Worldwide Power:
A Strategic Analysis of Power Corporation of Canada
EXECUTIVE SUMMARY 2
2.1 HISTORY 3
2.2 STRATEGIC GOALS 3
2.3 ORGANIZATION CHART 3
EXTERNAL ANALYSIS 4
3.1 THE GENERAL ENVIRONMENT 4
Global 4
Demographic 4
Political/Legal 4
Economic 4
Socio-cultural 5
Technological 5
3.2 THE INSURANCE INDUSTRY 5
3.4 TURNING THREATS INTO OPPORTUNITIES 7
INTERNAL ANALYSIS 7
4.1 VALUE CHAIN ANALYSIS 7
PRIMARY ACTIVITIES 7
4.2 FINANCIAL RATIOS 7
4.3 TURNING WEAKNESSES INTO STRENGTHS 8
STRATEGY FORMULATION 8
5.1 KEY ISSUES 8
6.2 DECISION CRITERIA 9
RECOMMENDATION 10
IMPLEMENTATION 10
POWER CORPORATION OF CANADA - ORGANIZATION CHART 11
Context
2.1 History
Power Corporation of Canada (Power), Canada’s fourth largest company in revenues , was founded on a vision. In 1925, facing foreign takeover threats from the U.S. in the Canadian electric industry, two Montreal under writers – A.J. Nesbitt and P.A. Thomson – took action to protect Canadian power utilities. They established Power Corporation of Canada, a holding group that would consolidate Canadian power companies under an umbrella organization. Over the years, Power began picking up considerable interests in power utilities across Canada and expanded globally with interests in the United States, Brazil, and China. Throughout the 1950s and ‘60s, Power was deeply hit by a trend of nationalized energy and diversified into other industries such as pulp and paper and finance. In 1968, Paul Desmarais joined the company in a merger and would be Power’s CEO until 1996. This would be the beginning of Power’s strategy to hold large, concentrated investments in a diverse portfolio and to leverage their managerial capital. During Desmarais’ tenure, Power’s corporate assets have increased by over 1500% (C$165 million to C$2.7 billion) and net earnings have grown by 6500% (C$3 million to C$200 million) .
2.2 Strategic Goals
Power has always been characterized by strong and consistent leadership. The company has operated under a romantic view that the leader is critical in shaping an organization to achieve success. Thus, strategic goals are critically important in communicating the message down the hierarchy from vision to mission to objectives. Power is built around a well-defined vision based on its core values of a corporate family.
Power has stated its mission as “enhancing shareholder value through the active management of long-term investments and responsible corporate citizenship”. This mission is outlined with the strategic objective to minimize risk by diversifying across sectors and geographic segments .
2.3 Organization Chart
Power’s principal asset is its 66.4% holding in Power Financial Corporation (Power Financial) which controls Great-West Lifeco Inc. and IGM Financial Inc. Through Power Financial, Power controls a deep network of wholly-owned subsidiaries offering insurance and wealth management across Canada, in the northern United States, and in European nations such as Germany and the United Kingdom. Power remaining portfolio includes seven daily newspapers in Ontario and Quebec, magazines, and websites operated by Gesca Limitée (Gesca) and investments in global technology companies and funds through Power Technology Investment Corporation (Refer to Appendix 1).
External Analysis
3.1 The General Environment
Global
In recent years, market shocks around the world have demonstrated the vast international linkages that are shared between economies. The Asian Financial Crisis of 1997 saw the stock markets across Southeast Asia in near synchronization. The ongoing worldwide slowdown can be attributed back to rotten mortgages in the United States. Multinational corporations now need to be aware of geographic vulnerabilities in a world of free capital mobility. The failure of one foreign subsidiary affects the corporation’s balance sheet as a whole and puts a crunch on other owned subsidiaries around the world.
Demographic
The effects of the baby boom generation are starting to show however the coming years could bring a major demographic shift. In the 2006 Canadian census, 49.5% of Canadians were above the age of 40. That implies almost half of the country will be retired in 20 years. The demographic required to replace the baby boomers in 20 years, age 0-24, represents only 30.9% of Canada and is not sufficient enough to cover the major labour outflow. Considering that Canada has a positive net migration rate (more people are leaving the country than arriving), there could be a major worker shortage in the coming years. This factor affects the insurance industry because the sales of insurance policies will not be enough to cover the increasing insurance claims and payments that will result in an aging population .
Political/Legal
The 2009 Canadian federal budget, which is currently in legislature, proposed a broad stimulus of cash across several sectors. Through the Extraordinary Financing Framework, $200 billion will be injected into the economy to ease credit markets and loosen liquidity. For Canadian insurers, the Canadian Life Assurance Facility was created to level Canadian insurers with foreign competitors who have received government protection through guaranteed programs. The 2009 budget also plans to repeal Section 18.2 of the Income Tax Act, which will allow Canadian multinational companies to deduct interest earned for certain investments in foreign subsidiaries . These measures, along with the various tax cuts and positive externalities from the budget proposals should be very beneficial to Canadian firms, particularly the multinationals.
Economic
Economists are mixed on forecasts for growth in Canada in 2009. The most optimistic outlook has the Canadian economy posting modest growth by the 3rd quarter. Nevertheless, the worldwide economic slowdown has left damaged balance sheets and cash flows in its wake, the effects of which shall be seen as companies release their 2008 annual reports.
Socio-cultural
Most Canadians are automatically covered by insurance through their family or work. The ability to sell extra packages or gain new customers is hindered by the different propensities to save among culture groups. For example, Chinese citizens typical have higher savings rates than western nations. In Canada, South Asians are the largest visible minority with a population of 1.23 million followed by Chinese at 1.16 million and Black at 0.78 million. These visible minorities are primarily situation in urban centres along the border. These cities continue to diversify culturally and understanding differences in culture translates to success in those vast markets.
Technological
Rapid advancement in processing speed of computers is making world a small place. Internet, telephone, and faxes have created a 24-hour global market where at any point in time, shares are bought and sold somewhere in the world. For a company that invests most of its income, this is a crucial factor for Power. In a changing landscape, the latest technologies may be an easy source of competitive advantage.
3.2 The Insurance Industry
The Canadian insurance market was valued at $95.6 billion in 2007. Non-life insurance such as health and property insurance comprised 56.7% of the market’s value. The remaining 43.4% represents life insurance premiums. The 5-year compound annual industry growth (measured 2001-2006) was 5%.
Porter Five Forces
The Threat of New Entrants
There are few barriers to entering the Canadian insurance industry however the market is highly mature and competitive. At 117 firms, a few companies have gained significant market share while the rest have found profitable niches. The market is increasingly complex and requires experienced management and personnel. There is the potential for other financial service providers such as commercial banks and mutual funds to offer insurance.
The Bargaining Power of Buyers
In the insurance industry, the buyers are known as policy holders. Policy holders vary between individual and group consumers. There are many policy holders relative to insurance companies which weakens the buying power. Furthermore, policies are locked into term contracts so the buyer is restricted from switching. Policies that allow “exceptions” usually require high enough costs to disincentive the buyer from switching. While insurance is not an essential need, many businesses involved with risk require insurance policies to function. However, since group policies can include thousands of individual policies, businesses have a little more buying power than individuals.
The Bargaining Power of Suppliers
The suppliers of Canadian insurers are makers of financial computer software and IT service. The market for computer systems is dominated by major firms such as IBM, adding to supplier power. There is little threat of vertical integration because insurance companies do not have the resources and personnel to develop and maintain computer software in-house. However, insurance companies can outsource certain back-office tasks, decreasing the supplier’s demand.
The Threat of Substitute Products or Services
There are no pure substitutes that offer the same features as an insurance policy. Buyers can invest in other savings options however they do not offer the same guaranteed protection that insurance does.
The Competitive Rivalry
There are three main Canadian insurance companies: ING Groep, Sun Life Financial Inc., and Power’ Great-West Lifeco Inc. Alongside these companies, are many smaller firms both domestic and international. Insurers’ assets are protected by regulations creating high exit barriers. With a large threat of new entrants and high exit barriers, the competitive rivalry intensifies as struggling companies continue operating .
3.4 Turning Threats into Opportunities
It is essential for managers to analyze the external environment looking for threats and opportunities. That alone, however, does not guarantee success. Threats should be identified and developed into opportunities. Current opportunities should be capitalized on now to support further opportunities. There is a worldwide economic slowdown. Credit markets are down as are asset prices. While this may be threatening, it is also a rare opportunity. Companies are undervalued during this recession and can be bought for cheap. In years past, government has been actively regulating the financial industry. The very same regulations that people complained about in the past were now being lauded for saving Canadian banks from crashing. Government regulation has help insurance companies with the double taxation of income trusts. Income trusts were a savings vehicle that could be considered a competitor to insurance policies. The double taxation law that was passed makes them less attractive as investments.
Internal Analysis
4.1 Value Chain Analysis
Primary Activities
Inbound Logistics: Financial computer software is purchased from suppliers. Training and maintenance may be required constantly.
Operations: Premium income is invested in financial markets. Financial software and expert analysts help generate returns on the invested income.
Outbound Logistics: Insurance policies are offered at providers of financial services such as commercial banks and wealth managers or physical branches can offer the entire product line.
Marketing and Sales: Online and phone distribution channels lead consumers to physical agents. Wide product range. Aiming for focus on customer service and quick response.
4.2 Financial Ratios
Although Power holds companies in many sectors, the bulk of its income is from its insurance subsidiaries. Thus, when analyzing Power’s financial ratios, it is helpful to view Power as an insurance company. The most important financial statement for an insurance company is the balance sheet. Great-West has important liabilities to its policyholders and it is critical to be able to cover those obligations. The current ratio can determine if Power is too leveraged to handle these obligations. Power has a debt/equity ratio of 0.78 which is well below the industry average of 1.41. Power also has a below industry average leverage ratio, showing that it is well positioned for the current credit crunch. Power’s return ratios are generally better than the industry average however trail competitor Sun Life on return on assets and return on equity. The most concerning ratio is the -32.1% drop in sales from the same time last year. However, Power’s two main competitors, ING and Sun Life, also saw 30% drops in sales. From these ratios, it is clear that Power has been hit by a slowdown in demand across the insurance industry. Since Power has strong leverage and liquidity ratios, it is capable of weathering the storm until sales start growing.
4.3 Turning Weaknesses into Strengths
The organizational chart shows that almost all of Power’s subsidiaries are in the business of insurance. Aside from holdings in Gesca and Pargesa, these insurance subsidiaries are also all based in Canada. These are weaknesses that need to be developed into strengths. Power has an excellent distribution network in Canada and can ented it into the United States. Power also has fresh new investments in China to make it a truly global company. These initiatives are being led by Paul Desmarais Jr., the son of former CEO Paul Desmarais. Strong and consistent leadership is an important value proposition for Power.
Strategy Formulation
5.1 Key Issues
As a holding company, Power is faced with issues of creating value for its subsidiaries.
Diversification
The current economic climate is full of under-valued assets. Given Power’s strong financial position and the extra credit available from the Extraordinary Financing Framework, an acquisition could be a good option for expansion. With an expansion, there arises the question of where and how much. For simplicity sake, the alternatives for expansion are: no expansion, related diversification, unrelated diversification. With related diversification, Power would expand into more insurance companies in North America. Power could capitalize on synergies between sales forces, brand names, and product offerings. An unrelated diversification spreads the vulnerability that Power has to the insurance industry. Power can still create synergies through shared support activities and talent pooling.
Sagging Subsidiary Profits
On October 11, 2008 both Great-West Lifeco and IGM Financial recorded lower quarterly profits. In total, earnings from subsidiaries decreased from $338 million in 2007 to $293 million. Power also received lower earnings from its operations in China through the Power Technology Investment Corporation. Given the strategy of cutting assets and focusing on major investments, Power may look to sell underperforming assets to free up capital. The alternatives are to keep all current subsidiaries, sell insurance subsidiaries, or sell other subsidiaries. Selling insurance subsidiaries would mean less focus on Power’s core business. Power may be too invested in insurance with subsidiaries cannibalizing each other’s sales. Power’s other subsidiaries include interests in television, newspapers, energy, and wines and spirits. Selling these assets will also bring the benefit of extra capital to spend on other investments.
International Expansion
Power’s international portfolio includes Gesca and Power Technology which are concentrated in Europe and China respectively but Power Financial is still based in North America. Power has had a long history of investment in China and Paul Desmarais has influential connections throughout Europe. These would be the two ideal locations for an international expansion of Power Financial. Power Financial already owns Pargesa Holding S.A. which owns major European energy, minerals, and building materials companies. Power Financial could benefit from this market presence by offering a line of insurance policies through a subsidiary.
6.2 Decision Criteria
At the 1999 annual meeting, Paul Desmarais Jr. defined the principles that would guide Power into the new millennium. He reiterated the mission to enhance shareholder value and to focus on companies that had the long-term potential to dominate their markets. This value must be sustainable in the long-term. To do so, companies need to have strong balance sheets to be able to grow autonomously.
Enhances
shareholder value Long-term
sustainability of profits Maintain healthy balance sheet Potential to dominate industry
Related Diversification Y Y Y Y
Unrelated Diversification Y N N Y
No change N N Y N
Sell insurance subsidiaries N N Y N
Sell other subsidiaries Y N Y Y
Expand to Europe Y Y N N
Expand to China Y Y N N
Recommendation
The only alternative that satisfies each of the decision criteria is for related diversification. By choosing to diversify though, Power is also implicitly deciding not to sell any current subsidiaries. An international expansion is not recommended because of the ramifications on the balance sheet and the lack of potential to dominate those markets. International expansions are very costly and would add more liabilities in the short-run. Furthermore, the insurance markets in Europe and China are already developed with their own respective barriers of entry. Therefore, the related diversification would have to occur in North America. In Canada, Power is already a leading insurer through Great-West and London Life but Power’s interests south of the border are less developed. The recommendation is to acquire a controlling interest (all shares if possible) of an insurance company in the United States.
Implementation
Analysts will search the American insurance industry for undervalued assets. Amidst the collapse of AIG, a lack of confidence in American insurance firms has dropped their value. Power should look for cheap companies that possess strong balance sheets such as those exhibiting low price-to-book ratios. Once a suitable company has been found, Power will offer a friendly takeover by buying the company’s shares. If a deal cannot be reached, alternative companies will be approached. Once assuming control of the American firm, expert management will be assigned to oversee the integration of the new company. In the short-term, support activities can be consolidated as well as marketing and sales functions. Over the long-term, the subsidiary will be left with a healthy balance sheet and autonomous control. During the integration, constant reports of financial statements and synergies created will be prepared and evaluated by managers.
Appendices
Power Corporation of Canada - Organization Chart
Drivers of Supplier Power in Canadian Insurance Industry, 2007
Factors of Threat of New Entrants in Canadian Insurance Industry, 2007
Factors of the Threat of Substitutes in Canadian Insurance Industry, 2007
Factors of the Degree of Rivalry in the Canadian Insurance Industry, 2007
Selected Financial Ratios for Power and its Competitors
Power Corporation ING Groep Sun Life Financial Industry
Debt/Equity Ratio 0.78 5.05 0.76 1.41
Leverage Ratio 13.9 48.7 3.9 14.2
Return on Equity 14.8 -0.5 28.9 12.3
Return on Assets 2.2 0 6.6 2.2
Sales (qtr vs. qtr last year) -32.10 -31.10 -30.6 -21.10
SWOT Analysis
Strengths
- diversified portfolio
- experienced leadership
- high brand recognition and goodwill
- well-connected and global executives
Weaknesses
- too exposed to insurance market
- lack of strength out side of canada
Opportunities
- under-valued assets
- government stimulus
- double-taxation of income trusts Threats
- excessive regulation of financial industry
- state-owned competitors
- credit crunch
- market volatility in wealth management industry
- accusations of political interests
Wednesday, April 22, 2009
Fuck Fox
To paraphrase an angry Tom Green:
http://www.youtube.com/watch?v=mzYqdz1lmTE
Fuck you Fox. Fuck! You can fucking suck my balls Fox. You dumb...fucks. Fuck! Do some fucking research you dumb fucks. Fuck you! Fucking Fox. Fuck Red Eye. Fuck! You stupid American...fucks!
Oh I'm American wah wah wah. Fuuuuck! Fuck fuck fuck fuck fuck you. Pentafuck you! Fuck you when you were a fetus. Fuck you to pieces dumb shits. Do some research! And don't mess with Canada.
http://www.youtube.com/watch?v=mzYqdz1lmTE
Fuck you Fox. Fuck! You can fucking suck my balls Fox. You dumb...fucks. Fuck! Do some fucking research you dumb fucks. Fuck you! Fucking Fox. Fuck Red Eye. Fuck! You stupid American...fucks!
Oh I'm American wah wah wah. Fuuuuck! Fuck fuck fuck fuck fuck you. Pentafuck you! Fuck you when you were a fetus. Fuck you to pieces dumb shits. Do some research! And don't mess with Canada.
Sucks to be a Toronto sports fan
Every team sucks. The leafs are rebuilding, the raptors are underachieving, and the jays are overachieving but should really suck. We can't even rely on the unimportant Argos or Rock to win a championship because they suck. Hey did we get the 1996 olympics? no. why? cuz we suck. How about the 200 Olympics? That's a lock right? No, we still sucked.
