English for Economic Sciences

Communication is essential to life and imperative if business is to prosper and

survive in a competitive environment.
It can be:
Verbal – the written word
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 Oral - the spoken word
Visual – the illustration
Numerical – the written and interpreted number
Electronic – using a computer
Communication should be received and understood so we must ask ourselves
not what we want but what the audience wants.
The term communication skills covers a number of defferent areas, including:
-speaking clearly, fluently, convincigly.
-understanding and responding to non verbal communication(body language).
-Producing effective written communications, including briefs and
presentations.
In business life it’ s important not only to be efficient and do your job but also
to look and sound friendly, confident, sincere and helpful.
Poor communication is the cause of all breakdowns in business relationships.
When they try to communicate people go through different stages and the lack
of care at any of them lead to confusion and wasted time and energy.
1.The need or desire to communicate with someone else- aiming.
2.The translation of internal thoughts and feelings into an external means of
transmitting them as a coherent message- encoding.
3.The transmission of the message(spoken, pictorial, written, body language,
tone of voice, timing)- transmitting.
4.The reception of the message(how and why people listen)-receiving
5.The translation of the message to internal thoughts and feelings on the part
of the receiver-decoding.
6.The need or desire to respond to the message that has been sent(thinking,
feeling, planning internally, setting objectives)-responding.
A successful communication is meant to beware that the meaning of the
message is the responsibility of the sender first. Having decided what it is that you
need to communicate and whom you are going to communicate with, you then need to
consider the impact the information will have- will it alarm people, will it make them
more efficient, irritable, more comfortable, resentful, dafer, happier, bored, more
productive, better informed, more motivated, more loyal? The impact that your
communication will have on the productivity of your organization has to be a primary
concern mostly if you are the bearer of bad news or your message is concerned with a
change that will affect the working life of others. Think about the questions people
will need answers to, ask yourself what you would feel if you were to hear this for the
first time, decide just what you want your audience to do after you have
communicated with them, think about the actions and changes that your
communication will cause.
Then, you have to make your message of interest to the receiver. The more
you can personalise your communication to fit with the needs and interests of your
audience, the better that information will be received and acted upon. We have to list
the information that is to be sent and then prioritize the points into categories such as:
must know, important to know, helps understanding, gives examples, nice to
know, interesting but not important; this is important when communication is verbal
since it is linear and it moves the whole time; the listener is required to take part in
and remember all that was said. After organizing our thoughts we put them into words
and images.They are based on our internal dictionaries, assumptions, experiences,
education, mood. Clarifying the meaning comes next as sometimes words alone are
not enough to get the meaning when we deal with complicated concepts or spatial
information.

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 We think at least three times faster than we speak. It is easy to mishear, ignore
or miss a great deal of information. So, written communication is easier to focus on
because we can return again to parts that we need to consider carefully.

What impression do you try to give to the people you deal with in business?
• pleasant, sincere, efficient, confident, calm, honest, skilful, intelligent,
nice , polite.
• Unfriendly, shy, aggressive, sleepy, unclear, lazy, dishonest, clumsy,
stupid, inefficient, nasty, unhelpful, off hand, rude.
Asking questions is something people have to do a lot in business.

Decide what the questions are that led to each of these answers :
1.Yes, thanks I had a very good flight.
2.I’d like to see Mr. Barry if he’s in the office.
3.On my last visit I spoke to Mrs. Helen.
4.It was Mr. Weber who recommended this hotel to me.
5.I think I’d like to see round the factory after lunch.
6.No, my husband is traveling with me. I’m meeting him later
7.We’ll probably be staying till Friday morning.
8.No, this is his first visit; he has never been here before.
a.Did you have a good flight?
b.Who would you like to see?
c.Who did you speak to last time you came?
d.Who recommended this particular hotel to you?
e.When would you like to see round the factory?
f.Are you traveling alone?
g.How long are you planning to stay?
h.Has he been here before?

Imagine you’re having dinner with Mr. Johnson who is visiting your country
for the first time.

Write down ten questions beginning like this:

 Are…?/Is…?
 Do…?/Does…?/ Did…?
 Have…?/Has…?
 Who..?/When…?/Where…?
 What…?/ Why…?
 How many...?/How much…?/How long…?

What do you consider difficult and/or enjoyable about talking to:

• Someone you’ve never met before?
• A superior or someone who could influence your future career?
• Someone who is considerably older than you?
• A foreigner?
• A member of the public?
• What experience did you have with a public person?
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 • What does the meaning of a message depend on?
• How do you respond to change?

Principal Comunication Media

Written Oral/Aural
Internal External
Memoranda
Notices
Bulletins
Agendas
Minutes
Reports
House-journals
Contracts
Handbooks Letters
Circulars
Invitations
Estimates
Quotations
Advertisements
Orders
Invoices
Statements
Export documents
Promotion literature
Press releases
Articles
Reports
Information
Booklets Face to face-encounters

Interviews
Briefing sessions
Seminars
Workshop
Meetings
Conferences
Telephone
Teleconferencing
Intercom
Public address system
Radio

The Principal Communication Media

Visual/Physical Telecommunication/
Technological
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 Charts
Diagrams
Graphs
Photographs
Slides
Films
Television
Video

Overhead projector Models

Conveyer belts
Messenger/
Courier services Telex
Tele text
Facsimile transmission

Electronic mail
Voice mail
Videoconferencing
View data
Wide area networks
Cellular radio/
Telephone
Cable television
Satellite transmission

MY EVERYDAY ACTIVITIES

I start work at the same time every day.

I wake up only when the alarm clock strikes.
I go to work by car/ underground/ I walk
I work overtime and have very short breaks.
I am never late at work. I am always in time.
I do not complain about my work.
I like my job and my boss.
I hate cigarettes and coffee.
I share my office with a smoker who is…my husband.
I get a lot of important calls.
I attend meetings and I talk with people.
I ask questions and I give answers.
I take decisions, I negotiate.
I reach agreements, I create a climate of co-operation or expectation.
I work with money. I know that it bewitches people.
People fret for it, swear for it, devise most ingenious ways to get it and to get
rid of it.
I work in the banking system/accountancy/management/trade/
I operate with consumer/ market/ current/ overhead/ top/ bottom/
ceiling(maximal) flat(unic)/floor(minimal)/closing(la inchiderea bursei de
valori)/fair(convenabil)/ force account rate(de regie)/knock out(derizoriu)/
upset(initial, de pornire))/ price

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 I operate in a Stock Exchange with securities: marketable(usor
realizabile/quoted/unquoted
I operate with : bearer bond-(obligatiune la purtator)/irredeemable bond
(neamortizabila)./registered bond-(nominativa)/junk bond-(riscanta, cu evaluare de
credit scazut).
I operate with shares: preference/ ordinary/deferred/forteited/ in trust.
I do market research and I check the mercurial(fluctuanta)/ sluggish(activa)/
sagging(in scadere)/steady(stabila)market.
I direct the sales for future delivery(vanzare la termen)
I talk about costs: flat(uniform)overheads(indirect)sunk(investit)capital(de
investitie).
I chair meetings and take the floor.
I order a cake as I like to eat sweets.
I go home late in the evening, very tired.
I have supper and I eat some fruit.
I listen to the news on TV.
I go to bed and I have nice dreams.
I relax on weekends: I go shopping, I watch TV, I go to picnic, I breathe fresh
air, I chat with my friends, I rest in the countryside, I get away from the noisy and
dusty town, I listen to music, I cook, I read the latest books, I meet my friends, I drive
my car.

Are you in control of your life?

I am keen on my job, enthusiastic, bursting with energy, confident with

myself. I love new challenges, I analyze problems methodically, I am an objective
thinker, I am friendly, highly trained, well informed, generous, easy going, polite,
Sometimes I am boastful, uncertain, embarrassed, moody, annoyed, bored,
lacking confidence, reluctant, incomprehensible
I often feel that I am at the mercy of outside forces beyond my control.
I often feel that life is passing me by.
When people praise my work I believe that usually they really mean it.
I have at least one habit that I can’t break.
I think it’s a waste of time planning ahead because something always turns up
which makes me change my plans.
I often dream about work problems.
I have at least three important leisure interests or hobbies that have nothing to
do with my work.
I often refuse my friend’s invitations because I have too much work to do.
When I read newspapers my mind keeps wandering back to work problems.
I enjoy meeting new people.
I like to be successful in my job
I want to know as much as possible about customers.
I never believe only in luck.
I don’t like outdated and inefficient things.
I admire smart people
I enjoy discussions and to hear other people’s opinions.
I find it easy to choose rich colour combinations in clothes, furniture,(yellow-
happiness, fulfillment, positive thoughts, creativity, orange-positive energy, well
being, blue-infinite power, balance, wisdom, red-courage, determination, energy, ..
I make important decisions based on what looks best to me, on my feeling and
intuition. I think of myself as someone who dresses sensibly, neatly, tidily.
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 I like to share attitudes and values with my partner.
I like to meet the highest demands and standards.
I consider signs important in life:nr.1.-creative power, unity, nr.2-balance,nr.3-
the Trinity,nr.4-order, nr.5-the figure of man, nr. 6- universal harmony, nr.7-cosmic
order, nr.8-the initiated one,nr.9- eternity…

What are your weaknesses ?

I am inexperienced, too enthusiastic. Not very confident in using the
computers, shy, not a very good communicator.
Sometimes I have no direction in life, I feel like getting lost.

Do you agree or disagree?

1. whatever reason people have for living together, it is a private matter.

2. couples need support of other families, of society.
3. young passions die and interests change.
4. rooms reflect our personalities and colours too.
5. man is confronted with possibilities or alternatives on the basis of
which he can project his life.
6. we are left with the freedom of choice as long as we consider
experience never limited and never complete.
7. we will always search for temporary solutions, we will always move
away from the values and authority of the older generations.
8. relationships will always remain incomplete even if with wonderful
moments.
9. we create versions of reality out of our desires and when they clash
with the external world they disappoint us.
10. we become complete when we assume the responsibility for our own
lives.
11. if we fail to look into ourselves we remain fragments, unsatisfied,
incomplete, empty.
12. never look into the past in order to find out how to live in the present
but always make the effort to find a new direction in life.

13. some of us fill the gap in our life by the help of traditional values and
yearn for the stability and security of marriage, others respond only emotionally being
“prisoners” of impulses, following a logic of the soul.
14. if given a solution, we face reality and act6 creatively in terms of our
own powers and we answer the most important questions in life.
15. sometimes we live out an illusion all our life and realize that the
workings of fate are enigmatic. We get strength when we cooperate with it as we live
in an universe of oppositions where the vertical has to return to the horizontal.
16. sometimes human suffering is far from remedy and we find the
ordering of existence meaningless so that we come to doubt our own doubts.
17. sometimes we are too intellectualized and the intellect threatens and
stifles the life of feelings and emotions.
18. the awareness of our divided nature has constantly unsettled us.
Despite such a divided nature, we still manage to preserve our balance.
19. our attempts range from the ridiculous to the sublime to cross even if
only in dreams, the boundaries of existence.
20. even if our illusions are swept away, we prefer life’s restlessness.

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 The Interview

Fashions seem to change quite rapidly in interview techniques and the only
rules that applicants should be aware of may be “expect the unexpected” and “be
yourself”.
In different countries, different trades and different grades, the salary that goes
with a job may be only part of the package: perks like a company car or cheap
housing loans, bonuses paid, company pension schemes, generous holidays, flexible
working hours may contribute to the attractiveness of a job.
Everybody has to go through interviews to be offered a position. Recruiting a
new member of your staff is likely to be the most expensive decision you will make as
a manager. If you do it right you can make a fortune for your company. Most
managers inherit a team of workers who know what they are supposed to do, who
know something about your company, about the way your team works, about your
customers, about the business processes within the department.
What happens when you bring an outsider in to this situation? Some of the
possible outcomes if you do it wrong are:
-you and your staff spend ages helping the new team member to get started.
-Your team norms are threatened and possibly changed.
-You discover that the perfect qualifications on the new employee’s C.V are
no more than hype.
- You discover that the new employee is not fit for what you want.
So, the recruitment process has to take into consideration the following:
a) job advertisement
b) C.V
c) The interview
Both parties the interviewer and the interviewee have to communicate
effectively: open questions, right answers, positive opinions.
A job appraisal interview is one of the major tasks of the leader of a team of
people. It enables to: plan the future, look at individual performance, discuss and plan
training and development needs, contribute to company career planning, salary
planning and job progression, evaluate the efficiency of past targets and goals,
establish priorities, identify, assess, solve problems, look at resourceful needs.

Job appraisal needs to be systematic if it is to be of any use. All

effective managers have day to day or week to week contact with their team, they will
also be running up dating sessions where they inform the team of corporate, market or
local changes in working, policy or law and any changes that affect the workings of
their teams. These are day to day tasks of management. The job appraisal interview is
an opportunity for the team member and their manager to think about the future
months in an organized manner. Before an appraisal they both have the opportunity to
think in depth about what they have been doing and where this will lead in the future,
where the success and shortfalls are, and what objectives they will set each other in
the future.
Applying good communication practices to the appraisal process will ensure
that career progression has the best chance of success from the point of view of both
parties.
Interviews really aren’t out to trap people. They evaluate people, they know
how to assess your qualities.

Characteristics to have a successful interview :

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 • Be neat and well groomed.
• Be natural, friendly, relaxed but not sloppy or overly casual.
• Be interested in the work involved in the job.
• Have definite vocational goals.
• Articulate the goals you have in mind.

Attention to:
1.What to wear! Inappropriate clothing or
being late can cost you the job.
2.What to bring to the interview! Select those items from your
background that demonstrate what employers look for.
3.How to act. Sit straight, don’t mumble,
look at people when you talk, don’t smoke.

Parts of an Interview

I. The Opening (2-5’)

The interviewers will set you at ease. They will open with easy questions
about your major interests or by telling you about the job of the company.
II. The Body (10- 20’)
You should expect questions that give you the opportunity to show your
strong points and of course to raise questions.
III. The Close (2- 5’)

The interviewer will tell you what happens next.

Possible Interview Questions:

1.Tell me something about yourself.

2.Why do you want to work for us? -state your qualification
-state things that separate you
from other applicants
3.Did you have any accomplishments? -pick up one or two which you
are proud of.
4.What is your class rank? What University did you graduate?
5.Where do you see yourself in 5 years?
6.What would you see as the ideal job for you?
7.What do you know about our company?
8.What are your interests outside work?
9.What are your strengths and weaknesses/ shortcomings ?
10.When did you last lose your temper?
11.What is the best idea you have had lately?
12.What is your worst fault and what is your best quality?
13.How long do you think you would stay with us if you were appointed?
14.What makes you think you’d enjoy working for us?
15.Why are people unlucky or unsuccessful in getting jobs?
16.If you were me what other questions would you ask?
Attention: -Don’t focus on salary. -Draw the attention that you’ll
work hard with loyalty.

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 • Why are people unlucky or unsuccessful in getting jobs?
Imagine that a friend of yours is about to attend an interview. Write at least ten
pieces of advice that you would give him. You have as suggestions:
1. Wear smart, formal clothes
2. Don’t smoke
3. Sit up straight
4. Arrive on time
 Find out about your partner’s career.
Ask about:
-present job
-work experience
-education and training
-ambitions and prospects for the future
-its rewards and frustrations

 Discuss how the impression you may give especially to a foreign can
be affected by:
a) Your expression ( smiling, blinking, frowning, looking down, looking
straight in someone’s eyes…)
b) The noises you make ( sighs, yawns, knocking loudly or softly at a
door, clicking a ballpoint pen…. )
c) Body contact ( shaking hands, touching…)
d) Body language ( crossing your arms, sitting up straight )
e) Clothes and appearance ( hair, make up, suit, tie )
f) What you talk about ( politics, business, sport, family )
g) Your tone of voice (sounding cool, friendly, familiar, serious )
 Find out about your partner’s career.
Ask about:
1. Present – its rewards and frustrations
2. Work experience
3. Education and training
4. Ambitions and prospects for the future
 Employees are often given a “progress interview” some
months into a new job, so that they get feedback on their performance
so far. Participants on training courses often take part in similar mid-
course interviews too. Make a list of ten questions that might be asked
at such an interview in your firm. Here are some examples:
 What have been your most valuable experiences with us so far?
 Which parts of the course have been least valuable to you?
 What particular difficulties have you had?
 How will do you get on with the other members of the staff?
 Try this quiz with a partner.
1.Which is the best definition of good conversationalist?
a.Someone who always has plenty to say.
b.Someone who has plenty of amusing stories to tell.
c.Someone who will listen carefully to what you have to say.
d.None of them ( give your own definition. )

2. If someone just says “what?” after you’ve carefully explained something,

do you …
a.Go through the explanation again using different words?

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 b.Feel that you have been wasting your time?
c.Feel that you have not been believed?
d.None of these.
3. If someone always looks you straight in the eye this means that he is:
a.Honest
b.Rude
c.Friendly
d.Trying to frighten you
4. If someone shakes your hand very hard and long, it means:
a.He is very pleased to see you.
b.He is trying to show you that he is sincere.
c.He is waiting for you to say something
d.He is reliable and friendly.

5. If a man wearing jeans and no tie comes into your office, do you think he:
a.Isn’t correctly dressed?
b.Can’t be important?
c.Is quite normal?
d.Is someone who has come to fix the electricity or something?

6. If you are meeting an Arab client it is polite to:

a.Get straight down to business.
b.Wait until he raises the topic of business.
c.Stick to small talk for the first few minutes.
d.Ask him to close the door of his office to prevent interruptions.
7. If someone smiles while you’re explaining something, this means he is:
a.Not sincere.
b.Happy.
c.Not listening.
d.Crazy.

Managing our Time

Are you a busy person?

Are you crowded by events?
Do you make your life manageable?

Well, time may be infinite, but each of us has a finite allocation: time is
something you can’t increase or decrease. As far as, no matter how clever you are,
how wealthy, how industrious, you still get 24 hours every day. What you need to do
is to carefully manage the time you have got putting it to the best use possible.
Before you can save time you have to spend some. You have to understand
time management and make a little effort to do things like: plan, organize, review,
rearrange, sort, think.
Can you invest time in time management?
Well, most of the words commonly used about time are money orientated:
buying, losing, saving, spending, wasting time. Time becomes important because you
can use it to make money but…no amount of money can buy you one extra second of
time; time becomes more valuable the less of it we have: it is like most commodities.

Good time management can:

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 • give you more time to do what you want
• improve your availability
• improve your decision making
• improve your health
• improve your productivity, efficiency, effectiveness
• make you easier to live with
• make you easier to work with
• make you feel more relaxed
• minimize the risks you take
• reduce stress
Good time management is about setting limits for:
*availability (how willing you are to be disturbed, to make yourself available)
*duration (how long you spend doing things)
*importance (how you prioritize things)
*involvement (how much you do yourself as opposed to delegate to others)
*standards (how well you do things)
*urgency (how quickly you do things)

Why are interruptions urgent?( when the phone rings or on there is someone at
the door)
Do you treat all work for a particular person as important?
Do you check how important something is when you receive work?
Do you limit your involvement in things?
If we aren’t perfectionists what standards do we set?
Is it important to give priority to things that are non urgent?
Do you agree with the following statement? : “you need to spend your time on
actually doing things, not being busy.”

! So, you can spend time doing the right things, doing what you like doing,
doing what you’re good at, achieving things not just being busy.
! Then, setting goals is something that we must do because they increase our
motivation, raise our self confidence, help us achieve more, improves our
performance, increase our satisfaction, improve our concentration.

Which would you choose?

• creative (decorate your house, landscape your garden, write a book….)
• career ( become a manager, gain a pay rise, work part time…)
• educational (gain an extra qualification, learn a language, read more..)
• family (get married, spend more time with the family, visit your
relatives more often…)
• financial (save at least 100$ every month, reduce mortgage payments,
repay debts and credit cards…)
• mental (accept your faults, be more sociable, control your temper
more, stop criticizing..)
• physical (cut down on junk food, lose weight, reduce tea and coffee,
stop smoking…
• social ( have friends round once a month, read more, start a hobby,
take a long weekend twice a year and go away..)

Discussion points:
1. Consider your personal goals and make a list of these. Do any of them
conflict with your work goals? If so, which is the most important to you?
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 2. Are you aware of your own limits? Which are they?
3. Do you set unnecessary high standards, do you aim for perfection?
4. Where do you belong to: the optimist, the perfectionist, the rebel, the
socialite(important persons) , the worrier? Do you agree with the following:
- being too optimistic is being unrealistic
- optimists are good starters of work but poor finishers.
- perfectionists often take so long to do something that its value is
reduced; they set impossibly high standards and then set about achieving them.
- rebels set their own deadlines with no reference to others; relish(enjoy)
crises and problems as they can overcome these to show how much in control they
really are; they are good finishers but poor starters of work.
- socialites like to be involved with people; they like to talk, to gather
information.
- the worriers never seem to develop confidence in their own ability;
they may avoid certain types of work as they worry of not being able to do it.

The world would be a very simple place indeed if it were an easy matter to
analyze what sort of person someone was, and to handle them accordingly. It would
even be simpler if there were definite types of persons. But they aren’t. In time
management terms two types of people cause the majority of problems and they are
at the two extremes: perfectionists and procrastinators. Both tend to achieve less in a
longer time.

Perfectionism can be a good thing: society has long valued accuracy, attention
to detail, low error rates. But it can actually interfere with your progress and work, to
the overall detriment of your work. Trying to be perfect can stop you feeling satisfied
and motivated.
Recognizing perfectionism:
• all or nothing thinking or black and white thinking. There is always
one right answer if only you can find it.
• being afraid of disapproval
• being afraid to make mistakes
• being over sensitive to criticism and the opinions of others
• constantly looking for a mistake or slip up
• difficult personal relationships
• difficult keeping things in perspective
• equating failure with being worthless
• expecting too much of others
• feeling that what you achieve is never enough
• living life with a set of rules: a life full of “shoulds” and “mustn’ts”
• never feeling satisfied with anything you have done
• putting off completing work to improve it or get it just right
• valuing yourself based on what others think of you
Working with perfectionists:
• ask them to help you set your goals so they can see how others
motivate themselves and think
• be approachable, so they encouraged to admit mistakes and not cover
them up
• be careful of rewarding over achievement
• check that they are progressing in the right direction; stop them
focusing on quality at the expense of getting the job done
• discuss your own mistakes openly and constructively
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 • encourage them to set goals based on past performance not their best
hopes
• help them set goals and make sure they are realistic
• let them know what standard is required
• never laugh at them for lack of success or making mistakes
• openly discuss priorities
Procrastination (postponement) is like perfectionism- it’s faulty thinking and
feelings; you are being dishonest to yourself when you say lies such as “I’ll do it after
this cup of coffee” and you know that you won’t.
Recognizing procrastination:
• accepting low standards
• being easily distracted
• dawdling
• getting side tracked
• ignoring things in the hope they will go away
• “just one minute’ syndrome”
• low priority tasks get in the way of high priority ones
• putting things off until later
• underestimating the effort or time needed to achieve a task
• waiting until you are in the mood

Working with procrastinators:

• compliment and encourage them when they do make progress
• don’t let them get distracted
• don’t laugh at their putting things off
• help them break down large tasks into phases or sub tasks
• monitor their progress and let them know they are being monitored
• reward them for progress
• set deadlines

Discussion points:
1. Can we understand the causes of perfectionism?/ procrastination?
2. Do you impose your high standards on others?
3. Do perfectionists lose track of the deadlines?
4. Look carefully through the signs of perfectionism. How many can you
see in yourself? How can you work on this situation? What about procrastination?
5. What is the impact of fearing success, failure, the unknown? Can it
become a cause of procrastination?
6. What do lack of information, of motivation entail?
7. How can you work on your weaknesses?

Little perfectionism can work wonders. But it isn’t normal thinking; it is faulty
thinking. Beliefs and feelings are inaccurate; appropriate working is far more valuable
than perfectionism to any company.

The Job I Like

People have always worked. So they have had different occupations along
centuries.
All professions require much training, learning and responsibility.

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 To get a job it’s not enough to be good, but you must convince others that you
are good.
You have to manage your own work easily, to be flexible in any situations, to
come up with new ideas to inspire confidence, to have well established priorities, to
be a good team player.
More and more people have part time jobs such as: babysitter, waiter/
waitress, shop assistant, paper boy, taxi driver .Among the advantages of part time
jobs there might be:
 -the sense of financial independence
 -self reliance
 -getting to know other people
 -stronger links to real life

There are jobs in all the fields of human activity:

Industry :
o Worker
o Foreman
o Technician
o Engineer
o Economist
o Mechanic
o Computer operator
Services
• Carpenter
• Potter
• House painter
• Blacksmith
• Glazier
• Locksmith
• Chimney sweeper
• Cooper
• Plumber
• Electrician
• Dustman
• Watchmaker
• Dressmaker / tailor
• Shoemaker
• Cobbler
• Hatter
• Receptionist
• Milliner
• Furrier
• Seamstress
• Barber
• Hairdresser
• Dyer
• Dry cleaner
• Waiter/ waitress
• Cook
• Typewriter
• Accountant
• Clerk
15
• Designer
Law
 Judge
 Prosecutor
 Lawyer/ solicitor
 Notary
 Clerk of the court
Education and culture
 Writer
 Printer
 Publisher
 Bookseller
 Bookbinder
 Journalist
 Producer
 Playwright
 Stage manager
 Actor/ actress
 Painter
 Librarian
 Singer
 Dancer
 Musician
 Composer
 Conductor
 Sculptor
 Teacher
 Philosopher
 Linguist
 Critic
 Priest
 Cameraman

Commerce
 Shop assistant
 Butcher
 Baker
 Greengrocer
 Salesman
 Grocer
 Confectioner/ pastry cook

Transport and telecommunication

 Driver
 Sailor
 Railway man
 Airman
 Postman
 Phone operator
 Telegraph operator
 Air hostess

16
 Construction
 Architect
 Planer
 Bricklayer
 House painter

Agriculture and forestry

o Farmer
o Forester
o Agronomist
o Woodcutter
o Winegrower
o Fisherman

Health
• Physician
• Surgeon
• Oculist
• Dentist
• Chemist
• Nurse

Other jobs
 Policeman
 Fireman
 Officer
 Soldier
 Custom officer

I. Answer the following questions:

1. Who are those making and repairing things?

2. Advantages and disadvantages of the teaching profession?
3. What does the medical profession require?
4. What do computer operators do?
5. Whom does the profession of arms include?
6. What could the ideal job be?
7. What qualities would somebody need for the following careers: police
officer, politician, journalist?
8. Explain what a part time job means?
9. What are the qualities that business people look for when they want to
employ someone?
10. What will you look for in your future career?
II. Find out the correct definition for:
a. Accountant
b. Civil engineer
c. Computer operator
d. Babysitter
17
e. Stevedore
f. Economist

1. An engineer involved in construction

2.An expert in economics
3.A person qualified to keep a company’ accounts
4.A person who works in the docks loading and unloading goods
5.A person who translates information into a form computers can understand
6.A person paid to look after a baby

III. What careers are the following qualities needed for?

Determination Curiosity Skill

Patience Shrewdness Tenacity
Inventiveness Ability Courage
Faith Tolerance Perceptiveness
Self-denial Physical appearance Modesty

IV. Match the following columns containing interest jobs

1. scientific a. plumber
2. artistic b. nurse
3. practical c. accountant
4. welfare d. academician
5. computational e. novelist

V. What are the things you should do or shouldn’t do if you want to get a job?
2) Find out as much as you can about your future job.
3) Sit down immediately when you enter the room.
4) Be careful about the clothes you wear.
5) Make sure where the interview is since you should always be
on time.
6) Stress poor aspects of yourself.
7) Have a light meal before you go to the interview.
8) Have a drink; so you will pluck up courage.
9) Bring your school certificates or letters of introduction.
10) Smoke if you like.
11) Criticize your last boss.

VI. Describe your ideal boss:

• Strong/ weak personality
• Very ambitious
• Easily adapting
• Good organizer
• Modest
• Funny
• Well informed
• Efficient

What do you think of the following situations?

1. You don’t like your boss.
18
 2. You think your boss is rubbish.
3. The boss is picking on you personally.
4. Your boss is prejudiced against you.
5. Your boss seems to think you’re permanently on call.
6. Your boss is having a tough time and is taking it out on you.
7. Your boss takes credit for your ideas.
8. Your boss blames you for their mistakes.

VII. How important are each of the following to you in providing you with job
satisfaction?
 Challenge
 Meeting people through work
 Security
 The respect of colleagues
 Working conditions
 Status in your organization
 Learning something new
 Personal freedom
 Exercising power
 Helping other people
 Being promoted
 Making money
VIII. Advertisements for jobs vary considerably in style. There are advantages
and disadvantages in using the dynamic style.
Imagine that you are interested in applying for a job. And you have come
across the following advertisement. Read the advert and write two more.

Sdk International
Has an immediate career opportunity in your city:
SALESMAN
Candidates should have excellent verbal communication; skills in both English
and Romanian, strong personality and creativity and age should be under 30.
Please respond in English with your CV and Letter of Application to Sdk
International Romania CP 129 OP 16 Bucharest

Read the advert and write two more.

IX. Write a Letter of Application having the following as model:

Dear Sir,
With reference to your advertisement in the Adevărul of October 23 I’d like to
apply for the job
I’ m 26 years old and I have graduated a course in Economics and Law.
Last summer I acquired some professional experience working in the
accountancy department of an office automation equipment company.
I am fluent in English, German and French.
I am not married and I can work on weekends too.
I enclose a CV and hoping that I will suit your requirements I look foreword to
hearing from you.
Sincerely
Adrian Voicu

19
 X. A CV is essential if you are applying for a new job or for promotion; it
usually accompanies a letter of application.
Name
Address
Telephone
Date of Birth
Age
Nationality
Status
Education:
School
College
University
Results obtained
Post school qualifications
Post graduate qualifications
Languages
Experience/ achievements
Interests
Published works
References

How Can you Manage Difficult People?

At work and in our leisure time we are often confronted by difficult people
and awkward situations and they seem to come at us from every angle. How can we
cope? People do not change easily.
20
 What is a difficult person? In general they are people who demonstrate bad
behavior, who don’t care how their behavior affects others and who even use it to
their advantage.
Being difficult is effective because it works but in the short term. Long term
relationships need a greater complexity of behavior. Difficult people hope that due to
their behavior we will either start to give priority to their wishes or that you will leave
them alone.
Difficult people are not restricted to the workplace. Working relationships
have few emotional ties and are more detached whereas within the home environment
lurks a complex web of history and emotions.
When you deal with difficult people effective listening is very important; you
must be able to tune in to what he/she is trying to tell you. A good listening means: to
hear the message- genuinely listen to what is being said; to interpret the message- to
take in all aspects of body language, tone of voice and interpret their significance; to
evaluate the message; to respond to it.
It is not always the people that are difficult but sometimes it is the situation.
Working relationships and environments bring together a whole host of situations for
which you cannot always prepare. At some point in your career you will have to deal
with difficult situations. They come up at the workplace. Difficult colleagues create
added pressure.
Then, conflict can hardly be avoided. You also have to cope with difficult
managers and with difficult staffs.
Difficult people and awkward situations are everywhere; therefore, running
away is not really an option unless you want to live a hermit for the remainder of your
days. So, a far better strategy is to learn to deal with such situations; this does not
mean being weak or let everyone take advantage of you; it means having some firm
strategies for dealing with people and situations.

Advantages:
-the ability to work with all people
-being known as a person who can get things done
-being seen as flexible and someone who can “deliver’ whether that be
projects or products.
Disadvantages:
- being restricted as to whom you can work with
- being seen as weak and ineffectual and being given a wide
berth(mostly in times of promotion)
- being thought difficult yourself owing to your inability to work
effectively with others.

Answer the following:

1. Where do you encounter difficult people most?
2. How can you achieve a responsible and effective working relationship?
3. Are difficult people at work fixed in your life?

21
 4. Do you find that life will become easier each time you deal with a
difficult situation?
5. Who are the people at the top?
6. Is it still possible to bully people into doing what they want?
7. What kind of people are the negativists?
8. How important is body language?
9. Do teams need to celebrate success?
10. How can you win people’s respect and your own peace of mind?
11. How important is the environment when you deal with difficult
people?
12. How important is timing in tackling a situation?

Action Points
1. Think of three things that you could do now to make you feel more
confident about your ability to tackle the next difficult person or situation which
comes along.
2. Make a list of all the people you have difficult working relationships
with, then write one thing you like about them beside each name. Try at some point in
future to complement them on that one thing- it will build bridges for the future.
3. Reflect on the last time you were criticized by a colleague. How would
you handle that if the same thing happens again tomorrow? Are there lessons you
have learnt?
4. Think of three people who have displayed difficult behavior in the last
month. What did their difficult behavior have in common?
5. Have you ever seen anyone or been involved yourself in a bullying
situation at work? What could you have done to help or done differently?

The Media

It is impossible to imagine a modern society functioning without the media

which remains a powerful means of spreading news and information.
We want to get informed and the T.V., the press, the radio have turned out to
be great transformers of minds or society.
•Answer the following questions.
I. Which of the media provides most of your:
a.) International information.
b.) National information.
c.) Local information
d.) Entertainment
II. If you had to rely on only one of the media, which would you choose ?
Why?
III. You’ve heard about a local radio program in which ordinary people are
interviewed about their lives and opinions. Each week there is a different theme e.g..
Fear “my most frightening experience”
Achievements “the proudest moment of my life”
Disasters “the worst holiday of my life”
Leisure “my hobby is so important to me”
Add possible themes for the next programs.
Do you classify the news when you listen to or watch it?
Do you prefer listening or watching the news?
IV. List the negative effects of T.V.
22
 V. Mention some of your favourite T.V programs on T.V
You may refer to:
-documentaries
-soap operas
-bulletins
-topics
-broadcast
-commercials

•Answer the following questions:

1. Is T.V. a great transformer of minds or society?
2. Do you remember much from a T.V. documentary?
3. Can you name some ideal subjects?
4. Do you think that a night’s viewing is wonderfully forgettable?
5. Is T.V. harmful to children?
6. What effect does quantity of viewing have on people?
7. What is the most interesting documentary you have seen?
8. What do soap operas have all in common?
9. Are the news always interesting?
10. What topics do you prefer?
11. What happens when you watch a boring film?
12. Can you name some commercials that you liked most?
13. Do you watch politics?
14. Are you better informed after watching T.V.?
15. Do you consider that some subjects are out of place/

The Press

The newspaper remains a powerful means of spreading news and information.

The purpose of the press is to publish news and give information on politics,
finance, economics, arts, theatre, science.
Apart from the ideological difference, there is also one in the way they are
designed.
We read newspapers, magazines, revues, journals.
There are daily newspapers, weekly, monthly newspapers quality and popular
newspapers.

The newspaper:
-instructs
-informs
-reports
-caters
-entertains.
A newspaper article is based on:
1. a discussion
2. a description
3. a narrative or a combination of more than one of these.
The backbone of an article is:
a) headline/ heading opening
b) paragraphing
c) quoting
23
 d) ending
Journalists aim at covering five W’s and an H( who, what,when,where,
why,how) about the event.
Newspaper columns express opinions. Writers contributing to them are
famous and influential and they adopt their own style. They say that a column can be
appreciated after reading it in order to understand the attitudes of its author.
Popular headlines frequently use slang and punning references to an article’s
content while quality newspapers tend to provide more information in their headlines.
Both types of newspaper use common jargon words to save space.
Look at the headlines and chose the correct answer:
Day the jailbirds came out in sympathy
1. prisoners
a) were extremely co-operative
b) planned an escape from jail
c) supported a strike
d) were released from jail
Lazy’ doc gets a rap
2. The doctor has been
a) Criticized
b) Sued
c) Fined
d) Dismissed
Shoplift slur on Doris, 72
3. An accusation of shoplifting has:
a) Made an elderly woman furious
b) Made an elderly woman confused
c) Damaged her reputation
d) Damaged her health

•Answer the following questions:

-Are you a great reader of periodical press?
-What sort of articles can a newspaper carry?
-What kind of newspapers do you know?

• Supply the suitable words:

A person -who sends news, articles, reports to a newspaper
- who looks through the manuscript of an article, corrects it, suggests, changes
and prepares it for printing.
-sets up type for printing
-who buys a newspaper, a magazine regularly
-who is engaged in publishing, editing or working for a newspaper.

But:
Whatever the T.V./ video industry might now say, television will never have
the impact on civilization that the written word has had.
The book – this little hinged thing – is cheap, portable, unbreakable, can be
stored indefinitely, can be written and manufactured by relatively unprivileged
individuals or groups, dozens of different ones can be going at the same time, in the
same room without a sound.

Advertising

24
 Advertising is the greatest art form of the 20th century. It may be described as
a science of arresting human intelligence long enough to get money from it. It
stimulates debate and sometimes controversy. It has a powerful effect on the human
consciousness as it is around us on television, radio, cinemas, newspapers and
magazines. The way we dress, talk and behave sends a message to other people. It is
about manipulating public opinion and getting a message across to an audience so that
they will behave in a particular way.
The advertising industry has been in existence since the end of the 17th
century when newssheets carried printed advertisements for products and information.
Merchants returning from voyages overseas needed to generate markets for the
products they imported and so they had to advertise. By the end of the 19th century,
advertising was big business. Advertisements dominated the newspapers, posters were
commonplace and spawned a whole art form. But the new communication technology
gave the industry its biggest boost. Modern advertising exploits every medium of
communication. We tend to think of advertisements in terms of the mainstream media
but we also have posters, billboards, point of sale displays, direct selling and cold
calling by phone and fax, the internet which taps into worldwide audiences.
If you work in advertising , you will for sure be part of an influential band of
people who can change public attitudes and behaviour.
The heart of this industry lies in the advertising agencies. The large ones are
multinationals with in such far flung places as Beijing and Buenos Aires. If you work
in a small agency, you may be expected to do everything, including account
management, client liaison, concept development, creative work. In a larger one, job
roles will be more structured. You will have a specific role and a greater chance of
more formal career development. Advertising agencies vary in the services they offer.
The most familiar names are full service agencies but there are also other companies
that specialize in media services or focus on particular areas of advertising, such as
recruitment or business to business advertising.

Business need to advertise so that we should learn of the existence of

different products.
Advertising is aimed at conveying information to potential customers and
clients.
Advertising is used to persuade the public to buy.
At the lowest level people need food, shelter, warmth and sex. Then, people
begin to think about personal possessions and finally we move on to egocentricity.
The ultimate need is for fulfillment. This would come when we have all that
the advertisers say we so desperately need. For most of us it seems that that day will
never come!
Sometimes advertisements are misleading. Advertisers shouldn’t make untrue
statements about their products but they so often do it. They create a demand which
would not otherwise exist.
Advertising goes far beyond T.V. and hoardings, newspapers and magazines,
they enrich our lives.

• Answer the following questions:

 What are the arguments for and against modern advertising methods?
Are there any controls which you think should be imposed on advertisers?

25
  Glamour and humour are two of the appeals which ads try to make for
us. What other appeals do they make?
 In what other ways, apart from advertising are we persuaded to buy
one product rather than another?
 How do national newspapers benefit from advertising?
 How can window dressing be seen as forms of advertising?

Arguments for advertising

 It tells consumers about the products that are available, allowing them
to make a wider choice.
 It encourages competition between firms.
 By creating a wider market for products it makes large scale
production and sales possible.
 Media would be more expensive without it.

Arguments against
 It is expensive.
 It can be wasteful, sometimes involving the same firm advertising
virtually identical products against each other. (eg. washing powder )
 It can be misleading.
 It can exert control over media.
 It can put pressure upon people to buy products that they don’t really
need or can’t afford.
Advertising media
 National newspapers
 Regional newspapers
 Consumer magazines
 Business and Professional Directories
 Press production costs
 Poster and Transport
 Cinema
 T.V, Radio
* Banners on Internet sites
Television commercials
 The most effective medium for reaching large numbers of people.
 They have to be brief.
But:
 They cannot be very informative and display images rather than
information.
 They are selective – it is hard to reach a particular group of people
except for certain programs.
Radio
-advertising is cheap and can be effective in reaching certain types of people:
old people and housewives.

National press
- it is expensive too but if has a large geographical selectivity and allows
detailed information to be given.
Magazines and trade press
It is a way of reaching a specialized group of customers.
There are magazines for almost any interest and for any type of product.
Posters and hoardings
26
 -Effective if good locations can be found.

Sales promotions
-They include free gifts, competitions, give away samples, special offers.
Sponsorship
-Of the arts, public works, sport can be very effective in putting a product or
company name before the public.
Packaging and display
-In shops; they maintain existing sales but also encourage first time buyers.
Here are some advertisements.
a. “when you can’t say good bye!”
b. “from here to eternity”
c. “you know the name. It’s the face you may not recognize”
Enlarge on them.
•Make an advertisement for:
a. a shampoo
b. a drink
c. a book
d. a restaurant
e. a sofa

 Write some adverts that promise:

 you’ll feel happier
 you’ll enjoy life more
 you’ll have a nice holiday
 you’ll be rich
 you’ll be famous

 Make an advert as the one below:

Friendly, humourous boy 20, not very good looking but funny, seeks nice girl
to go swimming, dancing, walking.

 Complete the following sentences using your own words:

 Advertising can help a business to …………………
 A good advertising agency will ……………………
 Although newspapers and magazines ………………
 One of the weaknesses of human beings is that ……
 It is essential that the packing of a product should be ………

 This is the information about a job advertisement:

Asian Monetary Institute

Computer Programmer in the Statistics Division
The successful candidate will have
 A University degree in economics or statistics
 Work experience in banking and financial accounts
 Fluent English and Mandarin
Applicants should send a C.V., a recent photo and references from previous
employers to the Asian Monetary Institute P.O. Box 6707

27
 • Answer the following
1. What is Hello: a magazine or a newspaper?
2. Which country in the world spends the most on advertising: U.S.A or
Japan?
3. Why is William Caxton famous: he produced the first printed
advertisement in England or in U.S.A. ?
4. How did the earliest advertising take place?
5. Who invented paper?
6. How do we promote ourselves?
7. When did TV advertising come to Britain?
8. What is advertising industry entitled to do?
9. What is the difference between small and large advertising agencies?
10. What does modern advertising exploit?
11. What do advertising campaigns bring?
12. What is business to business advertising?
13. What does concept development refer to?
14. How important is timing in advertising?
15. Which are the advantages and disadvantages of advertisements on
the internet?

Make an advertisement for:

1. Your Town and the Surroundings.
2. A Museum
3. A Car.
4. A Hypermarket
5. A Magazine
Enlarge upon the following:
“ More than a watch. A dream that has come true!”
“ It is not just a broken vase. It is the silence you feel when your shoppings are
being protected with the credit card.”
“ They are the snapshots of a challenge, they are always with us!”

Meetings

Managers spend a lot of time in meetings.

In fact they would argue “too much time” a meeting = the gathering of a
group of people for a controlled discussion with a specific purpose.
1. People should call a meeting
a) When decisions require judging rather than calculation or expertise.
b) When pooling ideas improves the chances of good decisions.
c) If ‘acceptance’ of the decision is an important consideration for
members.
d) To discuss multi-faced problems requiring different skills or
specialists.
2. Essential elements of a meeting:
a) A purpose
- problem solving
- idea gathering
- training
b) An agenda

28
 c) Members
-the chairman – presides the meeting.
-the secretary
-the other participants
d) A result (most resolutions are voted by a mere show of hands. For
important decisions, the so called “constitutional majority” is necessary, amounting to
two- thirds of the assembly.
e) A report, the minutes

Every meeting has an agenda. Whoever controls the agenda controls the
meeting. If the agenda is not made public, the meeting may be hijacked by private
agendas: the result will be confusion, frustration and failure. A written agenda allows
everyone to focus on what they are to do: before, during and after the meeting. It acts
as a plan of the meeting to aid preparation, an objective control of the meeting’s
progress, a measure of the meeting’s success. The responsibility for setting the agenda
is the Chair’s. The agenda should follow a natural shape: the most difficult items will
be placed in the middle third of the meeting, when the group’s physical and mental
alertness are at their peak. The easiest items can be put at the end. The agenda should
also reflect the thinking process that we wish to follow as problem solving, evaluation
of information and conflict resolution will need different approaches.
An agenda contains the following:
- title of meeting, date, time, venue, apologies for absence, minutes of
previous meetings, matters arising from the previous meeting, other items to be
discussed and decided, reports from subcommittees, contributions from guest
speakers, any other business, date, time and venue of next meeting.
Minutes are considered: a reminder of what happened at the meeting, a
basis for discussion of matters arising at the next meeting, a guide for non attendees, a
permanent record. Taking minutes involves two skills: listening and note taking. In a
society that communicates through visual images, listening has become a highly
complex skill. Most people will be thinking and speaking at the same time and
sometimes they will all be talking at once. Only a small proportion of the words we
use carries the information we wish to communicate. Most people surround their
thoughts with words which express feelings, attitudes to the listeners or their
relationship to the group.
You cannot listen and take notes at the same time; your primary task is to
understand what is going on: most of your time in a meeting should be spent listening.
You should take notes only intermittently. The trick is to be able to note down only
keywords but you have to be attentive to record information properly.
The minutes have to be written as soon as possible after the meeting and they
should follow the agenda exactly.

Opening a meeting

• Good morning ladies and gentlemen

• If we are all here
29
 -shall we start
-make a start
-let’s start
-I think we should start
• First of all I’d like to introduce
let me introduce

two colleagues from our Munich office

Would you like to say a few words about yourselves?
•Right, thank you.
•Have you all got a copy of the agenda?
•If everyone has got a copy of the agenda, let me first explain the purpose of
the meeting.
•The purpose / aim / target of the meeting is to …
•Now; let’s look at the agenda in detail.
•As you can there are 5 main points / items.
•I suggested that we take them in the following order.
•As we have a lot to get through this morning, can we agree on ground rules?
•I suggest the following ……
Moving to the first point
Handing over to another person
Bringing people in ( encouraging hesitant speakers ) “would you like to add
anything?”
Stopping people talking
 One at a time please!
 We can’t speak at once. John first, then Mary.
 Would you mind addressing your remarks to the chair?
 Could we have some other opinions?
 I think that’s clear now. We’ve all got the point. Shall we move on?
If you didn’t hear you can say:
• I’m sorry. Would you mind repeating?
If you didn’t understand you can say:
• I’m sorry. I don’t quite follow you. Could you go over that again?
If you feel the speaker is being vague or imprecise you can say:
• What exactly do you mean by?
Preventing irrelevance
•I’m afraid that’s outside the scope of this meeting.
• We lose sight of the main point.
• Keep to the point.
• I think we’d better leave that subject for another meeting.
Keeping on eye on the time
• We’re running short of time.
• There’s not much time left
• Could you please be brief?

Moving to the next point

• Let’s move on to the next point!
• Would like to introduce the next point?
• Well, I think that covers everything on that point.
Let’s move on!.
Controlling decision-making
• I’d like to propose that…
30
 • I’d like to propose the following amendment.
• Can we take a vote on that proposal?
• All those in favour. Right?
• All those against. Right?
• Well then we agree / with some reservations.
• Well then we agree / unanimously.
• Well it seems that we are broadly in agreement that…
Indicating follow up tasks.
• Do you think you could…?
• How about preparing some figures for the next meetings?
Closing
• I’d like to thank Mr. X & Y for coming over from Paris

Participating in a Meeting

1.Getting the chair’s attention.

• I’d like to comment on that.
• May I have the floor for a moment?
2. Asking for and giving opinions.
• I’m convinced that / sure / positive.
• I strongly believe that …
• I have absolutely no doubt.
• I definitely think that ….
• I really do think that …
• To my mind …
• As I see it …
• From my point of view …
• Am I right in thinking that …
• Would I be right …
• Don’t you think that …
• Are you absolutely sure / convinced / that …

Sample sentences
• In my opinion we shouldn’t rush into a long term agreement before
considering the implications.
• I tend to think that the loss of key personnel has damaged their confidence.
• Do you think that national advertising is the right way to launch our
products?

3. Agreeing and disagreeing

• I totally / agree with you / accept fully.
• I’m in total agreement.
• I’m in favour of that.
• Up to a point.
• To a certain extend.
• You may / could / be right but …
• That may be so, but …
• I can’t / agree / accept.
• I don’t /agree / accept.
• I can’t go along with …

31
 Sample sentences:
• I have talked to the foremen and they completely agree with the idea to set
up a quality circle.
• We are in agreement over the payment terms.
• I agree with Peter to a certain extend but I still feel that we are exposing
ourselves to unnecessary risks.
• I’m afraid we can’t agree to the terms in your latest offer. Please reconsider
them and get back to us.
• A productivity bonus for the workers? I totally disagree with that type of
incentive.
4. Advising and suggesting
• Shall we get started?
• Why don’t we move to the next point?
• Let’s postpone this till...
• I suggest we close the meeting.
• We should meet again next …
• Why don’t you present it at the next meeting?
• How about …
• I would recommend …
• It’s advisable to …
• He suggested that we analyze the threats and opportunities.
Sample sentences
• I don’t think we’ve got enough for all the points in the agreements.
• Why don’t we discuss point 4 at the next meeting?
• First you should do an audit of your present operations!
• The consultant suggested that we should focus on the threats to our business.

5. Requesting information and action.

• Can / could you tell me …
• Will / would …
• I’d like to …
• Do you happen to know …
• I wonder if you could tell me …
16. Write a complete report having the following as a model.
Report
Meeting held on 15 October 2000.
Location: Danavian Insurance Company, Stockholm
Present: Ulf Edberg (Treasurer, Denavian) self
Agenda: Letter of Credit Facility.
Client is not yet sure about company requirements for 2000.
Expressed worry, however, over the increase in our commissions and
estimates that this will cost Denavian three times as much as before.
Client pointed out that the counter value of SEK 800 million is deposited with
us. Currently pays 0.24% for outstanding volume of standby letters of credit but
changes will mean paying 0.75% flat on this amount. Requested that we look into the
possibility of setting up a trust found with Denavian’s securities. Volume of letters of
credit likely to fall quite heavily because of increased charges. I promised to
investigate the possibilities of setting up a trust fund and to contact the client early
next month with our outline proposals.

What do you think about the following:

32
 1. “Training and experience go hand in hand if we want to reach a high
level of responsibility in our career.”
2. “Managers spend too much of their time in meetings and they may
be sometimes too confident”.
3. “Don’t learn from books but from practice and make things
happen”!
4. “Team work and the know how offers you stability”.
5. ” Everybody has to be aware that competition makes us tougher
and more resourceful.”

Market

Originally it was a physical place where buyers and sellers gathered to

exchange goods and services.
To an economist, a market describes all the buyers and sellers who transact
over some goods or services.
A market is:
-the set of all actual and potential buyers of a product
-the set of buyers and an industry in the set of sellers.
1) Potential market – the set of consumers who profess some level of
interest in a particular product or service.
2) Available market – the set of customers who have interest, income and
access to a particular product or service.
3) Served market – the part of the qualified available market the company
decide to pursue. The company may decide to concentrate its marketing and
distribution efforts on Central and Eastern Europe.
4) Penetrated market – the set of consumers who have already bought the
goods.
If a company is not satisfied with current sales it can consider a number of
actions. It can try to attract a larger percentage of buyers from its served market.
It can expand to other available markets.
It can lower its price to expand the size of the available market.
It can try to expand the potential market by increasing its advertising.

Marketing

It is a creative management function which promotes business and

employment by assessing needs of the end user of products or services, initiates
research and development and produces products or services which can be profitably
provided to service market requirements. It coordinates the resources of production
and distribution of goods and services, determines and directs the nature and scale of
the total effort required to sell profitably the maximum production to the ultimate
user.
This is the process of:
-identifying
-maximizing
-satisfying consumer demand for a company’s products.
Marketing a product involves:
-anticipating changes in demand
-promotion of the product
33
 -ensuring that its quality, availability and price meet the
needs of the market
-providing after sales service.
Marketing can be split into four components:
1.research
2.strategy.
3.planning.
4.implementation.
Marketing and selling influence and control almost every part of a company’s
activities.
Marketing is customer rather than product focused. That means understanding
how everything about your product or service impinges on the customer. It is not just
the product itself that counts, but the way in which it is presented, delivered, repaired,
replaced. Marketing touches on many areas of product management; the marketing
department will be involved from the very beginning of a product’s life in
determining its image, deciding when, where and how it should be launched and
monitoring its success in the marketplace.
Market research is based on the idea that if you find the customers’ needs and
wants and then use the information to provide a package that meets these, then you
will be no doubt successful. There are two main types of research: desk (local library)
and field research (phone research, written questionnaires, street interviewing, face to
face interview, product tests, consumer panels, focus groups).
Marketing offers a range of career opportunities at different levels for people
who are interested in making things sell. In a large organization, the marketing
function will work in tandem with other functions, such as buying, logistics,
distribution, retailing. If this is the chosen field, then you will be working at the heart
of your company and will gain valuable experience.
Marketing staff may work on re-branding a product if it starts to loose
popularity or launching the product into new markets overseas.

All kinds of products and services are actively marketed these days, even
public services and monopolies.
Think of eight products ( goods and services ) that are produced or provided in
your city or region and answer the following questions:
• What competition does each product face?
• What is the image of each product?
• What is the image of the company that produces it?
Fill in the gaps using the words from the list:
profitable,. price, promotion, need, image, design, place, product, creative
process, satisfy.
1. What is marketing? Marketing is the ……….satisfying customer needs……
2.What is ’the marketing mix’? It consist of ‘the four P’s’: providing the
customer with the right P …. at the right P ……. presented in the most attractive way
( P…..) and available in the easiest way ( P……).
3. What is a product? It is something customers buy to…… a …….. they feel
they have. The ……. and the …… of the product are as important as it’s specification.
• How strongly or weakly is each of the products marketed?
• Where is each product advertised?
e.g.
a. A brand of beer or soft drink.
b. A grocery product.
c. An industrial product.
34
 d. A service
e. A place of entertainment
f. A public service
g. An educational service
h. A financial service
• What sort of questions are most useful in a sales meeting?
• What answer is each of these questions likely to provide/
• Which of the questions are likely to give more useful information?
Give your own examples.
#In marketing a product we should:
• analyze statistics
• conduct market research
• devise a questionnaire
• carry out a market survey
• consider the strengths and weaknesses
• devise a marketing strategy
•draft an advertisement
 Comment on the advertisements
•Iceland as nature intended
•Sweden refreshing
•Malawi the warm heart of Africa
# Make a list of five or more regions or countries that are in competition with
yours.
Design a questionnaire to find out about people’s attitudes to your region and
to its competitors.
The people you ask should rate each destination for its qualities on a scale 1 to
10:
Good value for money
Good entertainment
Friendliness
Culture
Easy to get to
Health and sport
Hospitality
Beautiful scenery
Peace and quiet
Uniqueness
Ask them to describe each place in one sentence like this:
“When I think of Sweden I think of cold winds and a flat landscape”
#The promotion of a product involves considering it as a “total product”; its
brand name, presentation, labeling, packaging, instructions, reliability, after sales
service.
Promoting a product involves developing a “Unique Selling Proposition”
( USP ): the features and benefits which make it unlike any of the competing products.
There are 4 stages in promoting a product (AIDA):
a) Attract the Attention of potential customers.
b) Arouse Interest in the product.
c) Create a Desire for its benefits.
d) Encourage customers to take good Action.
# Did you know that:
1) The world’s largest advertising agency is British Saatchi& Saatchi.

35
 2) The world’s greatest consumers of coffee are the Swedes. (8 kg per
person per year).
3) The world’s largest employer is Indian National Railways with 2
million employees.
4) 99% of all business is Japan and Switzerland employ an average of 15
people.
5) The world’s biggest manufactures of motor vehicles is Japan.
6) Over $1 billion a year is spent on advertising in the USA and the rest
of the world is over $1.5 billion.
7) The world’s largest airport is Jeddah (by area) or Chicago (by number
of passengers)
8) Most Japanese companies pay professional trouble- makers not to
cause trouble at their shareholders’ meetings otherwise the meeting is sure to be
disrupted.
9) The airport that handles the second largest number of international
passengers in the world is Gatwick. Number one is Heathrow.
10) The average person over 15 smokes, 1,750 cigarettes annually.
11) The world’s number one exporting country is Germany.
12) The world’s biggest restaurant chain McDonald’s serves about 15
million hamburgers a day at its 9000 restaurants.
13) The world’s largest food company is Nestle.
14) The world’s greatest and busiest port is Rotterdam.
15) The world’s greatest beer drinkers are the Germans.
# how would you deal with Mr. Call. as – he keeps raising objections to your
products: he say they are too expensive, that he’s worried about your after sales
service, that your new technology may not be reliable, that your design may not
appeal to his customers.
# What would you do if you worked in marketing for “Dentallo”.
Dentallo is a medium size firm marketing toothpaste and toothbrushes. Your
Dazzle toothpaste and Protect toothbrushes are market leaders in the domestic market,
but due to heavy competition from multinational companies with big advertising
budgets you are no longer able to reach your export sales targets. Market research
shows that a large proportion of consumers aboard find your product image is old
fashioned and dull though your prices are lower than the competition.

