COURSE

GUIDE

ENT 410
CORPORATE DEVELOPMENT: MERGERS
AND ACQUISITIONS

Course Team Dr. Ibrahim Idrisu (Course Writer)

Department of Financial Studies
Faculty of Management Sciences
National Open University of Nigeria

Olakunbi Lawal (Course Writer)

Department of Financial Studies
Faculty of Management Sciences
National Open University of Nigeria

Prof. Onyemaechi Onwe (Course Editor)

Department of Entrepreneurial Studies
Faculty of Management Sciences
National Open University of Nigeria

Dr. Lawal Kamaldeen A.A (H.O.D)

Department of Entrepreneurial Studies
Faculty of Management Sciences
National Open University of Nigeria

Dr. Timothy Ishola (Dean)

Faculty of Management Sciences
National Open University of Nigeria

NATIONAL OPEN UNIVERSITY OF NIGERIA

National Open University of Nigeria
Headquarters
University Village
Plot 91 Cadastral Zone
Nnamdi Azikiwe Expressway
Jabi, Abuja.

Lagos Office
14/16 Ahmadu Bello Way
Victoria Island, Lagos

e-mail: [email protected]
URL: www.noun.edu.ng

Published by:
National Open University of Nigeria

ISBN:

Printed: 2017

All Rights Reserved

COURSE GUIDE
CONTENTS

Introduction

Course Contents

Course Aims

Course Objectives

Working through This Course

Course Materials

Study Units

Textbooks and References

Assignment File

Assessment

Tutor-Marked Assignment

Final Examination and Grading

How to get the Best out of this Course

Facilitators/Tutors and Tutorials

Useful Advice

Summary
INTRODUCTION

ENT410: Corporate Development is a two credit course for students offering B. Sc.
Entrepreneurship and Business Management in the Faculty of Management Sciences. The
course consists of eighteen (15) units, that is, three (3) modules of five (5) units for each
module. The material has been developed to suit undergraduate students in
Entrepreneurship and Business Management at the National Open University of Nigeria
(NOUN).

The course guide tells you briefly what the course is about, what course materials you
will be using and how you can work your way through these materials. It suggests some
general guidelines for the amount of time you are likely to spend on each unit of the
course in order to complete it successfully. It also gives you some guidance on your tutor-
marked assignments. Detailed information on tutor-marked assignment is found in the
separate assignment file which will be available in due course.

COURSE AIMS

The aims of the course will be achieved by:

(i) Discussing corporate governance on Consolidation policy

(ii) Discussing mergers and acquisitions in Nigeria
(iii) Explaining merger procedures for Small, Large and Intermediate enterprises
(iv) Explaining documentation for required business combination transactions
(v) Understanding what mergers and acquisitions are all about
(vi) Discussing the relationship between various forms of corporate strategies
(vii) Identify the various issues and challenges in mergers and acquisitions
(viii) Discussing disclosure of negotiations in mergers and acquisitions

COURSE OBJECTIVES

By the end of this course, you should be able to:

(i) Understand the key company initiatives for corporate development
(ii) Identify various techniques for corporate development
(iii) Explain what a corporation is and the roles it performs;
(iv) Understand what a merger is and reasons for mergers
(v) Identify various types of mergers and the procedures for mergers
(vi) Understand the legal framework for Banks consolidation in Nigeria.

WORKING THROUGH THIS COURSE

To complete this course, you are required to read all study units, attempt the entire tutor
marked assignments and study the principles and practice of lending and credit
administration in this material provided by the National Open University of Nigeria
(NOUN). You will also need to undertake practical exercises for which you need access
to a personal computer. Each unit contains self-assessment exercises, and at certain points
during the course, you will be expected to submit assignments. At the end of the course is
a final examination. The course should take you about a total of 17 weeks to complete.
Below are the components of the course, what you have to do, and how you should
allocate your time to each unit in order to complete the course successfully on time.

COURSE MATERIALS

Major components of the course are:

(i) Course Guide
(ii) Study Units
(iii) Textbooks
(iv) Assignment file

STUDY UNITS

The study units in this course are as follows:

MODULE 1

Unit 1: Corporate Development

Unit 2: Mergers and acquisitions
Unit 3: Mergers and Acquisitions: Opportunities and avoiding the pitfalls
Unit 4: Mergers and Acquisitions: Challenges and Regulatory Authorities
Unit 5: Concept of Corporate strategy

MODULE 2

UNIT 6: Forms of Strategy

UNIT 7: Banking Sector Consolidation
UNIT 8: Consolidation in the oil and Gas Industry: Mergers and Acquisitions
UNIT 9: Incentives on Consolidation in the Nigerian Banking Industry
UNIT10: Products

MODULE 3

UNIT 11: Product-Mix Strategies

UNIT 12: New Product Development
UNIT 13: Product Development Theories
UNIT 14: Quality
UNIT 15: Total Quality Management

ASSIGNMENT FILE

There are two aspects to the assessment of the course: first is the tutor-marked
assignment; and secondly, the examination. Within each unit are self-assessment
exercises, which are aimed at helping you to check your assimilation as you proceed. Try
to attempt each of the exercises before finding out the expected answers from lecture. In
tackling the assignments, you are advised to be sincere in attempting the exercises; you
are expected to apply information, knowledge and techniques gathered during the course.

TUTOR-MARKED ASSIGNMENT (TMAS)

This is your continuous assessment and accounts for 30% of your total score. You are
expected to answer at least four TMA‘s, three of which must be answered and submitted.
However, it is desirable in all degree level education to demonstrate that you have read
and researched more widely than the required minimum. Using other references will give
you a broader viewpoint and may provide a deeper understanding of the subject.

FINAL EXAMINATION AND GRADING

With this examination written successfully, you have completed your course in Basic
research and one believes you would apply your knowledge (new or up-graded) in your
project. The ‗end of course examinations‘ would earn you 70% which would be added to
your TMA score (30%). The time for this examination would be communicated to you.

HOW TO GET THE BEST FROM THIS COURSE

In distance learning, the study units are specially developed and designed to replace the
conventional lectures. Hence, you can work through these materials at your own pace,
and at a time and place that suits you best. Visualize it as reading the lecture.
This is one of the great advantages of distance learning. You can read and work through
specially designed study materials at your own pace, and at a time and place that suits
you best. Think of it as reading the lecture that a lecturer might set you some readings to
do, the study unit will tell you when to read other materials. Just as a lecturer might give
you an in-class exercise, your study units provide exercises for you to do at appropriate
points.

Each of the study units follows a common format. The first item is an introduction to the
subject matter of the unit, and how a particular unit is integrated with the other units and
the course as a whole.
Next is a set of learning objectives. These objectives allow you to know what you should
be able to do by the time you have completed the unit. You should use these objectives
to guide your study. When you have finished the unit, you must go back and check
whether you have achieved the objectives. If you make a habit of doing this, you will
significantly improve your chances of passing the course.
The main body of the unit guides you through the required reading from other sources.
This will usually be either from a Reading Section of some other sources.

Self-tests are interspersed throughout the end of units. Working through these tests will
help you to achieve the objectives of the unit and prepare you for the assignments and the
examination. You should do each self-test as you come to it in the study unit. There will
also be numerous examples given in the study units, work through these when you come
to them too.

The following is a practical strategy for working through the course. If you run into any
trouble, telephone your tutor. Remember that your tutor‘s job is to help you. When you
need help, don‘t hesitate to call and ask your tutor to provide it.

(1) Read this course guide thoroughly.

(2) Organize a study schedule. Refer to the course overview for more details. Note
the time you are expected to spend on each unit and how the assignments relate to
the units. Important information e.g. details of your tutorials, and the date of the
first day of the semester will be made available. You need to gather all this
information in one place, such as your diary or a wall calendar. Whatever method
you choose to use, you should decide on and write in your own dates for working
on each unit.
(3) Once you have created your own study schedule, do everything you can to stick to
it. The major reason that students fail is that they get behind with their
coursework. If you get into difficulties with your schedule, please let your tutor
know before it is too late for help.
(4) Turn to unit 1 and read the introduction and the objectives for the unit.
(5) Assemble the study materials. Information about what you need for a unit is given
in the ‗Overview‘ at the beginning of each unit. You will always need both the
study unit you are working on and one of your references, on your desk at the
same time.
(6) Work through the unit. The content of the unit itself has been arranged to provide
a sequence for you to follow. As you work through the units, you will be
instructed to read sections from your set books or other articles. Use the unit to
guide your reading.
(7) Review of the objectives for each study unit and confirm that you have achieved
them. When you are confident that you have achieved a unit‘s objectives, you can
then start on the next unit. Proceed unit by unit through the course and try to face
your study so that you keep yourself on schedule.
(8) After completing the last unit, review the course and prepare yourself for the final
examination. Check that you have achieved the unit objectives (listed at the
beginning of each unit) and the course objectives (listed in the Course Guide).

SUMMARY

This course ENT410 is designed to give you some knowledge which would help you to
understand corporate development as applied to corporate governance and consolidation
in Nigeria. After going through this course successfully, you would be in a good position
to pass your examination at the end of the semester and use the knowledge gained to
apply in your daily entrepreneurial activities. You will also be able to contribute to the
development of scholarly thoughts in entrepreneurship and business management as it
affects corporate development and corporate governance.

We hope you enjoy your acquaintances with the National Open University of Nigeria
(NOUN). We wish you success in this interesting course and hope you will use what you
have learnt in this course to apply to knowledge.
 MAIN
CONTENT

CONTENTS PAGE

Module 1………………………………………………………………………… 1

UNIT 1: Corporate Development……………………………………………….. 3

UNIT 2: Mergers and acquisitions………………………………………………. 9
UNIT 3: Mergers and Acquisitions: Opportunities and avoiding the pitfalls…… 13
UNIT 4: Mergers and Acquisitions: Challenges and Regulatory Authorities…… 20
UNIT 5: Concept of Corporate strategy…………………………………………. 29

Module 2…………………………………………………………………………. 29

UNIT 6: Forms of Strategy……………………………………………………… 25

UNIT 7: Banking Sector Consolidation…………………………………………. 40
UNIT 8: Consolidation in the oil and Gas Industry: Mergers and Acquisitions… 44
UNIT 9: Incentives on Consolidation in the Nigerian Banking Industry………… 54
UNIT 10: Products………………………………………………………………... 59

Module 3…………………………………………………………………………. 68

UNIT 11: Product-Mix Strategies……………………………………………….. 68

UNIT 12: New Product Development…………………………………………... 78
UNIT 13: Product Development Theories………………………………………. 96
UNIT 14: Quality………………………………………………………………... 105
UNIT 15: Total Quality Management…………………………………………… 112
MODULE 1

Unit 1: Corporate Development

Unit 2: Mergers and acquisitions
Unit 3: Mergers and Acquisitions: Opportunities and avoiding the pitfalls
Unit 4: Mergers and Acquisitions: Challenges and Regulatory Authorities
Unit 5: Concept of Corporate strategy

UNIT 1 CORPORATE DEVELOPMENT

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1Corporation or Incorporation
3.2 Corporate developments
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

Meaning of a ‗Corporation‘ today, organizations are conducting their businesses to suit

current trend in technology and innovation. A corporation is a legal entity that is
separate and distinct from its owners. Corporations enjoy most of the rights and
responsibilities that an individual possesses; that is, a corporation has the right to
enter into contracts, loan and borrow money, sue and be sued, hire employees,
own assets and pay taxes.
The most important aspect of a corporation is limited liability. That is, shareholders have
the right to participate in the profits, through dividends and/or the appreciation of
stock, but are not held personally liable for the company's debts.

A corporation is a business or organization formed by a group of people, and it has rights

and liabilities separate from those of the individuals involved. It may be a
nonprofit organization engaged in activities for the public good; a municipal
corporation, such as a city or town; or a private corporation (the subject of this
article), which has been organized to make a profit.
2.0 OBJECTIVES

At the end of this unit, the student should be able to:

1. Demonstrate the understanding corporation

2. Be knowledgeable about forming a Corporation
3. Understand the key company initiatives for corporate development

3.0 MAIN CONTENT

3.1 Corporation or Incorporation

Browne'sCiv.Law,99;Civ.Code of Lo.art.418; defines a corporation as follows: "A

corporation, or body politic, or body in corporate, is a collection of many
individuals united in one body, under a special denomination, having perpetual
succession under an artificial form, and vested by the policy of the law, with a
capacity of acting in several respects as an individual, particularly of taking and
granting property, contracting obligations, and of suing and being sued; of
enjoying privileges and immunities in common, and of exercising a variety of
political rights, more or less extensive, according to the design of its institution, or
the powers conferred upon it, either at the time of its creation, or at any subsequent
period of its existence."

In the eyes of the law, a corporation has many of the same rights and responsibilities as a
person. It may buy, sell, and own property; enter into leases and contracts; and
bring lawsuits. It pays taxes. It can be prosecuted and punished (often with fines)
if it violates the law. The chief advantages are that it can exist indefinitely, beyond
the lifetime of any one member or founder, and that it offers its owners the
protection of limited personal liability.

3.1.1 Limited Liability

If you own shares in a corporation that cannot pay its debts and is sued by its creditors,
the assets of the company may be seized and sold. But although you can lose your
investment, the creditors cannot attach your personal assets (such as cars, houses,
or bank accounts) to satisfy their claims.

There are some important exceptions to this rule, however. If the business affairs of a
corporation and its shareholders are so entangled that they are, in effect, one and
the same, an opponent in a lawsuit may be able to convince a court to "pierce the
corporate veil" and impose personal liability, or responsibility, on the active
 shareholders. Personal liability may also be imposed if the corporation does not
comply with required legal formalities or fails to keep proper records.

3.1.2 Forming a Corporation

If you want to form a corporation, you must obtain a state charter. Here are some things
to do before you apply:

Choose the state in which you want to incorporate. This will usually be the state where
your company has its headquarters or where it conducts most of its business. Some
people prefer to incorporate in states that impose few regulations or no corporate
income tax, such as Delaware, Nevada, and Wyoming.
Decide whom you want as officers. Although many states require at least two or three
parties to form a corporation, they need not all be shareholders. You may want to
ask friends or family members to serve as the initial officers. If you remain the
sole shareholder, you alone will control the corporation's activities.

SELF ASSESSMENT EXERCISE

1. What are the procedures for forming a Corporation?

3.2 Corporate Development

This refers to the planning and execution of a wide range of strategies to meet specific
organizational objectives. The kinds of activities falling under corporate
development may include initiatives such as recruitment of a new management
team, plans for phasing in or out of certain markets or products, considering a
partner for a strategic alliance, establishing relationships with strategic business
partners, identifying and acquiring companies, securing financing, divesting of
assets or divisions, increasing intellectual property assets and so on. There is no
formula for "corporate development" and the activities encompassed are often the
role of the CEO or other executives or experienced business consultants.

3.2.1 Techniques for Corporate Development

1. Process

There is no one tried and true formula for the process of corporate development. The
actual structure of the corporate strategy will depend greatly on the current
circumstances of the company and the area where the development is desired. In
most cases, the process will not be of short duration; corporate development is
usually a process that takes place over an extended period of time and may be
adjusted or refined as the project moves forward (is under development).
2. Reshaping Management

One of the manifestations of corporate development has to do with reshaping the

management arm of the corporation. This may involve a process of phasing certain
management positions out of the existing structure or creating new positions in an
effort to strengthen the management team. As part of this type of approach,
corporate development may also demand that one or more current managers are
released from the company and replaced with people who possess skills required
to move the company forward. When this is the case, the corporate development
team will handle the functions of recruitment and evaluation of potential hires.

3. Growing the company

The process of corporate development can also be applied to the task of growing the
company through mergers and acquisitions. In this scenario, the project
development will involve identifying potential target companies for acquisitions or
unions resulting in a new and more aggressive corporation. The team will consider
all possible outcomes from any given potential merger or acquisition and attempt
to project if the action is likely to result in positive growth or could possibly
impair the company permanently.

Just as a management team may be revamped, corporate development may also be

employed to change the current focus for clients. This may mean looking into the
potential for breaking into new markets with existing products or developing
complementary products that will allow this type of expansion. Corporate
development strategy would monitor the trends associated with a corporation's
products or services and helps the corporation establish strategies to find more
customers. In addition, corporate development works to maximize the profits of a
corporation by figuring out the appropriate pricing for a given good or service. A
corporate development team also leads discussions with sales department heads
regarding how to market corporate goods, organize marketing campaigns, analyze
market research and incorporate any customer advice or complaints into marketing
strategies in such cases; extensive industry specific business experience is often
preferred which is why companies may hire an external firm to help them engage
in such moves.

Depending on the status of the base market, corporate development may also look at
shifting away from a shrinking consumer market while seeking market share in a
different consumer market with newer products. For example, many typewriter
manufacturers during the 1980s and 1990s slowly phased out their core business
and began to focus more on computer parts and accessories as a way to continue
operations.
4. Need for specialists

Particularly in larger companies, corporate development is provided as a charter for a

particular executive or team. In these cases, the opportunities and initiatives are
numerous enough to justify specialists, instead of being delegated to the office of
the CEO and line of business executives. When focused on product or financial
issues, corporate development executives often have MBA, CFA or CPA
credentials. Often the internal corporate development executives come from a
legal or investment banking background, due to the complex contractual and
valuation issues associated with many transactions.
Corporate development involves the quantification and qualification of business and
market risk using an analytical and evidence- based process built around detailed
industry- specific factors and market measures. Each assessment measures and
compares performance/ potential against detailed market, industrial and
competitive datasets and focuses on

3.2.2 Key company initiatives are:

1. Corporate Diversification: A process that enables a client to evaluate the cost/

benefits of diversification into new product markets by profiling its competencies
in current markets, benchmarking them against known success criteria/ good
practice for the new markets, quantifying the corporate gap in terms of risks/
opportunities/ costs, translating the outcome of the research and analysis into a
clearly defined action plan.

2. Corporate Growth: A process that measures the options for new business growth
(in terms of products and markets) and the associated risks/ rewards of each
option. Our analysis looks at current corporate performance, profiles it against the
requirements for success in current and new markets, identifies the key risk areas
and what is needed to address them. The final output is an action plan for
achieving targeted company growth.

3. Globalisation: A process that identifies the opportunities and the required actions
for a company to ―go global‖ in its chosen markets. Our research process can
quantify and qualify the new target markets, identify entry points into those
markets, analyse current company performance and identify the changes necessary
to achieve globalisation and devise the new business model/ strategy necessary to
achieve and sustain global status.

4. Consolidation: A process that measures company performance in its current

markets, compares this performance with competitors and with market
requirements, identifies the markets where the company has the greatest
competitive profile, devises the new business model/ strategy for consolidation
 around the selected markets and identifies the actions necessary to reduce business
risk and improve profitability through consolidation.

5. Corporate Re-Cycling: A process that enables the client to fully evaluate the
business options for the re-cycling or re-purposing of a ―problem site‖. Our
research includes measuring the capabilities of the site, identifying new
applications (products and markets) for those capabilities and developing the
business model/ strategy for the ―new‖ business.

4.0 CONCLUSION

We noted from the unit that a corporation has many of the same rights and
responsibilities as a person. It may buy, sell, and own property; enter into leases
and contracts; and bring lawsuits. While corporate development involves the
quantification and qualification of business and market risk using an analytical and
evidence- based process built around detailed industry- specific factors and market
measures. The various techniques of corporate development and the key company
initiatives have been discussed, while the need for the existence of a company has
also been explained

5.0 SUMMARY

In this unit we have discussed the meaning of a 'corporation', corporate development,

techniques for corporate development and key company initiatives for corporate
development. We also discussed the techniques for corporate development and
key company intiatives for corporate development such as corporate
diversification, corporate growth, globalization, consolidation and corporate re-
cycling. We shall proceed to consider Mergers and Acquisitions in the next unit.

6.0 TUTOR-MARKED ASSIGNMENT

a) Give detail account of your expectations, if you want to form a corporation.

b) What do you understand by corporate development?

c) Explain the key company initiatives for corporate development.

7.0 REFERENCES/FURTHER READINGS

Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of excess.
Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of
Minnesota Press.

Bataille, G. (1987). Eroticism (translate by M. Dalwood). London: Marian Boyars.

Bataille, G. (1988). Inner Experience (translated by L.A. Boldt).New York: State

University of New York Press.

Bataille, G. (1990). ―Hegel, death and sacrifice‖ (translated by J. Strauss).In A. Stoekl

(Ed.) On Bataille, Yale French Studies, 78: 9-28. New York: Yale University
Press.

Baudrillard, J. (1993). Symbolic exchange and death (translated by I.H. Grant).London:

Sage Publications.
UNIT 2 MERGERS AND ACQUISITIONS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Types of Mergers
3.2 Mergers and Acquisitions in the Globe
3.3 Mergers and Mergers in Nigeria – 29 Years After
3.4 The Legal Framework of Mergers and Acquisitions
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

In the world of business, mergers and acquisitions constitute a powerful growth tool used
by companies to achieve long-term growth and increased revenue or profitability.
It is a tool used for expanding the operations of a company with a view to
achieving growth. Mergers and acquisitions are crucial to the growth and health
of an economy being a highly attractive means for business owners and
entrepreneurs to get value from the wealth they have contributed in creating.
Mergers are vital tools used by companies for the purpose of expanding their
business operations with objectives ranging from increasing their size, long term
profitability or relevance within a particular market.

The term mergers and acquisitions and consolidation may often be confused, they
look
similar and mostly used interchangeably. However, the three different meanings of
Mergers may be of various types and so can acquisitions and consolidation. A
merger
refers to the combination of two or more organizations into one larger organization
or the
fusion of two or more companies, as distinct from the take-over of one company
by
another. Such actions are commonly voluntary and often result in a new
organizational
name. Acquisitions on the other hand, are the purchase of one organization by
another.
Such actions can be hostile or friendly and the acquirer maintains control over the
acquired
 firm and acquisitions differ from a consolidation which is a business combination
where
two or more companies join to form an entirely new company

Mergers may be undertaken for various reasons, notably to improve the efficiency of two
complementary companies by rationalizing output and taking advantage of
economies of scale, and to fight off unwelcome takeover bids from other larger
companies. The companies involved form one new company and their respective
shareholders exchange their holding for shares in the new concern at an agreed
rate. From a business perspective, a merger is simply the consolidation of two or
more companies into one. Merger‟ presupposes the existence of two independent
things or estates, the greater of which would swallow up the lesser one by the
process of absorption.

2.0 OBJECTIVES

At the end of this unit, students should be able to:

1. Understand what Mergers and Acquisitions are

2. Be knowledgeable about Mergers and Mergers in Nigeria
3. Understand the Legal Framework of Mergers and Acquisitions

3.0 MAIN CONTENT

3.1 Types of Mergers

1. Horizontal mergers: A horizontal merger involves two firms operating and

competing
in the same kind of business activity. Textiles firm merges raw materials firm.
2. Vertical mergers: Vertical mergers occur between firms in different stages of
production operation. - Example: Helene Curtis and Unilever.
3. Conglomerate Mergers: Conglomerate mergers involve firms engaged in
unrelated
types of business activity - Example: General Electric buying NBC television.
4. Concentric Mergers - Based on specific management functions whereas the
conglomerate mergers are based on general management functions - Example:
Citigroup (principally a bank) buying Salomon Smith Barney (an investment
banker/stock brokerage operation.

3.2 Mergers and Acquisitions in the Globe

Mergers and acquisitions (M&A) activities rose to a global record of US$3.8Trillion in
2006. This marked an increase of over thirty-five percent from year 2005, and
surpassed the previous high of US$3.4Trillion set in year 2000 during the previous
M&A boom. Many of these transactions were cross-border. In a study conducted
in 2000 by Lehman Brothers and another in 2010 by Morgan Stanley, it was found
that, on average, large M&A deals cause the domestic currency of the target
corporation to appreciate by one percent relative to the acquirer's. Lien argues that
for every $1 Billion deal, the currency of the target corporation increased in value
by 0.5%. More specifically, the report found that in the period immediately after
the deal is announced, there is generally a strong upward movement in the target
corporation's domestic currency (relative to the acquirer's currency). Fifty days
after the announcement, the target currency is then, on average, 1% stronger.
The rise of globalization has exponentially increased the market for cross border M&A.
In 1996 alone there were over 2000 cross border M&A transactions worth a total
of approximately $256 billion. This rapid increase took many M&A firms by
surprise because the majority of them never had to consider acquiring the
capabilities or skills required to effectively handle this volume of transactions. In
the past, the market's lack of significance and a stricter national mindset prevented
the vast majority of small and mid-sized companies from considering cross border
intermediation as an option which left M&A firms inexperienced in this field. This
same reason also prevented the development of any extensive academic works on
the subject.
Cross-border intermediation has many more levels of complexity to it namely corporate
governance, the power of the average employee, company regulations, political
factors, customer expectations and cultures, all crucial factors that could affect the
transaction.

3.3 Mergers and Acquisitions in Nigeria – 29 Years After

The year 1982 was a landmark year in the history of mergers and acquisitions in Nigeria.
Prior to 1982 the concept of mergers and acquisitions had minimal actual
significance in Nigeria. One of the very few major mergers that took place before
that time was the amalgamation of three companies- Re Bendel Co Ltd, Bendel
Intra-city Bus Service Ltd and Trans-Kalife Ltd- to form the Bendel Transport
Service Ltd. This situation changed significantly after the Securities and Exchange
Commission (SEC) began its operations in 1982, marking the beginning of
regulated business combinations in Nigeria. The first merger attempt was in 1982
between United Nigeria Insurance Company Limited and United Life Insurance
Company Limited, which was, however, not consummated. Between 1982 and
1988, The Securities and Exchange Commission supervised thirteen mergers-
including the mergers of Lever Brothers Nigeria Limited and Lipton Nigeria Ltd,
SCOA Nigeria Ltd and Nigeria Automotive Components Ltd, John Holt Ltd and
John Holt Investment Ltd- only two of which were unsuccessful.
The prospects of mergers and acquisitions in Nigeria have continued to evolve since then.
Different legislation have been passed to regulate business combinations,
including the Companies and Allied Matters Act of 1990 and the Investment and
Securities Act of 2007, as well as some sector-specific Acts, such as the Banking
and other Financial Institutions Act of 1991, the Insurance Act of 2003 and the
Electric Power Sector Reform Act of 2005. In 2002, there was a merger of two
important petroleum companies; Agip Nigeria Plc and Unipetrol Plc to form
Oando Plc.

3.4 The Legal Framework of Mergers and Acquisitions

In Nigeria the legislations that have impact, directly or indirectly on mergers and
acquisitions in Nigeria are:
1. The Investments and Securities Act (ISA) 2007 and the Rules and Regulations of
the Securities and Exchange Commission (SEC) made pursuant to the
ISA.
2. The Companies and Allied Matters Act (CAMA) 2004.
3. The Companies Income Tax Act 2004.

In addition, there are other sector-specific laws that regulate business combinations. The
Banks and other Financial Institutions Act (BOFIA) regulates the banking
industry; the Nigerian Telecommunications Act 2003, regulates the
telecommunications industry; the Insurance Act 2003 regulates the insurance
industry; the Electric Power Sector Reform Act 2005 regulates the electric power
sector. Transaction agreements relating to business combinations are typically
governed by Nigerian law which has its roots in English common law. The parties
to such agreements may, however provide for the law of any other jurisdiction to
govern the agreement, especially where the M&A has cross border dimensions.

4.0 CONCLUSION

A merger can happen when two companies decide to combine into one entity or when
one company buys another. An acquisition always involves the purchase of one
company by another. The functions of synergy allow for the enhanced cost
efficiency of a new entity made from two smaller ones - synergy is the logic
behind mergers and acquisitions.

Mergers and acquisitions are crucial to the growth and health of an economy
being a
highly attractive means for business owners and entrepreneurs to get value from
the
wealth they have contributed in creating. The companies involved form one new
 company and their respective shareholders exchange their holding for shares in
the new
concern at an agreed rate. Mergers can fail for many reasons including a lack of
management foresight, the inability to overcome practical challenges and loss of
revenue
momentum from a neglect of day-to-day operations.

5.0 SUMMARY

In this unit we have discussed;

1. Mergers and Acquisitions in Nigeria and in the globe.
2. Defined the term Mergers and Acquisitions.
3. Examined the legal framework regulatory bodies in charge of Mergers and
Acquisitions,
We also explained the effect of Mergers and Acquisitions in an organization and reasons
why such fails in an organization.

We shall proceed to examine reasons for, Opportunities and Avoiding the Pitfalls
in
Mergers and Acquisitions in next unit.

6.0 TUTOR-MARKEDASSIGNMENT

a) Define Mergers and acquisitions?

b) Explain the development of Mergers and Acquisitions in the Globe?

c) Give accounts on the Legal Framework of Mergers and Acquisitions.

7.0 REFERENCES/FURTHER READINGS

Bataille, G. (1985). ―Nietzsche and the fascists.‖In Georges Bataille Visions of excess.
Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of
Minnesota Press.

Bataille, G. (1987). Eroticism (translate by M. Dalwood). London: Marian Boyars.

