physical or geographical location.
Socialization of knowledge sharing
Web 2.0 technologies encourage the socialization of knowledge sharing through:

• Tagging of Information: A tag is a keyword assigned by a user to describe a piece of Information

(such as a file, an image or an internet bookmark). Tagging is a key feature of many Webs 2.0
applications and is commonly used on file storing and file sharing sites. Once a file has been tagged,
the tag allows it to be found again when a relevant search enquiry is made.
Tags are examples of metadata, which is 'data about other data'. The title, author and publication
date of a book are examples of metadata about a book, and this data could help a user find the book
he or she is looking for.
Tagging also highlights an important point which businesses need to consider. The new
technologies mean that the amount of Information on the internet is rising constantly. However,
Information is no use if it can't be found. SEO is therefore increasingly important for businesses
making sure that the information on the website of a business is findable and relevant.
• Mashups: A mashup is a web publication that combines data from more than one source into a
single web page. For example, a restaurant review website could take the location details of all the
local restaurants in an area and map them onto a single Google map page.
• Feedback on sources of Information.
• Promoting collective Intelligence: Collective intelligence refers to both structured and
unstructured group collaboration. It describes the way people's opinions or behaviors can be
aggregated so that others can learn from their collective decision-making.
The online auction site eBay uses collective intelligence to let potential buyers see how efficient and
trustworthy vendors are. Equally, Amazon and a number of online sites include product reviews, allowing
people who have purchased an item to comment on the Item and rate its performance.
Amazon also uses collective intelligence to make product recommendations based on purchasing patterns.
When a user selects an item to buy, he or she is presented with a list of other items purchased by people
who have already bought the current selection, which may encourage a user to make follow-up purchases.

• User generated content: Websites can now have sections of content created by their readers. One
of the main Ideas behind Web 2.0 technologies Is that users can generate the content of sites
themselves and these technologies allow users to create, capture and share information across the
web. The video streaming website, YouTube, and the image and video hosting website, Flickr, are
popular examples: content sharing sites.
• Consumer generated content (CGC): Websites can now contain shared feedback from
consumers; for example, product reviews. This has important implications for businesses, because
it means customers can communicate with other (potential) customers very easily. If a customer
receives poor customer service, they can now tell everyone else about it, which could damage the
business's reputation, and lead to a decline in sales.
The most widely known example of CGC is the user reviews developed by Amazon noted above.
Mark customers review users' product reviews when assessing prospective purchases.

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Web 2.0 and social media marketing
Social media marketing: Refers to the process of acquiring customers, and attracting the attention of
potential customers, through social media sites.
Social media risks
The report identifies four main risks from using social media:

• Damage to brand reputation

• Disclosure of proprietary and/or confidential information
• Corporate identity theft
• Legal, regulatory and compliance violations
Brands and strategic performance

• Traditionally, a brand is a name, term, sign, symbol or design intended to identify the product of a
seller and to differentiate it from those of competitors.
Strong brands can enhance business performance through their influence on key stakeholder
groups. For example:
• Customer: Influencing customer choice, and creating loyalty
• Employees: Attract, motivate and retain talent
• Investors: Lowering the cost of financing
The Influence of brands on customers is a particularly important driver of economic value. Strong
brands help shape customer perceptions and therefore purchase behavior, making products and
services less substitutable. In this way, brands help to create and sustain demand, allowing their
owners to enjoy higher returns.

Brand Identity:
Brand Identity conveys a lot of Information very quickly and concisely. This helps customers to identify
the goods or services and thus helps to create customer loyalty to the brand. It is therefore a means of
Increasing or maintaining sales. (In some extreme cases, a strong brand could even act as a barrier to
entry, preventing potential entrants from entering a market if they think customers will not be persuaded
to move away from the brand.)
Where a brand image promotes an idea of quality, a customer will be disappointed if their experience of a
product or service fails to live up to expectations. Quality assurance and control is therefore of the utmost
Importance. It is essentially a problem for service Industries such as hotels, airlines and retail stores, where
there is less possibility than in the manufacturing sector of detecting and rejecting the work of an
operator before it reaches the customer. Inappropriate or unhelpful behavior by an employee in a face-
to-face encounter with a customer will reflect on the entire company and possibly deter the customer from
using any of the company's services again.
Brand awareness is an indicator of a product's/organization’s place in the market. Recall tests can be
used to assess the public's brand awareness.

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Reasons for branding
The following are reasons for branding:

• It is a form of product differentiation, conveying a lot of Information very quickly and concisely.
This helps customers to identify the goods or services readily and thereby helps to create customer
loyalty to the brand. It is therefore a means of increasing or maintaining sales.
In this way, a brand can also act as a barrier to entry. If a supplier has already established a strong
brand in a market, it will discourage new entrants Into that market.
• Advertising needs a brand name to sell to customers, so advertising and branding are very closely
related aspects of promotion; the more similar a product (whether an industrial/commercial or
consumer) is to competing goods, the more branding is necessary to create a separate product
identity.
• Branding leads to a readier acceptance of a manufacturer's products by wholesalers and retailers.
• It facilitates self-selection of goods in self-service stores and also makes it easier for a manufacturer
to obtain display space in shops and stores.
• It reduces the Importance of price differentials between products.
• Brand loyalty in customers gives a manufacturer more control over marketing strategy and of
choice of channels of distribution.
• Other products can be introduced into a brand range to 'piggyback' on the articles already known
to the customer (but Ill-will as well as goodwill for one product in a branded range will be
transferred to all other products in the range). Adding products to an existing brand range is known
as brand extension strategy.
• It eases the task of personal selling (face to face selling by sales representatives).
• Branding makes market segmentation easier. Different brands of similar products may be
developed to meet the specific needs of different categories of users.
The relevance of branding does not apply equally to all products. The cost of Intensive brand advertising
to project a brand Image nationally may be prohibitively high. Products which are sold in large numbers,
on the other hand, promote a brand name by their existence and circulation.
Brand strength: The brand management consultancy, Interbrand, has highlighted a range of factors which
determine a brand's strength. If organizations are trying to manage or sustain their brands, they would be
advised to check how well their brands perform against these factors.

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When looking at strategies to maintain or develop their brands, companies should consider how well the
proposed strategies will help to strengthen these factors.
However, it is also important to ensure that the brand's position fits with the other elements of the marketing
mix.
Note: The link back to the Idea of positioning which we covered in section 3 of this chapter. Brands can be
positioned against competitor brands on product maps defined In terms of how buyers perceive key
characteristics of the brands.

Brand strategy and marketing strategy

Brand positioning is a crucial part of marketing strategy. As we identified in section 3 of this chapter,
positioning is the ‘act of designing the company’s offer and image so that it occupies a distinct and valued
place in the target customer’s mind.’ As its name implies, positioning involves finding an appropriate
position for a product or service in the marketplace so that consumers think about that product or service in
the ‘right’ way. Equally, brand positioning involves identifying the optimal location of a brand in the minds
of consumers, and in relation to its competitors, to maximize the potential benefit of the brand to the
company which owns it.
If we consider the general functions of a brand (per the bullet points below), we can see how closely they
are also linked to the logic of positioning:

• To distinguish a company’s offering, and to differentiate one particular product from competitor
products.
• To deliver an expected level of quality and satisfaction
• To help with promotion of the product and to develop awareness of it.

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Brand positioning should help to guide marketing strategy by clarifying what a brand is; how it is unique
or different from competing brands; and why consumers should purchase and use the brand.
Once a brand’s positioning strategy has been determined, the brand’s marketers can then develop and
implement their marketing strategy to create, strengthen or maintain brand associations. In this respect,
obtaining an appropriate combination of the ‘marketing mix’ elements (4 Ps, or 7 Ps) will be very important
when designing the marketing campaigns to support the brand.
Product: The product (or service) is central to brand equity because it is the primary influence on
consumers’ experience with a brand, as well as on what they hear about a brand from others, and about
what a company can tell consumers about the brand in any marketing communications.
Products must be designed, manufactured, marketed, sold, delivered and serviced in a way which creates a
positive brand image with customers. If a company does not have a product or service which satisfies
customer needs (particularly in relation to perceived quality and value), that company will not be able to
develop a successful brand or engender any customer loyalty to that brand.
The importance of acquiring and retaining loyal customers has led to relationship marketing becoming a
priority for branding. The marketers who are most successful at building customer-based brand equity will
be those who ensure they understand their customers and understand how to deliver value to their customers
before, during and after purchase.
Price: The price element of the marketing mix pricing policy for a brand is very important because it can
play a key role in shaping consumers’ perceptions of a product (e.g., as being high, medium or low-priced).
However, price often also has an association with quality; and consumers often infer the quality of a product
or service on the basis of its price.
In some cases, consumers are willing to pay a premium for certain brands because of what they represent.
But in terms of preparing a marketing strategy to develop a brand, it is important to ensure that the price is
consistent with the perceived quality or value of a product to the customer. The benefits delivered by a
product, and its competitive advantages compared to rival products, can often have a significant impact on
what consumers believe to be a fair price for a product.
In this context, the concept of value pricing could be very useful. The objective to value pricing is to
identify the right blend of product quality, product costs and product prices to satisfy both the needs and
wants of consumers and also the profit targets of the company.
Place: The manner in which a product is sold or distributed can have a profound impact on the sales success
of a brand. In this respect, channel strategy (the way firms distribute their products to consumers) is
important for building and maintaining a brand.
In this respect, channel strategy involves deciding whether to sell directly to customers or to sell through
third-party intermediaries (e.g., wholesalers and retailers). In either case, however, it is important to ensure
that the shop’s image is aligned to the brand’s image – for example, it would not seem appropriate to use a
discount retailer for selling a brand which seeks to emphasize high quality and luxury as differentiating
factors.
Another important decision in relation to channel strategy is whether to sell online, offline or through a
combination of both.

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For many companies, the best channel strategies will be ones which develop an integrated shopping
experience, combining physical stores and internet. For example, Nike sells its products through a range of
department and clothes shops as well as through some of its own ‘Nike Town’ shops.
Alongside this, Nike’s own e-commerce website ([Link]) allows customers to buy directly from it
online, while a number of the other shops which stock Nike products also have their own ecommerce
websites.
Promotion: It should be obvious that the aim of promotion and marketing communications should be to
increase consumers’ knowledge of a brand and to entice them to buy that brand.
Companies have a wide range of potential communication options they could use for a marketing campaign:
for example, broadcast media, print media, direct response (e.g., phone calls), online advertising, consumer
and trade promotions, and event marketing and sponsorship. Crucially, however, when deciding on its
promotion strategy, a company must evaluate the effectiveness and efficiency with which that strategy
affects brand awareness, and how it creates or strengthens favorable brand associations.
In their text Strategic Brand Management, Keller et al highlight a number of marketing communications
guidelines (shown in the table below). The need to focus on well-defined target markets is particularly
relevant here because it again highlights the link to positioning. Equally, the need for consistency across all
communications options can be seen as a parallel reminder of the need for consistency between an
organization’s brand and its strategy.

• Be analytical: Use frameworks of consumer behavior and managerial decision-making to develop

well-reasoned communication campaigns.
• Be curious: Use a variety of forms of research to understand consumers better, always thinking
how you can create value for consumers.
• Be single-minded: Focus your message on well-defined target markets.
• Be integrative: Reinforce your message through making that message consistent across all
communication channels and media, and by using communication tools in a
• consistent manner.
• Be creative: State your message in a unique fashion; use different proposition and media to create
acquirable, strong and unique brand associations.
• Be observant: Keep track of competition, competitors, channel members and employees through
monitoring their activities.
• Be patient: Take a long-term view of communication effectiveness to build and manage brand
equity.
• Be realistic: Understand the complexities involved in marketing communications and keep the
objectives of marketing communications "SMART".

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Sources of brand value:

Branding strategies
In the previous section, we looked at ways a company could manage or sustain its existing brand. However,
companies may also want to use branding strategies to develop and expand their brands. Kotler has
identified the following five strategies a company can use once it has established its brand(s):

• Line extension – An existing name is applied to new variants of existing products, for example
Coca-Cola launching Diet Coke.
• Brand extensions – Using an existing brand to launch a product in a new category, for example
chocolate bars such as Mars or Galaxy and Mars/Galaxy ice creams.
• Multi-branding – Launching several brands in the same category, for example Kellogg’s offers a
range of breakfast cereals with their own brands – for example, All-Bran, Cornflakes, Coco Pops,
Rice Krispies.
• New brands – New products are launched under their own brand, for example Coke attempting to
sell bottled water under the ‘Dasani’ brand.
• Co-branding – Two brands are combined in an offer, for example Sony PlayStations were offered
in a package with a Tomb Raider game.
The decision as to whether a brand name should be given to a range of products, or whether products should
be branded individually, depends on quality factors.

• If the brand name is associated with quality, all goods in the range must be of that standard.
• If a company produces different quality (and price) goods for different market segments, it would
be unwise to give the same brand name to the higher and the lower-quality goods because this could
deter buyers in the high quality/price market segment.

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Strategic planning and brand development
The 'classic' approach to developing brands is outlined below. Brands are developed from the strategic plan
and are part of the hierarchy.

Offline and online branding

IT and the Internet have particular implications for branding.

• The domain name is a vital element of the brand.

• Brand values are communicated within seconds via the experience of using the brand website.
• Online brands may be created in four ways:
o migrate the traditional brand.
o extend the traditional brand.
o partner with an existing digital brand –
o create a new digital brand.