P.S. Toronto does not suck.
P.S. Toronto does not suck.
Sunday, April 19, 2009
a list of celebrities
yeah i know, great idea eh?
ted turner
james brown
joe buck
ron jeremy
sally fields
jessica walter
fred langan
david miller
barack obama
barack obama's wife
barack obama's barber
benjamin franklin
ice cube
lauryn hill
jason alexander
stromile swift
miss universe
kirsten dunce cap
mary jane parker
eva longoria
missy elliot
joe blow
joe the plummer
christopher plummer
steve jobs
bill gates
carlos slim
guy who founded ikea
myspace guy
jedi kid
actual jedis
chuck norris
whew!
ted turner
james brown
joe buck
ron jeremy
sally fields
jessica walter
fred langan
david miller
barack obama
barack obama's wife
barack obama's barber
benjamin franklin
ice cube
lauryn hill
jason alexander
stromile swift
miss universe
kirsten dunce cap
mary jane parker
eva longoria
missy elliot
joe blow
joe the plummer
christopher plummer
steve jobs
bill gates
carlos slim
guy who founded ikea
myspace guy
jedi kid
actual jedis
chuck norris
whew!
Monday, April 13, 2009
http://www.kiva.org/
http://www.kiva.org/
Kiva seems like a really great idea for creating a win-win situation for investors and society. Kiva directs (and guarantees) invested funds towards small businesses in third-world nations. This form of microfinancing was founded by Muhammad Yunus who won a Nobel Peace Prize in 2006. If you have some extra money that you would like to see a safe return on, I'd advise you to check this site out.
Kiva seems like a really great idea for creating a win-win situation for investors and society. Kiva directs (and guarantees) invested funds towards small businesses in third-world nations. This form of microfinancing was founded by Muhammad Yunus who won a Nobel Peace Prize in 2006. If you have some extra money that you would like to see a safe return on, I'd advise you to check this site out.
Sunday, April 12, 2009
iTunes gripe
I want to see iTunes show what song and artist is playing when it is minized in the taskbar. pretty mcuh every other player does it!
Monday, April 6, 2009
Jason Kapono...good?
If Jason Kapono ever hit 24 out of 25 3 pointers in a row I'd bow down and praise him as the next MJ.
Paul Revere by Beastie Boys lyrics
Now here's a little story, I've got to tell
About three bad brothers, you know so well
It started way back in history
With Adrock, M.C.A., and me, Mike D.
Been had a little horsy named Paul Revere
Just me and my horsy and a quart of beer
Riding across the land, kicking up sand
Sheriff's posse on my tail cause I'm in demand
One lonely Beastie I be
All by myself, with nobody
The sun is beating down on my baseball hat
The air is gettin' hot, the beer is getting flat
Lookin' for a girl, I ran into a guy
His name is M.C.A., I said, "Howdy", he said, "Hi"
He told a little story, that sounded well rehearsed
Four days on the run and that he's dying of thirst
The brew was in my hand, and he was on my tip
His voice was hoarse, his throat was dry, he asked me for a sip
He said, "Can I get some?"
I said, "You can't get none!"
Had a chance to run
Pulled out his shotgun
Quick on the draw, I thought I'd be dead
He put the gun to my head and this is what he said,
"Now my name is M.C.A., I've got a license to kill
I think you know what time it is, it's time to get ill
Now what do we have here, an outlaw and his beer
I run this land, you understand, I make myself clear."
We stepped into the wind, he had a gun, I had a grin
You think this story's over but it's ready to begin
Now, "I got the gun, you got the brew
You got two choices of what you can do
It's not a tough decision as you can see
I can blow you away or you can ride with me" I said,
I'll ride with you if you can get me to the border
The sheriff's after me for what I did to his daughter
I did it like this, I did it like that
I did it with a whiffleball bat
So I'm on the run, the cop's got my gun
And right about now, it's time to have some fun
The King Adrock, that is my name
And I know the fly spot where they got the champagne."
We rode for six hours then we hit the spot
The beat was a bumping and the girlies was hot
This dude was staring like he knows who we are
We took the empty spot next to him at the bar
M.C.A. said, "Yippe Yo, you know this kid?"
I said, "I didn't.", but I know he did
The kid said, "Get ready cause this ain't funny
My name's Mike D. and I'm about to get money."
Pulled out the jammy, aimed it at the sky
He yelled, "Stick 'em up!", and let two fly
Hands went up and people hit the floor
He wasted two kids that ran for the door
"I'm Mike D. and I get respect
Your cash and your jewelry is what I expect"
M.C.A. was with it and he's my ace
So I grabbed the piano player and I punched him in the face
The piano player's out, the music stopped
His boy had beef, and he got dropped
Mike D. grabbed the money, M.C.A. snatched the gold
I grabbed two girlies and a beer that's cold.
About three bad brothers, you know so well
It started way back in history
With Adrock, M.C.A., and me, Mike D.
Been had a little horsy named Paul Revere
Just me and my horsy and a quart of beer
Riding across the land, kicking up sand
Sheriff's posse on my tail cause I'm in demand
One lonely Beastie I be
All by myself, with nobody
The sun is beating down on my baseball hat
The air is gettin' hot, the beer is getting flat
Lookin' for a girl, I ran into a guy
His name is M.C.A., I said, "Howdy", he said, "Hi"
He told a little story, that sounded well rehearsed
Four days on the run and that he's dying of thirst
The brew was in my hand, and he was on my tip
His voice was hoarse, his throat was dry, he asked me for a sip
He said, "Can I get some?"
I said, "You can't get none!"
Had a chance to run
Pulled out his shotgun
Quick on the draw, I thought I'd be dead
He put the gun to my head and this is what he said,
"Now my name is M.C.A., I've got a license to kill
I think you know what time it is, it's time to get ill
Now what do we have here, an outlaw and his beer
I run this land, you understand, I make myself clear."
We stepped into the wind, he had a gun, I had a grin
You think this story's over but it's ready to begin
Now, "I got the gun, you got the brew
You got two choices of what you can do
It's not a tough decision as you can see
I can blow you away or you can ride with me" I said,
I'll ride with you if you can get me to the border
The sheriff's after me for what I did to his daughter
I did it like this, I did it like that
I did it with a whiffleball bat
So I'm on the run, the cop's got my gun
And right about now, it's time to have some fun
The King Adrock, that is my name
And I know the fly spot where they got the champagne."
We rode for six hours then we hit the spot
The beat was a bumping and the girlies was hot
This dude was staring like he knows who we are
We took the empty spot next to him at the bar
M.C.A. said, "Yippe Yo, you know this kid?"
I said, "I didn't.", but I know he did
The kid said, "Get ready cause this ain't funny
My name's Mike D. and I'm about to get money."
Pulled out the jammy, aimed it at the sky
He yelled, "Stick 'em up!", and let two fly
Hands went up and people hit the floor
He wasted two kids that ran for the door
"I'm Mike D. and I get respect
Your cash and your jewelry is what I expect"
M.C.A. was with it and he's my ace
So I grabbed the piano player and I punched him in the face
The piano player's out, the music stopped
His boy had beef, and he got dropped
Mike D. grabbed the money, M.C.A. snatched the gold
I grabbed two girlies and a beer that's cold.
Sunday, April 5, 2009
The Abuse of the English Language in the 9/11 Presidential Address
“In the normal course of events, Presidents come to this chamber to report on the state of the Union. Tonight, no such report is needed. It has already been delivered by the American people”. These words spoken by President George W. Bush began one of the most important speeches is American history. A mere nine days after the incident, Bush was facing the insurmountable task of addressing a fragile nation looking for answers. His response was a carefully planned attack on Al-Qaeda and segues into the war on Iraq. This address to the nation used what many call political language to try to persuade a nation to follow his cause. This political language contained several of the bad habits or tricks that George Orwell outlined in Politics and the English Language. The four language tricks that he describes are: Meaningless words, pretentious diction, verbal false limbs, and dead metaphors. Although it was written in 1946, many of his theories are still true today and can be found in President Bush’s inaugural address.
The most evident language trick in Bush’s address was the use of meaningless words. In Politics and the English Language, Orwell outlined several examples of what he believes were meaningless words. Two of those words, appear predominately in Bush’s address: Freedom and democracy. President Bush commonly refers to terrorists and Al-Qaeda as “enemies of freedom”. Freedom can be viewed in many ways and it all depends on one’s point of view. People in Afghanistan might see freedom as the removal American forces from their area, while President Bush may see freedom as being able to live a normal life. The definition of freedom becomes quite vague and therefore has no finite meaning. The word democracy is also used without any special meaning to it. Democracy is often used to represent America and how it is the ideal way. Ironically, many critics complain that the American electoral system is not perfectly democratic. Perhaps the best example of this came from President Bush himself, when he won the presidency despite not receiving the most votes. If this system can be called democracy, then it truly shows no meaning for the word democracy.
Like all politicians, Bush used several words in his address that could easily replaced with shorter and easier to comprehend words. Orwell describes these words as pretentious diction and they are found throughout the address. Words like directive, pretense, piety, and pluralism could easily be replaced by words that are more common to everyday people. These words stop the flow of the address because it leaves the reader unsure about the meanings of them.
Many of the sentences in the presidential address feel boring and long due to the use of operators and verbal false limbs. They add syllables to the sentence but aren’t of any more use. These verbal false limbs replace verbs and nouns that could express meaning in much better ways. For example, in the phrase “hand over every terrorist”, the words ‘hand over’ can be replaced by single verbs such as surrender or relinquish. These verbs specify the meaning and make the sentence seem less commonplace.
Metaphors are always an effective way to describe something but sometimes when the metaphors are overused and dead, it defeats the purpose. When the same metaphor is used over and over again, the metaphor loses its meaning and effectiveness. Bush declares that the generation will lift a “dark threat of violence” from its people. Violence is very commonly referred to as a threat and associated with darkness. When the reader sees this, it will not evoke any new images because it has been seen too many times before.
President Bush’s presidential address skillfully rallied a lost nation towards a common goal. However, the bad habits that George Orwell outlines in Politics and the English Language are apparent throughout the speech. The use of meaningless words, pretentious diction, operators or verbal false limbs, and dead metaphors significantly reduce the effectiveness of the speech. Unfortunately, political language typically goes hand in hand with these four language tricks. They are, essentially, what makes political language different from everyday English language. This is the reason why many people complain that political language is hard to understand. If politicians ever want to shed their negative image and appeal to the common man, then they should take a page from Orwell’s book and stay clear of the bad habits that affect the English language.
The most evident language trick in Bush’s address was the use of meaningless words. In Politics and the English Language, Orwell outlined several examples of what he believes were meaningless words. Two of those words, appear predominately in Bush’s address: Freedom and democracy. President Bush commonly refers to terrorists and Al-Qaeda as “enemies of freedom”. Freedom can be viewed in many ways and it all depends on one’s point of view. People in Afghanistan might see freedom as the removal American forces from their area, while President Bush may see freedom as being able to live a normal life. The definition of freedom becomes quite vague and therefore has no finite meaning. The word democracy is also used without any special meaning to it. Democracy is often used to represent America and how it is the ideal way. Ironically, many critics complain that the American electoral system is not perfectly democratic. Perhaps the best example of this came from President Bush himself, when he won the presidency despite not receiving the most votes. If this system can be called democracy, then it truly shows no meaning for the word democracy.
Like all politicians, Bush used several words in his address that could easily replaced with shorter and easier to comprehend words. Orwell describes these words as pretentious diction and they are found throughout the address. Words like directive, pretense, piety, and pluralism could easily be replaced by words that are more common to everyday people. These words stop the flow of the address because it leaves the reader unsure about the meanings of them.
Many of the sentences in the presidential address feel boring and long due to the use of operators and verbal false limbs. They add syllables to the sentence but aren’t of any more use. These verbal false limbs replace verbs and nouns that could express meaning in much better ways. For example, in the phrase “hand over every terrorist”, the words ‘hand over’ can be replaced by single verbs such as surrender or relinquish. These verbs specify the meaning and make the sentence seem less commonplace.
Metaphors are always an effective way to describe something but sometimes when the metaphors are overused and dead, it defeats the purpose. When the same metaphor is used over and over again, the metaphor loses its meaning and effectiveness. Bush declares that the generation will lift a “dark threat of violence” from its people. Violence is very commonly referred to as a threat and associated with darkness. When the reader sees this, it will not evoke any new images because it has been seen too many times before.
President Bush’s presidential address skillfully rallied a lost nation towards a common goal. However, the bad habits that George Orwell outlines in Politics and the English Language are apparent throughout the speech. The use of meaningless words, pretentious diction, operators or verbal false limbs, and dead metaphors significantly reduce the effectiveness of the speech. Unfortunately, political language typically goes hand in hand with these four language tricks. They are, essentially, what makes political language different from everyday English language. This is the reason why many people complain that political language is hard to understand. If politicians ever want to shed their negative image and appeal to the common man, then they should take a page from Orwell’s book and stay clear of the bad habits that affect the English language.
To Kill a Mockingbird Essay: True Heroes
True Heroes
To Kill a Mockingbird is a classic tale of good versus evil in the small town of Maycomb, Alabama. It clearly sets up most characters as either a hero, or a villain through unconventional ways without looking at the obvious choice of the “man with the gun” (112). Although Atticus seems to be the clear hero in the story, some other improbable heroes are evident such as Mrs. Dubose and the Finch children. The one thing that raises them to hero status is also the one thing that hurts them so much. In to Kill a Mockingbird, Harper Lee portrays true heroes as people who persevere through hardships even though they know that they will lose.
The Finch children begin to learn the meaning of a true hero and begin to show it themselves. Scout, who still at a young age, doesn’t fully understand the meaning of a true meaning but at the request of his father, becomes an example of one. At school, Scout is well known for her quick temper and ability to get in fights. Since Atticus took the case, Scout is getting in a lot more fights to not opnly defend her honour, but to defend her family’s as well. However, Atticus confronts her and tell her to hold her “head up high an keep those fists down”, which upsets Scout (76). The next day, Scout decides to listen to Atticus and when she is challenged by Cecil Jacobs, Scout decides the walk away. All the children begin to call her a coward and laugh at her but Scout keeps her head up high. Even though she knows that all the kids will insult her, Scout goes through with it anyways. Jem also becomes an example of a hero when he is at the jailhouse with the Sarum mob. Despite being severely outnumbered, Jem decides to stand by his father and defend the door to the jailhouse. Armed with guns and other weapons, the Sarum mob can seriously hurt Jem, but he doesn’t care. All that matters to him is that he stands by his father and supports what he believes in. This just shows that true heroes do not have to be old and wise, and do not have to make huge sacrifices. They just need to stand up for their beliefs in times where there is so support whatsoever.
An unlikely hero in the book is Mrs. Dubose, who strongly overcame her morphine addiction. At first, Mrs. Dubose is seen as an evil and prejudiced character that hates Jem and Scout. Atticus reminds them to see it from her point of view before judging her which leads to them learning about her drug addiction. Mrs. Dubose needs the children to help her through it, yet she suffered in silence. Moreover, she is very ill and close to dying. The real courage comes from the fact that although she knows that she will die, she still tries to overcome her addiction, no matter how painful and difficult it is. Atticus’ description of true heroes is “when you know you’re licked before you begin but you begin anyway and you see it through no matter what (112).” In the end, Mrs. Dubose is able to die honourably and free from her demons. Even though it didn’t matter much, it was still important to her, and that’s what makes her a true hero.
Atticus Finch is the real hero of the book because he takes the biggest risk, despite knowing that he will definitely lose. Atticus shows in many cases, the definition of a true hero but no situation was more important than the Tom Robinson trial. In Maycomb, the thought of taking a negro’s word over a white man’s is ludicrous to the citizens. Especially over a matter as serious as a black man raping a white woman. Regardless of this information, Atticus still takes Tom Robinson’s case and tries to make as big of a difference as possible. When Scout asks him if he thinks that he will win the case, Atticus calmly replies “No, honey (76).” Atticus goes on to explain that “Simply because we were licked a hundred years before we started is no reason for us not to try to win (76).” Basically, Atticus believes that just because it is unlikely that he will win, doesn’t mean he has to give up before trying. In the weeks before the trial, the Finch family had to endure huge amounts of discrimination because of the case. Atticus in specific, received discrimination from people such as Mrs. Dubose and his own sister. It even went as far as his own nephew, saying that he is “ruinin’ the family” and that they cannot even walk the streets anymore (83). Through all these hardships, Atticus remains strong and focuses on his goal, no matter how tough it is. In his closing statements, Atticus pleas to the jury in a manner that the children have never seen before: “His voice had lost its aridity, its detachment (203).” He now longer was speaking as a professional, he was pleading from his heart for them to abandon their set biases. He knows in his heart that they won’t, but that does not stop him from trying. Even Scout knows deep down that the verdict will be guilty, when she compares watching Atticus’ efforts to “watching Atticus walk down the street, raise a rifle to his shoulder and pull the trigger, but watching all the time knowing that the gun was empty (211).” This metaphor explains that Scout knows all along that Tom Robinson will be judged guilty and sees that Atticus is trying so hard for no reason. When the verdict actually comes and unanimously finds Tom Robinson guilty, Atticus has nothing to do but feel proud that he might have made a difference. Which after all, is all he could possibly have done.
