MB0036

MB0036-Unit-01-Introduction to the Concept
of Strategic Management and Business Issues

– Basic Investment Strategy
Unit 1 Introduction to the Concept of
Strategic Management and Business
Issues – Basic Investment Strategy
Structure:
1.1 Introduction
Objectives
1.2 Purpose of Strategy
1.3 Translating Corporate Vision into Action-A Case Study
1.4 Strategies to Improve Sales
Self Assessment Questions I
1.5 Strategy Formulation & Implementation
1.5.1 Stages in Strategy Formulation and Implementation
1.5.2 Generic Strategy Alternatives
1.5.3 Strategic Alliances
1.5.4 Considering Strategy Variations
1.5.5 Selection of the Best Alternative
1.5.6 Strategic Choice
1.5.7 Allocation of Resources and Development of Organisational Structure
Self Assessment Questions II
1.6 Formulation of Policies, Plans, Programmes and Administration

1.7 Implementation: Evaluation and Control of Strategy
Self Assessment Questions III
1.8 Summary
1.9 Terminal Questions
1.10 Answers to SAQs and TQs
1.1 Introduction
The term ‘strategy’ is drawn from the armed forces. It is a strategic plan that interlocks all
aspects of the corporate mission designed to overpower the enemy or the competitor. An
appropriate strategy is considered to be essential to face adverse situations such as cut-throat
competition.
Strategy may imply general or specific programmes of action outlining how the resources are
deployed to attain goals in a given set of conditions. If these conditions change, the strategy also
changes. Strategies give direction for the achievement of objectives necessary through the
deployment of resources.
In this unit, we would attempt to understand the meaning and purpose of strategy, its
formulation, implementation and evaluation.
Objectives:
After studying this unit, you will be able to:
· Explain the meaning and purposes of a strategy.
· Explain the key elements of basic investment strategy.
· Mention the key strategy initiatives within a firm.
· List the stages involved in strategy formulation and implementation.
· Explain different forms of strategic alliances.
· Explain the importance of evaluation in the strategic management process.
1.2 Purpose of Strategy
A strategy is an operational tool to achieve the goals, and thus, the corporate mission. Strategies
do not attempt to outline exactly how the enterprise is to accomplish its objectives. A company
may view downsizing as a strategy in a competitive market to render cost-effective services.
Thus, strategy provides a framework to guide thinking and action. Strategies are very much
useful in organisations for guiding, planning and control.
Mass Market as the Focus of Corporate Strategy
Today, corporate strategy is to identify and focus on the largest potential and
concentrate business there. It is realised, of late, that the largest potential lies
in the mass market, which is the largest source of volume though with
marginal profits.
· HLL launched the WHEEL brand to cater to the requirements of large

customers (hitherto uncovered by its popular products Surf, Surf Excel etc.)
at affordable prices.
· Britannia was earlier addressing the needs of upper income segments of the
market. Having realised that the price-conscious market was much larger, the
company launched the Tiger brand.
Translating Corporate Vision into Action
The vision of Cadbury, the market leader of the 90’s, was translated into
different operational and marketing strategies – such as downsizing or
providing more value for money.
Strategy is a way of life both at the macro as well as micro levels for everyone, whether it is a
nation or a company. To win over in a given complex situation, the organisations, even trans-
nationals adopt strategies. They make changes, if necessary, even to their global strategies. An
individual company may formulate its own strategy to bring out the desired results. The eventual
success of the organisation depends upon strategy formulation and implementation.
The recently initiated moves such as globalisation, privatisation and liberalisation are strategies
to attain a globally competitive economy.
Corporate Strategies
· Articulate the vision of the company.
· Involve staff in the vision.
· Be a good motivator.
· Focus on human resources by having the right people with the right
thinking in the right jobs.
· Empower the staff to take risks and be innovative.

Programmes
Programmes refer to the logical sequence of operations to be performed in a given project or job.
Programmes tell you “what to do “. A programme is based on a set of goals, policies, procedures,
rules and task assignments. They are used to carry out a given course of action.
Normally, the size of each programme is assessed in terms of resources and duration. If a
programme takes larger resources and time, it is considered major, but supported by a number of
minor and supporting programmes. If a programme requires a logical sequence of activities, it
would require special attention of a manager.
Co-ordination and timing of supporting programmes need a detailed analysis. Failure of any part
of this network of supportive programmes means delays, higher costs and loss of revenue.
1.3 Translating Corporate Vision into Action – A Case Study
Case Study: BHEL
Vision: “A world class, innovative, competitive and profitable engineering enterprise providing
total business solutions. “
How do we translate this into action?
Mission – What the company wants to achieve:
To:
· Deal with products and services with specific focussed engineering applications close to their
Core Competence.
· Become an international player.
· Be innovative.
· Be profitable.
· Provide total business solutions to ensure customer satisfaction.
Goals – To achieve the above mission
· To understand the status of technology in engineering and management.
· To actively implement in-house and external R&D to develop innovative products and services.
· To emerge as the most competitive player in terms of price and quality.

Objectives – To achieve the above goals
· To upgrade innovative R&D skills among technical human resource.
· To outsource R&D services to close the gap.
· To ensure that employees are committed.
· To make key personnel more conscious of time, quality and cost.
· To develop reliable and resourceful network of customers.
· To optimise utilisation of resources, both financial as well as non-financial, material, as well as

human.
Strategies – To achieve the above objectives
· To promote a joint venture with a strategic partner, preferably a leading multi-national.
· To work for ISO 9000 certification, to streamline the operating systems in design,
manufacturing, installation, testing and service.
· To provide a continuous learning atmosphere for the technical and non-technical staff at all
levels.
· To network with leading international software vendors and transport companies of global
standards.
· To ensure quick recovery of receivables, offer incentives for early payment and initiate a
system of debt factoring if necessary to take protection against bad debts.
· To maintain an optimum staff strength and recruit only if and when necessary.
· To select people based on aptitude and attitude.
· To make the organisation flat and lean to enhance the degree of competitiveness.
Policies – To control strategies
· To follow structured recruitment procedures.
· To make training a compulsory element of employees’ growth strategy.
· To sell to a buyer only if he is not a significant contributor to debt levels.
· To encourage R&D and research paper presentations by employees.

· To make all maintenance staff live within factory premises.
Programmes – For implementation of objectives
· To work for ISO 9000 certification.
· To conduct orientation programmes for all staff at all levels to communicate goals of such
certification.
· To develop and encourage cross-function teams combining employees, customers and

suppliers.
· To conduct job analysis, to identify job description and work out job specifications.
· To use such data during recruitment.
· To schedule meetings with CEOs of major players in finance, supply and transportation and
initiate measures for strategic alliance.
· To conduct collection drive programmes for early recovery of outstandings.
· To empower key personnel to negotiate early and favourable settlement of pending accounts,
considering the best interests of the organisation.
· To organise cleanliness and safety weeks.
The above list outlines some of the key issues at every stage of action illustrating how:
· The mission springs out from vision statements
· Goals from the mission
· Objectives from goals
· Strategies from objectives
· And programmes from objectives
1.4 Strategies to Improve Sales
There are three alternatives to improve the sales performance of a business unit, to fill the gap
between actual sales and targeted sales:
a) Intensive growth
b) Integrative growth
c) Diversification growth
a) Intensive Growth:
It refers to the process of identifying opportunities to achieve further growth within the
company’s current businesses. To achieve intensive growth, the management should first
evaluate the available opportunities to improve the performance of its existing current
businesses.
It may find three options:
· To penetrate into existing markets
· To develop new markets
· To develop new products
At times, it may be possible to gain more market share with the current products in their current
markets through a market penetration strategy. For instance, SONY introduced TV sets with
Trinitron picture tubes into the market in 1996 priced at a premium of Rs.10,000 and above over
the market through a niche market capture strategy. They gradually lowered the prices to market
levels. However, it also simultaneously launched higher-end products (high-technology
products) to maintain its global image as a technology leader. By lowering the prices of TVs
with Trinitron picture tubes, the company could successfully penetrate into the markets to add
new customers to its customer base.
Market Development Strategy is to explore the possibility to find or develop new markets for its
current products (from the northern region to the eastern region etc.). Most multinational
companies have been entering Indian markets with this strategy, to develop markets globally.
However, care should be taken to ensure that these new markets are not low density or saturated
markets, which could lead to price pressures.
Product Development Strategy involves consideration of new products of potential interest to its
current markets (e.g. Gramaphone Records to Musical Productions to CDs)– as part of a
Diversification strategy.
Study the following example to understand what Product Development Strategy is.
MICROSOFT’s New Strategy
It is called PC-plus. It has three elements:
a) Providing computer power to the most commonly used devices such as

cell phone, personal computer, toaster oven, dishwasher, refrigerator,
washing machines and so on.
b) Developing software to allow these devices to communicate.
c) Investing heavily to help build wireless and high-speed internet access

throughout the world to link it all together.
Microsoft envisions a home where everyday appliances and electronics are

smart. According to Bill Gates, ‘In the near future, PC-based networks will
help us control many of our domestic matters with devices that cost no more
than $ 100 each ‘.
It is also said at Microsoft that VCRs can be programmed via e-mail, laundry
washers can be designed to send an instant message to the home computer
when the load is done and refrigerators can be made to send an e-mail when
there’s no more milk. Microsoft plans to give these appliances ‘brains‘ and
provide them the means to talk to each other through their Windows CE
Operating System.
b) Integrative Growth:
It refers to the process of identifying opportunities to develop or acquire businesses that are
related to the company’s current businesses. More often, the business processes have to be
integrated for linear growth in the profits. The corporate plan may be designed to undertake
backward, forward or horizontal integration within the industry.
If a company operating in music systems takes over the manufacturing business of its plastic
material supplier, it would be able to gain more control over the market or generate more profit.
(Backward Integration)
Alternatively, if this company acquires some of its most profitably operating intermediaries such
as wholesalers or retailers, it is forward integration. If the company legally takes over or
acquires the business of any of its leading competitors, it is called horizontal integration
(however, if this competitor is weak, it might be counter-productive due to dilution of brand
image).
c) Diversification Growth:
It refers to the process of identifying opportunities to develop or acquire businesses that are not
related to the company’s current businesses. This makes sense when such opportunities outside
the present businesses are identified with attractive returns and that industry has business
strengths to be successful. In most cases, this is planned with new products that have
technological or marketing synergies with existing businesses to cater to a different group of
customers (Concentric Diversification).
A printing press might shift over to offset printing with computerised content generation to
appeal to higher-end customers and also add new application areas ( Horizontal Diversification )
– or even sell stationery.
Alternatively, the company might choose new businesses that have nothing to do with the current
technology, products or markets (Conglomerate Diversification).
The classic examples for this would be engineering and textile firms setting up software
development centres or Call Centres with new service clients.
Situation Analysis
Sales Improvement Strategies:
a) A supplier of computer stationery invests in a computer stationery

manufacturing unit.
b) A vendor supplying engine boxes to Maruti decides to supply the same

with modifications to Hyundai.
c) A company dealing in computer floppies plans to set up a Software

Technology Park.
Downsizing Older Businesses – as part of Operating Plans
It is necessary to reduce the scale of operations of an unprofitable business to ensure that the
resources are optimally utilised. A weak business requires higher degree of managerial attention.
The management should focus on the company’s growth opportunities, not fritter away energy
and resources trying to revive tired and old businesses.
State whether the following statements are True or False:
1. A strategy is an operational tool to achieve the goals, and thus, the corporate mission.
2. Strategies attempt to outline exactly how the enterprise is to accomplish its objectives.
3. The recently initiated moves such as globalisation, privatisation and liberalisation are
strategies to attain a globally competitive economy.
4. A programme is based on a set of goals, policies, procedures, rules and task assignments.
5. ‘Product Development Strategy’ is to explore the possibility to find or develop new markets
for its current products.
6. ‘Market Development Strategy’ involves consideration of new products of potential interest to
its current markets.
1.5 Strategy Formulation and Implementation
It is the crux of the strategic management process. Strategy refers to the course of action desired
to achieve the objectives of the enterprise. Formulation, together with its implementation,
constitutes an integral part of the management activity. Managers use strategies for different
purposes such as to overcome competition, to increase sales, to increase production, to motivate
the employees to provide their best, and so on. Implementation of a strategy is a crucial task as
the formulation of it. There may be a lot of resistance during the implementation process. It is
necessary for the manager to be very tactful to involve the members of his group in the
formulation of strategy to facilitate the implementation process.
1.5.1 Stages in Strategy Formulation and Implementation
a) Identification of mission and objectives
b) Environment scanning
c) Generic strategy alternatives
d) Strategy variations
e) Strategic choice
f) Allocation of resources and formulation of organisational structure
g) Formulation of plans, policies, programmes and administration
h) Evaluation and control
1.5.2 Generic Strategy Alternatives
They refer to the strategy alternatives in broader terms. After the nature of the business of the
firm is defined, the next task is to focus on the type of strategic alternative, in general, the firm
should pursue. The strategist seeks to identify the right alternative through questions such as:
1. Should we get out of this business entirely?
2. Should we try to expand?
There are four strategy alternatives available to a firm or business:
a) To expand
b) To wind up or retrench
c) To stabilize, and
d) To continue its operations pertaining to its products, markets or functions.
a) Expansion strategy can be adopted in the case of highly competitive and volatile industries,
particularly, if they are in the introduction stage of product / service life cycle.
b) Stability strategy is a better choice when the firm is doing well, the environment is relatively
less volatile, and the product / service has reached the stability or maturity stage of the life cycle.
c) Retrenchment strategy is the obvious choice when the firm is not doing well in terms of sales
and revenue and finds greater returns elsewhere, or the product / service is in the finishing stage
of the product life cycle.
d) Combination strategy is not a new strategy as it combines the other strategies. However, it is
to be noted that it is better to evolve individual strategies and combine them rather than trying to
evolve a complex combination strategy which could be cumbersome with loss of precious
business time. It is best-suited to multiple SBU firms in times of economic transition and also
when changes occur in the product / service life cycle. If a firm realises that some of its main
product lines have outlived their lives, it may not be profitable to continue investment in the
same product or SBU. The firm may choose to withdraw its resources from this area (or SBU)
(Retrenchment strategy) and follow an Expansion strategy in a new product area. Combination
strategy is best suited when the firm finds that its product-wise performance is uneven, or all or
most of its products differ in their future potential.
Generic Strategy
Alternatives
Expand Retrench Stabilise Combination
Business Pace Business Pace Business Pace Definition

definition definition definition or Pace
Products Add new Find new Drop old De-crease maintain Make Drop old
products ones pro-ducts product package while
develop- changes, adding
ment quality new
improve- products
ments
Markets Find new Pene- Drop Reduce maintain Protect Drop old
territories trate distribution market share market customers
markets chan-nels shares, while
focus on finding
market new
niches customers
Func-tions Forward, Increase Be-come De-crease maintain Improve Increase
vertical capacity cap-tive process produc- capacity
integra- com-pany R&D tion and
tion efficiency improve
efficiency
Table 1.1: Generic Strategy Alternatives
Sometimes, a combination of a few or all of these strategies may be necessary. Any change must
be contemplated considering what is to be done (Business definition) and the speed (Pace) with
which it is to be done. Each of these alternatives has to be evaluated on its merits.
Figure 1.1: Strategy Formulation and Implementation
Examples of Strategic Alternatives:
· If the firm wants to grow substantially in terms of size, expansion is the

obvious alternative. But in this process, other objectives may take a back-
seat, at least in the short run.
· In case of recession, retrenchment is the most preferred strategy, involving

dropping of unviable products, reduction in non-performing assets,
withdrawal from the markets, and reduces the scale of activity. In the
process, the overhead costs are purposefully reduced to ensure that the
expenditure continues to be productive. These efforts will ultimately enhance
the profitability.
· At times, the company may realise more money by liquidating its

operations than by continuing. In such a case, to achieve the goal of
improving cash value, the strategy is to sell a part of its assets, realise the
sale proceeds, and invest the same profitably elsewhere.
· If an entrepreneur wants to maintain control over a business, stability

strategy may be a better strategy.
Goal of improving cash value
· Most timber depots in sprawling open places, located in the outskirts of the
city for decades, have been making more money by selling a part of their
open land than by doing timber business.
· In view of the substantial growth in the real estate in the city outskirts, most
of them could sell their surplus land (main roadside) to construction firms for
phenomenal sums.
· In this process, they could successfully create capital assets with a

tremendously appreciated value. Further analysis showed that they earned
more on these capital assets than in the timber business.
· However, since the values are further appreciating, can we offer a better
strategy.
A strategy is a means to an end. If an organisation wants to perform better in the long run, it has
to select an appropriate strategy and pursue it vigorously. In this process, it might face certain
hardships. Also, it has to make necessary changes in its strategy. A change in strategy should not
be construed as a sign of failure.
1.5.3 Strategic Alliances
Strategic alliances constitute another viable alternative. Companies can develop alliances with
the members of the strategic group and perform more effectively. These alliances may take any
of the following forms:
a) Product and/or service alliance: Two or more companies may get together to synergise their
operations, seeking alliance for their products and/or services. The product or service alliance
may take any of the following forms:
A manufacturing company may grant license to another company to produce its products. The
necessary market and product support, including technical know-how, is provided as part of the
alliance. Coca-cola initially provided such support to Thums Up.
Two companies may jointly market their products which are complementary in nature. Chocolate
companies more often tie up with toy companies. TV Channels tie-up with Cricket boards to
telecast entire series of cricket matches live.
Two companies, who come together in such an alliance, may produce a new product altogether.
Sony Music created a retail corner for itself in the ice-cream parlours of Baskin-Robbins.
b) Promotional alliance: Two or more companies may come together to promote their products
and services. A company may agree to carry out a promotion campaign during a given period for
the products and/or services of another company. The Cricket Board may permit Coke’s products
to be displayed during the cricket matches for a period of one year.
c) Logistic alliance: Here the focus is on developing or extending logistics support. One
company extends logistics support for another company’s products and services. For example,
the outlets of Pizza Hut, Kolkata entered into a logistic alliance with TDK Logistics Ltd.,
Hyderabad, to outsource the requirements of these outlets from more than 30 vendors all over
India – for instance, meat and eggs from Hyderabad etc.
d) Pricing collaborations: Companies may join together for special pricing collaborations. It is
customary to find that hardware and software companies in information technology sector offer
each other price discounts. Companies should be very careful in selecting strategic partners. The
strategy should be to select such a partner who has complementary strengths and who can offset
the present weaknesses. The acid test of an alliance is greater sales at lesser cost. It is a common
practice to develop organisational structures or modify them, if necessary, to support the
alliances and make them successful.
Logistic Alliance
· Pizza Hut restaurants do not stock more than three days of their inventory.
· The standard for distribution centres or warehouses is a stringent 14 days,

to minimise the costs and optimise quality control. This involves round-the-
clock monitoring of pick-ups and truck movements.
· Most of the items are perishable and the company’s standards cover the
entire delivery schedules.
· For in-city delivery, the truck is monitored from the time it leaves the
distribution centre till it reaches the restaurant. Not just that – the time taken
in offloading is noted too.
· The restaurant gives a strict 30 minutes window in which time the delivery
is to be completed.
1.5.4 Considering Strategy Variations
There can be a number of variations of the generic strategy alternatives. For instance, if the
strategy is to expand, then the alternatives are internal expansion or external expansion.
Internal expansion can be achieved through any of the following approaches:

· Penetrate existing markets
· Add new markets
· Add new products, and so on
Similarly, external expansion can be achieved through mergers or acquisitions. In most IT

Companies, subsidiaries are created to develop at the earliest upstream capabilities in the IT
value-chain. Once these subsidiaries gain the required capabilities in terms of consultancy,
system integration, product design and application, development and maintenance, and others,
they are merged into a major player. Merger has thus been one of the strategies to benchmark the
company in terms of performance globally.
If the strategy is to attain stability, then the alternatives could be internal stability or external
stability. In some cases, both may be required. External stability can be attained by maintaining
market share.
Internal stability of a firm can be achieved through:
a) Seeking production and marketing efficiencies, and
b) Redefining the existing organisational structure.
Strategy variations can attain the following forms:
· Internal or external
· Related or unrelated
· Horizontal or vertical
· Active or passive
Each of these variations has different strategic alternatives considering the major goals of the
organisation. For instance, internal strategy variation may be expansion, stability, retrenchment,
or combinations. If expansion is decided upon, the alternatives could be to penetrate existing
markets, add new products, or add new markets, and so on. Strategy variation is a global
phenomenon. When the firm finds that it is not possible to fill a gap in the market with the
existing strategy, it considers a change in the focus of the strategy. An example would be how
multinationals Indianised their global strategies to woo their customers in Indian markets.
Possible Strategy variations
Expansion Stability Retrenchment Combination

Internal Penetrate Seek Reduce costs; Sub-
existing markets; production reduce assets; contracting
add new and drop products;
products; add marketing drop markets;
new products efficiencies; drop functions
reorganise
External Acquisitions; Maintain Disinvest SBUs; Cross-
mergers market liquidations; licensing,
share bankruptcies joint ventures
Related Seek synergy Improve Eliminate
from new products related products,
products, markets or
markets or functions
functions
Unrelated Conglomerate Eliminate
diversification in unrelated
products, products,
markets or markets or
functions functions
Horizontal Add Eliminate
complementary complementary
products or products or
markets markets
Vertical Add new Reduce
functions functions
Active Innovative Grow to sell
entrepreneurial out
moves
Passive Imitator in R&D Reactive
products defence of
position
Table 1.2: Possible strategy variations
Innovative practices
· HDFC introduced a high degree of innovation in its activities relating to

customer friendliness, technology adaptation (by computerising operations),
slashing loan processing time and so on.
· British Airways provided creative interactive video services on the new

Boeing 777s for passengers to report to Customer Relations Depts. In-flight,
order duty-free goods, get the latest news on business, fashion, etc.
Changing trends in strategies: Global setting to Indian setting
· A keen insight into the strategies adopted by multi-national companies

dealing in products such as automobiles, beverages, leather products, and so
on, reveals the following shift from global strategies to Indianised strategies:
· Indianising positioning of products, i.e., positioning and advertising

products in the Indian context, instead of maintaining a uniform brand image
all over the world.
· Advertisements and brands are designed to appeal to Indian aspirations.
· For instance LG named one of its TVs as Sampoorna.
· Developing exclusive products rather than selling the same products

globally. For instance, a made-for-India refrigerator is designed to serve just
three basic purposes: chill drinking water, keep cooked food fresh and
withstand long power cuts ( ELECTROLUX )
· Coca-cola has redesigned its distributor-crates and trucks to suit Indian

roads.
· Widening appeal to all segments of customers rather than focussing on

select segments of the market ( REEBOK ).
· Operating through multi-brand stores rather than own distribution system.
· Entering market through small cars rather than with high-priced cars
(HYUNDAI ).
· Undertaking manufacturing with locally made products rather than with

imports ( HYUNDAI ).
· Using local film and sports personalities for advertising of premium brands
( OMEGA )
· Offering free hand on investments to local managers, considering market

size, rather than controlling country budgets ( PEPSI ).
· Agreeing to enter the market at any cost, sacrificing own terms, with scale
of operations remaining a major attraction ( PEPSI ).
· Operating through local managers through more decentralisation, rather

than deputing managers from the head office ( PEPSI ).
· Appointing an Indian CEO in place of an expatriate ( CARRIER AIRCON )
1.5.5 Selection of the Best Alternative

The best alternative is one that can improve overall performance. Its selection depends upon:
· Particular configuration of objectives
· Environmental threat and opportunity profile
· Strategic advantage profile
· The generic strategy itself
If a company has a higher growth as its objective, it is better to expand from a base of proven or
time-tested competence (e.g. cost leadership or market leadership) and organise the departments
to provide new opportunities while taking moderate risks.
Every company must tailor an appropriate strategy for achieving its goals. The most generic
types to initiate strategic thinking, as suggested by Michael Porter, are ( a ) Overall cost
leadership, ( b ) Differentiation and ( c ) Focus.
a) Overall cost leadership – The company is said to achieve OCL when it offers its products or
services at the lowest price ( due to its lowest cost ) among competitors, thus maintaining the
largest market share. Companies which pursue this strategy have to sharply focus on cost-
effective strategies in all the areas pertaining to engineering, purchases, manufacturing and
physical distribution. Any breakdown could cost the company very badly. A standby
arrangement is vital. Mergers and take-overs reflect the common route for companies to optimise
their resources and costs. HLL emerged stronger with the acquisition of Brook Bond.
b) Differentiation – The company should be capable of demonstrating a superior performance

through its products and services. This should benefit a large number of customers in saving their
resources in terms of time and money. Hero Honda could design its motorcycle differently to
offer higher mileage. This resulted in savings to the user. The strategy is to differentiate the
products and services sharply through quality in a market dumped with stocks. A photocopying
company can demonstrate its excellence by minimising defects per thousand prints. Constant
adaptation to changing technology and large-scale initiatives in R&D would provide a shot in the
arm for the company. INFOSYS and WIPRO are some examples which have made a niche in the
software industry through differentiation.
c) Focus – The company may concentrate on a narrow market segment and obtain full market
information about it. It may pursue either overall cost leadership or differentiation strategy
within that target segment. Such companies which pursue the same strategy to the same target
market, are called a strategic group of companies. If they relentlessly pursue their strategies, they
are bound to succeed, leading to benchmarking of strategies. The danger here is that others can
copy in the name of benchmarks. This can be avoided by performing similar activities in an
innovative and swift way, which the competitors cannot catch up with. There are certain issues
which cannot be copied in the short run.
1.5.6 Strategic Choice

It involves the decision to select from among alternatives, the best strategy which effectively
contributes to the business objectives. The spade work before making a strategic choice consists
of:
· Identifying the few viable alternative courses of action.
· Considering the parameters for selection of best alternative.
· Evaluating each alternative on its own merits and in relation to other alternatives.
· Making the final choice.
· Keeping the next best alternative as stand by ( to take care of contingencies )
The following are the questions in terms of which environmental and internal conditions are
analysed:
· What are the main business objectives?
· Does the selected strategy contribute to these objectives?
· What is the business definition – is it product-based, market-based or function-based?
· Will it be achieved in the future?
These questions help us to examine the performance gap between the expected and the ideal
outcomes in relation to the alternatives under consideration. If the gap is narrow or negligible,
the stability strategy is the best strategy, since it focuses on “ doing in the best way what we can
do “. Most international airlines lease out operations such as reservation, maintenance, ground
halting work, and others to professional agencies to improve their overall performance in general
and increase the pace of its own activities in particular. The focus will be on better
implementation initiating certain pace changes internally. If the gap is large and significant, the
probable alternatives are either to expand or to withdraw from unrelated areas. Mergers,
acquisitions, disinvestments are some of the measures that initiate changes in the pace of growth.
The decision-maker considers different choices closest to the present strategy. In the process, he
identifies the most preferred strategy. Some of the parameters that help him in this process are:
· Is it politically acceptable or not?
· What is the degree of risk involved?
· To what extent is the enterprise dependent on external factors?
Such an evaluation leads to the choice of an appropriate strategy, and at this point, it appears to
the decision-maker that the gap between the expected and the ideal outcomes is closed. Relying
excessively on one corporate plan with one or two variations, more often, may not be adequate.
Hence, it is desirable to keep a contingency plan ready as standby.
Strategy formulation and implementation
NOKIA studies closely each of the subsets of its customer segments. It

carefully assesses what appeals to each of them most. After identifying their
purchasing power, it chooses the appropriate technology and then formulates
the strategy.
When MOTOROLA could not take off with seven varieties of cell phones,
NOKIA struck gold with just two plain models. The secret of success was
that the products were changed or adapted to local conditions. In other
words, the products and services were more Indianised to ensure survival in
the Indian markets. NOKIA could successfully formulate its strategy around
its different customer segments, varying appeals and affordable technology.
TAPARIA, CEO of Rajashree Cements followed a value enhancement

strategy to capture the market dominated by 43 grade, where ACC and L&T
were market leaders. He noticed that nobody thought of the market-
positioning slot for superior grade 53, which, despite high price, leads to
overall savings due to less consumption. He expected that a shift from 43 to
53 grade would require convincing, for which channel support and its
participation in communication were essential.
To popularise grade 53, Taparia launched the Shoppe concept by associating

with ” weak and small channel “ members. The Shoppe concept empowered
them with the services of a civil/structural engineer at Rajashree’s cost for
any type of consultation with the customers visiting the shoppe.
The neat and clean environment of the cement outlets attracted the customers
who were otherwise used to the dirty and dusty environment of cement
outlets. The customers were assured of the availability and reliability of the
quality products. The customer could avail the services of a civil engineer
and also sit in an air-conditioned chamber of the Shoppe and watch a video
film on grade 53.
The quality of documentation (invoices, challans) was improved to create

confidence in the customer. The success of the Shoppe concept was evident
from a rise in demand from 5000 tonnes per month to 45,000 TpM in Pune
alone. Even established giants like ACC and LandT had to follow his
footsteps by introducing grade 53 and also developing their own exclusive
outlets like “ACC ki duniya” and “LandT station”.
Since strategic choice is a managerial ( business ) decision, care should be taken that it is not
affected by bias, intuition or politics. These constraints, if allowed to prevail, will limit the
choice. Progressive companies hold formal meetings involving all or most of their managers at
the top level while choosing strategy and to record the criteria used. More often, a company may
not have total freedom in choosing the strategy as it is dependent for its survival on one or more
of the following: owners, competitors, suppliers, the Government and the community. The
strategic choice is also affected by relative volatility of the market sector wherein the firm
chooses to operate. If the sector is more volatile, it needs a flexible and strategic response to be
more effective.
Strategic choice and its effectiveness is often restricted by various factors such as the strategies
earlier followed, the attitudes of the managers to risk
(most of the managers are averse to risk) and lobby for power (some managers wish to be close
to the boss to garner influence) in the organisation, internal and external alliances, and so on.
However, overall commitment to the chosen strategy is extremely important.
1.5.7 Allocation of Resources and Development of Organisational Structure
The process of strategy implementation calls for an integrated set of choices and activities. These
include allocating resources, organising, assigning appropriate authority to the key managers,
setting policies and developing procedures.
It is necessary to establish an operative system to reinforce, control and evaluate a strategy.
A good strategy with effective implementation has a higher probability of success. There source
allocation decisions, such as, which department is sanctioned how much of money and resources,
in the name of the budget, and so on – set the operative strategy of the firm.
Budgets are formulated after a series of negotiations across different levels in the organisation.
Budgets may be of different types: corporate budgets, capital budgets, departmental budgets,
sales budgets, expense budgets, and others.
An effective co-ordination and efficient division of labour requires an appropriate organisational

structure. The best structure is one, which fits into the organisational environment. Also its
internal characteristics should give rise to an effective strategy.
Appropriate changes in the organisation structure may be initiated to ensure strategic

implementation of the proposed strategy. Effective strategic management practices suggest that
organisation structure should also change if the strategy changes or if the organisation
experiences any bottlenecks in this regard
1. After the nature of the business of the firm is defined, the next task is to focus on
––––––––––––––––– .
2. –––––––––– can be adopted in the case of highly competitive and volatile industries.
3. –––––––––– is a better choice when the firm is doing well, the environment is relatively less
volatile, and the product / service has reached the stability or maturity stage of the life cycle.
4. –––––––––––– is the obvious choice when the firm is not doing well in terms of sales and
revenue and finds greater returns elsewhere, or the product / service is in the finishing stage of
the product life cycle.
5. In case of recession, ––––––––––––––– is the most preferred strategy.
1.6 Formulation of Policies, Plans, Programmes and Administration
The resources allocated are said to be well-utilised only when they are well-monitored. For this
purpose, it is essential:
· To develop policies and plans.
· To assign and reassign leaders the tasks and decisions to support the chosen strategy.
· To provide a conducive environment in the organisation through proper administration to

achieve the given objectives directly and indirectly.
The implementation of plans and policies is designed in accordance with the strategy chosen.
The firm creates plans and policies to guide managerial performance, and these make the chosen
strategies work. The corporate success lies ultimately in the ability to convert corporate strategy
into plans and policies that are compatible and workable.
The implementation of the strategy becomes easy when the organization:
· Plans for career development of its personnel at all levels.
· Applies organisational development concepts in its normal functioning.
(Organisational development aims at enhancing organisational effectiveness by applying

diagnostic and problem solving skills through behavioral approach )
· Ensures that the strategist is capable, experienced and versatile enough to match the strategy
demands.
It is always prudent to develop minimal plans, policies and programmes in all the functional
areas such as marketing, production, R&D, Finance, HRD and others. If the company wants to
retain its staff, the following programmes may be helpful:
· Focus on periodic appraisal through an objective and participative performance appraisal

system.
· Measure employee satisfaction levels regularly and respond promptly by launching corrective
measures to any signs of employee dissatisfaction or frustration.
· Institutionalise the career counseling function and fill the vacancies that arise by promoting the
qualified candidates.
· Do not depend on one single employee or group at any level in the organisation. Create
multiple responsibilities on the well-chosen group of managers at different levels.
· Ensure that the functional heads and the CEO are involved in this process.
· Recognise those variations, which are bound to exist across organisational levels and functions,
and formulate specific retention strategies to suit them.
Detailed support programmes must be developed to support the given strategies.
1.7 Implementation: Evaluation and Control of Strategy
Evaluation is the last phase of the strategic management process. It is at this stage that the
success of the programmes can be assessed. There should be a built-in mechanism to examine
the deviations and initiate corrections as and when required. This assures that the chosen
strategies will be implemented properly.
The control process requires identifying a set of parameters for evaluating and measuring the
performance at the individual level and also at the department level. The performance has to be
evaluated to identify deviations and take corrective action. The control and evaluation take place
not only at the SBU level but also at the corporate level. This process may involve the
participation of all the executives at all levels. Corrective actions are required wherever the
evaluation reveals deviations between the actual performance and the projected one, over a given
period of time. Timely measurement of performance and feedback determines the effectiveness
of the implementation of the strategy.
The parameters should be, as a part of the checklist, evolved to check the nature of objectives,
environmental assumptions, internal organisation, resources, attitudes to risk, timing of decisions
and actions, feasibility, and organisational commitment. Managers may consider, in the order of
priority, the changes in parameters, implementation, strategy, and finally, the objectives
themselves, if performance levels are lower than expected.
The evaluation system, thus, provides a feedback to the entire strategic management process.
Such a follow up calls for good objectives and performance standards, effective rewards, and
accurate and complete feedback. Managers should have total access to every type of information
they look for so that they can focus on objective-oriented performance. Thus MIS and MBO can
be useful tools for managers. But as with any system, effective application requires hard work on
the part of staff at different levels.
A strategy can well be implemented if staff is efficient, have a shared vision, and a developed
work culture and value system. It is the management’s responsibility to ensure a conducive
environment that fosters the effective implementation of strategies.
For want of committed workforce, most organisations fail at this stage.
1. In ––––––––– two or more companies may come together to promote their products and
services.
2. In ––––––––– the focus is on developing or extending logistics support.
3. External expansion can be achieved through –––––––––––––––– .
4. External stability can be attained by maintaining ––––––––––––– .
5. The most generic types to initiate strategic thinking, as suggested

by Michael Porter, are Overall cost leadership, Differentiation and
––––––––––––.
6. Organisational development aims at enhancing organisational effectiveness by applying

diagnostic and problem solving skills through
–––––––––––––––– .
7. –––––––––––––––– is the last phase of the strategic management process.
1.8 Summary
· A strategy is an operational tool to achieve the goals, and thus, the corporate mission.
· To win over in a given complex situation, the organisations, even trans-nationals adopt
strategies.
· The recently initiated moves such as globalisation, privatisation and liberalisation are strategies
to attain a globally competitive economy.
· There are three alternatives to improve the sales performance of a business unit, to fill the gap
between actual sales and targeted sales:
- Intensive growth
- Integrative growth
- Diversification growth
· Strategy formulation and implementation is the crux of the strategic
management process. Formulation, together with its implementation, constitutes
an integral part of the management activity.
· Companies can develop alliances with the members of the strategic group and perform more
effectively. These alliances may take any of the following forms:
- Product and/or service alliance
- Promotional alliance
- Logistic alliance
- Pricing collaborations
· Strategic Choice involves the decision to select from among alternatives, the best strategy
which effectively contributes to the business objectives.
· The process of strategy implementation calls for an integrated set of choices and activities.
These include allocating resources, organising, assigning appropriate authority to the key
managers, setting policies and developing procedures.
· Evaluation is the last phase of the strategic management process. It is at this stage that the
success of the programmes can be assessed.
1. What is a ‘strategy’? Explain the purpose of a strategy.
2. Explain the three alternatives to improve the sales performance of a business unit.
3. List the stages involved in strategy formulation and implementation.
4. Explain the four strategy alternatives available to a firm.
5. Explain different forms of strategic alliances.
6. Examine the role of evaluation in the strategic management process.
SAQs I
1. True
2. False
3. True
4. True
5. False
6. False
SAQs II
1. The type of strategic alternative
2. Expansion strategy
3. Stability strategy
4. Retrenchment strategy
5. Retrenchment
SAQs III
1. Promotional alliance
2. Logistic alliance
3. Mergers or acquisitions
4. Market share
5. Focus
6. Behavioural approach
7. Evaluation
Answers to TQs:
1. Refer to 1.2
2. Refer to 1.4
3. Refer to 1.5
4. Refer to 1.5
5. Refer to 1.5
6. Refer to 1.7
Copyright © 2009 SMU
Powered by Sikkim Manipal University
MB0036-Unit-02-Planning a New Business