Travelling

People travel abroad on business or for pleasure by road, by air and by sea.
They travel at their own expense or at the firms’ expense, they arrange
accommodation, they make travel arrangements, they even find out the “romance” of
travel.
Travel is a solitary enterprise: to see, to examine, to assess.
Travelling on your own can be very lonely so even if we crave for a little risk,
some danger, an experience we should have companions.
• What are the advantages / disadvantages / of travelling:
-alone
-with a companion
-in a group with a guide?
• Can travel broaden the mind? How?
• Advantages and disadvantages of travelling on business.
• Speak about your experiences and feelings about:
-staying in a hotel
36
 -driving a car abroad
-traveling by train
-visiting new places
-leaving out of a suitcase
-eating in restaurants abroad
-weekends away from home
-waiting for a delayed flight
• Which are enjoyable, exciting?
• Which are stressful, annoying, depressing?
• What difference does it make if you’re on holiday and not traveling on
business.
• Do you agree or disagree?
-take hand luggage not large suitcases.
-it’s essential to organize everything before you travel.
-you should take a walkman and plenty of reading matter.
-learn as much as you can about the customs of the people.
-it’s important to arrive a day earlier to give yourself time to adjust and
acclimatize.
-be careful about local food and drink.
-don’t get involved in a political discussion.
-treat everyone you meet with respect.
-“never forget that you’re a foreigner”
Add some more pieces of advice.
• How many of these tips for travelers are worth following?
-never get to the airport too early in case the plane is late.
-always take a good long book to read on a journey.
-always try to get some sleep on the plane.
-never take more than one suitcase on a journey.
-always try to do some work on the plane.
-never drink alcohol on a plane.
-you can avoid losing any important document by keeping it in your hand
luggage.
-you can save money on a hotel accommodation by getting rooms at a
discount through your travel agent.
-you can avoid delays by taking carry on luggage onto a plane.
-always have some water with you.
• You may depend on a travel agent or your firm’s travel department to make
your travel arrangements but there may be times when you want to change an
itinerary for a visitor or yourself.
Some phrases you might need to use:
 I want to fly to Miami on the 10 of the next month, returning on the 20.
 I’d like to reserve a seat on Flight number …
 I’d like to change my reservation on Flight no..
 I need to get to the airport / railway station / as quickly as possible.
 One coach class / round trip / one way to Huston.
 One first class / club class / tourist class return / single.
 Is it too late to check in for flight nr. E009?
 Which platform / track / gate does the 13: 40 to London leave from?
 Can you tell me what time flight nr. … is due to arrive / depart/ ?
• Who would you speak to in each case to get the information you require?
What would you say?
-You have heard that flight BZ 431 is delayed.
37
 -You want a rail ticket to Manchester.
-You want a plane ticket to Paris.
-You are in hurry to get to the airport.
-You have arrived at the airport three hours before your flight.
-You have three minutes before your train leaves.
-You want to make sure of a hotel room in Madrid before your flight departs.
• Do you know:
-where a visitor could go on a free day or at the weekend?
-when the museums are open?
-how a visitor can get tickets for a show?
-which restaurant to go?
-where a visitor can buy local specialities to take home?
• Imagine you’ll welcome two people from the other side of the world who
haven’t left their own country before. They’re coming to work with you for a few
months.
Make a list of customs and habits that will seem strange to them and which
will be different from their country. What will you explain them about:
-eating
-public transport
-shopping
-work
-entertainments
-sports
Accommodation
• Where can you find accommodation:
-in comfortable chalets/villas/?
-private houses / bungalows /?
-motels/
-holiday camps?
• What kind of hotel do you prefer to stay in on a business trip?
• What facilities do you know? Chose those you are interested in:
-buffet style breakfast
-fitness centre /gym/
-jacuzzi &sauna
-secretarial service
-video movies /T.V. /
-restaurant serving local specialities
-cocktail lounge
-free car parking
-photocopying
-self service cafeteria
-24 hour coffee shop
-room service
-swimming pool
-lifeguard
-golf course
-beach
Travel and hotels have always been closely related.
We place hotels in four groups:
 Commercial hotels providing services mainly for transients. Most of
them traveling on business.

38
  Resort hotels located in vacation areas providing recreational
facilities of their own.
 Conventions hotels which service conventions meetings usually held
yearly of business or professional groups.
 Resident hotels where people can rent accommodations on a seasonal
basis or even permanently.
Each hotel has got:
-a large lounge furnished with settees and chairs.
-a lobby with the reception desk.
-a service bureau.
-information desk.
-foreign exchange desk.
-waiting room with new stands.
-post office desk.
-souvenirs shop.
-lifts.
-restaurants
-bars.
-modern convenience.

• The hotel staff include:

-manager
-assistant manager
-night auditor
-cashier
-desk clerk
-reception clerk
-bellboy
-porter
-doorkeeper
-chambermaid
-houseman
-cook
-waiter /waitress
-storekeeper
-wine steward
-bartender
• What sort of rooms can you book in a hotel.
-single
-double
-suites
-rooms with bath /shower
-room looking out to …
• What modern convenience can you have in a hotel?
-central heating
-laundry service
-air conditioning
-disco
• Name some of the do’s and don’ts of the hotels. Start with:
-when going out you should not forget to leave the keys at the desk.
-you must pay the bill before leaving the hotel.
-rooms must be vacant by 12 am on the day of departure.
39
 -you are requested not to disturb other people’s rest.
-complaints should be made to Reception or to the manager.
• Describe a hotel that you liked most.

Travelling by Train

Railways today still carry the bulk of passenger and goods traffic.
It is one of the cheapest ways of transporting freight over long distances.
The railway station is provided with:
 A waiting room
 An inquire office
 Parcels office (heavy luggage is registered and labeled)
 Left luggage office
 Book stalls
 Post office
 Telephone booth
 Booking office
 Catering facilities ( restaurant, snack bar, coffee room, tea room..)
 Time table
 Shop
The passengers hurry along the platforms getting on or off the train; the
porters carry the luggage to the train or push it on their trucks to the luggage van.
The luggage van is placed behind the engine, then the mail van and the
passenger carriages with smoking and non smoking compartments, a dining car.
The passengers’ compartments have numbered seats.
At intervals a guard or a special inspector checks the travelers’ tickets.
The train arrivals and departures are posted up in time, the passengers being
invited to the trains by loudspeaker.

• What kind of trains can passengers get on?

Express trains
Fast trains
Slow trains
Through trains
Commuting trains
• What luggage do you usually have about you?
Light luggage
Heavy luggage
A suit case
A truck
Hand luggage
• Under what circumstances do you book?
A single, one way ticket
A return, round trip ticket
A platform ticket
A season ticket
• I wonder whether you have watched the rush in a railway station.
People looking up members in the Telephone Directory.
People consulting the time table.
People booking in advance.
People getting on and off the trains.
40
 Porters seeing to the passengers’ luggage.
The incoming and outgoing trains.
Trains pulling out the station and picking up speed.

• Find the definition for each of the words:

a. railway
b. railroad
c. railhead
d. bulk
e. station
f. bulky 1. U.S. system using trains to carry
2. end of a railway line
3. B.E. system using trains to carry passengers & goods
4. large and awkward
5. large quantity of goods
6. place where trains stop

• Describe your last journey by train using the following vocabulary:

First class sleeper
Through train
Booking office
Luggage rack
Smoking carriage
Return ticket
Entrance gate platform
Ticket collector
Breath talking landscape
Unique landscapes To travel light
To run on time
To change times
To delay
To enjoy
To put out / off the lights
To have a change

Travelling by Air

It is most comfortable and speediest of all means of transport.

Airlines are constantly improving their services.
They are concerned about improving check in facilities hiring well trained
deck-in personnel providing excellent in flight services such as: cabin services, seat
comfort, in flight entertainment, good catering.
It is advisable to book tickets in advance. You can book :
A first class (P) seat
A Business class (C)

An Economy class (Y)

Before boarding the plane the passengers must have their tickets and passports
checked, their luggage inspected, weighed and tag attached to it.
The passengers can avail themselves of the various services offered by the
airport:
41
  the exchange office
 the duty free shop
 the book stall
 the restaurants
They will be waiting for the announcer calling the flight.
The stewardess will take the passengers to the concrete runway where the
plane is ready to take off.
• What sort of classes and tickets can you book on any flight?
First class (P)
Business (C)
Economy (Y)
Single –one way
Return –round trip
Direct –point to point
Open dated return
Dated ticket
• Which are the airport formalities?
Flying ticket checking
Luggage weighing
Customs control formalities
Passport control
Security check
• Why are these necessary when the plane takes off?
Fasten your seat belt
Stop smoking
Listen to the instructions given by the air hostess
• What are these for?
The information desk
The currency exchange office
The public address system
Telephone booth
• Can you explain?
Aircraft
Aircrash
To board a plane
To book a ticket
Check in facilities
Catering To hit an air pocket
Liable to duty
Non stop flight
Point to point flight
Runway

• Find the definition for the words and expressions:

1) A direct flight
2) Catering
3) Load factor
4) Open dated ticket
5) Check in facilities
6) Break even point
7) Return ticket
8) Long haul
42
 9) Yield a) a point where sales cover cost but do not make a profit
b) one way flight
c) round trip ticket
d) amount of weighed factor
e) long distance
f) to book a ticket leaving the date of the return open.
g) supplying food ready to eat
h) profit
i) places where passengers give in their tickets for a flight

• You want to fly from Bucharest to New York.

Book a flight.
Write down a short dialogue.
 Why do people prefer to travel by air?
 What might a travel by plane depend on?
 What aspects are the airlines all over the world concerned about?

The Customs System

Customs clearance consists in the following operations of the means of

conveyance to customs units and production of the accompanying documents.
- customs inspection of the means of conveyance and of the merchandise
carried.
- the checking of customs declarations.
The customs Tariffs are applied when clearing the goods through the customs
– then customs duties are being charged in conformity with the guide to the law of
Import Customs Tariffs.
The guide enters the goods under several columns:
 tariff heading and subheading
 description of the goods
 rate of duty
Customs bodies should check whether the merchandise is in accordance with
the customs declaration and transport documents.
Customs duties are charged on the customs value of the goods. If the goods
fall under customs restrictions they are liable to duties, if they don’t exceed the free
tax quota they are un dutiable.
Natural persons may bring in the country personal effects which are duty free.
The Customs Regulations prohibits the introduction into the country of: arms,
narcotics, toxic substances, radio transmitters and receivers, documents and printed
matter under law restriction.
It is prohibited to take out of the country securities, goods that belong to the
national cultural patrimony.
Any traveler who has items coming under customs restrictions should declare
them either orally or in writing on a special form.
• What should the officer do in case of contraventions?
-fine you
-confiscate your objects.
-charge a penalty for dutiable goods, for deliberate concealment of prohibited
goods.
• How can your passport be?
-in order
43
 -needs the entry / transit visa
-needs no visa
-has expired

• Chose the correct definitions:

a. customs
b. to go through the customs
c. customs clearance
d. customs formalities
e. customs officers
f. customs tariffs
g. customs union
1. agreement between several countries that goods can travel between
them paying duty.
2. the government department that organize the collection of taxes or
imports.
3. to pass through the area of an airport (port where customs officials
examine goods).
4. documents given by customs to show that customs duty has been paid
and the goods can be moved.
5. declaration of goods and examination of them by the customs.
6. people working for the customs.
7. list of duties to be paid on imported goods.

• Make up a dialogue using the following vocabulary:

I came from …
I’ll spend a few days as a tourist
Your passport is in regular order
I have no cash
Liable on duty
Personal effects
No charge on
On condition
Prohibited goods
We are through with the customs
Clearance
Restrictions
To register
Visa

Money

All values in the economic system are measured in terms of money.

Our goods and services are sold for money and money is in turn exchanged for
other goods and services.
Coins are adequate for small transactions, while paper notes are used for
general business.
We also have a wider sense of the word “money” covering anything which is
used as a means of exchange.
Originally, a valuable metal (gold, silver, cooper) served as a constant store of
value; even today, the American dollar is “backed” by the store of gold which the US
government maintains.
44
 As gold has been universally regarded as a valuable metal, national currencies
were many years judged in terms of “gold standard”
Today national currencies are considered to be as strong as the national
economies which support them.
Valuable metal has been replaced by paper notes. They are issued by
governments and authorized banks and are know as “legal tender”.
Cheques and money orders perform the function of substitute money and are
known as “instruments of credit”
Credit is offered when creditors believe that they have a good chance of
obtaining legal tender.
If a man’s assets are known to be considerable then his credit will be good. If
his assets are in doubt then it may be difficult for him to obtain large sums of credit.
The value of money is basically its value as a medium of exchange or its
“purchasing power” which is dependent on supply and demand.
The demand for money is reckonable as the quantity needed to effect business
transactions.
An increase in business requires an increase in the amount of money coming
into general circulation.
But the demand for money is related not only to the quantity of business but to
the rapidity with which the business is done. The supply of money is the actual
amount in notes and coins available for business purposes. If too much money is
available, its value decreases and this condition is known as “inflation.”
The unit of English coinage is the pound sterling which is worth 100 new
pennies.
The symbol £ is always placed before the figures.
The abbreviation of “p” is written after the corresponding figures.
The Bank of England issues banknotes for £1, £5, £10, £50 and £100. there are
three bronze coins ½ (half penny), the one and two new penny, two copper- nickel
coins: the five and ten new penny. Then there is the 50p. coin.
# The unit currency in U.S.A:
dollar – a paper bill or a silver coin.
- banknotes of $ 1, 2, 5, 10, 20, 50, 100, 500, 1000
- coins 1¢ 5¢ (nickel), 10¢ (dime), 25¢ (quarter), 50¢ (half dollar) are made of
silver.
# How can you ask for a price?
• How much is it?
• How much does it come to?
• How much do I owe you?
• How much do you charge?
• It’s very expensive…
• It’s rather cheap…
• I’m short of money, can I buy cheaper?
# Say whether these statements are true (T) or false (F)
• The U.S. dollar is a constant store of value.
• Instruments of credit are accepted because they can be converted easily into
substitute money.
• The purchasing power of money depends upon supply and demands.
• The demand for money is related to the rapidity with which business is done.
• You can earn interest on a current account.
• Banks lend money to depositors who need capital.
• The main profits of a bank come from lending money at a fixed rate of
interest.
45
 • Money is described as “liquid” because it is compared to flowing water.

Everyone borrows money. And when you do this you improve your lifestyle.
It may be a risk but it also promises great rewards. Where do you borrow money
from? Banks are considered to be profit making machines. They come in all shapes
and sizes and they help you.
Lending money becomes one of the main functions of a bank. It is the interest
earned from banks that brings in most of the revenue to pay the expenses, including
staff salaries of the bank and give a sufficient surplus to pay shareholders a dividend
and retain funds in reserves accounts for the expansion of the bank. Before any loan is
granted, the following questions must be answered by the customer:
- how much is required?
- the purpose of the loan
- length of time the advance is requested
- the source of repayment
We have the following sources of funds for the Romanian banks:
- bank deposits(Short term, long term)
- borrowed funds
- own funds(own capital, supplementary capital)
The funds that are put out on loans belong to customers. It is their money that
is put at risk, so if a bank is making bad or unprofitable loans, this will be reflected in
the deposits.
Types of credit or loans:
1.Country loans.(in order to achieve national, political, social and economic
goals)
2.Corporate lending.( such as loans for:
- working capital and fixed assets
- overdrafts
- term loans
- syndicated loans
- revolving credit
.
Types of credits:
We can have:
1. Revocable credits( may be cancelled or amended at any time without
prior notice being given to the beneficiary)
2. Irrevocable credits(can be cancelled with the agreement of all parties)
3. Sight credits(allow for payment to be made as soon as documents are
presented)
4. Deferred credits(it allows for payment at a future date without calling
for a Bill of Exchange).
5. Transferable credit( it can be transferred by the original beneficiary to
one or more second beneficiaries).
6. Red clause credits(incorporate a special concession to the beneficiary
allowing the advising bank to advance a percentage of the total credit amount before
presentation of the shipping documents).
7. Revolving credit(the amount can be renewed or reinstated without
specific amendments to the credit being needed).
8. Stand by credits(acts as a guarantee by the issuing bank to the overseas
beneficiary against defaults by its applicant customer).

The main principles of granting credits are:

46
 - the banking prudence
- the creditworthiness of the borrowers
- the credits granted should be profitable both for the bank and for the
borrowers
- the credits have a destination precise and mandatory which cannot be
changed by the borrowers.
- credits are granted under guarantees that are written in the credit
contract.
- The bank shall reserve the right to verify its customers.

Forms of Payment:
1. Cash( small amounts can be sent in note form very easily, impractical
and expensive if in large amounts).
2. Cheque(remittance is quick and simple, exchange risks unless issued
on appropriate currency account, delay in receipt of proceeds by beneficiary where
bank insists on collection)
3. Banker’s Draft( issue process is straight forward; available in major
currencies, expensive to purchase, involves lengthy formalities including giving an
indemnity to the bank)
4. International Money Order(cheap, issue process is quick, but
appropriate for smaller amounts up to GBP 1000 or USD 2,500..)
5. International Payment Order(no limit of amount, documents can be
attached, payment is inter- bank, therefore secure, not appropriate for urgent transfers)
6. Telegraphic Transfer(quick, no limit on amount, an expensive
method)
7. Giro Cheque(inexpensive, but can be lost or stolen, remittance is quick
and simple)
8. Giro Transfer(simple and quick, number of countries limited)
9. Postal Order(exchange risk for the recipient, can be lost or stolen,
number of countries limited).

How ca you define a bank risk?

It is that risk that the bank is being confronted with in its current operations.
Banks are subject to all the risks that their customers face. The most significant is the
the credit one that arises from lending to individuals, companies, banks, governments.
The main types of risks involved in the banking activity are:
1. The Financial Risks
2. Delivery Risks
3. Environmental Risks
Financial risks:
- Credit risk
- Interest rate risk
- Liquidity risk
- Foreign exchange risk
- Capital risk

Delivery risks:
- operational risk
- technological risk
- new product risk
47
 - strategic risk
Environmental risks:
- defalcation
- economic
- competitive
- regulatory
Some British authors divide the main risks into :
1. product market risks
2. capital market risks
Product Market Risk
- credit risk
- strategy risk
- bank risk
- operating risk
- merchandise risk
- human risk
- legal risk
- product risk

Capital Market Risk

- interest rate risk
- liquidity risk
- currency risk
- discount risk
- basic risk
We may also have:
• The fraud risk
• The country risk
• The market risk

Electronic Banking Services

Electronic banking- essentially automated payment by computer - will
increase in importance and volume. The main forms of electronic banking services
are:
Telephone Banking
Such a service represents a competitive area and it may be either voice-
activated (i.e. the computer is expected to react to customer's voice and comply with
his or her instructions accordingly), or electronically activated ( the client speaks over
the microphone of their telephone and dials certain numbers meaning a certain
transaction). The telephone banking can offer transfers of funds, payments of regular
bills, applications for loans and overdrafts etc.
Bankers Automated Clearing System
This system is especially used for funds transfers between the participating
members and essentially operates standing orders, direct debits, payment of wages,
salaries, rentals, trade debts, etc. Bankers Automated Clearing is supplied with a
magnetic tape containing the details of the accounts to be debited or credited. It sorts
them into bank orders and, then, it provides each paying bank with the relevant
details, a printout being also
Electronic and Internet -Based Payments

48
 Internet banking is a banking product, which follows the older
solutions like e banking. E-banking represents a solution which is technologically
obsolete, supposing at the client level of that service a phone line and a computer
dedicated for such an operation, able to fulfill technical needs quested by the bank and
to run (execute) a software program necessary for lie optimal communication with the
client's bank. In that way, the person who will handle the e-banking application have
to work only from that computer which it is not very good for someone with a
dynamical job and with many physical places of work even in different localities or
countries.
Despite e banking, the I-banking (Internet-banking) supposes the usage
of a computer from wide world on which is installed a browser and an Internet
connection. The performances of such a solution are far away better also for the bank
and for the end user (the client).

The costs are calculated to a number of 100 banks from the United
States of America which are using all the channels, but the costs are represented at a
world wide level because they are common to all the banks that promote the
electronic pazments.
World tendencies

63 % from the great banks are offering Internet banking services and
59 % are offering electronic banking services. Not all Internet banking institutions are
charging the services, but most of those, which do, are starting to use a monthly
subscription for the base services . 61 % from the firsts 150-th banks of the United
States of America are offering on-line banking services, 15 % don't have included in
their strategies for the future the offer of on-line banking service and 19 % already
announced their intention to provide such services by the end of 2001.
In May 2000, Forrester Research estimated that by the end of the year
2003 there will exist over 20 million of home users in the United States of America
which will use the I-banking services, that means around 30 % of the profits obtained
from retail.
At the end of 2000, the specialists from Data monitor estimated that at
the end of the year 2005, around 20% of the world population would be connected at
the Internet.
Regarding Europe, since March 19, 2001 the British group Vodafone
has announced that the first transaction pilot project that will use the digital signature
using the mobile phone will start in April 2001 together with the Radio
Communications Agency. That announcement was made at a short period of time
after the British Government announced that it intended to allow all physical persons
to pay their taxes throw an electronic environment, using digital signatures.
On July 19, 2001, the cut-off time until which all the member state of
the European Union had to implement the Directive regarding digital signature
expired. The ending of that period will lead inevitably to a new beginning in the
development of electronic transactions field and in the e-business area.

As a consequence of that, the banks renounced at their territorially

development and instead they are concentrating on the new products which are based
on new technologies and the Internet development. So, the banks are reorienting their
investment politics to new technologies. That supposes the reconsideration of the
concept of territorial network of a bank, which is about to become an informational
network. At the end, the new technologies allow the banks to be closer to their clients
and in the same time to provide them more comfort and a depersonalization of the
49
services due to the elimination of the classical physical direct relation between the
account officer and the bank's customer.
SWIFT
These initials stand for the Society for Worldwide Interbank Financial
Telecommunication, which is an international organization whose members consist of
several hundred of the largest international banks. The society, which was created
under Belgian Law and located in Brussels, was formed to accelerate the transfer of
funds and other messages between the member banks. .
The system works by means of a telecommunication link between the
computer systems of the banks, which allows the rapid transmission of messages. The
system is used to execute telegraphic transfers previously sent by cable or telegraph
and may also be used for international payment orders/airmail transfers at the
discretion of the bank, making for a much faster execution of a customer's
instructions. When instructions are transmitted in this way the bank is said to be
sending a SWIFT message and for telegraphic transfers the phrase used is urgent
SWIFT message.

Lexical Index
Advertising
Advert - anunţ în ziar
Advertisement – anunţ, reclamă, publicitate
Advertisement canvasser – prospector de publicitate
Advertisement column – rubrică anunţuri
Advertisement department – serviciu de publicitate
Advertisement manager – director de publicitate
Advertisement office – birou de primire a anunţurilor
Advertising agent - agent de publicitate
Advertising appeal - atracţie publicitară
Advertising contest - concurs de reclame
Advertising directory - anuar de publicitate
Advertising expenditure - cheltuieli de publicitate
Advertising rates - tarif de publicitate
Advertising schedule - calendar al anunţurilor
Drawback - neajuns
Folder – pliant, dosar
Hoarding.- plancardă
Misleading – înşelător
Poster – afiş
Target customer – client ţintă
To advertise – a face reclamă
To boost - a populariza prin reclamă
Want ads – anunţ la rubrica cereri de serviciu

Mass media

Blurb – prezentare, reclamă.

Broadsheets – ziar popular
Cover – copertă.
Coverage – relatare.
Feature – rubrică fixă.
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Headline – titlu.
Headlines – rezumatul ştirilor principale.
Item – articol.
Jacket – supra copertă.
Layout – aranjarea materialului pentru o carte.
News caster – crainic.
News hawk – reporter.
News release – comunicat autorizat.
News sheet – gazetă de format redus.
News stand – chioşc de ziare.
Newsbill – afiş de ziar.
Newsbutcher – vânzător ambulant.
Newsreel – jurnal de actualităţi.
Oblituary – anunţ mortuar.
Peak viewing time – oră de maximă audienţă
Press clipping – tăietură din ziar.
Press release – comunicat de presă.
Printing works - tipografie.
Radio schedule – programul emisiunulor.
Rumour – zvon.
Script – scenariu
Sequel – continuare
Sets – decor
Skim – a atinge uşor.
Snap shot – instantaneu
Soap opera – telenovelă
Stunt artist – cascador
Tabloids – presă de scandal.
The picture flickers – imaginea pâlpâie
The picture is blurred – imaginea este estompată.
The picture is distorted – imaginea este deformată.
The picture washing out – imaginea se şterge.
Time signal – ora exactă.
To bribe – a mitui
To broadcast – a transmite
To browse through – a răsfoi
To cover news – a relata, a comenta.
To hint – a face aluzie.
To issue – a edita..
To re-edit – a reface
To release – a lansa

Market
Base rate - curs de referinţă
Blue chips stock - acţiuni sigure
Bond - obligaţiune,garanţie
Bond market - piaţa hărtiilor de valoare
Brand image - imagine de marcă
Brand leader - cap de serie
Brisk - piaţa activa
Canvasser - prospector de piaţă
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Deferred shares - acţiuni eşalonate
Demand - cerere
Demand rate - curs la vedere
Futures - piaţa livrărilor la termen
Hardening of the futures - redresarea pieţei
Home demand - cerere internă
Home market - piaţa internă
Margin - marjă
Margin in cash - acont în numerar
Margin of profit - marjă de beneficii
Market overt - piaţă publică
Market share - cota pieţei
Market swing - tendinţa pieţei
Market value - valoarea comercială
Prices levelled off – preţurile au atins un nivel constant
Prices picked up - preţurile s-au redresat
Prices rocketed - preţurile au crescut vertiginos
Rate of exchange - curs de referinţă
Rate of interest -.rata dobănzii
Rate of return - rata de recuperare
Revenue - venit al statului
Sales plummetted - văntările s-au prăbuşit…
Sales topped - vănzările au depăşit…
Securities - garanţii,titluri
Security - valoare,titlu
Settlement day - zi de referinţă
Soft market - piaţă în scădere
Steady demand - cerere permanentă
Steady market - piaţă stabilă
Stock account - cont de capital
Stock adventure - speculare de acţiuni
Stock holder - acţionar
Stock on hand - stocuri nevândute
Supply - ofertă
Terms of supply - condiţiile livrării
To dabble in the stocks - a juca la bursă
To take stocks - a cumpăra acţiuni
Uncertain market - piaţă nesigură
Underwriter - garant
Venture capital - capital de risc
Yield - venit al unei investiţii

Travelling

Accommodation – găzduire.
Amenity - farmec,plăcere.
Appeal – atracţie.
Appropriate – adecvat.
Available – accesibil.
Booking – rezervare.
Clerk – funcţionar.
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Chargeable call – convorbire taxată
Commercial hotels- hoteluri pentru oameni de afaceri
Continental breakfast - mic dejun uşor
Convenience – confort.
Courses - feluri de mâncare
Discount price - preţ redus
Discount - bonificaţie
Half fare ticket – bilet cu preţ redus
Height - înălţime
Joint destination – combinarea a două destinaţii.
Junction – încrucişare de drumuri
Lobby – culoar, hol mic.
Lounge – hol.
Maid – cameristă.
Promotional fares – preţuri promoţionale
Registration card – registru de hotel
Resort hotels – hoteluri în staţiuni.
Roundabout – ocol.
Season ticket – abonament
Settee – canapea.
Shallow water – apă puţin adâncă
Silversmith – argintar
Soft drinks - băuturi slabe
Sparkling landscapes – peisaje strălucitoare.
Spicy – condimentat
Straight ahead - drept înainte
Tender – ofertă.
Ticket nipper – compostor
Ticket window – ghişeu de bilete
Tip - bacşiş
To accommodate – a găzdui.
To add – a adăuga
To cater – a se îngriji de nevoile cuiva
To chill – a răcii
To chop – a tăia
To dip – a înmuia
To disturb – a deranja.
To go sight seeing – a vizita oraşul.
To melt – a topi
To offer facilities – a oferii condiţii.
To outline – a contura
To peel – a descoji
To pour – a turna
To provide with – a furniza
To put up at a hotel – a se opri la hotel
To season – a condimenta
To shake – a agita
To sprinkle – a stropi
To whisk – a bate ouăle
Undercooked – crud
Vacant – liber.
Well sitted – comod.
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Width - lărgime
To put through – a face legătura

Money

Account – cont
Account book – registru de conturi
Assets- active
Bank return – venitul băncii
Bill of exchange /draft – cambie
Board of trade returns – statistică comercială
Bounds – obligaţiuni
Bullion - lingou
Cash account – cont în casă
Cash assets – capital în numerar
Cash deposits – vărsăminte în numerar
Cash flow – fluxul numerarului
Cash in hand – numerar disponibil
Cheque to bearer – cec la purtător
Cheque to order – cec la ordin
Currency depreciation – devalorizare monetară
Current account – cont curent
Debenture bounds – obligaţiune cu dobândă fixă
Deferred payments - plaţi întârziate
Deposit account – cont de depozit
Earnings – venituri
Expenses – cheltuieli
Figure – cifră
Financial backing – sprijin financiar
Financial futures – contracte pe termen
Gamble – joc de noroc
Gross return – beneficiu brut
Hard currency – valută forte
Interest – dobândă
Legal tender currency – monedă legală
Let down – declin
Money chest – casă de fier, seif
Money in cash – bani lichizi
Money market – piaţă monetară
Money on deposit – bani depuşi
Money pressure – lipsă de bani
Overdraft- sold debitor
Pay in ship – borderou de vărsământ
Payee - beneficiar
Return – venit, beneficiu, rambursare
Revenue – venit mare, câştig
Revenue assets – capital circulant
Revenue office – administraţie financiară
Saving bonds – titluri de economii
Savings – economii
Tax return – declaraţie de impozit
Tenor – scadenţa unei obligaţiuni
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To earn – a câştiga
To get into dept – a avea datorii
To grant a loan – a acorda un împrumut
To open an account – a deschide un cont
To owe – a datora
To save money – a economisi bani
To settle an account – a lichida un cont

BUSINESS and BUSINESSES

55
 Business is a long term, highly repetitious activity, frequently requiring people
to do the same thing today, tomorrow, the next day.
Many of today’s well known businesses were started by one or two people and
the ownership of those businesses was very simple. It was during the 19th century that
businesses wanted to expand and increase the number of owners. To do this they
needed to sell shares. To encourage people to buy shares, governments around the
world passed laws which gave people limited liability. During the 20th century many
people bought shares in sucessful businesses for the following reasons:
- to have a share in the profit made by the business.
- the hope that a profitable business would attract more and more
people to buy shares and this will make the price rise so that shares could be sold at a
profit.
The simplest form of business ownership is the sole trader. Here, one person
owns the business, takes all the decisions and risks his own money. People enjoy to be
self employed and they are happy to have complete control of their own business. But
there is no one to share the responsibilities involved in decision making and raising
finance is a problem. Sole traders finance their business through a bank loan and the
bank will charge a high rate of interest. A bank will ensure that it can get the money
back, if the loan is not repaid, by requiring security on the loan. Sole traders are liable
for any debts they have, even if they are not the trader’s fault. A trader may do a job
for a larger business; it may be worth 20 000$ but it will not be paid until the job is
complete. The sole trader must spend 9 000 $ on equipment, but when the job is
complete the larger business closes down and the 20 000$ are not paid; still, the sole
trader has to cover the 9 000 already spent as he has unlimited liability.
Sometimes, a pair of a small group of people will get together to run a
business. This is called a partnership. Partnerships face unlimited liability as sole
traders do.
Partners may put some money into the partnership in return for a share of the
profits but take no part in the running of the partnership, do not work for it and have
„no say” in any decisions.Under these circumstances, it is only the money that has
been invested that is liable to be used in order to apy off any debts. This is a silent
partner and he has only limited liability.
The technical name for both private and public limited companies is joint
stock company. It means that the stock in a company is owned jointly by several
people.
Some business activity is carried on by the government and this forms the
public sector.
Profit maximisation may not be the only aim of a busines; in public companies
there is a separation of ownership and control, so that directors and managers may run
a company in their own interests.
Business is the production,buying, and selling of goods and services. A
business, company or firm is an organization that sells goods or services. A business
may be referred to formally as a concern. Then, it may be referred to approvingly as
an enterprise in order to emphasize its adventurous, risk taking qualities and business
in general may be referred to in the same way, in combinations such as free enterprise
and private enterprise.
A business requires tremendous effort to get it going and once going, it
requires minimum effort to keep it going. The role of business is to stay in business,
providing wages, goods and services into the community and meeting the profit needs
of the business and the key stakeholders in the business. The source of funding and
capital is considered to be the main difference between the stakeholders and the
56
shareholders. In the stakeholder model, funding is being supplied through bank loans.
This means that they will ask for managerial consideration and response from those
running the company.
In the shareholder model, stockholders advance capital to managers who act as
their agents in pre-authorized ways. Shareholdes buy shares to maximise the return on
their investment; the responsibility of the manager in a firm is to engage in activities
designed to increase the profits, that is to engage in open and free competition. To
create shareholder wealth, the management needs to outperform the expectations
shareholders had when they made their investment decisions. In the shareholder
model of corporate governance, the focus is on institutional agents monitoring
corporate agents in order to enhance the investment prospects of investors. In the
stakeholder model, the premise is that a company is more likely to perform well and
the shareholders are more likely to benefit, if opportunities are created for the various
groups holding an interest in the company to enter into binding relationship. The
emphasis in the stakeholder model is the way enterprises are governed while in
shareholder model the emphasis is on the way enterprises are managed. The
shareholder based entity is more responsive to changes in market conditions.
Both approaches take account of the issues of board checks and balances,
abuse of authority and power, the role of boards, director rewards and participation in
setting standards for accounting, safety, employee relations and risk management.
In today”s business world we have to take into consideration the two models.
The shareholder model encourages a top down, command and control leadership
approach whereas in the stakeholder model a team based, shared decision making,
servant leadership approach is more likely.
Stakeholder based governance refers to how the organization makes cost
effective decisions in terms of wealth creation but with consideration of stakeholders’
rights. Corporations have multiple responsibilities and need to balance competing
conditions, such as long and short term notion of gain, profit and sustainability, cash
and accounting concepts of value, democracy and authority, power and
accountability. This model is more common in continental Europe and Japan.
The micro approach to corporate governance refers to shareholders. This is
concerned with maximizing wealth creation for shareholders. Control is linked here to
profitability, an Anglo American model.

Then business may be referred to as commerce, commercial distinguishing the

business sphere from other areas such as government or arts or from non money
making activities.
Large companies are being referred to as corporations. Corporate is used to
describe things relating to a corporation or to corporations. Large companies
operationg in many countries are multinationals. Big business can refer to large
business organizations or to any business activity that makes a lot of money. Small
companies are referred to as small businesses or small firms.
When a private company is bought by the state and brought into the public
sector in a sell off, it is privatized. The first to be sold in a privatization programme
are often the companies responsible for the public supply of electricity, water and gas:
the utilities.
If a company A owns shares or equity in company B, then A holds a stake,
holding or shareholding in B. If A owns less than half the shares in B, then it has a
minority stake in B. If A owns more than half the shares in B, it has a majority stake
or controlling stake in B. If you have shares in a company you are a shareholder.
A holding or holding company is the one that holds stakes in one or more
subsidiaries. If it owns all the shares in a subsidiary, then the subsidiary is a wholly
57
owned one. A holding company”s relationship to its subsidiaries is that of parent
company and the subsidiaries” relationship to each other is that of sister companies. A
holding and its subsidiaries form a group. A conglomerate is a group containing a lot
of different companies in different businesses.
Company A may be attempting to gain control of company B in a takeover
bid, maybe by increasing its holding or stake in company B if it already owns shares
in B. Company B makes or launches a bid against company A, the takeover target. If
company B does not want to be taken ober, the bid is hostile. There are other ways of
saying that one company is taking over another one and it means that the company is
acquiring another or making an acquisition.
In a leveraged buyout or LBO, a company is acquired by a group of investors,
often financed by heavy borrowing. The debt is then paid out of the target company”s
operating revenues or by selling its assets. The borrowing involved inLBOs is often
high risk debt called junk bonds. LBOs financed by junk were frequent in the 1980s
and after an absence following the excesses of that period, they are now coming up
again.
Two or more companies may decide to work together by setting up a joint
venture or alliance in which each holds a stake. When two companies combine
voluntarily, they merge in a merger.
The social role of any business is linked to what we call as serving the future:
sufficient profits to satisfy the business and the stakeholders meet today’s profits
needs. But as the expectations increase society has to invest in ideas and technology
that expands the economic base and the wealth of the society. An essential
requirement is that each and every business strives to achieve profits over and above
immediate business needs and the stakeholders’ needs. Without this „surplus profit”
there can be no venture capital. Without venture capital, economic growth will
struggle to match population growth and the growth in social expectations.
Any business requires true professionalism- the courage to care about people,
clients, career.
True professionalism means the pursuit of excellence. If you value something,
then you must monitor your performance in that area, acept nothing less than
excellence and actively work to learn what to do differently every time you fall short
of excellence. Firms must provide help and counsel to those who are encountering
difficulties in living uo to their standards, in order to help them get back on track.
Once professionals have confirmed their core values, they need to design systems
which provide consequences for noncompliance. By leaving each individual
professional to decide for himself what level to achieve in key value areas, firms say
that the company as a society has no standards that must be adhered to. Excellence in
such areas become a matter of personal professional choice. Professionals must live
by the slogan „ you are allowed to fail, you are not allowed to give up trying.”
The oposite of the word professional is not unprofessional, but rather
technician. These may be highly skilled, but they aren’t professionals until they
demonstrate characteristics such as:taking pride in their work, showing a personal
commitment to quality, reaching out for responsibility,getting involved, looking for
ways to make things easier for those they serve, listening to the needs of those they
serve, being team players, honest, trustworthy, loyal, open to constructive critiques.
Professionalism is an attitude not a set of competences. A true professional is a
technician who cares. And if finding people with technical skill is usually easy,
finding people who are filled with energy, drive, enthusiasm personal commitment to
excellence is hard. Because real professionalism has little to do with which business
you are in, what role within that business you perform, how many degrees you have.

58
It implies a pride in work, a commitment to quality, a dedication to the interests of the
client, a sincere desire to help.
Traditional definitions of professionalism are filled with references to status,
educational attainments, noble calling. Now, we refer to attitude and character. So,
firms should hire people for attitude and train for skill. Being a professional asks for
treating people as professionals that is invest in them. Then professional success
requires more than talent, it asks for initiative, involvement, enthusiasm,
commitment.Being good at business development involves nothing more than a
sincere interest in clients and their problems and a willingness to go out and spend the
time being helpful to them.
Success in business life means not only good professionalism but effective
functioning of the firms, positive outlooks.

The Secrets of Achieving More with Less

Some things are likely to be considered more important than others. You can
achieve more with less effort, time and resources. We think that there is an inbuilt
imbalance between causes and results, inputs and outputs, effort and rewards. But
each individual can be more effective and happier, each profit seeking corporation can
become very much more profitable, each non profit organization can also deliver
more useful outputs, every government can ensure that its citizens benefit much more
from its existence. For everyone and every institution it is possible to obtain much
more that is of value and avoid what has negative value, with less input of effort,
expense or investment. At the heart of this progress there is a process of substitution.
Resources that have weak effects in any particular use are not being used sparingly.
Those which have powerful effects are being used as much as possible. Every
resource is ideally used where it has the greatest value. Wherever possible, weak
resources are developed so that they can mimic the behaviour of the stronger
resources. Business and markets have used this process for many years.
And so we call for a well known principle namely “the 80/20Principle”
which tells us that a minority of causes, inputs, efforts lead to a majority of the results,
outputs or rewards and that our daily lives can be improved by using this principle. A
new way to use this principle is the 80/20 thinking, that is about any issue that is
important to you and asks you to make a judgement on whether the principle is
working. This is the daily life , non quantitative putting into practice of the principle.
It is used to change behaviour and to focus on the most important 20 per cent. It
works when it multiplies effectiveness. Action resulting should lead us to get much
more from much less. When using this principle we do not assume that its results are
good or bad or that the powerful forces we observe are necessarily good. We decide
whether they are good and either determine to give the minority of powerful forces a
further shove in the right direction or to work out how to frustrate their operation.
By putting it into practice, this principle implies that we should do the
following:
- celebrate exceptional productivity, rather than raise
average efforts.
- look for the short cut, rather than run the full course
- exercise control over our lives with the least possible
effort
- be selective
- strive for excellence in few things, rather than good
performance in many
59
 - delegate or outsource as much as possible in our daily
lives and be encouraged rather than penalized by tax systems to do this
- choose our careers and employers with extraordinary
care
- only do the thing we are best at doing and enjoy most
- look beneath the normal texture of life to uncover
ironies and oddities
- in every important sphere work out where 20 per cent of
effort can lead to 80 per cent of returns
- calm down, work less and target a limited number of
very valuable goals where the 80/20 principle will work for us, rather than pursuing
every available opportunity
- make the most of those few ”lucky streaks” in our life
where we are at our creative peak and the stars line up to guarantee success.
The 80/20 Principle applied to business has one key theme- to generate the
most money with the least expenditure of assets and effort.
The classical economists of the XIXth and XXth century developed a theory
of economic equilibrium and of the firm that has dominated thinking ever since. The
theory states that under perfect competition firms do not make excess returns, and
profitability is either zero or the normal cost of capital, the latter usually being defined
by a modest interest charge. Then the theory of the firm goes like this: in any market,
some suppliers will be better than others at satisfying customer needs. They will
obtain the highest price achievements and the highest market shares.
More than this, the objective of 80/20 thinking is to generate action which will
make sharp improvements in your life and that of the others. Thinking escapes from
the linear logic trap by appealing to experience, introspection and imagination. If we
are unhappy we do not worry about the proximate cause. We think about the times we
have been happy, we do not look for causes of failure, we imagine and then create the
circumstances that will make us both happy and productive.

What do you think about the following insights for our personal life:

 80 per cent of achievement and happiness takes place in 20 per

cent of our time.
 Our life can be affected by a few events and a few decisions.
The decisions are often taken by default rather than conscious choice; we let life
happen to us rather than shape it; we can improve it by admitting the turning points
and by making the decisions that will make us happy and productive.
 There are always a few key inputs to what happens and they are
often not the obvious ones; if the key causes can be identified and isolated we can
very often exert more influence on them that we think possible.
 Everyone can achieve something significant. The key is not the
effort but to find the right thing to achieve. You are no doubt more productive at some
things than at others but one have to dilute the effectiveness of this by doing too many
others where our skill is nowhere near as great.
 There are always winners and losers and always more of the
latter. You can be a winner by choosing the right competition, the right team and the
right methods to win.

60
  Most of our failures are in races for which others enter us. Most
of our success comes from races we ourselves want to enter. We fail to win most
races because we enter too many of the wrong ones: their ones, not our ones.
 Few people take objectives really seriously. They put average
effort into too many things, rather than superior thought and effort into a few
important things. People who achieve the most are selective as well as determined.
 Most people spend most of their time on activities that are of
low value to themselves and others. The 80/20 thinker escapes this trap and can
achieve much more of the few higher value objectives without noticeable more effort.
 An important decision is the choice of allies. Almost nothing
can be achieved without allies; but most people do not choose them carefully. Some
of us have too many and do not use them properly. 80/20 thinkers choose a few allies
carefully and build the alliances carefully to achieve their specific objectives.
 Money used rightly can be a source of opportunity to shift
towards a better lifestyle.
 Few people spend enough time and thought cultivating their
own happiness. They seek indirect goals(money, promotion), that may be difficult to
attain and will prove to be extremely inefficient sources of happiness. Happiness not
spent today does not lead to happiness tomorrow. It will atrophy if not exercised. The
80/20 thinkers know what generates their happiness and pursue it consciously,
cheerfully and intelligently, using happiness today to build and multiply happiness
tomorrow.
 The logic of professional success leads to ever greater
professional demands. To succeed you must aim for the top. To get there, you must
turn yourself into a business. To obtain maximum leverage, you must employ a large
number of people. To maximize the value of your business, you must use other
people’s money and exploit capital leverage- to become even larger and more
profitable.
 If you decide which shares to buy it is good to specialize in an
area in which you consider yourself an expert. Possibilities are almost endless; you
could specialize in shares of the industry in which you work or of your hobby, your
local area or anything else you are interested in. if you like shopping you might decide
to specialize in the shares of retailers. Then, if you notice a new chain springing up,
where new store seem to be full of keen shoppers, you might want to invest in those
shares.
 The key to making a career out of an enthusiasm is knowledge.
You must know more about an area than anybody else does; then work out a way to
market it, to create a set of loyal customers. It is not enough to know a lot about a
little. You have to know more than anybody else, at least about something. You
should not stop improving your expertise until you are sure you know more, and are
better in your niche than anybody else. Then, reinforce your lead by constant practice
and do not expect to become a leader unless you really are more knowledgeable than
anyone else.

Many years ago, Aristotle said that the goal of all human activity should be
happiness. It seems that we haven’t listened too much to him. Perhaps he should have
told us how to be happy. So, he could have started by analyzing the causes of
happiness and unhappiness. Happiness is profoundly existential. Past happiness may
be remembered or future happiness planned, but the pleasure it gives can only be
experienced in the “now”. One of the 80/20 hypothesis would be that 80 per cent of
61
happiness occurs in 20 per cent of our time. It is interesting that those who are happy
with most of their lives are more likely to be happier overall; those whose happiness
is concentrated in short bursts are likely to be less happy with life overall.

Are there some ways to be happier?

 Identify the times when you are happiest and expand them as
much as possible.
 Identify the times when you are at least happy and reduce them
as much as possible.
Or :
-spend more time on the type of activities that are very effective at making you
happy and less time on other activities.
- start by cutting off the spots of unhappiness, the things that tend to
make you actively unhappy.
The best way to start being happier is to stop being unhappy. You have more
control over this by avoiding situations where experience suggests you are likely to
become unhappy.
- for such activities that are ineffective at making you happy it is
good to think systematically of ways that you could enjoy more.
- by cultivating habits of optimism we can have a happier life as
optimism is an ingredient for both success and happiness.
- we must sometimes change the way we think about events; we can
train ourselves to break the self reinforcing pattern of depression by simple steps such
as seeking out company, changing our physical setting or forcing ourselves to
exercise.
- we can change the way we think about ourselves; we can make ourselves
happy or unhappy by the way we decide to feel. We must make the choice that we
want to be happy. We owe it to ourselves and to other people too. A positive self
image is very important, a sense of self worth can and should be cultivated; you know
that you can do it: give up guilt, forget about your weaknesses, focus and build on
your strengths, remember all the good things you have done, all the small and big
achievements.
- we tell ourselves stories about us. We have to do this and we will
increase the sum of human happiness by starting with ourselves and radiating out to
others.
- we can make ourselves happier by changing events we encounter and
that make us depressed or miserable.
- we can become happier by changing the people we see most( the amount
of time spend with them has to be changed).

62
 Dialogue

Richard , the reporter: Good morning Mr. Osborne, thank you for being so
kind to me and give me some answers.
Mr. Osborne: I am available for only 20 minutes because I am meeting the
Company executive.
Richard: Would you be so kind and tell me if there are secrets for successful
businessmen because people wonder how you managed to become in such a short
time a well known businessman.
Mr. Osborne: Well, first you have to be open minded and explore ideas, to
aim for the top. You must turn yourself into a business. You must use other people’s
money and exploit capital leverage.
Richard: Do you think that professionals have to be very close to you?
Mr. Osborne: You need them to get excellence and then money will come, no
doubt.
Richard: Why is strategy important?
Mr. Osborne: If you arrive at a useful business strategy you can be successful
and raise profit.
Richard: Where are you making the most money?
Mr. Osborne: I am attentive to long term investments when the stock market
is low, I build my investments on expertise, I consider the merits of the emerging
markets, I run my gains…
Richard: What is the key to understanding and driving up profitability?
Mr. Osborne: Competitive segments as parts of our business where we face
different competitors or competitive dynamics.
Richard: What does business require?
Mr. Osborne: Decisions tacking and analysis. Since 1950 business has been
blessed by management scientists and analytical managers incubated in business
schools, accounting firms and consultancies who can bring analysis to bear on any
issue.
Richard: Can you work less, earn and enjoy more?
Mr. Osborne: Yes, your thinking has to be strategic, you have to be ambitious
and trust your own values.
Richard: Are you happy? If so, what makes you be happy?
Mr. Osborne: I have found two ways to be happy: first to identify the times
when you are happiest and expand them as much as possible, and to identify the times
when you are least happy and reduce them as much as possible.
Richard: Thank you for your time given and I wish you a prosperous life.

63
 Enlarge upon the following:

1. Happiness is a duty. We should choose to be happy. We

should work at happiness. And in doing so, we should help those closest to us, and
even those who just stumble across us, to share our happiness.

2. Time is the benign link between the past, present and

future. Time keeps coming round, bringing with it the opportunity to learn, to deepen
a few valued relationships, to produce a better product or outcome and to add more
value to life. We do not exist just in the present, we spring from the past and have a
treasure trove of past associations, and our future is immanent in the present.

3. One good rule for being successful is: ”realize that knowledge is
power”.

Do you agree or disagree:

1.An essential ingredient of a happy day is mental stimulation, as well as a

spiritual and artistic one.
2. Lack of control is the root cause of much unease and uncertainty.
3. Objectives that are too easy will lead us to be complacent, accepting
mediocre performance. Those which are too tough lead us to self fulfilling, self
perceptions of failure.
4. Life’s unplanned contribution should be incorporated into our own plan so
that it can proceed to an even higher level.
5. People with low self esteem and self confidence are a nightmare to live
with, however much mutual love abounds.
6. Most of the satisfaction you draw from all of your friends will be focused in
your relationship with a small number of close friends.
7. A short cut to lasting happiness is to evolve the lifestyle you and your
partner want and this requires of course a harmonious balance between your work life,
home life and social life.
8. The impact of the quality revolution on customer satisfaction and value,
and on the competitive positions of individual firms is truly great.
9. The information revolution has a long way to run.
10. Cause and effect, input and output operate in a non linear way. You do not
usually get back what you put in; you may sometimes get very much less and
sometimes get very much more.
11. The real world comprises a mass of influences where cause and effect are
blurred, where complex feedback loops distort inputs, where equilibrium is fleeting,
where there are patterns of repeated but irregular performance, where firms never
compete head to head and prosper by differentiation, where a few favoured souls are
able to corner the market for high returns.

This principle can help people get a great deal more out of their lives, to raise
their effectiveness and happiness, to boost profits and what leads to profits. It is a
practical tool for making a more sensible world. Business leaders who observe the
64
principle at work and see that 20 per cent of products or revenues are producing 80
per cent of profits and that 80 per cent are contributing only 20 per cent of profits- do
not shrug their shoulders. Sensible and profit maximizing entrepreneurs do something
to correct the imbalance; they make the really productive 20 per cent of activities a
larger proportion, they use the 80/20 principle in the pursuit of progress to improve on
reality as progress relies on finding a better way to do everything.
Now we do not prefer life to be quiet, stable or unaccountable. Now the
competition is very tough, and so we strive for solutions and for efficiency in all
domains. Any good business asks for
- good and trustful professionals
- developing personal career strategies
- caring for the genuine clients
- cost reduction and service improvement
- good marketing strategy
- the right management
- the valuable negotiation stages
- the appropriate funding
- finding the best solutions in order to increase profit
- sticking to the rule of the few: the search for the high
product quality
- using technology at its best
- a good fitting into the world
- courage in entering a business, faith in progress, in the
great leaps forward, in mankind’s efforts to improve life.
- creativity and determination

More than these all, I do think that we have to ponder over the following:

“ God plays dice with the universe. But they’re loaded dice. And the main
objective is to find out by what rules that were loaded and how we can use them
for our own ends”!

Discussion points:

1. How can development in business life be carried out?

2. Is life different for a businessman?
3. What do businesses operate with?
4. How important are trust and confidentiality?
5. What do we expect from a professional?

Enlarge upon the following:

1. It is better to make the wrong decision than to make no decision at

all!
2. Support any of your views regarding true professionalism with
examples from your own experience.
3. Everybody begins at the bottom!
4. Tackling challenges in business life is not easy at all!
5. There will always be a time for healing....

65
66
 Additional Vocabulary

To set up in a business- a se lansa în afaceri

Bid- ofertă
Bidder- licitant
Bond- obligaţiune
Business forecast- prognoză economică
Business data processing- informatică de gestiune
Business assets- active comerciale
Business environment- mediu de afaceri
Business expenditure- cheltuieli de reprezentare
Business outlook- prespective economice
Business manager- director comercial
Corporation earnings- veniturile societăţilor pe acţiuni
Corporation income tax- impozit asupra veniturilor corporaţiilor
Corporation sole- corporaţie individuală
Corporate acquisition- achiziţie de firmă
Corporate banking- servicii bancare pentru firme
Corporate body- persoană juridică
Corporate bond- obligaţiune emisă de o societate
Corporate equity- capital social/ fonduri proprii
Corporate securities- titluri de societate
Corporate venturing- furnizare de capital de investiţie de către o companie
altei companii
Equity- capital al acţionarilor într-o companie
Equity shares- capital investit în acţiuni cu drepturi asupra profitului
To hold- a cuprinde,a reţine,a ţine sub control,a organiza, a menţine, a se
aplica.
Holder- deţinător, purtător, proprietar, concesionar
Junk bonds- obligaţiuni riscante
Joint venture- societate mixtă
Interest- dobândă
Leverage-putere, influenţă, randament,raport dintre creanţe şi capital, indice
de îndatorare, mijloc de majorare a profitului.
Leveraged buyout- preluare asistată, pe credit.
Leveraged management buyout- cumpărare de câtre salariaţi
Liability- responsabilitate, răspundere
Security- titlu de valoare
Security market- bursă de valori
Sole trader- comerciant pe cont propriu
Take over- preluare
To merge- a fuziona
Trader- speculator la bursa de valori, comerciant
Merchandise- marfă
Merchant- comerciant
Willingness- bunăvoinţă
Willing- dispus, binevoitor

67
 THE COMPANY

A company is a very special form of business. It is owned by the shareholders

but has a separate legal existence from the people who own it. The shareholders elect
a board of directors to run the company on their behalf. If the company has 2- 50
shareholders it is a private one. The liability is limited to the money that the
shareholders have used to buy shares. If the shares are traded on the stock exchange
we have a public limited company. Members of the public can buy these shares by
going through a stockbroker or bank.

In business we must create for ourselves a set of attitudes and values that
balance the conflicting factors, enabling us to act effectively with integrity, dignity,
understanding. So we’ll have better relationships with our partners and our life
becomes richer. Emotional containment ensures then that the business values are not
undermined by other values from our society, such as we perhaps learned early in life.
We then have to know that there is no social health without economic wealth;
the role of business is to stay in business, providing wages, goods and services into
the community and meeting the profit needs of the business and the key stakeholders
in the business.
The business does not operate in a vacuum; there are competitors, there is a
level of economic activity, there is rapidly changing technology.
The visions we have for our businesses are what makes them and us really
successful. Setting goals and objectives will help us achieve our vision. The key to
success and happiness in life is to create a positive vision, to remain true to one’s own
spirit, to have the energy of challenge.
But running a business is never easy. It’s a ride through a range of hazards and
difficulties but one thing is sure: life will rarely, if ever, be dull. If you do not enjoy
running your business, you can’t expect to do it well.
Some ways to make a business successful are the following:
1. Ideas- bad or good- are important as the lifeblood of business and vital to its
long term success. Ideas are vital to develop new or existing products or services or
even to take the first step into a new business.
2. Choosing professional advisers is essential and they can make or break your
business.
3. Finding and keeping clients must form an integral part of your planning if
you want to grow your business.
4. Research your target companies does take time, but it’s well spent. If
knowledge is power, then researching a company can give you a much better
understanding of what they do and help you to prepare a successful bid.
5. Brand your business and you’ll be set apart and enable you to introduce a
wider range of products and services more easily.
6. Team up with another business to enhance yours and be competitive on the
market.
7. Consider a project based working which has many advantages for the
employer and employee. This means working for just one or two employers at any
time.
8. Be creative, have an open mind philosophy and a “I can do” attitude. Any
business can benefit from using it creatively.
9. Focus on creating a win/win situation.
10. Use your time wisely, as it is not elastic and it will not magically expand to
accommodate all we have to do.
68
 11. Keep your employees happy and remember that a happy workforce is a
productive one and will contribute to the performance and profits of your business.
12. Make powerful presentations by a good planning and preparation.
Exhibitions can be invaluable marketing exercises for any business.
13. Event management is important: organizing gatherings, conferences,
seminars, training courses.
14. Networking for success is a way to meet new people, exchange
information and get new business.
15. Master the media and you may get rewards by being attentive to the
interviews.
16. The success of a business will depend on how well you sell products and
services. How do you persuade people to buy the product? The more work you put
into planning and developing your sales strategy, the easier it will be to close and
develop a loyal customer base.
17. Lasting customer relationships are very important as profitable business
starts and ends with the customer. So it’s worth giving them the attention they
deserve.
18.Ensure that success will come from a website but be careful to a sound
strategy. E-commerce revolution is on its way and the staff has to be well trained in
this respect.
19. Maintain a positive flow of money in your business by realistic forecasting
which will only be of benefit if it is checked and reconciled on a regular basis.
20. Enter into partnership agreement and make sure that your partner can
contribute to the business and will strengthen it.
In business life time is important to be taken into consideration as it is our
most precious resource. We have to maintain a balance, we have to give ourselves
time and opportunity to do things right; we do not get a second chance with time, so
we must do our best to make every minute purposeful and enjoyable. Then our goals
are set as we want them to be and we can reward ourselves for gains.

