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Management Notes

LAF (Liquidity Adjustment Facility), Repo and Reverse Repo

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A liquidity adjustment facility (LAF) is a tool used in monetary policy, mainly by the Reserve Bank of India (RBI), which enables banks to borrow money through repurchase agreements (reposals) or banks to lend to the RBI using reverse repo contracts.

This arrangement manages liquidity pressures and ensures basic financial-market stability. The Reserve Bank of India transacts repositories and reverse repos within its open market operations in India.

The Liquidity Adjustment Facility or LAF is the principal operating monetary policy tool that allows banks to borrow money through repurchase agreements. This means, in order to meet short-term cash needs, bank, borrow money against government approved securities with an agreement to repurchase the same at a predetermined rate and date.

The liquidity adjustment facility is used to aide banks in the emergency arising out of severe cash shortage or acute liquidity crisis. It is used for modulating the short-term liquidity and transmitting the interest rate into the market.

Basic of a Liquidity Adjustment Facility

Facilities for liquidity adjustment are used to help banks overcome any short-term cash shortages during periods of economic uncertainty or any other stress caused by circumstances beyond their control. Different banks use eligible securities as collateral through a repo agreement and utilize the funds to ease their short-term requirements, thus remaining constant.

The facilities are introduced on a daily basis as banks and other financial institutions make sure they have sufficient capital on the overnight market.

The transaction of liquidity adjustment facilities takes place at a set time of the day, through an auction. A company that wants to raise capital to accomplish a shortfall is engaged in repo agreements, while one with excess capital is doing the opposite executing a reverse repo agreement.

Liquidity Adjustment Facility and the Economy

The RBI may use the facility for adjusting liquidity to manage high levels of inflation. It does this by raising the repo rate, which increases the cost of debt servicing. This, in turn, reduces the supply of investment and money within the economy of India.

Alternatively, if the RBI tries to boost the economy after a period of slow economic growth, the repo rate can be lowered to encourage businesses to borrow, thus increasing the supply of money.

For instance, analysts predict RBI to cut the repo rate in April 2019 by 25 basis points due to weak economic activity, low inflation, and slower global growth. However, as growth accelerates and inflation picks up, analysts expect repo rates to resume rising by 2020.

Repo Rate

Repo or repurchase option allows the scheduled commercial banks to borrow funds from the Reserve Bank of India against any government approved securities with an agreement to repurchase them in the near future at a predefined rate of interest. The rate at which RBI charges from the banks against such lending is called the Repo rate. Through these operations, the liquidity is injected into the economy or the financial system.

Banking is the first sector to get affected by any change in monetary policies. A cut in repo rate can allow banks to borrow from the Reserve Bank of India at a cheaper rate and infuse higher liquidity in the banking system. This can lead banks to reduce their lending rates for customer leading to cheaper loans in the long term. As bank loans get cheaper, consumers can borrow and spend more which boosts consumption and can eventually lead to economic growth. However, this is depending on the decision by the bank whether to pass on the RBI repo rate cut benefits to their customers through cheaper loan offers.

Components

Preventing Economy “squeezes”: The Central bank increases or decreases the Repo rate depending on the inflation. Thus, it aims at controlling the economy by keeping inflation in the limit.

Hedging & Leveraging: RBI aims to hedge and leverage by buying securities and bonds from the banks and provide cash to them in return for the collateral deposited.

Short-Term Borrowing: RBI lends money for a short period of time, maximum being an overnight post which the banks buy back their securities deposited at a predetermined price.

Collaterals & Securities: RBI accepts collateral in the form of gold, bonds etc.

Cash Reserve (or) Liquidity: Banks borrow money from RBI to maintain liquidity or cash reserve as a precautionary measure.

Repo Rate Affect on Economy

Repo rate is a powerful arm of the Indian monetary policy that can regulate the country’s money supply, inflation levels, and liquidity. Additionally, the levels of repo have a direct impact on the cost of borrowing for banks. Higher the repo rate, higher will be the cost of borrowing for banks and vice-versa.

  • Rise in inflation

During high levels of inflation, RBI makes strong attempts to bring down the flow of money in the economy. One way to do this is by increasing the repo rate. This makes borrowing a costly affair for businesses and industries, which in turn slows down investment and money supply in the market. As a result, it negatively impacts the growth of the economy, which helps in controlling inflation.

  • Increasing Liquidity in the Market

On the other hand, when the RBI needs to pump funds into the system, it lowers the repo rate. Consequently, businesses and industries find it cheaper to borrow money for different investment purposes. It also increases the overall supply of money in the economy. This ultimately boosts the growth rate of the economy.

Reverse Repo Rate

This is just opposite to the Repo rate, here the RBI borrows money from the commercial banks against government approved securities. The rate at which RBI pays interest to the commercial bank is called a reverse repo rate. Through reverse repo operations, the liquidity is absorbed from the economy or the financial system.

Whenever RBI decides to reduce the reverse repo rate, banks earn less on their excess money deposited with the Reserve Bank of India. This leads the banks to invest more money in more lucrative avenues such as money markets which increases the overall liquidity available in the economy. While this can also lead to lower interest rate on loans for the bank’s customers, the decision will depend on multiple factors including the bank’s internal liquidity situation and the availability of other potentially less risky and equally lucrative investment opportunities.

Repo Rate Reverse Repo Rate
It is the rate at which RBI lends money to banks It is the rate at which RBI borrows money from banks
It is higher than the reverse repo rate It is lower than the repo rate
It is used to control inflation and deficiency of funds It is used to manage cash-flow
It involves the sale of securities which would be repurchased in future. It involves the transfer of money from one account to another.

Management Notes

MSF (Marginal Standing Facility)

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The Marginal Standing Facility (MSF) is the rate at which the scheduled commercial banks borrow funds fortnight from the Reserve Bank of India against the government approved securities.

Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency when inter-bank liquidity dries up completely. The Marginal standing facility is a scheme launched by RBI while reforming the monetary policy in 2011-12.

Marginal Standing Facility (MSF) is a provision made by the RBI through which scheduled commercial banks can obtain liquidity overnight, in the event that inter-bank liquidity completely dries up. This is a facility for emergencies, through which banks obtain liquidity support at the MSF rate, which is a rate higher than the repo rate.

