Saturday, April 12, 2008

Organizational Behavior - Culture Lens

Dynacorp Case

Fall 2005



Problems inside Dynacorp:

When Dynacorp has changed its structure, there are problems of linkage and alignment in the light of Strategic Design Lens. According to the new structure, Research and Advanced Development Group and Business Units (BUs) are in the back and Customer Operations are in the front to communicate with markets and customers. Being in the back, the Research and Advanced Development Group and BUs have almost no relation with customers. As a result, the fragmentation of technical expertise would be deepened, the integration between market needs and technology development would be very poor and the technical support services are slow. Therefore, enhancing the integration and cooperation between the front and the back will become a big challenge. On the other hand, the new structure does not totally solve the alignment problem of improving performance measurement system because some branch managers and product managers of BUs are still spending most of their time worrying about the new performance measurement system that is based on performance against revenue and margin goals. In short, the new structure still has weaknesses in linkage between the back and the front and in alignment.

Problems in the view of Political Lens:

In light of Political Lens, the new structure is facing the problems of interest conflicts between BUs and the weak power of executives. As M. Pauley said, different product team leaders are trying to sell different types of products depending on their particular product lines. Moreover, BUs work on their different preferences and compete with each other to develop products in their interest because each of them focuses on particular product category. It means that there is still no recognition that interests are very important for the BUs and their totally different interests and priority are not yet understood and analyzed. Moreover, while arranging the new structure, most of the leaders who came from the old engineering department became the heads of the BUs. As a result, they may have not yet had full power to control their BUs that consist of people from the old production, engineering and marketing departments. Therefore, it is necessary that Dynacorp maps the interests of different BUs, gets buy-in, builds network among groups and increases power of the heads of BUs.

Structure change:

Dynacorp has changed its culture to motivate employees by altering its structure from the functional to front/back structure in order to bring them closer through account teams and by putting engineering and manufacturing functions together, but Dynarcop is still facing a big problem of creating a new organizational culture that matches with its new structure. Its people still work in the old manner and hold old concepts, beliefs, habits, norms, knowledge etc while the new structure requires new knowledge, skills, concepts and so forth. Even though the structure has changed for 2 years, its employees are still in the dark to find out themselves ways to adapt to the new structure and fulfill their new functions. Therefore, it needs to provide training to its employees in order for them to get accustomed to the new working culture and to get new necessary knowledge and skills to carry out their new responsibilities. At the same time, it needs to modify the job guidelines and put employees to suitable positions. As M. Walker noticed, it also needs to replace at leas 25 percent of its current staff and recruit new employees that fit the requirements of the new system. These actions are quite hard to carry out but urgently necessary in order to change Dynacorp’s culture to match with its new structure.

Organizational Behavior - Team Primer

Fall 2005


Problems facing Michael Bacon at the end of the case:

At the end of the case, Bacon faces some serious problems. The most serious problem is strong resistance from market managers who want to deny the task force’s report and recommendations, thus the task force’s objective may not be achieved. The second problem is that a task force member, Bodin, is attacked due to his finding on regional sales managers’ overstating their sales estimates that cause the company’s wrong sales forecasting. As the task force leader, Bacon must find the way to protect Bodin and take responsibility if he is hurt or compromised by the persons whose responsibilities were found related to the wrong sales forecasting. The third problem is the relationships between Bacon and Meir, between Bacon and Reiss. Meir is dissatisfied with task force members and thinks that Bacon does not trust him by hiding Bodin’s report. Reiss lost his trust to Bacon when Bacon let Meir know Bodin’s confidential report. As a result, the task force risks breaking up. The fourth problem is the relationship between Bacon and Cornelius. Bacon will face strong resistance from Cornelius when he did not give Cornelius information at the end of the case. Another problem is that the task force may fail to fulfill its given tasks because its members have not yet agree on the results to be presented and they seem to be separated by subgroups and have different approaches of the task force’s tasks. To restore the trust of the members and bring them together to work on the common tasks will be a big challenge for Bacon since team dissatisfaction has occurred and the members do not have the feeling of working, sharing, helping among each other as a team. Therefore, Bacon needs to find a way to restore the task force.

How did those problems evolve?

These problems have occurred from the task force design. Task force members who are too different in age, background, experience, interests, habits and so forth were wrongly selected. The first meeting was conducted in the absence of the management and was not prepared so that task force members were not aware of each other, did not understand clearly the task force’s goals and tasks, did not have team spirit and team motivation, and did not have a sense of themselves together as a unit. The division in subgroups made the members not to feel that they are part of the team, especially Meir who had to work alone while other worked in their groups. The fact that Bacon himself did not trust Meir put a negative influence on the team spirit and team performance, thus there were no strong commitment and trust within the task force. Then, the internal communication problem occurred when the members did not know the way in which they interact with each other to accomplish the task and to keep themselves together as a team. Due to the lack of skills of a team player, Bacon did not know how to influence the team, run the task force, improve teamwork performance, increase team member satisfaction, and encourage team learning. As a result, the members worked on their own way, did not interact with each other, did not share information among the team, and did not help each other. Bacon worked closely with Holt’s subgroup and Reiss but let Meir work alone and did not give him support or guidance to complete his tasks. Thus, Meir felt that he does not belong to the team but rather work independently. The suspicion between Bacon and Meir seemed to increase. The serious problem happened when the task force did not reach team consensus before presenting recommendations and did not brief the key managers and other constituencies before the final presentation to prevent defensive reactions and rejection of the proposal. Therefore the task force’s presentation seemed to be the presentation of separate subgroups and individuals. The task force could not defend itself before the attack of market managers. Meir was angry with the attitude of his team members and got mad when knowing that his work was much easier if the information was shared within the group and if other members work closely with him. His dissatisfaction and anger ended up by spreading confidential report to his boss. This put Bacon in serious trouble. In short, the problems have occurred from the formation of the task force, the first meeting, running of the task force and bringing the project to completion.

Workforce Management: Employement Relationships in Changing Organizations

Fall 2005

Wichita – success of the change initiative

Problems:

- High maintenance, fixed and operating costs.
- Razor-thin margins and low productivity (the facility consistently underperformed).

Reasons of the success of the initiative: the change was done through the right model and dimensions.

- Blocks to change: there is no block to change in Wichita. All employees were not resistant to change, instead they were willing and ready to change. Thus, there were no organizational inertia and no anticipated consequences of the change. This is because Jimenez integrated successfully the change initiative with key human resource practices, here is Keller.

- Model of change: the change initiative follows Tichy and Anne model in which there are 3 stages of changes: recognizing the need for change by generating a feeling of need to change and overcoming the cultural resistance to change in Wichita; creating a new vision by diagnosing the problem and mobilizing commitment of employees; managing the change. The role of Keller as a leader of change is a key for the success of the initiative. He extolled the importance of the initiative in the mind of his colleagues and acted consistently to involve and engage them in the process of change so that they were motivated to change.

- Dimensions of change: the four dimensions of the change initiative are incremental, continuous, bottom-up and emergent. Scope of change: the change efforts were incremental, being local in Wichita and involving in modifying its culture to one that values being more open about problems rather than hide them. Pace of change: the change is continuous by proceeding over time and one change leads to another. Source of change: the change is bottom-up. Even though the change is first driven by the CEO but it is broader, located farther down Wichita and is done by its employees. Process of change: the change is emergent because it started with no explicit maps (beginning with the meetings of the “problem chart”) but developed well over time and one change leads to another. Therefore, Wichita’s employees were socialized together as a unit, were willing to change continuously and thus the initiative was successful.

Lubbock

Problems: Lubbock has the same problems ad Wichita

- High maintenance, fixed and operating costs.
- Low productivity low productivity (the plant rarely met the production’s goal).

Reasons why the initiative was not successful: the change was done through the wrong model and dimensions.

- Blocks to change: there are serious blocks to change in Lubbock. All employees were strongly resistant and reluctant to change because of the human nature, organizational inertia and increasing forces from the management (Jimenez and her team) that block the change. Thus, anticipated consequences of the change occurred when implementing the initiative.