A business is a coordinated effort to achieve certain ends summarized in the

profit and loss. Joining a business means embracing some part of that at least. The
assumption is that everyone wants to be successful and for this within a company it is
important to:
* consolidate the aims of the team, the team spirit.
* understand the team’ effort to strive for achievements.
* focus on creating a team climate.
* understand the energy of challenge.
* be aware on one’s responsibility.
Desire or will is the very essence of success. Without this intensity the actions
of success have a hollowness, the hallmark of “but I tried”.

Successful business asks for good leadership and this is not some mystical act
performed by the few and only able to be performed by them through some luck of
upbringing or genetics that made them natural leaders. We can become better leaders
than we are; to achieve this means that we need to do the right things at the right time
more often than we usually do and we also need to examine ourselves. We also need
to have a clear idea of what to do in order to gain the best possible result from others.
The actions identified must be the appropriate actions in what is broadly called
”western society”(North America, U.K., Europe, Australia, New Zealand).
Leadership is to be taken into account whenever we have in view any
business; there are some steps to be followed:
69
 1. The agreement to success for every team member. Everyone wants to be
successful as far as goals are clear and business processes are far from being clumsy.
Everyone has positive and negative thoughts in their minds most of the time. We
know how easy it is for the negative thoughts: the company is not good, the boss is
bad…We represent the positive assertively in our mind- “work is rewarding”. But we
select our thoughts and they influence us. If a person has negative thoughts about the
job and the company, work performance is suffering. The negative impact can make
the team output less than it should otherwise be. But we are responsible for our own
thoughts, so what a manager can do is to point out the consequences. It is clear that
when the team becomes focused, gets people organized, celebrates success, then bad
attitudes disappear.
Defining success entails the idea of challenge which energizes people.
The team leaders and managers must live as exemplary models of how they
expect others in their team to act. Each management team member is expected to be
an “ inspiring player.” The team effort has to be understood properly. The team spirit
must be a consequence of doing other things well. Coordinating the effort is to be
achieved by the profit profile with each team member being accountable for some
number on the profile and this will define success for a team. People have seen now
the standards required.
Identifying the behaviours of success. As the goals have been agreed, the steps
to be followed are to make clear what actions were most likely to bring about the
goals.
In the goal-action principle, the idea of action becomes clear now, we have
those behaviours that will best fulfill the goal, derived from the goal and belonging to
it. It is important to find the balance between two things in conflict as a crucial act of
insight and creativity for the manager and the team. If the issue is finding sales tactics,
then the problem is one of creativity for the team to brainstorm possible tactics and
then select one or several that best achieves the balance of the required result.

Provide monitoring and feedback on progress and performance. The main

concern among the teams was to provide useful guidance on what should be changed
to improve the results. Better reports were being sought, better information.
Celebrate success, large and small. Teams celebrate success as people have
risen to the challenge. Team results were evident. The progressive build up of life
satisfaction was something that occurred beneath the daily flux and it should increase
each year. It was seen as related to goals and work had the potential to be a major
component.

Teams will remain the core of the business. Before demanding better
performance one have to be sure that this can be achieved. So, for every goal there are
tasks that must be acted out if the goal is to be achieved. Everyone succeeds if the
team succeeds. It is important to recognize individual performance, but from within
the framework of the team.
A management team should be a team, not a collection of individuals with
personal accountability. This means that every team member understands that they
can win only if the team wins and the team wins by achieving the targeted operating
profit. Within that, each person has his or her role and tasks within this role. If people
can fully perform their own jobs and have the mental, emotional and physical energy
to assist others, and if the others accept and appreciate the assistance, then those
people should be encouraged and celebrated within the team.

70
 A management team operates within the framework and policy prescribed by
the strategic plan and is accountable for creating sales revenue and converting it into
operating profit.
To develop a manager means to develop the person. That is, to improve
business management or business leadership is not merely an act of adding some
skills or some knowledge to the person; knowledge alone is not power; only if it is
backed by the ability and willingness of how, the judgement of when to use that
knowledge is power.
Intellectual honesty is an important quality that must be taken into
consideration. That means being truthful with yourself and not only. We have wishes
and dreams, sensitivities about ourselves; so often we do not want to think poorly of
ourselves; it is easier and more comfortable to find reasons beyond us for the
unfortunate things that happen or for results that should have been . Such emotional
forces can and do push us to think in certain ways. Then, intellectual honesty comes
to help us: a process of conceiving the factors accurately as a scientist might, without
the comfort of the excuses. It allows us to avoid giving up too early and this is one of
the hallmarks of all champions.
There are some situations we meet within a company:

T here are all kinds of reasons for w anting to be your ow n boss. Som e people like the idea of
there being no one in authority over them , telling them w hat to do, wsaying ork is their
not up to
standard, turning dow n their ideas, or insisting on m ethodspointless.
that seemO thers are attracted by
the thought of deciding their ow n hours, or days,
w ork.of
R unning your ow n business gives you the status of being self-em ployed, also perhaps
of
being a com pany director. There is the general feeling of independence, yourandincom
that e - and
perhaps even your w ay of life - is in your ow n hands. Som e are attracted to the idea of starting a sm all
enterprise and m aking it grow , m uch as a gardener tends his plot and m akes a num ber of plants com e
to m aturity, each in turn
creating further grow th.
If you are your ow n boss, say som e people, w ork is so m uch m ore pleasant. get Y ou can
som eone else to do the less interesting jobs and you are not bogged annoying
dow n in details. W ork
becom es easier, too, because you can get som eone else the mtoore
do difficult tasks.
M any others w ant to set up a little business of their ow n to occupy their spare tim e, and as a
pleasant w ay of earning extra m oney from w ork they like doing.
These are just a few of the reasons com m only given. Som e have good them sense; behind
others are based on com pletely false ideas. M ost contain som e elem ent of truth w hich gets m agnified
out of all proportion, and seized upon w ithout it being borne in m ind that there are other points to
consider as w ell.
A s w ith so m uch else in life, running an enterprise of your ow n entails disadvantages
as w ell
as advantages. It is surprising how rarely people stop to consider injust real
w hat
detail
the draw backs
are, yet this is an essential first step for anyone thinking
w hether
aboutit is even practicable for him to
be his ow n boss.
A n im portant reason w hy there is such glam our about being in charge of your ow n business is
that w hen you are w orking for som eone else, m any of the petty irritations as w ellofaslife,
the chore
of often having to get dow n to w ork that you do notdoing feel like
at that particular tim e, becom e
associated w ith being an em ployee. There is a feeling that, if only you w ere your ow n boss, life
w ould im m ediately becom e infinitely
pleasurable and free from irksom e detail.
This is alm ost entirely m isleading. M any of the little annoyances probably nothinghaveto
do w ith being an em ployee: being interrupted w hen you have im m at
ersed
last yourself in som e
disagreeable task, m issing the bus w hen you are infeeling
a hurry,tired or in other w ays not really up
to w orking hard at the m om ent, and so on.
These occur just as m uch w hen you are your own m aster. In fact, they tend m uch
to happen
m ore often, w hile at the sam e tim e, their effects can be far m ore upsetting.
71
 There are very real draw backs to running your own business, though for the of right kind
person, im m easurable benefits also.
A company has two ways of delivering value to clients: either the clients
obtain just the accumulated wisdom and talents of the specific professionals who are
servicing their work, or the clients can get this, “plus” all the relevant accumulated
wisdom, experience, tools, methodologies of the rest of the firm. What does it mean
for a company to have value above and beyond the talents of individual professionals?
What can a firm do that will help a professional to be more successful than he or she
would be at a halfway decent competitor? Maybe:
- provide professionals with the benefit of shared skills and experiences within
the practice group.
- facilitate access to the skills of others in different disciplines.
- establish procedures to produce well trained junior professionals.
- achieve a high level of cross selling and access to clients of other
professionals.
- provide superior support staff and systems.
- instill a system of supportive challenging, coaching to bring out the best in
each professional.
- create an emotionally supportive friendly environment.
- provide for diversification of personal risk.
- establish a powerful brand name that makes marketing easier.
Interesting but more and more in our concern the firm, the company has to be
viewed in future. The strategic challenge for professional firms is not to forecast the
future, but to ensure that the firm is effective at adapting to already observable market
changes. Most professional firms are resistant to change.
Old ways of doing business suffer from inertia and few firms are either willing
or able to implement significant changes in the way they manage their affairs. Major
trends are being identified and big schemes are announced as responding to them. But
a professional firm is not completely at the mercy of unknowable fates. You can make
things happen if you want to. Why plan in an unpredictable world? Because you can
make sure that the way you run your affairs makes you more adaptable and adaptive.
Through a combination of planning and reexamination of current management
practices, firms can become better at listening to the environment and picking up its
change signals early. They can also become better at ensuring that they have
numerous experiments going on to test new ideas and approaches. Firms should be
testing what the market will and will not respond to.
They must avoid complacency, be adaptive by constantly asking:” is there a
better way to do what we do?”
Firms are very good at figuring out what they want their people to do
differently. They are not so good at figuring out management systems to get them to
do it. So, planning means managing in new and different ways. Many companies miss
a central truth: if you haven’t changed your measures and rewards, you haven’t
changed your strategy.
A firm has to be better than the competition in the following ways:
- Aggressive listening to the market.- good tactics: focus groups,
feedback survey, client panels, formal market research..
- Using market intelligence: each practice is actively gathering
market intelligence and is devising new things to do for clients.
- Raising the level of innovation- the management’s job is to
stimulate experiments and encourage innovation.
- Sharing new knowledge- firms must become good at sharing the
results of their experiments.
72
 - Pressure for personal growth through professional performance
counseling and practice leadership.
- Management behaviour- management must be perceived as leaders
of a changed effort; stimulating new ideas, willingness to provide seed capital for
those who wish to try new things.
- Measuring success not only by the volume of work performance
but by the type of work it brings in.

What do you think about the following:

1. Visionary companies share a common subset of correct core values

2. Visionary companies require great charismatic visionary leaders.
3. The most successful companies exist first and foremost to
maximize profits.
4. Visionary companies are great places to work for everyone.
5. Highly successful companies make their best moves by brilliant
and complex strategic planning.
6. Companies should outside CEOs to stimulate fundamental change.
7. The most successful companies focus on beating competition.
8. The only constant is change.
9. Flexibility means drafting several possible scenarios for the future.
10. Companies employed bottom up planning.

Enlarge upon:

1. The Firm of the Future is so Close to us!

2. How Can You Manage Your Clients” Projects?
3. When does a Professional Company Merger Make Sense?
4. What Should a Firm Be Tolerant about?
5. How will the Adaptive Firm measure its success?

Dialogue

Mr. Norman General Manager of a large company is meeting Mr. Cleary a

reporter who wants to be informed about the success of the B&Y Company.
Mr.Cleary: Good morning Mr. Norman and thank you for the time you have
allowed to me.
Mr.Norman: It is my pleasure and I do not mind sparing some minutes with
you!
Mr. Cleary: I would like to write a few lines about your company in the
“Capitalul” magazine.
Mr. Norman: Our business has increased and as you may be acquainted with,
we have deemed it advisable to open more branches in the country.
Mr.Cleary: What kind of investment would you care for?
Mr. Norman: We deal with textiles. We enlarged our business by getting new
partners and we expect higher dividends. The quality of our products has been
maintained at a high level. So, wool prices are excellent and the revenue too. If we
73
refer to the profit and loss account, an increase of more than 20% is to be taken into
consideration.
Mr.Cleary: How did you manage that?
Mr. Norman: By working with a well trained team, by finding good partners,
by having a stroke of luck, by keeping with the new market trends.
Mr. Cleary: I do have some questions if you don’t mind. Such as:
- How quickly can one hope to climb the promotion ladder to partner level?
- What are salaries based on as your career progresses?
- How long do most people stay in your company?
- How successful is the company?
- Are you enthusiastic about the development of the company?
- Do you spend money on staff training?
- Where do you intend to expand the sales?
- What persons do you work with?
Mr. Norman:
The best are being promoted to partners; unless you make partner by the age
of 35, you will basically never make it.
Salaries reflect the assessment of the employees.
Over a ten year period, less than 40% of those hired are to be retained by the
company.
- The shareholders are content as the loss is small.
- Yes, as far as the turnover has increased and we have subsidiaries all over
the world.
- There are full and part time courses, most of them being paid by our
company.
- In Eastern Europe.
- Those experienced on the sales side, with first class technical knowledge,
young, full of energy and new ideas; those who know what competition means.

Additional Vocabulary:

chartered company- companie înfiinţată pe baza unei Carte Regale

joint stock c.- societate pe acţiuni
unlimited c.- societate cu răspundere nelimitată
limited c.- societate cu răspundere limitată
parent c.- societate mamă
wholly owned c.- societate în propietate integrală
unincorporated c.- societate neînregistrată
winding up of a c.- încetarea activităţii unei societăţi
greenfield c.- societate la început de drum
bogus company- societate fictică
close c.- societate închisă
dormant c.- societate inactivă
company funds – capital al firmei
company identity- imagine de marcă
to stay afloat- a se menţine pe linia de plutire
shareholder-acţionar
shares- acţiuni, titluri de valoare
preference shares- acţiuni privişegiate
deferred shares- acţiuni cu plata dividendului după satisfacerea celorlalte
outstanding shares- acţiuni în circuşaţie
74
share capital- capital social, în acţiuni
share market- bursă de acţiuni
share prices- curs
share index- indice
share split- divizare a acţiunilor
to share the profit- a împărţi profitul
to share one’s views- a împărtăşi părerile cuiva
to share one’s experience- a împărtăşi experienţă
to assess-a evalua
assessment- evaluare
assessed- evaluat
turnover- cifra de afaceri
loss-pierdere, deficit
to run at a loss- a lucra în pierdere
loss ratio- rata pierderilor
relocation- mutare
core business- activitate de bază
break up- lichidare
liable- responsabil de

75
 Dealing with a Customer

When dealing with a customer you may encounter some situations:

You have an angry customer because you messed up
T h e f i r s t s t e p in d e a l i n g w i t h any angry customer, whatever t h e reason, isto
l i s t e n w h i l e t h e y get t h e i r anger out oft h e i r s ys te m . Sympathizew i t h t h e p r o b le m
w i t h phrases su c h as, 'H o w f r u s t r a t i n g for you,' or '1 can see howi n f u r i a t i n g t h a t
must: be'.
Once t h e y have expressedt h e i r feelings, andre a liz e d t h a t you are li s t e n in g
a n d s y m p a t h e t i c ,t h e y w i l l c a l m down. Atth i s point it isw ise, as well ash o n e s t , to
h o l d your hands up and admit your mistake sa byyi ng s o m e t h i n g l i k e .I ’ m t e r r i b l y
sorry. 1 should have putt h e order t h r o u g h manually and Ic l e a n forgot. I doa p ologiz e,
e s p e cia llyafter it's caused you so muchtr o u b le '. T h i s w i l l ta k e t h e wind o u t of t h e i r
s a ils , not least because so few peoplea c t u a l l y a d m it lo t h e i r mistakes.
So long as you offer to put things right: in any reasonable way that suits the
customer, they are likely to end up feeling very satisfied. Not only have you resolved
the problem, you've also been honest with them. It should reassure them that
you're a good organization to do business with: everyone makes the occasional
mistake, and at least you admit to it and p u t it right magnanimously.
Some people will advise you never to admit blame when dealing with
customers in case they sue you. It may be wise to take legal advice if your mistake
has cost them thousands, but in most cases they're not going to sue. If you've cost
them jus t a few pounds, what's the problem? You ought to pay up, so there should
be no question of suing. From a legal point of view, refusing to admit blame may
sometimes be wise. From an ethical and customer relations standpoint, it is always
better to admit your mistakes.

You have an angry customer because one of your team messed up.
Handle this exactly as you would if it was you that had messed up. You are
responsible for your team, and you should carry the can. The customer doesn't
need to know which individual in your team messed up; it's enough to know that it's
your team. Don't ever try to pass the buck when speaking to a customer, tempting
though it may seem to say, 'I'm afraid a ju ni or member of my department made a
mistake'.
You w i ll obviously need to talk to the team member in question privately.
However, you need to separate the mistake from the customer's reaction to i t . If
the customer overreacted wildly to a minor error of judgement or an
understandable mistake, don't make a big deal of it with your team member jus t
because the customer made a big deal of it with you. If you're angry and upset by your
exchange w i t h the customer, wait until you've calmed down before tackling the
person who made the mistake.

You can't deliver on a promise to a customer

The important thing is to limit the damage, and there are two key ways to do
this:
1. The most important thing is to give your customer as much notice as you
possibly can. The later you tell them, the deeper the hole you land them in. Plenty of
warning gives them time to find a contingency without it becoming a major issue. If
you're not sure whether you can deliver but it's looking increasingly dodgy, you'll need
to explain the situation before you know for certain whether you'll have to let them

76
down. Then they can choose whether to take the risk or whether to find an
alternative.
2. When you tell them, apologize profusely and let them know that you
recognize how inconvenient it is for them. Then offer them whatever you can to make
up for it. This might mean telling them you can deliver part of what they want, or
they can have everything they want but later than they hoped or to a lower standard.
Or you might say, 'I can't do this, but I can find you someone who can'.

A major customer threatens to go elsewhere unless you make concessions you

can't afford
They say that they'll go to your manager/the top of your organization/the
press. The answer is in the question here. If you really can't afford the
concessions, you can't afford the customer and you're better off letting them go.
Before you do, however, make sure that there really aren't any other concessions chat
would suit you both. If you can't drop your prices low enough, maybe they can pay
in installments or on other very good terms. If you can't deliver soon enough,
perhaps you could deliver part of the order.
If there is no meeting ground, make sure you part on friendly terms. Don't
tell them they'll regret changing supplier. That way, they may well come back to you.
If they were bluffing to get you to make concessions, or if their new supplier lets
them down, you want them to feel they can come back to you easily.

A disgruntled customer threatens to report you

They say that they'll go to your manager/top of your organization/the press.
Let them. Presumably you've done nothing wrong, so you have nothing to worry
about. Arguing with them will make it worse, and look as if you're running scared. If
you say to them, 'If you feel you want to take it further, that's up to you,' it's more
likely to deter them. After all, they were threatening in order to get a response from
you. The tactic clearly hasn't worked so they may well abandon it.
If the customer threatens to go to someone internally, from your immediate
boss to the MD, forewarn the manager concerned. They won't be too pleased if they
get a call from a customer and look a fool because they don't have any of the facts. So
brief them fully.
If by any chance you are at fault, you're still better off 'fessing up. It is better
for your boss to hear it from you first than from an angry customer.

A customer is wrong
Sometimes a customer accuses you of doing something that you really
haven't done. In fact, maybe their subsequent problems have arisen because they
failed to give you their full address, or sign the cheque. So what do you do when they
complain? Is the customer really always right?
You need to listen to their complaint, and sympathize with their problem just
as yon would if the complaint were justified. You can still say, 'How frustrating!' or
I can see that must have put you in a difficult position,' without admitting blame.
Tactfully explain what has caused the problem, but don't make them feel
stupid or they could get defensive. Avoid words and phrases such as 'fault' or 'you
should have . . Give them an excuse for their mistake. For example, 'Our delivery
terms are 28 days unless you specify express delivery. I know how easy it can be to
overlook that sort of thing, especially when you're in a hurry.'
Let them feel their point is valid, without accepting blame. Say for example,
'Maybe we should print our delivery terms on the order form as well as on the terms
and conditions. I'll suggest that to the department concerned.'
77
 Don't offer refunds or replace items just to calm a customer down, in case it
implies that you were at fault. This might be an unwise precedent. However, if you
really want to do something, describe it as a gesture of appreciation for bringing
their problem to your attention.

You know one of your customers is lying to you

You get them occasionally, customers who frequently claim, for example,
that the goods arrived faulty or damaged when you know for a fact that they didn't.
Whatever you do, don't bother arguing. You've got two options:
1. give the customer the benefit of the doubt
2. stop supplying them and ask them to go elsewhere.
You've already got a dishonest customer. If you argue with them, you'll have
an angry, dishonest customer - and that's worse. They may spread rumours or
damaging gossip about your organization. So don't fall out with them.
The other trap to avoid is changing your systems in order to try and combat
their dishonesty. You could inconvenience all your honest customers, and make
your own lives more complicated, just for the sake of a customer who doesn't
deserve that kind of effort. So if you don't want to put up with it, just drop the
customer.

An important customer demands more of your time than you can spare
If you have a very talkative customer who engages you in long-winded
conversations, you need to find a way to get the information you need from them
and then terminate the conversation without upsetting them. You can't keep
interrupting them without sounding rude, so you need to interrupt yourself.
It may sound strange, b u t it makes sense really. You need to get a word in,
b u t to do it by joining t he i r conversation rather than deflecting it. Once you're
in, then you can change the subject, like this: 'I quite agree, the traffic's getting silly
on the North Circular these days. By the way, when do you need these delivered by?'

There's a no th er k i n d of demanding customer, too: the one who's on the

phone 10 times a day w ith endless minor queries. You can't avoid this customer
altogether, and you'll offend them if you try. You just need to get them to be less of a
nuisance:
If someone's calling several times a day, tell them the first time they call t h a t
you're very busy at the moment and you want to wait until you can give them your
full attention. Ask if you can call back at the end of the day. They can save all their
questions until you ring back, and you have only one call all day, at a time of your
choosing.
Put your voicemail on or have someone field your calls. You do have to talk
to this customer sometimes, however, so don't wind them up by taking ages to call
back. Once they learn they can trust you to call back the same day - albeit at the end of
the day - they'll start to feel happier about leaving messages.
If the customer is on email, ask them to email you instead of calling. Explain
that you prefer to have everything in writing so you can be sure you have all the
details, and you don't forget to follow anything up. Now you can deal with the queries
at a time that suits you. You may have to speak to them occasionally but, again, you
can choose the time.

A good and previously reliable supplier lets you down badly.

In t h e short term, you need to find another supplier. The question is whether in
the long term you should change to a new supplier or whether you should give this
78
one another chance. In the end it's your decision, but here are some considerations to
lake into account:
-Why did th ey let you down? Is it something they should have foreseen and
avoided? Or was it t h e k ind of freak problem that no one could haveanticipated?
- H o w did they let you down? Did they give you as much warning as
possible that trouble was brewing? Did they soundsuitably concerned at letting you
down? Did they do anything to try to mitigate the damage?
- Have they ever let you down before? Have there been other minorincidents,
or is this the first problem in years?
- Why were you using them in the first place? What is it that makes them
better than other suppliers?
- Could you find another supplier as good as them in all the essentials -price,
quality, reliability, service and so on? Shop around and see what elseis available.
By t h e tim e you've thought through all these questions, you should be in a
position to decide whether to stick w ith this supplier or not. And there's one other
thing you can do- monitor the service and quality you get from whichever supplier you
use as a replacement (assuming you find another supplier forthis order). This should
give you an idea of whetherit's worth moving your contract.

You have a PR crisis on your hands

Everyone loves a drama - except perhaps the people caught up in it.
Inevitably, then, many crises will attract the attention of the press. They gather like
hyenas around the kill, each hungry to get first bite at the story. And not only do
you have to deal with the crisis itself but you also have to cope with the press, who
will be ready at any moment to turn on you if you make a wrong move.
The press can be either a blessing or a curse in a crisis, and the balance can
lie in how you handle them. Of course, sometimes the press are on your side from
the start. If your buildings have been damaged by severe weather, or a lorry has
careered off the road straight through your shop window, you have the sympathy of
the media from the outset.
But the press always want someone to blame, and all too often they will pick
on you. If you're making redundancies, if you've polluted the river that runs past the
factory or if an accident has been caused by faulty equipment then they'll be
sniffing round for evidence to pin the blame on you.
So what can you do? The good news is that there is a wealth of advice,
derived from the experience of thousands of organizations over many years. There
are ways to handle the press (and other media) that will at least minimize the
damage and, at best, turn their attitude around to one of support for your case. So
below are the key rules for handling a PR crisis.

Tell the press what's going on right from the start. The more information you
give them,th e less th e y w i l l need to d ig d i e d i r t to get a decent story.D on't wait u n t i l
you've solved th e crisis - keep t h e m posted from the moment theyt u r n tip ask in g
questions.
I t ' s no good k e e p i n g th e press informed if youd o n 't also keep your ownpeople
posted. Otherwise disgruntled staff, who are being kept in the dark, may well decide
to pass on to the press their own outdated or misunderstood version of the facts.

Honesty can actually be a disarmingly smart policy. Many years ago, the BBC
accidentally double booked two key political figures to give one of the prestigious
Reith lectures. One had to be cancelled, of course, and the press were f u l l of how
and why he had been snubbed. The Director General of the BBC adopted a simple
79
but ingenious approach when questioned by the press. He j u s t said: 'It was a cock
up, OK?' He was open, honest and wrong-footed the press completely. We all have
cock tips from time to time, and the press understand that as well as anyone.

There are three rules to remember to keep things simple. First: the press
don't know your organisation or your indus try as well as you do, and they want to
print a clear, s imple story (or t he ir readers. So don't confuse them with
unnecessary details, jargon or background information they don't want. Just keep
your message uncluttered. If they ask for more, give it to them if you can. But
don't volunteer it.
The second rule of keeping your story simple is to make sure you have only
one spokesperson if you possibly can. Otherwise there is a danger that they may
contradict each other. One single point of communication means one single,
consistent voice.
And the third rule is: never speculate. This simply adds to the confusion.
Speculation may be reported as fact - it often is. So if you're asked to guess at the
cause of the chemical leak, how many redundancies there are likely to be or when the
building will be operational again, politely decline to comment. Or just say, I
don't know'.
So, the three rules of keeping it simple are:
1.don't give more information than you need to
2.have a single, consistent message delivered by a single spokesperson
3.never speculate.
Then, get your priorities right
You will horrify readers, listeners or viewers if you start to talk about the
financial cost of this disaster when people have been killed or injured.

Be aware how things look to other people

Be aware of what the public perception of your crisis handling will be. It's not
enough to be right - you have to be seen to be right. Suppose a press story breaks
reporting that many supermarket eggs are infected with salmonella, and there is a
slight risk of serious illness. You are an egg producer. If you react by insisting that
there is no danger at all, people will just think, 'They would say that, wouldn't, they?'
There may indeed be no danger - or there may be. It doesn't matter. What
matters is that people will think you are trying to cover up the facts for your own
ends; that you're prepared to lie to people about their health rather than lose profits.
So consider how your version of events, which people will consider potentially
very biased, will look. It is better to say that you are very concerned about the health
scare over eggs - you have no evidence that there is any risk at all, but you're taking
action to find out the facts as fast as possible. Support any research - maybe donate
funds to it - and invite inspectors to check out your operation. Say you would
welcome official guidelines on how your organization can remove any risk, and
generally be seen to be taking the action the public, wants, not just paying lip service
to it.
Never 'no comment'
What do you think when you hear an interviewee say 'no comment', or when a
report says that 'the company declined to comment'? You think they're guilty,
don't you? You reckon they've got something to hide. That's what everyone thinks.
And it's what they'll think about you, if you say 'no comment'. So don't. If there's
nothing you can tell them, it's better to say, Tin afraid I don't have any more
information at the moment'.
Be positive
80
 If you seem worried or down beat in interviews, people will assume you're in
trouble. If you come across as angry they will take a dislike to you. People will read a
great deal into your attitude, so make sure it is always friendly and positive,
especially when you're talking to the broadcast media. If people have suffered, it
doesn't do to look too cheerful about it, of course. But you can still be open and
courteous. Make sure you show sympathy for any victims of the disaster, whether or
not you accept responsibility.
Be friendly
The press are only doing their job. If you want them on your side, you need to
accept this and not hold grudges against them the phone and the cafeteria and give them a
warm room. Treat them politely and with respect and be as helpful as you can.

Get your friends on your side

If the press are against you, recruit people outside the company who will
speak on your behalf. Satisfied customers, trade association contacts, suppliers, ex-
employees . . . anyone who the press will be interested to talk to and whom you can rely
on to back you up. They will assure the press that your safety standards are exemplary,
that you're a great company to work for, that you are known for your reliability or
whatever it is you need said. Outsiders always have more credibility than insiders.
Go the extra mile
If you've made a mistake, or are believed to have made a mistake, do everything
you can to put it right. Even if people blame you for the crisis itself don't give anyone
an excuse to complain about your response to it. Do even more than you have to give
people extra time off, replace their damaged property without quibble and better than
it was before, pay to clean up the river and fund a new wildlife reserve along its banks.
Show that you're sorry you messed up, but you genuinely want to make everything better.
You may remember a few years ago a cross channel ferry ran aground on a
sandbank. Due to the vagaries of the tide it was a day or so before they could float it off
again. Meantime everyone was stuck on board. But the ferry company and the crew
leapt into action as soon as the disaster struck. They kept everyone informed,
refunded the cost of the tickets, gave away all the free food and drink they could and
generally bent over backwards to make up for the discomfort and inconvenience.
When the ferry finally docked, the press were waiting to interview the
passengers as they disembarked. But much to their disappointment , they couldn't
find a single passenger who had a bad word to say about the ferry operator. They
all insisted, 'It was just bad luck, and they looked after us beautifully.
Remember, you don't have to deal with very many crises , but the press deal
with them for a living. They are bound to be smarter than you at it, so don't try to
fool them - they'll make you look the fool. Just play it straight, honest and open.

Topics for discussion:

2. How can you discover the way the client defines quality?
3. Can you guarantee your clients” satisfaction?
4. How important is listening when you deal with difficult clients?
5. Which is the key talent in good selling?
6. Who decides value?

Enlarge upon the following:

81
 • “Do good work and the clients will come”!
• “Professionals are supposed to care about their clients, aren’t
they”?
• “Quality must be negotiated continually.”
• “New business will be won only to the extent that the client
believes the professional cares and is trying to help.”
• “Continuous investment must be made in getting better and better”!

Dialogue

Mr. Slide aims at success in business. He is a middle aged, talkative merchant,

a retailer and wholesaler too. He has got a large warehouse and a wide range of
products. The storage is done in a new, modern building. How important quality is
for him might be guessed in the following discussion:
Mr. Daube, the customer: Good morning to you my friend!
Mr. Slide: How are you? I haven’t seen you for a month!
Mr. Daube: Well, I was away in France. Now I am back and I do have plenty
of products to buy for my store. I would like good quality as you have inured me so
far. I need to buy coffee, tea, cigarettes, butter, juice, mineral water, olives, sweets,
dairy products, fresh vegetables. I don’t want them to be damaged, so please be
careful with the packaging. They may be easily spoiled by dampness.
Mr.Slide: They are all well packed, you need not worry. And the quality is the
expected one as far as I will always be concerned in stocking only the best goods. I
hate to deal in cheap lines. As far as the vegetables are being concerned, I would like
to recommend you the ones I brought from Craiova.
Mr. Daube: Are they ripe enough?
Mr. Slide: You will be pleased I do promise you!
Mr. Daube: Now, what about the payment? How would you prefer?
Mr.Slide: As you wish. Cash or by check. If you have a purchase in excess of
5 mil.lei the store grants a 10% discount and 2% additional rebate for cash payment.
Mr. Daube: You are very kind.
Mr. Slide: The prices have gone up lately due to the inflation and to the
alignment of the most important products to the European prices(gas, energy.) So that
I had no choice but to cope with them. Cigarettes and coffee are a luxury and still
most of us cannot live without them. But they are worth buying as the quality is the
best one.
Mr. Daube: Maybe more smokers will give up in future or will care more
about their health…. And we’ll drink less coffee and try to be less stresses and
nervous…
Mr.Slide: You see, even if this rise in wholesale prices entails an immediate
increase in the retail ones, the consumers are not alarmed. Then retailers will have to
change their price labels again and the profits in the luxury trade may not be the ones
we wish. Maybe some people living on a present day salary or fixed income will have
to do without a luxury that they could have still afforded some months ago. The retail
trade can be duller in this respect. Anyway, let’s not be so pessimistic because things
may change unexpectedly.
Mr. Daube: I trust your products and I will remain your faithful client!

82
Additional Vocabulary:

to grant- a acorda
storage- depozitare
subsidized price- preţ subvenţionat
brand name- marcă de fabrică
to book an order- a înregistra o comandă
sale- vânzare
sale by sample- vânzare cu mostră
sale for future delivery- v. la termen
sale on hire purchase- v. cu plata în rate
sales outlet-punct de desfacere
sales quota- cota de vănzări
sales records- evidenţa vânzărilor
sales department- serviciul commercial
overstock- depăşire a stocului
price advance- majorare
price alignment- aliniere
price collapse- cădere
price cut- reducere
price gap- decalaj
price maintenance- menţinere
price shading- reducere mică
price freeze- îngheţare
price ceiling- plafon de preţuri
blanket price- preţ global
bid price- preţ oferit
bottom price- preţul cel mai scăzut
ceiling price- preţul maxim
flat price- preţ unic
floor price- preţ minimal
peg price- stabilizare
purchase price- preţ de cumpărare
sell price- preţ de vânzare
invoice- factura
delivery- livrare
middleman- intermediary
convenience stores- magazine locale
out of stock- lipseşte din stoc
sole selling rights- drepturi de vânzare exclusivistă
world market price- preţ de pe piaţa mondială
store layout- configuraţia magazinului

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 Negotiations

Negotiation is not a science nor is it a branch of technology. It is a life skill.

We start to negotiate when we are very young and as we grow older we build up
patterns of behaviour that reflect what we feel “works for us”. And this will be based
partly upon the kind of personality we may have inherited and partly upon the kind of
personality we have lived and grown up.
Negotiation in business is no doubt about facts, costs, profits, logical decision
making but also about people, their emotions(joy, surprise, fear, doubt, anger, sorrow)
, goals and the kind of human beings they are. An understanding of people’s
motivation and how their personalities can affect their behaviour can be vital in
discovering how you can do business with them better and better.
To negotiate effectively one must communicate as such. The message has to
be conveyed, received, understood, accepted in order to entail the right actions or
responses. The process of transmission is very important – not all negotiations are
conducted face to face but there are other choices too: letters, the fax, the electronic
mail, the phone. Still there might be some problems such as: they may get missed or
misunderstood.

To many personnel managers, negotiation implies collective bargaining. To a

sales executive, it w ill be thought of in terms of making a commercial deal.
Quantity surveyors, purchasing managers and lawyers all have their own specialist
interpretations of what, in essence, is a process common to all managerial work. In
reality, all managers negotiate, if not with outside parties then with each other.
T h e procedures and language of formal negotiation vary with the type of
negotiation involved. A set-piece pay bargaining session has its own system and
jargon that differ from those of a meeting of solicitors to settle a claim for libel
damages. Yet the underlying principles and much of the psychology of the process
are the same for all forms of negotiation.
It is also easy for managers to overlook the fact that much of their informal
daily activity is, in effect, negotiation. All managers spend a large proportion of their
time trying to influence and persuade other managers over whom they have no
executive authority. Consider two examples:
A personnel manager attempts to 'sell' the need for a more systematic form of
employee consultation to a reluctant office manager. The company has a general policy
of support for employee involvement practices, but has not laid down any specific
system or procedure. Neither the extent to which the personnel manager can use the
general policy to require the office manager's cooperation, nor the right of the office
manager to reject the personnel manager's suggestions is clearly defined. The outcome
will be influenced by their possibly differing perceptions of the formal position, and
by the powers of argument or persuasion of the personnel manager.
A sales executive tries to persuade the production manager to change a
manufacturing schedule to fit in a small order for a special customer. The production
manager has full authority to decide production schedules against a weekly output plan
set by top management. Officially, the sales manager should make a request through the
sales director for an urgent variation to this plan but because the order is only a small
one, he approaches the production manager informally and must, therefore, rely on
persuasion.
Negotiating skills are, therefore, a very important element in the effective
manager's portfolio of personal competencies.

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 Recognizing when negotiation is occurring is the first step towards acquiring
the necessary skills, and this is aided by an understanding of the basic principles
involved.
Negotiation is a process, not a single skill. A range of skills are involved in
handling this process effectively, but to identify the skills relevant to any negotiating
episode, it is important to recognize which elements or principles of negotiation are
involved. There are seven principles common to all forms of negotiation:
• Negotiation involves two or more parties who need or think they need each
other's involvement in achieving some desired outcome. There must be some common
interest, either in the subject matter of the negotiation or in the negotiating context that
puts or keeps the parties in contact.
• Although sharing a degree of interest, the parties start with different opinions or
objectives, and these differences initially prevent the achievement of an outcome.
• At least initially, the parties consider that negotiation is a more satisfactory
way of trying to resolve their differences than alternatives such as coercion or
arbitration.
• Each party considers that there is some possibility of persuading the other to
modify their original position. It is not essential - though it is usually highly desirable
for each party to be willing to compromise. But negotiation can begin when parties have
an initial intention of maintaining their opening positions, but each has some hope of
persuading the other to change.
* Similarly even when their ideal outcomes prove unattainable, both parties
retain hope of an acceptable final agreement.
* Each party has some influence or power - real or assumed -over the other's
ability to act. If one party is entirely powerless, there may he no point in the other party
committing itself to a negotiating process. The matter can be settled unilaterally by the
party with the untrammeled power to act. This power or influence may, however, be indirect
and bear on issues other than those that are the direct subject of negotiation.
* The negotiating process itself is one of interaction between people in most
cases by direct, verbal interchange. Even when the negotiation is being conducted
through correspondence, there is an essential underlying human element. The progress
of all types of negotiation is strongly influenced by emotion and attitudes, not just by
the facts or logic of each party's arguments.
Negotiation is a process of interaction by which two or more parties who consider
they need to be jointly involved in an outcome, but who initially have different
objectives, seek by the use of argument and persuasion to resolve their differences in
order to achieve a mutually acceptable solution.
It will probably be readily accepted that this definition is relevant to formal
negotiations such as pay bargaining or the settlement of a legal claim for damages. Trade
unions and employers or the solicitors representing two parties to litigation obviously
accept that they need jointly to evolve a mutually satisfactory outcome, starting from
differing positions. Each party knows that the other has some power to influence the
outcome. A trade union might apply the sanction of industrial action: an employer might
reduce the labor force: the claimant's solicitors might stop negotiating and take the case
to court: the respondent has some defense if this occurs.
In the second of these examples, the sales executive has no direct power to require
the production manager to alter production schedules: the production manager can just
say no -- so where does negotiation come in? A willingness at least to consider the
request and thereby become involved in a discussion about a possible jointly
satisfactory outcome - will stem from several aspects of common interest, or from a
recognition of more subtle forms of power.

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 The sales executive wants the production schedules altered, the production
manager does not, but both managers, it is to be hoped, share an interest in the success of
the business. To disappoint an important customer may be of more immediate concern
to the sales executive than to the production manager, but a good production manager
will pay heed to the importance of good customer service. Similarly, the sales
executive will recognize the costs and perhaps delays to other orders that a change in
the production schedule might give rise to. So a common interest in the good of the
business enables both to see something in the other's point of view, and thus
encourages a dialogue, rather than the simple exercise of formal authority.
It may be that the sales executive (or the customer on whose behalf the request
is being made) is known by the production manager to be highly regarded by the
managing director. It might thus be unwise, in terms of company politics, for the
production manager to run the risk of being considered unhelpful.
Both managers also know that they have to continue to work together. Without
anything being said, both will probably be influenced by knowing that this long-term
working relationship could be adversely affected by mishandling the particular incident.
The production manager may have the right to say no in other words, not to negotiate
but will wonder whether this would cause avoidable friction. There may also be the
thought that by agreeing some concession, an obligation may be created that might be
capitalized on at some future date.

In the other example, considerations of a similar kind might also lead to the
office manager's being willing to discuss the personnel manager's advice. Both have an
interest in the smooth running of the company and in compliance with the company policy:
the personnel manager may be known to have top management backing: the managers
have to go on working together, and therefore the office manager will have to consider
the implications of rejecting the personnel manager's advice if employee relations are
then seen to deteriorate.

Some key points to have in mind:

All managers negotiate - with each other, as well as with customers,

suppliers, trade unions, and other outside par ties.
Negotiation is about achieving a mutually acceptable out come to a
situation in which the parties involved initially have differing aims.
Negotiations are affected by the emotions and attitudes of the negotiators
- not just by the logic of the arguments they use.
Consultation needs to be distinguished from negotiation. In negotiation,
the parties accept that joint agreement is necessary; in consultation, one party
reserves the right to act unilaterally.
Negotiators need to identify a top line objective - the best achievable
outcome - and a bottom line - the lowest, still acceptable outcome.
Over optimism about the probable outcome is often linked to a failure to
consider the bottom line. Top and bottom lines may each consist of several
alternative permutations of the issues under negotiation. Possible outcomes need
to be considered from the other party's viewpoint as well as one's own. It is
important to retain credibility by restricting statements about 'final offers' or
sticking-points to genuine bottom lines.
If possible, one objective should be to help the other party to feel satisfied
with the outcome; but an aggressive or damaging claim has to be resisted with
vigour.
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 In planning and conducting negotiations, positive attention should be
paid to the duration of bargaining sessions, formal presentations, and individual
contributions to the discussion.
A continuous session should rarely exceed two hours, a formal
presentation 15 to 20 minutes, and an informal con tribution two to three
minutes.
Adjournments coincident with refreshments should be used to break a
lengthy negotiation into two-hour segments. Adjournments should be used as
powerful aids to nego tiation by:
providing time to consider progress or new proposals
within the team and avoid snap decisions - bringing unconstructive or
personalized arguments to an end
providing an opportunity for informal, exploratory talks between
individual members of the two parties.

The purpose of negotiation is to reach agreement, not to score points in

argument.
Effective negotiators are good listeners: they ask questions more often than
they make statements. Humor, or good-natured banter, can be used to reduce tension
and help create a bond between the two parties. It is important to look for verbal and
non-verbal clues or sig nals of the other party's changes of mood or approach. There
should be a concentration on issues or outcomes of common interest, rather than on
the original differences.
The closer a negotiation is to agreement; the more sensi tively the
discussion should be handled. Periodic, jointly agreed summaries of progress can
secure a phased agreement and prevent reversion to earlier argument. Proposals
may initially be put as hypothetical suggestions. This makes it easier for both
parties to avoid the pressure of immediate acceptance or withdrawal.
There is a positive advantage in making it easy for the other side to move,
rather than challenging them on a win/lose basis. Proposals are best sold on their
advantages to the other party, not to one's own.
Fear of losing personal or corporate face can severely inhibit progress.
Compromise should be seen as constructive, not weakness. In assessing
the benefits of an agreement, consideration should be given to factors beyond the
context of the immediate negotiation - such as the creation of useful precedents,
and the quality of long-term relationships.

The final offer and agreement needs to be timed to coincide with a period
of constructive discussion - and not be done during a combative phase.
It is important to achieve credibility for any statement about an offer's
being final - the tone and style of such a state ment may be as important as its
substance. Devices can be used to break a deadlock in reaching agree ment - such as
promises of future negotiations on a related topic, or making the introduction of
a new conditions sub ject to later review.
Before finalizing an agreement, check that all aspects have been agreed,
particularly dates for implementation, review or completion; and definitions of
terms. Ensure full understanding of what has been agreed through final
summaries and by producing written confirmation. Unresolved issues should
not be 'fudged' by producing vague or ambiguous forms of words in order to
achieve ap parent agreement.

87
 An agreement is not successful until it has been effectively implemented.
It is often helpful to include an implementation program as an integral
part of a negotiated agreement. An implementation program defines what has
to be done, when, and by whom.
For some agreements, implementation may be best effect ed by a joint
team.
Those affected by, or required to apply, an agreement (though not
themselves involved in the actual negotiation) need adequate information and
explanation. Such action should be based on defining who needs to know what,
how, and by whom this information should be given, by what methods, and to
what time-scales.

Face-to-face discussions are not the only form of negotiation: effective use can
also be made of correspondence and the telephone.
An opening letter can help to set the parameters and styleof later negotiation.
Dealing with all or part of a negotiation by correspondence may well save
time, avoid an emotional confrontation, provide a record of the negotiation, and
enable carefully drafted and complex proposals to be produced. Some negotiators are
less resistant to proposals when discussing them on the telephone.
Telephone discussions may be used to settle minor or simple negotiating
points extremely quickly.

Negotiations cannot be conducted through the media, but the media can be
used to influence the attitudes of those concerned, as well as - where appropriate -
public understanding and support.
The common characteristics of media communications of all kinds are
accuracy, clarity, and reasonableness. Press advertisements offer full control over
what is said, but their status as advertisements may reduce their credibility. Press
releases provide initial control over content, but it cannot be guaranteed that they
will be reproduced fully, or at all.
Press releases need to be written in the style of the mediato which they are
issued.
Journalists may be assisted or persuaded to write news stories. These may
carry more public credibility than company statements, but incur the risk of error or
distortion.
Radio or TV interviews should be seen as opportunities to put across a
message in clear, simple terms, regardless of the precise questions asked.
• Commercial negotiations often differ from other forms of bargaining
in that the two parties have no working relation ship outside the issues under
negotiation.
• Internal market negotiations should focus on the joint re sponsibility of
purchaser and provider for the survival and success of the organization they
both work for.
• The most common feature of commercial negotiations is buying and
selling - often to produce a contractually bind ing agreement.
• In buying and selling, the balance of power frequently lies with the
buyer who can choose to deal with an alternative source of supply.
• Consequently, business literature and training programmes concentrate
far more on developing selling skills than on the expertise involved in buying.
• Sales techniques include the avoidance of direct competi tion by
emphasizing the unique qualities of the goods or services being sold, an

88
emphasis on the benefits of a deal to the buyer, and encouraging the buyer to
make an im mediate decision.
• General bargaining principles include an emphasis on care ful planning,
the trading of concessions, and the avoidance of impasse.
• Because most commercial agreements constitute legally enforceable
contracts, it is important that they should be in writing, unambiguous, and
founded on a basis of accurate information.
• Legal remedies for breach of contract include injunctions to enforce
performance and also compensation for financial damages.

Although some people are better natural negotiators than others,

negotiating skills can be acquired or improved by practice, coaching and
training.
There are three main elements involved in improving one's negotiating
abilities - knowledge, skills and attitudes. Effective negotiation demands a
knowledge of the princi ples of the negotiating process, the context of the
particular negotiation, and its detailed subject matter. The main types of skill
involved are analytical, interactive and communicative.
Different approaches are needed to deal effectively with dif ferent types
of difficult negotiations.
Negotiations are strongly influenced by underlying atti tudes to the
process itself, to the issues and personalities involved in the particular case, and
by one's own self-perception and personal needs for recognition and achieve -
ment.
Planning to improve one's negotiating skills should be an el ement in most
personnel professionals' personal develop ment plans.

Dialogue

Mr. Nagel is the owner of a beautiful estate located 20 km far from Sibiu.
Alex Feeny came from the USA two months ago and now he is looking for a
place to settle with his family. He met Mr. Nagel at a meeting last week. Mr. Nagel
owns several estates and this one is worth buying. But he wants to deal directly with
the person willing to become owner.
A. Feeny: Good morning Mr. Nagel how are you today?
Mr. Nagel: I am very tired as I have been looking for some agencies to help
me with the sale. It costs a lot, so I do want to deal with the client and not through a
middleman.
A. Feeny: I agree and I would like to talk with you about this. Have you
thought of a price?
Mr.Nagel: Well, the estate is worth around 570 000$ but the price may be
negotiable.
A. Feeny: It is a bit too expensive for me. Even if I am a businessman, I do
think I cannot afford the price unless you drop it.
Mr Nagel: Prices here have skyrocketed lately and they are not leveling off.
A. Feeny: I can only pay 550 000 $ cash. If you agree then I can give you the
money tomorrow.

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 Mr. Nagel: I agree only if you take into consideration the terms regarding the
insurance of the house. You have to pay the installments in advance as I had already
done this so far.
A.Feeny: I agree. I think we have to meet a notary and sign the papers.
Mr.Nagel: Therefore, we can see him at 9 tomorrow morning. I will bring all
the papers and as far as you are concerned do not forget to have the money with you!
A. Feendy: I will. Thank you very much. You are a very nice person. My
family is going to be very grateful to you as they enjoy this gorgeous land.

Additional Vocabulary:

to negotiate a loan- a negocia un împrumut

ongoing negotiations- tratative în desfăşurare
negotiations in progress- tratative în desfăşurare
joint- comun
joint bargaining- negocieri commune
joint owner- copropietar
joint management- conducere colectivă
outcome- rezultat, consecinţă
to settle- a stabili, a soluţiona, a reglementa
to claim- a pretinde, a cere, a revendica
to score- a înregistra, a nota, a marca, a obţine, a realiza
scheme- plan, aranjament, combinaţie
damage- daună, prejudiciu
to adjourn- a amâna, a suspenda
adjournment- amânare, suspendare, întrerupere
to adjust- a adapta, a ajusta, a corecta, a aranja, a pune în ordine, a aplana
adjustment- ajustare, potrivire, corectare, adaptare, aplanare, acoperire.
to involve- a implica, a antrena
involvement- implicare,participare
to enforce- a aplica, a pune în vigoare
enforceable- aplicabil
enforceability- aplicabilitate
enforcement- aplicare a unei legi
to bind- a lega, a încheia, a impune, a oblige, a se lega, a se oblige
binding- legătură
concession- concesie, recunoaştere
to incur- a contracta, a asuma, a suporta, a suferi
to induce- a convinge, a determina la, a impinge la, a hotărî la
guaranteed- garantat
guarantee- garanţie, siguranţă

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 Topics for discussion:

1.How can you be successful in a negotiation?

2.Can you be persuasive with a client? In what way?
3.Are there secrets in communication?
4.How can you be inventive in negotiating a product?
5.What mistakes do you have to avoid?

Enlarge upon:

1.There is no failure, but results and only results!

2.There is no long lasting success without sacrifices…
3.There are of three kind of people: those who make things happen, those who
look at things to happen, those who do not understand what is happening.
4.Keep close with those who win and avoid those who lose!
5.Never negotiate without being afraid, but never be afraid to negotiate!

Meetings

Meetings have to be an efficient tool to assist us in getting decisions,

information and action. We discuss, decide, decree, demolish. Sometimes they can
take over our life. Some are efficient, others are not and for some of us they have even
become a way of life. The objective of a meeting should never be to have a meeting.
They are a means to an end, never an end.
If handled well, meetings can be invaluable tools for getting things agreed or
discussed. Enjoyable meetings that are productive and help to get the job done are an
ideal that becomes possible with a little effort. An unsuccessful meeting may do more
harm than one which never takes place. So, the success is judged by the actions that
result from it. And this is linked to running the meeting as the responsibility of the
whole group not only the chairman.

There are many reasons to call a meeting:

briefing people
exchanging and evaluate information
negotiating a deal
making decisions
taking things through
solving a conflict
establishing a plan
We hold or attend meetings which serve a number of purposes. People have to
be sure why the meeting is being held. Not only does the meeting need to achieve
business but also people have to be satisfied that this has been done. Meetings are at
the very heart of management. More and more time is spent in attending them. They
can be inspiring, energizing and fun.

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 Sometimes meetings fail because of:

interruptions such as noisy rooms, mobile phones, messages, people arriving

late.
lack of focus: irrelevant discussions
objective not achieved: decisions are not taken, people say they need more
time.
politics motives are being brought in: confronting discussions
poor preparation: research has not been done properly.
poor chairing
poor environment: people crammed into a room, tables covered with tea and
coffee cups and room for the papers.
poor timing: people arriving late, meetings starting and ending late.
right people absent: people with necessary input or information are not invited
or not available.
unnecessary meetings: you need a quick decision
wrong people present: they can ruin a meeting.

What is important to know in a meeting:

• to clarify the purpose of the meeting

• to have meetings only if they are necessary
• to invite people who need to give approval, have the required
expertise or information, have the creativity or intelligence to help the group generate
ideas, will carry out decisions made, will support your issue, will be directly affected
by the outcome.
• to send out a background information
• to create an agenda in order to give the start time of the meeting
and location, list participants expected to attend, list issues, give the order in which
they will be dealt with.

• to anticipate and prevent problems: problem people, hot topics,

alliances and politics, support.

• the agenda can do half of your work before the meeting even
starts: assessing items, standard items, have an order for the items, time each item,
write the agenda.

• to chair the meeting carefully and well balanced: bring in quiet

people, be open about input, stimulate a debate or discussion, listen actively, control
discussions, gain agreement and approval by bringing discussions to an end, by letting
people know it is time to make decisions or to agree, summarize different viewpoints,
discourage interruptions, ask for a decision or consensus, make sure the quiet people
speak up, take a vote if necessary.

• to satisfy the participants as well as the agenda.

• to consider that a compromise could achieve both completion

of business as well as satisfying the participants.
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 • to be a good communicator by: making people feel good and
value them and their opinion, getting them involved in the meeting, by showing you
understand the way someone feels.

• to handle challenges by focusing on the issue not the behaviour

or opinion of others, bring in others on your side, do not lose temper, give in and then
raise the matter with a higher authority or at another time.

• to announce a finishing time, to limit the number of items on

the agenda to the time allowed.

• to allocate a task owner to each item who will control the

conversation and take responsibility for any decision.

• to summarize within items, at the end of them and at the end of

the meeting.

Types of Meetings

Team Meetings
Consultancy and client meetings
Negotiations
I. Team briefing develops the team meeting into a management information
system. The objective is to ensure that every employee knows and understands what
they and the others in the organization do and why. Team leaders and their teams get
together regularly to talk about issues relevant to them and their work. There are some
benefits to team briefing such as:
• it reinforces management
• it increases commitment
• it prevents misunderstandings
• it helps to facilitate change
• it improves upward communication
II. Whenever you meet a client to present a proposal, however uncommercial
the situation, something is being sold. So, the meeting will fail if the client’s
requirements are not defined adequately beforehand. Part of our job may be to help
the client to clarify what he wants. So preparation becomes essential, a pre- meeting is
useful to define the problem and agree the client’s requirements as clearly as possible.
First stage thinking has to be used to clarify what the client wants, before suggesting
solutions. The following guidelines have to be used:
• create agreement with the client.
• identify the client’s need.
• present your solution.
• explain the proposal in detail
• anticipate any objections you know the client has.
• restate the proposal by summarizing, discussing.
• keep discussion separate from your presentation.
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 III. Doing deals is a fundamental way to achieve goals; but it is a means not an
end. A successful negotiation closes with everybody satisfied, the negotiator is
delighted when the meeting creates genuine agreement. Once you recognized a
meeting as a forum for negotiation we have established as adversarial situation. As a
result, scoring over the opposition becomes an important strategy. The negotiation
becomes an exercise in game playing: secrecy, bullying, hood-winking. So, this tacit
agreement entails stress, wastes time and catastrophe may follow, new problems may
arrive, commitment will suffer, promises will be broken, reputations will be bruised.
The responsibility will be to seek agreement: a specific plan of action to
which all parties can commit themselves.

How to hold better meetings

Conflict
Conflict is undoubtedly one of the most common sources of anxiety in
meetings. Many meetings seem to collapse into argu ment, hostility and ritual
recrimination almost as a matter of course. Do not regard conflict as inevitable or
desirable. You are not powerless in the face of emotional hostility; but, in order to
handle it well, you need to distance yourself from it.
Begin by trying to locate the source of the problem. Sometimes this is
obvious: insecurity at a time of great change, stress, a new set of working
relationships or pressure from public exposure. On other occasions, it may seem
to bubble up from nowhere, starting with something small and escalating quickly
as it takes hold of the group. Conflict thrives on confusion and doubt. Some
group members may seek to manipulate it for their own ends or use it to justify
their cynicism about all matters managerial. As conflict grows through a group, it
becomes more emotional, generalized and unfocused. Looking for a target, it can
find the Chair, turning the meeting into an all-purpose 'grouse session'.
Hostility often results from a sense of powerlessness. It is the feeling of
being at the mercy of forces outside our control that is so disabling. This is why
anger often centres on what has happened in the past, and in particular on what
'they' have done: senior management, other teams, department heads , rogue
operators' who have bucked the system, engineers or
sales staff who are never in the office, customers, suppliers, competitors. Be prepared.
If you are facing conflict or group
resistance, you must give yourself a single overriding objective: to empower the group to
do something practical. Only by focusing their thoughts on the future, and on what they
can do
will you transform people's energy from conflict into purposeful activity. Arm yourself
with a few guiding principles.
- Make the objective of the meeting clear at the outset. Write it up on a flip chart
and be ready to refer back to it frequently.
Challenge people to explain the relevance of their remarks to the meeting's
objectives.
- Remember that your task is to control the conversation.
Resist being drawn into the emotional maelstrom, however hard that may be.
- Slow the conversation down. Do not mirror the tone, pitch or speed of
others' speech.
- Do not interrupt or cut people off in mid-sentence.
- Listen to the points people are making and display them openly on the flip
chart.