Bataille, G. (1988). Inner Experience (translated by L.A. Boldt).New York: State

University of New York Press.
Bataille, G. (1990). ―Hegel, death and sacrifice‖ (translated by J. Strauss).In A. Stoekl
(Ed.) On Bataille, Yale French Studies, 78: 9-28. New York: Yale University
Press.

Baudrillard, J. (1993). Symbolic exchange and death (translated by I.H. Grant).London:

SagePublications.

Mergers & Acquisitions: Identifying the Opportunities & Avoiding the Pitfalls: FABIAN
AJOGWU, SAN
UNIT 3: MERGERS AND ACQUISITIONS: OPPORTUNITIES AND AVOIDING
THE PITFALLS

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Reasons for Mergers
3.2 Market Competition Factors
3.3 The Procedure for Mergers in Nigeria
3.4 Avoiding the Pitfalls
3.5 The M and A Deal Closure
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

Meaning of Mergers

A merger connotes the combination of two companies into one larger company for
some economic or other strategic reasons. It is defined as a transaction in which
corporations of relatively equal size, combine It is also seen as a transaction in
which two or more corporations combine under state corporation law, with the
result that all but one of the participating corporations lose its identity. Sherman
and Hart describe a merger as a combination of two or more companies in which
the assets and liabilities of the selling firm(s) are absorbed by the buying firm.
Although the buying firm may be a considerably different organization after the
merger, it retains its originality.

Mergers can be defined from a broad as well as a narrow perspective. From a

broad perspective, a merger is simply any takeover of one company by another,
whereby the businesses of both companies are brought together as one. The
management of both companies is then fused into one. Coyle defines it from a
narrow perspective define merger as coming together of two companies of roughly
equal size, pooling their resources into a single business. The stockholders or
owners of both pre-merger companies have a share in the ownership of the merged
business and top management of both companies continues to hold senior
management positions after the merger.
A merger is defined under the Investment & Securities Act as the amalgamation of
the undertakings or any part of the undertakings or interest of two or more
 companies or the undertakings or any part of the undertakings or interest of one or
more companies and one or more bodies corporate.

2.0 OBJECTIVES

At the end of this unit, students should be able to:

1. Demonstrate knowledge on reasons Mergers and Acquisitions

2. Be knowledgeable about Procedure for Mergers in Nigeria
3. Understanding and avoiding the Pitfalls of – The Twin Issue of Due Diligence
and Valuation.

3.0 MAIN CONTENT

3.1 Reasons for Mergers

There are many reasons for companies wanting to acquire other companies. These
reasons include the pursuit of a growth strategy, the defense of hostile action from
another would-be acquirer, and financial opportunities. However, the commonest
reason is that the merger will result in substantial trade advantage or greater profits
than the combined profits of the two companies working separately. There is also
the element of synergy. For instance, laying out the reason for the merger between
United Bank for Africa Plc and Standard Trust Bank Plc, the Chairman of United
Bank for Africa Plc stated as follows;
The primary objective of the merger is to create the No. 1 bank in West Africa and one of
the largest Banks in sub Saharan Africa with a formidable asset base, offering a
full spectrum of banking services from basic products and services for the low
income personal market to customized solutions for the commercial and corporate
market. The combined entity upon completion of the merger will have total assets
of NGN365 Billion, over 360 branches spread across all the states of the country
and a market Leadership position within the sub-regional banking industry.
Mergers and acquisitions may enable a company acquire a competitor which poses
substantial threat to it, or a company which supplies its raw materials or provides
it with market outlets with the aim of assuring, improving these services, or
ensuring that these companies are not taken-over by a competitor. Again, the
motivation may be diversification of enterprises with a view to ensuring stability
of earnings; and it may be to acquire the much-needed technology or managerial
expertise of another company.
There are reasons for going the route of mergers, which have been considered to
primarily add to shareholder value. They are as follows: -

1. Economies of Scale: This refers to the fact that the combined company can often
reduce duplicate units or operations, lowering the costs of the company relative to
 the same revenue stream, thus increasing profit. In the United Bank for Africa Plc
merger, the Scheme cited economies of scale as benefit, when it stated thus: the
combined institution will create economies of scale that will result in a reduction
in costs and the utilization of the synergies between the two institutions to
streamline the operations of the post –merger UBA.

2. Increased Revenues/ Increased Market Share: This motive assumes that the company
will be absorbing a major competitor and thus increase its power (by capturing
increased market share) to set prices. This was laid out as a driver in the UBA
merger
through the merger, the combined bank will be better able to compete with institutions
within Nigeria, the Sub-Saharan Africa region and internationally, thereby
increasing market share, surpassing the competition and consequently increasing
gross revenue.

3. Cross Selling: For example, a bank buying a stock broker could then sell its banking
products to the stock broker's customers, while the broker can sign up the bank's
customers for brokerage accounts, or a manufacturer can acquire and sell
complementary products.

4. Synergy: Better use of complementary resources. Excluding any synergies resulting

from the merger, the total post-merger value of the two firms is equal to the pre-
merger value. However, the post-merger value of each individual firm likely will
be different from the pre-merger value because the exchange ratio of the shares
probably will not exactly reflect the firms' values with respect to one another. The
exchange ratio is often skewed because the target firm's shareholders are paid a
premium for their shares.
Synergy takes the form of revenue enhancement and cost savings. When two companies
in the same industry merge, such as two banks, combined revenue tends to decline
to the extent that the businesses overlap in the same market and some customers
become alienated. For the merger to benefit shareholders there should be cost
saving opportunities to offset the revenue decline; the synergies resulting from the
merger must be more than the initial lost value. In citing operational efficiency as
one of the envisaged benefits of the merger between Dangote Cement Plc and
Benue Cement Plc, the Chairman stated: The merger will result in greater
operational integration between Dangote Cement Plc and Benue Cement Plc and
make the consolidation of their supply and distribution chain more effective.
Following the merger, BCC and DCP will be able to share facilities, inventory and
other resources.

5. Taxes: A profitable company can buy a loss maker to use the target's loss as their
advantage by reducing their tax liability. In the United States and many other
 countries, rules are in place to limit the ability of profitable companies to "shop"
for loss-making companies, limiting the tax motive of an acquiring company.

6. Geographical or other diversification: This is designed to smooth the earnings results

of a company, which over a long term, smoothens the share price of a company,
giving conservative investors more confidence in investing in the company.
However, this does not always deliver value to shareholders (see below). This was
also cited as one of the drivers of the merger of United Bank for Africa Plc – the
combined institution will facilitate geographical expansion into markets where we
had not previously had a presence. As a result, the combined bank will be able to
decrease total risk, increase product sales and thus increase overall gross revenue.
7. Resource Transfer: Resources are unevenly distributed across firms and the interaction
of target and acquiring firm resources can create value through either overcoming
information asymmetry or by combining scarce resources.

8. Increased market share which can increase market power: In an oligopoly, increased
market share generally allows companies to raise prices. Note that while this may
be in the shareholders' interest, it often raises antitrust concerns, and may not be in
the public interest.

The reasons for a merger could also be appreciated from the perspective of the seller. The
reasons include;
1. The seller could be approaching retirement or getting ready for an exit out
of the business.
2. The need for competent management or managers that could lead the
business to the next level i.e. sustain it.
3. The business could require substantial investment in new technology and
business processes to enhance its competiveness.
4. The need for access to the target‘s resources coupled with the need for
liquid assets to augment working capital, and meet critical obligations of
the company.

The reasons for merging could also be appreciated from the buyer‘s perspective. The
reasons would include;
1. The need to enhance revenues, and reduce the operation costs relative to
the revenues, in essence to increase the earnings per share (EPS).
Mergers in which the acquiring company's earnings per share (EPS)
increases is known as ―accretive mergers‖. An alternative way of
calculating this is if a company with a high price to earnings ratio (P/E)
acquires one with a low P/E. The corollary of accretive mergers is
„dilutive mergers,‟ whereby a company's EPS decreases. The company
will be one with a low P/E acquiring one with a high P/E.
 2. Backward or vertical integration (vertical or horizontal operational
synergies) or economies of scale.
3. The need to acquire new technologies, business processes, production
capacity and management capabilities.
4. Strengthening management capabilities.
5. Change in the overall direction of the business.

A merger decision could also be driven by its business objectives at the time, such as
market leadership in the form of geographical market leadership, within a country,
a group of countries or globally. It could also be driven by the need for
technological leadership; or for providing high quality service or innovation or
simply being the lowest cost producer in the industry.
The Securities and Exchange Commission (SEC) is charged with the statutory
responsibility of considering the desirability or otherwise of a merger from the
point of view of the public interest or greater good to the society or economy. This
responsibility is exercised with clearly defined criteria and factors to be taken into
consideration in arriving at a decision whether or not the merger is against public
interest. Whenever required to consider a merger, the SEC is required to initially
determine whether or not the merger is likely to substantially prevent or lessen
competition, by assessing the factors set out in section 121, subsection (2) of the
ISA. If it appears that the merger is likely to substantially prevent or lessen
competition, then the SEC will determine - whether or not the merger is likely to
result in any technological efficiency or other pro-competitive gain which will be
greater than, and off-set, the effects of any prevention or lessening of competition,
that may result or is likely to result from the merger, and would not likely be
obtained if the merger is prevented, and… whether the merger can or cannot be
justified on substantial public interest grounds by assessing the factors set out in
subsection (3);

In considering the merger, the SEC is required to determine whether all the shareholders
of the merging entities are „fairly, equitably and similarly treated and given
sufficient information regarding the merger‟. When determining whether or not a
merger is likely to substantially prevent or lessen competition, the SEC is required
to assess the strength of competition in the relevant market, and the probability
that the company, in the market after the merger, will behave competitively or co-
operatively, taking into account any factor that is relevant to competition in that
market.

3.2 Market Competition Factors

The factors that should be taken into account as being relevant to competition in that
market are:
(a) The actual and potential level of import competition in the market;
(b) The ease of entry into the market, including tariff and regulatory barriers;
(c) The level and trends of concentration, and history of collusion, in the market;
(d) The degree of countervailing power in the market;
(e) The dynamic characteristics of the market, including growth, innovation, and product
differentiation;
(f) The nature and extent of vertical integration in the market;
(g) Whether the business or part of the business of a party to the merger or proposed
merger has failed or is likely to fail; and
(h) Whether the merger will result in the removal of an effective competitor.

When determining whether a merger can or cannot be justified on public interest grounds,
the SEC is required to consider the effect that the merger will have on a number of
issues
(a) A particular industrial sector or region;
(b) Employment;
(c) The ability of small businesses to become competitive; and
(d) The ability of national industries to compete in international markets.

3.3 The Procedure for Mergers in Nigeria

Preliminary Considerations
The formalities of a merger usually include the following steps:
a) The company may execute a Memorandum of Understanding which spells out the
understanding of the parties and ―sets the stage for honest and confident
negotiation and anticipates the future steps to be taken by the parties‖. This
document is not subject to regulation by the Securities and Exchange Commission.
The management of the acquiring and target companies will reach a preliminary
agreement.

b) The Board of directors of both companies would then adopt a merger agreement. Both
companies must notify their respective shareholders of the terms of the proposed
merger and the shareholders must approve the transaction by majority vote.

c) Notification and voting materials usually are provided to shareholders of public

companies as part of proxy statements required by statutory instrument. The proxy
statements will include the terms of the merger, the consideration that will be
offered to the target‘s shareholders and information about the two companies.
These considerations may include stocks and shares or other securities in the
acquiring company, debentures, or cash.

d) If the merger is approved by the required number of shares, the shareholders of the
merging company will exchange their stocks for the pre-negotiated consideration.
 All shareholders must be entitled to receive equal consideration of each of their
shares. However a choice of the form of consideration is sometimes permitted.

3.4 Avoiding the Pitfalls – The Twin Issue of Due Diligence and Valuation

The two main pitfalls arise from two main issues - the lack of or improper Due Diligence,
and Valuation. It is not intended to discuss the issue of valuation in this paper, for
reasons of limitations of space and time. Due diligence is the set of investigative
procedures which precede an acquisition or a merger. It is the process of
identifying and confirming or disconfirming the business reasons for a proposed
capital transaction. The purpose of due diligence investigation is to enable the
purchaser gain sufficient familiarity with the target‘s affairs to assess the risks
involved in the purchase. It is prudent to perform due diligence before the
execution of any mergers or acquisitions.
Due diligence determines the accuracy of information disclosed by the merging, selling
or buying company before the consummation of the transaction in order to avoid
any troubles with future business through identification of crucial issues,
resolution on contentious facts and confirmation of key assumptions. When risks
are adequately identified, the transacting parties can determine the realisation or
otherwise of the transaction and project on the appropriate means to execute the
acquisition or merger agreement. Several functions are involved in due diligence
processes- business strategy, finance, legal, marketing, operations, human
resources, and internal audit services. The direction of due diligence efforts
depends on what the company expects to gain from the transaction: employees,
customers, processes, products, or services.
Due diligence involves the complete awareness of the transacting parties on issues
delving on the cost of the merger or acquisition, the consequences of negative
disclosures, the likelihood of litigation or other unexpected conflict, risks
associated with the personal misconduct of the selling parties(e.g. insider trading,
self-dealing, fraud etc). Due diligence also allows the seller and buyer to
renegotiate the price if the buyer determines that there are problems with
information (value of assets, likelihood of lawsuits, robustness of technology, etc.)
or certain projections are unrealistic.

3.5 The M and A Deal Closure

The closing of a merger or acquisition usually brings a great sigh of relief to the buyer,
seller and their respective advisors. Everyone has worked hard to ensure that the
process went smoothly and that all parties are happy with the end result. But the
term closing can be misleading in that it suggests a sense of finality, when in truth
the hard work, particularly for the buyer, has just begun.
One of the major issues with the closing stage is the project staffing level. The first step
in determining project staffing level is to divide the work-force into management
 and staff/ labour. These two groups must be distinguished because the terms of
employment are often quite different. Management is often party to employment
contracts, and receives deferred compensation, share options, and other issues,
while staff can be protected by union contracts and/ or employment laws. In many
ways, management staffing is a much easier problem to resolve. The primary task
of resolving the level of management staffing is to determine where there are
redundancies and who the most qualified candidates are.
Following the closing of the transactions, there are many legal and administrative tasks
that must be accomplished by the acquisition team to complete the transaction.
The nature and extent of these tasks will vary, depending on the size and type of
the financing method selected by the purchaser. The parties to any acquisition
must be careful to ensure that the jubilation of closing does not cause any post-
closing matters to be overlooked.

In an asset acquisition, these post-closing tasks typically include the following:

 Final verification that all assets acquired is free of liens and encumbrances
 Recording of financing statements and transfer tax returns
 Recording of any assignments of intellectual property with the appropriate
authority
 Notification of the sale to employees, customers, distributors, and suppliers
 Adjustment of bank accounts and insurance policies
 Completion of the transfer of all share certificates
 Amendments to the company‘s memorandum and articles of association
 Preparation of all appropriate post-closing minutes and resolutions.

4.0 CONCLUSION

Many companies find that the best way to get ahead is to expand
ownership boundaries through mergers and acquisitions. For others, separating the
public
ownership of a subsidiary or business segment offers more advantages. At least in
theory,
mergers create synergies and economies of scale, expanding operations and cutting costs.
Investors can take comfort in the idea that a merger will deliver enhanced market power.
By contrast, de-merged companies often enjoy improved operating performance thanks
to
redesigned management incentives. Additional capital can fund growth organically or
through acquisition. Meanwhile, investors benefit from the improved information flow
from de-merged companies.

Mergers and Acquisitions (M&A) comes in all shapes and sizes, and investors need to
consider the complex issues involved in M&A. The most beneficial form of equity
structure involves a complete analysis of the costs and benefits associated with the deals.
The terms ―Mergers‖ and ―Acquisitions‖ are often used interchangeably to mean the
same thing, and in a more common sense used in the twin form of „mergers and
acquisitions‟. Acquisition describes the act of gaining effective control over the assets or
management and ownership (of shares in the capital) of another company without any
combination of companies. A merger decision could also be driven by its business
objectives at the time, such as market leadership in the form of geographical market
leadership, within a country, a group of countries or globally. It could also be driven by
the need for technological leadership; or for providing high quality service or innovation
or simply being the lowest cost producer in the industry.

5.0 SUMMARY

We have discussed the procedures for Mergers and Acquisitions, the reasons for merging
from the seller and buyer‘s perspective has been examined. The various regulatory bodies
and their individual roles in mergers and acquisition process have been discussed. The
reasons for Mergers and Acquisitions and some of the pitfalls were also examined. This
unit focused on citation of merger and acquisition meaning, reasons for merger, the
competitive factors and the procedure for organization merger and acquisition in Nigeria.
The various steps to formalities of mergers were considered.

The next unit we shall examine challenges and regulatory authorities of mergers and
acquisitions.

6.0 TUTOR-MARKED ASSIGNMENT

a) What is The Procedure for Mergers in Nigeria?

b) Explain the Twin Issue of Due Diligence and Valuation.
c) Give Reasons for Mergers.
d) Highlights step in formalities of a merger.

7.0 REFERENCES/FURTHER READINGS

Mergers & Acquisitions: Identifying the Opportunities & Avoiding the Pitfalls:
FABIAN AJOGWU, SAN
Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of excess.
Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of
Minnesota Press.

Bataille, G. (1987). Eroticism (translate by M. Dalwood). London: Marian Boyars.

Bataille, G. (1988). Inner Experience (translated by L.A. Boldt).New York: State

University of New York Press.
Bataille, G. (1990). ―Hegel, death and sacrifice‖ (translated by J. Strauss).In A. Stoekl
(Ed.) On Bataille, Yale French Studies, 78: 9-28. New York: Yale University
Press.

Baudrillard, J. (1993). Symbolic exchange and death (translated by I.H. Grant).London:

Sage Publications.

\
UNIT 4 MERGERS AND ACQUISITIONS: CHALLENGES AND REGULATORY
AUTHORITIES

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Issues and Challenges in M&A
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

The Nigerian banking system and indeed, the entire nation‘s financial system has
its share of the global financial crisis. In addition to the effect of the global
financial crisis on the Nigerian financial system, the challenges posed by the
banking consolidation programme that was concluded in 2005 and other
developments within the economy, made the nation to experience another round of
financial crisis in 2008/2009, as revealed by the CBN/NDIC joint Special
Examination carried out in 2009. The Examination result among others that 10 of
the 24 deposit money banks were in grave financial condition. The findings from
the examination led to the removal of eight (8) CEOs of the distressed banks and
members of their executive management teams and their replacement with new
executive managements appointed by the CBN. The CBN also injected N620
billion in the affected banks as tier 2 capital. Out of the 10 banks, owners of Wema
Bank and Unity Bank Plc were able to adequately re-capitalize their banks. The
efforts of The Regulatory Authorities to ensure that the remaining eight banks
were recapitalized were stalled by various court injunctions obtained by the
shareholders of the banks. In order to address that challenge, The CBN gave the
banks a deadline of 30th September, 2011 to recapitalize or have their licenses
revoked.

2.0 OBJECTIVES

At the end of this unit, students are expected to understand:

1. Issues and challenges in M&A

2. The current trend in M&A in the Nigerian banking industry
3. Financial safety nets and Regulatory Authorities.
3.0 MAIN CONTENT

3.1Issues and Challenges in M&A

The first experience of M & A in Nigeria took place during the banking
consolidation programme of 2004/2005. The recent M & A transactions for 4 of
the intervened banks were largely driven by the need to address their deficient
capital positions. The transactions were largely assisted by the Regulatory
Authorities through the provision of technical support in the form of advice. While
the development is expected to resolve the problems of the intervened banks, there
are obvious issues and challenges that should be addressed both by the Regulatory
Authorities and operators in order to derive maximum benefits from the outcome
of the transactions.
Some of these issues and challenges are highlighted below.

Payments System Efficiency

As M & A has the direct effect of positively affecting the payments system by
improving scale efficiencies in bank office payments operations as larger
processing sites may yield scale efficiencies in processing payments
information/instruments. In addition, many of the remaining inter-bank payments
may be cleared more quickly and efficiently because there are fewer end points to
which to send payment information or payment instruments. Thus, even if
individual institutions are not more proficient in handling cheques, credit card,
debit cards, automated clearing system, wire payments, etc, the payments system
efficiency increases as the number of institutions declines.

The issue that arises in this regard is how quickly the merging entities are able to
integrate into a formidable entity that can produce scope and scale economies in
the payments system. It is however, worthy of note to indicate that since all the
affected banks are products of M & A of the recent consolidation programme, they
will bring their experience to bear in this regard. The Regulatory Authorities
should, however, pay close attention to the integration process with a view to
quickly detecting problems when they occu rand proffering remedies to address
such problems.

Distress Resolution

M & A transactions are usually encouraged as they serve as an efficient way of

resolving problems of financial distress. Institutions that are troubled because of
their own inefficiency or underperforming investments are often taken over as an
efficient alternative to bankruptcy or other means of exit. In that type of situation,
the ideal merger would be for the ailing financial institution to be merged with a
conservatively leveraged one that has a complementary mix of financial products,
services and target markets. In the United States, the Federal Home Loan Bank
System had arranged the mergers of a number of large ―problem‖ savings and loan
associations into sound institutions, and the Federal Reserve System had done
same for banks.

While that may be desirable, the possibility that the depth of distress of the weaker
bank may adversely affect the soundness of the healthier one remains an issue of
concern to the Regulatory Authorities. The comfort in this regard is that the exact
depth of distress in all the affected weak banks was unearthed by the Management
teams of the respective banking institutions that were appointed by the Regulatory
Authorities and the financial advisers.

Range of Product Lines Available to Consumers

Successful M & A transactions should potentially be in the public interest,

particularly in the area of service delivery as the outcome is expected to add some
depth to the local banking sector and make a worthwhile contribution to banking
services and the banking industry in a particular country.
A frequent factor in motivating mergers is the possibility of scope efficiencies.
The pursuit of these efficiencies often results in the product lines of the two
entities being rationalized, with consequent cost benefits, since a single delivery
system is used to sell a ―better‖(bigger) range of products. This often increases the
options that consumers have and enhances the utility of these options.
Furthermore, economies of scale are fairly likely to improve after successful M &
A. larger transaction volumes and larger asset positions, through a rationalized
delivery system, mean that unit costs can be reduced. When such cost reductions
are passed on to the consumers, this may be regarded as a public interest benefit.

The challenge here is that the development may compound the oligopolistic
structure of the market where only a few banking institutions dominate and dictate
quality and prices of products and services offered to consumers. It is instructive
to note that when banks merge, the number of players will reduce and hence, the
intensity of competition. This might have implications for the prices, products and
quality of services in the banking sector. In addition, the reduction in the level of
competition, which is a direct result of M& A, implies that there may be less need
for innovation, with possible less research and development spending and, which
might adversely affect potentials for future growth and development at desirable
rates.
Furthermore, M & A can easily result in a substantial increase in the market power
of a bank. Despite the fact that a merger, for instance, is often being motivated on
grounds of economies of scale and cost containment, shareholders‘ interests also
drive mergers, and the cost savings may not always be passed onto customers. In
addition, the possibility exists that the increased market power might be abused by
the emerging entity, raising costs to customers to unacceptable levels.
In that regard, rather than deriving benefits arising from scope and scale
economies of the emerging large entities, consumers may be getting less quality
products/services at higher prices. Regulatory Authorities should therefore put in
place stricter regulation for banking products and service delivery to minimize
possible abuses and they should equally strengthen supervision to ensure
compliance.

3.1.4 Confidence in the Banking System

Banks, although stringently regulated, are prone to runs. This is because they are
known to be highly geared. Confidence is therefore crucial for banks to attract and
retain deposits. Big banks have been observed to be less vulnerable to external
shocks. It could therefore, be said that big banks enhance the confidence of the
public. Since M& A is expected to lead to the creation of large and strong banks,
confidence in the nation‘s banking system is likely to be enhanced and this in turn
may lead to improvement in banking habits of the populace thereby enhancing the
efficacy of monetary policy.
The challenge is that the development my lead to the creation of significantly
important financial institutions (SIFIs) which may take the features of too-big-to-
fail institutions.

The concerns of regulatory and supervisory agencies have been that the impact of
a large bank failing will challenge the issues of moral hazards, systemic risk and
impede the achievement of their mandate. There is the need therefore, to put in
place additional measures to cope with the too big-to-fail problem.

The objectives of regulatory/supervisory agencies in this regard are basically

three, namely:
i. To reduce the possibility of failure of large banks (also called Global
Systematically Important Banks (G-SIBs);
ii. To reduce the extent or impact of the failure of such banks in the unlikely event
of its occurrence; and
iii. Provide a level playing field by reducing the competitive advantage in funding
markets that these institutions have.

In line with practices in other jurisdictions, particularly in Europe, America, Japan

and emerging economies in the Eastern block, the following measures could be
considered for adoption by the Regulatory Authorities in order to achieve the
above-listed objectives of addressing the too-big-to-fail problem.
a. Reducing the Probability of Failure

The cornerstone of regulatory/supervisory response to the problem was the raising

of the amount of capital requirement for this category of banks through the
application of capital surcharge, which has the possibility of lowering the risk of
failure by enhancing their resilience to shocks. Jurisdictions that have started
taking such measures by requiring even higher minimum capital for this category
of banks, have categorized banks in their jurisdictions using size,
interconnectedness, global activity, substitutability and complexity.

b. Reducing the Impact of Failure

One way of reducing the impact of failure of big banks is to reduce their systemic
importance directly by regulatory/supervisory measures. Such measures may
include placing limitations on the size or business activities by separating core
banking services from other speculative investment activities and proprietary
trading operations.

c. Leveling the Playing Field

The distortion to the level-playing-field created by funding advantages by banks

perceived to be too-big-to-fail has remained an issue of concern to regulators and
other key stakeholders. Several attempts have been made to quantify such funding
advantages and the general conclusion has been that the advantage is huge.
Measures such as capital surcharge, restrictions on certain business activities and
imposition of special recovery and resolutions regimes, such as creation of living
will and direct policy intervention, are often put in place for the big banks to help
reduce the undue advantage by making transactions in the market fairer for small
banks which could ensure the creation of a level playing field.

d. Access to Financial Services by Small Firms

Typically, small banks lend a larger proportion of their assets to small businesses
than do large banks. The large institutions created through M & A transactions
may shift away from providing retail oriented services for small depositors and
borrowers because of new opportunities to provide wholesale services for large
capital market participants. This is because it may be scope inefficient for the
emerging large banking entity produce outputs/services that are suitable for small
businesses because diseconomies may most likely arise in providing services to
informational opaque small businesses.
In the main, M & A may inadvertently eliminate small banks, thereby raising the
concern that small firms may find it difficult to access banking services. In view of
the strategic importance of small businesses in the development process of any
nation, the need to strengthen the non-bank financial institutions, particularly
microfinance banks that are capable of rendering services to this group of
economic agents has become imperative.

e. Staff Rationalization

In a service industry such as banking, motivation of staff is a key factor in

ensuring that efficiency is maintained. When banks merge, there is the tendency
that jobs might be lost as part of their positioning strategies the new management
may want to undertake. Apart from the adverse impact on employment level, the
development could also impact negatively on the morale of the remaining
workforce. This development should be envisaged, at least in the short-run, hence
appropriate strategies must be put in place by the new managements of the
emerging banks to boost the morale of staff. In addition, adequate attention should
be given to trade unions in the industry in order to minimize disruptions from their
activities which rationalization of staff might inadvertently prompt.
The adverse effects on employment is, however, expected to wane with time as a
stronger banking sector would inevitably recruit more staff when the respective
banks grow and open new branches. In addition, the induced employment
generation from the real sector of the economy might more than compensate for
job loss, net of attrition, after a successful M & A.

f. Effectiveness of IT Architecture

The effectiveness of IT system might be impaired, at least in the short-run. IT

systems should be able to provide management information that is accurate, timely
and relevant to managing a bank‘s risks. IT is most probably the biggest risk if not
properly planned and managed. For example, there could be a lack of management
information, an increased possibility of fraud and incorrect measurement of risk,
since manual intervention is required until proper IT systems are in place.
In the long run however, successful M & A transactions are expected to lead to the
deployment of highly sophisticated IT systems that would be of immense
advantage to the industry in particular and the economy in general.

g. Executive Capacity

Management of banks should be fit and proper, competent, adequately skilled and
prudent. The ability of executive management to build and mould a management
team that is able to lead the emerging banking entity after M & A through the
painful process of merging IT systems, business lines and products, cultures and
people of critical importance. In that regard, the management of the emerging
entity needs to have the ability to identify the integration risks at an early stage
and manage them effectively in the shortest possible time.
h. Financial Safety Net

Given the importance of banks to the economy, their inherent fragility and the
devastating and painful consequences of bank failure, most governments put in
place safety nets. Financial safety nets are a set of rules and institutions that will
ensure a safe, sound and stable banking system. They are usually made up of
effective supervision, lender-of-last-resort role of central banks and deposit
insurance.

