Tag: University of Mumbai BMS Notes

Management Notes

Decision making under Certainty, Uncertainty, Risk

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Decision theory, in statistics, a set of quantitative methods for reaching optimal decisions. A solvable decision problem must be capable of being tightly formulated in terms of initial conditions and choices or courses of action, with their consequences. In general, such consequences are not known with certainty but are expressed as a set of probabilistic outcomes. Each outcome is assigned a “utility” value based on the preferences of the decision maker. An optimal decision, following the logic of the theory, is one that maximizes the expected utility. Thus, the ideal of decision theory is to make choices rational by reducing them to a kind of routine calculation.

Decision-making under Certainty

A condition of certainty exists when the decision-maker knows with reasonable certainty what the alternatives are, what conditions are associated with each alternative, and the outcome of each alternative. Under conditions of certainty, accurate, measurable, and reliable information on which to base decisions is available.

The cause and effect relationships are known and the future is highly predictable under conditions of certainty. Such conditions exist in case of routine and repetitive decisions concerning the day-to-day operations of the business.

Decision-making under Risk:

When a manager lacks perfect information or whenever an information asymmetry exists, risk arises. Under a state of risk, the decision maker has incomplete information about available alternatives but has a good idea of the probability of outcomes for each alternative.

While making decisions under a state of risk, managers must determine the probability associated with each alternative on the basis of the available information and his experience.

Decision-making under Uncertainty:

Most significant decisions made in today’s complex environment are formulated under a state of uncertainty. Conditions of uncertainty exist when the future environment is unpredictable and everything is in a state of flux. The decision-maker is not aware of all available alternatives, the risks associated with each, and the consequences of each alternative or their probabilities.

The manager does not possess complete information about the alternatives and whatever information is available, may not be completely reliable. In the face of such uncertainty, managers need to make certain assumptions about the situation in order to provide a reasonable framework for decision-making. They have to depend upon their judgment and experience for making decisions.

Modern Approaches to Decision-making under Uncertainty:

There are several modern techniques to improve the quality of decision-making under conditions of uncertainty.

The most important among these are:

(1) Risk analysis,

(2) Decision trees and

(3) Preference theory.

Risk Analysis:

Managers who follow this approach analyze the size and nature of the risk involved in choosing a particular course of action.

For instance, while launching a new product, a manager has to carefully analyze each of the following variables the cost of launching the product, its production cost, the capital investment required, the price that can be set for the product, the potential market size and what percent of the total market it will represent.

Risk analysis involves quantitative and qualitative risk assessment, risk management and risk communication and provides managers with a better understanding of the risk and the benefits associated with a proposed course of action. The decision represents a trade-off between the risks and the benefits associated with a particular course of action under conditions of uncertainty.

Decision Trees:

These are considered to be one of the best ways to analyze a decision. A decision-tree approach involves a graphic representation of alternative courses of action and the possible outcomes and risks associated with each action.

By means of a “tree” diagram depicting the decision points, chance events and probabilities involved in various courses of action, this technique of decision-making allows the decision-maker to trace the optimum path or course of action.

Preference or Utility Theory:

This is another approach to decision-making under conditions of uncertainty. This approach is based on the notion that individual attitudes towards risk vary. Some individuals are willing to take only smaller risks (“risk averters”), while others are willing to take greater risks (“gamblers”). Statistical probabilities associated with the various courses of action are based on the assumption that decision-makers will follow them.

3For instance, if there were a 60 percent chance of a decision being right, it might seem reasonable that a person would take the risk. This may not be necessarily true as the individual might not wish to take the risk, since the chances of the decision being wrong are 40 percent. The attitudes towards risk vary with events, with people and positions.

Top-level managers usually take the largest amount of risk. However, the same managers who make a decision that risks millions of rupees of the company in a given program with a 75 percent chance of success are not likely to do the same with their own money.

Moreover, a manager willing to take a 75 percent risk in one situation may not be willing to do so in another. Similarly, a top executive might launch an advertising campaign having a 70 percent chance of success but might decide against investing in plant and machinery unless it involves a higher probability of success.

Though personal attitudes towards risk vary, two things are certain.

Firstly, attitudes towards risk vary with situations, i.e. some people are risk averters in some situations and gamblers in others.

Secondly, some people have a high aversion to risk, while others have a low aversion.

Most managers prefer to be risk averters to a certain extent, and may thus also forego opportunities. When the stakes are high, most managers tend to be risk averters; when the stakes are small, they tend to be gambler.

Management Notes

Corporate Financing

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Corporate finance is the division of finance that deals with financing, capital structuring, and investment decisions. Corporate finance is primarily concerned with maximizing shareholder value through long and short-term financial planning and the implementation of various strategies. Corporate finance activities range from capital investment decisions to investment banking.

Corporate finance is one of the most important subjects in the financial domain. It is deep rooted in our daily lives. All of us work in big or small corporations. These corporations raise capital and then deploy this capital for productive purposes.

Corporate finance departments are charged with governing and overseeing their firms’ financial activities and capital investment decisions. Such decisions include whether to pursue a proposed investment and whether to pay for the investment with equity, debt, or both.

Principles of Corporate Finance

Let’s understand the three most fundamental principles in corporate finance which are- the investment, financing, and dividend principles.