- Model of change: the change initiative follows Beckhard and Harris model in which the change focuses mostly in the future state. Jimenez and her team made erroneous assumptions about how Lubbock currently operates and about what groups and sub-units will be the most affected by the change. They ignored to think about the present stage to understand Lubbock’s managers and its employees’ attitude toward the change and its capacity to make the proposed changes in the proposed time frame. They also did not think about the transitional stage when Lubbock’s people are leaving the old system and learning how to make the new system work. Rather they focused only on the future stage with wrong assumptions. Furthermore, they could not integrate the change initiative with key human resource practices who can act as a leader to involve and engage employees to participate in the process of change like Keller at Wichita.

- Dimensions of change: the four dimensions of the change initiative are the inversion of those applied at Wichita: radical, punctuated, top-down and planned. Scope of change: the change efforts were radical - the change involved in fundamental changes inside Lubbock. Pace of change: the change is punctuated - having a clear beginning and an end as scheduled by the team. Source of change: the change is top-down. Unlike Wichita, the meetings of “the problem chart” are compulsory and set by the team. Process of change: the change is carefully planned - the team diagnosed the fundamental problems of Lubbock and applied the model of change that was already very successful at Wichita.

Jimenez thought that she could succeed in applying the change model in Wichita to Lubbock. However, the above analyses show that in fact she had modified this model before implementing it at Lubbock. Therefore, the change initiative was not successful.

Roussel-Uclaf

Fall 2005


Organizational set model analysis

Input set: Roussel-Uclaf (RU) has established cooperative R&D agreements with leading French universities and research organizations who provide RU with technology development and knowledge to create new products. This is RU’s advantage to be a leader among other pharmaceutical companies. RU also has a strong partnership with Dr. Baulieu who is a star on French medical research a prominent researcher in the world’s medical research community to acquire new knowledge for R&D.

Output set: RU’s customers of RU486 are women who prefer buying it because it provides greater privacy, les invasive and avoids anesthesia. RU cares about distributors in eastern Europe where it will not control black market if selling RU486. RU also concerns about poor medical conditions of customers in developing countries where RU can not estimate how big the market should be.
Regulatory set: The French government authorized RU to commercialize RU486. UK and Sweden’s governments also approved RU. But the US government under Reagan and Bush administrations did not favor RU486 so RU could not sell them in such huge market. Until the Clinton administration can RU receive encouragement to produce RU486 in the US.

Set of competitors: RU has almost no competitor who can produce the same product.

Stakeholder model analysis

Interests of stakeholders: RU faces strong conflicts of what its stakeholders want. Inside RU, executives and employees are themselves divided about the ethnics of marketing RU486. Outside RU, the same controversy arises among RU’s subsidiaries. RU’s mother company, Hoechst, has different interest with RU: while RU wants to launch RU486, Hoechst does not want to market it because of the fear that public opinion will destroy Hoechst’s economic power and reputation and boycott all its products. Furthermore, there are strong opposition of local, national governments and local communities in the US and in the rest of Europe where RU want to sell its product. These institutions are against abortion and therefore try to prevent RU from selling RU486. The reason of these conflicts is that RU does not mobilize the interests of these external stakeholders, co-build the acceptance of abortion between internal stakeholders and among external stakeholders. RU also does not co-opt these sets of stakeholders to accept RU486. RU has only a coalition-building with WHO by signing an agreement to conduct test in the developing world thus paving the way for RU to sell it in there. But this coalition is not strong enough since WHO depends on the US’s money.

Power and influence of stakeholders: The Health Ministry of France uses its power, influence and legal right to force RU to sell RU486. Therefore, after a long time of debates against public oppositions, RU486 can be is produced in France and soon occupies most of French abortion clinics. Without this intervention, RU could not be able to sell RU486 since public oppositions against the company are very strong.

Institutional field model to analyze the interactions between organizations and their environments:

Share beliefs: The French society share the belief that abortion is right with RU so it accepts RU486 as the most powerful tool for women for avoid undesired pregnancy. Then the UK, China and Sweden’s societies do too. The CEO of RU also believes personally that it is worth to launch RU486. Other groups in the US also support RU and push it to sell RU486. But the US and Singapore, people, anti-abortion groups and social wisdom are strongly against abortion because they believe in the right-to-life.

Shared values: in Italy, Austria, catholic countries of south Europe people and governments still do not agree whether abortion is right and women should have free choices to use RU486. They do not share with RU that RU486 is the right way to help women in abortion.

Mindsets: The change of mindsets against abortion is very difficult since they are well rooted in people’s mind, especially in America. So RU can not easily get social approval from the US and other countries.
Coercive isomorphism: RU is between two forces: the Clinton administration now urges RU to test and produce RU486 in there while abortion remains highly charged political and cultural issue and anti-abortion pressure rises to threat the boycott of RU’s products.

Isomorphism: Someone suggests RU to do the same way as IUDs, a pharmaceutical firm having similar process to RU had done earlier: give the license for technology for a non-profit Population Council and let it find a smaller company that is willing to produce RU486.

Normative isomorphism: Dr. Baulieu was awarded the 1989 Albert Lasker Award for Research in Clinical Medicine for his contribution to the knowledge of steroid hormones included RU486 in New York. This means that this professional organization has proved that RU486 is the right way to help women in abortion.

Case study: Carly Fiorina - Leadership Capability

Fall 2005


Sense-making

Coming to understand the context in which you are operating:
Fiorina has a strong sense of understanding the context to map the external terrain. At AT&T, she recognized the phone-equipment manufacturing unit’s potential for growth in emerging market such as Asia and the firm’s capability to supply a switch able to handle both wireless and long-distance traffic. At HP, she boldly declared her intend to merge HP with Compaq as she sees the merge will make the two companies be more efficient and cost effective.

Creating a map that represents the current situation of the group or organization:
She has a savvy approach to customers to understand what they want and how to fulfill their need and wants. That’s why she could always expand the business of her company.

Making sense of the environment:
She saw the market moving quickly and the pace of change accelerating. This sense-making distinguishes her as a great leader who can discover the new terrain for HP as the environment changes.

Relating - centers on the leader’s ability to engage in inquiry, advocacy, and connecting

Inquiry:
Fiorina does not always listen and understand what others are thinking and feeling. She ignores others while implementing her decisions without explicit reasons. She also does not care about the critics against her leadership style “management with flying around”. In this context, she is right to act like that to maintain her position as a female leader, strengthen her executive power and make her management more efficient to manage HP as a world-wide company.

Advocacy:
She is always clear about her own point of view and trying to influence others of its merits. She is able to tell the truth about what needs to be done and clearly define what is and is not acceptable performance. This ability helps her communicate broad strategies, deep knowledge of operations, visions and instructions clearly to her management team and employees.

Connecting:
She is able to cultivate her followers who help each other to accomplish their goals. She also developed a personal touch that inspired intense loyalty among her followers and the ability to build collaborative relationships with others to create coalitions for change. For instance, she has a strong ally with HP board members. The 51.4% vote of HP’ shareholders for the merge HP-Compaq is her success in building coalitions for change as she planned.

Visioning

Creating a compelling, shared and meaningful vision:
She changed the vision of HP from a stand-alone product/service provider to a company that provides an integrated suite of information appliances, highly reliable IT infrastructure and e-service, or to expand HP in a new direction at “Internet speed” and customer orientation. This compelling vision motivate HP’s people to change their current view and ways of working, and work hard to reach it. This shared vision enables them to act together, become bound together around a common identity and sense of destiny. This vision also provides them with a sense of meaning about their work and the difference they will make. Therefore, HP could offer its own e-services and develop e-speak, package online services tailored to customers’ needs during her first year at HP.

Inventing

Changing the way that people work together:
Knowing that the shift of this vision only can be achieved with corresponding changes in organizational structure, she changed the way people work by restructuring HP into four organizations: two focusing on sales and the others focusing on products.
Creating a whole new way of approaching a task: She recognized the need for a new leadership style and faster actions for the new vision. So she decided to change HP from a fully integrated, product-focused business to a more disintegrated approach focusing on product generation, customer-facing and support activities. She also changed her leadership style by using internal Web and message boards to communicate with workers instead of visiting and talking to them in person as the old leadership style.


Creating new approach, new solutions, new practices:

To achieve the goal, she changed the culture and work habit to make employees be more efficient. She encouraged research to explore new technologies and develop new products. She also created the “rules of garage” to motivate new and innovative ideas.