The current trend in M & A in the Nigerian banking industry will raise the
following issues in the three components of the safety net.

a. Regulation and Supervision

The on-going M & A in the banking industry, will undoubtedly, lead to the
emergence of large banking entities. The development will necessarily entail
strengthening of the subsisting regulatory/supervisory framework.
In particular, strong prudential regulation that will introduce additional capital
surcharge for large banks and periodic review of fit-and-proper test results has
become more imperative than hitherto. Similarly, there is the need to develop
guidelines for the development of special resolution regime framework for
systemically important banks so as to reduce the problem of moral hazard as well
as minimize utilization of public funds to bail out banks. In addition, fine-tuning
of the framework for risk-based and consolidated supervision, ensuring
compliance with the recently issued guidelines on accounting and disclosure
regimes and effective self-regulation may be unavoidable so as to promote market
discipline. It is instructive to note that the recent banking reform has addressed
these imperatives but efforts should be made to sustain the momentum. In the case
of risk- based and consolidated supervision, the current efforts of the CBN/NDIC
in upgrading the electronic Financial Analysis Surveillance System (e-FASS) and
the activities of the Financial Services Regulation Coordinating Committee
(FSRCC) would go a long way to assist in this regard.

Furthermore, in view of the fact that M & A would create large and sometimes
complex banks, statutory regulation should be complemented by self-regulation.
Effective self-regulation requires probity, transparency and accountability. The
regulatory/supervisory authorities should take necessary steps to encourage these
virtues and operators must be made to appreciate the need for compliance with
rules and regulations to promote healthy competition since self-regulation does not
amount to a total elimination of regulatory controls and supervision.
In addition, consideration should always be given to the possibility that corporate
governance, in particular internal control systems, will be less effective during a
merger, since the individuals‘ responsible for governance and control will be
focusing on strategic issues relating to the merger. Regulatory/supervisory
authorities must therefore, continue to encourage the enthronement of responsive
corporate governance structure for effective risk management both during and
after M & A by banks.

b. Deposit Insurance
As a deposit protection agency, NDIC is concerned with putting in place
appropriate strategies to ensure adequate depositor protection in the banking
industry both during and after M & A transactions. In order to adequately protect
depositors, contribute to the stability of the banking system and reduce the
problem of moral hazard often associated with deposit insurance, some specific
deposit insurance design features as being applied by the NDIC may have to be
reviewed to enhance the effectiveness of the Corporation. These features, some of
which are already in place, include the following:

Placing limits on the amounts insured as currently being done but the limits should
be
periodically reviewed to ensure their adequacy in engendering confidence;
Excluding certain categories of depositors from coverage: this is also the practice
in
Nigeria; Fine-tuning the subsisting differential premium assessment system to
make it more effective in promoting sound risk management in banks; Minimizing
the risk of loss by adopting prompt corrective action and employing least
costly failure resolution option as demonstrated recently when bridge bank option
was
adopted. That has implication for capacity building in the relevant areas; and
Demonstrating a willingness to take legal action, where warranted, against
directors and
others for improper acts.

C. Lender-of-Last-Resort Facility
With the emergence of bigger banks arising from the on-going M & A in the
industry, the CBN should stand ready to provide temporary liquidity to deserving
banking institutions so as to avoid devastating damage to the entire banking
system. However, a lot of care should be exercised by the CBN so as to avoid
making itself lender-of-first resort with a view to promoting sound and prudent
bank management.

4.0 CONCLUSION
In the unit, we have attempted to highlight some issues and challenges on M & A
in the banking industry. In the main, the unit has provoked the managements of the
emerging bigger banking institutions to brace up to the challenges and run their
banks in a safe and sound manner. In that regard, they should enhance their risk
management capacity, enthrone responsive corporate governance, embrace the
right culture that would promote market discipline and should complement
statutory regulation with self-regulation and self-discipline. The
Regulatory/Supervisory Authorities should be more proactive in the discharge of
their role which implications for capacity building in all relevant areas.

5.0 SUMMARY

The purpose of this unit is to highlight issues and challenges in mergers and
acquisition. The Nigerian banking system and indeed, the entire nation‘s financial
system has its share of the global financial crisis. The next unit shall examine
industrial Corporate Strategy.

6.0 TUTOR-MARKED ASSIGNMENT

a) Discuss the features of Deposit Insurance.

b) What are the objectives of regulatory/supervisory agencies?

c) Identify five challenges in M&A

7.0REFERENCES/FURTHERREADINGS

DR. J. ADE AFOLABI Paper presented at the workshop for business editors and
finance correspondents association of Nigeria at manpower development institute,
dutse, jigawa state.

Mergers & Acquisitions: Identifying the Opportunities & Avoiding the Pitfalls:
FABIAN AJOGWU, SAN

Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of

excess.
Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of
Minnesota Press.

Bataille, G. (1987). Eroticism (translate by M. Dalwood). London: Marian Boyars.

Bataille, G. (1988). Inner Experience (translated by L.A. Boldt).New York: State

University of New York Press.
Bataille, G. (1990). ―Hegel, death and sacrifice‖ (translated by J. Strauss).In A.
Stoekl (Ed.) On Bataille, Yale French Studies, 78: 9-28. New York: Yale
University Press.

Baudrillard, J. (1993). Symbolic exchange and death (translated by I.H.

Grant).London: SagePublications.

UNIT 5: CONCEPT OF CORPORATE STRATEGY

1.0 Introduction
2.0 Objectives
3.0 Main Contents
3.1 What is Strategy?
3.2 Why Corporate Strategy
3.3 Levels of Strategy
3.4 Strategic Approach
 3.5. Corporate Strategy as ongoing process
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

Organizations are facing exciting and dynamic challenges in the 21st century. In
the gloabalized business, companies require strategic thinking and only by
evolving good corporate strategies can they become strategically competitive. A
sustained or sustainable competitive advantage occurs when firm implements a
value – creating strategy of which other companies are unable to duplicate the
benefits or find it too costly to initiate. Corporate strategy includes the
commitments, decisions and actions required for a firm to achieve strategic
competitiveness and earn above average returns.

2.0 OBJECTIVES

At the end of this unit, students are expected to understand:

1. Reasons for Corporate Strategy

2. Type of Corporate Strategy
3. Financial safety nets and Regulatory Authorities.

3.0 MAIN CONTENT

3.1What is strategy?
Strategy is narrowly defined as ―the art of the general‖ (the Greek stratos, meaning
‗field, spread out as in ‗structure‘; and agos, meaning ‗leader‘). The term first
gained currency at the end of the 18th century, and had to do with stratagems by
which a general sought to deceive an enemy, with plans the general made for a
campaign, and with the way the general moved and disposed his forces in war.
Also was the first to focus on the fact that strategy of war was a means to enforce
policy and not an end in itself. Strategy is a set of key decisions made to meet
objectives. A strategy of a business organization is a comprehensive master plan
stating how the organization will achieve its mission and objectives.

3.2 Why Corporate Strategy?

Strategic management is basically needed for every organization and it offers
several benefits;

3.2.1. Universal

Strategy refers to a complex web of thoughts, ideas, insights, experiences, goals,

expertise, memories, perceptions, and expectations that provides general guidance
for specific actions in pursuit of particular ends. Nations have, in the management
of their national policies, found it necessary to evolve strategies that adjust and
correlate political, economic, technological, and psychological factors, along with
military elements. Be it management of national polices, international relations, or
even of a game on the playfield, it provides us with the preferred path that we
should take for the journey that we actually make.

3.2.2. Keeping pace with changing environment

The present day environment is so dynamic and fast changing thus making it very
difficult for any modern business enterprise to operate. Because of uncertainties,
threats and constraints, the business corporations are under great pressure and are
trying to find out the ways and means for their healthy survival. Under such
circumstances, the only last resort is to make the best use of strategic management
which can help the corporate management to explore the possible opportunities
and at the same time to achieve an optimum level of efficiency by minimizing the
expected threats.

3.2.3. Minimizes competitive disadvantage

It minimizes competitive disadvantage and adds up to competitive advantage. For

example, a company like Hindustan Lever Ltd., realized that merely by merging
with companies like Lakme, Milk food, Ponds, Brooke bond, Lipton etc which
make fast moving consumer goods alone will not make it market leader but
venturing into retailing will help it reap heavy profits. Then emerged its retail
giant ―Margin Free‘ which is the market leader in states like Kerala. Similarly, the
R.P. Goenka Group and the Muruguppa group realized that mere takeovers do not
help and there is a need to reposition their products and reengineer their brands.
The strategy worked.

3.2.4. Clear sense of strategic vision and sharper focus on goals and objectives

Every firm competing in an industry has a strategy, because strategy refers to how
a given objective will be achieved. ‗Strategy‘ defines what it is we want to achieve
and charts our course in the market place; it is the basis for the establishment of a
business firm; and it is a basic requirement for a firm to survive and to sustain
itself in today‘s changing environment by providing vision and encouraging
defining mission.

3.2.5. Motivating employees

One should note that the labor efficiency and loyalty towards management can be
expected only in an organization that operates under strategic management. Every
guidance as to what to do, when and how to do and by whom etc, is given to every
employee. This makes them more confident and free to perform their tasks without
any hesitation. Labor efficiency and their loyalty which results into industrial
peace and good returns are the results of broad-based policies adopted by the
strategic management

3.2.6. Strengthening Decision-Making

Under strategic management, the first step to be taken is to identify the objectives
of the business concern. Hence a corporation organized under the basic principles
of strategic management will find a smooth sailing due to effective decision-
making. These points out the need for strategic management.

3.2.7. Efficient and effective way of implementing actions for results

Strategy provides a clear understanding of purpose, objectives and standards of

performance to employees at all levels and in all functional areas. Thereby it
makes implementation very smooth allowing for maximum harmony and
synchrony. As a result, the expected results are obtained more efficiently and
economically.

3.2.8. Improved understanding of internal and external environments of

business

Strategy formulation requires continuous observation and understanding of

environmental variables and classifying them as opportunities and threats. It also
involves knowing whether the threats are serious or casual and opportunities are
worthy or marginal. As such strategy provides
for a better understanding of environment.

3.3 Levels of strategy

A typical business firm should consider three types of strategies, namely.
Corporate strategy – Which describes a company‘s overall direction towards
growth by managing business and product lines? These include stability, growth
and retrenchment.
For example, Coco cola, Inc., has followed the growth strategy by acquisition. It
has acquired local bottling units to emerge as the market leader.
Business strategy - Usually occurs at business unit or product level emphasizing
the improvement of competitive position of a firm‘s products or services in an
industry or market segment served by that business unit. Business strategy falls in
the in the realm of corporate strategy.
For example, Apple Computers uses a differentiation competitive strategy that
emphasizes innovative product with creative design. In contrast, ANZ Grindlays
merged with Standard Chartered Bank to emerge competitively.
Functional strategy – It is the approach taken by a functional area to achieve
corporate and business unit objectives and strategies by maximizing resource
productivity. It is concerned with developing and nurturing a distinctive
competence to provide the firm with a competitive advantage. For example,
Procter and Gamble spends huge amounts on advertising to create customer
demand.

Operating strategy - These are concerned with how the component parts of an
organization deliver effectively the corporate, business and functional -level
strategies in terms of resources, processes and people. They are at departmental
level and set periodic short-term targets for accomplishment.

3.4 Strategic Approach

There are basically four approaches to crafting a strategy

1. The Chief Architect approach A single person – the owner or CEO –assumes
the role of chief strategist and chief entrepreneur, single handedly shaping most or
all of the major pieces of strategy. This does not mean that one person is the
originator of all the ideas underlying the resulting strategy or does all the
background data gathering and analysis: there may be much brainstorming with
subordinates and considerable analysis by specific departments.
The chief architect approach to strategy formation is characteristic of companies
that have been founded by the company‘s present CEO. Michael Dell at Dell
Computer, Steve Case at America Online, Bill Gates at Microsoft, and Howard
Schultz at Starbucks are prominent examples of corporate CEOs who exert a
heavy hand in shaping their company‘s strategy.
2. The Delegation Approach: Here the manager in charge delegates big chunks of
the strategy-making task to trusted subordinates, down-the-line managers in
charge of key business units and departments, a high-level task force of
knowledgeable and talented people from many parts of the company, self-directed
work teams with authority over a particular process or function, or, more rarely, a
team of consultants brought in specifically to help develop new strategic
initiatives.
3. The Collaborative or Team Approach: This is a middle approach when by a
manager with strategy-making responsibility enlists the assistance and advice of
key peers and
subordinates in hammering out a consensus strategy. Strategy teams often include
line and staff managers from different disciplines and departmental units, a few
handpicked junior staffers known for their ability to think creatively, and near-
retirement veterans noted for being keen observers, telling it like it is, and giving
sage advice.
Electronic Data Systems conducted a year-long strategy review involving 2,500of
its 55,000 employees and coordinated by a core of 150 managers and staffers from
all over the world. Nokia Group, a Finland-based global leader in wireless
telecommunications, involved250 employees in a strategy review of how different
communications technologies were converging, how this would affect the
company‘s business, and what strategic responses were needed.
4. The Corporate Intrapreneur Approach: In the corporate intrapreneur approach,
top management encourages individuals and teams to develop and champion
proposals for new product lines and new business ventures. The idea is to unleash
the talents and energies of promising corporate intrapreneurs, letting them try out
business ideas and pursue new strategic initiatives. Executives serve as judges of
which proposals merit support, give company intrapreneurs the needed
organizational and budgetary support, and let them run with the ball. W.L. Gore &
Associates, a privately owned company famous for its Gore-Tex waterproofing
film, is an avid and highly successful practitioner of the corporate intrapreneur
approach to strategy making. Gore expects all employees to initiate improvements
and to display innovativeness.

3.5. Corporate strategy asongoing process

Corporate strategy is a continuous ongoing process and extends companywide

over adiversified company‘s business. It is a boundary spanning planning activity
considering all theelements of the micro and macro environments of a firm. The
following are the key tasks of theprocess of developing and implementing a
corporate strategy.
i. Exploring and determining the vision of the company in the form of a
vision statement.
ii Developing a mission statement of the company that should include statement
ofmethodology for achieving the objectives, purposes, and the philosophy of
theorganization adequately reflected in the vision statement.
 iiiDefining the company profile that includes the internal analysis of culture,
strengths andcapabilities of an organization.
iv. Making external environmental analysis to identify factors as threats,
opportunitiesetc.
v.Finding out ways by which a company profile can be matched with its
environment tobe able to accomplish mission statement
viDeciding on the most desirable courses of actions for accomplishing the mission
of anorganization
viiSelecting a set of long-term objectives and also the corresponding strategies to
beadopted in line with vision statement.
ViiiEvolving short-term and annual objectives and defining the corresponding
strategies thatwould be compatible with the mission and vision statement.
IxImplementing the chosen strategies in a planned way based on budgets and
allocation ofresource, outlining the action programs and tasks.
x.Installation of a continuous comparable review system to create a controlling
mechanismand also generate data for selecting future course of action.

4.0 CONCLUSION

Chandler(1962)Strategy is the determinator of the basic long-term goals of an

enterprise, and the adoption of courses of action and the allocation of resources
necessary for carrying out these goals;Mintzberg (1979) Strategy is a mediating
force between the organization and its environment: consistent patterns in streams
of organizational decisions to deal with the environment.
Prahlad (1993) Strategy is more than just fit and allocation of resources. It is
stretch and averaging of resources.
Porter (1996) Strategy is about being different. It means deliberately choosing a
different set of activities to deliver a unique mix of value.
Mintzberg has identified the 5 P‘s of strategy. Strategy could be a plan, a pattern, a
position, aploy, or a perspective.

5.0 SUMMARY

In this unit you learnt:

meaning of Corporate strategies, Types of strategies,Reasons and benefits of
Corporate Strategy, Strategic Approach
We shall proceed to consider Product , Product mix and New Product
development in the subsequent unit.

6.0 TUTOR-MARKED ASSIGNMENT

a) Discuss the process of developing and implementing a corporate strategy.

 b) List and discuss the approaches to crafting a strategy.

c) What is strategy?

7.0 REFERENCES/FURTHERREADINGS

Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of

excess.
Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of
Minnesota Press.

Bataille, G. (1987). Eroticism (translate by M. Dalwood). London: Marian Boyars.

Bataille, G. (1988). Inner Experience (translated by L.A. Boldt).New York: State

University of New York Press.

Bataille, G. (1990). ―Hegel, death and sacrifice‖ (translated by J. Strauss).In A.

Stoekl (Ed.) On Bataille, Yale French Studies, 78: 9-28. New York: Yale
University Press.

Baudrillard, J. (1993). Symbolic exchange and death (translated by I.H.

Grant).London: SagePublications.

UNIT 6FORMS OF STRATEGY: GENERAL, CORPORATE & COMPETITIVE

CONTENTS
 1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1The Concept of Strategy
3.2 Corporate Versus Competitive Strategy
3.3 FactorsAffecting Competitive Industry
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

This unit examines three forms of strategy based on the different ways in which
the term is used in the business world:
(1) Strategy in a general sense;
(2) Corporate strategy; and
(3) Competitive strategy.

2.0 OBJECTIVES
At the end of this unit, students are expected to understand:
 Concept of strategy
 Analyse forms of strategy
 Discuss fundamental questions related to strategies.

3.0MAIN CONTENT

Keep one ear open in almost any business environment and the term "strategy" is
sure to crop up on a regular basis. Unfortunately, those using the term frequently
fail to define the way in which they are using it. Nor do those hearing it bother to
check to see how it is being used. As a result, conversations about strategy can
become confusing.
There are at least three basic forms of strategy in the business world and it helps to
keep them straight. The objectives of this brief paper are to clarify the general
concept of strategy and draw attention to the importance of distinguishing among
three forms of strategy:
(1) General strategy (or just plain strategy)
(2) Corporate strategy and
(3) Competitive strategy

3.1THE CONCEPT OF STRATEGY

The many definitions of strategy found in the management literature fall into one of
four categories: plan, pattern, position, and perspective. According to these views,
strategy is: A plan, a "how," a means of getting from here to there.

i) A pattern in actions over time; for example, a company that regularly

markets very expensive products is using a "high end" strategy.
ii) A position, that is, it reflects decisions to offer particular products or
services in particular markets.
iii) A perspective, that is, a vision and direction, a view of what the
company or organization is to become.
As a practical matter, strategy evolves over time as intentions accommodate
reality. Thus, one starts with a given perspective, concludes that it calls for a
certain position, and sets about achieving it by way of a carefully crafted plan.
Over time, things change. A pattern of decisions and actions marks movement
from starting point to goal. This pattern of decisions and actions is called
"realized" or "emergent" strategy.

STRATEGY IN GENERAL

Strategy, in general, refers to how a given objective will be achieved.

Consequently, strategy in general is concerned with the relationships between ends
and means, that is, between the results we seek and the resources at our disposal.
Strategy and tactics are both concerned with formulating and then carrying out
courses of action intended to attain particular objectives.
Although it is not my aim to draw definitive distinctions between strategy and
tactics, it is next to impossible to say something about one without also saying
something about the other. Below is a summaryof some of the important
differences between strategy and tactics.

Strategy Tactics
Scale of Grand Limited
Objective
Scope of Action Broad and general Narrowly focused

Guidance General and Specific and

Provided ongoing situational

Degreeof Adaptable but not Fluid, quick to

Flexibility hastily changed adjust and adapt
in minor or major
ways

Timing Before action During action

 Resource Focus Deployment Employment

Strategy and tactics are both terms that come to us from the military. Their use in
business
and other civilian enterprises has required little adaptation as far as strategy in general is
concerned; however, corporate strategy and competitive strategy do represent significant
departures from the military meaning of strategy.

3.2 Corporate versus competitive strategy

Corporate strategy defines the markets and the businesses in which a company will
operate. Competitive or business strategy defines for a given business the basis on
which it will compete. Corporate strategy is typically decided in the context of
defining the company‘s mission and vision, that is, saying what the company does,
why it exists, and what it is intended to become. Competitive strategy hinges on a
company‘s capabilities, strengths, and weaknesses in relation to market
characteristics and the corresponding capabilities, strengths, and weaknesses of its
competitors.

3.3 Factors Affecting Competitive Industry

According to Michael Porter, a Harvard Business School professor and the

reigning guru of competitive strategy, competition within an industry is driven by
five basic factors:

1. Threat of new entrants.

2. Threat of substitute products or services.

3. Bargaining power of suppliers.

4. Bargaining power of buyers.

5. Rivalry among existing firms.

Porter also indicates that, in response to these five factors, competitive strategy
can take one of three generic forms: (1) focus, (2) differentiation, and (3) cost
leadership.

Other factors affecting Corporate and Competitive strategy

Other writers on the subject of strategy point to several factors that can serve as
the basis for formulating corporate and competitive strategy. Regardless of the
definition of strategy, or the many factors affecting the choice of corporate or
competitive strategy, there are some fundamental questions to be asked and
answered. These include the following:

Related to mission and vision

 Who are we?
 What do we do?
 Why are we here?
 What kind of company are we?
 What kind of company do we want to become?
 What kind of company must we become?

Related to strategy in general

 What is our objective? What are the ends we seek?
 What is our current strategy, implicit or explicit?
 What courses of action might lead to the ends we seek?
 What are the means at our disposal?
 How are our actions restrained and constrained by the means at our
disposal?
 What risks are involved and which ones are serious enough that we should
plan for them?

Related to corporate strategy

 What is the current strategy, implicit or explicit?

 What assumptions have to hold for the current strategy to be viable?
 What is happening in the larger, social, political, technical and financial
environments?
 What are our growth, size, and profitability goals?
 In which markets will we compete?
 In which businesses?
 In which geographic areas?

Related to competitive strategy

 What is the current strategy, implicit or explicit?
 What assumptions have to hold for the current strategy to be viable?
 What is happening in the industry, with our competitors, and in general?
 What are our growth, size, and profitability goals?
 What products and services will we offer?
  To what customers or users?
 How will the selling/buying decisions be made?
 How will we distribute our products and services?
 What technologies will we employ?
 What capabilities and capacities will we require?
 Which ones are core?
 What will we make, what will we buy, and what will we acquire through
alliance?
 What are our options?
 On what basis will we compete?

4.0 CONCLUSION
In conclusion, strategy is concerned with deploying the resources at your disposal
whereas tactics is concerned with employing them. Together, strategy and tactics
bridge the gap between ends and means.

5.0 SUMMARY
The preceding discussion asserts that strategy in general is concerned with how
particular objectives are achieved, with courses of action. Corporate strategy is
concerned with choices and commitments regarding markets, business and the
very nature of the company itself. Competitive strategy is concerned with
competitors and the basis of competition.

6.0 TUTOR-MARKED ASSIGNMENT

a) Discuss the Factors Affecting Competitive Industry.

b) Write all you understand by corporate versus competitive strategy.

c) List 3 questions related to General, Corporate and Competitive strategy?

7.0 REFERENCES/FURTHER READINGS

Competitive Strategy (1986). Michael Porter. Harvard Business School Press.

The Concept of Corporate Strategy, 2nd Edition (1980). Kenneth Andrews. Dow-
Jones Irwin.
"Customer Intimacy and Other Value Disciplines." Michael Treacy and Fred
Wiersema.Harvard Business Review (Jan- Feb 1993).

The Discipline of Market Leaders (1994).Michael Treacy and Fred

Wiersema.Addison-Wesley.

The Rise and Fall of Strategic Planning (1994). Henry Mintzberg. Basic Books.

Strategy (1967). B. H. Liddell Hart. Basic Books.

Strategy: Pure and Simple (1993). Michel Robert. McGraw- Hill.

UNIT 7 BANKING SECTOR CONSOLIDATION

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Contents
3.1 Overview of the Banking sector in Nigeria
3.2 The current banking sector reform
3.3 The future of emerging banks
4.0 Conclusion
5.0 Summary
6.0 Tutor Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

Banking sector consolidation has been an ongoing phenomenon that has been
intensified due to the forces of globalization which are guiding the regulation of
the world‘s financial markets and economies. Consolidation simply means the
reduction in the number of banks and other deposit taking institutions with a
simultaneous increase in size and concentration of consolidated entities in the
sector.

2.0 OBJECTIVES

At the end of this unit, students are expected to understand:

 The Current Banking Sector Reform
 The future of Emerging Banks
 Nature of banking sector in Nigeria.

3.0 MAIN CONTENTS

3.1 Overview of the Banking sector in Nigeria

Modern form of banking in Nigeria started in 1892 when the African banking
Corporation (ABC) commenced formal banking business. ABC was later taken by
the Bank of British West Africa which metamorphosed to the present day First
Bank of Nigeria Plc. Between 1927 – 1951 there were 25 indigenous Banks out of
which 23 failed leaving only 2. The failure was due to the absence of banking
regulation, inadequate capital, shortage of qualified personnel and other factors.
The banking ordinance of 12952 was then enacted to regulate the banking
environment. Subsequent efforts at strengthening the regulatory framework
resulted in the enactment of the CBN act 1958, the NDIC act 1988, the CBN act
1991, and the banks and other financial institutions act of 1991. Nigerian banks
were however characterized by large number of small banks with few branches,
poor rating of a number of banks (as at December 2004, out of 89 banks no bank
was rated very sound, only 10 were rated as sound, 51 were rated satisfactory, 16
were rated marginal and 10 unsound). The sector was also characterized by weak
corporate governance, negative capital adequacy ratio, over dependence on public
sector deposits and eroded shareholders‘ funds caused by operating losses.

3.2 The Current Banking Sector Reform

Since Nigerian Banking sector is characterized by problems, then there is the need
to restructure the system. Restructuring becomes necessary so as to create a strong
and reliable banking sector which will play active developmental roles in the
Nigerian economy and the world financial system at large.
On July 6, 2004 the CBN governor enunciated the thrust of the banking system
reform program in his 13 point reform agenda. Two major elements of the reform
agenda are the requirement of the Nigerian banks to increase their share holders‘
funds to a minimum of N25 billion by the end of December 2005, and
consolidation through mergers and acquisition.

The objectives of the reform are as follows;

1. Minimum capitalization of N25 billion before end of December 2005.

2. Phased withdrawal of public sector funds from banks
3. Consolidation through mergers and acquisition
4. Adoption of risk focused and rule based regulatory framework
5. Adoption of zero tolerance in the regulatory framework.
6. The automation process for rendition of returns by banks through the electronic
and financial analysis surveillance system (e - FASS)
7. Establishment of hotline confidential internet address (governor @ cenbank.org)
for Nigerians wishing to share any confidential information with the CBN
governor on banking operations.
8. Strict enforcement of the contingency planning framework for systematic
banking distress
9. Establishment of an assets management company as an important element of
distress resolution.
10. Promotion of the enforcement of dormant laws especially those relating to the
issuance of dud cheques and the law relating to the vicarious liability of the board
of banks in cases of failing by the banks.
11. Revision and updating of the relevant laws and drafting of new ones on
banking operation
12. Closer collaboration with the economic and financial crimes commission
(EFCC) in the establishment of the financial intelligence unit and enforcement of
anti-money laundering and other economic measures.
13. Rehabilitation and effective management of the mint to meet the security
printing needs of Nigeria.

3.3 The future of Emerging Banks

Banks in Nigeria have faced a lot of challenges which includes inadequate

experience and technical knowledge on large scale consolidation, huge cost
associated with consolidation, problems of nonperforming loans, operational
challenges arising from information communication technologies (ICT) system
and supervision / regulation of mega banks.
One of the main effects of consolidation in Nigeria is the reduction in the number
of banks in the system. But the emerging ones are better capitalized and bigger,
this is because the minimum N25 BILLION induces growth.
The mega banks that have also emerged may have stronger capacity to take big
risks and thus be better able to finance key growth sectors of the economy.
The weak banks are also out of the industry in an orderly manner, while some
have merged together, others have been acquired by bigger banks and those that
have no suitors have been forced into a ―marriage of convenience‖
Good corporate governance is also a feature of the emerging banks; since the
shareholding base of the banks‘ is increased thus, family owned banks are
eliminated.
Merger and acquisition that resulted due to consolidation will improve the
profitability of the emerging banks as well as operational efficiency.
One of the negative effects of the reform is the retrenchment of workers in the
banking industry; this is more pronounced in the weak banks that are acquired by
strong ones.

4.0 CONCLUSION

Banks consolidation brought about a lot of benefits to the stake holders in the
industry. The current banking sector reform if well implemented will cleanse the
industry so that a stricter and more professional supervision and regulation could
be achieved. The Central Bank of Nigeria should however need the cooperation
and support of the stake holders for a successful implementation of the reform.

5.0 SUMMARY

Banks consolidation is motivated by technological innovations, deregulation of

financial services, enhancing intermediation, increased emphasis on shareholder
value as well as privatization and international competition (Berger and etal1999,
IMF 2001). Capitalization is an important term that is achieved through
consolidation this is so due to the fact that a bank with a strong capital base has the
ability to absolve losses from non performing liabilities (NPL).

6.0 TUTOR-MARKED ASSIGNMENT

1) Summarize the objectives of Banking reform in Nigeria.

