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The highly recommended: International Guidance for MBA distance learning

The highly recommended: International Guidance for MBA distance learning

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أخطاء تسويقية قاتلة

لماذا يفشل التسويق ؟ يحدد عميد علم التسويق فيليب كوتلر عشرة أسباب رئيسية يعتبرها أوجه قصور في ممارسات التسويق المعاصر، منبها إلى أن الأزمة أزمة ممارسة تسويق وليس نظريات تسويق: عدم تركيز وتوجه الشركات نحو التسويق واستهداف العملاء بشكل كاف عدم فهم واستيعاب المؤسسة لعملائها المستهدفين، من حيث الاحتياجات والتغيرات التي تنتابهم. عدم قيام الشركة بمتابعة ورصد أحوال منافسيها، وبذلك تتأخر عنهم، ولا تواكب أي تطورات تطرأ عليهم. سوء إدارة المؤسسة لعلاقاتها مع حملة أسهمها، إما بتجاهلهم تماما أو بالتركيز على متطلباتهم دون غيرهم. عدم تمكن الشركة من العثور على فرص جديدة ، أو التعرف عليها واقتناصها، كأي تطور تكنولوجي جديد، أو أية أسواق جديدة، أو حتى أي ثغرات أو فراغ تتركه شركة تركت السوق. قصور وأخطاء في إجراءات التخطيط التسويقي، كالفهم الخطأ للسوق أو آلياته. قصور في مجال سياسات الإنتاج أو خدمة العملاء، مما يهدر أية مجهودات تسويقية تقوم بها المؤسسة. ضعف محاولات ومجهودات الشركة لتكوين الماركة وتوصيلها للعملاء. عدم تنظيم المؤسسة جيدا، بحيث ينعكس ذلك على مجهودات التسويق. عدم استغلال التطور التكنولوجي بشكل كاف، مما يساعد على تدهور ترتيب الشركة في قائمة الشركات الناجحة المواكبة للتطور والتي تحسن استغلاله لصالحها. ويختتم كوتلر كتابه بعشر وصايا للتسويق الناجح الفعال، هي: تقسيم السوق إلى قطاعات واختيار أفضلها وتكوين مركز ووضع…

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أحاول هنا أن أقَدم إجابة مختصرة وواضحة في نفس الوقت. ماجستير إدارة الاعمال يهدف إلى إعطاء الدارس القدرة فهم عام لأساسيات إدارة الأعمال فيما عدا الجانب الفنى. و تشتمل الدراسة عادة على دراسة مجموعة من المواد الأساسية واختيار بعض المواد الاختيارية.  المواد الأساسية تغطي الادوات التي يحتاجها المدير في أي قطاع من قطاعات العمل، أما المواد الاختيارية فتُغطي تفاصيل خاصة بأحد قطاعات العمل (عمليات، تسويق، تخطيط استراتيجي، تمويل، موارد بشرية، صناعات صغيرة). المواد الأساسية في معظم الأحيان تُغطي دراسة الآتي: الإحصاء وتطبيقاتها في الإدارة Statistics for Managers: يحتاج إي مديرلجمع  الأرقام والمعلومات والتعامل معها وتحليلها وعرض النتائج على آخرين. تعتبر الإحصاء أحد الوسائل الأساسية لتجميع المعلومات وتحليلها. هذا العلم يتعرض لامور مثل نوع المعلومات، كيفية الحصول عليها، طرق تحليل المعلومات المخنلفة، كيفية عرض النتائج، كيفية معرفة العوامل المؤثرة في متغير معين. مبادئ التسويق Marketing: كيفية التفكير في تطوير المنتج أو استحداث منتج جديد، كيفية تحديد سعر المنتج، كيفية تحديد وسائل توزيع المنتج واستخدام وسائط من عدمه، كيفية الدعايا للمنتج. مبادئ المحاسبة Accounitng: مبادئ تسجيل دفاتر المحاسبة لكافة الأنشطة، كيفية إعداد القوائم المالية، تفهم تأثير قرارات معينة على القوائم المالية. مبادئ التمويل وتقييم الشركات Finance: كيفية تحديد قيمة شركة ما أو قيمة أسهمها، استخدام النسب المالية، طرق تمويل الشركات، العلاقة بين إدارة…

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Quick MBA

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Many thanks for our colleagues in College of Cambridge Kipp Business Law Four Paramount Legal Issues The American Legal System Obtaining Legal Counsel Read more …. AccountingFinancial Accounting Accounting Concepts Double Entry Bookkeeping Read more …. Entrepreneurship A Definition of Entrepreneurship Sample Business Plan Outline The Business Model Read more …. Economics Price Elasticity of Demand Industry Concentration Game Theory Read more …. Management The Trusted Leader Thornton’s 3-C Leadership Model Managing People Read more …. Finance Inside Chinese Business Corporate Finance Security Analysis Read more ….Operations Supply Chain Management The Bullwhip Effect Inventory Management Read more …. Marketing Marketing Plan Outline Market Segmentation The Marketing Mix Read more …. Strategy The Strategic Planning Process The Business Vision and Hierarchical Levels of Strategy Read more …. Statistics Central Tendency Dispersion Standard Deviation and Variance Read more ….  

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In today’s highly competitive business environment, budget-oriented planning or forecast-based planning methods are insufficient for a large corporation to survive and prosper. The firm must engage in strategic planning that clearly defines objectives and assesses both the internal and external situation to formulate strategy, implement the strategy, evaluate the progress, and make adjustments as necessary to stay on track. A simplified view of the strategic planning process is shown by the following diagram:   The Strategic Planning Process Mission &       Objectives           Environmental   Scanning   Strategy     Formulation        Strategy  Implementation           Evaluation       & Control   Mission and Objectives The mission statement describes the company’s business vision, including the unchanging values and purpose of the firm and forward-looking visionary goals that guide the pursuit of future opportunities. Guided by the business vision, the firm’s leaders can define measurable financial and strategic objectives. Financial objectives involve measures such as sales targets and earnings growth. Strategic objectives are related to the firm’s business position, and may include measures such as market share and reputation.   Environmental Scan The environmental scan includes the following components: Internal analysis of the firm Analysis of the firm’s industry (task environment) External macroenvironment (PEST analysis) The internal analysis…

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The Business Vision and

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While a business must continually adapt to its competitive environment, there are certain core ideals that remain relatively steady and provide guidance in the process of strategic decision-making. These unchanging ideals form the business vision and are expressed in the company mission statement. In their 1996 article entitled Building Your Company’s Vision, James Collins and Jerry Porras provided a framework for understanding business vision and articulating it in a mission statement. The mission statement communicates the firm’s core ideology and visionary goals, generally consisting of the following three components: Core values to which the firm is committed Core purpose of the firm Visionary goals the firm will pursue to fulfill its mission The firm’s core values and purpose constitute its core ideology and remain relatively constant. They are independent of industry structure and the product life cycle. The core ideology is not created in a mission statement; rather, the mission statement is simply an expression of what already exists. The specific phrasing of the ideology may change with the times, but the underlying ideology remains constant. The three components of the business vision can be portrayed as follows: Core  Values        Core Purpose          …

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Strategy can be formulated on three different levels: corporate level business unit level functional or departmental level. While strategy may be about competing and surviving as a firm, one can argue that products, not corporations compete, and products are developed by business units. The role of the corporation then is to manage its business units and products so that each is competitive and so that each contributes to corporate purposes. Consider Textron, Inc., a successful conglomerate corporation that pursues profits through a range of businesses in unrelated industries. Textron has four core business segments: Aircraft – 32% of revenues Automotive – 25% of revenues Industrial – 39% of revenues Finance – 4% of revenues. While the corporation must manage its portfolio of businesses to grow and survive, the success of a diversified firm depends upon its ability to manage each of its product lines. While there is no single competitor to Textron, we can talk about the competitors and strategy of each of its business units. In the finance business segment, for example, the chief rivals are major banks providing commercial financing. Many managers consider the business level to be the proper focus for strategic planning.   Corporate Level Strategy…