Investment Principle

This principle revolves around the simple concept that businesses have resources which need to be allocated in the most efficient way. The first and important decision that needs to be made in corporate finance is to do this wisely, i.e. decisions that not only provide revenue opportunities but also saves money for the future. This also encompasses the working capital decisions such as the credit days to be allotted to the customers etc. Corporate finance also measures the return on a planned investment decisions by comparing it to the minimum tolerable hurdle rate and deciding if the project/investment is feasible to be undertaken.

Financing Principle

Most often businesses are funded with either debt or equity or both. In the investment decision that we earlier discussed once we have finalized the mix of equity and debt and its effects for the minimum acceptable hurdle rate, the next step would be to determine if the mix is the right one in the financing principle section.

Dividend Principle

Businesses reach a stage in their life cycle where they grow and mature and the cash flow they generate exceeds the expected hurdle rate. At this stage, the company needs to determine the ways of rewarding the owners with it. So the basic discussion here is that if the excess cash should be left in the business or given away to the investors/owners. A company that is publicly held has the option of either pay off dividends or buy back stocks.

Types of Corporate Finance

  1. Capital Investments

Corporate finance tasks include making capital investments and deploying a company’s long-term capital. The capital investment decision process is primarily concerned with capital budgeting. Through capital budgeting, a company identifies capital expenditures, estimates future cash flows from proposed capital projects, compares planned investments with potential proceeds, and decides which projects to include in its capital budget.

Making capital investments is perhaps the most important corporate finance task that can have serious business implications. Poor capital budgeting (e.g., excessive investing or under-funded investments) can compromise a company’s financial position, either because of increased financing costs or inadequate operating capacity.

 Corporate financing includes the activities involved with a corporation’s financing, investment, and capital budgeting decisions.

  1. Capital Financing

Corporate finance is also responsible for sourcing capital in the form of debt or equity. A company may borrow from commercial banks and other financial intermediaries or may issue debt securities in the capital markets through investment banks (IB). A company may also choose to sell stocks to equity investors, especially when need large amounts of capital for business expansions.

Capital financing is a balancing act in terms of deciding on the relative amounts or weights between debt and equity. Having too much debt may increase default risk, and relying heavily on equity can dilute earnings and value for early investors. In the end, capital financing must provide the capital needed to implement capital investments.

  1. Short-Term Liquidity

Corporate finance is also tasked with short-term financial management, where the goal is to ensure that there is enough liquidity to carry out continuing operations. Short-term financial management concerns current assets and current liabilities or working capital and operating cash flows. A company must be able to meet all its current liability obligations when due. This involves having enough current liquid assets to avoid disrupting a company’s operations. Short-term financial management may also involve getting additional credit lines or issuing commercial papers as liquidity back-ups.

Importance/Significance of Corporate Financing

  1. Separation of Ownership and Management

The basis of corporate finance is the separation of ownership and management. Now, the firm is not restricted by capital which needs to be provided by an individual owner only. The general public needs avenues for investing their excess savings. They are not content with putting all their money in risk free bank accounts. They wish to take a risk with some of their money. It is because of this reason that capital markets have emerged. They serve the dual need of providing corporations with access to source of financing while at the same time they provide the general public with a plethora of choices for investment.

  1. Liaison between Firms and Capital Markets

The corporate finance domain is like a liaison between the firm and the capital markets. The purpose of the financial manager and other professionals in the corporate finance domain is twofold. Firstly, they need to ensure that the firm has adequate finances and that they are using the right sources of funds that have the minimum costs. Secondly, they have to ensure that the firm is putting the funds so raised to good use and generating maximum return for its owners.

  1. Financing Decision

As stated above the firm now has access to capital markets to fulfill its financing needs. However, the firm faces multiple choices when it comes to financing. The firm can firstly choose whether it wants to raise equity capital or debt capital. Even within the equity and debt capital the firm faces multiple choices. They can opt for a bank loan, corporate loans, public fixed deposits, debentures and amongst a wide variety of options to raise funds. With financial innovation and securitization, the range of instruments that the firm can use to raise capital has become very large. The job of a financial manager therefore is to ensure that the firm is well capitalized i.e. they have the right amount of capital and that the firm has the right capital structure i.e. they have the right mix of debt and equity and other financial instruments.

  1. Investment Decision

Once the firm has gained access to capital, the financial manager faces the next big decision. This decision is to deploy the funds in a manner that it yields the maximum returns for its shareholders. For this decision, the firm must be aware of its cost of capital. Once they know their cost of capital, they can deploy their funds in a way that the returns that accrue are more than the cost of capital which the company has to pay. Finding such investments and deploying the funds successfully is the investing decision. It is also known as capital budgeting and is an integral part of corporate finance.

Capital budgeting has a theoretical assumption that the firm has access to unlimited financing as long as they have feasible projects. A variation of this decision is capital rationing. Here the assumption is that the firm has limited funds and must choose amongst competing projects even though all of them may be financially viable. The firm thus has to select only those projects that will provide the best return in the long term.

Financing and investing decisions are like two sides of the same coin. The firm must raise finances only when it has suitable avenues to deploy them. The domain of corporate finance has various tools and techniques which allow managers to evaluate financing and investing decisions. It is thus essential for the financial well being of a firm.

Management Notes

Capitalization, Under capitalization and Over Capitalization

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Capitalization is an accounting method in which a cost is included in the value of an asset and expensed over the useful life of that asset, rather than being expensed in the period the cost was originally incurred. In finance, capitalization refers to the cost of capital in the form of a corporation’s stock, long-term debt, and retained earnings. In addition, market capitalization refers to the number of outstanding shares multiplied by the share price.