Venture: Tackling and Planning Business
Priorities
Unit 2 Planning a New Business Venture:
Tackling and Planning Business Priorities
Structure:
2.1 Introduction
Objectives
2.2 What is a business plan?
2.3 Creating One’s Own Business Plan
2.3.1 Executive Summary
2.3.2 Company and Product Description
2.3.3 Market Description
2.3.4 Equipment and Materials
2.3.5 Operations
2.3.6 Management and Ownership

2.3.7 Financial Information and Start-Up Timeline
2.3.8 Risks and Their Mitigation
2.4 Next Steps: Steps for Developing Sales Projections
2.4.1 The Business Priorities
2.4.2 Approach
2.4.3 Implementation
2.4.4 Developing the Recording network
2.4.5 Co-ordination and Promotion
2.5 The Work Programme
2.5.1 Developing the network
2.5.2 Local Data Sources
2.6 Summary
2.1 Introduction
A business plan is a detailed description of how an organization intends to produce, market and
sell a product or service. Whether the business is housing, commercial or some other enterprise,
a good business plan describes to others and to your own board of directors, management and
staff the details of how you intend to operate and expand your business.
A solid business plan describes who you are, what you do, how you will do it, your capacity to
do it, what financial resources are necessary to carry it out, and how you intend to secure those
resources. A well-written plan will serve as a guide through the start-up phase of the business. It
can also establish benchmarks to measure the performance of your business venture in
comparison with expectations and industry standards. And most important, a good business plan
will help to attract necessary financing by demonstrating the feasibility of your venture and the
level of thought and professionalism you bring to the task.
Objectives:
· Explain what a business plan is.
· Give examples of goals one may seek to achieve through the creation of a new business
venture.
· Explain various sections of a business plan.
· Explain the steps for developing sales projections.
2.2 What is a Business Plan?
A good business plan will help attract necessary financing by demonstrating the feasibility of
your venture and the level of thought and professionalism you bring to the task.
The first step in planning a new business venture is to establish goals that you seek to achieve
with the business. You can establish these goals in a number of ways, but an inclusive and
ordered process like an organizational strategic planning session or a comprehensive
neighborhood planning process may be best. The board of directors of your organization should
review and approve the goals, because these goals will influence the direction of the organization
and require the allocation of valuable staff and financial resources. Your goals will serve as a
filter to screen a wide range of possible business opportunities. If you fail to establish clear goals
early in the process, your organization may spend substantial time and resources pursuing
potential business ventures that may be financially viable but do not serve the mission of your
organization in other important ways. A liquor store on the corner may be a clear money-maker;
however, it may not be the retail to assist your community desires.
The following are examples of goals you may seek to achieve through the creation of a new
business venture:
Revenue Generation – Your organization may hope to create a business that will generate
sufficient net income or profit to finance other programs, activities or services provided by your
organization.
Employment Creation – A new business venture may create job opportunities for community
residents or the constituency served by your organization.
Neighborhood Development Strategy – A new business venture might serve as an anchor to a

deteriorating neighborhood commercial area, attract additional businesses to the area and fill a
gap in existing retail services. You may need to find a use for a vacant commercial property that
blights a strategic area of your neighborhood. Or your business might focus on the rehabilitation
of dilapidated single family homes in the community.
Whenever possible, goals should have quantifiable outcomes such as “to generate a minimum of
$50,000 of net income or profit within three years”; “to employ at least 15 community residents
within two years in new permanent jobs at a livable wage”; “to occupy and support a minimum
of 10,000 square feet of neighborhood commercial space”; or “to rehabilitate 50 single-family
houses over three years.” Clearly defined and quantifiable goals provide objective measurements
to screen potential business opportunities. They also establish clear criteria to evaluate the
success of the business venture.
Establish Goals
Once you have identified goals for a new business venture, the next step in the business planning
process is to identify and select the right business. Many organizations may find themselves
starting at this point in the process. Business opportunities may have been dropped at your
doorstep. Perhaps an entrepreneurial member of the board of directors or a community resident
has approached your organization with an idea for a new business, or a neighborhood business
has closed or moved out of the area, taking jobs and leaving a vacant facility behind. Even if this
is the case, we recommend that you take a step back and set goals. Failing to do so could result in
a waste of valuable time and resources pursuing an idea that may seem feasible, but fails to
accomplish important goals or to meet the mission of your organization.
Depending on the goals you have set, you might take several approaches to identify potential
business opportunities.
Local Market Study: Whether your goal is to revitalize or fill space in a neighborhood
commercial district or to rehabilitate vacant housing stock, you should conduct a local market
study. A good market study will measure the level of existing goods and services provided in the
area, and assess the capacity of the area to support existing and additional commercial or home-
ownership activity. This assessment is based on the shopping and traffic patterns of the area and
the demographic and socio-economic characteristics of the community. A bad or insufficient
market study could encourage your organization to pursue a business destined to fail, with
potentially disastrous results for the organization as a whole. Through a market study you will be
able to identify gaps in existing products and services and unsatisfied demand for additional or
expanded products and services. If your organization does not have staff capacity to conduct a
market study, you might hire a consultant or solicit the assistance of business administration
students from a local college or university. Conducting a solid and thorough market study up
front will provide essential information for your final business plan.
Analysis of Local and Regional Industry Trends: Another method of investigating potential
business opportunities is to research local and regional business and industry trends. You may be
able to identify which business or industrial sectors are growing or declining in your city,
metropolitan area or region. The regional or metropolitan area planning agency for your area is a
good source of data on industry trends.
Internal Capacity: The board, staff or membership of your organization may possess
knowledge and skills in a particular business sector or industry. Your organization may wish to
draw upon this internal expertise in selecting potential business opportunities.
Internal Purchasing Needs / Collaborative Procurement: Perhaps, your organization
frequently purchases a particular service or product. If nearby affiliate organizations also use this
service or product, this may present a business opportunity. Examples of such products or
services include printing or copying services, travel services, transportation services, property
management services, office supplies, catering services, and other products. You will still need
to conduct a complete market study to determine the demand for this product or service beyond
your internal needs or the needs of your partners or affiliates.
Identify Business Opportunities
Buying an Existing Business: Rather than starting a new business, you may wish to consider
purchasing an existing business. Perhaps a local retail or small light manufacturing business that
has been an anchor to the local retail area or a much-needed source of jobs in the neighborhood
is for sale. Its closure would mean the loss of jobs and services for your neighborhood. Your
organization might consider purchasing and taking over the enterprise instead of starting a new
business. If you decide to pursue this option, you still need to go through the steps of creating a
business plan. However, before moving ahead, these are just a few important areas to research in
assessing the business you plan to purchase:
Be sure to conduct a thorough review of the financial statements for the past three to five years to
determine the current fiscal status and recent financial trends, the validity of the accounts
receivable and the status of the accounts payable. Are all the required licenses and permits in
place and can they be transferred to a new owner?
Also look at the quality of key employees who, because of their expertise, may need to remain
with the business.
You will also need to assess the customer or client base and determine whether its members will
remain loyal to the business after it changes hands.
Another area to evaluate is the perception or image of the business. Inspect the facilities and talk
to suppliers, customers and other businesses in the area to learn more about the reputation of the
business.
At this early stage of your planning process, be sure to consult an attorney experienced in
corporation law. As a non-profit corporation, engaging in income-generating activities not
related to your mission may affect your tax-exempt status. You may also wish to protect your
organization from any liability issues connected with the proposed business activity. After you
have decided on a particular business activity, have a qualified attorney advise you on the proper
corporate structure for your new venture. In addition to qualified legal counsel, seek the expertise
of an experienced professional in that particular industry. He or she will bring valuable
knowledge and insights regarding the industry that will prove extremely useful during the
business planning process.
Advisory
You have decided on a business opportunity that meets the goals of your organization. Now you
are ready to test the feasibility of the venture and to present your business concept to the world.
A solid business plan will clearly explain the business concept, describe the market for your
product or service, attract investment, and establish operating goals and guidelines.
The first step in writing your business plan is to identify your target audience. Will this be an
internal plan the board will use to assess the feasibility and appropriateness of the business? Or
will this plan be distributed to a larger external audience such as funding sources, commercial
lenders or the community to gain financial backing and political support for the proposed
venture? The content and emphasis of the plan will shift according to the audience.
You will also need to decide who will conduct the necessary research and write the plan. The
following table lists the advantages and disadvantages of several options for getting the work
done. You might consider a combination of the options.
2.3 Creating One’s Own Business Plan
It is also important to establish a timeline for completing the plan. A business plan can be
completed by one staff member working full time in as little as a week, although a thorough
market analysis will add several days at least. A committee will probably need much more time.
Combinations of staff, volunteers, consultants and a board committee may lengthen or shorten
the process depending on skill level, available time, experience with planning and research, and
the group’s facilitation needs. Now that you have decided who will put together your business
plan and have set a timeline for its completion, you are ready to begin assembling the elements
of the plan. Your business plan should contain the following sections:
· Executive summary
· Company and product description
· Market description
· Operations
· Management and ownership
· Financial information and timeline
· Risks and their mitigation
A solid business plan will clearly explain the business concept, describe the market for your
2.3.1 Executive Summary
In this section of your business plan, provide a description of your company, the industry you
will be competing in, and the product or service you plan to offer.
Sell your concept! The executive summary may be the first and only section of your business
plan that most of your audience will read. Tell the audience why the business is a great idea.
Some readers will look at this section to determine whether or not they want to learn more about
a business. Other readers will look to the executive summary as a sample of the quality and
professionalism of the overall plan. The executive summary should be no more than one to three
pages long and should answer the following questions:
· Who are you? (describe your organization)
· What are you planning? (describe the service or product)
· Why are you planning it? (discuss the demand and market for the service or product)
· How will you operate your business?
· When will you be in operation? (overview of timeline)
· What is your expected net profit? (discuss your projected sales and costs)
Although the executive summary is the first part of your business plan, you should write it after
you have written the other sections of the plan in order to include the most important points of
each section.
2.3.2 Company and Product Description
In describing your company be sure to include what type of business you are planning
(homeownership development, wholesale, retail, manufacturing
or service) and the legal structure (corporation or partnership). You should discuss why you are
creating this new venture, referencing the goals you set at the beginning of the business planning
process. Also include a description of your non-profit organization, the role it has played in
developing this new venture and the on-going role, if any, it will play in operations. Give the
reader a brief overview of the industry, describing historic and current growth trends.
Whenever possible, provide documentation or references supporting your trend analysis such as
articles from business-oriented newspapers and magazines, research journals or other
publications. Include these references in the attachments of your business plan.
Product or Service
After describing your company and its industry context, describe the products or services you
plan to provide. Focus on what distinguishes your product or service from the rest of the market.
Discuss what will attract consumers to your product or service. Provide as much detail as
necessary to inform the reader about the particular characteristics of your product that distinguish
it from its competition – many nonprofits, for example, expect to produce higher-quality housing
than otherwise exists in the area. Mention any distinctive elements in the manufacture of the
product, such as being “hand-made by a particular people from a specific area.” If you are
providing a service, explain the steps you will take to provide a service that is better than your
competition.
Price
Provide a realistic estimate of the price for your product or service, and discuss the rationale
behind that price. An unrealistic price estimate may undermine the credibility of your plan and
raise concerns that your product or service may not be of sufficient quality or that you will not be
able to maintain profitability in the long run. Describe where this price positions you in the
marketplace: at the high end, low end or in the middle of the existing range of prices for a similar
product or service.
In other sections of the plan you will discuss the target market for your product or service and
also provide additional details on how the price of your product fits into the overall financial
projections for the enterprise.
Place
Describe the location where you will produce or distribute your product or provide your service.
Discuss the advantages of the location, such as its accessibility, surrounding amenities and other
characteristics that may enhance your business.
Depending on your anticipated customer base, accessibility to your location via public
transportation could affect the marketability of your product or service.
Customers
In this section of your business plan, you will describe the customer base or market for your
product or service. In addition to providing a detailed description of your customer base, you will
also need to describe your competition (other local developers or nearby businesses providing a
similar service to your potential customer base).
Who will purchase your product or use your service? How large is your customer base? Define
the characteristics of your target market in terms of its:
· Demographics – Measures of age, gender, race, religion and family size.
· Geography – Measures based on location.
· Socioeconomic Status – Measures based on individual or household annual income.
Provide statistical data to describe the size of your target market. Sources for this information
may include recent data from the Bureau of Statistics, state or local census data, or information
gathered by your organization, such as membership lists, neighborhood surveys and group or
individual interviews. Be sure to list the sources for your data, as this will further validate your
market assumptions. Include any relevant information regarding the growth potential for your
target market if your business is expected to rely on growth. Cite any research forecasting
population increases in your target market or other trends and factors that may increase the
demand for your product or service.
Competition
Discuss how people identified in your target market currently meet their need for your product or
service. What other businesses exist in your area that are similar to your proposed venture? For
example, for a housing business, what are the local markets for purchase and rental? How much
are people currently paying for similar products or services? Briefly describe what differentiates
your proposed venture from these existing businesses and discuss why you are entering this
market.
Sales Projections
Present an estimate of how many people you expect will purchase your product or service. Your
estimate should be based on the size of your market, the characteristics of your customers and
the share of the market you will gain over your competition. Project how many units you will sell
at a specified price over several years. The initial year should be broken down in monthly or
quarterly increments. Account for initial presentation and market penetration of your product and
any seasonal variations in sales, if appropriate.
2.3.3 Market Description
In this section, you will describe how you plan to operate the business. You will present
information on how you plan to create your product or provide your service, describe the staff
required to operate and manage the business, discuss the equipment and materials necessary, and
define the site or facility requirements, if any. A key component of the operation of your
business will be your sales and marketing strategy, so you must describe how you will inform
your target market about your product or service and how you will convince customers to
purchase it.
Production Description
Describe the steps for creating your product, from the raw material or initial stage to the finished
product, packaged and ready for distribution and sale. If you plan to provide a service, describe
the process of service deliver (such as the initial interview, for instance, if you are offering
consulting services), assessment, research and design, and final presentation. Provide a
description of any sub-contractors or external services you plan to use in the production process.
The reader of the plan may be unfamiliar with the industry, so avoid using industry jargon to
describe the production process.
Staffing
Describe the staff required to operate your business: discuss how many people you will need;
describe the tasks they will carry out; and the skills they will need. Prepare a chart outlining the
salaries and benefits you will provide to your workforce. Provide information on how you will
recruit staff and provide initial and ongoing training of employees.
2.3.4 Equipment and Materials
To manufacture your product or provide your service, what type of equipment will you need?
Describe any machinery and vehicles necessary in the production, packaging and distribution of
your product, including any office equipment such as computers, copiers, furniture, fixtures and
telephone systems. Also discuss the types of materials you will use in the production process and
describe the source and cost of those materials.
Facility
Describe the type of facility in which you will house your business. Indicate the amount of
building space you will need for production and administration. Also discuss any building
features required for the production process such as high ceilings, specialized ventilation and
heating systems, sanitized laboratory space or vehicular accessibility. If you have already
identified a location and a facility that meets your requirements, describe its features. Even if you
are planning to provide a service instead of manufacturing a product, you need to demonstrate
that you will have adequate space for administrative functions and other activities related to the
service you plan to provide .
Market Description
Describe your strategy for locating your target market, informing or educating customers about
your product or service and convincing them to purchase it. Provide details on the methods you
will use to advertise your product, such as print media (advertisements in newspapers, magazines
or trade journals), electronic media (television, radio and the Internet), direct mail, telemarketing,
individual sales agents or representatives, or other approaches. Discuss the product’s or service’s
features you plan to emphasize to gain the attention of your target market. Also detail how you
will distribute and sell your product or service. Will you use sales agents or existing retail
outlets, or directly distribute your product through a delivery service such as United Parcel
Service, Federal Express or independent trucking company?
2.3.5 Operations
In this section of your business plan, describe the senior managers responsible for overseeing the
start-up and operation of your business, their background and their responsibilities in the
business. Be sure to highlight your management team’s experience in managing the production,
marketing and administration of similar businesses or within the selected industry and attach the
resumes of each member to the plan. Be sure to provide a complete job description of any
vacancies in your management team. Describe the responsibilities, the skills, the background
required and the steps you plan to take to fill that key position.
Ownership
What is its relationship to your existing organization? Who is on the board of directors / board of
advisors of the new business and what are their backgrounds and areas of expertise? Potential
investors or lenders will be interested in the ownership stake of the board of directors and also in
what portion of the company’s equity is available. Success is often due to one’s contacts, so fully
describe your business relationships with attorneys, accountants and advertising or public
relations agencies, and any industry-specific services such as suppliers and distributors.
2.3.6 Management and Ownership
In this section you will describe the financial feasibility of your planned venture and provide
several financial reports and statements to document why your business will be a viable
enterprise and a sound investment. At a minimum, you should provide a brief descriptive
narrative for each of the following financial statements and include a copy in the attachments to
your plan:
· Start-up budget
· Cash flow projection
· Income statement
· Balance sheet
In preparing these statements, you may want to seek the advice of a certified public accountant
(CPA).
Start-up Budget
Describe the initial expenses you will incur to get your business up and running. Some items you
might include in your start-up budget research and product design and development expenses,
legal incorporation and licensing expenses, facility purchase or rental, equipment and vehicle
purchase or rental, and initial material or supply purchase. You can use Worksheet B as a
sample format for preparing your start-up budget.
Cash Flow Projection
This statement presents a month-to-month schedule of the estimated cash inflows and outflows
of your business for the first year. This schedule should indicate how much money your business
will have or need and when you will need it. You should describe your sources of income and
capital, detailing your projected sales revenue and indicating your own or investor equity
contribution, lenders, investors and other sources of capital. Itemize your projected expenses,
distinguishing between the cost of goods sold (materials, supplies, production labor), overhead
expenses (rent, utilities, insurance, maintenance, interest, insurance, administrative costs and
salaries, legal and accounting services, marketing, taxes, fees and other ongoing operating
expenses) and capital expenditures (land and buildings, equipment, furniture, vehicles, and
building repair or renovation expenses). In preparing this statement, account for a gradual
increase in sales from initial product introduction and any expected seasonal fluctuations in
revenue projections.
Income Statement
Prepare a multiyear (three- to five – year) statement of projected revenue, expenses, capital
expenditures and cost of goods sold. If you make assumptions about the growth of your business,
provide supporting documentation such as growth patterns of similar companies or studies that
forecast an industry-wide growth rate. This statement should indicate to the reader the potential
of your business to generate cash and its profitability over time. For an existing business, also
submit an income statement for at least three prior consecutive years. Lenders may look at this
statement to determine whether your business can support the additional debt you are requesting.
Balance Sheet
A start-up business probably will not have any assets or liabilities at the time you are drafting the
business plan. Provide a copy of the balance sheet of the business’s sponsoring organization or
individual. Describe in your narrative any assets that will be allocated to the start-up of the
business.
2.3.7 Financial Information and Start up Timeline
Capital Requirements
Describe the amount and type of financing you are seeking for your business. Are you looking
for debt from a lender or equity from an investor? Refer to your start up budget and cash flow
statement presented earlier. Discuss how and when you will draw on these funds and how they
will affect the bottom line. Also describe any commitments or investments that you may have
already secured.
If you are seeking investors, such as venture capitalists, describe what they will receive in return
for their capital. What is the repayment period and the expected return on investment? Also
discuss the nature of their ownership share and how it may change with future investments.
Equity investors are looking for rates of return higher than rates offered by banks or other
business lenders. The level of risk in your business and industry will help to determine the actual
market rate, as will the availability of equity dollars. Check with other businesses (although not
direct competitors) to see what return on investment their investors demanded. Be prepared to
negotiate. And make sure you research the investment market carefully; several socially minded
investment pools exist and more are in development. or lenders, describe the type of financing
you are seeking:
· Seed Capital – Short-term financing to cover start-up costs.
· Fixed Asset Financing – Longer-term financing for property, building improvements,

equipment or vehicles. The asset being purchased is usually pledged as security for the loan.
· Working Capital – Short-term financing to cover operating expenses and to bridge gaps in
cash flow.
Initial Start-up Timeline
Provide a timeline of tasks and events necessary to get your business operational. Be sure to
describe the current stage you are in and what steps you have taken to date. Include deadlines for
task completion. Set realistic deadlines according to your capacity to complete these tasks. The
following is a list of some of the steps you may wish to include:
· Filing legal incorporation documents
· Identifying and securing suitable space
· Designing and developing the product
· Obtaining required licenses or permits
· Securing necessary financing
· Leasing or purchasing equipment
· Hiring key staff
· Hiring and training of production or support staff
· Purchasing materials and production supplies

· Beginning marketing activities
· Opening
Although it is impossible to know exactly what will go wrong in starting and running your
business, thinking about different challenges will strengthen your plan. Potential problems could
include:
· Insufficient public subsidy available to new home owners or residents
· The competition drops its prices
· Not enough customers
· Production costs exceed estimates
· Difficulty in finding qualified employees
· Environmental or governmental changes such as tax increases, additional regulations or

population changes
For each potential problem, discuss its likelihood and describe possible solutions or actions you
might undertake to mitigate the problem.
2.3.8 Risks and their Mitigation
Although it is impossible to know exactly what will go wrong in starting and running your
business, thinking about different challenges will strengthen your plan.
After you have completed all of the elements of your business plan, you should focus its
presentation. A well-organized plan will assist you in communicating the most important
elements of your business plan to the reader, and a persuasive plan will help you to convince the
reader to invest in your business.
Executive Summary
As mentioned earlier, this section should be written last. However, if you have already written
the executive summary, review it to make sure it embodies the following characteristics. Because
it is the first and possibly the only section of the plan that many readers may see, the executive
summary should provide an overview of the plan and entice the reader to read the whole plan or
to agree to meet with you. The executive summary should be no more than three pages and
should briefly describe the most important elements of the plan. Review the Executive Summary
section of this manual for more tips on this critical introduction to your business.

1. Clearly defined and quantifiable goals provide objective measurements to screen potential
business opportunities.
2. Through a market study one will be able to identify gaps in existing products and services and
unsatisfied demand for additional or expanded products and services.
3. Socioeconomic measures of customer base are concerned with age, gender, race, religion and
family size.
4. Demographic measures of customer base are based on individual or household annual income.
2.4 Next Steps: Steps for Developing Sales Projections
Your business plan is not just a funding tool, but also a blueprint for how your business should
operate. The following are steps for developing sales projections.
Step I:
Estimate
For each product or service, estimate the number of people who are likely to buy and when they
will buy it. You can get this information from asking your likely customers about their possible
use of your business, or you can base your estimates on your knowledge of the market.
Step 2:
Use a Calendar
Estimate your sales and number of customers served during one week. Using the totals for a
week, make projections for each month. For the first few months, keep in mind that business will
start off slowly before people become more aware of your business. Use will most likely increase
as people learn about your products and services. Seasonal variations may affect your business as
well. You will use these numbers to project your equipment, supply and staffing needs, as well
as income.
Cost Account Heads:
· Organizational Start up Costs
· Product Design/Development
· Research & Development
· Legal/Licensing Expenses
· Property & Facilities
· Land/Building Purchase
· Initial Lease Deposit
· Building Repairs/Improvements
· Equipment/Machinery
· Production-related
· Administrative/Office Equip.
· Materials & Supplies
· Personnel
· Key Employees
· Contract Labour/Temps
· Training Expenses
· Marketing Expenses
· Advertisements
· Brochures/Literature/Other
· Insurance Premiums
· Distributor Contracts
· Contingency (5%)
Expenses:
Costs of Goods Sold
· Materials/Supplies
· Labor
· Rent
· Utilities
· Insurance
· Admin. Exp. (PT Sec.)
· Legal & Accounting
· Marketing
· Equipment Maintenance/Supplies
· Facility Maintenance
· Fees/Miscellaneous
Debt / Equity Investment:
· Equipment Loan
· Building Rehabilitation Loan
· Grants
· Owner Equity
Expenses
· Cost of Goods Sold
· Wages & Benefits
· Materials
· Supplies
Overhead Expenses:
· Rent
· Utilities
· Building Maintenance/Security
· Marketing
· Accounting
· Legal
· Administrative Expense
· Interest Expense
· Depreciation
The Business Priorities are based upon six top-level objectives; these are:
· To make Business data available both to decision-makers and as much as possible available in
the public domain;
· To ensure all holders of Business information are able to participate.
· To ensure that the data available through the NETWORK are of known quality;
· To ensure that the NETWORK Gateway gives access to data on Location and species used to
inform decisions affecting Business at local, regional, national and international levels;
· To promote knowledge, use and awareness of the NETWORK;
· To enhance the skills base and expertise needed to support and develop the NETWORK.
i) The objectives have cross-cutting themes which are:
A. Infrastructure development
B. Data standards and tools
C. Capacity building
D. Working with the wider public
E. Co-ordination and promotion
i) In addition, the partners will contribute to the overall realisation of the objectives through work
that they initiate on their own account, but which does not necessarily fall under the focussed
objectives for the Network.
ii) A series of assumptions have been made in formulating the Business Priorities and their
associated work programme. These are:
· It is assumed that the present way of working, i.e. a lead partner approach for each project will
be retained;
· The plan is not intended to represent all the work that could be undertaken;
· It is anticipated that other work towards the principal aim of adding content and providing a
fully functional gateway will be adopted by the NETWORK as part of its programme, but this
work would have to be prioritised against this core activity and separately resourced;
To give additional focus to the challenging nature of the task that the NETWORK is setting
itself, a series of principle drivers have been recognised. The drivers are:
· Processes – This driver relates to facilitated targeted action on the ground through providing
knowledge of resource location, extent, pattern of distribution, data quality and gaps. It also has
the potential for engaging more partners in the NETWORK;
· Environmental Impact Assessment (EIA) and Strategic Environmental Assessment – This

driver is concerned with providing ready access to data on location, extent, pattern and quality of
Business.
· Data contributor engagement – This driver is concerned with accessing sources of data for the
NETWORK enabling the assessment of actions and continual improvement in the targeting of
actions from the two previous drivers;
· Operational use – This relates to the use of the NETWORK within the day to day business of
agencies as a source of data relevant to local reporting or casework;
· Generic enhancement – This driver encompasses capacity building and Recording Schemes and
other contributing organisations and user groups, in order to ensure the continued and enhanced
supply and use of information.
These lead naturally to three broad areas of work:
· Developing the recording network;
· Enhancing the Internet Gateway in terms of its functionality and the data it accesses;
· Ensuring that the benefits already secured through the earlier work are maintained.
The plan also acknowledges the need to co-ordinate activity between the members of the
NETWORK and their partners, and to communicate the progress and successes of the work
programme.
The annex to the Business Priorities describes a recommended work plan built upon the
Business Priorities which contains criteria for the selection of objectives, milestones against
which they might be judged and recommendations for projects.
Following the publication of Business Priorities, the Network will hold a series of meeting,
seminars and conferences to arrive at a common view of priorities.
2.4.1 The Business Priorities
Globalised enterprises of today work with an Internet gateway giving access to millions of
records, with published principles, tools, standards and guidance that can be applied to Business
data including their collection, collation and mobilisation. The time has now come to extend
these successful prototypes into a fully functional operating system.
The Business Priorities are based on a reaffirmation of the joint vision of the Promoters of the
Network.
Vision:
The vision of the Network is:
· To enable people to find out about the enterprise priorities so that they can better appreciate,
understand and conserve;
· To ensure that the Network will provide the most accessible, reliable and comprehensive source
of Business information, whether locally, regionally or nationally, to which people can turn;
· To help individuals and organisations of all kinds to contribute data and to participate in the
Network so that the information is the best available, keeping pace with changes in wildlife.
The Promoters of the Network will:
· Promote the recording and validation of Business information by establishing minimum and
acceptable standards of quality assurance;
· Promote the establishment and maintenance of up-to-date and authoritative checklists of all the
departments together with agreed standards for describing their locations;
· Establish standards for the most effective and accessible forms of data storage and promote the
establishment and increased effectiveness of a network of data custodians, and local records
centres operating to agreed minimum and acceptable standards of quality control for data
storage, access and exchange;
· Aim, in principle, to provide free access to all information available through the Network;
· Establish standards and procedures for making information available through the Network and
to safeguard the intellectual property rights (IPR) of those who originally made and hold that
information;
· Ensure that access to sensitive information is controlled reducing the risk of irreparable loss or
damage to organisms or Locations;
· Encourage the intelligent interpretation of Business information and make both the data and
their interpretation available in an accessible form as metadata for use in educational
establishments of all kinds, or by other users.
In the execution of these tasks, the Promoters shall assign such priorities as seem most expedient
to them in order to establish the Network as rapidly and effectively as possible and, thereafter, to
maintain it in accordance with the vision of the Network.
Role of the Network:
Roles in respect of the Network:
· As guardian and promoter of the vision of a national network linking the recorders of
Business information to the users of the information;
· As a participant within the Network; this largely, but not entirely, relates to its ‘ownership’ of
the Gateway and the underpinning standards of the Network;
· As a facilitator through bringing together partners who undertake work to develop aspects of
the Network, or organising meetings at which issues can be discussed and resolved;
· Although some aspects of the Network’s functioning are within the realm of others, for
example obtaining data and managing them, nevertheless, the Promoters could and should act as
an advisor on procedures and protocols that might make this element of the Network more
robust e.g. by providing model licences.
Member organisations and other stakeholders will also take forward the NETWORK’s
development as part of their own remits in addition to those elements for which the Trust is
directly responsible.
2.4.2 Approach
The Strategic Review of the NETWORK is designed to move the development programme of the
NETWORK on from its initial ‘proof of concept’ phase. This early work included:
· The identification of barriers to access with the subsequent evolution of exchange principles,
technical standards such as the use of XML and the development of a species dictionary to
enable searching based on all known synonyms;
· Testing both the practicality and utility of mobilising Business data using an Internet gateway;
· Addressing some data capture and management issues including the development of an
NETWORK data model;
· Addressing issues related to the collection and collation of data by the voluntary sector through
testing and documenting the setting up and development of Local Records Centres (LRCs), and
working directly with National Societies and Recording Schemes.
The next phase of the network’s development builds upon this programme and will concentrate
on expanding and enhancing the Network, and on adding content provided by an increasing
assemblage of contributors in response to user needs. Other aspects of the programme including
further development of Gateway functionality will be subservient to the need to deliver a service
based on the mobilisation of data in response to the articulated needs of users.
2.4.3 Implementation
Scope
This section translates the aspirational targets of the previous section into a credible and
realisable work programme for the development of a functional NETWORK based on product
related targets. Broadly the work programme can be organised into three mutually compatible
elements that are required to develop a functioning network offering universal access to Business
information. The elements differ in the degree of influence the Trust may have upon their
advancement or on the priority that might be placed upon them if resourcing is a significant
constraint.
The members have collective ownership of the Internet gateway and, therefore, are able to
influence directly both the scope and speed of its development. Many of the Trust’s members are
using their Intranet capability to deliver information to operational staff: the NETWORK
gateway is seen as an integral part of this service, which tends to raise the priority members place
upon the development of this service by the Trust.
The activities also have a general public benefit that is as yet underdeveloped. Easy access to
Business information has obvious uses in education both formal and informal. These benefits
will become more apparent as the range of data available increases; nevertheless, it is possible to
develop exemplars of these types of use linked to messages related to the principle drivers.
Assumptions
Presumptions have not been made as to which member or members of the Network might adopt
parts of the plan, nor have costs been assigned to particular outputs as all these variables will
depend on which partner(s) take forward the individual elements of the plan. Nevertheless, the
work programme presents a set of benchmarks for the development of the core elements of the
NETWORK over the next three years. The milestones assigned to the recommended actions are
generic in nature and eventually will be reflected in the individual projects developed to realise
the work programme. In developing the work programme the following assumptions have been
made:
· It is assumed that the present way of working, i.e. a lead partner approach for each project will
be retained;
· The plan is not intended to represent all the work that could be undertaken;
· It is anticipated that other work toward the principal aim of adding content and providing a fully
functional gateway will be adopted by the Network as part of its programme, but this work
would have to be prioritised against this core activity and separately resourced;
2.4.4 Developing the Recording network
The sustainable development of the NETWORK is inevitably predicated upon the continuing
activity of the voluntary recorders and the organisational mechanisms that support them. The
continued development of the network will depend on partner organisations having the capacity
to respond to the new challenges and opportunities arising from the evolving NETWORK. The
Network will also have to assist in ensuring that recording skills are not lost, and if possible that
they should be enhanced. Furthermore, the present recorder population must be sustained by
encouraging others to participate and ensuring that the required training and support is available.
It should also be made easier to lodge records locally for use by all. In part, this will have to
involve an outreach programme designed to make the general population aware of biological
records, recording, and the role of the NETWORK and the part they might play in its
development. It will also entail the promotion of a national system of nodes that facilitates
biological recording and access to records of known documented quality.
Gateway
The principal target for the development of the Internet gateway is the addition of content. The
addition of content has hitherto been largely serendipitous; dependent upon availability, format,
quality etc. but with little attention to the articulated needs of users. Broadly the requirement is to
gain access to geospatially-referenced species and Location data in response to the principal
drivers identified above, but there will also be a need to react to new opportunities. To meet
these changing needs, a set of criteria are required against which new opportunities can be
assessed.
Securing the Benefits
The proof of concept programme has already provided ‘gains’ through the development of
principles, standards, guidance, the development of an Internet Gateway delivering access to
over 10 million species records and a species dictionary as an aid to searching. These benefits
will be secured through a programme of revision, updating and maintenance designed to
incorporate new data, meet new technical standards and the evolving needs of the network.
2.4.5 Co-ordination and Promotion
Co-ordination
Once established, the Business Priorities will be reviewed and updated annually. This will
require some modification of the present structure and working practices of the Network.
The plan is dependent upon co-ordination of the Network work programme. Overall direction
and co-ordination shall continue to remain the responsibility of the Promoters. Partners will
continue to fund the co-ordination and steering of the plan through their financial support of the
Secretariat of the Network but additional funds will be required as both the work programme and
Network grow.
The Secretariat of the Network will ensure co-ordination and revision of the Business Priorities
through servicing of committees and groups as required. It will prepare annually a summarised
assessment subsequent to the meetings of the review/steering committees and scrutiny of their
reports. Once approved by the Promoters, the annual summary will be made available to all
members of Network.
· The core functions of the Secretariat are:
· To support the Promoters and Chairman;
· To ensure adherence to jointly agreed objectives;
· To resolve conflicting priorities;
· To ensure integration across work themes and to identify gaps;
· To lead in the promotion of the NETWORK;
· To review progress and forward planning;
· To raise awareness of the NETWORK with other initiatives /users and to act as a channel for
liaison;
· To liaise with funders;
· To seek and secure extra funding for the development of the network;
· To ensure continuing support of the Network by members;
· To ensure the maintenance of NETWORK core functions;
· To maintain the accounts.
Communication
The need to communicate effectively underlies the whole work programme. There is a need to
communicate with and between projects, to communicate between partners in the NETWORK,
with funders and, above all, with those outwith the NETWORK to encourage them to use the
service and participate in it. Each project has a need to communicate either to enhance its
understanding of issues or to make others aware of its successes. This might be achieved by the
development of examples of operational use, or special interfaces with the NETWORK.
The Secretariat has a special responsibility for communication, which it will discharge through
the use of newsletters, its web site and by organising special events such as conferences.
Resourcing Strategy
‘In the absence of any external funding being attracted, the members would need to redefine their
immediate objectives and plan to implement all or part of the Business Priorities using their
own resources. This would doubtlessly require a scaling down of the plan and difficult internal
funding decisions.
2.5 The Work Programme
This section builds upon the previous sections to develop the framework of an actual work
programme to carry forward the vision. Possible projects within this programme are presented in
the form of a standardised framework that identifies in the first instance a series of selection
criteria to be applied to specific projects. It is not intended that all NETWORK badged projects
should meet all the criteria, but that they might provide a method for deciding upon the priority
of projects competing for a finite resource. Milestones are also suggested that will give a
framework against which specific project progress can be judged. The milestones are not
intended to provide a timeline for projects as it is often the case that different aspects of a project
progress concurrently or that failure to achieve a specific output does not prevent a project from
progressing. A recommended list of specific projects is also presented for discussion.
It is the nature of the NETWORK development process and resourcing that not all of the
suggested projects may be picked up by lead partners and that others of a similar nature may
emerge that fit more closely the internal agendas of Trust partners. Nevertheless, the work plan
presented in this document gives a basis upon which the NETWORK as a whole can evolve to
meet the Trust’s principle.
2.5.1 Developing the Network
The capacity of partner organisations in the NETWORK to contribute data on an ongoing basis
is identified above as a key work area. This will include their internal capacity to carry on the
work of gathering relevant data; their capacity to manage those data; and in particular their
capacity to continue to make their data available through the NETWORK Gateway.
For the purposes of this plan, these supplier organisations are broken down into three main
groups:
· Local data-gathering institutions and professionally run organisations (e.g. local records
centres);
· Voluntary recording schemes;