Heroes come in many forms, whether it’s a soldier in the war or an old lady overcoming an addiction. Harper Lee believes that true heroes are not the ones with the guns but the ones who persevere, even though they know that they will lose. Brave does not even begin to describe the people who go through so much pain for a lost cause. The universal image of a hero is a young physically able man who uses his strength to solve problems. In to Kill a Mockingbird, the heroes come in many shapes and sizes, from and frail old lady, to a twelve year old boy. This just goes to show, that in our world, anyone can be a hero and everyone should be respected for his or her efforts.
To Kill a Mockingbird is a classic tale of good versus evil in the small town of Maycomb, Alabama. It clearly sets up most characters as either a hero, or a villain through unconventional ways without looking at the obvious choice of the “man with the gun” (112). Although Atticus seems to be the clear hero in the story, some other improbable heroes are evident such as Mrs. Dubose and the Finch children. The one thing that raises them to hero status is also the one thing that hurts them so much. In to Kill a Mockingbird, Harper Lee portrays true heroes as people who persevere through hardships even though they know that they will lose.
The Finch children begin to learn the meaning of a true hero and begin to show it themselves. Scout, who still at a young age, doesn’t fully understand the meaning of a true meaning but at the request of his father, becomes an example of one. At school, Scout is well known for her quick temper and ability to get in fights. Since Atticus took the case, Scout is getting in a lot more fights to not opnly defend her honour, but to defend her family’s as well. However, Atticus confronts her and tell her to hold her “head up high an keep those fists down”, which upsets Scout (76). The next day, Scout decides to listen to Atticus and when she is challenged by Cecil Jacobs, Scout decides the walk away. All the children begin to call her a coward and laugh at her but Scout keeps her head up high. Even though she knows that all the kids will insult her, Scout goes through with it anyways. Jem also becomes an example of a hero when he is at the jailhouse with the Sarum mob. Despite being severely outnumbered, Jem decides to stand by his father and defend the door to the jailhouse. Armed with guns and other weapons, the Sarum mob can seriously hurt Jem, but he doesn’t care. All that matters to him is that he stands by his father and supports what he believes in. This just shows that true heroes do not have to be old and wise, and do not have to make huge sacrifices. They just need to stand up for their beliefs in times where there is so support whatsoever.
An unlikely hero in the book is Mrs. Dubose, who strongly overcame her morphine addiction. At first, Mrs. Dubose is seen as an evil and prejudiced character that hates Jem and Scout. Atticus reminds them to see it from her point of view before judging her which leads to them learning about her drug addiction. Mrs. Dubose needs the children to help her through it, yet she suffered in silence. Moreover, she is very ill and close to dying. The real courage comes from the fact that although she knows that she will die, she still tries to overcome her addiction, no matter how painful and difficult it is. Atticus’ description of true heroes is “when you know you’re licked before you begin but you begin anyway and you see it through no matter what (112).” In the end, Mrs. Dubose is able to die honourably and free from her demons. Even though it didn’t matter much, it was still important to her, and that’s what makes her a true hero.
Atticus Finch is the real hero of the book because he takes the biggest risk, despite knowing that he will definitely lose. Atticus shows in many cases, the definition of a true hero but no situation was more important than the Tom Robinson trial. In Maycomb, the thought of taking a negro’s word over a white man’s is ludicrous to the citizens. Especially over a matter as serious as a black man raping a white woman. Regardless of this information, Atticus still takes Tom Robinson’s case and tries to make as big of a difference as possible. When Scout asks him if he thinks that he will win the case, Atticus calmly replies “No, honey (76).” Atticus goes on to explain that “Simply because we were licked a hundred years before we started is no reason for us not to try to win (76).” Basically, Atticus believes that just because it is unlikely that he will win, doesn’t mean he has to give up before trying. In the weeks before the trial, the Finch family had to endure huge amounts of discrimination because of the case. Atticus in specific, received discrimination from people such as Mrs. Dubose and his own sister. It even went as far as his own nephew, saying that he is “ruinin’ the family” and that they cannot even walk the streets anymore (83). Through all these hardships, Atticus remains strong and focuses on his goal, no matter how tough it is. In his closing statements, Atticus pleas to the jury in a manner that the children have never seen before: “His voice had lost its aridity, its detachment (203).” He now longer was speaking as a professional, he was pleading from his heart for them to abandon their set biases. He knows in his heart that they won’t, but that does not stop him from trying. Even Scout knows deep down that the verdict will be guilty, when she compares watching Atticus’ efforts to “watching Atticus walk down the street, raise a rifle to his shoulder and pull the trigger, but watching all the time knowing that the gun was empty (211).” This metaphor explains that Scout knows all along that Tom Robinson will be judged guilty and sees that Atticus is trying so hard for no reason. When the verdict actually comes and unanimously finds Tom Robinson guilty, Atticus has nothing to do but feel proud that he might have made a difference. Which after all, is all he could possibly have done.
Heroes come in many forms, whether it’s a soldier in the war or an old lady overcoming an addiction. Harper Lee believes that true heroes are not the ones with the guns but the ones who persevere, even though they know that they will lose. Brave does not even begin to describe the people who go through so much pain for a lost cause. The universal image of a hero is a young physically able man who uses his strength to solve problems. In to Kill a Mockingbird, the heroes come in many shapes and sizes, from and frail old lady, to a twelve year old boy. This just goes to show, that in our world, anyone can be a hero and everyone should be respected for his or her efforts.
Fuck Hulu
First, they do not let Canadians view their videos. Now, I see them flaunting this great new service to my face through their new commercials. It seems like the people at NBC are sure good at discriminating online but not on TV. Fight for net neutrality and tell Hulu to fuck themselves.
Saturday, April 4, 2009
CASE STUDY: Wal-Mart in China
Wal-Mart Stores: Everyday Low Prices in China
Summary: (Taken From Harvard's site)
Although Wal-Mart, the world's largest company by revenue, was into its 9th year of operations in China, its stores were still losing money. It had created a miracle in the U.S. retail industry by revolutionizing the sector's business model and successfully implementing its model through innovative practices that enabled it to sell national brands at "Every Day Low Prices". The challenge Wal-Mart faced was whether it could transport its successful model to win in a market with many differing characteristics which threatened its low-cost structure and which could nullify its competitive advantage. Concerned with the application of established domestic business models in international expansion. Also sheds light on other globalization issues such as market entry strategy, localization vs. standardization, the effect of regulation changes on the competitive landscape, and firm performance.
Learning Objective: (Taken From Harvard's site)
To address competitive advantage and its sources (differentiation and cost leadership); debate standardization and localization in international expansion and strategy formation--the fit between firm strategies and external environments; provide students with a basic understanding of the concept of competitive advantage and its sources through a discussion of Wal-Mart's success in the U.S.; discuss the challenges of replicating a successful domestic strategy in a different market environment; explore whether a firm is able to transport its competitive advantage from one market to another using the example of Wal-Mart's entry into China; and think about potential strategies that Wal-Mart China should consider going forward.
Subjects Covered: (Taken From Harvard's site)
Competitive strategy, Global strategy, Consumer behavior, Industry standards, Standardization, Competitive advantage, Expansion, Consumer goods, Department stores, Retail stores, Retailers, Retailing, Business & government, Government & business, Multinational corporations, Internationalization, Localization, Public administration, Public sector.
(My Notes)
Users & Objectives:
1. Cassian Cheung- President of Wal-Mart China, recently resigned
2. Sam Walton, founder
3. Joe Hartfield- CEO of Wal-Mart Asia
Competitors:
• world rival- Carrefour, Thailand's Lotus, Uk's Tesco, Germany's Metro
• foreign operators would usually have a dominant market position at their home markets, strong liquidity, and came with long term plans for China
• mostly operated in the form of hypermarkets
Financial position:
• poor financial results for Wal-Mart China
WAL MART US
Strategy in US:
• opened “one horse”, rural, backwater towns ignored by other retailers
• aimed to serve customers who had travel long distances to save money
• grew outside competitors' radar screens to a substantial size to command economies of scale
• public listing provided company with ample resources to finance more rapid expansion
• selling brand name products for less
• offered multiple store formats, including discount stores, supercentres, warehouse stores, and neighbourhood markets
• brought customers from all income levels
• unique combination of culture and strategies at Wal-Mart that set it apart from its competition
• started by opening discount stores in small towns: (1) avoided direct competition from stronger players, (2) due to small populations it served once Wal-Mart opened a store, the town could not support another store of similar size, and (3) rural backwaters also reduced costs due to lower land and real estate prices
Cost Controls:
• one of company's core capabilities
• only worthwhile cost was the one that got their customers to buy a product and everybody played a part in keeping the cost down
• goal: to drive down the price of products to the lowest they could possibly be
• had a huge purchasing power with 68,000 suppliers, “love hate relationship”
• Wal-Mart demanded lower price, high quality, efficient bookkeeping and punctual delivery from their suppliers
• helped suppliers improve inventory management and efficiency by weeding out extra costs
• forced its suppliers to search hard for ways to eliminate the inefficiency in their own processes in order to drive costs to a minimum and to improve the quality of their products
Logistics Management:
• target was to have inventories at half the rate of sales and to have any required delivery arriving on the shelved within one day
• no store was more than a day's drive from its distribution centre
• use of technology gave Wal-Mart great efficiency in the supply chain arrangement and was a distinct competitive advantage, started using electronic data interchange (EDI), satellite technology: able to connect all stores to home office
• enabled it to offer its customers the right product mix at the right time while keeping inventory and associated costs as low as they could possibly be
Benefits to Workers:
• started profit sharing plans for rank and file workers, 2/3 of the American workforce owned stock in Wal-Mart
• “cross training”: people switched jobs to enable them to understand different parts of the company's operation, which gave them more variation int heir jobs
• financial numbers were also shared with every employee
• position against unions, would rather close a store than allow it to be unionised
• promotes open door policy so that employees could channel complaints
• employees were motivated, happy, and passionate about their job
Competitive Advantage in which customers were looking for:
• Quality of merchandise
• assortment of goods
• price level
• store environment
• customer support
• store hours
• availability of free parking
• Wal- Mart focused on two major drivers: Price and Service
• each Wal-Mart store monitored the prices of about 1500 items in their competitors' stores
• objective: to offer same merchandise at other local stores but at 20% less
• on-going program to lower prices even further when there was the opportunity to do so “roll back”
• “Special Buy”: a product with a special tag that offered everyday items bundled with additional amounts of the same product or another product for a limited time
Customer Service:
• 3 cardinal beliefs: (1) providing great customer service, (2) showing respect for the individual, and (3) striving for excellence
• these beliefs were translated to 10 specific business rules for every executive/ associate
• “Sundown rule” required for employees to answer requests from customers by the end of business hours
Wal Mart China
• 95% of world population was outside U.S
• Wal-mart China has been losing money since they arrived in August 1996
• Wal-Mart in Germany failed because it was hindered by strict union rule,high labour costs, zoning laws and existing competition
• growth in rural areas was much slower
• problems such as, backward infrastructure, diverse regional consumption patterns
• entry into the WTO gave foreign companies more control over wholesaling and distribution
• industry was crowded with both internationally renowned retailers and domestic players
• resulted to high store density in larger cities
• retail market was undergoing continuous consolidation to eliminate weaker operators
• foreign retailers grew rapidly and commanded a market share estimated at only 3% in 2004
• local rivals were competing head on with foreign operators
• supermarket segment was primarily dominated by domestic players
• localised demand, localised supply base, and localised distributio in China also provided domestic players with an edge in establishing strong regional dominance when foreign retailers found it hard to leverage national presence in a regional market
• China saw substantial growth but many factors either a legacy of history or ew phenomena born of reform still impeded the fast development of a national market
Income Disparity
• broadened gap I wealth between rich and poor and between urban and rural populatios
• income below US$500 limit purchases to daily necessities
• US $1000-$2000 purchase consumer durables and commercial housing
• US$2000- look for sophisticated products and advanced information services
• almost impossible to develop a uniformed national merchandising or marketing strategy
• satisfying consumer's demand in different regions became a costly practice
• low income in rural areas raised concerns on Wal-Mart's US-bred strategy of locating stores in smaller communities
• questions whether such areas could support a large supercentre and were forced to re-focus on more expensive, urban locations
Local Protectionism
• local governments had incetives to protect state-owned enterprises under their jurisdiction as they were the base of their political power and a source of private benefits as well as fiscal revenue
• Wal Mart's entrance to Shanghai: published a new commercial plan to restrict the opening of new supercentres in the inner city
• delay in obtaining municipal approval put Wal-Mart in a much disadvantaged position against major competition in Shanghai's retail market
Infrastructure:
• highways were costly to use, toll fees reached as much as 10% or more of total freight costs
• toll collection at the local level was arbitrary and illegal
• under-developed highway network that Wal-Mart depended on increased costs and more waste especially with perishable goods
• backward transportation network greatly added to the cost of inter-regional distribution
• logistics costs were around 20% of GDP compared with just 10-12% I developed markets
Regulatory Restrictions:
• when distribution centre served a large enough number of stores, economies of scale would be achieved therefore pushing costs down
• only three stores were allowed to be launched in one city and only a hadful of cities were open to foreign retailers
• every store opening had to be approved by the central government
• therefore this made Wal-Mart's expansion very slow
• stores in China were supported by two distribution centres, and they were significantly underused but was required given the slow speed of transportation thus usig the distribution centres did not enable Wal-Mart to reduce costs
• Carrefour expanded quickly to occupy important markets and established network by openly bending Chinese regulations
Lack of IT Network:
• lack of IT network and regulatory ban of satellite usage impaired retailer's effieciency in communicating with its 15,000 local suppliers
Chinese Consumers Culture
1. Many Trips, Little Purchase
• many Chinese spent leisure time in commercial centres instead of staying home and compared prices and quality among different shops
• purchase was often impulsive rather than according to plan
• consumers were brand conscious ad loyalty was very hard to cultivate when consumers always shopped around for best bargain
• people would rather pick up a small amount of goods at one time because most shoppers bked or walked which limited bulk buys
• takes Chinese customer at least 5 trips to buy as much as American shopper got I oe
• average cost of serving customer greatly increased
2. Fresh Means Alive
• freshness of food was an indication of quality
• Customers' demad for absolute freshness with poor transportation network required that a large variety of foods had to be procured locally instead of through Wal-Mart's centralised pocuremet system
• diminished economies of scale and interrupted supply chain meant higher costs insatisfying Chinese customers
3. Shoplifting
• associates morale was to easy to maintain when they were paid low wages and did ot have the upside of stock options
• management turn over was high
• labour official in China's Wal-Mart condemned for squeezing suppliers and making workers suffer
Class Discussion Questions: (Class Note)
1. Why is Wal-Mart successful in the US? What are Wal-Mart's competitive advantages and its sources?
Key Success Factors in US:
• one stop shop- buy things I bulk
• different values
• very patriotic
• low cost
• good logistics
• anti unionization policy
• frugal culture
• creative barriers to entry (rural locations)- small town
• reputation
• squeeze suppliers
• efficient logistics
• hiring practices (reducing benefits paid)
• own store brands
• product mix (only products that sell)
• continuously create value
• economies of scale
2. Should Wal-Mart replicate its domestic model in its original form in China? Why? Can it build the same competitive advantage in China through its success domestic model
3. Provide suggestions on potential strategies that Wal-Mart China should consider in going forward.
Wal Mart in China:(Using what is applicable/ not applicable to China from US key success factors)
• logistics: in store housing to reduce transportation, undercut transports, work with local suppliers who established transportig
• squeezing suppliers: no urgent need to modify, suppliers willing to be squeezed, because too many products/ suppliers already
• frugal culture: keep- anti unionization policy (Not applicable In China)
• create barriers to entry (rural locations)- must be modified, rural areas in China cannot support a Wal-Mart, build near highway (suburbs)
• reputation as U.S icon
• Economies of scale- parter with powerful Carforre is a good idea
Summary: (Taken From Harvard's site)
Although Wal-Mart, the world's largest company by revenue, was into its 9th year of operations in China, its stores were still losing money. It had created a miracle in the U.S. retail industry by revolutionizing the sector's business model and successfully implementing its model through innovative practices that enabled it to sell national brands at "Every Day Low Prices". The challenge Wal-Mart faced was whether it could transport its successful model to win in a market with many differing characteristics which threatened its low-cost structure and which could nullify its competitive advantage. Concerned with the application of established domestic business models in international expansion. Also sheds light on other globalization issues such as market entry strategy, localization vs. standardization, the effect of regulation changes on the competitive landscape, and firm performance.
Learning Objective: (Taken From Harvard's site)
To address competitive advantage and its sources (differentiation and cost leadership); debate standardization and localization in international expansion and strategy formation--the fit between firm strategies and external environments; provide students with a basic understanding of the concept of competitive advantage and its sources through a discussion of Wal-Mart's success in the U.S.; discuss the challenges of replicating a successful domestic strategy in a different market environment; explore whether a firm is able to transport its competitive advantage from one market to another using the example of Wal-Mart's entry into China; and think about potential strategies that Wal-Mart China should consider going forward.