2) Discuss the Overview of the Banking sector in Nigeria.

7.0 REFERENCES/FURTHER READINGS

Needle, David (1999).Business in Context.London: Thomson BusinessPress.

Benston, et al., 1986. Perspectives on Safe and Sound Banking: Past, Present and
Future. Cambridge, MA: MIT Press.

Dowd, K. ed., 1992.TheExperience of Free Banking. London: Routledge.

Dowd, K. 1996. The Case for Financial Laissez-Faire. The Economics Journal,
106(May), pp.679-687.
Kaufman, G.G. 1992. Capital in Banking: Past, Present and Future. Journal of
Financial Services Research, 5(4), pp.385-402.

Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of

excess.

Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of

MinnesotaPress.
UNIT 8CONSOLIDATION IN THE OIL AND GAS INDUSTRY
THROUGH MERGERS AND ACQUISITIONS

CONTENTS

1.0 Introduction
2.0Objectives
3.0 Main Contents
3.1Regulatory Framework
3.2 Merger procedures
3.3 Acquisitions
3.4 Takeover
3.5 Disclosure of negotiations
3.6 Sanctions
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

The oil price recently fell as low as $46 a barrel having hovered between $50-$60
per barrel since the beginning of year 2016. It may yet fall further given the crisis
rocking China‘s capital market or could rebound starting a welcome recovery. The
current low prices is putting tremendous strain on the cash flow of all oil
companies irrespective of size begging them to ask serious questions of
themselves as to their survival in the near and/or long term. Some of these
questions include but are not limited to:
a) The length of time it would take for oil prices to begin to rise from their current
slump.
b) The necessary cuts required in adapting to this new low price environment.
c) Is the industry likely to witness a wave of mergers and acquisitions to both scale
and capture growth positions at the current low prices or will the focus be more on
high margin lower risk assets to strengthen cash flow.

2.0 OBJECTIVES

At the end of this unit, students are expected to understand:

 Acquisitions
 Legal framework for mergers and acquisitions in Nigeria.
 Documentation for required business combinations transactions

3.0 MAIN CONTENTS

The International Oil Companies (IOC) operating in Nigeria and Nigerian

independents are not immune from the vagaries of the global oil market. Their
fortunes are made worse by a number of factors including but not limited to the
non-passage of the Petroleum Industry Bill (PIB) and the inability of NNPC to
meet its cash call obligation under its various joint ventures. It is perhaps in
anticipation of these present circumstances that IOC‘s such as Shell and Chevron,
as far back as 2010, commenced divesting assets they may have deemed as higher
cost assets with Nigerian independents snapping them up in the hope of having a
firmer foothold in upstream activities.
What may have been seen as a good opportunity for Nigerian independents may
up until last year be turning out to be a nightmare for some of these companies.
The low oil price is beginning to affect their balance sheets with some struggling
to meet their debt obligations. Perhaps, and as a means of survival, we may begin
to see mergers and acquisitions as a crucial part of the solution for both the IOCs
and Nigerian independents operating in the oil and gas sector in Nigeria. On the
international scene and from an IOC perspective, we have already seen Royal
Dutch Shell leading the way with its proposed $55 billion takeover of BG. If the
current decline in oil prices continues on a scale compared to that of 1998/99 we
may see another wave of mega mergers akin to that of the super majors like
Exxonmobil and TotalElfFina. On the domestic front, plunging oil prices has
forced Afren, a UK company with a subsidiary in Nigeria, into administration with
the Nigerian assets in its portfolio up for sale. Mid- Western Oil and Gas Limited
also recently pulled out of the proposed acquisition of Mart Resources perhaps to
ensure it accesses Mart‘s Nigerian assets at a lower cost.
With debt pressures mounting on the recent purchasers of the IOC divested assets,
it seems inevitable that a new wave of industry consolidation will soon commence.
In light of the foregoing and the impending flurry of consolidation activities in the
sector, it is important that stakeholders understand the legal framework for
mergers and acquisitions in Nigeria.

3.1 Regulatory Framework

The principal Legislations and Regulations governing Mergers, Acquisitions and

Takeovers (―M&A‖) in Nigeria are the Investment and Securities Act, 2007
(―ISA‖); the Companies and Allied Matters Act (―CAMA‖) LFN 2004 and the
Securities and Exchange Commission Rules and Regulations, 2013 (―SEC
Rules‖). In addition to these, there are sector specific Legislations and Regulations
relating to M&A such as the Petroleum Act Cap P10, LFN 20041; Central Bank of
Nigeria Act, 2007 and the Banks and Other Financial Institutions Act, Cap B3,
Laws of the Federation of Nigeria, 2004 regulating M&A in the banking and
financial sectors2; the Electricity Power Sector Reform Act 2005 regulating the
nascent electricity sector in Nigeria3; The Insurance Act, 20034; the Companies
Income Tax Act5 and the Nigerian Communication Act No 19 Cap N97 LFN
2004 regulates M&A in the telecommunications sector.
The Securities and Exchange Commission (―SEC‖) , by virtue of the ISA,
exercises regulatory oversight over all forms of business combinations between or
among all private companies, all public companies, partnerships and transactions
consummated under the authority of any Federal or State Government Agencies.
However, holding companies acquiring shares solely for the purpose of investment
without intent to use the acquired shares for voting or causing a substantial
restraint of competition or create a monopoly are exempted from the application of
the ISA7. This exemption is somewhat vague and may lend to interpretational
issues. Firstly, the section is silent on who determines whether the transaction is
solely for investment purpose- the merging parties or SEC as regulator? Secondly,
one is hardly able to exclude the possibility that parties may consummate an
acquisition that can restrain competition but present the transaction as being solely
for investment purposes. It is hoped that this lacuna would be addressed in a
subsequent review of the Act.

3.2 Merger procedures

The ISA8 and the SEC9 Rules classifies Mergers into three broad categories:
Small, Large and Intermediate. In determining whether a merger or proposed
merger is small, large or intermediate, SEC periodically prescribes a lower and
upper threshold of mergers. The extant SEC Rules provides that, to qualify as a
small merger, either the combined assets or turnover of the merging companies
must be below N1,000,000,000.00 (One Billion Naira). The threshold for an
intermediate merger is between N1,000,000,000.00 (One Billion Naira) and
N5,000,000,000.00 (Five Billion Naira) whilst the threshold for a large merger is
any value above N5,000,000,000.00 (Five Billion Naira).

1. Small Merger
The parties to a small merger do not require the approval of SEC before the
commencement of the merger procedure. However, SEC reserves the right to,
within six months from the commencement of the small merger process, request
formal notification from the parties where SEC is of the opinion that the proposed
mergers may substantially prevent or lessen competition and/or such merger
cannot bejustified on the grounds of public interest. The parties may elect to
voluntarily notify SEC at any time during the merger process and are required,
upon successful completion to notify SEC of the completion.

The Procedure for small mergers is set out in Section 12214 as follows:
a. Parties notify SEC (if required to). Where parties are required to notify SEC,
they cannot proceed until SEC‘s approval or conditional approval is obtained.

b. Where the parties are required to notify SEC and after they, the parties, have
fulfilled their notification requirement, SEC may within 20 working days notify
the parties in the prescribed manner of its:

i. approval of the merger;

ii. approval of the merger subject to any conditions;
iii. prohibition of the merger , if it has not been implemented; and
iv. if already implemented, a declaration that the merger is prohibited.

c. SEC may extend the period within which to consider the merger by a single
period, not exceeding forty (40) working days in which case it must issue an
extension certificate to the parties. Upon the expiration of the twenty (20) working
days or the expiration of the extension, if SEC has not notified the parties of its
decision, the merger shall be deemed to have been approved.

d. SEC shall publish a notice of its decision in the Gazette and issue written
reasons for its decision if it (a) prohibits or conditionally approves the merger (b)
is requested to do so by a party to the merger.

e. Where the merger is approved the parties shall apply to the Federal High Court
(―FHC‖) to sanction the merger and once this is done it becomes binding on the
parties.
2. Intermediate and Large Mergers

The parties to an intermediate or large merger are obligated before commencement

to notify SEC of the proposed merger and obtain prior approval, with or without
conditions. The procedures for intermediate and large mergers are set out in
Sections 123-126 of the ISA and they are as follows:
a. The parties, the primary acquiring company and the primary target company,
shall each send pre-merger notices to SEC in the prescribed form. A copy of the
said notice is to be sent to any registered trade union that represents a significant
amount of the employees or any employees or representatives concerned where
there is no such trade union.

b. As part of its oversight functions, SEC may investigate or assign an inspector(s)

to investigate the proposed merger and may require that any of the parties provide
additional information.

c. In respect of intermediate mergers, SEC is to within 20 working days after all

notification requirements have been met by the parties, issue a certificate either (a)
approving the merger (b) approving the merger subject to some conditions or (c)
prohibiting the implementation of the merger. As with small mergers, SEC may
extend the period within which to consider the merger, provided that it issues an
extension certificate to the parties and upon the expiration of the 20 days or the
extended period, if it fails to issue a certificate, the merger is be deemed to have
been approved.

d. SEC is to publish a notice of its decision in the Gazette and issue written
reasons for its decision if it (a) prohibits or conditionally approves the merger (b)
is requested to do so by a party to the merger.

e. For large mergers, SEC is required to refer the notice filed by the parties to the
FHC and within forty (40) working days after the parties have fulfilled the
prescribed notification requirements, forward to the court a statement in writing
stating whether the merger was approved, approved subject to conditions or
prohibited.

The merger notice to SEC is typically accompanied with the following documents:

(a) Completed Merger Notification Form

(b) A joint letter of intent from the merging entities
(c) Extract of Board Resolutions of the merging entities in support of the merger
duly certified by a Director and the Company Secretary.
(d) A copy of the letter appointing the financial adviser(s),
 (e) Certificate of Incorporation certified by the Company Secretary, certified true
copies of Form CAC 7, and Memorandum and Articles of Association of the
merging entities. (f) A letter of No objection from the Companies Regulator(s)
(where applicable) (g) The Audited Account of the merging entities for the
preceding five (5) years or the number of years the Companies have been in
operation, if less than five (5) years. (h) Evidence of payment of the prescribed
filing fee and (i) Information Memorandum.

It is instructive to note that the Act gives SEC the powers to revoke its decision to
approve a small, intermediate or large merger if it is discovered that any of the
parties provided incorrect information or an approval was obtained by deceit or a
breach of an obligation attached to the merger by any of the merging parties.
The Scheme Document
This is the principal document in a merger transaction which contains corporate
and other information about the merging entities. Typically the scheme document
would, amongst other things, provide the following information:

1. Separate letters from the Chairmen of the merging companies addressed to their
respective shareholders.
2. Explanatory statement to the shareholders by the joint financial advisers,
addressing the following:

a) The proposal.
b) Conditions precedent.
c) Reasons for the proposal.
d) The synergies/ benefits.
e) Plan for employees.
f) Capital gain tax.
g) Approved status.
h) Meetings and voting rights.
i) Instruction on proxies.
j) Settlement and certificate
k) Information regarding each of the merging companies.
l) Recommendations
m) Appendices.

3.3 Acquisitions
The SEC regulates acquisitions for both private and public unquoted companies. The
procedure for an acquisition involves the acquirer filing a letter of intent through a
registered capital market operator. The letter of intent is to be accompanied by the
following documents:

1) Two (2) draft copies of Information Memorandum;

2) Extracts of board resolutions of the acquirer and the acquiree agreeing to the
acquisition signed by the company‘s secretary and a director. (Where applicable);
3) The recent CAC certified true copy of the Memorandum and Article of
Association of the acquirer and the acquiree;
4) The certificate of incorporation of the acquirer and the acquire, certified by the
company secretary;
5) Extracts of shareholders resolution of the acquirer and the acquiree to be signed
by a director and company secretary;
6) Summary of the claims and litigations of the company to acquired;
7) A copy of ―No Objection‖ letter from the relevant regulatory body (where
applicable);
8) Copies of letters appointing the financial advertiser(s);
9) CAC certified form showing particulars of directors and allotment of shares of
the acquirer and the acquiree;
10) Notarized consent of directors of the acquirer and the acquire;

11) Financial services agreement between the acquirer and the acquiree and their
respective Financial Advisers;
12) Share purchase agreement and any other relevant agreement executed between
the acquirer and the acquiree;
13) Evidence of payment of prescribed fees;
14) Annual report and accounts of both companies for the proceeding period of
five (5) years or a shorter period of three (3) years for private companies and those
that have been operating for less than five (5) years;
15) Source of fund to finance the acquisition must be clearly disclosed and
supported by documentary evidence; and
16) Report of valuation shares/assets (where applicable).
The SEC Rules also makes provision for the publication of the acquisition in two
national newspapers.
With respect to dissenting shareholders, Rule 438 of the SEC rules stipulates that
dissenting shareholders are to be treated as contained in Sections 146 &147 of the
ISA 2007. However the recent amendment to the SEC Rules is silent as to whether
the provision empowering the dissenting shareholders to lodge a complaint to SEC
will apply in the case of an acquisition.

3.4 Takeover

The quantity/value of shares that is considered sufficient to confer control is

usually fixed by law. By virtue of section 131(1) ISA, acquisition of between 30
and 50 %( or a lower or higher threshold as may be prescribed by SEC from time
and to time) of the rights of the target company‘s called up shares by individual or
company qualifies as a takeover.
A takeover bid is dispatched to shareholders of the target company in order to
acquire shares of any class, attain sufficient shares so that the target becomes
subsidiary or gains control over the company. By virtue of section 133 (4), a
takeover bid cannot be made for a private limited liability company. Further, a
bidder is required by virtue of Rule 445 (4) SEC Rules 2013 to publish its
takeover bid in at least 2 (two) national daily newspapers. This is to serve as a
notification to the general public of its intention to offer a takeover bid for the
target company. In addition this, SEC rules also mandates a bidder to make an
announcement on the floor of the stock exchange of their intention to make a
takeover bid to the target company.

3.4.1 Procedures for Takeover:

1. Due Diligence

After a company identifies its target, it appoints professional advisers ranging

from lawyers, to accountants, environmental consultants, pension advisers to carry
out thorough investigations on the target. Due diligence is carried out to provide
an accurate reflection of the company‘s status. The target may also want to be
prudent and carry out due diligence on the bidder. It is advisable that the bidder
also carries out thorough investigations of the operations and debt exposure of the
target, thereby diminishing chances of future liability due to errors in
representations and warranties

2. Shareholders discussions

The bidding company shall ascertain its bidding price and set out to make
provisions for the necessary finances in implementing the bid. Shareholder with
majority holdings may initially have an informal discussion on the takeover bid
before a board meeting is scheduled where the formal resolution will be made to
set the bid in motion.

3. Authority to Proceed

By virtue of the provisions of the ISA and the SEC Rules, a takeover bid cannot be
made until SEC has given its authority to proceed. The bidding company makes an
application to SEC providing documentation and reports in a prescribed form by
the Regulations. Where SEC requires further information from the bidder, it would
make a request for the additional information and subject to the conditions in sub
section 6, SEC may grant its authority to proceed.
The authority to proceed with a bid granted by SEC is for a period of three months
subject to renewal upon application by the person making the bid. Such
application for renewal is required to be made at least fourteen (14) days before
the expiration of the three months and the renewal shall be for a period of three
months.

4. Registration of bid with SEC

A copy of the takeover bid is required to be lodged with SEC for registration
before it is dispatched to the shareholders of the target company. SEC will register
the bid once it is satisfied with compliance with the ISA and SEC Rules, otherwise
it may refuse registration of the bid and notify the applicant accordingly. Within
thirty (30) working days of such notice of refusal, the company can appeal to the
Investments & Securities Tribunal (―the Tribunal‖) for a review of SEC‘s
decision. 22 Section.

5. Dispatch of bid

The bidding company would thereafter dispatch the takeover bid to each
shareholder of the target company as well as SEC, at least 7 days before the date
on which the takeover bid is to take effect. Each shareholder is entitled to accept
or reject the bid. Upon receipt of the takeover bid, the directors of the target
company are required to issue a directors‘ circular to all shareholders of the
company. The amendment to the SEC rules provides that such circular must state
interalia, the particulars of the bidder; the number of shares sought to be acquired;
the effect of the takeover bid on the company‘s operations and its employees; and
the directors‘ opinions and recommendations on the takeover bid. This amendment
seeks to ensure that the directors of the target company proffer their opinion and
recommendations to shareholders on the likely effect of the takeover to the
company.
Where majority shareholders, holding no less than 90% of the shares subject to be
acquired, have accepted the bid the ISA provides that the acquiring company may
within one month after the date of the acceptance of the shares, give notice to the
dissenting shareholders that the takeover bid has been accepted, it would or have
paid off those who accepted the bid, and that the dissenting shareholder has to
elect whether to be paid the way the other shareholders were paid or prefers that
his shares to be valued and a fair value paid to him. However, with the recent
amendments to SEC Rules the dissenting and aggrieved shareholders can now
lodge a complaint with SEC.25

6. Announcement of bid
The acquiring company may now proceed with announcing the bid and commence
implementing marketing campaigns. There may be need for adjustment of the bid
due to the reactions of the target and market. The acquiring company may proceed
with payment of considerations when the acceptance is received within the
prescribed period. With a successful bid, all post bid requirements will be fulfilled
as well as resolutions on the issues with dissentients.

Documentation Required for Business Combination Transactions

a) Separate extract of board resolutions of the merging companies in support of the

merger duly certified by a director and the company secretary.
b) Copy of letters notifying the trade union of the relevant industry of the intention
of the companies to merge (required for mergers).
c) A copy of the letter appointing financial advisers.
d) Certificate of incorporation certified by the company secretary.
e) Certified True Copies of Form CAC 7, CAC 2. (required for private companies)
f) Memorandum and articles of association of the merging companies.
g) A letter of ―No Objection‖ from the Companies‘ Regulator(s). (where
applicable)
h) The audited accounts of the merging entities for the preceding five years or the
number of years the companies have been in operation if not up to five years.
i) Evidence of payment of filing fees.
j) Draft financial services agreement between the merging entities and their
financial advisers.
k) Evidence of increase in authorized share capital. (where necessary)
l) Signed and notarized consent letters of directors and parties to the merger.
m) Copy of merger implementation agreement and other agreements executed by
the merging entities.
n) Draft proxy forms for each of the merging companies.
o) A letter of undertaking to file evidence of settlement of all tax liabilities of the
Federal Inland Revenue Services (FIRS).
p) Certificate of capital importation (where applicable).
q) Reporting Accountant‘s report on the financials and forecast of the merging
entities.
r) List of claims and litigation of the merging entities.
s) Scheme Document/Information Memorandum/ Takeover Bid.

Pre-Contract Issues

There are several pre-contract issues that parties to a proposed merger have to
consider prior to the merger process. It is typical for the parties to enter into
several pre-merger agreements such as Exclusivity Agreements26, Memorandum
of Understanding27 (―MOU‖) and Confidentiality Agreements28. These
Agreements are aimed at regulating the relationships of the merging parties prior
to conclusion of the merger process.
In addition to the pre-merger agreements, the parties would conduct due diligence
on each other to ascertain that the assertions forming the basis of the proposed
merger are indeed accurate. Broadly speaking, the due diligence process covers
legal and financial issues pertaining to both companies.
The legal due diligence is to ascertain that the company is legally incorporated and
is a going concern; that all required business permits and certification have been
validly procured; that resolutions of board of directors, general meetings were
validly made in consonance with the company‘s memorandum and articles;
compliance and regulatory issues, material claims against the companies,
intellectual property, labour and employees issues.
Financial due diligence would typically seek to cover the parties‘ accounts and
monetary control systems; past and present financial performance compared
against budgets; the parties‘ viability in the short term and long term, against
industry indicators; tax liabilities and other tax related implications as a result of
the proposed deal; value of the assets and liabilities of the parties; product
portfolio and competitors; performance ratios- profitability and earnings ratios,
capital investments etc.; evaluation of synergy. ; a thorough credit check to
ascertain the true financial position of the parties‘ in meeting their liabilities.

3.5 Disclosure of Negotiations

Disclosure requirements are only relative to public companies in Nigeria. SEC

maintain that a takeover bid be publicized in at least two national newspapers.
SEC rules also mandate a bidder to make an announcement on the floor of the
stock exchange of their intention to make a takeover bid to the target company.
The ISA on the other hand do not precisely require disclosure of mergers and
acquisition transactions.

3.6 Sanctions

The recent amendment to the SEC Rules provides for penalty for non-compliance
with the provisions of section 118(1) of the ISA and Rule 423(1) with respect to
seeking the approval of SEC prior to commencing any form of business
combination in Nigeria. 29
In the case of a merger amongst companies with combined assets or turnover
between N1,000,000,000.00 and N5,000,000,000.00, contravention of section
118(1) of the ISA and Rule 423(1) attracts a penalty of not less than
N1,500,000.00 and thereafter N5,000.00 for every day of continuing default or
nullification of the said transaction from the date of consummation of the
transaction.
Mergers amongst companies with combined assets or turnover of
N5,000,000,000.00 and above shall be liable to a penalty of not less than
N2,000,000.00 and thereafter N5,000.00 for every day of continuing default or
nullification of the said transaction from the date of consummation of the
transaction .
An acquisition in a private/ unlisted public companies with combined assets or
turnover of N500,000,000.00 and above shall be liable to a penalty of not less than
N1,000,000.00 and thereafter N5,000.00 for every day of continuing default or
nullification of the said transaction from the date of consummation of the
transaction.

4.0 CONCLUSION

The laws regulating mergers in Nigeria are extensive and as such parties
contemplating transactions of this nature must ensure that the procedure followed
is in compliance with the laws to avoid any sanctions.

5.0 SUMMARY

In this unit you learnt:

Merger procedures for Small, Large and Intermediate.
Documentation for required business combinations transactions
Acquisitions
Disclosure of negotiations

6.0 TUTOR-MARKED ASSIGNMENT

1) Highlights the content of documentation required for business combinations

transactions
2) What is the Procedure for small mergers?
3) Discuss the Procedure for Takeover.

7.0 REFERENCES/FURTHER READINGS

Needle, David (1999).Business in Context.London: Thomson BusinessPress.

Benston, et al., 1986. Perspectives on Safe and Sound Banking: Past, Present and
Future. Cambridge, MA: MIT Press.
Dowd, K. ed., 1992.TheExperience of Free Banking. London: Routledge.

Dowd, K. 1996. The Case for Financial Laissez-Faire. The Economics Journal,
106(May), pp.679-687.

Kaufman, G.G. 1992. Capital in Banking: Past, Present and Future. Journal of
Financial Services Research, 5(4), pp.385-402.

Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of

excess.
Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of
MinnesotaPress.

UNIT9INCENTIVESON CONSOLIDATION INTHENIGERIAN BANKING

INDUSTRY

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Contents
3.1 Definition of key terms
3.2 Consolidation Option
3.3 Incentives
3.4 Forbearance
3.5 Legal Issues
3.6 Accounting Issues
3.7 Corporate Governance
3.8 Social Safety Net
3.9 Amnesty for past Misreporting
4.0 Conclusion
5.0 Summary
 6.0 Tutor-marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

Following the Governor‘s address to the Bankers‘ Committee on July 6,2004, on

the Nigerian banking sector reform and the subsequent interactions with various
stakeholders, the Board of the Central Bank ofNigeria has approved the guidelines
and incentives to facilitate consolidation in the industry in order to assist banks in
meeting theapproved capital base of N25 billion by December 2005.

2.0 OBJECTIVES

At the end of this unit, students are expected to understand:

 Consolidation option
 Legal framework for Banks consolidation in Nigeria.
 Corporate governance on Consolidation policy

3.0 MAIN CONTENT

3.1 DEFINITION OF KEY TERMS

For the purpose of the guidelines, the following definitions shall apply:
Capital base: paid-up capital and reserves unimpaired by losses.
Reserves: all reserves except asset revaluation surplus resulting from revaluation
in the course of consolidation.
Paid-up capital: ordinary shares plus non-redeemable preference
shares

Parties to the Consolidation: the banks that are merging, their boardsand
managements, financial/investment advisers,lawyers, accountants, auditors,
shareholders andany other persons involved in the transaction.

3.2 CONSOLIDATION OPTION

The only legal modes of consolidation allowed are mergers and outright
acquisition/takeover. A mere group arrangement is not acceptable forthe purpose
of meeting the N25 billion. Therefore, all banks that haveother banks as
subsidiaries or have common ownership are encouragedto merge.

3.3 INCENTIVES

The CBN intends to provide the following incentives for banks that
consolidate and/or are able to achieve the set minimum capital basewithin the
stipulated period:
1.Authorisation to deal in foreign exchange
2. Permission to take public sector deposits and recommendation tothe fiscal
authorities for the collection of public sector revenue.
3. Prospects of managing part of Nigeria‘s external reserves, subject to prevailing
guidelines. In order to ensure that banking institutions do not bear additional
burdendue to consolidation which they otherwise would have not borne, andalso to
encourage consolidation, the following additional incentives arebeing worked out:
4. Tax incentives in the areas of capital allowances, company incometax, stamp
duties, among others, the details of which will be released after the on-going
consultation with the fiscal authorities.
5. Reduction in transaction costs, the details of which will be releasedafter the on-
going consultations with the Securities and ExchangeCommission, Nigerian Stock
Exchange, Corporate Affairs Commission and all other parties involved in the
scheme –
- Financial Advisers
- Solicitors to the scheme
- Stockbrokers to the scheme (where applicable)
- Reporting Accountants to the scheme
- Auditors to the scheme
6. The CBN will provide and pay for a team of experts to provide technical
assistance to
the banks from August 15, 2004.
7. There will be the CBN Governor‘s distinguished industry leadershipaward
which would be based on the following:
i.Speed of completion of the consolidation exercise
ii. Successful acquisition of marginal and unsound banks; and
iii.The number of banks involved in each consolidated group
8. The CBN will provide a help desk to fast-track approvals.

3.4 FOREBEARANCE

1. The CBN will negotiate the possible write-down of its exposure to the
distressed banks that would be acquired as a way of improving their balance sheets
as well as the treatment of the distressed banks‘ bad assets. The negotiation will
also address the interests ofthe current owners of the distressed banks in the new
arrangement.
2. The CBN will encourage and facilitate the setting up of an AssetManagement
Company (AMC) in collaboration with other relevantagencies.

3.5 LEGAL ISSUES

1. The banks should comply with the legal requirements on mergers and
acquisitions as contained in S.100 – 123 of the Investment andSecurities Act No.
45, 1999 and all other regulatory requirements.
2. The banks should obtain the approval of the Governor of theCentral Bank of
Nigeria as required under S.7 of the Banks andOther Financial Institutions Act
[BOFIA] as amended before anymerger and/or acquisition is consummated and/or
announced.
3. The legal and regulatory requirements for effecting a consolidationwill be
obtainable from the CBN Help Desk, team of experts, theSecurities and Exchange
Commission (SEC) and the Nigeria StockExchange.
4. The CBN will actively collaborate with all agencies to fast-track theprocess of
mergers and acquisitions

3.6 ACCOUNTING ISSUES

1. The valuation of the shares should be carried out by reputable andindependent

advisers registered by SEC.
2. The valuation method should be agreed to by all the parties for thepurpose of
determining the consideration.
3. The valuation principles must be consistently applied to all parties involved in
the combination.
4. Any revaluation of fixed assets carried out in the case of a mergershould not be
incorporated into the financial records of theconsolidated bank except as approved
by the CBN.
5. Subject to 7.4 above, the revaluation of fixed assets carried outwhere one bank
acquires the other bank should be incorporatedinto the financial statements as
these assets would be acquired atfair market value
6. The valuation should be to the satisfaction of the CBN that such arevaluation
represents the fair value of the assets acquired.
7.It is the responsibility of the parties to the transaction to ensure thatthey conduct
due diligence of one another as a necessary step inthe consolidation process.
8. All the capital of whatever form, shall be denominated in Naira.
9. Both ordinary and preference shares shall be recognizedin making up the
minimum capital base of N25 billion.
10.Consideration in respect of all mergers by banks should be byexchange of
shares and not monetary payments except wheredissenting minority shareholders
are to be bought out under thelaw, provided that any such payment does not impair
the financialcondition of the surviving bank.

3.7 CORPORATE GOVERNANCE

1. All parties to the consolidation must have access to all material

information.
2. Each party should have an independent adviser except where the acquired bank
is a wholly owned subsidiary of the acquirer.
3.The structure of the emerging organisation should reflect defined lines of
responsibility and hierarchy. Co-Chairman and/or Co-Chiefexecutive officer
arrangements will not be allowed.
4.The number of non-executive directors in the enlarged bank should be more than
the number of executive directors subject to amaximum board size of 20 directors.

3.8 SOCIAL SAFETY NET

1. The CBN and the NDIC will ensure that the banks protect theinterest of the
depositors
2. To ameliorate the effect of possible job losses or redundancies, anystaff exiting
as a result of the consolidation should be compensatedby the consolidated entity in
line with industry standards, but notbelow the terms of their sustaining
employment.
3. In addition, the CBN will work with the Bankers‘ Committee to assistthe staff
that will be disengaged to access the SMIEIS Fund to set uptheir own SMEs and
consequently create jobs and wealth.