Banks can avail immediate cash of up to a percentage, now 3%, of their NDTL under MSF, meaning that they can dip into their SLR to obtain liquidity support from the RBI at the MSF rate. It is a penal rate of interest at which the RBI offers banks funds under the Marginal standing facility. If a bank’s liquidity dries up due to, say, a loan-deposit mismatch, it could avail funds from the RBI at the marginal standing facility rate even if it does not have eligible securities beyond the SLR.

MSF is a short-term arrangement as banks generally do not run out of liquidity for a long time, but at a given point they may face a dire shortage of funds.

  • Banks borrow from the RBI by pledging government securities at a rate greater than the repo rate under LAF (liquidity adjustment facility).
  • The MSF rate is pegged 100 basis points or a percentage point above the repo rate.
  • Under MSF, banks can borrow funds up to one percent of their net demand and time liabilities (NDTL).
  • The minimum amount for which RBI receives application is Rs.1 Crore, and afterward in multiples of Rs.1 Crore.

Normally, banks pledge eligible securities above the SLR requirement to the RBI to obtain liquidity through loans at the repo rate. Now, if a bank exhausts this means, it can resort to the MSF provision to get quick money for a 1-day period by pledging, within the limits of SLR, government securities.

Objectives of MSF rate

The Marginal Standing Facility was introduced by the RBI in the 2011-2012 monetary policy and it helps both banks and the RBI in a handful of ways.

  • There is less volatility in overnight lending rates thanks to MSF
  • Banks have a way to plug short-term liquidity shortfalls with MSF
  • With MSF, RBI has more control over the money supply in the economy

RBI uses Marginal standing facility to control and manage the money supply in the financial system. With the increase in the rate, the borrowing becomes expensive for the commercial banks and in return the loans become dearer for the individual or corporate borrowers, which will result in less flow of money in the market. Also, the MSF rate is often increased by RBI to curb the excessive availability of rupee and to avoid further rupee depreciation against a dollar.

Rate of Interest

The rate of interest on MSF is above 100 bps above the Repo Rate.  The banks can borrow up to 1 percent of their net demand and time liabilities (NDTL) from this facility. This means that Difference between Repo Rate and MSF is 200 Basis Points.  So, Repo rate will be in the middle, the Reverse Repo Rate will be 100 basis points below it, and the MSF rate 100 bps above it. Thus, if Repo Rate is X%, reverse repo rate is X-1% and MSF is X+1%.

Borrowing under MSF

  • Banks can borrow through MSF on all working days except Saturdays, between 3:30pm and 4:30pm in Mumbai where RBI has its headquarters.
  • The minimum amount which can be accessed through MSF is Rs. 1 crore and in multiples of Rs. 1 crore.
  • The application for the facility can be submitted electronically also by the eligible scheduled commercial banks.
University of Mumbai BMS Notes

Flow of Funds Matrix

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The national income accounts do not tell anything about monetary or financial transactions whereby one sector places its savings at the disposal of the other sectors of the economy by means of loans, capital transfers, etc.

In fact, the national income accounts do not take into consideration the financial dimensions of economic activity and they describe product accounts as if they are operated through barter. The flow of funds accounts is meant to supplement national income and product accounts. The flow of funds accounts was developed by Prof. Morris Copeland’ in 1952 to overcome the weaknesses of national income accounting.

The flow of funds accounts lists the sources of all funds received and the uses to which they are put within the economy. They show the financial transactions among different sectors of the economy and the link between saving and investment aggregates with lending and borrowing by them.

The account for each sector reveals all the sources of funds whether from income or borrowing and all the uses to which they are put whether for spending or lending. This way of looking at financial transactions in their entirety has come to be known as the flow of funds approach or of sources and uses of funds.

In the flow of funds accounts, all changes in assets are recorded as uses and all changes in liabilities are recorded as sources. Uses of funds are increases in assets if positive or decreases in assets if negative. They refer to capital expenditures or real investment spending which involve the purchase of real assets.

Sources of funds are increases in liabilities or net worth or saving if positive, and repayment of debt or dissaving if negative. Net worth is equal to a sector’s total assets minus its total liabilities. Therefore, a change in net worth equals any change in total assets less any change in total liabilities.

Flow of Funds Matrix:

The flow of funds accounting system is presented in the form of a matrix by placing sources and uses of funds statements of different sectors side by side. It is an interlocking self-contained system that reveals financial relationships among all sectors of the economy.

For the economy as a whole, total liabilities must equal total financial assets, although for any one sector its liabilities may not equal its financial assets. The consolidated net worth of an economy is consequently identical to the value of its real assets. This implies that saving must equal investment in an economy. Any single sector may save more than it invests or invest more than it saves. But the economy-wise total of saving must equal investment.

Limitations:

  1. The flow of funds accounts are more complicated than the national income accounts because they involve the aggregation of a large number of sectors with their very detailed financial transactions.
  2. There is the problem of valuation of assets. Many assets, claims and obligations have no fixed value. It, therefore, becomes difficult to have their correct valuation.
  3. The problem of inclusion of non-reproducible real assets arises in the flow of funds accounts. Economists have not been able to decide as to the type of reproducible assets which may be included in flow of funds accounts.
  4. Similarly, economists have failed to decide about the inclusion of human wealth in flow of funds accounts.

Despite these problems, the flow of funds accounts supplements the national income accounts and help in understanding social accounts of an economy.

Importance:

The flow of funds accounts presents a comprehensive and systematic analysis of the financial transactions of the economy.

As such, they are useful in a number of ways:

  1. The flow of funds accounts is superior to the national income accounts. Even though the latter are fairly comprehensive, yet they do not reveal the financial transactions of the economy which the flow of funds accounts do.
  2. They provide a useful framework for studying the behaviour of individual financial institutions of the economy.
  3. According of Prof. Goldsmith, they bring “the various financial activities of an economy into explicit statistical relationships with one another and with data on the nonfinancial activities that generate income and production.”
  4. They trace the financial flows that interact with and influence the real saving-investment process. They record the various financial transactions underlying saving and investment.
  5. They are essential raw materials for any comprehensive analysis of capital market behaviour. They help to identify the role of financial institutions in the generation of income, saving and expenditure, and the influence of economic activity on financial markets.
  6. The flow of funds accounts show how the government finances its deficit and surplus budget and acquires financial assets.
  7. They also show the results of transactions in government and corporate securities, net increase in deposits and foreign assets in the economy.
  8. The flow of funds accounts help in analysing the impact of monetary policies on the economy as to whether they bring stability or instability or economic fluctuations.
Management Notes

Indian Financial System Functions

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Encourage Savings:

Financial system promotes savings by providing a wide array of financial assets as stores of value aided by the services of financial markets and intermediaries of various kinds. For wealth holders, all this offers ample choice of portfolios with attractive combinations of income, safety and yield.