Subjects Covered: (Taken From Harvard's site)
Competitive strategy, Global strategy, Consumer behavior, Industry standards, Standardization, Competitive advantage, Expansion, Consumer goods, Department stores, Retail stores, Retailers, Retailing, Business & government, Government & business, Multinational corporations, Internationalization, Localization, Public administration, Public sector.
(My Notes)
Users & Objectives:
1. Cassian Cheung- President of Wal-Mart China, recently resigned
2. Sam Walton, founder
3. Joe Hartfield- CEO of Wal-Mart Asia
Competitors:
• world rival- Carrefour, Thailand's Lotus, Uk's Tesco, Germany's Metro
• foreign operators would usually have a dominant market position at their home markets, strong liquidity, and came with long term plans for China
• mostly operated in the form of hypermarkets
Financial position:
• poor financial results for Wal-Mart China
WAL MART US
Strategy in US:
• opened “one horse”, rural, backwater towns ignored by other retailers
• aimed to serve customers who had travel long distances to save money
• grew outside competitors' radar screens to a substantial size to command economies of scale
• public listing provided company with ample resources to finance more rapid expansion
• selling brand name products for less
• offered multiple store formats, including discount stores, supercentres, warehouse stores, and neighbourhood markets
• brought customers from all income levels
• unique combination of culture and strategies at Wal-Mart that set it apart from its competition
• started by opening discount stores in small towns: (1) avoided direct competition from stronger players, (2) due to small populations it served once Wal-Mart opened a store, the town could not support another store of similar size, and (3) rural backwaters also reduced costs due to lower land and real estate prices
Cost Controls:
• one of company's core capabilities
• only worthwhile cost was the one that got their customers to buy a product and everybody played a part in keeping the cost down
• goal: to drive down the price of products to the lowest they could possibly be
• had a huge purchasing power with 68,000 suppliers, “love hate relationship”
• Wal-Mart demanded lower price, high quality, efficient bookkeeping and punctual delivery from their suppliers
• helped suppliers improve inventory management and efficiency by weeding out extra costs
• forced its suppliers to search hard for ways to eliminate the inefficiency in their own processes in order to drive costs to a minimum and to improve the quality of their products
Logistics Management:
• target was to have inventories at half the rate of sales and to have any required delivery arriving on the shelved within one day
• no store was more than a day's drive from its distribution centre
• use of technology gave Wal-Mart great efficiency in the supply chain arrangement and was a distinct competitive advantage, started using electronic data interchange (EDI), satellite technology: able to connect all stores to home office
• enabled it to offer its customers the right product mix at the right time while keeping inventory and associated costs as low as they could possibly be
Benefits to Workers:
• started profit sharing plans for rank and file workers, 2/3 of the American workforce owned stock in Wal-Mart
• “cross training”: people switched jobs to enable them to understand different parts of the company's operation, which gave them more variation int heir jobs
• financial numbers were also shared with every employee
• position against unions, would rather close a store than allow it to be unionised
• promotes open door policy so that employees could channel complaints
• employees were motivated, happy, and passionate about their job
Competitive Advantage in which customers were looking for:
• Quality of merchandise
• assortment of goods
• price level
• store environment
• customer support
• store hours
• availability of free parking
• Wal- Mart focused on two major drivers: Price and Service
• each Wal-Mart store monitored the prices of about 1500 items in their competitors' stores
• objective: to offer same merchandise at other local stores but at 20% less
• on-going program to lower prices even further when there was the opportunity to do so “roll back”
• “Special Buy”: a product with a special tag that offered everyday items bundled with additional amounts of the same product or another product for a limited time
Customer Service:
• 3 cardinal beliefs: (1) providing great customer service, (2) showing respect for the individual, and (3) striving for excellence
• these beliefs were translated to 10 specific business rules for every executive/ associate
• “Sundown rule” required for employees to answer requests from customers by the end of business hours
Wal Mart China
• 95% of world population was outside U.S
• Wal-mart China has been losing money since they arrived in August 1996
• Wal-Mart in Germany failed because it was hindered by strict union rule,high labour costs, zoning laws and existing competition
• growth in rural areas was much slower
• problems such as, backward infrastructure, diverse regional consumption patterns
• entry into the WTO gave foreign companies more control over wholesaling and distribution
• industry was crowded with both internationally renowned retailers and domestic players
• resulted to high store density in larger cities
• retail market was undergoing continuous consolidation to eliminate weaker operators
• foreign retailers grew rapidly and commanded a market share estimated at only 3% in 2004
• local rivals were competing head on with foreign operators
• supermarket segment was primarily dominated by domestic players
• localised demand, localised supply base, and localised distributio in China also provided domestic players with an edge in establishing strong regional dominance when foreign retailers found it hard to leverage national presence in a regional market
• China saw substantial growth but many factors either a legacy of history or ew phenomena born of reform still impeded the fast development of a national market
Income Disparity
• broadened gap I wealth between rich and poor and between urban and rural populatios
• income below US$500 limit purchases to daily necessities
• US $1000-$2000 purchase consumer durables and commercial housing
• US$2000- look for sophisticated products and advanced information services
• almost impossible to develop a uniformed national merchandising or marketing strategy
• satisfying consumer's demand in different regions became a costly practice
• low income in rural areas raised concerns on Wal-Mart's US-bred strategy of locating stores in smaller communities
• questions whether such areas could support a large supercentre and were forced to re-focus on more expensive, urban locations
Local Protectionism
• local governments had incetives to protect state-owned enterprises under their jurisdiction as they were the base of their political power and a source of private benefits as well as fiscal revenue
• Wal Mart's entrance to Shanghai: published a new commercial plan to restrict the opening of new supercentres in the inner city
• delay in obtaining municipal approval put Wal-Mart in a much disadvantaged position against major competition in Shanghai's retail market
Infrastructure:
• highways were costly to use, toll fees reached as much as 10% or more of total freight costs
• toll collection at the local level was arbitrary and illegal
• under-developed highway network that Wal-Mart depended on increased costs and more waste especially with perishable goods
• backward transportation network greatly added to the cost of inter-regional distribution
• logistics costs were around 20% of GDP compared with just 10-12% I developed markets
Regulatory Restrictions:
• when distribution centre served a large enough number of stores, economies of scale would be achieved therefore pushing costs down
• only three stores were allowed to be launched in one city and only a hadful of cities were open to foreign retailers
• every store opening had to be approved by the central government
• therefore this made Wal-Mart's expansion very slow
• stores in China were supported by two distribution centres, and they were significantly underused but was required given the slow speed of transportation thus usig the distribution centres did not enable Wal-Mart to reduce costs
• Carrefour expanded quickly to occupy important markets and established network by openly bending Chinese regulations
Lack of IT Network:
• lack of IT network and regulatory ban of satellite usage impaired retailer's effieciency in communicating with its 15,000 local suppliers
Chinese Consumers Culture
1. Many Trips, Little Purchase
• many Chinese spent leisure time in commercial centres instead of staying home and compared prices and quality among different shops
• purchase was often impulsive rather than according to plan
• consumers were brand conscious ad loyalty was very hard to cultivate when consumers always shopped around for best bargain
• people would rather pick up a small amount of goods at one time because most shoppers bked or walked which limited bulk buys
• takes Chinese customer at least 5 trips to buy as much as American shopper got I oe
• average cost of serving customer greatly increased
2. Fresh Means Alive
• freshness of food was an indication of quality
• Customers' demad for absolute freshness with poor transportation network required that a large variety of foods had to be procured locally instead of through Wal-Mart's centralised pocuremet system
• diminished economies of scale and interrupted supply chain meant higher costs insatisfying Chinese customers
3. Shoplifting
• associates morale was to easy to maintain when they were paid low wages and did ot have the upside of stock options
• management turn over was high
• labour official in China's Wal-Mart condemned for squeezing suppliers and making workers suffer
Class Discussion Questions: (Class Note)
1. Why is Wal-Mart successful in the US? What are Wal-Mart's competitive advantages and its sources?
Key Success Factors in US:
• one stop shop- buy things I bulk
• different values
• very patriotic
• low cost
• good logistics
• anti unionization policy
• frugal culture
• creative barriers to entry (rural locations)- small town
• reputation
• squeeze suppliers
• efficient logistics
• hiring practices (reducing benefits paid)
• own store brands
• product mix (only products that sell)
• continuously create value
• economies of scale
2. Should Wal-Mart replicate its domestic model in its original form in China? Why? Can it build the same competitive advantage in China through its success domestic model
3. Provide suggestions on potential strategies that Wal-Mart China should consider in going forward.
Wal Mart in China:(Using what is applicable/ not applicable to China from US key success factors)
• logistics: in store housing to reduce transportation, undercut transports, work with local suppliers who established transportig
• squeezing suppliers: no urgent need to modify, suppliers willing to be squeezed, because too many products/ suppliers already
• frugal culture: keep- anti unionization policy (Not applicable In China)
• create barriers to entry (rural locations)- must be modified, rural areas in China cannot support a Wal-Mart, build near highway (suburbs)
• reputation as U.S icon
• Economies of scale- parter with powerful Carforre is a good idea
Organizational Behaviour Terms
Behavioural sciences – fields such as psychology and sociology that seek knowledge of human behaviour and society through the use of the scientific method
Organizational behaviour – the field that seeks increased knowledge of all aspects of behaviour in organizational settings through the use of the scientific method
Theory X – A traditional philosophy of management suggesting that most people are lazy and irresponsible and will work hard only when forced to do so
Theory Y – A philosophy of management suggesting that under the right circumstances, people are fully capable of working productively and accepting responsibility for their work
Organization – a structured social system consisting of groups and individuals working together to meet some agreed-upon objectives
Open systems – self-sustaining systems that transform input from the external environment into output, which the system then returns to the environment
Contingency approach – a perspective suggesting that organizational behaviour is affected by a large number of interacting factors. How someone will behave is said to be contingent upon many different variables at once.
Scientific management – an early approach to management and organizational behaviour emphasizing the importance of designing jobs as efficiently as possible
Time-and-motion study – A type of applied research designed to classify and streamline the individual movements needed to perform jobs with the intent of finding the most efficient way of doing them
Human relations movement – a perspective on organizational behaviour that recognizes the importance of social processes in work settings
Classical organizational theory – an early approach to the study of management that focused on the most efficient way of structuring organizations
Bureaucracy – an organizational design developed by Max Weber that attempts to make organizations operate efficiently by having a clear hierarchy of authority in which people are required to perform well-defined jobs
Theory – effects by scientists to explain why various events occur as they do. Theories consist of basic concepts and assertions regarding the relationship between them
Correlational research – an empirical research technique in which variables of interest are identified and carefully measured. These measures are then analyzed statistically to determine the extent to which they are related to one another
Multiple regression – a statistical technique indicating the extent to which each of several variables contributes to accurate predictions of another variable
Experimental method – an empirical research method in which one or more variables are systematically varied (the independent variables) to determine if such changes have any impact on the behaviour of interest (the dependent variables)
Naturalistic observation – a qualitative research technique in which an investigator observes events occurring in an organization while attempting not to affect those events by being present
Participant observation – naturalistic observations of an organization made by individuals who have been hired as employees
Case method – a qualitative research method in which a particular organization is studied in detail, usually in the hopes of being able to learn about organizational functioning in general
Personality
Personality – the unique and relatively stable patterns of behaviour, thoughts, and emotions shown by individuals
Interactionist perspective – the view that behaviour is a result of a complex interplay between personality and situational factors
Person-job fit – the extent to which individuals possess the traits and competencies required to perform specific jobs
“Big five” dimensions of personality – five basic dimensions of personality that are assumed to underlie many specific traits; conscientiousness, extroversion, agreeableness, emotional stability, openness to experience
Positive affectivity – the tendency to experience positive moods and feelings in a wide range of settings and under many different conditions
Negative affectivity – the tendency to experience negative moods in a wide range of settings and under many different conditions
Type A behaviour pattern – a pattern of behaviour involving high levels of competitiveness, time urgency, and irritability
Type B behaviour pattern – a pattern of behaviour characterized by a casual, laid-back style; the opposite of Type A behaviour pattern
Proactive personality – a personality trait reflecting the extent to which individuals seek to change the environment to suit their purposes and to capitalize on various opportunities
Self-efficacy – individuals’ beliefs concerning their ability to perform specific tasks successfully
Self-monitoring – a personality trait involving the extent to which individuals adapt their behaviour to the demands of specific situations, primarily to make the best possible impression on others
Machiavellianism – a personality trait involving willingness to manipulate others for one’s own purposes
Achievement motivation – the strength of an individual’s desire to excel – to succeed at difficult tasks and to do them better than other persons
Power motivation – the strength of an individual’s desire to be in charge, to be able to exercise control over others
Affiliation motivation – the strength of an individual’s desire to have close, friendly relations with others
Leadership motivation pattern (LMP) – a pattern of personality traits involving high power motivation, low affiliation motivation, and a high degree of self-control
Emotional intelligence – the ability to perceive and control emotions
Objective tests – questionnaires and inventories designed to measure various aspects of personality
Projective tests – methods for measuring personality in which individuals respond to ambiguous stimuli. Their responses provide insights into their personality traits
Reliability – the extent to which a test yields consistent scores on various occasions, and the extent to which all of its items measure the same underlying construct
Validity – the extent to which a test actually measures what it claims to measure
Chapter 6: Work-Related Attitudes: Feelings about Jobs, Organization and People
Attitudes – stable clusters of feelings, beliefs, and behavioural intentions towards specific objects, people, or institutions
Job Descriptive Index (JDI) – a rating scale for assessing job satisfaction. Individuals respond to this questionnaire by indicating whether or not various adjectives describe aspects of their work
Minnesota Satisfaction Questionnaire (MSQ) – a rating scale for assessing job satisfaction in which people indicate the extent to which they are satisfied with various aspects of their jobs
Pay Satisfaction Questionnaire (PSQ) – a questionnaire designed to assess employees’ level of satisfaction with various aspects of their pay (e.g., its overall level, raises, benefits)
Critical incidents technique – a procedure for measuring job satisfaction in which employees describe incidents relating to their work that they have found especially satisfying or dissatisfying
Two-factor theory (of job satisfaction) – a theory, devised by Herzberg, suggesting that satisfaction and dissatisfaction stem from different groups of variables (motivators and hygienes, respectively)
Value theory (of job satisfaction) – theory, devised by Locke, suggesting that job satisfaction depends primarily on the match between the outcomes individuals value in their jobs and their perceptions about the availability of such outcomes
Employee withdrawal – actions, such as chronic absenteeism and voluntary turnover (i.e., quitting one’s job), that enable employees to escape from adverse organizational situations
Organizational commitment – the extent to which an individual identifies and is involved with his or her organization and/or is unwilling to leave it
Side-bet orientation – the view of organizational commitment that focuses on the accumulated investments an individual stands to lose if he or she laves the organization
Goal-congruence orientation – an approach to organizational commitment according to which the degree of agreement between individual’s personal goals and those of the organization is a determinant of organizational commitment
Continuance commitment – the strength of a person’s desire to continue working for an organization because he or she needs to do so and cannot afford to do otherwise
Affective commitment – the strength of a person’s desire to work for an organization because he or she agrees with it and wants to do so
Normative commitment – the strength of a person’s desire to continue working for an organization because he or she feels obligations from others to remain there
Prejudice – negative attitudes toward the members of specific groups, based solely on the fact that they are members of those groups (e.g., age, race, sexual orientation)
Discrimination – the behaviour consistent with a prejudicial attitude; the act of treating someone negatively because of his or her membership in a specific group
Generation X – the generation of people born at the end of the baby boom, 1960-1966
Generation Y – The generation of people born between 1967 and 1979
Diversity management programs – programs in which employees are taught to celebrate the differences between people and in which organizations create supportive work environments for women and minorities
Awareness-based diversity training – a type of diversity management program designed to make people more aware of diversity issues in the workplace and to get them to recognize the underlying assumptions they make about people
Skills-based diversity training – an approach to diversity management that goes beyond awareness-based diversity training and is designed to develop people’s skills with respect to managing diversity
The Work Environment: Culture
Organizational culture – a cognitive framework consisting of attitudes, values, behavioural norms, and expectations shared by organizational members
Subcultures – cultures existing within parts of organizations rather than entirely through them. Members of subcultures share values in addition to the core values of their organization as a whole
Dominant culture – the overall culture of an organization, reflected by core values that are shared throughout the organization
Perception and Learning: Understanding and Adapting to the Work Environment
Perception – the process through which we select, organize, and interpret information gathered by our senses in order to understand the world around us
Social perception – the process through which individuals attempt to combine, integrate, and interpret information about others
Attribution – the process through which individuals attempt to determine the causes of others’ behaviour
Correspondent inferences – judgments made about what someone is like based on observations of his or her behaviour
Kelley’s theory of causal attribution – the approach suggesting that people will believe others’ actions to be caused by internal or external factors based on three types of information: consensus, consistency, and distinctiveness
Perceptual biases – predispositions that people have to misperceive others in various systematic ways
Fundamental attribution error – the tendency to attribute others’ actions to internal causes (e.g., their traits) while largely ignoring external factors that also may have influenced their behaviour
Halo effect – the tendency for our overall impressions of others to affect objective evaluations of their specific traits; perceiving high correlations between characteristics that may be unrelated
Similar-to-me effect – the tendency for people to perceive in a positive light others who are believed to be similar to themselves in any of several different ways
First-impression error – the tendency to base our judgments of others on our earlier impressions of them
Selective perception – the tendency to focus on some aspects of the environment while ignoring others
Stereotypes – beliefs that all members of specific groups share similar traits and behaviours
Performance appraisal – the process of evaluating employees on various work-related dimensions
Impression management – efforts by individuals to improve how they appear to others
Corporate image – the impressions that people have of an organization
Operant conditioning (or instrumental conditioning) – the form of learning in which people associate the consequences of their actions with the actions themselves. Behaviours with positive consequences are acquired; behaviours with negative consequences tend to be eliminated
Law of Effect – the tendency for behaviours leading to desirable consequences to be strengthened and those leading to undesirable consequences to be weakened
Positive reinforcement – the process by which people learn to perform behaviours that lead to the presentation of desired outcomes
Negative reinforcement (of avoidance) – the process by which people learn to perform acts that lead to the removal of undesired events
Punishment – decreasing undesirable behaviour by following it with undesirable consequences
Extinction – the process through which responses that are no longer reinforced tend to gradually diminish in strength
Contingencies of reinforcement – the various relationships between one’s behaviour and the consequences of that behaviour – positive reinforcement, negative reinforcement, punishment and extinction
Continuous reinforcement – a schedule of reinforcement in which all desired behaviours are reinforced
