Krupa Yadiyal

RegNo:510914609

Assignment Set 1

Semester 4

Master of Business Administration-MBA Semester IV

MI0029

Enterprise Resource Planning– 2 Credits

(Book ID: B0898)

1 Write a scenario to explain the failure of ERP implementation

ERP packages, if chosen correctly, implemented judiciously and used efficiently, will raise the productivity and profits of companies dramatically. But many a company fails in this because of a wrong product, incompetent and haphazard implementation and inefficient or ineffective usage.To work successfully, the ERP solutions need a lot of factors to click. There should be good people who know the business. The vendor should be good and his package should be the one best suited for the. Company’s needs. The ERP consultants should be good. The implementation should be planned well and executed perfectly. The end-user training should be done so that the people understand the system, and the effect of their efforts on the overall success of the program. The introduction of the ERP system will dramatically change the job descriptions and functions of many employees. Employees who were earlier doing the work of recording information will, overnight, be transformed into decision-makers. For example, in the past an order entry clerk’s job was to enter the orders that came to him. With the implementation of a good ERP system, the order entry clerk becomes an action initiator. As soon as he enters the order into the system, the information is passed on to the sales, distribution and finance modules. The distribution module checks whether the item is in stock and if available, the item is dispatched and the information is sent to the finance module. If the items are not in stock, then the manufacturing module is given the information, so that production can start. The customer is informed about the status of his order. If the items are shipped, the finance module prepares the invoice and sends it to the customer. All these actions take place automatically as soon as the order entry clerk enters the information regarding the order into the system. Thus the order entry clerk is transformed from a data entry operator to a decision-maker whose actions can trigger a chain of actions.

Many employees find this transformation difficult to accept. If the employees are not given proper training, well in advance, then the systems will fail. Another factor is the fear of unemployment. When procedures become automated, the people who were doing those jobs become redundant. So it is quite natural to have resistance from the employees. But the same employees can be trained in the new system and can work in more challenging and stimulating environments. For this also, the employees have to be told, in advance, as to what will happen and should be given ample time and training to make the transformation. Without support from the employees, even the best system will fail. So it is very important that the management should take the necessary steps, well in advance, to alleviate the fears of, and provide necessary training to their employees.

2 a. What is the use of transparency and information access?

This transparency and information access ensures that the departments no longer work in isolation pursuing their own independent goals. Each subsystem knows what the others are doing, why they are doing it and what should be done to move the company towards the common goal. The ERP system helps to accomplish this task by integrating the information systems, enabling smooth and seamless flow of information across departmental barriers, automating business process and functions and thus, helping the organization to work and move forward as a single entity.

b. What are the limitations of ERP systems? How ERP packages help in overcoming theses limitations.

ERP systems serve an important function by integrating separate business functions – materials management, product planning, sales, distribution, finance and accounting and others – into a single application. However, ERP systems have three significant limitations:

1. Managers cannot generate custom reports or queries without help from a programmer and this inhibits them from obtaining information quickly, which is essential for maintaining a competitive advantage.

2. ERP systems provide current status only, such as open orders. Managers often need to look past the current status to find trends and patterns that aid better decision-making.

3. The data in the ERP application is not integrated with other enterprise or division systems and does not include external intelligence.

There are many technologies that help to overcome these limitations. These technologies, when used in conjunction with the ERP package, help in overcoming the limitations of a standalone ERP system and thus, help the employees to make better decisions. Some of these technologies are:

· Business Process Reengineering (BPR)

· Management Information System (MIS)

· Decision Support Systems (DSS)

· Executive Information Systems (EIS)

· Data Warehousing

· Data Mining

· On-line Analytical Processing (OLAP)

· Supply Chain Management

Out of the above technologies MIS, DSS and EIS are forerunners of the ERP systems. Once the ERP system and the other technologies (like Data Warehousing, Data Mining, OLAP, etc.) are integrated, the MIS or DSS will become redundant as their functions will be taken care of by the new systems and they will be slowly phased out from the scene.

With the competition in the ERP market getting hotter and hotter, and ERP vendors searching for ways to penetrate new market segments and expand the existing ones, tomorrows ERP systems will have most of these technologies integrated into them. In this session we will see how each of these technologies is related to ERP systems.

3 What is the use of JIT approach to any organization?

Basically JIT means to produce goods and services when needed, not 1 early and not too late. It is time based and often has quality and efficier targets. JIT is a production philosophy and not a technology. This is due the fact that it looks at the whole of the production system, and goes far p inventory control. The JIT system has been called numerous names, fr zero defects and synchronous production to stockless production at Hew Packard. The JIT system also uses the pull method of scheduling material flow (Kanban). A JIT system aims to make goods available just in time, and these can be parts, products or subassemblies and achieve some of the following benefits:

· Increased flexibility

· Parts reduction

· Increased quality

· Simplicity of system

The increased flexibility allows a company the ability to react to changing events, i.e. change in customer orders, or design modifications. Increased productivity means that the shortest time and minimum of resources are needed to make a product. The overall objective of JIT is to produce parts in lot sizes of one, but this is not economically feasible due to the set-up cost being higher as compared to the carrying cost.

At the heart of JIT, is a set of tools and techniques. To achieve the aims of JIT a disciplined approach is needed which incorporates three principles applied to the organization:

· Elimination of Waste

· Total Quality Management (TQM)

· Total Employee Involvement

Ops – Elimination of Waste

Waste elimination is basically removal of any activity that is not value-added, but first it has to be identified. These activities don’t increase product value and are costly to the company. Examples of non-value-adding activities include traditional production methods, i.e. inspection of parts, holding stock, inventories, time, etc. Waste can be eliminated from these activities by removal of defects and by not over producing hence, make-to-order.

Ops – Total Quality Management

TQM eliminates waste by eliminating defects. In a JIT environment, the aim is to prevent defects from occurring, and this is achieved by detecting problems at their source. The whole organization is involved in the process, right from the stages of manufacturing, product development and purchasing. Manufacturing uses statistical process control (SPC) and in-process testing (to allow detection at source), while product development ensures that new products can be manufactured to specification. Purchasing makes sure the; the parts that are bought are of the required quality.

HR – Total Employee Involvement Total employee involvement has management providing the leadership which results in employees wanting to be involved in the processes. Opportunity provided through education and training, and work teams.

P – Kanban Most manufacturing companies view the making of a product as continuous – from design, manufacture, and distribution to sales and customer se vice. For many companies, the heart of this process is the Kanban, a Japanese term for Visual record’, which directly or indirectly drives much of tl manufacturing organization. It was originally developed at Toyota in tl 1950s as a way of managing material flow on the assembly line. Over the pa three decades the Kanban process, which is a highly efficient and effective factory production system, has developed into an optimum manufacturing environment leading to global competitiveness.

The Kanban process of production is sometimes incorrectly described as simple just-in-time management technique, a concept that attempts to maintain minimum inventory. The Kanban process involves more than fine tuning production and supplier scheduling systems, where inventories are minimized by supplying the components only when needed in production, and work progress in closely monitored. It also encourages industrial reengineering such as a ‘module and cellular production’ system, and group production techniques, where team members are responsible for specific work element and employees are encouraged to effectively participate in continuously in proving the Kanban processes within the Kaizen (continuous improvement concept.

D Benefits of JIT

JIT is continuously seeking to reduce inventory levels of work in process (WIP), raw-materials and finished goods. Therefore, less space is required with lower inventories so there is less chance of the product becoming damaged, spoiled or obsolete. Material handling of lots can be automated, and operations can be placed closer together, enhancing communication and teamwork. The following are some of the benefits of a properly implemented JIT system:

· Increased flexibility: This can be done through small batch sizes, which achieves faster throughput. Flexibility is a prerequisite, if small batch sizes are to be kept. A flexible workforce means that the operators must be multi-skilled which is done through training. The worker should also be free to move from low demand to high demand areas.

· Parts reduction: JIT continuously seeks to reduce inventory levels of raw materials, work in process and finished goods. Lower inventory means less space and less chance of the product being obsolete, damaged or spoiled. Work in process inventories are reduced as a firm implements the ‘pull system’. Raw material reduction is a key part of the JIT system and requires a sound relationship with the supplier. Inventories can be reduced if products are produced, purchased, delivered in small lots. To avoid unnecessary production delays, materials must arrive just before they are needed, they must be correct material and must satisfy the quality specifications.

· Increased quality: When operating a JIT system, disruption has a minimum impact, so quality problems need to be eliminated. Benchmark: Quality Function Deployment, and service design can be used for device operations. Service employees need to learn the value of providing defect free services.

D Simplicity of system: Product mix or volume changes as planned by Master Production Schedule (MPS), can be accomplished by adjusts the number of cards in the system. Production orders are prioritized by the cards on a post. Production orders for parts that are running low are moved in front of parts that have more supply.

O Potential Pitfalls of JIT

Many companies fail to understand what JIT is and what it can mean to the because they fail to implement it properly. Most importantly, they need to aware of the tasks, resources, time scale and costs. For this, the system needs the full backing of the top management. The JIT system will also fail if an adequate education programme is not provided. If careful planning process and control improvements are not strictly followed, they will result JIT not being realized. The planning stage will require dedication and t: and may also require the assistance of an external consultant(s). All above must be integrated with moves towards JIT purchasing, or again, JIT will not be achieved. The JIT system should not be viewed as a one scheme but as an ongoing continuous process.

Computer-Aided-Design/Computer-Aided-Manufacturing (CAD/CAM)

An increasingly popular tool for product design is Computer-Aided-Des (CAD). CAD systems are computer programs or integrated packages for we station hardware and software, that allow the user to draw and easily mo’ product designs on a computer screen. Advanced CAD systems provide signers with at least three major benefits.

· Graphics Capabilities: CAD systems allow the designer to view a product from different perspectives, including three-dimensional rotations, and various cross-sections. The designer can also make proportional changes in scale, or change the angle of an arc with the click of a computer mouse rather than having to redraw the entire product.

· Design, storage and retrieval: Some CAD systems can store the design characteristics of existing products and components. Then, for example, if a company needs a gear for a new product, the designer can enter the relevant information about the gear, such as its diameter, tooth pattern, and required hardness, into the CAD system. The CAD system determines whether the company is already using an identical or sufficiently similar gear, in which case a new one is unnecessary. If not, a gear that has similar properties may exist. The designer can then use the design of this similar gear as a starting point for the new gear. This capability not only promotes the use of common components but also reduces design time.

· Automatic evaluation of specifications: One of the most time-consuming aspects of design for highly technical products is calculating whether or not product specifications, such as strength, heat resistance or aerodynamic drag, are satisfied. These calculations can be programmed into some CAD systems so that whenever the designer changes the design (by altering the shape or material to be used), these performance characteristics are recalculated automatically and compared to the product requirements. This is sometimes called Computer-Aided-Engineering (CAE).

The overall benefits of CAD systems can be substantial. The features described above reduce development time and cost, and they improve product quality because more design options can be evaluated in greater detail more quickly. For example, Motorola used three-dimensional CAD to produce its award-winning MicroTac pocket sized cellular phone two years ahead of the competition. It is not uncommon for CAD systems to reduce product cycle times by 10-50%.

Even greater time and cost reductions have resulted from recent advances whereby, CAD-engineered designs are converted automatically into software programs for computerized production machines. These are called Computer-Aided-Design/Computer-Assisted-Manufacturing (CAD/CAM) systems. This automatic conversion eliminates the costly and time consuming steps of having a person convert design drawings into a computer program for computer-controlled production equipment, such as robots or machine tools. CAD and CAD/CAM systems are not used by large automotive or electronics companies alone. Future Enterprises, the largest maker of wedding jewellery in the United States, reported that its CAD/CAM system reduced the time required to design and make jewellery from five months to one week.

Master of Business Administration-MBA Semester IV

MI0030

E-Commerce and Web Design– 2 Credits

(Book ID: B0899)

1 a. Why did Wal-Mart implemented QR system

Quick response (QR) is a version of JIT purchasing tailored for retailing. Most often, keeping a store filled with merchandise is a task most shoppers never consider-until the product they want is out of stock. The frustration that shoppers experience sometimes gives way to thoughts of "How do retailers buy and stock products anyway?" The process is quite complex, given that a single retailer may purchase merchandise from thousands of vendors in a global market. The failure to stock merchandise that matches

customer demand can be extremely costly. For example, in the soft goods industry alone, excess inventories, inadequate information, and related inefficiencies resulted in lost sales of more than $25 billion in 1994.

To reduce the risk of being out of stock, retailers are implementing QR systems. QR provides for a flexible response to product ordering and lowers costly inventory levels. QR retailing focuses on market responsiveness while maintaining low levels of stocks. It creates a closed loop encompassing the retailer, vendor, and consumer chain, and as consumers make purchases the vendor automatically orders new deliveries from the retailer through its computer network. The bar-coded articles are logged by the cash registers at the point of sale, the inventory system of the store then determines the needed supply, and the system transmits an order message to the retailer. The availability of accurate information with respect to the current sales enables sophisticated marketing capable of responding to consumers’ preferences. One of the famous examples of QR systems was implemented in the 1980s by Wall-Mart. Wal-Mart invested half a billion dollars in computer and satellite communications networks, bar-code systems, scanners, and other QR equipment linking each point-of-sale terminal to distribution centers and headquarters in Bentonville, Arkansas. Many believe that it was this system that enabled Wal-Mart to manage the explosive retail sales growth that catapulted the company to number one position in the US retail business. The system enabled the company to maintain high service levels and increase sales while reducing the inventory costs to one-fourth of previous levels. Also by empowering its individual stores to order directly from suppliers, even overseas, individual Wal-Mart stores reduced inventory restocking time from an industry average of six weeks to thirty-six hours. Moreover, by tracking every sale through the point-of-sales devices to see what product was selling in large quantities,

Wal-Mart stores were better able to keep their stores well stocked while maintaining tight inventories and low prices.

b. What are the functions of supply chain management?

Until recently, these inventory management strategies were implemented through very expensive computer systems and private networks. The cost was an insurmountable barrier for many small businesses, and these new business strategies created many side effects. For instance, because of the vast investments needed to implement JIT / QR, the manufacturer / retailer tended to reduce the number of its suppliers and move toward single sourcing-an undesirable outcome. What the manufacturer /retailer needs is a larger supplier base in order to be more competitive. How is this done? One solution is to implement these strategies using a common network infrastructure such as the proposed Information Superhighway as the enabling technology.

Inventory management solutions (QR and JIT) address only part of the overall picture. Using QR or JIT may not be feasible if a company depends on an unresponsive supplier for key components. For example, a manufacturing company may develop the capability to assemble products quickly in response to customers’ orders but may find that this ability is constrained by suppliers’ long lead times. Hence, what is required is a technique for managing unanticipated problems (or perturbations) in the supply chain.

Supply chain management (SCM) is also called "extending," which means integrating the internal and external partners on the supply and process chains to get raw materials to the manufacturer and finished products to the consumer. Most companies fail to integrate their supply chain strategies for a number of reasons, among them a lack of system integration due to fragmented supply chain responsibilities. However, in neglecting integration and the broader concept of supply chain management, firms might be missing an opportunity to cut costs and boost customer service. SCM rests on the premise that product excellence alone fails to guarantee corporate success. In fact, customers expect many services, including the prompt delivery of products to precise locations with near-perfect administrative and physical quality.

Supply chain management includes the following functions:

· Supplier management. The goal is to reduce the number of suppliers and get them to become partners in business in a win/win relationship. The benefits are seen in reduced purchase order (PO) processing costs, increased numbers of POs processed by fewer employees, and reduced order processing cycle times.

· Inventory management. The goal is to shorten the order-ship-bill cycle. When a majority of partners are electronically linked, information faxed or mailed in the past can now be sent instantly. Documents can be tracked to ensure they were received, thus improving auditing capabilities. The inventory management solution should enable the reduction of inventory levels, improve inventory turns, and eliminate out-of-stock occurrences.

· Distribution management. The goal is to move documents related to shipping (bills of lading, purchase orders, advanced ship notices, and manifest claims). Paperwork that typically took days to cycle in the past can now be sent in moments and contain more accurate data, thus allowing improved resources planning.

· Channel management. The goal is to quickly disseminate information about changing operational conditions to trading partners. In other words, technical, product, and pricing information that once required repeated telephone calls and countless labor hours to provide can now be posted to electronic bulletin boards, thus allowing instant access. Thus electronically linking production with their international distributor and reseller networks eliminates thousands of labor hours per week in the process.

· Payment management. The goal is to link the company and the suppliers and distributors so that payments can be sent and received electronically. This process increases the speed at which companies can compute invoices, reducing clerical errors and lowering transaction fees and costs while increasing the number of invoices processed (productivity).

· Financial management. The goal is to enable global companies to manage their money in various foreign exchange accounts. Companies must work with financial institutions to boost their ability to deal on a’ global basis. They need to assess their risk and exposure in global financial markets and deal with global information as opposed to local market information.

· Sales force productivity. The goal is to improve the communication and flow of information among the sales, customer, and production functions. Linking the sales force with regional and corporate offices establishes greater access to market intelligence and competitor information that can be funneled into better customer service and service quality. Companies need to collect market intelligence quickly and analyze it more thoroughly. They also need to help their customers (relationship management) introduce their products to market faster, giving them a competitive edge.

In sum, the supply chain management process increasingly depends on electronic markets because of global sourcing of products and services to reduce costs, short product life cycles, and increasingly flexible manufacturing systems resulting in a variety of customizable products.

2. List out the Ecommerce opportunities for industries and give an example of your understanding for all the opportunities.

Following are some of the areas where e-commerce is witnessing rapid growth in the global markets. Indian software and services companies need to tap into some of these vertical segments to gain the maximum advantage in the e-commerce solution sector.

1. Financial services. A large number of users use the Internet for some form of financial guidance.

The new web e-commerce applications would include taking online payments using debit and credit cards, and setting up and amending paperless direct debit mandates. These

processes were to be implemented on the organization’s own hosting facilities, but requiredinteraction with remote services for payment card authorisation. Thorough consideration of the Payment Card Industry Data Security Standard3 (PCI DSS), issued by the PCI Security Standards Council4, had to be made to ensure compliance.

2. Stock trading. Online stock trading is nowadays one of the most demanding e-commerce utilities. The ability to offer market access at a competitive price is a key advantage of online stock broking companies and this is slowly happening in India too.

As e-commerce and online stock trading spreads globally, governments walk a fine line between overregulation and being too lax,. In many cases, foreign countries are wary of making their securities regulations comparable to those in the United States, because looser laws usually attract more money. There is an enormous desire for capital. Is there a reluctance to introduce regulation because of it? Foreign markets encroaching on U.S. futures exchanges because the rules and regulations are not uniform. For example, U.S. securities law requires traders to enter a code before completing an electronic trade, something that isn’t required of their foreign counterparts. “By the time my guy puts in the five-digit number, the trade is gone. The European trader has beaten him,” said Me lamed, who is a life GSB Council member. “Our complaint is that the regulatory authority in the United States bridles us. The regulations should be changed to allow us to compete.”--J.T.S.

3. Banking. Internet banking is now growing. Many banks like ICICI and HDFC are making inroads into this area.

With the rapid expansion of the Internet, there are a number of initiatives underway for the creation of a secure cost-effective payment system which will be able to support growing commercial activities on the network. Although electronic payment systems for large payments have been in operation for some time, rapidly expanding volumes of foreign exchange and securities trading are increasingly at variance with the requirements for a cost-effective and efficient electronic payment system for making low value payments. Current progress in establishing such payment systems on the Internet is examined. The paper argues that the ultimate vision could be for a truly global and virtual marketplace requiring completely new institutional and legal structures and having a similarly profound impact on economic life to the medieval trade fairs which emerged in Europe in the 12th century.

4. Legal and professional services. Opportunities also exist for Indian companies in legal and other professional services. There are significant legal and regulatory implications of implementing an Internet business or of migrating from a traditional off-line business. In terms of opportunities for Indian legal service providers, the requirement for professional, legal and regulatory advice is expected to increase as the number of e-commerce user’s increases.

5. Tour and travel. The travel industry has readily adapted to e-commerce. There has been a growing emphasis on the search for alternative distribution channels within the sector,

particularly with the railways and the airlines, as they seek to reduce costs. These sectors have adapted well because of their online reservation systems.

6. Healthcare. Healthcare represents one of the biggest expenditures of governments worldwide. The Internet has the potential to enhance communications, streamline processes and create new business opportunities, by providing high-quality administrative services and integrating information systems.

Fo l l owing a r e t he Ecommerce app l i c a t i ons fo r i ndus t r i e s :

1 . In fo rma t ion De l i ve ry t r anspo r t and Ecommerce app l i c a t i ons : T ranspo r t p rov ide r s a r e p r i nc ipa l l y t e l e commun ica t i ons , c ab l e , and w i r e l e s s i ndus t r i e s ; com pu te r ne two rks such a s Com pu Se r ve o r Ame r i c a On l ine ; and pu b l i c networks such as the internet. The distribution of information has become competitive market with a combination of offense and defense. Playing on the defense are telephone companies and cable television companies, providers t ha t hav e en joy ed mon opo ly pos i t i ons fo r dec ade s . Now , ho wev e r , t h e i r enormous investments in wiring and equipment have become vulnerable tone com ple t i o n . P l a y ing o f f ens e a r e compu te r com pan i e s t h a t o f f e r ne w hardware capability and software programs with the potential to define new markets. The computer companies are banking on public networks such as the Internet which is expanding at an astounding pace.