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PEST Analysis

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A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors: Political Economic Social Technological The acronym PEST (or sometimes rearranged as “STEP”) is used to describe a framework for the analysis of these macroenvironmental factors. A PEST analysis fits into an overall environmental scan as shown in the following diagram:       Environmental Scan           /   \ External Analysis     Internal Analysis     /                       \   Macroenvironment  Microenvironment      |   P.E.S.T.          Political Factors Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include: tax policy employment laws environmental regulations trade restrictions and tariffs political stability   Economic Factors Economic factors affect the purchasing power of potential customers and the firm’s cost of capital. The following are examples of factors in the macroeconomy: economic growth interest rates exchange rates inflation rate   Social Factors Social factors include the demographic and cultural aspects of the external macroenvironment. These factors affect customer needs and the size of potential markets. Some social factors include: health consciousness population growth rate age distribution career attitudes emphasis on safety   Technological Factors Technological…

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SWOT Analysis

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  A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. The SWOT analysis provides information that is helpful in matching the firm’s resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection. The following diagram shows how a SWOT analysis fits into an environmental scan:   SWOT Analysis Framework   Environmental Scan           / \            Internal Analysis       External Analysis / \                  / \ Strengths   Weaknesses       Opportunities   Threats | SWOT Matrix Strengths A firm’s strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include: patents strong brand names good reputation among customers cost advantages from proprietary know-how exclusive access to high grade natural resources favorable access to distribution networks   Weaknesses The absence of certain strengths may be viewed as a weakness. For example, each of the…

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Competitive Advantage

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When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage. Michael Porter identified two basic types of competitive advantage: • cost advantage • differentiation advantage A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself. Cost and differentiation advantages are known as positional advantages since they describe the firm’s position in the industry as a leader in either cost or differentiation. A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. The following diagram combines the resource-based and positioning views to illustrate the concept of competitive advantage: A Model of Competitive Advantage Resources Distinctive Competencies Cost Advantage or Differentiation Advantage Value Creation Capabilities Resources and Capabilities According to the resource-based view, in order to develop…

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Porter’s Five Forces

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The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure. Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.   Diagram of Porter’s 5 Forces     SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry   BARRIERS TO ENTRY Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products   THREAT OF SUBSTITUTES -Switching costs -Buyer inclination to  substitute -Price-performance  trade-off of substitutes   BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs….

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If the primary determinant of a firm’s profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns. A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm’s strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter’s generic strategies: Porter’s Generic Strategies Target Scope Advantage Low Cost Product Uniqueness Broad (Industry Wide) Cost Leadership Strategy Differentiation Strategy Narrow (Market Segment) Focus Strategy (low cost) Focus Strategy (differentiation)   Cost Leadership Strategy This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain…

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The Value Chain

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  To analyze the specific activities through which firms can create a competitive advantage, it is useful to model the firm as a chain of value-creating activities. Michael Porter identified a set of interrelated generic activities common to a wide range of firms. The resulting model is known as the value chain and is depicted below:   Primary Value Chain Activities Inbound Logistics >  Operations >  Outbound Logistics >  Marketing & Sales >  Service   The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin. Inbound logistics include the receiving, warehousing, and inventory control of input materials. Operations are the value-creating activities that transform the inputs into the final product. Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc. Marketing & Sales are those activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc. Service activities are those that maintain and enhance the product’s value including customer support, repair services, etc. Any or all of these primary activities may be vital in developing a competitive advantage. For example, logistics activities are…

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Vertical Integration

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     The degree to which a firm owns its upstream suppliers and its downstream buyers is referred to as vertical integration. Because it can have a significant impact on a business unit’s position in its industry with respect to cost, differentiation, and other strategic issues, the vertical scope of the firm is an important consideration in corporate strategy. Expansion of activities downstream is referred to as forward integration, and expansion upstream is referred to as backward integration. The concept of vertical integration can be visualized using the value chain. Consider a firm whose products are made via an assembly process. Such a firm may consider backward integrating into intermediate manufacturing or forward integrating into distribution, as illustrated below:   Example of Backward and Forward Integration No Integration Raw Materials   Intermediate Manufacturing   Assembly   Distribution   End Customer Backward Integration Raw Materials   Intermediate Manufacturing   Assembly   Distribution   End Customer Forward Integration Raw Materials   Intermediate Manufacturing   Assembly   Distribution   End Customer Two issues that should be considered when deciding whether to vertically integrate is cost and control. The cost aspect depends on the cost of market transactions between firms versus the cost of…

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Horizontal Integration

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  The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities. Horizontal growth can be achieved by internal expansion or by external expansion through mergers and acquisitions of firms offering similar products and services. A firm may diversify by growing horizontally into unrelated businesses. Some examples of horizontal integration include: The Standard Oil Company’s acquisition of 40 refineries. An automobile manufacturer’s acquisition of a sport utility vehicle manufacturer. A media company’s ownership of radio, television, newspapers, books, and magazines.   Advantages of Horizontal Integration The following are some benefits sought by firms that horizontally integrate: Economies of scale – acheived by selling more of the same product, for example, by geographic expansion. Economies of scope – achieved by sharing resources common to different products. Commonly referred to as “synergies.” Increased market power (over suppliers and downstream channel members) Reduction in the cost of international trade by operating factories in foreign markets. Sometimes benefits can be gained through customer perceptions of linkages between products. For example, in some cases synergy can be achieved…

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Ansoff Matrix

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To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on the firm’s present and potential products and markets (customers). By considering ways to grow via existing products and new products, and in existing markets and new markets, there are four possible product-market combinations. Ansoff’s matrix is shown below:   Ansoff Matrix     Existing Products New Products Existing Markets Market Penetration       Product Development       New Markets     Market Development       Diversification   Ansoff’s matrix provides four different growth strategies: Market Penetration – the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share. Market Development – the firm seeks growth by targeting its existing products to new market segments. Product Development – the firms develops new products targeted to its existing market segments. Diversification – the firm grows by diversifying into new businesses by developing new products for new markets.   Selecting a Product-Market Growth Strategy The market penetration strategy is the least risky since it leverages many of the firm’s existing resources and capabilities. In a growing market, simply maintaining market share will result in growth, and there may exist opportunities to increase market share if…

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BCG Growth-Share Matrix

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  The Boston Consulting Group, Perspectives on Strategy Perspectives on Strategy contains Bruce Henderson’s original writings on the BCG growth-share matrix. Specific articles include: The Product Portfolio – introduces the growth-share matrix and its dynamics, including the success sequence and the disaster sequence. Cash Traps – explains why the majority of products are cash traps. The Star of the Portfolio – and why market share is so important. Anatomy of the Cash Cow – including the buying and selling of market share for cash cows. The Corporate Portfolio – discussing the advantages of diversified companies. Renaissance of the Portfolio – after the portfolio concept’s falling out of favor, this article makes the case for its return. The 75 articles in Perspectives on Strategy also include the pricing paradox, segment-of-one marketing®, time-based competition, and other articles summarizing the insights of Bruce Henderson and other BCG members.   Companies that are large enough to be organized into strategic business units face the challenge of allocating resources among those units. In the early 1970’s the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on…

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GE / McKinsey Matrix

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In consulting engagements with General Electric in the 1970’s, McKinsey & Company developed a nine-cell portfolio matrix as a tool for screening GE’s large portfolio of strategic business units (SBU). This business screen became known as the GE/McKinsey Matrix and is shown below:   GE / McKinsey Matrix     Business Unit Strength     High      Medium      Low       High         Medium         Low         The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps strategic business units on a grid of the industry and the SBU’s position in the industry. The GE matrix however, attempts to improve upon the BCG matrix in the following two ways: The GE matrix generalizes the axes as “Industry Attractiveness” and “Business Unit Strength” whereas the BCG matrix uses the market growth rate as a proxy for industry attractiveness and relative market share as a proxy for the strength of the business unit. The GE matrix has nine cells vs. four cells in the BCG matrix. Industry attractiveness and business unit strength are calculated by first identifying criteria for each, determining the value of each parameter in the criteria, and multiplying…