With financial progress and innovations in financial technology, the scope of portfolio choice has also improved. Therefore, it is widely held that the savings-income ratio is directly related to both financial assets and financial institutions. That is, financial progress generally insures larger savings out of the same level of real income.

As stores of value, financial assets command certain advantages over tangible assets (physical capital, inventories of goods, etc.) they are convenient to hold, or easily storable, more liquid, that is more easily encashable, more easily divisible, and less risky.

A very important property of financial assets is that they do not require regular management of the kind most tangible assets do. The financial assets have made possible the separation of ultimate ownership and management of tangible assets. The separation of savings from management has encouraged savings greatly.

Savings are done by households, businesses, and government. Following the official classification adopted by the Central Statistical Organization (CSO), Government of India, we reclassify savers into, household sector, domestic private corporate sector, and the public sector.

The household sector is defined to comprise individuals, non-Government, non-corporate entities in agriculture, trade and industry, and non-profit making organisations like trusts and charitable and religious institutions.

The public sector comprises Central and state governments, departmental and non departmental undertakings, the RBI, etc. The domestic private corporate sector comprises non-government public and private limited companies (whether financial or non-financial) and corrective institutions.

Of these three sectors, the dominant saver is the household sector, followed by the domestic private corporate sector. The contribution of the public sector to total net domestic savings is relatively small.

Risk Function

The financial markets provide protection against life, health, and income risks. These guarantees are accomplished through the sale of life, health insurance, and property insurance policies.

Mobilisation of Savings:

Financial system is a highly efficient mechanism for mobilising savings. In a fully-monetised economy this is done automatically when, in the first instance, the public holds its savings in the form of money. However, this is not the only way of instantaneous mobilisation of savings.

Other financial methods used are deductions at source of the contributions to provident fund and other savings schemes. More generally, mobilisation of savings taken place when savers move into financial assets, whether currency, bank deposits, post office savings deposits, life insurance policies, bill, bonds, equity shares, etc.

Transfer Function

A financial system provides a mechanism for the transfer of resources across geographic boundaries.

Allocation of Funds:

Another important function of a financial system is to arrange smooth, efficient, and socially equitable allocation of credit. With modem financial development and new financial assets, institutions and markets have come to be organised, which are replaying an increasingly important role in the provision of credit.

In the allocative functions of financial institutions lies their main source of power. By granting easy and cheap credit to particular firms, they can shift outward the resource constraint of these firms and make them grow faster.

On the other hand, by denying adequate credit on reasonable terms to other firms, financial institutions can restrict the growth or even normal working of these other firms substantially. Thus, the power of credit can be used highly discriminately to favour some and to hinder others.

Reformatory Functions

A financial system undertaking the functions of developing, introducing innovative financial assets/instruments services and practices and restructuring the existing assets, services, etc, to cater to the emerging needs of borrowers and investors.

Key Points

  • Issuing and gathering of deposits.
  • Supply of loans from the collected pool of money.
  • The undertaking of financial transactions.
  • Boosting the growth of stock markets and other financial markets.
  • Setting up the legal commercial substructure.
  • Provision of monetary and consultative services.
  • Permits portfolio adaptation for existing assets.
  • Allotment of chance and risk.
  • It forges a connection between depositors and investors.
  • Boosts depth and breadth of finances by increasing its horizon.
  • It is responsible for capital creation.
  • Adds time value to assets and money.
  • To set up an entire payment structure and system.
  • Allocate and dissipate the economic resources.
  • To maintain the economic stability in the country and the markets.
  • To create markets that can judge the investment performance.
Management Notes

Weaknesses of Indian Financial System

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In order to meet the growing requirements of the Government and the industries, many innovative financial instruments have been introduced. Besides, there has been a mushroom growth of financial intermediaries to meet the ever-growing financial requirements of different types of customers. Hence, the Indian financial system is more developed and integrated today than what it was 50 years ago. Yet, it suffers from some weaknesses as listed below:

Dominance of development banks in industrial finance:

The industrial financing in India today is largely through the financial institutions set up by the government. They get most of their funds from their sponsors. They act as distributive agencies only. Hence, they fail to mobilise the savings of the public. This stands in the way of growth of an efficient financial system in the country.

Lack of co-ordination among financial institutions:

There are a large number of financial intermediaries. Most of the financial institutions are owned by the government. At the same time, the government is also the controlling authority of these institutions. As there is multiplicity of institutions in the Indian financial system, there is lack of co-ordination in the working of these institutions.

Unhealthy financial practices:

The dominance of development banks has developed unhealthy financial practices among corporate customers. The development banks provide most of the funds in the form of term loans. So there is a predominance of debt in the financial structure of corporate enterprises. This predominance of debt capital has made the capital structure of the borrowing enterprises uneven and lopsided. When these enterprises face financial crisis, the financial institutions permit a greater use of debt than is warranted. This will make matters worse.

Inactive and erratic capital market:

In India, the corporate customers are able to raise finance through development banks. So, they need not go to capital market. Moreover, they do not resort to capital market because it is erratic and inactive. Investors too prefer investments in physical assets to investments in financial assets.

Monopolistic market structures:

In India some financial institutions are so large that they have created a monopolistic market structures in the financial system. For instance, the entire life insurance business is in the hands of LIC. The weakness of this large structure is that it could lead to inefficiency in their working or mismanagement. Ultimately, it would retard the development of the financial system of the country itself.

High Rate of Interest:

There is a possibility of the high-interest rate charged by several financial institutions in the financial system of our country. Various institutions due to their monopolistic structure in the market may charge high or unfair interest rates.

Other factors:

Apart from the above, there are some other factors which put obstacles to the growth of Indian financial system. Examples are:

a. Banks and Financial Institutions have high level of NPA.

b. Government burdened with high level of domestic debt.

c. Cooperative banks are labelled with scams.

d. Investors confidence reduced in the public sector undertaking etc., e. Financial illiteracy.

Management Notes

Profits Prior to Incorporation and Accounting Treatment

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Profit of a business for the period prior to the date company into existence is referred to as Pre-Incorporation profit. Hence prior period item are those item which is done before incorporation of the company. Profit prior to incorporation is the profit earned or loss suffered during the period before incorporation. It is a capital profit and not legally available for distribution as dividend because a company cannot earn a profit before it comes into existence.