Inventing goes hand-in-hand with sense-making:
She blended sense-making with inventing. Together with the above initiatives, she developed HP’s brand by generating a branding campaign that sent new messages to customers, competitors and industry partners to build a lasting image of the company and brand awareness for its further sustainable development.

Her strong capability of sense-making, visioning, relating and inventing makes Fiorina become a powerful and talented female leader in the American corporate world.

English essay: local and export processing enterprises in Vietnam

Compare and Contrast Essay


In Vietnam, there are two types of processing manufacturers: local processing enterprises (LPEs) and export processing enterprises (EPEs) I have experienced working for both of them for quite a long time. Someone may argue that there are many similarities between LPEs and EPEs. However, they are different in legal rights and responsibilities, the level of their technology and production, and the effectiveness of their management. EPEs are business models for LPEs to follow.

In terms of legal issues, each of them has different rights and responsibilities. LPEs are owned by Vietnamese nationals or local institutions. LPEs are also restricted to selling their products to local markets and to buying the main raw materials from overseas markets. Besides, LPEs are allowed to hire foreign employees up to 5 percent of their total workforce. LPEs have to pay value-added, import and export taxes. In contrast, EPEs are owned by foreign individuals or institutions. EPEs have to export all their products to overseas markets and to buy the main raw materials from foreign countries. Moreover, EPEs are allowed to hire foreign employees up to 10 percent of their total workforce. But EPEs are exempted from value-added, import and export taxes.

The two types of processing enterprises also differ in technology and production level. Being local companies with limited capitals, LPEs are not usually able to adopt new and expensive technology. The local workforce, which has limited English and technical skills, prevents LPEs from applying new technology from foreign countries. Therefore, LPEs can only produce simple, non-technological products such as garments and shoes. On the other hand, EPEs are usually technology-rich firms with modern production methods because they must satisfy the technological requirements set by the Vietnamese government in order to have a license to operate in Vietnam. Thus, EPEs normally have their higher level of technology and produce highly technological products such as color printers and digital cameras.

Another difference between LPEs and EPEs is the effectiveness of management. LPEs normally have old management systems, which are bureaucratic, inflexible and conservative. These systems slow down the decision making process, thus prevent LPEs from being able to improve fast their production performance, produce new products and grow in highly competitive environments. In contrast, EPEs have networked, flat, flexible, diverse and global management that allows EPEs to respond quickly to environmental changes and adjust their organizational structures to fit new situations. As a result, EPEs are able to operate across the borders, compete in international markets and build networks with international business partners.
Although the two kinds of manufacturers are different in legal rights and responsibilities, the level of their technology and production, and the effectiveness of their management, they do not totally contrast one with another. Having their higher technology level and effective management, EPEs are business models for LPEs to follow. On the other hand, LPEs learn from EPEs not only the new technology they bring in but also the way they manage their business and compete in international markets. Thus both EPEs and LPEs contribute to the diversity and development of the Vietnamese manufacturing industry.

Business Communication: sample of an internal memo

Spring 2006



MEMO
To: All Weymouth Employees
From: Carl Weymouth
Date: September 10, 1990
Subject: Personnel Reduction at Weymouth in coming months

I am very sorry to inform you that our company will face serious difficulties in the near future. According to latest sales forecasts, the company’s revenues will probably decrease by 25% in the next eighteen months due to increasing competition from European and Japanese companies. To become more competitive, Weymouth needs new capitals to buy new equipment and restructure production processes at all mills. Moreover, the company needs to spend more money on controlling pollution levels within the state standards. Consequently, Weymouth must find effective solutions to save as many costs as possible.

Recently, our company has implemented several cost-cutting measures. The company has shut down several less efficient mills and processing plants, and delayed some plant modifications for those that do not meet environmental regulations. The company also has cut purchasing and supply costs, implemented restricted travel expenses and reduced operating expenses as many as it could do. However, these effective measures have not helped Weymouth meet its urgent need for capitals. Therefore, the last solution our company could take is to reduce our employment force by 1000 salaried positions at all levels in coming months.

The company will pay those who must leave the company and have one or more years of service a termination payment, unused vacation for 1990 and accrued vacation for 1991. Our company also pays one-month coverage insurance from the leaving date and a partial insurance at reasonable rates for the following months. The company’s managers will help those former employees search for new jobs.

On the other hand, the company will provide those who stay after this employment reduction with salary increases and improved benefit packages including provisions for retirement, vacations, medical and dental cares, life insurance and stock ownership. In return, those employees have to take more responsibilities and fulfill more job requirements. They also have to create more initiatives and work more effectively for the development of the company.

In coming months, supervisors will inform each employee individually his or her employment status and answer questions he or she may have.

I feel much regret to inform you this personnel reduction plan and look for your profound understanding of this solution. I will do my best to develop the company’s business and hope that former employees will have opportunities to work again at Weymouth.

Case study: Dividend Policy at FPL Group Inc

Dividend Policy is Irrelevant

Spring 2006


Why do firms pay dividend?:

- Firms pay dividends to balance their asset and capital structures when their earnings outstrip their investment opportunities.
- Firms pay dividends to mitigate agency problems when they have excess earnings.

Cons of cash dividend payment:

- A dividend policy is irrelevant or has no impact on the firm’s value because investors have the ability to create "homemade" dividends.
- Little to no dividend payout is more favorable for investors. This is because taxation on a dividend is higher than tax on capital gains.
- Dividends are taxed as ordinary incomes
- Dividends can reduce internal source of financing
- Once established, dividends cuts are hard to make without adversely affecting a firm’s stock price

Pros of cash dividend payment:

- Cash dividends can underscore good results and provide support to stock price
- Dividends may attract institutional investors who preferred some returns from dividends
- Stock price usually increases with the announcement of a new or increased dividends
- Dividends absorb cash flow so they may help reduce agency problems

Major issues of FPL in 1994:

- Negotiation between FPL and FERC (Federal Energy Regulatory Commission) to settle the lawsuit against FPL for changing excessive rates and denying fair access to its transmission system.
- Lower investment rate due to the fact that FPL probably does not raise dividends as discussed
- Suggestion of dividend cuts by FPL’s managers
- FPL’s stock price has fallen by 19.6% while the S&P index has decreased by 22.1%
- Rising interest rate and increasing competition in electric industry
From investors’ perspective, the current payout ratio is appropriate to some extent:
- FPL’s current payout ration = cash dividend/net income = 461693/248749 = 107.7%. According to the exhibit 9, FPL has the highest payout ratio in comparison to other electric utilities in the same industry.
- For institutional investors who hold 36.9% of FPL’s total common stocks, this payout ratio may be appropriate because they likely prefers high payout ratio in seeking for high earnings from their investment. If FPL tries to maintain this ratio, it can satisfy those small investors but it has to increase this ration over time to satisfy these investors’ expectation.
- For individual investors who hold 51.9% of FPL’s total common stocks, the payout ration has little meaning because they can use homemade dividend strategy to obtain capital gains rather than receive cash dividends due to higher taxes imposed on dividends. Furthermore, they do not need dividends to convert shares to cash. FPL’s decision to cut payout ration does not really affect the value of these individual investors.
- In my opinion, FPL currently maintains an inappropriate payout ration. Given the situation that the new regulation will be soon implemented, FPL will face strong competition not only from Florida but also from all other possible states. FPL can not protect itself by restricting access to its transmission system since it was sued for doing so. To prepare for competition and sustainable growth in near future, the best way FPL can do is to use its excess cash to invest in new positive NPV projects. Therefore, FPL should not maintain the high payout ration at 107.7%. Instead, it should lower this ratio to or below the average ratio of the industry (82.9%) since the dividend cut does not lower the firm’s value.

Recommendations on FPL’s stocks:

- First, FPL should declare to cut dividends. The company should not worry about a lawsuit against its lower dividend policy as the dividend cut does not affect the majority of its investors (individual investors). Upon the announcement of dividend cut, the stock price can decrease so FPL should use its excess cash to buy back its stock to increase the stock price whenever it falls down.
- Then, FPL should use Buy and Hold strategy to repurchase its stocks and hold them regardless of market fluctuations. This solution as a long term investment can help FPL increase its stock price which has fallen in early 1994. By doing so, FPL can get rid of its excess cash of $150 million per year. FPL also can use this strategy to increase incentive compensation by granting stock options to employees and thus, increase employment commitment and recruiting attractiveness to have competent personnel for future growth.
- FPL should use its excess cash to invest more in new profitable projects, acquire new companies and profitable assets, and reinvest in financial assets.