3.9 AMNESTY FOR PAST MISREPORTING

1. Banks are enjoined to be open in their negotiations by placing the actual value
of their assets on the table. Sanctions shall not beimposed for any previous
misreporting detected in the course ofconsolidation.
2. However, if any of the parties to the consolidation is found, after the
consolidation exercise, to have presented false or misleadinginformation to the
other parties and/or the regulatory authorities,such a party will bear the full legal
and regulatory consequences ofsuch misbehavior.

4.0. CONCLUSION

The consolidation guideline and incentives policy of CBN remains a vital point of
advise
and regulation to the Banking Industry in order meet up with the capital base
requirements in the Industry. It is a modality of ensuring strong and competitive
Banking
Industry in Nigeria.

5.0 SUMMARY

In this unit you learnt guidelines and incentives on consolidation in the Nigerian
banking industry our attention focused on:
  Consolidation option
 Incentives
 Forbearance
 legal issues
 Accounting issues
 Corporate Governance
 Social safety net
 Amnesty for past misreporting

6.0 TUTOR-MARKED ASSIGNMENT

1) What are the incentives provided by the CBN on Banks consolidation to attain
minimum capital.
2) What is social safety net?
3) Give detail analysis of accounting issues on consolidation.

7.0 REFERENCES/FURTHER READINGS

Needle, David (1999).Business in Context.London: Thomson BusinessPress.

Benston, et al., 1986. Perspectives on Safe and Sound Banking: Past, Present and
Future. Cambridge, MA: MIT Press.

Dowd, K. ed., 1992.TheExperience of Free Banking. London: Routledge.

Dowd, K. 1996. The Case for Financial Laissez-Faire. The Economics Journal,
106(May), pp.679-687.

Kaufman, G.G. 1992. Capital in Banking: Past, Present and Future. Journal of
Financial Services Research, 5(4), pp.385-402.

Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of

excess.
Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of
MinnesotaPress.
UNIT 10: PRODUCTS

CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Meaning of a Product
3.2 Product Levels
3.3 Elements of a Product
3.4 Product Classification
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

This unit introduces you to fundamental product concepts, beginning with a broad
definition of "product". After this, we will see how marketers classify the products
they deal with and, this is usually a vital step in designing your marketing strategy.
The unit also takes you through the elements that make up a product.

2.0 OBJECTIVES

After studying this unit, you should be able to:

Define the term production.
Describe the various classifications of consumer and industrial products.
Explain the value of branding and discuss typical branding strategies.
Analyse the two primary functions of packaging.
Discuss the three primary functions of labeling.
Describe the important elements of product support.

3.0 MAIN CONTENT

3.1 THE MEANING OF A PRODUCT

Let us start by asking you to name any three "products" off head. You are most
likely to consider things like cola, shoes, cars... or three other similar products.
Indeed, you might not thing of games reserves, WEMA Treasure account, or the
popular TV comedy - "Papa Ajasco". This is because when we are on the buying
end of an exchange, we often think of products as tangible objects, that is, things
we can actually touch and possess. Football teams, transport companies, TV
programme etc. provide an intangible service for our use or enjoyment, not for our
ownership.
Hence, from the marketing point of view, a product is defined as anything offered
for sale for the purpose of satisfying a need or want on both sides of the exchange
process. In this regard, a product includes a tangible object that marketers refer to
as a good, as well as an intangible service (such as an ideas, a place, an event, an
organization etc), or any combination of tangible objects and intangible services.
Quite often, most products consist of a bundle of attributes that can be heavy
on the tangible side, or heavy on the intangible side, or anywhere in between.

3.2 PRODUCT LEVELS

As illustrated by Figure 8.1, products can be viewed under five levels. Each of
these levels adds more customer value, and the five constitute a customer value
hierarchy. The most fundamental level is the core benefits i.e. the fundamental
service or benefit that the customer is really buying. For instance, the core benefit
enjoyed by a guest in a hotel is "rest and sleep".
At the second level, the marketer has to turn the core benefit into a basic product.
In the hotel example, such things as a bed, bathroom, towels, table, chair, dresser
and closet are the basic products enjoyed by a guest in the hotel. In the third level,
the marketer prepares an expected product i.e. a set of attributes and conditions
buyers normally expect when they purchase a product. For instance, hotel guests
expect a clean bed, fresh towels, working lamps, and a relatively quiet
environment.
At the fourth level, the marketer prepares an augmented product that exceeds
customer expectations. In this wise, a hotel can include a remote-controlled TV.
Set, remote-controlled air conditioner, fresh flowers, rapid check-in, express
checkout, and fine dining and room service. You need to understand that in the
developed countries, however, competition takes place mostly at the expected
product level.
At the fifth level, is the potential product, which consists of all the possible
augmentations and transformations the product might undergo in the future.
The foregoing description of the different layers of a product should make it clear
that a product is definitely more than a simple set of tangible features. Consumers
actually want to see products as complex bundle of benefits that satisfy their
needs. The facts, as of today are that most competition takes place at the product
augmentation level. This is why successful firms add benefits to their offers. Such
benefits not only satisfy the customers, they are also delighted.

3.3 ELEMENTS OF A PRODUCT

Elements that make up a product include attributes, branding, packaging, labeling,

and product support services. Certain decisions along these lines are often made
concerning the development and marketing of individual products. Each of these
elements applies to all categories of products. However, the way marketers handle
them can vary significantly from one product to another. Actually, one of the
primary goals of marketers is to differentiate their product from competing ones
by developing unique strategies for each product element. We shall be taking a
closer look at each of these elements.

3.3.1 PRODUCT ATTRIBUTES

The development of a product necessarily involves the consideration of the

benefits that the product will offer. Such benefits are communicated and delivered
by product attributes like quality, features and design. The degree of consideration
given to these attributes has far reaching implications on consumer's acceptance of
the product. Some of the product attributes are;

1. Product Quality
Quality is one of the marketing manager's strategies of placing the product in the
mind of the prospect or the consumer (i.e. positioning). Whenever a product is
being developed, the issue of quality comes under two dimensions: level and
consistency. In the first case, the marketing manager must choose a quality of a
product to perform its functions, such as overall durability, reliability, precision,
ease of operation, and repairs, as well as other valued attributes. The second
consideration for quality is in respect of consistently delivering the targeted level
of quality to consumers. Hence, there should be no defects in the products being
offered to the market. In addition, no variations should be spotted in them.
It is realization of the need for high levels of quality consistency that firms At up
quality control units. Generally, good quality control measures involve preventing
defects before they occur, through better product design and improved
manufacturing process.
In recent times, many business enterprises have embraced "Total Quality
Management (TQM) as an important tool to constantly improve product and
process quality in every facet of their activities. Such companies are gradually
turning quality into a potent strategic weapon of gaining an edge over competitors
by offering products and services that better serve customers' need and preferences
for quality.

2. Product Features
Another important product attributes are the features a particular product
processes. A product can be offered with varying features. A model without any
extras (a "stripped - down" model) is usually the starting point. The company can
simultaneously create higher-level models by adding more features. Consider
automobile-manufacturing plant for example. A "stripped-down" model of the
vehicles being produced will contain no extra features like air-conditioners, head
rests, alloy rims, car stereo etc. However, the higher models which contain any
one or combinations of these extras features are fast becoming a competitive tool
for differentiating the company's products from competitors'. What is generally
needed here is some high degree of innovativeness backed with a sound and
efficient marketing research unit.

3. Product Design
The process of designing a product's style and function concerns creating that is
attractive, easy, safe, and inexpensive to use and service. It should also be simple
and economical to produce and distribute.
Just like product features, product design can be one of the most powerful
competitive weapons in a company's marketing arsenal.
For instance, good designs can attract attention, improve product performance, cut
production costs, and give the product a strong, competitive advantage in the
target market.

3.3.2 BRANDING

A forward-looking marketing manager will usually consider the issue of branding,

as part of his strategic plans. But what is a brand?
A brand is a name, term, sign, symbol or design, or a combination of these, which
is intended to identify the products or services of one seller or group of sellers and
to differentiate them from those of competitors. Therefore, a brand identifies the
maker or seller of a product. It is a seller's promise to deliver consistently, a
specific set of features, benefits, and services to buyers.
We must observe that the term branding includes brand names, brand marks and
trademarks.
Brand name is narrower in meaning and is concerned with that part of a brand
which can be vocalized (i.e. utterable or pronounceable). A brand name is defined
as a brand or part of a brand consisting of a word, letter, group of words or letters,
comprising a name, which identifies the goods or services of a seller or group of
sellers and distinguishes them from competitors. Examples here include Coca
Cola, Pepsi Cola, Peugeot, Toyota, Panadol, Bacchus. Brand mark is that part of a
brand which can be recognized but is not utterable or pronounceable, such as
symbols, designs or distinctive colouring or lettering. Examples. Lion head (for
Peugeot).
A trademark is a brand or part of a brand that is given legal protection because it is
capable of exclusive appropriation. A trademark usually protects the seller's
exclusive rights to use the brand name and/or brand mark.
Branding is now an important issue in product strategy that can be viewed from
two sides. On the one hand, developing a branded product requires a great deal of
long-term marketing investment, especially for advertisement, promotion and
packaging. Hence, some manufactures usually find it convenient and cheaper to
make the product and let others do the brand building. This strategy is common
with Taiwanese manufactures who make substantial proportion of the world's
clothing, consumer electronics, and computers that are sold under non-Taiwanese
brand names.
On the other hand, many manufacturers have come to realize that the power lies
with the companies that control the brand names. For example, brand name
clothing, electronics, and computer companies can replace their Taiwanese
manufacturing sources with cheaper sources in Malaysia. It is however regrettable
that the Taiwanese producers can do very little to prevent the loss of sales to less
expensive suppliers.
Generally, branding adds value to consumers and society since it leads to higher
and more consistent product quality. It also increases the degree of innovativeness
in the business world by giving producers some incentives to look for new features
that cannot be easily copied by competitors. In this sense, branding can be said to
result in more product variety and choice for consumers. Finally, branding
increases shoppers' efficiency by providing sufficient information about products
and where to find them.
Apart from the above, branding has been observed to confer specific advantages
on both the buyer and the seller.
Benefits to the Buyer:
Brand names inform the buyer about product quality. For instance, a buyer who
purchases the same brand knows that he will obtain the same quality each time he
buys.
Brand names also increase the shopping efficiency of the buyer. Since different
products have their particular brand names, a buyer will find it easy to pick his
choice from the pack instead of just aimlessly going through nameless products.
(iii) Brand names also assist in calling customers' attention to new products,
especially when backed by aggressive promotional activities. .
Benefits to the Seller:
Brand names make it easier for sellers to receive and process orders, as well as
track down problems. For example, a contract for the supply of vehicles will
usually be specific about the particular model needed.

The sellers' brand name and trademark instantly give legal protection for unique
product feature that otherwise might be copied by competitors.
Branding allows the seller attract loyal and profitable sets of customers.
Through branding, the seller is able to segment his markets and by so doing cater
for the needs of the various segments in the market.

3.3.3 PACKAGING

Packaging has to do with the activities of designing and producing the container or
wrapper for a product. The package may comprise of the following:
the product's primary container (e.g. the bottle holding bennylin cough a syrup);
a secondary package, that is thrown away when the product is about to be used
(i.e. the card box containing the bottle of Bennylin cough syrup); and
the shipping package necessary to store, identify and ship the product (e.g. a
corrugated box carrying larger volumes of the product).
In today's business, several factors have made packaging an important marketing
tool. For instance, the increase in self-service dictates that packages must
necessarily perform many sales tasks such as attracting attention, describing the
products, as well as making the sale. In actual fact, innovative packaging can offer
a company an advantage over competitors.
Labeling, which consists of printed information appearing on or with the package,
should be seen as part and parcel of packaging. Labels may range from simple tags
attached to products to complex graphics that are part of the package. They often
perform at least two functions. In the first place, the label identifies the products or
brand. Secondly, it may contain some useful information about the product such as
its content, expiry date, direction for use etc.

3.3.4 PRODUCT-SUPPORT SERVICES

Another important element of product strategy is customer service. What a firm

offers in the market place usually includes some services, which may be a minor
or major part of the total offer. These are known as product-support services since
they augment actual products.
 Good customer service has its positive points. For instance, it costs less to keep the
goodwill of existing customers that it does to attract new ones or win back lost
customers. Firms that provide high quality service usually have the opportunity to
charge more, grow faster and make more profits.
It is in this sense that many are now setting up strong customer service operations
to handle complaints and adjustments, credit service, maintenance service,
technical service, and consumer information. A well-staffed and equipped
customer service department should be able to effectively coordinate al the firm's
services, create consumer satisfaction and loyalty, and helps the firm to further be
ahead of its competitors.

3.4 PRODUCT CLASSIFICATION

Several product classification systems have been devised for efficient marketing of
products and services. In the first place, all products and services can be broadly
grouped into two major classes on the bases of the types of consumers that use
them. These classes are: consumer products and industrial products.

3.4.1 CONSUMER PRODUCT

These are goods or services bought by final consumer for personal consumption,
in such a form that they may be used without further commercial processing.
The purpose of the marketing process is the satisfaction of consumers. Hence, to
develop and market products effectively, it is necessary to know how customers
feel about the products most especially their basis of choice. It follows form here
that any sub-division of consumers‘ goods should be based on consumer behavior.
In this regard, all customer goods can be separated into four categories.
1. Convenience products
2. Shopping products
3. Specialty products
4. Unsought products

1. Convenience Products
Convenience products are those products and services for which the probable gain
from making price and quality comparisons is thought to be small relative to the
value of the customer is time and efforts Examples include cigarettes, soap,
newspapers, magazines, chewing gun and most grocery products. These products
are frequently and readily purchased, require little service or selling efforts, are not
very expensive, and may even be bought by habit.
Convenience products can be subdivided further into three types, based primarily
on how customers think about and buy such products:
i. staples products
ii impulse products
iiiemergency products.

Staples Products:Staples such as food and drug items used regularly in every
household, are usually bought without much thought beyond the initial decision to
buy such products. Staples are usually purchased frequently. Here branding
becomes important since brand recognition or preference helps the customer
reduce his shopping effort. In addition, if prices change occasionally on these
items, he does not need to reconsider which items to purchase, since he can make
do with familiar ones.

Impulse Products:- These are products which customers typically do not seek,
they are often purchased with little planning or search effort. These products are
normally widely available. This is why candy bars, magazines, etc are placed next
to checkout counters in many stores since shoppers may not otherwise think of
buying them.
It has been observed that as the income and buying power of customers grow, the
number of impulse items seems to the expanding. We should however note that
not all impulse items are purchased for emotional reasons alone. To be sure, these
products may satisfy both emotional and economic motives.

Emergency Products:- These are purchased only when the need is urgent, and are
thus purchased less frequently. Considerations for price and quality is of little
importance if the need is immediate enough. Examples include ambulance
services, umbrellas or raincoats during a rainstorm.

2. Shopping Products
Shopping product are those for which the probable gain from making price, style,
suitability and quality comparisons is thought to be large relative to the time and
effort needed to shop properly for these products. Consumers spend much time
and efforts in gathering information and making comparisons when buying
shopping product. Examples include furniture , clothing, used cars, and major
appliances.
Shopping products can be subdivided into two classifications, depending on what
customers are seeking; (1) homogenous and (2) heterogeneous.
Homogenous Shopping products are seen by the consumer to be similar in quality
but different enough in price to justify shopping comparison. Examples here
include refrigerators, television sets, and automobiles. Thus, each competitor has
an almost perfect elastic demand curve. In such a case, a slight price cut would
substantially increase sales volume, therefore, we might expect price competition
among the various competitors in the market.
Heterogeneous:-Shopping products are seen by the consumer as non-standardized,
hence wants to inspect for quality and suitability because the product features are
more important than price.
It is important therefore that a seller of heterogeneous shopping products carry a
wide assortment to satisfy individual tastes. In addition, the seller must have well-
trained sales people to give information and advice to customers since they often
prefer to be guided. Furthermore, draperies, dishes and clothing are good examples
of this categories of shopping product.

3. Specialty Products:
Specialty products are those consumer products with unique characteristics or
brand identification for which or significant group of buyers is willing to make a
special purchase effort. The special effort the consumer makes is not to compare
the product with others, but merely to locate it, hence searching in the shopping
products sense does not take place here. Specialty products are usually specific
branded items rather than product categories, i.e. they are specific products which
have passed the brand preference stage and reached the brand insistence stage. For
instance, consumers have been observed asking for a drug product by its brand
name, and when offered a substitute actually leaving the store in anger. Some
well-advertised food and drug products seem to have carved out a market for
themselves. If they achieve the brand insistence stage, we refer to them as
specialty products. The demands for specialty products are relatively inelastic at
least within reasonable price ranges since customers are willing to insist upon the
product. Typical examples of specialty products include specific brands and types
of cars, high-priced photographic equipment and custom-made men's suits.

4. Unsought Products:
These are consumer products that the consumer either does not know about or
knows about, but does not normally think of buying. There seem to be two types
of unsought products: Almost all new products in the introductory stages may be
classified as "Unsought" until the consumer becomes aware of them through
advertising. Yet there are some consumer products that seem to perpetually remain
unsought for the majority of potential customers. Aggressive and continuous
promotion is therefore necessary for both types to move new products out of this
category and simply to sell the latter group (which very often never gets out of the
introductory stage). Examples of unsought products include life insurance,
encyclopedias, blood donation to the Red Cross.

3.4.2 INDUSTRIAL PRODUCTS

Industrial products are those purchased for further processing or for use in
conducting a business. When this description is compared with that of consumer
products, it would be seen that the distinction between then is simply based on the
purpose for which the particular product was bought. For example, if a consumer
buys a camcorder for the recording of important events for personal and private
use, the camcorder is seen as a consumer product If on the other hand, the
 consumer buys the same camcorder for the recording of events such as wedding,
funeral, birthdays with the intention of receiving financial rewards, this camcorder
is considered an industrial product.
Industrial product can be classified into three groups:
Materials and parts
Capital items
Supply and services

1. Materials and Parts

These are industrial products that enter the manufacturer's product completely,
including raw materials and manufactured materials and parts.
Raw Materials include farm products(e.g. Maize, wheat, cotton, cocoa beans,
livestock, fruits, vegetables etc) and are supplied by many small producers who
turn them over to marked intermediaries that process and sell them. The other
component of raw materials are natural products (e.g. lumber, fish, crude
petroleum, iron ore etc). They usually have great bulk and low unit value, and
require a lot of transportation to move them from producer to user. They are also
supplied by fewer but larger producers, who often tend to supply these products
directly to industrial users. Manufactured materials consist of component materials
(e.g. yam, cement,
wires, iron etc) and component parts (e.g. castings, engines, tires, bulbs etc).

2. Capital Items
Capital items are industrial products that aid in the buyers production or
operations. These are composed of (i) installations and (ii) accessory equipment.
Installations are large and expensive items which do not become a part of the final
product but instead are used up over many years. They represent major
expenditures for the firm and are depreciated over a long period. In addition then
are bought directly from the producer. Examples of installations include buildings
(e.g. factories, offices) and fixed equipment's (e.g. generators, drill presses, large
computers, elevators)
Accessory equipment like their installation counterparts do not become a part of
the final product. They are usually less expensive and shorter-lived than
installations. Products in this category include tools and equipment which
facilitate production or office activities. Examples include potable drills, lift
trucks, typewriters, fax machines, desks, filing cabinets wheel barrows etc).

3. Supplies and Services

These are industrial products that do not enter the finished product at all. Supplies
include operating supplies (e.g. lubricants, coal, computer paper, pencils) and
repair and maintenance items (e.g. brooms,. nails, paint etc.). In some respects,
supplies are the convenience products of the industrial field because they are
usually purchased with a minimum of efforts and comparison.
Services are frequently necessary or desirable to plan, facilitate or support
operation. Business services include maintenance and repairs services (e.g.
window cleaning, computer and machinery repair etc) and business advisory
services (legal, management consulting, advertising etc.).

4.0 CONCLUSION

Production is the first and the most important element in the marketing mix. A
product can be defined as a set of tangible and intangible attributes, including
packaging, colour, price, quality and brand, plus the seller's services and
reputation. A product may be a good, service, place, person or idea. In essence,
then, consumers are buying much more than a set of physical attributes when they
buy a product. They are buying want satisfaction in the form of the benefits they
expect to receive from the product.

5.0 SUMMARY

To manage its products effectively, a firm's marketers must understand the full
meaning of a product, which stresses that consumers are buying want satisfaction.
Products can be classified into two basic categories i.e, consumer products and
industrial products. Each category is then subdivided, because a different
marketing program is required for each distinct group of product.

SELF-ASSESSMENT EXERCISE

1. Compare the elements of a producer's marketing mix for a convenience good

with those of the mix for a speciality good.
2. In which of the five categories of business goods, should each of the following
be included? And which products may belong in more than one category?
Trucks
Medical X-ray equipment
Typing paper
copper wire
printing paper

6.0 TUTOR-MARKED ASSIGNMENT

1. Analyse two primary functions of packaging.

7.0 REFERENCES/FURTHER READINGS

Boyce, C.L. and J.V. Thill (1992): Marketing New York,: McGraw — Hill, Inc.
 Stanton, W.J. M.J. Etzal and B.J. Wallcen (1994): Fundamentals of marketing. 5th
ed. New York.; McGraw — Hill, Inc.

UNIT 11: PRODUCT-MIX STRATEGIES

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Contents
3.1 Product Mix and Product Line
3.2 Product-Mix Strategies
3.3 Product Life Cycle
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

A product mix (also called product assortment) is the set of all products and items
that a particular seller offers for sale. Over time, a company needs to make
numerous decisions about this array of products. The correctness or otherwise of
such decisions greatly affects the company's degree of success over some time. In
this unit, you will learn a number of strategic decisions pertaining to an
organization's assortment of products.

2.0 OBJECTIVES

After studying this unit, you should be able to:

 Differentiate between product mix and product line;
 Explain the major product-mix strategies;
 Explain the meaning of the terms, "trading up" and "trading down"
 Understand the concept of product life cycle.

3.0 MAIN CONTENTS

3.1 PRODUCT MIX AND PRODUCT LINE

As you will come to fully understand later in this course, few firms rely on a
single product. Rather, most companies deal in many products. The set of all
products and items that a particular seller offers for sale is called a product mix or
product assortment.
A company's product mix has a certain width, length, depth, and consistency:
The width of a product mix refers to how many different product lines the
company carries. The length of product mix refers to the total number of items in
the mix From this, we can also talk about the average length of a line. This is
found by dividing the total length by the number of lines.
The depth of a product mix refers to how many variants are offered of each
product in the line. For example, if a product, such as toothpaste, comes in three
different sizes (small, medium, and large) and two formulations, (regular and
smoker's), that particular product has a depth of six, the consistency of the product
mix refers to how closely related the various product lines are in end use,
production requirements, distribution channels or some other way. A company's
product lines are said to be consistent, for instance if they are consumer goods that
go through the same distribution channels. The lines are less consistent if they
perform different functions for the buyer.
These four product-mix dimensions allow the company to expand its business in
four ways. In the first place; it can add new product lines, thereby widening its
product mix. Secondly, it can lengthen each product line. Thirdly, it can add more
product variants to each product, thereby deepening its product mix. Fourthly, the
company may pursue more product-line consistency.
Let us now formally define a product line: A broad group of products, intended for
essentially similar uses and having similar physical characteristics, constitutes a
product line. In offering a product line, companies normally develop a basic
platform and modules that can be added to meet different customer requirements.
For instance, car manufacturer build their cars around a basic platform. Home
builders show a model home around which additional features can be added.

3.2 PRODUCTS-MIX STRATEGIES

You were informed in section 3.1 that most companies carry a diverse assortment
of products. For instance, you may find a particular company dealing in baked
goods, snack foods, family entertainment and different brands of soft drinks. This
wide variety of good has not been developed by accident. Rather, it reflects a
planned strategy by the company. This is to say that to be successful in marketing,
producers and middlemen need carefully planned strategies for managing their
product mixes. This would be made clearer in the sections that follow.

3.2.1 POSITIONING THE PRODUCT

A company's ability to bring attention to a product, as well as differentiate it in a
favourable way from similar products goes a long way toward determining that
product's revenues and the company's profits. Therefore, it is important for
companies to engage in positioning. Positioning means developing the image that
a product projects in relation to competitive products and to the firm's other
products.
You need to understand that positioning is not what you do to a product. It is what
you do to the mind of the prospect. That is, you position the product in the mind of
the prospect. This is the reason why well-known products generally hold a
distinctive position in consumers' mind.
There are a member of positioning strategies that marketing execution can choose
from. It is also possible to employ more than one strategy. Let us examine the
available strategies:
1. Positioning in Relation to a Competitor:
Positioning directly against the competitor is the best strategy for some product.
This strategy has been found to be especially suitable for a firm that already has a
solid differential advantage or is trying to solidify such an advantage. For
example, in order to ward off rival makers of microprocessors, Intel corp.
launched a campaign to convince buyers that its product is superior to
competitors'. To reap maximum benefits, the company even paid computer makers
to include the slogan, "Intel Inside", in their advertisements. You should be
familiar with this label on personal computers and even in newspaper
advertisements. In some other products however, head-to-head positioning should
never be done, especially when a competitor has a strong market position.
The market leader will do everything to frustrate such moves, and this might
eventually lead to the failure of the contender.
2. Positioning in Relation to Product class or Attribute:
At times, a company's positioning strategy entails associating its products with a
product class or attribute. Sometimes, however, the company might want to
actually dissociate its products from a product class or attribute. For instance,
some firms promote their products as having an attractive attribute, such as "low
energy consumption", or "environmentally friendly". These days, this strategy is
now widely used for food products. For example, some food products are being
labeled as containing little or no salt, sugar, fat, or cholesterol. Such items are
positioned against products that are packed with the conventional amount of salt,
calories, cholesterol or fat content.
3. Positioning by Price and Quality:
There are two extremes here. On one side, some producers and retailers may opt
for high quality and high prices strategy. On the other side, are discounters who
stress low prices. This is not to infer that discounters ignore quality.
Positioning in Relation to Target Market
Whatever positioning strategy is adopted, the needs of the target market must
always be considered. This is consistent with our discussion on satisfying the
needs and wants of the prospective customer.

3.2.2 PRODUCT-- MIX EXPANSION

Product — mix expansion is accomplished by increasing the depth within a

particular line and / or the number of lines a firm offers to consumers. An
illustration of the options would make the strategy clearer to you. When a
company adds a similar item to an existing product line with the same brand name,
this is termed a line extension. A firm many engage in line extension for several
reasons. The major one is that the firm wants to appeal to more market segments
by offering a wider range of choices for a particular product. Another way to
expand the product mix, known as mix extension, is to add a new product line to
the company's present assortment. Under this strategy, the new line may or may
not be related to current products. In addition, it may carry one of the company's
existing brand names or may be given an entirely new name. With these situations,
a company has four alternatives:
(i) Related product, same brand
(ii) Unrelated product, same brand
(iii) Related product, different brand
(iv) Unrelated product, different brand.

3.2.3 TRADING UP AND TRADING DOWN

Trading up and trading down strategies involve a change in product positioning as

well as an extension of the product line, in the case of trading up, a higher-price
product is added to a line in order to attract a broader market. Another reason for
adopting this strategy is that the added product's prestige might help the sale of the
existing lower-price products.
Trading down strategy entails adding a lower-price product to a company's
product line. It is expected that people who cannot afford the original higher-price
product or who see it as too expensive will buy the new lower-price product. The
reason for this is simple: the lower-price product carries some of the status and
some of the• other more substantive benefits (such as performance) of the higher-
price item.
It is possible to practice the trading down strategy without necessarily introducing
new, lower-price product. This is usually done or achieved through advertising.
For instance, a manufacturer of wrist watches might accomplish this by
advertising some of the lower-price items in its existing product lines. You should
note that trading up and trading down strategies could be very dangerous,
especially since the new product may confuse buyers, thereby resulting in
negligible net gain. It is equally undesirable if sales of the new item or line are
generated as the expense of the established products. For instance, when trading
down, the new products may permanently hurt the firm's reputation as well as that
of its established high-quality product. In order to run away from this damage, the
new lower-price products may be given brand names that are different from the
established brands.
With respect to trading up, the problem actually depends on whether the new
product or line carries the established brand name is adopted, it is necessary for
the company to change its image so that new customers will accept the higher-
price product. Ironically, the seller does not want to lose its present customers.
Thus, the new offering may present a cloudy image, not attracting new customers
but driving away existing customers. If a different brand name is used, the
company must create awareness for it, and then stimulate consumers to buy the
new product.