Profit earned after incorporation is revenue profit, which is available for dividend. Profit of prior period and post period however divided separately because the prior period profit and loss hence always credited and charged from capital reserve A/c. Post period profit and loss thus credited and charged from Profit & Loss A/c.

When a running business is taken over from a date prior to its incorporation/commencement, the profit earned up to the date of incorporation/commencement (incorporation, in case of private company; and commencement, in case of public company) is known as ‘Pre-incorporation profit’.

The same is to be treated as capital profit since these are profits which have been earned before the company came into existence. In short, the profit earned after the date of purchase of business is called ‘Post-incorporation or Post-acquisition profit’ and the profit earned before the date of purchase of business is termed as ‘Pre-incorporation profit’.

Method of Computation of Profits/Loss Prior to Incorporation:

In order to ascertain the profit prior to incorporation a Profit and Loss Account is to be prepared at the date of incorporation. But in practice, the same set of books of accounts is maintained throughout the accounting year.

A Profit and Loss Account is prepared at the end of the year and thereafter the profits (or losses) between the two periods are allocated:

(i) From the date of purchase to the date of incorporation or pre-incorporation period;

(ii) From the date of incorporation to the closing of the accounting year or post-incorporation period.

Method of Accounting of Profit/Loss Prior to Incorporation:

Steps may be suggested for ascertaining profit or loss prior to incorporation:

Step I:

A Trading Account should be prepared at first for the whole period, i.e., between the date of purchase and the date of final accounts, in order to calculate the amount of gross profit.

Step II:

Calculate the following two ratios:

(i) Sales Ratio:

Amount of sales should be calculated for the pre-incorporation and post-incorporation periods.

(ii) Time Ratio:

It is calculated after considering the time period, i.e., one is required to calculate the period falling between the date of purchase and the date of incorporation and the period between the date of incorporation and the date of presenting final accounts.

Step III:

A statement should be prepared for calculating the amount of net profit before and after incorporation separately on the following principle:

(i) Gross Profit should be allocated for the two periods on the basis of sales ratio which will present the gross profit for the two separate periods, viz. pre-incorporation and post- incorporation.

(ii) Fixed Expenses or expenses incurred on the basis of time, viz., Rent, Salary, Depreciation, Interest, etc. should be allocated for the two periods on the basis of time ratio.

(iii) Variable Expenses or expenses connected with sales should be allocated for the two periods on the basis of sales ratio.

(iv) Certain expenses, viz., partners’ salary, directors’ salary, preliminary expenses, interest on debentures, etc. are not apportioned since they relate to a particular period. For example, partners’ salary is to be charged against pre-acquisition profit whereas directors’ remuneration, debenture interest, etc. are to be charged against post-acquisition profit.

List of Expenses: Allocated on the basis of Sales/Turnover:

(a) Gross Profit

(b) Selling Expenses

(c) Advertisement

(d) Carriage Outwards

(e) Godown Rent

(f) Discount Allowed

(g) Salesmen’s Salaries

(h) Commission to Salesmen

(i) Promotion Expenses for Sales

(j) Distributions Expenses (Variable Portions)

(k) Free Samples given

(l) Expenses incurred for After-Sale Service, etc.

(m) Delivery Van Expenses.

List of Expenses: Allocated on the basis of Time:

(a) Office and Administration Expenses

(b) Salaries to Office Staff

(c) Rent, Rates and Taxes

(d) Depreciation on Fixed Assets

(e) Printing and Stationery

(f) Insurance

(g) Audit Fees

(h) Miscellaneous Expenses

(i) Distribution Expenses (Fixed Portion)

(j) Travelling Expenses (General)

(k) Interest of Debenture

(l) General Expenses

(m) Expenses Fixed in Nature.

Application/Accounting Treatment of Profit/Loss Prior to Incorporation:

(a) Pre-incorporation Profit:

Since “Profit prior to Incorporation” is a Capital Profit the same should be written off against:

(i) Preliminary Expenses Account

(ii) Formation Expenses Account

(iii) Liquidation Expenses Account

(iv) Write down the value of Fixed Assets, if any

(v) Goodwill Account

(vi) Balance, if any, transferred to Capital Reserve.

(b) Pre-incorporation Loss:

Since “Pre-incorporation Loss” is a Capital Loss the same is adjusted against

(i) Any Capital Profit

(ii) Debited to Goodwill Account

(iii) Writing-off Fictitious Assets

(iv) Capital Reserve.

Basis of allocation of items between ‘pre’ and ‘post’ incorporation period

Time basis

Some type of expense and income which thus divided between pre- and post-period item on basis of time ratio.

For example: Depreciation, salary & wages, Rent and trade expenses etc.

Turnover basis

Some type of expense and income thus divided between pre- and post-period item on the basis of turnover.

Debtors & Creditors Suspense Accounts

  • A company taking over a running business may also agree to collect its debts as an agent for the vendor and may further undertake to pay the creditors on behalf of the vendors in such a case, the debtors and creditors of a vendors will include in the accounts for the company by debit or credit separate total accounts in the general ledger to distinguish them from the debtors and creditors of the business and contra entries will make in corresponding suspense account. Also details of debtors and creditors balance will thus kept in separate ledger.
  • The vendor hence treated as a creditors for the cash received by the purchasing company in respect of the debts due to the vendor, just as if he has himself collected cash from his debtors and remitted the proceeds to the purchasing company.
  • The vendor thus considers a debtor in respect of cash paid to his creditors by the purchasing company. The balance of cash collected, less paid, will represent the amount due to or by the vendor, arising from debtors and creditors balances which have taken over, subject to any collection expenses.
  • Balance in suspense account will be equal to the amount of debtor and creditors taken over remaining unadjusted at anytime.
Management Notes

Difference between Salary and Wages

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Salary

Salary is a fixed regular payment, typically paid on a monthly basis, for the performance of work or services. Unlike wages, which are often calculated on an hourly or weekly basis, salaries provide employees with a consistent and predetermined amount of compensation, regardless of the number of hours worked.

Components:

  1. Base Salary:

The core, fixed amount of money paid to an employee on a regular basis, forming the foundation of the overall salary. Reflects the employee’s role, responsibilities, and experience.

  1. Bonuses:

Additional monetary rewards provided to employees, often based on performance, company profits, or specific achievements. Motivates employees and aligns their efforts with organizational goals.

  1. Allowances:

Supplementary payments intended to cover specific expenses or costs related to the job, such as housing, transportation, or meals. Addresses the financial impact of job-related requirements.