How to analyze a case study for Business Policy subject

As just mentioned, the purpose of the case study is to let you apply the concepts you've learned when you analyze the issues facing a specific company. To analyze a case study, therefore, you must examine closely the issues with which the company is confronted. Most often you will need to read the case several times - once to grasp the overall picture of what is happening to the company and then several times more to discover and grasp the specific problems.
Generally, detailed analysis of a case study should include eight areas:


The history, development, and growth of the company over time
The identification of the company's internal strengths and weaknesses
The nature of the external environment surrounding the company
A SWOT analysis
The kind of corporate-level strategy pursued by the company
The nature of the company's business-level strategy
The company's structure and control systems and how they match its strategy
Recommendations

To analyze a case, you need to apply what you've learned to each of these areas. We offer a summary of the steps you can take to analyze the case material for each of the eight points we just noted.

1. Analyze the company's history, development, and growth. A convenient way to investigate how a company's past strategy and structure affect it in the present is to chart the critical incidents in its history - that is, the events that were the most unusual or the most essential for its development into the company it is today. Some of the events have to do with its founding, its initial products, how it makes new-product market decisions, and how it developed and chose functional competencies to pursue. Its entry into new businesses and shifts in its main lines of business are also important milestones to consider.

2. Identify the company's internal strengths and weaknesses. Once the historical profile is completed, you can begin the SWOT analysis. Use all the incidents you have charted to develop an account of the company's strengths and weaknesses as they have emerged historically. Examine each of the value creation functions of the company, and identify the functions in which the company is currently strong and currently weak. Some companies might be weak in marketing; some might be strong in research and development. Make lists of these strengths and weaknesses. The SWOT checklist gives examples of what might go in these lists.


3. Analyze the external environment. The next step is to identify environmental opportunities and threats. Here you should apply all information you have learned on industry and macroenvironments, to analyze the environment the company is confronting. Of particular importance at the industry level is Porter's five forces model and the stage of the life cycle model. Which factors in the macroenvironment will appear salient depends on the specific company being analyzed. However, use each factor in turn (for instance, demographic factors) to see whether it is relevant for the company in question.

Having done this analysis, you will have generated both an analysis of the company's environment and a list of opportunities and threats. The SWOT checklist lists some common environmental opportunities and threats that you may look for, but the list you generate will be specific to your company.

4. Evaluate the SWOT analysis. Having identified the company's external opportunities and threats as well as its internal strengths and weaknesses, you need to consider what your findings mean. That is, you need to balance strengths and weaknesses against opportunities and threats. Is the company in an overall strong competitive position? Can it continue to pursue its current business- or corporate-level strategy profitably? What can the company do to turn weaknesses into strengths and threats into opportunities? Can it develop new functional, business, or corporate strategies to accomplish this change? Never merely generate the SWOT analysis and then put it aside. Because it provides a succinct summary of the company's condition, a good SWOT analysis is the key to all the analyses that follow.

5. Analyze corporate-level strategy. To analyze a company's corporate-level strategy, you first need to define the company's mission and goals. Sometimes the mission and goals are stated explicitly in the case; at other times you will have to infer them from available information. The information you need to collect to find out the company's corporate strategy includes such factors as its line(s) of business and the nature of its subsidiaries and acquisitions. It is important to analyze the relationship among the company's businesses. Do they trade or exchange resources? Are there gains to be achieved from synergy? Alternatively, is the company just running a portfolio of investments? This analysis should enable you to define the corporate strategy that the company is pursuing (for example, related or unrelated diversification, or a combination of both) and to conclude whether the company operates in just one core business. Then, using your SWOT analysis, debate the merits of this strategy. Is it appropriate, given the environment the company is in? Could a change in corporate strategy provide the company with new opportunities or transform a weakness into a strength? For example, should the company diversify from its core business into new businesses?

Other issues should be considered as well. How and why has the company's strategy changed over time? What is the claimed rationale for any changes? Often it is a good idea to analyze the company's businesses or products to assess its situation and identify which divisions contribute the most to or detract from its competitive advantage. It is also useful to explore how the company has built its portfolio over time. Did it acquire new businesses, or did it internally venture its own? All these factors provide clues about the company and indicate ways of improving its future performance.

6. Analyze business-level strategy. Once you know the company's corporate-level strategy and have done the SWOT analysis, the next step is to identify the company's business-level strategy. If the company is a single-business company, its business-level strategy is identical to its corporate-level strategy. If the company is in many businesses, each business will have its own business-level strategy. You will need to identify the company's generic competitive strategy - differentiation, low cost, or focus - and its investment strategy, given the company's relative competitive position and the stage of the life cycle. The company also may market different products using different business-level strategies. For example, it may offer a low-cost product range and a line of differentiated products. Be sure to give a full account of a company's business-level strategy to show how it competes.

Identifying the functional strategies that a company pursues to build competitive advantage through superior efficiency, quality, innovation, and customer responsiveness and to achieve its business-level strategy is very important. The SWOT analysis will have provided you with information on the company's functional competencies. You should further investigate its production, marketing, or research and development strategy to gain a picture of where the company is going. For example, pursuing a low-cost or a differentiation strategy successfully requires a very different set of competencies. Has the company developed the right ones? If it has, how can it exploit them further? Can it pursue both a low-cost and a differentiation strategy simultaneously?

The SWOT analysis is especially important at this point if the industry analysis, particularly Porter's model, has revealed the threats to the company from the environment. Can the company deal with these threats? How should it change its business-level strategy to counter them? To evaluate the potential of a company's business-level strategy, you must first perform a thorough SWOT analysis that captures the essence of its problems.

Once you complete this analysis, you will have a full picture of the way the company is operating and be in a position to evaluate the potential of its strategy. Thus, you will be able to make recommendations concerning the pattern of its future actions. However, first you need to consider strategy implementation, or the way the company tries to achieve its strategy.

7. Analyze structure and control systems. The aim of this analysis is to identify what structure and control systems the company is using to implement its strategy and to evaluate whether that structure is the appropriate one for the company. Different corporate and business strategies require different structures. For example, does the company have the right level of vertical differentiation (for instance, does it have the appropriate number of levels in the hierarchy or decentralized control?) or horizontal differentiation (does it use a functional structure when it should be using a product structure?)? Similarly, is the company using the right integration or control systems to manage its operations? Are managers being appropriately rewarded? Are the right rewards in place for encouraging cooperation among divisions? These are all issues that should be considered.

In some cases there will be little information on these issues, whereas in others there will be a lot. Obviously, in analyzing each case you should gear the analysis toward its most salient issues. For example, organizational conflict, power, and politics will be important issues for some companies. Try to analyze why problems in these areas are occurring. Do they occur because of bad strategy formulation or because of bad strategy implementation?

Organizational change is an issue in many cases because the companies are attempting to alter their strategies or structures to solve strategic problems. Thus, as a part of the analysis, you might suggest an action plan that the company in question could use to achieve its goals. For example, you might list in a logical sequence the steps the company would need to follow to alter its business-level strategy from differentiation to focus.

8. Make recommendations. The last part of the case analysis process involves making recommendations based on your analysis. Obviously, the quality of your recommendations is a direct result of the thoroughness with which you prepared the case analysis. The work you put into the case analysis will be obvious to the professor from the nature of your recommendations. Recommendations are directed at solving whatever strategic problem the company is facing and at increasing its future profitability. Your recommendations should be in line with your analysis; that is, they should follow logically from the previous discussion. For example, your recommendation generally will center on the specific ways of changing functional, business, and corporate strategy and organizational structure and control to improve business performance. The set of recommendations will be specific to each case, and so it is difficult to discuss these recommendations here. Such recommendations might include an increase in spending on specific research and development projects, the divesting of certain businesses, a change from a strategy of unrelated to related diversification, an increase in the level of integration among divisions by using task forces and teams, or a move to a different kind of structure to implement a new business-level strategy. Again, make sure your recommendations are mutually consistent and are written in the form of an action plan. The plan might contain a timetable that sequences the actions for changing the company's strategy and a description of how changes at the corporate level will necessitate changes at the business level and subsequently at the functional level.