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Online brand options
Migrate traditional brand online: This can make sense if the brand is well known and has a strong
reputation e.g., Marks & Spencer, Orange and Disney. However, there is a risk of jeopardizing the brand's
good name if the new venture is not successful.
Extend traditional brand: A variant. For example, before the growth of online shopping, when Aspirin
could only be bought over the counter In shops and pharmacies, Aspirin's brand positioning statement was
'Aspirin-provides Instant pain relief. However, management felt this didn't work as a meaningful statement
in relation to e-commerce, because consumers can't get instant pain relief on the web. So, the brand
positioning statement was changed to 'Aspirin-your self-help brand', and the website offered 'meaningful
health-oriented Intelligence and self-self-help.
Partner with an existing digital brand: Co-branding occurs when two businesses put their brand name
on the same product as a joint Initiative. This practice is quite common on the internet and has proved to
be a good way to build brand recognition and make the product or service more resistant to copying by
private label manufacturers.
Create a new digital brand: Because a good name is extremely Important, some factors to consider when
selecting a new brand name are that it should suggest something about the product (e.g., Betfair), be short
and memorable, be easy to spell, translate well into other languages and have an available domain name.

Benefits of brand valuation

Companies may find brand valuation useful for the following reasons:

• Making decisions on business Investments: Treating the brand in a comparable way to other
Intangible and tangible assets will assist the company when making resource allocation decisions
between different asset types (for example, on the basis of ROI requirements).
• Organizing and optimizing the use of different brands: in the business, according to the
contributions they make to creating economic value.
• Making decisions about licensing the brand to subsidiary companies: If subsidiaries are granted
a license, they will be accountable for the brand's management and use. An asset that has to be paid
for is likely to be managed more rigorously than one that is free.
• Transfer pricing: Assessing fair transfer prices for the use of brands in subsidiary companies.
• Acquisition: Most Importantly, as we have already noted, brand valuation will be crucial for
determining a price for brand assets in the context of an acquisition. Although IAS 38 dictates that
internally generated brand value cannot be capitalized in a company's own statement of financial
position, if a company is being taken over, then the value of its brands will need to be calculated
when assessing the values of the net assets acquired.
Brands can be a key driver of acquisition premiums in mergers and acquisitions, because "brand"
offers the potential to enter new markets and expand into adjacent categories.

Tobin's 'q'
The Nobel prize-winning economist, James Tobin, developed the ‘q’ method initially as a way of predicting
investment behavior.
‘q’ is the ratio of the market capitalization of the firm (share price × number of shares) to the replacement
cost of its assets.

42
If the replacement cost of assets is lower than the market capitalization, q is greater than unity and the
company is enjoying higher than average returns on its investment (‘monopoly rents’).
Technology and so-called ‘human capital’ assets are likely to lead to high q values. Tobin’s ‘q’ is affected
by the same variables influencing market capitalization as the market to book method. In common with that
method, it is used most appropriately to make comparisons of the value of intangible assets of companies
within an industry that serve the same markets and have similar tangible non-current assets. As such, these
methods could serve as performance benchmarks by which to appraise management or corporate strategy.

Cultural influences the risk:

Adams argued that there are four viewpoints that are key determinants in how risks are viewed.
Fatalists: Think they have no control over their own lives; hence risk management is pointless.
Hierarchizes: Most likely to exist in a bureaucratic organization, with formal structure and procedures.
Will emphasize risk reduction through formal risk management procedures.
Individualists: Seek to control their environment rather than let their environment control them. Often
found in small/single person-dominated organizations with less formal structures; hence, risk management
too will be informal if considered at all.
Egalitarians: Loyal to groups but have little respect for procedures. Often found in the public sector, non-
profit-making activities; prefer sharing risks as widely as possible or transferring risks to those best able to
bear them.

Conformance and performance:

Conformance focuses on controlling pure (only downside) strategic risks. It highlights compliance with
laws and regulations, best practice governance codes, fiduciary responsibilities, accountability and the
provision of assurance to stakeholders in general. It also includes ensuring the effectiveness of the risk
analysis, management and reporting processes, and that the organization is working effectively and
efficiently to achieve its goals.
Performance focuses on taking advantage of opportunities to increase overall returns within a business. It
includes policies and procedures that focus on alignment of opportunities and risks, strategy, value creation
and resource utilization, and guides an organization’s decision-making.
Enterprise risk management (ERM) is a process, effected by an entity's board of directors’ management
and other personnel, applied in strategy setting and across the enterprise, identify potential events that may
affect the entity and manage risks to be within its risk appetite order to provide reasonable assurance
regarding the achievement of entity objectives.
Committee of Sponsoring Organizations Define ERM: The Committee of Sponsoring Organizations of
the Treadway Commission (COSO) goes on to expand its definition. It states that enterprise risk
management (ERM) has the following characteristics.

• It is a process, a means to an end, which should ideally be intertwined with existing operations and
exist for fundamental business reasons.
• It is operated by people at every level of the organization and is not just paperwork. It provides a
mechanism for helping people to understand risk, their responsibilities and levels of authority.
• It is applied in strategy setting, with management considering the risks in alternative strategies.

43
 • It is applied across the enterprise. This means it takes into account activities at all levels of the
organization, from enterprise-level activities such as strategic planning and resource allocation, to
business unit activities and business processes. It includes taking an entity-level portfolio view of
risk. Each unit manager assesses the risk for his unit. Senior management ultimately consider these
unit risks and also Interrelated risks. Ultimately, they will assess whether the overall risk portfolio
is consistent with the organization’s risk appetite.
• It is designed to Identify events potentially affecting the entity and manage risk within its risk
appetite, as well as the amount of risk it is prepared to accept in pursuit of value. The risk appetite
should be aligned with the desired return from a strategy.
• It provides reasonable assurance to an entity's management and board. Assurance can, at best, be
reasonable, since risk relates to the uncertain future.
• It is geared to the achievement of objectives in a number of categories, including supporting the
organization’s mission, making effective and efficient use of the organization’s resources, ensuring
reporting is reliable, and complying with applicable laws and regulations.
As these characteristics are broadly defined, they can be applied across different types of organizations,
industries and sectors. Whatever the organization, the framework focuses on achievement of objectives.
An approach based on objectives contrasts with a procedural approach based on rules, codes or procedures.
A procedural approach alms to eliminate or control risk by requiring conformity with the rules. However,
a procedural approach cannot eliminate the possibility of risks arising because of poor management
decisions, human error, fraud or unforeseen circumstances arising.
Framework of ERM
The COSO framework consists of eight interrelated components.

• Objective setting
• Event identification
• Risk assessment
• Risk response
• Internal environment or control environment
• Control activities or procedures
• Information and communication
• Monitoring

Risk Manager responsibilities:

The risk manager will need technical skills in credit, market and operational risk. Leadership and persuasive
skills are likely to be necessary to overcome resistance from those who believe that risk management is an
attempt to stifle initiative. The risk manager is typically responsible for:

• Providing the overall leadership, vision and direction for enterprise risk management (ERM).
• Establishing an integrated risk management framework for all aspects of risk across the
organization, integrating ERM with other business planning and management activities, and
framing authority and accountability for ERM in business units.
• Promoting an ERM competence throughout the entity, including facilitating the development of
technical ERM expertise, helping managers align risk responses with the entity’s risk tolerances
and developing appropriate controls.

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 • Developing risk management policies, including the quantification of management’s risk appetite
through specific risk limits, defining roles and responsibilities, ensuring compliance with codes,
regulations and statutes, and participating in setting goals for implementation.
• Establishing a common risk management language that includes common measures around
likelihood and impact, and common risk categories. Developing the analytical systems and data
management capabilities to support the risk management programme.
• Implementing a set of risk indicators and reports including losses and incidents, key risk
exposures and early warning indicators. Facilitating managers’ development of reporting protocols,
including quantitative and qualitative thresholds, and monitoring the reporting process.
• Dealing with insurance companies: An important task because of increased premium costs,
restrictions in the cover available (will the risks be excluded from cover?) and the need for
negotiations with insurance companies if claims arise. If insurers require it, demonstrating that the
organization is taking steps to actively manage its risks. Arranging financing schemes such as self-
insurance or captive insurance.
• Allocating economic capital to business activities based on risk and optimizing the company’s
risk portfolio through business activities and risk transfer strategies.
• Reporting to the chief executive on progress and recommending action as needed.
Communicating the company’s risk profile to key stakeholders such as the board of directors,
regulators, stock analysts, rating agencies and business partners.

Risk management function

• Setting policy and strategy for risk management
• Primary champion of risk management at a 'strategic and operational level
• Building a risk-aware culture within the organization, including appropriate education
• Establishing internal risk policy and structures for business units
• Designing and reviewing processes for risk management
• Coordinating the various functional activities which advise on risk management issues within
organization.
• Developing risk response processes, including contingency and business continuity program
• Preparing reports on risks for the board and stakeholders

Competition analysis
Reports on competition within a particular industry or market may focus on profitability, revenues and
market share. You may be required to comment on aspects of competition and profitability, and the
implications for the future of the business.
Several models that you may remember from your previous studies could provide a useful checklist of
issues that may be relevant for analysis and comment.

• Porter's five forces model identifies five factors within an industry or market that affect the
strength of competition within the market and so the potential for profitability. Profitability will be
limited in markets where the following forces are strong.
o Competition between firms: that are already in the market: both price and non-price
competition affects profit margins.

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 o Low barriers to entry: When new entrants are able to enter a market easily, it will be
Impossible for existing firms to sustain high levels of profitability for long. High profits
will attract new entrants, and the added competition will reduce prices and profit margins.
o Supplier strength: When a market has a small number of dominant suppliers, or a single
monopoly supplier, costs of supply are likely to be high and opportunities for supply
flexibility are low.
o Buyer strength: When a market is dominated by a small number of buyers, the buyers are
able to put pressure on companies In the Industry to sell to them at low prices. An example
is the ability of large supermarket companies to demand low prices from their suppliers
and squeeze profit margins in Industries such as food manufacturing and farming.
o Availability of substitute products: Profit margins in a market may be low when
consumers have a choice of available alternatives and can switch between the different
products or services. For example, prices of tickets to live entertainment events may be
restricted by the alternative that consumers have to watch the event on subscription
television.
• A strategic report may discuss a company's product portfolio.
• The Boston Consulting Group (BCG) matrix provides a method of analyzing the product
portfolio of a company into cash cows, stars, question marks and dogs. A company needs a
sufficient number of cash cows to generate profits and funding for new investments. It also needs
'stars' that currently require substantial Investment but are expected to be successful and the cash
cows of tomorrow. For question marks, the strategic problem may be to decide whether to stop
investing In the product and use resources elsewhere.
• A strategic report may discuss the position of an Individual product in terms of sales growth,
profitability and Investment requirements. Product life cycle analysis can be used to assess the
position within its life cycle where a product has reached:
o Early Introduction and early growth phases, where revenues are small, investment
requirements are high, the product is making a loss and cash flows are negative.
o A rapid growth phase where new Investment is still required, but revenues grow strongly,
and the product eventually becomes profitable and generates positive cash flows
o A maturity phase, where the product becomes a cash cow.
o A decline phase, where sales revenues fall, and a decision for the company is whether to
withdraw from the product market, or whether to remain in the market, but operating at
lower levels of output.
• The checklist of Issues in the above list provides a basis for analyzing strategic reports on
competition within an industry and product-market area. As stated earlier, checklists do not provide
answers, but a framework for analysis.

Data analytics:
Although much of the focus in this section of the chapter is on the increasing amounts of data available to
organizations – so called ‘big data’– it is important to stress that data analytics does not relate only to
‘big data’.
Data analytics is the process of collecting and examining data in order to extract meaningful business
insights, which can be used to inform decision-making and improve performance. As such, data analytics
can be applied to internal data as well as external data. For example, data analytics techniques could be
applied to sales or purchases data to discover patterns or trends in them.

46
However, sales or purchases data – as part of a company’s traditional accounting records – could not really
be described as ‘big data’.
The words of Bernard Marr, one of the leading writers on big data, are instructive here:
“…[O]n one hand Big Data is changing the world because we now have so much more data and new data
formats. But on the other, nothing much has changed because we are still seeking to use data and
information to inform corporate decision-making. The only real difference is that we now have new data
formats that we can use and new technology to actually analyses that data and leverage it.” (Bernard Marr
(2015), Big Data: using smart big data, analytics and metrics to make better decisions and improve
performance; Wiley; Chichester.)
As such, the process of analyzing data, reporting results, and use those results to make decisions remains
crucial for business managers, whether they are using internal data, or external, ‘big data’ data sets. Having
said that, the primary focus of section 6 of this chapter is on big data, and the potential benefits and insights
it can provide to organizations.

Evaluating enterprise software

The increased importance of IT and software to business operations means that selecting the right systems
and software is becoming increasingly important for organizations.
Aspects which an organization should consider when selecting IT systems/software include:

• Reliability: assurance about the integrity and consistency of the application and all its transactions
• Interoperability: the system’s ability to interface and share data with other systems (including external
systems)
• Leveragability: the ability to access stored data and other system resources at all times and from
everywhere within the enterprise
• Scalability: the ability to continue to provide the required quality of service as the load or usage
increases
• Security: the ability to allow certain users access to application functions and data while denying access
to other users
• Maintainability and manageability: the ability to correct flaws in the system and to ensure the
continued health of the system without adversely affecting other components of the system.
• Portability: the ability of the software to run on a variety of hardware and operating systems

Cloud computing
The delivery of on-demand computing resources – everything from applications to data centers – over the
internet on a pay-for-use basis.

• Private cloud: Cloud services are supplied on an Infrastructure that belongs to only one customer.
The service can be managed by the customer themselves, or by the supplier.
• Public cloud: The cloud service is owned and provided by a supplier who serves multiple
organizations through the same infrastructure system.
• Community cloud: A cloud shared by a particular community of organizations with common
interests or data protection concerns.
• Hybrid cloud: A cloud that is a combination of two or more distinct cloud infrastructures (private,
community or public).