· Business organisations.
The role of the Network in delivering this work is seen as one of ‘facilitator’, but its role in
relation to each principal group will be different.
2.5.2 Local Data Sources
The following selection criteria will be applied:
· Active local source of managed local data;
· Requirement defined by relevant Network partners’ strategic publications.
The following milestones will be used to assess progress:
1. Local partnership in place including representation from Network member organisations

where possible;
2. Adequate resourcing in place;
3. Business Plan developed that indicates intention to become active member of NETWORK
sharing data with others;
4. Catalogue of data holdings;
5. Active data quality management;
6. Access policy in place that conforms to NETWORK principles;
7. Accessing and delivering data through the NETWORK;
8. Providing service to users;
9. Actively working with local recorders and other local data managers to encourage and support
all aspects of local recording and promote the efficient management and supply of data.
Recording schemes:
· Subject covered of high/moderate priority for policy etc.;
· Some current data potentially available for early mobilisation;
· Data management skills sufficiently well developed to enable early engagement;

· Volunteer base sufficiently organised and/or motivated to take part;
· Organisation open to/ready for further development;
· Potential for partnership working with other organisations/schemes.
1. Enhanced capacity of voluntary organisation through development of their own business plan;
2. Catalogue of data holdings and development of metadata documentation;
3. Mobilisation of data;
4. Engagement with membership to facilitate maintenance and use of available data;
5. Achievement of basic generic funding for prioritised data backlog computerisation;
6. Increased public access to data
Data Access:
Species:
· Relevance to the key drivers;
· Priority operational need;
· Existing quality datasets;
· Existing activity including good geographical coverage;
· Building on existing initiatives;
· Datasets ‘at risk’ of being lost;
· Proxy species – relate to other Location/species;
· Quick wins.
Suggested milestones for the addition of data:
1. Rapid access to all relevant quality datasets from ‘all’ sources in a transparent and neutral
way;
2. Completed analysis of data e.g. coverage, duplication, strengths etc.;
3. Completed advocacy and application across sectors;
4. Capacity building amongst recorders where required;
5. Revision of delivery methods;
6. Partnership forming and development to ensure update of data and addressing any significant
gaps;
7. Update/gap filling.
Location data:
The following selection criteria would be applied:
· Mapped datasets preferably available as polygons or methods that enable them to be produced;
· Accessibility;
· Relevance to key drivers;
· Threat;
· Motivation of candidate partners where already have comprehensive inventory in existence;
· Comprehensive inventory;
· Capable of cross validation with species datasets (see above);
· Fit into broad Location classification;
· NETWORK ability to report using boundary systems of users;
· Quick Wins.
Suggested milestones for the addition of Location inventory data
1. Thematic partnership with identified champion in place;
2. Completed analysis of data available resulting in methodology and standards for cost effective
integration;
3. Feasibility of method tested;

4. Revision of delivery methods;
5. Collation (regionally based) that integrates the regional and national sources;
6. Update/gap filling.
Regional Projects (phased NETWORK growth)
· Measured increase of new local providers;
· New challenges for the National Business Network;
· Activity in each country;
· Different socio-economic ‘regions’/culture.
1. Develop a partnership of national organisations with regional representatives;
2. Identify key local data requirements;
3. Identify the relevant datasets to meet the requirements and analyse for duplication, gaps, etc.;
4. If required, address the shortfalls in data collection, collation, and mobilisation by whatever
local or national mechanisms is most (cost) effective;
5. Contribute to thematic projects;
6. Apply species and Location datasets available through the NETWORK with the local datasets
to enhance local decision making;
7. Options for revision of the delivery mechanism.
Maintaining the network (All Themes):
· New technical opportunity;
· Improvement in service provision allied to principle drivers;
· Enhancement of participation.
1. Scoping study completed;
2. Development completed;
3. Testing completed;
4. Transfer to active system.
Recommended further technical development:
· Development of search engine;
· Introduce system/server redundancy to meet higher service standards;
· Phase in dispersed network architecture;
· Roll out data management skills to partners;
· Roll out necessary IT skills to NETWORK partners;
· Roll out use related skills to partners;
· Development of searching at higher taxonomic levels;
· Enhanced casework/local data screening.
Project Management:
· Each theme will be taken forward by a project or series of projects dependent upon its
complexity. Co-ordination and management will be achieved for each theme by working groups
of active contributors or funders.
· The membership of each working group shall normally not exceed six members together with
an independent chairman who shall not actively participate in the group’s projects. Members
shall be confined to those who are either involved in and fund, at least in part, the working
group’s approved projects or contribute in other ways to the group’s approved projects.
· Each working group shall determine its own modus operandi, which shall be reported to and
approval sought from the Promoters.
· The duties of each working group shall be to plan, promote and participate in the projects
proposed by the group, approved by the reviewing group within its relevant theme, and the
Promoters.
Annually they shall submit:
· A report on the progress of the projects carried out during the year together with an indication
of how far they have met the approved plan
· A proposed work schedule for future work to include projects with milestones and details of
funding available as required to the relevant annual review group for comment, discussion and
forwarding to the Promoters for their consideration.
Theme Review:
· Each theme will be reviewed annually and its report considered at a specific meeting.
· Duties in respect to this review shall be:
- To receive a report from its working group(s) on the progress of the previous year’s theme
work programme
- To receive a proposed work schedule for future work to include projects with milestones and
details of funding available
- To identify gaps and decide how these might be filled
· All members of the working group under review may attend the review meeting together with
such individuals as have a direct or related interest in the theme. Each review shall be convened
by the Programme Director and shall always include one Trustee.
Promoters’ Approval
· In the light of due discussion of both the proposals and their subsequent reviews the review
group shall forward these reports to the Promoters as a draft summary plan prepared by the
secretariat for their consideration, ratification and if need be resolution. It will be a requirement
that the Promoters approve any formal plans or review recommendations.
· Promoters may require further discussion with the chairman of any working group, but once
Promoters have approved the summary plan, working groups will be free to go ahead with their
proposals. Their first task will be to set immediate (1-year) targets that work toward the
aspirational targets.
· The summary business plan will be made available to all members of NETWORK.
To accommodate this procedure, it will be necessary to devote one meeting a year as a business
plan review meeting. It may therefore be necessary to increase the number of meetings of the
Promoters, but this is for further consideration as well as the timing of the review procedure.

1. The strategic review of the NETWORK is designed to move the development programme of
the NETWORK on from its initial ‘proof of concept’ phase.
2. The continued development of the network will depend on partner organisations having the
capacity to respond to the new challenges and opportunities arising from the evolving
NETWORK.
3. The principal target for the development of the Internet gateway is the addition of content.
4. Once established, the Business Priorities need not be reviewed and updated.
2.6 Summary
· A well-written business plan will serve as a guide through the start-up phase of the business. It
establishes benchmarks to measure the performance of your business venture in comparison with
expectations and industry standards.
· The first step in planning a new business venture is to establish goals that you seek to achieve
with the business.
· If one fails to establish clear goals early in the process, the organization may spend substantial
time and resources pursuing potential business ventures that may be financially viable but do not
serve the mission of the organization in other important ways.
· It is also important to establish a timeline for completing the plan.
· A good business plan should contain the following sections:
- Executive summary
- Company and product description
- Market description
- Operations
- Management and ownership
- Financial information and timeline
- Risks and their mitigation
· A solid business plan will clearly explain the business concept, describe the market for the
· The business plan is not just a funding tool, but also a blueprint of how the business should
operate.
1. Explain the meaning of a business plan.
2. Give examples of goals that are sought to be achieved through the creation of a new business
venture.
3. Explain various sections of a business plan.
4. Explain the steps for developing sales projections.
SAQs I
1. True
2. True
3. False
4. False
SAQs II
1. True
2. True
3. True
4. False
Answers to TQs:
1. Refer to 2.2
2. Refer to 2.2
3. Refer to 2.3
4. Refer to 2.4
MB0036-Unit-03-Harnessing Complexity –
Creativity
Unit 3 Harnessing Complexity – Creativity
in Business and a Favourable
Investment Strategy
Structure:
3.1 Introduction
Objectives
3.2 What is a Complex System?
3.3 Complex Systems Behaviour
3.4 Lessons for Business
3.5 Creativity
3.5.1 Best Creative Exercise Ever
3.5.2 A Simple Creative Exercise
3.6 Summary
3.1 Introduction
In the rapidly changing world of global markets, e-commerce and the internet, the secrets of
Complex System evolution provide a basis on which to reflect on the management of our
businesses. Insights gained from Complex Systems thinking suggest that freedom and creativity
count more than cost reduction and efficiency, as these provide the foundations for learning and
change.
Today, businesses and organizations must deal with the production and delivery of increasingly
complex products and services in a rapidly changing and uncertain environment. This raises
questions concerning the effectiveness of traditional management methods – focussed on
efficiency and strategic planning and control – in generating successful companies capable of
flourishing in this new environment. The need to adapt, change and be creative is crucial today,
and it is therefore vital to understand how companies can achieve this. Survival, in this brave
new world, requires that we learn how to bring about self-transformation, adaptation and change
in ourselves and in our organizations, as this is where we can harness the insights that have come
from recent research into the behaviour of Complex Systems.
This unit deals with Complex Systems behaviour.
Objectives:
· Explain the meaning of a Complex System.
· Describe Complex Systems behaviour.
· Explain the concept of creativity in business.
3.2 What is a Complex System ?
A Complex System is a system that has more than one possible future. In other words, it is ‘free’
enough to take more than a single pre-determined path into the future, and therefore cannot be
purely ‘mechanical’. Clearly, we are all complex systems by this definition, and so are the
organizations, communities, economic sectors, regional economies, ecologies and global systems
to which we belong and interact with. Indeed, mechanical systems really only exist as
abstractions in our minds, and the systems we inhabit and try to manage are not mechanical. Yet
all our science and our way of thinking about problems is based on the assumption that a
company or organization comprises a set of functional components with connecting flows of
goods and information. In this view, better management is often seen as simply running the
‘machine’ faster or more efficiently.
But that was when life was simple and the ‘product’ or ‘service’ to be produced and delivered
only needed to be made at a competitive cost with adequate quality. Today, we must constantly
create new products and services, with additional and novel attributes, and this creative, adaptive
capacity will be more important to our survival than our level of efficiency, particularly if, as
Complex Systems thinking suggests, efficiency reduces creativity.
Traditionally, decision making and strategy have been based on a rational set of assumptions
such as:
· We know our options.
· We know and can evaluate the (single) outcome of implementing each of them.
· We can ignore effects that we do not know.
· The environment in the future ‘after’ the decision is known.
· There was a situation ‘before’ our decision, and that there will be a situation ‘after’ our
decision, and that we can therefore examine the differences between them.
Such reflections are typical of a cost/benefit analysis, for example, by which the outcomes of
different possible decisions are compared. Yet, in a world of rapid change and uncertainty, the
assumptions relied upon by this kind of ‘reasonable’ behaviour are simply not true. In reality, we
do not necessarily know all our options, the path the system may take, the possible dimensions
that might be affected by resulting changes, or how circumstances may have changed in the
mean time. In short, our view of our organisation as a machine, sitting in a fixed or at any rate
predictable environment, is totally inadequate. We must instead turn to new ideas – we must
harness the ideas arising from Complex Systems.
3.3 Complex Systems Behaviour
In studying Complex Systems, initially in physics and chemistry, it became clear that the key
properties of ‘open’ systems, where flows of matter, energy and information can occur across
their boundaries, were that they could undergo spontaneous transformations of structure and
functionality. Instead of a ‘fixed’ mechanical system, this showed how systems came into being,
and evolved over time, changing structurally, gaining, and sometimes shedding, complexity and
qualities.
The study of Complex Systems therefore revealed a co-evolutionary process of a system and its
environment in which successive change and adaptation each involved two separate steps:
· Discovering what to do (exploration and evaluation).
· Doing what has been decided (implementation).
And these two steps are radically different in nature.
In Complex Systems, the first step is ‘taken’ by the ‘non-average’ underlying elements within
the system, while the second – the emergence of a transformed, functioning system – concerns
new, effective ‘average’ behaviour of the elements. The successful co-evolution of a system with
its environment therefore occurs through the dynamic interplay of the average and non-average
behaviours within it. Successive instabilities occur each time that existing structure and
organisation fail to withstand the impact of some new circumstance or behaviour. When this
occurs, the system re-structures and becomes a different system, subjected in its turn to the
disturbances from its own non-average individuals and situations. It is this dialogue between
successive ‘systems’ and their own inner ‘richness’ that provides the capacity for continuous
adaptation and change.
3.4 Lessons for Business
Clearly, these two steps will seem obvious to anyone running a business – firstly, we work out
what product or service we think will succeed, and then organise a system to produce and deliver
it as efficiently as possible. In a world of slowly changing markets and fixed technologies, this
could be undertaken once, or very infrequently, and the system optimised. However, in our world
of fast-changing markets, competitors and technologies, there is a constant need to keep revising
and updating knowledge and information about possible markets, customer needs and technical
possibilities.
Step 1 requires that we explore the possibilities in order to discover possible options and decide
from them what to do. We need to be good at ‘going beyond’ present knowledge and wandering
into undiscovered territory. But, in order to perform step 2 successfully, we need to execute what
has been decided as efficiently and fast as possible, avoiding any unnecessary waste. This
requires rational analysis to obtain mechanical and economic optimisation.
The qualities required for Step 1 are the freedom and ability to move into uncharted territory and
have new thoughts, while those required for Step 2 are the ability to make and act upon rational
analyses of the processes and costs of the system but these are opposite qualities. And, not only
that, pressure for greater measurable accountability, short term share-holder value and the
increasing use of IT makes it increasingly more difficult to protect the presence of the qualities
required for Step 1 against the simpler, more easily measured qualities for Step 2. Yet without
Step 1, there can be no Step 2.
Imagination and creativity must precede efficiency of execution. Complex Systems models and
simulations demonstrate the truth of this statement, showing the role of individual diversity in
Step 1 creativity and exploring the circumstances which may require more or less focus on Step
1 or Step 2 qualities. Study the following to have a clear idea regarding this:
Complex Systems thinking provides a framework that can inform every aspect of business
management, linking research, development, concept and design with imaginative market
exploration, human resources management, and overall business strategy and identity. It
concerns the complete ‘knowledge dynamics’ that drives the company – right through the
creation, evaluation, selection, implementation and discarding of knowledge. It demonstrates that
this is the power behind the competitiveness of new growth companies and indicates how it can
be adopted by businesses and by whole business networks.
Ultimately, the creativity and imagination of a business will come from the dynamic interaction
of diverse individuals. These individuals that create new ideas and value may be within one
company, but often will span several within the network, giving rise to winning clusters of
activity, capable of evolving faster than their rivals.
Complex Systems thinking also informs us how to achieve a high rate of delivery of new
products and services and rapid adaptation to changing conditions. Instead of designing and
planning products and services as a ‘top-down’ exercise through a captive ‘supply chain’, the
models of self-organising networks provide an alternative view. Here, products emerge as the
result of a changing pattern of collaboration of a network of suppliers, both competing and co-
operating, each expert in its own domain. The network is characterised by long-term
relationships between nodes, but does not always require the same partners to be involved all the
time. Different nodes can rapidly come together or separate for the production and delivery of
different things.
In the rapidly changing world of global markets, e-commerce, evolving tele-communications and
internet, the secrets of Complex System evolution offer us a basis on which to reflect on the
management of our businesses.
They tell us not to allow optimisation on any single criteria (e.g. cost minimisation) and to
provide freedom and resources to those parts of the business that must be creative, while
regulating closely those parts that are purely bureaucratic. Making sure that designs and
decisions are always debated among a diverse group of individuals, and that different
perspectives are discussed and examined, we need to encourage people to express their
individual views and differences and to have enough self-confidence to question their present
activity and knowledge. Allowing exploration and experiment means tolerating ‘failure’ and
being open to new ideas requires an atmosphere of confidence and trust, which in turn requires a
long-term social relationship. The insights coming from Complex Systems thinking tell us that
such things matter more than cost reduction and efficiency, as they provide the basis for a
sustainable adaptive capacity for learning and change.
3.5 Creativity
Everyone in business is creative.
Some of most creative people are in manufacturing.
They actually CREATE products that change the world.
Some of the least creative people perhaps are in advertising.
They spend most of their creative energy telling manufacturers that they…aren’t creative!
Salespeople Are Creative – They are natural born story-tellers.
Accountants are creative.
3.5.1 Best Creative Exercise Ever
Write down your ideas.
You have a ton every day.
But most of the time, you can’t remember them by the day’s end.
Don’t let spelling and grammar issues or relentless self-editing stop you.
Get your ideas on paper (Let someone else edit it.)
Go retro: Carry a notebook, pen, and calendar into your meetings.
Look up at people.
Story First, Technology Last.
Don’t invest in a presentation class called “How to Use PowerPoint”….

…until you’ve taken a class called “How to Tell Stories and Connect with Your Audience”.
3.5.2 A Simple Creative Exercise…

Simplify everything. Your life, your home, your office, your desk, your processes, vision, policy,
procedures. Everything.
Fixing Problems is Creative.
Your job is to fix problems, not to complain.
Brainstorming
Don’t tell people that their ideas are bad, especially if you don’t have a better one.
It’s only your life’s work.
Never say, “It’s not my job to be creative.”
How to Lose an Audience…
· Show your audience slides with columns of numbers.
· Refuse to tell them a story about the meaning of the numbers.
· Do not read your speech or presentation.
· Instead, read your audience.
How about a Show?
Try “giving a performance” instead of merely “giving a presentation.”
Everyone in Sales Knows…
· Tell stories.
· Don’t just provide data.
Avoid Meetings.
Do not attend more than two meetings a day, or else you will never get any real creative work
done.
Get Fresh Ideas.
Leave the office building at least once a day.
Another Lame Excuse…

Designers should put more of their passion into designing great work, instead of endless
(boring) discussions about the superiority of the Macintosh over the PC!
The Lame Excuse …
“I can’t [write/design/create] because I don’t have the latest

[software/hardware/ upgrade]….”
You can’t let a machine take credit for your creativity.
And you can’t blame a machine for your creative failures, either.
Don’t Blame the Tool!
The more you become a master of your particular creative form….
….the fewer tools you will use.
Master carpenters use fewer tools than novices.
So do cooks.
Use what works.
Creativity: Use it or Lose it.
Create something every day.
Creativity takes place every day, not once in a while.
It’s not rare.
It’s just been mystified – Own your creativity.
Facts and observations
Giga-investments made in the paper and pulp industry, in the heavy metal industry and in other
base industries, today face scenarios of slow growth (2-3 % p.a.) in their key markets and a
growing over-capacity in Europe.
The energy sector faces growing competition with lower prices and cyclic variations of demand.
Productivity improvements in these industries have slowed down to 1-2 % p.a .

Global financial markets make sure that capital cannot be used non-productively, as its owners
are offered other opportunities and the capital will move (often quite fast) to capture these
opportunities.
The capital markets have learned “the American way”, i.e. there is a shareholder dominance
among the actors, which has brought (often quite short-term) shareholder return to the forefront
as a key indicator of success, profitability and productivity.
There are lessons learned from the Japanese industry, which point to the importance of
immaterial investments. These lessons show that investments in buildings, production technology
and supporting technology will be enhanced with immaterial investments, and that these are even
more important for re-investments and for gradually growing maintenance investments.
The core products and services produced by giga-investments are enhanced with life-time
service, with gradually more advanced maintenance and financial add-on services.
New technology and enhanced technological innovations will change the life cycle of a giga-
investment.
Technology providers are involved throughout the life cycle of a giga-investment.
Giga-investments are large enough to have an impact on the market for which they are
positioned:
A 3,00,000 ton paper mill will change the relative competitive positions; smaller units are no
longer cost effective.
A new teechnology will redefine the CSF:s for the market.
Customer needs are adjusting to the new possibilities of the giga-investment.
The proposition that we can describe future cash flows as stochastic processes is no longer valid;
neither can the impact be expected to be covered through the stock market.
Types of options
· Option to Defer
· Time-to-Build Option
· Option to Expand
· Growth Options
· Option to Contract
· Option to Shut Down/Produce
· Option to Abandon
· Option to Alter Input/Output Mix
Table of Equivalences:
INVESTMENT OPPORTUNITY VARIABLE CALL OPTION

Present value of a project’s operating S Stock price.
cash flows.
Investment costs X Exercise price
Length of time the decision may be t Time to expiry.
deferred.
Time value of money. rf Risk-free interest rate
Risk of the project. σ Standard deviation of
returns on stock
Fuzzy numbers (fuzzy sets) are a way to express the cash flow estimates in a more realistic way.
This means that a solution to both problems (accuracy and flexibility) is a real option model
using fuzzy sets.
1. The people involved in manufacturing actually create products that change the world.
2. In the rapidly changing world of global markets, e-commerce, evolving tele-communications

and internet, the secrets of Complex System evolution offer us a basis on which to reflect on the
management of our businesses.
3. Complex Systems thinking informs us how to achieve a high rate of delivery of new products
and services and rapid adaptation to changing conditions.
4. The creativity and imagination of a business will come from the dynamic interaction of
diverse individuals.
5. Efficiency of execution must precede imagination and creativity.
3.6 Summary
Complex System is a system that has more than one possible future. In other words, it is ‘free’
enough to take more than a single pre-determined path into the future, and therefore cannot be
purely ‘mechanical’.
Complex Systems thinking provides a framework that can inform every aspect of business
management, linking research, development, concept and design with imaginative market
exploration, human resources management, and overall business strategy and identity.
Complex Systems thinking also informs us how to achieve a high rate of delivery of new
products and services and rapid adaptation to changing conditions.
1. What is meant by Complex System?
2. What are the assumptions on which decision making and strategy have been based on
traditionally?
3. Describe the Complex Systems behaviour.
4. “Everyone in business is creative.” Do you agree with this statement?
SAQs I
1. True
2. True
3. True
4. True
5. False
Answers to TQs:
1. Refer to 3.2
2. Refer to 3.2
3. Refer to 3.3
4. Refer to 3.5
MB0036-Unit-04-Business Continuity Plan

Unit 4 Business Continuity Plan
Structure:
4.1 Introduction
Objectives
4.2 Purpose of Business Continuity Plan
4.2.1 Key Words
4.2.2 Terminology
4.3 Practice Advisory – Part One

4.3.1 Developing the Plan
4.4 Practice Advisory – Part Two
4.4.1 Implementing and Maintaining the Plan
4.5 Check List
4.6 Summary
4.1 Introduction
The Business Continuity Guideline is a tool to allow organizations to consider the factors and
steps necessary to prepare for a crisis (disaster or emergency) so that it can manage and survive
the crisis and take all appropriate actions to help ensure the organization’s continued viability.
The advisory portion of the guideline is divided into two parts: (1) the planning process and (2)
successful implementation and maintenance. Part One provides step-by-step Business Continuity
Plan preparation and activation guidance, including readiness, prevention, response, and
recovery/ resumption. Part Two details those tasks required for the Business Continuity Plan to
be maintained as a living document, changing and growing with the organization and remaining
relevant and executable.
Objectives:
· Explain what a Business Continuity Plan is.
· Explain the purpose of Business Continuity Plan.
· Give the meaning of key words and terminology used in connection with Business Continuity
Plan.
· Describe how a Business Continuity Plan is developed and implemented.
4.2 Purpose of Business Continuity Plan
Recent world events have challenged us to prepare to manage previously unthinkable situations
that may threaten an organization’s future. This new challenge goes beyond the mere emergency
response plan or disaster management activities that we previously employed. Organizations now
must engage in a comprehensive process best described generically as Business Continuity. It is
no longer enough to draft a response plan that anticipates naturally, accidentally, or intentionally
caused disaster or emergency scenarios.
Today’s threats require the creation of an on-going, interactive process that serves to assure the
continuation of an organization’s core activities before, during, and most importantly, after a
major crisis event.
In the simplest of terms, it is good business for a company to secure its assets. CEOs and
shareholders must be prepared to budget for and secure the necessary resources to make this
happen. It is necessary that an appropriate administrative structure be put in place to effectively
deal with crisis management. This will ensure that all concerned understand who makes
decisions, how the decisions are implemented, and what the roles and responsibilities of
participants are. Personnel used for crisis management should be assigned to perform these roles
as part of their normal duties and not be expected to perform them on a voluntary basis.
Regardless of the organization – for profit, not for profit, faith-based, non-governmental – its
leadership has a duty to stakeholders to plan for its survival. The vast majority of the national
critical infrastructure is owned and operated by private sector organizations, and it is largely for
these organizations that this guideline is intended. ASIS, the world’s largest organization of
security professionals, recognizes these facts and believes the BC Guideline offers the reader a
user-friendly method to enhance infrastructure protection.
4.2.1 Key Words
Business Continuity Plan, Business Impact Analysis, Crisis Management Team, Critical
Functions, Damage Assessment, Disaster, Evaluation and Maintenance, Mitigation Strategies,
Mutual Aid Agreement, Prevention, Readiness, Recovery/Resumption, Resource Management,
Response, Risk Assessment, Testing and Training.
4.2.2 Terminology
Alternate Worksite – A work location, other than the primary location, to be used when the
primary location is not accessible.
Business Continuity – A comprehensively managed effort to prioritize key business processes,

identify significant threats to normal operation, and plan mitigation strategies to ensure effective
and efficient organizational response to the challenges that surface during and after a crisis.
Business Continuity Plan (BCP) – An ongoing process supported by senior management and
funded to ensure that the necessary steps are taken to identify the impact of potential losses,
maintain viable recovery strategies and plans, and ensure the continuity of operations through
personnel training, plan testing, and maintenance.
Business Impact Analysis (BIA) – A management level financial analysis that identifies the
impacts of losing an organization’s resources. The analysis measures the effect of resource loss
and escalating losses over time in order to provide reliable data upon which to base decisions on
mitigation, recovery, and business continuity strategies.
Contact List – A list of team members and key players in a crisis. The list should include home
phone numbers, pager numbers, cell phone numbers, etc.
Crisis – Any global, regional, or local natural or human-caused event or business interruption
that runs the risk of (1) escalating in intensity,
(2) adversely impacting shareholder value or the organization’s financial position, (3) causing
harm to people or damage to property or the environment, (4) falling under close media or
government scrutiny,
(5) interfering with normal operations and wasting significant management time and/or financial
resources, (6) adversely affecting employee morale, or (7) jeopardizing the organization’s
reputation, products, or officers, and therefore negatively impacting its future.
Crisis Management – Intervention and co-ordination by individuals or teams before, during,

and after an event to resolve the crisis, minimize loss, and otherwise protect the organization.
Crisis Management Center – A specific room or facility staffed by personnel charged with
commanding, controlling, and coordinating the use of resources and personnel in response to a
crisis.
Crisis Management Planning – A properly funded ongoing process supported by senior

management to ensure that the necessary steps are taken to identify and analyze the adverse
impact of crisis events, maintain viable recovery strategies, and provide overall coordination of
the organization’s timely and effective response to a crisis.
Crisis Management Team – A group directed by senior management or its representatives to

lead incident/event response comprised of personnel from such functions as human resources,
information technology facilities, security, legal, communications/media relations,
manufacturing, warehousing, and other business critical support functions.
Critical Function – Business activity or process that cannot be interrupted or unavailable for
several business days without having a significant negative impact on the organization.
Critical Records – Records or documents that, if damaged, destroyed, or lost, would cause
considerable inconvenience to the organization and/or would require replacement or recreation at
a considerable expense to the organization.
Damage Assessment – The process used to appraise or determine the number of injuries and
human loss, damage to public and private property, and the status of key facilities and services
resulting from a natural or human-caused disaster or emergency.
Disaster – An unanticipated incident or event, including natural catastrophes, technological

accidents, or human-caused events, causing widespread destruction, loss, or distress to an
organization that may result in significant property damage, multiple injuries, or deaths.
Disaster Recovery – Immediate intervention taken by an organization to minimize further losses
brought on by a disaster and to begin the process of recovery, including activities and programs
designed to restore critical business functions and return the organization to an acceptable
condition.
Emergency – An unforeseen incident or event that happens unexpectedly and demands

immediate action and intervention to minimize potential losses to people, property, or
profitability.
Evacuation – Organized, phased, and supervised dispersal of people from dangerous or

potentially dangerous areas.
Evaluation and Maintenance – Process by which a business continuity plan is reviewed in

accordance with a predetermined schedule and modified in light of such factors as new legal or
regulatory requirements, changes to external environments, technological changes, test/exercise
results, personnel changes, etc.
Exercise – An activity performed for the purpose of training and conditioning team members
and personnel in appropriate crisis responses with the goal of achieving maximum performance.
Mitigation Strategies – Implementation of measures to lessen or eliminate the occurrence or

impact of a crisis.
Mutual Aid Agreement – A pre-arranged agreement developed between two or more entities to
render assistance to the parties of the agreement.
Prevention – Plans and processes that will allow an organization to avoid, preclude, or limit the
impact of a crisis occurring. The tasks included in prevention should include compliance with
corporate policy, mitigation strategies, and behavior and programs to support avoidance and
deterrence and detection.
Readiness – The first step of a business continuity plan that addresses assigning accountability
for the plan, conducting a risk assessment and a business impact analysis, agreeing on strategies
to meet the needs identified in the risk assessment and business impact analysis, and forming
Crisis Management and any other appropriate response teams.
Recovery/Resumption – Plans and processes to bring an organization out of a crisis that

resulted in an interruption. Recovery/resumption steps should include damage and impact
assessments, prioritization of critical processes to be resumed, and the return to normal
operations or to reconstitute operations to a new condition.
Response – Executing the plan and resources identified to perform those duties and services to
preserve and protect life and property as well as provide services to the surviving population.
Response steps should include potential crisis recognition, notification, situation assessment, and
crisis declaration, plan execution, communications, and resource management.
Risk Assessment – Process of identifying internal and external threats and vulnerabilities,
identifying the likelihood of an event arising from such threats or vulnerabilities, defining the
critical functions necessary to continue an organization’s operations, defining the controls in
place or necessary to reduce exposure, and evaluating the cost for such controls.
Shelter-in-Place – The process of securing and protecting people and assets in the general area
in which a crisis occurs.
Simulation Exercise – A test in which participants perform some or all of the actions they
would take in the event of plan activation. Simulation exercises are performed under conditions
as close as practicable to ‘‘real world’’ conditions.
Tabletop Exercise – A test method that presents a limited simulation of a crisis scenario in a
narrative format in which participants review and discuss, not perform, the policy, methods,
procedures, coordination, and resource assignments associated with plan activation.
Testing – Activities performed to evaluate the effectiveness or capabilities of a plan relative to

specified objectives or measurement criteria. Testing usually involves exercises designed to keep
teams and employees effective in their duties and to reveal weaknesses in the Business
Continuity Plan.
Training – An educational process by which teams and employees are made qualified and
proficient about their roles and responsibilities in implementing a Business Continuity Plan.
Vital Records – Records or documents, for legal, regulatory, or operational purposes, that if
irretrievably damaged, destroyed, or lost, would materially impair the organization’s ability to
continue business operations.
1. –––––––––––––– Means intervention and co-ordination by individuals or teams before,

during, and after an event to resolve the crisis, minimize loss, and otherwise protect the
organization.
2. –––––––––––––––– is a management level financial analysis that identifies the impacts of

losing an organization’s resources.
3. ––––––––––––––––– is a comprehensively managed effort to prioritize key business

processes, identify significant threats to normal operation, and plan mitigation strategies to
ensure effective and efficient organizational response to the challenges that surface during and
after a crisis.
4. ––––––––––––––––– is a business activity or process that cannot be interrupted or unavailable

for several business days without having a significant negative impact on the organization.
4.3 Practice Advisory – Part One