Partial (or intermittent) reinforcement – a schedule of reinforcement in which only some desired behaviours are reinforced. Types include: fixed interval, variable interval, fixed ratio, and variable ratio
Fixed internal schedules – schedules of reinforcement in which a fixed period of time must elapse between the administration of reinforcements
Variable interval schedules – schedules of reinforcement in which a variable period of time (based on some average) must elapse between the administration of reinforcements
Fixed ratio schedules – schedules of reinforcement in which a fixed number of responses must occur between the administration of reinforcements
Variable ratio schedules – schedules of reinforcement in which a variable number of responses (based on some average) must occur between the administration of reinforcements
Schedules of reinforcement – rules governing the timing and frequency of the administration of reinforcement
Observational learning (or modeling) – the form of learning in which people acquire new behaviours by systematically observing the rewards and punishments given to others
Feedback – knowledge of results of one’s behaviour
Organizational behaviour management (or modification or OB Mod) – the practice of altering behaviour in organizations by systematically administering rewards
Shaping – the process of selectivity reinforcing behaviours that approach a desired goal behaviour
Discipline – the process of systematically administering punishments
Progressive discipline – the practice of gradually increasing the severity of punishments for employees who exhibit unacceptable job behaviour
Motivation in Organizations
Motivation – the set of processes that arouse, direct, and maintain human behaviour toward attaining some goal
Need hierarchy theory – Maslow’s theory specifying that there are five human needs (physiological, safety, social, esteem, and self-actualization) and that these are arranged such that lower, more basic needs must be satisfied before higher-level needs become activated
Self-actualization – the need to discover who we are and to develop ourselves to our full potential
ERG theory – an alternative to Maslow’s need hierarchy theory processed by Alderfer, which assets that there are three basic human needs: existence, relatedness, and growth
Outplacement services – assistance in finding new jobs, which companies provide to employees they lay off
Goal setting – the process of determining specific levels of performance for workers to attain
Goal commitment – the degree to which people accept and strive to attain goals
Equity theory – the theory stating that people strive to maintain ratios of their own outcomes (rewards) to their own inputs (contributions) that are equal to the outcome/input ratios of others with whom they compare themselves
Outcomes – the rewards employees receive from their jobs, such as salary and recognition
Inputs – people’s contributions to their jobs, such as their experience, qualifications, or the amount of time worked
Overpayment inequity – the condition, resulting in feelings of guilt, in which the ratio of one’s outcomes to inputs is more than the corresponding ratio of another person with whom that person compares himself or herself
Underpayment inequity – the condition, resulting in feelings of anger, in which the ratio of one’s outcomes to inputs is less than the corresponding ratio of another person with whom that person compares himself or herself
Equitable payment – the state in which one person’s outcome/input ratio is equivalent to that of another person with whom this individual compares himself or herself
Two-tier wage structures – payment systems in which newer employees are paid less than employees hired at earlier times to do the same work
Procedural justice – perceptions of the fairness of the procedures used to determine outcomes
Expectancy theory – the theory that assets that motivation is based on people’s beliefs about the probability that effort will lead to performance (expectancy), multiplied by the probability that performance will lead to reward (instrumentality), multiplied by the perceived value of the reward (valence)
Expectancy – the belief that one’s efforts will positively influence one’s performance
Instrumentality – an individual’s beliefs regarding the likelihood of being rewarded in accord with his or her own level of performance
Valence – the value a person places on the rewards he or she receives from an organization
Cafeteria-style benefit plans – incentive systems in which employees have an opportunity to select the fringe benefits they want from a menu of available alternatives
Pay-for-performance plan – a payment system in which employees are paid differentially, based on the quantity and quality of their performance. Pay-for-performance plans strengthen instrumentality beliefs
Job design – an approach to motivation suggesting that jobs can be created so as to enhance people’s interest in doing them
Job enlargement – the practice of expanding the content of a job to include more variety and greater number of tasks at the same level
Job enrichment – the practice of giving employees a high degree of control over their work, from planning and organization, through implementing the jobs and evaluating the results
Job characteristics model – an approach to job enrichment which specifies that five core job dimensions (skill variety, task identity, task significance, autonomy, and job feedback) produce critical psychological states that lead to beneficial outcomes for individuals (e.g., high job satisfaction) and the organization (e.g., reduced turnover)
Motivating potential score (MPS) – a mathematical index describing the degree to which a job is designed so as to motivate people, as suggested by the job characteristics model. It is computed on the basis of a questionnaire known as the Job Diagnostic Survey (JDS)
Organizational behaviour – the field that seeks increased knowledge of all aspects of behaviour in organizational settings through the use of the scientific method
Theory X – A traditional philosophy of management suggesting that most people are lazy and irresponsible and will work hard only when forced to do so
Theory Y – A philosophy of management suggesting that under the right circumstances, people are fully capable of working productively and accepting responsibility for their work
Organization – a structured social system consisting of groups and individuals working together to meet some agreed-upon objectives
Open systems – self-sustaining systems that transform input from the external environment into output, which the system then returns to the environment
Contingency approach – a perspective suggesting that organizational behaviour is affected by a large number of interacting factors. How someone will behave is said to be contingent upon many different variables at once.
Scientific management – an early approach to management and organizational behaviour emphasizing the importance of designing jobs as efficiently as possible
Time-and-motion study – A type of applied research designed to classify and streamline the individual movements needed to perform jobs with the intent of finding the most efficient way of doing them
Human relations movement – a perspective on organizational behaviour that recognizes the importance of social processes in work settings
Classical organizational theory – an early approach to the study of management that focused on the most efficient way of structuring organizations
Bureaucracy – an organizational design developed by Max Weber that attempts to make organizations operate efficiently by having a clear hierarchy of authority in which people are required to perform well-defined jobs
Theory – effects by scientists to explain why various events occur as they do. Theories consist of basic concepts and assertions regarding the relationship between them
Correlational research – an empirical research technique in which variables of interest are identified and carefully measured. These measures are then analyzed statistically to determine the extent to which they are related to one another
Multiple regression – a statistical technique indicating the extent to which each of several variables contributes to accurate predictions of another variable
Experimental method – an empirical research method in which one or more variables are systematically varied (the independent variables) to determine if such changes have any impact on the behaviour of interest (the dependent variables)
Naturalistic observation – a qualitative research technique in which an investigator observes events occurring in an organization while attempting not to affect those events by being present
Participant observation – naturalistic observations of an organization made by individuals who have been hired as employees
Case method – a qualitative research method in which a particular organization is studied in detail, usually in the hopes of being able to learn about organizational functioning in general
Personality
Personality – the unique and relatively stable patterns of behaviour, thoughts, and emotions shown by individuals
Interactionist perspective – the view that behaviour is a result of a complex interplay between personality and situational factors
Person-job fit – the extent to which individuals possess the traits and competencies required to perform specific jobs
“Big five” dimensions of personality – five basic dimensions of personality that are assumed to underlie many specific traits; conscientiousness, extroversion, agreeableness, emotional stability, openness to experience
Positive affectivity – the tendency to experience positive moods and feelings in a wide range of settings and under many different conditions
Negative affectivity – the tendency to experience negative moods in a wide range of settings and under many different conditions
Type A behaviour pattern – a pattern of behaviour involving high levels of competitiveness, time urgency, and irritability
Type B behaviour pattern – a pattern of behaviour characterized by a casual, laid-back style; the opposite of Type A behaviour pattern
Proactive personality – a personality trait reflecting the extent to which individuals seek to change the environment to suit their purposes and to capitalize on various opportunities
Self-efficacy – individuals’ beliefs concerning their ability to perform specific tasks successfully
Self-monitoring – a personality trait involving the extent to which individuals adapt their behaviour to the demands of specific situations, primarily to make the best possible impression on others
Machiavellianism – a personality trait involving willingness to manipulate others for one’s own purposes
Achievement motivation – the strength of an individual’s desire to excel – to succeed at difficult tasks and to do them better than other persons
Power motivation – the strength of an individual’s desire to be in charge, to be able to exercise control over others
Affiliation motivation – the strength of an individual’s desire to have close, friendly relations with others
Leadership motivation pattern (LMP) – a pattern of personality traits involving high power motivation, low affiliation motivation, and a high degree of self-control
Emotional intelligence – the ability to perceive and control emotions
Objective tests – questionnaires and inventories designed to measure various aspects of personality
Projective tests – methods for measuring personality in which individuals respond to ambiguous stimuli. Their responses provide insights into their personality traits
Reliability – the extent to which a test yields consistent scores on various occasions, and the extent to which all of its items measure the same underlying construct
Validity – the extent to which a test actually measures what it claims to measure
Chapter 6: Work-Related Attitudes: Feelings about Jobs, Organization and People
Attitudes – stable clusters of feelings, beliefs, and behavioural intentions towards specific objects, people, or institutions
Job Descriptive Index (JDI) – a rating scale for assessing job satisfaction. Individuals respond to this questionnaire by indicating whether or not various adjectives describe aspects of their work
Minnesota Satisfaction Questionnaire (MSQ) – a rating scale for assessing job satisfaction in which people indicate the extent to which they are satisfied with various aspects of their jobs
Pay Satisfaction Questionnaire (PSQ) – a questionnaire designed to assess employees’ level of satisfaction with various aspects of their pay (e.g., its overall level, raises, benefits)
Critical incidents technique – a procedure for measuring job satisfaction in which employees describe incidents relating to their work that they have found especially satisfying or dissatisfying
Two-factor theory (of job satisfaction) – a theory, devised by Herzberg, suggesting that satisfaction and dissatisfaction stem from different groups of variables (motivators and hygienes, respectively)
Value theory (of job satisfaction) – theory, devised by Locke, suggesting that job satisfaction depends primarily on the match between the outcomes individuals value in their jobs and their perceptions about the availability of such outcomes
Employee withdrawal – actions, such as chronic absenteeism and voluntary turnover (i.e., quitting one’s job), that enable employees to escape from adverse organizational situations
Organizational commitment – the extent to which an individual identifies and is involved with his or her organization and/or is unwilling to leave it
Side-bet orientation – the view of organizational commitment that focuses on the accumulated investments an individual stands to lose if he or she laves the organization
Goal-congruence orientation – an approach to organizational commitment according to which the degree of agreement between individual’s personal goals and those of the organization is a determinant of organizational commitment
Continuance commitment – the strength of a person’s desire to continue working for an organization because he or she needs to do so and cannot afford to do otherwise
Affective commitment – the strength of a person’s desire to work for an organization because he or she agrees with it and wants to do so
Normative commitment – the strength of a person’s desire to continue working for an organization because he or she feels obligations from others to remain there
Prejudice – negative attitudes toward the members of specific groups, based solely on the fact that they are members of those groups (e.g., age, race, sexual orientation)
Discrimination – the behaviour consistent with a prejudicial attitude; the act of treating someone negatively because of his or her membership in a specific group
Generation X – the generation of people born at the end of the baby boom, 1960-1966
Generation Y – The generation of people born between 1967 and 1979
Diversity management programs – programs in which employees are taught to celebrate the differences between people and in which organizations create supportive work environments for women and minorities
Awareness-based diversity training – a type of diversity management program designed to make people more aware of diversity issues in the workplace and to get them to recognize the underlying assumptions they make about people
Skills-based diversity training – an approach to diversity management that goes beyond awareness-based diversity training and is designed to develop people’s skills with respect to managing diversity
The Work Environment: Culture
Organizational culture – a cognitive framework consisting of attitudes, values, behavioural norms, and expectations shared by organizational members
Subcultures – cultures existing within parts of organizations rather than entirely through them. Members of subcultures share values in addition to the core values of their organization as a whole
Dominant culture – the overall culture of an organization, reflected by core values that are shared throughout the organization
Perception and Learning: Understanding and Adapting to the Work Environment
Perception – the process through which we select, organize, and interpret information gathered by our senses in order to understand the world around us
Social perception – the process through which individuals attempt to combine, integrate, and interpret information about others
Attribution – the process through which individuals attempt to determine the causes of others’ behaviour
Correspondent inferences – judgments made about what someone is like based on observations of his or her behaviour
Kelley’s theory of causal attribution – the approach suggesting that people will believe others’ actions to be caused by internal or external factors based on three types of information: consensus, consistency, and distinctiveness
Perceptual biases – predispositions that people have to misperceive others in various systematic ways
Fundamental attribution error – the tendency to attribute others’ actions to internal causes (e.g., their traits) while largely ignoring external factors that also may have influenced their behaviour
Halo effect – the tendency for our overall impressions of others to affect objective evaluations of their specific traits; perceiving high correlations between characteristics that may be unrelated
Similar-to-me effect – the tendency for people to perceive in a positive light others who are believed to be similar to themselves in any of several different ways
First-impression error – the tendency to base our judgments of others on our earlier impressions of them
Selective perception – the tendency to focus on some aspects of the environment while ignoring others
Stereotypes – beliefs that all members of specific groups share similar traits and behaviours
Performance appraisal – the process of evaluating employees on various work-related dimensions
Impression management – efforts by individuals to improve how they appear to others
Corporate image – the impressions that people have of an organization
Operant conditioning (or instrumental conditioning) – the form of learning in which people associate the consequences of their actions with the actions themselves. Behaviours with positive consequences are acquired; behaviours with negative consequences tend to be eliminated
Law of Effect – the tendency for behaviours leading to desirable consequences to be strengthened and those leading to undesirable consequences to be weakened
Positive reinforcement – the process by which people learn to perform behaviours that lead to the presentation of desired outcomes
Negative reinforcement (of avoidance) – the process by which people learn to perform acts that lead to the removal of undesired events
Punishment – decreasing undesirable behaviour by following it with undesirable consequences
Extinction – the process through which responses that are no longer reinforced tend to gradually diminish in strength
Contingencies of reinforcement – the various relationships between one’s behaviour and the consequences of that behaviour – positive reinforcement, negative reinforcement, punishment and extinction
Continuous reinforcement – a schedule of reinforcement in which all desired behaviours are reinforced
Partial (or intermittent) reinforcement – a schedule of reinforcement in which only some desired behaviours are reinforced. Types include: fixed interval, variable interval, fixed ratio, and variable ratio
Fixed internal schedules – schedules of reinforcement in which a fixed period of time must elapse between the administration of reinforcements
Variable interval schedules – schedules of reinforcement in which a variable period of time (based on some average) must elapse between the administration of reinforcements
Fixed ratio schedules – schedules of reinforcement in which a fixed number of responses must occur between the administration of reinforcements
Variable ratio schedules – schedules of reinforcement in which a variable number of responses (based on some average) must occur between the administration of reinforcements
Schedules of reinforcement – rules governing the timing and frequency of the administration of reinforcement
Observational learning (or modeling) – the form of learning in which people acquire new behaviours by systematically observing the rewards and punishments given to others
Feedback – knowledge of results of one’s behaviour
Organizational behaviour management (or modification or OB Mod) – the practice of altering behaviour in organizations by systematically administering rewards
Shaping – the process of selectivity reinforcing behaviours that approach a desired goal behaviour
Discipline – the process of systematically administering punishments
Progressive discipline – the practice of gradually increasing the severity of punishments for employees who exhibit unacceptable job behaviour
Motivation in Organizations
Motivation – the set of processes that arouse, direct, and maintain human behaviour toward attaining some goal
Need hierarchy theory – Maslow’s theory specifying that there are five human needs (physiological, safety, social, esteem, and self-actualization) and that these are arranged such that lower, more basic needs must be satisfied before higher-level needs become activated
Self-actualization – the need to discover who we are and to develop ourselves to our full potential
ERG theory – an alternative to Maslow’s need hierarchy theory processed by Alderfer, which assets that there are three basic human needs: existence, relatedness, and growth
Outplacement services – assistance in finding new jobs, which companies provide to employees they lay off
Goal setting – the process of determining specific levels of performance for workers to attain
Goal commitment – the degree to which people accept and strive to attain goals
Equity theory – the theory stating that people strive to maintain ratios of their own outcomes (rewards) to their own inputs (contributions) that are equal to the outcome/input ratios of others with whom they compare themselves
Outcomes – the rewards employees receive from their jobs, such as salary and recognition
Inputs – people’s contributions to their jobs, such as their experience, qualifications, or the amount of time worked
Overpayment inequity – the condition, resulting in feelings of guilt, in which the ratio of one’s outcomes to inputs is more than the corresponding ratio of another person with whom that person compares himself or herself
Underpayment inequity – the condition, resulting in feelings of anger, in which the ratio of one’s outcomes to inputs is less than the corresponding ratio of another person with whom that person compares himself or herself
Equitable payment – the state in which one person’s outcome/input ratio is equivalent to that of another person with whom this individual compares himself or herself
Two-tier wage structures – payment systems in which newer employees are paid less than employees hired at earlier times to do the same work
Procedural justice – perceptions of the fairness of the procedures used to determine outcomes
Expectancy theory – the theory that assets that motivation is based on people’s beliefs about the probability that effort will lead to performance (expectancy), multiplied by the probability that performance will lead to reward (instrumentality), multiplied by the perceived value of the reward (valence)
Expectancy – the belief that one’s efforts will positively influence one’s performance
Instrumentality – an individual’s beliefs regarding the likelihood of being rewarded in accord with his or her own level of performance
Valence – the value a person places on the rewards he or she receives from an organization
Cafeteria-style benefit plans – incentive systems in which employees have an opportunity to select the fringe benefits they want from a menu of available alternatives
Pay-for-performance plan – a payment system in which employees are paid differentially, based on the quantity and quality of their performance. Pay-for-performance plans strengthen instrumentality beliefs
Job design – an approach to motivation suggesting that jobs can be created so as to enhance people’s interest in doing them
Job enlargement – the practice of expanding the content of a job to include more variety and greater number of tasks at the same level
Job enrichment – the practice of giving employees a high degree of control over their work, from planning and organization, through implementing the jobs and evaluating the results
Job characteristics model – an approach to job enrichment which specifies that five core job dimensions (skill variety, task identity, task significance, autonomy, and job feedback) produce critical psychological states that lead to beneficial outcomes for individuals (e.g., high job satisfaction) and the organization (e.g., reduced turnover)
Motivating potential score (MPS) – a mathematical index describing the degree to which a job is designed so as to motivate people, as suggested by the job characteristics model. It is computed on the basis of a questionnaire known as the Job Diagnostic Survey (JDS)