2. Inventory management and Organizational applications:  With borders opening up and companies facing stiff global competition, managers need to catch on quickly to better ways of doing international business. Adaptation would include moving toward computerized, “paperless” operations, to reduce trading costs and facilitate the adoption of new business processes. Often t a rge t ed bu s iness p rocess i s i nv en to ry manage men t . So lu t ions fo r t h ese p rocesse s go by d i f f e ren t nam es . In t h e manufa c tu r ing indus t ry , t hey ’ re known as j u s t - i n - t ime inven to ry sys t ems , i n t he r e t a i l i ndus t ry a s qu i ck response programs, and in the transportation industry as consignment tracking systems. Inventory reduction is often a target as it averages 2 % of sales; and when the cost of inbound warehousing of raw materials or the cost of warehousing work in process inventory is included, the total often reaches6 % to 30% of sales. Electronic commerce projects seek to reduce this cost by as much as 90%.

3.Supply chain management: It means integrating the internal and external p a r t n e r s o n t h e s u p p l y a n d p r o c e s s c h a i n s t o g e t r a w m a t e r i a l s t o t h e manufacturer and finished products to the consumer. It includes Supplier management, Inventory management, Distribution management, Channel management, Payment management, financial management and Sales force productivity. These processes increasingly depends on electronic markets because of global sourcing of products and services to reduce costs, short product life cycles, and increasingly flexible manufacturing systems resulting in a variety of customizable products

4.Work group Collaboration Applications: Ecommerce represents the holy grail of connectivity; an internetwork  that  enables  easy  and  inexpensive connection of various

organizational segments to improve communications and information sharing among employees to gather and analyze competitive da t a i n r ea l - t ime . I t a l so f ac i l i t a t e s s a l e s fo r ce au toma t ion by ena b l ing sa l e speop le t o ca r ry p rodu c t and r e fe re nce in f o rma t ion in on e po r t ab l e device. Other applications like video conferencing document sharing, and multimedia email are expected to  reduce  travel  and encourage telecommuting.

Organizational applications of ecommerce have to meet challenges of the new business environment where the emphasis is on service quality, flexibility and customization of production to meet customer needs. Advantages of E-commerce in the industries include the following:

1. 24x7 operation : Round the clock operation is an expensive proposition in the “brick-and-conquer” world, while it is natural in the ‘click-and-conquer’ world.

2. Globa l r each : Reach ing g loba l cus tomers i s r e l a t i ve ly ea sy on the ne t compared to the world of bricks.

3. Cost of acquiring, serving and retaining customers is relatively cheaper to acquire new customers over the net

4. An extended enterprise is easy to build as it is a part of the ‘connected economy’. Internet provides an effective way to extend the enterprise beyond the narrow confines. Tools like ERP, SCM and CRM easily deployed over internet, permitting amazing efficiency in time needed to market, customer loyalty, on-time delivery and eventually profitability.

5. Disintermediation:  Using  internet,  one  can  directly  approach  the customers and suppliers, cutting down on the number of levels and in the process, cutting down the costs.

6. Improved customer service to clients resulting in higher satisfaction and more sales.

7. Power to provide the ‘best of both the worlds’. It benefits the traditional business side-by-side with the internet tools.

8. A technology based customer interface with screen to face interaction ,which has the potential to both increase sales and decrease costs.

9. The customer controls the interaction. He customers control the search p r o c e s s , t h e t i m e s p e n t o n v a r i o u s s i t e s ¸ t h e d e g r e e o f p r i c e / p r o d u c t comparison, the people with whom he or she comes into contact, and the decision to buy. In face to face interchange, the control can rest with either the buyer/seller or the community member.10 . Knowledge o f cus tomer behav io r : Whi l e t he cus tomer con t ro l s t he interaction,  the  firm  has  unprecedented  access  to  observe  and  track individual consumer behavior. It is possible to track customer behavior like behaviors on web sites visited, length of stays on a site, page views on a site, con ten t s o f w i sh l i s t s and shopp ing ca r t s , pu rchases , do l l a r amoun t o f  purchases, repeat purchases behavior, conversion rates of visitors who have completed transactions and other metrics.11. Network economics: It can be best expressed as a situation where the value of a product or service rises as a function of the number of other users who are using the

product. Word of mouth phenomenon that makes viral marketing a reality for consumer oriented e-commerce business such as ICQ in instant messaging system.

3 a. Visit any eBay or Amazon website and write what are the steps to be followed to transaction on any of these two websites

Amazon.com is a virtual merchant and it includes books, electronics, toys and music. It is a B2C Business-to Consumer model having retail sales. It is more than just an online store. It is about managing the entire process by using technology as a t oo l fo r o rde r p roces s ing and cus tomer suppor t . Fo l low ing a re t h e p ro cesse s involved.

1.V i s i t i ng t he v i r t ua l ma l l : The cus tomer v i s i t s t he ma l l by b rows ing on l i ne catalogue- a very organized manner of displaying products and their related i n fo rma t ion such a s p r i c e , de sc r i p t i on , and ava i l ab i l i t y . F ind ing t he r i gh t product becomes easy by using a keyword search engine. Virtual malls may include a basic to an advanced search engine, product rating system, content management, customer support systems, bulletin boards, newsletters components which make shopping convenient for shoppers.

2. Customer registers: The customer has to register to become part of the site’s shopper registry. This allows the customer to avail of the shop’s complete services. The customer becomes a part of the company’s growing database and can use the same for knowledge management and data mining.

3 . Cu s to mer bu ys p ro duc t s : Th r oug h a shopp i ng ca r t sy s t em , o rde r de t a i l s , shipping charges, taxes, additional charges and price totals are presented in an o rg an i zed man ne r . The cus t ome r ca n eve n cha ng e t he qua n t i t y o f a certain product. Virtual malls have a very comprehensive shopping system , complete with check out forms.

4. Merchant processes the order: The merchant then processes the order that is received from the previous stage and fills up the necessary forms.

5. Credit card is processed: The credit card of the customer is authenticated through a payment gateway or a bank. Other payment methods can be used as well, such as debit cards, prepaid cards, or bank-to-bank transfers.

6. Operations management: When the order is passed on to the logistics people, the traditional business operations will still be used. Things like inventory management,  total  quality management,  warehousing,  optimization  and p ro j ec t managemen t shou ld s t i l l b e i nco rpo ra t ed even t hough i t i s an e - business. Getting the product to the customer is still the most important aspect of e-commerce.

7. Shipment and delivery: The product is then shipped to the customer. The c u s t o m e r c a n t r a c k t h e o r d e r / d e l i v e r y a s v i r t u a l m a l l s h a v e a d e l i v e r y tracking module on the website which allows a customer to check the status of a particular order.8. Customer receives: The product is received by the customer, and is verified. The system should then tell the firm that the order has been fulfilled.

9. After-sales service: After the sale has been made, the firm has to make sure that it maintains a good relationship with its customers. This is done through customer relationship management or CRM.

3 . b . Exp la in the d i f f eren t types o f aggrega tors w i th an example

C l a s s i s who l e sa l e r s and r e t a i l e r s o f goods and s e rv i ce s a r e i nc r ea s ing ly referred to as e- tailers . Sales can be made based on list prices or through auctions. I n s o m e c a s e s , t h e g o o d s a n d s e r v i c e s a r e u n i q u e t o w e b a n d d o n o t h a v e a traditional brick and mortar store front. Some of the aggregator models are:

1.Virtual merchant: Th i s i s a bus ine s s t ha t ope ra t e s on ly f rom the web and offers either traditional or web-specific goods or services. The method of  selling may be by list price or auction. An example of a service merchant is Facetime, which calls itself an “application service provider”. It offers live customer support for e-commerce websites(e.g. Amazon, eToys, Eyewire and OnSale).

2.Catalogue merchant: Catalogue merchant is a the migration of mail order to a web based order business (e.g.Levenger)

3.Surf-and-turf : This is a traditional brick-and-mortar establishment with Webstore front. The model has the potential for channel conflict.

4.Bit Vendor: Th i s i s a me rchan t t ha t dea l s s t r i c t l y i n d ig i t a l p roduc t s and services and, in its purest form, conducts both sales and distribution over the Web.

5.Subscription model: In this, the users pay for access to the site. High value-added content is essential (e.g. Wall St.Journal, Consumer Reports). Generic news con t en t , v i ab l e on t he news - s t and , ha s p roven l e s s succe s s fu l a s a subscription model on the web.

Based on the electronic marketplace, the aggregator model bypasses distributors so that the buyers and sellers come together. To be more precise, the aggregators are the connectors between the buyers and the sellers. They are involved in the overall process of selection, organization, matching the buyers’ requirement with the p a r t i c u l a r s o f t h e a v a i l a b l e g o o d s , f u l f i l l m e n t o f t h e o r d e r s a n d e n a b l i n g t h e customers to create a value about the sellers

There are four types of aggregators as follows:1.Content aggregators:

They are among the first large scale sites on the web and mostly represent large publishing companies. E.g. Pathfinder.com. Their basic challenge is that content has to be attractive enough to make the site viable. For example, CANOE and Hockey plus, that provides extensive statistics, analysis, pool information or cricinfo.com.2. Mainstream aggregators:These include sites like Yahoo providing a Web directory and a search engine, along with a bunch of attractive tools like e-mail addresses, home pages, reminders, and many others. The most attractive feature of these sites is that they have an ‘easy to remember’ URL which is one of the reasons for them to be the top traffic sites on the web.

3.Event aggregators:These are sites that provide in-depth content and tools tailored to the needs of a particular group, which doubles as a clearly defined cus tomer ba se , f o r example , mor tgages -bu i l d t oo l s , r a t e s , adv i s e and t he ab i l i t y t o pu rchase a mor tgage on l i ne i n t he s ame p l ace (Mic ro so t ’ s Home advisor or Home Shark).

4.Shopping aggregators:Shopping aggregators let consumers roam through hundreds of sites and catalogues and find the best price in seconds. They help consumers  sift  through  dozens  of  e-commerce  sites.  For example,compare.com and bizrate.com evaluate their quality on independent basis as in the case of consumer reports.

Master of Business Administration-MBA Semester IV

MI0031- Technology Management– 2 Credits

1. Distinguish between technology adoption and technology absorption? Give suitable

examples.

Adoption of technology can be defined as the successful implementation of technology and deriving the full potential of the technology. Adoption is relatively easy in a new enterprise rather than in an ongoing firm. Adoption of technology requires gearing up of all the resources such as internal and external infrastructure, human resource, raw materials, and even marketing. As there is no existing system in a new enterprise, it is easy to adapt to the acquired technology. Whereas, in an ongoing enterprise, the prevailing systems have to modified and the existing work processes, working environment and culture may have to be changed, which makes it more difficult. In other words, unlearning has to be done in an existing enterprise before learning of new technology starts.

The concept of technology adoption has attracted much more attention in recent times due to the explosive growth of new technologies worldwide. Just within the last few years, business and consumer marketplaces have been exposed to the widespread use of the personal computer, the Internet, ubiquitous wireless communications and broadband communications.

Simon (1978) opined that many technologies that were transferred from developed to developing countries were not successfully adapted because of the inappropriateness of those technologies for developing countries. He studied the causes for inappropriateness of various technologies that were transferred from developed to developing countries, and identified the following as specific causes:

1. Missing preferences of local markets and consumers

2. Technology is based on in imported raw materials

3. Insufficient skills of local labour

4. Not scaled down to local market

5. Insufficient use of technology caused by the local labour, and

6. Excessive usage of capital goods and imported equipment.

Other general reasons that he identified are

1. High cost of transfer

2. Environmental pollution problems

3. Impact due to plant location, and

4. Impact due to energy inputs.

2. What is meant by Generation and Development of Technologies? What are the steps

involved in planning technology strategies?

Technology generation and development is often synonymous with the term "Research and Development (R&D)". However, technology generation involves R&D efforts while technology development involves further stages of translating R&D efforts into marketable products, processes and services. Basically, one can consider the R&D process as having four distinct stages as shown in Figure 5.1.

Recognition of a need for innovation is one of the motivations for R&D. "Research" on existing knowledge for satisfying identified need helps in idea generation – this is the "need push". The other primary motivation for R&D is to find potential applications for advances in knowledge. “Research" on existing activity for introducing new knowledge also helps in idea generation - this is the "technology-push". "Development" includes engineering (creation, design and production) and marketing (first use and diffusion) of the generated idea. Through the entire process it is ideas and knowledge which are being pursued, and the process is not complete until the new idea is converted into a marketable product or service (a hardware or software intensive technology).

Objectives of Corporate R & D and R&D Projects:

Corporate research and development is the principal corporate asset for long-term technological competitiveness. Corporate research activities can be classified by the purpose of the research:

1) To support current businesses;

2) To provide new business ventures;

3) To explore possible new technology basis.

As explained earlier, the R&D projects tend to go through the following stages:

1) Basic research and invention;

2) Applied research and functional prototype;

3) Engineering prototype and testing;

4) Production prototype and pilot production;

5) Product testing and modification;

6) Initial production and sales.

Stages 1, 2, 3 are usually called "research" while stages 4 to 6 are called "development’; hence, the term "research and development (R&D)". Each stage of innovating a new product is expensive, with the expense increasing by, an order of magnitude at each stage. The management decisions to continue from research to development are therefore very important. Overall, the expenses of modem industry for R&D were considerable. The major purpose of research is to reduce technical risk before production -scale investment is committed. It is generally reported that at each stage, the cost escalates by orders of magnitudes of over 1:10. It is precisely this reason that technology generation and development is costlier than basic R&D and hence all countries or all enterprises are not able to pursue these activities at similar levels.

Corporate Research and Product Lifetimes

R&D projects in corporate research create and extend the lifetimes of corporate products, avoiding technological obsolescence of businesses. Extending product lifetimes can be done by:

1) Improving the production processes to lower production costs and increase quality;

2) Upgrading and improving current product models;

3) Creating next generation product models.

The function of corporate research is to create and extend the lifetimes of the company’s products. This is an essential function because all products have finite lifetimes (sometimes as short as one year and sometimes as long as several years). In times of new and rapidly changing technologies, lifetime$ tend to be short. A mature technology product may have a very long lifetime if no clearly superior technology has emerged. But even in a long-lived product, periodic reformulations, variation in product lines, and changes in packaging provide some change in the product. To maintain a long-lived product, quality must be maintained on par with competing products, if not more, and cost reduction in production must be ahead of competitors. Product lifetimes are dependent on two factors: technological obsolescence and product substitution

Production Costs and R&D

Production costs of new products usually decline over times, due to process and product improvement. In any new product line, initial production costs are usually much higher than later production costs. All new products based on new technologies have initially high per unit product costs because of (i) large R&D and plant investment costs, (ii) small volumes of initial production, and (iii) inefficiencies in the production processes and in production design. For a successful product, these factors improve over time. Investment capital becomes amortized over larger production volumes. The increasingly larger volume of production also lowers per unit overhead charges. Innovations and improvements in production processes create more efficient production procedures. Later generation production models and computerized techniques are designed to lower production costs

Market Share, Profit Margins, Pricing Strategy etc.

These are also highly dependent on R&D efforts at corporate level and the efficiency at which R&D is carried out. The entry into a new high technology market is restricted because knowledge is new and is not widely known. Products then are high priced because sales volume is small and production costs are high. Yet, if the price is held there too long, other competitors can enter with "me too" technology products, since high profit margins and growing markets provide the competitive incentive. However, if prices are reduced in anticipation of production costs being increased in future, a competitor has less incentive to enter, and may incur losses. The strategic trick is for the technology innovator to ride the markets faster than the competitors and enter new products earlier than others. It is precisely due to this reason that open competitiveness encourages innovations as happens in advanced economies while restrictive policies and assured markets through licensing systems discourage innovations. The latter is the scenario in India all these years.

Process of Technology Generation

Technology is generated in R&D organizations. An illustration of the various inputs required for generation of technologies is given in Figure 5.2. Goals, surroundings, criteria and resource allocation are some of the inputs to R&D, the output of which is technology. The input resources into R&D organizations are the traditional inputs such as money, materials, facilities, energy, labour and management, and the intelligence-based inputs such as science, knowledge, skills, information and existing technologies. The effectiveness of any R&D is determined in terms of the ‘usefulness’ of the technologies it produces with respect to the overall objectives of the corporation.

The process of technology production

(Source: Technology for development, UN-ESCAP, 1984)

Besides the various factors discussed in earlier paras, the R&D or technology generation involves many other aspects such as, monitoring and evaluation of R&D projects, funding of R&D, training and development 0! resource personnel, interactions at all levels, management policies and support, the availability of support structures and incentives at government level, timely collection and interpretation of technical and other information, etc. Some of these aspects have been discussed in detail elsewhere in this course. The quality of resource leadership and commitment of the top management for research is extremely important. In Indian industry or corporate sector, it is generally observed that the research personnel occupy secondary place to finance, marketing and production personnel, and are not given due importance in decision-making at corporate level. Sometimes, inefficient personnel from other departments are posted or transferred to R&D department, thereby indicating a complete neglect of R&D concept. Such management attitudes need to be changed in the overall interest of the company.

5.3.5 Managing and Monitoring R&D

Managing R&D requires special skills and covers a wide variety of issues ranging from technical matters to management techniques and overall business environment at national and international levels. Managing R&D projects requires attention to performance, timing, cost, and personnel. Performance is the measure of a product or process to accomplish a specific function or application. The performance parameters must be defined for an R&D project in order to determine how successfully the goals of the project are attained. Progress in R&D projects can be watched by monitoring: (i) technical performance parameters against time, (ii) performance parameters against cost, and (iii) cumulative cost against time. Timing is important to the success of a project, since lead time created from timely innovation provides a competitive advantage.

Technology Development

Though, broadly speaking, the ‘D’ of R&D covers Technology Development, the latter has much wider connotation. For better understanding, more elaboration of various factors that determine technology development is called for. Figure 5.3 shows the determinants and their interrelationship in technology development from R&D to technology diffusion and substitution. Natural resources are mobilized and processed through the succeeding stages. The supply factors include natural resources, human resources, fund allocation, and produced resources. The demand side factors include market potential venture capital and enterprise profitability. The coordinating organizations, supporting facilities and government policies and systems have a major role to play in the success of the technology development process. Figure 5.4 shows various stages of technology development cycle, starting from the generation of ideas in the R&D department, to estimating market and inputs required, to executing projects, to field trials and modifications. It may be observed that this process is tedious and requires top management commitment and support from outside. Risk factor is large and the success rate depends upon the quality of inputs provided to the R&D department.

Technology Development Approaches

i. In-house R&D: Technology development activities are generally carried out through setting up of separate in-house R&D units within the corporation, managed and headed by a well-qualified and experienced chief, directly reporting to the top management. However, this unit has close interactions with other departments within the company and there could even be exchange of personnel among different departments. The strength and facilities in the in-house R&D unit would depend upon the technology policy of the company and the nature of the business. In large companies, there are sometime R&D labs for each department and a central R&D lab for .major R&D projects. Industrial R&D is mostly product or process oriented with specific objectives and time schedule; and not basic research. Incremental developmental efforts or import substitution efforts are generally common in most of the industries in developing countries including India, while emphasis is on new technologies or new applications of technologies in advanced countries.

ii. Co-operative R&D: A group of companies in a particular industrial sector promotes an R&D centre as a society or a non-profit making company, the expenses for which are met from the contributions of the participating companies (as a fixed percentage of their turnover) as well as grants from the governments. This centre undertakes R&D as per the requirements of the

companies in their larger interest, and sets up expertise and facilities of common nature and which are usually expensive. A company can also sponsor specific projects to this centre. Cooperative research facilities are normally utilized for the projects which are not of secretive nature from the business point of view or first substantial part of the R&D can be done at the centre and the remaining part involving finer details or critical technological aspects affecting the competitiveness is done at- the in-house R&D division of the company. National Council of Building Materials (Cement) at New Delhi, Textile Research Centre at Ahmadabad (ATIRA), are example of this type in India.

iii. Contract Research: A company may contract components of technology development to suitable R&D organizations, academic institutions, or consultants or experts, and its in-house R&D unit may coordinate the progress of the activities, to develop the desired technologies. This approach usually requires considerable internal technical and managerial capabilities coupled with a strong S&T information base.

iv. R&D collaboration: A company may collaborate with another company in areas of common interest if costs of development are high. Such inter-firm collaborative R&D efforts are becoming common in developed countries mainly due to high costs and shorter technology life cycles, in areas such as micro-electronics, materials, information technologies, bio-technologies, and so on. A firm may also collaborate with the public funded or privately funded R&D institutions on case-to-case basis where R&D results are shared mutually and so are the expenses. A company in India may even collaborate with another company or R&D institution abroad, on mutually agreed terms.

v. Research Societies: Large corporations or industrial houses may set up independent research societies, in addition to their in-house R&D units. Such societies may undertake R&D activities mostly relating to the broad interests of the promoting companies in line with the national interests. They will also take advantage of those facilities for the activities / programmes in their in-house R&D unit. Governments usually encourage such societies and provide several tax concessions and fiscal incentives.

vi. Research Companies: Large corporations of technology innovative entrepreneurs may promote research companies, specifically for conducting research and development of technologies for others on commercial basis. The development costs and reasonable profits are recovered from the sale and transfer of technologies. Such a concept is common in USA and other developed countries while it is yet to gain recognition in developing countries such as India. A company may adopt any of the approaches or a combination of the approaches depending on its needs and resources.

Master of Business Administration- MBA Semester III

MI0032 – Java and Web design -2 Credits

1. Explain the various rules for naming a variable in Java? Give one example for each.

When you learned algebraic equations in school, you used x and y to represent values in equations. Unlike pi which has a constant value of 3.14, the values of x and y are not constant in equations. Java provides constants and variables to store data in programs.Java allocates memory to each variable and constant you use in your program. As in algebra, the values of variables may change in a program, but the values of constants, as the name suggests, do not change. You must assign unique names to variables and constants. Variable names are used in a program in much the same way as they are in ordinary Algebra.Each variable used in a program must be declared. That is to say, the program must contain a statement specifying precisely what kind of information (data type) the variable will contain. This applies to every variable used in the program, regardless of the type

Naming Variables

A program refers to a variable using its name. Certain rules and conventions govern the naming of variables. You must adhere to rules. Conventions help improve the readability of the program, but following them is not mandatory.