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 - Do not be tempted to argue, or to contradict opinions or generalizations:
about what 'they' do, or what 'always' happens. A good response to such remarks
would be: 'In what circumstances?
- Turn complaints into objectives by asking people to restate them as 'how to'
statements. Write these up on the flip chart and display them.
- Stop people from talking about others who are not at the meeting. Insist
that 'they' are not here and we are, and that only we can address our objectives.
-Focus on solutions, not problems.
-Be a broken record! Repeat your questions to the group, over and over -
'What are we trying to do? What can we do about it? How does this relate to our
objectives?'
Be specific. People should know what contribution they are being asked to
make, and how their contribution will contribute to wider objectives. Being explicit
about goals and targets is the only way to achieve this. If you genuinely consult -
asking for suggestions, inviting people to participate in finding solutions - a great
deal of resistance will melt away.
Focus on action. Draw the group's attention away from what others have
done or are doing, towards what we will do in the future. You will have to be
sensitive about this. Demonstrating that you understand people's grievances can be
useful in winning them over to your own ideas; and in rooting out areas for
improvement. However, there will come a point in a 'grouse session' when you
should start asking, insistently but quietly: 'So what are we going to do?' In this
way, you will divert attention from damaging 'storytelling' and complaint towards
commitment and agreement. By showing that something can be done, you can show
people that they have power to change things.

CONVERSATION: THE HEART OF THE MEETING

At the heart of any meeting is conversation. It is by conversing that we express

our thinking and relationships to each other. If we want to improve our meetings, we
must improve the quality of the conversations that take place in them.

THE DYNAMICS OF CONVERSATION

Conversation is a verbal dance. The word, from Latin, has the root meaning of
'to keep turning with'. Conversation relies for its success on all participants moving.
Like any dance, conversation has rules and standard moves. These allow
people to move more harmoniously together, without stepping on each other's toes.
Different kinds of conversation have different conventions. Some are implicitly
understood; others must be spelled out in detail and rehearsed.
This sense of a conversation is well expressed in the word 'dialogue'. The
purpose of dialogue (from the Greek, 'meaning through') is to construct a new, shared
meaning through conversation: a meaning that would not come into being if the
conversation did not happen. We explore each other's perceptions, offer our own for

95
examination and transform our thinking in the light of others'. This, at its very best, is
what conversation can achieve.

Talking and listening

The dynamic of conversation involves two elements: talking and listening.

These two activities do not happen merely in sequence, but simultaneously: each
participant in a conversation is both speaker and listener throughout the conversation.
Most of us are better at talking than at listening. As managers, we are trained
in the techniques of presenting, explaining and influencing. Our education mostly
stresses the value of arguing: taking a position, holding it, defending it, convincing
others of its worth and attacking any argument that threatens it. As a result, our
conversations tend not to dance but to push and shove.

Adversarial thinking

In an attempt to impose order on our conversations, we have invented debate

(from the Latin, 'to beat down')- Debate fosters adversarial thinking: a form of group
thinking so common that, for many of us, it is the only way any group can think.
Instead of enduring a verbal brawl, we set up a boxing match, in which ideas -
preferably two opposing ideas - fight it out according to more or less strict rules. The
idea left standing at the end is considered to be 'true'.
Much is made in management theory of the virtue of debate. It is said to be
not merely unavoidable in business, but positively desirable: a recent article in
Harvard Business Review calls it 'creative abrasion'. No less an authority than Peter
Drucker has written: 'the understanding that underlies the right decision grows out of
the clash and conflict of divergent opinions and out of the serious consideration of
competing alternatives'.
By the rules of debate, if you prove the opposing idea to be wrong, you have
somehow proved that yours is correct. This is clearly ridiculous: both arguments may
be wrong; both may be partly right. Yet debate cannot allow us to consider these
possibilities - or any others. A debate is a conflict of rigid opinions.
Opinions are ideas gone cold. They are our assumptions about

• what might, or should, be true rather than what is true in specific

circumstances. They may take the form of:
- stories (about what happened, what may have happened,
• why it may have happened);
- explanations (for why something went wrong, or why
we
• failed);
• justifications (for taking action or not);
• wrong making (I am right, you are wrong);
• gossip (to make us feel better at the expense of others);
• generalizations (to save us the trouble of thinking).
We are so used to voicing and listening to opinions that we can easily mistake
them for the truth. Whenever you hear the word 'fact' in a meeting, you can be almost
certain that somebody is voicing an opinion.

96
 The overwhelming limitation of adversarial thinking is that it is destructive. The
'clash and conflict of divergent opinions' actually prevents people from exploring or
developing ideas. They are too busy defending themselves, too frightened to venture
from their corners, too battle-fatigued.
It is unusual for any meeting to avoid adversarial thinking. It
usually appears in one of four forms.

Critical thinking
For most of us, to think about something is automatically to look for
something wrong with it. Take note next time you ask anybody for their response to an
issue: invariably their first thoughts will be critical.
The rationale behind critical thinking is presumably that, by looking for the
weaknesses in an idea, we can strengthen it. But we rarely receive criticism in this way;
instead, we try to defend our idea from the criticism or attack the criticism itself, in an
effort to discredit it.

Ego thinking
In adversarial thinking, we become identified with our ideas. Criticism of an
idea quickly becomes an attack on the person holding it. Debate is used as a pretext
for scoring points against others. Reason gets infected with emotion.
Meetings often devote enormous amounts of energy to preventing emotion
from overwhelming debate, but the dynamic of debate makes emotional conflict
inevitable.

Rigid thinking
All thinking starts from propositions about reality. Adversarial thinking
merely pits these propositions against each other. It limits itself to their terms and
their consequences: any thinking that questions the thinking behind a proposition,
or strays beyond its boundaries, can be dismissed as 'irrelevant' (or 'deviant').
Indeed, the adversarial mode actually serves to entrench propositions rather than
adapt or modify them. Rigid thinking is usually the result of:
• conforming to authority ('if senior management see it this
• way, it must be right');
• the influence of custom ('our profession has thought like
• this for the last two hundred years');
• habit ('this is the way we think around here');
• willful ignorance ('thinking like this saves us the bother of
• dealing with inconvenient detail or finding out more').

Political thinking

When ideas become identified with individuals, people realize that

achieving action is a matter of aligning themselves with ideas, and with those
promoting them. As rigid thinking limits the growth of ideas, propositions can only
be attacked or defended. To attack an idea is to attack its sponsor; to support it is to
create an alliance. We begin to use conversational gambits, ploys, manoeuvres and
defence mechanisms, not to develop the conversation but to play politics: creating
'power bases' and undermining 'opponents', bureaucratic conniving, behind-the-
scenes manipulation and rumour-mongering. We accord adversarial thinking
enormous prestige. Managers

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 who can defend their ideas and withstand the onslaught of their peers - or,
better still, their superiors - gain status and may be promoted on the basis of their
'strong character'. They become 'heroes' and the stuff of myth.
Adversarial thinking is self-perpetuating. Like other kinds of conflict, it is
cyclical and can escalate easily. Being attacked for our ideas causes pain; we
respond in kind and help to pro long the conflict. We may engage in 'pre-emptive
strikes', attacking before being attacked. Adversarial thinking expresses our lack of
security, and the need to protect ourselves from future threats.
Thus we become locked in a 'cold war' of argument and counter-argument.
Although we may recognize that our behaviour is unproductive, we feel we cannot
do anything dif ferent. We do not know how to; and we may be too frightened to
who can defend their ideas and withstand the onslaught of their peers - or,
better still, their superiors - gain status and may be promoted on the basis of their
'strong character'. They become 'heroes' and the stuff of myth.
Adversarial thinking is self-perpetuating. Like other kinds of conflict, it is
cyclical and can escalate easily. Being attacked for our ideas causes pain; we
respond in kind and help to pro long the conflict. We may engage in 'pre-emptive
strikes', attacking before being attacked. Adversarial thinking expresses our lack of
security, and the need to protect ourselves from future threats.
Thus we become locked in a 'cold war' of argument and counter-argument.
Although we may recognize that our behaviour is unproductive, we feel we cannot
do anything dif ferent. We do not know how to; and we may be too frightened to

How, then, can we break out of the vicious spiral? What can we do to help
meetings evolve beyond the fruitless and exhausting ritual of adversarial thinking?
Perhaps the first step is to improve our listening.

The gentle art of listening

The quality of any conversation depends on the quality of the listening.

Listening is far more than simply not speaking. The listener controls the speaker's
behaviour by their own: by maintaining or breaking eye contact, by their body
position, by nodding or shaking their head, by taking notes or doodling, and so on.
Similarly, when we speak, we demonstrate the quality of our listening. If we interrupt,
we demonstrate that we have stopped listening, that we are not interested in listening
any longer. This, in turn, will affect the other's speaking and listening.
We all know the symptoms of poor listening. They are so familiar that we
even expect them and develop tactics to cope with them. They include:
• outright condemnation of an idea;
• criticizing the speaker's delivery;
• only replying to a part of what somebody has said;
• interrupting;
• daydreaming;
• paying attention to a distraction;
• holding another conversation at the same time;
• evading the issue;
• using emotional words;
• going to sleep.
We are all able, however, to listen effectively. We listen well when we:
98
 • like or admire the speaker;
• want to trip them up;
• think they have something interesting to say;
• expect to be rewarded or punished for listening well;
• know that we will be asked to comment;
• have an overwhelming need to listen;
• are not distracted;
• know or have learnt that effective listening improves group
behaviour and leads to improved results in the meeting.
The first step in improving our listening skills is to become aware of the
obstacles. Some we will have control over; others we may have to endure.

Talking:

Arguing
Multiple conversations
Asking an irrelevant question
Changing the subject
Wandering off the point
Unfamiliar voice patterns
Ambiguity: double meanings, woolz use of language, jargon
Lack of detail in speaking
Speaking too long

Behavioral:

Avoiding eye-contact
Looking bored
Sending the wrong signals: head-shaking, foot-tapping
Yawning
Fidgeting
Clock-watching
Rustling papers
Misinterpreting behaviour
Cross-cultural confusion

Psihological:

Shyness
Aggressiveness
Intimidation
Inappropriate use of authoritz
Personalitz clashes
Bias
Favourism
Prejudice: race, gender, class, age, educational background
Cultural habits

Physical:

99
 Noise
Other people
Other meetings
Sub-meetings
Interruptions from outside
Technical interruptions: phones, bleepers, computer malfunctions
Poor ventilation
Fierce air-conditioning
Extremes of temperature
Uncomfortable furniture
Sitting too long
Inappropriately shaped table
Disability not accomodated

Conversation is the way we think together. What we say is what we think.

We are paid to think. Our success depends on our results; we think when we want
results that are better than they would be without thinking. And yet most of us are
not trained to think. Thinking is not yet regarded as a key managerial skill. As a
result, we have developed a number of damaging misconceptions about thinking.
Thinking is not an alternative to doing. We can use thinking as an excuse
not to act; and we can act without thinking. The reason we do both so much is that
we regard thinking and action as opposed. They are not. Effec tive thinking improves
the effectiveness of our actions; and our actions are a rich source of good ideas.
Thinking is not intelligence. Thinking unintelligently may still achieve
something. Intelligence without thinking is useless.
Thinking is not a function of education. Highly educated people are not
necessarily good thinkers; and many people with little education can think
extremely effectively.
Thinking is not being clever. An increase of knowledge is not thinking: it
is simply hoarding. Too much information can seriously hamper our ability to
think.
Thinking is not only the operation of logic. It involves looking, exploring,
choosing, designing, evaluating and having hunches. It includes considering
priorities, objec tives, alternatives, consequences and other people's opinions.
There is a Japanese proverb: 'None of us are as smart as all of us.' Yet most
groups of people think far less well than any one of them individually. Two main
reasons suggest themselves.
1. We confuse conversation about the task with conversation about
process. We identify thoughts with people. We talk in code. We use conversation to
express loyalties or alliances, to bid for power, to protect our position or sense of
self-worth. We persist in old conventions or habits of conversation to feel more
comfortable.
2. We fail to manage the structure of the conversation. A well-managed
conversation will begin with clear objectives and end with clear actions. Many
conversations have unclear agendas (or hidden agendas); others are combinations of
several conversations at once. We allow our conversations to ramble, to get stuck, to
be hijacked or stifled. Because the behavioural or 'political' aspects of conversation are
so powerful, we find it difficult to influence the course of conversations productively -
particularly in a meeting, when a group of people are involved.
Tackling these two failings is critically important if we want to help ourselves
and others to think better in meetings.
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 Thinking 'hats'

Serious conversations should seek to distinguish ideas from people. Edward de

Bono's 'Six Thinking Hats' are becoming increasingly popular as tools for clarifying
this distinction. De Bono suggests that we label every contribution to a conversation by
means of a coloured 'hat' that the speaker is 'wearing' as they make it. Chairs can also
ask participants deliberately to make contributions 'wearing' a particular hat. The six
'hats' are:
White hat: facts and figures. Red hat: emotion, feelings, hunches and
intuition ;lack hat: caution, judgement, fitting propositions to facts.
Yellow hat: advantages, benefits, savings.
Green hat: creativity, new ideas, exploration, suggestions.
Blue hat: thinking about thinking, control of the thinking
process, 'points of order'.
The beauty of de Bono's hats is that we can put them on and take them off
very easily. It would be utterly inappropriate to suggest that someone is a 'red-hat
thinker' or a 'black-hat thinker'. Anybody can use the hats whenever they want. Indeed,
using the hats allows people to make remarks that they might not ordinarily
risk making.
We can use the hats informally or systematically. Judging which hat to pick at
which point can become a sophisticated chairing skill in itself. Consultancies now
exist that train managers in the use of the thinking hats.

The two stages of thinking ,

We can imagine thinking as a process in two stages.

First-stage thinking is concerned with perception: we recognize something
because it fits into some pre-existing mental pattern. We can call these mental patterns
'ideas'. Ideas are arrangements of experience in our minds. They allow us to make sense
of our experiences; they are the means by which we have experiences. In first-stage
thinking, we encode experience so that we can use it at the second stage. We name an
object or event; we translate complex activity into an equation; we simplify a structure
by drawing a diagram.
In second-stage thinking, we make judgements about our
experience by manipulating the code. Having named something
as, say, a 'cup', we apply logic, custom and aesthetics to judge
its effectiveness as a cup. Having labelled a downturn in sales
as 'a marketing problem', we use market research, spreadsheets,
past experience and critical scrutiny of the marketing depart
ment to judge how best to solve it.
Managing our thinking begins by:
- separating the two stages of thinking;
- becoming conscious of which stage we are in at any point; - applying
only the tools and techniques appropriate to that stage.
We are highly skilled in second-stage thinking. We are taught it at school: we
learn verbal and mathematical languages, we are encouraged to analyse, to deduce, to
argue and to evaluate. So sophisticated is our second-stage thinking that we can
construct computers to do it for us. We are so good at it that we regard it as the sum
total of thinking. IQ (intelligence quotient) is a measure of our ability to manipulate
language and symbols.

101
 We are not nearly so skilled at first-stage thinking. We are taught virtually no
techniques to help us improve our percep tions. Yet a change in our first-stage
thinking can have dramatic consequences at the second stage. If we decide that the
cup is not a cup but a trophy - or a vase, a mug, a chalice - our second- stage thinking
about it will change. Our 'marketing problem' may actually be a 'product quality
problem', a 'distribution problem', 'a personnel problem', a 'macroeconomic problem'
or a subtle combination of all five.
Second-stage thinking is focused on results. First-stage thinking is not focused
at all, and this makes us uncomfortable. Where second-stage thinking is 'deep',
concentrating our atten tion on a single idea, first-stage thinking is 'shallow',
scanning a wide area of experience. It creates anxiety because it delays the moment
of deciding, forces us to suspend judgement and challenges our current way of seeing
reality.
We prefer to take our perceptions for granted, but no amount of good
.second-stage thinking will be effective if it is based on limited or faulty
perceptions. Good thinking pays attention at both stages of the process.
The great Swiss psychologist, Carl Jung, developed the two stages of
thinking into two sets of paired complementary func tions: sensation and intuition at
the first stage; feeling and thinking at the second. Jung himself used this model as
the basis of a theory of personality types; it will be familiar to many managers as the
basis of the Myers-Briggs type indicator.
First-stage thinking questions include:
1. 'What can we see?' (Sensation). 2.'What might it mean?' (Intuition).
Second-stage questions include:
1. 'What can we do?' (Thinking). 2.'What shall we do?' (Feeling).

Vocabulary:

to chair- a prezida
chairman- preşedinte
to decree- a decide, a emite un decret
meeting- întrunire, şedinţă
to call a meeting- a convoca o şedinţă
notice of meeting- notificare a aunării generale
to brief- a rezuma, a instrui
briefing- instruire, informare
briefing conference- conferinţă de îndrumare
to exchange- a face schimb
to establish- a stabili,a institui, a întemeia, a instala
establishment- instituţie oficială, stabiliment,organizaţie publică sau privată,
fondare
timing- sincronizare
outright- deschis, cistit, total
outright loan to a project- împrumut direct pentru proiect
outright grants for research- alocaţii integrale pentru cercetare
bias- eroare sistematică, distorsiune
disability- neputinţă, incapacitate
disabled- incapabil de
to trigger- a declanşa, a porni, a lansa
liable- răspunzător, supus
commitment- angajament
102
 to reinforce- a consolida,a întări
reinforcement- consolidare
to share- a împărţi
to share in- a lua parte la
to share out- a repartiza, a distribui

Topics for discussion:

1.How important is conversation in a meeting?

2.Which are the symptoms of poor listening?
3.What happens to a meeting if it is stuck on a problem?
4.How important is timing in a meeting?
5.What is adversarial thinking?

Enlarge upon:

*“Meetings will not improve by magic. People must want change and be
willing to implement it.”
*“Thinking is an alternative to doing”.
*“A decision is committing to a course of action: choosing from among a
number of alternatives and making a rational and emotional commitment to that
choice.”
*“Meetings are the very heart of management.”
*“Getting agreement is easy. Getting everyone to confirm afterwards about
what exactly was agreed is the hard part!”

Dialogue

Mr. Brown is the General Manager of “Imperial Industries”, an important

Company. He is attending the Annual General Meeting in a huge hall crowded with
shareholders, all very excited. Mr. Crossly , the Sales Manager is going to preside the
meeting.
Mr. Crossly: Good morning and I am glad you are here today.
He turns the floor to Mr. Brown who is impatient and ready to convince the
audience with facts and figures.
Mr. Brown: We must be very pleased with the turnover of the company which
has enlarged considerably. Even if we had to face a tough competition, I’m glad to tell
you that we are highly appreciated on the domestic and foreign markets. We have
fine, reliable products for the next financial year and we do hope to merge with other
well known companies. One of them will be “ T&T” Company in the South of
Europe.
Mr. Monro, Marketing Manager for the “Liox”Company in Germany :
How did you succeed in spite of the unsuitable buildings? It seems to me
almost impossible now that I have in front of me the figures.
Mr. Brown: It is true that the buildings are in a deplorable condition but we
have updated machinery and highly trained staff. We are extending within an area of
4 square miles. The new location will cost a fortune but it’s worth. New openings
abroad are to be found and new funds are being expected.
103
 Mr. Monro: I cannot agree with this. Until money arrives what is going to
happen? Are you aware of this? How can you be so optimistic?
Mr.Brown: We are very prompt and efficient, promising and hard working.
Mr. Monro: But we talk about huge sums of money!
More and more excitement among those present at the meeting as they are
shaking their heads…
Mr. Crossly: You need not worry because we’ll manage to carry on our plan.
The outlook is good, we have no unemployment, the output is high, we have good
forecasts, the percentage of the business is the expected one.
Mr. Monro: Which are the export outlets figuring in marketing plans?
Is there any drawback to be expected?
Mr. Crossly: Mostly Eastern European outlets, and as far as drawbacks are
concerned, I’m thinking of a depreciation regarding the dollar any time.
In the end there was a unanimous consent to wait for the further funds and for
an outright loan.

Additional Vocabulary:

guidelines- directive
deputy manager- director adjunct
sales manager- director commercial
acting manager- director interimar
layout of a meeting- amplasare
to take charge- a-şi asuma responsabilitatea
turnover-cifra de afaceri
merger- fuziune
outright loan- împrumut direct
outlet- piaţă de desfacere
slump- criză
funding- finanţare
boom- avânt
long term- pe termen lung
medium term- pe termen mediu
short term- pe termen scurt
restrictive practices- practice anticoncurenţiale
leveraged- îndatorat
divestitures- sciziune
to bail out- a salva
golden parachutes- compensaţii financiare garantate
lay offs, redundancies- concedieri, disponibilizări
joint ventures- societăţi mixte
ailing- în dificultate
to spin off assets- a distribui activele
tender offer- ofertă publică de cumpărare
junk bond- obligaţiune speculativă
corporate governance- conducerea înterprinderii
leveraged buyouts- preluarea controlului prin împrumut, cumpărarea de către
salariaţi.
to bid- a face o ofertă financiară
buyout- cumpărarea unei firme în totalitate

104
 E- Business for the Small Business

W h a t is e - c o m m e r c e ?

All businesses exist because they serve a market. Successful enterprises,

big or small, keep their customers by providing what they need. In a traditional
business it means knowing your market, buying in the necessary raw components,
combining them in your own unique way, pricing products to suit the market and
distributing them efficiently. The final element is collecting the money. All of
these stages take time to get right, not to mention the boundless energy. Unless you
are very lucky indeed most traditional businesses take up to three years to show a
profit on the bottom line.
What the new technology has done is to solve, for some businesses, two basic
issues which until now have been major causes of early failure: cash flow and
distribution. Using the Internet as your shop-front, you can ask for the money before
you dispatch any goods or services to customers, thereby reducing your exposure.
In some cases you may not even need to produce the product until an order is
received. The second main benefit of a Web site is being able to reach potential
customers on a global basis with very little marketing cost. This makes your break-
even model completely different from making profits in a traditional business. You
could be profitable within a few months rather than having to wait for a couple of
years or more.
But e-commerce is also about the back end of the business. The side benefits
of installing linked PCs, whether they are all hooked up to the Internet or not,
include a more efficient business in terms of dealing with enquiries, product data
and pricing issues. These benefits extend back into your relationship with your
suppliers, in other words, obtaining and debt collection. If your suppliers are
themselves on the Internet, that is even better. At the very least you will no
longer need to write letters or send confirmations by mail for agreement. Just imagine
how much time that would save for the average business. By linking your staff
together using a company-wide 'intranet" (people sending each other messages on a
private, company-only system) would abolish the wasteful practice of internal paper
memos at a stroke. Decision making right across the company would be improved both
in its speed and the discussion of any relevant issues.
Whenever you need to do some research, the Internet can provide access to
information and market data which until now has only been available to big
companies with big resources and big margins or to members of expensive trade
associations. National statistics, trade trends, other people's prices and terms, new
products, impending legislation, competitor details are all available, often at little or
no cost. All you need is a little patience and skill in knowing how to search out
such information on publicly available and often free Web sites.

History of the Internet

The Internet did not suddenly come into being overnight. The system has
been in development in one form or another for more than 35 years. Understanding
how it all started provides current users w i t h a better appreciation of what it can do.

105
 When did it all start?

The US Department of Defense was concerned in the mid-1960s that in the

event of a nuclear war the armed forces would not be able to communicate with each
other through the usual telephone networks. These networks relied on central control
exchanges. Scientists argued that such control exchanges would be the first to be
attacked in hostilities and therefore could never be the basis of a secure telecommunica-
tions system. So they proposed that new technology should be developed whereby
messages could be sent directly from one party to another without having to go through
an exchange. Each sending station or 'node' had equal status within the system.
Messages would be packaged in electronic parcels and let loose on the network to find
their own way to their destination through the most efficient route. If any part of the
network were to be destroyed, the message parcel simply found an alternative route.
The principles of the new system were tested in the UK at the National
Physical Laboratory in 1968 and then later developed by the Pentagon. The first node
was a supercomputer based in UCLA (University of California at Los Angeles) to
which four more nodes were linked in 1969. For the first time scientists were able to
share computer facilities even though they were in different locations, by exchanging
data between the five nodes. By 1972 there were 37 nodes in the network known as
ARPAnet (Advanced Research Projects Agency net). The Internet today is largely a
development of ARPAnet.

When was e-mail invented?

During the trial periods it was noted that scientists were sending each other
personal messages as well as academic data and were exchanging ideas of a less formal
nature. The concept of 'e-mail' was born. By the late 1980s the National Science
Foundation (NSF), a US federal agency, had taken up the task of developing its own
network for some government employees using the technology of the ARPAnet, sending
messages via new, higher speed transmission lines. To distinguish whether the sender was
an academic or from the government, 'edu' or 'gov' was added to the sender's network address.
Later on other codes were developed to distinguish the type of user and were included in
their electronic address.

How did the system become available to the wider world?

As other organisations acquired computers that could convert messages into packages
to be sent electronically (and receive them back) new commercial networks were developed. It
was then a fairly simple idea for some of these organisations to link up to create even wider
networks. In time, computers bought for businesses and the home came with the necessary
decoding programs to send and receive messages through telephone lines which were in turn
linked to other networks through Internet Service Providers (ISPs). It has been estimated that
over 200 million people are now connected to the Internet via their nodes (computers) and the
numbers are growing each month.

Is the World Wide Web something different?

106
 It can be confusing. The terms 'Internet', 'Net' and 'World Wide Web' are often used
to mean the same thing. To be more accurate, the World Wide Web is the multimedia part of
the Internet. The Web is the collective name for all the documents on the Internet that can be
accessed through programs stored on your computer. These access programs are called Web
browsers. In essence, the Web browser converts electronic information from other computers
into displayed material that you can read or see. Anyone can create a document and make it
available on the World Wide Web for other computer users to read. This displayed
material is known as a Web site.

The importance of the Internet as a business tool

When you are running a business you need to grasp issues quickly if you are
going to keep ahead. You may already be wondering from the description above
what relevance such a system would have for you in your everyday business life.

E-mail

The Internet provides the facility to send and receive written business
messages through the telephone network. If you want you can set up your system to
be available to receive messages on a 24-hour basis, which is important if you trade
with overseas customers. You may want to place or receive an order late at night or
during the weekend. Or you may need a rush order completed to help you meet a
deadline for one of your own customers and you've missed the post. E-mail sends the
message virtually instantaneouslv.

Data collection

Almost any type of information can be found on the World Wide Web. If you
are not sure where the information is you can ask Internet companies called "search
engines' to help you find it. If you know the name of the organization that has the
information, you can visit its Web site from the comfort of your own office and print
off or store in a file any parts or all of it without having to declare your identity.

Discussion groups

Sometimesin b u s i n e s s ,y o u ju st want tot a l k to someone whoh a s been th ro u g ha

s i m i l a r commerciale x p e rie n c eso t h a t y o u can a v o id c o stly errors. U s i n g t h e I n t e r n e t
you can j o i n ' l i v e ' d isc u ss io n son yourc o m p u te rm onito r,o f t e n on a w o rld w id ebasis,
a n d ask q ue stion sabout your p a r t i c u l a rissue. You may want to know if there is a market
for y o u r p r o d u c t sin a f o r e i g n c o u n t r y .J o i n a USHNET group or a news- grouponline
a n d a s k th o se people whoa c t u a l l yl i v e there w h a t t h e y t h i n k .

Long distance data transfer

You may need tose nd a 40-page documentw i t h complexd i a g r a m sto a p ote ntial
c l i e n t on anotherc ontine nt.If you m a i l it this could take days, p o s si b ly weeks to get there
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and even then there is no guaranteewiti l l a r r i v e in one piece. U s i n g th e In te r n e t you
can 'a t t a c h ' th e document toan e - m a il and yourc l ie n t can print out the document onh is
or her o w n computer w i t h i n seconds. Developments in th e speed of d a t a transfer mean
t h a t p ic t u r e sand m o v i n g imagesc a n be sent bythe same method.

The building blocks of e-commerce

Once you have realised the potential savings in tim e and expense w h i c h even
average use of t h e Internet can deliver, you w i l l be keen to get started. The process of
getting online is not difficult, but as you w i l l discover, once you are connected you
may w ell have to changeth e entire way you dobusiness.
Here are j u s t some of the basic steps you w i l l need to ta k e to set up and
develop your own e-commercebusiness:
• buy su ita ble computers;
• lin k them together;
• rent an extra telephone line(s);
• choose anIS P and go online;

• create a Web site;

•choose appropriate money collection and security software:
•decide what products you can sell online:
•think through sending products to overseas customers:
•be aware of any legal issues that may result:
•create a marketing strategy and business plan for e-business:
•consider how e-business will affect your existing trade:
•develop your database.
It looks like a simple list. From a mechanical viewpoint, it is. Some experts
will tell you that they can get you online within a day but a Web site is not necessarily
an e-business. Each step requires you, as a small business owner, to consider all the
alternatives currently available if you want to achieve a profitable and sustainable
business. It is not easy. The language suppliers use is often confusing as are the claims
of speed, efficiency and suitability for your particular business.
Because the skills to help you develop e-commerce are all relatively new, the
costs can vary enormously. Equally, because this way of doing business is so new, no one
has all the answers. The advice from both start-ups and established players is to take
each stage in sequence. Think through how you need to organise your staff to get the
best results. It will be a frustrating as well as a rewarding experience, like all new
businesses, so be prepared for some hard work.
Finally, do not be afraid to ask so-called experts to explain what they mean. The
computer industry is probably the best example in the world of an industry that likes to
cloud the issue. At times the jargon can be overwhelming. So do not suffer in silence.
Get your new technology suppliers to explain in simple terms what the new piece of
equipment can do specifically for your business. If you do not understand it you
probably won't use it, so the investment will have been wasted. Remember that many
so-called e-businesses are often nothing more than direct marketing operations that
happen to take customer orders electronically. The vast majority of e-businesses still
only use the Internet as a way to get enquiries or orders.

As you grow in confidence, so will your awareness of how products, particularly

software, could enhance what you do. Use the Internet itself to ask for opinions and ideas.

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You'll be amazed how helpful other e-business owners around the world will be when you ask
for advice.

F r o ms m a l l b u s i n e s s t o b i g b u s i n e s s

There is no doubt that the early years of the dot.com revolution have been
littered with a number of high profile failures. Some of the losses have been
spectacular. Such bad news has always been good news for the newspaper publishing
industry - it is always much more entertaining for readers when things go wrong. But
there have also been some remarkable success stories that have received less public
attention.
Finding the right level of funds at the right time for a budding e-business on an
ongoing basis needs to be planned for. It is likely that the funds will not come from
the big banks as it has done in the past for most small businesses wishing to expand
their business.

The current trading background for dot.coms

When two twenty something Cornell University graduates floated

Theglobe.com on the New York Stock Exchange in the late 1990s the share price
recorded the highest ever one-day rise on Wall Street - 606 per cent. Within 12 months
the price had fallen by 9S.5 per cent and they were both replaced by a 50-year-old
advertising executive.
The tale of high expectations followed by poor sales and dubious management
has been repeated in the UK. There is even a Web site dedicated to tracking dot.com
failures, although there are rumours, ironically, that this too may be having financial
difficulties. The availability of investment funds seems to have receded in line with
the absence of any real evidence of future profits. But it need not be the same for
every dot.com business by any means. There are still many investors in the
marketplace who are keen to back new e-businesses provided there is a convincing
business plan.

Developing your e-business plan

Assuming you have a general idea that you are going to need more than you
currently have in the bank to fund the development of your e-business, the first thing
to consider is the main headings of expendi ture over, say a five-year period:
• Salaries: list all the salaries you will need to pay including any secretarial
help and the estimated outcomes of inflation.
• Benefits: add on all the salary-related extras like National Insurance, cars,
expenses, travel, pensions, bonuses, overtime, recruitment fees.
• Marketing: allow for new campaigns and procedures, ongoing Web site
development, selling aids, public relations, ASP soft ware, trading licences.
• Distribution: postage or shipping costs, packaging, warehousing, dispatch,
returns allowance, stocks and stocks unsold, insurances, taxes if applicable,
percentage per country market.
• Central support: finance, legal, human resources, professional advice.

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 • Equipment: new office hardware, warehousing plant, buildings, cleaning,
security, depreciation, servicing/leases.
The easiest way to approach this is to take your normal end-of-year list of costs
as drafted by your accountant and complete a s imilar list for your new e-business.
Depending on your market you may have other more specific costs without which
you could not trade on the Internet or deliver your customers' orders. The next list
is probably several tables showing what sales you expect to generate from various
markets and at what margin:
• Sales from the traditional business: static, growing or declining.
• Sales from the e-business: speed of take-up, global markets.
• Sales from associates/affiliations/agents.
• Indirect sales from reciprocal site links.
This section w i l l necessarily be estimated, but you should err on the side
of caution and if possible give sound evidence as to why you think sales will be at
the level stated within each category. It is quite possible that there may be no sales
for some time, so you should come clean and say so. An overview of your intended
market, with plausible-estimates of your share over the first five years, will help to
add credibility to your claims that somewhere in all your figures is a viable business.
From this first pass through the planning stages you should be able to draw
your own conclusions as to whether you t hi nk you have a viable business idea. If
you do not believe it, neither will the investors. Case histories and anecdotal
evidence may be the only third-party support you can get as to whether what you
are proposing w i l l work but it is worth compiling as there is unlikely to be any
other market survey or industry statistics you could use to support your plan. Clearly
the most important support you could receive for your plan would be future
customers. Research could bring these out in the open, but do not rely too heavily on
them as would-be customers can be notoriously fickle as soon as you ask them for
money up front to fund your first year.

The business model

Once you have satisfied yourselfth a t what you are attempting couldactually
return a sustainable profit, you need to articulate your business model in terms sim p le
enough for a non-specialist to understand. You should also provide some evidence
that you are ahead of the game in business terms and th at your sla nt on the idea
represents the way the market is going within your particular industry niche.
For example, the printing industry is already well advanced in most uses ofthe
Internet so if you are in th is field you may w i s h to highlight that you intend to do
things using WAP technology. Or itcould be that you supply archaeological site
maps to academics butth a t you would supply them on lin e as 3-D. all-around images.
Whatever it is, it needsto add a new dim ension to what already exists.
One of the m ain advantages of any business is its scalability. Could your e-
concept be rolled o u t to many markets aroundt h e w o rld, both geog raphically and
across many in d us t ri es ? If so it stands a better chance of attracting development
funds. You need to hav e worked o u t the e stim ate d numbers of your market, both
a c t u a l and po ten tial, so that any backers can seethe scale of the returns that are
possible g ive n the right level of investment.
How easily can your idea be replicated? If it can be, is there any way you can
protect it throughpatents, licences, trad ing righ ts or special equipment to protectits
growth over the fi rs t few years'? The te chnology needs to be bespoke whenever
possible so that competitorsw il l not be able to replicate easily what you intend to do.
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 Is there any way that you can persuade one or two strategic buyers sign to a
letter of in ten t to work w i t h you on an e x c lu s iv e basis in the early stages? A u se fu l
way forward may be togive the m some e qu ity options in return for their use of your
idea so that you will have at least one big customer even before you launch.
Another way to reducethe ri sk of early fa i l u r e is to save cash by leasing
rather than b uy in g equipment and going for reciprocalmarketing whenever possible
rather than large scale brand-building. It goes without saying that excessive salaries
and c lu b class a ir tickets should not be "policy " in the first few years, if ata ll .
Do we really know who our competitors are and whatth ey charge? It is not
uncommon for a new e-business idea to be thought of at around the sametime by
several people aroundthe world. There can be no copyright on an idea. The keyth in g
is to get your idea to market as soon aspossible and b u i l d volume. Attend seminars, go
to e x h i b itions, read the trade press and start collecting articles about anything w i t h
even a remote connection to your big idea. At worst you could save yo u rse lf a great
deal of t im e and effort if you discovered someoneelse had already doneit. At best you
might see a fatal fl a w in the technical detail of your competitors'pla n which could
propel your idea into a world-beater.
Perhaps the most important aspect concernsthe senior people who w i ll take
day-to-day charge ofthe business as it grows. Theyw i l l need to be robust, know th ei r
industry, be w e ll connected and get onw e ll together as a team. When it comes togoing
for funds, the VCs (venture capitalists) w i l l set great store bythe maturity of the team
and how they interact, as at the end ofthe day if there is a problem these are the people
who are going to have to knuckle down andt u r n it around.

Finding the funds

There are many sources of funds for a business wishing to expand. In theory
there is nothing special about e-businesses. The high profile stories about raising
millions on the markets are really the tip of a very large iceberg and the vast majority
of companies use the traditional routes to raise capital:
• friends and family;
• banks;
• private investors;
• VCs;
• government agencies;
• joint ventures with complementary businesses;
• customer equity partnerships.
Apart perhaps from the friends and family route, these sources will
certainly want a detailed business plan and a defensible sales plan on which they can
safely make a decision. All your assumptions need to be shown. You should also
ensure that there are a number of 'safely factors' built in to the plan so that if
things do not grow as fast as you said they would, you have an alternative scenario.
Backers are never very keen on being asked for more money at some later stage
when things go wrong, so getting your sums right in the first place makes good
sense.
A further factor to consider is that your funding can come fr om a variety
of sources: it does not all have to come from a single source. In fact the majority of e-
business start-ups have a combination of private investors, founders money, local
grants, some medium-term bank loans and perhaps one longer-term venture capital
arrangement. Each of these sources will have different rates attached and different
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time-scales, so your cash flow plan becomes one of the most important business
measures you will need to use in the first few years. Government support should not be
sniffed at either. Often government agencies are very keen to have a local company
"showing the way' to the rest of the business community and make it relatively easy
for you to qualify for grants. Some can be as much as £250.000 or more, which for
many c-businesses is more than enough to get you going in the right direction.

Venture capital

Of all the sources of funds, the largest will be either private investors known
as "business angels", or VCs. Private investors may want less return and a longer
payback period but may insist on some equity. They will be interested in how they
could save tax from their investment, so you need to be prepared to be flexible as to
how the investment is brought into the company. They are useful investors to have as
they are generally the easiest people to go to if more funds are required at a later
stage and are likely to have the least demands in terms of payback periods, if they
are convinced you have a good idea.
VCs, on the other hand, tend to be very precise about what they want and when
they want it. They will probably have a brochure explaining the type of businesses
they want to be involved with and the type of funding they generally provide.
They may specialise in start-ups or they may prefer to invest later in the cycle.
They could introduce you to complementary business partners with whom they see
synergies for your business. Or they might provide the missing technical or people
management expertise to complete your senior team. You could do some initial
research by logging on to the British Venture Capital Association to see the range of
members they represent.
In general they will not be technical experts in your field but they have had
a lot of experience of what works and what does not. So, when you are preparing
your presentation to send them, you need to be as succinct as possible. Your
accountant or solicitor might arrange an introduction to the three or four who would
he most likely to look at your plan sympathetically. But unlike dealing with a bank,
you are in the driving seat. The VCs will offer the finance if the plan stands up as
viable, so you need to consider caref u l l y each offer you receive and choose the one
you think can add value to what you are doing. All of them will be looking for high
returns within a three to five year period, so the relationship will not go on for ever, but
it would be better to take the funding from people you get on with rather than sacrifice
good business empathy for a few less generous terms.
The VC presentation
If your idea is attractive to the VC they w i l l want to meet you and perhaps
one other member of your senior team and have a presentation from you about your e-
business. Meetings are normally scheduled for an hour or so. You need to be brief
and direct. This is not the time for waxing lyrical about how you started your
business 20 years ago in a garden shed. You need to plan your presentation
carefully to leave yourself enough time to go through the basic idea and the
figures in your plan. No more than a dozen laptop images will be required to get the
main ideas across.
In this first session they will give you an opportunity to ask them questions,
so prepare what you need to know beforehand and make a careful note of the answers,
as you may need to compare what they say with what other VCs tell you. If all goes
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well you will be invited back for a longer discussion with perhaps an industry expert
sitting in and more people from the VC. This session is to help them get a clearer
picture of your depth of thinking and for you to see if you could work with the VC
on a medium term basis as they w i l l probably want to put one of their own
consultants on your board and may even insist that they chair it to protect their
investment.
The deal
Depending on the amount of money required, the VC will attach a range of
terms and conditions to any funding offered. It w i l l include the percentage of their
equity, which will be based on their initial valuation of your new e-business. It will
also include how much of the debt you need to repay on an ongoing basis and what
happens if you default on any payments. These terms may change if after due
diligence they find that your plan is not as watertight as they thought. So, if there
is anything negative w i t h i n the plan or perhaps a market change, you should
declare it as soon as you can.

Becoming a dot.com millionaire

Typically, if things go well, your initial funding of, say. £1 million w i l l have
been enough to get things going. But a year or so later you find that you need to
establish the brand on a national basis to get the real returns. So, you may need to
go back and ask for £10 million.
Two years later the business model is working well in the UK hut you see an
opportunity to expand the concept into Europe, so you go back and ask for £30
million. The stage after this could well be a flotation or IPO (I ni ti al Public
Offering) after which you may w ell realize all your initial equity and become a
dot.com millionaire.

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 Topics for discussion:

1. Do you think E- commerce is being destined to become a

big business?
2. What is the E revolution about?
3. Which are the advantages and disadvantages of the E
commerce?

Enlarge upon the following:

“Within the E- business environment the journey from your first networked
computer to your first million could be a very short step.”

“The challenge is one of constant change and tuning to the new. If you can
work these new changes into your unique e- business idea to gain the competitive
edge, you stand to increase your chances of success…until another advance is made.
Dealing with those changes will not be easy. But no one ever said running a business
would be easy.”

“Your business model should bring you sustainable profit”.

Translate into English:

1.Îţi trebuie bani pentru a demara o afacere? Bine-înţeles că îţi trebuie. Mulţi?
Depinde de specificul fiecărei afaceri, dar nu e greu de aflat câţi anume- nu trebuie
decât să pui pe hârtie toate cheltuielile strict necesare şi să vezi ce iese. Te poţi trezi
cu o surpriză foarte plăcută: poţi să descoperi că banii de start nu constituie o
problemă chiar aşa de mare şi că e posibil să demarezi o afacere de care te vei putea
bucura.
2. Orice succes porneşte de la mintea omului şi nici o decizie nu poate fi mai
bună decât informaţiile pe care se bazează. Există oameni care fac lucrurile să se
întâmple, apoi cei care pivesc aşteptând ca lucrurile să se întâmple şi cei care nu
înţeleg ce se întâmplă.
3. Aceste investiţii au fost făcute cu un scop: pentru a se crea condiţii bune de
muncă iar astfel randamentul va fi mai bun, dar şi pentru imaginea firmei. Sediile
companiilor trebuie să fie dotate cu săli de conferinţe, cu computere şi acces nelimitat
la internet, cu mobilier ergonomic.

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 Negocierea se bazează pe principiul câştig- câştig, ambele părţi având de
câştigat în urma discuţiilor. Flexibilitatea ne va ajuta să nu capitulăm în faţa unor
cerinţe pe care nu le acceptăm la început. Vom continua pentru a câştiga, vom ţine
cont şi de nevoile celeilalte părţi.
Se recurge la manipularea interlocutorilor pentru a ne îndeplini scopurile. Într-
o lume ideală ar fi minunat dacă n-ar trebui să renunţăm la nimic pentru satisfacerea
nevoilor nostre, dar pentru că acest lucru nu este posibil, renunţăm la ceva pentru a
obţine altceva în schimb.
Există câteva lucruri în care cred persoanele care au success, ca de pildă : nu
există eşec, ci doar rezultate, lucrurile nu se îmbunătăţesc din întâmplare, ci numai în
urma unor acţiuni adecvate, succesul cere sacrificii, oamenii reprezintă resursa cea
mai importantă, iar ceea ce faci trebuie să fie util cuiva indifferent cât de bine este
făcut sau cât effort s-a depus.

Pentru directorul general, angajatul perfect este cel interesat de clienţi şi care
încearcă permanent să îmbunătăţească serviciile companiei. Dacă îţi pasă de angajat,
vei fi în afaceri pentru totdeauna. Trebuie să-ţi aduci mereu aminte că ei, clienţii sunt
cei care îţi plătesc chitanţele iar cei care reuşesc să se concentreze asupra clienţilor
sunt de fapt angajaţii perfecţi.
Prin onestitate, siguranţă, inteligenţă, inovaţie, flexibilitate vom evolua.
Preţuim inovaţia, pentru că modul nostru de a gândi este revoluţionar. Chiar şi atunci
când suntem pe un drum bătătorit îndrăznim să redescoperim noutatea şi valoarea.
Eficacitatea şi pasiunea pentru servicii a fiecăruia dintre noi sunt condiţii cerute de
orice companie.
Compania Augsburg are un pachet larg de beneficii şi indemnizaţii, ce
include, subvenţie pentru transport, maşină de serviciu pentru cei din management,
abonamente la o clinică medicală, preţuri reduse la produsele firmei. Dorim să-i
fidelizăm şi să-i stimulăm pe angajaţii firmei şi să completăm oferta salarială.

Comerţul electronic mondial are o dinamică ascendentă pe măsură ce tot mai

mulţi consumatori şi tot mai multe afaceri se conectează la web. Principalele bariere
în dezvoltarea comerţului electronic rămân problemele legate de securitate şi
încredere. Pe măsura creşterii utilizatorilor casnici de internet, procedurile legate de
autentificare şi criptare a datelor personale primesc o importanţă tot mai mare şi
succesul comercianţilor de pe web depinde de succesul implementării.
Obstacolul principal pentru o dezvoltare mai rapidă este cel financiar.
Romania este o ţară cu constrângeri bugetare, iar varianta testării unor soluţii la nivel
mic, precum şi luarea unor decizii de extindere a acestora este destul de potrivită
acum.

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 Translate into Romanian:

A truly effective client- service plan will include a set of activities that will
help professionals to know the client’s business better and in a more organized way.
A good client service plan will include activities meant to deepen the business
relationship by expanding the amount of client contact.
Business requires decisions: frequent, fast and often without much idea
whether they are right or wrong. When a business consistently outperforms
expectations, there is at least a good chance that it can be multiplied by ten or a
hundred times. In these circumstances most people settle for modest growth. Those
who seize the day become seriously rich.
In a firm which relies mostly on firmwide or group rewards, all the partners or
owners share the consequences if an individual’s performance is down. Accordingly,
other professionals have a direct incentive to take steps to help that individual or
group improve either formally through practice group leaders or informally through
the efforts of fellow partners.

You do not need to be a high tech business to benefit from the Internet. The
best success stories have been the more traditional businesses that have found new
ways to do business by using the basic technology currently available. Like all new
business you need to use your common sense and plan for profits on a gradual basis.
But unlike traditional businesses the process of building e-commerce profits will
differ both in scale and in the type of markets available. The more aware you are of
what is likely to happen with your new e-commerce venture, the more sensible your
decisions will be.

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Vocabulary:

Boundless- nemărginit
Bottom line- de bază
To dispatch-a trimite, a rezolva rapid, promt
Cash flow- flux monetary
To draft- a redacta, a întocmi
To exchange- a face schimb
Web browser- program software pentru navigare pe internet
Joint venture- societate mixtă
To display- a expune, a afişa
Impending- imminent
Expenditure- cheltuială
Allowance- reducere
Scalability- capacitate de a grada
To hook- a prinde, a agăţa
Hook up- program comun, înlănţuire
To knuckle down- a se apuca de
Tip- informaţie
Secure- în siguranţă, care nu prezintă risc, garantat
To secure- a proteja, a asigura
To store- a stoca, a memora
Ongoing- neîntrerupt
Backer- susţinător,girant
To back- a sprijini, a susţine, a gira,a da îndărăt
To back down- a o lăsa mai moale, a bate în retragere
To err- a greşi, a face o eroare
To bud- a începe
To litter- a murdări
Fickle- nestatornic, capricios
To highlight- a evidenţia
Claims- cereri, revendicări
To comply with- a se conforma
Encasement- încasare, plată în numerar
Rental- valoare locativă
Obsolete- demodat, învechit
Would be customers- clienţi potenţiali
In sequence- în succesiune, unul după altul
Venture capital- capital de risc
Venture- speculaţie, risc,acţiune comercială
Watertight- ireproşabil, impecabil, clar
To default- a fi în restanţă, în întârziere cu plata
Diligence- osteneală
Due- cele cuvenite
To slant- a denature,a prezenta tendenţios
Slant- punct de vedere, opinie, înclinaţie, tendinţă
Onerous- apăsător,împovătător

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 THE JOY OF BEING CLIENTS
FOR LIFE

WE WOULD ALL LIKE to have loyal clients who come back to us year after year.
Clients who treat us as valued professionals and seek our advice on their most
important issues and prob lems. Clients who don't shop around each time they
think about buying our services, who come back because they will always get
fresh perspectives, insights, and ideas from us and because they trust us. Clients
who will enthusiastically rec ommend us to others even if we aren't serving them
at that moment.
Reflect for a moment on your own client relationships. If you're like most
professionals, you may have a few loyal clients who have drawn you into their
inner circle of advisers. They consult you on a broad range of issues and wouldn't
dream of using a com petitor to provide your service.
Others, though, are just buying your expertise—they use you because you
have specific knowledge and skills that you deliver at a competitive price. The
next time around, how ever, these same clients may very well turn to someone
else. They view you as a commodity.
Somewhere in the middle, there are those bread-and-butter clients who
keep asking you back, year after year, but never seem to let you get very close to
them. You may have worked for them for years, but your influence and the scope
of your work is limited; and although they feel some loyalty to you, it's not enough
to prevent them from switching to someone else if they see a major economic
benefit.
Do you wish you had more clients who would draw you into their inner
circle?
Do you sometimes feel you're treated like a vendor instead of a respected
professional?
Would you like to compete less on price and more on the value you can
add?
Is it getting harder to differentiate yourself from other professionals in
your field, be they other management con sultants, lawyers, or accountants?
If you answered yes to some or all of these questions, we wouldn't be
surprised. The fact is, most professionals are on a journey—defined by the role
they play with their clients— and few have finished it. When it begins, you're an
expert for hire who offers information and expertise to your clients on a transaction
basis. Further along, you may earn the right to be a steady supplier, and you'll be
asked back repeatedly. When you've reached the final and most rewarding stage,
you'll be come a trusted adviser who consistently develops collabora tive
relationships with your clients and provides insight rather than just information.
At this stage you will have break through relationships. Because of the broad,
influential role that you play and the unusual degree of trust that you de velop,
these relationships will be of a significantly higher order than the run-of-the-mill
associations that so many pro fessionals have with their clients.
This developmental journey—from expert for hire to trusted adviser—is
the focus of what we mean by studying about clients in general. From extensive
research, there is a client-validated model for suc cess—a roadmap of the specific
characteristics that underlie extraordinary performance with clients—that will
help you establish and sustain more of these enduring, advisory rela tionships.

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 FORGETING CONVENTIONAL WISDOM

The abiding client relationships not only bring us immense personal and
professional satisfac tion, but in fact they make our careers. Unfortunately, the
conventional wisdom about how to develop them and achieve professional
success is woefully inadequate.
“Do good work, act with integrity, and the rest will follow" has been the
time-honored prescription for individuals who sell and deliver services.
"Find an area to specialize in, focus on it, and make your name there" could
be added to it.
Clients today are highly sophisticated, educated, and in formed buyers who
select professionals from increasingly competitive and mature service industries. In
a world of con tinual corporate cost-cutting and almost unlimited informa tion,
institutional buyers have less loyalty to suppliers than ever before. Studies have
shown, for example, that over 50 percent of executives who switch providers say
they were "sat isfied" with them before switching. And though specializa tion is
important to a point, the corporate leaders say that most of the highly specialized
profes sionals they deal with are incapable of advising them on broader business
issues. You have to do far more, in other words, than "satisfy" your clients and do
a "good job" if you want to create long-term loyalty and enter into the collabora tive
relationships that allow you to have a major impact on your clients and their
decisions.

WHY DO SOME PROFESSIONALS COMMAND

ENDURING CLIENT
LOYALTY?

There is a simple observation the telephones of some professionals we

knew never stopped ringing—clients called them, rather than vice versa. At the
same time, we saw others treated like vendors by their clients: these professionals
were constantly challenged on price, and they often struggled to get new business
through laborious RFPs (requests for proposal) that eliminate practically all
human contact during the client's decision-making process. Was the difference
just that the former worked harder, I were smarter, and did higher-quality work?
These were the obvious reasons, and while certainly relevant, they did not
provide anything near a satisfactory explanation for the in tense client loyalty we
observed. After all, we also knew many smart, hard-working professionals who were
not able to de velop so many loyal clients. Clearly, these qualities were necessary but
not sufficient.
We must set out, then, to comprehensively research and an swer a series of
fundamental questions: Why do some profes sionals manage to develop long-term
relationships and become trusted business advisers to their clients while others get
called in on a one-off basis like commodities? What quali ties do leaders look for in the
professionals—in fields as di verse as law, consulting, finance, and technology—
whom they bring into their inner circle? How do clients define value?
The starting point may be fifty years of combined experience in advising
senior managers in many organiza tions around the world. People went well beyond
their own per sonal experience, however, and spoke at length with the present and
past leaders of dozens of major corporations, such as Kodak, BellSouth, Cox
Communications, Motorola, American Express, Citibank, Eli Lilly, and General
Electric, listening as these chief executives shared their lifetimes of ex perience in buying
services and seeking advice from profes sionals. Such interviews were eye-opening,
and they debunked many of the widely held notions about why clients value certain
professionals over others.

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 What could strike us was the dissatisfaction many clients expressed about the
outside pro fessionals they engaged and by the difficulty they experi enced in
finding truly objective individuals to help them resolve their most important issues.
A number of well- known advisers who counsel and consult to leading
executives and politicians, as well as many less-known but high-performing
professionals who face the same day-to-day challenges that we all do in trying to
build client relation ships are ready to be interviewed.
Some of the greatest advisers in history, such as Aristotle, Thomas More, j.
P. Morgan, George Mar shall, David Ogilvy, and Henry Kissinger are always asked
to be studied.
It is not easy to identify the essence of what it takes to become an
extraordinary professional and consis tently provide value to clients. There are
some attributes and attitudes that will enable you to develop your own break -
through client relationships.
The meaning about clients for life has several distinct connotations. The
first is literal: how to develop lifetime clients—or at least long-term ones—when
such a relation ship is mutually beneficial for the client and the professional.
Second, is figurative because in some cases a continual relationship may
not be practical, realistic, or even desired. A client, for example, may need the
ongoing services of an accountant every year for many years, whereas he might call
in a management consultant or executive recruiter only once every four or five
years. A few professionals may also choose a transactional model of serving
clients, where they work on specific issues rather than on a retainer basis (the law
firm Wachtell, Lipton, Rosen & Katz, for example, success fully adopted this
approach in the early 1970s). Even a trans actional strategy, however, will succeed
or fail based on having repeat clients.
Clients, thus, can be attitudinally loyal for life—they re member us for
having done an outstanding job, they call us back if they ever need our particular
service again, and they enthusiastically recommend us to others.

C LIENT S FO R L IFE: W H O CAN BENE FIT ?

We define a professional as someone who practices an occupation

requiring a high degree of education and train ing, and who has clients rather than
customers. This defini tion includes not just service professionals, but also
technology consultants and sales executives who sell a com plex product. It does
not include teachers or musicians, for example, because they don't have
individual or organiza tional clients the way consultants and accountants do.
The professionals used as examples are drawn from a variety of fields,
including consulting, law, accounting, advertising, finance, medicine, sales,
and the military. Although each profession has specific skills and knowledge
that its practitioners must master—consumer be havior for an advertiser, financial
reporting requirements if you're an accountant, contract law if you're a lawyer,
and so on - achieving client leadership is premised on a set of common factors that
transcend individual professional requirements.
All types of professionals—and their clients—can bene fit from long-term
relationships. These relationships give you the opportunity to engage in extensive
client learning, which greatly increases your ability to offer tailored solutions, de -
velop new ideas, and provide germane insights rather than generic platitudes.
They are also the proving grounds where you can expand your service offering
and therefore your pro fessional experience—a loyal client who trusts you will try
you out in areas that a new client wouldn't let you touch.
Finally, the positive financial impact of having even just a few lifelong
advisory relationships, if they are managed profitably, can be enormous.
The distinction between a client and a customer is more than semantic.
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 Customers, for example, buy a product or serv ice with well-defined
characteristics that match their needs, with little or no negotiation and
discussion between buyer and seller; the professional's relationship with a client,
in con trast, has a consultative aspect to it—there is give-and-take to clarify needs,
identify problems, and recommend solutions. While there doesn't have to be a
personal relationship be tween a customer and the seller of the product or service,
with a client there is typically a close, personal relationship with a high degree of
trust.
And finally, a professional offers a client an authoritative body of
knowledge and expertise. So while the customer can have it his way at Burger
King, a client taking tax advice can't always have it his way (unless he wants to get
into trouble with the IRS).
The focus on clients, therefore, is a deliberate one. If you have customers,
your relationships will tend to be narrow in scope, whereas if you serve clients, you
have the opportu nity to develop the collaborative, broad-gauge relationships that
are the focal point.
A different ap proach is required for sophisticated clients who buy complex
products and services. For example, although we may believe that the customer is
always right—a standard prescription for managing customers—we sometimes
have to tell our clients how they are wrong and why we disagree with them.

W H A T K IN D O F P R O F E S S IO N A L A R E Y O U ?

There are three types of professionals to be taken into account.