3 Questions About Motown
1. Why was HDH not able to duplicate the chart topping success they had at Motown when they formed their own label?
- Although HDH were brilliant writers and producers on their own, they still suffered from a lack of charisma star performers. The Motown machine was able to produce stage ready stars by their first single; however HDH did not have the luxury of writing for polished performers with their new label. As a result, despite having mild short-term success, none of the artists on HDH’s new labels would come close to matching the careers of most Motown artists. Ultimately, without big name performers on their labels, HDH’s labels would eventually go out of business by 1974.
2. What was most responsible for HDH’s Motown success, why?
- HDH had some of the best performers in America singing their songs. Many of their songs were sung by superstars such as Diana Ross, The Supremes, and Marvin Gaye. Many other writers had similar success for the same reason. While the writing by HDH was very good, the songs could not be as successful as they were without the right artist. For example, Otis Redding’s “Respect” was a mild success but the song took off with Aretha Franklin’s rendition of it. Furthermore, the power that Motown wielded at the time ensured that their songs would be heard and available all around the nation. Every radio station and every record store would have the latest Motown records. HDH’s new label did not have this power and thus it was harder to reach a broad audience.
3. In the final analysis, do you think Motown would have had more hits had they kept HDH instead of firing them?
- ¬Although the key to Motown’s success was its artists, HDH was still an integral component of the Motown machine. Throughout their time with Motown, the team of HDH wrote 25 number one hits. However, HDH wasn’t the only successful writing team on the Motown staff. Surely without HDH, Motown would lose some hits but the label continued to be successful without the star writing trio. Once again, they relied on the star power of their performers, with many more number one hits coming from Diana Ross, The Temptations, Marvin Gaye, and Stevie Wonder. The slowdown in the frequency of number one hits can be attributed mostly to the breaking down of Motown itself. By this time, the label had become too big for Barry Gordy to micromanage. Gordy could no longer oversee and control every aspect of Motown and as a result, the quality began to drop.
- Although HDH were brilliant writers and producers on their own, they still suffered from a lack of charisma star performers. The Motown machine was able to produce stage ready stars by their first single; however HDH did not have the luxury of writing for polished performers with their new label. As a result, despite having mild short-term success, none of the artists on HDH’s new labels would come close to matching the careers of most Motown artists. Ultimately, without big name performers on their labels, HDH’s labels would eventually go out of business by 1974.
2. What was most responsible for HDH’s Motown success, why?
- HDH had some of the best performers in America singing their songs. Many of their songs were sung by superstars such as Diana Ross, The Supremes, and Marvin Gaye. Many other writers had similar success for the same reason. While the writing by HDH was very good, the songs could not be as successful as they were without the right artist. For example, Otis Redding’s “Respect” was a mild success but the song took off with Aretha Franklin’s rendition of it. Furthermore, the power that Motown wielded at the time ensured that their songs would be heard and available all around the nation. Every radio station and every record store would have the latest Motown records. HDH’s new label did not have this power and thus it was harder to reach a broad audience.
3. In the final analysis, do you think Motown would have had more hits had they kept HDH instead of firing them?
- ¬Although the key to Motown’s success was its artists, HDH was still an integral component of the Motown machine. Throughout their time with Motown, the team of HDH wrote 25 number one hits. However, HDH wasn’t the only successful writing team on the Motown staff. Surely without HDH, Motown would lose some hits but the label continued to be successful without the star writing trio. Once again, they relied on the star power of their performers, with many more number one hits coming from Diana Ross, The Temptations, Marvin Gaye, and Stevie Wonder. The slowdown in the frequency of number one hits can be attributed mostly to the breaking down of Motown itself. By this time, the label had become too big for Barry Gordy to micromanage. Gordy could no longer oversee and control every aspect of Motown and as a result, the quality began to drop.
Data analysis in Microsoft Excel
As we have seen in class, Excel is capable of performing a variety of statistical analyses. These can be accessed under the “Tools” pull-down menu, within “Data Analysis”. Some of the capabilities we have explored so far include:
Descriptive Statistics
Identify the range of data for which you would like statistics in the Input Range.
Specify how the data is arranged in your spreadsheet - whether the data for one variable is grouped within the same column or the same row.
If you have included labels to describe your data in the first row/column, check the box to indicate this (it is a good idea to do this, since it makes the results easier to read, particularly when you are analyzing several variables simultaneously).
Specify where you would like the output to appear (on the same worksheet, on a new worksheet, in a new workbook).
Indicate which statistics you would like calculated. “Summary statistics” will provide most of the basic statistics you are interested in (mean, median, mode, variance, standard deviation, range, minimum, maximum, sum, count).
Histogram
Identify the range of data for which you would like a frequency table and/or a histogram in the Input Range.
If desired, identify the list of end points of the intervals you would like to use (in ascending order) in the Bin Range. Excel will choose equally spaced intervals if you do not specify any.
Specify where you would like the output to appear (on the same worksheet, on a new worksheet, in a new workbook).
Select Chart Output if you would like a histogram in addition to a frequency table.
Correlation
Identify the range of data for which you would like correlation statistics in the Input Range (at least 2 variables).
Specify how the data is arranged in your spreadsheet - whether the data for one variable is grouped within the same column or the same row.
If you have included labels to describe your data in the first row/column, check the box to indicate this (it is a good idea to do this, since it makes the results easier to read, particularly when you are analyzing several variables simultaneously).
Specify where you would like the output to appear (on the same worksheet, on a new worksheet, in a new workbook).
The output will appear as a matrix, with one row and one column for each variable.
Further details about these (or any other) Excel functions are available through the Help function in Excel.
Descriptive Statistics
Identify the range of data for which you would like statistics in the Input Range.
Specify how the data is arranged in your spreadsheet - whether the data for one variable is grouped within the same column or the same row.
If you have included labels to describe your data in the first row/column, check the box to indicate this (it is a good idea to do this, since it makes the results easier to read, particularly when you are analyzing several variables simultaneously).
Specify where you would like the output to appear (on the same worksheet, on a new worksheet, in a new workbook).
Indicate which statistics you would like calculated. “Summary statistics” will provide most of the basic statistics you are interested in (mean, median, mode, variance, standard deviation, range, minimum, maximum, sum, count).
Histogram
Identify the range of data for which you would like a frequency table and/or a histogram in the Input Range.
If desired, identify the list of end points of the intervals you would like to use (in ascending order) in the Bin Range. Excel will choose equally spaced intervals if you do not specify any.
Specify where you would like the output to appear (on the same worksheet, on a new worksheet, in a new workbook).
Select Chart Output if you would like a histogram in addition to a frequency table.
Correlation
Identify the range of data for which you would like correlation statistics in the Input Range (at least 2 variables).
Specify how the data is arranged in your spreadsheet - whether the data for one variable is grouped within the same column or the same row.
If you have included labels to describe your data in the first row/column, check the box to indicate this (it is a good idea to do this, since it makes the results easier to read, particularly when you are analyzing several variables simultaneously).
Specify where you would like the output to appear (on the same worksheet, on a new worksheet, in a new workbook).
The output will appear as a matrix, with one row and one column for each variable.
Further details about these (or any other) Excel functions are available through the Help function in Excel.
MGMT 2000 Exam with Solutions
QUESTION 1 [8 points]
A particular type of printer ribbon is produced by only two companies, Alamo Ribbon Company and South Jersey Products. Suppose Alamo produces 65% of the ribbons and South Jersey produces 35%. Eight percent of the ribbons produced by Alamo are defective and 12% of the South Jersey ribbons are defective.
a) A customer purchases a new ribbon. What is the probability that Alamo produced the ribbon? [2 points]
b) The ribbon is tested, and it is defective. Now what is the probability that Alamo produced the ribbon? [2 points]
c) Which company would you choose to become your ribbon supplier and why? What other factors must you consider when making this decision? [4 points]
Answer:
a) 65%
b) p(A|D) = p(A,D) / p(D) = (.65)(.08) / [(.65)(.08) +(.35)(.12)] = .553
c) I would have to know the price of both types of ribbons and any costs (time, damages etc.) associated with identifying a particular ribbon as defective. If the price were the same for both and costs of identifying defectives were negligible, I would choose Alamo since it has the greatest market share (and may therefore be more reliable) and the lowest defect rate.
QUESTION 2 [10 points]
You decide to purchase new furniture for your apartment. The cash price for the furniture is $1500 (option A). You have the option to select an instalment plan of $84/month for 24 months (option B).
a) Draw a cash flow diagram for each option. [2 points]
b) What is the interest per month that you are charged? [4 points]
c) What are the nominal and effective rates per year? (If you were unable to solve part b), assume an interest rate of 1.5% per month for your calculations here and for part d).) [2 points]
d) Which option would you select and why? [2 points]
Answer:
a) Option A Option B
0 1 24
-$84
-$1500
b) PV = U * [(1+i)n-1]
[i(1+i)n]
at I=2%, PV(B-A) = 1500 + 84 ((1.02)24-1)/[(.02)(1.02)24) = -88.77
at I=3%, PV(B-A) = 1500 + 84 ((1.03)24-1)/[(.03)(1.03)24) = 77.41
IRR = r1 + (r2-r1) |NPV1| .
|NPV1| + |NPV2|
= 2 + (3-2) (88.77) / (88.77+77.41) = 2.53%
c) nominal = 12(2.53) = 30.36%
effective = (1.0253)12 –1 = 34.96%
or, using the 1.5% rate:
nominal = 12(1.5) = 18%
effective = (1.015)12 –1 = 19.56%
d) I would pay the $1500 up front. The furniture store is implicitly offering me a loan at over 30% interest. I can get a bank loan for considerably less.
QUESTION 3 [11 points]
You want to invest $10,000 in the stock market by buying shares in one of 3 companies. Shares in Company A, though risky could yield a 50% return on investment during the next year. If the stock market conditions are not favourable (a “bear” market), the stock may lose 20% of its value. If the market is neutral, the value of Company A stock will not change. Company B provides safe investments with 15% return in a “bull” market, 10% in a neutral market, and only 5% in a “bear” market. Company C is a counter-cyclical investment. It provides 10% in a “bear” market and loses 5% in a “bull” market. Its value does not change in a neutral market. All the publications you have consulted are predicting a 60% chance for a bull market, a 10% chance for a neutral market, and a 30% chance for a bear market.
a) You began to draw a decision tree to solve the problem but were called away by the sound of reindeer landing on your roof. Complete the attached tree, filling in the shaded areas. [5 points]
Bull 0.6
15000
Company A Neutral 0.1
10000
Bear 0.3
8000
Bull 0.6
Company B Neutral 0.1
11150
Bear 0.3
Bull 0.6
Company C Neutral 0.1
Bear 0.3
b) Which stock would you invest in? [1 point]
c) Compute the value of perfect information. [3 points]
d) Perfect information about the future performance of the stock market is impossible to obtain. Knowing that, why would you compute the value of perfect information? [2 points]
Answer:
a)
Bull 0.6
15000
Company A Neutral 0.1
10000
12400
Bear 0.3
8000
Bull 0.6
11500
Company B Neutral 0.1
11000
12400 11150
Bear 0.3
10500
Bull 0.6
9500
Company C Neutral 0.1
10000
10000
Bear 0.3
11000
b) company A
c) EVw/PI = .6*15000+.1*11000+.3*11000 = 13400
VOPI = 13400-12400 = 1000
d) The value of perfect information gives us an upper bound on the amount we would be willing to pay for any kind of information. We can use this value as a filter to eliminate from consideration any offers of information at a price greater than the value of perfect information.
QUESTION 6 [9 points]
Schulich tracks the number of students graduating in each term.
Year Term Graduates Moving Average
2000 Fall 23
2001 Winter 48 75.33333
2001 Summer 155 74.66667
2001 Fall 21 70
2002 Winter 34 76
2002 Summer 173 75
2002 Fall 18 69.33333
2003 Winter 17 60.33333
2003 Summer 146 65
2003 Fall 32 69
2004 Winter 29 68
2004 Summer 143
a) Use the above data to compute seasonal indices. [5 points]
b) Over how many observations was the moving average taken? [1 point]
c) Explain the meaning of the seasonal index for Fall. [2 points]
d) What Excel feature is helpful in organizing data to compute seasonal indices? [1 point]
Answer:
a)
Moving Average
F W S
75.33333 0.637168 0.637168 2.075893
74.66667 2.075893 0.3 0.447368 2.306667
70 0.3 0.259615 0.281768 2.246154
76 0.447368 0.463768 0.426471
75 2.306667
69.33333 0.259615 0.341128 0.448194 2.209571 2.998893
60.33333 0.281768
65 2.246154 0.341254 0.448359 2.210387
69 0.463768
68 0.426471
b) 3
c) The number of graduates in the fall term is 34% of what you would expect in a typical term if there were no seasonal variation.
d) pivot table
QUESTON 7 [7 points]
At the latest firemen’s union meeting, the membership expressed concern that their wages were not keeping up with the pace of inflation. The following regression model was created to investigate the growth in firemen’s average wages in thousands of dollars:
ln(Wage) = 10.69 + 0.039 (Time)
where Time = 1 in the year 1990.
a) Forecast firemen’s average wages for 2006. [1 point]
b) Compute the growth rate. [2 points]
c) Inflation has been in the 2-3% range in the last decade. Are the firemen justified in their concerns? Why or why not? [2 points]
d) Sketch a rough graph of firemen’s wages over time. [2 points]
Answer:
a) ln (Wage) = 10.69 + 0.039(17) = 11.353
Wage = 85,220.73
b) e0.039 - 1 = 3.98%
c) No. On average, their wages are growing at slightly more than the rate of inflation. (However, individual firemen’s wages may be increasing at a faster or slower rate, so some may have reason for their complaints while others would not.)
d) Wage($)
Time
QUESTION 8 [8 points]
The Finance Department at Treasure Island Toys is evaluating its cost structure. One of the things the company would like to evaluate is the appropriateness of its allocation of expenses between fixed and variable costs. The Finance Department produced the following graph using financial results for the company and industry statistics for the last 10 years:
a) Is this an effective graph for comparing the company’s cost allocation to industry standards? Why or why not? [3 points]
b) Does the company have high or low variable costs relative to the industry? [1 point]
c) Last year, the company’s sales were $500,000 and profits were 5% of income. Unfortunately this has been a slow year, and sales are forecast to drop to $400,000. What will be the effect on the company’s profit? Does the company appear to have made a good choice with respect to its degree of operating leverage under the current circumstances? [4 points]
Answer:
a) It is effective. It shows the degree of operating leverage for the company over time, which allows us to see any trends. It also shows the values relative to industry totals for easy comparison. It is easy to see that DOL has been increasing for the company while industry values remained steady; the company’s DOL is now appreciably higher than industry average. The graph is clear and easy to follow. One improvement could be to put actual years rather than a time index for the horizontal axis.
b) The company has a higher proportion of variable costs than the industry.
c) % change in sales = (400-500)/500 = -0.2
DOL = % change in profit/%change in sales ~= 2.5
Therefore % change in profit must be about –0.5
Profit(last year) = 500,000*.05 = 25,000
Profit (this year) = 25,000 (.5) = 12,500
The company’s profit will drop to $12500.