Rules for Naming Variables in Java

A variable name:

· Must not be a keyword in Java.

Subsequent characters may be letters, digits, dollar signs, or underscore characters. Conventions (and common sense) apply to this rule as well. When choosing a name for your variables, use full words instead of cryptic abbreviations. Doing so will make your code easier to read and understand. In many cases it will also make your code self-documenting; fields named cadence, speed, and gear, for example, are much more intuitive than abbreviated versions, such as s, c, and g. Also keep in mind that the name you choose must not be a keyword or reserved word.

Here is a list of keywords in the Java programming language. You cannot use any of the following as identifiers in your programs. The keywords const and goto are reserved, even

though they are not currently used. true, false, and null might seem like keywords, but they are actually literals; you cannot use them as identifiers in your programs.

abstract continue for new switchassert*** default goto* package synchronizedBoolean Do if private thisbreak double implements protected throwbyte else import public throwscase enum**** instance of return transientcatch extends int short trychar final interface static voidclass finally long strictfp** volatileconst* float native super while

· Must not begin with a digit.

Any variable name cannot begin with a digit. I,e. 2var,1inc etc

· Must not contain embedded spaces.

· Can contain characters from various alphabets, like Japanese, Greek, and Cyrillic.

Syntax for Defining Variables All the attributes of a class are defined as data members. The syntax used to declare a class variable is:

<data_type> <variable_name>;

As the braces “{}” are used to mark the beginning and end of a class, a semicolon “;” is used to mark the end of a statement

2. What are the different methods under Buffered Input Stream and Buffered Output

Stream? Explain the uses of random access file over sequential access file?

The java.io package contains two classes, Input Stream and Output Stream, from which most of the other classes in the package derive.

The Input Stream class is an abstract superclass that provides a minimal programming interface and a partial implementation of input streams. The Input Stream class defines methods for reading bytes or arrays of bytes, marking locations in the stream, skipping bytes of input, finding out the number of bytes available for reading, and resetting the current position within the stream. An input stream is automatically opened when you create it. You can explicitly close a stream with the close method, or let it be closed

implicitly when the Input Stream is garbage collected. Remember that garbage collection occurs when the object is no longer referenced.

The Output Stream class is an abstract superclass that provides a minimal programming interface and a partial implementation of output streams. Output Stream defines methods for writing bytes or arrays of bytes to the stream. An output stream is automatically opened when you create it. You can explicitly close an output stream with the close method, or let it be closed implicitly when the Output Stream is garbage collected, which occurs when the object is no longer referenced.

The java.io package contains several subclasses of Input Stream and Output Stream that implement specific input or output functions. For example, FileInputStream and FileOutputStream are input and output streams that operate on files on the native file system.

java.io Class BufferedInputStream

java.lang.Object java.io.InputStream java.io.FilterInputStream java.io.BufferedInputStream

public class BufferedInputStreamextends FilterInputStream

This subclass of FilterInputStream buffers input from an underlying implementation to provide a possibly more efficient read mechanism. It maintains the buffer and buffer state in instance variables that are available to subclasses. The default buffer size of 2048 bytes can be overridden by the creator of the stream.

This class also implements mark/reset functionality. It is capable of remembering any number of input bytes, to the limits of system memory or the size of Integer.MAX_VALUE

Please note that this class does not properly handle character encodings. Consider using the BufferedReader class which does.

Field Summary

protected byte[]

buf           The buffer used for storing data from the underlying stream.

protected int

count           The number of valid bytes currently in the buffer.

protected marklimit

int           This is the maximum number of bytes than can be read after a call to mark() before the mark can be discarded.

protected int

markpos           The value of pos when the mark() method was called.

protected int

pos           The index of the next character that will by read from the buffer.

Public MethodsName Description

available Overridden. Returns the available number of bytes that can be read from the input stream without being blocked.

close Overridden. Closes the input buffer.

equals  (inherited from Object )

hashCode  (inherited from Object )

getClass  (inherited from Object )

mark Overridden. Marks the current position of the byte read so far in the input buffer.

markSupported Overridden. Checks if fc2bb7b1-e8ab-44ca-a9a1-362d98852478 and bde7d3cb-ef57-4231-9a8d-4578236481e1 are supported.

clone  (inherited from Input Stream )

read Overloaded. Overridden.  

reset Overridden. Repositions the mark created by fc2bb7b1-e8ab-44ca-a9a1-362d98852478 to its last position when mark() was last called.

skip Overridden. Skips reading a specific number of bytes.

toString  (inherited from Input Stream )

Protected MethodsName Description

finalize  (inherited from Object )

Buffered Output Stream:

Stores the data to be written into a buffer. The data is actually written when the buffer is full or when you empty the buffer by calling the flush method.

Package: java.io

Assembly: vjslib (in vjslib.dll)

public class java.io.BufferedOutputStream extends java.io.FilterOutputStream

Public MethodsName Description

close Overridden. Closes the output stream.

equals  (inherited from Object )

flush Overridden. Empties the output buffer, causing the stored data to be written to the output stream.

hashCode  (inherited from Object )

getClass  (inherited from Object )

clone  (inherited from Output Stream )

to String  (inherited from Output Stream )

write Overloaded. Overridden.  

Protected MethodsName Description

finalize  (inherited from Object )

3.With suitable example, explain the difference between errors and exceptions.

Explain the various types of exceptions.

The term exception denotes an exceptional event. It can be defined as an abnormal event that occurs during program execution and disrupts the normal flow of instruction.

Error-handling becomes a necessity when you develop applications that need to take care of unexpected situations. The unexpected situations that may occur during program execution are:

· Running out of memory

· Resource allocation errors.

· Inability to find a file.

· Problems in network connectivity.

If an above-mentioned situation is encountered, a program may stop working. You cannot afford to have an application stop working or crashing, if the requested file is not present on the disk. Traditionally, programmers used return values of methods to detect the errors that occurred at runtime. A variable errno was used for a numeric representation of the error. When multiple errors occurred in a method, errno would have only one value-that of the last error that occurred in the method.

Java handles exceptions the object-oriented way. You can use a hierarchy of exception classes to manage runtime errors.

Arithmetic Exception, NullPointer Exception, ArrayIndexOutOfBounds Exception

java.lang.Object | +----java.lang.Throwable | +----java.lang.Error | +----java.lang.Exception |

+----java.io.IOException | +----java.lang.RuntimeException | +----java.lang.ArithmeticException | +----java.lang.ArrayIndexOutOfBoundsException | +----java.lang.IllegalArgumentException | +----java.lang.NumberFormatException

Master of Business Administration-MBA Semester 4

MB0036 – Strategic Management and Business Policy

Q.1 Explain how strategies are formulated and implemented.

Strategy Formulation and Implementation

It is the crux of the strategic management process. Strategy refers to the course of action desired to achieve the objectives of the enterprise. Formulation, together with its implementation, constitutes an integral part of the management activity. Managers use strategies for different purposes such as to overcome competition, to increase sales, to increase production, to motivate the employees to provide their best, and so on. Implementation of a strategy is a crucial task as the formulation of it. There may be a lot of resistance during the implementation process. It is necessary for the manager to be very tactful to involve the members of his group in the formulation of strategy to facilitate the implementation process.

Stages in Strategy Formulation and Implementation

a) Identification of mission and objectives

b) Environment scanning

c) Generic strategy alternatives

d) Strategy variations

e) Strategic choice

f) Allocation of resources and formulation of organisational structure

g) Formulation of plans, policies, programmes and administration

h) Evaluation and control

Generic Strategy Alternatives

They refer to the strategy alternatives in broader terms. After the nature of the business of the firm is defined, the next task is to focus on the type of strategic alternative, in general, the firm should pursue. The strategist seeks to identify the right alternative through questions such as:

1. Should we get out of this business entirely?

2. Should we try to expand?

There are four strategy alternatives available to a firm or business:

a) To expand

b) To wind up or retrench

c) To stabilize, and

d) To continue its operations pertaining to its products, markets or functions.

a) Expansion strategy can be adopted in the case of highly competitive and volatile industries, particularly, if they are in the introduction stage of product / service life cycle.

b) Stability strategy is a better choice when the firm is doing well, the environment is relatively less volatile, and the product / service has reached the stability or maturity stage of the life cycle.

c) Retrenchment strategy is the obvious choice when the firm is not doing well in terms of sales and revenue and finds greater returns elsewhere, or the product / service is in the finishing stage of the product life cycle.

d) Combination strategy is not a new strategy as it combines the other strategies. However, it is to be noted that it is better to evolve individual strategies and combine them rather than trying to evolve a complex combination strategy which could be cumbersome with loss of precious business time. It is best-suited to multiple SBU firms in times of economic transition and also when changes occur in the product / service life cycle. If a firm realizes that some of its main product lines have outlived their lives, it may not be profitable to continue investment in the same product or SBU. The firm may choose to withdraw its resources from this area (or SBU) (Retrenchment strategy) and follow an Expansion strategy in a new product area. Combination strategy is best suited when the firm finds that its product-wise performance is uneven, or all or most of its products differ in their future potential.

Generic Strategy Alternatives

Expand Retrench Stabilize Combination

Business definition

Pace Business definition

Pace Business definition

Pace Definition or Pace

Products Add new products

Find new ones

Drop old pro-ducts

De-crease product develop-ment

maintain Make package changes, quality improve-ments

Drop old while adding new products

Markets Find new territories

Pene-trate markets

Drop distribution chan-nels

Reduce market share

maintain Protect market shares, focus on market niches

Drop old customers while finding new customers

Func-tions Forward, vertical integra-tion

Increase capacity

Be-come cap-tive com-pany

De-crease process R&D

maintain Improve produc-tion efficiency

Increase capacity and improve efficiency

Generic Strategy Alternatives

Sometimes, a combination of a few or all of these strategies may be necessary. Any change must be contemplated considering what is to be done (Business definition) and the speed (Pace) with which it is to be done. Each of these alternatives has to be evaluated on its merits.

Examples of Strategic Alternatives:

· If the firm wants to grow substantially in terms of size, expansion is the obvious alternative. But in this process, other objectives may take a back-seat, at least in the short run.

· In case of recession, retrenchment is the most preferred strategy, involving dropping of unviable products, reduction in non-performing assets, withdrawal from the markets, and reduces the scale of activity. In the process, the overhead costs are purposefully reduced to ensure that the expenditure continues to be productive. These efforts will ultimately enhance the profitability.

· At times, the company may realise more money by liquidating its operations than by continuing. In such a case, to achieve the goal of improving cash value, the strategy is to sell a part of its assets, realise the sale proceeds, and invest the same profitably elsewhere.

· If an entrepreneur wants to maintain control over a business, stability strategy may be a better strategy.

Goal of improving cash value

· Most timber depots in sprawling open places, located in the outskirts of the city for decades, have been making more money by selling a part of their open land than by doing timber business.

· In view of the substantial growth in the real estate in the city outskirts, most of them could sell their surplus land (main roadside) to construction firms for phenomenal sums.

· In this process, they could successfully create capital assets with a tremendously appreciated value. Further analysis showed that they earned more on these capital assets than in the timber business.

· However, since the values are further appreciating, can we offer a better strategy.

A strategy is a means to an end. If an organization wants to perform better in the long run, it has to select an appropriate strategy and pursue it vigorously. In this process, it might face certain hardships. Also, it has to make necessary changes in its strategy. A change in strategy should not be construed as a sign of failure.

Strategic Alliances

Strategic alliances constitute another viable alternative. Companies can develop alliances with the members of the strategic group and perform more effectively. These alliances may take any of the following forms:

a) Product and/or service alliance: Two or more companies may get together to synergies their operations, seeking alliance for their products and/or services. The product or service alliance may take any of the following forms:

A manufacturing company may grant license to another company to produce its products. The necessary market and product support, including technical know-how, is provided as part of the alliance. Coca-cola initially provided such support to Thums Up.

Two companies may jointly market their products which are complementary in nature. Chocolate companies more often tie up with toy companies. TV Channels tie-up with Cricket boards to telecast entire series of cricket matches live.

Two companies, who come together in such an alliance, may produce a new product altogether. Sony Music created a retail corner for itself in the ice-cream parlors of Baskin-Robbins.

b) Promotional alliance: Two or more companies may come together to promote their products and services. A company may agree to carry out a promotion campaign during a given period for the products and/or services of another company. The Cricket Board may permit Coke’s products to be displayed during the cricket matches for a period of one year.

c) Logistic alliance: Here the focus is on developing or extending logistics support. One company extends logistics support for another company’s products and services. For example, the outlets of Pizza Hut, Kolkata entered into a logistic alliance with TDK Logistics Ltd., Hyderabad, to outsource the requirements of these outlets from more than 30 vendors all over India – for instance, meat and eggs from Hyderabad etc.

d) Pricing collaborations: Companies may join together for special pricing collaborations. It is customary to find that hardware and software companies in information technology sector offer each other price discounts. Companies should be very careful in selecting strategic partners. The strategy should be to select such a partner who has complementary strengths and who can offset the present weaknesses. The acid test of an alliance is greater sales at lesser cost. It is a common practice to develop organisational structures or modify them, if necessary, to support the alliances and make them successful.

Logistic Alliance

· Pizza Hut restaurants do not stock more than three days of their inventory.

· The standard for distribution centers or warehouses is a stringent 14 days, to minimize the costs and optimize quality control. This involves round-the-clock monitoring of pick-ups and truck movements.

· Most of the items are perishable and the company’s standards cover the entire delivery schedules.

· For in-city delivery, the truck is monitored from the time it leaves the distribution centre till it reaches the restaurant. Not just that – the time taken in offloading is noted too.

· The restaurant gives a strict 30 minutes window in which time the delivery is to be completed.

Considering Strategy Variations

There can be a number of variations of the generic strategy alternatives. For instance, if the strategy is to expand, then the alternatives are internal expansion or external expansion.

Internal expansion can be achieved through any of the following approaches:

· Penetrate existing markets

· Add new markets

· Add new products, and so on

Similarly, external expansion can be achieved through mergers or acquisitions. In most IT Companies, subsidiaries are created to develop at the earliest upstream capabilities in the IT value-chain. Once these subsidiaries gain the required capabilities in terms of consultancy, system integration, product design and application, development and maintenance, and others, they are merged into a major player. Merger has thus been one of the strategies to benchmark the company in terms of performance globally.

If the strategy is to attain stability, then the alternatives could be internal stability or external stability. In some cases, both may be required. External stability can be attained by maintaining market share.

Internal stability of a firm can be achieved through:

a) Seeking production and marketing efficiencies, and

b) Redefining the existing organisational structure.

Strategy variations can attain the following forms:

· Internal or external

· Related or unrelated

· Horizontal or vertical

· Active or passive

Each of these variations has different strategic alternatives considering the major goals of the organization. For instance, internal strategy variation may be expansion, stability, retrenchment, or combinations. If expansion is decided upon, the alternatives could be to penetrate existing markets, add new products, or add new markets, and so on. Strategy variation is a global phenomenon. When the firm finds that it is not possible to fill a gap in the market with the existing strategy, it considers a change in the focus of the strategy. An example would be how multinationals Indianite their global strategies to woo their customers in Indian markets.

.

Possible Strategy variations

Expansion Stability Retrenchment Combination

Internal Penetrate existing markets; add new

Seek production and

Reduce costs; reduce assets; drop products;

Sub-contracting

products; add new products

marketing efficiencies; reorganize

drop markets; drop functions

External Acquisitions; mergers

Maintain market share

Disinvest SBUs; liquidations; bankruptcies

Cross-licensing, joint ventures

Related Seek synergy from new products, markets or functions

Improve products

Eliminate related products, markets or functions

Unrelated Conglomerate diversification in products, markets or functions

Eliminate unrelated products, markets or functions

Horizontal Add complementary products or markets

Eliminate complementary products or markets

Vertical Add new functions

Reduce functions

Active Innovative entrepreneurial moves

Grow to sell out

Passive Imitator in R&D products

Reactive defense of position

Changing trends in strategies: Global setting to Indian setting

· A keen insight into the strategies adopted by multi-national companies dealing in products such as automobiles, beverages, leather products, and so on, reveals the following shift from global strategies to Indianite strategies:

· Indian sing positioning of products, i.e., positioning and advertising products in the Indian context, instead of maintaining a uniform brand image all over the world.

· Advertisements and brands are designed to appeal to Indian aspirations.

· For instance LG named one of its TVs as Sampoorna.

· Developing exclusive products rather than selling the same products globally. For instance, a made-for-India refrigerator is designed to serve just three basic purposes: chill drinking water, keep cooked food fresh and withstand long power cuts ( ELECTROLUX )

· Coca-cola has redesigned its distributor-crates and trucks to suit Indian roads.

· Widening appeal to all segments of customers rather than focusing on select segments of the market ( REEBOK ).

· Operating through multi-brand stores rather than own distribution system.

· Entering market through small cars rather than with high-priced cars (HYUNDAI ).

· Undertaking manufacturing with locally made products rather than with imports ( HYUNDAI ).

· Using local film and sports personalities for advertising of premium brands ( OMEGA )

· Offering free hand on investments to local managers, considering market size, rather than controlling country budgets ( PEPSI ).

· Agreeing to enter the market at any cost, sacrificing own terms, with scale of operations remaining a major attraction ( PEPSI ).

· Operating through local managers through more decentralization, rather than deputing managers from the head office ( PEPSI ).

· Appointing an Indian CEO in place of an expatriate ( CARRIER AIRCON )

Selection of the Best Alternative

The best alternative is one that can improve overall performance. Its selection depends upon:

· Particular configuration of objectives

· Environmental threat and opportunity profile

· Strategic advantage profile

· The generic strategy itself

If a company has a higher growth as its objective, it is better to expand from a base of proven or time-tested competence (e.g. cost leadership or market leadership) and organize the departments to provide new opportunities while taking moderate risks.

Every company must tailor an appropriate strategy for achieving its goals. The most generic types to initiate strategic thinking, as suggested by Michael Porter, are ( a ) Overall cost leadership, ( b ) Differentiation and ( c ) Focus.

a) Overall cost leadership – The company is said to achieve OCL when it offers its products or services at the lowest price ( due to its lowest cost ) among competitors, thus maintaining the largest market share. Companies which pursue this strategy have to sharply focus on cost-effective strategies in all the areas pertaining to engineering, purchases, manufacturing and physical distribution. Any breakdown could cost the company very badly. A standby arrangement is vital. Mergers and take-overs reflect the common route for companies to optimize their resources and costs. HLL emerged stronger with the acquisition of Brook Bond.

b) Differentiation – The company should be capable of demonstrating a superior performance through its products and services. This should benefit a large number of customers in saving their resources in terms of time and money. Hero Honda could design its motorcycle differently to offer higher mileage. This resulted in savings to the user. The strategy is to differentiate the products and services sharply through quality in a market dumped with stocks. A photocopying company can demonstrate its excellence by minimizing defects per thousand prints. Constant adaptation to changing technology and large-scale initiatives in R&D would provide a shot in the arm for the company. INFOSYS and WIPRO are some examples which have made a niche in the software industry through differentiation.

c) Focus – The company may concentrate on a narrow market segment and obtain full market information about it. It may pursue either overall cost leadership or differentiation strategy within that target segment. Such companies which pursue the same strategy to the same target market, are called a strategic group of companies. If they relentlessly pursue their strategies, they

are bound to succeed, leading to benchmarking of strategies. The danger here is that others can copy in the name of benchmarks. This can be avoided by performing similar activities in an innovative and swift way, which the competitors cannot catch up with. There are certain issues which cannot be copied in the short run.

Strategic Choice

It involves the decision to select from among alternatives, the best strategy which effectively contributes to the business objectives. The spade work before making a strategic choice consists of:

· Identifying the few viable alternative courses of action.

· Considering the parameters for selection of best alternative.

· Evaluating each alternative on its own merits and in relation to other alternatives.

· Making the final choice.

· Keeping the next best alternative as stand by ( to take care of contingencies )

The following are the questions in terms of which environmental and internal conditions are analyzed:

· What are the main business objectives?

· Does the selected strategy contribute to these objectives?

· What is the business definition – is it product-based, market-based or function-based?

· Will it be achieved in the future?

These questions help us to examine the performance gap between the expected and the ideal outcomes in relation to the alternatives under consideration. If the gap is narrow or negligible, the stability strategy is the best strategy, since it focuses on “ doing in the best way what we can do “. Most international airlines lease out operations such as reservation, maintenance, ground halting work, and others to professional agencies to improve their overall performance in general and increase the pace of its own activities in particular. The focus will be on better implementation initiating certain pace changes internally. If the gap is large and significant, the probable alternatives are either to expand or to withdraw from unrelated areas. Mergers, acquisitions, disinvestments are some of the measures that initiate changes in the pace of growth.

The decision-maker considers different choices closest to the present strategy. In the process, he identifies the most preferred strategy. Some of the parameters that help him in this process are:

· Is it politically acceptable or not?

· What is the degree of risk involved?

· To what extent is the enterprise dependent on external factors?

Such an evaluation leads to the choice of an appropriate strategy, and at this point, it appears to the decision-maker that the gap between the expected and the ideal outcomes is closed. Relying excessively on one corporate plan with one or two variations, more often, may not be adequate. Hence, it is desirable to keep a contingency plan ready as standby.

Strategy formulation and implementation

NOKIA studies closely each of the subsets of its customer segments. It carefully assesses what appeals to each of them most. After identifying their purchasing power, it chooses the appropriate technology and then formulates the strategy.

When MOTOROLA could not take off with seven varieties of cell phones, NOKIA struck gold with just two plain models. The secret of success was that the products were changed or adapted to local conditions. In other words, the products and services were more Indianite to ensure survival in the Indian markets. NOKIA could successfully formulate its strategy around its different customer segments, varying appeals and affordable technology.