3.2.4 ALTERATION OF EXISTING PRODUCTS

Instead of developing a completely new product, management could take critical

look at the company's existing product-mix. The firm can thus adopt the strategy
of product alteration, by improving an established product. This strategy may
actually be more profitable and less risky than developing new products. However,
product alteration has some inherent risks. For instance, when Coca-Cola Bottling
Company modified the formula for its leading product (i.e. Coca-cola) and
changed its name to New Coke, sales dropped drastically. The company was
subsequently forced to bring the old formula back three months later under the
classic Coca-cola brand name.
Another possible alternative, especially for consumer goods, is to change the
products packaging, instead of the product itself. Companies often have been
found to alter products' packaging to enhance appearance or to improve the
product's usability.

3.2.5 PRODUCT — MIX CONTRACTION

Product-mix contraction is carried out either by eliminating an entire line or by

simplifying the assortment within a line. The main objective of this strategy is to
obtain higher profits from fewer products. In this case, thinner and / or shorter
product lines or mixes can weed out low-profit and unprofitable products.
Generally, as firms discover that they have an unmanageable number of products
or that various items or lines are unprofitable or both product-mix pruning is the
best bet.

3.3 PRODUCT LIFE CYCLE

Products like human beings have a life cycle. The product life cycle (PLC)
concept takes an important place in the development of product mix strategy. It
serves to identify the competitive environment for new products, and to identify
alternative competitive environment for new products. In order words, it helps to
assess the changing nature of competition, costs, and market opportunities over
time. The following four points must be considered in the life cycle of a product:

(i)Products have a limited life

(ii)Product sales pass through distinct stages, each posing different challenges,
opportunities and problems to the seller.
(iii)Profits rise and fall at different stages of the PLC.
(iv)Products require different marketing, financial, manufacturing, purchasing and
human resource strategies in each stage of their life cycle.

Normally, one would expect that a product's sales potential and profitability will
change overtime. The PLC is thus an attempt to recognise distinct stages in the
sales history of the product. From birth to death, the cycle is typically divided into
four stages these are: Introduction, growth, maturity and decline.
The length of the cycle varies among products, ranging from a few weeks or a
short season (e.g. a fad or apparel fashion) to several decades (e.g. autos or
telephones). The duration of each stage may also be different among products. For
instance, some take years to pass through the introductory stage, while others are
accepted in a few weeks. We should also note that not all products go through all
stages: Some may die off in the introductory stage. However, in virtually all cases
decline and possible death are unavoidable for certain reasons, which may be
that:the need for the product has disappeared; a better or less expensive product is
developed to fill the same need; or a competitor does a superior marketing job.

3.3.1 ENVIRONMENTAL CHARACTERISTICS AND MARKETING

STRATEGIES FOR THE STAGES

(1) Introductory Stage:

The product is new to the market, and most buyers have not even tried it since
little is known about the product. In many respects, the introductory stage is the
most risky and expensive one. This is why there is the high percentage of product
failures at this period. Operations in this introductory period are characterized by
high costs, low sales volume, and limited distribution. For really new products,
there is very little competition. The promotional programme stimulates primary,
rather than secondary demand. Profits are non-existent at this stage because of the
heavy expenses on productintroduction.
Possible Marketing Strategies for the introductory stage, when introducing a new
product to the market, marketing managers can set a high or a low level for each
marketing variable, such as price, promotion, and product quality.
If we assume product quality to be constant, price and promotion can be employed
to pursue one of the four strategies shown in Table 1 below.

PROMOTION
High Low
Rapid — Slow —
Skimming Skimming
Strategy Strategy
Rapid — Slow —
Penetration Penetration
Strategy Strategy
High PRICE Low

Table 1: Four Introductory Marketing Strategies

(a) Rapid— Skimming Strategy

This consists of launching the new product at a high price and a high promotion
level. A high price is being charged because the firm wants to recover as much
gross profit per unit as possible. In addition, the firm spends heavily on promotion
in order to convince the market of the products' merits even at the high price level.
The high promotion acts to accelerate the rate of market penetration. This strategy
is applicable under the following conditions: a large part of the potential market is
unaware of the product;
those who become aware are eager to have the product and able to pay the asking
price; and the firm faces potential competition and wants to build up brand
preference.

(b) Slow — Skimming Strategy

Under this strategy, the new product is launched at a high price and low
promotion. As usual, the objective of the high price is to recover as much gross
profit per unit as possible. The low level of promotion is to keep the marketing
expenses down. This particular strategy is expected to skim a lot of profit from the
market. This strategy is applicable under the following conditions:
(i)The market is limited in size;
(ii)Most of the market is aware of the product;
(iii)Buyers are willing to pay a high price; and
(iv)Potential competition is not imminent.

(c) Rapid-Penetration Strategy

This consists of launching the product at a low price and spending heavily on
promotion. From this attractive combination, the strategy hopes to bring about the
fastest market penetration and the largest market share. The strategy is applicable
under the following conditions:
the market is large;
the market is unaware of the product;
most buyers are price sensitive;
there is strong potential competition; and
the company's unit manufacturing experience.

(d) Slow-penetration Strategy

This consists of launching the new product at low price and low level of
promotion. The low price is expected to encourage rapid product acceptance. The
firm also keeps its promotion costs down in order to realize more net profit. The
firm believes that market demand is highly price elastic, but minimally promotion
elastic. The strategy is applicable under the following conditions:
(i)The market is large;
(ii)The market is highly aware of the product
(iii)The market is price sensitive; and
there is some potential competition.

(2) Growth Stage: The product becomes widely known and sales grow rapidly,
leading new competitors to enter the market. There is substantial profit
improvement at this stage. Sellers shift to "buy-my-brand" rather than "try my-
product" promotional strategy i.e. emphasis now on secondary demand. The
number of distribution outlets increases, economies of scale is introduced, and
prices may come down a bit

Possible Marketing Strategies in the Growth Stage

The firm uses several strategies to sustain market growth as long as possible. Such
strategies include:
(i) Improving product quality and adding new-product features and models
entering new market segments
(ii) Entering new distribution channels shifting some advertising from building
product awareness to bringing about product conviction and purchase.
(iii) Lowering prices at the right time to attract the next layer of price-sensitive
buyers.

(3) Maturity Stage: This is a period of slowdown in growth because the product
has achieved acceptance by most of the potential buyers. Repeat purchases
dominate sales and only the strongest competitors remain in the business.
Marginal producers are forced to drop out of the market. Price competition
becomes increasingly severe, and the producer assumes a greater share of the total
promotional effort as he fights to retain his dealers and the shelf space in their
stores.

Possible Marketing Strategies in the Maturity Stage

Most firms tend to passively defend their products in the maturity stage. Their
opinion is that it is best to conserve money and spend it on newer products.
However, we should understand that attack is the best form of defense. The
following marketing strategies are often used:
(i)Market modification
(2)Product modification
(3)Marketing — mix modification

(4) Decline Stage: Sales slowly decline because of changing buyer needs or the
introduction of substitute product forms or product classes. Cost control becomes
increasingly important as demand drops. Advertisement declines, and a number of
competitors withdraw from the market.

Possible Marketing Strategies in the Decline Stage

The appropriate decline strategy is a function of the industry's relative
attractiveness and the firm's competitive strength in the industry. The following
are some of the general strategies in use:
(i)Increasing the firm's investment (to dominate or get a good competitive
position). Holding the firm's investment level until the uncertainties about the
industry are resolved.
(ii)Decreasing the firm's investment posture selectively, by sloughing off the
unpromising
customer groups, while simultaneously strengthening the firm's investment
positions within the lucrative niches of enduring customer demands.
(iii)Harvesting (or milking) the firm's investment to recover cash quickly,
regardless of the resulting investment posture.
(iv)Divesting the business quickly by disposing of its assets as advantageously as
possible.

3.3.2 EXTENDING THE PRODUCT LIFE CYCLE.

From our discussions so far, you can see that marketers face choices that can
change the products course in every stage of the PLC. For instance, by
manipulating the product, the promotion, the pricing, and the distribution, you can
give your products at least a temporary sales boost.
Usually, no PLC is static, hence, it is possible to extend it once close attention is
paid to the marketing environment In actual fact, products that have been
discontinued can make a comeback. This is possible through product modification
and careful timing. Another way to extend the life cycle is to position the product
for other uses or other audiences.

3.3.3 IMPORTANCE OF PRODUCT LIFE CYCLE (PLC) TO

MANAGEMENT

A careful study of the stages in the PLC suggests that each would present distinct
opportunities and problems with respect to marketing strategy and profit potential.
By knowing the stage that a product is already in, or is moving toward, firms, can
formulate better marketing plans. In particular, the PLC can be useful to
management for several reasons.
First, it tells more about the difficulty and cost of increasing market share than the
current brand growth rate would do. Low growth may occur in the introductory
stage or in the maturity phase. It should however be observed that the ability to
improve market share is more limited in the maturity stage because of the
following reason:
(i)The products are technologically on a par with each other, consumer preferences
tend to be well established, and
(ii)The vast majority of sales is replacement or repeat purchases, suggesting that
increased sales must come primarily from competitors rather than from new users.

Second, the PLC suggests that product redesign, product reformulation, or minor
product variations should be developed when maturity is reached, as a means of
revitalizing sales through modifying the product form or class.

Third, knowing the stage of the PLC enables a firm to project future costs and
profits. For instance, marketing costs, especially advertising tend to be greatest in
the introduction and early growth stages of the life cycle. In the introduction stage,
extensive advertising and selling efforts are required to communicate the basic
benefits derivable from the new form or class. During the early growth stage, high
marketing expenses from promotion and minor product modifications are needed
as firms compete for strong market-share positions so as to withstand the attacks
of competitors that usually show up at maturity. Lastly, in the late growth and
maturity, product modification, improvement, or proliferation may result in
increased production and inventory costs.

The PLC concept indeed offers valuable tool for a marketing manager since it
enables him to understand the competitive environment in which each brand or
product form must operate. Through the examination of the PLC, managers can
better understand the opportunities and constraints facing individual brands and
product forms, together with the associated costs of improving or maintaining
market share for products.

4.0 CONCLUSION

The product portfolio is a combination of products and product lines balanced

to achieve the company's overall profit objective, while satisfying the needs of its
target markets. The portfolio concept helps marketers consider individual products
within the context of the entire line and the complete mix, allocating more money
to products and lines that have attractive current or future sales or that are
competitively strong.

5.0 SUMMARY

Most companies sell more than one product. The set of all products offered for
sale by a company is called a product mix. A product mix can be classified
according to width, length, depth and consistency. These four dimensions are the
tools for developing the company's marketing strategy and deciding which product
lines to grow, maintain, harvest and divest.

Self-Assessment Question
1. Describe how marketers manage the product mix by introducing products,
discontinuing products and modifying products.
Solution
As you manage the product mix, you have the choice of modifying products,
discontinuing products, or adding products.
The goal is to create a product mix that meets the needs of the target audience,
with new products, existing products, and repositioned products. How you treat
individual products depends on your company's profit and market share objectives.
Also, when deciding whether to add, modify, or discontinue a product, you
monitor changes in the marketing environment, such as emerging technology,
competitor actions, and shifting consumer tastes.
When a product moves into the decline stage of its life cycle and sales go down
with no sign of rebounding, you consider modifying the product, discontinuing it,
or adding a new product in its place.

6.0 TUTOR-MARKED ASSIGNMENT

1. Discuss how marketers use the marketing mix to manage products throughout
the Plc.

7.0 REFERENCES/FURTHER READINGS

Bovee, C.L. and J.V. Thill (1992): Marketing New York,: McGraw — Hill,
Inc.

Stanton, W.J. M.J. Etzal and B.J. Wallcen (1994): Fundamentals of marketing. 5th
ed. New York.; McGraw — Hill, Inc.
UNIT 12: NEW PRODUCT DEVELOPMENT

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 What is a New Product?
3.2 The New Product Development Dilemma
3.3 Organizing New Product Development
3.4 Product Development Objectives
3.5 The Product-Development Process
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 Further Reading

1.0 INTRODUCTION

In our previous discussions, a product was defined as anything that can be offered
to a market for attention, acquisition, use or consumption that might satisfy a want
or need. In this regard, a product might be said to include physical objects,
services, persons, places, organizations, and ideas. In addition, every product
should be seen as the packaging of a problem-solving service.
Again, we have also stressed that, every product seems to go through a life cycle
i.e. it is born, goes through several phases, and eventually dies. Newer products
show up in the market to serve the consumer better than the dead one. These new
products would also suffer the same fate as the previous ones, and another cycle
begins. This product life cycle poses one important challenge to organizations:
since all product eventually decline (in sales or acceptance), the firm must find
new products to replace aging ones. The focus of this unit therefore is on new
product development.

2.0 OBJECTIVES

After studying this unit, you should be able to:

 define a new product
 explain why new products are important to firms
 discuss the major reasons for new product failures
 outline the steps in the new product development process.

3.0 MAIN CONTENT

3.1 WHAT IS A NEW PRODUCT?

Any product that consumers treat as an addition to the available choices could be
considered a new product. From the viewpoint of the firm, however, new products
are those products that are new to the company.
Mining can obtain new products in two ways: (a) acquisition (b) new product
development.
The acquisition route can take three forms:
1. The firm can pursue a corporate-acquisition programme involving the search for
small companies that have attractive product lines;
2. The firm can pursue a patent-acquisition programme, in which it buys the rights
to new products from their patent holders.
3. The firm can pursue a license-acquisition programme for manufacturing various
products. It should be observed from all the three cases above that the firm does
not develop any new products, but simply acquires the rights to existing ones.

The new product route can take two forms:

1. The firm can pursue internal product development by operating its own research
and development (R&D) department.
2. The firm can pursue contract-new product development. This involves hiring
independent researchers or new product development agencies to develop specific
products for the firm.

3.2 THE NEW PRODUCT DEVELOPMENT DILEMMA

Firms are often free to select any one or a combination of these strategies for their
development. Generally, new products account for a high proportion of growth in
many firms and are usually major contributors to overall profits for these
businesses.
 Under modern conditions of competition, firms that do not develop new products
are merely exposing themselves to risks of business closure. Such firms will find
their products falling victim to changing consumer needs and tastes, new
technologies, shortened product life cycles, and increased domestic and foreign
competition.
On the other hand, new product development can be very risky. A variety of
researchers have investigated the rate of failure associated with new products. It
has been reported that between 33% to 98% of the new products introduced fail to
achieve commercial success.

3.2.1 REASONS FOR NEW-PRODUCT FAILURES

Several factors have been found to be responsible for new product failures:
1. Dictatorial tendencies of top management: some high-level executive might
push a favourite idea through in spite of negative marketing research findings.
2. Over-estimating of market size: The project idea might be good, but the market
size may be over-estimated.
3.Product deficiencies: The actual product might not be properly designed to fit
the needs and wants of prospective consumers. This often results in poor quality
and performance. 4. The product may turn out to be too complicated and might not
offer any significant advantage over competitive products already on the market.
5. Lack of effective marketing effort: There could be failure to provide sufficient
follow- through effort after introductory programme, and failure to train marketing
personnel for new products and new markets. In addition, the product might be
incorrectly positioned in the market, or even overpriced.
6. Higher costs than anticipated: This often results to higher prices, with the
attendant lower sales volume than projected.
7. Competitors' strength/reaction: The competitors might fight back harder than
expected. In addition, the speed and ease of the copying an innovation may
overcrowd the market sooner than expected.
8. Poor timing of introduction: The new-product might make a premature entry
into the market. In some other instances, the product might be introduced too late
9. Technical or production problems: The firm might not be able to produce
sufficient quantities to meet demand. In the process, competition might gain an
unanticipated share of the market.

To compound the problems faced by firms, it has been speculated that successful
new products may even be more difficult to achieve in the future for the reasons
given below:

1. Shortage of important new-product ideas in certain areas: For instance, some

scientists claim that there are too few new technologies of the investment
magnitude of the automobile,
television, computers, xerography, and wonder drugs.
2. Fragmented markets: The intense competition being witnesses is leading to
rapid fragmentation of markets. Hence, companies have to aim new products at
smaller market segments rather than the mass market with the resultant lower sales
and profits for each product.
3. Social and governmental constraints: New products have to satisfy public
criteria such as consumer safety and ecological compatibility.
4. Costliness of the new-product-development process: A company typically has
to generate many new-product ideas in order to finish with a few good ones. It
should be noted that each product costs more to develop and launch due to the
effect of the recent inflation on manufacturing, media, and distribution costs.
5. Capital shortage: Many companies cannot afford or raise the funds needed to
research true innovations. Thus, they emphasize new product modifications and
imitations instead of true innovation.
6. Shorter growth periods for successful product:When a new product is
successful, rivals quickly jump into the arena to imitate the product, so much that
its growth stage is shortened.

3.3 ORGANISING NEW PRODUCT DEVELOPMENT

Faced with the above problems how then can we have successful new-product
introductions? There are two sides to this. In the first place, the organization must
improve its organizational arrangements for handling the new-product -
development process. Secondly, the organization needs to handle each step of the
process with all seriousness, including using the best available techniques.

3.3.1 EFFECTIVE ORGANISATIONAL ARRANGEMENT

Since top management bears the ultimate responsibility for the quality of the new-
product-development work, it must start with a clear definition of company growth
strategy that specifies the business domains and product categories in which the
company wants to do business. Apart from this, top management should also set
specific criteria for new product-idea acceptance. The criteria can vary with the
specific strategic role the product is expected to play. Such roles may include:
(a) Maintaining position as a product innovator defending a market-share position
(b) Establishing a foothold in a future new market Pre-emptying a market segment
(c) Exploring technology in a new way
(d) Capitalizing on distribution strengths.

The consideration of the acceptance criteria may be based on the following:

(a) A specified period within which the product can be introduced e.g five years
(b) A stated minimum market potential and growth rate e.g at least 30 million and
a 10 percent growth rate
(c) Expected returns e.g at least 25 percent return on sales and 35 percent on
investment
Technical/market leadership.

Furthermore, top management must determine the budget outlay for new product-
development; Since R&D outcomes are so uncertain, it becomes a little bit
difficult to use normal investment criteria for budgeting. A number of alternative
ways exist towards finding a useful solution to this problem. These include:
1. Encouraging and financing as many project proposals as possible, hoping to hit
a few winners;
2. Setting R&D budgets by applying a conventional percentage-to-sales figure;
spending what competition spends;
3. Working backwards to estimate the required R&D investment after keeping the
number of successful products needed.

3.3.2 E STABLISHING A WORKABLE ORGANISATIONAL

STRUCTURE

Another important factor in effective product-development work is to establish

workable organizational structures. The following are some of the ways being
adopted by different organizations:
1. Product managers: Some firms entrust new-product development to their
product managers. Two notable faults have been detected in this system. Firstly,
product managers are usually so busy managing their existing/current product
lines that they give little attention to new products other than brand modifications
or extensions. Secondly, product managers have been found to lack the specific
skills and knowledge needed to develop new products.
2. New-product managers: This system professionalizes the new-product function.
However, new-product managers tend to think in terms of product modifications
and line extensions limited to their product market.
3. New-product department: In order to support new-product development as a
full-time activity, some manufacturers usually set up a new-product department.
This small department is headed by a manager who has substantial authority, as
well as access to top management. Typically, these departments are responsible
for generating and screening new ideas, directing and controlling R&D work, and
carrying out field testing and pre-commercialization work. When a product is
ready for full-scale commercial marketing, it is turned over to the appropriate
operating department.
4. Product planning committee: Organizations that make use of this approach often
have a high-level management committee charged with reviewing new-product
proposals. The committee is usually made up of representatives from marketing,
manufacturing, finance, engineering, and other relevant departments. After the
product has successfully passed through the introductory stages of development,
the marketing responsibility for it is then taken over by another unit - e.g a product
manager or a new-product department. The advantage here is that, in a committee,
the ideas and wisdom of several executives can be pooled. In addition, any new
product resulting from the committee's work is likely to win the approval of the
administrators who took part in its development. However, one major
disadvantage of this system is that committee activity takes much valuable
executives time and slows the decision-making process.
5. Venture Team. This is a relatively new, rapidly growing organizational concept
for managing product innovation from idea stage to full-scale marketing. The
venture team is designed to avoid the product-development problems in traditional
organizational structure. Such problems include bureaucratic operation, reluctance
to change, and lack of authority to move a product through the developmental
stages. Generally, a venture team is a small, multidisciplinary group,
organizational removed from the main stream of the firm. This team is made up of
representatives from engineering, production, finance and marketing research. The
main goal of the venture team is to enter a new market profitably. The group is
able to work in an entrepreneurial environment since it sees itself as a separate
small business entity. It is usual for the group to report directly to top
management. Immediately the new product reaches the stage of being
commercially viable, it is typically turned over to another division, such as an
existing unit, a new division, or even a new subsidiary company. The venture team
is then disbanded. In some cases however, the team may be allowed to continue as
the management nucleus when a new company is established.

3.4 PRODUCT DEVELOPMENT OBJECTIVES

It is very important to clearly state the objective of the product-development effort

in order to provide direction for product-development decisions. Generally,
product-development programmes may be designed to implement the corporate
marketing plan or to implement the marketing strategy for a given product or
product line.
There are four basic types of product-development programmes, each of which is
designed to fulfill specific objectives. These programmes include:
1. Product-line modification programmes
2. Product-line extension programmes
3. Complementary-product programmes
4. Diversification programmes.
An organization may employ any one or a combination of these programmes to
achieve different product-development objectives.

3.4.1 PRODUCT-LINE MODIFICATION PROGRAMMES

These programs are generally employed with the primary objective of enhancing
sales of the present line.
 They may be useful in implementing a customer-retention marketing strategy for
the purposes of:
(a) meeting changing buyer needs
(b) meeting new competitive offerings or
(c) Improving satisfaction with the product.

Redesigning or reformulating the product to provide new benefits or to improve

Product quality; or by using multiple packaging in order to reduce competitors'
opportunities.
T
h We may note that product modification programmes may enhance sales just
i by stimulating primary demand through increasing the rate of purchase. For
s instance, major design changes may result in a faster replacement rate for
durable goods. In particular, modest packaging changes can lead to more rapid
o consumption of the product.
b
j 3.4.2 PRODUCT-LINE EXTENSION PROGRAMMES
e
c The primary objective of product-line extension programmes is to reach anew
t segment of a market. Basically, these programmes may be employed to:
i (a) acquire competitors' customers in segments where a firm presently does not
v have an offering, or
e (b) stimulate demand among current nonusers of a product form.
In these two situations above, an entirely new product must be created with
o product features distinguishing it from the current offering.
f
3.4.3 COMPLEMENTARY-PRODUCT PROGRAMMES
e
n Complementary product programmes seek to introduce products that can be
h generally used with existing products. The objectives of these programmes may be
a two-fold: either to enhance sales of existing products or to establish sales growth
n in related markets.
c Complementary products have been found to enhance the sales of existing
i products. For example, a flash attachment to a camera will enable the customer to
n use the product in more situations, and will thus enhance the quality of the
g photographs taken. In another way, a complementary product may be introduced
simply to take advantage of a company's brand name, image, or sales force. For
s example, a tyre manufacturing firm may add the production of tubes as
a complementary products.
l
e 3.4.4 DIVERSIFICATION PROGRAMMES
s

o
f

t
h
Diversification programmes are designed to establish a firm in new markets in
order to achieve objectives such as new growth opportunities OR sales stability.
Generally, diversification is a policy of adding new products to serve new markets.

3.5 THE PRODUCT-DEVELOPMENT PROCESS

The specific process used in implementing product-development programmes

varies among organizations. However, it is important that they employ logical,
sequential processes with full recognition of the role that product is expected to
play in corporate and marketing strategy. The advantage of having such a
structured approach is to provide some mechanism for evaluating a new product
idea at several points in time as additional information is developed. Hence in each
stage, management must decide whether:
(i) to move to the next stage;
(ii)to abandon the product; or
(iii)to seek additional information

There are eight stages in the product-development process:

1.Idea generation
2.Screening
3.Concept development and testing
4.Marketing strategy
5.Business analysis
6.Product development
7.Market testing and
8.Commercialization.

State 1: Idea Generation

New-product development starts with an idea. Generally, ideas can come from a
variety of sources, it is however desirable to establish a formalized approach to
generating new-product alternatives. This entails incorporating the firm's product-
development objectives. In other words, a systematic approach should be
established to search for ideas that will meet current primary objectives. In
addition, top management should define the product and markets to emphasize.
Furthermore, it should state how much effort should be devoted to developing
original products, modifying existing ones, and imitating competitors' products.

Sources of New-Product Ideas

New-product ideas often come from many sources including the following:
1. Customers: Our earlier understanding of the marketing concept suggests that
customers' needs and wants should be the logical places to start in the search for
new-product idea. In this sense, films can identify customers' needs and wants
through direct customer surveys, projective tests, focus group discussions, as well
as suggestions and complaints letters from customers.
2. Scientists: Many organizations in the chemical, electronics and pharmaceutical
industries rely on their scientists for new product ideas.
3.Competitors' product: New product ideas can also be generated by monitoring
competitors' products. For instance, firms can listen to distributors, suppliers and
sales representatives in order to know the position of things in the market. In
addition, firms can assess who is buying competitors' new products together with
the particular reasons for making the new purchase. Furthermore, firms can buy
competitors‘ products, dismantle them, and build better ones. This is known as
product imitation and improvement rather than product innovation.
4.Firm's sales representatives and dealers: These are important sources of new
product ideas. Their activities on the field usually endow them with firsthand
exposure to customers' needs and complaints. They are usually the first to learn of
competitive developments.
5. Top management: This is another major source of new-product ideas. However,
as we already observed (under reasons for product failures) this might not be good
enough, since a top executive may push through a pet idea without thoroughly
researching market size or interest.
6. Miscellaneous sources: Other sources include investors, patent attorneys,
university and commercial laboratories, industrial consultants, advertising
agencies, marketing research films, and industrial publications.

Stage 2: Idea Screening

The purpose of this stage is to reduce the large number of ideas generated from the
previous stage (i.e idea generation)". Basically, idea screening rates the general
desirability of the new product concept to the firm. For instance, even when a
concept is being viewed as marketable, the same concept may be seen as
inappropriate for a firm that lacks the specific resources needed to produce and
market it successfully.
The following aspects are usually given proper considerations in the rating scheme
for evaluating new product ideas: marketability, durability, productive ability and
growth potential (See Table 2)

Table 2: Major Considerations in Idea Screening

Aspect Considerations
 1.Marketability Relation to present distribution channels
Relation to present product lines
Quality-price
) relationship
Number of sizes and grades
Merchandisability
Effects on sales of present products

2. Durability Stability
Breadth of market
Resistance to cyclical fluctuations Resistance
to seasonal fluctuations Exclusiveness of
design

3. Productive Equipment necessary

Ability Production knowledge and personnel necessary
Raw materials availability

4. Growth Potential Place in market

Expected competitive situation-value added
Expected availability of end users.

It should be clear from Table 2 that a variety of market-based internal and external
factors are often considered. Therefore, screening must generally be carried out by
a multifunctional group such that relevant inputs might be collected from
production, finance, R&D, and marketing.
Apart from the four general aspects contained in Table 2, it is also important to
check whether the product idea is consistent with the current product-development
objectives. In this regard, a good idea that has scaled all the hurdles of the
screening factors may be rejected or stepped down, if it will absorb resources
needed to achieve the top priority objectives.
In this screening stage, the firm must avoid two types of errors: a DROP-error or a
GO-error.
A DROP-error occurs when the company dismisses an otherwise good idea.
It is often said that if a firm markets too many DROP-errors, its standards are too
conservative.
A GO-error occurs when the company permits a poor idea to move into
development and commercialization. There are three types of product failures that
can arise from this error:
(a) An absolute product failure: This loses money, and its sales do not cover
variable costs.
(b) This also loses money. However, its sales cover all the variable costs and some
of the fixed costs.
(c) A relative product failure: This yields a profit that is less than the firm's normal
rate of return.
In summary, the major objective of the idea screening stage is to spot and drop
poor ideas as early as possible. The justification for this is premised on the fact
that product-development costs rise substantially at each stage. It is thus, a case of
"a stitch in time saves nine".

Stage 3: Concept Development and Testing

The purpose of concept development and testing is to ensure that the proposed
product is devoid of all kinds of problems when it eventually gets to the market.
After the elimination of all the poor product ideas at the screening stage, the
surviving ideas must now be developed into product concepts. It will be necessary
to distinguish between a product idea, a product concept, and a product image: A
product idea is just an idea for a product that the firm can think of offering to the
market. A product concept is an elaborated version of the idea expressed in
meaningful consumer terms. A product image is the particular picture that
consumers acquire of an actual or potential product.
Concept Development
Concept development can be illustrated with the case of a food processor, who has
an idea of producing a powder to be added to milk for the purposes of increasing
its nutritional level and taste. At this point, this is merely a product idea. However,
customers do not buy product ideas, but product concepts.
Generally speaking, any product idea can be turned into several product concepts.
Firstly, we start with the persons or group(s) of persons who are likely to benefit
from the use of the product. For instance, the proposed powder can be aimed at
infants, children, teenagers, middle-aged adults, or the elderly. Secondly, the
primary benefits to be derived from the consumption of the powder are
considered. This could be taste, nutrition, refreshment or energy. Thirdly, the
primary occasion for the drink is next considered. For instance, should it be for
breakfast, mid-morning, lunch, mid-afternoon, dinner or late evening?. By
properly given adequate considerations to the issues raised above, a firm can
develop several product concepts. For example, the following three concepts can
be generated from the issues already raised:
Concept 1: An instant breakfast drink for working-class adults who want a quick
nutritional breakfast without preparing a breakfast.
Concept 2: A tasty snack drinks for school children to drink as a midday
refreshment
Concept 3: A health supplement for the elderly to drink in the late evening before
going to bed.