Capitalization has two meanings in accounting and finance. In accounting, capitalization is an accounting rule used to recognize a cash outlay as an asset on the balance sheet, rather than an expense on the income statement. In finance, capitalization is a quantitative assessment of a firm’s capital structure.

Capitalization in Finance

Another aspect of capitalization refers to the company’s capital structure. Capitalization can refer to the book value cost of capital, which is the sum of a company’s long-term debt, stock, and retained earnings. The alternative to the book value is the market value. The market value cost of capital depends on the price of the company’s stock. It is calculated by multiplying the price of the company’s shares by the number of shares outstanding in the market.

If the total number of shares outstanding is 1 billion and the stock is currently priced at $10, the market capitalization is $10 billion. Companies with a high market capitalization are referred to as large caps (more than $10 billion); companies with medium market capitalization are referred to as mid caps ($2 – $10 billion); and companies with small capitalization are referred to as small caps ($300 million – $2 billion).

It is possible to be overcapitalized or undercapitalized. Overcapitalization occurs when earnings are not enough to cover the cost of capital, such as interest payments to bondholders or dividend payments to shareholders. Undercapitalization occurs when there’s no need for outside capital because profits are high and earnings were underestimated.

Undercapitalization

Undercapitalization occurs when a company does not have sufficient capital to conduct normal business operations and pay creditors. This can occur when the company is not generating enough cash flow or is unable to access forms of financing such as debt or equity.

Undercapitalized companies also tend to choose high-cost sources of capital, such as short-term credit, over lower-cost forms such as equity or long-term debt. Investors want to proceed with caution if a company is undercapitalized because the chance of bankruptcy increases when a company loses the ability to service its debts.

Being undercapitalized is a trait most often found in young companies that do not adequately anticipate the initial costs associated with getting a business up and running. Being undercapitalized can lead to a significant drag on growth, as the company may not have the resources required for expansion, leading to the eventual failure of the company. Undercapitalization can also occur in large companies that take on significant amounts of debt and suffer from poor operating conditions.

If undercapitalization is caught early enough, and if a company has sufficient cash flows, it can replenish its coffers by selling shares, issuing debt, or obtaining a long-term revolving credit arrangement with a lender. However, if a company is unable to produce net positive cash flow or access any forms of financing, it is likely to go bankrupt.

Undercapitalization can have a number of causes, such as:

  • Poor macroeconomic conditions that can lead to difficulty in raising funds at critical times
  • Failure to obtain a line of credit
  • Funding growth with short-term capital rather than permanent capital
  • Poor risk management, such as being uninsured or underinsured against predictable business risks

Examples of Undercapitalization in Small Business

When starting a business, entrepreneurs should conduct an assessment of their financial needs and expenses—and err on the high side. Common expenses for a new business include rent and utilities, salaries or wages, equipment and fixtures, licenses, inventory, advertising, and insurance, among others. Since startup costs can be a significant hurdle, undercapitalization is a common issue for young companies.

Because of this, small business startups should create a monthly cash flow projection for their first year of operation (at least) and balance it with projected costs. Between the equity, the entrepreneur contributes and the money they are able to raise from outside investors, the business should be able to be sufficiently capitalized.

In some cases, an undercapitalized corporation can leave an entrepreneur liable for business-related matters. This is more likely when corporate and personal assets are commingled when the corporation’s owners defraud creditors, and when adequate records are not kept.

  • Undercapitalized companies do not have enough capital to pay creditors and often need to borrow more money.
  • Young companies that do not fully understand initial costs are sometimes undercapitalized.
  • When starting, entrepreneurs must asset their financial needs and expenses then err on the high side.
  • If a company can’t generate capital over time, chances of going bankrupt increase, as it loses the ability to service its debts.

Causes of Under-Capitalization:

(1) A company which is floated during depression will find itself under-capitalized during boom period. The reason being that the assets were acquired at lower cost and the return during inflation will be high.

(2) If the company is working at a high degree of efficiency it will earn more profits which will push up the real value of the shares in the market, indicating under-capitalisation.

(3) The promoters of the company at the time of preparing financial plan may under estimate future earnings or make under-estimation of capital requirements.

If the earnings, later on, prove to be higher than the estimated figure, the company will become under-capitalized.

(4) The company may follow a conservative dividend policy (i.e., moderate rate of dividend) thereby leading to enough funds for business expansion, machinery replacement etc. This will lead to higher rates of earnings and hence under-capitalisation.

(5) The promoters of the company in a desire to keep control over the affairs of the concern may issue lesser number of shares and prefer to manage with their own capital or through cheap borrowings and retained earnings, it may lead the company to under-capitalisation after some time.

Effects of Under-Capitalization:

(1) Seeing the high rate of earning and profits of the company, the employees/workers shall start demanding high salaries.

(2) High profits of the company may encourage others to enter the same business line leading to sever competition.

(3) Customers may feel that they are being exploited by the company.

(4) Company will have to pay more taxes.

Where under-capitalization arises due to inadequacy of funds:

(5) At times, company may be compelled to raise funds at higher rates of interest.

(6) Due to inadequacy of capital, once the company runs into rough weather, it may lack working capital and hence a constant danger of failure of business.

Remedial Measures to Control Under-Capitalization:

(1) The existing shareholders may be allotted shares of higher face (par) value in exchange for the old shares. This procedure will bring down the rate of earning per rupee of share value but will not affect the amount of dividend per share.

(2) The shares may be splitted up. It has the effect of reducing the dividend per share. In other words, the par value of shares may be reduced by sub-dividing the shares.