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Cloud computing technologies have changed the ways in which organizations store and manage their data.
An increasing amount of organizational data is now held in servers operated by cloud-based service
providers. In effect, cloud computing is the access to business services through the internet. There could
take the form of:

• Software as a service: e.g., anti-virus software. The software is hosted in the cloud but appears on
users' devices with full functionality. This type of cloud service is the most common and is often
aimed directly at the end user (e.g., Hotmail; Gmail).
• Platform as a service: e.g., Windows Azure. For a fee, the cloud provider offers virtual space in
which customers can host and develop their own applications.
• Infrastructure as a service: e.g., data storage and back-up. Cloud storage can handle all kinds of
structured and unstructured data.
Benefits and risks of cloud computing
Cloud computing ('public cloud") can provide an organization with a number of benefits:

• Cost effectiveness: using cloud computing services may be more cost effective than operating in-
house technology. Moreover, cloud computing could remove the capital costs required for buying
hardware; replacing them with revenue costs for the cloud-based services that an organization uses.
• Flexibility: cloud computing offers companies the capacity to scale up their capacity as required,
and so can be ideal for businesses with growing-or fluctuating-service demands. Operational agility
is one of the main drivers for cloud adoption.
In a similar vein, establishing a cloud-based approach to data storage and management can be done
faster than establishing the technology in-house.
• Accessibility: storing organizational data in the cloud means that it is accessible anywhere around
the world where there is internet connectivity, for I-Cloud-based services can also be very useful
for Increased collaboration between teams working In different locations. Similarly, this can also
Improve document control. Instead of having to send files as email attachments to be worked on
by colleagues (with the associated risk of conflicting versions, formats etc.) the cloud enables all
files to be stored centrally, so that everyone can see the same version of a file.
• Availability: cloud computing is available both to large organizations and much smaller entities
alike. This could be particularly important for small companies looking to establish themselves in
a market-because the cloud gives them access to cutting-edge technology, without the need for
significant capital Investment.
• Automatic software updates: cloud service providers roll out regular software updates- including
security updates-so organizations don't have to worry about updating systems software or systems
themselves.
Cloud computing vs owned technology
In the preceding sections, we have looked at the potential benefits, and risks, associated with cloud
computing. The balance between these benefits and risks becomes critical for senior management within
organizations when they are deciding whether their organization should pursue a cloud-based approach to
data management, or whether to continue to manage data in-house using owned hardware and software.
The answer to such a question could depend on a number of factors. Organizations with IT staff that possess
the levels of expertise required to manage IT systems may prefer to retain data storage and data management
in-house. Similarly, complex data compliance requirements, or a risk averse attitude among senior

48
management about allowing external parties to control organizational data, will make in-house data
management more likely.
Conversely, for organizations, particularly small and medium-sized entities that need a multi-national or
global presence but lack the necessary IT expertise and resources to manage their data and infrastructure
in-house, a cloud-based approach could be an appropriate choice.
A related question for organizations to consider is: what data will they store in the cloud? In particular, will
personal data be part of the data accessed or stored in a cloud computing service? Personal data is subject
to data protection laws and an organization must still comply with those laws even if it uses external
providers.
Typically, in law, the cloud service provider is viewed as a data processor, acting on the instructions of the
data controller (the organization using the cloud platform). As such, the data controller is required to ensure
that its agreement with the cloud provider meets data protection standards, and that it minimizes the risks
of data misuse or loss.

E-commerce strategy
Most experts agree that a successful strategy for e-commerce cannot simply be bolted on to existing
processes, systems, delivery routes and business models. Instead, management groups have, in effect, to
start again by asking themselves fundamental questions.

• What do customers want to buy from us?

• What business should we be in?
• What kind of partners might we need?
• What categories of customer do we want to attract and retain?
In turn, organizations can visualize the necessary changes at three interconnected levels:
Level 1: the simple introduction of new technology to connect electronically with employees, customers
and suppliers (e.g., through an intranet, extranet or website)
Level 2: reorganization of the workforce, processes, systems and strategy in order to make best use of the
new technology
Level 3: repositioning of the organization to fit it into the emerging e-economy So far, very few companies
have gone beyond Levels 1 and 2. Instead, pure internet businesses such as Amazon have emerged from
these new rules. Unburdened by physical assets, their competitive advantage lies in knowledge
management and customer relationships.

E-business strategies
We can identify three broad types of e-business strategy which a company can employ to help it gain a
competitive advantage:
Cost and efficiency Improvements: Focus on improving efficiency and lowering costs by using the
Internet and other digital technologies as a fast, low-cost way to communicate and interact with customers,
suppliers and business partners (e.g., use of email to communicate with customers; and EDI to communicate
with suppliers)

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Performance Improvement in business effectiveness: Make major Improvements in business
effectiveness-for example, the use of intranets can substantially improve information sharing, collaboration
and knowledge management within a business or with its trading partners
Product and service transformation: Developing new internet-based products and services or supporting
entry into new markets (including e-commerce which enables access to a global marketplace).

Quality of Good Information:

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Managing cyber threats:
CESG has identified 10 key steps which it believes are crucial in helping organizations to protect themselves
against the majority of cyber threats:

• Defining the organization’s risk management regime: This is central to an organization’s cyber
security strategy, because it helps to determine the organization’s risk appetite.
• User education and awareness: Produce user security policies covering acceptable and secure use
of the organization’s systems. Establish a staff training programme. Maintain user awareness of the
cyber risks.
• Home and mobile working: Develop a mobile working policy and train staff to adhere to it. Ensure
all devices comply with the minimum requirements of the policy. Protect data in transit and at rest
(e.g., through storing devices securely).
• Secure configuration: Apply security patches and ensure that the secure configuration of all ICT
systems is maintained.
• Removable media: Produce a policy to control all access to removable media (e.g., USB sticks).
Limit media types and use. Scan all media for malware before importing on to the corporate system.
• Managing users’ privileges: Establish account management processes which control user
privileges and monitor user activity (e.g., monitoring websites users visit).
• Incident management: Establish an incident response and disaster recovery capability (including
the creation of an incident management team). Produce and test incident management plans. Report
criminal incidents to law enforcement.
• Monitoring: Establish a strategy for monitoring all ICT systems and networks, and then
continuously monitor them. Analyze logs for any unusual activity that could indicate an attack.
• Malware protection: Establish anti-malware defenses that are applicable and relevant to all
business areas. Scan for malware across the organization.
• Network security: Protect the organization’s networks against external and internal attack.
Manage the network perimeter. Filter out unauthorized and malicious content. Monitor and test
security controls.
ICAEW'S IT faculty has identified its own '10 steps to cyber security, which-not surprisingly-reiterate
some of the steps Identified by CESG:

• Allocate responsibilities: As with any business activity, It's crucial to identify what must be and
who will do it. Overall responsibility should rest with a senior manager (for example, the CIO).
who has a broad view of all the risks and how to tackle them. Other Individuals can then be assigned
specific roles-for example, Installing security software.
Management should Identify the information and technology which are really vital to the business,
and therefore where the key risks lie. For example, damage to a business's financial system, or loss
of its customer list could lead to the failure of the business.
Identifying the key risk areas, then establishing what security measures already exist, whether they
work, and what extra measures may be required will allow an organization to target its security
efforts where they are most needed.
• Protect your computers and your network: Malicious activity could come from outside a
business or from inside. Attacks from outside (e.g., from hackers) can be protected by installing a
firewall.
The firewall can also be used to manage staff's Internet activity, for instance by blocking access to
sites where employees might encounter security risks.

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• Keep your computers up to date: Suppliers of software and operating systems (such as Windows)
frequently Issue software updates (patches) to fix problems or to improve security. It's essential to
keep all computers and other devices up to date with the latest patches. A single, vulnerable
computer in a network can put all the others at risk.
• Control employee access to computers and documents: Although computers should be guarded
with a firewall, it is still necessary to protect user accounts and documents with passwords. Each
individual user should have a unique username and password, which can be used to regulate users'
access to different parts of the system.
The use of passwords and access rights not only controls staff access to systems and information,
but it can also provide further security against outside intrusions.
• Protect against viruses: Ensure that computers are fitted with up-to-date anti-virus software. This
software regularly scans a computer in search of malicious software (or 'malware') and deletes any
that is found. Regular updates to fend off new threats are key to anti-virus software.
• Extend security beyond the office: If employees work away from the office-using laptops, phones
or tablets-make sure these are also covered by anti-virus software, password protection and (where
applicable) a firewall. Ensure that sensitive data is kept in an encrypted are of the computer or
device. Employees should also be reminded of the potential dangers of connecting to unencrypted
public Wi-Fi, because hackers can intercept data.
• Don't forget disks and drives: Removable disks and drives (such as USB sticks) pose security
risks In two ways: they can Introduce malware into computers, and they can be mislaid when
containing sensitive Information.
Ensure that as far as possible, employees only use disks and drives owned by their business are
used In their computers and set up anti-malware software to scan them whenever they are used in
the office.
• Plan for the worst: No system is 100% secure, so it is worth planning how you would react if
things went wrong. Do you need external help (e.g., a specialist computer company)? Do you need
to contact key customers or suppliers to explain there is a problem? Can some functions be
continued using other computers while systems are repaired?
Ensure there is a clear plan identifying who is responsible for doing what in an emergency. This
may Incorporate elements of plans for other disasters, such as a fire on the business' premises.
• Educate your team: It is vital to tell everyone in the business that security matters, and to ensure
that they know how they can help to uphold security (for example, by keeping passwords safe, and
changing them regularly).
Training sessions or written policy documents may help remind staff about the importance of
security, and the risks they may face. For example, reminding them not to click on web links or
email attachments from unfamiliar sources.
Employees also need to watch out for social engineering (or 'phishing) where hackers try to trick
them into revealing details that make an organization’s computers vulnerable.
• Keep records and test your security: Maintaining security is an ongoing, not a one-off fix, so it's
Important to keep clear records-for example, keeping a record of the hardware and software an
organization uses will help build up a picture of your business's security status, and spot potential
weak points.

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Audit insights: cyber security recommends that businesses should instigate the following measures:

• Embed a greater awareness of cyber risk throughout their strategy and operations.
• Build a security-focused culture based on continuous improvement and integrated thinking
around cyber security, rather than seeing it as a series of one-off tactical activities.
• Improve cyber risk reporting: make cyber risk reporting more transparent, qualitative and focused
on the impact of security investments.
• Reduce the complexity of the IT environment: standardizing systems where possible and mitigate
risks through effective controls between legacy and modern environments.
• Manage talent: develop talent management strategies at all levels of the organization.
• Apply discipline: focus on applying strong discipline around security, and consistently complying
with good practices.
o Learning from past security breaches.
o Determining the organization’s tolerance to the cyber risks
o Ensuring that non-executive board members play an active role in promoting cyber
security during their interactions with the board.

Cyber Security and Assurance

Cyber Essentials
In the UK, a third framework for assessing cyber security in an organization is Cyber Essentials, which the
government launched in June 2014, and which forms a pre-requisite for suppliers bidding for many central
government contracts.
Cyber Essentials requires an organization to assess its system security in relation to five key control areas:

• Service configuration: ensuring that systems are configured in the most secure way for the needs
of the organization
• Boundary firewalls and internet gateways: these are designed to prevent unauthorized access to
or from private networks, but good setup of them in hardware of software form is important for
them to be effective.
• Access control: ensuring only those people who should have access to systems do have access,
and at the appropriate level
• Malware protection: ensuring that virus and malware protection is installed and is kept up-to date
• Patch management: ensuring that the latest supported version of applications is used, and all the
necessary patches supplied by the vendor have been applied.
The Cyber Essentials assessment can be applied at two levels:

• The basic Cyber Essentials certification is awarded on the basis of a verified self-assessment.
Organizations assess themselves against the five key control areas via a questionnaire, which is
approved by a senior executive such as the CEO. An independent, qualified assessor then verifies
the information provided to assess whether an appropriate standard has been achieved for
certification to be awarded.
This option offers a basic level of assurance but can be achieved at low cost.
• Cyber Essentials PLUS provides a higher level of assurance. A qualified and independent assessor
examines the same five controls, testing that they work in practice by simulating hacking and
phishing attacks.

53
 Because of the more resource intensive nature of this process, Cyber Essentials PLUS is much more
expensive that Cyber Essentials. However, the level of assurance provided is correspondingly
higher.

Organizational learning.
• Organizational learning is particularly important in the increasing number of task environments
that are both complex and dynamic It becomes necessary for strategic managers to promote and
foster a culture that values Intuition, argument from conflicting views, and experimentation.
A willingness to back ideas that are not guaranteed to succeed is another aspect of this culture;
there must be freedom to make mistakes.
• The aim of knowledge management is to exploit existing knowledge and to create new knowledge
so that it may be exploited in tum. This is not easy. All organizations possess a great deal of data,
but it tends to be unorganized and Inaccessible. It is often locked up Inside the memories of people
who do not realize the value of what they know. This is what Nonaka calls tacit knowledge. Even
when it is made explicit (available to the organization) by being recorded in some way, it may be
difficult and time consuming to get at, as is the case with most paper archives. This is where
knowledge management technology can be useful-for example, intranets, databases and other
knowledge repositories.
Learning Organizations: Learning organizations are organizations where people continually expand their
capacity to create the result they truly desire, where new and expansive patterns of thinking are nurtured,
where collective aspiration is set free, and where people are continually learning to see the whole together.
(Peter Senge)
Johnson, Scholes and Whittington also highlight the Importance of knowledge in learning organizations:
Learning organization is capable of continual regeneration from the variety of knowledge, experience and
skills of Individuals within a culture that encourages mutual questioning and challenge around shared
purpose or vision (Johnson, Scholes and Whittington)

Knowledge management (KM) systems.