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Core Competencies

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In their 1990 article entitled, The Core Competence of the Corporation, C.K. Prahalad and Gary Hamel coined the term core competencies, or the collective learning and coordination skills behind the firm’s product lines. They made the case that core competencies are the source of competitive advantage and enable the firm to introduce an array of new products and services. According to Prahalad and Hamel, core competencies lead to the development of core products. Core products are not directly sold to end users; rather, they are used to build a larger number of end-user products. For example, motors are a core product that can be used in wide array of end products. The business units of the corporation each tap into the relatively few core products to develop a larger number of end user products based on the core product technology. This flow from core competencies to end products is shown in the following diagram:   Core Competencies to End Products End Products  1   2   3   4   5   6   7   8   9  10 11 12 Business 1 Business 2 Business 3 Business 4               Core Product  1                     Core Product  2             Competence 1 Competence 2 Competence…

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During the last half of the twentieth century, many barriers to international trade fell and a wave of firms began pursuing global strategies to gain a competitive advantage. However, some industries benefit more from globalization than do others, and some nations have a comparative advantage over other nations in certain industries. To create a successful global strategy, managers first must understand the nature of global industries and the dynamics of global competition.   Sources of Competitive Advantage from a Global Strategy A well-designed global strategy can help a firm to gain a competitive advantage. This advantage can arise from the following sources:   Efficiency Economies of scale from access to more customers and markets Exploit another country’s resources – labor, raw materials Extend the product life cycle – older products can be sold in lesser developed countries Operational flexibility – shift production as costs, exchange rates, etc. change over time Strategic First mover advantage and only provider of a product to a market Cross subsidization between countries Transfer price Risk Diversify macroeconomic risks (business cycles not perfectly correlated among countries) Diversify operational risks (labor problems, earthquakes, wars) Learning Broaden learning opportunities due to diversity of operating environments Reputation Crossover customers…

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Classical theories of international trade propose that comparative advantage resides in the factor endowments that a country may be fortunate enough to inherit. Factor endowments include land, natural resources, labor, and the size of the local population. Michael E. Porter argued that a nation can create new advanced factor endowments such as skilled labor, a strong technology and knowledge base, government support, and culture. Porter used a diamond shaped diagram as the basis of a framework to illustrate the determinants of national advantage. This diamond represents the national playing field that countries establish for their industries.   Porter’s Diamond of National Advantage   Firm Strategy, Structure, and Rivalry   Factor Conditions     Demand Conditions     Related and Supporting Industries           The individual points on the diamond and the diamond as a whole affect four ingredients that lead to a national comparative advantage. These ingredients are: the availability of resources and skills, information that firms use to decide which opportunities to pursue with those resources and skills, the goals of individuals in companies, the pressure on companies to innovate and invest. The points of the diamond are described as follows. I.  Factor Conditions A country creates…

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Foreign Market Entry

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The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms: Exporting Licensing Joint Venture Direct Investment   Exporting Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses. Exporting commonly requires coordination among four players: Exporter Importer Transport provider Government   Licensing Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance. Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.   Joint…

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Central Tendency

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The term central tendency refers to the “middle” value or perhaps a typical value of the data, and is measured using the mean, median, or mode. Each of these measures is calculated differently, and the one that is best to use depends upon the situation.   Mean The mean is the most commonly-used measure of central tendency. When we talk about an “average”, we usually are referring to the mean. The mean is simply the sum of the values divided by the total number of items in the set. The result is referred to as the arithmetic mean. Sometimes it is useful to give more weighting to certain data points, in which case the result is called the weighted arithmetic mean. The notation used to express the mean depends on whether we are talking about the population mean or the sample mean:   =  population mean   =  sample mean The population mean then is defined as:                       =           where   =  number of data points in the population   =  value of each data point i. The mean is valid only for interval data or ratio data. Since it uses the values of all of the data…

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Dispersion

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Without knowing something about how data is dispersed, measures of central tendency may be misleading. For example, a residential street with 20 homes on it having a mean value of $200,000 with little variation from the mean would be very different from a street with the same mean home value but with 3 homes having a value of $1 million and the other 17 clustered around $60,000. Measures of dispersion provide a more complete picture. Dispersion measures include the range, average deviation, variance, and standard deviation. Range The simplest measure of dispersion is the range. The range is calculated by simply taking the difference between the maximum and minimum values in the data set. However, the range only provides information about the maximum and minimum values and does not say anything about the values in between. Average Deviation Another method is to calculate the average difference between each data point and the mean value, and divide by the number of points to calcuate the average deviation (mean deviation). However, performing this calcuation will result in an average deviation of zero since the values above the mean will cancel the values below the mean. If this method is used, the absolute…

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A commonly used measure of dispersion is the standard deviation, which is simply the square root of the variance. The variance of a data set is calculated by taking the arithmetic mean of the squared differences between each value and the mean value. Squaring the difference has at least three advantages: Squaring makes each term positive so that values above the mean do not cancel values below the mean. Squaring adds more weighting to the larger differences, and in many cases this extra weighting is appropriate since points further from the mean may be more significant. The mathematics are relatively manageable when using this measure in subsequent statisitical calculations. Because the differences are squared, the units of variance are not the same as the units of the data. Therefore, the standard deviation is reported as the square root of the variance and the units then correspond to those of the data set. The calculation and notation of the variance and standard deviation depends on whether we are considering the entire population or a sample set. Following the general convention of using Greek characters to express population parameters and Arabic characters to express sample statistics, the notation for standard deviation and…

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Probability

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 Three Different Concepts of Probability The classical interpretation of probability is a theoretical probability based on the physics of the experiment, but does not require the experiment to be performed. For example, we know that the probability of a balanced coin turning up heads is equal to 0.5 without ever performing trials of the experiment. Under the classical interpretation, the probability of an event is defined as the ratio of the number of outcomes favorable to the event divided by the total number of possible outcomes. Sometimes a situation may be too complex to understand the physical nature of it well enough to calculate probabilities. However, by running a large number of trials and observing the outcomes, we can estimate the probability. This is the empirical probability based on long-run relative frequencies and is defined as the ratio of the number of observed outcomes favorable to the event divided by the total number of observed outcomes. The larger the number of trials, the more accurate the estimate of probability. If the system can be modeled by computer, then simulations can be performed in place of physical trials. A manager frequently faces situations in which neither classical nor empirical probabilities are…

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Certain types of probability calculations involve dividing the number of outcomes associated with an event by the total number of possible outcomes. For simple problems it is easy to count the outcomes, but in more complex situations manual counting can become laborious or impossible. Fortunately, there are formulas for determining the number of ways in which members of a set can be arranged. Such arrangements are referred to as permutations or combinations, depending on whether the order in which the members are arranged is a distinguishing factor. The number of different orders in which members of a group can be arranged for a group of r members taken r at a time is: (r)(r-1)(r-2)…(1)   This is more easily expressed as simply r!. When order is a distinguishing factor, a group of n members taken r at a time results in a number of permutations equal to the first r terms of the following multiplication: (n)(n-1)(n-2)… This can be expressed as: nPr  =  n! / (n – r)!   In combinations, order is not a distinguishing factor: nCr   =   nPr / (r!)   =   n! / (n – r)!r!   For the special case of possible pairs in a group of…