(3) The management may issue bonus shares to equity shareholders. This measure shall capitalize the earnings/products, thus increase the capitalisation and the number of shares. Dividend per share and rate of earnings will be reduced.

(4) To remove the state of under-capitalisation, fresh (more) shares and debentures may be issued.

Overcapitalization

Overcapitalization occurs when a company has issued more debt and equity than its assets are worth. The market value of the company is less than the total capitalized value of the company. An overcapitalized company might be paying more in interest and dividend payments than it has the ability to sustain long-term. The heavy debt burden and associated interest payments might be a strain on profits and reduce the amount of retained funds the company has to invest in research and development or other projects. To escape the situation, the company may need to reduce its debt load or buy back shares to reduce the company’s dividend payments. Restructuring the company’s capital is a solution to this problem.

In the insurance market, overcapitalization takes on a different meaning. Overcapitalization occurs when the supply of policies exceeds demand for policies, creating a soft market and causing insurance premiums to decline until the market stabilizes. Policies purchased in times of low premium levels can reduce an insurance company’s profitability.

The opposite of overcapitalization is undercapitalization, which occurs when a company has neither the cash flow nor the access to credit that it needs to finance its operations. The company may not be able to issue stock on the public markets because the company doesn’t meet the requirements or the filing expenses are too high. Essentially, the company can’t raise capital to fund itself, its daily operations or expansion projects. Undercapitalization most commonly occurs in companies with high start-up costs, too much debt and insufficient cash flow. Undercapitalization can ultimately lead to bankruptcy.

Causes of Over-Capitalization:

(i) More shares and/or debentures might have been issued, resulting in availability of surplus funds that cannot be profitably employed, but dividend shall have to be paid on such excess capital also.

(ii) Rate of interest on borrowings might be higher than the rate of earnings of the company.

(iii) Wrong estimate of the earnings of the company. If future earning is over-estimated, the market value of shares will fall below the purchase price because shareholders will not get what they had been promised by the company.

(iv) Floating the company under inflationary conditions will lead to over-capitalisation because of purchase of assets at high prices.

(v) Payment of high promotional expenses, i.e., if the remuneration paid to promoters etc., is very high.

(vi) Provision of depreciation lass than justified. So company will find it difficult to replace the assets (machinery etc.) with the funds made available by depreciation provision.

(vii) Insufficient and extravagant management of the company. Liberal payment of dividend and low retention of earnings for self-financing.

(viii) Time lag between installation of machinery and starting production.

(ix) High tax rates and excessive tax payment also results in over-capitalisation.

Effects of Over-Capitalization:

(i) Less earnings of the company, leading to reduction of rate of dividend and hence decrease in market value of its shares.

(ii) Shareholders of the company get less dividends.

(iii) Employees are denied increase in salaries.

(iv) Prices of company products may go high.

(v) Company finds it difficult to raise capital, because in present situation of over-capitalisation, it finds it difficult to pay a fair rate of return to its investors.

(vi) To save their skin, directors of the company may resort to unfair practices like manipulation of the books of accounts to show artificial prosperity.

Remedial Measures to Correct Over-Capitalization:

(i) All avoidable costs should be avoided e.g., purchase of new vehicles, air-conditioners, sophisticated office furniture etc.

(ii) Wastage and extravagance should be avoided.

(iii) Earning capacity should be increased by minimizing scrap and by increasing efficiency of workers.

(iv) The par value of shares or the number of shares may be reduced (to eliminate watered stock).

(v) Debentures and cumulative preference shares carrying higher rate of interest and dividend should be redeemed or their holders may be persuaded to take new debentures at lower rate of interest.

Lucknow University BBA Notes / Management Notes / University of Mumbai BMS Notes

Marketing of Services in Hospital

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Health marketing is an approach to public health promotion that applies traditional marketing principles and theories alongside science-based strategies to protect and promote the health of diverse populations. It involves creating, communicating, and delivering messages for the public on prevention, health promotion and health protection. Health marketing is one of the ways advancements in medicine and in health-protecting services, such as insurance, are made widely known.

The marketing strategy would follow the traditional “4Ps” of marketing, namely:

  • The “product” in question in this case the surgical procedure.
  • The “place” which refers to the access to this procedure.
  • “Promotion” refers to creating awareness and hence demand.
  • “Price” refers to the cost of the procedure e.g. money, time, reputation etc.

“Health marketing” is a term rarely used in public healthcare and related disciplines. “Social marketing” or “integrated marketing communication” are more commonly used in public health and other disciplines to refer to marketing-based planning frameworks for public health communication.

Medical marketing in the private sector

Health marketing or Medical Marketing is a specialized branch of marketing. Medical marketing was born from the necessity for private health professionals to attract new patients, the characteristics of the health market makes it a unique kind of marketing. Medical marketing is usually a business to consumer (B2C) services. The primary customers for these medical marketing companies are Generation Z. About 85% of Gen Zers said they are open to alternative healthcare options like telemedicine, dispatch services and membership-based services. Marketers and medobal healthcare provides offline/online medical services for healthcare seekers. Healthcare professionals using this type of marketing usually offer beauty related services, such as aesthetic medicine, plastic surgery, dental surgery or dermatology and much more.

Fundamentals

Professional Referral Marketing: A reliable and continuing stream of inbound patient referrals from other medical, dental or other professional sources is the lifeblood of many specialty providers. And whether it’s a primary or secondary channel, professional referral sources can’t be taken for granted. Doctor referrals do not happen by magic or simply because you are a good provider. Success requires a written plan and an unfailing system to preserve and grow the flow of professional referrals.