The Business Continuity Guideline is comprised of two sections:
(1) the planning process and (2) successful implementation and maintenance.
Note: Business continuity planning is cyclical. Rigorous plan administration and maintenance,
as well as any events experienced, will necessitate revisions and/or plan additions.
4.3.1 Developing the Plan
This section addresses the process of preparing a Business Continuity Plan (BCP), including
readiness, prevention, response, and recovery/resumption. It details the specific BCP elements
and provides step-by-step plan preparation and activation guidance. The specifics of this
guideline are appropriate for a mid- to large-sized organization. By understanding the concepts
and procedures described, it will be possible to effectively adapt the guideline to smaller-sized
organizations. The level of effort may vary widely, but the basic approach of preparedness and
response should be constant.
The following steps are important:
1. Assign Accountability
It is essential that senior leadership of the organization sponsors and takes responsibility for
creating, maintaining, testing, and implementing a comprehensive Business Continuity Plan
(BCP). This will insure that management and staff at all levels within the organization
understand that the BCP is a critical top management priority. It is equally essential that senior
leadership engage a ‘‘top down’’ approach to the BCP so that management at all levels of the
organization understand accountability for effective and efficient plan maintenance as part of the
overall governance priorities.
Corporate Policy
In the event of a crisis, an organization-wide BCP Policy committed to undertaking all

reasonable and appropriate steps to protect people, property, and business interests is essential.
Corporate policy should include a definition of a ‘‘crisis.’’
Ownership of Systems, Processes, and Resources
Responsibility for systems and resource availability and key business processes should be clearly
identified in advance.
Planning Team
A Business Continuity Planning Team with responsibility for BCP development that includes
senior leaders from all major organizational functions and support groups should be appointed to
ensure wide-spread acceptance of the BCP.
Communicate BCP
The BCP should be communicated throughout the organization, to ensure employees are aware
of the BCP structure and their roles within the plan.
2. Perform Risk Assessment
Step two in the creation of a comprehensive BCP is completion of a Risk Assessment, designed
to identify and analyze the types of risk that may impact the organization. Assessment should be
performed by a group representing various organizational functions and support groups.
Review Types of Risks That Could Impact the Business
Using available information about known or anticipated risks, the organization should identify
and review risks that could possibly impact the business, and rate the likelihood of each. A Risk
Assessment matrix can aid identification of risks and prioritization of mitigation/planning
strategies.
3. Conduct Business Impact Analysis (BIA)
Once risks have been identified, any organizational impacts that could result from an interruption
of normal operations should be examined in a Business Impact Analysis (BIA).
Identify Critical Processes
Business critical processes should be identified and documented. They could include purchasing,
manufacturing, supply chain, sales, distribution, accounts receivable, accounts payable, payroll,
IT, and research and development. Once the critical processes are identified, an analysis of each
can be made using the evaluation criteria described below. Processes should be ranked as a High,
Medium, or Low.
Assess Impact if Crisis Were to Happen
· Human cost: physical and psychological harm to employees, customers, suppliers, other
stakeholders, etc.
· Financial cost: equipment and property replacement, downtime, overtime pay, stock
devaluation, lost sales/business, lawsuits, regulatory fines/penalties, etc.
· Corporate image cost: reputation, standing in the community, negative press, loss of customers,
etc.
Determine Maximum Allowable Outage and Recovery Time Objectives
· Determine how long process can be non-functional before impacts become unacceptable.
· Determine how soon process should be restored (shortest allowable outage restored first).
· Determine different recovery time objectives according to time of year (year-end, tax filing,
etc.)
· Identify and document alternate procedures to a process (manual workarounds or processes,

blueprints, notification/calling trees, etc.)
· Evaluate costs of alternate procedures versus waiting for system to be restored.
Identify Resources Required for Resumption and Recovery
Such resources can include personnel, technology hardware and software (including
telecommunications), specialized equipment, general office supplies, facility/office space and
critical and vital business records. Identifying, backing-up, and storing critical and vital business
records in a safe and accessible location are essential prerequisites for an effective BCP. The
Risk Assessment and BIA provide the foundation on which the organization’s BCP will rest, as
strategies will be formulated and plans will be developed to meet the needs identified in them.
These analyses should be repeated on a regular basis and/or in response to significant changes to
the organization’s operating environment.
4. Agree on Strategic Plans
Strategic planning addresses the identification and implementation of:
· Methods to mitigate the risks and exposures identified in the BIA and Risk Assessment.
· Plans and procedures to respond to any crisis that does occur. A BCP may include multiple
strategies that address a variety of probable situations, including the duration of the business
interruption (short versus long term), the period in which it occurs (peak versus low), and the
extent of the interruption (partial versus complete). It is important that the strategies selected are:
· Attainable
· Highly probable to be successful
· Verifiable through tests and exercises
· Cost effective
· Appropriate for the size and scope of the organization.
5. Crisis Management and Response Team Development
It is necessary that an appropriate administrative structure be put in place to effectively deal with
crisis management. Clear definitions must exist for a management structure, authority for
decisions, and responsibility for implementation. An organization should have a Crisis
Management Team to lead incident/event response. The Team should be comprised of such
functions as human resources, information technology, facilities, security, legal,
communications/media relations, manufacturing, warehousing, and other business critical
support functions, with all under the clear direction of senior management or its representatives.
The Crisis Management Team may be supported by as many Response Teams as appropriate
taking into account such factors as organization size and type, number of employees, location,
etc. Response Teams should develop Response Plans to address various aspects of potential
crises, such as damage assessment, site restoration, payroll, human resources, information
technology, and administrative support. Response Plans should be consistent with and included
within the overall BCP. Individuals should be recruited for membership on Response Teams
based upon their skills, level of commitment, and vested interest.
Contact Information
Contact information for personnel assigned to crisis management and response teams should be
included in the plans. Personal information such as unlisted phone numbers and home addresses
should be protected. The organization should establish procedures to ensure that the information
is kept up to date. Consideration should be given to a BCP software tool that supports effective
change management.
Compliance with Corporate Policy
Compliance audits should be conducted to enforce BCP policies and procedures. Policy and
procedures violations should be highlighted and accountability for corrective action assigned in
accordance with organizational governance regimes.
6. Mitigation Strategies
Devise Mitigation Strategies
Cost effective mitigation strategies should be employed to prevent or lessen the impact of
potential crises. For example, securing equipment to walls or desks with strapping can mitigate
damage from an earthquake; sprinkler systems can lessen the risk of a fire; a strong records
management and technology disaster recovery program can mitigate the loss of key documents
and data.
Resources Needed for Mitigation
The various resources that would contribute to the mitigation process should be identified. These
resources, including essential personnel and their roles and responsibilities, facilities, technology,
and equipment should be documented in the plan and become part of ‘‘business as usual.’’
Monitoring Systems and Resources
Systems and resources should be monitored continually as part of mitigation strategies. Such
monitoring can be likened to simple inventory management.
The resources that will support the organization to mitigate the crisis should also be monitored
continually to ensure that they will be available and able to perform as planned during the crisis.
Examples of such systems and resources include, but are not limited to:
· Emergency equipment
· Fire alarms and suppression systems
· Local resources and vendors
· Alternate worksites
· Maps and floor plans updated/changed due to construction and internal moves
· System backups and offsite storage.
7. Avoidance, Deterrence and Detection
Avoidance Deterrence and Detection
Avoidance has the goal of preventing a the purpose of deterrence and detection is crisis from
happening. The potential crisis to make a hostile act (or activity) more should be identified,
understood, and difficult to carry out against the addressed and, in doing so, avoided. The
organization or significantly limit, if not Risk Assessment can be used to identify negate, its
impact. The BCP should address the specifics of potential crises, including and include overall
deterrence and any precursors and warning signs. detection measures. Examples of crises that
can have warning signs include, but are not limited to:
· Workplace violence (erratic or threatening employee behavior)
· Natural disasters (hurricanes, wild-fires, etc.)
· Activism, protests, riots
· Product or manufacturing failure
· Hostile takeover
· Terrorism
· Lawsuits.
Employee Behavior to Support Avoidance and Deterrence and Detection
Employees should be appropriately motivated to feel personally responsible for avoidance and
deterrence and detection. Through the proper corporate climate, operational plans, and
management objectives, employees should support avoidance and deterrence and detection
policies and procedures.
Facility Security Programs to Support and Enhance Avoidance and Deterrence and Detection
· Architectural: natural or manmade barriers.
· Operational: security officers’ post orders; employee security awareness programs; counter
surveillance and counter intelligence as avoidance, detection and deterrence measures; and
Protective Security Operations for the protection of the leadership and their families.
· Technological: intrusion detection, access control, recorded video surveillance, package and
baggage screening, when appropriate.
8. Potential Crisis Recognition
The first element in a response program is to determine if a potential crisis exists. The
organization should know and be able to easily recognize when specific dangers occur that
necessitate the need for some level of response. A strong program of avoidance and deterrence
and detection policies and procedures as outlined above will support this process.
Identification and Recognition of Danger Signals
Identification of danger signals coupled with the likelihood of an event is often indicative of an
imminent crisis. Warning signs may include, but are not limited to:
· Unusual or unexplained changes in sales volume
· Legislative changes
· Corporate policy changes
· Changes to competitive environment
· Changes to supply based environment
· Warnings of natural disasters
· Imminent or actual changes in Homeland Security Advisory System threat level
· Cash flow changes
· Potential for civil or political instability
· Impending strike or likely protests

· Hostile labor negotiations.
Responsibility to Recognize and Report Potential Crises
Certain departments or functions are uniquely situated to observe warning signs of an imminent
crisis. Personnel assigned to these departments or functions should be trained appropriately. The
responsibility to report a potential crisis (including the notification mechanism) should be
communicated to all employees. The general employee population may also be an excellent
source of predictive information when there is a documented reporting structure and where
attention is paid to what the employee reports.
Notify the Team(s)
A potential crisis, once recognized, should be immediately reported to a supervisor, a member of

management, or another individual tasked with the responsibility of crisis notification and
management.
Parameters for Notification
Specific notification criteria should be established, documented, and adhered to by all employees
(with the timing and sequence of notification calls clearly documented). The actual activation of
a response process should require very specific qualifications being met.
Custody and Updates to Contact Information
Qualified personnel should have ready access to the updated, confidential listings of persons and
organizations to be contacted when certain conditions or parameters of a potential crisis are met.
Types of Notification
Notifications in a crisis situation should be timely and clear and should use a variety of
procedures and technologies, with recognition that devices used have advantages and limitations.
Remember: In some types of crises, the notification systems are themselves impacted by the
disaster, whether through capacity issues or infrastructure damage. Thus, it is important to have
redundancies built into the notification system and several different ways to contact the listed
individuals and organizations.
Assess the Situation
Problem assessment (an evaluative process of decision making that will determine the nature of
the issue to be addressed) and severity assessment (the process of determining the severity of the
crisis and what any associated costs may be in the long run) should be made at the outset of a
crisis. Factors to be considered include the size of the problem, its potential for escalation, and
the possible impact of the situation.
Declare a Crisis
The point at which a situation is declared to be a crisis should be clearly defined, documented,
and fit very specific and controlled parameters. Responsibility for declaring a crisis should also
be clearly defined and assigned. First and second alternates to the responsible individual should
be identified.
The activities that declaring a crisis will trigger include, but are not limited to:
· Additional call notification
· Evacuation, shelter, or relocation
· Safety protocol
· Response site and alternate site activation
· Team deployment
· Personnel assignments and accessibility
· Emergency contract activation
· Operational changes
In certain situations, there may be steps that can and should be implemented, even without
officially declaring a crisis.
Execute the Plan
BCPs should be developed around a ‘‘worst case scenario,’’ with the understanding that the
response can be scaled appropriately to match the actual crisis. When initiating a response, it is
important to insure that the goals protect the following interests listed in order of their priority:
· Save lives and reduce chances of further injuries/deaths
· Protect assets
· Restore critical business processes and systems
· Reduce the length of the interruption of business
· Protect reputation damage
· Control media coverage (e.g. local, regional, national or global)

· Maintain customer relations.
Prioritized classifications can be set up as relative indicators of the magnitude, severity, or

potential impact of the situation. These levels may aid organizations that are developing response
plans and implementation ‘‘triggers’’ for use during a crisis. Determining the initial level of the
crisis and the progression from one level to the next will normally be the responsibility of the
Crisis Management Team.
9. Communications
Remember: Effective communication is one of the most important ingredients in crisis

management.
Identify the Audiences
Internal and external audiences should be identified in order to convey crisis and organizational
response information. In order to provide the best communications and suitable messages for
various groups, it is often appropriate to segment the audiences. In this way, messages tailored
specifically for a group can be released.
Internal External
· Employees and their families
· Customers/Clients, present and potential
· Business Owners/Partners
· Contractors/Vendors
· Boards of Directors
· Media
· Onsite Contractors/Vendors
· Government and Regulatory Agencies
· Local law enforcement
· Emergency responders
· Investors/Shareholders
· Surrounding communities
Communicating with Audiences
The following items should be taken into account in the crisis communications strategy:
· Communications should be timely and honest.
· To the extent possible, an audience should hear news from the organization first.
· Communications should provide objective and subjective assessments.
· All employees should be informed at approximately the same time.
· Give bad news all at once – do not sugarcoat it.
· Provide opportunity for audiences to ask questions, if possible.
· Provide regular updates and let audiences know when the next update will be issued.
· Treat audiences as you would like to be treated.
· Communicate in a manner appropriate to circumstances:
– Face-to-face meetings (individual and group)
– News conferences
– Voice mail/email
– Company Intranet and Internet sites
– Toll-free hotline
– Special newsletter
– Announcements using local/national media.
Preplanning for communications is critical. Drafts of message templates, scripts, and statements
can be crafted in advance for threats identified in the Risk Assessment.
Procedures to ensure that communications can be distributed at short notice should also be
established, particularly when using resources such as Intranet and Internet sites and toll-free
hotlines.
Official Spokesperson
The organization should designate a single primary spokesperson, with back-ups identified, who
will manage/disseminate crisis communications to the media and others. This individual should
be trained in media relations prior to a crisis. All information should be funneled through a single
source to assure that the messages being delivered are consistent.
It should be stressed that personnel should be informed quickly regarding where to refer calls
from the media and that only authorized company spokespeople are authorized to speak to the
media. In some situations, an appropriately trained site spokesperson may also be necessary.
10. Resource Management
The Human Element
People are the most important aspect of any BCP. How an organization’s human resources are
managed will impact the success or failure of crisis management.
Accounting for All Individuals
A system should be devised by which all personnel can be accounted for quickly after the onset
of a crisis. This system could range from a simple telephone tree to an elaborate external
vendor’s call-in site. Current and accurate contact information should be maintained for all
personnel. Consideration should be given to engaging the company’s travel agency to assist in
locating employees on business travel.
Notification of Next-of-Kin
Arrangements should be made for notification of any next-of-kin in case of injuries or fatalities.
If at all possible, notification should take place in person by a member of senior management.
Appropriate training should be provided.
Family Representatives
The organization should implement a Family Representative program in case of severe injury or
fatality. The Family Representative should be someone other than the person who performed the
notification. This Representative should act as the primary point of contact between the family
and the organization. Comprehensive training for the Representative is a necessity.
Crisis Counseling
Crisis counseling should be arranged as necessary. In many cases, such counseling goes beyond
the qualifications and experience of an organization’s Employee Assistance Program (where
available). Other reliable sources of counseling should be identified prior to a crisis situation.
11. Financial Support

A crisis may have far reaching financial implications for the organization, its employees and
their families, and other stakeholders; these implications should be considered an important part
of a BCP. Implications may include financial support to families of victims. Additionally, there
may be tax implications that should be referenced and clarified in advance.
Payroll
The payroll system should remain functional throughout the crisis.
Logistics
Logistical decisions made in advance will impact the success or failure of a good BCP. Among
them are the following:
Crisis Management Center
A primary Crisis Management Center should be identified in advance. This is the initial site used
by the Crisis Management Team and Response Teams for directing and overseeing crisis
management activities. The site should have an uninterruptible power supply, essential computer,
telecommunications, heating/ventilating/air conditioning systems, and other support systems.
Additionally, emergency supplies should be identified and kept in the Center.
Where a dedicated Center is not possible, a designated place where the Teams may direct and
oversee crisis management activities should be guaranteed. Access control measures should be
implemented, with the members of all Teams given 24×7 access. A secondary Crisis
Management Center should also be identified in the event that the primary Center is impacted by
the crisis event.
Alternate Worksites
The organization should have alternate worksites identified for business resumption and
recovery. In the absence of other company facilities being available and/or suitable, access to
alternate worksites can be arranged through appropriate vendors. Planning concerning the
identification and availability of alternate worksites should take place early in the BCP process.
Alternate worksites should provide adequate access to the resources required for business
resumption identified in the BIA.
Offsite Storage
Offsite storage is a valuable mitigation strategy allowing rapid crisis response and business
recovery/resumption. The off-site storage location should be a sufficient distance from the
primary facility so that it is not likely to be similarly affected by the same event. Items to be
considered for off-site storage include critical and vital records (paper and other media)
necessary to the operations of the business. Procedures should be included in the plan to ensure
the timely deliver of any necessary items from offsite storage to the Crisis Management Center
or the alternate worksites.
12. Financial Issues and Insurance
If appropriate, existing funding and insurance policies should be examined, and additional
funding and insurance coverage should be identified and obtained. Policy parameters should be
established in advance, including pre-approval by the insurance provider of any response related
vendors. Where possible, the amount of funds to help ensure continuity of operations should be
determined in the planning process. Additionally, any cash should be stored in an easily
accessible location to assure its availability during a crisis, and some cash and credit should be
available for weekend and after-hours requirements. All crisis related expenses should be
recorded throughout the response and recovery/resumption periods. Insurance providers should
be contacted as early as possible in the crisis period, particularly in instances of a wide-reaching
crisis, where competition for such resources could be vigorous. All insurance policy and contact
information should be readily available to the Crisis Management Team and backed up or stored
offsite as appropriate.
Transportation
Transportation in a time of crisis can be a challenge. Provisions should be arranged ahead of

time, if possible. Areas where transportation is critical include, but are not limited to:
· Evacuation of personnel (e.g., from a demolished work-site or from a satellite facility in another
country)
· Transportation to an alternate worksite
· Supplies into the site or to an alternate site
· Transportation of critical data to worksite
· Transportation for staff with special needs.
13. Suppliers/Service Providers
Critical vendor or service provider agreements should be established as appropriate and their
contact information maintained as part of the BCP. Such information could include phone
numbers, contact names, account numbers, pass-codes (appropriately protected), and other
information in the event that someone unfamiliar with the process would need to make contact.
In some instances, it may be appropriate to request and review the BCP, or a summary of such,
of the critical vendors, in order to evaluate their ability to continue to provide necessary supplies
and services in the case of a far-reaching crisis. At a minimum, the vendor’s or service provider’s
roles and service level agreements should be discussed in advance of the crisis.
14. Mutual Aid Agreements
Mutual aid agreements identify resources that may be borrowed from other organizations during
a crisis, as well as mutual support that may be shared with other organizations. Such agreements
should be legally sound and properly documented, clearly understood by all parties involved, and
representative of dependable resources as well as a commitment to cooperation.
15. Damage and Impact Assessment
Once the Crisis Management Team has been activated, the damage should be assessed. The
damage assessment may be performed by the Crisis Management Team itself or a designated
Damage Assessment Team. Responsibility should be assigned for the documentation of all
incident related facts and response actions, including financial expenditures.
Crises Involving Physical Damage
For situations involving physical damage to company property, the Crisis Management Team or
its designated Damage Assessment Team should be mobilized to the site. The Team will gain
entry, if permission from the public safety authorities is granted, and make a preliminary
assessment of the extent of damage and the likely length of time that the facility will be
unusable.
Crises Not Involving Physical Damage
Certain types of crises do not involve immediate physical damage to a company worksite or
facility. These would include the business, human, information technology, and societal types of
crises. In these crises, the Team will likely assess the damage or impact as the crisis unfolds.
16. Resumption of Critical and Remaining Processes
Process Resumption Prioritization
Once the extent of damage is known, the process recovery needs should be
prioritized and a schedule for resumption determined and documented. The prioritization should
take into account the fundamental criticality of the process and other factors, including
relationships to other processes, critical schedules, and regulatory requirements, as identified in
the BIA. Decisions regarding prioritization of processes should be documented and recorded,
including the date, time, and justification for the decisions.
Resumption of Critical Processes
Once the processes to be restored have been prioritized, the resumption work can begin with
processes restored according to the prioritization schedule. The resumption of these processes
may occur at either the current worksite or an alternate worksite, depending on the circumstances
of the crisis. Documentation should be kept of when the processes were resumed.
Resumption of Remaining Processes

Once the critical processes have been resumed, the resumption of the remaining processes can be
addressed. Where possible, decisions about the prioritization of these processes should be
thoroughly documented in advance, as should the timing of actual resumption.
17. Return to Normal Operations
The organization should seek to bring the company ‘‘back to normal.’’ If it is not possible to
return to the pre-crisis ‘‘normal,’’ a ‘‘new normal’’ should be established. This ‘‘new normal’’
creates the expectation that, while there may be changes and restructuring in the workplace, the
organization will phase back into productive work. Each step of the process and all decisions
should be carefully documented. As a rule, it is at this point that the crisis may be officially
declared ‘‘over.’’ Again, it is important to document this decision. Press conferences and mass
media communications may be undertaken to bolster employee and client confidence.
4.4 Practice Advisory – Part Two
4.4.1 Implementing and Maintaining the Plan
This section of the Guideline contains those functions and tasks required for the Business
Continuity Plan to remain a living document: one that grows and changes with the organization
and remains relevant and actionable.
1. Educate and Train
The BCP is only as valuable as the knowledge that others have of it. Education and training are
necessary components of the BCP process. They require a time commitment from the Crisis
Management Team, the Response Teams, and the general employee population.
Educate and Train Teams
The Crisis Management and Response Teams should be educated about their responsibilities and
duties. Check lists of critical actions and information to be gathered are valuable tools in the
education and response processes. Teams should be trained at least annually and new members
should be trained when they join. These Teams should also be trained with respect to prevention
of crises, as described in the next section.
Educate and Train All Personnel
All personnel should be trained to perform their individual responsibilities in case of a crisis.
They should also be briefed on the key components of the BCP, as well as the Response Plans
that affect them directly. Such training could include procedures for evacuation, shelter-in-place,
check-in processes to account for employees, arrangements at alternate worksites, and the
handling of media inquiries by the company. It is recommended that any external resources that
may be involved in a response – such as Fire, Police, Public Health, and third party vendors –
should be familiar with relevant parts of the BCP.
2. Test the BCP
Benefits of Testing
The benefits and necessity for testing, which involves training and exercises, cannot be
overemphasized. Testing can keep Teams and employees effective in their duties, clarify their
roles, and reveal weaknesses in the BCP that should be corrected. A commitment to testing lends
credibility and authority to the BCP.
Goals and Expectations
The first step in testing should be the setting of goals and expectations. An obvious goal is to
determine whether a certain crisis response process works and how it can be improved. Other
less obvious goals can be to test capacity (as in the case of a call-in or call-out phone system, for
instance), to reduce the time necessary for accomplishment of a process (for example, using
repeated drills to shorten response times), and to bring awareness and knowledge to the general
employee population about the BCP. Lessons learned from previous tests, as well as actual
incidents experienced, should be built into the testing cycle for the BCP.
Planning and Development
The responsibility for testing the BCP should be assigned. Larger organizations may consider
establishing a Test Team. Where appropriate, the expertise of external resources (consultants,
local emergency organizations, etc.) can be leveraged.
Timeline
A test schedule and timeline as to how often the plan and its components will be tested should be
established.
Scope of Testing
The scope of testing should be planned to develop over time. In their infancy, tests should start
out relatively simple, becoming increasingly complex as the test process evolves. Early tests
could include checklists, simple exercises, and small components of the BCP. As the test
schedules evolve, tests should become increasingly complex, up to a full-scale activation of the
entire BCP, including external participation by public safety and emergency responders.
Test Monitoring
When feasible, assign observers to take notes during the test. If possible, arrange to videotape
and/or use audiotape devices for further appraisal at the conclusion of the exercise. If videotape
and/or audiotape devices are not available, then a person should be assigned to document the
chronological list of events during the testing.
Test and Exercise Scenarios

Testing scenarios should be designed using the events identified in the Risk Assessment.
Test and Exercise Roles
There are several roles that test participants can fill. All participants should understand their roles
in the exercise, and the exercise should involve all participants. As part of the exercise,
participants should be allowed to interact and discuss issues and lessons.
Test and Exercise Participation
Various groups from the organization itself, as well as from the public sector, can participate in
the tests:
Test and Exercise Evaluation
After completion, the test should be critically evaluated. The evaluation should include, among
other things, an assessment of how well the goals and objectives of the test were achieved, the
effectiveness of participation, and whether the BCP itself will function as anticipated in the case
of a real crisis. Future testing, as well as the BCP itself, should then be modified as necessary
based on the test results.
Ongoing Development of Test Schedules
Design of tests should be evaluated and modified as necessary. They should be dynamic, taking
into account changes to the BCP, personnel turnover, actual incidents, and results from previous
exercises.
3. Develop BCP Review Schedule
The BCP should be regularly reviewed and evaluated. Reviews should occur according to a pre-
determined schedule, and documentation of the review should be maintained as necessary. The
following factors can trigger a review and should otherwise be examined once a review is
scheduled:
· Risk Assessment: The BCP should be reviewed every time a Risk Assessment is completed for
the organization. The results of the Risk Assessment can be used to determine whether the BCP
continues to adequately address the risks facing the organization.
· Sector/Industry Trends: Major sector/industry initiatives should initiate a BCP review.

General trends in the sector/industry and in business continuity planning techniques can be used
for benchmarking purposes.
· Regulatory Requirements: New regulatory requirements may require a review of the BCP.
· Event Experience: A review should be performed following a response to an event, whether

the BCP was activated or not. If the plan was activated, the review should take into account the
history of the plan itself, how it worked, why it was activated, etc. If the plan was not activated,
the review should examine why and whether this was an appropriate decision.
· Test/Exercise Results: Based on test/exercise results, the BCP should be modified as

necessary.
4. Develop BCP Maintenance Schedule
Regular maintenance of the BCP cannot be overemphasized. Clear responsibility for BCP
maintenance should be assigned. Maintenance can be either planned or unplanned and should
reflect changes in the operation of the organization that will affect the BCP. The following are
examples of procedures, systems, or processes that may affect the plan:
· Systems and application software changes
· Changes to the organization and its business processes
· Personnel changes (employees and contractors)
· Supplier changes
· Critical lessons learned from testing
· Issues discovered during actual implementation of the plan in a crisis
· Changes to external environment (new businesses in area, new roads or changes to existing
traffic patterns, etc.)
· Other items noted during review of the plan and identified during the Risk Assessment.
4.5 Check List
Developing the Plan
Overview
1. If a major disaster occurred today, has your organization planned for survival?
2. Does your organization have a Business Continuity Plan (BCP), and is it up to date?
3. Has senior management approved the BCP?
4. Does senior management support the BCP?
5. Has the cost of the BCP been determined, including development and maintenance?
6. Have the initial audit, security, and insurance departments reviewed the BCP?
7. Has the BCP been tested, including a surprise test?
Accountability
1. Does your organization’s policy include a definition of crisis?
2. Has the person responsible for critical systems and business processes been identified?
3. Has a BCP Team been appointed, and does it include senior business function leaders?
4. Has the BCP been communicated throughout the organization?
5. Has a person been assigned with the responsibility to update the BCP?
Risk Assessment
1. Has your organization conducted a Risk Assessment?
2. Have the types of risks that may impact your organization been identified and analyzed?
3. Has the likelihood for each type of risk been rated?
Business Impact Analysis
1. Have the critical business processes been identified?
2. Have the business processes been ranked (low, medium, high)?
3. If a crisis were to happen, has the impact, in terms of human and financial costs, been
assessed?
4. Have the maximum allowable outage and recovery time objectives been determined?
5. Has the length of time your organization’s business processes could be non-functional been
determined?
6. Have the recovery time objectives been identified?
7. Have the resources required for resumption and recovery been identified?
Strategic Plans
1. Have methods to mitigate the risks identified in the Business Impact Analysis and Risk
Assessment been identified?
2. Have plans and procedures to respond to any incident been developed?
3. Have strategies that address short and long term business interruptions been selected?
4. Are the strategies attainable, tested, and cost effective?
Crisis Management and Response Team Development
1. Is the Crisis Management Team comprised of members from human resources?
2. Have Response Teams to support the Crisis Management Team been organized?
3. Have response plans to address the various aspects of the crisis been developed and
incorporated into the organization’s overall BCP?
4. Do the response plans address damage assessment, site restoration, payroll, human resources,
information technology, and administrative support?
5. Has contact information been included in the plan for the Crisis Management and the
Response Teams?
Prevention
Compliance with Corporate Policy & Mitigation Strategies
1. Have compliance audits been conducted to enforce BCP policy and procedures?
2. Have the systems and resources that will contribute to the mitigation process been identified,
including personnel, facilities, technology, and equipment?
3. Have the systems and resources been monitored to ensure they will be available when needed?
Avoidance, Deterrence, and Detection
1. Are employees motivated to be responsible for avoidance and deterrence and detection?
2. Have facility security programs to support avoidance and deterrence and detection been
established?
3. Have operational policy and procedures to protect the facilities been developed?
4. Is it ensured that sufficient physical security systems and planning are in place to protect the
facility?
Response
Potential Crisis Recognition and Team Notification
1. Will the response program recognize when a crisis occurs and provide some level of response?
2. Have the danger signals been identified that indicate a crisis is imminent?
3. Have personnel been trained to observe warning signs of an imminent crisis?
4. Has a notification system been put in place, including redundant systems?
5. Is the notification contact list complete and up to date?
Assess the Situation
1. Has an assessment process to address the severity and impact of the crisis been developed?
2. Has the responsibility for declaring a crisis, with first and second alternates, been assigned?
Declare a Crisis
1. Have the criteria been established for when a crisis should be declared?
2. Has the responsibility for declaring a crisis been clearly defined and assigned?
3. Has an alert network for BCP Team members and employees been established?
4. Is it ensured that there is an alternate means of warning if the alert network fails?
5. Have the activities that will be implemented in event of a crisis been identified, including
notification, evacuation, relocation, alternate site activation, team deployment, operational
changes, etc?
Execute the Plan
1. Has consideration been given to developing the BCP around a ‘‘worst case scenario?’’
2. Has the BCP been prioritized to save lives, protect assets, restore critical business processes
and systems, reduce the length of the interruption, protect reputation, control media coverage,
and maintain customer relations?
3. Have the severity of the crisis and the appropriate response been determined?
Communications
1. Has a crisis communications strategy been developed?

2. Are communications timely, honest, and objective?
3. Are communications with all employees occurring at approximately the same time?
4. Are regular updates provided, including notification of when the next update will be issued?
5. Has a primary spokesperson and back-up spokespersons been designated who will manage and
disseminate crisis communications to the media and others?
Resource Management – Human Element
1. Has a system been devised by which all personnel can be accounted for quickly?
2. Is there a system to ensure current and accurate contact information is maintained?
3. Have arrangements been made for next-of-kin notifications?
4. Can crisis counseling be arranged as necessary?
5. Will the financial systems for payroll and support of facilities and employees remain
functional?
Resource Management – Logistics
1. Has a designated Crisis Management Center been identified, and does it have necessary life
support functions, including uninterruptible power supply and communications equipment?
2. Have alternate worksites for business resumption and recovery been identified?
3. Have critical and vital records been stored at an offsite storage facility?
4. How long can each business function operate effectively without normal data input storage
processes?
5. What must be done to restore data to the same previous point in time within the recovery time
objective?
6. Can any alternate data storage processes be used, after the initial data recovery, to speed the
forward recovery to the present time?
Resource Management – Financial Issues and Insurance,
Transportation, Suppliers/Service Providers, and Mutual Aid
1. Has the appropriate insurance coverage been identified and obtained?

2. Are cash and credit available to the BCP Team?
3. Have transportation alternatives been arranged in advance?
4. Have critical vendor and service provider agreements been established?
5. Have mutual aid agreements been established?
6. If so, are they legally sound, properly documented, and understood by all parties?
Recovery and resumption
Damage and Impact Assessment, Process Resumption, and Return to Normal Operations
1. Has a damage assessment been performed as soon as possible?
2. Has the Damage Assessment Team been mobilized to the site?
3. Has business process recovery been prioritized to recover the most critical business processes
first?
4. Is the schedule of the processes to be restored in accordance with the prioritization schedule?
5. Is there documentation of when the processes were resumed?
6. Has the organization returned to normal operations?
7. Has the decision to return to normal operations been documented and communicated?
Implementing and maintaining the plan
Education and Training
1. Are the Crisis Management and Response Teams educated about their responsibilities and
duties?
2. Has a checklist of critical actions and responsibilities and duties been developed?
3. Do Teams receive annual training?
Testing
1. Are the Business Continuity Plan and appropriate Teams tested to reveal any weaknesses that
require correction?
2. Have goals and expectations of testing and drills been established?

3. Are drills and tabletop exercises conducted on an annual basis?
4. Has responsibility for testing the BCP been assigned with consideration for establishing a test
team?
5. Does test participation include various groups from the organization and the public sector?
6. Have observers been assigned who will take notes during the test and critique the test at the
conclusion of the exercise?
7. Have tests and drills been evaluated, including assessing how well the goals and objectives of
the tests and drills were met?
BCP Review and Maintenance Schedules
1. Is the BCP regularly reviewed and evaluated on a predetermined schedule?
2. Is the BCP reviewed every time a Risk Assessment is completed for the organization?
3. Is the BCP modified as needed based on test/exercise results?
4. Has responsibility for on-going BCP maintenance been assigned?
5. Does BCP maintenance reflect changes in the operation of the organization?
1. Junior leadership of the organization sponsors and takes responsibility for creating,
maintaining, testing, and implementing a comprehensive Business Continuity Plan.
2. Education and training are necessary components of the BCP process.
3. Only top executives should be trained to perform their individual responsibilities in case of a
crisis.
4. The BCP should be reviewed every time a Risk Assessment is completed for the organization.
4.6 Summary
‘Business Continuity Plan’ is an ongoing process supported by senior management and funded to
ensure that the necessary steps are taken to identify the impact of potential losses, maintain
viable recovery strategies and plans, and ensure the continuity of operations through personnel
training, plan testing, and maintenance.
The Business Continuity Guideline is a tool to allow organizations to consider the factors and
steps necessary to prepare for a crisis (disaster or emergency) so that it can manage and survive
the crisis and take all appropriate actions to help ensure the organization’s continued viability.
The advisory portion of the guideline is divided into two parts: (1) the planning process and (2)
successful implementation and maintenance.
By understanding the concepts and procedures described in this unit, it will be possible to
effectively adapt the guideline to smaller-sized organizations.
1. Explain the purpose of Business Continuity Plan.
2. Give the meaning of the following terms:
a) Crisis Management
b) Business Impact Analysis
c) Critical Function
d) Disaster Recovery
3. Describe how a Business Continuity Plan is developed.
4. Describe how a Business Continuity Plan is implemented.
SAQs I
1. Crisis Management
2. Business Impact Analysis
3. Business Continuity
4. Critical Function
SAQs II
1. False
2. True
3. False
4. True
Answers to TQs:
1. Refer to 4.2
2. Refer to 4.2
3. Refer to 4.3
4. Refer to 4.4
MB0036-Unit-05-Small Businesses – Big

Obstacles
Unit 5 Small Businesses – Big Obstacles
Structure
5.1 Introduction
Objectives
5.2 What is Small Business Administration (SBA)?
5.3 The Different Phases of a New Business
5.4 Stock Options
5.5 Bankruptcy Laws

5.6 The Chief Financial Officer (CFO)
5.6.1 Organizational Affiliation
5.6.2 Functions
5.7 Summary
5.1 Introduction
Everyone is talking about small businesses. In 1993, when it was allowed in Developing
countries, more than 90,000 new firms were registered by individuals. Now, less than three years
later, official figures show that only 40,000 of them still pay their dues and present annual
financial statements. These firms are called "active" – but this is a misrepresentation. Only a very
small fraction really does business and produces income.
Why this reversal? Why were people so enthusiastic to register companies – and then became too
desperate to operate them?
Small business is more than a fashion or a buzzword. In the USA, only small businesses create
new jobs. The big dinosaur firms (the "blue-chips") create negative employment – they fire
people. This trend has a glitzy name: downsizing.
In Israel many small businesses became world class exporters and big companies in world terms.
The same goes, to a lesser extent, in Britain and in Germany.
Objectives:
· Describe the valuable services provided by Small Business Administration.
· Explain different phases of a new business.
· Explain the benefits of Stock Option Plan.
· Explain the Bankruptcy Laws prevailing in the USA.