  1. Benefits:

Non-monetary compensation, including healthcare, retirement plans, and other perks, provided to enhance employees’ overall well-being. Contributes to employee satisfaction and work-life balance.

  1. Overtime Pay:

Additional compensation for hours worked beyond the standard workweek, often calculated at a higher rate than the regular hourly pay. Compensates employees for extra effort and time invested in work.

  1. Performance–Based Incentives:

Variable payments linked to individual or team performance, encouraging employees to achieve specific goals or targets. Aligns compensation with results and fosters a performance-driven culture.

  1. Profit Sharing:

Sharing company profits with employees, providing them with a stake in the organization’s financial success. Aligns the interests of employees with the overall success of the business.

  1. Commissions:

Payments based on sales or revenue generated by an employee, common in roles with direct sales responsibilities. Rewards employees for their contribution to revenue generation.

  1. Retirement Benefits:

Contributions made by the employer to retirement plans, such as 401(k) or pension schemes. Supports employees in building financial security for their post-work years.

  • Stock Options:

The right to purchase company stock at a predetermined price, offering employees a share in the company’s ownership. Aligns employees’ interests with the company’s long-term success.

  • Education and Training Support:

Financial assistance provided by the employer for the education and skill development of employees. Promotes continuous learning and professional growth.

  • Health and Wellness Programs:

Initiatives and benefits aimed at promoting employees’ physical and mental well-being. Enhances employee health, productivity, and job satisfaction.

  • Vacation and Leave Benefits:

Paid time off from work, including vacation days, holidays, and other types of leave. Supports work-life balance and employee well-being.

  • Severance Pay:

Compensation provided to employees upon termination of employment, often based on factors like length of service. Offers financial support during transitions and provides a safety net for employees.

  • Other Perquisites (Perks):

Additional benefits or privileges provided to employees, such as company cars, memberships, or flexible work arrangements. Enhances the overall employment experience and contributes to employee satisfaction.

Wages

Wages refer to the compensation paid to an employee for the hours worked or services rendered, often calculated on an hourly, daily, or weekly basis. Unlike salaries, which provide a fixed amount irrespective of hours worked, wages are directly tied to the time spent on the job.

Components:

  1. Hourly Rate:

The amount paid for each hour worked by an employee. Forms the basic unit for calculating wages based on time.

  1. Overtime Pay:

Additional compensation provided for hours worked beyond the standard workweek or regular working hours. Compensates employees for extra effort and time beyond the standard working hours.

  1. Piece-Rate Pay:

Compensation based on the number of units produced or tasks completed. Directly links pay to productivity and output.

  1. Commission:

A percentage of sales or revenue earned by an employee, common in sales roles. Rewards employees based on their contribution to generating business.

  1. Tips and Gratuities:

Additional payments received by employees, often in service industries, as a form of appreciation from customers. Augments income and is often based on customer satisfaction.

  1. Holiday Pay:

Compensation for hours worked on recognized holidays. Encourages employees to work during holiday periods and compensates for the disruption to personal time.

  1. Shift Differentials:

Additional pay for working shifts that fall outside regular daytime hours. Compensates for inconveniences associated with non-standard working hours.

  1. Bonuses (Variable):

Additional payments beyond regular wages, often tied to performance, project completion, or other achievements. Acts as an incentive and recognition for exceptional contributions.

  1. Piecework Bonuses:

Additional payments for meeting or exceeding production targets in piecework arrangements.  Motivates employees to achieve or surpass production goals.

  • Travel Allowances:

Compensation for work-related travel expenses, such as mileage or transportation costs. Addresses additional costs incurred while traveling for work.

  • Uniform or Tool Allowances:

Payments provided to cover the cost of uniforms, tools, or equipment required for the job. Supports employees in meeting job-specific requirements.

  • Incentive Pay:

Additional compensation tied to achieving specific targets, often related to productivity or efficiency. Encourages employees to meet or exceed performance expectations.

  • Danger Pay:

Additional compensation for employees working in hazardous conditions or environments. Recognizes the risks associated with certain jobs.

  • Call-out Pay:

Compensation for employees called in to work outside their regular schedule, often applicable to on-call positions. Compensates for the inconvenience of being available on short notice.

  • Benefits (Limited):

Some wage-related benefits, such as health insurance or retirement contributions, may be provided, but to a lesser extent compared to salary packages. Enhances the overall compensation package, albeit on a more limited scale compared to salaried positions.

Difference between Salary and Wages

Basis of Comparison

 Salary

Wages
Payment Frequency Monthly Hourly or Weekly
Consistency Fixed, stable Variable, fluctuates
Calculation Basis Annual rate / 12 Hourly rate x Hours worked
Overtime Compensation Typically included Paid separately
Employment Level Often for salaried employees Common for hourly workers
Work Hours Impact Irrelevant to pay Directly affects earnings
Benefits Often includes benefits Limited or no benefits
Professional Positions Common for white-collar jobs Common for blue-collar jobs
Skill-Based Reflects skills and qualifications Often skill-independent
Administrative Work Common for managerial roles Common for administrative roles
Unionization Less common for unionized jobs Common in unionized settings
Job Complexity Reflects job responsibilities May not directly reflect complexity
Job Stability Generally perceived as stable Can be influenced by job market
Performance Impact Less direct impact on pay Directly impacts pay through hours
Perception in Society Often associated with higher status May not carry the same status

Management Notes

Basis for Compensation Fixation

indiafreenotesby indiafreenotes2

Compensation refers to compensating any damage, loss or mental harassments, wages or salaries as reward for physical and/or mental efforts to perform any agreed task or job. But the concept of equity in remunerating any work or task has forced us to perceive wages and salaries as compensation, because people work efficiently only when they are paid according to their worth or feel satisfied with the remunerations. Besides basic salaries or wages, companies are forced to view the benefits and services to justify the positional and esteem needs of employees and to provide adequate cushion for inflations. Though the cost of human resources is estimated at between 2% to 20% of the operating cost (depending upon the type of industry), to retain the employees or to avoid job-hopping, some of the industries are even forced to adopt varying scales and benefits.

Compensation is the reward that the employees receive in return for the work performed and services rendered by them to the organization. Compensation includes monetary payments like bonuses, profit sharing, overtime pay, recognition rewards and sales commission, etc., as well as non­monetary perks like a company-paid car, company-paid housing and stock opportunities and so on.