Internet Marketing: From websites and social media tools, to patient portals and mobile apps, online marketing is a mainstream channel for marketing, advertising and public relations. Exactly how you use the muscle of the digital freeway can be highly effective and profitable, or a huge waste of time and money.

Branding: This is all about standing out from the crowd in a positive way, and it includes virtually everything you do. A powerful, differentiating brand for your healthcare business is part of your reputation. Meaningful and effective branding does not occur without a deliberate effort to shape and express the right message at the right time.

Internal Marketing: This heading includes all the ways and means that you communicate with people who already know you, primarily present and previous patients. Depending on the nature of your practice or situation, this influential audience can be a rich resource for referrals, additional services, testimonials and/or word-of-mouth advertising.

External Marketing: These are the media that reach prospective patients that don’t know you. Advertising in newspapers, radio, television, billboards and the like target an audience that needs to know that you provide an answer for their healthcare need. There’s little margin for error in an external media budget that is expected to produce a measurable return-on-investment.

Public Relations: This heading includes, among other things, planning and generating healthcare publicity and free press exposure, such as newspaper articles or broadcast interviews. The end results look easy, and it can be a positive and powerful influence. But “free press” typically results from careful planning, good timing, a clear message and a deliberate effort.

Management Notes / University of Mumbai BMS Notes

Marketing of Services in Tourism

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Tourism marketing is different because the customer purchases a series of services, but is left with very little concrete value at the completion of his trip. As a result, the marketing initiatives have to emphasize the value of the memories, make the collection of services easily accessible and add value through additional programming and other factors. A key challenge is to convince potential customers that the item they are purchasing provides good value for the price, and that the services will be as described and expected. The 8 P’s in marketing tourism summarize the special approach that is required. Many small businesses market tourism products and employ these marketing strategies.

Product: What You Have to Offer

The product is the collection of services that have features and benefits. Standard features and benefits include the normal amenities of a hotel room, for example. Good marketing adds special features, such as free breakfasts or free Internet.

Price: What Customers Will Pay

The price has to match the product, but good marketing makes the price seem more attractive. The operator can either add features to the product and keep the price the same or give a discount for the same features.

Promotion: How You Sell Your Wares

The promotion gives details of the product and the price. The key characteristics of your travel marketing strategy are the method of communicating the information, the content of the promotion and the cost to the operator. The promotion has a target market, and the method and content of the promotion has to appeal to the people who it reaches. The price the members of the target market are willing to pay has to cover the cost of the promotion.

Place: Where You Do Business

Place refers to the location where the customer buys the collection of services. Ideally, the operator who sends out the promotion uses it to encourage the potential customer to visit the operator’s location and complete the purchase. With the convenience of online payments, the operator may find that the best strategy is to direct potential customers to an attractive website where they can complete the purchase.

People: Your Hidden Strength

Since the product is a collection of services, the people who provide the services are a key to the success of the transaction. Operators must have top-level service to initially complete the sale and to encourage repeat customers.

Planning: Look Ahead

The key service component of the tourism experience is planning. The customer expects that the experience will correspond closely to what he purchased. The only way to ensure that kind of correspondence is to execute according to detailed plans, and have contingency planning in place for problems.

Programming: Cater to Your Clients

One way to add value to the standard product and to distinguish a particular offering from competitors is to offer exclusive programming, a practice known as service marketing. Customers will purchase a product that caters to their particular interests. Special programming can address such preferences and draw in additional customers.

Physical Evidence

If possible, the provision of physical evidence that the customer experienced the particular tourism product can help sales. Providing professional photographs of the customers at key events or the supply of branded products are effective strategies for promoting particular tourism products.

Lucknow University BBA Notes / Management Notes

Components of environment & Environmental analysis

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Environmental Analysis is described as the process which examines all the components, internal or external, that has an influence on the performance of the organization. The internal components indicate the strengths and weakness of the business entity whereas the external components represent the opportunities and threats outside the organization.

To perform environmental analysis, a constant stream of relevant information is required to find out the best course of action. Strategic Planners use the information gathered from the environmental analysis for forecasting trends for future in advance. The information can also be used to assess operating environment and set up organizational goals.

It ascertains whether the goals defined by the organization are achievable or not, with the present strategies. If is not possible to reach those goals with the existing strategies, then new strategies are devised or old ones are modified accordingly.

Some of the features or characteristics of Environmental Analysis are:

  • Holistic View: Environmental Analysis is a holistic exercise in the sense that it must comprise a total view of the environment rather than viewing a trend piecemeal. The corporate must scan the circumference of its environment in order to minimize the chances of surprises and to maximize its utility.
  • Continuous Process: The analysis of environment must be a continuous process rather than being an intermittent scanning system. It must operate continuously in order to keep track of the rapid pace of development. So, Environmental analysis becomes essential due to the dynamic nature of the environment.
  • Exploratory Process: While the Monitoring aspect of the environment is concerned with the present development, a large part of the process seeks to explore the unknown dimensions of possible future. The analysis emphasizes on “What could happen” and not necessarily “What will happen.”