· Describe the functions of Chief Financial Officer.
5.2 What is Small Business Administration (SBA)?
Virtually every Western country has a "Small Business Administration" (SBA).
These agencies provide many valuable services to small businesses:
They help them organize funding for all their needs: infrastructure, capital goods (machinery and
equipment), land, working capital, licence and patent fees and charges, etc.
The SBAs have access to government funds, to local venture capital funds, to international and
multilateral investment sources, to the local banking community and to private investors. They
act as capital brokers at a fraction of the costs that private brokers and organized markets charge.
They assist the entrepreneur in the preparation of business plans, feasibility studies, application
forms, questionnaires – and any other thing which the new start-up venture might need to raise
funds to finance its operations. This saves the new business a lot of money.
They reduce bureaucracy. They mediate between the small business and the various tentacles of
the government. They become the ONLY address which the new business should approach, a
"One Stop Shop".
But why do new (usually small) businesses need special treatment and encouragement at all?
And if they do need it – what are the best ways to provide them with this help? This is a question
to ponder over.
5.3 The Different Phases of a New Business
A new business goes through phases in the business cycle (very similar to the stages of human
life).
The first phase – is the formation of an idea. A person – or a group of people join forces, centred
around one exciting invention, process or service.
These crystallizing ideas have a few hallmarks:
They are oriented to fill the needs of a market niche (a small group of select consumers or
customers), or to provide an innovative solution to a problem which bothers many, or to create a
market for a totally new product or service, or to provide a better solution to a problem which is
solved in a less efficient manner.
At this stage, what the entrepreneurs need most is expertise. They need a marketing expert to tell
them if their idea is marketable and viable. They need a financial expert to tell them if they can
get funds in each phase of the business cycle – and wherefrom and also if the product or service
can produce enough income to support the business, pay back debts and yield a profit to the
investors. They need technical experts to tell them if the idea can or cannot be realized and what
it requires by way of technology transfers, engineering skills, know-how, etc.
Once the idea has been shaped to its final form by the team of entrepreneurs and experts – the
proper legal entity should be formed. A bewildering array of possibilities arises:
A partnership? A corporation – and if so, a stock or a non-stock company? A research and

development (RND) entity? A foreign company or a local entity? And so on.
This decision is of cardinal importance. It has enormous tax implications and in the near future
of the firm it greatly influences the firm’s ability to raise funds in foreign capital markets. Thus,
a lawyer must be consulted who knows both the local applicable laws and the foreign legislation
in markets which could be relevant to the firm.
This costs a lot of money, one thing that entrepreneurs are in short supply of free legal advice is
likely to be highly appreciated by them.
When the firm is properly legally established, registered with all the relevant authorities and has
appointed an accounting firm – it can go on to tackle its main business: developing new products
and services. At this stage the firm should adopt Western accounting standards and methodology.
Accounting systems in many countries leave too much room for creative playing with reserves
and with amortization. No one in the West will give the firm credits or invest in it based on
domestic financial statements.
A whole host of problems faces the new firm immediately upon its formation.
Good entrepreneurs do not necessarily make good managers. Management techniques are not a
genetic heritage.
They must be learnt and assimilated. Today’s modern management includes many elements:
manpower, finances, marketing, investing in the firm’s future through the development of new
products, services, or even whole new business lines. That is quite a lot and very few people are
properly trained to do the job successfully.
On top of that, markets do not always react the way entrepreneurs expect them to react. Markets
are evolving creatures: they change, develop, disappear and re-appear. They are exceedingly
hard to predict. The sales projections of the firm could prove to be unfounded. Its contingency
funds can evaporate.
Sometimes it is better to create a product mix: well-recognized brands which sell well – side by
side with innovative products.
This is a brief – and by no way comprehensive – taste of what awaits the new business and its
initiator, the entrepreneur. You see that a lot of money and effort are needed even in the first
phases of creating a business.
How can the Government help?
It could set up an "Entrepreneur’s One Stop Shop".
A person wishing to establish a new business will go to a government agency.
In one office, he will find the representatives of all the relevant government offices, authorities,
agencies and municipalities.
He will present his case and the business that he wishes to develop. In a matter of few weeks he
will receive all the necessary permits and licences without having to go to each office separately.
Having obtained the requisite licences and permits and having registered with all the appropriate
authorities – the entrepreneur will move on to the next room in the same building. Here he will
receive a list of all the sources of capital available to him both locally and from foreign sources.
The terms and conditions of the financing will be specified for each and every source. Example:
EBRD – loans of up to 10 years – interest between 6.5% to 8% – grace period of up to 3 years –
finances mainly industry, financial services, environmental projects, infrastructure and public
services.
The entrepreneur will select the sources of funds most suitable for his needs – and proceed to the
next room.
The next room will contain all the experts necessary to establish the business, get it going – and,
most important, raise funds from both local and international institutions. For a symbolic sum
they will prepare all the documents required by the financing institutions as per their instructions.
But entrepreneurs in many developing countries are still fearful and uninformed. They are
intimidated by the complexity of the task facing them.
The solution is simple: a tutor or a mentor will be attached to each and every entrepreneur. This
tutor will escort the entrepreneur from the first phase to the last.
He will be employed by the "One Stop Shop" and his role will be to ease life for the novice
businessman. He will transform the person to a businessman.
And then they will wish the entrepreneur: "Bon Voyage" – and may the best ones win.
There is an inherent conflict between owners and managers of companies. The former want, for
instance, to minimize costs – the latter to draw huge salaries as long as they are in power.
In publicly traded companies, the former wish to maximize the value of the stocks (short term),
the latter might have a longer term view of things. In the USA, shareholders place emphasis on
the appreciation of the stocks
(the result of quarterly and annual profit figures). This leaves little room for technological
innovation, investment in research and development and in infrastructure. The theory is that
workers who also own stocks avoid these cancerous conflicts which, at times, bring companies to
ruin and, in many cases, dilapidate them financially and technologically. Whether reality lives up
to theory, is an altogether different question.
1. SBAs help small businesses to organize funding for all their needs.
2. The SBAs, however, do not have access to government funds.
3. SBAs act as capital brokers at a fraction of the costs that private brokers and organized
markets charge.
4. SBAs assist the entrepreneur in the preparation of business plans.
5. The first phase of a new business is the formation of an idea.
6. Good entrepreneurs always make good managers.
5.4 Stock Options
A Stock Option Plan is an organized program for employees of a corporation allowing them to
buy its shares. Sometimes the employer gives the employees subsidized loans to enable them to
invest in the shares or even matches their purchases: for every share bought by an employee, the
employer awards him with another one, free of charge. In many companies, employees are
offered the opportunity to buy the shares of the company at a discount (which translates to an
immediate paper profit).
Stock options have many uses: they are popular investments and speculative vehicles in many
markets in the West, they are a way to hedge (to insure) stock positions (in the case of put
options which allow you to sell your stocks at a pre-fixed price). With very minor investment
and very little risk (one can lose only the money invested in buying the option) – huge profits can
be realized.
Creative owners and shareholders use stock options to provide their workers with an incentive to
work for the company and only for the company. Normally, such perks were reserved to senior
management, thought indispensable. Later, as companies realized that their main asset was their
employees, all employees began to enjoy similar opportunities. Under an incentive stock option
scheme, an employee is given by the company (as part of his compensation package) an option
to purchase its shares at a certain price (at or below market price at the time that the option was
granted) for a given number of years. Profits derived from such options now constitute the main
part of the compensation of the top managers of the Fortune 500 in the USA and the habit is
catching on even with more conservative Europe.
Dividends that the workers receive on the shares that they hold can be reinvested by them in
additional shares of the firm (some firms do it for them automatically and without or with
reduced brokerage commissions). Many companies have wage "set-aside" programs: employees
regularly use a part of their wages to purchase the shares of the company at the market prices at
the time of purchase. Another well-known structure is the Employee Stock Ownership Plan
(ESOP) whereby employees regularly accumulate shares and may ultimately assume control of
the company.
Let us study in depth a few of these schemes:
It all began with Ronald Reagan. His administration passed in Congress the Economic Recovery
Tax Act (ERTA – 1981) under which certain kinds of stock options ("qualifying options") were
declared tax-free at the date that they were granted and at the date that they were exercised.
Profits on shares sold after being held for at least two years from the date that they were granted
or one year from the date that they were transferred to an employee were subject to preferential
(lower rate) capital gains tax. A new class of stock options was thus invented: the "Qualifying
Stock Option". Such an option was legally regarded as a privilege granted to an employee of the
company that allowed him to purchase, for a special price, shares of its capital stock (subject to
conditions of the Internal Revenue – the American income tax – code). To qualify, the option
plan must be approved by the shareholders, the options must not be transferable (i.e., cannot be
sold in the stock exchange or privately – at least for a certain period of time).
Additional conditions: the exercise price must not be less than the market price of the shares at
the time that the options were issued and that the employee who receives the stock options (the
grantee) may not own stock representing more than 10% of the company’s voting power unless
the option price equals 110% of the market price and the option is not exercisable for more than
five years following its grant. No income tax is payable by the employee either at the time of the
grant or at the time that he converts the option to shares (which he can sell at the stock exchange
at a profit) – the exercise period. If the market price falls below the option price, another option,
with a lower exercise price can be issued. There is a 100,000 USD per employee limit on the
value of the stock covered by options that can be exercised in any one calendar year.
This law – designed to encourage closer bondage between workers and their workplaces and to
boost stock ownership – led to the creation of Employee Stock Ownership Plans (ESOPs). These
are programs which encourage employees to purchase stock in their company. Employees may
participate in the management of the company. In certain cases – for instance, when the company
needs rescuing – they can even take control (without losing their rights). Employees may offer
wage concessions or other work rules related concessions in return for ownership privileges – but
only if the company is otherwise liable to close down ("marginal facility").
How much of its stock should a company offer to its workers and in which manner?
There are no rules (except that ownership and control need not be transferred). A few of the
methods:
1. The company offers packages of different sizes, comprising shares and options and the
employees bid for them in open tender.
2. The company sells its shares to the employees on an equal basis

(all the members of the senior management, for instance, have the right to buy the same number
of shares) – and the workers are then allowed to trade the shares between them.
3. The company could give one or more of the current shareholders the right to offer his shares to
the employees or to a specific group of them.
The money generated by the conversion of the stock options (when an employee exercises his
right and buys shares) usually goes to the company. The company sets aside in its books a
number of shares sufficient to meet the demand which may be generated by the conversion of all
outstanding stock options. If necessary, the company issues new shares to meet such a demand.
Rarely, the stock options are converted into shares already held by other shareholders.
It all starts by defaulting on an obligation. Money owed to creditors or to suppliers is not paid on
time, interest payments due on bank loans or on corporate bonds issued to the public are
withheld. It may be a temporary problem – or a permanent one.
As time goes by, the creditors gear up and litigate in a court of law or in a court of arbitration.
This leads to a “technical or equity insolvency” status.
But this is not the only way a company can be rendered insolvent. It could also run liabilities
which outweigh its assets. This is called “bankruptcy insolvency”. True, there is a debate raging
as to what is the best method to appraise the firm’s assets and the liabilities. Should these
appraisals be based on market prices – or on book value?
There is no one decisive answer. In most cases, there is strong reliance on the figures in the
balance sheet.
If the negotiations with the creditors of the company (as to how to settle the dispute arising from
the company’s default) fails, the company itself can file (=ask the court) for bankruptcy in a
"voluntary bankruptcy filing".
Enter the court. It is only one player (albeit, the most important one) in this unfolding, complex
drama. The court does not participate directly in the script.
Court officials are appointed. They work hand in hand with the representatives of the creditors
(mostly lawyers) and with the management and the owners of the defunct company.
They face a tough decision: should they liquidate the company? In other words, should they
terminate its business life by (among other acts) selling its assets?
The proceeds of the sale of the assets are divided (as "bankruptcy dividend") among the
creditors. It makes sense to choose this route only if the (money) value yielded by liquidation
exceeds the money the company, as a going concern, as a living, functioning, entity, can
generate.
The company can, thus, go into "straight bankruptcy". The secured creditors then receive the
value of the property which was used to secure their debt (the "collateral", or the "mortgage,
lien"). Sometimes, they receive the property itself – if it not easy to liquidate (=sell) it.
Once the assets of the company are sold, the first to be fully paid off are the secured creditors.
Only then, the priority creditors are paid (wholly or partially).
The priority creditors include administrative debts, unpaid wages (up to a given limit per
worker), uninsured pension claims, taxes, rents, etc.
And only if any money left after all these payments is it proportionally doled out to the
unsecured creditors.
5.5 Bankruptcy Laws
The USA had many versions of bankruptcy laws. There was the 1938 Bankruptcy Act, which
was followed by amended versions in 1978, 1984 and, lately, in 1994.
Each State has modified the Federal Law to fit its special, local conditions.
Still, a few things – the spirit of the law and its philosophy are common to all the versions.
Arguably, the most famous procedure is named after the chapter in the law in which it is
described, Chapter 11. Following is a brief discussion of chapter 11 intended to demonstrate this
spirit and this philosophy.
This chapter allows for a mechanism called "reorganization". It must be approved by two thirds
of all classes of creditors and then, again, it could be voluntary (initiated by the company) or
involuntary (initiated by one to three of its creditors).
The American legislator set the following goals in the bankruptcy laws:
a. To provide a fair and equitable treatment to the holders of various classes of securities of the
firm (shares of different kinds and bonds of different types).
b. To eliminate burdensome debt obligations, which obstruct the proper functioning of the firm
and hinder its chances to recover and ever repay its debts to its creditors.
c. To make sure that the new claims received by the creditors (instead of the old, discredited,
ones) equal, at least, what they would have received in liquidation.
Examples of such new claims: owners of debentures of the firm can receive, instead, new, long
term bonds (known as reorganization bonds, whose interest is payable only from profits).
Owners of subordinated debentures will, probably, become shareholders and shareholders in the
insolvent firm usually receive no new claims.
The chapter dealing with reorganization (the famous "Chapter 11") allows for "arrangements"
to be made between debtor and creditors: an extension or reduction of the debts.
If the company is traded in a stock exchange, the Securities and Exchange Commission (SEC) of
the USA advises the court as to the best procedure to adopt in case of reorganization.
What chapter 11 teaches us is that:
American Law leans in favour of maintaining the company as an ongoing concern. A whole is
larger than the sum of its parts – and a living business is sometimes worth more than the sum of
its assets, sold separately.
A more in-depth study of the bankruptcy laws shows that they prescribe three ways to tackle a
state of malignant insolvency which threatens the well being and the continued functioning of the
firm:
Chapter 7 (1978 Act) – Liquidation
A District Court appoints an "interim trustee" with broad powers. Such a trustee can also be
appointed at the request of the creditors and by them.
The Interim Trustee is empowered to do the following:
· liquidate property and make distribution of liquidating dividends to creditors
· make management changes
· arrange unsecured financing for the firm
· operate the debtor business to prevent further losses
By filing a bond, the debtor (really, the owners of the debtor) is able to regain possession of the
business from the trustee.
Chapter 11 – Reorganization
Unless the court rules otherwise, the debtor remains in possession and in control of the business
and the debtor and the creditors are allowed to work together flexibly. They are encouraged to
reach a settlement by compromise and agreement rather than by court adjudication.
Maybe the biggest legal revolution embedded in chapter 11 is the relaxation of the age old
ABSOLUTE PRIORITY rule that says that the claims of creditors have categorical precedence
over ownership claims. Rather, the interests of the creditors have to be balanced with the
interests of the owners and even with the larger good of the community and society at large.
And so, chapter 11 allows the debtor and creditors to be in direct touch, to negotiate payment
schedules, the restructuring of old debts, even the granting of new loans by the same disaffected
creditors to the same irresponsible debtor.
Chapter 10
Is sort of a legal hybrid, the offspring of chapters 7 and 11:
It allows for reorganization under a court appointed independent manager (trustee) who is
responsible mainly for the filing of reorganization plans with the court – and for verifying strict
adherence to them by both debtor and creditors.
Despite its clarity and business orientation, many countries found it difficult to adapt to the
pragmatic, non sentimental approach which led to the virtual elimination of the absolute priority
rule.
In England, for instance, the court appoints an official "receiver" to manage the business and to
realize the debtor’s assets on behalf of the creditors (and also of the owners). His main task is to
maximize the proceeds of the liquidation and he continues to function until a court settlement is
decreed (or a creditor settlement is reached, prior to adjudication). When this happens, the
receivership ends and the receiver loses his status.
The receiver takes possession (but not title) of the assets and the affairs of a business in a
receivership. He collects rents and other income on behalf of the firm.
So, British Law is much more in favour of the creditors. It recognizes the supremacy of their
claims over the property claims of the owners. Honouring obligations – in the eyes of the British
legislator and their courts – is the cornerstone of efficient, thriving markets. The courts are
entrusted with the protection of this moral pillar of the economy.
Economies in transition are in transition not only economically – but also legally. Thus, each one
adopted its own version of the bankruptcy laws.
In Hungary – Bankruptcy is automatically triggered. Debt for equity swaps are disallowed.
Moreover, the law provides for a very short time to reach agreement with creditors about
reorganization of the debtor. These features led to 4000 bankruptcies in the wake of the new law
– a number which mushroomed to 30,000 by 5/97.
In the Czech Republic – the insolvency law comprises special cases

(over-indebtedness, for instance). It delineates two rescue programs:
a. A debt to equity swap (an alternative to bankruptcy) supervised by the Ministry of

Privatization.
b. The Consolidation Bank (founded by the State) can buy a firm’s obligations, if it went
bankrupt, at 60% of par.
But the law itself is toothless and lackadaisically applied by the incestuous web of institutions in
the country. Between 3/93 – 9/93 there were 1000 filings for insolvency, which resulted in only
30 commenced bankruptcy procedures. There hasn’t been a single major bankruptcy in the
Czech Republic since then – and not for lack of candidates.
Poland is a special case. The pre-war (1934) law declares bankruptcy in a state of lasting
illiquidity and excessive indebtedness. Each creditor can apply to declare a company bankrupt.
An insolvent company is obliged to file a maximum of 2 weeks following cessation of debt
payments. There is a separate liquidation law which allows for voluntary procedures.
Bad debts are transferred to base portfolios and have one of three fates:
1. Reorganization, debt-consolidation (a reduction of the debts, new terms, debt for equity
swaps) and a program of rehabilitation.
2. Sale of the corporate liabilities in auctions
3. Classic bankruptcy (happens in 23% of the cases of insolvency).
No one is certain what is the best model. The reason is that no one knows the answers to the
questions: Are the rights of the creditors superior to the rights of the owners? Is it better to
rehabilitate than to liquidate?
Until such time as these questions are answered and as long as the corporate debt crisis deepens
– we will witness a flowering of versions of bankruptcy laws all over the world.
1. A ––––––––––––- is an organized program for employees of a corporation allowing them to

buy its shares.
2. ESOP stands for –––––––––––––––––––––.
3. A company can run liabilities which outweigh its assets. This is called
––––––––––––––––––––.
4. Once the assets of the company are sold, the first to be fully paid off are
––––––––––––––––– .
5.6 The Chief Financial Officer (CFO)
The CFO (Chief Financial Officer) is fervently hated by the workers. He is thoroughly despised
by other managers, mostly for scrutinizing their expense accounts. He is dreaded by the owners
of the firm because his powers that often outweigh theirs. Shareholders hold him responsible in
annual meetings. When the financial results are good – they are attributed to the talented Chief
Executive Officer (CEO). When they are bad – the Chief Financial Officer gets blamed for not
enforcing budgetary discipline. It is a no-win, thankless job. Very few make it to the top. Others
retire, eroded and embittered.
The job of the Chief Financial Officer is composed of many elements. Here is a universal job
description which is common throughout the West.
5.6.1 Organizational Affiliation
The Chief Financial Officer is subordinated to the Chief Executive Officer, answers to him and
regularly reports to him.
The CFO is in charge of:
1. The Finance Director

2. The Financing Department
3. The Accounting Department which answers to him and regularly reports to him.
Despite the above said, the CFO can report directly to the Board of Directors through the person
of the Chairman of the Board of Directors or by direct summons from the Board of Directors.
In many developing countries, this would be considered treason – but, in the West every function
holder in the company can – and regularly is – summoned by the (active) Board. A grilling
session then ensues: debriefing the officer and trying to spot contradictions between his
testimony and others’. The structure of business firms in the USA reflects its political structure.
The Board of Directors resembles Congress, the Management is the Executive (President and
Administration), the shareholders are the people. The usual checks and balances are applied: the
authorities are supposedly separated and the Board criticizes the Management.
The same procedures are applied: the Board can summon a worker to testify – the same way that
the Senate holds hearings and cross-questions workers in the administration. Lately, however,
the delineation became fuzzier with managers serving on the Board or, worse, colluding with it.
Ironically, Europe, where such incestuous practices were common hitherto – is reforming itself
with zeal (especially Britain and Germany).
Developing countries are still after the cosy, outdated European model. Boards of Directors are
rubber stamps, devoid of any will to exercise their powers. They are staffed with cronies and
friends and family members of the senior management and they do and decide what the General
Managers tell them to do and to decide. General Managers – unchecked – get involved in
colossal blunders (not to mention worse). The concept of corporate governance is alien to most
firms in developing countries and companies are regarded by most general managers as milking
cows – fast paths to personal enrichment.
5.6.2 Functions
(1) To regulate, supervise and implement a timely, full and accurate set of accounting books of
the firm reflecting all its activities in a manner commensurate with the relevant legislation and
regulation in the territories of operation of the firm and subject to internal guidelines set from
time to time by the Board of Directors of the firm.
This is somewhat difficult in developing countries. The books do not reflect reality because they
are "tax driven" (i.e., intended to cheat the tax authorities out of tax revenues). Two sets of books
are maintained: the real one which incorporates all the income – and another one which is
presented to the tax authorities. This gives the CFO an inordinate power. He is in a position to
blackmail the management and the shareholders of the firm. He becomes the information
junction of the firm, the only one who has access to the whole picture. If he is dishonest, he can
easily enrich himself. But he cannot be honest: he has to constantly lie and he does so as a life
long habit.
He (or she) develops a cognitive dissonance: I am honest with my superiors – I only lie to the
state.
(2) To implement continuous financial audit and control systems to monitor the performance
of the firm, its flow of funds, the adherence to the budget, the expenditures, the income, the
cost of sales and other budgetary items.
In developing countries, this is often confused with central planning. Financial control does not
mean the waste of precious management resources on verifying petty expenses. Nor does it mean
a budget which goes to such details as how many tea bags will be consumed by whom and
where. Managers in developing countries still feel that they are being supervised and followed,
that they have quotas to complete, that they have to act as though they are busy (even if they are,
in reality, most of the time, idle). So, they engage in the old time central planning and they do it
through the budget. This is wrong.
A budget in a firm is no different than the budget of the state. It has exactly the same functions. It
is a statement of policy, a beacon showing the way to a more profitable future. It sets the
strategic (and not the tactical) goals of the firm: new products to develop, new markets to
penetrate, new management techniques to implement, possible collaborations, identification of
the competition, of the relative competitive advantages. Above all, a budget must allocate the
scarce resources of the firm in order to obtain a maximum impact (=efficiently). All this,
unfortunately, is missing from budgets of firms in developing countries.
No less important are the control and audit mechanisms which go with the budget. Audit can be
external but must be complemented internally. It is the job of the CFO to provide the
management with a real time tool which informs them what is happening in the firm and where
are the problematic, potential problem areas of activity and performance.
Additional functions of the CFO include:
(3) To timely, regularly and duly prepare and present to the Board of Directors financial
statements and reports as required by all pertinent laws and regulations in the territories of
the operations of the firm and as deemed necessary and demanded from time to time by the
Board of Directors of the Firm.
The warning signs and barbed wire which separate the various organs of the Western firm
(management from Board of Directors and both from the shareholders) – have yet to reach
developing countries. As I said: the Board in these countries is full with the cronies of the
management. In many companies, the General Manager uses the Board as a way to secure the
loyalty of his cronies, friends and family members by paying them hefty fees for their
participation (and presumed contribution) in the meetings of the Board. The poor CFO is loyal to
the management – not to the firm. The firm is nothing but a vehicle for self enrichment and does
not exist in the Western sense, as a separate functional entity which demands the undivided
loyalty of its officers. A weak CFO is rendered a pawn in these get-rich-quick schemes – a
stronger one becomes a partner. In both cases, he is forced to collaborate, from time to time, with
stratagems which conflict with his conscience.
It is important to emphasize that not all the businesses in developing countries are like that. In
some places the situation is much better and closer to the West. But geopolitical insecurity (what
will be the future of developing countries in general and my country in particular), political
insecurity (will my party remain in power), corporate insecurity (will my company continue to
exist in this horrible economic situation) and personal insecurity (will I continue to be the
General Manager) combine to breed short-sightedness, speculative streaks, a drive to get rich
while the going is good (and thus rob the company) – and up to criminal tendencies.
(4) To comply with all reporting, accounting and audit requirements imposed by the capital
markets or regulatory bodies of capital markets in which the securities of the firm are traded
or are about to be traded or otherwise listed.
The absence of a functioning capital market in many developing countries and the inability of
developing countries firms to access foreign capital markets – make the life of the CFO harder
and easier at the same time. Harder – because there is nothing like a stock exchange listing to
impose discipline, transparency and long-term, management-independent strategic thinking on a
firm. Discipline and transparency require an enormous amount of investment by the financial
structures of the firm: quarterly reports, audited annual financial statements, disclosure of
important business developments, interaction with regulators (a tedious affair) – all fall within
the remit of the CFO. Why, therefore, should he welcome it?
Because discipline and transparency make the life of a CFO easier in the long run. Just think how
much easier it is to maintain one set of books instead of two or to avoid conflicts with tax
authorities on the one hand and your management on the other.
(5) To prepare and present for the approval of the Board of Directors an annual budget, other
budgets, financial plans, business plans, feasibility studies, investment memoranda and all
other financial and business documents as may be required from time to time by the Board of
Directors of the firm.
The primal sin in developing countries was so called “privatization”. The laws were flawed. To
mix the functions of management, workers and ownership is detrimental to a firm, yet this is
exactly the path that was chosen in numerous developing countries. Management takeovers and
employee takeovers forced the new, impoverished, owners to rob the firm in order to pay for
their shares. Thus, they were unable to infuse the firm with new capital, new expertise, or new
management. Privatized companies are dying slowly.
One of the problems thus wrought was the total confusion regarding the organic structure of the
firm. Boards were composed of friends and cronies of the management because the managers
also owned the firm – but they could be easily fired by their own workers, who were also owners
and so on. These incestuous relationships introduced an incredible amount of insecurity into
management ranks (see previous point).
(6) To alert the Board of Directors and to warn it regarding any irregularity, lack of
compliance, lack of adherence, lacunas and problems whether actual or potential concerning
the financial systems, the financial operations, the financing plans, the accounting, the audits,
the budgets and any other matter of a financial nature or which could or does have a
financial implication.
The CFO is absolutely aligned and identified with the management. The Board is meaningless.
The concept of ownership is meaningless because everyone owns everything and there are no
identifiable owners (except in a few companies). Absurdly, Communism (the common
ownership of means of production) has returned in full vengeance, though in disguise, precisely
because of the ostensibly most capitalist act of all, privatization.
(7) To collaborate and co-ordinate the activities of outside suppliers of financial services hired
or contracted by the firm, including accountants, auditors, financial consultants, underwriters
and brokers, the banking system and other financial venues.
Many firms in developing countries (again, not all) are interested in collusion – not in
consultancy. Having hired a consultant or the accountant – they believe that they own him. They
are bitterly disappointed and enraged when they discover that an accountant has to comply with
the rules of his trade or that a financial consultant protects his reputation by refusing to
collaborate with shenanigans of the management.
(8) To maintain a working relationship and to develop additional relationships with banks,
financial institutions and capital markets with the aim of securing the funds necessary for the
operations of the firm, the attainment of its development plans and its investments.
One of the main functions of the CFO is to establish a personal relationship with the firm’s
bankers. The financial institutions which pass for banks in developing countries lend money on
the basis of personal acquaintance more than on the basis of analysis or rational decision making.
This "old boy network" substitutes for the orderly collection of data and credit rating of
borrowers. This also allows for favouritism and corruption in the banking sector. A CFO who is
unable to participate in these games is deemed by the management to be "weak", "ineffective" or
"no-good". The lack of non-bank financing options and the general squeeze on liquidity make
matters even worse for the finance manager. He must collaborate with the skewed practices and
decision making processes of the banks – or perish.
(9) To fully computerize all the above activities in a combined hardware-software and
communications system which integrates with the systems of other members of the group of
companies.
(10) Otherwise, to initiate and engage in all manner of activities, whether financial or other,
conducive to the financial health, the growth prospects and the fulfillment of investment plans
of the firm to the best of his ability and with the appropriate dedication of the time and efforts
required.
It is this point that occupies the working time of Western CFOs. It is their brain that is valued –
not their connections or cunning acts.
1. The Chief Financial Officer is subordinated to ––––––––––––––.
2. The CFO can report directly to the Board of Directors through the person of
––––––––––––––– .
5.7 Summary
Virtually every Western country has a "Small Business Administration" (SBA). SBAs provide
many valuable services to small businesses. They assist the entrepreneur in the preparation of
business plans, while providing access to government funds, to local venture capital funds, to
international and multilateral investment sources.
A new business goes through phases in the business cycle which have discussed in brief in this
unit.
A Stock Option Plan is an organized program for employees of a corporation allowing them to
buy its shares. Creative owners and shareholders use stock options to provide their workers with
an incentive to work for the company and only for the company.
The Chief Financial Officer is subordinated to the Chief Executive Officer, answers to him and
regularly reports to him. The job of the Chief Financial Officer is composed of many elements
which have been discussed in this unit.
1. Describe the valuable services provided by SBAs.
2. Explain different phases of a new business.

3. What is Stock Option Plan? Explain its benefits to the employees.
4. Explain the Bankruptcy Laws prevailing in the USA.
5. Describe the functions of Chief Financial Officer.
SAQs I
1. True
2. False
3. True
4. True
5. True
6. False
SAQs II
1. Stock Option Plan
2. Employee Stock Ownership Plan
3. Bankruptcy insolvency
4. The secured creditors
SAQs III
1. The Chief Executive Officer
2. The Chairman of the Board of Directors
Answers to TQs:
1. Refer to 5.2
2. Refer to 5.3
3. Refer to 5.4
4. Refer to 5.5
5. Refer to 5.6
MB0036-Unit-06-Decision Support Systems

Unit 6 Decision Support Systems
Structure
6.1 Introduction
Objectives
6.2 Levels of Reporting and Flows of Data
6.2.1 The Daily Financial Statements
6.2.2 The Daily Ratios Report
6.2.3 Examples of the Ratios to be included in the Decision System
6.3 The Effects of Using a Decision System
6.4 Valuing Stocks

6.5 The Process of Due Diligence
6.6 Financial Investor vs. Strategic Investor
6.7 Mortgage-backed Construction
6.8 Banking
6.9 Credit Cards
6.10 Summary
6.1 Introduction
Many companies in developing countries have a very detailed reporting system going down to
the level of a single product, a single supplier, a single day. However, these reports – which are
normally provided to the General Manager – should not be used by them at all. They are too
detailed and, thus, tend to obscure the true picture. A General Manager must have a bird’s eye
view of his company. He must be alerted to unusual happenings, disturbing financial data and
other irregularities.
As things stand now, the following phenomena could happen:
· That the management will highly leverage the company by assuming excessive debts burdening
the cash flow of the company.
· That a false Profit and Loss (PNL) picture will emerge – both on the single product level – and
generally. This could lead to wrong decision-making, based on wrong data.
· That the company will pay excessive taxes on its earnings.
· That the inventory will not be fully controlled and appraised centrally.
· That the wrong cash flow picture will distort the decisions of the management and lead to
wrong (even to dangerous) decisions.
The following section discusses how these phenomena could be handled.
Objectives:
· State the outcome of the detailed reporting system.
· Explain the levels of reporting and flows of data.
· Explain the method of valuation of stocks.
· Explain the process of Due Diligence.
· Distinguish between the ‘strategic investor’ and the ‘financial investor’.
· Explain the steps involved in a typical credit card transaction.
6.2 Levels of Reporting and Flows of Data
To assist in overcoming the above, there are four levels of reporting and flows of data which
every company should institute:
The first level is the annual budget of the company which is really a business plan. The budget
allocates amounts of money to every activity and/or department of the firm.
As time passes, the actual expenditures are compared to the budget in a feedback loop. During
the year, or at the end of the fiscal year, the firm generates its financial statements: the income
statement, the balance sheet, the cash flow statement.
Put together, these four documents are the formal edifice of the firm’s finances. However, they
can not serve as day-to-day guides to the General Manager.
The second tier of financial audit and control is when the finance department (equipped with
proper software – Solomon IV is the most widely used in the West) is able to produce pro forma
financial statements monthly.
These financial statements, however inaccurate, provide a better sense of the dynamics of the
operation and should be constructed on the basis of Western Accounting Principles (GAAP and
FASBs, or IAS).
But the Manager should be able to open this computer daily and receive two kinds of data, fully
updated and fully integrated:
1. Daily financial statements
2. Daily ratios report.
6.2.1 The Daily Financial Statements

The Manager should have access to continuously updated statements of income, cash flow, and a
balance sheet. The most important statement is that of the cash flow. The manager should be able
to know, at each and every stage, what his real cash situation is – as opposed to the theoretical
cash situation which includes accounts payable and account receivable in the form of expenses
and income.
These pro forma financial statements should include all the future flows of money – whether
invoiced or not. This way, the Manager will be able to type a future date into his computer and
get the financial reports and statements relating to that date.
In other words, the Manager will not be able to see only a present situation of his company, but
its future situation, fully analysed and fully updated.
Using today’s technology – a wireless-connected laptop – Managers are able to access all these
data from anywhere in the world, from home, while traveling, and so on.
6.2.2 The Daily Ratios Report
This is the most important part of the decision support system.
It enables the Manager to instantly analyse dozens of important aspects of the functioning of his
company. It allows him to compare the behaviour of these parameters to historical data and to
simulate the future functioning of his company under different scenarios.
It also allows him to compare the performance of his company to the performance of his
competitors, other firms in his branch and to the overall performance of the industry that he is
operating in.
The Manager can review these financial and production ratios. Where there is a strong deviation
from historical patterns, or where the ratios warn about problems in the future – management
intervention may be required.
Instead of sifting through mountains of documents, the Manager will only have to look at four
computer screens in the morning, spot the alerts, read the explanations offered by the software,
check what is happening and better prepare himself for the future.
6.2.3 Examples of the Ratios to be Included in the Decision System
a) SUE measure – deviation of actual profits from expected profits
b) ROE – the return on the adjusted equity capital
c) Debt to equity ratios
d) ROA – the return on the assets

e) The financial average
f) ROS – the profit margin on the sales
g) ATO – asset turnover, how efficiently assets are used
h) Tax burden and interest burden ratios
i) Compounded leverage
j) Sales to fixed assets ratios
k) Inventory turnover ratios
l) Days receivable and days payable
m) Current ratio, quick ratio, interest coverage ratio and other liquidity and coverage ratios
n) Valuation price ratios
o) And many others
6.3 The Effects of Using a Decision System
A decision system has great impact on the profits of the company. It forces the management to
rationalize the depreciation, inventory and inflation policies. It warns the management against
impending crises and problems in the company. It specially helps in following areas:
· The management knows exactly how much credit it could take, for how long (for which
maturities) and in which interest rate. It has been proven that without proper feedback, managers
tend to take too much credit and burden the cash flow of their companies.
· A decision system allows for careful financial planning and tax planning. Profits go up, non
cash outlays are controlled, tax liabilities are minimized and cash flows are maintained positive
throughout.
As a result of all the above effects, the value of the company grows and its shares appreciate.
The decision system is an integral part of financial management in the West. It is completely
compatible with western accounting methods and derives all the data that it needs from
information extant in the company.
So, the establishment of a decision system does not hinder the functioning of the company in any
way and does not interfere with the authority and functioning of the financial department.
Decision Support Systems cost as little as 20,000 USD (all included: software, hardware, and
training). They are one of the best investments that a firm can make.
1. The budget allocates amounts of money to every activity and / or department of the firm.
2. A decision system has great impact on the profits of the company.
3. The establishment of a decision system hinders the functioning of the company.
4. The Daily Ratios Report enables the Manager to instantly analyse dozens of important aspects
of the functioning of his company.
6.4 Valuing Stocks
The debate rages all over Eastern and Central Europe, in countries in transition as well as in
Western Europe. It raged in Britain during the 80s.
Is privatization really the robbery in disguise of State assets by a select few, cronies of the
political regime? Margaret Thatcher was accused of it – and so were privatizers in developing
countries. What price should State-owned companies have fetched? This question is not as
simple and straightforward as it sounds.
There is a stock pricing mechanism known as the Stock Exchange. Willing buyers and willing
sellers meet there to freely negotiate deals of stock purchases and sales. New information,
macro-economic and micro-economic, determines the value of companies.
Greenspan testifies in the Senate, economic figures are released – and the rumour mill starts
working: interest rates might go up. The stock market reacts with frenzily – it crashes. Why?
A top executive is asked how profitable will his firm be this quarter. He winks, he grins – this is
interpreted by Wall Street to mean that profits will go up. The share price surges: no one wants
to sell it, everyone wants to buy it. The result: a sharp rise in its price. Why?
Moreover, the share price of a company of an identical size, similar financial ratios (and in the
same industry) barely budges. Why not?
We say that the stocks of the two companies have different elasticity (their prices move up and
down differently), probably the result of different sensitivities to changes in interest rates and in
earnings estimates. But this is just to rename the problem. The question remains: Why do the
shares of similar companies react differently?
Economy is a branch of psychology and wherever and whenever humans are involved, answers
don’t come easily. A few models have been developed and are in wide use but it is difficult to
say that any of them has real predictive or even explanatory powers. Some of these models are
"technical" in nature: they ignore the fundamentals of the company. Such models assume that all
the relevant information is already incorporated in the price of the stock and that changes in
expectations, hopes, fears and attitudes will be reflected in the prices immediately. Others are
fundamental: these models rely on the company’s performance and assets. The former models
are applicable mostly to companies whose shares are traded publicly, in stock exchanges. They
are not very useful in trying to attach a value to the stock of a private firm. The latter type
(fundamental) models can be applied more broadly.
The value of a stock (a bond, a firm, real estate, or any asset) is the sum of the income (cash
flow) that a reasonable investor would expect to get in the future, discounted at the appropriate
rate. The discounting reflects the fact that money received in the future has lower (discounted)
purchasing power than money received now. Moreover, we can invest money received now and
get interest on it (which should normally equal the discount). Put differently: the discount
reflects the loss in purchasing power of money deferred or the interest lost by not being able to
invest the money right away. This is the time value of money.
Another problem is the uncertainty of future payments, or the risk that we will never receive
them. The longer the payment period, the higher the risk. A model exists which links time, the
value of the stock, the cash flows expected in the future and the discount (interest) rates.
The rate that we use to discount future cash flows is the prevailing interest rate. This is partly
true in stable, predictable and certain economies. But the discount rate depends on the inflation
rate in the country where the firm is located (or, if a multinational, in all the countries where it
operates), on the projected supply of and demand for its shares and on the aforementioned risk of
non-payment. In certain places, additional factors must be taken into account (for example:
country risk or foreign exchange risks).
The supply of a stock and, to a lesser extent, the demand for it determine its distribution (how
many shareowners are there) and, as a result, its liquidity. Liquidity means how freely one can
buy and sell it and at which quantities sought or sold do prices become rigid.
Example: If a controlling stake is sold – the buyer normally pays a "control premium". Another
example: In thin markets, it is easier to manipulate the price of a stock by artificially increasing
the demand or decreasing the supply ("cornering" the market). In a liquid market (no problems to
buy and to sell), the discount rate is comprised of two elements: one is the risk-free rate
(normally, the interest payable on government bonds), the other being the risk-related rate (the
rate which reflects the risk related to the specific stock).
But what is this risk-related rate?
The most widely used model to evaluate specific risks is the Capital Asset Pricing Model
(CAPM).
According to it, the discount rate is the risk-free rate plus a coefficient (called beta) multiplied by
a risk premium general to all stocks (in the USA it was calculated to be 5.5%). Beta is a measure
of the volatility of the return of the stock relative to that of the return of the market. A stock’s
Beta can be obtained by calculating the coefficient of the regression line between the weekly
returns of the stock and those of the stock market during a selected period of time.
Unfortunately, different betas can be calculated by selecting different parameters (for instance,
the length of the period on which the calculation is performed). Another problem is that betas
change with every new datum. Professionals resort to sensitivity tests which neutralize the
changes that betas undergo with time.
Still, with all its shortcomings and disputed assumptions, the CAPM should be used to determine
the discount rate. But to use the discount rate we must have future cash flows to discount.
The only relatively certain cash flows are dividends paid to the shareholders. So, Dividend
Discount Models (DDM) were developed.
Other models relate to the projected growth of the company (which is supposed to increase the
payable dividends and to cause the stock to appreciate in value).
Still, DDM’s require, as input, the ultimate value of the stock and growth models are only
suitable for mature firms with a stable, low dividend growth. Two-stage models are more
powerful because they combine both emphases, on dividends and on growth. This is because of
the life-cycle of firms. At first, they tend to have a high and unstable dividend growth rate (the
DDM tackles this adequately). As the firm matures, it is expected to have a lower and stable
growth rate, suitable for the treatment of Growth Models.
But how many years of future income (from dividends) should we use in our calculations? If a
firm is profitable now, is there any guarantee that it will continue to be so in the next year, or the
next decade? If it does continue to be profitable – who can guarantee that its dividend policy will
not change and that the same rate of dividends will continue to be distributed?
The number of periods (normally, years) selected for the calculation is called the "price to
earnings (P/E) multiple". The multiple denotes by how much we multiply the (after tax) earnings
of the firm to obtain its value. It depends on the industry (growth or dying), the country (stable or
geopolitically perilous), on the ownership structure (family or public), on the management in
place (committed or mobile), on the product (new or old technology) and a myriad of other
factors. It is almost impossible to objectively quantify or formulate this process of analysis and
decision making. In telecommunications, the range of numbers used for valuing stocks of a
private firm is between 7 and 10, for instance. If the company is in the public domain, the
number can shoot up to 20 times net earnings.
While some companies pay dividends (some even borrow to do so), others do not. So in stock
valuation, dividends are not the only future incomes you would expect to get. Capital gains
(profits which are the result of the appreciation in the value of the stock) also count. This is the
result of expectations regarding the firm’s free cash flow, in particular the free cash flow that
goes to the shareholders.
There is no agreement as to what constitutes free cash flow. In general, it is the cash which a
firm has after sufficiently investing in its development, research and (predetermined) growth.
Cash Flow Statements have become a standard accounting requirement in the 80s (starting with
the USA). Because "free" cash flow can be easily extracted from these reports, stock valuation
based on free cash flow became increasingly popular and feasible. Cash flow statements are
considered independent of the idiosyncratic parameters of different international environments
and therefore applicable to multinationals or to national, export-orientated firms.
The free cash flow of a firm that is debt-financed solely by its shareholders belongs solely to
them. Free cash flow to equity (FCFE) is:
FCFE = Operating Cash Flow MINUS Cash needed for meeting growth targets
Where
Operating Cash Flow = Net Income (NI) PLUS Depreciation and Amortization
Cash needed for meeting growth targets = Capital Expenditures + Change in Working Capital
Working Capital = Total Current Assets – Total Current Liabilities
Change in Working Capital = One Year’s Working Capital MINUS Previous Year’s Working
Capital
The complete formula is:
FCFE = Net Income PLUS