Concept Testing
The purpose of concept testing is to develop a more refined estimate of market
acceptance for the new product concept, or to compare competing concepts in
order to determine the most appealing one (or two), or both.
Concept testing is particularly designed to obtain the reaction of potential
consumers or buyers to one or more hypothetical product concepts. What is
usually done is to present the product features and benefits in verbal form or
explained through visual aids. Potential users are then interviewed to obtain
comments about the advantages and shortcomings of each concept. Alternatively
they may be asked to rate the products in various ways.

Stage 4: Marketing-strategy Development

What goes on at this stage is the development of a preliminary marketing-strategy.

This is refined appropriately in subsequent stages.
The marketing-strategy statement often consists of three parts: In the first part, the
description of the size, structure, and behavior of the target market are given.
Furthermore, the planned product positioning and the sales, market share, and
profit goals sought in the first few years are similarly stated.
In the second part of the marketing-strategy statement, the proposed product's
planned prices, distribution strategy, as well as the marketing budget for the first
year are outlined.
The descriptions of the planned long-run sales and profit goals and the marketing-
mix strategy over time are presented in the third part of the marketing-strategy
statement.

Stage 5: Business Analysis

The business attractiveness of the new-product proposal is evaluated here.

Essentially, the proposal is expanded into a concrete business proposal in which
management
(i) estimates sales;
(ii) estimates costs and profit projections.

These are done in order to determine whether such projections satisfy the firm's
objectives.
One major purpose of estimating sales is to check if it will be high enough to
return a satisfactory profit to the firm. The best approach for the sales estimation is
to examine the sales history of similar products. Additionally, a survey of market
opinion should also be undertaken. From these, management should then prepare
estimates of minimum and maximum sales to learn the range of risk.
After the preparation of sales forecast, management goes on to estimate the
expected costs and profits of the proposal. The costs are estimated by the R&D,
manufacturing, marketing and finance departments. Several techniques are then
used to determine whether the proposed project meets the firm's minimum
profitability standards. Among the most widely used methods are the net present-
value and the payback approaches.

Stage 6: Product Development

If the business analysis for the proposal turns out to be favourable, the product
concept moves to R&D and/or engineering, where it is developed into a physical
product. It is at this stage that the "idea-on-paper" is converted into a physical
product.
As would be expected, this stage calls for huge investment which is far beyond
what was spent in earlier stages. This stage often determines whether the product
idea can be translated into a technically and commercially feasible product.
Otherwise, the firm's accumulated investment will be lost, safe for any useful
information gained in the process.
While developing one or more physical versions of the product concept, the R&D
department strives to find a proto-type that satisfies the following criteria:
consumers views it as possessing the key attributes described in the product-
concept statement;
the proto-type performs safely under normal use and conditions;
the proto-type can be produced for the budgeted manufacturing costs.
It usually takes considerable length of time to develop a successful prototype.
There is the need for the lab scientists to design the required functional
characteristics. They should also know how to communicate the psychological
aspects through physical cues. For example, in order to support the claim that a
lawnmower is powerful, the lab people have to design a heavy frame and a fairly
noisy engine!. It will also be necessary for the marketing team to work closely
with the lab people so as to let them understand how consumers judge product
qualities they have in mind.
When a proto-type has been developed, it must be put through rigorous functional
and consumer tests. The functional tests are conducted under laboratory and field
conditions to make sure that the product performs safely and effectively. The
functional tests are essentially technical. They are meant to provide information
on:
Product shelf life
Product wear-out rates
Problems resulting from improper usage or consumption
Potential defects that will require replacement
Appropriate maintenance schedules.

As earlier pointed out, it is also necessary to examine the product performance

from the buyers' perspective. Such consumer testing can take a variety of forms,
ranging from bringing consumers into a lab to test the product versions to giving
them samples to use in their homes. The degree to which the new product is likely
to acquire new customers rather than simply "cannibalizing" the sales of any
existing products can be established. In addition, consumer product testing can
provide a check on whether or not the concept has been implemented. If consumer
descriptions of the product do not match the intended concept, then reformulation
may be necessary.

Stage 7: Market Testing

If the product's functional performance is satisfactory, the product is deemed fit to

be dressed up with a brand name, packaging and a preliminary marketing
programme, to test it in more real-life consumer settings. The purpose of market
testing is to learn how consumers and dealers react to handling, using, and
repurchasing the actual product and how large the market is.
Market testing can yield valuable information about buyers, dealers, marketing
programme effectiveness, market potential etc.
The amount of market testing is influenced by the investment cost and risk on one
hand, and the time pressure and research cost on the other hand. Normally, high
investment/risk products deserve to be market-tested so as not to make costly
mistakes. Here then, the cost of the market tests will be an insignificant percentage
of the cost of the project itself. In addition, high-risk products i.e those that create
new-product categories or have novel features, require more market testing than
modified products. However, the amount of market testing may be seriously
limited if the firm is under intense pressure to introduce its brand probably
because the season is just starting, or competitors are about to launch their brands.
In some instances, the firm may prefer the risk of a product failure to the risk of
losing distribution or market penetration on a highly successful product. Finally,
the cost of market testing will affect how much is done and what kind.
There are differences in the market-testing methods between consumer and
industrial products.

3.5.1 Consumer-Goods Market Testing

The main purpose of testing consumers is to estimate the main determinants of
sales i.e trial, first repeat, adoption, and purchase frequency. Ordinarily, most
firms want to find all of these at high level. However, a firm might find many
consumers trying the product but not re-purchasing it, thus indicating a lack of
product satisfaction. Yet, another firm might find high first-time repurchases but
only to experience a rapid wear-out effect. In another instance, a firm might find
high permanent adoption but low frequency of purchase because the buyers use
the product only on special occasions.
Furthermore, the firm wants to understand how many and what types of dealers
will handle the product, under what terms, and with what shelf-position
commitments.
There are four main methods of consumer-goods market testing. These are (a)
sales-wave research (b) simulated store technique (c) controlled test marketing (d)
test marketing.

(a) Sales-wave research

This is an extension of the ordinary home-use testing in which consumers who
initially try the product at no cost are re-offered the product, or a competitor's
products, at slightly reduced prices. These consumers may be re-offered the
product as many as three to five times. During these periods of offer, the firm
records how many consumers selected its own product again, together with their
reported level of satisfaction.
Apart from under-studying the repeat purchase of products, sales-wave research
can also be used to monitor the impact of advertising exposure on repeat purchase.
This is done by exposing consumers to one or more advertising concepts in rough
form and then recording the effect.
Sales-wave research has been found to possess some advantages. Firstly, it enables
the firm to estimate the repeat-purchase rate under conditions where consumers
spend their own money and choose among competing brands. Secondly, the firm
can also measure the impact of alternative advertising concepts on producing
repeat purchases. Thirdly, sales-wave research can be implemented quickly,
conducted under relative competitive security, and carried out without needing to
develop final packaging and advertising.
This method however has two limitations: It does not indicate the trial rates that
would be achieved with different sales promotion incentives, since the consumers
are pre-selected to try the product. Neither does it indicate the brand's power to
gain distribution and favourable shelf position from the trade.

(b) Simulated store technique

This is also variously known as "laboratory-test-markets"; "purchase laboratories"
or "accelerated test-marketing". Here, about thirty to forty shoppers at a shopping
centre or elsewhere are invited to a brief screening of some television
commercials.
What is shown to this audience contains a number of well-known commercials and
some new ones, and they usually cover a range of products. Within the period of
screening, one commercial advertises the new product, but this is not singled out
for attention.
The consumers are later given some small amount of money, as well as invited to
a store, where they may use the money to buy any item or keep the money. The
researchers record how many consumers buy the new product and competing
brands. This definitely provides a measure of trial of the commercial effectiveness
against competing brands. The consumers are made to reconvene in order to know
the reasons for their purchases or non-purchases. Some weeks later, the same sets
of consumers are re-interviewed by telephone to determine product attitudes,
usage, satisfaction, and re-purchase intention and are offered another opportunity
to repurchase any products.
The simulated store technique has several advantages. These include the
measuring of trial rates, as well as repeat rates, advertising effectiveness, speedy
results, and competitive security. The results of the exercise are often incorporated
into mathematical models in order to project ultimate sales levels. The outcomes
of such prediction have been found to be very accurate.

(c) Controlled test marketing

This is also called "mini-market testing". The method often requires the marketing
research firm conducting the test to make some arrangement with a controlled
panel of stores. Such stores must have agreed to carry new products for a given
amount of money. The firm with the new product specifies the number of stores
and geographical locations it wants. The marketing research firm then delivers the
product to the participating stores and subsequently controls shelf location,
number of facings, displays and point-of-purchase promotions, as well as pricing
according to pre-specified plans. Sales that result from this arrangement can be
audited both from shelf movement and from consumer diaries. In addition, the
firm can test small-scale advertising in local newspapers during controlled test
marketing.
This method has a special advantage since it allows the firm to test the impact of
in-store factors and limited advertising on consumers' buying behaviour without
involving consumers directly. A sample of consumers can be interviewed later in
order to obtain their impressions of the product. Another advantage inherent in the
controlled test marketing method is that the firm does not have to use its own sales
force, give trade allowances, or take the time to buy into distribution.
However, this method does not provide experience in trying to sell the trade on
carrying the new product. In addition, the technique also exposes the product to
competitors.
(d) Test marketing
This is the costliest and the best way of testing a new consumer product. Under the
method, a firm offers a product for sale in a limited geographic area that is as
representative as possible of the total market in which the product will eventually
be sold. Test marketing has several distinguishing features relative to other
approaches:
Test marketing lowers the risk of national failure, which could endanger channel
relationships, reduce confidence, and morale of employees, and have a negative
impact upon presentcustomers' images of other products.
No special benefits are offered to induce purchasing other than those that would
later be available on a national basis.
The product competes with other competitive products in a real sales environment.
Any firm using test marketing usually works with an outside research firm to
locate a small number of representative test cities in which the company's sales
force will try to sell the trade on carrying the product and exposing it effectively
on the shelves. Moreover, the firm needs to put on a frill advertising and
promotions campaign in these markets as would be done in frill national
marketing.
As would be expected, test marketing costs money. The actual amount to be spent
however depends on the consideration given to the following:
(a) The number of cities:
It has been found that most tests use between two and six cities, with an average of
four. Again, it has been further suggested that a larger number of cities should be
employed if:
there is the probability of loss from going national or the maximum possible loss is
very great;
there is substantial number of contending/marketing strategies or the level of
uncertainty is very high;
there are wide regional differences; and
(iv) there is high chance of calculated test-market interference by competitors.

Type of cities:
Though no one city is a perfect replica of the nation as a whole, some cities often
typify aggregate national or regional characteristics better than others. Such cities
may be included in the study. Firms are of course; free to develop their own test-
selection criteria.
1.Length of test:
Generally, the length of test markets ranges from a few months to several years.
The longer the product's average re-purchase period, the longer the test period
necessary to observe repeat-purchase rates. However, if competitors are rushing to
the market, the period should be shortened.
2. Nature and amount of information:
The type of information to be collected has bearing with its value and cost. The
following can be used to illustrate the variations in the amount of details contained
in different types of information:
Warehouse shipment data shows gross inventory buying, but fails to indicate
weekly sales at retail store audits will give actual retail sales and competitors'
market shares but will not indicate the characteristics of the buyers of the different
brands.
3. Consumer panels will show which people are buying which brands together
with their loyalty and switching rates
4. Buyer surveys give in-depth information about consumer attitudes, usage, and
satisfaction.
Other things that can be re-searched here include trade attitudes, retail distribution,
and the effectiveness of advertising, promotion, and point-of-sale material.
Many benefits are derivable from test marketing. Firstly, it yields a more
reliable forecast of future sales. For instance, if product sales fall below
target levels in the test market, the firm may have to drop or modify the product.
Secondly, the method allows the pre-testing of alternative marketing plans. A
different marketing mix can be employed in each of the test cities. From these, the
optimum mix that results in the best profit level can be detected.
Thirdly, a firm may discover a product fault that escaped its attention in the
product-development stage. In addition, the firm may discover important clues to
distribution-level problems, and through this, it may gain better insight into the
behaviour of different market segments. It has been observed that the main value
of test marketing's does not lie in sales forecasting, but in learning about
unsuspected problems and opportunities connected with the new product. Though
test marketing has lots of advantages, a number of problems have been identified
as limiting its effective application. These concern the problems of:
1. obtaining a set of markets that is reasonably representative of the country as a
whole
translating national media plans into local equivalents
2. estimating what is going to happen in the coming year, based on what has
happened in this year's competitive environment
3. competitive knowledge of appropriate test(s) and of deciding whether any local
counter activities are representative of what competition will do nationally in
the future.
4.extraneous and uncontrollable factors such as economic conditions and weather

3.5.2 Industrial-Goods Market Testing

In the past, it is usual for new industrial goods to undergo extensive product
testing in the laboratories in order to measure performance, reliability, design and
operating cost. With satisfactory results, many firms will commercialize the
product by listing it in the catalogue and turning it over to the sales force. In
modern-day business however, a large number of firms are changing to market
testing as an intermediate step. Firms stand to gain substantial benefits in the
process, since market testing can indicate:
the product's performance under actual operating conditions;
the key buying influences;
how different buying influences react to alternative prices and sales approaches;
the market potential; and
the best market segment
Due to certain reasons, test marketing is not typically used for industrial products.
Firstly, it is too expensive to produce their samples, not to talk of putting them up
for sale in a select market, just to see how well they sell. Secondly, industrial
buyers will want to be sure of the availability of spare parts and after-sales
services before buying durable goods. Thirdly, marketing research firms are yet to
develop the test-market systems that are found in consumer markets. Hence,
industrial-goods manufacturers have to use other methods that can be employed in
researching the market's interest in new industrial products. Four of such methods
are in use. These are (a) product-use test (b) trade shows (c) distributor and dealer
display and (d) controlled or test marketing.
(a) Product-use test
This is the most common method, and it is similar to the in-house use test for
consumer products. Here, the manufacturer selects some potential customers who
must have agreed to use the product for a limited period. The technical team from
the firm monitors how these customers use the product. The outcome of this
exercise often exposes unanticipated problems of safety and servicing. It also
gives the manufacturer clues about customer training and service requirements. At
the end of the test, the customer is asked to express purchase intent and other
reactions.
Trade shows
Another common market-test method is to introduce the new industrial product at
trade shows. Trade shows usually draw a large number of buyers, who view new
products in a few concentrated days. During the exposure, the manufacturer will
be able to see how much interest buyers indicate in the new product, how they
react to various features and terms, and how many of them actually express
purchase intentions or place orders. One major disadvantage inherent in this
method is that it reveals the product to competitors. Hence, the manufacturer
should be ready to launch the product once it has been displayed at trade shows.
Distributor and dealer display rooms
Manufacturers can also market-test new products in distributor and dealer display
rooms, where such products may be placed next to the manufacturer's other
products and possibly competitors' products. This method makes it possible to
obtain preference and pricing information in the normal selling atmosphere for the
product. It however has some shortcomings. For instance, the customers may want
to place order that cannot be met. In addition, the customers who come in might
not be representative of the target market.
Controlled or test marketing
Although it was mentioned earlier that test marketing is not typically used for
industrial products, some manufacturers have been found to make use of it. In this
case, they produce a limited supply of the product and give it to the sales force to
sell in limited geographical areas with adequate promotional support, printed
catalogue sheets etc. Through this process, the firm can have a fore knowledge of
what might happen under full-scale marketing and thus get well prepared for the
launching.

Stage 8: Commercialization
At this stage, full-scale production and marketing programmes are planned, and
then the product is launched. There are a number of important decisions to make
before the product is finally launched.
First, the timing of the introduction should be carefully evaluated. In general, it is
more appropriate to introduce the new product during peak periods if demand is
seasonal. This will allow the firm to obtain a high rate of trial and early sales,
helping to offset the high costs of introduction. It is also necessary to time the
introduction appropriately, so that distributors will have adequate levels of
inventory by the time the introductory promotional campaign starts. If the new
product is being proposed to replace another product, it might be necessary to
delay its introduction until the old product's stock is drawn down, through the
normal sales.
Second, the firm should properly consider its geographical strategy. In particular,
it should decide whether to launch the new product in a single locality, a region,
several regions, the national market, or the international market. It has been
observed that only few firms have the confidence, capital, and capacity to launch
new products into full national distribution. They therefore tend to develop a
planned market rollout over time. For smaller companies, this approach entails the
selection of an attractive city with aggressive promotional campaign to enter the
market. Larger companies on their part often introduce their new products into a
whole region and then enter others, one at a time.
Under rollout marketing, firms have to assess the alternative markets for their new
products, using such criteria as market potential, firm's local reputation, cost of
filling the pipeline, quality of research data available in the particular area,
influence of area on other areas, and competitive penetration. The outcome of the
assessment will allow the firm to determine the prime markets and develop a
geographical rollout plan.
Third, with respect to the rollout markets, the firm must target its distribution and
promotion to the best prospect groups. It is expected that prime prospects should
have been identified during the market testing stage. Ideally, prime prospects for
new consumer products have been found to be: early adoptersheavyusersopinion
leaders who talk favourably about the product
Reached at low cost.
We should note that very few groups of prospective customers possess all of the
above characteristics. The best thing is for the firm to rate the various prospect
groups on these features, and then target the best one. The purpose of doing this is
to generate high sales as soon as possible to motivate the sales force and attract
other new prospects.
Fourth, other programme decisions, with respect to price, advertising, sales
promotion, and sales and distribution activities need to be developed and
coordinated. These programmes are very important since they influence the sales
and profit results of any new products.

4.0 CONCLUSION

You have learned in this unit that every company needs to develop new products.
This is because new-product development shapes the company's future.
Replacement products must be created to maintain or build sales. Customers want
new products, and competitors will do their best to supply them. Therefore
companies that fail to develop new products are putting themselves at great risk.

5.0 SUMMARY

Once a company has segmental the market, chosen its target customer groups,
identified their needs and determined its desired market positioning, it is ready to
develop and launch appropriate new products. Successful new product
development requires the company to establish an effective organization for
managing the development process. Eight stages are involved in the new-product
development process idea generation, screening, concept development and testing,
marketing strategy development, business analysis, product development, market
testing, and commercialization. The purpose of each stage is to determine whether
the idea should be dropped or moved to the next stage. Our subsequent unit shall
focused on Quality Management as vital tool for the success of corporate
development, consolidation, mergers and acquisitions exercises.

SELF-ASSESSMENT QUESTION

1. Outline and discuss the steps in the new-product development process.

6.0 TUTOR-MARKED ASSIGNMENT

(a) Discuss the reasons for new-product failures

(b) It has been speculated that successful new-products may even be more difficult
to achieve in the future. What are the likely reasons for this ascertain?
7.0 REFERENCES/FURTHER READINGS

Kotler, P (2000): Marketing Management. The Millennium Edition .New Delhi,

Practice Hall, India.

Stanton, W.J, M.J Etzeland , B. J Walker (1994)

Needle, David (1999).Business in Context.London: Thomson BusinessPress.

Benston, et al., 1986. Perspectives on Safe and Sound Banking: Past, Present and
Future. Cambridge, MA: MIT Press.

Dowd, K. ed., 1992.TheExperience of Free Banking. London: Routledge.

Dowd, K. 1996. The Case for Financial Laissez-Faire. The Economics Journal,
106(May), pp.679-687.

Kaufman, G.G. 1992. Capital in Banking: Past, Present and Future. Journal of
Financial Services Research, 5(4), pp.385-402.

Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of

excess.

Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of

MinnesotaPress.
 UNIT 13: PRODUCT DEVELOPMENT THEORIES

CONTENTS

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Innovation and product development: Pierr Bourdieu's theory
of habitus, capital and field.
3.2. New product development, desire and the fear of death.
3.3. Innovation and overcoming our fear of death
3.4. Capital, field and multiple strategies
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

This unit is based upon grounded research within small manufacturing organizationsand
attempts an ontological understanding of being innovative rather than nautical description
of
roduct development processes. We argue that theseorganizations are aware of but do not
utilise the ―best practice‖ models forproduct development and that these strategies cannot
be
reduced and simplifieddown to the rational pursuit of an economic, profit maximizing
goal.
They are better conceived through Bourdieu‘s theory of habitus, capital and field.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

Explain the theories of product development
Explain concept of death and continuity of a product
Discuss the critique of innovation theories
Explain companies‘ strategies for product development.

3.0 MAIN CONTENT

3.1 INNOVATION AND PRODUCT DEVELOPMENT: PIERRE BOURDIEU’S

THEORY OF HABITUS, CAPITAL AND FIELD.
How organizations innovate has been a subject of interest to academics from disciplines
such
aseconomics, psychology, sociology, engineering and management for many years. This
has
naturally lead to a wide and diverse literature on the subject. Despite this vast interest, or
perhaps because of it, organizational innovation remains an area of considerable
academic
debate(Van de Ven and Rogers, 1988; Wolfe, 1994; and Slappendel, 1996) but one that
has,
accordingto Wolfe (1994), remarkably little consistency.
Van de Ven (1986) argues that innovation is both a product and process of human
interaction.
Innovation, and therefore the management of innovation and new product development,
is
socially and culturally based. Innovation here is seen as a process rather than an event, it
has a
temporal, unfolding nature, it is not the result of some simple action that happens at a
singlepoint in time and space. He argues further that innovation has a transactional nature
thatsuggests it involve issues of discourse, knowledge and power between agents in some
form ofsocial system (or institutional order). Finally an innovation may take many forms,
one of whichis the creation of a new product. New product development (NPD) is one
form of organizational innovation.

NPD research during the last decade has concentrated upon speed and time to market.
Theimplicit, and at times explicit, beliefs are that: the rate of technological development
iscontinually increasing; long product development times are not cost effective; markets
arechanging more rapidly; market competition is increasing (see for instance, Stalk and
Hout, 1990;
Vesey, 1991; Clark and Fujimoto, 1991). These beliefs lead academics, the general media
andmanagement practitioners to exhort organizations to compress their product
development times, in effect to adopt time compression new product development
process as the ―best practice‖ forproduct innovation.
This unit is neither a review of the various models suggested as ―best practices‖ nor does
itpresent a further practical model of a NPD process. It is instead concerned with
developing an understanding of the ontology of product innovation. To paraphrase
Heidegger, it considerswhat the way of being innovative is. In so doing it attempts a
counter-positional critique of thephilosophy of the accepted views of new product
development. It will develop a theory of newproduct development based particularly on
the works of Georges Bataille and Pierre Bourdieu.

A critique of innovation theories

Thomas (1994) develops a sociological critique of theories of the management of
innovation. Heargues against a structural determinism that he views as underpinning
theories of management ofinnovation. He suggests that innovation is too often viewed as
being technologically or environmentally determined.
Technological determinism here assumes innovation to be driven by an ―ineluctable
flow‖.
Technology here constrains and determines how new products may be designed,
developed and manufactured. The development of an innovation, or new product,
becomes inevitable as society progresses towards some utopian future. To stand in the
way would be to oppose this obviousand inevitable progress. These theories of
innovation suggest why radical innovation may arise.
They do not however focus upon the process that occurs.Environmental determinism
assumes that the structure of an organization‘s market determineshow it produces new
products. Organizational strategy and tactics, and new productdevelopment processes are
chosen according to the demands of the market. An environmentaldeterministic position
leads to a homogenization of organizational forms and practices within amarket or a
market niche (DiMaggio and Powell 1983; Freeman and Hannan 1987). Theassumption
is that organizations will become isomorphic as they mimic the practices of the
mostsuccessful firm in their particular niche. Thus a successful organization in a
turbulent market isone that can respond to change rapidly. This, according to Eisenhardt
and Tabrizi (1995),requires them to adopt a new product development process that is
equally open to adaptation.
This then becomes the accepted practice within a market as the organization‘s success
isrecognised and others start to mimic it.

A post-structural critique of the best practice of NPD models.

Technological and environmental deterministic models are based on antic

methodologicalassumptions. Primary here is a belief in objectification so that a concept
may be isolated, studiedand measured. Objectification however requires both a reified
object and neutrality (Heidegger,1988). Innovation and the practice of innovation are
neither. They are contextual processes thatinvolve the actions of multiple actors. To
paraphrase Heidegger, innovation has two forms, it isboth a means to an end and a human
activity (Heidegger, 1977), innovation therefore has astrategic nature. We will consider
this further from Bourdieu‘s theory of capital.
An unstated and therefore unquestioned assumption (or ―doxa‖ in Bourdieu‘s
terminology[Bourdieu, 1977]) of the ontic methods is that firms use ―best practice‖ as a
rational mechanismto most efficiently meet the rules of their structurally determined
world. In so doing there islittle, if any, need to question fundamentally what it means to
be innovative. Ontological concerns disappear under the need to provide ontical
positivistic research of the processes. The possibility that non-rational and irrational
forces, such as creativity, passion, desire, may affectNPD disappears under the weight of
rationality. We will argue that the tension created betweenthe rational and the irrational
forms the ontological being of innovation.

3.2 New product development, desire and the fear of death.

Georges Bataille presents a series of complex dialectical and paradoxical movements to

arguethat human society is split between the profane, rational world and the sacred. This
splitoccurred as a result of humanity‘s Fear of Death and has permitted humanity to
effectivelyretreat in to the rational and profane world of work so as to distance
themselves from the violence of the natural world. The profane achieves this end (albeit
temporarily) and maintains itself through the imposition of rules and taboos on humans
(in particular, Bataille, 1987, 1988,1990; Guerlac, 1990: 90-105). (Fear of death here
becomes the limit experience of human existence. Our originary Fear of Death here is
embedded with our discontinuity as human beings because each of us is individual. We
are thrown into the world by a violent rupture which leaves us isolated, alone, anguished
and in pain [c.f. Heidegger‘s notion of exteriority]. We need to extinguish these profound
qualities but paradoxically they distinguish us as human.)
Bataille argues further that humans are only truly sovereign when they become self-
legitimating,i.e. when they both set and act according to their own self-imposed rules. As
such ouracceptance and following of social rules and taboos means that we are not truly
sovereign, weare in effect Hegelian Slaves. (Bataille‘s philosophy here is deeply
influenced by Kojève‘sreading [Kojève, 1969] of Hegel‘s Phenomenology [Hegel, 1977].
Bataille‘s reading of Hegel here is somewhat idiosyncratic, departing from the more
common view of Hegelian theory astranscendental dialectic towards a more Nietzschain
dialectic of forever becoming. For Bataille,fascism describes the actions of a being that
prevents another being from achieving sovereignty[Bataille, 1985]. According to
Bourdieu [1977] such actions may be real [physical or economic]or symbolic acts of
violence.) We exist within a paradoxical tension between our desire forsovereignty and
our originary fear of death.
For Bataille, transgression is implicitly embedded as the other of a rule. (Rules exist to be
transgressed, without it they would be an inviolable, animalistic urges.) Transgression
here isnot merely the breaking of a rule however it is the means by which we transcend
the profane andour originary fear of death to become sovereign. Transgression thus
means that we must leavebehind the profane, rational world to become other by a leap
into the void.
Batailletheoriesstates thatthis movement is accomplished when we are overcome by the
ecstasy of Human Desire. (Human desire is not the longing for something that we lack.
Desire as negativity, as a ―lack‖, isanimal desire. Human desire is the desire for
recognition by some other being. Furthermore wedo not possess human desire but are
possessed by it. Bataille here avoids the objectification ofDesire common to humanist
readings.)
Abernathy and Utterback (1978) suggest that product development is based on a cyclic
motionbetween the extremes of incremental and radical innovation. Incremental product
developmentand innovation seek to build on, compliment and extend existing products,
resources andprocesses. As such it acts so as to develop a system without destroying it.
Radical innovationdoes not build and extend what exists but seeks to overturn it. It is
destructive of the skills,practices, product forms and social relationships that already exist
within and betweenorganizations (Abernathy and Clark 1985; Henderson and Clark
1990).
From a Bataillean perspective incremental innovation operates in the profane and rational
humanworld so as achieve a technical advance that further separates, and protects, the
human worldfrom the violence of the Natural one. It achieves continuity, and allows
progression whilsmaintaining, and further reifying, existing social systems. Incremental
innovators here ―step back‖ from the void, preferring the safer ground of the known
world. They do so however at thecost of remaining as slaves in a state of servitude, only
radical innovation holds out thepossibility of sovereignty.