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Supply Chain Management

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A supply chain is a network that includes vendors of raw materials, plants that transform those materials into useful products, and distribution centers to get those products to customers. Without any specific effort to coordinate the overall supply chain system, each organization in the network has its own agenda and operates independently from the others. However, such an unmanaged network results in inefficiencies. For example, a plant may have the goal of maximizing throughput in order to lower unit costs. If the end demand seen by the distribution system does not consume this throughput, there will be an accumulation of inventory. Clearly, there is much to be gained by managing the supply chain network to improve its performance and efficiency. Decision Variables in Supply Chain Management In managing the supply chain, the following are decision variables: Location – of facilities and sourcing points Production – what to produce in which facilities Inventory – how much to order, when to order, safety stocks Transportation – mode of transport, shipment size, routing, and scheduling   The Bullwhip Effect A problem frequently observed in unmanaged supply chains is the bullwhip effect. This effect is an oscillation in the supply chain caused by demand…

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The Bullwhip Effect

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An unmanaged supply chain is not inherently stable. Demand variability increases as one moves up the supply chain away from the retail customer, and small changes in consumer demand can result in large variations in orders placed upstream. Eventually, the network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. This phenomenon is known as the bullwhip effect and has been observed across most industries, resulting in increased cost and poorer service. Causes of the Bullwhip Effect Sources of variability can be demand variability, quality problems, strikes, plant fires, etc. Variability coupled with time delays in the transmission of information up the supply chain and time delays in manufacturing and shipping goods down the supply chain create the bullwhip effect. The following all can contribute to the bullwhip effect: Overreaction to backlogs Neglecting to order in an attempt to reduce inventory No communication up and down the supply chain No coordination up and down the supply chain Delay times for information and material flow Order batching – larger orders result in more variance. Order batching occurs in an effort to reduce ordering costs, to take advantage of…

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Inventory Management

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    To minimize supply and demand imbalances in the supply chain, firms utilize various methods of inventory management. The problem is complicated by the fact that demand is uncertain, and this uncertainty can cause stockouts in which inventory is depleted and orders cannot be filled. Here, we discuss a model in which the inventory level is reviewed periodically, and orders are placed at regular intervals to order up to a certain base stock. This policy is known as a Policy of Periodic Review, Order-Up-To Base Stock. Under this policy, one orders a variable quantity  Q  every fixed period of time  p  in order to maintain an inventory position ( Qty on hand  +  Qty on order ) at a predefined base stock level  S,  also known as the “order-up-to level.” The base stock level  S  is determined by calculating the quantity needed between the time the order is placed and the time that the next period’s order is received, and adding a quantity of safety stock to allow for variation in the demand. The time between the placing of the order and the receiving of the next period’s order is the sum of the review period  p  and the…

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  Some firms have successfully improved their supply chain performance by implementing an approach known as Vendor Managed Inventory (VMI). With VMI, the vendor specifies delivery quantities sent to customers through the distribution channel using data obtained from EDI. Vendor Managed Inventory, Just-in-Time Distribution (JITD), and Efficient Consumer Response (ECR) all refer to similar concepts, but applied to different industries. For example, the grocery and apparel industries tend to use ECR, whereas the automobile industry tends to use VMI and JITD. The Vendor Managed Inventory Approach VMI reduces stock-outs and reduces inventory in the supply chain. Some features of VMI include: Shortening of the supply chain Centralized forecasting Frequent communication of inventory, stock-outs, and planned promotions. Electronic Data Interchange (EDI) linkages facilitate this communication. No manufacturer promotions Trucks are filled in a prioritized order. For example, items that are expected to stock out have top priority, then items that are furthest below targeted stock levels, then advance shipments of promotional items (promotions allowed only in transition phase), and finally, items that are least above targeted stock levels. Relationship with downstream distribution channels Result: Inventory reduction and stock-out reduction   VMI Implementation Challenges VMI can be made to work, but the problem…

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Make to Order

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                                  Traditional production systems produce products and stock them as inventory until they are sold (make-to-stock). In order to reduce inventory and increase the level of customization, some firms have designed their production systems to produce a product only after it is ordered. Such systems are referred to as make-to-order. Make-to-order systems are not appropriate for all types of products, and the make-to-order versus make-to-buy decision must be weighed carefully. The following are some factors to consider when evaluating the prospect of make-to-order:   Value of a custom product:  Are customers willing to pay more for customization? Customer patience:  Are customers willing to wait for a custom product to be manufactured and delivered? If not, the cost of losing the customer to the competition is the margin on the product, plus the value of any future purchases that may be lost as a result of the customer’s switching to the competition. Even if the customer switches to another model from the same firm, a loss of goodwill may result. Cost of stockouts:  Assuming the customer is patient enough to wait the specified delivery time, make-to-order eliminates the problem of…

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  Introduction All businesses have process flows in which a product is designed or manufactured or in which a service is rendered. An on-going goal is to achieve the maximum possible throughput at the lowest possible cost while meeting all the requirements of the product or service. Inventory Benefits A certain minimum amount of in-process inventory is always necessary. This level is defined by Little’s Law: I = R x T where I = inventory, R = flow rate, and T = flow time, all of which are average values. The actual amount of inventory in the process will be greater than the theoretical amount because some inventory always will be in-transit between different locations. Furthermore, the actual levels usually are planned to be even higher. There are four possible reasons that firms intentionally plan excess inventory levels: 1. Economies of scale Quantity discounts offered by suppliers. Fixed ordering costs and fixed setup costs are lower if spread across more units. 2. Production and capacity smoothing Rather than vary processing rate to match varying demand, it may be more economical to process at a constant rate and use inventory as a buffer. 3. Protection against supply disruptions and demand surges…

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Linear programming is a quantitative analysis technique for optimizing an objective function given a set of constraints. As the name implies, the functions must be linear in order for linear programming techniques to be used.   Problem Formulation Checklist The objective function and constraints are formulated from information extracted from the problem statement. The following checklist is useful for minimizing the risk of errors in problem formulation. Every number in problem statement should be either implemented in the formulation or rejected as irrelevant, e.g. sunk costs. Don’t forget any initial conditions, e.g. initial staff on hand at beginning of first staffing period. Ensure every variable in the objective function is listed somewhere in the constraints. Ensure that any non-negativity constraints are listed. Ensure that binary integer variables are restricted to 0,1. For example, Y ∈ {0,1} For good form, move all variables to left hand side of equation, writing them in the order of their subscripts.   Sensitivity Analysis While problems may be modeled using deterministic objective functions, in the real world there is variation. A sensitivity analysis can be performed to determine the sensitivity of the solution to changes in parameters. Microsoft Excel can generates a sensitivity report in…

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Marketing Plan Outline

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  I.   Executive Summary A high-level summary of the marketing plan.   II.   The Challenge Brief description of product to be marketed and associated goals, such as sales figures and strategic goals.   III.   Situation Analysis Company Analysis Goals Focus Culture Strengths Weaknesses Market share Customer Analysis Number Type Value drivers Decision process Concentration of customer base for particular products Competitor Analysis Market position Strengths Weaknesses Market shares Collaborators Subsidiaries, joint ventures, and distributors, etc. Climate Macro-environmental PEST analysis : Political and legal environment Economic environment Social and cultural environment Technological environment SWOT Analysis A SWOT analysis of the business environment can be performed by organizing the environmental factors as follows: The firm’s internal attributes can be classed as strengths and weaknesses. The external environment presents opportunities and threats.   IV.   Market Segmentation Present a description of the market segmentation as follows: Segment 1 Description Percent of sales What they want How they use product Support requirements How to reach them Price sensitivity Segment 2   .   .   .   V.   Alternative Marketing Strategies List and discuss the alternatives that were considered before arriving at the recommended strategy. Alternatives might include discontinuing a product, re-branding, positioning as a premium or value product, etc.   VI.   Selected Marketing…

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Market Segmentation

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Rather than offer the same marketing mix to vastly different customers, market segmentation makes it possible for firms to tailor the marketing mix for specific target markets, thus better satisfying customer needs. Not all elements of the marketing mix are necessarily changed from one segment to the next. For example, in some cases only the promotional campaigns would differ. A market segment should be: measurable accessible by communication and distribution channels different in its response to a marketing mix durable (not changing too quickly) substantial enough to be profitable A market can be segmented by various bases, and industrial markets are segmented somewhat differently from consumer markets, as described below. Consumer Market Segmentation A basis for segmentation is a factor that varies among groups within a market, but that is consistent within groups. One can identify four primary bases on which to segment a consumer market: Geographic segmentation is based on regional variables such as region, climate, population density, and population growth rate. Demographic segmentation is based on variables such as age, gender, ethnicity, education, occupation, income, and family status. Psychographic segmentation is based on variables such as values, attitudes, and lifestyle. Behavioral segmentation is based on variables such as…