Depreciation and Amortization MINUS
Capital Expenditures PLUS
Change in Working Capital.
A leveraged firm that borrowed money from other sources (even from preferred stock holders)
exhibits a different free cash flow to equity. Its CFCE must be adjusted to reflect the preferred
dividends and principal repayments of debt (MINUS sign) and the proceeds from new debt and
preferred stocks (PLUS sign). If its borrowings are sufficient to pay the dividends to the holders
of preference shares and to service its debt – its debt to capital ratio is sound.
The FCFE of a leveraged firm is:
FCFE = Net Income PLUS
Depreciation and Amortization MINUS
Principal Repayment of Debt MINUS

Preferred Dividends PLUS
Proceeds from New Debt and Preferred MINUS
Capital Expenditures MINUS
Changes in Working Capital.
A sound debt ratio means:
FCFE = Net Income MINUS

(1 – Debt Ratio)*(Capital Expenditures MINUS
Depreciation and Amortization PLUS
Change in Working Capital).
6.5 The Process of Due Diligence
A business which wants to attract foreign investments must present a business plan. But a
business plan is the equivalent of a visit card. The introduction is very important – but, once the
foreign investor has expressed interest, a second, more serious, more onerous and more tedious
process commences: Due Diligence.
"Due Diligence" is a legal term (borrowed from the securities industry). It means, essentially, to
make sure that all the facts regarding the firm are available and have been independently
verified. In some respects, it is very similar to an audit. All the documents of the firm are
assembled and reviewed, the management is interviewed and a team of financial experts, lawyers
and accountants descends on the firm to analyze it.
First Rule:
The firm must appoint ONE due diligence coordinator. This person interfaces with all outside
due diligence teams. He collects all the materials requested and oversees all the activities which
make up the due diligence process.
The firm must have ONE VOICE. Only one person represents the company, answers questions,
makes presentations and serves as a coordinator when the DD teams wish to interview people
connected to the firm.
Second Rule:
Brief your workers. Give them the big picture. Why is the company raising funds, who are the
investors, how will the future of the firm (and their personal future) look if the investor comes in.
Both employees and management must realize that this is a top priority. They must be instructed
not to lie. They must know the DD coordinator and the company’s spokesman in the DD process.
The DD is a process which is more structured than the preparation of a Business Plan. It is
confined both in time and in subjects: Legal, Financial, Technical, Marketing, Controls.
The Marketing Plan
Must include the following elements:
· A brief history of the business (to show its track performance and growth)
· Points regarding the political, legal (licences) and competitive environment
· A vision of the business in the future
· Products and services and their uses
· Comparison of the firm’s products and services to those of the competitors
· Warranties, guarantees and after-sales service
· Development of new products or services
· A general overview of the market and market segmentation
· Is the market rising or falling (the trend: past and future)
· What customer needs do the products / services satisfy
· Which markets segments do we concentrate on and why
· What factors are important in the customer’s decision to buy (or not to buy)
· A list of the direct competitors and a short description of each
· The strengths and weaknesses of the competitors relative to the firm
· Missing information regarding the markets, the clients and the competitors
· Planned market research
· A sales forecast by product group
· The pricing strategy (how is pricing decided)
· Promotion of the sales of the products (including a description of the sales force, sales-related
incentives, sales targets, training of the sales personnel, special offers, dealerships, telemarketing
and sales support). Attach a flow chart of the purchasing process from the moment that the client
is approached by the sales force until he buys the product.
· Marketing and advertising campaigns (including cost estimates) – broken by market and by
media
· Distribution of the products
· A flow chart describing the receipt of orders, invoicing, shipping.
· Customer after-sales service (hotline, support, maintenance, complaints, upgrades, etc.)
· Customer loyalty (example: churn rate and how is it monitored and controlled).
Legal Details
· Full name of the firm
· Ownership of the firm
· Court registration documents
· Copies of all protocols of the Board of Directors and the General Assembly of Shareholders
· Signatory rights backed by the appropriate decisions
· The charter (statute) of the firm and other incorporation documents
· Copies of licences granted to the firm
· A legal opinion regarding the above licences
· A list of lawsuit that were filed against the firm and that the firm filed against third parties
(litigation) plus a list of disputes which are likely to reach the courts
· Legal opinions regarding the possible outcomes of all the lawsuits and disputes including their
potential influence on the firm
Financial Due Diligence
· Last 3 years income statements of the firm or of constituents of the firm, if the firm is the result
of a merger. The statements have to include:
· Balance Sheets
· Income Statements
· Cash Flow statements
· Audit reports (preferably done according to the International Accounting Standards, or, if the
firm is looking to raise money in the USA, in accordance with FASB)
· Cash Flow Projections and the assumptions underlying them
Controls
· Accounting systems used
· Methods to price products and services
· Payment terms, collections of debts and ageing of receivables
· Introduction of international accounting standards
· Monitoring of sales
· Monitoring of orders and shipments
· Keeping of records, filing, archives
· Cost accounting system
· Budgeting and budget monitoring and controls
· Internal audits (frequency and procedures)
· External audits (frequency and procedures)
· The banks that the firm is working with: history, references, balances
Technical Plan
· Description of manufacturing processes (hardware, software, communications, other)
· Need for know-how, technological transfer and licensing required
· Suppliers of equipment, software, services (including offers)
· Manpower (skilled and unskilled)
· Infrastructure (power, water, etc.)
· Transport and communications (example: satellites, lines, receivers, transmitters)

· Raw materials: sources, cost and quality
· Relations with suppliers and support industries
· Import restrictions or licensing (where applicable)
· Sites, technical specification
· Environmental issues and how they are addressed
· Leases, special arrangements
· Integration of new operations into existing ones (protocols, etc.)
A successful due diligence is the key to an eventual investment. This is a process much more
serious and important than the preparation of the Business Plan.
6.6 Financial Investor vs. Strategic Investor
In the not so distant past, there was little difference between financial and strategic investors.
Investors of all colors sought to safeguard their investment by taking over as many management
functions as they could. Additionally, investments were small and shareholders few. A firm
resembled a household and the number of people involved – in ownership and in management –
was correspondingly limited. People invested in industries they were acquainted with first hand.
As markets grew, the scales of industrial production (and of service provision) expanded. A
single investor (or a small group of investors) could no longer accommodate the needs even of a
single firm. As knowledge increased and specialization ensued – it was no longer feasible or
possible to micro-manage a firm one invested in. Actually, separate businesses of money making
and business management emerged. An investor was expected to excel in obtaining high yields
on his capital – not in industrial management or in marketing. A manager was expected to
manage, not to be capable of personally tackling the various and varying tasks of the business
that he managed.
Thus, two classes of investors emerged. One type supplied firms with capital. The other type
supplied them with know-how, technology, management skills, marketing techniques,
intellectual property, clientele and a vision, a sense of direction.
In many cases, the strategic investor also provided the necessary funding. But, more and more, a
separation was maintained. Venture capital and risk capital funds, for instance, are purely
financial investors. So are, to a growing extent, investment banks and other financial institutions.
The financial investor represents the past. Its money is the result of past – right and wrong –
decisions. Its orientation is short term: an "exit strategy" is sought as soon as feasible. For “exit
strategy” read quick profits. The financial investor is always on the lookout, searching for willing
buyers for his stake. The stock exchange is a popular exit strategy. The financial investor has
little interest in the company’s management. Optimally, his money buys for him not only a good
product and a good market, but also a good management. But his interpretation of the rolls and
functions of "good management" are very different to that offered by the strategic investor. The
financial investor is satisfied with a management team which maximizes value. The price of his
shares is the most important indication of success. This is "bottom line" short termism which also
characterizes operators in the capital markets. Invested in so many ventures and companies, the
financial investor has no interest, nor the resources to get seriously involved in any one of them.
Micro-management is left to others – but, in many cases, so is macro-management. The financial
investor participates in quarterly or annual general shareholders meetings. This is the extent of its
involvement.
The strategic investor, on the other hand, represents the real long term accumulator of value.
Paradoxically, it is the strategic investor that has the greater influence on the value of the
company’s shares. The quality of management, the rate of the introduction of new products, the
success or failure of marketing strategies, the level of customer satisfaction, the education of the
workforce – all depend on the strategic investor. That there is a strong relationship between the
quality and decisions of the strategic investor and the share price is small wonder. The strategic
investor represents a discounted future in the same manner that shares do. Indeed, gradually, the
balance between financial investors and strategic investors is shifting in favour of the latter.
People understand that money is abundant and what is in short supply is good management.
Given the ability to create a brand, to generate profits, to issue new products and to acquire new
clients – money is abundant.
These are the functions normally reserved to financial investors:
Financial Management
The financial investor is expected to take over the financial management of the firm and to
directly appoint the senior management and, especially, the management echelons, which
directly deal with the finances of the firm.
1. To regulate, supervise and implement a timely, full and accurate set of accounting books of
the firm reflecting all its activities in a manner commensurate with the relevant legislation and
regulation in the territories of operations of the firm and with internal guidelines set from time to
time by the Board of Directors of the firm. This is usually achieved both during a Due Diligence
process and later, as financial management is implemented.
2. To implement continuous financial audit and control systems to monitor the performance of
the firm, its flow of funds, the adherence to the budget, the expenditures, the income, the cost of
sales and other budgetary items.
3. To timely, regularly and duly prepare and present to the Board of Directors financial
statements and reports as required by all pertinent laws and regulations in the territories of the
operations of the firm and as deemed necessary and demanded from time to time by the Board of
Directors of the Firm.
4. To comply with all reporting, accounting and audit requirements imposed by the capital
markets or regulatory bodies of capital markets in which the securities of the firm are traded or
are about to be traded or otherwise listed.
5. To prepare and present for the approval of the Board of Directors an annual budget, other
budgets, financial plans, business plans, feasibility studies, investment memoranda and all other
financial and business documents as may be required from time to time by the Board of Directors
of the Firm.
6. To alert the Board of Directors and to warn it regarding any irregularity, lack of compliance,
lack of adherence, lacunas and problems whether actual or potential concerning the financial
systems, the financial operations, the financing plans, the accounting, the audits, the budgets and
any other matter of a financial nature or which could or does have a financial implication.
7. To collaborate and coordinate the activities of outside suppliers of financial services hired or
contracted by the firm, including accountants, auditors, financial consultants, underwriters and
brokers, the banking system and other financial venues.
8. To maintain a working relationship and to develop additional relationships with banks,

financial institutions and capital markets with the aim of securing the funds necessary for the
operations of the firm, the attainment of its development plans and its investments.
9. To fully computerize all the above activities in a combined hardware-software and

communications system which will integrate into the systems of other members of the group of
companies.
10. Otherwise, to initiate and engage in all manner of activities, whether financial or of other
nature, conducive to the financial health, the growth prospects and the fulfillment of investment
plans of the firm to the best of his ability and with the appropriate dedication of the time and
efforts required.
Collection and Credit Assessment
1. To construct and implement credit risk assessment tools, questionnaires, quantitative methods,
data gathering methods and venues in order to properly evaluate and predict the credit risk rating
of a client, distributor, or supplier.
2. To constantly monitor and analyse the payment morale, regularity, non-payment and non-
performance events, etc. – in order to determine the changes in the credit risk rating of said
factors.
3. To analyse receivables and collectibles on a regular and timely basis.
4. To improve the collection methods in order to reduce the amounts of arrears and overdue
payments, or the average period of such arrears and overdue payments.
5. To collaborate with legal institutions, law enforcement agencies and private collection firms in
assuring the timely flow and payment of all due payments, arrears and overdue payments and
other collectibles.
6. To coordinate an educational campaign to ensure the voluntary collaboration of the clients,

distributors and other debtors in the timely and orderly payment of their dues.
The strategic investor is, usually, put in charge of the following:
Project Planning and Project Management
The strategic investor is uniquely positioned to plan the technical side of the project and to
implement it. He is, therefore, put in charge of:
· The selection of infrastructure, equipment, raw materials, industrial processes, etc.
· Negotiations and agreements with providers and suppliers
· Minimizing the costs of infrastructure by deploying proprietary components and planning
· The provision of corporate guarantees and letters of comfort to suppliers
· The planning and erecting of the various sites, structures, buildings, premises, factories, etc.
· The planning and implementation of line connections, computer network connections,

protocols, solving issues of compatibility (hardware and software, etc.)
· Project planning, implementation and supervision
Marketing and Sales
1. The presentation to the Board an annual plan of sales and marketing including: market
penetration targets, profiles of potential social and economic categories of clients, sales
promotion methods, advertising campaigns, image, public relations and other media campaigns.
The strategic investor also implements these plans or supervises their implementation.
2. The strategic investor is usually possessed of a brandname recognized in many countries. It is

the market leaders in certain territories. It has been providing goods and services to users for a
long period of time, reliably. This is an important asset, which, if properly used, can attract users.
The enhancement of the brand name, its recognition and market awareness, market penetration,
co-branding, collaboration with other suppliers – are all the responsibilities of the strategic
investor.
3. The dissemination of the product as a preferred choice among vendors, distributors, individual
users and businesses in the territory.
4. Special events, sponsorships, collaboration with businesses.
5. The planning and implementation of incentive systems (e.g., points, vouchers).
6. The strategic investor usually organizes a distribution and dealership network, a franchising
network, or a sales network (retail chains) including: training, pricing, pecuniary and quality
supervision, network control, inventory and accounting controls, advertising, local marketing and
sales promotion and other network management functions.
7. The strategic investor is also in charge of "vision thinking": new methods of operation, new
marketing ploys, new market niches, predicting the future trends and market needs, market
analyses and research, etc.
The strategic investor typically brings to the firm valuable experience in marketing and sales. It
has numerous off the shelf marketing plans and drawer sales promotion campaigns. It developed
software and personnel capable of analysing any market into effective niches and of creating the
right media (image and PR), advertising and sales promotion drives best-suited for it. It has built
large databases with multi-year profiles of the purchasing patterns and demographic data related
to thousands of clients in many countries. It owns libraries of material, images, sounds, paper
clippings, articles, PR and image materials, and proprietary trademarks and brand names. Above
all, it accumulated years of marketing and sales promotion ideas which crystallized into a new
conception of the business.
Technology
1. The planning and implementation of new technological systems up to their fully operational
phase. The strategic partner’s engineers are available to plan, implement and supervise all the
stages of the technological side of the business.
2. The planning and implementation of a fully operative computer system (hardware, software,
communication, intranet) to deal with all the aspects of the structure and the operation of the
firm. The strategic investor puts at the disposal of the firm proprietary software developed by it
and specifically tailored to the needs of companies operating in the firm’s market.
3. The encouragement of the development of in-house, proprietary, technological solutions to the

needs of the firm, its clients and suppliers.
4. The planning and the execution of an integration program with new technologies in the field,
in collaboration with other suppliers or market technological leaders.
Education and Training
The strategic investor is responsible to train all the personnel in the firm: operators, customer
services, distributors, vendors, sales personnel. The training is conducted at its sole expense and
includes tours of its facilities abroad.
The entrepreneurs – who sought to introduce the two types of investors, in the first place – are
usually left with the following functions:
Administration and Control
1. To structure the firm in an optimal manner, most conducive to the conduct of its business and
to present the new structure for the Board’s approval within 30 days from the date of the GM’s
appointment.
2. To run the day to day business of the firm.
3. To oversee the personnel of the firm and to resolve all the personnel issues.
4. To secure the unobstructed flow of relevant information and the protection of confidential
organization.
5. To represent the firm in its contacts, representations and negotiations with other firms,
authorities, or persons.
This is why entrepreneurs find it very hard to cohabitate with investors of any kind.
Entrepreneurs are excellent at identifying the needs of the market and at introducing
technological or service solutions to satisfy such needs. But the very personality traits which
qualify them to become entrepreneurs – also hinder the future development of their firms. Only
the introduction of outside investors can resolve the dilemma. Outside investors are not
emotionally involved. They may be less visionary – but also more experienced.
They are more interested in business results than in dreams. And – being well acquainted with
entrepreneurs – they insist on having unmitigated control of the business, for fear of losing all
their money. These things antagonize the entrepreneurs. They feel that they are losing their
creation to cold-hearted, mean spirited, corporate predators. They rebel and prefer to remain
small or even to close shop than to give up their cherished freedoms. This is where nine out of
ten entrepreneurs fail – in knowing when to let go.
6.7 Mortgage-backed Construction
The Buyers
1. The Buyers of residential property form an Association.
2. The Buyers’ Association signs a contract with a construction company chosen by open and
public tender.
3. The contract with the construction company is for the construction of residential property to be
owned by the Buyers.
4. The Buyers secure financing from the Bank (see below).

5. The Buyers then pay the construction company 25% of the final value of the property to be
constructed in advance (=Buyer’s Equity). This money is the Buyers’ own funds, out of pocket –
NOT received from the Banks.
6. The Buyers Association together with the Banks appoints supervisors to oversee the work
done by the construction company: its quality and adherence to schedule.
The Banks
1. The government provides a last resort guarantee to the commercial banks. This guarantee can
be used ONLY AFTER the banks have exhausted all other legal means of materializing a
collateral or seizing the assets of a delinquent debtor in default.
2. Against this guarantee, the commercial banks issue 10 years mortgages (=lend money with a
repayment period of 120 months) to the private Buyers of residential property.
3. The money lent to the Buyers (=the mortgages) REMAINS in the bank. It is NOT be given to
the Buyers.
4. The mortgage loan covers a maximum of 75% of the final value of the property to be
constructed according to appraisals by experts.
5. A lien in favour of the bank is placed on the land and property on it – to be built using the
Bank’s money and the Buyers’ equity. Each Buyer pledges only HIS part of the property (for
instance, ONLY the apartment being constructed for HIM). This lien is an inseparable part of the
mortgage (loan) contract each and every buyer signs. It is registered in the Registrar of
Mortgages and the Courts.
The Construction Company
1. The construction companies use the advance of 25% to start the construction of the residential
property – to buy the land, lay the foundations and start the skeleton. All the property belongs to
the BUYERS and is registered solely to their names. The Banks have a lien of the property, as
per above.
2. When the advance-money is finished, the construction company notifies the BUYERS.
3. The Buyers then approach the Bank for additional money to be taken from the mortgage loans
deposited at the Bank (=the money that the Bank lent the Buyers).
4. The Bank verifies that the construction is progressing according to schedule and according to
quality standards set in the construction contract.
5. If everything is according to contract, the Bank releases the next tranche (lot) of financing to
the Buyers, who then forward it to the construction firm.
6. The funds that the Buyers borrowed from the Banks are released in a few tranches according
to the progress of the construction work. When the construction is finished – the funds should be
completely exhausted (=used).
When The Construction is Finished
1. The construction company will have received 100% of the price agreed in the contract.
2. The Buyers can move into the apartments.
3. The Buyers go on repaying the mortgage loans to the Banks.
4. As long as the mortgage loan is not fully paid – the lien on the property in favour of the Bank
remains. It is lifted (=cancelled) once the mortgage loan and the interest and charges thereof has
been fully repaid by the Buyers.
While the Mortgage Loan is Being Repaid…
1. The Buyers can rent the apartment.
2. The Buyers can live in the apartment.
3. The Buyers can sell the apartment only with the agreement of the Bank – or if they pre-pay the
remaining balance of the mortgage loan to the Bank.
4. The Banks can securitize the mortgage pool and sell units or mortgage backed bonds to the
public. This means that the Banks can sell to the public pass-through certificates – securities
backed by an underlying pool of mortgages of various maturities and interest rates. This way the
Banks can replenish their capital stock and re-enter the mortgage market.
6.8 Banking
Banks are institutions where miracles happen regularly. We rarely entrust our money to anyone
but ourselves – and our banks. Despite a very chequered history of mismanagement, corruption,
false promises and representations, delusions and behavioural inconsistency – banks still succeed
to motivate us to give them our money. Partly it is the feeling that there is safety in numbers. The
fashionable term today is "moral hazard". The implicit guarantees of the state and of other
financial institutions move us to take risks which we would, otherwise, have avoided. Partly it is
the sophistication of the banks in marketing and promoting themselves and their products.
Glossy brochures, professional computer and video presentations and vast, shrine-like, real estate
complexes all serve to enhance the image of the banks as the temples of the new religion of
money.
But what is behind all this? How can we judge the soundness of our banks? In other words, how
can we tell if our money is safely tucked away in a safe haven?
The reflex is to go to the bank’s balance sheets. Banks and balance sheets have been both
invented in their modern form in the 15th century. A balance sheet, coupled with other financial
statements is supposed to provide us with a true and full picture of the health of the bank, its past
and its long-term prospects. The surprising thing is that – despite common opinion – it does.
But it is rather useless unless you know how to read it.
Financial statements (Income – or Profit and Loss – Statement, Cash Flow Statement and
Balance Sheet) come in many forms. Sometimes they conform to Western accounting standards
(the Generally Accepted Accounting Principles, GAAP, or the less rigorous and more fuzzily
worded International Accounting Standards, IAS). Otherwise, they conform to local accounting
standards, which often leave a lot to be desired. Still, you should look for banks, which make
their updated financial reports available to you. The best choice would be a bank that is audited
by one of the Big Four Western accounting firms and makes its audit reports publicly available.
Such audited financial statements should consolidate the financial results of the bank with the
financial results of its subsidiaries or associated companies. A lot often hides in those corners of
corporate holdings.
Banks are rated by independent agencies. The most famous and most reliable of the lot is Fitch
Ratings. Another one is Moody’s. These agencies assign letter and number combinations to the
banks that reflect their stability. Most agencies differentiate the short term from the long term
prospects of the banking institution rated. Some of them even study (and rate) issues, such as the
legality of the operations of the bank (legal rating). Ostensibly, all a concerned person has to do,
therefore, is to step up to the bank manager, muster courage and ask for the bank’s rating.
Unfortunately, life is more complicated than rating agencies would have us believe.
They base themselves mostly on the financial results of the bank rated as a reliable gauge of its
financial strength or financial profile. Nothing is further from the truth.
Admittedly, the financial results do contain a few important facts. But one has to look beyond the
naked figures to get the real – often much less encouraging – picture.
Consider the thorny issue of exchange rates. Financial statements are calculated (sometimes
stated in USD in addition to the local currency) using the exchange rate prevailing on the 31st of
December of the fiscal year (to which the statements refer). In a country with a volatile domestic
currency this would tend to completely distort the true picture. This is especially true if a big
chunk of the activity preceded this arbitrary date. The same applies to financial statements,
which were not inflation-adjusted in high inflation countries. The statements will look inflated
and even reflect profits where heavy losses were incurred. "Average amounts" accounting (which
makes use of average exchange rates throughout the year) is even more misleading. The only
way to truly reflect reality is if the bank were to keep two sets of accounts: one in the local
currency and one in USD (or in some other currency of reference). Otherwise, fictitious growth
in the asset base (due to inflation or currency fluctuations) could result.
Another example: in many countries, changes in regulations can greatly effect the financial
statements of a bank. In 1996, in Russia, for example, the Bank of Russia changed the algorithm
for calculating an important banking ratio (the capital to risk weighted assets ratio).
Unless a Russian bank restated its previous financial statements accordingly, a sharp change in
profitability appeared from nowhere.
The net assets themselves are always misstated: the figure refers to the situation on 31/12. A 48-
hour loan given to a collaborating client can inflate the asset base on the crucial date. This
misrepresentation is only mildly ameliorated by the introduction of an "average assets" calculus.
Moreover, some of the assets can be interest earning and performing – others, non-performing.
The maturity distribution of the assets is also of prime importance. If most of the bank’s assets
can be withdrawn by its clients on a very short notice (on demand) – it can swiftly find itself in
trouble with a run on its assets leading to insolvency.
Another oft-used figure is the net income of the bank. It is important to distinguish interest
income from non-interest income. In an open, sophisticated credit market, the income from
interest differentials should be minimal and reflect the risk plus a reasonable component of
income to the bank. But in many countries (Japan, Russia) the government subsidizes banks by
lending them money cheaply (through the Central Bank or through bonds). The banks then
proceed to lend the cheap funds at exorbitant rates to their customers, thus reaping enormous
interest income. In many countries the income from government securities is tax free, which
represents another form of subsidy. A high income from interest is a sign of weakness, not of
health, here today, gone tomorrow. The preferred indicator should be income from operations
(fees, commissions and other charges).
There are a few key ratios to observe. A relevant question is whether the bank is accredited with
international banking agencies. These issue regulatory capital requirements and other mandatory
ratios. Compliance with these demands is a minimum in the absence of which, the bank should
be regarded as positively dangerous.
The return on the bank’s equity (ROE) is the net income divided by its average equity. The
return on the bank’s assets (ROA) is its net income divided by its average assets. The (tier 1 or
total) capital divided by the bank’s risk weighted assets – a measure of the bank’s capital
adequacy. Most banks follow the provisions of the Basel Accord as set by the Basel Committee
of Bank Supervision (also known as the G10). This could be misleading because the Accord is ill
equipped to deal with risks associated with emerging markets, where default rates of 33% and
more are the norm. Finally, there is the common stock to total assets ratio. But ratios are not
cure-alls. Inasmuch as the quantities that comprise them can be toyed with – they can be subject
to manipulation and distortion. It is true that it is better to have high ratios than low ones. High
ratios are indicative of a bank’s underlying strength, reserves, and provisions and, therefore, of
its ability to expand its business. A strong bank can also participate in various programs,
offerings and auctions of the Central Bank or of the Ministry of Finance. The larger the share of
the bank’s earnings that is retained in the bank and not distributed as profits to its shareholders –
the better these ratios and the bank’s resilience to credit risks.
Still, these ratios should be taken with more than a grain of salt. Not even the bank’s profit
margin (the ratio of net income to total income) or its asset utilization coefficient (the ratio of
income to average assets) should be relied upon. They could be the result of hidden subsidies by
the government and management misjudgement or understatement of credit risks.
To elaborate on the last two points:
A bank can borrow cheap money from the Central Bank (or pay low interest to its depositors and
savers) and invest it in secure government bonds, earning a much higher interest income from the
bonds’ coupon payments. The end result: a rise in the bank’s income and profitability due to a
non-productive, non-lasting arbitrage operation. Otherwise, the bank’s management can
understate the amounts of bad loans carried on the bank’s books, thus decreasing the necessary
set-asides and increasing profitability. The financial statements of banks largely reflect the
management’s appraisal of the business. This has proven to be a poor guide.
In the main financial results page of a bank’s books, special attention should be paid to
provisions for the devaluation of securities and to the unrealized difference in the currency
position. This is especially true if the bank is holding a major part of the assets (in the form of
financial investments or of loans) and the equity is invested in securities or in foreign exchange
denominated instruments.
Separately, a bank can be trading for its own position (the Nostro), either as a market maker or as
a trader. The profit (or loss) on securities trading has to be discounted because it is conjectural
and incidental to the bank’s main activities: deposit taking and loan making.
Most banks deposit some of their assets with other banks. This is normally considered to be a
way of spreading the risk. But in highly volatile economies with sickly, underdeveloped financial
sectors, all the institutions in the sector are likely to move in tandem (a highly correlated market).
Cross deposits among banks only serve to increase the risk of the depositing bank (as the recent
affair with Toko Bank in Russia and the banking crisis in South Korea have demonstrated).
Further closer to the bottom line are the bank’s operating expenses: salaries, depreciation, fixed
or capital assets (real estate and equipment) and administrative expenses. The rule of thumb is:
the higher these expenses, the weaker the bank. The great historian Toynbee once said that great
civilizations collapse immediately after they bequeath to us the most impressive buildings. This
is doubly true with banks. If you see a bank fervently engaged in the construction of palatial
branches – stay away from it.
Banks are risk arbitrageurs. They live off the mismatch between assets and liabilities. To the best
of their ability, they try to second guess the markets and reduce such a mismatch by assuming
part of the risks and by engaging in portfolio management. For this they charge fees and
commissions, interest and profits – which constitute their sources of income.
If any expertise is imputed to the banking system, it is risk management. Banks are supposed to
adequately assess, control and minimize credit risks. They are required to implement credit
rating mechanisms (credit analysis and value at risk – VAR – models), efficient and exclusive
information-gathering systems, and to put in place the right lending policies and procedures.
Just in case they misread the market risks and these turned into credit risks (which happens only
too often), banks are supposed to put aside amounts of money which could realistically offset
loans gone sour or future non-performing assets. These are the loan loss reserves and provisions.
Loans are supposed to be constantly monitored, reclassified and charges made against them as
applicable. If you see a bank with zero reclassifications, charge offs and recoveries – either the
bank is lying through its teeth, or it is not taking the business of banking too seriously, or its
management is no less than divine in its prescience. What is important to look at is the rate of
provision for loan losses as a percentage of the loans outstanding. Then it should be compared to
the percentage of non-performing loans out of the loans outstanding. If the two figures are out of
kilter, either someone is pulling your leg – or the management is incompetent or lying to you.
The first thing new owners of a bank do is, usually, improve the placed asset quality (a polite
way of saying that they get rid of bad, non-performing loans, whether declared as such or not).
They do this by classifying the loans. Most central banks in the world have in place regulations
for loan classification and if acted upon, these yield rather more reliable results than any
management’s "appraisal", no matter how well intentioned.
In some countries the Central Bank (or the Supervision of the Banks) forces banks to set aside
provisions against loans at the highest risk categories, even if they are performing. This, by far,
should be the preferable method.
Of the two sides of the balance sheet, the assets side is the more critical. Within it, the interest
earning assets deserve the greatest attention. What percentage of the loans is commercial and
what percentage given to individuals? How many borrowers are there (risk diversification is
inversely proportional to exposure to single or large borrowers)? How many of the transactions
are with "related parties"? How much is in local currency and how much in foreign currencies
(and in which)? A large exposure to foreign currency lending is not necessarily healthy. A sharp,
unexpected devaluation could move a lot of the borrowers into non-performance and default and,
thus, adversely affect the quality of the asset base. In which financial vehicles and instruments is
the bank invested? How risky are they? And so on.
No less important is the maturity structure of the assets. It is an integral part of the liquidity (risk)
management of the bank. The crucial question is: what are the cash flows projected from the
maturity dates of the different assets and liabilities – and how likely are they to materialize. A
rough matching has to exist between the various maturities of the assets and the liabilities. The
cash flows generated by the assets of the bank must be used to finance the cash flows resulting
from the banks’ liabilities. A distinction has to be made between stable and hot funds (the latter
in constant pursuit of higher yields). Liquidity indicators and alerts have to be set in place and
calculated a few times daily.
Gaps (especially in the short term category) between the bank’s assets and its liabilities are a
very worrisome sign. But the bank’s macroeconomic environment is as important to the
determination of its financial health and of its creditworthiness as any ratio or micro-analysis.
The state of the financial markets sometimes has a larger bearing on the bank’s soundness than
other factors. A fine example is the effect that interest rates or a devaluation have on a bank’s
profitability and capitalization. The implied (not to mention the explicit) support of the
authorities, of other banks and of investors (domestic as well as international) sets the
psychological background to any future developments. This is only too logical. In an unstable
financial environment, knock-on effects are more likely. Banks deposit money with other banks
on a security basis. Still, the value of securities and collaterals is as good as their liquidity and as
the market itself. The very ability to do business (for instance, in the syndicated loan market) is
influenced by the larger picture. Falling equity markets herald trading losses and loss of income
from trading operations and so on.
Perhaps the single most important factor is the general level of interest rates in the economy. It
determines the present value of foreign exchange and local currency denominated government
debt. It influences the balance between realized and unrealized losses on longer-term
(commercial or other) paper. One of the most important liquidity generation instruments is the
repurchase agreement (repo). Banks sell their portfolios of government debt with an obligation to
buy it back at a later date. If interest rates shoot up – the losses on these repos can trigger margin
calls (demands to immediately pay the losses or else materialize them by buying the securities
back).
Margin calls are a drain on liquidity. Thus, in an environment of rising interest rates, repos could
absorb liquidity from the banks, deflate rather than inflate. The same principle applies to
leverage investment vehicles used by the bank to improve the returns of its securities trading
operations. High interest rates here can have an even more painful outcome. As liquidity is
crunched, the banks are forced to materialize their trading losses. This is bound to put added
pressure on the prices of financial assets, trigger more margin calls and squeeze liquidity further.
It is a vicious circle of a monstrous momentum once commenced.
But high interest rates, as we mentioned, also strain the asset side of the balance sheet by
applying pressure to borrowers. The same goes for a devaluation. Liabilities connected to foreign
exchange grow with a devaluation with no (immediate) corresponding increase in local prices to
compensate the borrower. Market risk is thus rapidly transformed to credit risk. Borrowers
default on their obligations. Loan loss provisions need to be increased, eating into the bank’s
liquidity (and profitability) even further. Banks are then tempted to play with their reserve
coverage levels in order to increase their reported profits and this, in turn, raises a real concern
regarding the adequacy of the levels of loan loss reserves. Only an increase in the equity base can
then assuage the (justified) fears of the market but such an increase can come only through
foreign investment, in most cases. And foreign investment is usually a last resort, pariah, solution
(see Southeast Asia and the Czech Republic for fresh examples in an endless supply of them.
Japan and China are, probably, next).
In the past, the thinking was that some of the risk could be ameliorated by hedging in forward
markets (=by selling it to willing risk buyers). But a hedge is only as good as the counterparty
that provides it and in a market besieged by knock-on insolvencies, the comfort is dubious. In
most emerging markets, for instance, there are no natural sellers of foreign exchange (companies
prefer to hoard the stuff). So forwards are considered to be a variety of gambling with a default
in case of substantial losses a very plausible way out.
Banks depend on lending for their survival. The lending base, in turn, depends on the quality of
lending opportunities. In high-risk markets, this depends on the possibility of connected lending
and on the quality of the collaterals offered by the borrowers. Whether the borrowers have
qualitative collaterals to offer is a direct outcome of the liquidity of the market and on how they
use the proceeds of the lending. These two elements are intimately linked with the banking
system. Hence the penultimate vicious circle: where no functioning and professional banking
system exists – no good borrowers will emerge.
6.9 Credit Cards
Your credit card is stolen. You place a phone call to the number provided in your tourist guide or
in the local daily press. You provide your details and you cancel your card. You block it. In a
few minutes, it should be transferred to the stop-list available to the authorization centres
worldwide. From that moment on, no thief will be able to fraudulently use your card. You can
sigh in relief. The danger is over.
But is it?
It is definitely not. To understand why, we should first review the intricate procedure involved.
In principle, the best and safest thing to do is call the authorization centre of the bank that issued
your card (the issuer bank). Calling the number published in the media is second best because it
connects the cardholder to a "volunteer" bank, which caters for the needs of all the issuers of a
given card. Some service organizations (such as IAPA – the International Air Passengers
Association) provide a similar service.
The "catering bank" accepts the call, notes down the details of the cardholder and prepares a fax
containing the instruction to cancel the card. The cancellation fax is then sent on to the issuing
bank.
The details of all the issuing banks are found in special manuals published by the clearing and
payments associations of all the banks that issue a specific card. All the financial institutions that
issue Mastercards, Eurocards and a few other more minor cards in Europe are members of
Europay International (EPI). Here lies the first snag: the catering bank often mistakes the identity
of the issuer. Many banks share the same name or are branches of a network. Banks with
identical names can exist in Prague, Budapest and Frankfurt, or Vienna, for instance. Should a
fax cancelling the card be sent to the wrong bank – the card will simply not be cancelled until it
is too late. By the time the mistake is discovered, the card is usually thoroughly abused and the
financial means of the cardholder are exhausted.
Additionally, going the indirect route (calling an intermediary bank instead of the issuing bank)
translates into a delay which could prove monetarily crucial. By the time the fax is sent, it might
be no longer necessary.
If the card has been abused and fraudulent purchases or money withdrawals have been debited to
the unfortunate cardholders’ bank or credit card account – the cardholder can reclaim these
charges. He has to clearly identify them and state in writing that they were not effected by him.
A process called "chargeback" thus is set in motion.
A chargeback is a transaction disputed within the payment system. A dispute can be initiated by
the cardholder when he receives his statement and rejects one or more items on it or when an
issuing financial institution disputes a transaction for a technical reason (usually at the behest of
the cardholder or if his account is overdrawn).
A technical reason could be the wrong or no signature, wrong or no date, important details
missing in the sales vouchers and so on. Despite the warnings carried on many a sales voucher
("No Refund – No Cancellation") both refunds and cancellations are daily occurrences.
To be considered a chargeback, the card issuer must initiate a well-defined dispute procedure.
This it can do only after it has determined the reasons invalidating the transaction. A chrageback
can only be initiated by the issuing financial institution. The cardholder himself has no standing
in this matter and the chargeback rules and regulations are not accessible to him. He is confined
to lodging a complaint with the issuer. This is an abnormal situation whereby rules affecting the
balances and mandating operations resulting in debits and credits in the bank account are not
available to the account name (owner). The issuer, at its discretion, may decide that issuing a
chargeback is the best way to rectify the complaint.
The following sequence of events is, thus, fairly common:
1. The cardholder presents his card to a merchant (aka: an acceptor of payment system cards).
2. The merchant may request an authorization for the transaction, either by electronic means (a
Point of Sale / Electronic Fund Transfer apparatus) or by phone (voice authorization). A
merchant is obliged to do so if the value of the transaction exceeds predefined thresholds. But
there are other cases in which this might be either a required or a recommended policy.
3. If the transaction is authorized, the merchant notes down the authorization reference number
and gives the goods and services to the cardholder. In a face-to-face transaction (as opposed to a
phone or internet/electronic transaction), the merchant must request the cardholder to sign the
sale slip. He must then compare the signature provided by the cardholder to the signature
specimen at the back of the card. A mismatch of the signatures (or their absence either on the
card or on the slip) invalidate the transaction. The merchant will then provide the cardholder with
a receipt, normally with a copy of the signed voucher.
4. Periodically, the merchant collects all the transaction vouchers and sends them to his bank (the
"acquiring" bank).
5. The acquiring bank pays the merchant on foot of the transaction vouchers minus the
commission payable to the credit card company. Some banks pre-finance or re-finance credit
card sales vouchers in the form of credit lines (cash flow or receivables financing).
6. The acquiring bank sends the transaction to the payments system (VISA International or
Europay International) through its connection to the relevant network (VisaNet, in the case of
Visa, for instance).
7. The credit card company (Visa, Mastercard, Diners Club) credits the acquirer bank.
8. The credit card company sends the transaction to the issuing bank and automatically debits the
issuer.
9. The issuing bank debits the cardholder’s account. It issues monthly or transaction related
statements to the cardholder.
10. The cardholder pays the issuing bank on foot of the statement (this is automatic, involuntary
debiting of the cardholders account with the bank).
Some credit card companies in some territories prefer to work directly with the cardholders. In
such a case, they issue a monthly statement, which the cardholder has to pay directly to them by
money order or by bank transfer. The cardholder will be required to provide a security to the
credit card company and his spending limits will be tightly related to the level and quality of the
security provided by him. The very issuance of the card is almost always subject to credit history
and to an approval process.
The typical credit card transaction involves these steps:
1. The cardholder presents his card to a merchant, the acceptor.
2. The merchant may request an authorization for the transaction, either by electronic means (a
Point of Sale / Electronic Fund Transfer apparatus) or by phone (voice authorization). A
merchant is obliged to do so if the value of the transaction exceeds predefined thresholds. But
there are other cases in which this might be a policy either required or recommended by issuers,
card companies, or clearinghouses.
3. If authorized, the merchant notes down the transaction authorization code and gives, or ships,
the goods, or services to the cardholder. If the cardholder is present, he must sign the sale slip
(voucher) and the merchant validates the signature by comparing it to the specimen at the back of
the card. The transaction goes through only if the signatures match. The merchant then provides
the cardholder with a receipt, normally with a copy of the signed voucher.
4. The merchant collects all the transaction vouchers periodically and gives them to his bank (the
"acquiring" bank).
5. The acquiring bank credits the merchant’s bank account with the difference between the total
amount of the transactions and the commissions and fees payable to the credit card company.
Some banks pre-finance or re-finance credit card sales vouchers (receivables financing) – i.e.,
they lend against future credit card revenues.
6. The acquiring bank forwards the slips or an electronic ledger to the payments system (VISA
International, or Europay International) through its connection to the relevant network (VisaNet,
in the case of Visa, for instance).
7. The credit card company (Visa, MasterCard, Diners Club) credits the acquiring bank.
8. The credit card company sends the transactions to the issuing bank and automatically debits it.
9. The issuing bank automatically debits the cardholder’s account. It issues monthly or
transaction related statements to the cardholder.
In some countries – mainly in Central and Eastern Europe, the Middle East, Africa, and Asia –
credit card companies sometimes work directly with their cardholders who pay the companies
via money order or bank transfer. The cardholder is often required to provide a security to the
credit card company and his spending limits are tightly supervised. Credit history, collateral, and
background checks are rigorous. Even then, the majority of the cards issued are debit – rather
than credit – cards.
1. The value of a stock is the sum of the income that a reasonable investor would expect to get in
the future, discounted at the appropriate rate.
2. The most widely used model to evaluate specific risks is the Capital Asset Pricing Model
(CAPM).
3. "Due Diligence" is a legal term which means ’to make sure that all the facts regarding the firm
are available and have been independently verified.’
4. Venture capital and risk capital funds, for instance, are purely strategic investors.
5. The financial investor has little interest in the company’s management.
6. A bank cannot borrow cheap money from the Central Bank and invest it in secure government
bonds.
7. A ‘chargeback’ is a transaction disputed within the payment system.
6.10 Summary
· The Manager of a firm should have access to continuously updated statements of income, cash
flow, and a balance sheet.
· The pro forma financial statements should include all the future flows of money – whether
invoiced or not.
· The Daily Ratios Report enables the Manager to instantly analyse dozens of important aspects
of the functioning of his company. The Manager can review financial and production ratios.
Where there is a strong deviation from historical patterns, or where the ratios warn about
problems in the future – management intervention may be required.
· A decision system has great impact on the profits of the company. It forces the management to
rationalize the depreciation, inventory and inflation policies. It warns the management against
impending crises and problems in the company.
· The decision system is an integral part of financial management in the West.
· There is a stock pricing mechanism known as the Stock Exchange. The value of a stock is the
sum of the income that a reasonable investor would expect to get in the future, discounted at the
appropriate rate.
· The most widely used model to evaluate specific risks is the Capital Asset Pricing Model
(CAPM).
· The financial investor represents the past. He is always on the lookout, searching for willing
buyers for his stake. He has little interest in the company’s management.
· The strategic investor, on the other hand, represents the real long term accumulator of value. It
is the strategic investor that has the greater influence on the value of the company’s shares.
1. Explain the levels of reporting and flows of data.
2. How are stocks valued?
3. Explain the process of Due Diligence.
4. Distinguish between the ‘strategic investor’ and the ‘financial investor’.
5. How are banks rated?
6. Explain the steps involved in a typical credit card transaction.
SAQs I
1. True
2. True
3. False
4. True
SAQs II
1. True
2. True
3. True
4. False
5. True
6. False
7. True
Answers to TQs:
1. Refer to 6.2
2. Refer to 6.4
3. Refer to 6.5
4. Refer to 6.6
5. Refer to 6.8
6. Refer to 6.9
.
MB0036-Unit-07-Licensing and Enforcing
Intellectual
Unit 7 Licensing and Enforcing Intellectual
Property Rights
Structure
7.1 Introduction
Objectives
7.2 Background to Commercializing Intellectual Property
7.3 Options for Exploiting IP rights
7.4 Licensing and Assigning IP rights