TAPARIA, CEO of Rajashree Cements followed a value enhancement strategy to capture the market dominated by 43 grade, where ACC and L&T were market leaders. He noticed that nobody thought of the market-positioning slot for superior grade 53, which, despite high price, leads to overall savings due to less consumption. He expected that a shift from 43 to 53 grade would require convincing, for which channel support and its participation in communication were essential.

To popularize grade 53, Taparia launched the Shoppe concept by associating with ” weak and small channel “ members. The Shoppe concept empowered them with the services of a civil/structural engineer at Rajashree’s cost for any type of consultation with the customers visiting the shoppe.

The neat and clean environment of the cement outlets attracted the customers who were otherwise used to the dirty and dusty environment of cement outlets. The customers were assured of the availability and reliability of the quality products. The customer could avail the services of a civil engineer and also sit in an air-conditioned chamber of the Shoppe and watch a video film on grade 53.

The quality of documentation (invoices, challans) was improved to create confidence in the customer. The success of the Shoppe concept was evident

from a rise in demand from 5000 tonnes per month to 45,000 TpM in Pune alone. Even established giants like ACC and LandT had to follow his footsteps by introducing grade 53 and also developing their own exclusive outlets like “ACC ki duniya” and “LandT station”.

Since strategic choice is a managerial ( business ) decision, care should be taken that it is not affected by bias, intuition or politics. These constraints, if allowed to prevail, will limit the choice. Progressive companies hold formal meetings involving all or most of their managers at the top level while choosing strategy and to record the criteria used. More often, a company may not have total freedom in choosing the strategy as it is dependent for its survival on one or more of the following: owners, competitors, suppliers, the Government and the community. The strategic choice is also affected by relative volatility of the market sector wherein the firm chooses to operate. If the sector is more volatile, it needs a flexible and strategic response to be more effective.

Strategic choice and its effectiveness is often restricted by various factors such as the strategies earlier followed, the attitudes of the managers to risk (most of the managers are averse to risk) and lobby for power (some managers wish to be close to the boss to garner influence) in the organization, internal and external alliances, and so on. However, overall commitment to the chosen strategy is extremely important.

1.5.7 Allocation of Resources and Development of Organisational Structure

The process of strategy implementation calls for an integrated set of choices and activities. These include allocating resources, organising, assigning appropriate authority to the key managers, setting policies and developing procedures.

It is necessary to establish an operative system to reinforce, control and evaluate a strategy.

A good strategy with effective implementation has a higher probability of success. There source allocation decisions, such as, which department is sanctioned how much of money and resources, in the name of the budget, and so on – set the operative strategy of the firm.

Budgets are formulated after a series of negotiations across different levels in the organization. Budgets may be of different types: corporate budgets, capital budgets, departmental budgets, sales budgets, expense budgets, and others.

An effective co-ordination and efficient division of labour requires an appropriate organisational structure. The best structure is one, which fits into the organisational environment. Also its internal characteristics should give rise to an effective strategy.

Appropriate changes in the organization structure may be initiated to ensure strategic implementation of the proposed strategy. Effective strategic management practices suggest that organization structure should also change if the strategy changes or if the organization experiences any bottlenecks in this regard

Q.2 Mr. Nandankumar wants to start a business of his own. He is seeking advice from a consultancy firm on how to go about it. If you were an employee of this consultancy firm, how would you guide him in preparing a business plan that would suit Nandankumar’s business?

Creating Nandakumar’s Business Plan

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

· Executive summary· Company and product description

· Market description

· Operations

· Management and ownership

· Financial information and timeline

· Risks and their mitigation

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

Executive Summary

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

Sell your concept! The executive summary may be the first and only section of your business plan that most of your audience will read. Tell the audience why the business is a great idea. Some readers will look at this section to determine whether or not they want to learn more about a business. Other readers will look to the executive summary as a sample of the quality and professionalism of the overall plan. The executive summary should be no more than one to three pages long and should answer the following questions:

· Who are you? (describe your organization)· What are you planning? (describe the service or product)

· Why are you planning it? (discuss the demand and market for the service or product)

· How will you operate your business?

· When will you be in operation? (overview of timeline)

· What is your expected net profit? (discuss your projected sales and costs)

Although the executive summary is the first part of your business plan, you should write it after you have written the other sections of the plan in order to include the most important points of each section.

Company and Product Description

In describing your company be sure to include what type of business you are planning (homeownership development, wholesale, retail, manufacturing

or service) and the legal structure (corporation or partnership). You should discuss why you are creating this new venture, referencing the goals you set at the beginning of the business planning process. Also include a description of your non-profit organization, the role it has played in developing this new venture and the on-going role, if any, it will play in operations. Give the reader a brief overview of the industry, describing historic and current growth trends.

Whenever possible, provide documentation or references supporting your trend analysis such as articles from business-oriented newspapers and magazines, research journals or other publications. Include these references in the attachments of your business plan.

Product or Service

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

Price

Provide a realistic estimate of the price for your product or service, and discuss the rationale behind that price. An unrealistic price estimate may undermine the credibility of your plan and

raise concerns that your product or service may not be of sufficient quality or that you will not be able to maintain profitability in the long run. Describe where this price positions you in the marketplace: at the high end, low end or in the middle of the existing range of prices for a similar product or service.

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

Place

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

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

Customers

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

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

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

· Geography – Measures based on location.

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

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

Competition

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

Sales Projections

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

Market Description

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

Production Description

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

Staffing

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

Equipment and Materials

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

Facility

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

Market Description

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

Operations

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

Ownership

What is its relationship to your existing organization? Who is on the board of directors / board of advisors of the new business and what are their backgrounds and areas of expertise? Potential investors or lenders will be interested in the ownership stake of the board of directors and also in what portion of the company’s equity is available. Success is often due to one’s contacts, so fully

describe your business relationships with attorneys, accountants and advertising or public relations agencies, and any industry-specific services such as suppliers and distributors.

Management and Ownership

In this section you will describe the financial feasibility of your planned venture and provide several financial reports and statements to document why your business will be a viable enterprise and a sound investment. At a minimum, you should provide a brief descriptive narrative for each of the following financial statements and include a copy in the attachments to your plan:

· Start-up budget

· Cash flow projection

· Income statement

· Balance sheet

In preparing these statements, you may want to seek the advice of a certified public accountant (CPA).

Start-up Budget

Describe the initial expenses you will incur to get your business up and running. Some items you might include in your start-up budget research and product design and development expenses, legal incorporation and licensing expenses, facility purchase or rental, equipment and vehicle purchase or rental, and initial material or supply purchase. You can use Worksheet B as a sample format for preparing your start-up budget.

Cash Flow Projection

This statement presents a month-to-month schedule of the estimated cash inflows and outflows of your business for the first year. This schedule should indicate how much money your business will have or need and when you will need it. You should describe your sources of income and capital, detailing your projected sales revenue and indicating your own or investor equity contribution, lenders, investors and other sources of capital. Itemize your projected expenses, distinguishing between the cost of goods sold (materials, supplies, production labor), overhead expenses (rent, utilities, insurance, maintenance, interest, insurance, administrative costs and salaries, legal and accounting services, marketing, taxes, fees and other ongoing operating expenses) and capital expenditures (land and buildings, equipment, furniture, vehicles, and building repair or renovation expenses). In preparing this statement, account for a gradual increase in sales from initial product introduction and any expected seasonal fluctuations in revenue projections.

Income Statement

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

Balance Sheet

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

Financial Information and Start up Timeline

Capital Requirements

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

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

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

· Fixed Asset Financing – Longer-term financing for property, building improvements, equipment or vehicles. The asset being purchased is usually pledged as security for the loan.

· Working Capital – Short-term financing to cover operating expenses and to bridge gaps in cash flow.

Initial Start-up Timeline

Provide a timeline of tasks and events necessary to get your business operational. Be sure to describe the current stage you are in and what steps you have taken to date. Include deadlines for task completion. Set realistic deadlines according to your capacity to complete these tasks. The following is a list of some of the steps you may wish to include:

· Filing legal incorporation documents

· Identifying and securing suitable space

· Designing and developing the product

· Obtaining required licenses or permits

· Securing necessary financing

· Leasing or purchasing equipment

· Hiring key staff

· Hiring and training of production or support staff

· Purchasing materials and production supplies

· Beginning marketing activities

· Opening

Although it is impossible to know exactly what will go wrong in starting and running your business, thinking about different challenges will strengthen your plan. Potential problems could include:

· Insufficient public subsidy available to new home owners or residents

· The competition drops its prices

· Not enough customers

· Production costs exceed estimates

· Difficulty in finding qualified employees

· Environmental or governmental changes such as tax increases, additional regulations or population changes

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

Risks and their Mitigation

Although it is impossible to know exactly what will go wrong in starting and running your business, thinking about different challenges will strengthen your plan.

After you have completed all of the elements of your business plan, you should focus its presentation. A well-organized plan will assist you in communicating the most important elements of your business plan to the reader, and a persuasive plan will help you to convince the reader to invest in your business.

Executive Summary

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

Q.3. a. What is the purpose of business continuity plan?

Purpose of Business Continuity Plan

Recent world events have challenged us to prepare to manage previously unthinkable situations that may threaten an organization’s future. This new challenge goes beyond the mere emergency response plan or disaster management activities that we previously employed. Organizations now must engage in a comprehensive process best described generically as Business Continuity. It is no longer enough to draft a response plan that anticipates naturally, accidentally, or intentionally caused disaster or emergency scenarios.

Today’s threats require the creation of an on-going, interactive process that serves to assure the continuation of an organization’s core activities before, during, and most importantly, after a major crisis event.

In the simplest of terms, it is good business for a company to secure its assets. CEOs and shareholders must be prepared to budget for and secure the necessary resources to make this happen. It is necessary that an appropriate administrative structure be put in place to effectively deal with crisis management. This will ensure that all concerned understand who makes decisions, how the decisions are implemented, and what the roles and responsibilities of participants are. Personnel used for crisis management should be assigned to perform these roles as part of their normal duties and not be expected to perform them on a voluntary basis. Regardless of the organization – for profit, not for profit, faith-based, non-governmental – its leadership has a duty to stakeholders to plan for its survival. The vast majority of the national critical infrastructure is owned and operated by private sector organizations, and it is largely for these organizations that this guideline is intended. ASIS, the world’s largest organization of

security professionals, recognizes these facts and believes the BC Guideline offers the reader a user-friendly method to enhance infrastructure protection.

3.b. Give a short note on mitigation strategies.

Mitigation Strategies

Devise Mitigation Strategies

Cost effective mitigation strategies should be employed to prevent or lessen the impact of potential crises. For example, securing equipment to walls or desks with strapping can mitigate damage from an earthquake; sprinkler systems can lessen the risk of a fire; a strong records management and technology disaster recovery program can mitigate the loss of key documents and data.

Resources Needed for Mitigation

The various resources that would contribute to the mitigation process should be identified. These resources, including essential personnel and their roles and responsibilities, facilities, technology, and equipment should be documented in the plan and become part of ‘‘business as usual.’’

Monitoring Systems and Resources

Systems and resources should be monitored continually as part of mitigation strategies. Such monitoring can be likened to simple inventory management.

The resources that will support the organization to mitigate the crisis should also be monitored continually to ensure that they will be available and able to perform as planned during the crisis. Examples of such systems and resources include, but are not limited to:

· Emergency equipment· Fire alarms and suppression systems

· Local resources and vendors

· Alternate worksites

· Maps and floor plans updated/changed due to construction and internal moves

· System backups and offsite storage.

4. Distinguish between financial investor and strategic investor.

Financial Investor vs. Strategic Investor

In the not so distant past, there was little difference between financial and strategic investors. Investors of all colors sought to safeguard their investment by taking over as many management functions as they could. Additionally, investments were small and shareholders few. A firm resembled a household and the number of people involved – in ownership and in management – was correspondingly limited. People invested in industries they were acquainted with first hand.

As markets grew, the scales of industrial production (and of service provision) expanded. A single investor (or a small group of investors) could no longer accommodate the needs even of a single firm. As knowledge increased and specialization ensued – it was no longer feasible or possible to micro-manage a firm one invested in. Actually, separate businesses of money making and business management emerged. An investor was expected to excel in obtaining high yields on his capital – not in industrial management or in marketing. A manager was expected to manage, not to be capable of personally tackling the various and varying tasks of the business that he managed.

Thus, two classes of investors emerged. One type supplied firms with capital. The other type supplied them with know-how, technology, management skills, marketing techniques, intellectual property, clientele and a vision, a sense of direction.

In many cases, the strategic investor also provided the necessary funding. But, more and more, a separation was maintained. Venture capital and risk capital funds, for instance, are purely financial investors. So are, to a growing extent, investment banks and other financial institutions.

The financial investor represents the past. Its money is the result of past – right and wrong – decisions. Its orientation is short term: an "exit strategy" is sought as soon as feasible. For “exit strategy” read quick profits. The financial investor is always on the lookout, searching for willing buyers for his stake. The stock exchange is a popular exit strategy. The financial investor has little interest in the company’s management. Optimally, his money buys for him not only a good product and a good market, but also a good management. But his interpretation of the rolls and functions of "good management" are very different to that offered by the strategic investor. The financial investor is satisfied with a management team which maximizes value. The price of his shares is the most important indication of success. This is "bottom line" short termism which also characterizes operators in the capital markets. Invested in so many ventures and companies, the financial investor has no interest, nor the resources to get seriously involved in any one of them. Micro-management is left to others – but, in many cases, so is macro-management. The financial investor participates in quarterly or annual general shareholders meetings. This is the extent of its involvement.

The strategic investor, on the other hand, represents the real long term accumulator of value. Paradoxically, it is the strategic investor that has the greater influence on the value of the company’s shares. The quality of management, the rate of the introduction of new products, the success or failure of marketing strategies, the level of customer satisfaction, the education of the workforce – all depend on the strategic investor. That there is a strong relationship between the quality and decisions of the strategic investor and the share price is small wonder. The strategic

investor represents a discounted future in the same manner that shares do. Indeed, gradually, the balance between financial investors and strategic investors is shifting in favor of the latter. People understand that money is abundant and what is in short supply is good management. Given the ability to create a brand, to generate profits, to issue new products and to acquire new clients – money is abundant.

These are the functions normally reserved to financial investors:

Financial Management

The financial investor is expected to take over the financial management of the firm and to directly appoint the senior management and, especially, the management echelons, which directly deal with the finances of the firm.

1. To regulate, supervise and implement a timely, full and accurate set of accounting books of the firm reflecting all its activities in a manner commensurate with the relevant legislation and regulation in the territories of operations of the firm and with internal guidelines set from time to time by the Board of Directors of the firm. This is usually achieved both during a Due Diligence process and later, as financial management is implemented.

2. To implement continuous financial audit and control systems to monitor the performance of the firm, its flow of funds, the adherence to the budget, the expenditures, the income, the cost of sales and other budgetary items.

3. To timely, regularly and duly prepare and present to the Board of Directors financial statements and reports as required by all pertinent laws and regulations in the territories of the operations of the firm and as deemed necessary and demanded from time to time by the Board of Directors of the Firm.

4. To comply with all reporting, accounting and audit requirements imposed by the capital markets or regulatory bodies of capital markets in which the securities of the firm are traded or are about to be traded or otherwise listed.

5. To prepare and present for the approval of the Board of Directors an annual budget, other budgets, financial plans, business plans, feasibility studies, investment memoranda and all other financial and business documents as may be required from time to time by the Board of Directors of the Firm.

6. To alert the Board of Directors and to warn it regarding any irregularity, lack of compliance, lack of adherence, lacunas and problems whether actual or potential concerning the financial systems, the financial operations, the financing plans, the accounting, the audits, the budgets and any other matter of a financial nature or which could or does have a financial implication.

7. To collaborate and coordinate the activities of outside suppliers of financial services hired or contracted by the firm, including accountants, auditors, financial consultants, underwriters and brokers, the banking system and other financial venues.

8. To maintain a working relationship and to develop additional relationships with banks, financial institutions and capital markets with the aim of securing the funds necessary for the operations of the firm, the attainment of its development plans and its investments.

9. To fully computerize all the above activities in a combined hardware-software and communications system which will integrate into the systems of other members of the group of companies.

10. Otherwise, to initiate and engage in all manner of activities, whether financial or of other nature, conducive to the financial health, the growth prospects and the fulfillment of investment plans of the firm to the best of his ability and with the appropriate dedication of the time and efforts required.

Collection and Credit Assessment

1. To construct and implement credit risk assessment tools, questionnaires, quantitative methods, data gathering methods and venues in order to properly evaluate and predict the credit risk rating of a client, distributor, or supplier.

2. To constantly monitor and analyze the payment morale, regularity, non-payment and non-performance events, etc. – in order to determine the changes in the credit risk rating of said factors.

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

4. To improve the collection methods in order to reduce the amounts of arrears and overdue payments, or the average period of such arrears and overdue payments.

5. To collaborate with legal institutions, law enforcement agencies and private collection firms in assuring the timely flow and payment of all due payments, arrears and overdue payments and other collectibles.

6. To coordinate an educational campaign to ensure the voluntary collaboration of the clients, distributors and other debtors in the timely and orderly payment of their dues.

The strategic investor is, usually, put in charge of the following:

Project Planning and Project Management

The strategic investor is uniquely positioned to plan the technical side of the project and to implement it. He is, therefore, put in charge of:

· The selection of infrastructure, equipment, raw materials, industrial processes, etc. · Negotiations and agreements with providers and suppliers

· Minimizing the costs of infrastructure by deploying proprietary components and planning

· The provision of corporate guarantees and letters of comfort to suppliers

· The planning and erecting of the various sites, structures, buildings, premises, factories, etc.

· The planning and implementation of line connections, computer network connections, protocols, solving issues of compatibility (hardware and software, etc.)

· Project planning, implementation and supervision

Marketing and Sales

1. The presentation to the Board an annual plan of sales and marketing including: market penetration targets, profiles of potential social and economic categories of clients, sales promotion methods, advertising campaigns, image, public relations and other media campaigns. The strategic investor also implements these plans or supervises their implementation.

2. The strategic investor is usually possessed of a brand name recognized in many countries. It is the market leaders in certain territories. It has been providing goods and services to users for a long period of time, reliably. This is an important asset, which, if properly used, can attract users. The enhancement of the brand name, its recognition and market awareness, market penetration, co-branding, collaboration with other suppliers – are all the responsibilities of the strategic investor.

3. The dissemination of the product as a preferred choice among vendors, distributors, individual users and businesses in the territory.

4. Special events, sponsorships, collaboration with businesses.

5. The planning and implementation of incentive systems (e.g., points, vouchers).

6. The strategic investor usually organizes a distribution and dealership network, a franchising network, or a sales network (retail chains) including: training, pricing, pecuniary and quality supervision, network control, inventory and accounting controls, advertising, local marketing and sales promotion and other network management functions.

7. The strategic investor is also in charge of "vision thinking": new methods of operation, new marketing ploys, new market niches, predicting the future trends and market needs, market analyses and research, etc.

The strategic investor typically brings to the firm valuable experience in marketing and sales. It has numerous off the shelf marketing plans and drawer sales promotion campaigns. It developed software and personnel capable of analyzing any market into effective niches and of creating the right media (image and PR), advertising and sales promotion drives best-suited for it. It has built large databases with multi-year profiles of the purchasing patterns and demographic data related to thousands of clients in many countries. It owns libraries of material, images, sounds, paper

clippings, articles, PR and image materials, and proprietary trademarks and brand names. Above all, it accumulated years of marketing and sales promotion ideas which crystallized into a new conception of the business.

Technology

1. The planning and implementation of new technological systems up to their fully operational phase. The strategic partner’s engineers are available to plan, implement and supervise all the stages of the technological side of the business.

2. The planning and implementation of a fully operative computer system (hardware, software, communication, intranet) to deal with all the aspects of the structure and the operation of the firm. The strategic investor puts at the disposal of the firm proprietary software developed by it and specifically tailored to the needs of companies operating in the firm’s market.

3. The encouragement of the development of in-house, proprietary, technological solutions to the needs of the firm, its clients and suppliers.

4. The planning and the execution of an integration program with new technologies in the field, in collaboration with other suppliers or market technological leaders.

Education and Training

The strategic investor is responsible to train all the personnel in the firm: operators, customer services, distributors, vendors, sales personnel. The training is conducted at its sole expense and includes tours of its facilities abroad.

The entrepreneurs – who sought to introduce the two types of investors, in the first place – are usually left with the following functions:

Administration and Control

1. To structure the firm in an optimal manner, most conducive to the conduct of its business and to present the new structure for the Board’s approval within 30 days from the date of the GM’s appointment.

2. To run the day to day business of the firm.

3. To oversee the personnel of the firm and to resolve all the personnel issues.

4. To secure the unobstructed flow of relevant information and the protection of confidential organization.

5. To represent the firm in its contacts, representations and negotiations with other firms, authorities, or persons.

This is why entrepreneurs find it very hard to cohabitate with investors of any kind. Entrepreneurs are excellent at identifying the needs of the market and at introducing technological or service solutions to satisfy such needs. But the very personality traits which qualify them to become entrepreneurs – also hinder the future development of their firms. Only the introduction of outside investors can resolve the dilemma. Outside investors are not emotionally involved. They may be less visionary – but also more experienced.

They are more interested in business results than in dreams. And – being well acquainted with entrepreneurs – they insist on having unmitigated control of the business, for fear of losing all their money. These things antagonize the entrepreneurs. They feel that they are losing their creation to cold-hearted, mean spirited, corporate predators. They rebel and prefer to remain small or even to close shop than to give up their cherished freedoms. This is where nine out of ten entrepreneurs fail – in knowing when to let go.