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The Marketing Mix

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(The 4 P’s of Marketing) The major marketing management decisions can be classified in one of the following four categories: Product Price Place (distribution) Promotion These variables are known as the marketing mix or the 4 P’s of marketing. They are the variables that marketing managers can control in order to best satisfy customers in the target market. The marketing mix is portrayed in the following diagram:   The Marketing Mix   Product   Place               Target Market                 Price   Promotion   The firm attempts to generate a positive response in the target market by blending these four marketing mix variables in an optimal manner. Product The product is the physical product or service offered to the consumer. In the case of physical products, it also refers to any services or conveniences that are part of the offering. Product decisions include aspects such as function, appearance, packaging, service, warranty, etc.   Price Pricing decisions should take into account profit margins and the probable pricing response of competitors. Pricing includes not only the list price, but also discounts, financing, and other options such as leasing.   Place…

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The Product Life Cycle

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A new product progresses through a sequence of stages from introduction to growth, maturity, and decline. This sequence is known as the product life cycle and is associated with changes in the marketing situation, thus impacting the marketing strategy and the marketing mix. The product revenue and profits can be plotted as a function of the life-cycle stages as shown in the graph below:       Product Life Cycle Diagram     Introduction Stage In the introduction stage, the firm seeks to build product awareness and develop a market for the product. The impact on the marketing mix is as follows: Product branding and quality level is established, and intellectual property protection such as patents and trademarks are obtained. Pricing may be low penetration pricing to build market share rapidly, or high skim pricing to recover development costs. Distribution is selective until consumers show acceptance of the product. Promotion is aimed at innovators and early adopters. Marketing communications seeks to build product awareness and to educate potential consumers about the product.   Growth Stage In the growth stage, the firm seeks to build brand preference and increase market share. Product quality is maintained and additional features and support services may be added. Pricing…

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Product Diffusion Curve

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can be grouped according to how quickly they adopt a new product. On the one extreme, some consumers adopt the product as soon as it becomes available. On the other extreme, some consumers are among the last to purchase a new product. As a whole, the new product adoption process can be modeled in the form of a bell-shaped diffusion curve similar to the following:   New Product Diffusion Curve   Defining bins one standard deviation wide about the mean, five different product adoption groups can be defined: Innovators – well-informed risk-takers who are willing to try an unproven product. Innovators represent the first 2.5% to adopt the product. Early adopters – based on the positive response of innovators, early adopters then begin to purchase the product. Early adopters tend to be educated opinion leaders and represent about 13.5% of consumers. Early majority – careful consumers who tend to avoid risk, the early majority adopts the product once it has been proven by the early adopters. They rely on recommendations from others who have experience with the product. The early majority represents 34% of consumers. Late majority – somewhat skeptical consumers who acquire a product only after it has become…

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Positioning

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As Popularized by Al Ries and Jack Trout  As Popularized by Al Ries and Jack Trout  In their 1981 book, Positioning: The Battle for your Mind, Al Ries and Jack Trout describe how positioning is used as a communication tool to reach target customers in a crowded marketplace. Jack Trout published an article on positioning in 1969, and regular use of the term dates back to 1972 when Ries and Trout published a series of articles in Advertising Age called “The Positioning Era.” Not long thereafter, Madison Avenue advertising executives began to develop positioning slogans for their clients and positioning became a key aspect of marketing communications. Positioning: The Battle for your Mind has become a classic in the field of marketing. The following is a summary of the key points made by Ries and Trout in their book.   Information Overload Ries and Trout explain that while positioning begins with a product, the concept really is about positioning that product in the mind of the customer. This approach is needed because consumers are bombarded with a continuous stream of advertising, with advertisers spending several hundred dollars annually per consumer in the U.S. The consumer’s mind reacts to this high…

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Marketing Warfare

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A summary of Al Ries & Jack Trout ‘s marketing bestseller: The marketing concept states that a firm’s goal should be to identify and profitably satisfy customer needs. In Marketing Warfare Al Ries and Jack Trout argue that marketing is war and that the marketing concept’s customer-oriented philosophy is inadequate. Rather, firms would do better by becoming competitor-oriented. If the key to success were to introduce products closest to those wanted by customers, then the market leader simply would be the firm that performed the best market research. Clearly, much more is required. To illustrate their point, Ries and Trout compare marketing to a football game. If a team simply identifies the goal line and moves the ball towards it without regard to the competing team, they most likely will be blocked in their effort. To win the game, the team must focus its efforts on outwitting, outflanking, or over-powering the other side. This is the case in football, war, and marketing, according to Marketing Warfare. Because of the importance of the competition faced by the firm, a good marketing plan should include an extensive section on competitors. 2500 Years of War There is much that marketers can learn from…

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Market Share

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Sales figures do not necessarily indicate how a firm is performing relative to its competitors. Rather, changes in sales simply may reflect changes in the market size or changes in economic conditions. The firm’s performance relative to competitors can be measured by the proportion of the market that the firm is able to capture. This proportion is referred to as the firm’s market share and is calculated as follows: Market Share    =    Firm’s Sales  /  Total Market Sales Sales may be determined on a value basis (sales price multiplied by volume) or on a unit basis (number of units shipped or number of customers served). While the firm’s own sales figures are readily available, total market sales are more difficult to determine. Usually, this information is available from trade associations and market research firms.   Reasons to Increase Market Share Market share often is associated with profitability and thus many firms seek to increase their sales relative to competitors. Here are some specific reasons that a firm may seek to increase its market share: Economies of scale – higher volume can be instrumental in developing a cost advantage. Sales growth in a stagnant industry – when the industry is not…

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Marketing Strategy

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 e marketing concept of building an organization around the profitable satisfaction of customer needs has helped firms to achieve success in high-growth, moderately competitive markets. However, to be successful in markets in which economic growth has leveled and in which there exist many competitors who follow the marketing concept, a well-developed marketing strategy is required. Such a strategy considers a portfolio of products and takes into account the anticipated moves of competitors in the market.   The Case of Barco In late 1989, Barco N.V.’s projection systems division was faced with Sony’s surprise introduction of a better graphics projector. Barco had been perceived as a leader, introducing high quality products first and targeting a niche market that was willing to pay a higher price. Being a smaller company, Barco could not compete on price, so it traditionally pursued a skimming strategy in the graphics projector market, where it had a 55% market share of the small market. Barco’s overall market share for all types of projectors was only 4%. Even though Barco’s market was mainly in graphics projectors, the company had not introduced a new graphics projector in over two years. Instead, it was spending a large portion of its…

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Marketing Research

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Managers need information in order to introduce products and services that create value in the mind of the customer. But the perception of value is a subjective one, and what customers value this year may be quite different from what they value next year. As such, the attributes that create value cannot simply be deduced from common knowledge. Rather, data must be collected and analyzed. The goal of marketing research is to provide the facts and direction that managers need to make their more important marketing decisions. To maximize the benefit of marketing research, those who use it need to understand the research process and its limitations. Marketing Research vs. Market Research These terms often are used interchangeably, but technically there is a difference. Market research deals specifically with the gathering of information about a market’s size and trends. Marketing research covers a wider range of activities. While it may involve market research, marketing research is a more general systematic process that can be applied to a variety of marketing problems. The Value of Information Information can be useful, but what determines its real value to the organization? In general, the value of information is determined by: The ability and…