7.5 Joint Venture Agreements and Start-up Companies
7.6 Commercialisation Mechanisms
7.7 Decoding Licences and Technology Agreements
7.8 Licensing, Enabling Technologies and the Public Interest
7.9 Enforcement of Intellectual Property Rights
7.9.1 Enforcement Measures Required by TRIPS
7.9.2 General Enforcement Obligations under Trips
7.10 Civil Remedies
7.11 Criminal Procedures
7.12 Special Border Enforcement Measures – Customs
7.13 Different Roles in IP Enforcement
7.14 Summary
7.1 Introduction
Intellectual property rights can be very valuable commercial rights for inventors, creators and
researchers. Intellectual property rights are legal rights to do certain things in relation to an
invention or creation. In general terms, intellectual property rights are infringed if someone
exercises an intellectual property right without the permission of the owner of the right. In order
to protect the value of intellectual property rights effective legal remedies must be available if
intellectual property rights are infringed.
One needs to make good commercial decisions to benefit from one’s intellectual property rights.
This unit throws light on intellectual property rights and the ways in which they need to be
protected.
Objectives:
By the end of this unit, you will be able to:
· List out some ways to exploit one’s intellectual property rights so as to get financial benefits
from them.
· Explain the ways of protecting the intellectual property rights.
· Give reasons why intellectual property rights need to be protected.
· Explain the civil remedies and criminal procedures in relation to the protection of intellectual
property rights.
7.2 Background to Commercializing Intellectual Property
The cost of protecting IPRs:
This unit considers some of the practical intellectual property issues that arise when bringing a
new technology to the public. Let’s say you have achieved a breakthrough in your research, and
have applied for a patent – what do you do next? There are many patents that have never been
successfully transformed into new products in the marketplace – what goes wrong in these cases?
In some cases, it’s because the technology was not practically feasible, or was superseded by
newer technologies. In other cases, the inventor lacked the resources or skills to take the
invention to the next step.
One constant factor in the development of new technologies has been the cost and difficulty of
the process of putting new technologies on the market. The technical merit or scientific brilliance
of an invention is only one aspect of actually bringing a new technology to the public in a useful
practical form. This can be a costly and complex process. Normally, it is not possible without a
range of different partnerships and relationships – as sources of funding, expertise and other
resources.
Intellectual property protection needs to be properly managed so that it facilitates this process,
and doesn’t itself become a burden.
The problems of getting worthwhile benefits from the patent system – even for the patent owner
– are not new ones, as this quotation from 120 years ago makes clear: Patenting was
unnecessarily and unwisely expensive, and the poor patentee was left almost without any aid or
guidance. Intellectual property rights recognize innovative and creative activities, and are
intended to reward useful and valuable contributions to society. But they are not direct rewards
in themselves. All they do is to create an opportunity for the inventor or creative person to seek
rewards for their invention or returns from their investment in the research. A patent can be
expensive to obtain, especially if it is applied for in many countries, and costs money to keep in
force, as annual renewal fees are required in many countries. In addition, patents can be very
expensive to enforce if it becomes necessary to go to court to prevent infringement. Patents
recognise inventiveness, but they are neutral on the commercial value of the invention. Many
patented inventions will prove to be technologically unsuccessful, or commercially unviable. In
many other cases, patented inventions which could be very successful fail to be developed
because the inventor lacks the capacity, resources or skills to develop the invention
commercially.
Many patent systems are run on a ‘cost recovery’ basis – so that the fees charged to patent
applicants are sufficient to cover the costs of administering the patent office, or even to create a
surplus. The Patent
Co-operation Treaty (PCT) system administered by the World Intellectual Property Organisation
returns a surplus from the fees charged to private applicants, and these resources are used in
many ways, especially in providing technical support and assistance to developing countries. So
society does not reward inventors directly for making a patented invention – instead, it requires
the patentee to pay his or her way in getting a patent, and then leaves it to them to see whether
they can make money in a commercial way from the patented invention.
Some governments do provide support for small and medium enterprises, for instance in
charging lower patent fees. The international PCT system also has greatly reduced fees for
individuals in countries with low average incomes. But generally speaking the cost of the patent
system is borne by patent applicants. And to the official fees must be added the cost of patent
attorneys’ or patent agents’ professional services in conducting patent searches, in preparing and
filing patent applications (which may include the services of attorneys in several countries), in
considering examiners’ reports and preparing responses to the examiner’s objections (patent
‘prosecution’), and in maintaining the patent (and possibly advising on enforcement).
All this adds up to make the patenting process a significant investment.
Much depends on the number of countries you seek patents in, and whether any difficulties are
found in getting a patent (for example, complex objections by patent examiners requiring
significant amendments to the patent and legal argument and representations, or when a
competitor challenges or opposes the grant of the patent).
It is obviously much cheaper to seek patent protection in only your home country, but then you
would have to accept use being made freely of your invention potentially in every other country.
The cost of going through the patenting process in a number of countries is typically beyond the
resources of all but the largest companies and research establishments, and most enterprises and
institutions require some kind of commercial partnership or financial support to gain, and to keep
in force, the patent rights.
The case is similar for other intellectual property rights, like plant breeders’ rights, trade marks,
and industrial designs, although these normally cost less overall than patents. The applicant takes
a risk and invests time and money in the process of obtaining an IP right. The hope is that the IP
right will improve their capacity to develop a new product and gain the benefits from their
research and innovation. But when the costs are unpredictable and potentially high, and the
future benefits from the IP right are uncertain and may only be realized after a number of years,
it can be difficult to work out whether it is worth making the investment. Unregistered rights,
like trade secrets and copyright, do not incur direct costs in the same way, but may involve
investment in physical security, preparation of confidentiality agreements, and monitoring and
enforcement costs.
In short, obtaining registered intellectual property rights can be expensive, and do not in
themselves make you any returns for your investment. Patents can be costly liabilities to you,
your business or your research institute, unless you can find a way to apply your invention
commercially or can get other forms of financial support. This calls for a range of skills and
experience quite apart from technological and scientific skills. Often the most difficult aspect of
putting a new
technology to work, and of making it available to the public, lies not in the patenting process, but
in finding a suitable commercial vehicle to gain suitable returns from the invention, including
through commercial use of the patent. Commercialising inventions can involve a great deal of
commercial risk, which small companies and research institutes might not be able to accept and
manage. Because of these considerations, in many cases institutions and companies choose not to
commercialise their invention at all, but elect to sell (‘assign’) or license their rights to the
invention to other companies for them to take the invention to the marketplace.
Because intellectual property rights can be so costly to obtain, to keep in force and to enforce,
they should not be pursued for their own sake. Patenting your invention may be worthless, and in
fact could waste resources, unless you have a commercial strategy in which your patenting
program has a logical place. And this strategy will usually involve some form of partnership –
this may be a bank or venture capitalist providing you with the funds you need, a company with
access to technology or a product that is needed for the success of your invention, or a
commercial enterprise with product development and marketing skills.
When you are weighing up whether to commercialise your invention yourself, or whether you
should find commercial partners or another way of developing your invention, you should
consider:
1. Your overall objectives
Are you looking just to fund further research, or to create a new industry particularly for the
benefit of your own country, or to build up a capital asset, or simply to disseminate the fruits of
your research as broadly as possible, with some control over the way the technology is used?
2. Your financial position
Can you accept the cost and financial risk of investing in patents and other IPRs, and other
aspects of commercialisation; do you have the reserves to defend and enforce your IPRs,
potentially in several countries; will financial constraints keep you out of some of the major
potential markets for the invention?
3. The skills and resources available

Do you, or your organization, have the capacity to develop and implement a product
development and marketing program for a new product?
What are the focus and core expertise of your organization?
4. Regulatory requirements for getting onto the market
Do you have access to sufficient expertise and resources to undertake the kind of testing and
approval processes that might be required for a new product, such as a new pharmaceutical, a
new pesticide or a genetically modified crop? Can you deal with labelling and certification
requirements in different countries? Are there joint ventures or local participation obligations to
enter some markets?
5. Your options for overseas production or export
Do you have the capacity to produce, export and market your invention in major foreign
markets?
6. The nature of the technology
The invention may require access to other IP-protected technologies or know-how for it to be
produced; and particular manufacturing technologies might be required for it to be made in an
economic manner, so that the product is competitively priced.
7. The strength of the competition
Does your product need to find a place in a crowded market with strong competition, requiring
the backing and resources of a major company in the field?
8. The range of possible uses for your invention
Do you have the capacity to put it to work in all the areas it could be used, or do you need
partnership with others to make sure your invention achieves its full potential?
7.3 Options for Exploiting IP rights
The question of how to exploit hard-won patent rights involves a range of legal, commercial and
strategic judgments. This applies whether your aim is to maximize the commercial return from
the invention, or to promote the widespread use and application of your invention. Managing
patent rights effectively can be just as important for public sector organizations which are
concerned how to ensure that the benefits of their technology are fully realized. If a public sector
or charitably funded organization does not retain some IP rights over the new technologies it
produces, this can have the ironic result that they lose control over how the technology is
developed and applied, because other private entities are free to develop and patent their own
improvements on the invention.
There are various ways of exploiting your intellectual property rights; these generally involve
balancing immediate financial interests, risks, resources, and longer-term strategic and
technology management interests. It is comparatively rare, particularly for research institutions,
to bear all the risk and financial cost of bringing a new technology to market. At some stage,
research partners or commercial partners need to be brought in. The relationship with a partner
will depend very much on:
1. What stage is the invention at? Is it an unproven research insight, or a research outcome that is
proven in principle but not fully tested in practice, or is it a fully operational prototype that is
close to a consumer product?
2. How much more research and development is required, and what are the chances of its
success?
3. What amount of risk, future commitment and financial investment is expected from the
partner? Is the partner funding continuing research, or just brought in to use the invention with
their existing processes?
4. Have IP rights been granted, and checked for their validity; or are they just at the application
stage, with no guarantee that IP rights will actually be granted in the future?
If the commercial partner is bringing to the market a technology which is well- developed, has
already been technically proven, and has been granted patents in the key markets, the
commercial partner is taking on comparatively little risk, and the terms of the agreement should
reflect that. On the other hand, if the commercial partner is being asked to fund continuing
ongoing exploratory research, the outcome and viability of which is uncertain, they would expect
a higher degree of interest in the intellectual property rights and greater long-term rewards in
exchange for taking on a greater level of risk.
If you are a researcher working as a full-time employee, then your employer would normally
have the rights to any patent on an invention that you develop as part of your employment (you
may be entitled to specific rewards or compensation, however, especially if the invention is
notable and meritorious). Under many national laws and under the policy of many companies
and universities, the inventor can be entitled to either the IP rights or some benefits from their
invention – whether you are a researcher, manager or employer, you should be clear on the legal
entitlement of the inventor to IP rights in the research outcome. In some cases, for instance,
graduate students may not be bound by employer-employee obligations. Some institutions may
permit you to exploit your rights yourself by entering into a commercial joint venture
arrangement or starting up your own company to manufacture and market your product.
You will need to make fundamental choices about the path you take to commercialise the
invention. This will entail first working out:
1. Your overall objectives for commercialising the technology – what do you ultimately want to
achieve? What benefits do you want from your research?
2. Your level of confidence in the technical utility of your invention, its commercial viability and
the strength and range of IP rights – do you want to bear the risks, or do you want another
institution or company to carry some or all of the risk?
3. The financial resources and kinds of expertise you will need.
Depending on these factors, you can choose between a number of different ways of managing
your IP rights to get the benefits from your research. These options typically include:
– licensing your rights (an IP right such as a patent can be licensed out to others – either partially
or fully, exclusively or to several parties)
– assigning your rights (an IP right such as a patent can be assigned, or its ownership transferred,
to another – this can be in exchange for a financial payment or for some other valuable
consideration, such as shares in the company).
– entering into a joint venture arrangement (you can effectively pool your intellectual property
rights and other resources with a partner, to form a joint venture to develop and exploit a new
technology), and
– starting up your own company to exploit the technology (often called ‘spinning off’ a new
company, or a ‘start-up’ – this one approach taken by research institutions and university
faculties to create a suitable commercial vehicle for putting new technology to work, while
keeping basic research separate from applied development and commercialisation).
The discussion of each of these options focusses on patents, but very similar considerations
apply to other forms of IP, such as trade secrets (undisclosed or confidential information), plant
variety rights, industrial designs, trade marks or copyright. In fact, a range of different IP rights
can be bundled together, to be licensed or exploited as a single technology package, together
with arrangements for technical cooperation, staff training and other elements of a broader
relationship.
If you have a comprehensive package of interlocking IP rights and associated know-how, this
could be more attractive to commercial partners, in contrast to a single patent or other IP right.
7.4 Licensing and Assigning IP rights
One basic choice is whether you should actively exploit your IP rights yourself, or to keep your
IP rights and license them to others to use, or sell or assign the rights to another person. You can,
in principle, make different choices in different countries for exploiting IP rights for the same
underlying invention. If you are based in Malaysia, you could in theory decide to exploit your
patent yourself in the East Asian region, grant a licence a Canadian company to use the invention
in North America, and sell or assign the rights in Europe to a Danish company – whether or not
this is the best approach in practice is a different matter, of course.
A licence is a grant of permission made by the patent owner to another to exercise any specified
rights as agreed. Licensing is a good way for an owner to benefit from their work as they retain
ownership of the patented invention while granting permission to others to use it and gaining
benefits, such as financial royalties, from that use. However, it normally requires the owner of
the invention to invest time and resources in monitoring the licensed use, and in maintaining and
enforcing the underlying IP right.
The patent right normally includes the right to exclude others from making, using, selling or
importing the patented product, and similar rights concerning patented processes. The license can
therefore cover the use of the patented invention in many different ways.
For instance, licences can be exclusive or non-exclusive. If a patent owner grants a non-exclusive
licence to Company A to make and sell their patented invention in Malaysia, the patent owner
would still be able to also grant Company B another non-exclusive for the same rights and the
same time period in Malaysia. In contrast, if a patent owner granted an exclusive licence to
Company A to make and sell the invention in Malaysia, they would not be able to give a licence
to
anyone else in Malaysia while the licence with Company A remained in force.
Licenses are normally confined to a particular geographical area – typically, the jurisdiction in
which particular IP rights have effect. You can grant different exclusive licences for different
territories at the same time. For example, a patent owner can grant an exclusive licence to make
and sell their patented invention in Malaysia for the term of the patent, and grant a separate
exclusive licence to manufacture and sell their patented invention in India for the term of the
patent.
Separate licences can be granted for different ways of using the same technology. For example,
if an inventor creates a new form of pharmaceutical delivery, she could grant an exclusive
licence to one company to use the technology for an arthritis drug, a separate exclusive licence to
another company to use it for relief of cold symptoms, and a further exclusive licence to a third
company to use it for veterinary pharmaceuticals.
A licence is merely the grant of permission to undertake some of the actions covered by
intellectual property rights, and the patent holder retains ownership and control of the basic
patent.
An assignment of intellectual property rights is the sale of a patent right, or a share of the patent.
It should be remembered that the person who makes an invention can be different to the person
who owns the patent rights in that invention. If an inventor assigns their patent rights to someone
else they no longer own those rights. Indeed, they can be in infringement of the patent right if
they continue to use it.
Patent licences and assignments of patent rights do not have to cover all patent rights together.
Licences are often limited to specific rights, territories and time periods. For example, a patent
owner could exclusively licence only their importation right to a company for the territory of
Indonesia for 12 months. If an inventor owns patents on the same invention in five different
countries, they could assign (or sell) these patents to five different owners in each of those
countries. Portions of a patent right can also be assigned – so that in order to finance your
invention, you might choose to sell a half-share to a commercial partner.
If you assign your rights, you normally lose any possibility of further licensing or commercially
exploiting your intellectual property rights. Therefore, the amount you charge for an assignment
is usually considerably higher than the royalty fee you would charge for a patent licence. When
assigning the rights, you might seek to negotiate a licence from the new owner to ensure that you
can continue to use your invention. For instance, you might negotiate an arrangement that gives
you licence to use the patented invention in the event that you come up with an improvement on
your original invention and this falls within the scope of the assigned patent. Equally, the new
owner of the assigned patent might want to get access to your subsequent improvements on the
invention.
7.5 Joint Venture Agreements and Start-up Companies
Rather than simply exploit your IP rights by licensing or assignment, you might choose to set up
a new legal mechanism to exploit your technology. Typically this can be a partnership expressed
through a joint venture agreement or a new corporation, such as a start-up or spin-off company.
These options require much more work on your part than licensing or assigning your intellectual
property rights. This could be a desirable choice in cases where:
– you want to keep your institute’s research activities separate from the development and
commercialisation of technology, especially when your institute has a public interest focus or an
educational role; or
– you need to attract financial support from those prepared to take a risk with an unproven
technology (‘angel investors’ or ‘venture capitalists’), and they will only take on a long-term risk
if they can get a share of future profits of the technology.
In working out the right vehicle for your technology, you will normally need specific legal
advice from a commercial lawyer, preferably one with experience in technology and
commercialisation in your jurisdiction. The laws governing partnerships and companies differ
considerably from one country to another, and this discussion is only intended to give a general
flavour of the various options.
A joint venture agreement involves a formal, legally binding commitment between two or more
partners to work together on a shared enterprise. It is normally created for a specific purpose (for
example, to commercialise a specific new technology) and for a limited duration. For instance,
you might sign a partnership agreement with a manufacturing company to develop and market a
product based on your invention. Before entering into a joint venture agreement, you need to
check out possible commercial partners and make sure that the objectives of your potential
commercial partners are consistent with your objectives. In the joint venture agreement, the
partners typically agree to share the benefits, as well as the risks and liabilities, in a specified
way.
But this kind of partnership isn’t normally able in itself to enter legal commitments, or own IP in
its own right, so that the partners remain directly legally responsible for any losses or other
liabilities that the partnership’s operations create. In other words, a partnership which is not a
corporation, a company or a specific institution doesn’t really separately exist as a legal entity.
By contrast, a company is a new legal entity (a ‘legal person’ recognised by the law as having its
own legal identity) which can own and license IP and enter into legal commitments in its own
right. A spin-off company is an independent company created from an existing legal body – for
example, if a research institute decided to turn its licensing division or a particular laboratory
into a separate company. A start-up company is a general term for a new company in its early
stages of development. If a company is defined as a limited liability company, the partners or
investors normally cannot lose more than their investment in the company (but officeholders in
the company might be personally responsible for their actions in the way they manage the
company). This separate legal identity means that a start-up company can be a useful way of
developing and commercialising a new technology based on original research, while keeping the
main research effort of an institute focussed on broader scientific and public objectives, and
insulated from the commercial risks and pressures of the commercialisation process. At the same
time, the research institute can benefit from the commercialisation of its research, through
receiving its share of the profits and growth in assets of the spin-off company, thus strengthening
the institute’s capacity to do scientific research.
The company is normally owned through shares (its ‘equity’). These effectively represent a
portion of the assets and entitlement to profits of the company. Investors can purchase shares in
the company, which is one way of bringing in new financial resources to support the
development of the technology – in exchange, the investors stand to benefit from the growth in
the company’s worth, as their shares proportionately rise in value, and to receive a portion of any
profits produced by the company’s operations, commensurate with the number of shares they
own. If it is a public company, shares in the company can be bought and sold on the open stock
market. An initial public offering is when the shares in a start up company are first made
available to the public to purchase. A private company’s shares, by contrast, are not traded on the
open market (but can still be bought and sold).
The option of starting up your own company to manufacture and market your patented invention
requires you to have business skills, marketing skills, management skills and substantial capital
to draw on for factory premises, hiring staff and so on. But it also can offer a mechanism for
attracting financial backing for research, development and marketing, which can improve access
to the necessary resources and expertise.
Which model of commercialisation is best for you?
Each new technology and associated package of IP rights is potentially difference, and the
mechanism you choose for commercialisation should take into account the particular features of
the technology. One basic consideration is to what extent you, as originator of the technology,
wish to be involved and to invest in the subsequent development of the technology. You will
need to compare the advantages and disadvantages of each model of commercialisation.
Generally speaking, the higher degree of risk and commitment of finance and resources you can
invest, the higher the degree of control you can secure over exploitation of the technology
invention, and the higher the financial return to your institution may be.
There are many possible variations on each of these general models, and in practice they can
overlap. In deciding which model of commercialisation is best for you, it is always a good idea
to seek commercial or legal advice.
Remember that IPRs alone do not guarantee you a financial return on your invention. You need
to make good commercial decisions to benefit financially from your intellectual property rights.
Properly managed, intellectual property rights should not be a burden but should yield a return
from your hard work in creating an invention.
1. A –––––––––––– is merely the grant of permission to undertake some of the actions covered
by intellectual property rights, and the ––––––– retains ownership and control of the basic patent.
2. The –––––––––––– normally includes the right to exclude others from making, using, selling
or importing the patented product, and similar rights concerning patented processes.
3. A –––––––––––––– involves a formal, legally binding commitment between two or more

partners to work together on a shared enterprise.
4. A ––––––––– company is an independent company created from an existing legal body.
5. A ––––––––––––- is a general term for a new company in its early stages of development.
7.6 Commercialisation Mechanisms
In summary, a technology licensing agreement will normally:
· Name the intellectual property rights being licensed.
· Make it clear who retains ownership of the intellectual property rights.
· State how the royalty rates will be worked out.
· Set out when royalties will be paid, including milestone payments.
· Set out which territory the licence applies to.