Laudon and Laudon highlight that one apt slogan of knowledge management is 'Effective knowledge
management is 80% managerial and organizational, and 20% technology. In other words, the culture and
patterns of behavior in an organization need to support knowledge management. IT cannot support
knowledge management by itself. For example, in order for knowledge to be shared between teams,
members from different teams have to be prepared to share it.
In terms of actually developing and Implementing a KM strategy, there are five main steps to consider:

• Support from senior management. Senior management support will be needed not only to
provide the necessary resources and to lead the development of a knowledge-based culture, but also
because if senior managers are not seen to be supporting the strategy, then other staff will not do
so either.
• Installing the IT Infrastructure: IT hardware and software will need to be acquired to ensure that
the organization has the capabilities to capture, store and communicate knowledge.
• Developing the databases: Advanced databases and database management systems may need to
be developed (either in house' or 'In the cloud), with the details of their design and structure being
tailored to the type of knowledge the organization is looking to capture.

54
 • Develop a sharing culture: Knowledge is widely known to represent power, and staff are likely
to want to hoard the knowledge they have already accumulated rather than to share it. A culture of
knowledge sharing must be developed.
• Capturing and using the knowledge: Existing knowledge needs to be captured and recorded in
the databases. Staff then need to be trained how to use the databases and encouraged to do so.

Data Warehouse:
Data warehouse: A data warehouse consists of a database containing data from various operations systems
and reporting and query tools.
Features of data warehouses
A data warehouse is subject-oriented, integrated, time-variant and non-volatile.

• Subject-oriented: A data warehouse is focused on data groups, not application boundaries.

Whereas the operational world is designed around applications and functions such as sales and
purchases, a data warehouse world is organized around major subjects such as customers, suppliers,
products and activity.
• Integrated: Data within the data warehouse must be consistent in format and codes used – this is
referred to as integrated in the context of data warehouses. For example, one operational application
feeding the warehouse may represent sex as ‘M’ and ‘F’, while another represents sex as ‘1’ and
‘0’. While it does not matter how sex is represented in the data warehouse (let us say that ‘M’ and
‘F’ is chosen), it must arrive in the data warehouse in a consistent, integrated state. The data import
routine should cleanse any inconsistencies.
• Time-variant: Data is organized by time and stored in time-slices. Data warehouse data may cover
a long-time horizon, perhaps from 5 to 10 years. Data warehouse data tends to deal with trends
rather than single points in time. As a result, each data element in the data warehouse environment
must carry with it the time for which it applies.
• Non-volatile: Data cannot be changed within the warehouse. Only load and retrieval operations
are made.
Advantages of setting up a data warehouse system include the following:

• Enhances strategic decision making: The warehouse provides a single source of authoritative
data which can be analyzed using data mining techniques to support strategic decision making.
Basing decisions on data (rather than having to rely on gut instinct) should also enhance the quality
of decisions being made.
• Data quality and consistency: Having a single source of data available will reduce the risk of
inconsistent data being used by different people during the decision-making process. This means
managers should be able to have greater confidence in the accuracy of the data on which decisions
are being made.
• Saves time: Data warehousing can enable faster responses to business queries, by storing data in
an easily accessible central repository and enabling data to be retrieved from multiple sources. By
providing users with data from a number of sources in one place, data warehouses mean that
informed decisions can be made more quickly. In addition, managers and executives can interrogate
the data themselves without relying on the IT department to generate reports for them.
• Data warehouses have proved successful in some businesses for:
• quantifying the effect of marketing initiatives

55
 • improving knowledge of customers
• identifying and understanding an enterprise’s most profitable revenue streams
• In this way, data warehouses (and data mining) allow organizations to use the data they hold to
help improve their competitiveness.
Limitations of data warehouses

• Some organizations find they have invested considerable resources implementing a data warehouse
for little return. To benefit from the information a data warehouse can provide, organizations need
to be flexible and prepared to act on what they find. Other Limitations exist, particularly if a data
warehouse is intended to be used as an operational system rather than as an analytical tool.
o The data held may be outdated.
o An efficient regular routine must be established to transfer data into the warehouse.
o A warehouse may be implemented and then, as it is not required on a day-to-day basis, be
ignored
• Another important consideration is the quality of data in the warehouse. We have noted that one
of the advantages of a data warehouse is that it improves decision-making, but this will only be the
case if the into the warehouse, but a data cleansing exercise will take time and require suitably
skilled staff.
• There is also an issue of security.
• This conflict can be managed by encrypting data at the point of capture and restricting access by
a system of authorizations entitling different users to different levels of access. For this to work,
the data held must be classified according to the degree of protection It requires; users can then be
given access limited to a given class or classes of data. Encryption at the point of capture also exerts
control over the unauthorized uploading of data to the data warehouse.

Data mining:
• While a data warehouse is effectively a large database which collates Information from a wide
variety of sources, data mining is concerned with the discovery of meaningful relationships in the
underlying data. Data mining software looks for hidden patterns and relationships in large pools of
data. Data mining is primarily concerned with analyzing data. It uses statistical analysis tools to
look for hidden patterns and relationships (such as trends and correlations in large pools of data!
The value of data mining lies in its ability to highlight previously unknown relationships.
• In this respect, data mining can give organizations a better Insight into customer behaviors and
can lead to increased sales through predicting future behavior.
• When a supermarket customer pays for their shopping using a loyalty card, the supermarket can
create a record of the items the customer has bought: The purchasing behavior of customers can be
used to create a profile of what kinds of people the cardholders are
• Data mining techniques could be applied to customers' purchasing Information to identify patterns,
in the items which were purchased together or what types of items were omitted from shopping
baskets, and how the make-up of customers' baskets varied by different types of customers. The
supermarket could then target its promotions to take advantage of these purchasing patterns.
• In this way, by identifying patterns and relationships, data mining can guide decision-making.
True data mining software discovers previously unknown relationships. The hidden patterns and
relationships the software Identifies can be used to guide decision-making and to predict future
behavior.

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 • In Chapter 5 we considered how obtaining detailed customer Information is an important element
of CRM.
• Obtaining detailed customer Information allows a firm to identify customer needs arid develop"
improved ways of meeting those needs, as well as targeting marketing campaigns to specific
customers, bringing relevant new products or services to their attention.
• Customer loyalty/reward cards can provide valuable information about the buying habits and
patterns of customers, but more generally the process of gathering and storing data about customers
and then analyzing patterns is an application of data warehousing and data mining,

Business Intelligence:
Business intelligence (BI) refers to technologies, applications and practices for collecting, integrating,
analyzing and presenting business information.
Analytics relates to the use of (a) data and evidence, (b) statistical, quantitative and qualitative analysis, (c)
explanatory and predictive models, and (d) fact-based management to drive decision making.
Together, they include approaches for gathering, storing, analyzing and providing access to data helps users
to gain insights and make better fact-based business decisions, to Improve performance help cut costs or to
help Identify new business opportunities. Examples of Bl and analytics applications Include:

• measuring, tracking and predicting sales and financial performance

• budgeting, financial planning and forecasting
• analyzing customer behaviors, buying patterns and sales trends
• tracking the performance of marketing campaigns
• Improving delivery and supply chain effectiveness
• CRM
• risk analysis
• strategic value driver analysis
Overall, a company also needs intelligence about its business environment to enable it to anticipate change
and design appropriate strategies that will create business value for customers and be profitable in new
markets and new industries in the future. Not only does a company have to anticipate the future, but it also
needs the capability to react to that future successfully. (This reiterates the point we noted in section 3.8
earlier, that the speed and effectiveness with which an organization reacts to opportunities and threats could
be a dynamic capability for it.)

Bullwhip effect
In theory, collaboration and connectivity should enable this: customers order products, the vendor keeps
track of what is being sold and orders enough materials or inputs from supplier to meet customers’ demand
and replenish inventory levels in line with expected future demand.
However, in practice, the supply chains are not always this coordinated. Suppliers, manufacturers,
salespeople and even customers often have an incomplete understanding of what the real demand is. These
dynamics create inaccuracy and volatility in production levels, and these (inaccuracies and volatility)
increase for operations further upstream in the supply chain.
This increase is known as the bullwhip effect, because the increasingly large disturbances in the chain as
they work their way to the end resemble the oscillations in a whip when it is cracked.

57
Each group in the supply chain (suppliers, manufacturers, sales staff) only has control over part of the chain,
but the decisions they take (for example, ordering too much or too little) affect production or inventory
levels throughout the whole chain. Furthermore, each group in the chain is influenced by decisions that
others are making.

Vendor-managed inventory (VMI)

• One way of reducing fluctuations in demand and production throughout the supply chain is to allow an
upstream supplier to manage the inventories of its downstream customer. This is known as VMI. Under
a VMI model, the (downstream) buyer of a product provides information about customer demand to
the (upstream) supplier of that product, and the supplier manages production levels in order to maintain
an agreed inventory of the product to meet demand.
• VMI encourages a closer relationship and understanding between buyer and supplier, and it helps
reduce both the levels of inventory in the supply chain and the risk of stock-out situations. Because the
vendor is responsible for supplying the buyer when items are needed, this removes the need for the
buyer to hold significant levels of safety stock.
• However, a crucial element in VMI working effectively is the use of EDI between the buyer and
supplier; for example, so that the supplier knows the quantity of a product the buyer has sold to end
user customers. Effective VMI also uses statistical methodologies and demand-planning tools to help
forecast and maintain the correct levels of inventory in the supply chain (taking account of variables
such as promotions or seasonality, for example).
• A crucial difference between a VMI system and traditional supply chain arrangements is that the
vendor receives data from the buyer rather than purchase orders. Instead of the downstream buyer
making purchase orders and ‘pulling’ supply through the system, the upstream supplier now initiates
the order (based on the purchase information they receive) and they ‘push’ supplies through the system.

HR and Porter’s five forces analysis:

HR can play an important role in reducing the adverse effect of the five forces for an existing member of
the industry. Some forces are more susceptible to HRM than others.

• Barriers to entry: To enter an industry, an organization needs staff of the right quality, ability and
cost. Assuming that entry is not achieved by takeover, then almost certainly recruitment will be
required, and this can be difficult if there is a shortage of suitable candidates either already trained or
wanting to train. Increasingly, many industries have a higher technical content in their jobs today and
more qualified employees are therefore needed. Additionally, many economies have moved from
manufacturing to service industries and, because more employees have dealings with customers,
employees with better interpersonal skills might be needed. Remember, if a poor product is
manufactured it can be identified through the quality assurance process. Poor service is often delivered
instantly and can cause immediate damage to customer relations.
• Suppliers: Supplier power can derive from various factors such as the number of suppliers in the
market, how specialized their goods are, geographical proximity and the fact that the organization
requires goods of a certain standard in a certain time. HRM can help to erode supplier power by ensuring
that buyers have comprehensive knowledge about suppliers and their products and have good
negotiating skills. Additionally, partnership sourcing is becoming more common. This is where a
purchaser and supplier build a long-term relationship involving mutual trust and recognize that they
need each other if they are to be successful.

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• Bargaining power of customers: The bargaining power of customers is high if there are only a few of
them and each buys a large quantity, and also if customers buy mainly on price. The bargaining power
of customers can be reduced by finding more customers and by trying to lock in all customers. HR,
for example through suitable training, can do this by:
o Raising switching costs in both cash terms, and in terms of operational inconvenience. An example
is where staff provide exceptionally good service, or design, manufacturing and dispatch are
excellent.
o Finding more customers. Recruitment of and training a good sales team and, increasingly, the
establishment of a good internet site are essential for this.
• Rivalry/competition: Winning over competitors depends on the nature of the competition. Cost levels
will be affected by wage levels, recruitment and training. Differentiation will be affected by recruiting
talented people and managing them in an appropriate way.
• Substitutes: The emergence of substitute products and services is difficult to predict. HRM can,
however, play important roles as follows:
▪ The adoption of substitutes. For example, it can be argued that cheap airlines have become a
substitute for some car and train journeys. If an airline wants to win part of that type of business it
will have to adopt HR policies that are consistent with the cheap airline model with regards to wages,
job flexibility and working hours.
▪ The invention of substitutes. The marketing, research and development and production departments
can all contribute here. Recruiting and developing creative people in an environment conducive to
conceiving new products and services is vital.

HR and big data

• We have highlighted how big data and big data analytics could provide opportunities for organizations
to improve their business insight and their decision-making. However, one of the key challenges which
big data presents is getting from the underlying data to interesting and useful information. The
exploiting big data requires:
o skills in computing and the manipulation of data.
o statistical skills to build models.
o knowledge of the business areas to ask the right questions and enable interpretation of the result
• Anning continues by suggesting that this usually requires teamwork between specialists in IT, science
and different business functions. However, if organizations do not currently have sufficient with the
necessary skills, they will either need to recruit additional staff, or train existing staff, they are able to
take advantage of big data.

Remote working (Home working)

• Another significant development in the way workforces is structured has been the increasing number
of remote workers or home workers.
• An Important factor in the development of remote working is the beneficial impact it can have on
employees work life balance. Employees value the time and money savings remote working offers
them, compared to having to commute to work. Some employees may also value the autonomy and
Independence which working at home affords them. Since companies have increasingly recognized
the Importance of attracting and retaining talented staff, they have also realized the need to offer staff
flexibility in their working arrangements.
• Remote working could also improve productivity. On the one hand, if remote working leads to
higher job satisfaction, higher retention and lower absenteeism, these factors could contribute to

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 increased productivity. On the other hand, remote workers could also be more productive than 'office-
based colleagues because they are able to work without Interruption.