After following all these stages, you will have performed a thorough analysis of the case and will be in a position to join in class discussion or present your ideas to the class, depending on the format used by your professor. Remember that you must tailor your analysis to suit the specific issue discussed in your case. In some cases, you might completely omit one of the steps in the analysis because it is not relevant to the situation you are considering. You must be sensitive to the needs of the case and not apply the framework we have discussed in this section blindly. The framework is meant only as a guide and not as an outline that you must use to do a successful analysis.

CONCLUSION

When evaluating a case, it is important to be systematic. Analyze the case in a logical fashion, beginning with the identification of operating and financial strengths and weaknesses and environmental opportunities and threats. Move on to assess the value of a company's current strategies only when you are fully conversant with the SWOT analysis of the company. Ask yourself whether the company's current strategies make sense, given its SWOT analysis. If they do not, what changes need to be made? What are your recommendations? Above all, link any strategic recommendations you may make to the SWOT analysis. State explicitly how the strategies you identify take advantage of the company's strengths to exploit environmental opportunities, how they rectify the company's weaknesses, and how they counter environmental threats. Also, do not forget to outline what needs to be done to implement your recommendations

The role of financial analysis


Another important aspect of analyzing a case study and writing a case study analysis is the role and use of financial information. A careful analysis of the company's financial condition immensely improves a case write-up. After all, financial data represent the concrete results of the company's strategy and structure. Although analyzing financial statements can be quite complex, a general idea of a company's financial position can be determined through the use of ratio analysis. Financial performance ratios can be calculated from the balance sheet and income statement. These ratios can be classified into five different subgroups: profit ratios, liquidity ratios, activity ratios, leverage ratios, and shareholder-return ratios. These ratios should be compared with the industry average or the company's prior years of performance. It should be noted, however, that deviation from the average is not necessarily bad; it simply warrants further investigation. For example, young companies will have purchased assets at a different price and will likely have a different capital structure than older companies. In addition to ratio analysis, a company's cash flow position is of critical importance and should be assessed. Cash flow shows how much actual cash a company possesses.

Profit Ratios

Profit ratios measure the efficiency with which the company uses its resources. The more efficient the company, the greater is its profitability. It is useful to compare a company's profitability against that of its major competitors in its industry. Such a comparison tells whether the company is operating more or less efficiently than its rivals. In addition, the change in a company's profit ratios over time tells whether its performance is improving or declining. A number of different profit ratios can be used, and each of them measures a different aspect of a company's performance. The most commonly used profit ratios are gross profit margin, net profit margin, return on total assets, and return on stockholders' equity.

Gross profit margin. The gross profit margin simply gives the percentage of sales available to cover general and administrative expenses and other operating costs. It is defined as follows:

Gross Profit Margin
=
(Sales Revenue - Cost of Goods Sold)/Sales Revenue

Net profit margin. Net profit margin is the percentage of profit earned on sales. This ratio is important because businesses need to make a profit to survive in the long run. It is defined as follows:

Net Profit Margin=Net Income/Sales Revenue

Return on total assets. This ratio measures the profit earned on the employment of assets. It is defined as follows:

Return on Total Assets=Net Income Available to Common Stockholders/Total Assets


Net income is the profit after preferred dividends (those set by contract) have been paid. Total assets include both current and noncurrent assets.

Return on stockholders' equity. This ratio measures the percentage of profit earned on common stockholders' investment in the company. In theory, a company attempting to maximize the wealth of it stockholders should be trying to maximize this ratio. It is defined as follows:

Return on Stockholders' Equity
=
Net Income Available to Common Stockholders/Stockholders' Equity

Liquidity Ratios

A company's liquidity is a measure of its ability to meet short-term obligations. An asset is deemed liquid if it can be readily converted into cash. Liquid assets are current assets such as cash, marketable securities, accounts receivable, and so on. Two commonly used liquidity ratios are current ratio and quick ratio.

Current ratio. The current ratio measures the extent to which the claims of short-term creditors are covered by assets that can be quickly converted into cash. Most companies should have a ratio of at least 1, because failure to meet these commitments can lead to bankruptcy. The ratio is defined as follows:

Current Ratio
=
Current Assets/Current Liabilities

Quick ratio. The quick ratio measures a company's ability to pay off the claims of short-term creditors without relying on the sale of its inventories. This is a valuable measure since in practice the sale of inventories is often difficult. It is defined as follows:

Quick Ratio
=
(Current Assets - Inventory)/Current Liabilities

Activity Ratios

Activity ratios indicate how effectively a company is managing its assets. Inventory turnover and days sales outstanding (DSO) are particularly useful:

Inventory turnover. This measures the number of times inventory is turned over. It is useful in determining whether a firm is carrying excess stock in inventory. It is defined as follows:

Inventory Turnover
=
Cost of Goods Sold/Inventory

Cost of goods sold is a better measure of turnover than sales, since it is the cost of the inventory items. Inventory is taken at the balance sheet date. Some companies choose to compute an average inventory, beginning inventory, plus ending inventory, but for simplicity use the inventory at the balance sheet date.

Days sales outstanding (DSO), or average collection period. This ratio is the average time a company has to wait to receive its cash after making a sale. It measures how effective the company's credit, billing, and collection procedures are. It is defined as follows:

DSO=Accounts Receivable/Total Sales/360

Accounts receivable is divided by average daily sales. The use of 360 is standard number of days for most financial analysis.

Leverage Ratios

A company is said to be highly leveraged if it uses more debt than equity, including stock and retained earnings. The balance between debt and equity is called the capital structure. The optimal capital structure is determined by the individual company. Debt has a lower cost because creditors take less risk; they know they will get their interest and principal. However, debt can be risky to the firm because if enough profit is not made to cover the interest and principal payments, bankruptcy can occur.

Three commonly used leverage ratios are debt-to-assets ratio, debt-to-equity ratio, and times-covered ratio.

Debt-to-assets ratio. The debt-to-asset ratio is the most direct measure of the extent to which borrowed funds have been used to finance a company's investments. It is defined as follows:

Debt-to-Assets Ratio=Total Debt/Total Assets


Total debt is the sum of a company's current liabilities and its long-term debt, and total assets are the sum of fixed assets and current assets.

Debt-to-equity ratio. The debt-to-equity ratio indicates the balance between debt and equity in a company's capital structure. This is perhaps the most widely used measure of a company's leverage. It is defined as follows:

Debt-to-Equity Ratio=Total Debt/Total Equity

Times-covered ratio. The times-covered ratio measures the extent to which a company's gross profit covers its annual interest payments. If the times-covered ratio declines to less than 1, then the company is unable to meet its interest costs and is technically insolvent. The ratio is defined as follows:

Times-Covered Ratio
=
Profit Before Interest and Tax/Total Interest Charges

Shareholder-Return

Ratios Shareholder-return ratios measure the return earned by shareholders from holding stock in the company. Given the goal of maximizing stockholders' wealth, providing shareholders with an adequate rate of return is a primary objective of most companies. As with profit ratios, it can be helpful to compare a company's shareholder returns against those of similar companies. This provides a yardstick for determining how well the company is satisfying the demands of this particularly important group of organizational constituents. Four commonly used ratios are total shareholder returns, price-earnings ratio, market to book value, and dividend yield.

Total shareholder returns. Total shareholder returns measure the returns earned by time t + 1 on an investment in a company's stock made at time t. (Time t is the time at which the initial investment is made.) Total shareholder returns include both dividend payments and appreciation in the value of the stock (adjusted for stock splits) and are defined as follows:

Total Shareholder Returns=(Stock Price (t + 1) - Stock Price (t) + Sum of Annual Dividends per Share)/Stock Price (t)

Thus, if a shareholder invests $2 at time t, and at time t + 1 the share is worth $3, while the sum of annual dividends for the period t to t + 1 has amounted to $0.2, total shareholder returns are equal to (3 - 2 + 0.2)/2 = 0.6, which is a 60 percent return on an initial investment of $2 made at time t.