Because the company is more highly leveraged, the effect on profit is greater than it would have been if the company followed industry standard. Being more leveraged is hurting the company in this instance as its profit will drop more than it would have if DOL had been lower.
QUESTION 9 [7 points]
True/False
Determine whether the statement is true or false and circle the corresponding word.
a) An of 0.1 weights the most recent observation more heavily than an of 0.2. True False
b) Ieff compounded monthly is greater than ieff compounded quarterly for the same APR. True False
c)
d) Fred and Jane each invest $100 today. Fred earns 6% per year for the first 2 years and 8% per year for the second 2 years. Jane earns 8% per year for the first 2 years and 6% per year for the second 2 years. At the end of 4 years, Fred and Jane will have the same amount of money. True False
e) Fred and Jane each invest $100 at the beginning of each year for a period of 4 years. Fred earns 6% per year for the first 2 years and 8% per year for the second 2 years. Jane earns 8% per year for the first 2 years and 6% per year for the second 2 years. At the end of 4 years, Fred and Jane will have the same amount of money. True False
f) Quarterly seasonality can be captured in a regression model using 3 dummy independent variables. True False
g) When forecasting sales with seasonality, we use the model Deseasonalized Sales = a + b (Time) because it predicts the trend alone, while the model Sales = a+b (Time) would predict both the trend and seasonality. True False
QUESTION 10 [6 points]
Select the correct answer(s). Points will be granted for correct choices but will be deducted for incorrect choices.
1) The coefficient of determination (r2) tells us
a) that the coefficient of correlation is larger than 1
b) whether R has any significance
c) that we should not partition the total variation
d) the proportion of total variation in y that is explained by x
2) What Excel function can be used to do the equivalent of: IF(J4>H3,J4,H3)
a) MAX
b) MIN
c) GOALSEEK
d) COUNT
3) An investment is acceptable if its IRR
a) is exactly equal to its net present value (NPV)
b) is exactly equal to zero
c) is less than the required return
d) exceeds the required return
4) Net present value:
a) is equal to the initial investment in a project
b) compares project cost to the present value of the project benefits
c) is equal to zero when the discount rate used is less than the IRR
d) is simplified by the fact that future cash flows are easy to estimate
e) requires a firm to set an arbitrary cut-off point for determining whether an investment is acceptable
5) What are the disadvantages of the payback period method:
a) ignores the time value of money
b) biased against long-term projects
c) biased toward liquidity
A particular type of printer ribbon is produced by only two companies, Alamo Ribbon Company and South Jersey Products. Suppose Alamo produces 65% of the ribbons and South Jersey produces 35%. Eight percent of the ribbons produced by Alamo are defective and 12% of the South Jersey ribbons are defective.
a) A customer purchases a new ribbon. What is the probability that Alamo produced the ribbon? [2 points]
b) The ribbon is tested, and it is defective. Now what is the probability that Alamo produced the ribbon? [2 points]
c) Which company would you choose to become your ribbon supplier and why? What other factors must you consider when making this decision? [4 points]
Answer:
a) 65%
b) p(A|D) = p(A,D) / p(D) = (.65)(.08) / [(.65)(.08) +(.35)(.12)] = .553
c) I would have to know the price of both types of ribbons and any costs (time, damages etc.) associated with identifying a particular ribbon as defective. If the price were the same for both and costs of identifying defectives were negligible, I would choose Alamo since it has the greatest market share (and may therefore be more reliable) and the lowest defect rate.
QUESTION 2 [10 points]
You decide to purchase new furniture for your apartment. The cash price for the furniture is $1500 (option A). You have the option to select an instalment plan of $84/month for 24 months (option B).
a) Draw a cash flow diagram for each option. [2 points]
b) What is the interest per month that you are charged? [4 points]
c) What are the nominal and effective rates per year? (If you were unable to solve part b), assume an interest rate of 1.5% per month for your calculations here and for part d).) [2 points]
d) Which option would you select and why? [2 points]
Answer:
a) Option A Option B
0 1 24
-$84
-$1500
b) PV = U * [(1+i)n-1]
[i(1+i)n]
at I=2%, PV(B-A) = 1500 + 84 ((1.02)24-1)/[(.02)(1.02)24) = -88.77
at I=3%, PV(B-A) = 1500 + 84 ((1.03)24-1)/[(.03)(1.03)24) = 77.41
IRR = r1 + (r2-r1) |NPV1| .
|NPV1| + |NPV2|
= 2 + (3-2) (88.77) / (88.77+77.41) = 2.53%
c) nominal = 12(2.53) = 30.36%
effective = (1.0253)12 –1 = 34.96%
or, using the 1.5% rate:
nominal = 12(1.5) = 18%
effective = (1.015)12 –1 = 19.56%
d) I would pay the $1500 up front. The furniture store is implicitly offering me a loan at over 30% interest. I can get a bank loan for considerably less.
QUESTION 3 [11 points]
You want to invest $10,000 in the stock market by buying shares in one of 3 companies. Shares in Company A, though risky could yield a 50% return on investment during the next year. If the stock market conditions are not favourable (a “bear” market), the stock may lose 20% of its value. If the market is neutral, the value of Company A stock will not change. Company B provides safe investments with 15% return in a “bull” market, 10% in a neutral market, and only 5% in a “bear” market. Company C is a counter-cyclical investment. It provides 10% in a “bear” market and loses 5% in a “bull” market. Its value does not change in a neutral market. All the publications you have consulted are predicting a 60% chance for a bull market, a 10% chance for a neutral market, and a 30% chance for a bear market.
a) You began to draw a decision tree to solve the problem but were called away by the sound of reindeer landing on your roof. Complete the attached tree, filling in the shaded areas. [5 points]
Bull 0.6
15000
Company A Neutral 0.1
10000
Bear 0.3
8000
Bull 0.6
Company B Neutral 0.1
11150
Bear 0.3
Bull 0.6
Company C Neutral 0.1
Bear 0.3
b) Which stock would you invest in? [1 point]
c) Compute the value of perfect information. [3 points]
d) Perfect information about the future performance of the stock market is impossible to obtain. Knowing that, why would you compute the value of perfect information? [2 points]
Answer:
a)
Bull 0.6
15000
Company A Neutral 0.1
10000
12400
Bear 0.3
8000
Bull 0.6
11500
Company B Neutral 0.1
11000
12400 11150
Bear 0.3
10500
Bull 0.6
9500
Company C Neutral 0.1
10000
10000
Bear 0.3
11000
b) company A
c) EVw/PI = .6*15000+.1*11000+.3*11000 = 13400
VOPI = 13400-12400 = 1000
d) The value of perfect information gives us an upper bound on the amount we would be willing to pay for any kind of information. We can use this value as a filter to eliminate from consideration any offers of information at a price greater than the value of perfect information.
QUESTION 6 [9 points]
Schulich tracks the number of students graduating in each term.
Year Term Graduates Moving Average
2000 Fall 23
2001 Winter 48 75.33333
2001 Summer 155 74.66667
2001 Fall 21 70
2002 Winter 34 76
2002 Summer 173 75
2002 Fall 18 69.33333
2003 Winter 17 60.33333
2003 Summer 146 65
2003 Fall 32 69
2004 Winter 29 68
2004 Summer 143
a) Use the above data to compute seasonal indices. [5 points]
b) Over how many observations was the moving average taken? [1 point]
c) Explain the meaning of the seasonal index for Fall. [2 points]
d) What Excel feature is helpful in organizing data to compute seasonal indices? [1 point]
Answer:
a)
Moving Average
F W S
75.33333 0.637168 0.637168 2.075893
74.66667 2.075893 0.3 0.447368 2.306667
70 0.3 0.259615 0.281768 2.246154
76 0.447368 0.463768 0.426471
75 2.306667
69.33333 0.259615 0.341128 0.448194 2.209571 2.998893
60.33333 0.281768
65 2.246154 0.341254 0.448359 2.210387
69 0.463768
68 0.426471
b) 3
c) The number of graduates in the fall term is 34% of what you would expect in a typical term if there were no seasonal variation.
d) pivot table
QUESTON 7 [7 points]
At the latest firemen’s union meeting, the membership expressed concern that their wages were not keeping up with the pace of inflation. The following regression model was created to investigate the growth in firemen’s average wages in thousands of dollars:
ln(Wage) = 10.69 + 0.039 (Time)
where Time = 1 in the year 1990.
a) Forecast firemen’s average wages for 2006. [1 point]
b) Compute the growth rate. [2 points]
c) Inflation has been in the 2-3% range in the last decade. Are the firemen justified in their concerns? Why or why not? [2 points]
d) Sketch a rough graph of firemen’s wages over time. [2 points]
Answer:
a) ln (Wage) = 10.69 + 0.039(17) = 11.353
Wage = 85,220.73
b) e0.039 - 1 = 3.98%
c) No. On average, their wages are growing at slightly more than the rate of inflation. (However, individual firemen’s wages may be increasing at a faster or slower rate, so some may have reason for their complaints while others would not.)
d) Wage($)
Time
QUESTION 8 [8 points]
The Finance Department at Treasure Island Toys is evaluating its cost structure. One of the things the company would like to evaluate is the appropriateness of its allocation of expenses between fixed and variable costs. The Finance Department produced the following graph using financial results for the company and industry statistics for the last 10 years:
a) Is this an effective graph for comparing the company’s cost allocation to industry standards? Why or why not? [3 points]
b) Does the company have high or low variable costs relative to the industry? [1 point]
c) Last year, the company’s sales were $500,000 and profits were 5% of income. Unfortunately this has been a slow year, and sales are forecast to drop to $400,000. What will be the effect on the company’s profit? Does the company appear to have made a good choice with respect to its degree of operating leverage under the current circumstances? [4 points]
Answer:
a) It is effective. It shows the degree of operating leverage for the company over time, which allows us to see any trends. It also shows the values relative to industry totals for easy comparison. It is easy to see that DOL has been increasing for the company while industry values remained steady; the company’s DOL is now appreciably higher than industry average. The graph is clear and easy to follow. One improvement could be to put actual years rather than a time index for the horizontal axis.
b) The company has a higher proportion of variable costs than the industry.
c) % change in sales = (400-500)/500 = -0.2
DOL = % change in profit/%change in sales ~= 2.5
Therefore % change in profit must be about –0.5
Profit(last year) = 500,000*.05 = 25,000
Profit (this year) = 25,000 (.5) = 12,500
The company’s profit will drop to $12500.
Because the company is more highly leveraged, the effect on profit is greater than it would have been if the company followed industry standard. Being more leveraged is hurting the company in this instance as its profit will drop more than it would have if DOL had been lower.
QUESTION 9 [7 points]
True/False
Determine whether the statement is true or false and circle the corresponding word.
a) An of 0.1 weights the most recent observation more heavily than an of 0.2. True False
b) Ieff compounded monthly is greater than ieff compounded quarterly for the same APR. True False
c)
d) Fred and Jane each invest $100 today. Fred earns 6% per year for the first 2 years and 8% per year for the second 2 years. Jane earns 8% per year for the first 2 years and 6% per year for the second 2 years. At the end of 4 years, Fred and Jane will have the same amount of money. True False
e) Fred and Jane each invest $100 at the beginning of each year for a period of 4 years. Fred earns 6% per year for the first 2 years and 8% per year for the second 2 years. Jane earns 8% per year for the first 2 years and 6% per year for the second 2 years. At the end of 4 years, Fred and Jane will have the same amount of money. True False
f) Quarterly seasonality can be captured in a regression model using 3 dummy independent variables. True False
g) When forecasting sales with seasonality, we use the model Deseasonalized Sales = a + b (Time) because it predicts the trend alone, while the model Sales = a+b (Time) would predict both the trend and seasonality. True False
QUESTION 10 [6 points]
Select the correct answer(s). Points will be granted for correct choices but will be deducted for incorrect choices.