IT and remote working:

• Developments in technology have been crucial in facilitating the growth of home working. For
example, remote workers need a laptop or personal computer, with reliable Internet access, and secure
remote access to a company's internal networks and internal messaging systems (e.g., share points) in
order to work from home effectively.
• Videoconferencing can also be valuable for contacting remote employees, particularly in relation to
important matters which it may not be appropriate to discuss by email
• In general, technology has been essential for the development of remote working, because it provides
opportunities for exchanges of Information between employees working remotely and their colleagues
or managers in a different location.

Communication and remote working:

• Poor workplace communication is often seen as the biggest disadvantage of remote working. In this
respect, the growth of remote working presents new issues for managers in relation to managing staff.
• Socialization and relationship building are important aspects for helping remote employees to feel
included within an organization. As such, managers’ communication skills and relationship building
skills will be important in ensuring that remote workers do not feel isolated. While many remote
workers value the greater independence which they gain from working at home, it remains important
for managers to communicate regularly with these workers in order to build trust and to maintain a
relationship with them.
• Equally, managers will need to provide the employees with clear goals and expectations for their
work, as for any other employee in the company. In order to manage remote employees effectively,
managers should adopt a ‘management by objectives’ approach, as opposed to managing by
observation. This will involve setting goals and action plans, and then evaluating employees’
performance based on the outputs or results.

HR and change agents:

• Moreover, change comes in different forms and can occur at different levels within an organizations
• Individuals
• Structures and systems
• Organizational climate
• Changing individuals involves changing their skills, values, attitudes and behaviors. Any such
individual changes have to support the overall organizational changes required. However, ultimately
organizational changes can only be achieved if the individual people working for an organization
change as necessary.
• Changing structures and systems involves changing the formal and informal organizational structures
in place: for example, changing business processes, or changing roles, responsibilities and relationships.
• Changing the organizational climate involves changing the way people relate to each other in an
organization; the management style; and the overall culture of the organization. For example, this might
involve creating a culture of high interpersonal trust and openness between staff.
The presence of these three levels means a change manager needs to ensure that appropriate methods
exist in order that the desired change is achieved at each level.

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McKinsey 7-5 model
The McKinsey 7-5 model provides a framework for looking at an organization as a set of interconnected
and interdependent subsystems. This interdependence highlights those strategies adopted in anyone area of
an organization (or changes to the strategies pursued in any area of the organization) will have an impact
on other parts of the organization.
Therefore, when considering changes in an
organization, it could be useful to think
about how the proposed changes fit with the
7 5s:
There are three "hard' elements of business
behavior:

• Structure: The organization structure

refers to the formal division of tasks in
the organization and the hierarchy of
authority from the most senior to Junior.
• Strategy: How the organization plans
to outperform its competitors, or how it
intends to achieve its objectives. This is linked to shared values.
• Systems: These include the technical systems of accounting, personnel, management information and
so forth. These are linked to the skills of the staff.
These "hard" elements are easily quantified and defined, and deal with facts and rules.
'Soft' elements are equally important.

• Style refers to the corporate culture that is the shared assumptions, ways of working, attitudes and
beliefs. It is the way the organization presents itself to the outside world.
• Shared values are the guiding beliefs of people in the organization as to why it exists. (For example,
people in a hospital seek to save lives.)
• Staff are the people in the organization.
• Skills refer to those things that the organization does well. For example, the UK telecom company BT
is good at providing a telephone service but, even if the phone network is eventually used as a
transmission medium for TV or films, BT is unlikely to make those programmes itself.
All elements, both hard and soft, must pull in the same direction for the organization to be effective.

Strategic fund management

• Strategic fund management involves asset management to make assets available for sale if cash
deficiencies arise.
• Strategic fund management is an extension of cash flow planning that takes into consideration the
ability of a business to overcome unforeseen problems with cash flows, recognizing that the assets of a
business can be divided into three categories:
o Assets that are needed to carry out the ‘core ‘activities of the business. A group of companies will
often have one or several main activities, and in addition will carry on several peripheral activities.
The group’s strategy should be primarily to develop its main activities. There has to be enough cash
to maintain those activities and to finance their growth.
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 o Assets that are not essential for carrying out the main activities of the business and could be sold
off at fairly short notice. These assets will mainly consist of short-term marketable investments.
o Assets that are not essential for carrying out the main activities of the business and could be sold off
to raise cash, although it would probably take time to arrange the sale and the amount of cash
obtainable from the sale might be uncertain. These assets would include long-term investments (for
example, substantial shareholdings in other companies); subsidiary companies engaged in
‘peripheral’ activities, which might be sold off to another company or in a management buyout; and
land and buildings.
• If an unexpected event takes place which threatens a company’s cash position, the company could also
meet the threat by:
o working capital management to improve cash flows by reducing stocks and debtors, taking more
credit, or negotiating a higher bank overdraft facility
o changes to dividend policy

Valuation of start-up businesses:

• Here we define a start-up business as an unquoted company that has not been in business for long. Start-
ups may be attractive takeover propositions, not because of what they have achieved so far, but because
of their future potential. The value of start-ups may lie in expectations of future revenue growth and
profits, or in the value of some of the assets that it owns.
• The valuation of start-ups presents a number of challenges for the methods we have considered so far,
due to their unique characteristics which are summarized below:
• Most start-ups typically have little or no track record. Their revenues may be growing, but from a
very small starting point.
• Because a start-up is earning relatively little revenue, it will probably be making losses and will also
be cash flow negative.
• It will not yet have established a strong customer base.
• Its products may be insufficiently tested in the market. Its products may even still be under
development, and not yet marketed at all. If so, its likely market acceptance and the volume of sales
demand for the product will be unknown.
• Its management team may be inexperienced in business.
• Little may be known about the nature of competition, if the product is new.

Automated trading
• Automated forms of trading have sometimes been blamed for major movements in stock prices.
• Program trading has been defined by the NYSE as an order to buy or sell 15 or more stocks valued at
over US$1 million total. In practice, this means that computers are used to enter program trades. Such
trades are often made to take advantage of arbitrage opportunities, which seek to exploit small price
differences between related financial instruments, such as index futures contracts and the stocks
underlying them.
• Algorithmic trading is a form of trading in which orders are entered to an electronic trading platform
based on an algorithm which sets criteria for making the trade based on aspects such as timing, price
and quantity: Generally, orders will be executed without human intervention. A special type of
algorithmic trading is high frequency trading or flash' trading, which seeks to respond to information
received electronically before other human traders are able to process the information and place trades.
Studies have found that over half the equity trading volume on major exchanges results from
algorithmic trading.

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Eurobonds or International Bonds
• Eurobonds or International bonds are long-term loans raised by International companies or other
institutions and sold to investors in several countries at the same time. Most Eurobonds are currently
denominated in US dollars and, to a lesser extent, euros and yen.
• In recent years, a strong market has built up which allows very large companies to borrow in this way,
long term or short term. The market is not subject to national regulations but there is a self-regulatory
association of bond dealers, the International Capital Market Association (ICMA).
Advantages of International bonds:

• Most International bonds are "bearer Instruments, which means that there is no bond ownership register
and the owner does not have to declare his Identity
• Interest is paid gross, and this has meant that in the past Eurobonds have been used by Investors to
avoid payments of tax
• International bonds can be used to create a liability in a foreign currency to match against a foreign
currency asset.
• They may be cheaper than a foreign currency bank loan because they can be sold on by the Investor,
who will therefore accept a lower yield in return for this greater liquidity.
• They are typically Issued by companies with excellent credit ratings and are normally unsecured,
which makes it easier for companies to raise debt finance In the future. Companies with lower credit
ratings that want to raise funds In the bond markets may do so through a national 'junk bond market.
There is a large junk bond market in the US.
• International bond issues are not normally advertised to the general investing public because they are
placed with Institutional investors, and this reduces issue costs.
Disadvantages of International bonds

• Like any form of debt finance there will be issue costs to consider and there may also be problems if
gearing levels are too high.
• A borrower contemplating an international bond issue must consider the foreign exchange risk of a
long-term foreign currency debt. If the money is to be used to purchase assets which will earn revenue
in a currency different to that of the bond issue, the borrower will run the risk of exchange losses if the
currency of the loan strengthens against the currency of the revenues out of which the bond (and
Interest) must be repaid.

Demerger:
• Demerger: The opposite of a merger. It is the splitting up of a corporate body into two or more separate
independent bodies.
• Demerging, in its strictest sense, stops short of selling out.
Advantages of demergers

• A demerger should ensure greater operational efficiency and greater opportunity to realize value.
A two-division company with one loss-making division and one profit-making, fast-growing division
may be better off splitting the two divisions. The profitable division may acquire a valuation well in
excess of its contribution to the merged company.

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• A demerger should ensure that share prices reflect the true value of the underlying operations. In
large, diversified conglomerates, so many different businesses are combined into one organization that
it becomes difficult for analysts to understand them fully.
• A demerger can correct a lack of focus, where senior management have to oversee and monitor a large
number of businesses.
Disadvantages of demergers

• Economies of scale may be lost, where the demerged parts of the business had operations in common
to which economies of scale applied.
• The smaller companies which result from the demerger will have lower turnover, profits and status
than the group before the demerger.
• There may be higher overhead costs as a percentage of turnover, resulting from (b).
• The ability to raise extra finance, especially debt finance, to support new investments and expansion
may be reduced.
• Vulnerability to takeover may be increased. The impact on a firm’s risk may be significant when a
substantial part of the company is spun off. The result may be a loss in shareholder value if a relatively
low risk element is unbundled.

Sell-Offs:
• Sell-off: A form of divestment, involving the sale of part of a company to a third party, usually another
company. Generally, cash will be received in exchange.
• The extreme form of a sell-off is where the entire business is sold off in a liquidation. In a voluntary
dissolution, the shareholders might decide to close the whole business, sell off all the assets and
distribute net funds raised to shareholders.
Reasons for sell-off

• As part of its strategic planning. a company has decided to restructure, concentrating management
effort on particular parts of the business. Control problems may be reduced if peripheral activities are
sold off.
• A company wishes to sell off a part of its business which makes losses, to Improve the company
future reported consolidated profit performance. This may be in the form of a management buyout
(MBO) - see below.
• In order to protect the rest of the business from takeover a company may choose to sell a part of the
business which is particularly attractive to a buyer.
• The company may be short of cash.
• A subsidiary with high risk in its operating cash flows could be sold, so as to reduce the business risk
of the group as a whole.
• A subsidiary could be sold at a profit. Some companies have specialized in taking over large groups
of companies, and then selling off parts of the newly acquired groups, so that the process of sales more
than pay for the original takeovers.
However, a sell-off may disrupt the rest of the organization, especially if key players within the
organization disappear as a result.

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Spin-offs:
Spinoff: The creation of a new company, where the shareholders of the original company own the shares.
In a spin-off

• There is no change in the ownership of assets, as the shareholders own the same proportion of shares
in the new company as they did in the old company.
• Assets of the part of the business to be separated off are transferred Into the new company, which
will usually have different management from the old company.
• In more complex cases, a spin-off may involve the original company being split into a number of
separate companies.
Advantages of spin-offs

• The change may make a merger or takeover of some part of the business easier in the future or may
protect parts of the business from predators.
• There may be improved efficiency and more streamlined management within the new structure.
• It may be easier to see the value of the separated parts of the business now that they are no longer
hidden within a conglomerate. Directors may believe that the individual parts of the business may be
worth more than the whole.
• The requirements of regulatory agencies might be met more easily within the new structure. For
example, if the agency is able to exercise price control over a particular part of the business which was
previously hidden within the conglomerate structure.
• After the spin-off, shareholders have the opportunity to adjust the proportions of their holdings
between the different companies created.

Carve-outs
• Carve-out: The creation of a new company, by detaching parts of the original company and selling the
shares of the new company to the public
• Parent companies undertake carve-outs in order to raise funds in the capital markets. These funds can
be used for the repayment of debt or creditors, or the new cash can be retained within the firm to fund
expansion. Carved-out units tend to be highly valued.

Management buyouts (MBOs)

• Management buyout: The purchase of a business from its existing owners by members of the
management team, generally in association with a financing Institution.
• An MBO is the purchase of all or part of a business from its owners by its managers. For example,
directors of a subsidiary company in a group might buy the company from the holding company, with
the intention of running it as proprietors of a separate business entity.
o To the managers, the buyout would be a method of setting up in business for themselves,
o To the group, the buyout would be a method of divestment, selling off the subsidiary as a going
concern.
• Management-owned companies seem to achieve better performance probably because of:
o a favorable buyout price having been achieved
o personal motivation and determination
o quicker decision-making and so more flexibility
o keener decisions and action on pricing and debt collection

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 o savings in overheads, e.g., in contributions to a large head office
• However, many MBOS, once they occur, begin with some redundancies to cut running costs.
Reasons for an MBO

• The board of directors of a large organization may agree to an MBO of a subsidiary for any number
of different reasons.
o The subsidiary may be peripheral to the group’s mainstream activities, and no longer fit in with
the group’s overall strategy.
o The group may wish to sell off a loss-making subsidiary. A management team may think that it
can restore the subsidiary’s fortunes.
o The parent company may need to raise cash quickly.
o The subsidiary may be part of a group that has just been taken over and the new parent company
may wish to sell off parts of the group it has just acquired.
o The best offer price might come from a small management group wanting to arrange a buyout.
o When a group has taken the decision to sell a subsidiary, it will probably get better cooperation
from the management and employees of the subsidiary if the sale is an MBO.
• A private company’s shareholders might agree to sell out to a management team because they need
cash, they want to retire, or the business is not profitable enough for them.
Parties to an MBO
There are usually three parties to an MBO.