The first group includes service pro fessionals—lawyers, management and

technology consul tants, accountants, corporate bankers, financial advisers,
executive recruiters, advertising executives, and so on. These individuals are in an
ideal position to become broad-based business advisers to their clients: their
services are of high strategic importance to their clients, and they are intimately
involved in the sale and delivery of the service. If you are one of these
professionals, all of the material in this book should speak directly to you.
The second group consists of sales executives who want to be considered
business consultants rather than simply sales people. If you sell a complex product or
service that is critical to your client's business, such as telecommunications sys -
tems, computer equipment, power plants, or mission-critical software, your client
will have a significant need for advice and consultation, and the opportunity
exists for you to be come an adviser to him rather than just a salesperson.
Finally, there are professionals who are staff or functional man agers
within corporations. Human resources or finance specialists who re port to line
executives, for example, face the same challenges that outride professionals do in
creating value, and they are held back by similar barriers.
It’s interesting to look at some extraordinary professionals who have
consistently engaged clients for life, identify how they add value, and discuss the
barriers that prevent other professionals from achieving the same level of success,
to grasp core attributes of great client advisers—the ingredients for success with
clients—and provide specific suggestions for how you can cultivate these
qualities, to see the major pitfalls that profes sionals can fall into as they develop
and manage client rela tionship.
Virtually all of the large service firms endeavor to de velop advisory or
consultative relationships with their clients, emulating those very few—McKinsey
in consulting, for exam ple, or Goldman Sachs in investment banking—that have a
history and culture of building deep relationships. Stockbro kers are now
"financial advisers"; accounting and consulting firms aspire to advise senior
management, not just undertake reengineering projects; software programmers
are referred to as "consultants"; and companies like Reuters don't just sell
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databases but want to be your "information adviser." Often, however, the words
"adviser" and "consultant" lack substance and have a hollow ring to them.
Ironically, just at a time when the professions are experi encing their
greatest growth in history, just as so many are striving to become trusted
advisers, many clients are in fact dissatisfied with the quality of the advice they
receive and the attitude of those who give it. It's getting harder and harder for
them to find professionals like James Kelly and Nancy Peretsman.
Why then? What holds professionals back from an undeni ably attractive role
that is highly valued by clients?

B A R R IE R S T O D E V E L O P IN G B R E A K T H R O U G H R E L A T IO N S H IP S

Three barriers stand in the way of becoming a business adviser to your

clients, and of experiencing the client loyalty and professional fulfillment that
accompany this role:

1. Most professional service firms demand specialization. If you work for a

large consulting or accounting firm, you might become a reengineering expert
for the chemical industry or an auditor for automotive companies. This is fine for
starters, but the problem is that the more expert you become in the niche where
your company has placed you, the more "valuable"—at least in the short term—
your firm thinks you are. This becomes a disin centive to providing you with other
experiences.
While there is great benefit in developing a deep ex pertise, this specialization
will eventually become a liabil ity if you want to play a broader-gauge role with
clients. Some firms recognize this issue and try to address it by systematically
diversifying the experience of their junior staff, but many do not. (This push for
specialization, by the way, is pervasive not just in the business world but in
medicine, academia, science, and other fields.) In addi tion, while large firms
provide tremendous opportuni ties and training for young professionals, they also
have financial and growth goals that must be met (many are now publicly held
companies). Sometimes, these short- term pressures override the long-term process
necessary to build deep, trusted client relationships.

2. Expertise is becoming automated and reduced to a commodity. Ironically, while

service professionals have been major beneficiaries of the late twentieth-century
infor mation economy, there are now signs that many types of expertise are losing
value. Just as the industrial revolu tion replaced skilled craftsmen with low-wage
factory workers during the early nineteenth century, the "ex pertise" sold by
professionals is becoming easily replica ble, more widely available, and
increasingly cheaper in our Internet-speed, technology-driven economy. Al ready,
the average incomes of some classes of profession als—doctors, for example—are
starting to decline.
Several forces combine to diminish the value of ex pertise:

• The supply of service professionals is growing significantly. The historically

rigid controls on the supply of gradu ates have been relaxed, and many individuals
with lesser certifications (e.g., paralegals, physicians' assis tants) are doing the
work formerly entrusted to de greed professionals such as lawyers or doctors.
Price based competition has become a permanent feature of the market for
professional services. In the corporate world, most major contracts for
professional services are now competitively bid, and the competition (for
management consulting and advertising services, for example) can be ferocious.

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 The internet and expert software now provide unparalleled access to all
kinds of expertise, at far lower prices than ever before.
Market research reports that used to cost thousands of dollars or that
investment banks provided only to their big-spending corporate clients can now
be obtained free over the Internet. Increasingly, professionals are paying to have
their "expertise" put in front of clients. A new Web site for CEOs, which already
has the participa tion of big names such as Michael Dell of Dell Com puter
Corporation, is charging professional firms $50,000 for the privilege of putting their
articles or research up on the site.
In other areas, Web-based sales automation is re ducing the need for
expensive sales forces; and mil lions of consumers use inexpensive software like
TurboTax to do their taxes and even write wills, thus avoiding tax advisers and
lawyers.
L abor m obility am ong know ledge w orkers is increasing.
firms, U
for.S example,
. are
tapping into pools of English- speaking talent in countries such as India, South
Africa, and Australia. Law school graduates are cross ing over into adjacent fields,
such as consulting and investment banking.

The effects of these trends are readily apparent. In fields as diverse as law,
accounting, consulting, and tech nology services there is significant consolidation
occur ring, with new mergers being announced almost monthly. What used to be
the "Big 8" accounting firms are now the "Big 5." Law firms, which historically
enjoyed long-term retainer relationships with their clients, are being asked to bid
competitively for work; some even went out of business altogether in the 1990s,
and we are now beginning to see a growth in mergers as law firms consolidate.
Consulting firms are being asked by major corporations to submit breakdowns of
their cost struc ture, their partner-to-associate ratios, and their billing schedules so
that the profitability of their projects can be managed and reduced. Many
companies are now con ducting frequent, tough reviews of their advertising
agencies, forcing incumbents to continually justify their relationship.
These and other signs of intense competition and industry maturation are
now widespread. High-end ser vices, such as merger and acquisition advisory work,
may never become commodities. But just as we can now put a vacation out to bid
on the Internet to see which airline wants to sell us a ticket at the best price, we
believe the day is not far away when this will be done for services as well. Imagine
asking doctors to "bid" to conduct a rou tine surgical procedure or inviting
lawyers to compete for your estate planning business.

3. Many professionals are held back by stereotypes about what clients want them to
be and how they should behave. Here are typical statements we have heard from
these profes sionals:

• "My job is to provide answers."

• "I need to become as expert as possible in one specific subject area within
my field and then to make my name in it."
• "When I meet prospective clients, I need to demon strate my expertise.
After all, that's what they're buy ing from me."
• "If I work in a new industry or function, I will be igno rant of basic
concepts. I will add little value, and clients will reject me."
• "This is a professional, business relationship. The per sonal side is
separate. Furthermore, my loyalty is to the greater goals of the institution, not to
the individ ual."
• "Clients will take advantage of you. You have to stick up for your own
interests."

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 There is some validity to all these statements. They are incomplete,
however. In contrast, consider these comments from clients who have spent a
lifetime using professionals:

• "The really good professionals ask great questions. Often, they enable
solutions rather than supply them."
• "The best business advisers have a good understand ing of my industry,
but also breadth.. Some of the best insights I have gotten have come from
professionals who bring analogies from other fields."
• "Good professionals are great listeners. They hear what you mean,
not necessarily what you say."
• "It's very tough finding 'honest brokers” who are unbi ased and not
pushing their own agenda with you. Everyone walks in here wanting
something."
• "Investment bankers cannot be true advisers. They are too focused on
the deals."
• "Our consultants always end the session with a half- hour presentation
on 'next steps,' the execution of which cannot, of course, be accomplished
without the consultants. What I really value instead are working sessions which
advance our thinking."
• "Our lawyers focus on every detail with equal empha sis. That's OK to a
point, but they rarely pull back and help us see the big picture."

Many professionals, in short, focus on providing an swers, being

perceived as "experts," doing great analysis, and specializing more and more
during their careers. Clients, in contrast, seek professionals who can ask the right
questions, provide knowledge breadth as well as depth, demonstrate big-picture
thinking as well as analysis, and listen rather than just tell.
Professor J. Brian Quinn of Dartmouth's Amos Tuck School of Business,
who has spent nearly forty years advising business and political leaders, including
several U.S. presi dents, puts his own slant on the issue of stereotypes: "I used to
believe that solving the problem was paramount. In reality, when the good advisers
deliver their recommendations, most of them have already been implemented. I
realize now that the process of problem solving is more important than the solution."
Clients do value professionals who can play a broad advi sory role. Theodore
Sorensen, in his book The Kennedy Legacy,
reports that just a few days before his inauguration, John F. Kennedy was presented
with a list of 250 items requiring a de cision from him. He apparently blurted out,
"Now I know
why Ike had Sherman Adams!" (Adams was President Eisen hower's trusted adviser).
The fact is, clients at any level, whether they are presidents of nations or corporate
managers, appreciate someone who can help them put there issues in perspective,
solve problems, and make better, faster decisions.

T H E IN G R E D IE N T S
F O R B R E A K T H R O U G H R E L A T IO N S H IP S

There are seven key attributes that, when blended to gether in the right
quantities and in the right manner, facili tate the development of insight and the
formation of deep, trusting relationships. These characteristics are a blend of in nate
talent, acquired skill, and attitude, and it's pointless to try to determine exactly
which is which. That's why we use the more general term "attribute" to describe
them. Empathy, for example, is definitely something you develop at a young age
(a "talent"), yet we know that people can improve their empathetic ability late in
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life. Native ability certainly counts, but hard work and openness to change can
improve any of these qualities, an assertion borne out by the experiences of the
many great professionals we've studied.
There is a natural, logical progression to the develop ment of these
attributes and to the order in which they usu ally come into play in building an
advisory relationship. The two foundational attributes for any professional who
aspires to serve clients are selfless independence and empathy. Great ad visers have an
attitude of complete financial, intellectual, and emotional independence. They
balance this independence, however, with selflessness—they are dedicated,
loyal, and focus on their client's agenda, not their own. It is a fine line to draw: on
the one hand, being responsive to a client's needs and problems and, on the
other, maintaining objectivity and honesty at all times. This selfless
independence illustrates why clients are different from customers.
The second attribute, empathy, is what opens the door to learning.
Empathy fuels your ability to discern a client's emotions and thoughts, and to
appreciate the context within which that client operates. It enables you to
diagnose what the problem really is and later underpins a learning relation ship
with your client. Dr. Michael Gormley, a London-based physician and renowned
diagnostician who treats several members of the British royal family, provides an
apt medical metaphor when he tells us, 'You can't just chop the patient up into
little pieces and then examine each one of them under the microscope. You
have to understand the whole context of his daily life."
The next three attributes concern your ability to think and reason. You
simply have to have something valuable to say before you can develop the long-
term professional rela tionship. A passion for learning drives the professional to de -
velop a core expertise and then to become a deep generalist by continually
broadening her knowledge. Synthesis is the ability to see the big picture, to draw out
the themes and patterns in herent in masses of data and information. It includes
related skills, such as critical thinking and problem solving. The abil ity to synthesize
sets the business adviser apart from the sub ject matter expert who relies mainly on
analysis. Judgment is often—but not always—the culmination of a particular en -
gagement or advice session, drawing on all the learning and synthesis you have
undertaken.
Conviction and integrity constitute two important charac ter attributes that are
common to all of the extraordinary professionals we have studied. When
credibility of content has been established, trust can follow, and the depth of a
client's trust in you will be very much governed by his assess ment of your character.
Conviction comes into play as the adviser begins to offer opinions,
recommendations, and judgments in earnest. Con viction, however, does not exist in
a vacuum; it is based on a set of compelling, explicit personal beliefs and values.
Properly harnessed, it is a powerful force that can motivate and energize both
professional and client.
The attribute of integrity comprises a constellation of skills and behaviors
that build trust, including discretion, consistency, reliability, and the ability to
discern right from wrong. Without this trust, it is unlikely you will develop a col -
laborative relationship. Your client will always keep you at arm's length and treat
you like a supplier.
There are other qualities, of course—motivation, opti mism, tenacity,
determination, analytical skills, and so on— that are valuable for professionals and
indeed necessary to be a successful expert. The seven we have identified, however,
are the ones that truly stand out and make a difference in a professional's
effectiveness. They enable you to go beyond expertise and become a broad-based
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adviser. These are the qualities that foster the development of the insights and rela -
tionships that lead to consistent value creation for clients, and they are the
characteristics that great advisers themselves have intuitively developed. If you
want, in short, to become an extraordinary professional who commands
unwavering client loyalty, you need especially to develop and strengthen these
attributes.

Becoming an Integrated Professional

These attributes build on and interact with each other to create a whole that
is greater than the sum of the parts. Ca sual observers might call an individual who
has successfully integrated them a "seasoned professional" or someone who
really "has a head on her shoulders." Drawing on his thirty- eight years as a
successful client adviser, James Kelly articu lates this state of integration and its
benefits:
“I have come to accept that I am constantly learning, and will never, ever
know it all. I've learned to become an intense observer of people—I know that
situations are never quite what they seem at first. I accept that sometimes I'm
wrong, but that's the cost of intellectual boldness, of daring to be right. I have a
constant sense of being surrounded by expert resources that I can call on—they're
everywhere. When you get your ego out of it and allow yourself to relax and
observe, you really do get into the flow of events and ideas. I'm working for my
clients, but I'm also feeling quite independent from them— I'm driven not
because I'm being paid but by a desire to help my clients, to learn, to satisfy a
higher pur pose. The ideas and solutions come quite freely in this state.
This happened just last week—I was the last speaker at a three-day
conference for a group of top executives. When I was younger, I would have
prepared a canned speech days in advance. This time I listened intensely for the
first two days. I observed the participants carefully. I opened up my mind to the
variety of ideas that were being presented and discussed—even though I didn't
like some of them. On the third morning, I got up early and took out a pen and
paper.”

Characteristics of a Successful Client Adviser

• Clients often ask you for advice, both on subjects directly within your field
of expertise and in pe ripheral areas that happen to be of concern.
• Most of your client relationships are long-term ones. The vast majority of
your clients would en thusiastically recommend you to someone else.
• There is strong mutual trust, on a professional and a personal level, between
you and your clients.
• You collaborate extensively with your clients to de fine the product or service
you deliver to them and match it to their needs.
• You frequently approach your clients with unso licited ideas and
suggestions.
• Your clients believe you consistently deliver value in excess of your fees.
They rarely if ever shop around to see if they can get the kind of services you offer
more cheaply elsewhere.
THESE BUILDING -BLOCK attributes are fundamental and straightforward. The reality,
however, is that most profession als don't practice or actively develop them. Or
they delude themselves into thinking that they have already mastered them.
Often, what they think passes for insight is, to their clients, merely expertise.
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They forget that this year's insight has a very limited shelf life and can quickly
revert to simple expertise—debt underwriting and reengineering consulting used
to be value-added services, for example. Now they are virtual commodities.

THE IMPORTANCE OF KEEN JUDGMENT

Consultants, attorneys, bankers, accountants, and other professionals are

involved in high-risk, high-stakes decisions every day: Should the case go to trial or
be settled out of court? Should a microchip manufacturer invest another 1 billion
dollars to increase production capacity? Do the company fi nancial statements
represent the actual condition of the busi ness? A keen judgment is one of the most
valuable asset a professional can have. Few clients, for obvious reasons, go back to
a professional whose judgment is poor. Many of the executives we have
interviewed, in fact, remember all too clearly the poor judgments offered by some of
their advisers, even though the incidents occurred years ago.
Good judgment, in contrast, is invaluable to clients. Win Bischoff, chairman of
the British merchant bank Schroders, recalls a seminal decision he made and how
the accurate judgment of his adviser contributed to Schroders' interna tional
success:
It was in the early 1980s, and we felt we needed tore- capitalize our U.S. bank,
which engaged in commercial lending. We were convinced we could issue debt to
do this. I went to see the head of Warburgs [a major British merchant bank], David
Scholey, to seek advice. In the space of an hour he delivered an unequivocal set of
judgments. Issuing debt would be all but impossible, he of fered, quickly turning the
conversation to the topic of Schroders' overall strategy, and the need for us to assess
it in detail at this critical juncture.
We were already considering undertaking a strate gic review, and Scholey's
advice was important encour agement. We subsequently made a series of important
decisions, including eventually selling the U.S. bank in stead of recapitalizing it, as
well as making other strate gic choices that enabled us to prosper as an institution.
That short, singular conversation, and the rapid-fire but incisive views
provided by Scholey, became a significant influence on our thinking.
Instinctively, Scholey did several things when asked to advise Schroders.
First, he made a rapid, intuitive judgment about the feasibility of issuing debt. The
situation fit a pattern in his experience, and he knew what the answer was without
hesitating. In the process, he thought two or three steps ahead, and was able to
visualize the chain of events following a hypothetical debt issue by Schroders, and the
negative con sequences that could ensue. In effect, he helped Bischoff avoid a
potentially bad judgment. Second, he reframed the question Bischoff was asking.
The right question wasn't "Should we recapitalize our American bank?" but "Should
we be in the U.S. banking business at all?" Since that time, Schroders' market
value has increased fifteen-fold, from about $300 million to $5 billion today.

F IV E J U D G M E N T T R A P S T O A V O ID

Before we look at the specific practices that allow great professional

advisers to arrive at high-quality judgments, we have to understand how to avoid
bad judgments. First, bad judgments can be deadly for an organization; second,
they will ruin your reputation as a professional—your clients will never forget the
poor decisions you recommend; and third, it's very common to make mistakes of
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judgment, since so many factors can cloud our decision making. The fact is,
avoiding bad decisions is one-half of the battle: even if you don't make particularly
good ones, you can muddle along and survive, whereas a poor judgment can put
you out of business, for good. The exceptional professional, therefore, constantly
examines his client's thinking and behavior to help prevent these wrong turns.
Here are five of the most important judgment traps that professionals
should be aware of as they advise their clients:

I. W eak Prem ises: Starting O ut on the W rong Foot

Many clients approach a problem or decision with wrong or partial facts at
the outset, resulting in a chain reac tion of faulty thinking. The two most common
errors that bias clients are anchoring— the decision maker allows himself to get
"anchored" on a specific starting number—and avail ability, the tendency to use the
most available, recent, or vivid information.
If two real estate appraisers, for example, are asked to as sess a house that is
already for sale, their valuations will vary based on what selling price they're given.
The appraiser who thinks the house is for sale at $200,000 will assign a lower val -
uation than the second appraiser who is told it's on the mar ket for $250,000, even
though it's the same house. Where you start often determines where you end up.
Clients can get anchored in many ways. Incumbent cor porations in
deregulated industries like telecommunications and utilities, for example, often
get anchored in their old growth paradigms. Compared to their historic growth
rates of 3 percent or 4 percent a year, achieving 5 percent or 10 percent now
seems wondrously high. But the new standard, in order for a company to be
considered a "growth" business, is more like 15 percent annual growth. Because
many of these companies are anchored on the old standards, they end up being
acquired.
Whatever happens to be the most available, recent, and vivid data can also
bias us. This perception bias can operate when managers go out and talk to just a
few customers and then draw sweeping conclusions about their company's prod ucts
and positioning. Bad personnel decisions are often rooted in this judgment trap
—we sometimes pick people we already know for a job rather than the most
qualified candidate.

2 . C o n firm a tio n : S e ein g W h at Y o u W a n t to S ee

Many people start out wanting to confirm—consciously or unconsciously—
what they already believe and tend to ig nore subsequent evidence that contradicts
their beliefs.
The confirmation trap is often triggered during mergers or acquisitions. Some
years ago, two large professional serv ice firms decided to pursue a merger, which, if
completed, would have resulted in large financial payouts to manage ment. A
subsequent study commissioned to assess the cul tural compatibility of the two
companies pointed out very major differences in the two cultures, and an unbiased
observer would have concluded that the organizations were vir tually incompatible
and shouldn't merge. Some partners who read the report, however, came to the
opposite conclu sion—that there was a strong cultural fit. They ignored the
differences that the study cited, or reframed them as "strengths" that would actually
aid the merger. As a result, the two firms went through significant post-merger
trauma as their different cultures clashed, resulting in bitter conflicts and an exodus
of partners.
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 3. O verconfidence:

U n d e re stim a tin g W h a t It T a k e s to S u cc eed

Overconfidence is probably the most common and fatal judgment trap. In

his book, When Giants Stumble, historian Robert Sobel chronicles famous business
blunders by major corporations. He sums up by saying, "If there is any single
moral to the tales [about corporate failures] it is that for all but one of these entities
failure was preceded by great suc cess." Business success, Sobel cautions, can breed
overconfi dence and complacency.
Clearly, the Decca record executive was suffering from a major case of over-
confidence (and maybe incompetence as well) when he so brusquely turned down
the Beatles. A famous historical ex ample of overconfidence is Germany's invasion of
Russia dur ing World War II. Adolf Hitler, buoyed by easy victories over Poland,
France, and other European countries, became filled with hubris as the war
progressed. He then ignored the warnings of his generals and insisted on invading
Russia nearly a month too late. His armies were virtually destroyed by the
combination of the severe Russian winter and the un expectedly large number of
Russian troops that Stalin was able to mobilize.
Several other classic judgment traps that are related to overconfidence
include an over-reliance on rules of thumb and a misunderstanding of base-rates.
Rules of thumb include "When writing an ad, use sentences of no more than twelve
words," or "Summer is the best time of year to sell your house." We tend to
simplify our experiences and reduce them to easy-to-remember rules and
guidelines. Problems arise when these cherished rules just don't apply. For exam ple,
Long Term Capital, a hedge fund manager, had lever aged $160 billion worth of
securities with just $4.8 billion in capital (the underlying value of the derivatives was
estimated at$l trillion). The company bet large sums of money that the yields on
twenty-nine-year government bonds would con verge with the yields on thirty-year
bonds—something that had always happened in the past (this expected convergence
was a "rule of thumb"). In July and August of 1998 the yields actually diverged and
Long Term Capital lost virtually all of its capital, nearly causing a global panic in
the process.
Misunderstanding or ignoring the underlying statistics regarding an event is
also common. For example, most stud ies on the success of corporate acquisitions
demonstrate that 50 to 60 percent of acquisitions are considered failures within five
years. The figure is even higher for cross-border mergers, which only succeed 30
percent of the time. Yet many execu tives pay no attention to these sobering
statistics.

4 . P rio r C o m m itm en ts: M ak in g N ew , Ina pp ro priate C om m itm en ts B a sed o n P rev io us O n es

Prior investments or decisions can unduly influence the formulation of new

commitments: once we take a stand or position, we often resist changing our mind.
This phenomenon may explain why President Kennedy gave the go-ahead for the
Bay of Pigs incursion—it was already planned, orga nized, and ready to go when he
was elected. Companies fre quently ignore an analogous rule of finance—don't
consider sunk investments when making new ones—and they mistak enly pour good
money after bad.
In his classic book Influence: The Psychology of Persuasion, Robert Cialdini
cites many examples of how even very small prior commitments can induce level-
headed individuals to agree to things that make no sense. In one study, for exam ple,
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homeowners consented to have large billboards encour aging traffic safety installed
on their front lawns, simply because they had previously agreed to put a small
sticker bearing a similar message in the corner of a window!

5. G ro up th in k: B eliev ing T hat It's "U s A gainst Th em "

The author Irving Janis, in a book entitled Groupthink, identifies eight

symptoms that can distort judgments and be haviors. These include:
• An illusion of invulnerability, which leads to excessive risk taking
• An unflinching belief in the morality and Tightness of the group
• Stereotyped views of adversaries as either evil or in competent, and
therefore not worth dealing with
Corporate organizations often suffer from groupthink, and it can lead
their managers to make poor judgments.
When Mexico deregulated its long-distance telephone mar ket, for example,
several large U.S. telecommunications com panies entered the Mexican market
believing they could easily dislodge the national phone company. They held its
management in disdain and considered it a stodgy, unworthy competitor. To their
surprise, they sustained heavy losses as the national company beat them at every turn
with innovative marketing and pricing strategies.
During World War I, this attitude resulted in the slaugh ter of tens of thousands
of soldiers in Turkey. In The Broken Years: Australian Soldiers in the Great War, Bill
Gammage describes the first Australian soldiers who went into action at Gallipoli:
"They thought themselves the equal to twenty Turks, they bowed to no man, and with
the eagerness of chil dren they restlessly awaited their glory." Within nine months they
had suffered appalling casualties and were forced to creep away in defeat.

H o w to A void B ad ju d gm en ts

You need to be constantly vigilant for signs that your client is about to fall
into one of these judgment traps. Do you see a client using rules of thumb that are
shopworn and out dated? Has your client already made up his mind and just wants
your stamp of approval? Do you have clients who rush to judgment based on too
much "intuition" and too few facts, or who grossly underestimate what it will take to
succeed?
Here are some specific actions you can take as an outside professional to help
your client avoid lapses in judgment:
• Always vigorously challenge your clients' assumptions. What makes their
starting number right? What would justify a number that was 50 percent less or 50
percent more? Do their customers really only buy on price? Do their products really
have the highest quality? Intro duce as much contradictory information as you can
and ask lots of "discontinuing" questions whose an swers might undermine the
initial premise.
• Keep yourself up-to-date on key statistics and research in your field—
remember, there's a lot of folklore out there. Beware of accepted wisdom: the
"dogs of the Dow" stock-buying strategy, for example—popular for many years
with investors—has worked poorly during the last five years. (This popular
investment strategy involves buying the ten stocks in the Dow Jones Indus trial
Average with the highest dividend yields during the previous year; holding them

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for one year; and then going through the same selection process again for the
following year, picking a new group of ten).
• Be careful how you ask and frame questions. "Do you feel the market is
saturated now?" is a leading ques tion; a better phrasing would be "What is the
market potential?" Many professionals ask questions that are biased and reflect
what they think or what they feel their clients already believe.
• Try to identify independent thinkers who can help challenge your
clients' thinking. These can be outside speakers, for example, or perhaps mid-level
managers who see the need for change more clearly than top management does.
• Finally, don't ever let yourself be used simply to con firm something a
client already believes—your collu sion may help undo the client. An assignment
like this may help out with short-term bookings, but it won't build your
reputation as a professional with integrity and an independent point of view.
(The exception would be the case of a legal advocate who commits to
demonstrating the truth of her client's story in court).

W H A T IS SO U N D JU D G M E N T ?

What is sound judgment and how does a professional develop it? We are
concerned with a definition of judgment that is the ability to arrive at opinions about
issues; the power of comparing and deciding; good sense.
The elements that contribute to sound judgment can be expressed in a formula
with three basic parts:

Judgment = (Facts) X (Experience) X (Personal Values)

The facts about the issue at hand—too few and you'll be hip- shooting, too many
and you'll risk overanalyzing the situa tion—represent the first major input.
Experience, which fuels intuition, is the mechanism by which the adviser adds to and
processes these facts. Good decision makers then filter the resulting options through a
strong set of personal beliefs and values.
Historically, good judgment was associated with age and experience. The elders in
a society were considered the wis est, and therefore they were consulted on the most
important decisions. Today, there are several, contradictory schools of thought on what
constitutes good judgment and decision making. Most researchers in the field embrace
the cognitive model and believe that solid judgments can only be reached through a
highly logical, step-by-step, rational process, focus ing almost exclusively on the factual
inputs described in our judgment formula. Many popular books have been written that
propose this approach, and they're filled with elaborate, quantitative tables and charts,
which decision makers are supposed to use in order to come to sound conclusions. Un -
fortunately, research into decision making in the real world clearly demonstrates that
good decision makers rarely under take this much rational analysis.
Another, smaller group of scholars believes that judg ment is essentially
intuitive, and that most real-world deci sions are made with little analysis. Based on our
own research into professionals and the clients who employ them, we be lieve that the
best decision makers blend these two ap proaches—cognitive and intuitive—and they
add a third dimension, which is the personal value system.

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 FIV E ST E PS T O G O O D JU D G M E N T

Great professionals excel at a number of specific prac tices that underpin

sound judgment. They:
• Frame problems appropriately at the outset
• Engage in creative but selective fact gathering
• Use intuition: they leverage their personal experience to find similar
patterns and relevant analogs
• Filter their judgments through a clear set of personal beliefs and values
• Are honest enough to learn from experience

I. F ra m e th e P ro b le m
The first critical step is to identify the right problem and frame it correctly.
Diagnosing the wrong problem is one of the most common mistakes that
professionals make, regard less of their field. Many corporate executives will ask
consultants to help "reorganize," when the real problem—for example,
ineffective communication or poor leadership— often has nothing to do with
organizational structure.
Professor Joseph Bower of Harvard Business School, who actively consults
to industry leaders, told the following story about problem framing, or rather,
reframing:
“The head of a large company called me in to advise on a major
revitalization program that he wanted to launch. He had identified a host of
problems with his or ganization structure, distribution network, technology
platforms, and so on. He was also going to engage a large consulting firm to help
with the effort. I sat in on the kick-off meeting with the CEO and his fifteen top
execu tives. For two hours the CEO waxed eloquent about the need to change, and
the new program he was about to launch. There was little discussion, and the
meeting ended. Afterward, I sat with the CEO and he asked me for my reaction. I
looked at him and said, "Did you see the faces in that room? There isn't one of your
top exec utives who buys into your program. I think that's your real problem."
Initially, he was stunned, but then he nodded his head. He began to smile. "You're
right," he said quietly. "They're not on board at all, are they?"
Ironically, that was the end of the consulting assign ment for both me and the
large firm he had lined up. In his mind, the engagement had been a success and was
over. The real problem had been identified and he set to work fixing it, personally.
The consultants were a bit stunned, but to me it was a good outcome. The CEO sub -
sequently replaced half his senior team with outsiders, and they went on to be quite
successful.”

2. E n g age in C reativ e bu t S electiv e F act G ath ering

Horserace handicappers use historical data on horses to set the odds for each
race. In a classic study, a group of pro fessional handicappers was asked to make
predictions for var ious races. In the study they were given increasingly more facts
about each horse and then, after absorbing the new batch of facts, asked to predict
its performance. For the first round, they were given only five facts on each horse;
for the second round, ten; the third round, twenty; and finally, forty pieces of
information on which to make a judgment. What happened? After each round, the
handicappers' confidence in their judgments increased. But their accuracy stayed
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the same! After a minimum threshold of key facts is reached, having more
information does not increase the quality of de cision making. In certain business
situations where time is of the essence, gathering more information can actually
decrease the quality of decisions because key actions are delayed as managers
conduct more and more analysis.
While somewhat counterintuitive, the idea that more in formation and
expertise isn't always helpful has been born out in a variety of settings. In our
largest corporations, for example, the careful review and analysis of decisions by
large numbers of internal staff experts and external professional advisers often
decreases rather than increases the quality and robustness of decision making. This
may happen be cause excessive analysis screens out promising creative ideas that do
not stand up to the scrutiny of traditional financial benchmarks.

3 . U seI n t u i t i o ton L ev erag e F acts

an d P e rso n a l E x p e rie n ce

Intuition is a powerful tool for making judgments. Just look at this

example: a fire chief leads his men into a house where a kitchen fire is burning. It
is a relatively small fire and shouldn't be a problem for the half-dozen trained fire
fight ers arrayed to put it out. Suddenly, the chief has a terrible feeling about the
fire. Without thinking, he orders his men to evacuate immediately. They rush
outside, and as they leave the house, the entire first floor collapses in an explosive
inferno. They have just escaped with their lives. When a post mortem is done on
the situation, the chief believes that his "sixth sense" perceived the danger and
saved him and his m en.”
Researcher and author Gary Klein, who studies decision making under
pressure, recorded this case, and he knows that it wasn't the chiefs extrasensory
perception that saved the day (Klein's book Sources of Power examines how people
make decisions in real life as opposed to the laboratory). Using innovative
interview techniques, Klein reveals the real reason: the chief's experience-based
intuition. The fireman sensed that, even though the fire was small, it was
generating an unusually large amount of heat. Furthermore, there was very little
noise—it was too quiet for such a hot fire. In fact, what had happened was that
the basement was on fire, and what seemed like a kitchen fire was actually a huge
basement conflagration leaking upstairs. Subconsciously, the chief compared this
fire to similar fires in his experience. It didn't fit established patterns, and this set
off warning bells. He knew something was wrong—he didn't know exactly what yet.
So he ordered a retreat to reexamine the situation from a safe vantage point.
The example of the kitchen fire illustrates the first key component of intuition:
the subconscious analysis of 'patterns. We often experience it as "good feel," but a
better description would be "experience feel." After we have seen many, many similar
cases, we develop an ability to sense whether a new ex ample fits—or diverges from—
the patterns we have come to recognize. Chess grandmasters function very much the
same way. They spend most of their time studying games and posi tions, and they
develop the ability to rapidly size up any situa tion they encounter on the chessboard.
As you can see, developing your powers of observation, a theme we high lighted in
the previous two chapters on learning and synthe sis, will help sharpen your
judgment skills. In order to leverage your experience, you have to cultivate the
ability to observe intensely what is going on around you.
The second step in using intuition involves imagining how the decision will
play out. Various researchers use ex pressions like "mental simulation" or
"imagining the out come" to describe this. Very skilled professionals can rapidly
simulate scenarios in their minds. Bain & Company CEO Orit Gadiesh implicitly
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refers to this when she tells us: "The good client advisers always keep three or four
moves ahead. They are constantly imagining steps two, three, four, and five of the
process while their clients are still focused on step one."
The intuitive part of judgment also involves the ability to identify analogs— to
be able to say, "This here is like that over there." Analogies are also an important
tool for synthesis. Here, we are trying to use analo gies to make better judgments, to
enhance our understand ing of the immediate decision we have to make. American
military advisers during World War II, for example, might have foreseen the
attack on Pearl Harbor if they had studied the history of the Russo-Japanese war. In
that situation, the war was also preceded by a Pearl Harbor—like attack on the
Russian fleet at Port Arthur in 1905.

4 . In co rp orate Y ou r P erso na l V alu es a nd S tan da rd s

Good judgment, or at least judgment that is consistent with your own

character, is also based on having a strong, ex plicit set of personal beliefs and values
that guide your de cisions .
The following story, told by the chief executive of a $2 billion company,
illustrates the power of an adviser's per sonal value system. You may not agree with the
values, but you can't argue with the result:
“Some years ago, we faced a class action suit from a group of dealers,
which potentially was going to cost us $50 million. We believed we had done
nothing wrong, but our lawyers advised us that if it went to court, we stood only a
50-50 or worse chance of winning. A major distributor, who used to be the chairman
of my company, originated the suit. He had died just shortly after the suit was filed,
and on his deathbed he had his sons swear they would not relent in their pursuit of
the lawsuit.
One of my long-standing advisers is a minister who excels at taking
principles from the scriptures and apply ing them to business problems. I explained
the situation to him, and he gave me this advice: he told me to go see the sons of
the major distributor (who had just died) and tell them that we were donating
$200,000 to a charity of their choice "to honor their father." "He was the
founder," I was to tell him, and "this is to honor him." I did this, and they
accepted. Then my adviser told me to go around and personally visit each
distributor who was a party to the lawsuit. He told me to ask them what their issues
really were and what they needed. I spent six weeks traveling to see them. At the
end of this, I offered to settle for something like $2 million over three years.
Eventually they settled for $1 million up front. This ad vice saved the
company tens of millions of dollars and helped reestablish the loyalty of our key
distributors.”
The pharmaceutical company Merck's development of Mectizan, a drug for
river blindness, is another example of how a clear set of personal values can and
should influence business decision making. In The Leadership Moment, Professor
Michael Useem of the Wharton School of Business chron icles the story of Roy
Vagelos, who was the head of Merck's laboratories in the 1980s. Vagelos made a
personal decision to support development of a revolutionary drug that could cure or
forestall the spread of river blindness, which is caused by a devastating parasite
infection affecting 60 million people in developing nations. The problem was that
none of the cus tomers for Mectizan could afford to pay for it.
Vagelos advised Merck's management committee, and later, when he
became CEO, its board of directors, to support the production and distribution of
Mectizan—for free, for ever. This was a huge and risky decision that by 1997 cost
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Merck $200 million in lost income. Yet Vagelos never hesi tated. A physician himself,
he deeply espoused a personal mis sion to "preserve and improve human life." His
own beliefs and values were carefully factored into his decision making.

5. D on 't B e M isled by Y ou r E x perience

On November 23, 1951, Ivy League rivals Dartmouth and Princeton

played a hotly contested football game. The game was marked by fierce rivalry and
very rough play on the field. Princeton's star player broke his nose and a Dartmouth
player broke his leg. Afterward, a bitter dispute erupted about the way the game
was played, with each side accusing the other of unsportsmanlike conduct. A
psychologist from Dartmouth, Albert Hastorf, and a researcher from Prince-ton,
Hadley Cantril, teamed up to study the incident. They surveyed students who had
seen the game, and they showed a film of the game to students at both colleges who
had not at tended the match. Predictably, each side reported that the other team had
committed the most infractions. Even with the benefit of objective evidence—a film
that recorded every thing—the students couldn't agree. The researchers con cluded,
"It seems clear that the 'game' was actually many different games. It is inaccurate
and misleading to say that different people have different 'attitudes' concerning the
same 'thing.' For the 'thing' simply is not the same for differ ent people."
As this example illustrates, although it would seem very natural for us to
learn from experience, memories are "re constructed" after the fact and sometimes
not very accurately. Researchers in the legal field, for example, have found that
eyewitness" accounts can be very unreliable. In short, we lend to see what we want
to see.
Physicians can be particularly susceptible to this phe nomenon. A study
done many years ago asked a group of ex perienced doctors to assess who among 500
children needed tonsillectomies. They concluded that about 50 percent needed to
have their tonsils removed. They then separated out the 50 percent whose tonsils
were deemed healthy and asked another group of doctors to examine them. Again,
just under 50 percent were deemed in need of surgery to remove their tonsils. The
"healthy" children were again culled from this group and assessed by yet a third
group of doctors. In credibly, nearly 50 percent were still diagnosed with un -
healthy tonsils requiring removal!
There are three major pitfalls that prevent us from learn ing from experience:
• We claim credit for all successes. Not all good things are due to our genius;
luck and happenstance affect a lot of outcomes. We have to recognize this and
develop a measured understanding of our capabilities.
• We minimize and dismiss failures. Often, we will reframe events with
hindsight so they are more favorable to us, or we simply forget them. This keeps us
from learning.
• We distort actual events, in our favor. Like the students at Dartmouth and
Princeton, we allow personal biases to color our recollections.
You can enhance your ability to learn from experience by doing a few
simple things. First of all, keep track of your advice. Six or twelve months after the
fact, ask yourself if you would give the same advice, or if, perhaps, you would say or
do something different. Second, think about how past events might have turned out
differently. Research has shown that you can reduce hindsight biases by looking at
how the results of decisions could have been different. It's not enough to say, "Why
did things turn out the way they did?" You also have to ask, "How else might it have
turned out, and why?"
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 TECH NIQ UES TO DEVELO P BETTER JUDG M ENT

Based on our observations of professionals who have great judgment, here

are some suggestions for improving your own decision-making ability:
Overinvest in problem identification. Lack of up-front investment in thorough
understanding of the issues that the client faces is one of the biggest mistakes
professionals make. At least 50 percent of the time, the "problem" presented by
your client will change and evolve from the one you discussed at your initial
meeting. It is a dangerous mistake to accept your client's first "problem statement"
at face value.
Examine alternative problem definitions. Be creative in examining all the root
causes of the issue at hand. Harvard's Joseph Bower, in our earlier example,
correctly identified that his client's first problem was executive alignment and
buy-in, not antiquated processes or information systems.
Make sure the problem is really apriority. Given the strategy, goals, and current
situation of the organization or individual you're dealing with, does it make sense to
work on this problem? A few years ago, a major bank had lost nearly $500 mil lion in
just twelve months. Management began soliciting multimillion-dollar bids to develop
a "cultural change" program. Was this really the place to start, given the huge losses
and other associated problems of cost efficiency and strategic positioning that the bank
faced?
Ask "disconfirming" questions. As we mentioned earlier, you can avoid the
confirmation judgment trap by asking questions and collecting data that you
suspect might dis prove the initial hypothesis. For example, the United States
decided to drop the atom bomb on Japan in 1945 be cause of a firm belief that the
Japanese would never surren der. U.S. officials believed that an invasion of
mainland Japan, which would cost an estimated 1 million Allied casu alties, was the
only other viable option. But what if the fol lowing question had been seriously
pursued: "Short of dropping the atom bomb or invading the mainland, what event
could lead the Japanese to surrender?" This line of in quiry, if advanced in a
thorough manner, might have re vealed other options to the Allies, including the
obvious one of just waiting for a few more weeks, since constant Ameri can
firebombing had already destroyed a large number of Japanese cities.
Develop both standard and outlandish alternatives. We often put boundaries
around our thinking, and this severely limits the range of alternatives or
possibilities we are able to con sider. What if we do nothing? What if we do the
opposite of what everyone is suggesting? An outlandish alternative pro posed at a
Drexel Burnham brainstorming session in 1983 was the concept of an "air fund"
for corporate acquisitions--- a fund with no money in it. At first, the idea seemed
absurd. But it eventually evolved and developed into the "highly con fident" letter
that Drexel would send out prior to a takeover. Basically, the letter stated that
Drexel was highly confident the financing could be raised in the high-yield bond
market.
There was no money available yet, just the promise of billions of dollars soon to
materialize.
Engage in prospective hindsight. Try stating a question about the future in two
different ways:
• How likely is it that our closest competitor will take ten points of market share
away from us in the next two years and surpass us in revenue? Give reasons why this
might occur.
Here is a slightly different version of this question:

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 • Pretend it is two years from now. Our closest competi tor has increased its
market share by ten points and surpassed us in revenue. Explain how and why this has
happened.
When a hypothetical event is stated as a reality—as in the second question above—
people are far more creative in com ing up with reasons for why it could happen, and the
quality of their thinking improves dramatically.
Understand your client's tolerance for risk and uncertainty. Every client has different
levels of tolerance for risk, and this tolerance will vary from situation to situation.
Several years ago, for example, a leading European travel company commissioned a
group of consultants to review its U.S. operations. Although the firm's U.S. office was
at a serious disadvantage against bigger players, and losing money, the consultants
believed that with a great deal of work and further investment it could grow and
achieve greater market clout and economies of scale, finally becoming profitable.
Their conclusions bothered the CEO, however, and he asked a friend, a former
top executive in the travel business who had retired, to come see him. Sitting over lunch
the next week, his friend said, "It all comes down to what management really wants here.
So what do you really want out of your U.S. operations? And what risks will you
tolerate?" The CEO paused, since no one had bothered to ask him these ques tions
in quite this way. He replied, "I basically need to show the flag in the United States.
The business doesn't have to be big—in fact it can be very small—we just need a
visible pres ence. And I can't risk it ever losing any money. I just cannot af ford it
anymore—the government won't put up with the losses." The CEO declined the
follow-on consulting contract and instead spent a month downsizing the U.S. office
to the point where it could break even under any circumstances. The CEO was
happy, and so were his shareholders, who were more interested in national
representation—"showing the flag"—than market share. The consultants, in short,
had mis judged their client's appetite for risk and misunderstood his business
objectives in the United States.
Enhance your ability to reach for patterns in your experience. You can deepen
your effective experience by learning from other, more seasoned peers. Get them to
share stories and an ecdotes. You might consider questions like: "What was the most
difficult client you ever had? What was the most awk ward professional moment of
your career, and how did you handle it? Have you ever taken on a case that seemed
hopeless? Why?" Stories are a powerful means of enhancing your experience.

BECOMING A GOOD THINKER

Good judgment flourishes, first of all, in the absence of bad judgments.

Great professionals help their clients avoid the many subtle judgment traps that
can lead to poor deci sions. Then they actively exploit each part of the judgment
equation in a balanced fashion. They combine known facts with their
experience and assess the alternatives through the lens of their beliefs and values,
by becoming a deep generalist, cultivating your powers.

D o Y ou H ave G ood Ju d gm en t?

• When your clients face tough choices, they often use you as a
sounding board. They share their dilemmas with you.
• You're right more than 50 percent of the time.

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 • You have the confidence to make judgments rela tively quickly. You
identify and marshal the key facts and perspectives that you need, but it doesn't
bother you if you don't have all the facts.
• If you're asked by a client to judge an issue where you lack experience
and important information, you're not afraid to come out and say you just don't
know.
• You're honest about your track record at giving ad vice and making
recommendations. You've made mistakes and learned from them.
• You're very aware of your clients' tolerance for risk and loss, having
discussed this openly with them.
Of synthesis, and developing good judgment, you will be well on the road to
becoming a good thinker, a person aptly defined by Vincent Ruggiero in his book
The Art of Thinking:
Good thinkers produce both more ideas and better ideas than poor
thinkers. They become more adept in using a variety of invention techniques,
enabling them to discover ideas. More specifically, good thinkers tend to see the
problem from many perspectives before choosing any one, to consider many
different investiga tive approaches, and to produce many ideas before turn ing to
judgment. In addition, they are more willing to take intellectual risks, to be
adventurous and consider outrageous or zany ideas, and to use their imaginations
and aim for originality.
IF YOU ARE able not only to demonstrate sound judgment yourself but also help
your clients arrive at their own good judgments, your value as an adviser will increase
significantly. By developing a reputation among your clients as a good thinker, you
will be asked back by them again and again.

WHAT MONEY CANNOT BUY

Creating Trust through Integrity

QUESTION: Is not commercial credit based primarily upon money or property ?

j. PIERPONT MORGAN: No, sir, the first thing is character.
QUESTION: Before money or property ?
j. PIERPONT MORGAN: Before money or anything
else. Money cannot buy it. . . . Because
a man I do not trust could not get money from me on all the bonds in Christendom.
J. P. MORGAN'S 1912 Congression Testimony'

AMERICA is slowly becoming a low-trust society. In 1960, 58 percent of

Americans surveyed felt that "most people could be trusted," but when asked
the same question in 1993, only 37 percent replied in the affirmative. Evidence
of low trust is everywhere: politicians routinely lie, litigation proliferates, and
the confidence we have in a variety of pro fessional figures—doctors, lawyers,
consultants, stockbro kers, journalists, and others—appears to be at a low
ebb. Even our trust in respected institutions such as local police, the FBI,
clergy, and the military has waned in recent years.

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 A lack of trust in business and personal dealings carries many costs.
Corporate managers and public officials, for ex ample, are reluctant to share
information that could empower their organizations, resulting in sharply
reduced employee loyalty. Transaction costs, such as legal fees and overly detailed
contracting, are major expenses for both cor porations and individuals. And because
of a fear that they will be sued, many employers refuse to give recommendations for
former employees—the two parties, in essence, don't trust each other.
Service professionals, who have historically enjoyed a reputation for
unimpeachable integrity, have contributed their fair share to the diminution of
trust that clients place in them. Stories are reported in the press—and also occa -
sionally circulated among clients—about investment banks whose client loyalties
are a function of deal size rather than prior commitments; about consultants who
oversell and put inexperienced staff on projects; of lawyers who create con flicts of
interest by allowing themselves to become finan cially intertwined with their
clients; and so on. Litigation against large professional service firms, once rare,
has be come commonplace.
The basic patterns are all fairly familiar by now: confi dential information is
misused; a client's interests are put last rather than first; standards are
compromised in order to re tain client business; and conflicts of interest are not
disclosed. As the service industries become more competitive, there is an
increasing tendency to compromise principles in order to meet growth and
profitability objectives. Integrity, inexorably followed by a decline in trust, is the
casualty.
Great professionals, however, never concede their in tegrity in order to win.
They may be bold and determined in pursuit of their objectives, but integrity and
their clients' needs—not selling the next assignment, not earning a large bonus,
not pleasing their boss—come first. And if there ever is a conflict between the two
—between what a client wants and what the professional's integrity dictates—
integrity al ways wins out.

YO UR M O ST PO W ERFUL ALLY

Trust is especially important in situations where there is a "high degree of

dependence on someone else—precisely the situation when a client hires a
professional for advice or buys a complex product or service from him. Trust
between a client and a professional is both a necessity and an important asset for
both parties: if there is mutual trust, everything works better, faster, and more
smoothly. When a client trusts her professional adviser, a number of positive things
happen:

• When you suggest additional work to your client, she believes you are
proposing the work because you hon estly believe it will help her, not because you
need more business.
• Your client will be willing to buy services from you that extend beyond your
core expertise. Trust allows you to increase the depth and breadth of the
relationship.
• If you make an honest mistake or slip up in some way, your client will most
likely forgive you and won't hold it against you.
• You will be able to work with your client on a more in formal basis, leading
to a more relaxed and creative process. There will be a decreased need to carefully
document and check everything you do.
• When you make recommendations, they will have more impact. Your
client will believe that your words are backed with integrity and that your only
agenda is to help solve her problem.

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 Trust, in other words, is a professional's most powerful ally. Trust is worth a
fortune (it is, literally, if we're talking about keeping a client for life), yet you can't
purchase it, a fact noted b. P. Morgan when he testified before Congress in 1912.
What is trust, exactly? We know it's missing in many aspects of our society, and we
know how powerful it can be when it's present, but it's easier to articulate the feeling
of trust than the elements that actually create it. Trust is complex: in some
situations, it means "I believe you are competent to per form this service"; in others, "I
know you will act in my inter ests, not yours." Author Robert Shaw proposes a
general definition of trust: "A belief that those on whom we depend will meet our
expectations of them."

H a r ry H o p k in s: F ra n k lin R o o sev elt's M ost T ru ste d A d v iser

Harry Hopkins, who served as an adviser to Franklin Roosevelt from 1936

to 1945, was one of the most remarkable political advisers in U.S. history. Much of
his success was based on a relationship of extraordinary trust that he devel oped
not just with the U.S. president but with other world leaders at the time, such as
Winston Churchill and Joseph Stalin. Hopkins, who had almost no formal
position in the White House during World War II, was influential in both the success
of the New Deal and the effective conduct of the war. The trust he engendered,
added to his native abilities, en abled him to play a highly unusual role in both
increasing Roosevelt's effectiveness as president and in facilitating a highly
productive relationship among the Allied war leaders. Secretary of the Army George
Marshall, who was not prone to hyperbole, said that Hopkins "rendered a service to
this country which will never even vaguely be appreciated."
A professional social worker by training, Hopkins as a young man showed
little hint of the greatness he would achieve as the most important adviser to a
famous U.S. presi dent. He headed the Federal Emergency Relief Administra tion
and the Works Progress Administration during the mid-1930s and was secretary of
commerce from 1938 to 1940. Ironically, it was when Hopkins abandoned any
personal po litical aspirations that his power increased exponentially. He had a bout
with cancer, then was diagnosed with a chronic, wasting intestinal ailment that
doctors believed would be fatal. Because of his health, he gracefully stepped
down as commerce secretary in 1940, but soon after Roosevelt was re- elected, he
asked Hopkins to move into the White House and become his informal adviser. It
was during the war years, when he held no major post, that Hopkins established a
unique relationship with Roosevelt.
Living in a guestroom at the White House, Hopkins joined Roosevelt for
virtually all his meals and attended every important meeting with him. Roosevelt
got to know Hopkins intimately, reinforcing their personal chemistry and a sense
that they shared many of the same values. Based on Roosevelt's deep trust in
Hopkins, he sent him as his personal emissary to London in January 1941, to meet
with Churchill (Roosevelt and Churchill did not yet know each other per sonally,
although they had met once years earlier). Hopkins and Churchill spent two
weeks together, including three weekends in the countryside at Chequers, the
prime minis ter's country estate, where they talked, drank, and relaxed to gether. The
relationship Hopkins established with Churchill during this trip built a foundation
of trust that allowed Hopkins to create an unusual link between the two leaders.
Moreover, as Hopkins's biographer, Robert Sherwood, notes, "there was by
now an intimacy between the two men which developed to such a degree that it is
no exaggeration to say that Churchill reposed the same confidence in Hopkins
that Roosevelt did." After yet a second visit with Churchill, Sherwood tells us,
"there was started at this time correspondence without precedent: an informal,
off-the- record but none the less official correspondence between the heads of two
governments through a third party, Hopkins, in whose discretion and judgment each
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had complete confidence. Time and time again, when the Prime Minister wanted to
sound out the President's views on some new move, he would ad dress a private
cable to Hopkins . . .
Hopkins exercised impeccable discretion. Despite being privy to virtually
every state secret and private conversation of the president, he never, ever—not even
once—betrayed the confidences placed in him. He never leaked news or used his
information for personal gain. In July 1941, shortly after the Germans had invaded
Russia, Roosevelt sent Hopkins to meet with Stalin in Moscow to assess the situation.
It was a his toric set of meetings, the first between Stalin and a direct rep -
resentative of the U.S. president. Very little was reported in the newspapers,
however. During the press conferences he held afterward, Hopkins revealed
virtually nothing about the substance of their talks, even though to do so would
have enhanced his prestige and highlighted the powerful and unprecedented role
he was playing. Roosevelt knew that Hopkins was as silent as a tomb, and it
magnified his ability to trust him.
Hopkins's reliability and consistency further reinforced Roosevelt's belief
in his integrity. He never overstepped his bounds; if Roosevelt sent him on a
mission to meet with a for eign leader, he knew that Hopkins would assiduously
adhere to the agenda and limits that had been set for him.
After every meeting, Hopkins would carefully draw up a detailed memo
for the president that succinctly laid out the key points and issues to consider.
Hopkins didn't believe in political patronage, and he was incorruptible.
When he administered relief funds for Roosevelt as head of the Federal Emergency
Relief Adminis tration, he did it strictly by the book, favoring no particular state or
constituency. A few times, Roosevelt had to intervene to satisfy some political ally
whom Hopkins had treated too impartially.
Hopkins never profited from his position of enor mous influence; when he
died in 1945, his estate was worth only a few hundred dollars. Yet this had been a
man who had personally overseen the disbursement of $9 billion in aid dur ing the
Depression and who had been a director of the lend- lease program during World
War II, which allocated over $50 billion in military spending.
In Roosevelt and Hopkins, Robert Sherwood sums up Hopkins the
adviser: "Hopkins did not originate policy and then convince Roosevelt it was
right. He had too much intel ligence as well as respect for his Chief to attempt the
role of mastermind. He made it his job to provide a sounding board for
discussions of the best means of attaining the goals that the President set for
himself. Roosevelt liked to think out loud, but his greatest difficulty was finding a
listener who was both understanding and entirely trustworthy. That was Hop kins.
Because he had set aside his own personal ambitions for formal office, Hopkins's
agenda was Roosevelt's agenda. This, together with his unwavering integrity, made
it easy for Roosevelt to trust him.
If we look at Harry Hopkins and his relationship with Roosevelt—indeed,
if we examine any business relationship with a high degree of trust—several
factors stand out that uniquely affect the level of trust that a client has in you.
The first major quality that underpins trust is integrity. The dis cretion,
consistency, and reliability that you demonstrate, and your sense of right and
wrong—these will influence, more than just about anything else, the degree of
trust people place in you. Hopkins exhibited these qualities to Roosevelt on a
daily basis, always coming through for the president, never forgetting a
commitment, as incorruptible on the last day of his tenure as on the first.
Hopkins's strong performance at every task Roosevelt gave him
illustrates an additional factor that builds trust: competence. In a business
setting, a client's trust will natu rally be influenced by whether or not he thinks
you're com petent to do the job you've promised. The risk of trusting someone is
a final consideration, and that perceived risk will raise or lower the total amount of
trust that a client has in you.
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 These three factors—integrity, competence, and risk— can be combined
into a trust formula:

Trust = (Integrity X Competence)

Risk

Your clients' perception of each factor in the equation will raise or lower
the trust they place in you.

INTEGRITY: THE BACKBONE OF TRUST

Integrity is a state of wholeness in which you act in accor dance with a set of
coherent values or principles. In other
words, you know what's right, you're clear about what you be lieve in, and you
consistently follow your beliefs.
Integrity has several main dimensions to it. The first, ac cording to Yale law
7
professor Stephen Carter, is discernment between right and wrong. Just acting
consistently with your beliefs is not enough; you have to have beliefs that are ethical
and moral. Adolph Hitler, for example, passed many of the tests of integrity—he
acted on his beliefs quite consistently— but he had evil, wrong beliefs. There was
no discernment.
In Dante's Inferno, which is the first part of his Divine Comedy, the "false
counselors" are found in the eighth circle of hell, one of the lowest, just below
common thieves.
These false counselors are spiritual thieves, who advised others to commit
fraud. They used their intellect to rob people of their integrity, and as a result
must walk for eternity en veloped in painful flames.
Using one's intellectual powers to deceive and encourage wrongdoing was,
for Dante, an espe cially egregious crime. Honesty is an important manifestation of
discernment.

HOW YOU CAN BUILD TRUST

Trust is like a fine Oriental rug that is carefully woven over many months
or even years, rather than an edifice that is set up overnight. Lots of small things go
into building trust. Here are some areas to consider:

1. Face Tim e with Clients

"One of my few client relationships that went badly," Spencer Stuart's

Andrea de Cholnoky tells us, "was due to lack of face time. The client told me
that he just hadn't seen enough of me, that it didn't seem like I had the energy in the
assignment. I immediately called up every single one of my other clients and took
them out to lunch! You've got to in vest, continually, in face-to-face time with
clients."
There is simply no substitute for meeting with a client and allowing time
so that the two of you can come to know each other personally. The purpose is not
to make the client like you—we're not talking about "schmoozing." And there's no
guarantee that if you spend time together the trust will in crease.
If, however, there is personal chemistry, as well as shared values and
interests, personal time together will bring this out, and it will subtly facilitate the
development of trust. Face time provides an opportunity for your client to see your
sterling qualities firsthand. It amplifies your competence and integrity.
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 2. Setting and Reviewing Expectations

We said early on that a client's satisfaction is a function of expectations versus

actual (or perceived) performance. Trust works the same way: you may very well
fulfill your commit ments on time, but if you and your client don't agree on what a
particular commitment was in the first place, your perceived integrity will suffer and
trust will diminish.