Apart from the basic financial pay the employees receive paid vacations, sick leave, holidays and medical insurance, maternity leave, free travel facility, retirement benefits, etc., and these are called benefits.

The Fixation or determination of compensation involves considering various factors and elements to arrive at a fair and competitive remuneration package for employees. The basis for compensation fixation may vary across industries, organizations, and job roles. The Combination of these factors, tailored to the specific needs and priorities of the organization, forms the basis for the fixation of compensation. Organizations often develop a comprehensive compensation strategy that integrates these elements to attract, retain, and motivate a talented and satisfied workforce.

  • Market Conditions:

Aligning compensation with prevailing market rates for similar positions in the industry or geographic location. Ensures competitiveness in attracting and retaining talent.

  • Job Evaluation:

Systematically assessing the relative value of different jobs within the organization based on factors like skills, responsibilities, and complexity. Establishes internal equity and aids in determining appropriate compensation levels.

  • Industry Standards:

Considering compensation benchmarks and practices established within a specific industry. Helps organizations stay competitive and in line with industry norms.

  • Organization’s Financial Health:

Evaluating the financial capacity of the organization to sustain and afford the proposed compensation structure. Ensures that compensation is aligned with the organization’s financial resources.

  • Employee Performance:

Linking compensation to individual or team performance, often through performance appraisals and merit-based systems. Rewards and motivates high-performing employees, fostering a performance-driven culture.

  • Cost of Living:

Adjusting compensation based on the cost of living in a particular region or country. Accounts for variations in living expenses and ensures fair compensation.

  • Skill and Experience:

Recognizing the level of skills and experience possessed by an employee. Differentiates between entry-level and experienced employees, reflecting their contributions.

  • Legal Compliance:

Ensuring compliance with local, state, and national labor laws and regulations related to minimum wage, overtime, and other compensation standards. Mitigates legal risks and ensures ethical employment practices.

  • Union Agreements:

Adhering to terms negotiated and agreed upon in collective bargaining agreements with labor unions. Reflects the terms and conditions established through negotiations with employee representatives.

  • Market Positioning:

Positioning the organization’s compensation strategy relative to competitors in the talent market. Influences the organization’s attractiveness to potential employees and helps in talent acquisition.

  • Employee Benefits:

Including non-monetary benefits, such as health insurance, retirement plans, and other perks, in the overall compensation package. Enhances the total rewards offered to employees, contributing to their overall well-being.

  • Job Complexity and Risk:

Recognizing the complexity and level of risk associated with specific job roles. Reflects the nature of the job and the skills required, influencing compensation levels.

  • Retention and Succession Planning:

Considering the organization’s long-term talent strategy, including the retention of key employees and planning for future leadership needs. Aligns compensation with strategic workforce planning goals.

  • Employee Value Proposition (EVP):

Evaluating the overall value proposition offered to employees beyond monetary compensation, including career development opportunities, work-life balance, and organizational culture. Considers factors that contribute to employee satisfaction and engagement.

  • Global Considerations:

Adapting compensation practices to account for variations in economic conditions, cultural norms, and legal requirements in different countries for multinational organizations. Ensures consistency and compliance across diverse geographic locations.

Management Notes

Effect of Various Labour Laws on Wages

indiafreenotesby indiafreenotes0

Labour laws play a pivotal role in shaping the employment landscape and influencing wage structures within a country. These laws are designed to regulate the relationship between employers and employees, ensuring fair treatment, safe working conditions, and just compensation. The impact of labour laws on wages is multifaceted, encompassing aspects such as minimum wage regulations, overtime pay, equal pay for equal work, and various other provisions aimed at protecting workers’ rights. Labour laws wield substantial influence over wage structures, seeking to establish a balance between the interests of employers and the rights of workers. While these laws are crafted with the intention of promoting fairness, equity, and worker protection, their impact is subject to various challenges. Striking the right balance between regulation and flexibility, addressing regional disparities, and adapting to evolving workforce dynamics are ongoing challenges for policymakers and businesses alike. Nevertheless, a well-crafted and effectively enforced legal framework is essential for fostering a work environment where wages are just, working conditions are safe, and the rights of workers are upheld.

Minimum Wage Regulations:

Intended Benefits:

  • Fair Compensation:

Minimum wage laws are enacted to ensure that workers receive a baseline level of compensation deemed necessary for a decent standard of living. This promotes economic justice by preventing the exploitation of vulnerable workers.

  • Poverty Alleviation:

Setting a minimum wage helps lift workers out of poverty, providing them with the means to cover essential living expenses. This has broader societal implications, contributing to poverty reduction.

Challenges:

  • Impact on Small Businesses:

Critics argue that higher minimum wages can impose financial burdens on small businesses, potentially leading to job cuts or increased prices for goods and services.

  • Regional Disparities:

Minimum wage regulations may not adequately account for regional variations in living costs, creating challenges in finding a one-size-fits-all solution that addresses the diverse economic landscapes within a country.

Equal Pay for Equal Work:

Intended Benefits:

  • Gender Pay Equity:

Labour laws promoting equal pay for equal work aim to eliminate gender-based wage disparities. This contributes to gender equality in the workplace, fostering a fair and inclusive environment.

  • Fair Treatment:

The principle of equal pay extends to all forms of discrimination, ensuring that employees are not subjected to wage disparities based on race, ethnicity, or other protected characteristics.

Challenges:

  • Data Accuracy and Transparency:

Implementing equal pay measures requires accurate and transparent data on employees’ roles, responsibilities, and compensation. Some organizations may face challenges in collecting and disclosing this information.

  • Subjectivity in Job Evaluation:

Determining what constitutes “equal work” can be subjective, and variations in job roles may complicate efforts to ensure equal pay. Standardizing job evaluation methodologies is a complex task.

Overtime Pay and Working Hours:

Intended Benefits:

  • Fair Compensation for Extra Effort:

Overtime pay regulations are intended to compensate employees for working beyond standard hours. This ensures that employees are fairly rewarded for their additional efforts.

  • Limiting Exploitative Practices:

Labour laws prescribing limits on working hours and overtime seek to prevent exploitative practices and promote a healthy work-life balance. This contributes to employee well-being and job satisfaction.

Challenges:

  • Operational Constraints:

Industries with fluctuating workloads may face challenges in accommodating strict working hour regulations. Flexibility in working hours may be crucial for certain sectors.

  • Compliance Monitoring:

Ensuring compliance with overtime regulations requires effective monitoring mechanisms, which can be resource-intensive for regulatory authorities.