Price-earnings ratio. The price-earnings ratio measures the amount investors are willing to pay per dollar of profit. It is defined as follows:

Price-Earnings Ratio=Market Price per Share/Earnings per Share

Market to book value. Another useful ratio is market to book value. This measures a company's expected future growth prospects. It is defined as follows:

Market to Book Value=Market Price per Share/Earnings per Share

Dividend yield. The dividend yield measures the return to shareholders received in the form of dividends. It is defined as follows:

Dividend Yield=Dividend per Share/Market Price per Share


Market price per share can be calculated for the first of the year, in which case the dividend yield refers to the return on an investment made at the beginning of the year. Alternatively, the average share price over the year may be used. A company must decide how much of its profits to pay to stockholders and how much to reinvest in the company. Companies with strong growth prospects should have a lower dividend payout ratio than mature companies. The rationale is that shareholders can invest the money elsewhere if the company is not growing. The optimal ratio depends on the individual firm, but the key decider is whether the company can produce better returns than the investor can earn elsewhere.

Cash Flow Cash flow position is simply cash received minus cash distributed. The net cash flow can be taken from a company's statement of cash flows. Cash flow is important for what it tells us about a company's financing needs. A strong positive cash flow enables a company to fund future investments without having to borrow money from bankers or investors. This is desirable because the company avoids the need to pay out interest or dividends. A weak or negative cash flow means that a company has to turn to external sources to fund future investments. Generally, companies in strong-growth industries often find themselves in a poor cash flow position (because their investment needs are substantial), whereas successful companies based in mature industries generally find themselves in a strong cash flow position.

A company's internally generated cash flow is calculated by adding back its depreciation provision to profits after interest, taxes, and dividend payments. If this figure is insufficient to cover proposed new-investment expenditures, the company has little choice but to borrow funds to make up the shortfall or to curtail investments. If this figure exceeds proposed new investments, the company can use the excess to build up its liquidity (that is, through investments in financial assets) or to repay existing loans ahead of schedule.

WHAT IS CASE STUDY ANALYSIS?

A case study presents an account of what happened to a business or industry over a number of years. It chronicles the events that managers had to deal with, such as changes in the competitive environment, and charts the managers' response, which usually involved changing the business- or corporate-level strategy.

Cases prove valuable in a course for several reasons. First, cases provide you, the student, with experience of organizational problems that you probably have not had the opportunity to experience firsthand. In a relatively short period of time, you will have the chance to appreciate and analyze the problems faced by many different companies and to understand how managers tried to deal with them.

Second, cases illustrate what you have learned. The meaning and implication of this information are made clearer when they are applied to case studies. The theory and concepts help reveal what is going on in the companies studied and allow you to evaluate the solutions that specify companies adopted to deal with their problems. Consequently, when you analyze cases, you will be like a detective who, with a set of conceptual tools, probes what happened and what or who was responsible and then marshals the evidence that provides the solution. Top managers enjoy the thrill of testing their problem-solving abilities in the real world. It is important to remember, after all, that no one knows what the right answer is. All that managers can do is to make the best guess. In fact, managers say repeatedly that they are happy if they are right only half the time in solving strategic problems. Management is an uncertain game, and using cases to see how theory can be put into practice is one way of improving your skills of diagnostic investigation.

Third, case studies provide you with the opportunity to participate in class and to gain experience in presenting your ideas to others. Instructors may sometimes call on students as a group to identify what is going on in a case, and through classroom discussion the issues in and solutions to the case problem will reveal themselves. In such a situation, you will have to organize your views and conclusions so that you can present them to the class. Your classmates may have analyzed the issues differently from you, and they will want you to argue your points before they will accept your conclusions; so be prepared for debate. This is how decisions are made in the actual business world.

Instructors also may assign an individual, but more commonly a group, to analyze the case before the whole class. The individual or group probably will be responsible for a thirty- to forty-minute presentation of the case to the class. That presentation must cover the issues involved, the problems facing the company, and a series of recommendations for resolving the problems. The discussion then will be thrown open to the class, and you will have to defend your ideas. Through such discussions and presentations, you will experience how to convey your ideas effectively to others. Remember that a great deal of managers' time is spent in these kinds of situations, presenting their ideas and engaging in discussion with other managers, who have their own views about what is going on. Thus, you will experience in the classroom the actual process of what goes on in a business setting, and this will serve you well in your future career.

If you work in groups to analyze case studies, you also will learn about the group process involved in working as a team. When people work in groups, it is often difficult to schedule time and allocate responsibility for the case analysis. There are always group members who shirk their responsibilities and group members who are so sure of their own ideas that they try to dominate the group's analysis. Most business negotiations take place in groups, however, and it is best if you learn about these problems now.

WRITING A CASE STUDY ANALYSIS

Often, as part of your course requirements, you will need to present your instructor with a written case analysis. This may be an individual or a group report. Whatever the situation, there are certain guidelines to follow in writing a case analysis that will improve the evaluation your work will receive from your instructor. Before we discuss these guidelines and before you use them, make sure that they do not conflict with any directions your instructor has given you.
The structure of your written report is critical. Generally, if you follow the steps for analysis discussed in the previous section, you already will have a good structure for your written discussion. All reports begin with an introduction to the case. In it you outline briefly what the company does, how it developed historically, what problems it is experiencing, and how you are going to approach the issues in the case write-up. Do this sequentially by writing, for example, "First, we discuss the environment of Company X...Third, we discuss Company X's business-level strategy... Last, we provide recommendations for turning around Company X's business."

In the second part of the case write-up, the strategic-analysis section, do the SWOT analysis, analyze and discuss the nature and problems of the company's business-level and corporate strategy, and then analyze its structure and control systems. Make sure you use plenty of headings and subheadings to structure your analysis. For example, have separate sections on any important conceptual tool you use. Thus, you might have a section on Porter's five forces model as part of your analysis of the environment. You might offer a separate section on portfolio techniques when analyzing a company's corporate strategy. Tailor the sections and subsections to the specific issues of importance in the case.
In the third part of the case write-up, present your solutions and recommendations. Be comprehensive, and make sure they are in line with the previous analysis so that the recommendations fit together and move logically from one to the next. The recommedations section is very revealing because, as mentioned earlier, your instructor will have a good idea of how much work you put into the case from the quality of your recommendations.

Following this framework will provide a good structure for most written reports, though obviously it must be shaped to fit the individual case being considered. Some cases are about excellent companies experiencing no problems. In such instances, it is hard to write recommendations. Instead, you can focus on analyzing why the company is doing so well, using that analysis to structure the discussion. Following are some minor suggestions that can help make a good analysis even better.

Do not repeat in summary form large pieces of factual information from the case. The instructor has read the case and knows what is going on. Rather, use the information in the case to illustrate your statements, to defend your arguments, or to make salient points. Beyond the brief introduction to the company, you must avoid being descriptive; instead, you must be analytical.
Make sure the sections and subsections of your discussion flow logically and smoothly from one to the next. That is, try to build on what has gone before so that the analysis of the case study moves toward a climax. This is particularly important for group analysis, because there is a tendency for people in a group to split up the work and say, "I'll do the beginning, you take the middle, and I'll do the end." The result is a choppy, stilted analysis because the parts do not flow from one to the next, and it is obvious to the instructor that no real group work has been done.

Avoid grammatical and spelling errors. They make the paper sloppy.
In some instances, cases dealing with well-known companies don't include up-to-date research because it was not available at the time the case was written. If possible, do a search for more information on what has happened to the company in subsequent years. Following are sources of information for performing this search:

The World Wide Web is the place to start your research. Very often you can download copies of a company's annual report from its Web site, and many companies also keep lists of press releases and articles that have been written about them. Thoroughly search the company's Web site for information such as the company's history and performance, and download all relevant information at the beginning of your project.

Compact disk sources such as Lotus One Source and InfoTrac provide an amazing amount of good information, including summaries of recent articles written on specific companies that you can then access in the library.
F&S Predicasts provide a listing on a yearly basis of all the articles written about a particular company. Simply reading the titles gives an indication of what has been happening in the company.

Annual reports on a Form 10-K often provide an organization chart.
Companies themselves provide information if you write and ask for it.
Fortune, BusinessWeek, and Forbes have many articles on companies featured in most cases.

Standard & Poor's industry reports provide detailed information about the competitive conditions facing the company's industry. Be sure to look at this journal.

Sometimes instructors hand out questions for each case to help you in your analysis. Use these as a guide for writing the case analysis. They often illuminate the important issues that have to be covered in the discussion.
If you follow the guidelines in this section, you should be able to write a thorough and effective evaluation.