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Questionnaire Design

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The questionnaire is a structured technique for collecting primary data in a marketing survey. It is a series of written or verbal questions for which the respondent provides answers. A well-designed questionnaire motivates the respondent to provide complete and accurate information. The survey questionnaire should not be viewed as a stand-alone tool. Along with the questionnaire there is field work, rewards for the respondents, and communication aids, all of which are important components of the questionnaire process.   Steps to Developing a Questionnaire The following are steps to developing a questionnaire – the exact order may vary somewhat. Determine which information is being sought.   Choose a question type (structure and amount of disguise) and method of administration (for example, written form, email or web form, telephone interview, verbal interview). The questionnaire is a structured technique for collecting primary data in a marketing survey. It is a series of written or verbal questions for which the respondent provides answers. A well-designed questionnaire motivates the respondent to provide complete and accurate information. The survey questionnaire should not be viewed as a stand-alone tool. Along with the questionnaire there is field work, rewards for the respondents, and communication aids, all of which…

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Conjoint Analysis

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When asked to do so outright, many consumers are unable to accurately determine the relative importance that they place on product attributes. For example, when asked which attributes are the more important ones, the response may be that they all are important. Furthermore, individual attributes in isolation are perceived differently than in the combinations found in a product. It is difficult for a survey respondent to take a list of attributes and mentally construct the preferred combinations of them. The task is easier if the respondent is presented with combinations of attributes that can be visualized as different product offerings. However, such a survey becomes impractical when there are several attributes that result in a very large number of possible combinations. Fortunately, conjoint analysis can facilitate the process. Conjoint analysis is a tool that allows a subset of the possible combinations of product features to be used to determine the relative importance of each feature in the purchasing decision. Conjoint analysis is based on the fact that the relative values of attributes considered jointly can better be measured than when considered in isolation. In a conjoint analysis, the respondent may be asked to arrange a list of combinations of product…

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The Trusted Leader

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Robert Galford and Anne Seibold Drapeau, The Trusted Leader The book on which this article is based, The Trusted Leader covers the subject of trusted leadership in-depth with plenty of examples that bring theory to life. After introducing the theory, the book presents practical advice for situations frequently encountered by senior leaders.  Table of Contents   Part One: An Overview of Trusted Leadership     1.  What is trusted leadership?     2.  The Trusted Leader Self-Assessment     3.  The Characteristics and Competencies of the Trusted Leader     4.  The Enemies of Trusted Leadership   Part Two: Identifying and Applying the Tools of Trusted Leaders     5.  The Tools of Building Personal Trust     6.  The Tools of Building Organizational Trust   Part Three:  How Trusted Leaders Work     7.  From the Top     8.  Inside Teams, Departments, Offices     9.  Across Teams, Departments, Offices   Part Four: Defining Moments     10.  In Times of Change     11.  When People Leave     12.  In Times of Crisis   Part Five: Building Trust in Perspective     13.  Trust Lost, Trust Rebuilt     14.  When You Leave: The Legacy of Trust   Afterword: The Trusted Leader Continues   Notes and References   About the Authors   Index    Trust is a vital ingredient in organizations since they represent a type of ongoing relationship. In their book The Trusted Leader, Robert Galford and Anne Seibold Drapeau analyze…

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Numerous theories have been put forth about the many aspects of leadership such as motivation, alignment, and empowerment. However, it is not obvious how these pieces fit together into a coherent model, if they do at all. As such, leadership has a reputation of being an art that is practiced by the lucky few who possess certain talents. In his 1999 book, Be The Leader, Make The Difference, consultant Paul B. Thornton proposed an integrating framework that takes these various leadership ideas and transforms them into a model that quickly can be studied, understood, and implemented by managers in order to develop an effective leadership style and better lead their organizations. The model is based on the premise that leaders exist because individuals need guidance, without which they do not always know what they can accomplish, what they should accomplish, or how to accomplish it. To this end, leaders can provide challenge, confidence, and coaching. Thornton calls this framework the 3-C Leadership Model and depicted it as shown below.  3-C Leadership Model  This three vertex diagram illustrates the balanced relationship among the three 3-Cs of leadership: presenting a challenge, building confidence, and providing coaching. Present a Challenge Of the 3…

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Managing People

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The effective management of people in an organization requires an understanding of motivation, job design, reward systems, and group influence.   Behavior Modification Operant conditioning is the learning that takes place when the learner recognizes the connection between a behavior and its consequences. Positive reinforcement vs. punishment: rewarding desired behavior vs. punishing undesired behavior. Negative reinforcement: removing negative consequences from workers who perform the desired behavior. Extinction: removing whatever is currently reinforcing the undesirable behavior. Reinforcement schedules: variable, erratic reinforcement schemes are more effective than steady reinforcement schedules. Classical conditioning: if one gets sick after eating tacos, from that point forward one may get sick from the smell of tacos. People are genetically hard-wired to make certain associations. For example, sickness is associated with food.   Expectancy Theory The expectancy theory of motivation models motivational force as the product of three factors perceived by the individual. There is research evidence to support the theory, and it has become relatively widely accepted.   Principal-Agent Problem In a company, stockholders are principals and managers are agents. The goal of a compensation system is to align principals’ and agents’ interests. Executives who are compensated based on financial performance may favor diversifying the company…

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Expectancy Theory

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 The expectancy theory of motivation has become a commonly accepted theory for explaining how individuals make decisions regarding various behavioral alternatives. Expectancy theory offers the following propositions: When deciding among behavioral options, individuals select the option with the greatest motivation forces (MF). The motivational force for a behavior, action, or task is a function of three distinct perceptions: Expectancy, Instrumentality, and Valance. The motivational force is the product of the three perceptions: MF  =  Expectancy  x  Instrumentality  x  Valence   Expectancy probability: based on the perceived effort-performance relationship. It is the expectancy that one’s effort will lead to the desired performance and is based on past experience, self-confidence, and the perceived difficulty of the performance goal. Example: If I work harder than everyone else in the plant will I produce more? Instrumentality probability: based on the perceived performance-reward relationship. The instrumentality is the belief that if one does meet performance expectations, he or she will receive a greater reward. Example: If I produce more than anyone else in the plant, will I get a bigger raise or a faster promotion? Valence: refers to the value the individual personally places on the rewards. This is a function of his or her…

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  Summary of Stephen R. Covey’s   In his #1 bestseller, Stephen R. Covey presented a framework for personal effectiveness. The following is a summary of the first part of his book, concluding with a list of the seven habits. Inside-Out:  The Change Starts from Within While working on his doctorate in the 1970’s, Stephen R. Covey reviewed 200 years of literature on success. He noticed that since the 1920’s, success writings have focused on solutions to specific problems. In some cases such tactical advice may have been effective, but only for immediate issues and not for the long-term, underlying ones. The success literature of the last half of the 20th century largely attributed success to personality traits, skills, techniques, maintaining a positive attitude, etc. This philosophy can be referred to as the Personality Ethic. However, during the 150 years or so that preceded that period, the literature on success was more character oriented. It emphasized the deeper principles and foundations of success. This philosophy is known as the Character Ethic, under which success is attributed more to underlying characteristics such as integrity, courage, justice, patience, etc. The elements of the Character Ethic are primary traits while those of the Personality…

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Inside Chinese Business

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A Guide for Managers Worldwide Summary of Ming-Jer Chen’s Book   Note: The following text is a summary of part of Ming-Jer Chen’s book. We recommend that you purchase the book in order to benefit from the full depth of the author’s own words. Chapter 1.      Introduction: Who (and Where) are the Chinese? Many non-Chinese find the behavior of Chinese business people to be difficult to understand. To understand it, one must understand Chinese culture. While China is a diverse country, it also has a large degree of unity. While there are 200 dialects, there is a common written language. 90% of the population belongs to a single ethnic group called the Han. Perhaps the most important source of unity is Confucianism, which has endured for more than 2500 years. Confucianism governs every relationship, including business ones. Even when the Chinese emigrate from China and become citizens of other countries, most still consider themselves to be Chinese, even after several generations. Many of those who left China before the 1949 revolution consider themselves more Chinese than those in China today because the emigrants did not experience the communist assaults on their traditional values. Chinese culture and institutions seem vastly different to Westerners,…