Collective Bargaining and Trade Union Laws:

Intended Benefits:

  • Negotiating Power for Workers:

Collective bargaining laws empower workers to negotiate wages and working conditions collectively. This enhances their bargaining power, leading to more equitable agreements with employers.

  • Labour Market Stability:

By providing a structured framework for negotiations, collective bargaining laws contribute to labour market stability, reducing the likelihood of widespread strikes or industrial unrest.

Challenges:

  • Power Imbalances:

In situations where there is a significant power imbalance between employers and workers, collective bargaining may be challenging. This is particularly relevant in industries with limited unionization.

  • Potential for Disruption:

While collective bargaining aims for mutually beneficial agreements, disputes can arise, leading to work stoppages and disruptions that impact both workers and employers.

Social Security and Benefits:

Intended Benefits:

  • Worker Well-being:

Labour laws pertaining to social security and benefits, such as healthcare, retirement plans, and disability insurance, aim to enhance the overall well-being of workers.

  • Attracting and Retaining Talent:

Competitive benefit packages can attract skilled workers and contribute to employee retention. Labour laws often prescribe minimum standards for these benefits.

Challenges:

  • Financial Strain on Employers:

Mandating certain benefits can place a financial burden on employers, especially smaller businesses. Striking a balance between worker welfare and business viability is crucial.

  • Changing Workforce Dynamics:

The rise of the gig economy and non-traditional employment arrangements poses challenges in adapting social security and benefit regulations to accommodate diverse work structures.

Child Labour and Forced Labour Laws:

Intended Benefits:

  • Protecting Vulnerable Populations:

Laws prohibiting child labour and forced labour are designed to protect vulnerable populations from exploitation. These regulations prioritize the well-being of children and individuals subjected to coercion.

  • Ethical Business Practices:

Compliance with child labour and forced labour laws is integral to promoting ethical business practices. Organizations adhering to these regulations contribute to global efforts against human rights abuses.

Challenges:

  • Enforcement and Monitoring:

Effectively enforcing laws against child labour and forced labour requires robust monitoring systems, especially in industries where such practices may be prevalent.

  • Global Supply Chain Complexity:

Addressing child labour and forced labour becomes complex in global supply chains, where products may pass through multiple jurisdictions with varying regulations and enforcement capacities.

Management Notes

The Impact of Information Technology in Retailing

indiafreenotesby indiafreenotes3

Information technology (IT) has had a profound impact on the retail industry, transforming various aspects of the business from operations and customer interactions to supply chain management and overall strategic decision-making. The integration of IT in retailing has led to increased efficiency, improved customer experiences, and enhanced competitiveness.

Technology has always played a major role, creating a massive impact in reviving the retail industry, bringing it reknown and repute. It is assisting retailers to become highly-equipped and advanced in the way they enhance the experience for consumers.

The Industry Growth

As per Euromonitor International’s recent retailing research, the market size of Modern Grocery Retailers in retail value sales at current prices (including inflation) was Rs 603 billion in 2017. Modern Grocery Retailers grew at 13.2 percent in 2016- 17. The category is forecast to grow by CAGR 9.2 percent through 2017-22.

The search for a one-stop shopping destination keeps making consumers shift from traditional to modern retailing stores. Modern retail stores attract footfalls in their physical store in Tier I and Tier II equally, albeit for different reasons. Aspirational Tier II consumers look at modern retailers as places to experience the new age retail. Equally Tier II & III cities have lucrative geographies for expansion of modern retail.

Retailers are tapping on to this new market of aspirational consumers increasingly. The lack of presence of most of the international and a major portion of national brands in these areas, have led consumers to resort to online channels in Tier II cities.

IT in Retail Importance

  • To collect and analyze customer data while enhancing differentiation.
  • To increase the company’s ability to respond to the evolving marketplace through enhanced speed and flexibility.
  • To work effectively; retailers need one system working across stores (or even across national borders) to make sure the most effective use of stock and improve business processes.

Helpful for Retailer:

  • Transparency and tracking

Retailers must increase transparency between systems, as well as obtain better tracking to integrate systems from manufacturer through to the consumer while obtaining customer and sales information.

  • Customer data

Many retailers struggle with information overload because they’re required to collect and sift through mass amounts of data, then convert it into useful information in a customer-centric industry.

  • PCI Security Compliance

PCI Security Compliance addresses the retailer’s internal security setup and practices, in order to mitigate payment security risks. Every business engaged in credit card payment processing is required to comply with PCI Security Standards. If a retailer collects or stores credit card information that becomes compromised, the retailer may lose the ability to accept credit card payments. Other possible consequences include lawsuits, insurance claims, cancelled accounts, and government fines.

  • Global data synchronization

Due to radio frequency identification/electronic product coding, the entire supply chain has become more intelligent. Retailers must enable the use of real-time data to watch inventory levels. In addition, radio frequency identification tagging positions the company to be able to safeguard its shipments by allowing products to be tracked from manufacturer through the entire supply chain.

Advantages of Information Technology in Retailing

  • Automating processes

Automating a process render many advantages to the retailers. It reduces costs, increases accuracy, reduces processing times, enables quick decision and speeds up customer service.

For example, EPOS (electronic point of sales) uses scanning systems. It ensures accurate prices, enables checkout staff to work faster, and it eliminates the need to fix price label to goods. All these factors reduce the cost considerably.

  • Collecting data about the customer

The purchase details of individual shoppers are collected and analyzed. Product extensions and promotions are based on the analysis of purchasing patterns of different types of shoppers.

Demographic information about the customers is known from a loyalty card database. The entries in the loyalty card are related to transactions data furnished by EPOS. These data can be further used to profile a customer base. This facilitates specific offers to be made to certain types of customers.

A retailer may send mail order catalogue to all loyalty card holders who have bought in the previous year. Moreover, internet and e-commerce sites use previous transactions information to personalize their sites for each shopper by offering them product items that have been related to their last few transactions. They automatically greet them by name when they enter the site.

  • Feedback on marketing decisions

Analysis of EPOS data helps the retailer in knowing the effect of promotion, prices, new products and packaging changes. Retailers can assess the impact of changes in layout or merchandising of stores in terms of category sales, competitor brands, gross profit and sales in the store. Innovative product ideas may be tested against the realities prevailing in the market. In short, the EPOS data analysis helps the company in

  • Evaluating its promotions
  • Calculating customer price responsiveness for core and seasonal products.
  • Predicting the outcome of its newly adopted policies.
  • Planning its promotional measures.