GDP calculation

Macroeconomics – National Economic Accounting: Past, Present and Future

Date: April 22, 2006


Question 1: Three approaches to measure GDP:
- Value-added approach: GDP is the sum of the value-added at each stage of production, where value added is revenues minus material costs.
- Income approach: GPD is total income which is the sum of rent, wages and profits.
- Expenditure approach: GDP is total spending on final goods and services of a nation. In other words, GDP = C + G + I + X – M where C is consumption, G is government expenditure, I is investment, X is export and M is import.
Among three methods, expenditure approach is the most widely used because it provides policy makers with the most usefulness in formulating economic policies.

Question 2: In general the final results of these three approaches should be the same because GDP measures the value of output of a nation in a specific period of time (1 year). However, the results are not the same in reality. The reason is that the information on which the data is collected may come from different sources and inevitably contains inaccuracies and round-up data.

Question 3: Depreciation is a decrease in the value of a property as a result of wear and tear, obsolescence, accidental damage and aging. In macroeconomics, depreciation covers reductions of the capital stock by disasters. If the capital depreciation is very large, the investment might not be sufficient to support rapid growth in the long run. Therefore, the term Net Domestic Product (NDP), which is GDP minus depreciation, is used instead of GDP.

Question 4: According to Kuznet, the value of net output is the sum of Income Paid Out and Business Saving, where Income Paid Out is the sum of wages, salaries, rent and distributed post-tax corporate profits, and Business Saving is positive business saving (investment, reserves, additions to capital stock) and negative business saving such as depreciation, depletion of natural resources and withdrawals from reserves.
According to Keynes, the value of the net output is the sum of consumption, investment and government spending. This approach incorporates the relationship between employment, the quantity of money, the interest rate and aggregate expenditures.

Question 5: The reason why Kuznet was unhappy with the inclusion of government expenditures in the value of output is the double-counting problem in calculating the output value. Kuznet argued that most government spending was on intermediate goods crucial to the production process rather than on the final products. Therefore, if the government spending is counted, there would be double-counted products in the value of net output and the true value of output would be over-calculated.

Question 6: Challenges in accounting for aggregate output:
Inputting Output:
- How to count for new goods and services that were unsold in the formal economy or that were unpriced in the market. The challenge to count the value of unsold goods such as home-made clothes, unpaid household work and unpriced services like free bank services remains the most difficult challenge that each country faces in calculating their GDP.
- How to count the value of the informal economy. If a country has a big informal economy like Colombia, GDP would be under-calculated if this country ignores the informal economic sector.
- How to count the value of barter if the country still has barter systems.
- How to measure the quality of goods produced. The quality of goods is not fully reflected on the price.
Natural Resources:
- How and what to count the value and depletion of natural resources. Even though UN has provided guidance on how to estimate the annual value of natural resources used, this calculation remains inaccurate since natural resources are what we might not be able to measure accurately.

Question 7: Factors that should be considered:
- The value of non-tradable, un-owned aspects of the environment such as clean air, clean water and climate
- The value of non-market economy of household and community
- The value of informal economy
- Unpriced social cost associated with production such as pollution and environmental degradation

Question 8: Reasons for the importance of the traditional GDP: The traditional GDP suggested by Keynes reflects the relationship between employment, quantity of money, interest rate and aggregate expenditures. Therefore it is:
- An essential tool for analyzing and assessing the state of a nation’s economy.
- A valuable metric for short-term macroeconomic planning because the government can use fiscal and monetary policies to push or cool down the economy.
- An essential tool for formulating macroeconomic stabilization policies.
- An important indicator of the economic growth and potential for investors.

Question 9: Arguments for the environmental accounting:
- Economic growth must be sustainable, growth together with environmental protection.
- Sustainable growth is needed to ensure that our younger generations could have living standards at least as high as those of current generations.
- GDP will provide a more complete overview of economic performance and living standards than GDP without concerning about environmental matters.
- The value of output in environmental accounting (NNG) would be a better indicator of sustainable social well-being than traditional GDP.
- NNG would help policy makers make better decisions in planning the economic growth strategies for a nation.

Question 10: Reasons for “A higher GDP is not necessary mean a higher measure of welfare”:
- GDP might be over or under calculated, depending on the methods of collecting and interpreting data.
- GDP ignores the value of non-market economy of household and community such as recreation, intellectual capital, education…
- GDP treats depletion of natural resources, pollution, environment degradation, disasters as income because it measures expenses on those areas as economic gains.
- GDP takes no account for income distribution.
- GDP ignores the drawbacks of borrowing money from other countries.

Singapore: Committee on Singapore's Competitiveness

Date: May 27, 2006 Pham Thi Thuy Ha

Economy overview from 1959 to 1998:

From 1959 to 1956, Singapore adopted import-substitution policy while it was a member of the Federation of Malaysia. But right after becoming an independent country in 1965, the country moved from labor-intensive exports to high value adding industries while shifting manufacturing facilities to lower-cost neighboring countries. In 1990s, it changed the policy to become an international business hub international financial center to turn the country in a knowledge economy and enjoyed fruitful economic growth (about 8%/year) until 1997-Asia-economic crisis. Since the country’s economy was largely regional focus, it was drastically hurt by this crisis and economic growth was less than 1% by the end of 1999.

The Committee on Singapore’s competitiveness (CSC):

In May 1996, CSC was formed with most members from private sectors to:1) evaluate the country’s competitiveness in the next 10 years in the context of rapid globalization and emerging competition; 2) to detect problems and propose strategies and policies to maintain the competitiveness of Singapore in the future. However, due to 1997-crisis, CSC added one objective which is to examine short-tern issues and recommend solutions to help Singapore overcome the economic downturn. CSC’s 1998-report presented short-term and medium-term solutions to help Singapore stay competitive. Those solutions are:
- Short-term recommendations: 1) reduce business costs and help businesses survive; 2) remain strong financial system; 3) Maintain investors’ confidence; 4) Push economic restructuring; 5) make Singapore’ economy stay resilient; 6) seek business opportunities in the region through partnerships; 7) implement cost-cutting and tax-cutting measures
- Long-term recommendations: 8 key strategies:
1. Promoting manufacturing and service as twin engines: develop manufacturing in the regional hub; attract multinational companies; develop services sector in a premier hub in Asia through fast-growth services.
2. Strengthening the external wing: Diversify market dependency beyond the region; invade into the abundant resources overseas.
3. Building world-class companies: Nurture stable world-class companies by broadening the corporate profile and economic base of Singapore for sustained and resilient growth.
4. Strengthening the base of small and medium local enterprises: Help them remain resilient and reach maximum potential; underpin their role as strategic partners of multinational companies and government-linked companies.
5. Developing human & intellectual capital as key competitive edge: develop a world-class work force by providing world-class education for youth, promoting life-long learning for life-long employability and encouraging management, innovation & technology.
6. Leveraging science, technology & innovation: lever science, technology and innovation; construct the existing IT2000 program to turn Singapore into an IT hub in Asia.
7. Optimizing resources management: optimize the allocation of scare resources to increase supply and encourage efficient usage of those resources.
8. Reinforcing Government role as a business facilitator: Support private sector by providing consistent policies & regulatory environment.

Besides the 8 keys strategies, CSC also recommended strategies for 5 sectors to enhance each sector. In manufacturing: develop world-class work force move to R&D, and nurture enterprises. In financial and banking: develop fund management industry, expand domestic capital market. In service: develop international trading, transport and logistics, business & professional services, media, communications and tourism. In domestic business: help local enterprises to optimize scare resources and develop business.

Responses from Government and Public: the report was warmly welcomed by the government and public and the recommendations were quickly adopted with immediate or nearly immediate effect.
Lessons drawn from the case
1. Build a competitive society is the core of the sustained growth in globalization context
2. Education is the core strategy that each government should take to build a world-class work force, lever science, technology and innovation
3. Private sector and small and medium enterprises play an important role in economic growth so it is deserved to receive full support and assistance from government
4. Effective integration in international markets is a strong wing of the national economy

In Vietnam, the government has formed policies and strategies that cover all above areas to build a knowledge-based and competitive society.