1) The coefficient of determination (r2) tells us
a) that the coefficient of correlation is larger than 1
b) whether R has any significance
c) that we should not partition the total variation
d) the proportion of total variation in y that is explained by x
2) What Excel function can be used to do the equivalent of: IF(J4>H3,J4,H3)
a) MAX
b) MIN
c) GOALSEEK
d) COUNT
3) An investment is acceptable if its IRR
a) is exactly equal to its net present value (NPV)
b) is exactly equal to zero
c) is less than the required return
d) exceeds the required return
4) Net present value:
a) is equal to the initial investment in a project
b) compares project cost to the present value of the project benefits
c) is equal to zero when the discount rate used is less than the IRR
d) is simplified by the fact that future cash flows are easy to estimate
e) requires a firm to set an arbitrary cut-off point for determining whether an investment is acceptable
5) What are the disadvantages of the payback period method:
a) ignores the time value of money
b) biased against long-term projects
c) biased toward liquidity
Finance Cheat Sheet
Cash Flow from Assets
= Cash Flow to Creditors + Cash Flow to Stockholders
= Operating Cash Flow (OCF) - Net Capital Spending (NCS) - Additions to Net Working Capital (NWC)
Cash Flow to Creditors
= - (Net New Borrowing)
Cash Flow to Equityholders
= Dividends Paid - (Net New Equity Raised) = (dividends – equity issued) – (interest – new LT debt)
Operating Cash Flow
= Net Income + Depreciation
Net Capital Spending
= End. Net Fixed Assets - Beg. Net Fixed Assets + Depreciation
Additions to Net Working Capital
= End. NWC - Beg. NWC
NWC = Current Assets - Current Liabilities
Personal Tax on Dividends
1. Grossed-up dividends = gross-up factor (1.25) x dividends
2. Gross federal tax = federal tax rate x grossed-up dividends
3. Federal dividend tax credit = federal dividend tax credit rate x grossed-up dividends
4. federal dividend tax = gross federal dividend tax – federal dividend tax credit
Ch 4: Time Value of Money
Future Value = I * (1+r)t
Present Value
= future value after t periods / (1+r)t
r = (FVPV )1/n – 1
Rule of 72: time for investment to double is 72/r
Interest rate on a perpetuity = cash payment / present value
= C / PV
PV of a perpetuity = cash payment / interest rate
= C / r
PV of a delayed perpetuity
= (cash payment / interest rate) x [1 / (1+r)t]
PV of a t-year annuity
= C [1/r – 1/(r(1+r)t) ]
PV annuity due
= 1 + [1/r – 1/(r(1+r)t-1)]
FV of annuity
= cash payment x (1+r)t
= C x {[1/r – 1/r(1+r)t] x (1+r)t}
= C x {[(1+r)t – 1] / r}
PV of a perpetual stream of payments growing at a constant rate
= C / (r-g)
PV of a finite stream of payments growing at a constant rate
= [C / (r-g)] x {1-[(1+g) / (1+r)]T}
Real future value of investment
= [$1000 x (1 + nominal interest rate)] / (1 + inflation rate)
1 + real interest rate
= (1 + nominal interest rate) / (1 + inflation rate)
Real interest rate =(approximately) nominal interest rate – inflation rate
1+EAR = (1 + annual rate)
= (1 + monthly rate)12
= (1+(APR/m))m
Monthly interest rate
= APR / 12
Per period rate
= (1+EAR)1/m -1
APR = m × per period rate
Ch 5 : Bonds Valuation
PV of a bond (bond price)
= PV (coupons) + PV (face value)
= coupon x [1/r – 1/r(1+r)t] + face value / (1+r)t
Coupon rate
= coupon / face value
Current yield
= annual coupon payment / bond price
Rate of Return
= (coupon income + price change) / investment
Effective annual equivalent: rate of return on a 2 year bond
= [1 + (coupon income + price change) / investment] ½
Price
= face value / (C+YTM) maturity
Ch 17: Ratios
Leverage Ratios
Long-term debt ratio
= long-term debt / (long-term debt + equity)
Debt-equity ratio
= long-term debt / equity
Total debt ratio
= total liabilities / total assets
Times interested earned
= EBIT / interest payments
Cash coverage ratio
= (EBIT + depreciation) / interest payments
Fixed charge coverage ratio
= (EBIT + depreciation) / interest payments + (debt payments) / (1 - tax rate)
Liquidity Ratios
NWC to assets
= net working capital / total assets
Current ratio
= current assets / current liabilities
Quick ratio
= (cash + marketable securities + receivables) / current liabilities
Interval Measure
= (cash + marketable securities + receivables) / average daily expenditures from operations
Efficiency Ratios
Total asset turnover
= sales / average total assets
Average collection period
= average receivables / average daily sales
Inventory turnover
= cost of goods sold / average inventory
Days’ sales in inventories
= average inventory / (cost of goods sold / 365)
Average payment period
= average payables / average daily expenses
Profitability Ratios
Gross profit margin
= (sales - cost of goods sold) / sales
Operating profit margin
= (EBIT - taxes) / sales
Net profit margin
= (net income + interest) / sales
Return on assets
= (net income + interest) / average total assets
Return on equity
= net income / average equity
Payout ratio
= dividends / earnings
Plowback ratio
= 1 - payout ratio
Growth in equity from plowback
= plowback ratio x ROE
Market Based Ratios
Price-earnings ratio
= stock price / earnings per share
Market to book ratio
= stock price / book value per share
= Market EquityBook Equity
Book value per share
= shareholder's equity/number of common shares outstanding
DuPont System
ROA
= asset turnover x profit margin
= sales/assets x (net income + interest) / sales
ROE
= leverage ratio x ROA x “debt burden”
= leverage ratio x asset turnover x profit margin x “debt burden”
= assets/equity x sales/assets x (net income + interest)/sales x net income/(net income + interest)
EVA = residual income
= income earned – income required
= income earned – [cost of capital x investment]
Dividends = eps * payout ratio
Ch 6: Stocks Valuation
Expected return = r = (DIV1 + P1 – P0)/P0
After-tax rate of return = (DIV1 – dividend tax)/P0 + (capital gain – capital gains tax)/P0
Price today = P0 = (DIV1 + P1)/P0
P0 = PV of (DIV1, DIV2…) = DIV1/(1 + r) + DIV2/(1 + r)2 + … + (DIVt + Pt)/(1 + r)2
Stock price = PV (all future dividends per share)
P0 = DIV1/r
Value of a no-growth stock = P0 = EPS1/r
Constant-growth DDM P0 =DIV1/r-g = DIV0* (1+g) / r-g
Expected rate of return = r = DIV1/P0 + g = dividend yield + growth rate
Non-constant growth:
P0 = DIV1/(1 + r) = DIV2/(1 + r)2 + … + DIVH/(1 + r)H + PH/(1 + r)H
PV of a growing annuity
= C1/(r-g) x {1- [(1-g)/(1+r)]t}
EPS = stock price/earnings
Terminal price = Pt = DIVt+1/(r – g)
Sustainable growth rate = g = return on equity x plowback ratio
Payout ratio = dividends/earnings
Plowback ratio = 1-payout ratio
Ch 7: NPV
NPV = PV – required investment
PV = C1/(1 + r) + C2/(1 + r)2 + … + Ct/(1 + r)t, last year to add CF sold for
NPV = C0 + C1/(1 + r) + C2/(1 + r)2 + … + Ct/(1 + r)t
PV = cash flow x annuity factor = C x [(1/r) - 1/r(1 + r)t]
Rate of return = profit/investment = (C1 – investment)/investment = (C1 + C0)/(-C0)
NPV = C0 + C1/(1 + IRR) + C2/(1 + IRR)2 + … + Ct/(1 + IRR)t
Book rate of return = book income/book assets
Equivalent annual cost = present value of costs/annuity factor
Profitability index = NPV/initial investment
Ch 8: Capital Budgeting
Incremental CF = CF with project = CF without project
Net working capital = ST assets – ST liabilities
Total project cash flows = CF from investment in plant and equipment + CF from investment in WC + CF from operations (incl. OCF & CCA tax shield)
CF O = revenues – cash expenses – taxes paid = net profit + depreciation = (revenues – cash expenses) x (1 – tax rate) + (depreciation x tax rate)
Depreciation tax shield = depreciation x tax rate = CCA tax shield
Taxable income = revenues – expenses – CCA
PV of CCA tax shield
= [CdTc/(r + d)][(1 + 0.5r)/(1 + r)] – [SdTc/(r + d)][1/(1 + r)t]
C = capital cost of an asset acquired at beginning of year 1
D = CCA rate for asset class to which asset belongs
UCC = undepreciated capital cost in year t after deducting CCA for the year
Tc = firm’s tax rate
r = discount rate
S = salvage amount from sale of asset at end of year t
PV of CCA tax shields = PV of perpetual tax shield on asset acquired in year 1 - in year t
PV = S/(1 + r)t
PV of CCA tax shield = 1/(1 + r)t x SdTc/(r + d)
CCA tax shield = CCA x tax rate
NPV = total PV excluding CCA tax shields + PV of CCA tax shield
Financial projections*
= Capital investment + Working capital + Change in working capital + Revenues + Expenses + CCA of equipment + Pretax Profit + Tax (35%) + Profit after tax
Cash flows*
= Capital investment + Change in working capital + Cash flows from operations (excl. CCA tax shield) + total cash flows (excl. CCA tax shield) + Discount factor + Present value (excl. CCA tax shields)+ Total PV (excl. CCA tax shields)
OCF (excl. CCA tax shield)
= Revenues – Expenses = Profit before tax – tax at 35%
Profitability index = NPV / -Co
Ch 10: Risk, Return of Capital
Percentage return = (capital gain + dividend) / initial share price
Dividend yield = dividend / initial share price
Percentage capital gain = capital gain / initial share price
1 + real rate of return = (1 + nominal rate of return) / (1 + inflation rate)
Portfolio rate of return = (fraction of portfolio in first asset x rate of return on first asset) / (fraction of portfolio in second asset x rate of return on second asset)
Correlation b/w x & y = (covariance b/w x & y) / (STD of x * STD of y)
Portfolio STD = ơp = sqrt(x2sơ2s + x2gơ2g + 2xsxgρsg ơs ơg)
Ch 11: CAPM
Beta of stock j = βj = (ρj,m)(ơj) / ơm or cov(rj, rm) / ơ2m = change in the rate of the return of stock j / change in the rate of return of the market
Beta of portfolio = (fraction of portfolio in 1st stock x beta of 1st stock) / (fraction of portfolio in 2nd stock x beta of 2nd stock)
Risk premium on any asset
= r – rf = β (rm-rf)
Market risk premium = rm - rf
Expected return on stock = risk-free interest rate + (beta x market risk premium) = r = rf + β(rm-rf)
rf = (required return – βrm) / 1-β
r = (DIV + capital gain) / price
fair price = (DIV + expected price) / 1+r
Variance = proportion * (estimated return – expected return)2 + …
Ch 12: WACC
Company cost of capital = weighted avg of debt and equity returns
After-tax cost of debt = pretax cost x (1-tax rate) = rdebt x (1-Tc)
WACC = [D/V x (1-Tc) rdebt] + (E/V x requity) + (P/V x rpreferred)
NPV = investment + (after-tax cash flow/rate of return)
requity = DIV1/P0 + g
rpreferred = dividend / price of preferred
stock’s beta = (expected return on stock – risk-free rate) / expected market risk premium
debt’s beta = (expected return on debt – risk-free rate) / expected market risk premium
βequity = βassets + (βassets – βdebt) D/E or βassets x (1+ D/E)
βlevered¬ = βu + (βu - βdebt)(1-Tc)D/E or βu x [1+(1-Tc)x D/E]
= Cash Flow to Creditors + Cash Flow to Stockholders
= Operating Cash Flow (OCF) - Net Capital Spending (NCS) - Additions to Net Working Capital (NWC)
Cash Flow to Creditors
= - (Net New Borrowing)
Cash Flow to Equityholders
= Dividends Paid - (Net New Equity Raised) = (dividends – equity issued) – (interest – new LT debt)
Operating Cash Flow
= Net Income + Depreciation
Net Capital Spending
= End. Net Fixed Assets - Beg. Net Fixed Assets + Depreciation
Additions to Net Working Capital
= End. NWC - Beg. NWC
NWC = Current Assets - Current Liabilities
Personal Tax on Dividends
1. Grossed-up dividends = gross-up factor (1.25) x dividends
2. Gross federal tax = federal tax rate x grossed-up dividends
3. Federal dividend tax credit = federal dividend tax credit rate x grossed-up dividends
4. federal dividend tax = gross federal dividend tax – federal dividend tax credit
Ch 4: Time Value of Money
Future Value = I * (1+r)t
Present Value
= future value after t periods / (1+r)t
r = (FVPV )1/n – 1
Rule of 72: time for investment to double is 72/r
Interest rate on a perpetuity = cash payment / present value
= C / PV
PV of a perpetuity = cash payment / interest rate
= C / r
PV of a delayed perpetuity
= (cash payment / interest rate) x [1 / (1+r)t]
PV of a t-year annuity
= C [1/r – 1/(r(1+r)t) ]
PV annuity due
= 1 + [1/r – 1/(r(1+r)t-1)]
FV of annuity
= cash payment x (1+r)t
= C x {[1/r – 1/r(1+r)t] x (1+r)t}
= C x {[(1+r)t – 1] / r}
PV of a perpetual stream of payments growing at a constant rate
= C / (r-g)
PV of a finite stream of payments growing at a constant rate
= [C / (r-g)] x {1-[(1+g) / (1+r)]T}
Real future value of investment
= [$1000 x (1 + nominal interest rate)] / (1 + inflation rate)
1 + real interest rate
= (1 + nominal interest rate) / (1 + inflation rate)
Real interest rate =(approximately) nominal interest rate – inflation rate
1+EAR = (1 + annual rate)
= (1 + monthly rate)12
= (1+(APR/m))m
Monthly interest rate
= APR / 12
Per period rate
= (1+EAR)1/m -1
APR = m × per period rate
Ch 5 : Bonds Valuation
PV of a bond (bond price)
= PV (coupons) + PV (face value)
= coupon x [1/r – 1/r(1+r)t] + face value / (1+r)t
Coupon rate
= coupon / face value
Current yield
= annual coupon payment / bond price
Rate of Return
= (coupon income + price change) / investment
Effective annual equivalent: rate of return on a 2 year bond
= [1 + (coupon income + price change) / investment] ½
Price
= face value / (C+YTM) maturity
Ch 17: Ratios
Leverage Ratios
Long-term debt ratio
= long-term debt / (long-term debt + equity)
Debt-equity ratio
= long-term debt / equity
Total debt ratio
= total liabilities / total assets
Times interested earned
= EBIT / interest payments
Cash coverage ratio
= (EBIT + depreciation) / interest payments
Fixed charge coverage ratio
= (EBIT + depreciation) / interest payments + (debt payments) / (1 - tax rate)
Liquidity Ratios
NWC to assets
= net working capital / total assets
Current ratio
= current assets / current liabilities
Quick ratio
= (cash + marketable securities + receivables) / current liabilities
Interval Measure
= (cash + marketable securities + receivables) / average daily expenditures from operations
Efficiency Ratios
Total asset turnover
= sales / average total assets
Average collection period
= average receivables / average daily sales
Inventory turnover
= cost of goods sold / average inventory
Days’ sales in inventories
= average inventory / (cost of goods sold / 365)
Average payment period
= average payables / average daily expenses
Profitability Ratios
Gross profit margin
= (sales - cost of goods sold) / sales
Operating profit margin
= (EBIT - taxes) / sales
Net profit margin
= (net income + interest) / sales
Return on assets
= (net income + interest) / average total assets
Return on equity
= net income / average equity
Payout ratio
= dividends / earnings
Plowback ratio
= 1 - payout ratio
Growth in equity from plowback
= plowback ratio x ROE
Market Based Ratios
Price-earnings ratio
= stock price / earnings per share
Market to book ratio
= stock price / book value per share
= Market EquityBook Equity
Book value per share
= shareholder's equity/number of common shares outstanding
DuPont System
ROA
= asset turnover x profit margin
= sales/assets x (net income + interest) / sales
ROE
= leverage ratio x ROA x “debt burden”
= leverage ratio x asset turnover x profit margin x “debt burden”
= assets/equity x sales/assets x (net income + interest)/sales x net income/(net income + interest)
EVA = residual income
= income earned – income required
= income earned – [cost of capital x investment]
Dividends = eps * payout ratio
Ch 6: Stocks Valuation
Expected return = r = (DIV1 + P1 – P0)/P0
After-tax rate of return = (DIV1 – dividend tax)/P0 + (capital gain – capital gains tax)/P0
Price today = P0 = (DIV1 + P1)/P0
P0 = PV of (DIV1, DIV2…) = DIV1/(1 + r) + DIV2/(1 + r)2 + … + (DIVt + Pt)/(1 + r)2
Stock price = PV (all future dividends per share)
P0 = DIV1/r
Value of a no-growth stock = P0 = EPS1/r
Constant-growth DDM P0 =DIV1/r-g = DIV0* (1+g) / r-g
Expected rate of return = r = DIV1/P0 + g = dividend yield + growth rate
Non-constant growth:
P0 = DIV1/(1 + r) = DIV2/(1 + r)2 + … + DIVH/(1 + r)H + PH/(1 + r)H
PV of a growing annuity
= C1/(r-g) x {1- [(1-g)/(1+r)]t}
EPS = stock price/earnings
Terminal price = Pt = DIVt+1/(r – g)
Sustainable growth rate = g = return on equity x plowback ratio
Payout ratio = dividends/earnings
Plowback ratio = 1-payout ratio
Ch 7: NPV
NPV = PV – required investment
PV = C1/(1 + r) + C2/(1 + r)2 + … + Ct/(1 + r)t, last year to add CF sold for
NPV = C0 + C1/(1 + r) + C2/(1 + r)2 + … + Ct/(1 + r)t
PV = cash flow x annuity factor = C x [(1/r) - 1/r(1 + r)t]
Rate of return = profit/investment = (C1 – investment)/investment = (C1 + C0)/(-C0)
NPV = C0 + C1/(1 + IRR) + C2/(1 + IRR)2 + … + Ct/(1 + IRR)t
Book rate of return = book income/book assets
Equivalent annual cost = present value of costs/annuity factor
Profitability index = NPV/initial investment
Ch 8: Capital Budgeting
Incremental CF = CF with project = CF without project
Net working capital = ST assets – ST liabilities
Total project cash flows = CF from investment in plant and equipment + CF from investment in WC + CF from operations (incl. OCF & CCA tax shield)
CF O = revenues – cash expenses – taxes paid = net profit + depreciation = (revenues – cash expenses) x (1 – tax rate) + (depreciation x tax rate)
Depreciation tax shield = depreciation x tax rate = CCA tax shield
Taxable income = revenues – expenses – CCA
PV of CCA tax shield
= [CdTc/(r + d)][(1 + 0.5r)/(1 + r)] – [SdTc/(r + d)][1/(1 + r)t]
C = capital cost of an asset acquired at beginning of year 1
D = CCA rate for asset class to which asset belongs
UCC = undepreciated capital cost in year t after deducting CCA for the year
Tc = firm’s tax rate
r = discount rate
S = salvage amount from sale of asset at end of year t
PV of CCA tax shields = PV of perpetual tax shield on asset acquired in year 1 - in year t
PV = S/(1 + r)t
PV of CCA tax shield = 1/(1 + r)t x SdTc/(r + d)
CCA tax shield = CCA x tax rate
NPV = total PV excluding CCA tax shields + PV of CCA tax shield
Financial projections*
= Capital investment + Working capital + Change in working capital + Revenues + Expenses + CCA of equipment + Pretax Profit + Tax (35%) + Profit after tax
Cash flows*
= Capital investment + Change in working capital + Cash flows from operations (excl. CCA tax shield) + total cash flows (excl. CCA tax shield) + Discount factor + Present value (excl. CCA tax shields)+ Total PV (excl. CCA tax shields)
OCF (excl. CCA tax shield)
= Revenues – Expenses = Profit before tax – tax at 35%
Profitability index = NPV / -Co
Ch 10: Risk, Return of Capital
Percentage return = (capital gain + dividend) / initial share price
Dividend yield = dividend / initial share price
Percentage capital gain = capital gain / initial share price
1 + real rate of return = (1 + nominal rate of return) / (1 + inflation rate)
Portfolio rate of return = (fraction of portfolio in first asset x rate of return on first asset) / (fraction of portfolio in second asset x rate of return on second asset)
Correlation b/w x & y = (covariance b/w x & y) / (STD of x * STD of y)
Portfolio STD = ơp = sqrt(x2sơ2s + x2gơ2g + 2xsxgρsg ơs ơg)
Ch 11: CAPM
Beta of stock j = βj = (ρj,m)(ơj) / ơm or cov(rj, rm) / ơ2m = change in the rate of the return of stock j / change in the rate of return of the market
Beta of portfolio = (fraction of portfolio in 1st stock x beta of 1st stock) / (fraction of portfolio in 2nd stock x beta of 2nd stock)
Risk premium on any asset
= r – rf = β (rm-rf)
Market risk premium = rm - rf
Expected return on stock = risk-free interest rate + (beta x market risk premium) = r = rf + β(rm-rf)
rf = (required return – βrm) / 1-β
r = (DIV + capital gain) / price
fair price = (DIV + expected price) / 1+r
Variance = proportion * (estimated return – expected return)2 + …
Ch 12: WACC
Company cost of capital = weighted avg of debt and equity returns
After-tax cost of debt = pretax cost x (1-tax rate) = rdebt x (1-Tc)
WACC = [D/V x (1-Tc) rdebt] + (E/V x requity) + (P/V x rpreferred)
NPV = investment + (after-tax cash flow/rate of return)
requity = DIV1/P0 + g
rpreferred = dividend / price of preferred
stock’s beta = (expected return on stock – risk-free rate) / expected market risk premium
debt’s beta = (expected return on debt – risk-free rate) / expected market risk premium
βequity = βassets + (βassets – βdebt) D/E or βassets x (1+ D/E)
βlevered¬ = βu + (βu - βdebt)(1-Tc)D/E or βu x [1+(1-Tc)x D/E]
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