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Corporate Finance

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Arguably, the role of a corporation’s management is to increase the value of the firm to its shareholders while observing applicable laws and responsibilities. Corporate finance deals with the strategic financial issues associated with achieving this goal, such as how the corporation should raise and manage its capital, what investments the firm should make, what portion of profits should be returned to shareholders in the form of dividends, and whether it makes sense to merge with or acquire another firm. Balance Sheet Approach to Valuation If the role of management is to increase the shareholder value, then managers can make better decisions if they can predict the impact of those decisions on the firm’s value. By observing the difference in the firm’s equity value at different points in time, one can better evaluate the effectiveness of financial decisions. A rudimentary way of valuing the equity of a company is simply to take its balance sheet and subtract liabilities from assets to arrive at the equity value. However, this book value has little resemblance to the real value of the company. First, the assets are recorded at historical costs, which may be much greater than or much less their present market…

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Security Analysis

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  Security analysis is about valuing the assets, debt, warrants, and equity of companies from the perspective of outside investors using publicly available information. The security analyst must have a thorough understanding of financial statements, which are an important source of this information. As such, the ability to value equity securities requires cross-disciplinary knowledge in both finance and financial accounting. While there is much overlap between the analytical tools used in security analysis and those used in corporate finance, security analysis tends to take the perspective of potential investors, whereas corporate finance tends to take an inside perspective such as that of a corporate financial manager.   Equity Value and Enterprise Value The equity value of a firm is simply its market capitalization; that is, the market price per share multiplied by the number of outstanding shares. The enterprise value, also referred to as the firm value, is the equity value plus the net liabilities. The enterprise value is the value of the productive assets of the firm, not just its equity value, based on the accounting identity: Assets  =  Net Liabilities  +  Equity Note that net values of the assets and liabilities are used. Any cash and cash-equivalents would…

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Financial Ratios

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A firm’s performance can be evaluated using financial ratios. Referencing these ratios to those of other firms allows a comparison to be made. The following is a listing of some useful ratios. Leverage :   Assets / Shareholder’s Equity Gross Margin   =   Gross Profit / Sales. Gross margin measures the profitability considering only variable costs and is a measure of the percentage of revenue that goes to fixed costs and profit. Net Profit Margin   =   Net Income / Sales Total Asset Turnover   =   defined as Sales / Total Assets Return on Assets (ROA)   =   Net Income / Assets ROA is a measure of the return on money provided by both owners and creditors, and is a measure of how efficiently all resources are managed. Return on Equity (ROE)   =   defined as Net Income / Equity where the equity value is the shareholder’s equity at the end of the period in which the income was earned. ROE is a measure of the return on money provided by the firm’s owners. ROE can be calculated indirectly as: ROE  =  ( Net Income / Total Assets ) ( Total Assets / Equity ) ROE also can be calculated using DuPont analysis : ROE  = …

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Free Cash Flow

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When valuing the operations of a firm using a discounted cash flow model, the operating cash flow is needed. This operating cash flow also is called the unlevered free cash flow (UFCF). The term “free cash flow” is used because this cash is free to be paid back to the suppliers of capital. Calculating Free Cash Flow For a particular year, the unlevered free cash flow is calculated as follows: 1. Start with the annual sales and subtract cash costs and depreciation to calculate the earnings before interest and taxes (EBIT). The EBIT also is referred to as the operating income and represents the pre-tax earnings without regard to how the business is financed. 2. Calculate the earnings before interest and after tax (EBIAT) by multiplying the EBIT by one minus the tax rate. Note that the EBIAT represents the after-tax earnings of the firm as if it were financed entirely with equity capital. 3. To arrive at the UFCF, add the depreciation expense back to the EBIAT, and subtract capital expenditures (CAPEX) that were not charged against earnings and subtract any investments in net working capital (NWC). The free cash flow calculation in equation form: Operating Income (EBIT) =…

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Terminal Value

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  In a discounted cash flow valuation, the cash flow is projected for each year into the future for a certain number of years, after which unique annual cash flows cannot be forecasted with reasonable accuracy. At that point, rather than attempting to forecast the varying cash flow for each individual year, one uses a single value representing the discounted value of all subsequent cash flows. This single value is referred to as the terminal value. The terminal value can represent a large portion of the valuation. The terminal value of a piece of manufacturing equipment at the end of its useful life is its salvage value, typically less than 10% of the present value. In contrast, the terminal value associated with a business often is more than 50% of the total present value. For this reason, the terminal value calculation often is critical in performing a valuation. The terminal value can be calculated either based on the value if liquidated or based on the value of the firm as an ongoing concern. Terminal Value if Liquidated If the firm is to be liquidated, the liquidation value can be based on book value, salvage value, or break-up value, but liquidation…

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Debt Valuation

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  In the enterprise model of valuation, the firm’s equity value is calculated by subtracting the value of the firm’s debt from the enterprise value. Debt valuation then becomes an important component of a valuation of the firm’s equity. A company’s debt is valued by calculating the payoffs that debt holders can expect to receive, taking into account the risk of default. The default risk is addressed by considering the probability of default and the amount that could be recovered in that event. For modeling purposes, one may assume that the cash flow from the recovered amount is realized at the end of the year of default. Debt valuation may take one of the following two approaches: Discount the expected cash flow at the expected bond return; or Discount the scheduled bond payments at the rating-adjusted yield-to-maturity.   Debt Valuation – Method 1 Discount the expected cash flow at the expected bond return Under this method, the value of the bond is the sum of the expected annual cash flows discounted at the expected bond return: Value  =  the sum for each year  t  of E(cash flow)t / ( 1 + rdebt )t where  E(cash flow)t  =  expected cash flow…

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(pre-merger value of both firms  +  synergies)    =   pre-merger stock price post-merger number of shares The above equation then can be solved for the value of the minimum required synergies. The success of a merger is measured by whether the value of the acquiring firm is enhanced by it. The practical aspects of mergers often prevent the forecasted benefits from being fully realized and the expected synergy may fall short of expectations.

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In their 1973 paper, The Pricing of Options and Corporate Liabilities, Fischer Black and Myron Scholes published an option valuation formula that today is known as the Black-Scholes model. It has become the standard method of pricing options. The Black-Scholes formula calculates the price of a call option to be: C  =  S N(d1)  –  X e-rT N(d2) where   C  =  price of the call option   S  =  price of the underlying stock   X  =  option exercise price   r  =  risk-free interest rate   T  =  current time until expiration   N()  =  area under the normal curve   d1  =  [ ln(S/X) + (r + σ2/2) T ] / σ T1/2   d2  =  d1 – σ T1/2   Put-call parity requires that: P  =  C  –  S + Xe-rT Then the price of a put option is: P  =  Xe-rT N(-d2)  –  S N(-d1) Assumptions The Black-Scholes model assumes that the option can be exercised only at expiration. It requires that both the risk-free rate and the volatility of the underlying stock price remain constant over the period of analysis. The model also assumes that the underlying stock does not pay dividends; adjustments can…

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Stock Indexes

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Stock indexes are useful for benchmarking portfolios, for generalizing the experience of all investors, and for determining the market return used in the Capital Asset Pricing Model (CAPM). A hypothetical portfolio encompassing all possible securities would be too broad to measure, so proxies such as stock indexes have been developed to serve as indicators of the overall market’s performance. In addition, specialized indexes have been developed to measure the performance of more specific parts of the market, such as small companies. It is important to realize that a stock price index by itself does not represent an average return to shareholders. By definition, a stock price index considers only the prices of the underlying stocks and not the dividends paid. Dividends can account for a large percentage of the total investment return. Weighting One characteristic that varies among stock indexes is how the stocks comprising the index are weighted in the average. Even if no explicit weighting is applied when calculating an average, there may be an implicit one. While a one dollar price change in one stock in a simple stock price index will have the same effect as a one dollar change in any other stock, a given…