3. C arefu lly M ak in g P rom ises

The worst kind of professional is someone who con stantly promises things
and never delivers. This kind of credi bility gap, once established, is almost
insuperable. Lewis Smedes, an ordained minister, beautifully sums up the mean ing
of a promise in a sermon entitled "The Power of Promises": "When a person
makes a promise, he stretches himself out into circumstances that no one can
control and controls at least one thing: he will be there no matter what the
circumstances turn out to be."
Here are some suggestions for how to keep commit ments:

• Don't be cavalier with promises. Don't say, "Let's have lunch" or "I'll call
so-and-so for you" unless you really mean it. Being known as a person of your
word is a powerful thing. Don't dilute your integrity with thoughtless
commitments.
• If necessary, make conditional agreements. If an event or occurrence
could get in the way of a promise, state it clearly up front. This way there will be
no surprises.
• If you can't keep a promise, let the other person know as early as
possible. The longer you wait to reveal the bad news, the worse things get. If you
have built up trust by keeping your previous commitments, then that client will
probably understand.
• Learn to say no. Busy, successful people are the ones who are always
asked to do things. Be selective about what you commit to.

4. D em onstrating L oyalty

Loyalty means having an allegiance to your client and putting her agenda
before your own. When clients experi ence a sense of loyalty from you, it
reinforces their percep tion of your integrity and strengthens their ability to trust
you. Someone who feels third or fourth on your list of priori ties, who gets the
impression that she's just one of dozens or hundreds of clients, is never going to
trust you very deeply. Think about how you feel when a doctor barely recognizes
you and has to visibly reorient himself as he walks into the ex amining room.
Everyone wants to feel special—your clients are no different.
It's also important never to criticize anyone who is not present. You win
the trust of the people you're with by show ing loyalty to those who aren't there. If
someone is indiscreet and tells you a piece of gossip or confidential information, it
becomes difficult to trust that individual. If he or she is always criticizing other
people, it makes you wonder, What will this person say about me to others?

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 5. Nurturing Trust on a Daily Basis

There is no doubt that one dramatic event can establish a great deal of trust.
For example, when George Washington voluntarily relinquished the presidency
after his second term had expired, he instilled a deep public trust both in himself
and in the new American government. Few if any major heads of state before him
had ever stepped down of their own free will. What really cements and develops a
sense of trust, however, is the daily nurturing of your relationships. Stephen Covey's
metaphor for this reservoir of trust is the emotional bank account. When an action
reinforces trust, you have made a deposit; when you do something to undermine
trust, such as letting someone down, you make a withdrawal. You have to make
lots of deposits, regularly, to sustain trust.

6. There Are No "Minor" Commitments

At Beth Israel Hospital in Boston, legendary chief of sur gery Dr. William
Silen tells his residents, "I don't know what the difference is between 'major' and
'minor' surgery. I just know that no one performs 'minor' surgery on me!" In a sim -
ilar vein, there is no such thing as a minor commitment. Each promise you make,
large or small, should be treated with the same seriousness. "Character is made in
the small moments of our lives," offered nineteenth-century clergyman Phillips
Brooks. It's all the little things that you do—often when no one is looking— that
constitute your character and define your integrity.

7 . K n o w in g W h a t Y o u S ta n d F o r

By definition, integrity is a wholeness or completeness that is underpinned

and bounded by a set of beliefs and val ues. What are your principles? What do you
stand for? What guides your professional and personal life? Where do you draw
the line when your beliefs are challenged or threat ened?
Law professor and best-selling author Alan Dershowitz told us this story
about clarity of principles and integrity: "Several years ago I helped a large law
firm win a very impor tant case. To celebrate, the partners took me out to dinner to a
private club. I learned that the club did not allow women in side the door, however, a
practice that violated one of my basic beliefs about equality between the sexes
and non-discrimination. When I refused to go to the club, they said 'but there's
no other good place to eat.' I insisted, and we ended up holding the victory dinner
at McDonalds."

8 . B ein g P r ep a red to T a lk o n T V

All professionals are faced with ethical and moral dilem mas just about every
week of their lives. Some are relatively minor. Should I fly first class or economy?
Should I put hotel laundry on my expense report? Some are major. Should I agree
to an accounting practice that I feel is wrong? There are no simple rules for how to
conduct yourself. Hemingway's quip that "I only know that moral is what you feel
good after and immoral is what you feel bad after" can take you only so far.

One good principle to follow as a professional is what we call the "light-of-day"

test. Whatever action you take, be it stay ing in a certain class of hotel or meeting with a
client's com petitor, would you be comfortable discussing it with your client the
next morning in the full light of day? What if you were interviewed on television
and asked about something you did? Would you feel comfortable explaining it?
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 "Anything related to issues of integrity, trust, and ethics are fatal flaws"
commented Rebecca Guerra, the vice presi dent for human resources at eBay, the
online auction house. Speaking to The New York Times, she emphasized that while
failure in one's past was OK, questions about character were unacceptable to her
company.
Another way of looking at this is that you shouldn't have any secrets. By
secrets we don't mean confidential client in formation, which you are duty-bound to
protect. Rather, you should have nothing to hide; you should be comfortable
sharing details of your professional conduct with a client, without
embarrassment or defensiveness.

9. Reducing Your Client's Risk

Recall that the amount of trust a client has in you will go up or down
depending on the risk he perceives. You can do several things to reduce this risk.
First of all, you have to demonstrate consistency and reliability right from the
start, even for the smallest of things. Showing integrity itself, in other words,
reduces risk.
Second, you can either implicitly or explicitly guarantee your work. A
guarantee doesn't have to take the form of a cer tificate that your clients mail in to
you. More likely, it will be an understanding between you and your client. You
want your clients to feel that if they are not satisfied at any time with your work,
you will rectify it as best you can—period. The words "we'll work on this until
you're satisfied" can be the occasional reminder of the fact that you'll stand behind
your work and strive to address any issues they may have with your performance.

W H E NT R U S T IS L O S T

Sometimes, even though you feel you have demon strated a high level of
integrity and competence, trust is lost. Here are some principles to remember about
losing trust:

Clients don't inform you when they stop trusting you. Trust can vanish rapidly and
mysteriously, and you're always the last to know. Because the symptoms of a loss of
trust can be so var ied, and because some of them can also signify other prob lems
or issues, it's always hard to pinpoint when your client stops trusting you. Perhaps
you lose a follow-on assignment that you were sure you would win; or suddenly
the client throws your business open for a competitive bid. Often, a client can't
even articulate that she's lost trust in you. She feels a vague dissatisfaction, and
she stops sharing informa tion with you and turning to you for advice. You have to
watch and listen very carefully.

It's useful to hold a frank and open discussion with your client when the
engagement ends, something that is easier to do if you set the expectation, right up
front, that you'll be having this discus sion three or six months down the road.
Unfortunately, by the time you discover that the trust has dried up, it may be too
late to do anything about it.

Clients don't care why you let them down. Unless a catastrophe has occurred—
an earthquake or a death in the family— clients, like most people, don't
particularly care what the reason was that caused you not to deliver on a
commitment. You may believe you had perfectly good reason to let them down,
and the excuses are myriad: you caught a cold, the work took longer than you had
planned, another client had an emergency, your computer crashed, you forgot to
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write it down in your agenda, you wrote it down in the wrong agenda, your secretary
forgot to tell you about it, and so on. But your client doesn't really care, and trying
to explain it won't help. It's better to say, "I let you down, I'm sorry, and it won't hap -
pen again." If you have built up a reservoir of trust with your client, he may let it
pass.

Sometimes, repairing a lapse in trust can enhance your relationship. If you let a
client down, you may be able to recover her confidence. How you react to the
incident and the way in which you go about remediating it are critically important.
Several years ago, a management consultant conducting an assignment for a large
West Coast company carelessly left a draft copy of his report on a BART train in
San Francisco. An unscrupulous passenger found it, contacted the client, and
demanded $50,000 in ransom for the return of the docu ment. All hell broke
loose: the company threatened not just to terminate its relationship with the
consultants, but to file a major lawsuit as well. The consulting firm went into
action immediately. Its president flew out to California the next day and met with
the CEO of the client company. He apologized for the incident, offering no
excuses. He informed the CEO that the consultant had been disciplined and that
the firm was assigning a task force of partners to develop new policies and
procedures to minimize the possibility that such an inci dent could reoccur. Then
he offered to conduct a major study for the client, free of charge, on a key issue
the com pany faced. The client accepted, and the relationship contin ued
successfully for another four years.
This anecdote illustrates some cardinal rules for dealing with a breach of
trust:

• Admit that you've made a mistake. Own up to the lapse.

• Don't make excuses—no one wants to hear them.

H a ve Y ou D evelop ed T ru st w ithC lYi eoun rt s ?

• Sometimes, you conduct assignments based on a minimum of

documentation. Once you and your client have agreed on the objectives and
deliver ables, your client trusts you to follow through.
• Clients may remind you of something you're sup posed to do, but they
rarely "check up" on you.
• Clients ask you to tackle issues that are of major importance to them.
• If on a rare occasion you slip up and miss a com mitment, your clients
are very forgiving.
• There is a quality of openness to your client rela tionships. Both you
and your clients feel free to bring up touchy or awkward subjects with each
other.
• Your clients have become familiar with your partic ular skills as well as
your values and beliefs. They can predict how you will react to a particular situa -
tion or dilemma.
• Clients' trust in you extends beyond their belief that you will do
good work; it is a deeper, broader trust based on both professional
competence and personal integrity.

• Provide value-added compensation to the client. Some clients might

value having the fee reduced; for others, such as the client in the example
above, a free piece of work can he appropriate.

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 • Learn from the incident, and let your client know that you are
learning from it. Tell them what you're going to do to make sure it doesn't
happen again.

There may be situations where you feel that you are 100 percent in the
right and that the client is absolutely in the wrong. Even in these cases, keep
in mind that the client per ceives that you have let him down. You may have to
walk away from the relationship, but be careful about how you deal with it; you
don't want to leave burned bridges behind you. If there has been good
communication between you and the client, however, and expectations have
been set, you should be able to avoid this kind of confrontation.

DEEP PERSONAL and professional trust, which boils down to a client's belief in
your integrity and your competence, is a hallmark of the long-term relationships
that great profession als are able to develop. Clients expect and will forgive occa -
sional errors of judgment, but lapses of integrity are a red flag to everyone around
you. As the fifth-century religious leader St. Augustine wrote in his essay On
Lying. "When regard for the truth has been broken down or even slightly
weakened, all things will remain doubtful." Set high standards of con duct for
yourself. Tirelessly develop your reputation for in tegrity and honesty, and it will
become one of your biggest assets as a professional.

T H E S O U L OTFH E G R E A T P R O F E SSIO N A L

This is the true joy of life, the being used by a purpose recognized by yourself as a
mighty one; the being thoroughly worn out before you are thrown on the scrap heap; the
being a force of nature instead of a feverish, selfish little clod of ailments and grievances
complaining that the world will not devote itself to making you happy.
GEORGE BERNARD SHAW, Man and Superman

GREAT PROFESSIONALS become extraordinary client ad visers by developing

some important attributes. These attributes encompass the im portant talents,
skills, and attitudes that enable professionals in any field to build and sustain
long-term, broad-gauge client relationships on a consistent basis.
The great advisers we've studied also possess certain out looks that frame
and inform their work. We call these out looks the soul of the great
professional. They are not so much personal characteristics as they are ways
of looking at the world. If you cultivate them, your ability to add value will be
enhanced, and you'll become a more appealing person to your clients—
someone they will both respect and enjoy spending time with. In addition,
you'll be better able to shape and manage your own career. These outlooks—
the elements of this soul— can be discerned in virtually all of the professionals
we have studied who command strong client lo y alty .

G reat P rofession als H ave an A b u n d an ce M en tality

An abundance mentality allows you to see the possibili ties and opportunities
inherent in every situation. 1 The opposite is a scarcity mentality, which focuses on
limitations and risks.

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 Professionals with an abundance mentality:

• Always look for opportunities, growth, and expansion

• Constantly generate new ideas
• Are positive and upbeat in their demeanor
• Feel that there are rewards enough to go around for everyone—they
know that a "rising tide" lifts all boats
• Are willing to invest time and money in the short term in order to earn
more later on.

Professionals with a scarcity mentality, in contrast, have very different

attitudes. They:

• Are primarily concerned with what might go wrong and what won't
work
• Focus on the risks of new proposals rather than the po tential rewards
• Believe that life is a zero-sum game, with a limited amount of
opportunity to go around
• Are concerned with "getting their fair share" at all times
• Won't make investments that don't show an immedi ate return

If you were a client, whom would you rather spend time with? There's no
contest here: all of us would prefer a posi tive, energizing individual to someone
who always sees the dark side of things. Some situations, such as a tax audit, may
benefit from the scarcity mentality we've described. But in general, clients prefer
and benefit from the expansive think ing of the professional who sees abundance,
not scarcity.
Don't confuse an abundance mentality with laxness, lazi ness, or imprudence.
The professionals who perceive abun dance often have a healthy dissatisfaction
with the way things are done today. They know there's often a better solution.
Like strong organizational leaders, they push and stretch for new ideas and
innovations; they don't wait for them to float down from the sky. That's why
clients like having them around so much: these professionals constantly
energize, motivate, and inspire others.
The sources of your fundamental outlook on life—abun dance versus
scarcity—are varied and complex. Your early childhood experiences and
upbringing clearly have a strong influence on this dimension of your
personality. Someone who suffers physical or emotional deprivation as a child,
for example, may always harbor a deep-seated sense of scarcity. A lack of love and
affection damages self-esteem, making it hard to have an abundance outlook.
There is no doubt an el ement of personal "constitution" involved—some
individuals just seem to be born with more resilience against the vicissi tudes of
life—but family and parental role models are also an important influence on your
adult attitudes of either abun dance or scarcity.
We believe that the education you receive plays a critical role as well.
Economics and engineering, which are typical backgrounds of many
professionals in business, are founded on principles of scarcity. Both disciplines
are concerned with the optimal use of scarce resources. They focus on the trade offs
that have to be made—for example, "guns versus butter," a graph recognizable to
many readers, which is found in many introductory economics textbooks. The
liberal arts, in contrast, are premised on abundance. The liberal arts per spective
sees a world of nearly infinite ideas and resources, a world where trade-offs are not
always necessary. It also raises important philosophical questions.
Rajat Gupta, McKinsey's worldwide managing director, says that he reads
poetry at the end of each partners' meet ing: "At first, that took people by surprise.

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But over time, po etry has affected what we're doing. Poetry helps us reflect on the
important questions: What is the purpose of our busi ness? What are our values?"
The European Renaissance, which was a time of enor mous scientific as well
as artistic ferment and innovation, ex emplifies the power of the liberal arts
perspective. The concept of humanism, which fueled the Renaissance, was based
on a belief in the potential of human beings and their ability to reach self-
fulfillment without recourse to higher powers or supernatural means. The most
accomplished and inventive figures of the period, from Niccolo Machiavelli to
Leonardo DaVinci, were consummate liberal arts scholars, equally at home with
art, science, mathematics, philosophy, history, and literature.
Does this mean you have to study liberal arts to become an accomplished
professional and develop lifelong clients? Yes and no. What we have found is that
the best client advis ers, regardless of what they majored in at college or studied in
graduate school, become deep generalists. They read widely, take an interest in a
variety of subjects and disciplines, and cultivate personal in terests as well as
professional expertise. Recall Peter Drucker, for example, who has a passion for
Japanese art, or David Ogilvy, who had a deep interest in French culture (he eventu -
ally went to live in France). The risk of burrowing too deeply into one discipline
like economics, engineering, or account ing is that you will begin to adopt a scarcity
mentality. Broad knowledge and learning, in contrast, open the way for an out look of
abundance.

G reat P rofessionals H ave a M ission O rientation

The individuals who have had a significant impact on history—figures such

as Jesus, Buddha, Joan of Arc, Gandhi, and Abraham Lincoln—had clear missions
that led them to perform at extraordinary levels. The great advisers we've
looked at in this book also had well-developed personal mis sions. For
Thomas More, it was fulfilling God's work in this life; for Niccolo Machiavelli, it
was creating a stable, unified Italian state; for J. P. Morgan, it was establishing an
orderly financial system in the absence of regulatory agencies. Gertrude Bell's
mission was to promulgate an understanding of the Arab world among Westerners
and ensure peaceful co habitation of the Iraqis and the British. Early on, General
George Marshall was driven by a desire to create a profes sional, respected U.S.
Army founded on principles of excel lence, efficiency, compassion, and hard
work; later, his mission became no less than ensuring that the United States kept
the world safe for democracy.
For most of us, our personal missions are perhaps more down-to-earth but
no less sincere, sacred, and important to us. When you ask great professionals
what drives them in their careers, you will hear phrases such as "making a differ -
ence to my clients' business"; "enriching management prac tice through my ideas";
"being a teacher—teaching and explaining the importance of people's rights";
"educating managers so they lead more successful, effective lives"; or simply
"practicing excellence in everything I do."
Fred Brown, who descends from the famed Brown Brothers Harriman
banking family, is an example of an ex traordinary adviser who has a clear
mission that drives his daily behavior. A highly successful personal financial
consul tant, Brown has authored several books on financial manage ment. He writes a
weekly newspaper column entitled "Money and Spirit," and he has a waiting list of
clients. He could well afford a trophy house and late-model luxury cars, but his
relatively modest home in the Southwest and his utilitarian Subaru suit him just
fine—he prefers to live his values of moderation and balance rather than flaunt
his achievements through flashy possessions. Using a powerful, unique ap proach
to financial management that blends cutting-edge fi nancial expertise with a deep
understanding of each client's personal, familial, professional, and spiritual life,
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Brown has developed an intensely loyal following of individuals and families
who come back to him year after year.
Brown charges an hourly rate that is a fraction of what the market could bear,
but this is a conscious choice he has made that is consistent with his mission of
helping people lead bet ter lives through improved financial management. "By charg -
ing what I do," Brown tells us, "I am able to serve a very broad clientele—I get the
millionaires but also people who are scraping by and desperately need help just to
survive."
The opposite of a mission orientation is the strictly ma terial orientation.
Your main focus becomes money, title, pro motion, or publicity. When a
professional has no sense of mission, he or she risks becoming a mercenary—
someone that Machiavelli cautioned against five hundred years ago when he wrote,
"Mercenaries are disunited, thirsty for power, undisciplined, and disloyal."
Machiavelli urged the creation of national militias—citizens' armies with an
overriding pur pose and an intense loyalty to their home state—a revolu tionary
concept at the time but now the accepted norm.
The author Victor Frankl, who survived the Nazi con centration camp at
Auschwitz during World War II, wrote that "Nothing is more likely to help a
person overcome or endure troubles than the consciousness of having a task in
life." A mission orientation not only helps you overcome difficulties, but it will
give you great strength in practicing the seven attributes. It will be easier for you
to be an empathetic listener; your conviction will intensify; your integrity will be
strengthened; and it will be far easier to practice self less independence.

G reat Professionals Channel Adversity into W isdom and Confidence

The extraordinary client advisers we've profiled have all gone through
difficult experiences. They've made mistakes, suffered reversals of fortune, and
even been humiliated. Whereas many people become embittered, cynical, or dis -
trustful as a result of these setbacks, the really great profession als get stronger. They
become wiser, more confident, and humble. Their comfort zones expand, enabling
them to tackle an ever-broader variety of situations and client assignments. Laura
Herring's story illustrates how extraordinary set backs can create resolve and
determination. In less than ten years, Herring's firm, The IMPACT Group, has
grown to 120 professionals who deliver a variety of relocation support ser vices,
from counseling to resume preparation. It had an in auspicious beginning,
however. The concept got its start when Herring, originally a family therapist,
pointed out to a Fortune 500 executive that relocation was one of the toughest
personal issues facing his employees. Challenged to develop a solution, Herring
invested $360,000 and months of time to create a program called Momentum. Just
after the company placed a major order for her services, however, its relocation
manager vetoed the idea, leaving Herring with no business. "I had double-
mortgaged my house," she tells us, "and sold some real estate my husband and I
owned. I was deeply in debt, with no cash flow. Panic set in." She goes on to say:

I was unable to go home and tell my husband what had happened. So I

went to the phone book, and began looking through the Yellow Pages for other
companies that I could sell the program to. I called the vice presi dent of
marketing at United Van Lines and told him I thought he should have the first
shot at buying our ser vices. He agreed to meet the next day. He loved the ma -
terials so much that he immediately placed an order for 10,000 tapes, books, and
related services—it was a $1 million sale. I was ecstatic. Two days later,
however, he called me back with terrible news. "We've decided to de velop this

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internally," he told me. "We can't go forward with the order." Unfortunately, I
didn't have a signed contract.

Shortly afterward, Herring flew to a relocation confer ence being held in

Florida—her last hope—but after arriv ing, she learned she couldn't actively
market to any of the participants. There, after three fruitless days walking the
floors of the conference hall, she finally met a top Johnson & Johnson
executive who was literally walking out the door. In trigued with her new (but still
untested) service, he invited Herring to come to his office to make a presentation.
"Gary Gorran," Herring concludes, "was the J&J executive. He be came our first
client, and thirteen years later he is still one of our best and largest clients."
When asked about how this and other difficult experi ences affected her,
Herring replies: "The other day I took my young niece to a club I belong to in St.
Louis. When we walked in, a lot of people came over and greeted me. My niece
was a bit shocked—she said to me, 'Everyone knows you—do you ever marvel at
how far you've come? And I told her that I know what it's like to be invisible, and
therefore I never take the end result for granted—you've got to earn it. There's
always someone out there who is better and smarter than you are. There's always
someone's uncle who knows more. You just have to keep driving toward your goals. I
believe that failure is not a possibility."
Herring's account, and how it steeled rather than dimin ished her resolve
and determination, is typical of great pro fessionals. Consultant James Kelly tells
another story of early-career trauma:

When I finished business school, Professor Dick Van cil hired me with the
idea of building a faculty-based con sulting firm [which under Kelly's leadership
became the MAC Group, a $125 million strategy consul ting business]. The second
year we did so well that we extended employ ment offers to a dozen top MBA
graduates from around the country. But suddenly our backlog of business just
died. It was early summer, and we were going to go bank rupt if we took on all these
new hires. I had to call each one of them up, tell them what had happened, and
rescind the offers. It was one of the worst days of my professional life.

Although it may seem that Kelly (who was twenty-six at the time)
exercised poor judgment in hiring so many new people, he learned from the
episode. He could have become gun-shy, retrenched, and never made a bold
hiring move again. Instead, he assimilated the experience in a balanced,
constructive way. His subsequent careful management of rev enues, backlog, and
professional staffing at the MAC Group resulted in twenty-five years of continual
growth and prof itability under his leadership—a far better record than most
consulting firms can show.

G reat P rofession als A lw ays V iew

C l iO
e nldt sA s N ewC l i e n t s

A marriage requires constant work and investment—-just ask any Couple

that has successfully been together for fifteen or twenty years. When a couple
divorces, the partners will often look back and describe a long period of mutual
neglect prior to the eruption of real acrimony. If one spouse is work ing in a
demanding occupation, for example, it may seem as if his or her job gets all the
time and attention, leaving little energy for the other person.
The bases for successful marriages and successful long- term client
relationships are similar. When you've been work ing with a client for many years,
the tendency is to take each other for granted. If you're like the vast majority of
profes sionals, most of your marketing and promotional resources go to new,
prospective clients rather than to your existing clients. As benign neglect sets in,
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your long-term client may become intrigued by other professionals in your field
competitors whose ideas seem newer and fresher, who are court ing him
aggressively. Just as in a marriage, the antidote to wandering clients is constant
reinvestment that revitalizes the relationship.
When we look at professionals who have long-term, broad-based client
relationships, who inspire great client loy alty, they all have a similar approach: they
treat each assign ment as if it were the first one for that client. They bring the same
energy, creativity, and drive to their long-term clients as they do to the new client
they are trying to impress. They communicate constantly, and the flow of ideas
never stops. Even if they aren't working on an assignment for the client at that
moment, they are in touch at least two or three times a year. The courtship, so to
speak, never stops.

Great Professionals Engage in Continual Self-renewal

Most professionals focus on their income statement— their annual tally of

expenses and revenues, leading to a fig ure that represents their total income for
that year. This is true whether you work for a large firm or on your own. If you
invested a lot in a client proposal that fell through, your year- end bonus may be
reduced. If you sold a large piece of follow- on business, your bonus may be larger
than usual. The focus is this year's sacrifices and rewards.
If you earnestly develop the attributes and outlooks we've been discussing,
however, you will naturally build your balance sheet assets. Deep generalists, for
example, make in vestments in learning and acquiring knowledge that may have
no immediate payback but bring rewards two or three years down the road.
Your personal capital—the sum of your talents, skills, ex periences, and
knowledge—can be developed in many ways. This personal development can but
doesn't have to occur through dramatic actions, such as taking a formal sabbatical
or making a career change. Often, professionals embed it in their daily routines,
indulging in leisurely reading, self-study, and the gradual cultivation of new areas
of interest.
Harvard Law School professor Alan Dershowitz, for ex ample, after writing
a series of very successful nonfiction books, recently published his first novel.
Renowned manage ment consultant Ram Charan just followed up several years of
work on how effective corporate boards function with a book on growth
strategies. Although part of the pre-Internet generation, financial consultant Fred
Brown is going up learning curve and setting up an interactive Web site, which
may not yield significant results for a year or two, to ex tend the reach of a steep his
innovative financial counseling.
How do you know when it's time to push into new areas? Peter Drucker
counsels that it's time for a change "When the harder you work, the less you seem
to accomplish—or when you're sure that you know all the answers, and you've
stopped asking, 'What are the right questions?' " 5
Just as successful professionals take a long-term view of client
relationships, they also have a multiyear perspective on their own personal and
professional development. They fol low Thomas More's injunction to "live as if
you are to die tomorrow, study as if you were to live forever." When you focus on
building your balance sheet—on self-renewal— remember that your income
statement may take some hits. This is why it's so important to cultivate qualities
such as inde pendence and conviction. Without them it will be difficult to navigate
the inevitable squalls that are part of asset building.

Great professionals successfully develop and integrate the seven core

attributes into a powerful whole, and then in-
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The Ingredients for Breakthrough Relationships

153
 Knowledge
Depth and Breadth

Selfless .
Independence Abundance

T h e S ou l of the G reat P rofession al,

fuse everything they do with their soul of abundance, mis sion, and self-
renewal. This combination of attributes and outlooks, summarized in the
accompanying illustration, en ables professionals to create broad-based, abiding
client rela tionships that engender collaboration and insight.

TOPICS FOR DISSCUSSION

1. What happens when client loyalties shift unpredictably?

2. What do professionals focus on ?
3. Can you anticipate client needs?
4. What makes you a deep generalist?
5. How important is keen judgment?
6. Is overconfidence a judgment trap?
7. Can we use intuition to leverage facts and personal experience?
8. Do you have a good judgment?
9. What do the lack of trust in business and personal dealings entail?
10. How can you build trust in a low trusted world?
11. Can overconfidence be considered the most common judgment
trap?

12. Can you be misled by experience?

13. How can you improve your own decision making ability?

ENLARGE ON:
1. A professional adviser should be independently wealthy; then he would be
objective, independent.
2. The great client advisers are constant learners not wedded to past concepts,
they help accelerate learning within the organizations they serve.
3. One cool judgment is worth a thousand hasty councils. The thing to do is to
supply light and not heat.

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 4. Clients don’t care why you let them down, they don’t inform you when
they stop trusting you.
5. Princes like to be helped, but not surpassed. When you counsel someone,
you should appear to be reminding him of something he had forgotten, not the light he
was unable to see.

Tips on Managing Relationship Value

If you want to keep a relationship on an even keel, manage it as you would

any other activity that matters to you.
• Create trust. Trust is created when people see tangible evidence that one's
words and actions are in harmony. So avoid making commitments you may be unable
to honor, and always do what you have committed to do. Trust is also created when
you acknowledge and demonstrate respect for the other party's core interests.
• Communicate. The different parties should communicate their interests, their
capabilities, and their concerns to each other. For example, if you agreed to complete
a customer survey for the marketing vice president within thirty days but have hit a
logjam, communicate that information to him.
• Never sweep mistakes under the rug. Mistakes are bound to happen.
Acknowledging and addressing them—quickly—is always the best course of action.
• Ask for feedback. If everything appears to be going as planned, never
assume that the other side sees it the same way. Be proactive in uncovering problems.
The other side will respect you for it. Ask questions such as these: "Is everything
happening as you expected?" "Are the parts reaching your plant on schedule?" "Did
my report cover all important points?"

Negotiation

Negotiation is a means by which people deal with their differences. Whether

such differences involve the purchase of a new car, a labor contract dispute, the terms
of a sale, a complex alliance between two companies or a peace accord, resolutions
are sought through negotiations. To negotiate is to seek mutual agreement through
dialogue.
Negotiation became an ever present feature of our lives both at home and at
work.
A business negotiation may be a formal affair that takes place across the
bargaining table where you haggle over price and performance or the complex terms
of a partnership venture. It may be less formal such as a meeting between you and
several employees whose collaboration is needed to get a job done. Whether a
supervisor, manager or executive you will probably spend a good part of your day
negotiating with people inside or outside your organization. If you are closing a sale
or getting a subordinate to agree to certain performance goals you are negotiating too.

***
The basic types of negotiation you're likely to encounter are the following:

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 • A distributive negotiation which pits two or more parties in competition for a
fixed amount of value. Here, each side's goal is to claim as much value as possible, as
in the sale of a rug at a street bazaar. Value gained by one party is unavailable to
others.
• Integrative negotiation is about creating and claiming value. Through
collaboration and information sharing, the parties look for opportunities to satisfy the
key objectives of each, recognizing that they will probably have to give ground on
other objectives.
• The negotiator's dilemma describes the situation faced by people who enter
any type of bargaining situation. They must determine which game to play:
aggressively claim the value currently on the table (and possibly come out the loser),
or work with the other side to create even better opportunities that can be shared.
• No matter which type of negotiation you're faced with, it's bound to be more
complex if it is multi phased or involves multiple parties. If your negotiation is multi
phased, use the early phases to build trust and to become familiar with the other
parties. If many parties are involved, consider the benefits of forming a coalition to
improve your bargaining power.

When people don’t have the power to force a desired outcome, they negotiate-
but only when they believe it is to their advantage to do so. A negotiated solution is
advantageous only under certain condition, that is when a better option is not
available. Any successful negotiation must have a fundamental framework based on
knowing the following: the alternative to negotiation, the minimum threshold for a
negotiated deal, how flexible a party is willing to be and what trade offs it is willing to
make. We consider three concepts important for establishing this framework: BATNA
(best alternative to a negotiated agreement), reservation price and ZOPA (zone of
possible agreement).
*BATNA is the best alternative to a negotiated agreement. It is one's preferred
course of action in the absence of a deal. Knowing your BATNA means knowing
what you will do or what will happen it you fail to reach agreement. Don't enter a
negotiation without knowing your BATN A.
• It your BATNA is weak, do what you can to improve it. Anything that
strengthens your BATNA improves your negotiating position.
• Identity the other side's BATNA. (Fit is strong, think of what you can do to
weaken it.
* Reservation price is the price at which the rational negotiator will walk
away. Don't enter a negotiation without a clear reservation price.
* Z0PA is the zone of possible agreement. It is the area in which a deal will
satisfy all parties. This area exists when the parties have different reservation prices,
as when a home buyer is willing to pay up to $275,000 and the home seller is willing
to take an offer that is at least $250,000.
* Value creation through trades is possible when a party has something he or
she values less than does the other party— and vice versa. By trading these values, the
parties lose little but gain greatly.

*****

If your aim is to be an effective negotiator, take the time and make the effort
needed to become fully prepared. There are nine preparatory steps:

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 1. Know what a good outcome would be from your point of view and that of
the other side. Never enter into a negotiation without first asking yourself: what would
be a good outcome for me? Then ask the same question from the perspective of the
other side.

2. Look for opportunities to create value in the deal. You can identify areas of
common ground, compromise, opportunities for favorable trades.
3. Know your BATNA and reservation price. Make an effort to estimate those
benchmarks for the other side.
4. If your BATNA isn't strong, find ways to improve it. Good negotiators
work to improve their BATNA before and during deliberations with the other side.
5. Find out if the person or team you're dealing with has the authority to make
a deal. You find real advantages to negotiate with the person who has the power to
sign on the dotted line: all of your reasoning is heard directly by the decision maker,
the benefits of the good relationship build at the bargaining table are likely to be
reflected in the deal and its implementation, there are fewer chances of disputes or
misinterpretation of particular provisions..
6. Know those with whom you're dealing. Learn as much as you can about the
people and the culture on the other side and how they've framed the issue.
7. If a future relationship with the other side matters, gather the external
standards and criteria that will show your offer to be fair and reasonable.
8. Don't expect things to follow a linear path to a conclusion. Be prepared for
bumps in the road and periodic delays.
9. Alter the agenda and process moves in your favor. Learning about the issues
and about the other side is always limited by time, the cost of gathering information
and the fact that some information will be deliberately hidden. We have to be
prepared to learn as negotiations unfold.

*****
The first challenge in negotiation is to get the other side to the table.
This won't happen unless the other side sees that it is better off negotiating
than going with the status quo. Encourage negotiation by uttering incentives, making
the status quo expensive, and by enlisting the help of allies.
Once you've gotten the other side to the table, get things off to a good start by
relieving tension, making sure that all parties agree with the agenda and the process,
and setting the right tone.
Several tactics are particularly useful in distributed (or win-lose) deals:
* Establish an anchor, an initial position around which negotiations make
adjustments.
» It an initial anchor is unacceptable to you, steer the conversation away from
numbers and proposals. Focus instead on interests, concerns, and generalities. Then,
after some time has passed and more information has surfaced, put your number or
proposal on the table, and support it with sound reasoning.
* Make concessionary moves if you must. But remember, many interpret a
large concessionary move as an indicator that you're capable of conceding still more.
A small concession, on the other hand, is generally seen as an indication that the
bidding is approaching the reservation price and that any succeeding concessions will
be smaller and smaller.

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 Tactics for distributive (win-win) negotiations are fundamentally different
from those just described since value creation is one of the goals. So concentrate on
these tactics:
• Active listening: keep your eyes on the speaker, take notes as appropriate,
don’t allow yourself to think about anything but what the speaker is saying, resist the
urge to formulate your response until after the speaker has finished, pay attention to
the speaker’s body language, ask questions to get more information and to encourage
the speaker to continue, repeat in your own words what you’ve heard to ensure that
you understand and to let the speaker know that you’ve processed his or her words.
• Exploiting complementary interests
• Packaging options for more favorable deals

Some of the questions in negotiation are organized under three categories:

price, procedures, and people.

1. Should I ever state my acceptable range? (Some negotiators will ask

you to state a monetary range of what you are willing to pay).
Should I tell the other side my real bottom line?(you can reveal your bottom
line only if you’ve reached it)
2. Is it ever acceptable to bid against myself- to make two moves in a
row? (Just say: wait, you seem to be asking me to make another move here. I made
the last offer; I don’t want to bid against myself; give me your offer).
3. Is it smart or fair to bluff?( as long as what you bring to the table has
real value, you need not reveal all the circumstances that make you willing to
conclude a deal. You may describe the major projects for which you have been
responsible if negotiating the terms of a job offer)
4. Is it better to reach agreement issues by issue or wait until the end?
(It’s better to aim for tentative agreements or agreed upon ranges for each issue, one
at a time).
5. Is it better to deal with difficult or easy issues first? (Dealing with
easier issues will build momentum, deepen the parties’ commitments to the process,
enable the parties to become familiar with each other’s negotiation and
communication styles before hitting the tough stuff).
6. What if there is an unexpected turn in the road before or after an
agreement? (You have to determine if a deal still makes sense or if you need to undo
the deal that has been negotiated)
7. What happens when you pit a collaborative negotiator against a
positional hard bargainer? (if the collaborative negotiator is effective, he should be
able to tease out some of the interests underlying the hard bargainer’s positions)
8. How should I respond if the other side seeks to change something in its
offer after a deal has been reached? (express surprise or disappointment)
9. What should I do when the negotiator on the other side has a temper
tantrum?(help him regain control, the right response will depend upon how angry or
upset you feel, the value of the deal).
10. I don’t believe what the other side is saying. What should I do?(you
require that they provide back up documentation and that the deal be explicitly
contingent on its accuracy)
11. When is it appropriate to negotiate, over the telephone or by e-mail?
Or is it essential to insist on a face to face meeting? ( e-mail communication is devoid
of emotions; for an inexperienced negotiator this can be a big plus)

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 12. How should I react when the other side challenges my credentials,
status, authority to make a deal?(the best approach is to shift the discussion to general
ground rules).

*****
Typical barriers to negotiated agreements and what you can do to
overcome or eliminate them

• Die-hard bargainers will pull for every advantage and try to make every
concession come from you. You can deal with these people if you understand the
game they are playing, withhold useful information from them (they'll only use it
against you) unless they demonstrate a willingness to reciprocate, and make it clear
that you don't mind walking away. If you don't want to walk away—or cannot—do
whatever you can to strengthen your position and your alternative to a deal.
• Lack of trust is a serious impediment to making a deal. Nevertheless,
agreements are possible if you take precautions, require enforcement mechanisms,
build incentives for compliance into the deal, and insist on compliance transparency.
• It's difficult to make a deal—and impossible to create value—in the absence
of information. What are the other side's interests?
What does it have to offer? What is it willing to trade? Ironically, fear of
advantaging the other side encourages parties to withhold the information needed to
create value for both sides. Each is reluctant to be the first to open up. This is the
negotiator's dilemma. The solution to this dilemma is cautious, mutual, and
incremental information sharing.
Structural impediments include the absence of important parties at the table,
the presence of others who don't belong there but get in the way, and lack of pressure
to move toward an agreement. Remedies to these impediments were provided.
Spoilers are people who block or undermine negotiations. Several tips were
offered for neutralizing or winning over these individuals, including the creation of
winning coalitions.
Cultural and gender difference can be barriers to agreement, particularly when
one of the parties brings to the table a set of assumptions that the other side fails to
notice: assumptions about who will make key decisions, what is of value, and what
will happen if agreement is reached. Negotiators who represent organizations with
conflicting cultures (e.g., entrepreneurial versus bureaucratic) are also likely to
experience problems in reaching agreements.
Communication problems can also create barriers .You can diffuse them by
insisting that each team be led by an effective communicator and by practicing active
listening, documenting progress as it is made, and establishing real dialogue between
parties.
Dialogue can eliminate or lower all of the barriers.

Mental errors by negotiators can result in no deal or a bad deal.

• Escalation—that is, irrational escalation—is the continuation of a previously
selected course of action beyond the point where it continues to makes sense. Some
people commit this error because they cannot stand losing. Others fall prey to auction
fever.

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 • Partisan perception is the psychological phenomenon that causes people to
perceive truth with a built-in bias in their own favor or toward their own point of
view.
• Irrational expectations are an error insofar as they eliminate zones of
possible agreement.
1. Overconfidence in negotiating is dangerous. It encourages negotiators to
overestimate their strengths and underestimate their rivals. It is reinforced by
groupthink, a mode of thinking driven by consensus that tends to override the
motivation to realistically appraise alternative courses of action. The antidote to both
overconfidence and groupthink is to have one or more objective outsiders examine
one's assumptions.
Unchecked emotions are frequently observed in business negotiations, and
generally result in self-injury. Among the remedies recommended are a cooling-off
period and the use of an objective moderator. In the absence of a moderator we have
to do the following:
-determine what is making the other negotiator angry. What does this deal or
this dispute mean to him? listen very carefully when he gets angry.
-respond to what appears to be the emotional problem.
-remember that people are most often angered and frustrated at a personal
level by perceived deception, unfairness, humiliation or loss of pride and lack of
respect. You can avoid these land mines by focusing discussion on the issues and the
problems instead of on individuals and their personalities.

The relationship value that is part of so many of today's agreements, both

between separate entities and between employees of the same organization.
• Flatter organizations and the desire of companies to build long-term links
with suppliers are two important reasons why relationships matter in many of today's
negotiations.
• Relationship value moderates extreme value-claiming behavior. Negotiating
parties understand that trying too hard to claim value today will risk losing
opportunities for claiming value in future transactions.
• Parties who perceive no relationship value will aggressively claim value.
• Even when both parties recognize a relationship value, there is likely to be an
imbalance in how strongly each party feels about that value. This can lead to
manipulation of the party to whom the relationship matters most.
• Negotiators must separate the deal from the broader relationship.

*****
People and organizations represent their own interests but in many other cases,
they are represented by others. These others may be independent agents contracted to
represent one of the parties. They may be non independent agents- employees-
charged with representing their companies; or they may be officials of an organization
whose responsibility is to represent the interests of their members.
• An agent is a person charged with representing the interests of another (a
principal) in negotiations with a third party.
• People engage agents to represent them in negotiations when the agent has
greater expertise and when they want to reduce the risk of damaging their relationship
with the other side.
Information asymmetries, divided interests, and conflicts of interest are three
important problems in the agent/principal relationship.

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 Information asymmetry means that one party has more information than the
other. If the principal has much more information than the agent, the agent may have
a difficult time representing the principal's interests; in the reverse situation, the agent
may discover value-creating opportunities that the principal does not understand or
appreciate.
Not every organization is of one mind as to its core interests. This fact puts
those who represent the organization into a difficult position.
Principals face the problem of preventing agents from putting agent interests
ahead of their own. Incentive systems that align the agent's interests with those of the
principal can help, especially when combined with oversight and communication.

*****
It's one thing to develop one's individual negotiating skills. Developing the
negotiating skills of an organization at many levels is a very different challenge, but
one with great potential rewards.
• The discipline of continuous improvement can develop the effectiveness of
an organization's internal capabilities and, over time, improve bottom-line results.
This same discipline can be applied to the negotiation process.
• The first step toward continuous improvement in negotiations is to treat
negotiation as a process with a fairly universal set of process steps: pre-negotiations,
preparation, negotiations, agreement or non agreement, postmortem learning, and
learning capture. Learning capture feeds back to the next negotiating experience. The
second step is to organize to learn from the process as it takes place, and at the
conclusion of the negotiation itself.
• An organization can improve its overall negotiating skill and turn that skill
into an important capability by doing the following: providing training and
preparation for negotiators, clarifying organizational goals and expectations from any
agreement and clarifying when negotiators should walk away, insisting that every
negotiating team develop a BATNA and work to improve it, developing mechanisms
for capturing and reusing lessons learned from previous negotiations, and developing
negotiating performance measures and linking them to rewards.
Because organizational competence is the sum of the competences of an
organization's individual members, we have to know the characteristics of effective
negotiators. These define the goals that management should aim for in developing
organization-wide capabilities. An effective negotiator
• Aligns negotiating goals with organizational goals
• Prepares thoroughly and uses each negotiating phase to prepare further
• Uses negotiating sessions to learn more about the issues at stake and the
other side's BATNA and reservation price
• Has the mental dexterity to identify the interests of both sides, and the
creativity to think of value-creating options that produce win-win situations
• Can separate personal issues from negotiating issues
• Can recognize potential barriers to agreement
• Knows how to form coalitions
• Develops a reputation for reliability and trustworthiness
Difficulties in Communication
Communication is the medium of negotiation. You cannot make progress
without it. Poor communication renders the simple treacherous and the difficult
impossible. Communication problems cause deals to go sour and disputes to ripen.

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When you suspect that communication is causing the negotiation to go oft track, try
the following tactics:
• Ask for a break. Replay in your mind what has been communicated, how,
and by whom. Look for a pattern. Does the confusion or misunderstanding arise from
a single issue? Were important assumptions or expectations not articulated? After the
break, raise the issue in a non accusatory way. Offer to listen while the other side
explains its perspective on the issue. Listen actively acknowledging their point of
view. Explain your perspective. Then, try to pinpoint the problem.
If the spokesperson of your negotiating team seems to infuriate the other side,
have someone else act as spokesperson. Ask the other side to do the same if their
spokesperson drives your people up the wall.
Jointly document progress as it is made. This is particularly important in
multiphase negotiations. It will solve the problem of someone saying, "I don't
remember agreeing to that."

In multiparty negotiations, certain stakeholders may prefer ”no deal” as the

outcome. They may have the power to block or sabotage your negotiations. They are
called spoilers. They may have seats at the table or they may not. The president of the
USA may negotiate a trade deal with a foreign nation, but two or three powerful
senators may block ratification in Congress. An influential executive who has the ear
of key board members can sometimes accomplish the same result. This barrier can be
anticipated by identifying all key stakeholders, their respective interests and the power
of each to affect the agreement and its implementation. Then it’s important to identify
potential spoilers and consider the necessity of sweetening the deal in a way that
would neutralize their incentive to sabotage an agreement.
Many internal negotiations aim to create change within the organization;
change is a necessary condition of vitality but it often creates winners and losers. And
those who see themselves as potential losers do what they can to resist or undermine
change. Some people enjoy advantages that they view as threatened by change. They
may perceive change as a threat to their livelihoods, perks, workplace social
arrangements, status in the organization. Anytime they expect resistance and possible
sabotage. Resistance may be passive, in the form of non commitment to the goals and
the process for reaching them, or active indirect opposition or subversion. Some tips
for dealing with resistance and possible sabotage:
# always try to answer the question: where and how will this change create
pain or loss in the organization?
# identify people who have something to lose and try to anticipate how they
will respond.
# communicate the “why” of change to potential resisters.
# emphasize the benefits of change to potential resisters. Those benefits might
be greater future job security, higher pay.
# help resisters find new roles that represent genuine contributions .
# remember that some resist change because it represents a loss of control over
their daily lives. You can return some of that control by making them active partners
in your change program.
# built a coalition with sufficient strength to overpower the spoilers.

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 The Power of Dialogue

Dialogue is a powerful mode of communication and an effective antidote to

most, if not all, of the human barriers identified in this chapter. It is a time-tested
communication form in which parties exchange views and ideas with the goal of
reaching amicable agreement.
Dialogue is usually the very best way to peel back the layers of problems,
bring undisclosed concerns to center stage, develop solutions, and reach common
understandings.
Though the practice of dialogue between two or more individuals undoubtedly
goes back into the mists of time, Plato, through his Socratic dialogues, helped the
Western world appreciate its power. Plato's purpose was not to tell us what he thought
directly, but to teach us how to toss ideas back and forth in a logical process that
eventually leads to the truth and common understanding. That same logical process
makes negotiations run more smoothly, draws out the best ideas, and builds
agreement around them.
Dialogue can also help you give direction without telling people what to do in
so many words—which is what managers in today's participatory organizations must
learn to do. For such managers, negotiating with people is as important as directing
them.
For example, instead of saying, "Have the inventory report on my desk at 3
P.M. tomorrow," try something like this:
Manager: What progress have you made on the inventory report?
Employee: It's almost ready. I only have one section to complete.
Manager: Good. Do you see any problem in getting it all wrapped up by
tomorrow afternoon?
Employee: No, not if you need it by then.
Manager: Yes, I do need it by 3 P.M. at the latest.
Employee: You can count on it.
What works between managers and their people can also work between
negotiating parties if they start slowly, practice active listening, and gradually develop
the level of trust that problem solving requires.

TOPICS FOR DISCUSSION:

1. What are some of the impediments to making a deal?

2. Is information necessary in creating value?
3. What are spoilers?
4. Does dialogue help people give direction?
5. When do people negotiate?
6. How can you be more flexible in a negotiation?
7. Is it important to be prepared for changes on both sides: new people
and unanticipated developments?
8. Have you ever felt that your ideas were ignored during meetings?
9. What happens when communication is poor?
10. What tactics can be useful in distributed deals?

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11. What is the first challenge in negotiations?
12. Which are the most frequent errors made in dealings?
13. What does active listening help you to do?
14. Why is the two way exchange of information important?
15. What happens when one or another party has better alternatives elsewhere?

Accounting

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 The purpose of accounting is to provide information about the economic
affairs of an organization. This information may be used in a number of ways: by the
organization's managers to help them plan and control the organization's operations;
by owners and legislative or regulatory bodies to help them appraise the
organization's performance and make decisions as to its future; by owners, lenders,
suppliers, employees, and others to help them decide how much time or money to
devote to the organization; by governmental bodies to determine how much tax the
organization must pay; and occasionally by customers to determine the price to be
paid when contracts call for cost-based payments. Accounting provides
information for all these purposes through the maintenance of files of data, analysis
and interpretation of these data, and the preparation of various kinds of reports. Most
accounting information is historical--that is, the accountant observes the things that
the organization does, records their effects, and prepares reports summarizing what
has been recorded; the rest consists of forecasts and plans for current and future
periods. Accounting information can be developed for any kind
of organization, not just for privately owned, profit-seeking businesses. One branch of
accounting deals with the economic operations of entire nations.

COMPANY FINANCIAL STATEMENTS

Among the most common accounting reports are those sent to investors and
others outside the management group. The reports most likely to go to investors are
called financial statements, and their preparation is the province of the branch of
accounting known as financial accounting. Three financial statements will be
discussed: the balance sheet, the income statement, and the statement of cash flows.

The balance sheet.

A balance sheet describes the resources that are under a company's control
on a specified date and indicates where these resources have come from. It consists of
three major sections: (1) the assets: valuable rights owned by the company; (2) the
liabilities: the funds that have been provided by outside lenders and other creditors in
exchange for the company's promise to make payments or to provide services in the
future; and (3) the owners' equity: the funds that have been provided by the
company's owners or on their behalf. The list of assets shows
the forms in which the company's resources are lodged; the lists of liabilities and the
owners' equity indicate where these same resources have come from. The balance
sheet, in other words, shows the company's resources from two points of view, and
the following relationship must always exist: total assets equals total liabilities plus
total owners' equity. This same identity is also expressed in another way: total assets
minus total liabilities equals total owners' equity. In this form, the equation
emphasizes that the owners' equity in the company is always equal to the net assets
(assets minus liabilities). Any increase in one will inevitably be accompanied by an
increase in the other, and the only way to increase the owners' equity is to increase the
net assets. Assets are ordinarily subdivided into current
assets and noncurrent assets. The former include cash, amounts receivable from

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customers, inventories, and other assets that are expected to be consumed or can be
readily converted into cash during the next operating cycle (production, sale, and
collection). Noncurrent assets may include noncurrent receivables, fixed assets (such
as land and buildings), and long-term investments. The liabilities are
similarly divided into current liabilities and noncurrent liabilities. Most amounts
payable to the company's suppliers (accounts payable), to employees (wages payable),
or to governments (taxes payable) are included among the current liabilities.
Noncurrent liabilities consist mainly of amounts payable to holders of the company's
long-term bonds and such items as obligations to employees under company pension
plans. The difference between total current assets and total current liabilities is known
as net current assets, or working capital. The
owners' equity of an American company is divided between paid-in capital and
retained earnings. Paid-in capital represents the amounts paid to the corporation in
exchange for shares of the company's preferred and common stock. The major part of
this, the capital paid in by the common shareholders, is usually divided into two parts,
one representing the par value, or stated value, of the shares, the other representing
the excess over this amount. The amount of retained earnings is the difference
between the amounts earned by the company in the past and the dividends that have
been distributed to the owners. A slightly
different breakdown of the owners' equity is used in most of continental Europe and
in other parts of the world. The classification distinguishes between those amounts
that cannot be distributed except as part of a formal liquidation of all or part of the
company (capital and legal reserves) and those amounts that are not restricted in this
way (free reserves and undistributed profits).
The income statement is usually accompanied by a statement that
shows how the company's retained earnings has changed during the year. Net
income increases retained earnings; net operating loss or the distribution of cash
dividends reduces it.

The statement of cash flows.

Companies also prepare a third financial statement, the statement of cash

flows. Cash flows result from three major groups of activities: (1) operating
activities, (2) investing activities, and (3) financing activities. The
income statement differs from the cash flow statement in other ways, too. Cash was
received from the issuance of bonds and was paid to shareowners as dividends;
neither of those figured in the income statement. Cash was also paid to purchase
equipment; this added to the plant and equipment asset but was not subtracted from
current revenues because it would be used for many years, not just this one.
Cash from operations is not the same as net income (revenues minus
expenses). For one thing, not all revenues are collected in cash. Revenue is usually
recorded when a customer receives merchandise and either pays for it or promises to
pay the company in the future (in which case the revenue is recorded in accounts
receivable). Cash from operating activities, on the other hand, reflects the actual cash
collected, not the inflow of accounts receivable. Similarly, an expense may be
recorded without an actual cash payment. The purpose of the
statement of cash flows is to throw light on management's use of the financial

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resources available to it and to help the users of the statements to evaluate the
company's liquidity, its ability to pay its bills when they come due.

Consolidated statements.

Most large corporations in the United States and other industrialized

countries own other corporations. Their primary financial statements are consolidated
statements, reflecting the total assets, liabilities, owners' equity, net income, and cash
flows of all the corporations in the group. Thus, for example, the consolidated balance
sheet of the parent corporation (the corporation that owns the others) does not list its
investments in its subsidiaries (the companies it owns) as assets; instead, it includes
their assets and liabilities with its own.

Some subsidiary corporations are not wholly owned by the parent; that is,
some shares of their common stock are owned by others. The equity of these minority
shareholders in the subsidiary companies is shown separately on the balance sheet.
For example, if Any Company, Inc., had minority shareholders in one or more
subsidiaries, the owners' equity section of its Dec. 31, 19--, balance sheet might
appear as follows:

The consolidated income statement also must show the minority owners'
equity in the earnings of a subsidiary as a deduction in the determination of net
income. For example:

Disclosure and auditing requirements.

A corporation's obligations to issue financial statements are prescribed in

the company's own statutes or bylaws and in public laws and regulations. The
financial statements of most large and medium-size companies in the United States
fall primarily within the jurisdiction of the federal Securities and Exchange
Commission (SEC). The SEC has a good deal of authority to prescribe the content
and structure of the financial statements that are submitted to it. Similar authority is
vested in provincial regulatory bodies and the stock exchanges in Canada; disclosure
in the United Kingdom is governed by the provisions of the Companies Act.
A company's financial statements

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are ordinarily prepared initially by its own accountants. Outsiders review, or audit,
the statements and the systems the company used to accumulate the data from which
the statements were prepared. In most countries, including the United States, these
outside auditors are selected by the company's shareholders. The audit of a company's
statements is ordinarily performed by professionally qualified, independent
accountants who bear the title of certified public accountant (CPA) in the United
States and chartered accountant (CA) in the United Kingdom and many other
countries with British-based accounting traditions. Their primary task is to investigate
the company's accounting data and methods carefully enough to permit them to give
their opinion that the financial statements present fairly the company's position,
results, and cash flows.

MEASUREMENT PRINCIPLES

In preparing financial statements, the accountant has several measurement

systems to choose from. Assets, for example, may be measured at what they cost in
the past or what they could be sold for now, to mention only two possibilities. To
enable users to interpret statements with confidence, companies in similar industries
should use the same measurement concepts or principles. In some countries
these concepts or principles are prescribed by government bodies; in the United States
they are embodied in "generally accepted accounting principles" (GAAP), which
represent partly the consensus of experts and partly the work of the Financial
Accounting Standards Board (FASB), a private body. The principles or standards
issued by the FASB can be overridden by the SEC. In practice, however, the SEC
generally requires corporations within its jurisdiction to conform to the standards of
the FASB.

Asset value.

One principle that accountants may adopt is to measure assets at their value
to their owners. The economic value of an asset is the maximum amount that the
company would be willing to pay for it. This amount depends on what the company
expects to be able to do with the asset. For business assets, these expectations are
usually expressed in terms of forecasts of the inflows of cash the company will
receive in the future. If, for example, the company believes that by spending $1 on
advertising and other forms of sales promotion it can sell a certain product for $5,
then this product is worth $4 to the company.
When cash inflows are expected to be delayed, value is less than the
anticipated cash flow. For example, if the company has to pay interest at the rate of 10
percent a year, an investment of $100 in a one-year asset today will not be worthwhile
unless it will return at least $110 a year from now ($100 plus 10 percent interest for
one year). In this example, $100 is the present value of the right to receive $110 one
year later. Present value is the maximum amount the company would be willing to
pay for a future inflow of cash after deducting interest on the investment at a specified
rate for the time the company has to wait before it receives its cash.
Value, in other words, depends on three factors:

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 (1)the amount of the anticipated future cash flows,
(2) their timing, and (3) the interest rate. The lower the expectation, the more
distant the timing, or the higher the interest rate, the less valuable the asset will be.
Value may also be represented by the amount the company could obtain by
selling its assets. This sale price is seldom a good measure of the assets' value to the
company, however, because few companies are likely to keep many assets that are
worth no more to the company than their market value. Continued ownership of an
asset implies that its present value to the owner exceeds its market value, which is its
apparent value to outsiders.