 

  • Communication

The stores manager indulges in effective communication with his suppliers. He sends documents such as purchase orders, stock and sales information over third party communication networks. This is electronic commerce. This method works fast and costs less. It is sufficient for stores to place their orders one or two days and in advance against seven days earlier in the traditional paper based method.

Store computers transmit EPOS data to the head office on daily basis. So, the senior manager is able to assess the performance of every store and product group.

Stock replenishment is done automatically. The computer system receives daily EPOS data from each store and next day’s stock requirements are known.

The system automatically sends the requirement electronically overnight to the distribution centre. So, delivery of merchandise is possible the very next day.

Effective communication reduces the lead time. It is the time taken between sending an order and receiving the merchandise.

Tools for Planning the business

(i) With the use of sophisticated computer software packages, retailers are able to

  • Plan, budget and forecast,
  • Choose the most successful location; and
  • Control their business.

(ii) Model decision making, statistical packages of sales forecast and data mining tools are available for retailers.

(iii) Retailers can also use geographic information systems (GIS).

(iv) Socio demographic data along with company transactions data and intelligent analytical tools are used to forecast sales in different stores.

  • Adding value to the retail transaction

Customers prefer IT assisted transactions to traditional retailing because IT assisted transactions provide speed, accuracy and convenience. For example, ATMs are used at any time of day. Thus, use of IT adds value to retailing.

  • Technology enabled shopping

Selling goods over the internet is becoming popular. Electronic means of selling include the following.

  • Products: Grocery, clothing, footwear, music, books, videos, cameras, photographic goods, computer hardware and software, pharmacy goods etc.
  • Services: Retail banking, personal insurance, financial service, real estate, stocks and shares, Tourism, florists, entertainment tickets, virtual education, information services, etc.

Thus, IT is transforming the nature of products, processes, companies, industries and even competition itself. The spectacular reach of IT is widely accepted today.

Components

  • E-commerce and Online Retailing:

Information technology has fueled the growth of e-commerce, enabling retailers to establish online platforms for buying and selling products. E-commerce platforms provide a convenient and accessible way for customers to browse, shop, and make transactions.

  • Point-of-Sale (POS) Systems:

POS systems, powered by IT, have replaced traditional cash registers. These systems streamline transactions, track sales, manage inventory, and provide valuable data for decision-making.

  • Supply Chain Management:

IT has revolutionized supply chain management in retail. Technologies like RFID (Radio-Frequency Identification), barcoding, and advanced analytics help in real-time tracking of inventory, reducing stockouts and overstock situations.

  • Customer Relationship Management (CRM):

CRM systems leverage IT to manage and analyze customer data. Retailers can personalize marketing efforts, track customer interactions, and enhance customer loyalty through targeted promotions and communication.

  • Data Analytics and Business Intelligence:

Retailers use data analytics and business intelligence tools to gain insights into consumer behavior, market trends, and operational efficiency. This data-driven approach supports informed decision-making and strategy formulation.

  • Mobile Commerce (m–commerce):

The rise of smartphones and mobile apps has given birth to mobile commerce. Retailers leverage IT to create mobile-friendly platforms, enabling customers to shop, compare prices, and make transactions using their mobile devices.

  • Augmented Reality (AR) and Virtual Reality (VR):

AR and VR technologies enhance the shopping experience. Retailers use these technologies for virtual try-ons, interactive product displays, and creating immersive environments that engage customers.

  • Social Media Integration:

IT facilitates the integration of social media platforms into retail strategies. Retailers use social media for marketing, customer engagement, and gathering insights into consumer preferences.

  • Automated Checkout Systems:

Self-checkout systems and automated kiosks, driven by IT, offer an efficient and convenient alternative for customers. These systems reduce wait times and enhance the overall shopping experience.

  • Personalized Marketing:

IT enables retailers to implement personalized marketing strategies. Through data analysis, retailers can create targeted promotions, personalized recommendations, and individualized communication based on customer preferences.

  • Cloud Computing:

Cloud computing technologies have streamlined data storage, processing, and collaboration. Retailers use cloud-based solutions for inventory management, data analytics, and overall business operations.

  • Artificial Intelligence (AI) and Machine Learning (ML):

AI and ML technologies are used for predictive analytics, demand forecasting, chatbots for customer service, and enhancing the overall efficiency of retail operations.

  • Voice Commerce:

 Voice-activated technologies, such as virtual assistants, have introduced new ways of shopping. Customers can use voice commands to search for products, place orders, and receive personalized recommendations.

  • Cybersecurity:

As retail operations become more digitized, the importance of cybersecurity has grown. IT is crucial in implementing robust security measures to protect customer data and secure online transactions.

  • Internet of Things (IoT):

IoT devices, such as smart shelves and connected devices in stores, contribute to real-time monitoring of inventory, temperature control, and other operational aspects, improving overall efficiency.

  • Feedback and Reviews Platforms:

IT facilitates the collection and analysis of customer feedback and reviews.

Limitations of Using Information Technology in Retailing

  • Originally IT was used by retailers to automate control services such as finance, pay roll, and management accounts. Electronic point of sales systems can be afford only by a very few department stores. Basically, retailing is a highly dispersed business. Retailers have to incur enormous amount of expenditure on installation of IT equipment in their retail business.

  • Retailing involves a wide array of products. So, a complex system is required to handle a large number of product lines.
  •  In retail stores, staff may have limited knowledge about computers. So, computer specialists are to be employed to deal with the automation process. Only the largest retailers can afford to employ technically qualified people.
  • The costs of routine investment in automation process is very high.
  • Many IT projects fail and the risk of such failure is too high for retailers.
  • According to Prof. John Sawson, many retailers concentrate on operational improvement rather than transformational ones. The expected pay off from IT has not been fully realized. Retailers devote only a small amount of their budgets to IT.
  • Getting the full benefits of IT may actually take a longer time. Retailers should learn how best to exploit the new systems. Many U.K. grocers invested in EPOS in the 1980s. But only a few made effective use of information about customer’s shopping behavior. Only after making heavy investments and learning from experience, retailers could create IT based stock replenishment system.

  • IT alone has not produced performance advantage in the retail industry.

Inspite of the above limitations in using Information Technology for competitive advantages, firms have gained advantages such as flexible culture, strategic planning and improved supplier relationships. Advantage lies in people and systems rather than systems alone. To derive full competitive advantage of IT requires long-term investment.

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