5 Give a note on enforcement of intellectual property rights.

Enforcement of Intellectual Property Rights

Intellectual property rights are of limited value unless they are effectively enforced. Without enforcement, there are no real deterrents for infringers or

remedies for those whose rights are infringed. The legal authorities do have some role in enforcing intellectual property rights, but this is often limited, and for infringement of rights such as patents, plant breeders rights and trade secrets, you would normally have to take action yourself to take the infringing party to court. The same practical commercial considerations that apply to obtaining and managing IP rights also apply to enforcement – in some cases, the possibility of taking court action could act to encourage the infringing party to take out a license to use your technology. This would save you the expense and the uncertainty of a protracted court case, and could provide you with a good financial return.

The procedures for enforcement of IP rights differ widely between countries, because they have much more to do with the general legal system than other aspects of IP rights, such as examination and grant of rights by a patent office. The TRIPS Agreement has established some general principles for IP enforcement which are reflected in the laws of many countries, so this discussion will focus on the TRIPS provisions to give an overall picture of how enforcement operates.

One basic distinction in enforcement lies between more those IP infringements which tend to be infringed widely, potentially by many different people and on a large commercial scale, and general IP rights. In the first category are pirated copyright works and counterfeit trade mark goods.

TRIPS, for instance, specifies that the government or legal authorities need to have a more active role in dealing with these infringements than, say, for patents and plant breeders’ rights. So the state often has an active role in tracking down and prosecuting those who infringe copyright and

trademark rights on a commercial scale, whereas for patents it is normally up to the patent holder or licensee to take an infringer to court.

Enforcement Measures Required by TRIPS

The TRIPS Agreement differs from earlier international intellectual property treaties in several ways; this includes having specific provisions for effective enforcement of IP rights in national laws. The main enforcement provisions in TRIPS include:

· The general obligations under the TRIPS Agreement, which relate to the provision of fair enforcement procedures.

· Civil remedies, including injunctions, damages and provisional measures.

· Criminal procedures, which are compulsory for intentional trade mark and copyright piracy on a commercial scale and optional for other kinds of intellectual property, such as patents.

· Special border enforcement measures to stop counterfeit trade mark and pirated copyright material coming into a country, border enforcement measures are optional for other kinds of intellectual property, such as patents.

General Enforcement Obligations under Trips

The TRIPS Agreement provides for a range of general obligations in relation to the enforcement of intellectual property rights. The purpose of these obligations is to ensure that the enforcement measures are effective, and that certain basic principles of due process are met, so that enforcement is fair and balanced, and does not impede legitimate trade.

Remedies must be timely and deter further infringements

TRIPS requires that enforcement procedures permit effective action against any infringement of intellectual property rights, and that the remedies available are expeditious in order to prevent infringements. A legal system that enables timely initiation and execution of legal processes is particularly important for effective enforcement of intellectual property rights because the information that intellectual property protects is often easy to copy and spread quickly. The remedies available must also be severe enough to deter further infringements. These procedures must be applied in a way that avoids the creation of barriers to legitimate trade and to provide for safeguards against their abuse.

Enforcement procedures must be fair.

TRIPS provides that enforcement procedures must be fair and equitable, and may not be unnecessarily complicated or costly, or entail unreasonable time-limits or delays. Decisions in enforcement cases must be based on the merits of a case. Decisions should preferably be in writing and reasoned, and be made available to the parties without undue delay. Decisions on the

merits of a case must be based only on evidence in respect of which the parties were offered the opportunity to be heard.

Parties to a proceeding must have an avenue of appeal, unless the case was criminal in nature and the accused was acquitted. TRIPS does not require a special judicial system for the enforcement of intellectual property rights distinct from the normal court system. Finally, TRIPS creates no obligations with respect to the distribution of resources as between enforcement of intellectual property rights and the enforcement of law in general.

Example – enforcing a patented invention for making house paint.

For example, imagine that you own a patent for house paint that dries very quickly. It took you 8 years to develop the process and cost you thousands of dollars to patent your invention in Australia, the US and Indonesia. Just as you started to distribute the paint yourself in Australia you found out that your paint is being sold cheaply to the painting trade in Sydney by a company trading as Cheap Paints. You also suspect that Cheap Paints are exporting tins of infringing paint overseas. Obviously you need to take legal action against Cheap Paints to enforce your rights, otherwise, there would be no market left for you to get any financial return on your invention. The kinds of remedies you could take against Cheap Paints are set out in this unit.

6. Give a note on complex systems behavior and creativity.

A Complex System is a system that has more than one possible future. In other words, it is ‘free’ enough to take more than a single pre-determined path into the future, and therefore cannot be purely ‘mechanical’. Clearly, we are all complex systems by this definition, and so are the organizations, communities, economic sectors, regional economies, ecologies and global systems to which we belong and interact with. Indeed, mechanical systems really only exist as abstractions in our minds, and the systems we inhabit and try to manage are not mechanical. Yet all our science and our way of thinking about problems is based on the assumption that a company or organization comprises a set of functional components with connecting flows of goods and information. In this view, better management is often seen as simply running the ‘machine’ faster or more efficiently.

But that was when life was simple and the ‘product’ or ‘service’ to be produced and delivered only needed to be made at a competitive cost with adequate quality. Today, we must constantly create new products and services, with additional and novel attributes, and this creative, adaptive capacity will be more important to our survival than our level of efficiency, particularly if, as Complex Systems thinking suggests, efficiency reduces creativity.

Traditionally, decision making and strategy have been based on a rational set of assumptions such as:

· We know our options.· We know and can evaluate the (single) outcome of implementing each of them.

· We can ignore effects that we do not know.

· The environment in the future ‘after’ the decision is known.

· There was a situation ‘before’ our decision, and that there will be a situation ‘after’ our decision, and that we can therefore examine the differences between them.

Such reflections are typical of a cost/benefit analysis, for example, by which the outcomes of different possible decisions are compared. Yet, in a world of rapid change and uncertainty, the assumptions relied upon by this kind of ‘reasonable’ behavior are simply not true. In reality, we do not necessarily know all our options, the path the system may take, the possible dimensions that might be affected by resulting changes, or how circumstances may have changed in the mean time. In short, our view of our organization as a machine, sitting in a fixed or at any rate predictable environment, is totally inadequate. We must instead turn to new ideas – we must harness the ideas arising from Complex Systems.

Complex Systems Behavior

In studying Complex Systems, initially in physics and chemistry, it became clear that the key properties of ‘open’ systems, where flows of matter, energy and information can occur across their boundaries, were that they could undergo spontaneous transformations of structure and functionality. Instead of a ‘fixed’ mechanical system, this showed how systems came into being, and evolved over time, changing structurally, gaining, and sometimes shedding, complexity and qualities.

The study of Complex Systems therefore revealed a co-evolutionary process of a system and its environment in which successive change and adaptation each involved two separate steps:

· Discovering what to do (exploration and evaluation).· Doing what has been decided (implementation).

And these two steps are radically different in nature.

In Complex Systems, the first step is ‘taken’ by the ‘non-average’ underlying elements within the system, while the second – the emergence of a transformed, functioning system – concerns new, effective ‘average’ behavior of the elements. The successful co-evolution of a system with its environment therefore occurs through the dynamic interplay of the average and non-average behaviors within it. Successive instabilities occur each time that existing structure and organization fail to withstand the impact of some new circumstance or behavior. When this occurs, the system re-structures and becomes a different system, subjected in its turn to the disturbances from its own non-average individuals and situations. It is this dialogue between successive ‘systems’ and their own inner ‘richness’ that provides the capacity for continuous adaptation and change.

Master of Business Administration-MBA Semester 4

MB0037 – International Business Management - 3 Credits

Q.1 What is globalization? What are its benefits? How does globalization help ininternational business? Give some instances?

Globalization (or globalisation) describes the process by which regional economies, societies,and cultures have become integrated through a global network of political ideas throughcommunication, transportation, and trade. The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence.[1] However, globalization is usually recognized as being driven by a combination of economic, technological, socio cultural, political, and biological factors.[2] The term can also refer to the transnational circulation of ideas, languages, or popular culture through acculturation. An aspect of the world which has gone through the process can be said to be globalized.Against this view, an alternative approach stresses how globalization has actually decreased inter-cultural contacts while increasing the possibility of international and intra-national conflict.[3]Globalization has various aspects which affect the world in several different ways

Industrial - emergence of worldwide production markets and broader access to a range offoreign products for consumers and companies. Particularly movement of material andgoods between and within national boundaries. International trade in manufacturedgoods increased more than 100 times (from $95 billion to $12 trillion) in the 50 yearssince 1955.China's trade with Africa rose sevenfold during 2000-07 alone.Financial - emergence of worldwide financial markets and better access to externalfinancing for borrowers. By the early part of the 21st century more than $1.5 trillion innational currencies were traded daily to support the expanded levels of trade andinvestmentEconomic - realization of a global common market, based on the freedom of exchange of goods and capitalJob Market- competition in a global job market. In the past, the economic fate of workers was tied to the fate of national economies. With the advent of the information age and improvements in communication, this is no longer the case. Because workers compete in a global market, wages are less dependent on the success or failure of individual economies. This has had a major effect on wages and income distributionPolitical - some use "globalization" to mean the creation of a world government whichregulates the relationships among governments and guarantees the rights arising fromsocial and economic globalization. Politically, the United States has enjoyed a position of power among the world powers, in part because of its strong and wealthy economy. With the influence of globalization and with the help of the United States’ own economy, the People's Republic of China has experienced some tremendous growth within the past decade. If China continues to grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power.Most of us assume that international and global business are the same and that anycompany that deals with another country for its business is an international or globalcompany. In fact, there is a considerable difference between the two terms.International companies – Companies that deal with foreign companies for their business are considered as international companies. They can be exporters or importers who may not have any investments in any other country, apart from their home country.Global companies – Companies, which invest in other countries for business and also operate from other countries, are considered as global companies. They have multiple manufacturing plants across the globe, catering to multiple markets.The transformation of a company from domestic to international is by entering just one market or a few selected foreign markets as an exporter or importer. Competing on a truly global scale comes later, after the company has established operations in several countries across continents and is racing against rivals for global market leadership. Thus, there is a meaningful distinction between a company that operates in few selected foreign countries and a company that operates and markets its products across several countries and continents with manufacturing capabilitiesin several of these countries.Companies can also be differentiated by the kind of competitive strategy they adopt while dealing internationally. Multinational strategy and global competitive strategy are the two types of competitive strategy.Multinational strategy – Companies adopt this strategy when each country’s market needs to be treated as self contained. It can be for the following reasons:

° Customers from different countries have different preferences and expectations about a product or a service.° Competition in each national market is essentially independent of competition in other national markets, and the set of competitors also differ from country to country.° A company’s reputation, customer base, and competitive position in one nation have little or no bearing on its ability to successfully compete in another nation.Some of the industry examples for multinational competition include beer, life insurance, and food products.· Global competitive strategy – Companies adopt this strategy when prices and competitive conditions across the different country markets are strongly linked together and have common synergies. In a globally competitive industry, a company’s business gets affected by the changing environments in different countries. The same set of competitors may compete against each other in several countries. In a global scenario, a company’s overall competitive advantage is gauged by the cumulative efforts of its domestic operations and the international operations worldwide.A good example to illustrate is Sony Ericsson, which has its headquarters in Sweden, Research and Development setup in USA and India, manufacturing and assembly plants in low wage countries like China, and sales and marketing worldwide. This is made possible because of the ease in transferring technology and expertise from country to country. Industries that have a global competition are automobiles, consumer electronics (like televisions, mobile phone), watches, and commercial aircraft and so on.Table 1.2 portrays the differences in strategies adopted by companies in international and global operations.

Benefits of globalisationWe have moved from a world where the big eat the small to a world where the fast eat the slow”, as observed by Klaus Schwab of the Davis World Economic Forum. All economic analysts must agree that the living standards of people have considerably improved through the market growth.With the development in technology and their introduction in the global markets, there is not only a steady increase in the demand for commodities but has also led to greater utilization. Investment sector is witnessing high infusions by more and more people connected to the world's trade happenings with the help of computers. As per statistics, everyday more than $1.5 trillion is now swapped in the world's currency markets and around one-fifth of products and services are generated per year are bought and sold.Buyers of products and services in all nations comprise one huge group who gain from world trade for reasons encompassing opportunity charge, comparative benefit, economical to purchase than to produce, trade's guidelines, stable business and alterations in consumption and production. Compared to others, consumers are likely to profit less from globalization. Another factor which is often considered as a positive outcome of globalization is the lower inflation. This is because the market rivalry stops the businesses from increasing prices unless guaranteed by steady productivity. Technological advancement and productivity expansion are the other benefits of globalization because since 1970s growing international rivalry hastriggered the industries to improvise increasingly.Globalization can be described as a process by which the people of the world are unified into a single society and functioning together. This process is a combination of economic,technological, sociocultural and political forces. Globalization, as a term, is very often

used to refer to economic globalization, that is integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and spread of technology. The word globalization is also used, in a doctrinal sense to describe the neoliberal form of economic globalization.Globalization is also defined as internationalism, however suchusage is typically incorrect as "global" implies "one world" as a single unit, while "international" (between nations) recognizes that different peoples, cultures, languages, nations, borders,economies, and ecosystems exist(http://en.wikipedia.org/).Globalization has two components: the globalization of market and globalization ofproduction....Some other benefits of globalization as per statisticsCommerce as a percentage of gross world product has increased in 1986 from 15% tonearly 27% in recent years.The stock of foreign direct investment resources has increased rapidly as a percentage of gross world product in the past twenty years.For the purpose of commerce and pleasure, more and more people are crossing national borders. Globally, on average nations in 1950 witnessed just one overseas visitor for every 100 citizens. By the mid-1980s it increased to six and ever since the number has doubled to 12.Worldwide telephone traffic has tripled since 1991. The number of mobile subscribershas elevated from almost zero to 1.8 billion indicating around 30% of the worldpopulation. Internet users will quickly touch 1 billion.· Promotes foreign trade and liberalisation of economies.· Increases the living standards of people in several developing countries through capital investments in developing countries by developed countries.· Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low, with increased productivity.· Promotes better education and jobs.· Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices, and culture.· Provides better quality of products, customer services, and standardised delivery models across countries.· Gives better access to finance for corporate and sovereign borrowers.· Increases business travel, which in turn leads to a flourishing travel and hospitality industry across the world.· Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production.· Provides several platforms for international dispute resolutions in business, which facilitates international trade.Some of the ill-effects of globalisation are as follows:· Leads to exploitation of labour in several cases.· Causes unemployment in the developed countries due to outsourcing.· Leads to the misuse of IPR, copyrights and so on due to the easy availability of technology, digital communication, travel and so on.· Influences political decisions in foreign countries. The MNCs increasingly use their economical powers to influence political decisions.

· Causes ecological damage as the companies set up polluting production plants in countries with limited or no regulations on pollution.· Harms the local businesses of a country due to dumping of cheaper foreign goods.· Leads to adverse health issues due to rapid expansion of fast food chains and increased consumption of junk food.· Causes destruction of ethnicity and culture of several regions worldwide in favor of more accepted western culture.In spite of its disadvantages, globalisation has improved our lives in various fields likecommunication, transportation, healthcare, and education.

Q.2. What is culture and in the context of international business environment how does itimpact international business decisions?

Culture is defined as the art and other signs or demonstrations of human customs,civilisation, and the way of life of a specific society or group. Culture determines every aspect that is from birth to death and everything in between it. It is the duty of people to respect other cultures, other than their culture. Research shows that national ‘‘cultures’’ generally characterize the dominant groups’ values and practices in society, and not of the marginalised groups, even though the marginalised groups represent a majority or a minority in the society.Culture is very important to understand international business. Culture is the part ofenvironment, which human has created, it is the total sum of knowledge, arts, beliefs, laws, morals, customs, and other abilities and habits gained by people as part of society. Culture is an important factor for practising international business. Culture affects all the business functions ranging from accounting to finance and from production to service. This shows a close relation between culture and international business.The following are the four factors that question assumptions regarding the impact of global business in culture:· National cultures are not homogeneous and the impact of globalisation on heterogeneous cultures is not easily predicted.· Culture is not similar to cultural practice.· Globalisation does not characterise a rupture with the past but is a continuation of prior trends.· Globalisation is only one of many processes involved in cultural change.Cultural differences affect the success or failure of multinational firms in many ways. The company must modify the product to meet the demand of the customers in a specific location and use different marketing strategy to advertise their product to the customers. Adaptations must be made to the product where there is demand or the message must be advertised by the company.The following are the factors which a company must consider while dealing with international business:· The consumers across the world do not use same products. This is due to varied preferences and tastes. Before manufacturing any product, the organization has to be aware of the customer choice or preferences.· The organization must manage and motivate people with broad different cultural values and attitudes. Hence the management style, practices, and systems must be modified.· The organization must identify candidates and train them to work in other countries as the cultural and corporate environment differs. The training may include language training,corporate

training, training them on the technology and so on, which help the candidate to work in a foreign environment.· The organization must consider the concept of international business and construct guidelines that help them to take business decisions, and perform activities as they are different in different nations. The following are the two main tasks that a company must perform:° Product differentiation and marketing – As there are differences in consumer tastes andpreferences across nations; product differentiation has become business strategy all over the world. The kinds of products and services that consumers can afford are determined by the level of per capita income. For example, in underdeveloped countries, the demand for luxury products is limited.° Manage employees – It is said that employees in Japan were normally not satisfied with their work as compared with employees of North America and European countries; however the production levels stayed high. To motivate employees in North America, they have come up with models. These models show that there is a relation between job satisfaction and production. This study showed the fact that it is tough for Japanese workers to change jobs. While this trend is changing, the fact that job turnover among Japanese workers is still lower than the American workers is true. Also, even if a worker can go to another Japanese entity, they know that the management style and practices will be quite alike to those found in their present firm. Thus,even if Japanese workers were not satisfied with the specific aspects of their work, they know that the conditions may not change considerably at another place. As such, discontent might not impact their level of production.The following are the three mega trends in world cultures:· The reverse culture influence on modern Western cultures from growing economies,particularly those with an ancient cultural heritage.· The trend is Asia centric and not European or American centric, because of the growing economic and political power of China, India, South Korea, and Japan and also the ASEAN.· The increased diversity within cultures and geographies.The following are the necessary implications in international business:· Avoid self reference criterion such as, one’s own upbringing, values and viewpoints.· Follow a philosophical viewpoint that considers that many perspectives of a single observation or phenomenon can be true.· Discover and identify global segments and global niche markets, as national markets are diverse with growing mobility of products, people, capital, and culture.· Grow the total share market by innovating affordable products and services, and making them accessible so that, they are affordable for even subsistence level consumers rather than fightingfor market share.· Organize global enterprises around global centers of excellence.

Hofstadter’s cultural dimensionsAccording to Dr. Geert Hofstede, ‘Culture is more often a source of conflict than of synergy.Cultural differences are a trouble and always a disaster.’Professor Hofstede carried out a detailed study of how values in the workplace are influenced by culture. He worked as a psychologist in IBM from 1967 to 1973. At that time he gathered and analyzed data from many people from several countries. Professor Hofstede established a model using the results of the study which identifies four dimensions to differentiate cultures. Later, a fifth dimension called ‘long-term outlook’ was added.

The following are the five cultural dimensions:· Power Distance Index (PDI) – This focuses on the level of equality or inequality, between individuals in the nation’s society. A country with high power distance ranking depicts that inequality of power and wealth has been allowed to grow within the society. These societies follow caste system that does not allow large upward mobility of its people. A country with low power distance ranking depicts the society and de-emphasises the differences between its people’s power and wealth. In these societies equality and opportunity is stressed for everyone.· Individualism – This dimension focuses on the extent to which the society reinforcesindividual or collective achievement and interpersonal relationships. A high individualismranking depicts that individuality and individual rights are dominant within the society.Individuals in these societies form a larger number of looser relationships. A low individualism ranking characterises societies of a more collective nature with close links between individuals. These cultures support extended families and collectives where everyone takes responsibility for fellow members of their group.· Masculinity – This focuses on the extent to which the society supports or discourages the traditional masculine work role model of male achievement, power, and control. A country with high masculinity ranking shows the country experiences high level of gender differentiation. In these cultures, men dominate a major part of the society and power structure, with women being controlled and dominated by men. A country with low masculinity ranking shows the country, having a low level of differentiation and discrimination between genders. In low masculinity cultures, women are treated equal to men in all aspects of the society.· Uncertainty Avoidance Index (UAI) – This focuses on the degree of tolerance for uncertainty and ambiguity within the society that is unstructured situations. A country with high uncertainty avoidance ranking shows that the country has low tolerance for uncertainty and ambiguity. A rule-oriented society that incorporates rules, regulations, laws, and controls is created to minimize the amount of uncertainty. A country with low uncertainty avoidance ranking shows that the country has less concern about ambiguity and uncertainty and has high tolerance for a variety of opinions. A society which is less rule-oriented, readily agrees to changes, and takes greater risks reflects a low uncertainty avoidance ranking.· Long-Term Orientation (LTO) – Describes the range at which a society illustrates apragmatic future oriented perspective instead of a conventional historic or short term point of view. The Asian countries are scoring high on this dimension. These countries have a long term orientation, believe in many truths, accept change easily, and have thrift for investment. Cultures recording little on this dimension, trust in absolute truth is conventional and traditional. They have a small term orientation and a concern for stability. Many western cultures score considerably low on this dimension.In India, PDI is the highest Hofstede dimension for culture with a rank of 77, LTO dimension rank is 61, and masculinity dimension rank is 62.Every society has its own unique culture. Culture must not be imposed on individuals of different culture. For example, the Cadbury Kraft Acquisition, 2009 was a landmark international deal, in which a U.S. based company Kraft acquired the British chocolate giant, Cadbury which were in complete extremes in terms of culture. Let us discuss the major cultural elements that are related to business.Cultural elements that relate businessThe most important cultural components of a country which relate business transactions are:· Language.