• A management team wanting to make a buyout! This team ought to have the skills and ability to
convince financial backers that it is worth supporting.
• Directors of a group of companies.
• Financial backers of the buyout team, who will usually want an equity stake in the bought-out
business, because of the venture capital risk they are taking. Often, several financial backers provide
the venture capital for a single buyout.

Exit strategies
• Venture capitalists generally like to have a predetermined target exit date, the point at which they can
recoup some or all of their investment in an MBO. At the outset, they will wish to establish various exit
routes, the possibilities including:
o the sale of shares following a flotation on a recognized stock exchange
o the sale of the company to another firm
o the repurchase of the venture capitalist's shares by the company or its owners
o the sales of the venture capitalist's shares to an Institution such as an investment trust

Appraisal of MBOS
An institutional Investor (such as a venture capitalist) should evaluate a buyout before deciding whether or
not to finance. Aspects of any buyout that ought to be checked are as follows.

• Does the management team have the full range of management skills that are needed (for example, a
technical expert and a finance director)? Does it have the right blend of experience? Does it have the
commitment?

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• Why is the company for sale? The possible reasons for buyouts have already been listed. If the reason
is that the parent company wants to get rid of a loss-making subsidiary, what evidence is there to suggest
that the company can be made profitable after a buyout?
• What are the projected profits and cash flows of the business? The prospective returns must justify
the risks involved.
• What is being bought? The buyout team might be buying the shares of the company, or only selected
assets of the company. Are the assets that are being acquired sufficient for the task? Will more assets
have to be bought? When will the existing assets need replacing? How much extra finance would be
needed for these asset purchases? Can the company be operated profitably?
• What is the price? Is the price right or is it too high?
• What financial contribution can be made by members of the management team themselves?
• What are the exit routes and when might they be taken?

Problems with MBOs

• A common problem with MBOS is that the managers may have little or no experience in financial
management or financial accounting. Managers will also be required to take tough decisions. A good
way of approaching the problem is scenario analysis, addressing the effect of taking a major decision
in isolation. However, the results may be painful, Including the ditching of long-established products.
• Tax and legal complications
• Difficulties in deciding on a fair price to be paid
• Convincing employees of the need to change working practices or to accept redundancy
• Inadequate resources to finance the maintenance and replacement of tangible non-current assets
• The maintenance of employees' employment or pension rights
• Accepting the board representation requirement that many providers of funds will insist on (9) The loss
of key employees if, the company moves geographically, or wage rates are decreased too far, or
employment conditions are unacceptable in other ways
• Maintaining continuity of relationships with suppliers and customers
• Lack of time to make decisions

Leveraged buyouts
• Leveraged buyout is the purchase of another company using a very significant amount of debt (bonds
or loans). Often the cash flows and assets of the company being purchased are used as collateral as well
as the assets of the company making the acquisition.
• Typically, the company acquiring the equity in a leveraged buyout (LBO) is a hedge fund.
• For example, a hedge fund may want to acquire a target company, which could be either a private or a
public company. It will negotiate with the board of the target company and agree acquisition terms that
are then put to the shareholders and debt security holders in the target company for acceptance.
• The money to pay for the acquisition will come partly from the hedge fund (which will acquire the
equity in the target company) and partly by Issuing a large amount of new debt that will be put into the
company.
• As a result of the LBO, the company will have a new capital structure, with equity owned by the hedge
fund and large amounts of debt that will be paid off over time.

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Benefits of a share repurchase scheme:
• Finding a use for surplus cash, which may be a ‘dead asset’.
• Increase in EPS through a reduction in the number of shares in issue. This should lead to a higher
share price than would otherwise be the case, and the company should be able to increase dividend
payments on the remaining shares in issue.
• Increase in gearing. Repurchase of a company’s own shares changes the relative proportion of debt to
equity, so raising gearing. This will be of interest to a company wanting to increase its gearing without
increasing its total long-term funding.
• Readjustment of the company’s equity base to more appropriate levels, for a company whose
business is in decline.
• Possibly preventing a takeover or enabling a quoted company to withdraw from the stock market.
• Rewarding shareholders without having to increase dividends, which can give out unwanted signals
to the market.

Issues with a share repurchase scheme:

• It can be hard to arrive at a price that will be fair both to the vendors and to any shareholders who
are not selling shares to the company.
• A repurchase of shares could be seen as an admission that the company cannot make better use of
the funds than the shareholders.
• Some shareholders may suffer from being taxed on a capital gain following the purchase of their
shares rather than receiving dividend income.
• An increase in EPS might benefit directors if their bonus is aligned to this ratio.

Sources of finance for SMEs

Potential sources of funding for SMEs include:

• owner financing
• equity finance
• business angel financing
• venture capital
• leasing
• factoring
• bank loans
• Owner financing: France from the owner(s)' personal resources or those of family connections is
generally the initial source of finance. At this stage, because many assets are intangible, external
funding may be difficult to obtain
• Equity finance: Other than investment by owners or business angels (see below), businesses with few
tangible assets will probably have difficulty obtaining equity finance when they are formed (a problem
known as the equity gap)
However, once small firms have become established, they do not necessarily need to seek a market
listing to obtain equity financing. Shares can be placed privately. Letting external shareholders invest
does not necessarily mean that the original owners have to cede control, particularly if the shares are
held by a number of small investors. However, small companies may find it difficult to obtain large
sums by this means.

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 As noted above, owners will need to Invest a certain amount of capital when the business starts up
However, owners can subsequently choose whether they withdraw profits from the business or reinvest
them.
• A major problem with obtaining equity finance can be the inability of the small firm to offer an easy
exit route for any Investors who wish to sell their stake
o The firm can purchase its own shares back from the shareholders, but this involves the use of cash
that could be better employed elsewhere.
o The firm can obtain a market listing but not all small firms do.
• Business angels: Business angel financing can be an important Initial source of business finance.
Business angels are wealthy individuals or groups of Individuals who invest directly in small businesses
using their own money. They bring invaluable direct relevant experience, expertise and contacts in an
advisory capacity.
• The main problem with business angel financing is that it is informal in terms of a market and can be
difficult to set up. However, informality can be a strength. There may be less needed to provide business
angels with detailed information about the business due to the prior knowledge that they tend to have
• Venture capital: Venture capital is risk capital, normally provided in return for an equity stake.
Venture capital organizations, such as 3i, have been operating for many years. The types of venture that
the 3i group might invest in include the following.
o Business start-ups. When a business has been set up by someone who has already put time and
money into getting it started, the group may be willing to provide finance to enable it to get off the
ground.
o Business development. The group may be willing to provide development capital for a company
that wants to invest in new products or new markets or to make a business acquisition
o MBOs. An MBO is the purchase of all or parts of a business from its owners by its managers.
o Helping a company where one of its owners wants to realize all or part of their Investment.
The venture capital organization may be prepared to buy some of the company's equity.
• Venture capital organizations will take account of various factors in deciding whether or not to invest.
o The nature of the product (viability of production and selling potential)
o Expertise in production (technical ability to produce efficiently)
o The market and competition (threat from rival producers or future new entrants)
o Future profits (detailed business plan showing profit prospects that compensate for risks)
o Board membership (to take account of the interests of the venture capital organization and to ensure
it has a say in future strategies)
o Risk borne by existing owners

Enterprise capital funds:

• Enterprise capital funds (ECFS) are designed to be commercial funds, established to invest a
combination private and public money in small high growth businesses
• Each ECF is able to make equity Investments of up to £2 million into eligible SMEs that have genuine
growth potential but whose funding needs are currently not met, based on the evidence that such
businesses struggle to obtain finance of up to £2 million.
• ECFs are administered by the Department for Business, Energy and Industrial Strategy through the
British Business Bank.

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Macro hedging
• Macro hedging, also known as portfolio hedging, is a technique where financial instruments with
similar risks are grouped together and the risks of the portfolio are hedged together. Often this is done
on a net basis, with assets and liabilities included in the same portfolio. For example, instead of using
interest rate swaps to hedge interest rate exposure on a loan-by-loan basis, banks hedge the risk of their
entire loan book or specific portions of the loan book.
• In practice, however, macro hedging is difficult, as it may be hard to find an asset that offsets the risk
of a broader portfolio.

Benefits and disadvantages of currency swaps:

Other benefits of currency swaps can be stated briefly as follows

• Flexibility: Swaps are easy to arrange and are flexible since they can be arranged in any size and are
reversible.
• Cost: Transaction costs are low, only amounting to legal fees, since there is no commission or premium
to be paid
• Market avoidance: The parties can obtain the currency they require without subjecting themselves to
the uncertainties of the foreign exchange markets.
• Access to finance: The company can gain access to debt finance In another country and currency where
it is little known, and consequently has a poorer credit rating, than in its home country. It can therefore
take advantage of lower interest rates than it could obtain if it arranged the currency loan itself.
• Financial restructuring: Currency swaps may be used to restructure the currency base of the
company's liabilities. This may be Important where the company is trading overseas and receiving
revenues in foreign currencies, but its borrowings are denominated in the currency of its home country.
Currency swaps thereby provide a means of reducing exchange rate exposure.
• Conversion of debt type: At the same time as exchanging currency, the company may be able to
convert fixed rate debt to floating rate or vice versa. Thus, It may obtain some of the benefits of an
interest rate swap in addition to achieving the other purposes of a currency swap.
• Liquidity Improvement: A currency swap could be used to absorb excess liquidity in one currency
which is not needed Immediately, to create funds in another where there is a need.
Disadvantages of currency swaps

• Risk of default by the other party to the swap (counterparty risk): If one party became unable to
meet Its swap payment obligations, this could mean that the other party risked having to make them
Itself.
• Position or market risk: A company whose main business lies outside the field of finance should not
increase financial risk in order to make speculative gains.
• Sovereign risk: There may be a risk of political disturbances or exchange controls in the country
whose currency is being used for a swap.
• Arrangement fees: Swaps have arrangement fees payable to third parties. Although these may appear
to be Inexpensive, this is because the intermediary accepts no liability for the swap. (However, the
third party does suffer some spread risk, as it warehouses one side of the swap until it is matched with
the other, and then undertakes a temporary hedge on the futures market.)
Currency swaps are much less common than interest rate swaps.

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Takeover of, or merger with, established firms overseas:
• If speed of entry into the overseas market is a high priority, then acquisition may be preferable starting
from scratch. The main problem is that the better acquisitions may only be available premium.
Advantages of takeovers/mergers

• Merging with established firms abroad can be a means of purchasing market information, market
share, distribution channels and reputation.
• Other synergies include acquisition of management skills and knowledge, intangibles such as
brands and trademarks, and additional cash and debt capacity.
• Acquiring a subsidiary may be a means of removing trade barriers.
• Acquisition can be a means of removing a competitor.
• Start-up costs will not be incurred.
Disadvantages of takeovers/mergers

• Cultural Issues may make it difficult to Integrate the subsidiary Into the Group.
• Growing organically may be cheaper. In the long run it is more likely to be financed by retained cash
flows than new sources with Issue costs, and It will not Involve paying a premium for desirable
subsidiary.
• There may be duplication of resources/operations with the acquiring company.

Overseas/Foreign subsidiaries
The basic structure of many MNCs consists of a parent (holding) company with subsidiaries in seven
countries. The subsidiaries may be wholly or partly owned, and some may be owned through other
subsidiaries.
Advantages of subsidiaries

• A local subsidiary may have a significant profile for sales and marketing purposes.
• As a separate legal entity, a subsidiary should be able to claim legal privileges, reliefs and grants
Disadvantages of subsidiaries

• As a separate entity, a subsidiary may be subject to significant legal and accounting formalities,
including minimum capital requirements.
• In some regimes, the activities of the subsidiary may be limited to the objects set out in its
constitution and it may not be able to draft these objects too widely.
• Dissolution of a subsidiary may be fairly complex

Branches
• Firms that want to establish a presence in an overseas country may choose to establish a branch than a
subsidiary.
Advantages of branches

• Establishment of a branch is likely to be simpler than establishment of a subsidiary.

• In many countries, the remitted profits of a subsidiary will be taxed at a higher rate than those of a
branch, as profits paid In the form of dividends are likely to be subject to a withholding tax However,

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 how much impact the withholding tax has is questionable, particularly as a double tax treaty can reduce
its effect.
Disadvantages of branches

• The parent company is fully liable for the liabilities of the branch. A parent company may have to
appoint an Individual or company to, for example, represent it in dealing with the tax authorities and
the Individual or company chosen may be liable as well.
• The obligations of the branch will be the same as those of the parent.
• Banks and clients may prefer dealing with a local company rather than the branch of a foreign
company.
• The board of the parent company may need to ratify acts of the branch.
• A branch may not be ideal for substantial projects because the parent company runs the entire risk

Joint Venture
• Joint venture is the commitment, for more than a very short duration, of funds, facilities and services
by two or more legally separate interests to an enterprise for their mutual benefit
• A contractual joint venture is for a fixed period. The duties and responsibility of the parties are
contractually defined. A Joint-equity venture involves Investment, is of no fixed duration and
continually evolves.
Advantages of international joint venture

• It gives relatively low-cost access to markets in new countries.

• Easier access to local capital markets may be available, possibly with accompanying tax. Incentives
or grants.
• The joint venture partner's existing local knowledge, cultural awareness, distribution network and
marketing or other skills can be used.
• Depending on government regulations, a joint venture may be the only means of access to a particular
overseas market.
Disadvantages of International joint venture

• Managerial freedom may be restricted by the need to take account of the views of all the joint venture
partners, particularly if cultural differences arise. The joint venture may be difficult to control or amend,
especially if the investing company only has a limited presence in the country.
• There may be problems in agreeing on partners' percentage ownership, transfer prices, remittance
arrangements, nationality of key personnel, remuneration and sourcing of raw materials and
components.
• Finding a reliable joint venture partner may take a long time, because of lack of local knowledge.
Potential partners may not have the adequate skills.