The Importance of Environmental Analysis are:

  • First Mover Advantage: Awareness of environment helps an enterprise to take advantage of early opportunities instead of losing them to competitors. For instance, Maruti Udyog became the leader in the small car market because it was the first to recognize the need for small cars on account of rising Middle class.
  • Early Warning Signal: Environmental awareness serves as an early warning signal. It makes a firm aware of the impending threat or crisis, so that the firm can take timely action to minimize the adverse effects if any. For instance, A MNC entering in to the Indian market would act as a early warning signal for Indian Firms.
  • Focus On Customer: Environmental Understanding makes the management or Business organization sensitive towards the changing needs and expectations of customer. For instance, Several FMCG companies have launched small sachets of shampoo and other products realizing the wishes of customers.
  • Strategy Formulation: Environmental Monitoring provides relevant information about the business environment. such information serves as the basis for strategy formulation. For Instance, ITC realized that there is a vast scope for growth in the travel and tourism industry in India and therefore ITC planned New hotels in India.
  • Change Agent: Business leaders acts as the agents of change. They create a drive for change at the grassroot level. In order to decide the direction and nature of change, the leaders need to understand the aspirations of people and other environmental forces through Environmental Scanning.
  • Public Image: A business firm can improve its image by showing that it is sensitive to its environment and responsive to the aspirations of public. Environmental understanding enables the business to be responsive to their environment.
  • Continuous Learning: Environmental analysis keeps the organization in touch with the changing scenario so that thet are never caught unaware. With the help of Environmental learning, managers can react in an appropriate manner and thereby increase the success of their organization.

The Process of Environmental Analysis/Scanning consists of the following steps:

  • Environmental Scanning: It means the process of analyzing the environment for identifying the factors which may influence the business. Environmental Scanning alerts an organization to potentially significant forces in the external environment, so that suitable strategic initiatives may be taken before the organization reaches to a critical situation.
  • Environmental Monitoring: At this stage, the information from the relevant environment is collected. Once this information is collected, adequate data is gathered so as to find out the patterns and trends of the environment. Further Monitoring is a follow up and deeper analysis of environmental forces. Several techniques such as company records, spying, publication and verbal talks with the customers, employees, dealers and suppliers are the main sources of collecting data.
  • Environmental Forecasting: Environmental Forecasting is the process of estimating the events of future based on the analysis of past records and present behavior. Further it is necessary to analyze or anticipate the future events before any strategic plans are formulated. Forecasts are made for economic, social and political factors. Several techniques such as Time series, Graph method, Delphi method etc. are used for this purpose.
  • Assessment Or Diagnosis: At this stage, Environmental factors are assessed in terms of their impact on the organization. Some factors in the environment may entail an opportunity while others may pose a threat yo the organization. For this purpose, SWOT analysis and ETOP analysis are used.

Advantages of Environmental Analysis

The internal insights provided by the environmental analysis are used to assess employee’s performance, customer satisfaction, maintenance cost, etc. to take corrective action wherever required. Further, the external metrics help in responding to the environment in a positive manner and also aligning the strategies according to the objectives of the organization.

Environmental analysis helps in the detection of threats at an early stage, that assist the organization in developing strategies for its survival. Add to that, it identifies opportunities, such as prospective customers, new product, segment and technology, to occupy a maximum share of the market than its competitors.

Steps Involved in Environmental Analysis

  1. Identifying: First of all, the factors which influence the business entity are to be identified, to improve its position in the market. The identification is performed at various levels, i.e. company level, market level, national level and global level.
  2. Scanning: Scanning implies the process of critically examining the factors that highly influence the business, as all the factors identified in the previous step effects the entity with the same intensity. Once the important factors are identified, strategies can be made for its improvement.
  3. Analysing: In this step, a careful analysis of all the environmental factors is made to determine their effect on different business levels and on the business as a whole. Different tools available for the analysis include benchmarking, Delphi technique and scenario building.
  4. Forecasting: After identification, examination and analysis, lastly the impact of the variables is to be forecasted.

Environmental analysis is an ongoing process and follows a holistic approach, that continuously scans the forces effecting the business environment and covers 360 degrees of the horizon, rather than a specificsegment.

Lucknow University BBA Notes / Management Notes

Developing Pay Structures

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The pay structure or salary structure defines the compensation given to the employees. It shows the breakup of the salary into various components. Based on various criteria such as the professional experience or employees, or grades or bands the employees are categorized under, different pay structures may be defined in an organization. One pay structure may be applicable to multiple bands or grades and one band or grade may have multiple pay structures.

Pay structures offer a framework for wage progression and can help encourage appropriate behaviours and performance, while pay progression describes how employees are able to increase their pay within their salary grade or band.

Pay structures can be distinguished by two key characteristics: the number of grades, levels or bands; and the width or span of each grade. For example:

Narrow-graded pay structures, often found in the public sector, typically comprise ten or more grades, with jobs of broadly equivalent worth in each grade. Progression is by service increments, although due to narrow grades employees can reach the top of the pay range relatively quickly, potentially leading to ‘grade drift’ and jobs ranked more highly than justified

Broad-graded structures have fewer grades, perhaps six to nine, and greater scope for progression that can counter ‘grade drift’ problems

Broad-banding involves the use of an even smaller number of pay bands (four or five). Designed to allow for greater pay flexibility, typical broad-banding would place no limits on pay progression within each band, although some employers have introduced a greater degree of structure

Job families group jobs within similar functions or occupations, with separate pay structures for different ‘families’ (e.g. sales or IT staff). With around six to eight levels, similar to broad-grading, job family structures allows for higher rates of pay for sought-after specialist staff

Career families extend the metaphor with a common pay structure across all ‘job families’ rather than separate pay structures for each family. Career families tend to emphasise career paths and progression rather than the greater focus on pay of job families.