· Religion.· Conflicting attitudes.Cross cultural management is defined as the development and application of knowledge about cultures in the practice of international management, when people involved have diverse cultural identities. International managers in senior positions do not have direct interaction that is face-to-face with other culture workforce, but several home based managers handle immigrant groups adjusted into a workforce that offers domestic markets. The factors to be considered in cross cultural management are:Cross cultural management skillsThe ability to demonstrate a series of behavior is called skill. It is functionally linked toachieving a performance goal. The most important aspect to qualify as a manager for positions of international responsibility is communication skills. The managers must adapt to other culture and have the ability to lead its members.The managers cannot expect to force members of other culture to fit into their cultural customs, which is the main assumption of cross cultural skills learning. Any organization that tries to enforce its behavioural customs on unwilling workers from another culture faces conflict. The manager has to possess the skills linked with the following:· Providing inspiration and appraisal systems.· Establishing and applying formal structures.· Identifying the importance of informal structures.· Formulating and applying plans for modification.· Identifying and solving disagreements.Handling cultural diversityCultural diversity in a work group offers opportunities and difficulties. Economy is benefited when the work groups are managed successfully. The organisation’s capability to draw, save, and inspire people from diverse cultures can give the organization spirited advantages in structures of cost, creativity, problem solving, and adjusting to change. Cultural diversity offers key chances for joint work and co-operative action. Group work is a joint venture where, the production of two or more individuals or groups working in cooperation is larger than the combined production of their individual work.Factors controlling group creativityOn complicated problem solving jobs diverse groups do better than identical groups. Diverse groups require time to solve issues of working together. In diverse groups, over time, the work experience helps to overcome gender, racial, and organisational and functional discriminations. But the impact cannot be evaluated and there is always risk in creating a diverse group. A successful group is profitable with respect to quick results and the creation of concern for the future. Negative stereotypes are emphasised if it fails. Factors related with the industry and company culture are also important. Diverse groups do well when the members:· Assist to make group decisions.· Value the exchange of different points of view.· Respect each other’s skills and share their own.· Value the chance for cross-cultural learning.· Tolerate uncertainty and try to triumph over the inefficiencies that occur when members of diverse cultures work together.A diverse group is known to be more creative, where the members are tolerant of differences. The top management level provides its moral and administrative support, and gives time for the

group to overcome the usual process difficulties. They also provide diversity training, and the group members are rewarded for their commitment.Ignore diversityIt may be difficult to manage diversity. It is better to ignore, which is an alternative. Themanagement must:· Ignore cultural diversity within the employees.· Down-play the importance of cultural diversity.This rejection to identify diversity happens when management:· Fails to have sufficient awareness and skills to identify diversity.· Identifies diversity but does not have the skill to manage the diversity.· Recognises the negative consequences of identifying diversity probably cause greater issues than ignoring it.· Thinks the likely benefits of identifying and managing diversity do not validate the expected expenses.· Identifies that the job provides no chances for drawing advantages from diversity.Strategies to ignore diversity may be possible when culture groups are given various jobs, and sharing required resources are independent in the workplace. Groups and group members are equally incorporated and work together. In such cases, confusion occurs when the diverse value systems are not identified that are held by different staff groups.

Q.3 Explain the meaning of the term ‘trade liberalization’ and advantages. Also, identify some commonly observed mistakes in international trade.

Policies that make an economy open to trade and investment with the rest of the world are needed for sustained economic growth. The evidence on this is clear. No country in recent decades has achieved economic success, in terms of substantial increases in living standards for its people, without being open to the rest of the world. In contrast, trade opening (along with opening to foreign direct investment) has been an important element in the economic success of East Asia, where the average import tariff has fallen from 30 percent to 10 percent over the past 20 years.

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

There is considerable evidence that more outward-oriented countries tend consistently to grow faster than ones that are inward-looking. Indeed, one finding is that the benefits of trade liberalization can exceed the costs by more than a factor of 10. Countries that have opened their economies in recent years, including India, Vietnam, and Uganda, have experienced faster growth and more poverty reduction. On average, those developing countries that lowered tariffs sharply in the 1980s grew more quickly in the 1990s than those that did not.

Freeing trade frequently benefits the poor especially. Developing countries can ill-afford the large implicit subsidies, often channeled to narrow privileged interests that trade protection provides. Moreover, the increased growth that results from free trade itself tends to increase the

incomes of the poor in roughly the same proportion as those of the population as a whole. New jobs are created for unskilled workers, raising them into the middle class. Overall, inequality among countries has been on the decline since 1990, reflecting more rapid economic growth in developing countries, in part the result of trade liberalization.

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

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

These considerations point to the need to liberalize trade further. Although protection has declined substantially over the past three decades, it remains significant in both industrial and developing countries, particularly in areas such as agriculture products or labour-intensive manufactures and services (e.g., construction), where developing countries have comparative advantage.

Industrial countries maintain high protection in agriculture through an array of very high tariffs, including tariff peaks (tariffs above 15 percent), tariff escalation (tariffs that increase with the level of processing), and restrictive tariff quotas (limits on the amount that can be imported at a lower tariff rate). Average tariff protection in agriculture is about nine times higher than in manufacturing. In addition, agricultural subsidies in industrial countries, which are equivalent to 2/3 of Africa’s total GDP, undermine developing countries’ agricultural sectors and exports by depressing world prices and pre-empting markets. For example, the European Commission is spending 2.7 billion euro per year making sugar profitable for European farmers at the same time that it is shutting out low-cost imports of tropical sugar.

In industrial countries, protection of manufacturing is generally low, but it remains high on many labour-intensive products produced by developing countries. For example, the United States, which has an average import tariff of only 5 percent, has tariff peaks on almost 300 individual products. These are largely on textiles and clothing, which account for 90 percent of the $1 billion annually in U.S. imports from the poorest countries – a figure that is held down by import quotas as well as tariffs. Other labour-intensive manufactures are also disproportionately subject to tariff peaks and tariff escalation, which inhibit the diversification of exports toward higher value – added products.

Many developing countries themselves have high tariffs. On average, their tariffs on the industrial products they import are three to four times as high as those of industrial countries, and they exhibit the same characteristics of tariff peaks and escalation. Tariffs on agriculture are even higher (18 percent) than those on industrial products.

Non-traditional measures to impede trade are harder to quantify and assess, but they are becoming more significant as traditional tariff protection and such barriers as import quotas decline. Antidumping measures are on the rise in both industrial and developing countries, but are faced disproportionately by developing countries. Regulations requiring imports to conform to technical and sanitary standards comprise another important hurdle. They impose costs on exporters that can exceed the benefits to consumers. European Union regulations on aflotoxins, for example, are costing Africa $1.3 billion in exports of cereals, dried fruits, and nuts per European life saved. Is this an appropriate balance of costs and benefits?

For a variety of reasons, preferential access schemes for poorer countries have not proven very effective at increasing market access for these countries. Such schemes often exclude, or provide less generous benefits for, the highly protected products of most interest to exporters in the poorest countries. They are often complex, non-transparent, and subject to various exemptions and conditions (including non-economic ones) that limit benefits or terminate them once significant market access is achieved.

Further liberalization – by both industrial and developing countries – will be needed to realize trade’s potential as a driving force for economic growth and development. Greater efforts by industrial countries and the international community more broadly, are called for to remove the trade barriers facing developing countries, particularly the poorest countries. Although quotas under the so-called Multi-fibre Agreement are due to be phased out by 2005, speedier liberalization of textiles and clothing and of agriculture is particularly important. Similarly, the elimination of tariff peaks and escalation in agriculture and manufacturing also needs to be pursued. In turn, developing countries would strengthen their own economies (and their trading partners’) if they made a sustained effort to reduce their own trade barriers further.

Enhanced market access for the poorest developing countries would provide them with the means to harness trade for development and poverty reduction. Offering the poorest countries duty – and quota – free access to world markets would greatly benefit these countries at little cost to the rest of the world. The recent market-opening initiatives of the EU and some other countries are important steps in this regard. To be completely effective, such access should be made permanent, extended to all goods, and accompanied by simple, transparent rules of origin. This would give the poorest countries the confidence to persist with difficult domestic reforms and ensure effective use of debt relief and aid flows.

Some Common Mistakes in International Trade

Common Export Mistakes Solutions

1. Failure to obtain qualified export counseling and to develop a master international marketing plan before starting an export business.

Obtain Export Counseling

2. Insufficient commitment by top management to exporting.

Determine Export Readiness

3. Failure to have a solid agent/distributor’s agreement

Understand Agent/Distributor Contracts

4. Blindly chasing “E-orders” from around the world.

Avoid Accidental Exporting

5. Failure to understand the connection

between country risk and securing export financing.

Understand Export Financing

6. Failure to understand Intellectual Property Rights

Understand Intellectual Property Rights (IPR)

7. Insufficient attention to marketing and advertising requirements.

Pay Attention to Overseas Marketing and Advertising

8. Lack of attention to product preparation needs.

Pay Attention to Product Preparation Requirements

9. Failure to consider legal aspects of going global.

Understand Licensing and Joint Ventures

10. Failure to know the rules of trade. Understand Export Regulations

· Failure to obtain export counseling and to develop a master international marketing plan before starting an export business:

Utilize Government and Association Resources for Export Counseling: It is also important for new exporters to seek legal counsel.

Hire a Lawyer to Help. You Structure Your Export Operations for the Long Run: Lawyers are concerned with issues of compliance on both ends of the transaction, therefore they are instrumental in helping you to make sure that your recordkeeping system is planned correctly, that your legal documents are structured correctly, and to advise you on a broad range of compliance issues before the sale, during the sale, and after the sale.

· Insufficient commitment to overcome the initial difficulties and financial requirements of exporting:

To be successful in exporting, firms have to establish an export department to which they dedicate personnel and a budget, and for which they develop appropriate procedures, preferably in consultation with a qualified trade lawyer.

· Failure to have a solid agent and or distributor’s agreement:

Firms that intend to enter and to expand in exporting will likely need an agent or distributor at some point. Key considerations include

Understanding the Role of Agents: The NTDB Web site at (www.stat-USA.gov) provides information on agents and distributors. As explained on this Web site, agents receive commission on their sales rather than buying and selling for their own account. As agents do not own the products they sell, the risk of loss remains with the company the agent represents (the principal).

Understanding the Role of Distributors: The key legal distinctions between an agent and distributor are

A distributor takes title to the goods and accepts the risk of loss. A distributor makes profits by reselling the goods.

Distributors cannot contractually bind the company producing the goods.

Distributors establish the price and sales terms of the goods.

Contract Drafting Considerations for Agent/Distributor Agreements: The first and most important consideration when drafting an agreement is to, ensure that the agreement clearly states whether there is an agent or a distributor relationship. The agreement should also clarify the terms and conditions for selling the products. For example:

Determine whether the relationship is exclusive versus non-exclusive. Specify which geographic regions are to be covered.

Outline issues of payment and payment schedules for the products (in the case of a distributor) and for payments of commissions (in the case of agents).

Determine the currency in which payments are to be made and address currency fluctuation issues.

Provide specific provisions regarding renewal of the agreement, including specific parameters for performance, promotional activity and notice of desire to renew.

Establish a specific provision for termination of the agreement and terms for such termination. (Some foreign countries restrict or prohibit termination without just cause or compensation.)

Outline the termination process for the end of the agreement period.

Provide for workable and acceptable dispute settlement clauses.

Assure that the agreement addresses whether or not intellectual property rights are being licensed or reserved.

Do not allow, without seller’s consent, the contract to be assigned to another party (sub-agents or sub-distributors) to be used to fulfill obligations in the contract or the contract to be transferred with a change of ownership or control over the agent/distributor.

Assure that your contract complies with both U.S. and foreign laws.

· Blindly chasing orders from around the world

You may be in your office when suddenly and unexpectedly someone from a foreign country contacts you electronically and wants to buy a line of your products. What do you do next?

Make sure the order is not on the denied list: Go to the Bureau of Industry and Security’s Web site to view the entire list of denied orders (bxa.doc.gov/DPL/Default.shtm).

Business considerations in checking out the firm making the inquiry: Make sure the opportunity is a reasonable one and involves something that can reasonably be handled by your firm, without spending countless hours researching the requirement. The Department of Commerce Commercial Service has a number of services to assist you.

International Company Profile (ICP) – The ICP service, referred to earlier, helps firms investigate the reliability of prospective trading partners.

Country Directories of International Contacts (CDIC) Provides the name and contact information for directories of importers, agents, trade associations, government agencies, etc., on a country-by-country basis. The information is available on the National Trade Data Bank.

Competitive considerations in checking out the market for the product: By reviewing industry sector information, firms can obtain useful data to assess the probability that the inquiry they are investigating is real. One resource that may be helpful is the Department of Commerce, Commercial Service’s Industry Sector.

· Failure to understand the connection between country risk and the probability of getting export financing

The best source of information about whether a country is in good standing with the U.S. is the U.S. Export-Import Bank’s Country Limitation Schedule. (www.exim.gov).

Access the Export Financing Options: The SBA, ExIm and the Agriculture Department are three of the biggest providers of export financing in the federal government. A list of the strategic

banking partners of the ExIm and SBA export financing and credit insurance programs can be obtained from ExIm and SBA.

Check out SBA’s Export Financing Products: The SBA’s Export Working Capital Program (EWCP) provides short-term working capital for up to one year.

Consult the ExIm’s Export Financing Products: The ExIm’s Working Capital Guarantee Program allows commercial lenders to make working capital loans to U.S. exporters for various export-related activities by substantially reducing the risks associated with these loans.

Access ExIm’s Export Credit Insurance: The Export Credit Insurance program provides protection against losses associated with foreign buyers or other foreign debtor default for political or commercial reasons.

· Failure to understand Intellectual Property Rights (IPR):

Intellectual property rights refer to the legal system that protects patents, trademarks, copyrights, trade secrets. It is important for exporters to understand how and whether intellectual property rights are protected in different countries.

· Insufficient attention to marketing and advertising requirements:

Key considerations include

Trade Shows and Trade Missions: Trade shows and missions may be in the virtual form or entail travelling to the foreign country.

Advertising: Exporters can advertise U.S.-made products or services in Commercial News USA, a catalogue-magazine published 10 times a year to promote U.S. products and services in overseas markets. Commercial News USA is disseminated to business readers worldwide via U.S. embassies and consulates and international electronic bulletin boards, and selected portions are also reprinted in certain newsletters.

U.S. Pavilions: About eighty to one hundred worldwide trade fairs are selected annually by the Commerce Department for recruitment of a USA pavilion. Selection priority is given to events in viable markets that are suitable for new-to-export or new-to-market, "export ready" firms.

· Lack of attention to product adaptation and preparation needs

The selection and preparation of a firm’s product for export requires not only knowledge of the product, but also knowledge of the unique characteristics of each market being targeted. Key considerations include

Product Adaptation to standards requirements: As tariff barriers (tariffs, duties, and quotas) are eliminated around the world in accordance with the requirements of participation in the World Trade Organization (WTO), other non-tariff barriers, such as product standards, are

proliferating. Exporters must understand conformity requirements to operate on an international basis. The DOC’s National Center for Standards and Certification Information (NCSCI) provides information on U.S. and foreign conformity assessment procedures and standards for non-agricultural products. You can visit their Web site by going to ts.nist.gov.

Product Engineering and Redesign: The factors that may necessitate re-engineering or redesign of U.S. products may include differences in electrical and measurement systems.

Branding, Labelling and Packaging: Cultural considerations and customs may influence branding, labelling and package considerations.

· Are certain colors used on labels and packages attractive or offensive?

· Do labels have to be in the local language?

· Must each item be labelled individually?

· Must each item be labelled individually?

· Are name brands important?

Installation: Another important element of product preparation is to ensure that the product can be easily installed in the foreign location. Importers and exporters need to know they may also consider providing training or providing manuals that have been translated into the local language along with the product.

Warranties: In order to compete with competitors in the market, firms may have to include warranties on their products.

Servicing: The service that U.S. companies provide for their products is of concern to foreign consumers. Foreign consumers want to know whether they can access spare parts, technicians who can service the product, and distributors of the products in their countries.

· Failure to obtain legal advice

While it is virtually impossible for any firm, no matter how big or small, to know all of the laws that pertain to exporting from the U.S., as well as the relevant laws of other countries, there are measures that can be taken by firms in the planning process to minimize the probability that they will make unnecessary errors that have grave legal consequences

· Failure to understand export licensing requirements

Businesses that are new to the export arena may confuse the local and state rules regarding business taxes, zoning and other issues, i.e., legal registrations, with the federal requirements governing export licenses. In order to export an item that may be on the restricted list, an export

license is required. This allows the federal government to control the export of the goods. The license is not required for every item exported.

The U.S. Department of Commerce Bureau of Export Administration (BXA) is the primary licensing agency for dual-use exports (commercial items that could have military applications). The first step in determining your license requirements is to classify your product using the Commerce Control List (CCL). Once the product’s classification is determined, the following five questions will determine your obligations under the EAR:

· What is the item you intend to export or re-export?

· Where is it going?

· Who will receive it?

· What will they do with it?

· What is the recipient’s other activities?

Advantages and Disadvantages of International Trade

Advantages

· Enhance your domestic competitiveness

· Increase sales and profits

· Gain your global market share

· Reduce dependence on existing markets

· Exploit international trade technology

· Reduce dependence on existing markets

· Exploit international trade technology

· Extend sales potential of existing products

· Stabilize seasonal market fluctuations

· Enhance potential for expansion of your business

· Sell excess production capacity

· Maintain cost competitiveness in your domestic market

Disadvantages to keep in mind:

· You may need to wait for long-term gains

· Hire staff to launch international trading

· Modify your product or packaging

· Develop new promotional material

· Incur added administrative costs

· Dedicate personnel for travelling

· Wait long for payments

· Apply for additional financing

· Deal with special licenses and regulations

International Trade

Due Diligence Procedures for International Trade

List the following:

Export Counseling: List your sources of counseling including your export legal counsel.

Export Readiness: Describe the economic reasons and justification for your plans.

Outline the personnel, budget and procedures you plan to implement.

Agent/distributor Agreement: Provide a draft of your agent/distributor agreement and the agents/distributors you are considering to do business with.

Analysis of Competitive Considerations: Explain the due diligence resources to be used in the evaluation opportunities including appropriateness for your business.

Evaluation of Country Risk: Explain the resources to be used in the evaluation of country risk (is the country in good standing?) including potential sources of financing.

Describe your plans to insure protection of your intellectual property rights.

Describe your marketing and advertising plans.

Evaluate potential problems regarding product adaptation to standards and measurements.

Describe the licensing requirements for export or import of the product or service you plan to market in international trade.

Table Checklist for international trade documentation

Q.4 Explain the product life cycle theory.

Life cycle theory has been used since the 1970s to describe the behavior of a product or service from design to obsolescence.

The typical pattern of a product is represented by a curve divided into four distinct phases: introduction, growth, maturity, and decline. Recent research in the area has focused on its use in decision making in areas ranging from those as broad as overall strategy to those as narrow as equipment replacement.

But does the product life cycle, or PLC, really tell the entire story? Consider the Ford Mustang. Since its 1964 introduction, the automobile has undergone several changes. Performance was increased with the addition of the 428 CobraJet in 1968 and Mach I styling in 1969. Another substantial change took place in 1971 with the introduction of the high-performance Boss 351. Then a true muscle car, the Mustang was detuned in 1974, when oil prices forced a more fuel-efficient redesign, called Mustang II. The fourth generation Mustang, introduced as the 1994 model, has been further refined and is more aerodynamic than its immediate predecessor. Yet it still shares roots with earlier models. A 302 V-8 is still offered, the wheelbase is similar, and if one looks closely enough, one can see its genesis in the 1964 model. The pattern evidenced by the life of the Mustang, then, is several curves of introduction, growth, maturity, and decline.

Another intriguing example is the C-130 Hercules aircraft manufactured by Lockheed. The company recently announced the sale of 25 "J" models to the Royal Air Force, which is the fifth version of the Hercules originally produced in the 1950s. Although the aircraft resembles its older relatives, the new model features a totally different electronics package and more powerful engines. Here again, the Hercules PLC shows a curve with five local maximum points (swells of activity, in effect), rather than the traditional, single maximum point, PLC curve.

The examples above suggest a PLC model represented by waves of product introductions, growth, maturity, and decline. Design engineering, process engineering, product marketing, production, and end-of-life decisions are key elements within the system. Each has its own cycle consisting of varying levels of activity. The waves are triggered by critical decision points during

the life of a product, when production, operations, and marketing managers must optimize their collective efforts

Conventional Life Cycle Theory

conventional theory suggests that a product or service goes through four distinct stages. The objective is to maximize the product’s value and profitability at each stage. In the introductory phase, sales are slow. The strategy is to create widespread awareness. Costs are incurred in building distribution and increasing awareness through heavy promotion. It is hoped that the investments made in new product introduction pay off and the product or service moves to the growth phase.

The firm may either build market share or profitability in the growth phase. Strategies here are to make differential changes that add value to the product and to target new markets. Marketing moves away from promotion through personal selling toward more mass media advertising. Just as predators react to attractive targets, competition begins to build as awareness increases and sales momentum builds. Unit manufacturing costs begin to fall as fixed costs are spread over more production units and workers move down the learning curve. The firm attempts to stay in the growth stage as long as possible.

Sales growth slows at maturity and the firm moves to defend market position. This is where marketing managers must pay the most attention. Promotion costs increase significantly. Cost reduction is crucial as competitors begin to lower prices and introduce improved versions of the product. With the lower prices come lower profits, and competitors begin to drop out. This is typically the longest lasting stage, with some market leaders holding their position over several decades.