Borrowing Internationally
There are several advantages and risks when borrowing from international capital markets, as opposed to
domestic capital markets.
The advantages of borrowing Internationally

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• Availability: Domestic financial markets, with the exception of the large countries and the Eurozone,
lack the depth and liquidity to accommodate either large debt issues or issues with long maturities.
• Lower cost of borrowing: In Eurobond markets interest rates are normally lower than borrowing rates
in national markets.
• Lower Issue costs: The cost of Issuing debt is normally lower than in domestic markets
The risks of borrowing Internationally:
An MNC has three options when financing an overseas project by borrowing in:

• the same currency as the Inflows from the project

• a currency other than the currency of the inflows but with a hedge in place
• a currency other than the currency of the inflows, but without hedging the currency exposes
the company to exchange rate risk that can substantially change the profitability of a project.

Treasury policy
Treasury management: 'the corporate handling of all financial matters, the generation of external ale
internal funds for business, the management of currencies and cash flows, and the complex strategies
policies and procedures of corporate finance. (The Association of Corporate Treasure)
Large companies rely heavily for both long- and short-term funds on the financial and currency market To
manage cash (funds) and currency efficiently, many large companies have set up a separate treasury
department.
The role of the treasurer:
The diagrams below are based on the Association of Corporate Treasurers' list of experience required from
its student members before they are eligible for full membership of the Association.
Corporate financial objectives

• Liquidity Management: Liquidity management

makes sure that the company has the liquid funds it
needs, and invests any surplus funds, even for very
short terms.
• Funding management: Funding management is
concerned with all forms of borrowing, and
alternative sources of funds, such as leasing and
factoring.

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• Currency management: Currency dealings can save or
cost a company considerable amount of money, and the
success or shortcomings of the corporate treasurer can have
a significant impact on the profit or loss of a company
which is heavily involved in foreign trade.
• Corporate finance: The treasury department has a
role in all levels of decision-making within the
company. It is involved with strategic decisions
such as dividend policy or the raising of capital,
tactical decisions such as risk management, and
operational decisions such as the investment of
surplus funds.

Advantages of a separate treasury department:

Advantages of treasury function which is separate from the financial control function are as follows:

• Centralized liquidity management avoids mixing cash surpluses and overdrafts in different localized
bank accounts.
• Bulk cash flows allow lower bank charges to be negotiated.
• Larger volumes of cash can be invested, giving better short-term investment opportunities.
• Borrowing can be agreed in bulk, probably at lower interest rates than for smaller borrowings.
• Currency risk management should be improved, through matching of cash flows in different
subsidiaries. There should be less needed to use expensive hedging instruments such as option
contracts.
• A specialist department can employ staff with a greater level of expertise than would be possible in a
local, more broadly based, finance department.
• The company will be able to benefit from the use of specialized cash management software.
• Access to treasury expertise should improve the quality of strategic planning and decision-making.
Outsourcing

• Because of the specialist nature of treasury management, a number of businesses outsource the function
to specialist Institutions. The company receives the benefit of the expertise of the specialist's staff,
which may be able to fill resource or skills gaps otherwise absent from the internal team. Outsourcing
operational functions may enable the internal team to concentrate on strategic functions. It may also
give the organization access to better systems solutions. The specialists can deal on a large scale and
pass some of the benefit on in the form of fees that are lower than the cast of setting up an internal
function would be.
• However, whether the same level of service could be guaranteed from the external institution as from
an internal department is questionable. The external institution may not have as much knowledge of
the reds of the business as an Internal department.
• If treasury activities are to be outsourced, contract documentation needs to be clear and management
and reporting procedures must be established.
• Other mechanisms may achieve the cost savings of outsourcing but be more responsive to an
organization’s needs. These include shared service centers (separate legal entities owned by the
organization and acting as Independent service providers), which can be used to obtain economies of

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 scale by concentrating dispersed units into one location. These may not necessarily be located near head
office; In fact, many are located where they can obtain tax advantages.

Centralized or decentralized cash management:

• The centralization decision:
o A large company may have a number of subsidiaries and divisions. In the case of a multinational,
these will be located in different countries. It will be necessary to decide whether the treasury
function should be centralized.
o With centralized cash management, the central treasury department effectively acts as the bank to
the group. The central treasury has the job of ensuring that Individual operating units have all the
funds they need at the right time.
Advantages of a specialist centralized treasury department

• Centralized liquidity management avoids having a mix of cash surpluses and overdrafts in different
local bank accounts and facilitates bulk cash flows, so that lower bank charges can be negotiated.
• Larger volumes of cash are available to invest, giving better short-term investment opportunities (for
example, money market deposits, high interest accounts and Certificates of Deposit).
• Any borrowing can be arranged in bulk, at lower Interest rates then for smaller borrowings, and perhaps
on the eurocurrency or Eurobond markets.
• Foreign currency risk management is likely to be improved in a Group of companies. A central treasury
department can match foreign currency income earned by one subsidiary with expenditure in the same
currency by another. In this way, the risk of losses on adverse exchange rate changes can be avoided
without the expense of forward exchange contracts or other ‘hedging’ (risk-reducing) methods.
• A specialist treasury department will employ experts with knowledge of dealing in futures,
eurocurrency markets, taxation, transfer prices and so on. Localized departments would not have such
expertise.
• The centralized pool of funds required for precautionary purposes will be smaller than the sum of
separate precautionary balances which would need to be held under decentralized treasury
arrangements.
• Through having a separate profit Centre, attention will be focused on the contribution to Group profit
performance that can be achieved by good cash, funding, investment and foreign currency management.
• Centralization provides a means of exercising better control through use of standardized procedures
and risk monitoring. Standardized practices and performance measures can also create productivity
benefits.
Possible advantages of decentralized cash management

• Sources of finance can be diversified and matched with local assets.

• Greater autonomy can be given to subsidiaries and divisions because of the closer relationships they
will have with the decentralized cash management function.
• The decentralized treasury function may be able to be more responsive to the needs of individual
operating units.
However, since cash balances will not be aggregated at Group level, there will be more limited
opportunities to invest such balances on a short-term basis.

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Centralized cash management in the multinational firm:

• If cash management within a multinational firm is centralized, each subsidiary holds only the minimum
cash balance required for transaction purposes. All excess funds will be remitted to the central treasury
department.
• Funds held in the central pool of funds can be returned quickly to the local subsidiary by telegraphic
transfer or by means of worldwide bank credit facilities. The firm’s bank can instruct its branch office
in the country in which the subsidiary is located to advance funds to the subsidiary.

The treasury department as a cost Centre or profit Centre

Treasury department as a cost Centre

• A treasury department might be managed either as a cost Centre or as a profit Centre. For a Group of
companies, this decision may need to be made for treasury departments in separate subsidiaries as well
as for the central corporate treasury department.
• In a cost Centre, managers have an incentive only to keep the costs of the department within budgeted
spending targets. The cost Centre approach implies that the treasury is there to perform a service of a
certain standard to other departments in the enterprise. The treasury is treated much like any other
service department.
Treasury department as a profit Centre

• However, some companies (including BP, for example) are able to make significant profits from their
treasury activities. Treating the treasury department as a profit Centre recognizes the fact that treasury
activities such as speculation may earn revenues for the company, and as a result may make treasury
staff more motivated. It also means that treasury departments have to operate with a greater degree of
commercial awareness in, for example, the management of working capital.

Control of treasury function

Statement of treasury policy:

• All treasury departments should have a formal statement of treasury policy and detailed guidance on
treasury procedures. A treasury policy should enable managers to establish direction, specify
parameters and exercise control, and also provide a clear framework and guidelines for decisions.
• The guidance needs to cover the roles and responsibilities of the treasury function, the risks requiring
management, authorization and dealing limits.
• Guidance on risks should cover:
o Identification and assessment methodology
o criteria including tolerable and unacceptable levels of risk
o reporting guidelines
o management guidelines, covering risk elimination, risk control, risk retention and risk
transfer
• The guidance must also include guidance on measurement of treasury performance. Measurement
must cover both the management of risk and the financial contribution the department makes.
Planning and review
As with other areas, there should be proper forecasts and contingency arrangements, with funds being
made available by the bank when required. Because treasury activities have the potential to cost the

76
organization huge amounts of money, there ought to be a clear policy on tolerated risk and regular review
of investments.
Controls over operations:
The following Issues should be addressed.

• Competence of staff: Local managers may not have sufficient expertise in the area of treasury
management to carry out speculative treasury operations competently. Mistakes in this specialized field
can be costly. It may only be appropriate to operate a larger centralized treasury function as a profit
Centre, and additional specialist staff may need to be recruited.
• Controls: Adequate controls must be in place to prevent costly errors and overexposure to risks
such as foreign exchanges. It is possible to enter into a very large foreign exchange deal over the
telephone.
• Information: A treasury team that trades in futures and options or in currencies is competing with
other traders employed by major financial institutions who may have better knowledge of the market
because of the large number of customers they deal with. In order to compete effectively, the team
needs to have detailed and up to date market Information.
• Attitudes to risk: The more aggressive approach to risk taking which is characteristic of treasury
professionals may be difficult to reconcile with a more measured approach to risk within the board of
directors. The recognition of treasury operations as profit-making activities may not fit well with the
main business operations of the company.
• Internal charges: the department is to be a true profit Centre, then market prices should be charged
for its services to other departments. It may be difficult to put realistic prices on some services, such as
arrangement of finance and general financial advice.
• Performance evaluation: Even with a profit Centre approach, It may be difficult to measure the
success of a treasury team for the reason that successful treasury activities sometimes Involve avoiding
Incurring costs, for example when a currency devalues.

Global treasury management

Issues affecting global treasury management:
Any company involved in international trade must assess and plan for the different risks it will face. As
well as physical loss or damage to goods, there are also cash flow problems and the risk that the customer
may not pay either on time or at all. The tasks that treasury departments have to undertake domestically,
for example efficient cash and liquidity management, will also be relevant for international management.
However, issues such as arranging funds to move cross-borders may complicate these tasks. As also
indicated above, the treasury function will be responsible for currency management. The following issues
may be particularly significant for the treasury function.
Cash flow issues: The treasury department in a multinational company (MNC) will be dealing with cash
flows from customers, suppliers and Group companies based in perhaps many different countries. The
treasury department will be dealing with a variety of different banking and payment systems. As mentioned
above, the situation may also be complicated by many transactions crossing borders.
Legal issues: The treasury department of an international company will need to be aware of the laws that
affect financial transactions and assets, and the power of authorities in different jurisdictions to impose
restrictions. A big risk area may be laws relating to bribery or money laundering, particularly the fact that
behavior that is legal (or at any rate not illegal) in some countries is prohibited in others. If the parent

77
company is based in a jurisdiction where these activities are prohibited, it may be liable if its employees or
agents breach these laws even if this takes place in other jurisdictions.
Political issues: An MNC's treasury department will have to deal with issues such as blocked funds and
restrictions on ownership that some foreign governments may impose.
Tax issues: Treasury departments will have to cope with a variety of tax laws and taxes.
Structure of treasury operations:
The question of the extent of centralization may be particularly difficult for MNCs with extensive foreign
operations.
Extent of centralization:

• For some MNCs, increasing globalization may be an impetus towards centralization and concentration
on control frameworks, decision support and improved business performance.
• In some instances, the decision will follow how the MNC operates. If the MNC purely operates overseas
sales offices, centralization is more likely. If it operates subsidiaries that carry out full business
operations, it is more likely to operate a decentralized structure with guidelines, a formal reporting
system and assurance procedures.
• Many MNCs resolve the centralization vs decentralization issue by operating treasury centers on a
regional basis. This enables them to use staff who are well informed about global requirements, but
also sympathetic to local stipulations. A regional structure allows some decisions, for example the
extent of outsourcing, to be taken region by region.
• The degree of centralization is also important when the MNC is considering its banking as well as its
treasury arrangements. Businesses will be concerned about whether their banks have the ability to
provide global treasury services. However, the services of the global bank need to be matched with
regional needs.
Shared service Centre

• A shared service Centre (SSC) may be the best method of achieving efficiencies and cost savings
through some centralization, while allowing overseas operations some autonomy in their treasury
operations. The company can take a selective approach, centralizing operations where there is no
advantage in local management. An SSC may allow the company to operate global management
systems and centralized databases, taking advantage of the most recent technology and standardized
Information management. Tax considerations and the availability of expert staff may be important
determinants of where the SSC is based-perhaps it will not be located in the same country as the parent
company.
In-house banking

• The activities of a shared service treasury function may extend to providing in-house banking services.
This means financial Institutions have a single point of contact and should help the business obtain
discounts by aggregating some transactions and undertaking some operations in bulk. An in-house
banking arrangement would oversee netting and pooling arrangements (discussed below).

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Treasury management
Pooling: Pooling means asking the bank to pool the amounts of all its subsidiaries when considering
Interest levels and overdraft limits. It requires all the Group companies to maintain accounts at the same
bank. Banks normally require credit facilities to support debit balances in the Group.
Pooling should reduce the interest payable, stop overdraft limits being breached and allow greater
control by the treasury department. It also gives the company the potential to take advantage of better
rates of Interest on larger cash deposits.
Netting: A process in which credit balances are netted off against debit balances so that only the reduced
net amounts remain due to be paid by actual currency flows.