Foreign exchange markets and transactions

Date: May 31, 2006 Pham Thi Thuy Ha

Foreign Exchange Market:

Started in 1970s, the foreign exchange market first enables the conversion of other currencies to US dollars at fixed exchange rate. This market has grown over time due to the expansion of international trade and became the largest market in the world with 1.2 trillion average daily turnover in 2001. The largest trading center is in UK with 16% of US dollars, 9% of Japanese Yen. OTC is the most popular trading method and transactions include spot transactions, outright forwards and swaps. Euro and world-wide consolidation of in the financial sector have reduced traded volume of the market. There was a trend toward fewer banks with larger market share in the exchange market. Electronic brokering systems account for increasing share of turnover in spot market.

What is an exchange rate?

An exchange rate is the rate at which one currency can be exchanged for another. On other words, it is the price of a currency in the exchange market. Direct quotes are exchange rates listed in the form of US $ Equivalent and give the price of a unit of foreign currency in US dollars. Indirect quotes are rates listed in the form of Currency per U.S. $ and give the number of units of foreign currency required to buy 1 U.S.$. Cross exchange rate are exchange rates in terms of two non-U.S. dollar currencies. For instance, the cross rate between RMB and Euro. Bid/ask spread is the service fees that banks or brokers charge for each currency transaction. A quote is a bank’s buy price and an ask quote is a bank’s sell price. The spread is the difference between these two prices. Therefore, bank currency quotes are usually given in pairs with the first rate being the bid quote and the second being the ask quote.

Exchange rate movements:

Prices of currencies fluctuate quite often in the exchange market like the prices of goods fluctuate in the good market.
Currency appreciation is the increase in the value of a currency relative to other currencies. When the value is decrease, currency is depreciated. When a currency is appreciated, its purchasing power increases.
Exchange rate fluctuations are measured in percentage relative to some reference currency, for example Euro could appreciate 10% relative to US dollars. Three steps to calculate percentage of fluctuation: 1) convert exchange rates into a standard form; 2) determine whether the studied currency is depreciated or appreciated; 3) calculate the percentage of changes of the original exchange rate.

There are 2 reasons why exchange rates fluctuate: 1) according to purchasing power parity theory, exchange rate fluctuate because of the changes of purchasing power of a currency to another currency; 2) according to interest parity theory, exchange rates fluctuate because of the fluctuation of interest rates. In other words, potential holders of foreign currency deposits should not be different between two currencies.

5 types of foreign exchange transactions:
- Spot transactions are foreign exchange transactions based on spot rates, daily exchange rates quoted in the Wall Street Journal and other news sources.

- Forwards are transactions made sometime in the future at forward rates and forward contracts, an agreement between buyer and seller to trade a particular currency on a date in the future for a fixed price regardless of the changes in spot rates. If the currency is expected to appreciate in the future, forward rates will contain a premium. If the currency is expected to depreciate in the future, forward rates will contain a discount. Forwards end with the purchase of currencies.

- Swaps are a series of forwards under a contract that hedges long-term, sustained foreign exchange exposure. It differs from forwards in the sense that swaps cover multiple future transactions until the mature date while forwards deal with one transaction. Swaps are arranged by brokers and banks in favor of two parties who have complementary foreign exchange to pair up and trade their currencies.

- Futures are contracts that specify a standard volume of a currency to be exchanged on a settlement date some time in the future. Futures are similar to forwards except the fact that futures are standardized for trading on markets like Chicago Mercantile Exchange. They are often used as a tool for currency speculation rather than a hedging tool. Future contracts are traded on the market and the holder can have gains or losses depending on the movement of spot rate over time and changing expectation about the spot rate’s value on the settlement date.

- Options are contracts that allow their owners to buy or sell a currency at a designated price within specific period of time. A currency call option is a contract that allows its owner the right to buy a specific currency. A currency put option is a contract that allows its owner the right to sell a specific currency. Exercising an option is to take the right to buy or sell the currency. Options are sold in standard volumes.

Lessons drawn from the case

1. Companies using foreign currency should have different strategies of foreign currency against unfavorable movements of exchange rates before making decisions on any transaction relating to foreign currency.

2. Corporations conducting international business should consider currency options to cover the risks of unfavorable exchange movements.

3. Call options are suitable for companies that need future foreign currency and want to hedge against currency appreciation

4. Put options are suitable for companies who hold a large amount of foreign currency and want to hedge against currency depreciation

Japan: beyond the bubble

Date: June 5, 2006 Pham Thi Thuy Ha

Fruits of the Miracle:

Although Japan was affected by the ending of the Breton Woods system of fixed exchange rates and the first oil shock, the 2nd the oil shock helped depreciate Yen so Japan gained export competitiveness at the end of 1980s. Due to the rise of U.S real interest rate in 1981, Yen was weakened again and Japan enjoyed export competitiveness and much cheaper imported materials to boost economic growth. However, under a threat of inflation and pressure of estate speculation, the Bank of Japan had to raise interest rate and cool off the economy in 1989. After a series of attempts to balance budget, the government implemented fiscal stimulus in 1992. As a result, deficit spending rose quickly but the economic growth was still stagnated. Then, the government lowered interest rate to 0.5% by 1995 and the Bank of Japan introduced a zero-interest rate policy in 1999 in order to have enough cash to raise price and reduce price deflation. The bank increased interest rate in august 2000 but implemented again this policy in 2001 to deal with deflation problem. However, the bank will gradually increase interest rate to turn monetary policy to normal.

Institutional Concerns:

The ministry of Finance (MOF) managed government fiscal policy and influenced over monetary and securities policy and therefore the Bank of Japan has not acted independently in monetary policy making. In the labor market, job security and seniority system were changed in the late 1990s due to recession. Labor costs were increasing. The bankruptcy of some companies forced employees to find alternative solutions. In the financial market, banks changed from book-value systems to marked-to-market accounting systems to increase their transparency. The government also changed its long-term policy not to allow banks fail to allow banks collapse in 1997. Still, individuals had limited opportunities in the capital markets and were limited in reporting foreign exchange transactions so their personal savings were held in personal saving accounts with very flat interest rates. As a result, unlike American firms, Japanese firms have had limited capital equity. Keiretsu, business groups, has been a dominant business practice in Japan. Keiretsu has 3 types: horizontal keiretsu, vertical keiretsu and satellite groups centered on banks for funds. Cross-holding of share is still common practice and thus, firms were not really under the pressure from shareholders. Japan also faced social issues such as aging problem, medical care, pensions, role of women, standard of living and education.

The Hashimoto Era and Structural Reform:

Hashimoto introduced a grand plan to restructure administration, education, the financial system, fiscal policy and social security among which the financial market reform was the most important reform. According to the plan, the administrative reform is to re-organize the governing structure to be more efficient and more responsive to the needs of the people by strengthening the power of the primer minister and cabinet, reducing number of ministries and limiting numbers of bureaucrats. The economic reform encompassed removal of restrictions on large-scale retailers, telephone deregulation, series of deregulations in 5 main areas: logistics, energy, petroleum and gas, telecommunications and trade/commerce. The educational reform was to reorganize educational system, cultivate a rich humanity, elicit prompt responses to changing social needs and increase schools’ cooperation with students’ families and communities. The financial restructure aimed at the financial market reform and disposal of the massive bad debts by lifting the ban on derivative and amending the Anti-Monopoly Law. The fiscal reform included five major principles: 1) reduce budget deficit; 2) devote to fiscal reform; 3) implement year-to-year reductions in general expenditures; 4) reduce all current long-term spending programs; 5) maintain the national burden below 50%. The social security reform received 5 different proposals and a pension reform bill was completed in 2000. This massive reform resulted in less power of MOF and the primer minister was granted the rights to submits policy proposals to the cabinet.

Structural Reform under Koizumi:

In early May 2001, Koizumi proposed structural reforms. The new reform agenda was: 1) force banks to write off all nonperforming loans in 2 or 3 years; 2) privatize the postal saving system; 3) a cap of government borrowing of $245 billion to halt Japan’ $5.6 trillion debts; 4) Reduce deficits by cutting government spending; 5) a government-subsidized unemployment plan to grant jobless benefits so that firms can lay off worker easily.

Lessons drawn from the case:

The government should change timely the policy in response to the changes of domestic and international macroeconomic conditions. In my country, a massive reform was done in late 1980s and 1990s in accordance with the change of the government’s policy from a close to an open economy after the collapse of the former Soviet Union. So far this reform has boosted economic growth at high rates and maintained political stability. The government continues reforms in all areas such as deregulation, legislation, education, health care, pensions, social security… and promotes privatization.