The final stage is decline. Here the firm may continue to market the product hoping that competitors will discontinue their products. Other strategies are to maximize profit by eliminating as many product costs as possible as sales slow, or else to eliminate the product altogether.

· Life Cycle Elements

Design engineering, process engineering, product marketing, and production have been recurring elements in each stage of the product life cycle. In addition, end-of-life (EOL) issues must be addressed when the product approaches obsolescence. These elements vary in importance as the product or service moves through its life, thus creating waves of activity. The fact that they change in importance and magnitude requires that they be closely managed. Let’s begin our discussion of the individual elements with design engineering.

· Design Engineering

The typical design engineering curve (see Figure 4.2) shows two peaks. One occurs during the introduction of the new product and the other during a redesign that takes place during the maturity phase of the life cycle.

Design engineering is involved in the five phases of the new product introduction (NPI) process. Idea validation is first. Engineers take informal ideas and study the market for needs that are not being met by products currently being offered or planned. Technology, manufacturing capabilities, competition, and potential revenues are analyzed in the review.

The second phase is conceptual design. Here, ideas begin to take shape as product specifications are identified. Initial investigations are made into product pricing, performance, and styling in a feasibility analysis. Design and manufacturing engineers may work as part of a concurrent team to develop specifications and resolve technical aspects of how the product will be produced.

Specification and design are third. This is the phase in which design engineering plays a large role. The goal is design release. Final decisions are made as to how the product will work and look.

The objective of prototype production and testing is to provide assurances that the design is sound and the need for subsequent changes will be small. The product is tested under a pilot run simulation to see how well it meets specifications and quality objectives. Manufacturing capabilities are also checked. Engineers may solicit customer reactions to the product in this phase.

The final traditional phase of NPI is manufacturing ramp – up, or commercialization. The chief concern is obtaining the desired level of manufacturing capacity as soon as possible while meeting quality specifications. Design engineers provide solutions to problems with product reliability and variability in this stage. They also participate in any resulting manufacturing process changes.

The goal of any new product introduction is to place a quality product in the market, in desired amounts, at the producing firm’s lowest possible cost. Design engineering’s integral role in this process results in the introduction of the initial version of the product. We call this the "A" model designation, meaning that this is the first model in a potential series.

The second design engineering activity spike occurs when the cumulative effect of implemented or contemplated product changes results in a substantially new product. If the product needs a major face – lift to attract new users, the resulting peak in activity level may be higher than that for the previous model. Changes made to the product here typically result in markedly higher quality, new features that increase the product’s utility value, and/or improvements in the attractiveness of the product through styling. This second, updated model is the "B" version. An example is Caterpillar’s high-drive crawler tractors, which were given an entirely new series designation ("H") upon their introduction in the 1980s. The high-drive bulldozers, on which the track resembles a skewed pyramid, represented a substantial departure from conventional – tracked tractors with their oval tracks. In fact, they have redefined the industry.

· Process Engineering

The process engineering function is responsible for the production system. To that end, process engineers specify the type of system, equipment, tooling, layout, and flow used in manufacturing or service operations. Their task is to ensure the efficient production of each part or component. Traditionally, the first step is a review of the end item bill of materials, which identifies all the separate parts that make up the product or service to be produced in, or to flow through, the operation area. Once the bill of materials analysis is completed, the problem of which type of production system to employ may be tackled.

Laufer (1975) identifies three basic types of process structures used in manufacturing (which could easily be used by service entities as well): intermittent, batch, and continuous. Typically, the type of product offered by the firm defines which structure will be employed. Intermittent operations are usually found in custom firms or job shops in which end item or service specifications are provided by the customer. The product or service is made as ordered, so production tends to be either infrequent or one time only. Production run lengths are often small. Output is more standardized in the batch operation and is produced in higher quantities. The plant is used to process a product run over a given period of time, after which a different item or goods may be produced. Finally, production in continuous operations is highly standardized, variety is limited, and output is high.

When considering the type of process to employ, a production layout that facilitates the product movement through the plant must be chosen. Questions to consider include: Is the product suited to an assembly line layout, in which work stations are linked by some type of material handling device? Is production more efficient in a cellular layout, in which groupings of dissimilar machines work on components that have similar processing requirements? Should the firm employ a just-in-time layout and pull the product through the plant?

In conjunction with selecting the process layout, manufacturing decisions must be made as to the level of automation used within the plant. For example, will the firm feature a flexible manufacturing system and group numerically controlled machines throughout the different manufacturing areas? Finally, maintenance and repair decisions must be made–no small chore. Less frequent maintenance may allow for higher use of equipment and tooling. Eventually, however, this may be offset by more frequent (and more expensive) catastrophic failures.

The process engineering curve shadows that of design engineering in Figure 2, with its two peaks. Activity begins just after receipt of the bill of materials. The initial system is designed, equipment and tooling are purchased, maintenance programs are put in place, and flows are decided. The first peak is reached after design and process changes stabilize. Again, this is the "A" model. The second begins to build with the development of the "B" version, and peaks just before the system stabilizes, as equipment, tooling, and flow are adjusted to optimize production.

· Production

Production activity follows demand for the product or service; both are linked by manufacturing planning and control systems. Activity begins in earnest during production ramp-up. Equipment processes, and trained production personnel must be in place. Targets for product cost,

conformance to specification, and overall quality must be met. As customer sales begin to speed up production, overhead per-unit costs decrease and direct costs increase.

Manufacturing activity ramps up during initial production, leaps through growth, and peaks near the point at which customer demand is highest. The shape of the curve, then, is similar to the traditional PLC shown in Figure 1. Potts (1988) suggests that demand for service parts shadows the installed base and also shows one peak, albeit lagging somewhat behind product sales.

· Relationships

Design engineering, process engineering, and production are all related. The purpose of presenting the traditional relationship here is to facilitate later comparisons with the five-element wave. The model is illustrated in Figure 3, which shows that traditional product engineering follows a linear path. The first step is design engineering, in which the good or service is taken from concept and detail design to prototyping. The product moves to process engineering, where technologies and production methods are evaluated as a system is set into motion. Finally, the product flows to production, where down-stream manufacturing activities, such as production planning and scheduling, take place. This is known as the over-the-wall method of product design and development, with each stage separate from the next.

· Product Marketing

New products are usually supported with high advertising budgets to build awareness and encourage an initial purchase. If the target is the entire market, a typical first strategy is to attack it with one theme. When resources are relatively limited, the business may choose to identify smaller, more homogenous concentrations within the market and tailor the advertising to those groups. Once the product becomes established, fewer advertising dollars per sales unit are required to encourage demand.

Sales promotion is another tool used to stimulate immediate demand. Emphasis on sales promotion is highest at new product introduction, falls during product growth, and increases as the good or service becomes more of a commodity after competitors and the market adjust. Sales promotion effects tend to be short – term. According to Kotler and Armstrong (1991), "Sales promotion consists of short-term incentives to encourage purchase or sales of a product or service. Whereas advertising offers reasons to buy a product or service, sales promotion offers reason to buy now." Examples of these promotions are free samples, rebates on purchases, and the ubiquitous newspaper coupon.

There are two occurrences of particularly high activity or expenditure in marketing a product or service. The first peak occurs during introduction-the "A" version – where plans are created and first put into action. During growth, marketing activity begins to fall as the product begins to generate its own demand. The second flurry of activity occurs after demand growth flattens and the product becomes somewhat of a commodity, when the product is modified and results in a new and improved "B" version. Finally, once the firm decides to allow the good to gracefully exit the market as it moves towards obsolescence, advertising and promotion activity levels naturally fall to zero.

· End of Life

This element considers what happens when sales decline to the point at which revenues drop to a level that supposedly precludes continued production of a good by the firm. One strategy is to cease production and allow inventory levels to drop to zero. An alternative tactic is to attempt to give new life to the product and risk succumbing to what is known as "The Thomas Lawson Syndrome." Harari (1994) provides this summary:

Even before it sank, the sailing ship Thomas Lawson had become obsolete as steam-powered vessels emerged. Its saga symbolizes the fatal tendency of organizations to cling to old beliefs and outmoded technologies.

In other words, the firm ignores the technological warnings of the industry and continues to make the product at the expense of future success. This is analogous to the ostrich that sticks its head in the sand when approached by a hungry lion. The bird (firm) expects that it cannot be hurt by what it cannot see, while the lion (the competitor) sees nothing but an easy meal. How big a problem is EOL decision making? It may be immense, considering that the largest firms in the U.S. have many products in the late mature stage. Most technological changes occurred in a 20 – year period after World War II. Markets boomed, owing to large population increases and repressed demand during the Depression and the ensuing war years. The market’s hangover began in the 1970s. Product break-through were expensive and few. Companies began to cut R&D expenditures, and population growth slowed. Businesses that made names for themselves in the post-war boom had begun to feel invincible. They relied on dated products, ignored potential new products that could result from research and development, and created businesses filled with hierarchical practices rather than the flexibility required for growth.

Where should a firm position itself? A product should continue to be marketed as long as it provides a return that minimizes opportunity cost. The key is to recognize that EOL decisions are important and should be driven by a combination of customer expectation and marketplace realities.

EOL activities should consider profitability measures and a program in which a manufacturer enters into an agreement with an EOL company.

According to Emehiser (1991):

An EOL program is a unique opportunity for a manufacturer to sell the legal obligation of supporting a product that is no longer in manufacture. All or part of product support may be assumed, dependent on the amount of finished product in use, anticipated life of the product, spares available, and other considerations. Product support can include parts distribution, service, technical support, quality assurance, and/or continuation engineering.

In effect, the EOL Company assumes responsibility for supporting the product or service, which the original manufacturer no longer produces. The former therefore becomes the manufacturer and has its own single-peaked manufacturing cycle.

In summary, then, each of the five elements of the product life cycle system has its own cycles. These cycles, or waves, are formed by product decisions that result in varying activity levels among the five elements. Figure 4 provides an initial comparison between the traditional product life cycle and the five-element wave.

The Five-Element Product Wave

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

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

Finally, the EOL curve peaks at each redesign. The last wave begins shortly before original production ceases and ends when the product is no longer manufactured or supported by the EOL Company or division. The EOL element requires that a decision be made about the preceding version at each major redesign: continue production, make a short-term run of spares, keep blueprints active so that parts can be made as ordered, enter into a manufacturing and support agreement with another entity, or discontinue production.

For the sake of parsimony, Figure 4.5 shows only a two-product model ("A" and "B" versions). In reality, there may be hundreds of significant redesigns. The wave effect comes from the fact that the process repeats for the successful firm, forming swells in design engineering, process engineering, and product marketing, and manufacturing curves before the final crest at EOL activity.

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

That the five-element wave is grounded in reality becomes apparent when considering the recent research that suggests product introduction cycles are being compressed. Bayus (1994) claims

that knowledge is being applied faster, resulting in increasing levels of new product introductions. Yet since product removals are not keeping pace with introductions, there are an increasing number of product variations on the market. Slater (1993) observes that product life cycles are growing shorter and shorter. Vesey (1992) reports that the strategy for the 1990s is speed to market and discusses the pressures the market is exerting to shorten product introduction lead times.

Regardless of whether life cycles are actually being compressed or knowledge is simply being applied faster, it is apparent that firms are increasing the speed with which they bring their products to market. The effect of this is a compression of the design engineering, process engineering, production, and product marketing elements of the wave model. (The EOL curve may remain unchanged because accelerated introductions do not necessarily affect EOL efforts.) The five-element wave clearly shows the inefficiency of traditional "over-the-wall" systems as speed to market increases. As the elements compress, more and more information is thrown over the wall. Recipients find themselves with less and less time to take action. Taken to the extreme, in-baskets, phone lines, conference rooms, desks, and floors are soon gridlocked and littered with unanswered correspondence and things to do. Forget quality; production itself grinds to a halt.

The solution is to maximize the advantage of the relationships within the five-element wave and work in concurrent teams, as illustrated in Figure 6. That way, responsibility is shared throughout the system. Members from each discipline optimize the system. The method tears down barriers between departments and speeds the introduction process, thus decreasing costs. The focal point becomes the customer, rather than the task. The system is totally interactive and bound together. Each element is connected to all of the others and is focused on the customer. (Note that the authors have taken a great deal of artistic license here! No meaning should be attached to the actual measure of overlap area in Figure 4.6.)

What is the recent experience with teams? There is evidence that using concurrent design teams speeds the product to market and provides substantial savings. Boeing expects that concurrent design will save some $4 billion in the development of its 777 airliner. Westinghouse recently suggested that concurrent engineering would eliminate 200 duplicate processes in a project that consisted of 600 using traditional over-the-wall approaches. Ford’s Team Taurus was able to cut a full year out of model turnaround. In addition, design changes required after initial production began were reduced by some 76 percent.

The strength of the five-element product wave is the fact that it illuminates critical decision points in the life of a product or service. The interrelationships of the elements clearly illustrate the benefit of working product introductions, design changes, and end-of-life decisions in teams. This is particularly true in today’s rapidly compressing environment of speeding products to market. Furthermore, the model is flexible and may be expanded or contracted to include those functional areas relevant to the production team. Thus, whether a given firm’s product is a service or a manufactured good, the five-element wave is a powerful tool that can be deployed to accelerate effective decision making in markets demanding ever-increasing levels of speed and agility.

Q.5 Discuss the implications of Heckscher-Ohlin theory model.

The Heckscher-Ohlin (HO hereafter) model was first conceived by two Swedish economists, Eli Heckscher (1919) and Bertil Ohlin. Rudimentary concepts were further developed and added later by Paul Samuelson and Ronald Jones among others. There are four major components of the HO model:

1. Factor Price Equalization Theorem,

2. Stolper-Samuelson Theorem,

3. Rybczynski Theorem, and

4. Heckscher-Ohlin Trade Theorem.

Due to the difficulty of predicting the goods trade pattern in a world of many goods, instead of the Heckscher-Ohlin Theorem, the Heckscher-Ohlin-Vanek Theorem that predicts the factor content of trade received attention in recent years.

4.4.1 Eli Heckscher (1879 – 1952)

Heckscher was a Swedish economist. He is probably best known for his book "Mercantilist." Although his major interest was in studying economic history, he also developed the essentials of the factor endowment theory of international trade in a short article in Swedish in 1919. It was translated into English thirty years later.

4.4.2 Bertil Ohlin (1899-1979)

Heckscher’s student, Bertil Ohlin developed and elaborated the factor endowment theory. He was not only a professor of economics at Stockholm, but also a major political figure in Sweden. He served in Riksdag (Swedish Parliament), was the head of liberal party for almost a 1/4 of a century. He was Minister of Trade during World War II. In 1979 Ohlin was awarded a Nobel prize jointly with James Meade for his work in international trade theory.

HO Model = 2 × 2 × 2 model (2 countries, 2 commodities, 2 factors)

For example, there are two countries (America and Britain); each country is endowed with 2 homogeneous factors (labour and capital) and produces 2 commodities.

This is the smallest case of "even" model, i.e., the number of commodities is equal to that of factors. Extending the model to a more general case is not easy. In fact, the results obtained from a more general model do not have the clear, common sense interpretations which the simple HO model enjoys.

Factor Price Equation Theorem

Among the four main results of the HO theory, FPE is the most fragile theorem. If any of the eight assumptions are violated, it will not hold. However, this is one of the most powerful

findings, if not the most important one, in trade theory, as it shows how trade affects the income distribution of a trading country.

Of course, the assumptions are somewhat unrealistic in the sense that they are not likely to be observed in the real world. However, even if some of the assumptions are violated, international trade has a tendency to equalize factor prices; it will remove the wage gaps between countries, despite the constraint that trading countries impose on the movement of factors, in particular, on the movement of workers.

Assumptions

1. No barriers to trade

World trade is assumed to be free from any impediments, such as tariffs, quotas, voluntary export restraints, and exchange control.

2. No transportation cost

After the industrial revolution in the mid 1800s, major cities were connected by railroads, reducing the transportation costs further. Lawrence of Arabia helped the Arabs to recapture Arabia from the Turks. Arabs eventually ousted Turks from the region now known as Saudi Arabia. As a result, Israel gained its independence in 1948.

Procession of Horsemen and Chariots, Eastern Han, 25 – 220 AD.

Romans built good roads such as Via Appia and Via Ignatia, connecting various parts of the Empire, reducing the transportation costs. Good roads made it possible for the Romans and the Chinese to utilize horse drawn chariots for fast communication and transportation. There were bandits in various regions and pirates in the ocean, but the Romans made it sufficiently safe for ordinary people to travel.

Luke 15:13 "Not long after that, the younger son got together all he had, set off for a distant country and there squandered his wealth in wild living. 14 After he had spent everything, there was a severe famine in that whole country, and he began to be in need. So he went and hired himself out to a citizen of that country, who sent him to his fields to feed pigs.

The Prodigal Son by Pierre puvis de Chavannes (Washington National Gallery). This parable suggests that people were able to travel easily to foreign countries during the time of Jesus. Travel was relatively safe and affordable by the emerging middle class.

Transportation costs are assumed to be zero.

In reality, transportation costs are a significant portion of the marketing costs of most traded goods, especially in agricultural products.

Remark: This is unrealistic. However, it is not a bad assumption, because transportation costs inhibit and reduce trade volume; it does not reverse the trade pattern between the countries.

3. Perfect Competition (PC) + Full Employment (FE)

      PC prevails in both product and factor markets. This assumption rules out monopolistic and oligopolistic market structures. It also rules out price and wage rigidities. In a perfectly competitive market all buyers and sellers are price takers, i.e., each one is too small to exert market power and influence market prices. All factors are fully employed.

4. Factors are mobile in each country but are immobile across national borders.

Like Ricardo, HO model draws a sharp distinction between domestic and external factor mobility. The maximum degree of factor mobility is permitted between industries within the same country (internal factor mobility). But neither capital nor labour can cross national borders (international factor immobility).

IFM insures that workers move from a low wage region to a high wage region, and capital moves from a low interest country to a high interest region. The net effect is that all factor prices are the same within a country.

      IFI implies that Mexican workers are not allowed to work or migrate to the US.

5. No specialization

After the introduction of free trade, neither country specializes in one commodity, as in Ricardian model. Each country produces both goods.

6. Production functions exhibit constant returns to scale (CRS) and differ among industries:

Such a production function is sometimes said to be homogeneous of degree 1 – HD(1) for short here.

     CRS means that a proportionate increase in all inputs increases the output by the same percentage.

Specifically, CRS means:

If y = F (L, K), then y’ = F (2L, 2K) = 2y.

7. Identical technology between trading countries:

Production functions are the same in America and Britain. The HO model is a long run model. Ohlin argued that "the physical conditions of production are everywhere the same." Some countries may be slow to adopt new technology. With the development of modern telecommunications, information travels fast. This is a result of declining transportation and communication costs.

The first page of Analects of Confucius contains two verses in bold: The Master said, "Is it not a pleasure to learn something and practice it often? "Is it not a joy to have friends visiting you from far away quarters? (Characters in regular font are the commentaries like those of Bible interpreters.)

This book written by Confucius (551 – 473 BC) before Plato and Socrates includes Zhu Xi’s commentaries. This edition was printed in Japan before Meiji Restoration. Trade spreads technologies.

Paper was invented by Cai Lun in AD 105. Printing with carved wood blocks appeared during the Tang dynasty. Movable type was invented during Song dynasty (c. 1050 AD) long before the Gutenberg printing press.

8. No factor intensity reversal:

Remark: The implication of (1) and (2) is that commodity trade equalizes commodity prices between countries. That is, Americans and Britons pay the same prices for same commodities.

Will commodity price equalization result in factor price equalization?

Julius Caesar’s tomb in Palatino Hill, Rome (May 2003)

An Italian inscription which explains that the body of an ancient ruler, Caesar, was deposited here. Julius Caesar laid the cornerstone of the Roman Empire (27 BC – 476 AD).

By conquering neighboring countries, Roman government also provided police function and ensured safety of travelers. For example, Praetorian Guard and Roman legions stationed in various outposts provided peace and maintained law and order throughout the Roman Empire. As a result, international trade flourished on an unprecedented scale. Licinius Crassus crushed the Spartacus rebellion (71 BC).

Unit Value Isoquants

A unit value isoquant is a locus of input combinations that yield $1 worth of output.

1) Among many isoquants choose the one for which p*2y2 = 1, or y2 = 1/p*2.

Unit value isoquant

2) Different production functions yield different isoquants:

Two different UVIs intersect each other.

In Figure 2, industry 2 is more capital intensive than industry 1.

3) Choose y2, L2, and K2 to

maximize Π = p*2y2 – wL2 – rK2

Subject to y2 = F2 (L2,K2).

Once the desired output is chosen, the cost must be minimized. The equilibrium condition is:

MRTS = w/r

Figure 4.3, Implication of cost minimization

4) "No specialization" implies that a common isocost curve must be tangent to both unit value isoquants. Suppose not.

Arbitrary factor prices (w, r) results in specialization in one commodity.

An arbitrary pair of factor prices (w ,r) cannot prevail, because it causes the economy to specialize in one good. For instance, given the factor prices represented by the slopes of the two isocost curves, industry 2 survives at point A (p2y2 = c2) the tangency points (both A and B) yield exactly $1 revenue. But the production costs at points 1 and 2 will differ. For example, C1 > C2 = 1. Thus, firms will produce only commodity 2, which costs less but yields the same revenue. That is, the country specializes in good 2 in the above example.

Thus, for a given pair of output prices (p1, p2), there exists a unique pair of factor prices (w,r). This implies that a pair of output prices completely determines a pair of factor prices. Within a country, (p*1,p*2) <=> (w ,r).

Common Isocost Curve

Factor Price Equalization Theorem

Given assumptions 1 – 8, factor prices will be equalized between countries. That is,

w = w*, r = r*.

Woman ironing, Edgar Degas. How will her wage be affected by free trade?