Radical innovation destructively transgresses existing rules and taboos to establish itself
beyond a high degree of risk for the innovator. There can never be a guarantee that the
―cost‖ of transgression will be paid or indeed that the innovator survives the risk of
transgression. Radical innovation carries with it the possibility of complete destruction
for the innovator. We can notunderstand this willingness to risk all within a profane,
rational framework. The existence ofradical innovation demands a theory of a
Batailleantransgressive desire. The fundamental,ontological question here is, ―Why do
some step back whilst others risk all, including death, toinnovate?‖ We will now attempt
to answer this question below.

3.3 Innovation and overcoming our fear of death

To produce a radical innovation implies that the limit experience, the human fear of
death, is atleast temporally, overcome. An appreciation of Bataille‘s philosophy suggests
that this may beachieved through human desire for recognition. Radical innovation here
stems from a desire tobe recognised as innovators by those whom we respect. The desire
is not just to be innovativebut to be seen as innovative, a desire to be recognised as
sovereign. The corollary suggests thatincremental innovation and more so the failure to
innovate is followed where this desire isinsufficient to overcome our fear of death or
where we believe ourselves to already be sovereign.

The desire for sovereignty however may be insufficient by itself if the innovator lacks the
ability to achieve sovereignty here is suggestive of a power relationship. Power here has
tobe viewed in the Foucaultian sense because it allows an innovator to transgress even
when theyare in a dominated position within a social system (Foucault 1980). Seen from
this perspective,the attempt by an agent to impose rules and taboos which maintains their
dominant position in asociety attains the status of symbolic violation and annihilation
against the Slave. The conceptof a ―best practice‖ form of innovation or product
development here becomes particularlypernicious because they appear as facts
legitimated by an independent authority. It maintainsand reifies practices and positions
within an industry, reduces the scope for transgression andchange and acts as a barrier for
a dominated company to achieve sovereignty.
In order to achieve radical innovation, the innovator needs to be open to immersion in,
orpossession by, Human Desire. This becomes increasingly more likely as she places the
limitexperience under increasing tension by transgressing the rules and taboos of the
profane.

We will now present empirical evidence drawn from two SMEs to substantiate our
Batailleaninfluenced ontology of innovation. These organizations have similar structural
characteristics(size, market type, age, turnover and family owned and managed).
Company A has won numerous awards for innovative products whilst Company B has
been described by its customersand itself as ―non-innovative‖.
The evidence below is a distillation of over 20 hours of semistructuredcompanies.

Company A-a radical innovator

Its present managing director (MD) formed this organization after she divorced her first
husband some 21 years ago. The company employs the MD‘s sons in several senior roles.
It operates inthe same market and is in direct competition with the MD‘s ex-husband‘s
company. Her ex-husband‘s company dominates what is described to be a highly
competitive market and has established the de-facto product standards for it. The MD
believes that market, and economic, advantage comes not from establishing and
maintaining these standards but by achieving logistical advantages. According to the MD,
her company has not pursued a strategy focused on logistics, preferring to concentrate on
radical product development as a means to challenge thede-facto standards. She does
believe that her company should be run for economic maximizing
reasons.

Company B – ―non-innovative‖

This company was set up some twenty years ago. It passed to the present MD on the
death ofone of the founders, the present MD‘s father. The MD wished to pass the
company on to hisown children in the future. During the interviews the product and
market was described as static,a viewpoint that came to be contested because of major
changes that occurred in the market.
(Changes included increased competition, a smaller market size and new demands by
customersfor lower prices, increased efficiencies, rapid product developments and
multiple rather thansingle source supply contracts.) The organization believes that it
―serves‖ its customers withwhom it has established a relationship and understanding. It
believes that these relationshipsform the basis of its market advantages, advantages that
lead to ―sufficient‖ rather than maximalturnover and profit.

Death and continuity

Company A
During the interviews the MD of Company A made clear that she did not intend her sons
inheritthe company even though she describes the company as a family business (“this is
a lifestyle type business, it is a family business. Furthermore, most people out on the shop
floor know thefamily. It’s got a history that tends to reinforce the family aspect”). The
family here takes on arole in the present, as a social system rather than as an historic
lineage whereby the childreninherit capital from the parents. Her concern was with the
present, as an arena to contest her ex-husbands company‘s market dominance. She
believes that radical product innovation acts as ameans whereby her company may
fundamentally change the de-facto market standards and sobecomes the market leader.
Her company focuses on this to the exclusion of a more rational,economic pursuit of
improving its logistics.

The MD of this company does not accept the economic hegemonic ―logic‖ of modern
society whereby men assume the role of economic provider (Beck and Beck-Gernsheim,
1995). Herinitial act of forming Company A was to gain economic independence from
her ex-partner, to become sovereign in her own right. (It is apposite to note that she has
rejected her gendered role in society for many years. She rejected a place at a ―ladies
finishing school‖ at the age of 18 in favor of a University education and studied for her
B.Sc. in Engineering – very much a male bastion - some 30-40 years ago. So from a
relatively early age she followed a path of questioning, breaking, transgressing the taboos
and rules of society.)

Company B
Company B was started by its founders who then bequeathed the organization to their
ownfamily:
Furthermore continuity here becomes important. The present MD, a son of one of the
founders,inherited the organization. The MD wants his own children to inherit the
company. The senseof continuity and history here is particularly strong:

This sense of continuity becomes more profound because it is enmeshed with the
company beliefthat it operates in a stable market, one where long term relationships are
important. These allowthe organization to know its customers, suppliers and competitors
and be known to them:
When faced with the potential of an indeterminate market that suddenly demands change
(and holds the potential of death) it expresses a marked degree of consternation; it does
notunderstand why its customers are undermining the stable master-slave relationship.
3.4 Capital, field and multiple strategies

It is clear that Company A is willing to risk the limit experience in order to be sovereign
whilst Company B attempts to defray death even though the cost is its own slavery. In
order to be successful however, Company A requires sufficient total capital to become
the object of the other’sdesire. In order to achieve this the act of innovating is not
sufficient – the organizationmust become the object of the other‘s desire; it must achieve
sufficient status in fields associatedwith ―being innovative‖.
Table 1 situates these two companies within various fields that they view as important to
boththeir industry and innovation. (The economic capital of both these companies is
similar, inBourdieuean terms both occupy dominated positions within the economic field.
Table 1excludes the economic capital of these two companies both because of their
overall similarityand so as to reduce the complexity of the diagram. It considers only the
forms of capital thatmight be thought of symbolically as cultural capital.) These fields are
the characteristics thatthese companies associate with being an innovative company.

Table 3- Innovation, Capital and Field

Position

Dominant Dominated
Field
Dominant Dominated
Education
(General
educational Company A Company B
standard of (Degree or (HNC/ONC.)
senior higher.)
staff.)
 Company A Company B
Technical (Good knowledge (Good
knowledge of technology knowledge
for outside own area.) only of own
industry specialist
area.)

Status as Company A Company B.

innovator (Wins awards for
innovation.)

Status in Company A Company B

industry (Independent (Low tier
SME.) Supply chain
SME.)

It is important to remember that human desire is the desire for recognition – a human
desire for innovation is the desire to be recognized innovative. Being innovative should
not be conflated with the possession of a sufficient volume of capital, capital acts as a
resource to enable action itdoes not determine here the propensity for action. (It is
apposite to note that there are many conflicting accounts in the academic literature
regarding whether or not an organization‘s access to finance leads to increased levels of
radical innovation. Such arguments confuse a resourcewith a propensity to act.) The
propensity for radical innovation is held within the organization‘transgression of its fear
of death as it becomes consumed by Human Desire.

An innovative company here has skilled, educated staff knowledgeable about technology
within their own and other industries. It will have gained external recognition for
innovation in theform of prizes or awards. It will finally be able to develop its own
designs and therefore hassome degree of independent status in its industrial market.
Bourdieu suggests that action is directed towards improving our relative positions
withinmultiple fields. Actors do not attempt to gain positional advantage in a single area
but try toimprove or maintain their positions in many related areas by accumulating
appropriate capital.
(The form or type of a capital is dependent on its associated field. Educational capital is
theactor‘s educational qualifications. Capital can however be transferred between fields
becausethey are all related to a dominant form of capital – economic capital. [Bourdieu,
1984])
However, our propensity to invest in a field is linked to our existing capital as this
determinesboth the required future investment and our likelihood of success. Success is
more likely if oneoccupies a position within the dominant domain. (Bourdieu [1984]
argues that it is easier tomove from a dominated sub-position within the dominated sector
than to move from thedominated to dominant sector.)
It is clear from this simple comparison that Company A possesses more capital, in
Bourdieu‘ssense, than Company B. Company A is better able to contest and improve its
relative standings in these fields than Company B; it is quite simply more able to achieve
a dominant position inthese various fields. Company A can therefore achieve sovereignty
through radical innovationby pursuing a complex, multiple strategy of investing in the
diverse fields associated withinnovating. It has both the resources to achieve this and, as
we have shown above, thepropensity for radical innovation because it wishes to gain
sovereignty.

4.0 CONCLUSION

Innovation is often theorized according to an ontical methodology whereby innovation is

reducedto a reified object. Ontical methodology here often results in concepts of ―best
practice ―innovation processes. ―Best practice‖ here is however both context dependant
and non-neutral innature. The consequence of this non-neutrality is however often
ignored by researchers. ―Best practice‖ theories here reduce innovation to someform of
economic utility supportive of the economic hegemony. The potential that actors may be
acting according to non-economic rationales is lost.Ontical methodology furthermore is
not appropriate for considering innovation as ontological.
An ontological theory of innovation suggests that the being of innovation is associated
with thelimit experience and sovereignty. Radical innovation here is a Bataillean Desire
for sovereignty.
In order to achieve sovereignty however requires both the desire to transgress and the
means toachieve it. Desire here is the desire for recognition and therefore requires the
transgressiveinnovator in a move to become the object of the other’s desire; the innovator
must not only beinnovative but recognized as innovative. The innovator is placed in a
complex and multipleseries of strategic moves whereby they attempt to acquire sufficient
capital in the fieldsassociated with innovation. Radical innovation is thus dependent on
multiple strategic actionsrather than a simple economic one.

5.0 SUMMARY
New product success still remains the critical challenge for companies. Many companies
are aware of the major role new products must play in their future and quest for
prosperity: companies are constantly searching for ways to revitalize, restructure and
redesign their NPD practices and processes for better results. This unit had considered
companies strategies for new product innovation, our analysis also considered the
deathand continuity of a new product. We shall consider TQM in the subsequent unit.

6.0 TUTOR — MARKED ASSIGNMENT

(a) Discuss the critique of innovation theories
(b) Thesummarise the differences between a radical innovator and non-innovative.
(c) Explain the post-structural critique of the best practice NPD models.

7.0 REFERENCES/FURTHER READINGS

Abernathy, W.J. and Clark, K.B. (1985). ―Innovation: Mapping the winds of creative
destruction.‖ Research Policy, 14: 2-22.

Anthony O‘Shea Post graduate research student, Sunderland University Business School
University of Sunderland Sunderland, Tyne and Wear, England.

Abernathy, W.J. and Utterback, J.M. (1978) ―Innovations over time and in historical
context -
Patterns of industrial innovation.‖Technology Review, 80 (7).

Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of excess.

Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of
Minnesota
Press.

Bataille, G. (1987). Eroticism (translate by M. Dalwood). London: Marian Boyars.

Bataille, G. (1988). Inner Experience (translated by L.A. Boldt).New York: State

University of
New York Press.

Bataille, G. (1990). ―Hegel, death and sacrifice‖ (translated by J. Strauss). In A. Stoekl

(Ed.) On
Bataille, Yale French Studies, 78: 9-28. New York: Yale University Press.

Baudrillard, J. (1993). Symbolic exchange and death (translated by I.H. Grant).London:

Sage
Publications.
Beck, U. and Beck-Gernsheim, E. (1995).The normal chaos of love.Cambridge: Polity
Press.
Bourdieu, P. (1977). Outline of a theory of practice (translated by R. Nice). Cambridge:
Cambridge University Press.

Bourdieu, P. (1984). Distinction.A social critique of the judgement of taste (translated by

R.
Nice). London: Routledge.
Bourdieu, P. and Wacquant, L. (1992).An invitation to reflexive sociology.London: Polity
Press.
Clark, K.B. and Fujimoto, T.

UNIT 14: QUALITY

CONTENT

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Meaning of Quality
3.2 Quality Control
3.3 Steps in Quality Control Programme
3.4 Objectives of Quality Control
3.5 Steps in Quality Control Process
3.6 Advantages of Quality Control
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings

1.0 INTRODUCTION

This unit introduces you to fundamental of Quality; every manufacturing

organisation is concerned with the quality of its product. While it is important that
quantity requirements be satisfied and production schedules met, it is equally
important that the finished product meet established specifications.
Because,customer's satisfaction is derived from quality products and services. Stiff
competition at national and international level and consumer's awareness require
production of quality goods and services for survival and growth of the company.
Quality and productivity are more likely to bring prosperity into the country and
improve quality of work life.
However, the management looks to achieve customer satisfaction by running its
business at the desired economic level. Both these can be attained by properly
integrating quality development, quality maintenance and quality improvement of
die product. The integration of these three aspects of a product can be achieved
through a sound quality control system.
Quality is a relative term and it is generally used with reference to die end use of
the product. For example, a gear used in sugarcane juice extracting machine may
not possess good surface finish, tolerance and accuracy as compared with the gear
used in the head stock of a lathe, still it may be considered of good quality if it
works satisfactorily in die juice extracting machine. The quality is thus defined as
die fitness for use/purpose at die most economical level.

2.0 OBJECTIVES

After studying this unit, you should be able to:

 Define the term "Quality".
 Describe the various classifications of "Quality" products.
 Explain "Quality Control.
 AnalyseObjectives of Quality Control.
 Discuss the benefits of quality control.
 Describe the Cost of Quality.

3.0 MAIN CONTENT

3.1 THE MEANING OF QUALITY

The word "Quality" has variety of meanings :-

1. Fitness for purpose: The component is said to possess good quality, if it works
well in the equipment for which it is meant. Quality is thus defined as fitness for
purpose.
2. Conformance to requirements: Quality is die ability of the material/component
to perform satisfactorily in an application for which it is intended by die user.
Quality of a product, thus, means conformance to requirements. Customer needs
have to be assessed and translated into specifications depending upon die
characteristics required for specific application. Just as every human has his own
characteristics every application has its own characteristics.
3. Grade: Quality is a distinguishing feature or grade of the product in appearance,
performance, life, reliability, taste, odor, maintainability etc. This is generally
called as quality characteristics.
4. Degree of preference: Quality is the degree to which a specified product is
preferred over competing products of equivalent grade, based on comparative test
by customers, normally called as customer's preference.
5. Degree of excellence: Quality is a measure of degree of general excellence of
the product.
6. Measure of fulfillment of promises: The quality of a product is a measure of
fulfillment of the promises made to the customers.

The quality of a product must have the following features;

1. Suitability: For specific application.

2. Reliability: It should give efficient and consistent performance.
3. Durability: It should have desired life.
4. Safety: Safe and foolproof workability.
5. Affordability: It should be economical.
6. Maintainability: It should be easy to maintain.
7. Aesthetic look: It should look attractive.
8. Satisfaction to customers: It should satisfy the customers' requirements.
9. Economical: It should have reasonable price.
10. Versatility: It should serve number of purposes.
A product can be said to possess good quality if all the above requirements are
properly balanced while designing and manufacturing it.

SELF ASSESSMENT EXERCISE 1

1. Give four (4) definitions of quality.

3.2 Quality Control

Control can be defined as "a process by means of which we observe the actual
performance and compare it with some standard".
If there is a deviation between the observed performance and the standard
performance then it is necessary to take corrective action.
The term "Quality Control" has variety of meanings:
1. Quality control is the process through which we measure the actual quality
performance, compare it with the standards and take corrective action if there is a
deviation.
2. It is a systematic control of various factors that affect the quality of the product.
It depends on: Material, Tools, Machines, type of labour, working conditions,
measuring instruments, etc.
3. Quality control can be defined as the entire collection of activities which
ensures that the operation will produce the optimum quality products at minimum
cost.
4. It can also be defined as the tools, devices or skills through which quality
activities are carried out.
5. It is the name of the department which devotes itself full time to quality
functions.
6. The procedure for meeting the quality goals is termed as quality control.
7. It is a system, plan or method of approach to the solution of quality problems.
Total Quality control is "An effective system for integrating the quality
development, quality maintenance and quality improvement efforts of the various
groups in anorganization, so as to enable production and services at the most
economical levels which allow full customer satisfaction."

3.3 Steps In Quality Control Programme

1. Formulate quality policy.

2. Work out details of product requirements, set the standards (specifications) on
the basis of customers preference, cost and profit.
3. Select inspection plan and set up procedure for checking.
4. Detect deviations from set standards or specifications.
5. Take corrective action through proper authority and make necessary changes to
achieve standards.
6. Decide on salvage method i.e. to decide how the defective parts are disposed of,
entire scrap or rework.
7. Co-ordination of quality problems.
8. Developing quality consciousness in the organization. Quality control is not a
function of any single department or a person. It is the primary responsibility of
any supervisor to turn out work of acceptable quality.
Quality control is one aspect of production planning and control. It is basically
concerned with the quality production through regular inspection technique.
Quality is a combination of characteristics pertaining to the manufacture of the
product and control is the correction in the quality of the product, when the
deviations in the product are more than expected. A good quality item is one
which conforms to some standard specifications. These specifications are
determined by the expectations of consumers and also by the availability and costs
of processes and materials.
To most people, quality is variable. It is subjectively judged because it deals with
the relative goodness of a product. When a buyer boasts that his house or car is the
best, it implies high quality. Quality is thus subjective and vaguely measurable.
In the words of Broom,
"Subjective quality refers to degree of goodness of a product and objectively it
consists of a set of measurable characteristics for which standard dimensions
together with small, allowable departures, up and down, may be prescribed."
All manufacturing processes face a basic difficulty. It is physically impossible to
make all items or units exactly alike. There is always variability in the product.
With precision manufacturing, the variability may be difficult to see but
nevertheless it is there. When variability becomes obvious it results in scraps, re-
work and losses, thus adding to the costs.

3.4 Objectives of Quality Control

1. Establishment of quality standard: The main objective of quality control is the

economical production of a high quality product at the quality level the customer
wants. It is basically for eliminating variations in production and in order to have
uniformity in production.
2.Locating quality deviations: It is necessary to analyze the trend and extent of
quality deviations in a manufacturing process. Such deviations should be
explained by statistical techniques when they cannot be attributed to the element
of chance.
3.Evaluating methods and processes of production: By evaluating methods and
processes of production, quality control helps to take corrective measures to
maintain the quality of the product during the process of manufacture.
4.Quick sale of quality goods: Quality control accelerates the sale of the goods by
supplying only the quality goods in the market. Consumers also support quality
goods.
5.Production of standard quality goods: Quality control aims at manufacturing
standard quality products and avoids the production of inferior quality goods. Such
standard quality goods give satisfaction to consumers and also create goodwill in
the market.
6.Improvement in quality: One objective of quality control is to find out high
quality standards and to make constant efforts to reach those standards. Quality
control aims at creating quality consciousness at all levels in the Organisation.

3.5 Steps in Quality Control Process

1.Devising control over raw materials: The quality of the finished product is
determined mostly by the quality of raw materials. It calls for close connection
between the raw material purchase department of the company and the vendors.
As and when necessary, a resident inspector may be deputed by the Quality
Control Department in the vendor's place to see that only goods in accordance
with specifications are supplied. It is advisable to re-inspect the raw materials
before putting them to actual use.
2.Fixing standards and specifications: In order to make any scheme of quality
control successful, it is essential to predetermine standards and specifications. The
practice should be to provide quality instructions in the form of drawings, showing
shapes, dimensions and specifications describing color, strength, thickness,
chemical composition, etc.
3.Exercising control over production operations: In order to execute efficient
practices, the technical expert of the Quality Control Department must investigate,
from time to time, the operating methods. Such investigation helps to eliminate all
possible variables.
4.Locating inspection points: When the points at which defects occur are wrongly
located or located with delay, it hinders quality control. Therefore there should
first inspection of the raw materials at the vendor's places, then at the company's
plant, then at the various points during the process of production and finally at the
time of packing. The defects are likely to occur at these points. The finished goods
can be cleared after obtaining 'O.K.' or 'All Correct' from the Quality Control
Department.
5.Maintaining quality of equipments: The final quality of the products is
conditioned by the quality of the equipments and other devices used. The Quality
Control Department is responsible for testing the equipment used in inspection
such as gauges, which measure dimensions, electronic devices, magnetic devices
and industrial radio graphical instruments.
6.Maintaining records: The Quality Control Department is responsible for
maintaining all records relating to quality inspection and control and the number
rejected.

3.6 Advantages of Quality Control

Quality control is important as it offers certain advantages to the manufacturer.

Such advantages are: stability to sale, goodwill in the market, ability to face
market competition effectively, reduction in production costs, and elimination of
wastage due to rejections and uniformity in production. These benefits are
important for sales promotion and profit maximization. Manufacturers now give
special attention to quality control techniques for long term benefits. Attention is
given to research and development activities for this purpose. Even foreign
collaborations are made for raising the quality standards of products
manufactured. In brief, quality control is a matter of great importance in
production management.
The benefits of quality control to consumers are:
1. Availability of standard quality and reliable goods, proper reward for the price
paid
2. Safety to life and health
3. Better standard of living and protection against substitution or adulteration and
quick shopping of goods. Consumers always purchase standard quality goods even
by paying a little higher price as they get full satisfaction over a long period from
quality goods. Consumers, particularly educated consumers, support quality
products as they know the benefits available from such standard quality products.
This suggests the importance of quality control from the point of view of
consumers.
The importance of quality control is, now, accepted even at the global level.
Consumers now insist for superior quality goods. Expenditure on quality control is
an investment for more sale and satisfaction to consumers. Quality control is a
must for export promotion. Companies can capture foreign markets only by
manufacturing superior quality goods at reasonable cost of production. Japan is a
leading world exporter. This is mainly due to superior quality of goods
manufactured in Japan. Governments in many countries support quality control
measures. They provide all possible help for maintaining superior quality of
goods. Restrictions are also imposed on the manufacturing of cheap goods. Even
associations of manufacturers and traders support quality control measures. This
suggests the importance of quality control in business.

SELF ASSESSMENT EXERCISE 2

1. What is the importance of Quality control?

2. What are the factors to consider in the cost of carrying out company quality
program also known as "Cost of Quality

SELF ASSESSMENT EXERCISE 3

1. What are the costs involved in quality control?

4.0 CONCLUSION

The quality depends on die perception of a person in a given situation. The

situation can be user-oriented, cost-oriented or supplier-oriented. Since, die item is
manufactured for me use of die customer, die requirements of die customer
dictates die quality of die product. Quality is to be planned, achieved, controlled
and improved continuously.

5.0 SUMMARY

In this unit we have gave detail analysis on meaning of Quality, Quality control
and costs of quality in organization. We shall further this explanation in the next
unit by considering Total Quality Management as corporate development tools.

6.0 TUTOR-MARKED ASSIGNMENT

(a) Discuss Advantages of Quality Control

(b) The word "Quality" has variety of meanings? Give three meaning in your own
word.

7.0 REFERENCES/FURTHER READING

Benston, et al., 1986. Perspectives on Safe and Sound Banking: Past, Present and
Future. Cambridge, MA: MIT Press.

Dowd, K. ed., 1992.TheExperience of Free Banking. London: Routledge.

Dowd, K. 1996. The Case for Financial Laissez-Faire. The Economics Journal,
106(May), pp.679-687.

Kaufman, G.G. 1992. Capital in Banking: Past, Present and Future. Journal of
Financial Services Research, 5(4), pp.385-402.

Llewellyn, D. 1999. The Economic Rationale for Financial Regulation. Occasional

Paper Series; The Financial Services Authority April.

Needle, David (1999).Business in Context.London: Thomson BusinessPress.

Benston, et al., 1986. Perspectives on Safe and Sound Banking: Past, Present and
Future. Cambridge, MA: MIT Press.

Dowd, K. ed., 1992.TheExperience of Free Banking. London: Routledge.

Dowd, K. 1996. The Case for Financial Laissez-Faire. The Economics Journal,
106(May), pp.679-687.

Kaufman, G.G. 1992. Capital in Banking: Past, Present and Future. Journal of
Financial Services Research, 5(4), pp.385-402.

Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of

excess.
Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of
MinnesotaPress.
UNIT 15: TOTAL QUALITYMANAGEMENT

CONTENT

1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Quality and Total Quality Management
3.2 Quality and Its Associated Cost
3.3 Total Quality Management (TQM)
3.4 Criticism of TQM
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Readings
1.0 INTRODUCTION

In this unit we are going to look at the concept of Quality and Total
Quality Management.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

· identify the costs associated with Quality
· explain the concept ―Total Quality Management‖
· list the criticisms against the concept TQM.

3.0 MAIN CONTENT

3.1 Quality and Total Quality Management

3.2 Quality and Its Associated Cost

The Oxford English mini dictionary defines quality as a degree of excellence, a

characteristic distinctive attribute of a person or thing.
Generally, the notion of quality is inherent in every organisation.Mission
statements of most organisation have the phrase ―qualityservice‖ or ―quality
products‖ boldly inscribed. According to Needle (1999), the traditional view of a
quality product isthat it conforms to specifications.
Today, however, quality is seen in the perspective of the customer vis-a-visvalue
for money, reputation, appearance, safety, ease of use,customer support and
behaviour of staff with whom the customer hascontact.Quality has costs associated
with it.
These are:
a. Failure Costs: This refers to those costs incurred when goods arefound to be
faulty. The cost includes those incurred by thecompany in scrap or replacement.
b. Appraisal Costs: Are those costs involved in the installation andoperation of a
quality control system. It includes the time takento complete paper work systems
and the employment of staffwith specific responsibility for quality control.
c. Prevention Costs: This entails the establishment of mechanismswhich build
quality procedures in all operations.

3.3 Total Quality Management (TQM)

TQM emerged from the work in statistical quality control at the WesternElectric
Hawthorne plant in the 1930s.
It is a strategic approach to quality which embraces the entireorganisation. The
main features of TQM are:
 It is a top-down management philosophy that focuses on the needs
ofcustomer.
 It comprises a quality plan which offers a structured, disciplinedapproach
to quality.
 it is culturally based, with involvement as a core philosophy.
 by focusing on the costs of poor quality, it saves money.
 it encompasses the notion of continuous improvement and as such, itis
essentially long-term.

3.4 Criticism of TQM

TQM has been subjected to a series of criticism principal among them

are:
 that the importance of TQM has been over-emphasised to thedetriment of
the effects of technology, market dominance and theinfluence of the state
and the control of critical raw materials.
 that TQM may be feasible in some organisations but greatly limitedin
some others.
 that the assumption that total quality is relatively easy to come by
ismisguided.
 that the feature of excellence may not be directly linked tocompanies that
adopt the concept of TQM alone.
 that a strong commitment to TQM may lead to resistance to change.
 that the not-so excellent companies may exhibit the same attributes.
 that it is difficult to prove a relationship between TQM and
companyperformance.

SELF ASSESSMENT EXERCISE

1. What is Quality and what are its associated costs?

4.0 CONCLUSION

TQM is a holistic approach to Quality Management. Top managementdetermines

the quality priorities and establishes the systems for itsadministration.

5.0 SUMMARY
TQM is a strategic approach to quality which affects the entireorganisation. It
incorporates certain essential features and has itsassociated cost.

6.0 TUTOR-MARKED ASSIGNMENT

1. What are the essential features of TQM? Briefly explain each.

7.0 REFERENCES/FURTHER READINGS

Needle, David (1999).Business in Context.London: Thomson BusinessPress.

Benston, et al., 1986. Perspectives on Safe and Sound Banking: Past, Present and
Future. Cambridge, MA: MIT Press.

Dowd, K. ed., 1992.TheExperience of Free Banking. London: Routledge.

Dowd, K. 1996. The Case for Financial Laissez-Faire. The Economics Journal,
106(May), pp.679-687.

Kaufman, G.G. 1992. Capital in Banking: Past, Present and Future. Journal of
Financial Services Research, 5(4), pp.385-402.

Bataille, G. (1985). ―Nietzsche and the fascists.‖InGeorges Bataille Visions of

excess.
Selected writings, 1927-1939 (translated by A. Stoekl). Minneapolis: University of
MinnesotaPress.

Bataille, G. (1987). Eroticism (translate by M. Dalwood). London: Marian Boyars.

Bataille, G. (1988). Inner Experience (translated by L.A. Boldt).New York: State

University ofNew York Press.

Bataille, G. (1990). ―Hegel, death and sacrifice‖ (translated by J. Strauss). In A.

Stoekl (Ed.) On Bataille, Yale French Studies, 78: 9-28. New York: Yale
University Press.
Baudrillard, J. (1993). Symbolic exchange and death (translated by I.H.
Grant).London: SagePublications.