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Trading Costs

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The cost associated with trading securities can have a non-negligible impact on portfolio return. Trading costs include the following: Explicit costs – commissions, fees, and taxes. Market maker spread – difference between the bid and ask prices that the specialist sets for a stock; the specialist keeps the difference as compensation for providing immediacy. For less liquid stocks, the specialist has greater exposure to adverse price movements and likely will make the spread larger. Market impact – results when high volume trades influence the market price. Market impact can be broken into two components – a temporary one and a permanent one. The temporary component is due to the need for liquidity to fill the order. The permanent impact is due to the change in the market’s perception of the security as a result of the block trade. Opportunity cost – the effective cost of price movements that occur before the trade executes. NYSE specialists sometimes may appear to have a monopoly on trading their respective securities, creating a larger than necessary spread between bid and ask. However, there is more competition than is initially obvious. First, there is competition for the specialist positions, providing the specialist incentive to price…

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Market Timing

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Some investment managers and individual investors attempt to improve their performance by timing the market and adjusting their portfolio according to predictions about the market or specific sectors. Examples of market timing include switching among sectors, switching among different countries’ securities, switching between stocks and bonds, or switching between stocks and risk-free treasury bills. The effect of correctly timing the market would be to increase the portfolio beta in up markets and decrease it in down markets. For the purpose of this discussion, an up market is one in which the market return exceeds the risk-free rate, and a down market is one in which the market return is less than the risk-free rate. Proponents of market timing may argue that the market timer does not have to be correct 100% of the time in order to benefit from timing. Some even may argue that for market timing to be worthwhile, the timer simply must be right more often than wrong. Opponents to market timing may argue that the financial markets are fairly efficient, and therefore there is little to be gained from attempting to time them. Furthermore, there are transaction costs and tax implications associated with buying and selling…

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The concept of entrepreneurship has a wide range of meanings. On the one extreme an entrepreneur is a person of very high aptitude who pioneers change, possessing characteristics found in only a very small fraction of the population. On the other extreme of definitions, anyone who wants to work for himself or herself is considered to be an entrepreneur. The word entrepreneur originates from the French word, entreprendre, which means “to undertake.” In a business context, it means to start a business. The Merriam-Webster Dictionary presents the definition of an entrepreneur as one who organizes, manages, and assumes the risks of a business or enterprise. Schumpeter’s View of Entrepreneurship Austrian economist Joseph Schumpeter ‘s definition of entrepreneurship placed an emphasis on innovation, such as: new products new production methods new markets new forms of organization Wealth is created when such innovation results in new demand. From this viewpoint, one can define the function of the entrepreneur as one of combining various input factors in an innovative manner to generate value to the customer with the hope that this value will exceed the cost of the input factors, thus generating superior returns that result in the creation of wealth. Entrepreneurship vs….

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Title PageName of company, date, contact information, etc. Table of Contents Executive Summary Business Concept Company Market Potential Management Team Distinct Competencies Required Funding and its Use Exit Strategy Main Sections I.  Company Description Mission Statement Summary of Activity to Date Current Stage of Development Competencies Product or Service Description Benefits to customer Differences from current offerings Objectives Keys to Success Location and Facilities II.  Industry Analysis Entry Barriers Supply and Distribution Technological Factors Seasonality Economic Influences Regulatory Issues III.  Market Analysis Definition of Overall Market Market Size and Growth Market Trends Market Segments Targeted Segments Customer Characteristics Customer Needs Purchasing Decision Process Product Positioning IV.  Competition Profiles of Primary Competitors Competitors’ Products/Services & Market Share Competitive Evaluation of Product Distinct Competitive Advantage Competitive Weaknesses Future Competitors V.  Marketing and Sales Products Offered Pricing Distribution Promotion Advertising and Publicity Trade Shows Partnerships Discounts and Incentives Sales Force Sales Forecasts VI.  Operations Product Development Development Team Development Costs Development Risks Manufacturing (if applicable) Production Processes Production Equipment Quality Assurance Administration Key Suppliers Product / Service Delivery Customer Service and Support Human Resource Plan Facilities VII.  Management and Organization Management Team Open Positions Board of Directors Key Personnel Organizational Chart VIII.  Capitalization and Structure Legal Structure of Company Present Equity…

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The Business Model

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  To extract value from an innovation, a start-up (or any firm for that matter) needs an appropriate business model. Business models convert new technology to economic value. For some start-ups, familiar business models cannot be applied, so a new model must be devised. Not only is the business model important, in some cases the innovation rests not in the product or service but in the business model itself. In their paper, The Role of the Business Model in Capturing Value from Innovation, Henry Chesbrough and Richard S. Rosenbloom present a basic framework describing the elements of a business model. Given the complexities of products, markets, and the environment in which the firm operates, very few individuals, if any, fully understand the organization’s tasks in their entirety. The technical experts know their domain and the business experts know theirs. The business model serves to connect these two domains as shown in the following diagram:   Role of the Business Model   Technical Inputs   Business Model   Economic Outputs A business model draws on a multitude of business subjects, including economics, entrepreneurship, finance, marketing, operations, and strategy. The business model itself is an important determinant of the profits to be…

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Attracting Stakeholders

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A new business requires resources such as funds for R&D, equipment, marketing, and inventory. These funds are obtained by attracting stakeholders. Financial stakeholders are most at risk – these include banks, bond holders, investors, and venture capital firms. However, employees, customers, and suppliers of a business also are at risk. Employees may not receive some of their pay if the business fails, and they may have given up lucrative positions to which they no longer can return. Customers may find that they are stuck with a non-supported product, and suppliers may lose the opportunity to recoup their development costs or to receive their accounts receivable. Because of the risk of failure, attracting stakeholders is more difficult for a new venture than for an established, successful company. Minimizing Downside Exposure One way to make a new venture more attractive to potential stakeholders is to minimize their downside exposure to the fullest extent possible. For example, non-transferable R&D costs can be reduced by using off-the-shelf technology wherever possible. Investment in capital equipment can be made somewhat reversible by using more general machines that can be used for other purposes, thereby enhancing their liquidation value. The initial marketing expenditures can be reduced by…

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The VC Pitch

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Some Tips for Success Acquiring venture capital funding can consume a large amount of valuable time and effort. Here are a few tips that can help you secure funding and get on with the process of building your company. Choose the Right VC Carefully research your potential investors. Learn about their focus areas and their philosophy. Then, go to venture capitalists who have financed firms similar to your own; they will understand what you are saying. Some VC’s are very hands-off, whereas others regularly become quite involved with the operations of their portfolio companies. Be sure to talk to those that more closely match your needs. Once you have identified a good match, be sure to talk to the right person within the firm. For example, if your idea is in the realm of medical technology, be sure that you are speaking to those people in the VC firm. Business Plan A VC likely will spend only a few minutes looking through your business plan. Illustrate concepts using diagrams so that one does not have to read the plan to figure it out. Assume that the VC will not read the entire plan, because he/she probably won’t read it. A…

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Dealing with the Press

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When dealing with the press, it is important to realize that the outcome will not necessarily be like you think it should be. Rather than controlling the press, it is better to think in terms of managing it. The following covers some basics and serves as a primer on managing the press. Know With Whom You Are Dealing If you are contacted by a reporter, the reporter should identify herself and the organization that she is representing. Be sure to have a clear understanding of which media you are dealing with, i.e. a trade publication, newspaper, or television. Provide responses that the reporter will understand. For example, a Wall Street Journal reporter probably will have a better understanding of business issues than will a smaller town newspaper reporter, so be sure to tailor your responses accordingly. Also consider who will be the ultimate audience. Building the Relationship Your relationship with reporters is very important and is the basis of your interaction with the media. These relationships take time to develop, and this time should be viewed as a long-term investment. If you are heading a start-up company that has not established a relationship with the local press, read the local…

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