Basic Pay

This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one’s grade within the company’s salary is a fixed part of one’s compensation structure. Many allowances and deductions are described in terms of percentage of the Basic Salary.

Basic salary is the base income of an individual. Basic salary is the amount paid to employees before any reductions or increases due to overtime or bonus, allowances (internet usage for those who work from home or communication allowance). Basic salary is a fixed amount paid to employees by their employers in return for the work performed or performance of professional duties by the former. Base salary, therefore, does not include bonuses, benefits or any other compensation from employers. As the name suggests, basic salary is the core of the salary of an employee. It is a fixed part of the compensation structure of an employee and generally depends on her or her designation. If the appointment of an employee is made on a pay scale, the basic salary may increase every year. Else, it remains fixed.

According to experts, the basic salary differs according to the type of the industry. For instance, employees in the information technology industry prefer take-home salary (since the staff turnover is high) while employees in the manufacturing companies get more fringe benefits.

DA (Dearness Allowance)

The Dearness Allowance (DA) is a cost of living adjustment to allowance. It is calculated as a percentage of (Basic pay + grade pay). Dearness allowance is updated every quarter of calendar year to compensate for inflation in consumer price index. It may increase or decrease depending on inflation rate. (Decrease in DA is rare).

House Rent Allowance (HRA)

House Rent Allowance (HRA) is a common component of their salary structure. Although it is a part of your salary, HRA, unlike basic salary, is not fully taxable. Subject to certain conditions, a part of HRA is exempted under Section 10 (13A) of the Income-tax Act, 1961.

The amount of HRA exemption is deductible from the total income before arriving at a taxable income. This helps the employee to save tax. But do keep in mind that the HRA received from your employer, is fully taxable i f an employee is living in his own house or if he does not pay any rent.

HRA Benefit

The tax benefit is available only to a salaried individual who has the HRA component as part of his salary structure and is staying in a rented accommodation. Self-employed professionals cannot avail the deduction.

Gross Pay

Gross pay for an employee is the amount used to calculate that employees’ wages (for an hourly employee) or salary (for a salaried employee. It is the total amount you as the employer owe the employee for work during one pay period. Gross pay includes regular hourly or salaried pay and it also includes any overtime paid to the employee during the pay period.

For both salaried and hourly employees, the calculation is based on an agreed-upon amount of gross pay. That is, both the employee and employer have agreed that this is the pay rate. The pay rate should be in writing and signed by both the employee an employer.

For hourly employees, that pay rate might be negotiated by a union contract. For salaried employees, that rate might be in an employment contract or just a pay letter. In each case, the gross pay rate should be agreed to and signed before the employee begins working.

An example of gross pay calculation for a salaried employee:

 A salaried employee has an annual salary of $47,000 a year. The salaried employees at this company are paid on the 15th and 30th of each month (twice a month). The $47,000 is divided by 24 to get $1958.33, which is the gross pay for each pay period.

Take Home Pay

Take-home pay is the net amount of income received after the deduction of taxes, benefits, and voluntary contributions from a paycheck. It is the difference between the gross income less all deductions. Deductions include federal, state and local income tax, Social Security and Medicare contributions, retirement account contributions, and medical, dental and other insurance premiums. The net amount or take-home pay is what the employee receives.

Lucknow University BBA Notes

HRM Training Methods

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Many methods of training are available each has certain advantages and disadvantages. Here we list the different methods of training…you can comment on the pros and cons and make the examples concrete by imagining how they could be applied in training truck drivers.

  1. Technology Based Learning

Common methods of learning via technology include:

  • Basic PC-based programs
  • Interactive multimedia: using a PC-based CD-ROM
  • Interactive video: using a computer in conjunction with a VCR
  • Web-based training programs

The forms of training with technology are almost unlimited. A trainer also gets more of the learner’s involvement than in any other environment and trainees have the benefit of learning at their own pace.

Example: In the trucking industry one can imagine interactive multimedia training on tractor-trailers followed by a proficiency test to see how well the employee knows the truck.

  1. Simulators

Simulators are used to imitate real work experiences.

Most simulators are very expensive but for certain jobs, like learning to fly a 747, they are indispensable. Astronauts also train extensively using simulators to imitate the challenges and micro-gravity experienced on a space mission. The military also uses video games (similar to the “shoot-em-up” ones your 14-year old plays) to train soldiers.

Example: Truck drivers could use simulators to practice responding to dangerous driving situations.

  1. On-The-Job Training

Jumping right into work from day one can sometimes be the most effective type of training.

Here are a few examples of on-the-job training:

  • Read the manual a rather boring, but thorough way of gaining knowledge of about a task.
  • A combination of observation, explanation and practice.
  • Trainers go through the job description to explain duties and answer questions.
  • Use the intranet so trainees can post questions concerning their jobs and experts within the company can answer them.

On-the-job training gives employees motivation to start the job. Some reports indicate that people learn more efficiently if they learn hands-on, rather than listening to an instructor. However, this method might not be for everyone, as it could be very stressful.

Example: New trucking employees could ride with experienced drivers. They could ask questions about truck weigh stations, proper highway speeds, picking up hitchhikers, or any other issues that may arise.

  1. Coaching/Mentoring

Coaching/mentoring gives employees a chance to receive training one-on-one from an experienced professional. This usually takes place after another more formal process has taken place to expand on what trainees have already learned.

Here are three examples of coaching/mentoring:

  • Hire professional coaches for managers.
  • Set up a formal mentoring program between senior and junior managers
  • Implement less formal coaching/mentoring to encourage the more experienced employees to coach the less experienced.