Multicurrency accounts
• Treasury departments may also negotiate multicurrency account arrangements with banks. These
arrangements allow customers to receive or make international payments in a range of currencies from
one account of the company. Multicurrency arrangements generally specify:
o the base currency of the account
o the currencies accepted
o the spread or margin over the spot rate when exchanging other currencies back to the base currency
o the value date for each transaction currency and type
Other arrangements

• Treasury departments may also supervise arrangements designed to limit exposure to foreign exchange
risk, including:
o Leading and lagging cross-border payments ahead of or behind the scheduled payment d
depending on how exchange rates are expected to move.
o Reinvoicing: the reinvoicing Centre purchases goods from an exporting subsidiary, which is selling
the goods to an internal subsidiary. It improves foreign exchange rates available by allowing larger
trades and Improves liquidity management by allowing flexibility in Intercompany payment
o Factoring: buying accounts receivable from exporting subsidiaries and collecting monies from
importing business.

Taxation Issues
The treasury department may have to deal with complex global tax issues and also conflicting demands
from different jurisdictions. In-house or external expertise will be needed to support treasury operations.
Capital tax: Treasury functions will need to be alert for the different ways in which some jurisdictions levy
capital taxes. The initial capital used, and subsequent investments may be subject to tax. In other
jurisdictions the tax point may be when the capital is repatriated at the conclusion of the investment.
Asset tax: Even if an investment does not produce any profits, the assets used may be subject to an asset
tax MNC may be subject to tax on the value of property or financial assets.
Sales tax: In many jurisdictions, an MNC will be subject to some form of turnover tax. It may simply be
levied on sales of goods and services. Alternatively, it may be a value-added tax, where the tax is charged
at each stage of production or distribution on the increased value occurring at that stage.

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Withholding tax: As we have seen in investment appraisal, companies may be required to pay tax when
moving any funds (not just capital) from a foreign country.

Working capital financing:

There are different ways in which the funding of the current and non-current assets of a business can be
achieved by employing long- and short-term sources of funding.
Short-term finance is usually cheaper than long-term
finance (under a normal yield curve).
The diagram below illustrates three alternative types of
policy A, B and C. The dotted lines A, B and C are the
cut-off levels between short-term and long-term
financing for each of the policies A, B and C respectively:
assets above the relevant dotted line are financed by
short-term funding while assets below are financed by
long-term funding.
Fluctuating current assets together with permanent
current assets (the core level of investment in inventory and receivables) form part of the working capital
of the business, which may be financed by either long-term funding (including equity capital) or current
liabilities (short-term funding). This can be seen in terms of policies A, B and C. Once again, a conservative
or an aggressive approach can be followed.

• Policy A can be characterized as a conservative approach to financing working capital. All non-current
assets and permanent current assets, as well as part of the fluctuating current assets, are financed by
long-term funding. There is only a need to call on short-term financing at times when fluctuations in
current assets push total assets above the level of dotted line A. At times when fluctuating current assets
are low and total assets fall below line A, there will be surplus cash which the company will be able to
Invest in marketable securities.
• Policy B is a more aggressive approach to financing working capital. Not only are fluctuating current
assets all financed out of short-term sources, but so are some of the permanent current assets. This
policy represents an increased risk of liquidity and cash flow problems, although potential returns will
be Increased if short-term financing can be obtained more cheaply than long- term finance. It enables
greater flexibility in financing.
• A balance between risk and return might be best achieved by the moderate approach of policy C policy
of maturity matching in which long-term funds finance permanent assets while short-term funds finance
non-permanent assets.

Documentary credits
• A documentary credit (or letter of credit) is a fixed assurance from the customer’s bank in the
customer’s own country. This basically says that payment will be made for the goods or services
provided the exporter complies with all the terms and conditions established by the credit contract.
• The exporter’s own bank may be willing to advance a short-term loan for a percentage of the
documentary credit prior to goods being shipped, to cover the temporary shortfall of cash. The bank
will then collect the loan from the proceeds of the transaction.

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Forfaiting:
• Forfaiting-or medium-term capital goods financing - is used for larger projects and Involves a bank
buying 100% of the Invoice value of an export transaction at a discount. The exporter is then free from
the financial risk of not receiving payment and the resultant liquidity problems-the only responsibility
the exporter has and is liable for is the quality of the goods or services being provided:
• Three elements make up the price of a forfaiting transaction.
o The discount rate, which is the Interest element and is usually quoted as a margin over LIBOR
o Grace days, which are added to the actual number of days to maturity to cover the number of days'
delay that usually occurs in the transfer of payment. The number of days depends on the customer's
country.
o Commitment fee, which is applied from the date the forfeiter assumes responsibility for the
financing to the date of discounting.
• Forfaiting enhances the competitive advantage of the exporter, who will be able to provide financing
to customers, thus making the products or services more attractive. By having the assurance of knowing
that they will receive the money owed to them, exporters will also be more willing to undertake business
in countries whose risks would normally prohibit them from doing so.

Credit Insurance:
• Exporters may also make use of credit Insurance facilities to ease liquidity problems. This involves
assigning credit-insured Invoices to banks who will offer up to 100% of the insured debt as a loan.
These Instruments may also carry the guarantee of the customer's home Government.

Environment, Social, and Governance (ESG):

What does ESG tackle?
Marked by its acronym, ESG focuses to approach and address issues fitting into the categories of
environment, social, and governance.
Environment:
Environmental standards include the company's usage of energy resources, policies on waste
management, and its impact and efforts towards net-zero emission and climate change.
With the adverse effects of climate change, like the "climate change bankruptcy of Pacific and Electric
(PG&E), investors are now looking at how company operations manage and lose their impact on the
environment. These specific environmental issues include station, water pollution, carbon emission,
among others.
Social:
Social criteria cover social relationships focusing on management and employee relationships. This
includes human rights, worker's rights, workplace policies, employee wellness and training, DEI
(diversity, equity, and inclusivity), and wages.
Is there armed conflict in a company's headquarters or at the manufacturing base? Are the workers on
strike? Are they paying their workers unfairly? Is the company utilizing child labor? These questions
are important in the light of social unrest or political instability. The presence of conflict or policies
that run counter to an investor's values will ultimately affect the company's reputation in the
international business community. Sharing obstructive views on social factors adversely affects value
creation, making it less attractive for future investments.

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Governance:
Governance criteria encapsulate issues and efforts involving decision-making, and corporate cultures
of transparency, accountability, inclusivity, and compliance. This also includes the relationship with
stakeholders, such as shareholders, investors, and customers.
Under this set of criteria, companies must evaluate concerns such as board composition. board-
shareholder relationships, financial report transparency, suppliers and regulators policies,
partner compensation, customer relations, and political stances.
Is ESG the same as corporate social responsibility?
Corporate social responsibility or CSI is related to ESG, but these two terms do not mean the same
idea. CSR is a business model that drives companies to develop and implement socially responsible
programs to bring a positive impact on the community while maximizing profit. ESG, on the other
hand, is the criteria for assessing the corporations' impact and initiatives towards being socially
responsible.
CSR provides the vision and mission for businesses to be accountable in their sustainability and
responsibility agenda, while ESG offers the standards to which social actions and measures are made.
To put it simply, CSR is the qualitative side of social commitments, whereas ESG is the
quantitative side.
The Importance of ESG:
In recent years, there has been growing support for stakeholder capitalism and the long-terms impact
of companies on society. The effects of the COVID-19 pandemic and climate change have greatly
furthered ESG as a long-term initiative. This deviates from how companies take decisive actions for
short-term changes, Incorporating ESG is not only essential in risk approaches but has now been seen
as an emerging factor for financial growth.
In 2005, a landmark report entitled "Who Cares Wins" resulted from the initiative of incorporating ESG
values into the company's actions. The report argued that non-financial issues, such as environmental,
social, and governance concerns, were impacting companies financially and will have long-term
effects on the business's longevity. ESG reports paint a holistic picture of a company's supply chain
management and sustainability in the long term, factors that investors look at before investing in your
business.
ESG investing has now become vital for investors as they have seen how the stock price of ESG-
focused companies has become more stable, outperforming those with low ESG rankings. Such a
statement confirms that companies that are highly oriented in ESG can expect high returns.
Likewise, ESG is not only relevant to the investors but also to the companies themselves. With the
pieces of evidence of how incorporating ESG affects their bottom line, companies are now pressured
to disclose their impact and further ESG efforts, Pressure mounts also from the society and the
government, primarily people issues and regulations. By prioritizing sustainable and socially
responsible initiatives, it can improve the company's reputation. potentially attracting more
investors.
How can boards take action in initiating ESG?
Incorporating and reporting on ESG can help companies realize the huge potential of ESG within and
beyond the organization. However, some may feel overwhelmed and would not know where to start.
Here are some essential actions boards may take to start ESG reporting.
o Understand the stakeholders' demands: Investors, regulators, and customers are demanding
transparency and change towards ESG efforts and performance. Boards must actively engage with
the stakeholders to know their perspectives on ESC issues. From there, you can craft an ESG
strategy that embeds their demands.

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 o Understand the ESG data: From your data, you can gain insights to identify the gaps and
opportunities. In extracting data, your company needs the right data professionals. They should be
able to manage the reporting requirements while regularly checking your ESG performance and
the granular ESG data. Understanding the data can help your board develop data driven ESG
strategies.
o Comply with regulatory frameworks: Investors appreciate investing in companies that follow a
recognized framework, as it provides a "familiar" and/ cohesive ESG narrative. There have been
various standards and frameworks established, such as TCFD, GRI, and SASB. You need to
evaluate the best framework that suits your company.
o Creating a dialogue with the investors: ESG reporting is one way that creates conversations with
the investors on ESG efforts. It must be accurate, clear, consistent, comparable, and compliant with
regulations. With the software made available today, boards can streamline the data compilation
and reporting processes that do not compromise the quality of the report.

The Sustainable Development Goals:

There are several reasons why companies should focus on sustainable business practices, and they include:
• the increased future government focus on sustainable business
• such business practices often improve performance as they lower operational, reputational and
regulatory risk
• there are significant business growth opportunities in products and services that address the SDG
challenges
• the fact that short term, profit based models are reducing in relevance. Companies and their stakeholders
are changing how they measure success, and this is becoming more than just about profit.
Investors realize that the SDGs will not all be equally relevant to all companies, with boilerplate disclosures
having little relevance at all, Good disclosure will qualitatively show bow the company's SDG related
activities affect the primary value drivers of the business. It would be natural to assume that SDG reporting
should be based around the disclosure of information to mitigate business risk and the drive for improved
predictability of investment decisions. However, if there is to be fair presentation, then there should also be
disclosure of my negative and positive impacts on society and the environment.
investors' expectations will still be focused on companies realizing their core business activities with
financial sustainability as a prerequisite for attracting investment. However, institutional investors have a
fiduciary duty to act in the best interests of their beneficiaries, and thus have to take into account
environmental, social and governance (ESG) factors, which can be financially significant. Companies
utilizing more sustainable business practices provide new investment opportunities.,
Investors screen companies as regards their ESG policies and integrate these factors into their valuation
models. Additionally, there is an increased practice of themed investing, whereby investors select a
company for investment based upon specific ESG policy criteria such as clean technology, green real estate,
education and health. Investors are increasingly factoring impact goals into their decision making whereby
they evaluate how successful the company has been in a particular area for example, the reduction of
educational inequal SDGs through their portfolios This approach can help optimize financial returns and
demonstrate their contribution to the SDGs through their portfolios. Investors are increasingly incentivized
to promote sustainable economies and markets to improve their long-term financial performance.

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Institutional investors realize that environmental events can create costs for their portfolios in the form of
insurance premiums, taxes, and the physical cost related with disasters. Social issues can lead to unrest and
instability, which carries business risks which may reduce future cash flows and financial returns.
Investors seek SDG information produced in line with widely accepted recommendations The Global
Reporting Initiative (GRI) and the UN Global Compact amongst others, have developed guidance
documents that mutually complement each other and create a reference point for companies.
Companies should disclose to investors how they have decided on their SDG strategy, philosophy and
approach. The approach should be capable of measurable impacts and have a clear description of the
material issues and a narrative that links the sustainability issues back to the business model and future
outlook of the entity.
For investors, it is important that SDG-related reporting is presented in the context of the strategy,
governance, performance and prospects of the entity. Stakeholders should be engaged from the beginning
in order to identify any potential impact with some investors expecting companies to have a stakeholder
dialogue that goes beyond financial matters. Investors often require an understanding of how the entity feels
about the relevance of the SGDS to the overall corporate strategy, and this will include a discussion of any
risks and opportunities identified and changes that have occurred in the business model as a result
The SDGs and targets are likely to present some of the greatest business risks and opportunities for
companies who should publish material SDG contributions, both positive and negative, as part of their
report. For example, an inability to address negative social and environmental impacts may also be directly
detrimental to short-term financial value for a business. Investors are increasingly seeking investment
opportunities that can make a credible contribution to the realization of the SDGS.
However, if an investor wants to have a positive impact on working conditions for example, they cannot
assume that any investment in this area is relevant. The investor would need to be provided with additional
information such as data on the lowest income workers, any potential income increases and how confident
the company is that an increase in income will occur.
Investors can choose not to invest in, or to favor, certain investments. Alternatively, they can actively
engage in new or previously overlooked opportunities that offer an attractive impact and financial
opportunity, even though these may involve additional risk.
There is an assumption that the disclosure of ESG factors will ultimately affect the cost of capital, lowering
it for sustainable businesses and increasing it for non-sustainable ones. It may also affect cash flow
forecasts, business valuations and growth rates. Investors employ screening strategies, which may involve
eliminating companies that have specific features. for example, low pay rates for employees and eliminating
them on a ranking basis. They may also be eliminated on the basis of companies who are contributing or
not, to a range of SDGs and targets. Investors will use SDG-related disclosures to identify risks and
opportunities on which they will, or will not, engage with companies, Investors will see potential business
opportunities in those companies that address the risks to people and the environment and those companies
that develop new beneficial products, services and investments that may mitigate the business risks related
to the SDGs.

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