Asset cost.

Accountants are traditionally reluctant to accept value as the basis of asset

measurement in the going concern. Although monetary assets such as cash or
accounts receivable are usually measured by their value, most other assets are
measured at cost. The reason is that the accountant finds it difficult to verify the
forecasts upon which a generalized value measurement system would have to be
based. As a result, the balance sheet does not pretend to show how much the
company's assets are worth; it shows how much the company has invested in them.
The historical cost of an
asset is the sum of all the expenditures the company made to acquire it. This amount
is not always easily measurable. If, for example, a company has built a special-
purpose machine in one of its own factories for use in manufacturing other products,
and the project required logistical support from all parts of the factory organization,
from purchasing to quality control, then a good deal of judgment must be reflected in
any estimate of how much of the costs of these logistical activities should be
"capitalized" (i.e., placed on the balance sheet) as part of the cost of the machine.

Net income.

From an economic point of view, income is defined as the change in the

company's wealth during a period of time, from all sources other than the injection or
withdrawal of investment funds. Income is the amount the company could consume
during the period and still have as much real wealth at the end of the period as it had
at the beginning. For example, if the value of the net assets (assets minus liabilities)
has gone from $1,000 to $1,200 during a period and dividends of $100 have been
distributed, income measured on a value basis would be $300 ($1,200 minus $1,000,
plus $100). Accountants generally have rejected this approach for the same
reason that they have found value an unacceptable basis for asset measurement: Such
a measure would rely too much on estimates of what will happen in the future,
estimates that would not be readily susceptible to independent verification. Instead,
accountants have adopted what might be called a transactions approach to income
measurement. They recognize as income only those increases in wealth that can be
substantiated from data pertaining to actual transactions that have taken place with
persons outside the company. In such systems, income is measured when work is
performed for an outside customer, when goods are delivered, or when the customer

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is billed. Recognition of income at this time requires two sets of estimates: (1)
revenue estimates, representing the value of the cash that the company expects to
receive from the customer; and (2) expense estimates, representing the resources that
have been consumed in the creation of the revenues. Revenue estimation is the easier
of the two, but it still requires judgment. The main problem is to estimate the
percentage of gross sales for which payment will never be received, either because
some customers will not pay their bills ("bad debts") or because they will demand and
receive credit for returned merchandise or defective work.
Expense estimates are generally based on the historical cost of the
resources consumed. Net income, in other words, is the difference between the value
received from the use of resources and the cost of the resources that were consumed
in the process. As with asset measurement, the main problem is to estimate what
portion of the cost of an asset has been consumed during the period in question.
Some assets give up their services gradually rather than all at
once. The cost of the portion of these assets the company uses to produce revenues in
any period is that period's depreciation expense, and the amount shown for these
assets on the balance sheet is their historical cost less an allowance for depreciation,
representing the cost of the portion of the asset's anticipated lifetime services that has
already been used. To estimate depreciation, the accountant must predict both how
long the asset will continue to provide useful services and how much of its potential
to provide these services will be used up in each period.
Depreciation is usually computed by some simple formula. The two
most popular formulas in the United States are straight-line depreciation, in which
the same amount of depreciation is recognized each year, and declining-charge
depreciation, in which more depreciation is recognized during the early years of life
than during the later years, on the assumption that the value of the asset's service
declines as it gets older. The role of the independent accountant (the
auditor) is to see whether the company's estimates are based on formulas that seem
reasonable in the light of whatever evidence is available and whether these formulas
are applied consistently from year to year. Again, what is "reasonable" is clearly a
matter of judgment. Depreciation is not the only expense for which
more than one measurement principle is available. Another is the cost of goods sold.
The cost of goods available for sale in any period is the sum of the cost of the
beginning inventory and the cost of goods purchased in that period. This sum then
must be divided between the cost of goods sold and the cost of the ending inventory:

Accountants can make this division by any of three main inventory costing
methods: (1) first in, first out (FIFO), (2) last in, first out (LIFO), or (3) average cost.
The LIFO method is widely used in the United States, where it is also an acceptable
costing method for income tax purposes; companies in most other countries measure
inventory cost and the cost of goods sold by some variant of the FIFO or average cost
methods. Average cost is very similar in its results to FIFO, so only FIFO and LIFO
need be described. Each purchase of goods
constitutes a single batch, acquired at a specific price. Under FIFO, the cost of goods
sold is determined by adding the costs of various batches of the goods available,
starting with the oldest batch in the beginning inventory, continuing with the next

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oldest batch, and so on until the total number of units equals the number of units sold.
The ending inventory, therefore, is assigned the costs of the most recently acquired
batches. For example, suppose the beginning inventory and purchases were as
follows:

The company sold 1,900 units during the year and had 1,100 units remaining
in inventory at the end of the year. The FIFO cost of goods sold is:

The ending inventory consists of 1,100 units at a FIFO cost of $5.50 each (the
price of the last 1,100 units purchased), or $6,050. Under
LIFO, the cost of goods sold is the sum of the most recent purchase, the next most
recent, and so on, until the total number of units equals the number sold during the
period. In the example, the LIFO cost of goods sold is:

The LIFO cost of the ending inventory is the cost of the oldest units in the
cost of goods available. In this simple example, assuming the company adopted LIFO
at the beginning of the year, the ending inventory cost is the 1,000 units in the
beginning inventory at $5 each ($5,000), plus 100 units from the first purchase during
the year at $5.25 each ($525), a total of $5,525.

Problems of measurement.

Accounting income does not include all of the company's holding gains or
losses (increases or decreases in the market values of its assets). For example,
construction of a superhighway may increase the value of a company's land, but
neither the income statement nor the balance sheet will report this holding gain.
Similarly, introduction of a successful new product increases the company's
anticipated future cash flows, and this increase makes the company more valuable.
Those additional future sales show up neither in the conventional income statement
nor in the balance sheet. Accounting reports have also been
criticized on the grounds that they confuse monetary measures with the underlying

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realities when the prices of many goods and services have been changing rapidly. For
example, if the wholesale price of an item has risen from $100 to $150 between the
time the company bought it and the time it is sold, many accountants claim that $150
is the better measure of the amount of resources consumed by the sale. They also
contend that the $50 increase in the item's wholesale value before it is sold is a special
kind of holding gain that should not be classified as ordinary income.
When inventory purchase prices are rising, LIFO
inventory costing keeps many gains from the holding of inventories out of net income.
If purchases equal the quantity sold, the entire cost of goods sold will be measured at
the higher current prices; the ending inventory will be measured at the lower prices
shown for the beginning-of-year inventory. The difference between the LIFO
inventory cost and the replacement cost at the end of the year is an unrealized (and
unreported) holding gain. In
the inventory example cited earlier, the LIFO cost of goods sold ($10,275) exceeded
the FIFO cost of goods sold ($9,750) by $525. In other words, LIFO kept $525 more
of the inventory holding gain out of the income statement than FIFO did.
Furthermore, the replacement cost of the inventory at the end of the year was $6,050
(1,100 $5.50), which was just equal to the inventory's FIFO cost; under LIFO, in
contrast, there was an unrealized holding gain of $525 ($6,050 minus the $5,525
LIFO inventory cost). The amount of inventory
holding gain that is included in net income is usually called the "inventory profit."
The implication is that this is a component of net income that is less "real" than other
components because it results from the holding of inventories rather than from trading
with customers. When most of the changes in the
prices of the company's resources are in the same direction, the purchasing power of
money is said to change. Conventional accounting statements are stated in nominal
currency units (dollars, francs, lire, etc.), not in units of constant purchasing power.
Changes in purchasing power--that is, changes in the average level of prices of
goods and services--have two effects. First, net monetary assets (essentially cash and
receivables minus liabilities calling for fixed monetary payments) lose purchasing
power as the general price level rises. These losses do not appear in conventional
accounting statements. Second, holding gains measured in nominal currency units
may merely result from changes in the general price level. If so, they represent no
increase in the company's purchasing power.
In some countries that have experienced severe and prolonged inflation,
companies have been allowed or even required to restate their assets to reflect the
more recent and higher levels of purchase prices. The increment in the asset balances
in such cases has not been reported as income, but depreciation thereafter has been
based on these higher amounts. Companies in the United States are not allowed to
make these adjustments in their primary financial statements.

MANAGERIAL ACCOUNTING

Although published financial statements are the most widely visible

products of business accounting systems and the ones with which the public is most
concerned, they are only the tip of the iceberg. Most accounting data and most
accounting reports are generated solely or mainly for the company's managers.
Reports to management may be either summaries of past events, forecasts of the

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future, or a combination of the two. Preparation of these data and reports is the focus
of managerial accounting, which consists mainly of four broad functions: (1)
budgetary planning, (2) cost finding, (3) cost and profit analysis, and (4)
performance reporting.

Budgetary planning.

The first major component of internal accounting systems for

management's use is the company's system for establishing budgetary plans and
setting performance standards. The setting of performance standards requires also a
system for measuring actual results and reporting differences between actual
performance and the plans.

Figure 1: Budget planning and performance reporting.

The simplified diagram in Figure 1 illustrates the interrelationships

between these elements. The planning process leads to the establishment of explicit
plans, which then are translated into action. The results of these actions are compared
with the plans and reported in comparative form. Management can then respond to
substantial deviations from plan, either by taking corrective action or, if outside
conditions differ from those predicted or assumed in the plans, by preparing revised
plans.

Although plans can be either broad, strategic outlines of the company's

future or schedules of the inputs and outputs associated with specific independent
programs, most business plans are periodic plans--that is, they refer to company
operations for a specified period of time. These periodic plans are summarized in a
series of projected financial statements, or budgets. The two principal
budget statements are the profit plan and the cash forecast. The profit plan is an
estimated income statement for the budget period. It summarizes the planned level of
selling effort, shown as selling expense, and the results of that effort, shown as sales
revenue and the accompanying cost of goods sold. Separate profit plans are ordinarily
prepared for each major segment of the company's operations.

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 Figure 2: Relationship of company profit plan to responsibility structure.

The details underlying the profit plan are contained in departmental sales
and cost budgets, each part identified with the executive or group responsible for
carrying out that part. Figure 2 shows the essence of this relationship: the company's
profit plan is really the integrated product of the plans of its two major product
divisions. The arrows connecting the two divisional plans represent the coordinative
communications that tie them together on matters of mutual concern.
The exhibit also goes one level farther down, showing that
division B's profit plan is really a coordinated synthesis of the plans of the division's
marketing department and manufacturing department. Arrows again emphasize the
necessary coordination between the two. Each of these departmental plans, in turn, is
a summary of the plans of the major offices, plants, or other units within the division.
A complete representation of the company's profit plan would require an extension of
the diagram through several layers to encompass every single responsibility centre in
the entire company. Many companies also prepare alternative
budgets for operating volumes other than the volume anticipated for the period. A set
of such alternative budgets is known as the flexible budget. The practice of flexible
budgeting has been adopted widely by factory management to facilitate evaluation of
cost performance at different volume levels and has also been extended to other
elements of the profit plan. The second major
component of the annual budgetary plan, the cash forecast or cash budget,
summarizes the anticipated effects on cash of all the company's activities. It lists the
anticipated cash payments, cash receipts, and amount of cash on hand, month by
month throughout the year. In most companies, responsibility for cash management
rests mainly in the head office rather than at the divisional level. For this reason,
divisional cash forecasts tend to be less important than divisional profit plans.
Company-wide cash forecasts, on the
other hand, are just as important as company profit plans. Preliminary cash forecasts
are used in deciding how much money will be made available for the payment of
dividends, for the purchase or construction of buildings and equipment, and for other
programs that do not pay for themselves immediately. The amount of short-term
borrowing or short-term investment of temporarily idle funds is then generally geared
to the requirements summarized in the final, adjusted forecast.
Other elements of the budgetary plan, in addition to the profit plan and the
cash forecast, include capital expenditure budgets, personnel budgets, production
budgets, and budgeted balance sheets. They all serve the same purpose: to help
management decide upon a course of action and to serve as a point of reference
against which to measure subsequent performance. Planning is a management

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responsibility, not an accounting function. To plan is to decide, and only the manager
has the authority to choose the direction the company is to take. Accounting personnel
are nevertheless deeply involved in the planning process. First, they administer the
budgetary planning system, establishing deadlines for the completion of each part of
the process and seeing that these deadlines are met. Second, they analyze data and
help management at various levels compare the estimated effects of different courses
of action. Third, they are responsible for collating the tentative plans and proposals
coming from the individual departments and divisions and then reviewing them for
consistency and feasibility and sometimes for desirability as well. Finally, they must
assemble the final plans management has chosen and see that these plans are
understood by the operating executives.

Cost finding.

A major factor in business planning is the cost of producing the company's

products. Cost finding is the process by which the company obtains estimates of the
costs of producing a product, providing a service, performing a function, or operating
a department. Some of these estimates are historical--how much did it cost?--while
others are predictive--what will it cost? The basic principle in cost
finding is that the cost assigned to any object--an activity or a product--should
represent the amount of cost that object causes. The most fully developed methods of
cost finding are used to estimate the costs that have been incurred in a factory to
manufacture specific products. The simplest of these methods is known as process
costing. In this method, the accountant first accumulates the costs of each separate
production operation or process for a specified period of time. The total of these costs
is then restated as an average by dividing it by the total output of the process during
the same period. Process costing can be used whenever
the output of individual processes is reasonably uniform or homogeneous, as in
cement manufacturing, flour milling, and other relatively continuous production
processes.

A second method, job order costing, is used when individual production

centres or departments work on a variety of products rather than just one during a
typical time period. Two categories of factory cost are recognized under this method:
prime costs and factory overhead costs. Prime costs are those that can be traced
directly to a specific batch, or job lot, of products. These are the direct labour and
direct materials costs of production. Overhead costs, on the other hand, are those that
can be traced only to departmental operations or to the factory as a whole and not to
individual job orders. The salary of a departmental supervisor is an example of an
overhead cost. Direct materials and direct labour
costs are recorded directly on the job order cost sheets, one for each job. Although not
traceable to individual jobs, overhead costs are generally assigned to them by means
of overhead rates--i.e., the ratio of total overhead cost to total production volume for a
given time period. A separate overhead rate is usually calculated for each production
department, and, if the operations of a department are varied, it is often subdivided
into a set of more homogeneous cost centres, each with its own overhead rate.
Separate overhead rates are sometimes used even for individual processing machines
within a department if the machines differ widely in such factors as power

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consumption, maintenance cost, and depreciation. Because output within a
cost centre is not homogeneous, production volume must be measured by something
other than the number of units of product, such as the number of machine hours or
direct labour hours. Once the overhead rate has been determined, a provision for
overhead cost can be entered on each job order cost sheet on the basis of the number
of direct labour hours or machine hours used on that job. For example, if the overhead
rate is $3 a machine hour and Job No. 7128 used 600 machine hours, then $1,800
would be shown as the overhead cost of this job. Many production costs are
incurred in departments that don't actually produce goods or provide salable services.
Instead, they provide services or support to the departments that do produce products.
Examples include maintenance departments, quality control departments, and internal
power plants. Estimates of these costs are included in the estimated overhead costs of
the production departments by a process known as allocation--that is, estimated
service department costs are allocated among the production departments in
proportion to the amount of service or support each receives. The departmental
overhead rates then include provisions for these allocated costs.
A third method of cost finding, activity-based costing, is based on the fact
that many costs are driven by factors other than product volume. The first task is to
identify the activities that drive costs. The next step is to estimate the costs that are
driven by each activity and state them as averages per unit of activity. Management
can use these averages to guide its efforts to reduce costs. In addition, if management
wants an estimate of the cost of a specific product, the accountant can estimate how
many of the activity units are associated with that product and multiply those numbers
by the average costs per activity unit.

For example, suppose that costs driven by the number of machine hours
average $12 per machine hour, costs driven by the number of production batches
average $100 a batch, and the costs of keeping a product in the line average $100 a
year for each kind of material or component part used. Keeping in the line a product
that is assembled from six component parts thus incurs costs of 6 $100 = $600 a
year, irrespective of volume and even if the product is not made at all during the
period. If annual production amounts to 10,000 units, the unit cost of product
maintenance is $600/10,000 = $.06 a unit. If this product is manufactured in batches
of 1,000 units, then batch-driven costs average $100/1,000 = $.10 a unit. And, if a
batch requires 15 machine hours, hour-driven costs average 15 $12/1,000 = $.18 a
unit. At the 10,000-unit volume, then, the cost of this product is $.06 + $.10 + $.18 =
$.34 a unit plus the cost of materials. Product cost finding under activity-based
costing is almost always a process of estimating costs before production takes place.
The method of process costing and job order costing can be used either in preparing
estimates before the fact or in assigning costs to products as production proceeds.
Even when job order costing is used to tally the costs actually incurred on individual
jobs, the overhead rates are usually predetermined--that is, they represent the average
planned overhead cost at some production volume. The main reason for this is that
actual overhead cost averages depend on the total volume and efficiency of operations
and not on any one job alone. The relevance of job order cost information will be
impaired if these external fluctuations are allowed to change the amount of overhead
cost assigned to a particular job. Many
systems go even farther than this. Estimates of the average costs of each type of
material, each operation, and each product are prepared routinely and identified as
standard costs. These are then readily available whenever estimates are needed and

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can also serve as an important element in the company's performance reporting
system, as described below. Similar methods of cost finding can be used to
determine or estimate the cost of providing services rather than physical goods. Most
advertising agencies and consulting firms, for example, maintain some form of job
cost records, either as a basis for billing their clients or as a means of estimating the
profitability of individual jobs or accounts.
The methods of cost finding described in the preceding paragraphs are
known as full, or absorption, costing methods, in that the overhead rates are intended
to include provisions for all manufacturing costs. Both process and job order costing
methods can also be adapted to variable costing in which only variable manufacturing
costs are included in product cost. Variable costs are those that will be greater in total
in the upper portions of the company's normal range of volumes than in the lower
portion. Total fixed costs, in contrast, are the same at all volume levels within the
normal range. Unit cost under variable costing represents the average variable cost
of making the product. The main argument for the variable costing approach is that
average variable cost is more relevant to short-horizon managerial decisions than
average full cost. In deciding whether to manufacture goods in large lots, for example,
management needs to estimate the cost of carrying larger amounts of finished goods
in inventory. More variable costs will have to be incurred to build the inventory to a
higher level; fixed manufacturing costs presumably will be unaffected.
Furthermore, when a management decision changes the
company's fixed costs, the change is unlikely to be proportional to the change in
volume; therefore, average fixed cost is seldom a valid basis for estimating the cost
effects of such decisions. Variable costing eliminates the temptation to assume
without question that average fixed cost can be used to estimate changes in total fixed
cost. When variable costing is used, supplemental rates for fixed overhead production
costs must be provided to measure the costs to be assigned to end-of-year inventories
because generally accepted accounting principles in the United States and in most
other countries require that inventories be measured at full product cost for external
financial reporting.

Cost and profit analysis.

Accountants share with many other people the task of analyzing cost and
profit data in order to provide guidance in managerial decision making. Even if the
analytical work is done largely by others, they have an interest in analytical methods
because the systems they design must collect data in forms suitable for analysis.
Managerial decisions are based on comparisons of the estimated future
results of the alternative courses of action that the decision maker is choosing among.
Recorded historical accounting data, in contrast, reflect conditions and experience of
the past. Furthermore, they are absolute, not comparative, in that they show the effects
of one course of action but not whether these were better or worse than those that
would have resulted from some other course.
For decision making, therefore, historical accounting data must be
examined, modified, and placed on a comparative basis. Even estimated data, such as
budgets and standard costs, must be examined to see whether the estimates are still
valid and relevant to managerial comparisons. To a large extent, this job of review
and restatement is an accounting responsibility. Accordingly, a major part of the

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accountant's preparation for the profession is devoted to the study of methods and
principles of analysis for managerial decision making.

Performance reporting.

Once the budgetary plan has been adopted, accounting's next task is to
prepare information on the results of company activities and make it available to
management. The manager's main interest in this information centres on three
questions: Have his or her own actions had the results expected, and, if not, why not?
How successful have subordinates been in managing the activities entrusted to them?
What problems and opportunities seem to have arisen since the budgetary plan was
prepared? For these purposes, the information must be comparative, relating actual
results to the level of results that management regards as satisfactory. In each case, the
standard for comparison is provided by the budgetary plan.
Much of this information is contained in periodic financial reports. At the
top management and divisional levels, the most important of these is the comparative
income statement. This shows the profit that was planned for this period, the actual
results received for this period, and the differences, or variances, between the two. It
also gives an explanation of some of the reasons for the difference between a planned
and an actual income. The report in this exhibit employs the widely used profit
contribution format, in which divisional results reflect sales and expenses traceable to
the individual divisions, with no deduction for head office expenses. Company net
income is then obtained by deducting head office expenses as a lump sum from the
total of the divisional profit contributions. A similar format can be used within the
division, reporting the profit contribution of each of the division's product lines, with
divisional headquarters expenses deducted at the bottom. By far the greatest
number of reports, however, are cost or sales reports, mostly on a departmental basis.
Departmental sales reports usually compare actual sales with the volumes planned for
the period. Departmental cost performance reports, in contrast, typically compare
actual costs incurred with standards or budgets that have been adjusted to correspond
to the actual volume of work done during the period. This practice reflects a
recognition that volume fluctuations generally originate outside the department and
that the department head's responsibility is ordinarily limited to minimizing cost while
meeting the delivery schedules imposed by higher management.

For example, a factory department's output consists entirely of a single

product, with a standard materials cost of $3 a unit and standard labour cost of $16.
Materials cost represents three pounds of raw materials at $1 a pound; standard labour
cost is two hours of labour at $8 an hour. Overhead costs in the department are
budgeted at $10,000 a month plus $2 a unit. Under normal conditions, volume is
7,000 units a month, but during October only 6,000 units were produced. The cost
standards for the month would be as follows:

The actual cost this month was $17,850 for materials (17,000 pounds at
$1.05), $101,250 for labour (12,500 hours at $8.10 an hour), and $23,000 for

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overhead. A summary report would show the following:

These variances may be analyzed even further in order to identify the

underlying causes. The labour variance, for example, can be seen to be the result of
both high wage rates ($8.10 instead of $8.00) and high labour usage (12,500 hours
instead of 12,000). The factory accountant ordinarily would measure the effect of the
rate change in the following way:

In most cases, the labour rate variance would not be reported to the department
head, because it is not subject to his or her control.
Standard costing systems no longer have the central importance they
commanded in many industries up to the 1970s. One reason is that significant changes
in management technology have shifted the focus of cost control from the individual
production department to larger, more interdependent groups. Just-in-time production
systems require changes in factory layouts to reduce the time it takes to move work
from one station to the next. They also reduce the number of partly processed units at
each work station, thereby requiring greater station-to-station coordination.
At the same time, management's emphasis has shifted from cost
control to cost reduction, quality enhancement, and closer coordination of production
and customer deliveries. Most large manufacturing companies and many service
companies have launched programs of total quality control and continuous
improvement, and many have replaced standard costs with a more flexible approach
using prior period results as current performance standards. Management is also likely
to focus on the amount of system waste by identifying and minimizing activities that
contribute nothing to the value that customers place on the product.
Reducing set-up time, inspection time, and time spent moving work from
place to place while maintaining or improving quality are some of the results of these
programs. Advances in computer-based models have enabled companies to tie
production schedules more closely to customer delivery schedules while increasing
the rate of plant utilization. Some of these changes actually increase variances from
standard costs in some departments but are undertaken because they benefit the
company as a whole. The overall result is that
control systems are likely to focus in the first instance on operational controls (real-
time signals to operating personnel that some immediate remedial action is required),

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with after-the-fact analysis of results focusing on aggregate comparisons with past
performance and the planned results of current improvement programs.

OTHER PURPOSES OF ACCOUNTING SYSTEMS

Accounting systems are designed mainly to provide information that

managers and outsiders can use in decision making. They also serve other purposes:
to produce operating documents, to protect the company's assets, to provide data for
company tax returns, and, in some cases, to provide the basis for reimbursement of
costs by clients or customers. The accounting
organization is responsible for preparing documents that contain instructions for a
variety of tasks, such as payment of customer bills or preparing employee payrolls. It
also must prepare documents that serve what might be called private information
purposes, such as the employees' own records of their salaries and wages. Many of
these documents also serve other accounting purposes, but they would have to be
prepared even if no information reports were necessary. Measured by the number of
people involved and the amount of time required, document preparation is one of
accounting's biggest jobs. Accounting systems must provide means of
reducing the chance of losses of assets due to carelessness or dishonesty on the part of
employees, suppliers, and customers. Asset protection devices are often very simple;
for example, many restaurants use numbered meal checks so that waiters will not be
able to submit one check to the customer and another, with a lower total, to the
cashier. Other devices entail a partial duplication of effort or a division of tasks
between two individuals to reduce the opportunity for unobserved thefts.

These are all part of the company's system of internal controls. Another
important element in the internal control system is internal auditing. The task of
internal auditors is to see whether prescribed data handling and asset protection
procedures are being followed. To accomplish this, they usually observe some of the
work as it is being performed and examine a sample of past transactions for accuracy
and fidelity to the system. They may insert a set of fictitious data into the system to
see whether the resulting output meets a predetermined standard. This technique is
particularly useful in testing the validity of the programs that are used to process data
through electronic computers. The accounting system
must also provide data for use in the completion of the company's tax returns. This
function is the concern of tax accounting. In some countries financial accounting must
obey rules laid down for tax accounting by national tax laws and regulations, but no
such requirement is imposed in the United States, and tabulations prepared for tax
purposes often diverge from those submitted to shareholders and others. "Taxable
income" is a legal concept rather than an accounting concept. Tax laws include
incentives to encourage companies to do certain things and discourage them from
doing others. Accordingly, what is "income" or "capital" to a tax agency may be far
different from the accountant's measures of these same concepts. Finally,
accounting systems in some companies must provide cost data in the forms required
for submission to customers who have agreed to reimburse the companies for the
costs they have incurred on the customers' behalf.

Banks and Banking

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 The principal types of banking in the modern industrial world are
commercial banking and central banking. A commercial banker is a dealer in money
and in substitutes for money, such as checks or bills of exchange. The banker also
provides a variety of financial services. The basis of the banking business is
borrowing from individuals, firms, and occasionally governments--i.e., receiving
"deposits" from them. With these resources and also with the bank's own capital, the
banker makes loans or extends credit and also invests in securities. The banker makes
profit by borrowing at one rate of interest and lending at a higher rate and by charging
commissions for services rendered. A bank
must always have cash balances on hand in order to pay its depositors upon demand
or when the amounts credited to them become due. It must also keep a proportion of
its assets in forms that can readily be converted into cash. Only in this way can
confidence in the banking system be maintained. Provided it honours its promises
(e.g., to provide cash in exchange for deposit balances), a bank can create credit for
use by its customers by issuing additional notes or by making new loans, which in
their turn become new deposits. The amount of credit it extends may considerably
exceed the sums available to it in cash. But a bank is able to do this only as long as
the public believes the bank can and will honour its obligations, which are then
accepted at face value and circulate as money. So long as they remain outstanding,
these promises or obligations constitute claims against that bank and can be
transferred by means of checks or other negotiable instruments from one party to
another. These are the essentials of deposit banking as practiced throughout the world
today, with the partial exception of socialist-type institutions. Another
type of banking is carried on by central banks, bankers to governments and "lenders
of last resort" to commercial banks and other financial institutions. They are often
responsible for formulating and implementing monetary and credit policies, usually in
cooperation with the government. In some cases--e.g., the U.S. Federal Reserve
System--they have been established specifically to lead or regulate the banking
system; in other cases--e.g., the Bank of England--they have come to perform these
functions through a process of evolution.
Some institutions often called banks, such as finance companies, savings
banks, investment banks, trust companies, and home-loan banks, do not perform the
banking functions described above and are best classified as financial intermediaries.
Their economic function is that of channelling savings from private individuals into
the hands of those who will use them, in the form of loans for building purposes or for
the purchase of capital assets. These financial intermediaries cannot, however, create
money (i.e., credit) as the commercial banks do; they can lend no more than savers
place with them.

The development of banking systems

Banking is of ancient origin, though little is known about it prior to the 13th
century. Many of the early "banks" dealt primarily in coin and bullion, much of their
business being money changing and the supplying of foreign and domestic coin of the
correct weight and fineness. Another important early group of banking institutions
was the merchant bankers, who dealt both in goods and in bills of exchange,

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providing for the remittance of money and payment of accounts at a distance but
without shipping actual coin. Their business arose from the fact that many of these
merchants traded internationally and held assets at different points along trade routes.
For a certain consideration, a merchant stood prepared to accept instructions to pay
money to a named party through one of his agents elsewhere; the amount of the bill of
exchange would be debited by his agent to the account of the merchant banker, who
would also hope to make an additional profit from exchanging one currency against
another. Because there was a possibility of loss, any profit or gain was not subject to
the medieval ban on usury. There were, moreover, techniques for concealing a loan by
making foreign exchange available at a distance but deferring payment for it so that
the interest charge could be camouflaged as a fluctuation in the exchange rate.
Another form of early banking activity was the acceptance of deposits.
These might derive from the deposit of money or valuables for safekeeping or for
purposes of transfer to another party; or, more straightforwardly, they might represent
the deposit of money in a current account. A balance in a current account could also
represent the proceeds of a loan that had been granted by the banker, perhaps based on
an oral agreement between the parties (recorded in the banker's journal) whereby the
customer would be allowed to overdraw his account.
English bankers in particular had by the 17th century begun to develop a
deposit banking business, and the techniques they evolved were to prove influential
elsewhere. The London goldsmiths kept money and valuables in safe custody for their
customers. In addition, they dealt in bullion and foreign exchange, acquiring and
sorting coin for profit. As a means of attracting coin for sorting, they were prepared to
pay a rate of interest, and it was largely in this way that they began to supplant as
deposit bankers their great rivals, the "money scriveners." The latter were notaries
who had come to specialize in bringing together borrowers and lenders; they also
accepted deposits. It was found that when
money was deposited by a number of people with a goldsmith or a scrivener a fund of
deposits came to be maintained at a fairly steady level; over a period of time, deposits
and withdrawals tended to balance. In any event, customers preferred to leave their
surplus money with the goldsmith, keeping only enough for their everyday needs. The
result was a fund of idle cash that could be lent out at interest to other parties.
About the same time, a practice grew up whereby a customer could arrange
for the transfer of part of his credit balance to another party by addressing an order to
the banker. This was the origin of the modern check. It was only a short step from
making a loan in specie or coin to allowing customers to borrow by check: the amount
borrowed would be debited to a loan account and credited to a current account against
which checks could be drawn; or the customer would be allowed to overdraw his
account up to a specified limit. In the first case, interest was charged on the full
amount of the debit, and in the second the customer paid interest only on the amount
actually borrowed. A check was a claim against the bank, which had a corresponding
claim against its customer. Another way in
which a bank could create claims against itself was by issuing bank notes. The
amount actually issued depended on the banker's judgment of the possible demand for
specie, and this depended in large part on public confidence in the bank itself. In
London, goldsmith bankers were probably developing the use of the bank note about
the same time as that of the check. (The first bank notes issued in Europe were by the
Bank of Stockholm in 1661.) Some commercial banks are still permitted to issue their
own notes, but in most countries this has become a prerogative of the central bank.
In Britain the check soon proved to be such a convenient means of

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payment that the public began to use checks for the larger part of their monetary
transactions, reserving coin (and, later, notes) for small payments. As a result, banks
began to grant their borrowers the right to draw checks much in excess of the amounts
of cash actually held, in this way "creating money"--i.e., claims that were generally
accepted as means of payment. Such money came to be known as "bank money" or
"credit." Excluding bank notes, this money consisted of no more than figures in bank
ledgers; it was acceptable because of the public's confidence in the ability of the bank
to honour its liabilities when called upon to do so.
When a check is drawn and passes into the hands of another party in
payment for goods or services, it is usually paid into another bank account. Assuming
that the overdraft technique is employed, if the check has been drawn by a borrower,
the mere act of drawing and passing the check will create a loan as soon as the check
is paid by the borrower's banker. Since every loan so made tends to return to the
banking system as a deposit, deposits will tend to increase for the system as a whole
to about the same extent as loans. On the other hand, if the money lent has been
debited to a loan account and the amount of the loan has been credited to the
customer's current account, a deposit will have been created immediately.
One of the most important factors in the
development of banking in England was the early legal recognition of the
negotiability of credit instruments or bills of exchange. The check was expressly
defined as a bill of exchange. In continental Europe, on the other hand, limitations on
the negotiability of an order of payment prevented the extension of deposit banking
based on the check. Continental countries developed their own system, known as giro
payments, whereby transfers were effected on the basis of written instructions to debit
the account of the payer and to credit that of the payee.

The business of banking

The business of banking consists of borrowing and lending. As in other

businesses, operations must be based on capital, but banks employ comparatively
little of their own capital in relation to the total volume of their transactions. The
purpose of capital and reserve accounts is primarily to provide an ultimate cover
against losses on loans and investments. In the United States capital accounts also
have a legal significance, since the laws limit the proportion of its capital a bank may
lend to a single borrower. Similar arrangements exist elsewhere.

FUNCTIONS OF COMMERCIAL BANKS

The essential characteristics of the banking business may be described

within the framework of a simplified balance sheet. A bank's main liabilities are its
capital (including reserves and, often, subordinated debt) and deposits. The latter may
be from domestic or foreign sources (corporations and firms, private individuals,
other banks, and even governments). They may be repayable on demand (sight
deposits or current accounts) or repayable only after the lapse of a period of time
(time, term, or fixed deposits and, occasionally, savings deposits). A bank's assets
include cash (which may be held in the form of credit balances with other banks,
usually with a central bank but also, in varying degrees, with correspondent banks);
liquid assets (money at call and short notice, day-to-day money, short-term
government paper such as treasury bills and notes, and commercial bills of exchange,

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all of which can be converted readily into cash without risk of substantial loss);
investments or securities (substantially medium-term and longer term government
securities--sometimes including those of local authorities such as states, provinces, or
municipalities--and, in certain countries, participations and shares in industrial
concerns); loans and advances made to customers of all kinds, though primarily to
trade and industry (in an increasing number of countries, these include term loans and
also mortgage loans); and, finally, the bank's premises, furniture, and fittings (written
down, as a rule, to quite nominal figures).
All bank balance sheets must include an item that relates to contingent
liabilities (e.g., bills of exchange "accepted" or endorsed by the bank), exactly
balanced by an item on the other side of the balance sheet representing the customer's
obligation to indemnify the bank (which may also be supported by a form of security
taken by the bank over its customer's assets). Most banks of any size stand prepared to
provide acceptance credits (also called bankers' acceptances); when a bank accepts a
bill, it lends its name and reputation to the transaction in question and, in this way,
ensures that the paper will be more readily discounted.

Deposits.

The bulk of the resources employed by a modern bank consists of borrowed

money (that is, deposits), which is lent out as profitably as is consistent with safety.
Insofar as an increase in deposits provides a bank with additional cash (which is an
asset), the increase in cash supplements its loanable resources and permits a more than
proportionate increase in its loans. An increase in deposits
may arise in two ways. (1) When a bank makes a loan, it may transfer the sum to a
current account, thus directly creating a new deposit; or it may arrange a line of credit
for the borrower upon which he will be permitted to draw checks, which, when
deposited by third parties, likewise create new deposits. (2) An enlargement of
government expenditure financed by the central bank may occasion a growth in
deposits, since claims on the government that are equivalent to cash will be paid into
the commercial banks as deposits. In the first instance, with the increase in bank
deposits goes a related increase in the potential liability to pay out cash; in the second
case, the increase in deposits with the commercial banks is accompanied by a
corresponding increase in commercial bank holdings of money claims that are
equivalent to cash. Taking one bank in isolation, an increase
in its loans may result in a direct increase in deposits. This may occur either as a result
of a transfer to a current account (as above) or a transfer to another customer of the
same bank. Once again, there is an increase in the potential liability to pay out cash.
On the other hand, if there has been an increase in loans by another bank (including
an increase in central bank loans to the government), this may give rise to increased
deposits with the first bank, matched by a corresponding claim to cash (or its
equivalent). For these reasons a bank can generally expect that, if there is an increase
in deposits, there will also be some net acquisition of cash or of claims for receipt of
cash. It is in this way that an increase in deposits usually provides the basis for further
bank lending. Except in countries where banks
are small and insecure, banks as a whole can usually depend on their current account
debits being largely offset by credits to current accounts, though from time to time an
individual bank may experience marked fluctuations in its deposit totals, and all banks
in a country may be subject to seasonal variations. Even when deposits are repayable
on demand, there is usually a degree of inertia in the deposit structure that prevents

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sharp fluctuations; if money is accepted contractually for a fixed term or if notice
must be given before its repayment, this inertia will be greater. On the other hand, if a
significant proportion of total deposits derives from foreign sources, there is likely to
be an element of volatility arising from international conditions.
In banking, confidence on the part of the depositors is
the true basis of stability. Confidence is steadier if there exists a central bank to act as
a "lender of last resort." Another means of maintaining confidence employed in some
countries is deposit insurance, which protects the small depositor against loss in the
event of a bank failure. Such protection was the declared purpose of the
"nationalization" of bank deposits in Argentina between 1946 and 1957; banks
receiving deposits acted merely as agents of the government-owned and government-
controlled central bank, all deposits being guaranteed by the state.

Reserves.

Since the banker undertakes to provide depositors with cash on demand or

upon prior notice, it is necessary to hold a cash reserve and to maintain a "safe" ratio
of cash to deposits. The safe ratio is determined largely through experience. It may be
established by convention (as it was for many years in England) or by statute (as in
the United States and elsewhere). If a minimum cash ratio is required by law, a
portion of a bank's assets is in effect frozen and not available to meet sudden demands
for cash from the bank's customers. In order to provide more flexibility, required
ratios are frequently based on the average of cash holdings over a specified period,
such as a week or a month. In addition to holding part of the bank's assets in cash, a
banker will hold a proportion of the remainder in assets that can quickly be converted
into cash without significant loss. No banker can safely ignore the necessity of
maintaining adequate reserves of liquid assets; some prefer to limit the sum of loans
and investments to a certain percentage of deposits, not allowing their loan-deposit
ratio to run for any length of time at too high a level.
Unless a bank held cash covering 100 percent of its demand deposits, it
could not meet the claims of depositors if they were all to exercise in full and at the
same time their rights to demand cash. If that were a common phenomenon, deposit
banking could not long survive. For the most part, the public is prepared to leave its
surplus funds on deposit with the banks, confident that they will be repaid if needed.
But there may be times when unexpected demands for cash exceed what might
reasonably have been anticipated; therefore, a bank must not only hold part of its
assets in cash but also must keep a proportion of the remainder in assets that can be
quickly converted into cash without significant loss. Indeed, in theory, even its less
liquid assets should be self-liquidating within a reasonable time. A
bank may mobilize its assets in several ways. It may demand repayment of loans,
immediately or at short notice; it may sell securities; or it may borrow from the
central bank, using paper representing investments or loans as security. Banks do not
precipitately call in loans or sell marketable assets, because this would disrupt the
delicate debtor-creditor relationships and increase any loss of confidence, probably
resulting in a run on the banks. Ready cash may be obtainable in this way only at a
very high price. Banks must either maintain their cash reserves and other liquid assets
at a high level or have access to a "lender of last resort," such as a central bank, able
and willing to provide cash against the security of eligible assets. In a number of
countries, the commercial banks have at times been required to maintain a minimum
liquid assets ratio. But central banks impose such requirements less as a means of

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maintaining appropriate levels of commercial bank liquidity than as a technique for
influencing directly the lending potential of the banks.
Among the assets of commercial banks, investments are less liquid
than money-market assets such as call money and treasury bills. By maintaining an
appropriate spread of maturities, however, it is possible to ensure that a proportion of
a bank's investments is regularly approaching redemption, thereby producing a steady
flow of liquidity and in that way constituting a secondary liquid assets reserve. Some
banks, particularly in the United States and Canada, have at times favoured the
"dumbbell" distribution of maturities, a significant proportion of the total portfolio
being held in long-dated maturities with a high yield, a small proportion in the middle
ranges, and another significant proportion in short-dated maturities. Following
redemption, the banks usually reinvest all or most of the proceeds in longer-term
maturities that in due course become increasingly short-term. Interest-rate
expectations frequently modify the shape of a maturity distribution, and, in times of
great uncertainty with regard to interest rates, banks will tend to hold the bulk of their
securities at short term, and something like a T-distribution may then be preferred
(mainly shorts, supported by small amounts of medium to longer dated paper).
Investments and money-market assets merge into each other. The dividing line is
arbitrary, but there is an essential difference: the liquidity of investments depends
primarily on marketability (though sometimes it also depends on the readiness of the
government or its agent to exchange its own securities for cash); the liquidity of
money-market assets, on the other hand, depends partly on marketability but mainly
on the willingness of the central bank to purchase them or accept them as collateral
for a loan. This is why money-market assets are more liquid than investments.

INDUSTRIAL FINANCE

Long-term and medium-term lending.

Banks that do a great deal of long-term lending to industry must ensure

their liquidity by maintaining relatively large capital funds and a relatively high
proportion of long-term borrowings (e.g., time deposits, or issues of bonds or
debentures), as well as valuing their investments very conservatively. Such banks,
notably the French banques d'affaires and the German commercial banks, have
developed special means of reducing their degree of risk. Every investment is
preceded by a thorough technical and financial investigation. The initial advance may
be an interim credit, later converted into a participation. Only when market conditions
are favourable is the original investment converted into marketable securities, and an
issue of shares to the public is arranged. One function of these banks is to nurse an
investment along until the venture is well established. Even assuming its ultimate
success, a bank may be obliged to hold such shares for long periods before being able
to liquidate them. In addition, they often retain an interest in a firm as an ordinary
investment as well as to ensure a degree of continuing control over it. The
long-term provision of industrial finance in Britain and the Commonwealth countries
is usually handled by specialist institutions, with the commercial banks providing only
part of the necessary capital. In Japan the long-term financial needs of industry are
met partly by special industrial banks (which also issue debentures as well as

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accepting deposits) and partly by the ordinary commercial banks. In Germany the
commercial banks customarily handle long-term finance. Since World War II the
commercial banks in the United States have developed the so-called term loan,
especially for financing industrial capital requirements. The attempt to popularize the
term loan began in the economic depression of the 1930s, when the banks tried to
expand their business by offering finance for a period of years. Most term loans have
an effective maturity of little more than five years, though some run for 10 years or
more. They are usually arranged between the customer and a group of lending banks,
sometimes in cooperation with other institutions such as insurance companies, and are
normally subject to a formal term loan agreement. Banks in Britain, western Europe,
the Commonwealth, and Japan began during the 1960s to give term loans both to
industry and to agriculture.

Short-term lending.

Short-term loans are the core of the banking business even in countries
where commercial banks make long-term loans to industry. Much short-term lending
consists in the provision of working capital, but the banks also provide temporary
finance for fixed capital development, aiding a customer until long-term finance can
be found elsewhere. Much of this short-term
lending is done by overdraft, particularly in the United Kingdom and a number of the
Commonwealth countries, or by way of "current account lending" in many western
European countries. The overdraft permits a depositor to overdraw an account up to
an agreed limit. In theory, overdrafts are repayable on demand or after reasonable
notice has been given, but often they are allowed to run on indefinitely, subject to a
periodic review. An advance is reduced or repaid whenever the account is credited
with deposits and recreated when new checks are drawn upon it, interest being paid
only on the amount outstanding. An alternative method of short-
term lending is to debit a loan account with the amount borrowed, crediting the
proceeds to a current account; interest is usually payable on the whole amount of the
loan, which normally is for a fixed period of time. (In Britain arrangements are
sometimes more flexible, and the term of the loan may be set by oral agreement.)
In a number of countries, including the United States,
the United Kingdom, France, Germany, and Japan, short-term finance is often made
available on the basis of discountable paper--commercial bills or promissory notes.
Some of this paper is usually rediscountable at the central bank, thus becoming
virtually a liquid asset, unlike a bank advance or loan. Credit may
be offered with or without formal security, depending on the reputation and financial
strength of the borrower. In many countries, a customer may use a number of banks,
and these institutions usually freely exchange information about joint credit risks. In
Britain and The Netherlands, however, most concerns tend to use a single banking
institution for most of their needs.
Traditionally bankers took the view that the liabilities of a bank (in
particular, its deposits) were more or less stable and concerned themselves primarily
with the investment of these funds. Since the late 1950s and '60s, especially in North
America and latterly in the United Kingdom, there has been a change in emphasis.
Banks began to find it more difficult to obtain deposits. Interest rates rose to high
levels, and banks were obliged to compete with each other and with other institutions
for funds. At the same time, there was little point in paying a high rate of interest for
money unless it could be employed profitably. Bankers began to relate the cost of

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borrowed money directly to the return on loans and investments. Previously the main
limitation on a bank's expansion had been its ability to find profitable new business,
but now the determining factor became the availability of funds to lend out. The
essence of assets and liabilities management, as it came to be called, was deciding
what kinds of new money to buy and what to pay for it. In the United States the
liabilities side of bank balance sheets now included, inter alia, in much larger
proportion than during the 1960s, repurchase agreements (under which securities are
sold subject to an agreement to repurchase at a stated date), federal funds purchases
(on the assets side, federal funds sales), excess balances of commercial banks and
other depository institutions (regularly traded throughout the United States),
negotiable certificates of deposit (which can be traded on a secondary market), and,
for the larger banks, Eurocurrency borrowings, mostly Eurodollars (dollar balances
held abroad). In the United Kingdom, "bought" money consisted of wholesale (i.e.,
large) deposits (on which money market rates were paid), negotiable certificates of
deposit, interbank borrowings, and Eurocurrency purchases. This bought money could
then be used to finance the loan demand, including term loans, long favoured in the
United States but a more recent innovation in the United Kingdom and elsewhere,
where they were developed considerably in the 1970s. Although much of the lending
financed by bought money was by way of term loans, these could be "rolled over,"
with an interest rate adjustment, every three or six months, and there could therefore
be a measure of interest-rate matching and also sometimes a matching of maturities.
In less sophisticated environments than North America and the United Kingdom,
there was again an increasing emphasis on bought money to meet any expansion in
loan demands (much of which was now term lending), with an adjustment at the
margin when more funds were needed--e.g., wholesale deposits, certificates of
deposit, interbank borrowings, and purchases of Eurocurrencies.

The principles of central banking

The principles of central banking grew up in response to the recurrent

British financial crises of the 19th century and were later adopted in other countries.
Modern market economies are subject to frequent fluctuations in output and
employment. Although the causes of these fluctuations are various, there is general
agreement that the ability of banks to create new money may exacerbate them.
Although an individual bank may be cautious enough in maintaining its own liquidity
position, the expansion or contraction of the money supply to which it contributes
may be excessive. This raises the need for a disinterested outside authority able to
view economic and financial developments objectively and to exert some measure of
control over the activities of the banks. A central bank should also be capable of
acting to offset forces originating outside the economy, although this is much more
difficult.

RESPONSIBILITIES OF CENTRAL BANKS

The first concern of a central bank is the maintenance of a soundly based

commercial banking structure. While this concern has grown to comprehend the

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operations of all financial institutions, including the several groups of nonbank
financial intermediaries, the commercial banks remain the core of the banking system.
A central bank must also cooperate closely with the national government. Indeed,
most governments and central banks have become intimately associated in the
formulation of policy.

Relationships with commercial banks.

One source of economic instability is the supply of money. Even in

relatively well-controlled banking systems, banks have sometimes expanded credit to
such an extent that inflationary pressures developed. Such an overexpansion in bank
lending would be followed almost inevitably by a period of undue caution in the
making of loans. Frequently the turning point was associated with a financial crisis,
and bank failures were not uncommon. Even today, failures occur from time to time.
Such crises in the past often threatened the existence of financial institutions that were
essentially sound, and the authorities sometimes intervened to prevent complete
collapse. The willingness of a central bank
to offer support to the commercial banks and other financial institutions in time of
crisis was greatly encouraged by the gradual disappearance of weaker institutions and
a general improvement in bank management. The dangers of excessive lending came
to be more fully appreciated, and the banks also became more experienced in the
evaluation of risks. In some cases, the central bank itself has gone out of its way to
educate commercial banks in the canons of sound finance. In the United States the
Federal Reserve System examines the books of the commercial banks and carries on
a range of frankly educational activities. In other countries, such as India and
Pakistan, central banks have also set up departments to maintain a regular scrutiny of
commercial bank operations. The most
obvious danger to the banks is a sudden and overwhelming run on their cash resources
in consequence of their liability to depositors to pay on demand. In the ordinary
course of business, the demand for cash is fairly constant or subject to seasonal
fluctuations that can be foreseen. It has become the responsibility of the central bank
to protect banks that have been honestly and competently managed from the
consequences of a sudden and unexpected demand for cash. In other words, the
central bank came to act as the "lender of last resort." To do this effectively, it was
necessary that the central bank be permitted either to buy the assets of commercial
banks or to make advances against them. It was also necessary that the central bank
have the power to issue money acceptable to bank depositors. But if a central bank
was to play this role with respect to commercial banks, it was only reasonable that it
or some related authority be allowed to exercise a degree of control over the way in
which the banks conducted their business. Most central banks now
take a continuing day-to-day part in the operations of the banking system. The Bank
of England, for example, has been increasingly in the market to ensure that the banks
have a steady supply of cash, even during periods of credit restriction. It also lends
regularly to the discount houses, supplementing their resources whenever the
commercial banks feel the need to call back money they have on loan to them. In the
United States the Federal Reserve System has operated in a similar way by buying

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and selling securities on the open market and by lending to dealers in government
securities on the basis of repurchase agreements. The Federal Reserve may also
discount paper submitted by the commercial banks through the Federal Reserve
banks. The various techniques of credit control in use are discussed in greater detail
below. The evolution of those working relations among banks
implies a community of outlook that in some countries is relatively recent. The whole
concept of a central bank as responsible for the stability of the banking system
presupposes mutual confidence and cooperation. For this reason, contact between the
central bank and the commercial banks must be close and continuous. The latter must
be encouraged to feel that the central bank will give careful consideration to their
views on matters of common concern. Once the central bank has formulated its policy
after a full consideration of the facts and of the views expressed, however, the
commercial banks must be prepared to accept its leadership. Otherwise, the whole
basis of central banking would be undermined.

The central bank and the national economy.

Relationships with other countries.

Since no modern economy is self-contained, central banks must give

considerable attention to trading and financial relationships with other countries. If
goods are bought abroad, there is a demand for foreign currency to pay for them.
Alternatively, if goods are sold abroad, foreign currency is acquired that the seller
ordinarily wishes to convert into the home currency. These two sets of transactions
usually pass through the banking system, but there is no necessary reason why, over
the short period, they should balance. Sometimes there is a surplus of purchases and
sometimes a surplus of sales. Short-period disequilibrium is not likely to matter very
much, but it is rather important that there be a tendency to balance over a longer
period, since it is difficult for a country to continue indefinitely as a permanent
borrower or to continue building up a command over goods and services that it does
not exercise. Short-period disequilibrium can be met very simply by
diminishing or building up balances of foreign exchange. If a country has no balances
to diminish, it may borrow, but normally it at least carries working balances. If the
commercial banks find it unprofitable to hold such balances, the central bank is
available to carry them; indeed, it may insist on concentrating the bulk of the
country's foreign-exchange resources in its hands or in those of an associated agency.
Long-period equilibrium is more difficult to achieve. It may be
approached in three different ways: price movements, exchange revaluation
(appreciation or depreciation of the currency), or exchange controls.
Price levels may be influenced by expansion or contraction in the supply of
bank credit. If the monetary authorities wish to stimulate imports, for example, they
can induce a relative rise in home prices by encouraging an expansion of credit. If
additional exports are necessary in order to achieve a more balanced position, the
authorities can attempt to force down costs at home by operating to restrict credit.
The objective may be achieved more directly by
revaluing a country's exchange rate. Depending on the circumstances, the rate may

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be appreciated or depreciated, or it may be allowed to "float." Appreciation means
that the home currency becomes more valuable in terms of the currencies of other
countries and that exports consequently become more expensive for foreigners to buy.
Depreciation involves a cheapening of the home currency, thus lowering the prices of
export goods in the world's markets. In both cases, however, the effects are likely to
be only temporary, and for this reason the authorities often prefer relative stability in
exchange rates even at the cost of some fluctuation in internal prices.
Quite often governments have resorted to exchange controls (sometimes
combined with import licensing) to allocate foreign exchange more or less directly in
payment for specific imports. At times, a considerable apparatus has been assembled
for this purpose, and, despite "leakages" of various kinds, the system has proved
reasonably efficient in achieving balance on external payments account. Its chief
disadvantage is that it interferes with normal market processes, thereby encouraging
rigidities in the economy, reinforcing vested interests, and restricting the growth of
world trade. Whatever method is chosen, the process of adjustment is generally
supervised by some central authority--the central bank or some institution closely
associated with it--that can assemble the information necessary to ensure that the
proper responses are made to changing conditions.

Economic fluctuations.

As noted above, monetary influences may be an important contributory

factor in economic fluctuations. An expansion in bank credit makes possible, if it
does not cause, the relative overexpansion of investment activity characteristic of a
boom. Insofar as monetary policy can assist in mitigating the worst excesses of the
boom, it is the responsibility of the central bank to regulate the amount of lending by
banks and perhaps by other financial institutions as well. The central bank may even
wish to influence in some degree the direction of lending as well as the amount.
An even greater responsibility of the central bank is that
of taking measures to prevent or overcome a slump. Recessions, when they occur, are
often in the nature of adjustments to eliminate the effects of previous overexpansion.
Such adjustments are necessary to restore economic health, but at times they have
tended to go too far; depressive factors have been reinforced by a general lack of
confidence, and, once this has happened, it has proved extremely difficult to stimulate
recovery. In these circumstances, prevention is likely to be far easier than cure. It has
therefore become a recognized function of the central bank to take steps to preclude,
if possible, any such general deterioration in economic activity.

For the central bank to be effective in regulating the volume and distribution
of credit so that economic fluctuations may be damped, if not eliminated, it must at
least be able to regulate commercial bank liquidity (the supply of cash and "near
cash"), because this is the basis of bank lending. Monetary authorities in a number of
countries have begun to resort increasingly to the management of monetary
aggregates as a basic policy. This does not mean an uncritical acceptance of
monetarist philosophy but rather what the U.S. economist and banker Paul A. Volcker
has called "practical monetarism." In addition to the Federal Reserve in the United
States, a growing number of western European countries have adopted the practice of
setting growth targets for the money supply and sometimes other monetary targets as
well (like domestic credit expansion), usually setting some range of allowable
variation. Japan has had reservations and has preferred to indicate monetary

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projections or forecasts, partly because of the difficulty of changing a set target should
it become necessary. Nor is there any great degree of consensus as to which target or
aggregate to employ. In general terms, choice of a particular aggregate as a basis for
reference would be linked to the theories--more or less explicit--on which the actions
of a particular central bank are based and also on the state of the country's economy
and its financial environment. Where there are publicly declared targets, these can
have an important effect by the very fact of being announced.
There is now little dispute about the broad objectives, though the
techniques of control are various and depend to some extent on environmental factors.
It would be incorrect to suppose, however, that the actions of the central bank can,
unaided, achieve a high degree of stability. It can by wise guidance contribute to that
end, but monetary action is in no sense a panacea; at all times, the degree to which it
is likely to be effective depends on the provision of an appropriate fiscal environment

Banking services.

Another responsibility of the central bank is to ensure that banking services

are adequately supplied to all members of the community that need them. Some areas
of a country may be "under-banked" (e.g., the rural areas of India and the northern
and more remote parts of Norway), and central banks have attempted, directly or
indirectly, to meet such needs. In France, this need underlay the early extension of
branches of the Bank of France to the départements. In India the authorities
encouraged the opening of "pioneer" branches by the former Imperial Bank of India
and its successor, the State Bank of India, latterly by all the nationalized banks, and
particularly their extension to rural and semirural areas. In Pakistan, officials of the
State Bank of Pakistan played an active part in the foundation of the semipublic
National Bank of Pakistan with a similar objective in view.
A different sort of problem arises when the business
methods of existing banks are unsatisfactory. In such circumstances, a system of bank
inspection and audit organized by the central banking authorities (as in India and
Pakistan) or of bank "examinations" (as in the United States) may be the appropriate
answer. Alternatively, the supervision of bank operations may be handed over to a
separate authority, such as France's Banking Control Commission or South Africa's
Registrar of Banks. In developing countries, central banks may encourage
the establishment and growth of specialist institutions such as savings institutions and
agricultural credit or industrial finance corporations. These serve to improve the
mechanism for tapping existing liquid resources and to supplement the flow of funds
for investment in specific fields.

Responsibilities to the government.