Coaching/mentoring gives trainees the chance to ask questions and receive thorough and honest answers; something they might not receive in a classroom with a group of people.

Example: Again, truck drivers could gain valuable knowledge from more experienced drivers using this method.

  1. Lectures

Lectures usually take place in a classroom-format.

It seems the only advantage to a lecture is the ability to get a huge amount of information to a lot of people in a short amount of time. It has been said to be the least effective of all training methods. In many cases, lectures contain no form of interaction from the trainer to the trainee and can be quite boring. Studies show that people only retain 20 percent of what they are taught in a lecture.

Example: Truck drivers could receive lectures on issues such as company policies and safety.

  1. Group Discussions & Tutorials

These most likely take place in a classroom where a group of people discuss issues.

For example, if an unfamiliar program is to be implemented, a group discussion on the new program would allow employees to ask questions and provide ideas on how the program would work best.

A better form of training than lectures, it allows all trainees to discuss issues concerning the new program. It also enables every attendee to voice different ideas and bounce them off one another.

Example: Truck drivers could have group discussions and tutorials on safety issues they face on the road. This is a good way to gain feedback and suggestions from other drivers.

  1. Role Playing

Role playing allows employees to act out issues that could occur in the workplace. Key skills often touched upon are negotiating and teamwork.

A role play could take place between two people simulating an issue that could arise in the workplace. This could occur with a group of people split into pairs, or whereby two people role play in front of the classroom.

Role playing can be effective in connecting theory and practice, but may not be popular with people who don´t feel comfortable performing in front of a group of people.

Example: Truck drivers could role play an issue such as a large line-up of trucks is found at the weighing station and one driver tells another that he might as well go ahead and skip the whole thing. Or role play a driver who gets pulled over by a police officer and doesn’t agree with the speeding charge.

  1. Management Games

Management games simulate real-life issues faced in the workplace. They attract all types of trainees including active, practical and reflective employees.

Some examples of management games could include:

  • Computer simulations of business situations that managers ´play´.
  • Board games that simulate a business situation.
  • Games surrounding thought and creativity to help managers find creative ways to solve problems in the workplace, or to implement innovative ideas.

Example: In a trucking business, managers could create games that teach truckers the impact of late deliveries, poor customer service or unsafe driving.

  1. Outdoor Training

A nice break from regular classroom or computer-based training, the usual purpose of outdoor training is to develop teamwork skills.

Some examples include:

  • Wilderness or adventure training: participants live outdoors and engage in activities like whitewater rafting, sailing, and mountain climbing.
  • Low-impact programming: equipment can include simple props or a permanently installed “low ropes” course.
  • High-impact programming: Could include navigating a 40-foot “high ropes” course, rock climbing, or rappelling.

Outgoing and active participants may get the most out of this form of training. One risk trainers might encounter is distraction, or people who don´t like outdoor activities.

Example: As truck drivers are often on the road alone, they could participate in a nature-training course along with depot personnel to build esprit de corps.

  1. Films & Videos

Films and videos can be used on their own or in conjunction with other training methods.

To be truly effective, training films and videos should be geared towards a specific objective. Only if they are produced effectively, will they keep the trainees attention. They are also effective in stimulating discussion on specific issues after the film or video is finished.

Films and videos are good training tools, but have some of the same disadvantages as a lecture i.e., no interaction from the trainees.

A few risks to think about showing a film or video from an outside source may not touch on issues directly affecting a specific company. Trainees may find the information very interesting but irrelevant to their position in the company.

Some trainers like to show videos as a break from another training method, i.e. as a break from a lecture instead of a coffee break.

This is not a good idea for two reasons. One: after a long lecture, trainees will usually want a break from any training material, so a training film wouldn´t be too popular. Two: using films and videos solely for the purpose of a break could get expensive.

Example: Videos for truckers could show the proper way to interact with customers or illustrate preventive maintenance techniques.

  1. Case Studies

Case studies provide trainees with a chance to analyze and discuss real workplace issues. They develop analytical and problem-solving skills, and provide practical illustrations of principle or theory. They can also build a strong sense of teamwork as teams struggle together to make sense of a case.

All types of issues could be covered i.e. how to handle a new product launch.

Example: Truck drivers could use case studies to learn what issues have been faced in the trucking industry in the past and what they could do if a similar situation were to occur.

  1. Planned Reading

Basically planned reading is pre-stage preparation to more formal methods of training. Some trainees need to grasp specific issues before heading into the classroom or the team-building session.

Planned reading will provide employees with a better idea of what the issues are, giving them a chance to think of any questions beforehand.

Example: Here we may be stretching if we think that truckers are going to read through a lot of material the training department sends them.

Lucknow University BBA Notes

BBA406 Consumer Behavior

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Unit 1 {Book}

Meaning and Nature of Consumer Behaviour

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Factors affecting Consumer Behaviour

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Consumer Involvement and Decision Making

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Models of Decision Making

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Unit 2 {Book}

Consumer Perception

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Consumer Attitudes and Changes in Attitude

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Consumer Motivation

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Unit 3 {Book}

Models of Consumer Behaviour

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Consumer Behaviour in India

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Difference between Consumer Buying and Industrial Buying

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Nature and Factors Affecting Industrial Buying

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Unit 4 {Book}

Factors Influencing Purchase Decision of a Consumer

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Personality

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Self-Concept

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Life-Style

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Psychographics

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Reference Group

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