Proof

1. PC in factor markets + No specialization imply

w = p1MPL1 = P2MPL2

r = p1MPK1 = P2MPK2

w/r = MPL1/MPK1 = MRTS1 = the slope of UVI: y1 = 1/p1.

= MPL2/MPK2 = MRTS2 = the slope of UVI: y2 = 1/p2.

Thus, in the Home country, a common isocost curve is tangent to both UVIs.

2. The same is true in the foreign country. w* = p*1MP*L1 = p*2MP*L2

r* = p*1MP*K1 = p*2MP*K2

3. No Barriers to Trade + No Transportation Costs imply

p*1 = p1 and p*2 = p2. (Free trade implies output price equalization)

Thus, w* = p*1MP*L1 = p1MP*L1. But will marginal products of labor in any industry be the same in the two countries?

4. Identical Technologies

- IT: both countries have the same isoquant maps. This and (3) imply that HC and FC have the same set of unit value isoquants.

- No FIR implies that expansion paths are unique in each country, and the two countries have the same expansion paths, as shown in Figure 6.

(k1 = k*1, k2 = k*2).

Effects of CRS on marginal products.

- HD(1) or CRS: Expansion paths are rays from the origin, along which MPs remain constant. Each country chooses an input allocation along each expansion path, depending on its resource endowment. However, regardless of their locations, A = (L1,K1) and B = (L*1,K*1), marginal product of each input does not depend on the output level; it depends only on the capital-labor ratios. In Figure 5a, CRS implies that marginal products remain constant along each expansion path, regardless of the output levels. Thus,

MP*Li = MPLi, MP*Ki = MPKi.

5. w* = p*iMP*Li = piMPLi = w, (wage equalization)

r* = p*i MP*Ki = piMPKi = r. (interest rate equalization)

FPE is not observed in the real world. What does this mean?

1. It could mean that the Heckscher-Ohlin model does not apply to all trade patterns. It applies to industries in which factor proportions are important, e.g., agriculture and manufacture.

2. In practice, transportation costs are not negligible. Free trade does not equalize output prices or wipe out factor price differentials completely, but will reduce the gap in factor prices between countries.

3. Capital is more mobile than labour. If FPE does not hold, both factors have incentives to move across national boundaries. If stringent restrictions are imposed on migration, it is the capital that will move in search of lower labour costs. This means outsourcing and a huge job loss in high wage countries. Capital mobility further reinforces the effect of free trade to equalize factor prices.

Convergence of Long run Income

National income is written as wL+ rK.

wL + rK = (w + rK/L)L = (w + rS/L)L.

Since w and r are equalized in the world market, there are two elements that determine long run national income.

Population or labor force (L) and the savings rate (S/L).

Per capita income is (w+rS/L).

Beyond a certain threshold level of income, per capita savings rate is a decreasing function of per capita income or wage. For example, China’s household savings rate is over 20%, but it is expected to decline. Due to its high savings rate, China was able to maintain the growth rate of 9% over the last 25 years. As the savings rate declines with the rise in per capita income, per capita income approaches a limit that is attained by high income. Eventually, in a stationary state, a nation’s economic power is measured by its population. In the short run, its wage also matters. However, population growth also stops once the wage reaches a threshold level.

Business Week, September 1, 2003, page 44.

A Chill Wind Blows from the East

At first glance, IBM’s computer disk drive factory in Szekesfehervar, Hungary, doesn’t look the picture of industrial decline. Built just eight years ago, its bright facade still glows from a hillside overlooking a bustling shopping plaza. But a closer look reveals an unnatural stillness. Loading docks that once were piled high with components lie empty. Turnstiles that admitted 3,700 workers a day are chained.

IBM shut the plant last November, moving the work to China, where wages are 75% cheaper. Dutch electronics maker Royal Philips Electronics and Singapore contract manufacturer Flextronics International Ltd. has moved an additional 1,500 Hungarian jobs to China in the past 18 months. Flextronics also has closed a 1,000 – worker plant in the Czech Republic. The

closings are sending shudders across eight formerly communist countries just as they are gearing up to celebrate their entry into the European Union on May 1.

The labor markets of Asia, especially China, are beginning to pull away industrial investments that helped this region rebuild after communism’s collapse. "Their whole goal has been to join the EU," says Humphrey W. Porter, president of Flextronics Europe. "The risk is that they don’t realize this is a rat race. And it’s just the beginning, not the end."

But Eastern Europe’s cost advantage is shrinking by the day. In the past two years, real wages have risen by 20% in Hungary and 11.5% in the Czech Republic, according to Vienna-based Erste Bank. Despite the runup, wages in Eastern Europe’s most dynamic economies are still 25% lower than those in Western Europe. But the gap is widening with China, where wages have stayed at about $100 per month for unskilled factory workers. Even Eastern European companies, such as Hungary’s Karsai Plastics Holding, are opening plants in China.

Q.6 Do you think WTO is helpful for promoting international business? Give reasons for your answer.

1. The system helps to keep the peace

This sounds like an exaggerated claim, and it would be wrong to make too much of it. Nevertheless, the system does contribute to international peace, and if we understand why, we have a clearer picture of what the system actually does.

Peace is partly an outcome of two of the most fundamental principles of the trading system: helping trade to flow smoothly and providing countries with a constructive and fair outlet for dealing with disputes over trade issues. It is also an outcome of the international confidence and cooperation that the system creates and reinforces.

History is littered with examples of trade disputes turning into war. One of the most vivid is the trade war of the 1930s when countries competed to raise trade barriers in order to protect domestic producers and retaliate against each others’ barriers. This worsened the Great Depression and eventually played a part in the outbreak of World War 2.

Two developments immediately after the Second World War helped to avoid a repeat of the pre-war trade tensions. In Europe, international cooperation developed in coal, and in iron and steel. Globally, the General Agreement on Tariffs and Trade (GATT) was created.

Both have proved successful, so much so that they are now considerably expanded – one has become the European Union, the other the World Trade Organization (WTO).

How does this work?

Crudely put, sales people are usually reluctant to fight their customers. In other words, if trade flows smoothly and both sides enjoy a healthy commercial relationship, political conflict is less likely.

What’s more, smoothly – flowing trade also helps people all over the world become better off. People who are more prosperous and contented are also less likely to fight.

But that is not all. The GATT/WTO system is an important confidence-builder. The trade wars in the 1930s are proof of how protectionism can easily plunge countries into a situation where no one wins and everyone loses.

The short – sighted protectionist view is that defending particular sectors against imports is beneficial. But that view ignores how other countries are going to respond. The longer term reality is that one protectionist step by one country can easily lead to retaliation from other countries, a loss of confidence in freer trade, and a slide into serious economic trouble for all – including the sectors that were originally protected. Everyone loses.

Confidence is the key to avoiding that kind of no-win scenario. When governments are confident that others will not raise their trade barriers, they will not be tempted to do the same. They will also be in a much better frame of mind to cooperate with each other.

The WTO trading system plays a vital role in creating and reinforcing that confidence. Particularly important are negotiations that lead to agreement by consensus and a focus on abiding by the rules.

2. The system allows disputes to be handled constructively

As trade expands in volume, in the number of products traded, and in the numbers of countries and companies trading, there is a greater chance that disputes will arise. The WTO system helps resolve these disputes peacefully and constructively.

There could be a down side to trade liberalization and expansion. More trade means more possibilities for disputes to arise. Left to themselves, those disputes could lead to serious conflict. But in reality, a lot of international trade tension is reduced because countries can turn to organizations, in particular the WTO, to settle their trade disputes.

Before World War 2 that option was not available. After the war, the world’s community of trading nations negotiated trade rules which are now entrusted to the WTO. Those rules include an obligation for members to bring their disputes to the WTO and not to act unilaterally.

When they bring disputes to the WTO, the WTO’s procedure focuses their attention on the rules. Once a ruling has been made, countries concentrate on trying to comply with the rules, and perhaps later renegotiating the rules – not on declaring war on each other.

Around 300 disputes have been brought to the WTO since it was set up in 1995. Without a means of tackling these constructively and harmoniously, some could have led to more serious political conflict.

The fact that the disputes are based on WTO agreements means that there is a clear basis for judging who is right or wrong. Once the judgment has been made, the agreements provide the focus for any further actions that need to be taken.

The increasing number of disputes brought to GATT and its successor, the WTO, does not reflect increasing tension in the world. Rather, it reflects the closer economic ties throughout the world, the GATT/WTO’s expanding membership and the fact that countries have faith in the system to solve their differences.

Sometimes the exchanges between the countries in conflict can be acrimonious, but they always aim to conform to the agreements and commitments that they themselves negotiated.

3. A system based on rules rather than power makes life easier for all

The WTO cannot claim to make all countries equal. But it does reduce some inequalities, giving smaller countries more voice, and at the same time freeing the major powers from the complexity of having to negotiate trade agreements with each of their numerous trading partners

Decisions in the WTO are made by consensus. The WTO agreements were negotiated by all members, were approved by consensus and were ratified in all members’ parliaments. The agreements apply to everyone. Rich and poor countries alike have an equal right to challenge each other in the WTO’s dispute settlement procedures.

This makes life easier for all, in several different ways. Smaller countries can enjoy some increased bargaining power. Without a multilateral regime such as the WTO’s system, the more powerful countries would be freer to impose their will unilaterally on their smaller trading partners. Smaller countries would have to deal with each of the major economic powers individually, and would be much less able to resist unwanted pressure.

In addition, smaller countries can perform more effectively if they make use of the opportunities to form alliances and to pool resources. Several are already doing this.

There are matching benefits for larger countries. The major economic powers can use the single forum of the WTO to negotiate with all or most of their trading partners at the same time. This makes life much simpler for the bigger trading countries. The alternative would be continuous and complicated bilateral negotiations with dozens of countries simultaneously. And each country could end up with different conditions for trading with each of its trading partners, making life extremely complicated for its importers and exporters.

The principle of non-discrimination built into the WTO agreements avoids that complexity. The fact that there is a single set of rules applying to all members greatly simplifies the entire trade regime.

And these agreed rules give governments a clearer view of which trade policies are acceptable.

4. Freer trade cuts the cost of living

We are all consumers. The prices we pay for our food and clothing, our necessities and luxuries, and everything else in between, are affected by trade policies.

Protectionism is expensive: it raises prices. The WTO’s global system lowers trade barriers through negotiation and applies the principle of non-discrimination. The result is reduced costs of production (because imports used in production are cheaper) and reduced prices of finished goods and services, and ultimately a lower cost of living.

There are plenty of studies showing just what the impacts of protectionism and of freer trade are. These are just a few figures:

Food is cheaper

When you protect your agriculture, the cost of your food goes up – by an estimated $1,500 per year for a family of four in the European Union (1997); by the equivalent of a 51% tax on food in Japan (1995); by $3 billion per year added to US consumers’ grocery bills just to support sugar in one year (1988).

Negotiating agricultural trade reform is a complex undertaking. Governments are still debating the roles agricultural policies play in a range of issues from food security to environmental protection.

But WTO members are now reducing the subsidies and the trade barriers that are the worst offenders. And in 2000, new talks started on continuing the reform in agriculture. These have now been incorporated into a broader work programme, the Doha Development Agenda, launched at the fourth WTO Ministerial Conference in Doha, Qatar, in November 2001.

Clothes are cheaper

Import restrictions and high customs duties combined to raise US textiles and clothing prices by 58% in the late 1980s.

UK consumers pay an estimated £500 million more per year for their clothing because of these restrictions. For Canadians the bill is around C$780 million. For Australians it would be a$300 annually per average family if Australian customs duties had not been reduced in the late 1980s and early 1990s.

The textiles and clothing trade is going through a major reform – under the WTO – that will be completed in 2005. The programme includes eliminating restrictions on quantities of imports.

If customs duties were also to be eliminated, economists calculate the result could be a gain to the world of around $23 billion, including $12.3 billion for the US, $0.8 billion for Canada, $2.2 billion for the EU and around $8 billion for developing countries.

The same goes for other goods

When the US limited Japanese car imports in the early 1980s, car prices rose by 41% between 1981 and 1984 – nearly double the average for all consumer products. The objective was to save American jobs, but the higher prices were an important reason why one million fewer new cars were sold, leading to more job losses.

If Australia had kept its tariffs at 1998 levels, Australian customers would pay on average a$2,900 more per car today. In 1995, aluminium users in the EU paid an extra $472 million due to tariff barriers.

One of the objectives of the Doha Development Agenda (DDA) is another round of cuts in tariffs on industrial products, i.e. manufactured and mining products. Some economists, Robert Stern, Alan Deardorff and Drusilla Brown, predict that cutting these by one third would raise developing countries’ income by around $52 billion.

… and services

Liberalization in telephone services is making phone calls cheaper – in the 1990s by 4% per year in developing countries and 2% per year in industrial countries, taking inflation into account.

In China, competition from a second mobile phone company was at least part of the reason for a 30% cut in the price of a call. In Ghana the cut was 50%.

The group of economists led by Robert Stern estimates that lowering services barriers by one third under the Doha Development Agenda would raise developing countries’ incomes by around $60 billion.

And so it goes on. The system now entrusted to the WTO has been in place for over 50 years.

In that time there have been eight major rounds of trade negotiations. Trade barriers around the world are lower than they have ever been in modern trading history. They continue to fall, and we are all benefiting.

5. It gives consumers more choice and a broader range of qualities to choose from

Think of all the things we can now have because we can import them: fruits and vegetables out of season, foods, clothing and other products that used to be considered exotic, cut flowers from any part of the world, all sorts of household goods, books, music, movies, and so on.

Think also of the things people in other countries can have because they buy exports from us and elsewhere. Look around and consider all the things that would disappear if all our imports were

taken away from us. Imports allow us more choice – both more goods and services to choose from, and a wider range of qualities. Even the quality of locally – produced goods can improve because of the competition from imports.

The wider choice isn’t simply a question of consumers buying foreign finished products. Imports are used as materials, components and equipment for local production.

This expands the range of final products and services that are made by domestic producers, and it increases the range of technologies they can use. When mobile telephone equipment became available, services sprang up even in the countries that did not make the equipment, for example.

Sometimes, the success of an imported product or service on the domestic market can also encourage new local producers to compete, increasing the choice of brands available to consumers as well as increasing the range of goods and services produced locally.

If trade allows us to import more, it also allows others to buy more of our exports. It increases our incomes, providing us with the means of enjoying the increased choice.

6. Trade raises incomes

Lowering trade barriers allows trade to increase, which adds to incomes – national incomes and personal incomes. But some adjustment is necessary.

The WTO’s own estimates for the impact of the 1994 Uruguay Round trade deal were between $109 billion and $510 billion added to world income (depending on the assumptions of the calculations and allowing for margins of error).

More recent research has produced similar figures. Economists estimate that cutting trade barriers in agriculture, manufacturing and services by one third would boost the world economy by $613 billion – equivalent to adding an economy the size of Canada to the world economy.

In Europe, the EU Commission calculates that over 1989 – 93 EU incomes increased by 1.1–1.5% more than they would have done without the Single Market.

So trade clearly boosts incomes.

Trade also poses challenges as domestic producers face competition from imports. But the fact that there is additional income means that resources are available for governments to redistribute the benefits from those who gain the most – for example to help companies and workers adapt by becoming more productive and competitive in what they were already doing, or by switching to new activities.

7. Trade stimulates economic growth and that can be good news for employment

Trade clearly has the potential to create jobs. In practice there is often factual evidence that lower trade barriers have been good for employment. But the picture is complicated by a number

of factors. Nevertheless, the alternative – protectionism – is not the way to tackle employment problems.

This is a difficult subject to tackle in simple terms. There is strong evidence that trade boosts economic growth, and that economic growth means more jobs. It is also true that some jobs are lost even when trade is expanding. But a reliable analysis of this poses at least two problems.

First, there are other factors at play. For example, technological advance has also had a strong impact on employment and productivity, benefiting some jobs, hurting others.

Second, while trade clearly boosts national income (and prosperity), this is not always translated into new employment for workers who lost their jobs as a result of competition from imports.

The picture is not the same all over the world. The average length of time a worker takes to find a new job can be much longer in one country than for a similar worker in another country experiencing similar conditions.

In other words, some countries are better at making the adjustment than others. This is partly because some countries have more effective adjustment policies. Those without effective policies are missing an opportunity.

There are many instances where the facts show that the opportunity has been grasped – where freer trade has been healthy for employment. The EU Commission calculates that the creation of its Single Market means that there are somewhere in the range of 300,000 – 900,000 more jobs than there would be without the Single Market.

Often, job prospects are better in companies involved in trade. In the United States, 12 million people owe their jobs to exports; 1.3 million of those jobs were created between 1994 and 1998. And those jobs tend to be better – paid with better security. In Mexico, the best jobs are those related to export activities: sectors which export 60 per cent or more of their production, pay wages 39% higher than the rest of the economy and maquiladora (in-bond assembly) plants pay 3.5 times the Mexican minimum wage.

The facts also show how protectionism hurts employment. The example of the US car industry has already been mentioned: trade barriers designed to protect US jobs by restricting imports from Japan ended up making cars more expensive in the US, so fewer cars were sold and jobs were lost.

In other words, an attempt to tackle a problem in the short term by restricting trade turned into a bigger problem in the longer term.

Even when a country has difficulty making adjustments, the alternative of protectionism would simply make matters worse.

8. The basic principles make the system economically more efficient, and they cut costs

Many of the benefits of the trading system are more difficult to summarize in numbers, but they are still important. They are the result of essential principles at the heart of the system, and they make life simpler for the enterprises directly involved in trade and for the producers of goods and services.

Trade allows a division of labour between countries. It allows resources to be used more appropriately and effectively for production. But the WTO’s trading system offers more than that. It helps to increase efficiency and to cut costs even more because of important principles enshrined in the system.

Imagine a situation where each country sets different rules and different customs duty rates for imports coming from different trading partners. Imagine that a company in one country wants to import raw materials or components – copper for wiring or printed circuit boards for electrical goods, for example – for its own production.

It would not be enough for this company to look at the prices offered by suppliers around the world. The company would also have to make separate calculations about the different duty rates it would be charged on the imports (which would depend on where the imports came from), and it would have to study each of the regulations that apply to products from each country. Buying some copper or circuit boards would become very complicated.

That, in simple terms, is one of the problems of discrimination.

Imagine now that the government announces it will charge the same duty rates on imports from all countries, and it will use the same regulations for all products, no matter where they come from, whether imported or locally produced. Life for the company would be much simpler. Sourcing components would become more efficient and would cost less.

Non-discrimination is just one of the key principles of the WTO’s trading system. Others include:

· Transparency (clear information about policies, rules and regulations);

· Increased certainty about trading conditions (commitments to lower trade barriers and to increase other countries’ access to one’s markets are legally binding);

· Simplification and standardization of customs procedure, removal of red tape, centralized databases of information, and other measures designed to simplify trade that come under the heading “trade facilitation”.

Together, they make trading simpler, cutting companies’ costs and increasing confidence in the future. That in turn also means more jobs and better goods and services for consumers.

9. The system shields governments from narrow interests

The GATT – WTO system which evolved in the second half of the 20th Century helps governments take a more balanced view of trade policy. Governments are better – placed to defend themselves against lobbying from narrow interest groups by focusing on trade – offs that are made in the interests of everyone in the economy

One of the lessons of the protectionism that dominated the early decades of the 20th Century was the damage that can be caused if narrow sectoral interests gain an unbalanced share of political influence. The result was increasingly restrictive policy which turned into a trade war that no one won and everyone lost.

Superficially, restricting imports looks like an effective way of supporting an economic sector. But it biases the economy against other sectors which shouldn’t be penalized – if you protect your clothing industry, everyone else has to pay for more expensive clothes, which puts pressure on wages in all sectors, for example.

Protectionism can also escalate as other countries retaliate by raising their own trade barriers. That’s exactly what happened in the 1920s and 30s with disastrous effects. Even the sectors demanding protection ended up losing.

Governments need to be armed against pressure from narrow interest groups, and the WTO system can help.

The GATT – WTO system covers a wide range of sectors. So, if during a GATT – WTO trade negotiation one pressure group lobbies its government to be considered as a special case in need of protection, the government can reject the protectionist pressure by arguing that it needs a broad-ranging agreement that will benefit all sectors of the economy. Governments do just that, regularly.

10. The system encourages good government

Under WTO rules, once a commitment has been made to liberalize a sector of trade, it is difficult to reverse. The rules also discourage a range of unwise policies. For businesses, that means greater certainty and clarity about trading conditions. For governments it can often mean good discipline.

The rules include commitments not to backslide into unwise policies. Protectionism in general is unwise because of the damage it causes domestically and internationally, as we have already seen.

Particular types of trade barriers cause additional damage because they provide opportunities for corruption and other forms of bad government.

One kind of trade barrier that the WTO’s rules try to tackle is the quota, for example restricting imports or exports to no more than a specific amount each year.

Because quotas limit supply, they artificially raise prices, creating abnormally large profits (economists talk about “quota rent”). That profit can be used to influence policies because more money is available for lobbying.

It can also provide opportunities for corruption, for example in the allocation of quotas among traders. There are plenty of cases where that has happened around the world.

In other words, quotas are a particularly bad way of restricting trade. Governments have agreed through the WTO’s rules that their use should be discouraged.

Nevertheless, quotas of various types remain in use in most countries, and governments argue strongly that they are needed. But they are controlled by WTO agreements and there are commitments to reduce or eliminate many of them, particularly in textiles.

Many other areas of the WTO’s agreements can also help reduce corruption and bad government.

Transparency (such as making available to the public all information on trade regulations), other aspects of “trade facilitation”, clearer criteria for regulations dealing with the safety and standards of products, and non-discrimination also help by reducing the scope for arbitrary decision-making and cheating.

Quite often, governments use the WTO as a welcome external constraint on their policies: “we can’t do this because it would violate the WTO agreements”.