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 Central banks have over the years acquired a number of well-defined
responsibilities to their respective national governments. Some, notably the Bank of
England, developed into central banks after being, in origin, bankers to the
government. More recently it has become a matter of course for a new central bank to
accept responsibility for the financial affairs of its government. The reasons are self-
evident. Government transactions have become of increasing importance in
influencing the workings of the economy, and the institution that holds the
government's account is in a strategic position to cushion the commercial banks
against the impact of large movements of cash originating in this way. As banker to
the government, furthermore, the central bank has an obvious responsibility to
provide routine banking services, such as arranging loan flotations and supervising
their service, renewal, and redemption. The central bank also usually issues the
currency. Equally important are its responsibilities as an
adviser on the probable monetary consequences of any proposed action. In this role
the central bank should scrutinize the government's proposals with a certain amount
of objectivity and state its point of view with vigour. One may cite a now-famous
dictum of Montagu Norman as governor of the Bank of England:

I think it is of the utmost importance that the policy of the Bank and
the policy of the Government should at all times be in harmony--in as
complete harmony as possible. I look upon the Bank as having the unique
right to offer advice and to press such advice even to the point of "nagging";
but always of course subject to the supreme authority of the Government.

Many central banks are now nationalized, reflecting the increasingly

general recognition of the significance of the central bank's role as a servant, if not a
creature, of the government. This development is also, in a way, a final recognition of
the central bank as a responsible public institution whose major function is to serve
the community as a whole, untrammelled by narrow dictates of profit and loss. Most
central banks, nevertheless, make very handsome profits.

TECHNIQUES OF CREDIT CONTROL

Central banks have developed a variety of techniques for influencing,

regulating, and controlling the activities of commercial banks. These may be divided
into (1) the so-called classical, or indirect, techniques and (2) various direct controls.
The classical techniques make use of open-market purchases or sales by the central
bank of certain types of assets that are invariably associated with fluctuations in
interest rates. Direct, or quantitative, credit controls are employed to influence the
cash and liquidity bases of commercial bank lending by means of freezing or
unfreezing their liquid resources; sometimes ceilings are imposed on bank loans.

Open-market operations.

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 The way in which open-market operations influence the cash reserves and,
through them, the general liquidity of the commercial banks is essentially simple. If
the central bank buys securities in the open market, the cash it offers in exchange adds
to the reserves of the banks; if the central bank sells securities in the open market, the
cash necessary to pay for them is either withdrawn from the banks' reserves or
obtained by diminishing holdings of other assets (with the possibility of capital losses
in consequence of these sales). It does not matter whether this buying and selling
takes place between the central bank and the commercial banks directly or between
the central bank and other financial sectors, including the public at large, since these
are the customers of the commercial banks.

Open-market operations are invariably associated with related changes in one

or more "strategic" rates of interest, the most influential of these rates being the
minimum rate at which the central bank does business (the bank rate, or the discount
rate), since other rates tend to move in sympathy with it. The central bank seeks to
achieve an appropriate and consistent structure of interest rates. If a particular rate
structure is desired (e.g., prior to a new issue of government securities or in order to
change the emphasis of institutional investment between, say, long-term and short-
term securities), it may be necessary to precondition the market by means of open-
market operations. To achieve its purposes the central bank must possess (if it is
selling) or be willing to absorb (if it is buying) the appropriate types of securities.
In London the specialist banks known as discount houses effectively put to
work the revolving fund of cash that circulates through the British banking system. If
temporarily there is an inadequate supply of cash, the Bank of England either lends on
a short-term basis or buys some of the assets held by the discount market. (From 1980
there was a shift in emphasis from lending to open-market operations, especially by
dealing in bankers' acceptances.) Alternatively, the Bank of England may buy assets
from the clearing banks (the large joint-stock banks), which then make the relevant
moneys available to the market. On the other hand, if the discount market is
oversupplied with funds, the Bank of England sells treasury bills, in this way mopping
up the excess of cash. These transactions are known as smoothing-out operations. In
addition, the Bank of England is also responsible for managing the national debt, and,
whether the object is to influence the flows of money or not, such transactions in fact
have monetary effects. In the United States the Federal Reserve
System regulates the money supply. Within the Federal Reserve System, the Federal
Open Market Committee is the most important single policy-making body. It is
presided over by the chairman of the Board of Governors, with the president of the
Federal Reserve Bank of New York as its permanent vice chairman. The main
responsibility of the Open Market Committee is to decide upon the timing and amount
of open-market purchases or sales of government securities. Since open-market
operations must obviously be consistent with other aspects of monetary and credit
policy, it is in the committee that broad agreement is reached on matters such as
changes in discount rates or reserve requirements.
One of the big differences between London and New York is that the
central banking authorities in New York maintain direct relationships more or less
continuously with the nonbank government securities dealers as well as with the
commercial banks. The Federal Reserve Bank of New York may make temporary
accommodation available to some 35 primary dealers (including certain banks) under

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a repurchase agreement, whereby securities are sold to the bank under an agreement
that they be repurchased after a stipulated time. These agreements are made only for
the purpose of supplying reserves to the banking system, but from the dealer's
standpoint they are helpful in financing portfolios. Such repos, as they are called, may
also be done with foreign official accounts. Since early 1966 the bank has also been
prepared to mop up money by undertaking reverse repurchase agreements, in which
the dealers act as intermediaries for large commercial banks with temporarily surplus
money that they are prepared to place against bills, subject to the bank's repurchasing
them a few days later; the commercial bank concerned lends the dealer the money to
finance the holding of the bill. Similar arrangements are also made by the Federal
Reserve directly with bank dealers. All
member banks of the Federal Reserve System, and now also other depository
institutions, have direct access to the discount service of their Federal Reserve Bank,
of which there is one in each of 12 districts. This is a privilege, however, and not a
right. In the early years of the system, the banks would sell discountable paper to the
Federal Reserve, but now they usually borrow against a pledge of government
securities held in safe custody with the Federal Reserve Bank in question. The Federal
Reserve lends for a number of purposes but always at a time of general stress. It is
assumed that, as the pressure abates, borrowing banks will repay their indebtedness as
quickly as possible. Under ordinary conditions, the continuous use of Federal Reserve
credit by a member bank over a considerable period is not regarded as appropriate.

Direct control of assets.

The so-called classical techniques of credit control--open-market operations

and discount policy--can be employed only where there is a sufficiently developed
complex of markets in which to buy and sell assets of the type that commercial banks
ordinarily hold. Direct credit controls have a wider range of application. They may be
used either as a substitute for the classical techniques or as a supplement to them.
Direct controls are more likely to be resorted to when the money market is
undeveloped, because then a central bank can only impose its authority by means of
direct action. This is often the situation facing a newly established central bank.
Rather than wait for the slow evolution of a money market, the authorities may
provide the central bank from the start (as in Pakistan, the Philippines, Sri Lanka, and
Malaysia) with very full powers to control the banking system.
The aim in imposing a direct, quantitative regulation of
credit is to curb inflationary pressures that may result from an expansion of
commercial bank lending. This can be done in four main ways: (1) the commercial
banks may be required to maintain stated minimum reserve ratios of cash to deposits,
a stated liquid assets ratio, or some combination of both; (2) part of the cash resources
of the commercial banks may be immobilized at the discretion of the central bank; (3)
ceilings may be imposed on the amount of accommodation to be made available to the
commercial banks at the central bank (sometimes referred to as "discount quotas");
and (4) a ceiling may be prescribed for commercial bank lending itself.

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 Minimum reserve requirements.

The variation of minimum cash reserve requirements as a direct means of

quantitative credit control has become increasingly general in recent years. The
practice has largely derived from experience in the United States. In its origin the U.S.
insistence on stated minimum reserve requirements for commercial banks was simply
a means of prescribing minimum standards of sound behaviour. Only later did such
ratios come to be seen as a useful supplementary quantitative credit control.
The power granted by the Banking Act of 1935 to the Federal Reserve
System to determine the cash reserves of the commercial banks in the United States
was employed for the first time during the boom of 1936-37, and periodic variation of
minimum reserve requirements subsequently came to be recognized as an appropriate
technique for controlling the money supply. The Federal Reserve Board's decisions
were sometimes subject to considerable criticism, but, as it became more experienced
in the use of this technique, variation in reserve requirements combined with other
measures came to be regarded as a useful means of cushioning the economy against a
recession. The variation of reserve requirements did not prove as effective in
preventing inflation, largely because of the government's insistence that the Federal
Reserve simultaneously support the prices of government bonds through open-market
operations. This insistence was abandoned by the Treasury in March 1951. Since
then, much greater emphasis has been placed on the use of open-market operations,
which had become more effective, and the importance of varying minimum reserve
requirements as a means of controlling the credit base has diminished in the United
States. The technique is still widely used, however, in many countries.
In some countries, the authorities require the maintenance of
minimum liquid assets ratios. This is often combined with minimum requirements for
cash reserves, as in India, Pakistan, and Germany, though not always (in France, for
example, until 1967 there were no minimum cash reserve requirements). Where
prescribed minima relate to liquid assets and not to cash as such, reserves are held in
the form of earning assets--an important distinction from the point of view of the
commercial banks. An important step toward
a uniform and explicit minimum liquidity ratio for the London clearing banks was
taken in 1951, when the governor of the Bank of England indicated to the banks that a
liquidity ratio of from 32 to 28 percent would be regarded as normal and that it would
be undesirable for the ratio to be allowed to fall below 25 percent. By 1957 a fairly
rigid 30-percent minimum was in place (it was reduced to 28 percent in 1963). After
1946 the London clearing banks (but not the Scottish banks) also observed a more or
less fixed cash ratio of 8 percent. A new element was introduced in 1960, when the
Bank of England launched its system of "special deposits" as a means of reinforcing
other methods of credit control. Calls were made from time to time on the London
clearing banks to deposit with the Bank of England by a specified date some specified
percentage of their gross deposits; similar arrangements applied to the Scottish banks,
but the calls were smaller. This system lasted until 1971, when a new 12.5-percent
minimum reserve ratio (excluding till cash) was introduced. This ratio related to
"eligible liabilities" (primarily sterling deposits of up to two years maturity, including
sterling certificates of deposit). The banks could also be required to place special
deposits with the Bank of England. These arrangements were replaced in August 1981
by a voluntary holding of operational funds with the Bank of England by the London
clearing banks ("for clearing purposes") and a uniform requirement of 0.5 percent of
an institution's eligible liabilities that would be applied to all banks and licensed

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deposit-takers with eligible liabilities averaging more than 10,000,000. All banks
that were eligible acceptors were also normally required to hold an average equivalent
to 6 percent of their eligible liabilities either as secured money with discount houses
or as secured call money with money brokers and gilt-edged jobbers, but the amount
held in the form of secured money with a discount house was not normally to fall
below 4 percent of eligible liabilities. This money became known as "club money."
The use of variable minimum reserve requirements as a means of
credit control can, if carried far enough, produce results, especially when the
requirements include the holding of cash balances. It is more useful as an anti-
inflationary weapon than as a means of countering recession, since it cannot
overcome a possible unwillingness of the banks to lend or of their customers to
borrow. It is a somewhat clumsy technique, however, and cannot make adequate
allowance for the special needs of different institutions.

Immobilization of cash resources

A second group of direct quantitative credit controls involves keeping a

portion of the cash resources of commercial banks immobilized at the discretion of
the central bank. Two leading examples of this technique were the use of the Treasury
Deposit Receipt (TDR) in the United Kingdom during and after World War II and the
"special account procedure" adopted in Australia in 1941. Both were means of
immobilizing the increased liquidity deriving from wartime government expenditure.
The direct issue of Treasury Deposit Receipts at a nominal rate of interest
to banks in the United Kingdom began in July 1940. They were not negotiable in the
market or transferrable between banks, but they could be tendered in payment for
government bonds (and tax certificates); hence, during the war years they had a
limited degree of liquidity. The Bank of England communicated to the banks
collectively the amount of the weekly call, which was divided among them in
proportion to their deposits. After the war, TDR's were replaced by treasury bills; in
order to reduce the consequent high liquidity of the banks, there was a "forced
funding" of 1,000,000,000 of treasury bills in November 1951, which were required
to be invested in Serial Funding Stocks. The special
account procedure introduced in Australia in 1941 had a similar objective. The
surplus investable funds of the Australian trading banks, defined as the amount by
which each bank's total assets in Australia at any time exceeded the average of its
total assets in Australia in August 1939, were required to be placed in special deposit
accounts with the Commonwealth Bank (then the central bank) at a nominal rate of
interest. A bank was not to withdraw any sum from its special account except with the
consent of the Commonwealth Bank; during the war years, the bank generally
directed the trading banks to lodge in their special accounts each month an amount
equal to the increase in their total assets in Australia during the preceding month,
although as a rule a lodgment was not required if it was known that a rise in assets
would be followed by an early fall. Legislation in 1945 adopted the special account
procedures as a means of general credit control (e.g., to curb inflation), but the
provisions were made more flexible. In 1953 a more complicated formula was
introduced, and in 1960 the system was abandoned in favour of minimum reserve
ratios.

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 Direct control of loans.

Accommodation ceilings.

Some countries have tried limiting the amount of accommodation that the
central bank may make available to the commercial banks. The difficulty in this type
of quantitative credit control is to make it effective while also allowing for changes in
the economy; its most obvious use is as a means of checking inflation, but, if the
upward pressures on prices are strong, there is a temptation to increase the ceilings so
that the restraint then becomes little more than a temporary check. Usually, it
is only when a control begins to be felt and to affect bank profits that the banks
become really sensitive to changes in credit policy and the implementation of the
control becomes truly effective. The postwar experience of France is a case in point.
Plafonds, or "ceilings," were first introduced in France in 1948. Rediscount ceilings
(or discount quotas) were fixed for each bank, though some categories of paper were
excluded. Ceilings could be increased or (after 1957) reduced.
From the authorities' point of view, the chief difficulty
in operating this control was the persistent building up of pressure against the ceilings.
This was met partly by upward revisions in the ceilings themselves and partly by
instituting a number of safety valves. The degree of elasticity required constituted the
chief weakness of the ceiling technique. The central bank was constantly under
pressure to adjust the ceilings upward. Some upward revisions were unavoidable, but
the problem was to decide which claims were legitimate and which not. Much
bilateral bargaining took place between the Bank of France and individual
commercial banks, but the banks continued to complain that the strictness of the
control was excessive and that the technique was lacking in flexibility.
The inadequacies of the plafonds technique in its
original form became apparent when prices began to rise rapidly during the Korean
War boom, and even the built-in safety valves failed fully to accommodate the
pressures on bank liquidity. The need to strengthen the mechanism was obvious, and
this was attempted in 1951. Previously, rediscounts had frequently exceeded the
ceilings during the month and were only brought within the plafonds by special action
(e.g., through open-market purchases). The situation was brought under control by
introducing a secondary ceiling to which a penalty rate of interest was applied. This
was extended in 1958 to permit rediscounts even beyond the secondary ceiling,
provided a further penalty was paid; each application, however, was scrutinized by the
Bank of France. The system lasted until about the spring of 1964, though it did not
finally disappear until 1968, when it was largely replaced by Bank of France
operations in the open market. After early 1967, banks also were subject to minimum
reserve requirements. Plafonds, or discount
quotas, also are employed in Germany. They were introduced in West Germany in
1952 and strengthened in 1955. Quotas may be reduced periodically (after 1964 they
were also used to discourage institutions from borrowing abroad). Again there were
safety valves (although less generous than in France) and the possibility of extra
accommodation (Lombard credits) at a higher rate. In some circumstances,
supplementary quotas might be approved for up to six months. A bank might also
raise funds through the money market, though likely at higher cost. Discount quotas
are still an important tool of credit control in Germany. Other countries
have employed this technique, including Sweden, where for a time the central bank
imposed formal or informal ceilings on banks and sometimes on finance companies.

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If the banks failed to observe the ceiling, a penalty was applied based on the amount
of the excess borrowing and its duration. In Finland, commercial banks have at times
been able to borrow limited amounts from the Bank of Finland by way of traditional
credit quotas. Beyond these quotas, funds could formerly be obtained as supra-quota
credit at a higher rate, but banks now are forced into the official call-money market.
Denmark, too, has permitted borrowing from the central bank in tranches, with
higher (penalty) rates applying after the first tranche of the loan quota has been
resorted to, a practice that can be expensive.

General ceilings on credit.

Attempts have been made to prescribe a general ceiling within which the
quantity of commercial bank lending must be held. This is even more difficult to
achieve. One example of such an attempt was the adoption of a "rising ceiling" by
Chile in 1953. All banks were required not to expand the volume of their loans to
businesses and individuals by more than 1.5 per-cent a month, using as their basis the
average of a bank's advances on selected dates in 1953. Certain types of loans were
forbidden, and bank resources were to be directed to productive and distributive
activities that really contributed to the expansion of the national economy. Banks
were also required to provide information on the destination of their loans. In
succeeding years, adjustments were made on several occasions in the maximum
permitted credit increase, expressed either as a percentage of advances or sometimes
as a total for the banking system as a whole. In 1959 all quantitative credit restrictions
were removed, and banks were permitted to advance funds up to their financial
capacity, provided that they operated within the general banking law. There was no
evidence the controls had been effective, but the major problem in Chile was
budgetary rather than monetary. A temporary ceiling on loans was imposed by
agreement in Canada (in 1951-52), The Netherlands (1957-58), and France (1958-
59). The United Kingdom had considerable experience with this type of ceiling,
introducing it as a temporary measure in 1955, when the banks were asked to bring
their advances down by an average of 10 percent. Later an attempt was made to
impose a true ceiling, requiring that bank advances not exceed the average of the
period October 1956 to September 1957. This was continued until July 1958. Again,
in 1961, the authorities indicated the banks must aim at checking the rate of rise in
bank advances; this came to be interpreted as a request that the level of advances at
the end of 1961 be no higher than in the previous June. The banks also were not to
encourage an increase in the volume of commercial bills. The request was modified in
May 1962 and largely withdrawn in October; but it was made again in May 1965,
when the clearing banks were requested not to increase their advances to the private
sector, at an annual rate of more than about 5 percent, in the 12 months to mid-March
1966 (likewise with commercial bills). Other financial institutions were requested to
observe a comparable degree of restraint. For 12 months after March 1966, advances
and discounts, allowing for seasonal factors, were not permitted to rise above levels
set for March 1966. This represented an intensification of the credit squeeze because
prices were rising. The credit restriction led to a falling off in business confidence,
and, consequently, toward the end of 1966, bank lending was well below the official
ceiling. In April 1967, authorities announced a change in techniques, with an
emphasis on making calls to special deposits, but the ceilings returned again in
November 1967. There was to be no increase in bank advances to the private sector
(excluding exports and shipbuilding) except for seasonal reasons. In May 1968 a new

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ceiling was instituted for all such lending (including that for exports and
shipbuilding); the clearing banks were asked to restrict the total of this lending, after
seasonal adjustment, to 104 percent of the November 1967 figure, with priority to be
given to finance for exports and for activities directly related to improving the balance
of payments. The restrictions also extended to other types of credit. Credit became
even tighter (in March 1969) when the ceiling was reduced to 98 percent of the
November 1967 level. The banks had considerable difficulty in meeting this
requirement and agreed merely to "do their best." Advances increased above the
ceiling, and, as a penalty, the interest paid by the Bank of England on special deposits
was halved. Not until late 1969 did it become clear that the authorities were prepared
to abandon their long campaign to get bank loans down to the target figure. The
ceiling was subsequently replaced by minimum reserve requirements. The system of
quantitative credit control requires, for its successful implementation, the full
cooperation of the banking community. In the United Kingdom, where banks base
much of their lending on the overdraft technique, the system was very unpopular.

In France, however, the encadrement du crédit, as it is called, temporarily

imposed in 1958-59, was revived during the first half of 1973. Subject to certain
exclusions (e.g., certain investment credits, agricultural credits, export credits, the
financing of energy savings and innovation, leasing transactions, and special medium-
term construction loans), the mechanism chosen was to permit a certain percentage
rate of growth in bank credits in relation to a particular month in the previous year,
these limits being fixed quarterly and subject to variation from time to time.
Subsequently, in early 1975, reference was made to a fixed base defined as equal to
an index of 100, in relation to which the index might be increased (or decreased) and
credit expanded (or contracted). The system was further refined to vary the rate of
change of credits within different financial sectors, and it has been subject in the
interests of flexibility to many amendments over the years. In effect, there has been a
combination of quantitative and qualitative credit controls. In addition
to regulating the quantity of credit, central banks have sometimes attempted to
influence the directions in which the commercial banks lend. A loose system of
control prevailed in the United Kingdom during World War II and afterward, based
initially on directives from the Capital Issues Committee and later on requests from
the Bank of England. A highly formalized technique was employed in Australia
during the war and earlier postwar years; detailed and specific instructions were given
to the trading banks, marginal cases being referred to the central bank. The system of
Voluntary Credit Restraint in the United States in 1951 was similar. The more formal
controls seemed to be no more effective than the looser system employed in the
United Kingdom. Selective controls have been imposed on consumer installment
finance in the United States and elsewhere (e.g., by stipulating the percentage of
deposit that is required and the length of the term over which repayments may be
made). Even when these are not varied in order to serve as a control over credit, there
is a case for insisting on such requirements for prudential reasons. In the United
States, under the Securities Exchange Act of 1934, the Federal Reserve can vary the
margins that purchasers of securities must pay in cash, thereby limiting the credit
available for this purpose.

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 The structure of modern banking systems

The banking systems of the world have many similarities, but they also
differ, sometimes in quite material respects. The principal differences are in the
details of organization and technique. The differences are gradually becoming less
pronounced because of the growing efficiency of international communication and the
tendency in each country to emulate practices that have been successful elsewhere.
Banking systems may be classified in terms of their structure as
unit banking, branch banking, or hybrids of the two. For example, unit banking
prevails in large areas of the United States. In other countries it is more usual to find a
small number of large commercial banks, each operating a highly developed network
of branches. This is the system used in England and Wales, among others. Examples
of hybrid systems include those of France, Germany, and India, where banks that are
national in scope are supplemented by regional or local banks. Some of these hybrid
systems are slowly changing their character, the banks becoming fewer in number and
individually larger, with a larger number of branches.

UNIT BANKING: THE UNITED STATES

Bank organization in the United States during the years after World War II
was still passing through a phase of structural development that many other countries
had completed some decades earlier. Development in the United States has been
subject to constraints not found elsewhere. The federal Constitution permits both the
national and state governments to regulate banking. Some states prohibit branch
banking, largely because of the political influence of small local bankers, thus
encouraging the establishment and retention of a large number of unit banks.
Even in its early years, the United States had an unusually large
number of banks. As the frontiers of settlement were pushed rapidly westward, banks
sprang up across the country. One reason for this was the demand for capital in the
expanding frontier economy. There was also an obvious need for a large number of
banks to serve the diverse and rapidly expanding demands of a growing and
constantly migrating population. It must be remembered, too, that at this time
communications between the frontiers of settlement and the established centres of
commerce and finance were still inadequately developed.

As long as communications remained imperfect, the existence of large

numbers of competing institutions is not difficult to explain. The subsequent failure of
bank mergers or amalgamations to produce a concentration of financial resources in
the hands of large banking units can be attributed in part to the character of the federal
Constitution as noted above. Among the people, moreover, there was a widespread
distrust of monopoly and a deep-rooted fear that a "money trust" might develop. This
went hand in hand with a political philosophy that emphasized the virtues of
individualism and free competition; restrictions on branching, merging, and on the
formation of holding companies were a feature of both the state and the federal
banking laws. Where permitted, however, bank branches are numerous in the United
States (especially in California and in New York); in states in which branching is
prohibited, one often finds local bank monopolies in small towns. Interstate banking is
prohibited by federal law, but large banking organizations have provided financial

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services (e.g., through loan offices and offices of nonbank subsidiaries) for many
years across state lines. A number of states have passed limited interstate or reciprocal
banking laws, so that banks in other states with similar laws can acquire or merge
with local banks. The banking system of the United States would not work without a
network of correspondent bank relationships, which are more highly developed there
than in any other country. From the 1970s there was an acceleration in the
evolution of U.S. banking patterns. Unregulated financial institutions (and some
nonfinancial institutions) moved into traditional banking activities; at the same time,
depository institutions began offering a fuller range of financial services. Money-
market mutual funds, for example, secured access to open-market interest rates for
investors with relatively small amounts of money. Securities firms and insurance
companies moved aggressively into providing a range of liquid financial instruments.
Likewise, large manufacturing and retail firms moved into the commercial and retail
lending businesses--e.g., by acquiring a savings and loan association, a securities
brokerage house, an industrial loan company, a consumer banking business, or even a
commercial bank. Meanwhile, depository institutions developed a number of new
services, most notably the Negotiable Order of Withdrawal (NOW) account, an
interest-bearing savings account with a near substitute for checks. These appeared
first in 1972 in New England and after 1980 spread to the whole nation; they were
offered both by commercial banks and by thrift institutions. Share drafts at credit
unions also became a means of payment, and after 1978 the automatic transfer
services of commercial banks permitted savings account funds to be transferred
automatically to cover overdrafts in checking accounts. So-called Super-NOW
accounts (with no interest rate ceilings and unlimited checking facilities with a
minimum balance) were subsequently introduced, along with money-market deposit
accounts, free of interest rate restrictions but with limited checking.
Rapid changes in financial structure and the supply of financial services
posed a host of questions for regulators, and, after much discussion, the Depository
Institutions Deregulation and Monetary Control Act was passed in 1980. The object
was to change some of the rules--many of them obsolete--under which U.S. financial
institutions had operated for nearly half a century. The principal objectives were to
improve monetary control and equalize more nearly its cost among depository
institutions; to remove impediments to competition for funds by depository
institutions, while allowing the small saver a market rate of return; and to expand the
availability of financial services to the public and reduce competitive inequalities
among financial institutions offering them. The major changes were: (1) Uniform
Federal Reserve requirements were phased in on transaction accounts (demand
deposits, NOW accounts, telephone transfers, automatic transfers, and share drafts) at
all depository institutions--commercial banks (whether Federal Reserve members or
not), savings and loan associations, mutual savings banks, and credit unions. (2) The
Federal Reserve Board was authorized to collect all data necessary for the monitoring
and control of money and credit aggregates. (3) Access to the discount window at
Federal Reserve banks was widened to include any depository institution issuing
transaction accounts or nonpersonal time deposits. (4) The Federal Reserve was to
price its services, to which all depository institutions would now have access. (5)
Regulation Q, which had long set interest-rate ceilings on deposits, was to be phased
out over a six-year period. (6) An attempt was made to grasp the nettle of the state
usury laws. (7) NOW accounts were authorized on a nationwide basis and could be
offered by all depository institutions. Other services were extended. (8) The
permissible activities of thrift institutions were broadened considerably. (9) Deposit

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insurance at commercial banks, savings banks, savings and loan associations, and
credit unions was raised from $40,000 to $100,000. (10) The "truth in lending"
disclosure and financial regulations were simplified to make it easier for creditors to
comply.

BRANCH BANKING: THE UNITED KINGDOM

If the United States banks can be taken as representative of a unit banking

system, the British system is the prototype of branch banking. Its development was
linked to the growth of transportation and communications, for otherwise banks
cannot clear checks drawn on other banks and effect remittances speedily and
efficiently. The Scots favoured branch banking from the very beginning (the Bank of
Scotland was founded in 1695), but at first they were not very successful--largely
because of poor communications and the difficulty of supplying branches with
adequate amounts of coin. Not until after the Napoleonic Wars, when the road system
of Scotland had been greatly improved, did branch banking begin to develop
vigorously there. As the Industrial Revolution progressed and as the size of businesses
increased, the structure of English banking underwent a corresponding change.
Greater resources were required for lending, and banks also needed more extensive
interconnections in order to provide an increasing range of services. Where banks
remained small, they were frequently unable to take the strain of the larger demand;
they tended to become overextended and often failed.

The growth in size of banks was also greatly encouraged by legislation that
encouraged joint-stock ownership, beginning in 1826. Joint-stock ownership, which
reduced the risk to any individual, must be distinguished from limited liability, which
did not become widely accepted until the failure of the City of Glasgow Bank in 1878
demonstrated the need for a legal device to protect the stockholder. The early joint-
stock banks tended to remain localized in their business interests; it was only
gradually (with the spread of limited liability and disclosure of accounts) that
amalgamations began to convert the banking system in England and Wales into its
highly concentrated modern form. The main movement was completed before World
War I, though there was to be a further degree of concentration in the years after
World War II. By these means, British banks were able to attract deposits from all
parts of the country and to spread the banking risk over a wide range of industries and
areas.

HYBRID SYSTEMS

A third group of banking systems differs from the unit banking system of
the United States and also from the branch banking systems of countries that have
followed the British model (such as Australia, Canada, New Zealand, and South
Africa). This group is characterized by the existence of a small number of banks with
branches throughout the country, holding a significant part of total deposits, along
with a relatively large number of smaller banks that are regional or local in emphasis.

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Such systems exist in France, Germany, and India. Japan has a small number of large
city banks with branch networks but a larger number of local banks.

France.

Banking institutions in France were classified after World War II into three
main groups: deposit banks, banques d'affaires (or investment banks), and institutions
that were either specialized or operated mainly outside France. New banking
legislation in 1966 greatly reduced the importance of the distinction between deposit
banks and banques d'affaires. There was also (1) a further concentration of banking
resources, as a result of several large mergers and also of greater financial integration
through share-exchange agreements and interlocking directorates, and (2) the
conversion of a number of banques d'affaires into deposit banks, which hived off their
investment interests into separate investment or holding companies.
Further legislation in 1982 nationalized the remaining large and
medium-sized banks (36 in all, plus two financial holding companies--those of
Indosuez and Paribas); the largest deposit banks had already been nationalized after
World War II. Another new law in 1984 abolished the old divisions between the
several categories of banks, which were now defined simply as établissements de
crédit, able to receive deposits from the public, undertake credit operations (including
loans), and provide means of payment. The intention was to move cautiously toward a
system of "universal banking." The new law was extended to cover the Caisse
Nationale de Crédit Agricole, the banques populaires, the crédit mutuel, the central
organizations of the cooperatives and the savings banks (and thereby institutions
affiliated with them), and semipublic institutions like the Crédit Foncier and the
Crédit National, but not the Caisse des Dépôts et Consignations nor the central
banking institutions. All the regional banks and some local banks have
branches. The balanced character of the regional economies often provides these
banks with a good portfolio of risks; they serve not only a prosperous agriculture but
also a number of local industries. Some of the local banks are also very sound
institutions, despite their small size. The
survival of a hybrid system in France, despite the long-run trend toward
centralization, reflects certain characteristics of French society. These included, until
recently, a strong emphasis on small business, together with a preference for
individual and personal service. Particularism in some parts of France manifests itself
in support for local institutions, and the local banker also often has the advantage of
special knowledge of local industries and people, which makes possible the
acceptance of risks that the big banks decline.

Germany.

An even more direct conflict between the forces favouring concentration

and those working against it may be seen in Germany, where banking grew in the
latter part of the 19th century along with industry. The banks were inclined to rely
mainly on their own capital resources and did not at first try to attract deposits from
the public. Not until 1874 did the Deutsche Bank A.G. begin to seek deposits through
offices specially opened for the purpose. This was done to provide cheap finance for
traders, the deposits being invested in mercantile bills that were regarded as both safe
and liquid. In pursuit of deposits, the banks built up a widespread network of branch
offices, which were also used to establish and maintain industrial contacts throughout

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the country. The unification of Germany in 1871 removed the political obstacles to a
more integrated banking system, and the selection of Berlin as the capital made that
city the country's financial centre. Four of the largest banks were already established
there; the new Reichsbank was set up in 1876. In addition, the larger and more
enterprising of the provincial banks were attracted to the capital. The Berlin stock
exchange rapidly displaced that of Frankfurt am Main as the country's leading
securities market. The Berlin banks extended their influence by
developing correspondent relationships and subsequently by acquiring a financial
interest in the provincial banks and being represented on their boards. Each of the big
Berlin banks came to be associated with a group of provincial banks more or less
under its control. At the same time, all of the banks, Berlin and provincial alike,
expanded their business by opening branches. During World War I the degree
of centralization increased; by 1918 the big Berlin banks held more than 65 percent of
total deposits. In the early 1920s there were amalgamations, and branch systems
became much larger. Bank failures and the financial crisis of 1931 resulted in further
consolidation until the German banking system was dominated by three giants. But
there were countervailing forces. Probably the most important of these was the
establishment of publicly owned banking institutions, such as the communal savings
banks and their central institutions, the Girozentralen, which became of increasing
importance after World War II. German savings banks, which were permitted to
have checks drawn on them from 1909 and which had giro clearing from the 1920s,
now offer a wide range of services, especially to lower income groups and smaller
businesses. The large commercial banks have concerned themselves more with big
business and with wealthy individuals. The savings banks now compete in wholesale
banking as well. A number of them, together with their Girozentralen, are to all
intents and purposes "universal banks," like the Big Three and the larger regional
banks. The Big Three (the Deutsche Bank, the Dresdner Bank, and the
Commerzbank) remain unchallenged only in stock exchange and foreign banking
business. Of the private bankers, only
about a half-dozen are of any size. The bigger private banks are important in the fields
of investment and wholesale banking, while the smaller ones flourish in the leading
stock-exchange cities, such as Düsseldorf and Frankfurt am Main. Many of these
private bankers, however, are not bankers in the true sense; they subsist mainly on
stock-exchange transactions, investment services, portfolio management, and
insurance and mortgage brokerage. There are also consumer finance institutions,
mortgage and other specialist banks, and a large number of cooperatives. Regional
and private banks are often within the sphere of influence of the Big Three. In some
cases the latter have a financial interest in these banks, and in some cases they own
them. The Big Three also have shares in certain of the private mortgage banks. There
are also "cooperation agreements," and a number of mergers have taken place. In
these several ways, much more integration exists than appears on the surface. While
banking in Germany remains a hybrid system, a trend toward greater concentration is
evident.

India.

Until the 1950s, banking in India was carried on by a large number of banks,
many of them quite small. India is still primarily an agricultural country, with an
economic and social structure based largely on the village. The integration of banking
has been impeded by poor communications, by illiteracy, and by the barriers of

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language and caste. Banking and credit have remained largely in the hands of the so-
called indigenous banker and the village moneylender. Although their influence has
been greatly reduced in recent years, they still remain important in many an up-
country area. The indigenous banker, who is also a merchant, offers genuine banking
services: accepting deposits and remitting funds; making loans quickly and with a
minimum of formality; and, by means of the hundi (a credit instrument in the form of
a bill of exchange), financing a still significant, if declining, portion of India's internal
trade and commerce. Efforts were made to eliminate the moneylender by developing
a network of rural credit cooperatives. When progress proved to be slow, a more
successful alternative was found in requiring banks to open "pioneer" branches in
rural areas. The first branches were those of the semipublic Imperial Bank of India
and its nationalized successor, the State Bank of India (and its subsidiaries). Many
smaller banks began to disappear, sometimes by merger and sometimes as a result of
failure. Between 1952 and 1967 the number of "reporting" banks fell from 517 to 90.
Nationalized banks, including the State Bank of India and its seven subsidiaries, the
14 large commercial banks taken over in 1969, and the six additional banks
nationalized in 1980, accounted for more than 90 percent of aggregate deposits in
commercial banks. Banking services are also provided by chit funds, which accept
and pay interest on monthly deposits against which it is possible to draw only by way
of loan, and by Nidhis, mutual loan societies that have developed into semibanking
institutions but deal only with their member shareholders. The
main path of banking development in India is the expansion of bank branches into the
under-banked areas. The authorities have sought to expand the number of branches
but to avoid their concentration in the larger towns and cities and, in particular, to
provide the rural areas with adequate facilities. The ultimate objective is to encourage
the mobilization of deposits on a massive scale throughout the country, a formidable
challenge in a country of 575,000 villages, and a stepping up of lending to weak
sectors of the economy.

Japan.

Banking business in Japan is largely concentrated in the hands of the big

banks (some of which are specialized), though a number of small banks still survive.
The principal classes of banks are city banks and regional banks, but it should be
noted that the distinction has no legal basis, though they are separately supervised.
Both belong to the Federation of Bankers' Associations of Japan. The city banks
service mainly manufacturing industry and commerce, particularly the big firms,
while the regional banks are based on a prefecture, though some extend their
operations into neighbouring prefectures, collecting deposits and lending to local
businesses and smaller firms. The regional banks have city bank correspondents, not
only to hold surplus balances but also for assistance in investing their funds,
especially in the call-money market. In addition, a city bank may introduce certain of
its large customers to a regional bank (e.g., a big company having a local factory).
City correspondents in Japan do not, however, provide the wide range of ancillary
services common in the United States. Since
World War II there has been much stability in Japanese banking, but the city banks
have suffered a relative decline in the importance of their business in competition
with other institutions, especially the agricultural cooperatives, which attract the
larger part of the Treasury's payments owing to government purchases of the rice
crop. There has also been a relative increase in the importance of the life insurance

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companies and the trust funds, which have attracted sizable funds from the general
public.

Insurance

Insurance is a method of coping with risk. Its primary function is to

substitute certainty for uncertainty as regards the economic cost of loss-producing
events. Insurance may be defined more formally as a system under which the insurer,
for a consideration usually agreed upon in advance, promises to reimburse the insured
or to render services to the insured in the event that certain accidental occurrences
result in losses during a given period. Insurance
relies heavily on the "law of large numbers." In large homogeneous populations it is
possible to estimate the normal frequency of common events such as deaths and
accidents. Losses can be predicted with reasonable accuracy, and this accuracy
increases as the size of the group expands. From a theoretical standpoint, it is possible
to eliminate all pure risk if an infinitely large group is selected.
From the standpoint of the insurer, an insurable risk must meet the
following requirements:

1. The objects to be insured must be numerous enough and homogeneous

enough to allow a reasonably close calculation of the probable frequency and severity
of losses.

2. The insured objects must not be subject to simultaneous destruction. For

example, if all the buildings insured by one insurer are in an area subject to flood, and
a flood occurs, the loss to the insurance underwriter may be catastrophic.

3. The possible loss must be accidental in nature, and beyond the control of the
insured. If the insured could cause the loss, the element of randomness and
predictability would be destroyed.

4. There must be some way to determine whether a loss has occurred and how
great that loss is. This is why insurance contracts specify very definitely what events
must take place, what constitutes loss, and how it is to be measured.
From the viewpoint of the insured person, an
insurable risk is one for which the probability of loss is not so high as to require
excessive premiums. What is "excessive" depends on individual circumstances,
including the insured's attitude toward risk. At the same time, the potential loss must
be severe enough to cause financial hardship if it is not insured against. Insurable
risks include losses to property resulting from fire, explosion, windstorm, etc.; losses
of life or health; and the legal liability arising out of use of automobiles, occupancy of
buildings, employment, or manufacture. Uninsurable risks include losses resulting
from price changes and competitive conditions in the market. Political risks such as
war or currency debasement are usually not insurable by private parties but may be
insurable by governmental institutions. Very often contracts can be drawn in such a
way that an "uninsurable risk" can be turned into an "insurable" one through
restrictions on losses, redefinitions of perils, or other methods.

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 Insurance

Insurance is a method of coping with risk. Its primary function is to

substitute certainty for uncertainty as regards the economic cost of loss-producing
events. Insurance may be defined more formally as a system under which the insurer,
for a consideration usually agreed upon in advance, promises to reimburse the insured
or to render services to the insured in the event that certain accidental occurrences
result in losses during a given period. Insurance
relies heavily on the "law of large numbers." In large homogeneous populations it is
possible to estimate the normal frequency of common events such as deaths and
accidents. Losses can be predicted with reasonable accuracy, and this accuracy
increases as the size of the group expands. From a theoretical standpoint, it is possible
to eliminate all pure risk if an infinitely large group is selected.
From the standpoint of the insurer, an insurable risk must meet the
following requirements:

1. The objects to be insured must be numerous enough and homogeneous

enough to allow a reasonably close calculation of the probable frequency and severity
of losses.

2. The insured objects must not be subject to simultaneous destruction. For

example, if all the buildings insured by one insurer are in an area subject to flood, and
a flood occurs, the loss to the insurance underwriter may be catastrophic.

3. The possible loss must be accidental in nature, and beyond the control of the
insured. If the insured could cause the loss, the element of randomness and
predictability would be destroyed.

4. There must be some way to determine whether a loss has occurred and how
great that loss is. This is why insurance contracts specify very definitely what events
must take place, what constitutes loss, and how it is to be measured.

From the viewpoint of the insured person, an insurable risk is one for which
the probability of loss is not so high as to require excessive premiums. What is
"excessive" depends on individual circumstances, including the insured's attitude
toward risk. At the same time, the potential loss must be severe enough to cause
financial hardship if it is not insured against. Insurable risks include losses to property
resulting from fire, explosion, windstorm, etc.; losses of life or health; and the legal
liability arising out of use of automobiles, occupancy of buildings, employment, or
manufacture. Uninsurable risks include losses resulting from price changes and
competitive conditions in the market. Political risks such as war or currency
debasement are usually not insurable by private parties but may be insurable by
governmental institutions. Very often contracts can be drawn in such a way that an
"uninsurable risk" can be turned into an "insurable" one through restrictions on losses,
redefinitions of perils, or other methods.

Kinds of insurance

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 PROPERTY INSURANCE

Two main types of contracts--homeowner's and commercial--have been

developed to insure against loss from accidental destruction of property. These
contracts (or forms) typically are divided into three or four parts: insuring agreements,
identification of covered property, conditions and stipulations, and exclusions.

Homeowner's insurance.

Homeowner's insurance covers individual, or nonbusiness, property.

Introduced in 1958, it gradually replaced the older method of insuring individual
property under the "standard fire policy."

Perils insured.

In homeowner's policies, of which there are several types, coverage can be

"all risk" or "named peril." All-risk policies offer insurance on any peril except those
later excluded in the policy. The advantage of these contracts is that if property is
destroyed by a peril not specifically excluded the insurance is good. In named-peril
policies, no coverage is provided unless the property is damaged by a peril
specifically listed in the contract. In
addition to protection against the loss from destruction of an owner's property by
perils such as fire, lightning, theft, explosion, and windstorm, homeowner's policies
typically insure against other types of risks faced by a homeowner such as legal
liability to others for injuries, medical payments to others, and additional expenses
incurred when the insured owner is required to vacate the premises after an insured
peril occurs. Thus the homeowner's policy is multi-peril in nature, covering a wide
variety of risks formerly written under separate contracts.

Property covered.

Homeowner's forms are written to cover damage to or loss of not only an

owner's dwelling but also structures (such as garages and fences), trees and shrubs,
personal property (excluding certain listed items), property away from the premises
(such as boats), money and securities (subject to dollar limits), and losses due to
forgery. They also cover removal of debris following a loss, expenditures to protect
property from further loss, and loss of property removed from the premises for safety
once an insured peril has occurred.

Limitations on amount recoverable.

Recovery under homeowner's forms is limited to loss due directly to the

occurrence of an insured peril. Losses caused by some intervening source not insured
by the policy are not covered. For example, if a flood or a landslide, which usually are
excluded perils, severely damages a house that subsequently is destroyed by fire, the
homeowner's recovery from the fire is limited to the value of the house already
damaged by the flood or landslide.

Recovery under homeowner's forms may be on the basis of either full

replacement cost or actual cash value (ACV). Under the former, the owner suffers no

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reduction in loss recovery due to depreciation of the property from its original value.
This basis applies if the owner took out coverage that is at least equal to a named
percentage--for example, 80 percent--of the replacement value of the property.
If the insurance amount is less than 80
percent, a coinsurance clause is triggered, the operation of which reduces the
recovery amount to the value of the loss times the ratio of the amount of insurance
actually carried to the amount equal to 80 percent of the value of the property.
However, the reduced recovery will not be less than the "actual cash value" of the
property, defined as the full replacement cost minus an allowance for depreciation, up
to the amount of the policy. For example, assume that a property is valued at
$100,000 new, has depreciated 20 percent in value, insurance of $60,000 is taken, and
a $10,000 loss occurs. The actual cash value of the loss is $8,000 ($10,000 minus 20
percent depreciation). The operation of the coinsurance clause would limit recovery to
6/8 of the loss, or $7,500. However, since the actual cash value of the loss is $8,000,
this is the amount of the recovery. Recovery under homeowner's forms is
also limited if more than one policy applies to the loss. For example, if two policies
with equal limits are taken out, each contributes one-half of any insured loss. Loss
payments also are limited to the amount of an insured person's insurable interest.
Thus, if a homeowner has only a one-half interest in a building, the recovery is
limited to one-half of the insured loss. The co-owners would need to have arranged
insurance for their interest.

Excluded perils.

Among the excluded perils (or exclusions) of homeowner's policies are the
following: loss due to freezing when the dwelling is vacant or unoccupied, unless
stated precautions are taken; loss from weight of ice or snow to property such as
fences, swimming pools, docks, or retaining walls; theft loss when the building is
under construction; vandalism loss when the dwelling is vacant beyond 30 days;
damage from gradual water leakage; termite damage; loss from rust, mold, dry rot,
contamination, smog, and settling and cracking; loss from animals or insects; loss
from earth movement, flood, war, or spoilage (e.g., chemical deterioration); loss from
neglect of the insured to protect the property following a loss; and losses arising out
of business pursuits. Special forms for business risks are available. Under
named-peril forms, only losses from the perils named in the policy are covered. The
named perils are sometimes defined narrowly; for example, theft claims are not paid if
the property is merely lost and theft cannot be established.
Earthquake and flood loss, while excluded from the basic homeowner's
forms, may usually be covered by endorsement.

Conditions.

Homeowner's policies may include the following conditions: (1) Owners

are required to give immediate written notice of loss to the insurer or the insurer's
agent. (2) The insured must provide proof of the amount of loss. This suggests that
owners should keep accurate records of the items in a building and of their original

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cost. (3) The insured must cooperate with the insurer in settling a loss. (4) The insured
must pay the premium in advance. (5) The insurer has a right of subrogation (i.e., of
pursuing liable third parties for any loss). This prevents an owner from collecting
twice, once from the insurer and once from a liable third party. (6) A mortgagee's
interest in a property can be protected. (7) The policy may be canceled by the insurer
upon due notice, usually 10 days. If the insurer cancels, a pro rata refund of premium
must be returned to the insured; if the insured cancels, a less-than-proportionate return
of a premium may be recovered from the insurer. (8) Fraud by the insured, including
misrepresentation or concealment of material facts concerning the risk, is ground for
denial of benefits by the insurer. Also available is a
form called renter's insurance, which provides personal property insurance for tenants.

Business property insurance.

Insurance for business property follows a pattern that is similar in many

ways to the one for individual property. A commonly used form is the "building and
personal property coverage form" (BPP). This form permits a business owner to cover
in one policy the buildings, fixtures, machinery and equipment, and personal property
used in business and the personal property of others for which the business owner is
responsible. Coverage also can be extended to insure newly acquired property,
property on newly acquired premises, valuable papers and records, property
temporarily off the business premises, and outdoor property such as fences, signs, and
antennas.

Direct losses.

Coverage on the BPP form can be written on a scheduled basis, whereby

specific items of property are listed and insured, or on a blanket basis, whereby
property at several locations can be insured for a single sum.
Perils insured under the BPP are listed in the policy.
All-risk coverage is also written, subject to specified exclusions.
Losses may be settled on a replacement-cost coverage on the
BPP by endorsement. Otherwise recovery is on an actual cash value basis that makes
an adjustment for depreciation. Coverage
for business personal property with constantly changing values is available on a
reporting form. The business owner reports values monthly to the insurer and pays
premiums based on the values reported. In this way, only the insurance actually
needed is purchased.

Indirect losses.

An entirely different branch of the insurance business has been developed

to insure losses that are indirectly the result of one of the specified perils. A prominent
example of this type of insurance is business income insurance. The insurer
undertakes to reimburse the insured for lost profits or for fixed charges incurred as a
result of direct damage. For example, a retail store might have a fire and be
completely shut down for one month and partially shut down for another month. If the

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fire had not occurred, sales would have been much higher, and therefore substantial
revenues have been lost. In addition, fixed costs such as salaries, taxes, and
maintenance must continue to be paid. A business income policy would respond to
these losses. Forms of indirect insurance include the
following: (1) contingent business income insurance, designed to cover the
consequential losses if the plant of a supplier or a major customer is destroyed,
resulting in either reduced orders or reduced deliveries that force a shutdown of the
insured firm, (2) extra expense insurance, which pays the additional cost occasioned
by having extra expenses to pay, such as rent on substitute facilities after a disaster,
and (3) rent and rental value insurance, covering losses in rents that the owner of an
apartment house may incur if the building is destroyed. Rental income insurance pays
for rent lost when a peril destroys an owner's property that has been rented to others.

MARINE INSURANCE

Marine insurance is actually transportation insurance. After insurance

coverage on ocean voyages had been developed, it was a natural step to offer
insurance on inland trips. This branch of insurance became known as inland marine.
In many policy forms, the distinction between inland and ocean marine has
disappeared; it is common to cover goods from the time they leave the warehouse of
the shipper, even if this warehouse is situated at a substantial distance from the
nearest seaport, until they reach the warehouse of the buyer, which likewise may be
located far inland.

Ocean marine insurance.

Ocean marine contracts are written to cover four major types of property
interest: (1) the vessel or hull, (2) the cargo, (3) the freight revenue to be received by
the ship owner, and (4) legal liability for negligence of the shipper or the carrier. Hull
insurance covers losses to the vessel itself from specified perils. Usually there is a
provision that the marine hull should be covered only within specified geographic
limits. Cargo insurance is usually written on an open contract basis under which
shipments, both incoming and outgoing, are automatically covered for the interests of
the shipper, who reports periodically the values exposed and pays a premium based
upon these values. By means of a negotiable open cargo certificate, which is attached
to the bill of lading, insurance coverage is automatically transferred to whoever has
legal title to the goods in the course of their movement from seller to buyer.
Freight revenue may be insured in
several different ways. If there is an obligation by the shipper to pay the carrier's
freight bill regardless of whether the goods are delivered, the value of the freight is
declared a part of the value of the cargo and is insured as part of this value. If the
freight revenue is contingent upon safe delivery of the goods, the carrier insures the
freight as a part of the regular hull coverage.
Major clauses or provisions that are fairly standardized are (1) the perils
clause, (2) the "running down" clause, or RDC, (3) the "free of particular average," or
FPA, clause, (4) the general average clause, (5) the sue and labour clause, (6) the
abandonment clause, (7) coinsurance, and (8) express and implied warranties. Each of
these will be discussed in turn.

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 Perils clause.

Until 1978 the main insuring clause of modern ocean marine policies was
preserved almost unchanged from the original 1779 Lloyd's of London form. The
clause is as follows:

Touching the adventures and perils which we the assurers are

contented to bear and do take upon us in this voyage: they are of the seas,
men-of-war, fire, enemies, pirates, rovers, thieves, jettisons, letters of mart
and countermart, surprisals, takings at sea, arrests, restraints, and
detainments of all kings, princes, and people, of what nation, condition, or
quality soever, barratry of the master and mariners, and of all other perils,
losses, and misfortunes, that have or shall come to the hurt, detriment, or
damage of the said goods and merchandises, and ship, etc., or any part
thereof.

Although the clause reads as if it were an all-risk agreement, courts have

interpreted it to cover only the perils mentioned. Essentially, the clause insures the
voyage from perils "of" the sea. Perils on the sea, such as fire, are not covered unless
specifically mentioned. Furthermore, although the perils clause indicates coverage
from "enemies, pirates, rovers, thieves," the policy does not cover losses from war.
(War risk insurance is offered in some nations through governmental agencies.)
In 1978, at the request of the UN Conference on Trade
and Development, the 1779 language was modernized and a revised insuring clause
was proposed. The new form restricts coverage on losses from poor packing, places
the burden of proof of seaworthiness on the shipper rather than on the carrier, and
excludes losses resulting from insolvency of the common carrier, with the burden of
proof placed on the shipper that the carrier is financially sound. The revised form has
not been adopted by all insurers.

RDC clause.

The RDC, or "running down" clause, provides coverage for legal liability
of either the shipper or the common carrier for claims arising out of collisions.
(Collision loss to the vessel itself is part of the hull coverage.) The RDC clause covers
negligence of the carrier or shipper that results in damage to the property of others. A
companion clause, the protection and indemnity clause (P and I), covers the carrier or
shipper for negligence that causes bodily injury to others.

FPA clause.

The FPA, or "free of particular average," clause excludes from coverage

partial losses to the cargo or to the hull except those resulting from stranding, sinking,
burning, or collision. Under its provisions, losses below a given percentage of value,
say 10 percent, are excluded. In this way the insurer does not pay for relatively small
losses to cargo. The percentage deductible varies according to the type of cargo and
its susceptibility to loss.

General average clause.

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 The general average clause in ocean marine insurance obligates the insurers
of various interests to share the cost of losses incurred voluntarily to save the voyage
from complete destruction. Such sacrifices must be made voluntarily, must be
necessary, and must be successful. For example, if a shipper's cargo is voluntarily
jettisoned in a storm in order to save the vessel from total loss, the general average
clause requires the insurers of the hull and of all other cargo interests to make a
contribution to the loss of the shipper whose goods were sacrificed. Other types of
losses may also be covered. It has been held, for example, that losses suffered from
efforts to put out a fire on shipboard, which result in damage to specific goods, can be
included in a general average claim. Similarly, losses from salvage efforts to free a
stranded vessel may qualify under a general average claim to which all interests must
contribute.

Sue and labour clause.

The sue and labour clause requires the ship owner to make every attempt to
reduce or save the exposed interests from loss. Under the terms of the clause, the
insurer pays for any necessary costs incurred in carrying out the requirements of the
sue and labour clause. Thus, if a ship is stranded, under the sue and labour clause the
hull owner would be required to hire salvors to attempt to save the ship. Such
expenses are paid even if the salvage attempts fail.

Abandonment clause.

If salvaging or rehabilitating a ship or cargo following a marine loss costs

more than the goods are worth, the loss is said to be constructively total. Under such
conditions, the ocean marine policy permits the insured to abandon the damaged ship
or cargo to the insurer and make a claim for the entire value. In this case, the salvage
belongs to the insurer, who may dispose of it in any way. Abandonment is not
permitted in other forms of property insurance.

Coinsurance.

Although there is no coinsurance clause as such in the ocean marine

policy, losses are settled as though a 100 percent coinsurance clause existed. Thus, if
an insured takes out coverage equal to 50 percent of the true replacement cost of the
goods, only 50 percent of any partial loss may be recovered.

Warranties.

In the field of ocean marine insurance there are two general types of
warranties that must be considered: express and implied. Express warranties are
promises written into the contract. There are also three implied warranties, which do
not appear in written form but bind the parties nevertheless.
Examples of expressed warranties are the FC&S warranty and the strike,
riot, and civil commotion warranty. The FC&S, or "free of capture and seizure,"
warranty excludes war as a cause of loss. The strike, riot, and civil commotion
warranty states that the insurer will pay no losses resulting from strikes, walkouts,

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riots, or other labour disturbances. The three implied warranties relate to the following
conditions: seaworthiness, deviation, and legality. Under the first, the shipper and the
common carrier warrant that the ship will be seaworthy when it leaves port, in the
sense that the hull will be sound, the captain and crew will be qualified, and supplies
and other necessary equipment for the voyage will be on hand. Any losses stemming
from lack of seaworthiness will be excluded from coverage. Under the deviation
warranty, the ship may not deviate from its intended course except to save lives.
Clauses may be attached to the ocean marine policy to eliminate the implied
warranties of seaworthiness or deviation. The implied warranty of legality, however,
may not be waived. Under this warranty, if the voyage itself is illegal under the laws
of the country under whose flag the ship sails, the insurance is void.

Inland marine insurance.

Although there are no standard forms in inland marine insurance, most

contracts follow a typical pattern. They are usually written on a named-peril basis
covering such perils of transportation as collision, derailment, rising water, tornado,
fire, lightning, and windstorm. The policies generally exclude losses resulting from
pilferage, strike, riot, civil commotion, war, delay of shipments, loss of markets,
illegal trade, or leakage and breakage. The scope of inland marine is greatly
extended by means of "floater" policies. These are used to insure certain types of
movable property whether or not the property is actually in transit. Business floater
policies are purchased by jewelers, launderers, dry cleaners, tailors, upholsterers, and
other persons who hold the property of others while performing services. Personal
property floaters are used to cover, on a comprehensive basis, any item of personal
property owned by a private individual. They may also cover the property of visitors,
or the property of servants while on the premises of the insured. They exclude certain
types of property for which other contracts have been designed, such as automobiles,
aircraft, motorcycles, animals, or business and professional equipment.

LIABILITY INSURANCE

Liability insurance arises mainly from the operation of the law of

negligence. Individuals who, in the eyes of the law, fail to act reasonably or to
exercise due care may find themselves subject to large liability claims. Court
judgments have been issued for sums so large as to require a lifetime to pay.
There are at least four major types of liability insurance
contracts: (1) liability arising out of the use of automobiles, (2) liability arising out of
the conduct of a business, (3) liability arising from professional negligence
(applicable to doctors, lawyers, etc.), and (4) personal liability, including the liability
of a private individual operating a home, carrying on sporting activities, and so on.
Practically all liability contracts falling in these
four categories have some common elements. One is the insuring clause, in which the
insurer agrees to pay on behalf of the insured all sums that the insured shall become

215
legally obligated to pay as damages because of bodily injury, sickness or disease,
wrongful death, or injury to another person's property. The liability policy covers only
claims that an insured becomes legally obligated to pay; voluntary payments are not
covered. It is often necessary to resort to legal or court action to determine the amount
of these damages, although in a vast majority of cases the damages are settled out of
court by negotiation between the parties