· Set out whether the licence is exclusive or non-exclusive.
· Set out whether the licensee can licence the intellectual property rights to others.
· State who will pay the costs of maintaining the patent rights.
· Set out arrangements for dealing with improvements and new applications of the new
technology.
· Set out how confidentiality issues will be dealt with and the rights of the inventor to publish
their research.
· Provide for an insurance, release and indemnity clauses.
· Provide for dispute resolution and termination.
Choosing a potential licensee can be very important, as you are relying on this commercial
partner to deliver the benefits of your technology – not only the commercial benefits, but the
benefits to society that might come from the full dissemination and widest possible use of your
technology.
The choice should not just be based on willingness to pay a higher royalty. A partner who has a
convincing business plan and establishes a good working relationship with you is likely to be
more valuable. If you are selecting a licensee, you may need to consider a host of factors,
including:
· Does the company have experience and proven success in developing new technologies and
bringing products to market?
· What kind of R&D and business plan does the company have? Are there realistic plans for
developing and distributing the product based on your technology? Do these plans have well-
defined milestones that could be built into a license agreement?
· Do you want to favour development of the technology in your own country? Is the company
willing and able to invest locally in facilities for exploiting the technology?
· Are the resources, expertise and reputation of a large, established company needed, or are the
flexibility and lower costs of a smaller, start-up company more appropriate for the technology?
· Are you planning to export your technology or otherwise develop overseas markets? Is your
potential partner established overseas, or have experience in foreign markets?
· Is your commercial partner likely to be able to take up new applications and improvements on
the technology that your research is working towards? Are they able to apply the technology in
all the potential areas of use?
Due diligence
Of course, your commercial partner will need some reassurance about the quality of the offer you
are making to them. If you are involved in licensing technology or seeking commercial support
for your research you are likely to hear of ‘due diligence.’ When a future partner is considering
whether or not to license technology, to buy a share of patent rights, or to support your research,
they will need to satisfy themselves that it is a viable proposition. The process of assessing the
viability, risk, potential liabilities and commercial prospects of a project is known as ‘due
diligence.’ Indeed, if a potential partner seems not to be interested in this kind of issues, it may
actually raise questions about their commitment to the project or the credibility of their business
plan, particularly if the relationship assumes some degree of risk and investment on their part.
Generally, due diligence will involve assessing the overall commercial operations, cash flow,
assets and liabilities of a business that is being purchased or otherwise financially supported.
You would think twice about purchasing a business if you found that it was burdened with debts,
or was about to be involved in difficult litigation, or if there were doubts about whether it really
owned its assets. The same applies to a potential investment involving intellectual property. For
instance, a potential commercial partner would not want to invest in patented technology only to
find out that patent renewal fees have not been paid and the patent has lapsed, or to find out that
the patent was being opposed by another company, or to find that there is prior art available that
calls into question its validity. It may transpire that a student, a contractor or a visiting researcher
could actually be legally entitled to some or all of the patent rights. Even a serious level of
uncertainty or doubt could be enough to deter a potential partner, especially if they have run into
this kind of difficulty before.
Due diligence may also involve searching for information about the full range of IP rights that
might impact on the relevant technology – for instance, to check whether you have later filed
patent applications on improvements to the original patented technology, that may limit the value
of their investment in the original technology. Other intellectual property rights – such as related
trade mark or design registrations, or key trade secrets or copyright material (such as manuals or
software) – may also need to be identified or located, as these may also affect the commercial
partner’s interests in the technology. For example, they may be unwilling to take out a licence for
your patent without getting access to the software you have developed for a related process. They
may want the right to use your trade mark in association with the patented technology.
So in a due diligence process, your commercial partner may undertake a range of checks and
need various forms of information. These may include:
· Checks on external records, such as patent registers and patent databases, including foreign
patents;
· Searches of patent databases for conflicting technology;
· Independent advice from patent attorneys on issues such as patent ownership, patent validity
and scope of patent claims;
· Checks on employment contracts, confidentiality arrangements, and contracts with other parties
that may interfere with the exercise of IP rights;
· Details of the patent prosecution such as examiners’ reports and other opinions;
· Details of any legal challenges to the patent, and the way the proceedings were resolved;
· Checks on laboratory notebooks in the event that the validity of US patents is of concern to the
commercial partner (this also provides reassurance as to claims of ownership of the patent);
· Surveys of the activity of competitors and owners of competing technology, and possibilities of
conflict; and
· Analysis of freedom to operate issues.
In preparing to licence your technology, you should consider in advance these kind of due
diligence issues. If you can anticipate and provide comprehensive answers to these questions,
you will be able more effectively to reassure your commercial partner, and you will be in a
stronger negotiating position in negotiating licence terms. It should also speed up the licensing
negotiations, and
ultimately the commercialisation of your intellectual property.
7.7 Decoding Licences and Technology Agreements
Licenses on IP are literally a part of everyday life, although we are not always aware of this.
When you buy a book, a software package or a music CD, you may be buying a license for
limited uses of copyright material – you normally don’t get an unlimited licence that permits you
to do whatever you like with the copyright material. This is unlike the case if you buy other
objects – say a computer, a CD player, or a screwdriver – when the person selling the object
can’t normally restrict the way in which you use it. For example, when you buy a music CD, you
are normally only paying for an entitlement to play the music in a private environment. You
would need to get a separate license to make and sell copies of the CD, or to play the CD in a
public restaurant, or to broadcast the CD on public radio. If you buy a software package, you
might only be given a licence to use the software only on one computer, and to make only one
copy of the disc for back-up purposes. You might need to get a separate licence to install the
software on a network, or to make numerous copies of the software to distribute within your
organisation.
Researchers in the biotechnology field increasingly find they have to read, understand, negotiate
and enter into, licences covering the technology they are working with. While these are different
in scope and subject matter to the kind of licence that comes with a word-processing package or
music CD, the basic elements of licenses remain the same. The license defines certain limited
uses of IP material, and sets out conditions on this use. This entitlement is normally given in
exchange for some form of payment or other benefit. A licence may be free of charge, but could
limit the way the licensed IP is used.
This section discusses the main elements of licensing agreements. But beware: this is only a
general introduction to a complex area of law. If you ever get involved in serious licence
negotiations, you should seek expert advice with experience in the national legal system (or
systems) you are dealing with.
The parties to the licence:
The ‘parties’ to the licence are the entities (individual people, companies or institutions) that are
bound by the licence as a legal contract. They normally sign (or ‘execute’) the licence to confirm
in a legally clear-cut way that they agree to comply with its terms. The parties can be individual
persons, but they are normally legal entities such as a research institution, a university or a
company. It is important to ensure that the licence is signed in a way that is legally binding, and
by a person authorized to sign for their institution. The institution itself has to have ‘legal
identity’ under the relevant national law – it has to exist in a legal sense. A research team, a
division within a research institution or a joint venture partnership is probably not able to sign a
licence in its own right – either the individuals concerned have to sign the licence and become
legally bound by it as individuals, or the licence has to be signed on behalf of the overall
organization or company.
In some cases, the licence is not directly signed (think of the ‘I Agree’ block which you are often
asked to click when installing a software package on a computer), and in the national law of
many countries, contractual obligations can arise even without a formal signed document.
Following are some of the basic provisions you will find in many technology licenses.
Licensor and licensee:
The person granting the licence – the ‘licensor’ – typically holds rights to technology, biological
material, IP rights, know-how, or other information. The person receiving the licence – the
‘licensee’ – is the party which is seeking to use or exploit that material.
The basic idea of the licence is that the person granting the licence (the ‘licensor’) is giving
another person (the ‘licensee’) the right to do something that they could otherwise prevent them
from doing, in exchange for some kind of benefit (this may be financial, but may be other forms
of benefit). So the licensor might permit the licensee to use a technology that is covered by a
patent – and if there was no license, the licensor could take legal action under the patent to
prevent this use of the technology.
In effect, the legal purpose of the license is to guarantee the licensee that they can use the
patented technology confident that there will be no legal challenge from the licensor on the basis
of the patent right. Normally, the licensee will get other less specific non-legal benefits that flow
from a cooperative relationship with the people who created the technology, including technical
advice and know how.
Definition and scope:

The licence will normally define what its subject matter includes, and what the purpose of the
licence is. For instance, it could define the subject matter as falling within the claims of a certain
patent. The subject matter could be broader than that, however – it might involve access to
related know-how (including confidential information) that might assist the licensee in using the
patented technology, and it might involve use of a related trade mark, industrial designs or
copyright material.
The definition could define the subject matter in some detail as ‘licensed rights’ or a ‘technology
package,’ or it might just refer to specific patents by number. If the technology is at an early
stage – for instance, if patent applications are still in process, the definition might have to make
clear that the scope includes any patents granted on the basis of those applications, or only those
patents which relate to a specific use of the technology covered in the applications. It could also
apply to any derivative patents, such as continuations of the original patent application.
If the licence includes unregistered intellectual rights, such as know-how or trade secrets, special
care should be taken to define this so as to avoid future uncertainty and potential disputes. If the
licence covers both patented technology and trade secrets (confidential know-how), it may be
necessary to specify that what occurs in the event of the patent or patent application lapsing –
does the licence still apply to the trade secret or know how?
Grant of licensed rights:
The license needs to define what rights under the defined intellectual property the licensor is
granting to the licensee – for instance, the right to use a patented process to produce a certain
product. The licence could specify and also define certain permitted usage of the licensed
technology – for instance, the permitted usage may be limited to one industry sector only (e.g.
the licensed use for a new chemical entity covered by a patent might be defined as only for
agricultural use or only for human pharmaceutical use). It might limit the use to research or non-
commercial use.
It might also clarify what rights are not being licensed – for instance, the patented technology,
but not the associated trade mark. It might specifically reserve certain rights, such as the right to
use patented improvements of the licensed technology.
Sole, exclusive or non-exclusive licences:
The choice taken among these options is very important. An exclusive licence means that the
licensor agrees not to grant another licence to any other party, and agrees not to use the licensed
rights (in other words, the licensor cannot become a competing user of the licensed technology).
A sole licence means that the licensor grants a licence to only one licensee, the sole licensee, but
the licensor retains the right to use the technology itself. Under a non-exclusive licence, the
licensor grants the licensee a right to use the technology, but the licensor can still give the same
rights to other licensees. The kind of license granted will depend on several factors, and will do
much to influence the pattern of use, and the scale of royalties or other payments, made by the
licensee.
The scope of exclusivity given to the licensee would normally be matched by stronger
expectations of the licensee’s diligence and active exploitation of the technology. After all, in
many countries, the law can intervene and grant compulsory licenses to third parties if the patent
is not adequately worked after three years. Exclusive licenses may be particularly important
when the licensee is expected to make considerable investment in bringing the technology to the
market – for instance, in undertaking the regulatory requirements for the public release of new
chemical entity for pharmaceutical or agricultural purposes.
While these are distinct categories, there is considerable scope for moving between the
categories. For instance, a licence might be exclusive for only a certain period, after which it
becomes non-exclusive.
The licensee might only be interested in getting a head start on competitors, rather than reserving
exclusive rights for a longer period. Or there may be a mechanism in the agreement allowing for
an exclusive licence to become non-exclusive in certain circumstances – for example, if the
licensee fails to meet a certain milestone or is not sufficiently active in developing and marketing
the technology – this is often called a ‘march-in’ right. And again the licensor might
retain the right to issue further licenses for non-commercial purposes, or licenses to government
agencies.
Sub-licences
A ‘sub-licence’ is a further licence, when the licensee of the original licence itself grants a
licence to a third party. The sub-licence may extend to some or all of the rights granted under the
original licence. The original licence may need to make clear whether sub-licences can be
granted, and if so, to who, and on what terms or conditions. There may be issues such as
protecting the confidentiality of licensed material, liability for use of the technology, or the
interests of the licensor in granting direct licenses to the same third parties.
A sub-licensing program may be of considerable benefit to the licensor, as it will increase the
scope of use of the licensed technology, and may be an effective way of exporting the
technology to new overseas markets. The original licensor might retain an entitlement to a share
of any royalties or other payments paid by the sub-licensee. The original licensor might retain the
right to investigate and approve the eligibility of a sub-licensee, especially if the sub-licensee has
no direct relationship with the original licensee.
Diligence and milestones
The licensee may be relying on the license as the principal mechanism for recovering its
investment in research and for deriving benefits from the patent or other IP. So it may be
important to the licensor to ensure that the licensee does everything they can to develop and
commercialise the licensed IP. If a licensee gains an exclusive licence, subject to a royalty
payment on profits, and then decides to shelve the technology for several years because its
immediate interests lie elsewhere, then the whole value of the IP is lost to the licensor. So
licenses will frequently include obligations on the licensee to develop and apply the licensed
technology diligently and to meet specific deadlines. Where possible, certain defined points or
milestones should be identified – possibly based on the business plan originally proposed by the
licensee. The license could require the licensee to bring the product to the market as soon as
practicable, and to continue to make the product available to the public on reasonable terms.
These obligations may also be built into sub-licenses granted under the licence.
Payments and pricing:
A licence will normally involve a valuable ‘consideration’ – something of value which is given
in exchange for the right to use this technology. It need not be financial consideration – it could
be a right in exchange to use another technology (a ‘cross-licence’), or valuable access to other
facilities or resources.
There are many potential models for payment. It is always difficult to establish a value for
intellectual property, even more so if it relates to unproven technology that will require a licensee
to take a considerable commercial risk. The options boil down to lump sum payments, and
royalties based on the extent of use of the technology. It is not unusual to see a mixture of both.
For instance, there can be an initial lump-sum payment payable as soon as the licence is signed.
Lump-sum payments can also be required after other specific events, such the grant of a patent
covered by the licence, or on a regular basis, such as annual licence maintenance fees. Requiring
lump-sum payments provides an incentive to work the licensed technology that may not be
present if the license only provided for royalties. Yet royalties ensure that the licensor derives
benefits from the scale of commercial success of the technology they have created. Royalties
may be set as a certain percentage of gross sales of products using the technology or a percentage
of profits, or may be linked to other signs of turnover, such as the number of units produced
using the technology or the number of units sold.
If you are licensing out, especially to one licensee only, and you are relying on that licensee to
produce the returns that will pay for your research, then you may need to structure the license to
ensure they have an incentive actively to use the technology – if they are simply committed to
paying a royalty if and when they choose to use your technology, they might not have an
incentive to invest immediately in producing your technology, and they could leave it in the
bottom drawer while they exploit other opportunities. As a stimulus to diligence, the licensee
may have to pay a certain minimum royalty payment whether or not actual sales or use reaches
that level.
Initial payments can also be credited against future royalties – in effect, an upfront payment can
become an advance payment of minimum royalties. Or they can be separate from royalty
payments, so that they are in effect a separate licensing fee, which is not credited against future
royalty payments. Royalties need not be fixed – they can be scaled so that they are relatively
high if the product is only produced in low volumes, but so they decrease if the licensee produces
high volumes of the product. It might also be necessary to clarify when royalties fall due – when
the licensee issues an invoice for the product, or when the licensee is actually paid by the
purchaser of the product. There may also be provisions to allow for the royalty structure or level
to be reviewed in the light of changing market conditions or other factors.
The need to monitoring the use of the invention and to ensure that royalties are paid, as well as
checking on milestones and diligence obligations, can lead to requirements for record-keeping,
access to accounts and records, and independent auditing of accounts concerning the payment of
royalties and related data.
The approach taken should be realistic, especially in licensing biotechnology which can be
subject to long regulatory delays and on which returns to the licensee can take a long time to
realize.
Confidentiality:
There may be a requirement under the licence to keep certain know-how protected, and this may
translate into specific obligations on the part of the licensee to provide protection and to restrict
access to confidential information, in the same manner as a distinct non-disclosure agreement.
Copyright:
Apart from copyright protecting the licensed subject-matter (for example, if it includes computer
software), the licence may clarify the copyright provisions covering manuals, data sheets or other
documentation that are received and used as part of a licensed technology package.
Term
The license should specify how long the licensed right runs for. It could include an initial term,
with option for renewal, subject to negotiations certain terms (such as royalty payments, or
exclusivity) or demonstration of diligence. Alternatively, the license could be set to run for the
life of the patent (potentially including any extension of the patent term).
Termination
The license may provide for termination before its expiry. This may arise in the event of breach
of a license provision, or the bankruptcy, dissolution or insolvency of the licensee. The license
could provide for termination in the event of the lapse or invalidation of the licensed patent right.
There may be provision for termination by the licensee with due notice to the licensor,
potentially subject to a termination fee.
Assignment
The license may need to set out on what terms the licensor or licensee can assign its rights and
obligations under the license (for instance, clarifying what happens if a licensor sells its patent
portfolio to a third party, and how the interests of an exclusive licensee can be preserved). It may
provide for the licensee to give prior written consent before the licensor’s rights can be assigned
or transferred to a third party. It may also clarify whether, and under what conditions, the
licensee can assign the licensed rights to a third party.
Improvements and grant-back rights

The licence may specify who will own IP rights relating to improvements and adaptations to the
licensed technology arising from the licensed use of the technology. Equally, the licence may
cover improvements made by the licensor to the original technology – the licensee may be
entitled to access to any improvements (possibly subject to conditions, such as additional
royalties or licence fees). There may be an agreement to cross-license improvements to one
another, on a royalty-free basis. Unless the licensor is not interested in continued research in the
field, the licensor would normally try to secure non-exclusive ‘grant-back’ rights, giving them
access to any improvements made by the licensee – otherwise, the licensee might be able to get
patent protection on these improvements and deny the licensor access to the best way of
exercising their own invention. However, imposing licensing requirements for exclusive grant-
back rights – i.e. unduly limiting the licensee’s own capacity to exploit their inventions –is often
cited in national law as illegal anti-competitive commercial behaviour (see below on ‘abusive
licensing practices’).
Cross-licence
This kind of agreement involves an exchange of different entitlements – in a sense, each party is
both licensor and licensee. So A grants B a licence to use A’s intellectual property, and B grants
A a licence to use B’s intellectual property. This is one way of resolving complex patent
litigation or competing claims to ownership of overlapping intellectual property rights.
Indemnification and warranties
These provisions cover such issues as who would defend (and pay for) any legal action against
the licensee, in the event that the licensed use is claimed to infringe a third party’s patent or other
IP right. The licence might try to give the licensor an indemnity or safeguard against any claim
of damages caused by legal action taken against the licensee regarding their use of the licensed
technology. On the other hand, the licensor might be asked to give a warranty that they have the
right to grant the licence, that intellectual property rights are valid, and that they are actually
owned by the licensor without any conflicting claim. The licensor may need to warrant that they
are unaware that the use of the licensed technology would infringe the IP rights of a third party –
this might include an undertaking actively to investigate this possibility (such as through
searches of patent documents). The licensee might be asked to give warranties that they will
ensure they will continue to have the necessary expertise and resources to exploit the licensed
technology effectively.
Required performance
If you are licensing out your IP-protected technology, you need to consider what level of
performance you are expecting from the licensee, and what kind of guaranteed performance you
would like to build into the licence agreement. To some extent, this is covered by the structure
you choose for licence fees and royalties (discussed above), but there may be additional
performance targets that can be set – for instance, minimum sales levels (potentially compared to
previous years’ levels), or relative to other markets or to competitors, such as a particular market
share. This is especially relevant if you are contemplating granting an exclusive licence. You
need to be clear whether the licence is really just an agreement to pay you a royalty when and if
your technology is used, without any real obligation to exploit the technology; or whether the
licence is meant to create positive obligations on the licensee to take active steps – or even their
‘best endeavours’ – to make sure the technology is fully exploited for your benefit and for the
public benefit, and even to ensure that the technology is improved and refined as it is exploited.
The licensor may also have obligations to perform. The licensee may be expecting more than just
a legal right to use the technology, and may be looking for more substantial assistance to exploit
the technology effectively. So the license might involve obligations on the licensor to provide a
certain level of training and technical support and advice, and to assist in the process of gaining
regulatory approval to use the technology (for instance, assisting in providing the data necessary
for the approval of a new pharmaceutical formulation). The licensor might also be required to
advise the licensee of any research developments or improvements, or any new research
outcomes that could adversely affect the viability of the licensed technology.
Publication of research
Licenses may contain conditions on the publication of research relating to the licensed
technology, both to monitor developments in the technology and the licensed activities, and to
ensure that prior publication does not destroy any future patent rights.
Maintaining IPRs
Licenses may cover obligations on maintaining a patent, especially in ensuring that an

application is prosecuted to grant, and then ensuring that renewal fees are paid to keep the patent
in force. Typically, an annual fee or some form of regular payment must be paid to the patent
office to keep the patent in force – if it is not paid, then the patent lapses. These fees often
increase during the life of a patent, and if a patent is held in different countries, the payments can
become very considerable.
Because the licensee is gaining benefits from the patent – especially under an exclusive licence –
they may be asked to contribute to, or to be totally responsible for, keeping the patent in force by
paying these fees. In theory, a licence could provide that either party is responsible for paying
renewal fees, although the licensor (and patent holder) may feel more comfortable ensuring
payment, as it can be difficult (or after a certain time impossible) to reinstate a patent that has
lapsed due to failure to pay renewal fees. The license can stipulate that the licensee pay a
proportion of the IPR maintenance costs.
Especially if it involves a composite technology package – for example, combining patented

technology with unregistered trade secrets or know how (confidential information) – then the
license will need to be very clear about what happens when one of the components of the
package changes status – say if a patent expired or was invalidated, while the related know-how
remained protected. This could involve a significant cut in the level of royalty payments, for
instance, reflecting the decreased overall value of the licence.
Enforcing IPRs
The licensee of IP rights is often in a better position to monitor what its competitors are doing,
and might be the first to find out about other parties infringing the patent or other IP right. Any
licensee will be interested in preventing this activity, because it represents a competitor gaining
an advantage over them, because they are avoiding licensing costs and other conditions on use of
the licensed technology. Yet the licensor, as the owner of the IP, also has a fundamental interest
in avoiding damage to the value of their IP caused by the infringing activities. IP litigation is
expensive and time-consuming. Licenses can therefore clarify the respective roles and
responsibilities of the licensor and licensee in enforcing the licensed IP rights.
Enforcing the licence and choice of law:
If either party fails to live up to the licence, there needs to be a way of enforcing the obligations
undertaken by the licensor and licensee, and for compensating the other party for damage caused.
Serious breaches of licences are not common, particularly if licences are well- drafted and
properly represent the shared interests and agreed working relationship of the two parties. Yet
major licence disputes can be as complex and difficult as patent litigation. In addition, the
licensor and licensee may be based in different countries, raising questions about what national
law applies to the licence.
Licences therefore often contain provisions specifying what action should be taken in the event
of a dispute between the licensor and licensee. It may provide for arbitration or mediation
through a specified service as an alternative to litigation. And it will normally specify which law
applies to the contract – such as the law of Indonesia or the law of Singapore, or in the case of a
federal system such as the United States or Canada, it may be a state law, such as the law of the
Province of Ontario.
Other licence terms
The licence can be more than just an agreement to permit the usage of the licensed technology in
exchange for a payment. For instance, it might involve providing technical assistance, training
and continuing transfer of technology that will be of assistance in exploiting the licensed
technology.
The license may cover such issues as marketing products produced by the licensed technology
and requirements for the licensor’s trade mark or certification mark to be applied. The license
may also include undertakings as to compliance with ethical standards, environmental protection
measures, and government regulations.
In addition, broader technology management issues may be addressed, so that the licensee does
not impair the viability of the technology.
Preliminary documents: heads of agreement or letter of intent
A potential licensee may be unwilling to make firm and detailed commitments, for instance to
pay a certain level of royalties or to cross-licence its own proven technologies, before an
opportunity to evaluate the technology that is to be licensed. But they may be unwilling to invest
in the evaluation process unless they have some confidence they will get exclusive rights to
exploit the licensed technology. A confidentiality agreement or materials transfer agreement can
be used to cover the initial disclosure for evaluation, so the future licensee can check the
technology without damaging the interests of the party providing the technology or biological
materials. But it might also be necessary to reach preliminary agreement on the commercial
arrangements that will apply and to ensure that the future negotiations on the details of a licence
have a solid basis of understanding. Even the commitment of resources to engage in negotiations
on a licence requires some level of confidence that it is a worthwhile investment.
This leads to the commercial practice of agreeing on the general basis or overall framework of a
future agreement, by means of documents variously called ‘heads of agreement,’ ‘letter of
intent,’ ‘memorandum of understanding’ or ‘agreement in principle.’ You should be cautious
when dealing with these documents. It may be unclear whether you are entering into a firm legal
obligation – a binding legal contract – or just signalling your general willingness to do business
and helping to shape and focus the detailed negotiations. If the negotiations fail, the other party
might seek to enforce rights under an informal ‘letter of intent’ or ‘agreement in principle’ even
if you thought it was not a strict legal obligation but just a general framework for discussions.
Abusive licensing practices
An IP holder is often not entitled to use the power of their IP rights to impose unfair terms on
licensees who are interested in using the technology – national IP law or competition law often
intervenes to make unfair, coercive or abusive licences illegal. The TRIPS Agreement
acknowledges that ‘some licensing practices or conditions pertaining to intellectual property
rights which restrain competition may have adverse effects on trade and may impede the transfer
and dissemination of technology.’ Examples of these restrictions are exclusive grant-back
conditions (e.g. requiring a licensee only to grant licenses over any improvements to the licensor
and no-one else), conditions preventing challenges to validity (e.g. requiring the licensee to avoid
taking legal action against a patent on the basis that it is not novel or is obvious), and coercive
package licensing (e.g. requiring the licensee to use only the licensor’s products in other areas as
a condition of the license – stating, for instance, that a technology can only be licensed on the
condition that the licensee purchases raw materials from the licensor).
Compulsory licences
A compulsory licence comes about when the holder of a patent is unwilling to license the
technology or is otherwise viewed as failing to ‘work’ or exploit the patent for the benefit of the
community. Under the patent law of many countries, there is provision for a court or similar
legal authority to step in and issue a licence to permit a third party to make use of the patented
invention. Because the licence is issued without the authorization of the patent holder it is known
as a ‘compulsory’ licence. A compulsory licence may be required to deal with anti-competitive
behaviour regarding patented technologies, to enable a patent holder of a dependent patent (a
patent for a subsequent invention falling within the scope of an earlier patent) to exploit the
invention, and for other general public policy reasons. Typically, compulsory licences are
granted for limited purposes, are essentially restricted to the domestic (non-export) market, are
nonexclusive, and are subject to payment of compensation to the patent holder.
Often included under the category of compulsory licences is non-commercial government use.
The patent law of many countries provides for government agencies to make use of patented
technology for non-commercial purposes, without prior authorization of the patent holder, again
subject to payment of adequate compensation.
7.8 Licensing, Enabling Technologies and the Public Interest
An article from the magazine, Stanford’s DNA patent ‘enforcer’ Grolle closes the $200M book
on Cohen-Boyer, quotes the licensing officer as saying that "The philosophy of Stanford was that
we wanted to make it available to mankind, and we felt it would never be exploited properly with
an exclusive license," and comments that ‘the university also sought to keep the buy-in modest
so many companies were able to pick up the license.’ At the same time, the patent was able to
generate a very considerable amount of income to support further research.
In the ongoing debate over how companies and universities should best profit from research
tools, it’s understandable that licensors would review how past research tools have been treated.
Probably, the most famous case of all is the Cohen-Boyer gene-splicing patent shared by
Stanford University and the University of California system, which describes the fundamental
technique for using restriction enzymes and plasmids to snip a gene from one organism’s cells
and insert it in a bacterium in order to produce a protein
What gets a bit muddled from time to time, though, are a few of the key details about just how
the universities profited, and what their intent was. One often-heard inaccuracy, for example, is
that Cohen-Boyer was offered royalty-free to all comers, in exchange for a nominal up-front fee.
There’s no question the universities wanted to encourage the technique’s broad use. "We wanted
to spread it around for the whole world," says Floyd Grolle, the Cohen-Boyer patent "enforcer"
for Stanford’s Office of Technology Licensing since 1982. According to Grolle, the terms were
quite clear-cut. There was an initial licensing fee of $10,000 and, after that, a minimum annual
fee of $10,000. In addition, there was a royalty agreement, from which the minimum annual fee
could be discounted. In other words, each licensee paid Stanford at least $10,000 up front and
another $10,000 annually for the use of the Cohen-Boyer patent and more when the royalties
from a successful product rolled in.
Part of the confusion is that unlike some of the research tools today which are a true intermediary
step in the process, Cohen-Boyer is technically infringed whenever someone makes a
recombinant protein using gene-splicing. Thus, the basis for the royalties is not "reach-through,"
but rather a technical infringement in the actual manufacture of a recombinant protein.
The other interesting question that arises over Cohen-Boyer is how different the development of
the biotech industry might have been if Stanford and UC had licensed it exclusively. One version
of the story says that Stanford University, which owned the patent with UC, offered it on an
exclusive basis to Genentech, Inc. of South San Francisco and decided to go the non-exclusive
route only when Genentech didn’t offer enough money. The other version of the story is that
Genentech wanted exclusive rights, but Stanford, which was handling the negotiations of the two
schools, never offered them.
7.9 Enforcement of Intellectual Property Rights
Intellectual property rights are of limited value unless they are effectively enforced. Without
enforcement, there are no real deterrents for infringers or
remedies for those whose rights are infringed. The legal authorities do have some role in
enforcing intellectual property rights, but this is often limited, and for infringement of rights such
as patents, plant breeders rights and trade secrets, you would normally have to take action
yourself to take the infringing party to court. The same practical commercial considerations that
apply to obtaining and managing IP rights also apply to enforcement – in some cases, the
possibility of taking court action could act to encourage the infringing party to take out a licence
to use your technology. This would save you the expense and the uncertainty of a protracted
court case, and could provide you with a good financial return.
The procedures for enforcement of IP rights differ widely between countries, because they have
much more to do with the general legal system than other aspects of IP rights, such as
examination and grant of rights by a patent office. The TRIPS Agreement has established some
general principles for IP enforcement which are reflected in the laws of many countries, so this
discussion will focus on the TRIPS provisions to give an overall picture of how enforcement
operates.
One basic distinction in enforcement lies between more those IP infringements which tend to be
infringed widely, potentially by many different people and on a large commercial scale, and
general IP rights. In the first category are pirated copyright works and counterfeit trade mark
goods.
TRIPS, for instance, specifies that the government or legal authorities need to have a more active
role in dealing with these infringements than, say, for patents and plant breeders’ rights. So the
state often has an active role in tracking down and prosecuting those who infringe copyright and
trademark rights on a commercial scale, whereas for patents it is normally up to the patent holder
or licensee to take an infringer to court.
7.9.1 Enforcement Measures Required by TRIPS
The TRIPS Agreement differs from earlier international intellectual property treaties in several
ways; this includes having specific provisions for effective enforcement of IP rights in national
laws. The main enforcement provisions in TRIPS include:
· The general obligations under the TRIPS Agreement, which relate to the provision of fair
enforcement procedures.
· Civil remedies, including injunctions, damages and provisional measures.
· Criminal procedures, which are compulsory for intentional trade mark and copyright piracy on
a commercial scale and optional for other kinds of intellectual property, such as patents.
· Special border enforcement measures to stop counterfeit trade mark and pirated copyright
material coming into a country, border enforcement measures are optional for other kinds of
intellectual property, such as patents.
7.9.2 General Enforcement Obligations under Trips
The TRIPS Agreement provides for a range of general obligations in relation to the enforcement
of intellectual property rights. The purpose of these obligations is to ensure that the enforcement
measures are effective, and that certain basic principles of due process are met, so that
enforcement is fair and balanced, and does not impede legitimate trade.
Remedies must be timely and deter further infringements
TRIPS requires that enforcement procedures permit effective action against any infringement of
intellectual property rights, and that the remedies available are expeditious in order to prevent
infringements. A legal system that enables timely initiation and execution of legal processes is
particularly important for effective enforcement of intellectual property rights because the
information that intellectual property protects is often easy to copy and spread quickly. The
remedies available must also be severe enough to deter further infringements. These procedures
must be applied in a way that avoids the creation of barriers to legitimate trade and to provide for
safeguards against their abuse.
Enforcement procedures must be fair.
TRIPS provides that enforcement procedures must be fair and equitable, and may not be
unnecessarily complicated or costly, or entail unreasonable time-limits or delays. Decisions in
enforcement cases must be based on the merits of a case. Decisions should preferably be in
writing and reasoned, and be made available to the parties without undue delay. Decisions on the
merits of a case must be based only on evidence in respect of which the parties were offered the
opportunity to be heard.
Parties to a proceeding must have an avenue of appeal, unless the case was criminal in nature and
the accused was acquitted. TRIPS does not require a special judicial system for the enforcement
of intellectual property rights distinct from the normal court system. Finally, TRIPS creates no
obligations with respect to the distribution of resources as between enforcement of intellectual
property rights and the enforcement of law in general.
Example – enforcing a patented invention for making house paint.
For example, imagine that you own a patent for house paint that dries very quickly. It took you 8
years to develop the process and cost you thousands of dollars to patent your invention in
Australia, the US and Indonesia. Just as you started to distribute the paint yourself in Australia
you found out that your paint is being sold cheaply to the painting trade in Sydney by a company
trading as Cheap Paints. You also suspect that Cheap Paints are exporting tins of infringing
paint overseas. Obviously you need to take legal action against Cheap Paints to enforce your
rights, otherwise, there would be no market left for you to get any financial return on your
invention. The kinds of remedies you could take against Cheap Paints are set out in this unit.
7.10 Civil Remedies
Fair and equitable procedures
Defendants in civil matters must be notified in writing that they are being sued, informed of the
claims made against them in sufficient detail and have the right to be represented by independent
legal counsel. The parties are entitled to present all relevant evidence, while confidential
information must be identified and protected.
Injunctions
TRIPS requires that courts be capable of ordering injunctions. An injunction is a court order
compelling a party to stop infringements, or prevents it from infringing in the first place.
Injunctions can also be ordered to prevent imported infringing goods from entering into domestic
distribution channels.
Example – Use of an injunction against infringing sale of patented house paint:
Remember in the above example that Cheap Paints were selling cheap tins of your patented
house paint in markets in Sydney. This was a major problem for you because the price of your
paint was higher than the pirated paint and Cheap Paints were destroying your market. Unlike
you, Cheap Paints did not have to recoup all the costs you incurred in developing and patenting
the new paint so they could afford to under-cut your price.
In this case, an effective remedy for you to use against Cheap Paints is an injunction – a
definitive order issued by the court, which the infringer is bound to follow. An injunction could
order Cheap Paints to stop selling the infringing paint and give you back the market for selling
your patented paint.
Damages
TRIPS requires that courts must be able to order an infringer, at least if he or she acted in bad
faith, to pay adequate damages to the intellectual property right owner (TRIPS Article 45(1)).
Damages compensate the intellectual property owner for the damage caused by an infringement.
Courts must also be authorised to order the infringer to pay the right owner’s court costs,
including lawyers’ fees (TRIPS Article 45(2)). In appropriate cases, the courts may allow the
plaintiff to recover profits made by the defendant through the unauthorised use of the plaintiff’s
intellectual property (an ‘account of profits’) and/or pre-established damages even where the
infringer acted in good faith (TRIPS Article 45(2)).
Example – Damages for infringing sale of patented house paint:
Another remedy for you to use against Cheap Paints is the remedy of damages. Damages can be
used in addition to an injunction. In the previous example it was important for you to get an
injunction against Cheap Paints to stop them from selling infringing versions of your house
paint.
This enabled you to sell your patented paint yourself and get the financial benefits from sales of
your patented invention. However, you could also take an action against Cheap Paints for
damages to compensate you for the loss that you suffered because of their infringing sales of
your patented paint. For example, you could get damages to compensate you for lost profits
during the time that the infringing paint was sold. You may also be able to obtain compensation
for any loss of reputation that Cheap Paints may have caused you if, for example, its paints were
of an inferior quality and consumers believed that you produced it. Cheap Paints may cause you
serious financial damage if consumers have stopped buying your products.
Other remedies
TRIPS provides for other remedies in addition to injunctions and damages. In order to create an
effective deterrent to infringement, TRIPS requires judicial authorities to have the authority to
order infringing goods to be disposed of outside the channels of commerce, or, where possible
under domestic law, destroyed. Similarly, it must be possible to dispose of materials and
instruments predominantly used in the production of the infringing goods.
Provisional measures
As noted above, TRIPS requires that enforcement procedures must permit effective action
against infringements and include timely remedies. However, as complete judicial procedures
can take a quite a long time, TRIPS requires that judicial authorities be able to provide
provisional relief for intellectual property owners in order to stop an alleged infringement
immediately while the case is fully considered. This may mean that a judge can grant an
injunction almost straight away, which may prevent the defendant trading in the allegedly
infringing goods until the final trial decision is handed down. It is imperative that swift (and in
some cases pre-emptive) action can be taken to prevent infringements or stop them quickly.
Provisional measures must be available in two situations. First, it must be possible to prevent an
infringement from occurring, and to prevent infringing goods from entering the channels of
commerce. This includes preventing imported infringing goods from being dispersed into
domestic distribution channels immediately after customs clearance. Second, provisional
measures must be available to preserve relevant evidence relating to the alleged infringement.
This, for example, may be in the form of an order compelling the defendant to allow the plaintiff
and his lawyers to enter his or her business premises to secure evidence. In many common law
countries, this is called an
Anton Piller order. This remedy is important in intellectual property cases because it is often
easy for the defendant to dispose of evidence on short notice (sometimes it might be as easy as
deleting files on a computer).
In order to be effective, provisional measures may require that action be taken without giving
prior notice to the other side. Accordingly, the judicial authorities must be able to order
provisional measures (such as injunctions) in the absence of the defendant where appropriate,
particularly where any delay is likely to cause irreparable harm to the intellectual property
owner, or where there is a risk of evidence being destroyed.
You may think that these procedures are unfair on the defendant and that the presumption of
innocence is discarded because he or she is punished before the trial has taken place. This has
been a concern in national legal systems, and TRIPS requires that provisional measures must
contain safeguards against abuse of such measures. For example, the judicial authority may
require the applicant to provide a security or equivalent assurance sufficient to protect the
defendant and to prevent abuse. This may be payable to the defendant if the plaintiff loses the
case. Some countries have made injunctions more difficult to obtain by, for example, requiring
that the plaintiff prove that the defendant has a serious case to answer and to establish that
damages will be an inadequate remedy if the injunction is not granted.
There are other provisional measures which TRIPS does not mention, but which are provided for
under the laws of many countries. For example, if a plaintiff is afraid that defendant will move
its assets out of the jurisdiction to avoid paying compensation, he or she may be able to convince
the court to freeze the assets of the defendant for the duration of the trial. This is called a Mareva
Injunction in some countries.
7.11 Criminal Procedures
Civil proceedings, initiated by the right holder, are often considered to be more appropriate
approach for dealing with infringement of IP rights. They give the right-holder the opportunity to
obtain damages to compensate his or her losses, lost profits and legal costs if the case is
successful.
However, criminal proceedings apply to infringement of some IP rights. In this case, the state’s
legal authorities are responsible for taking the infringer to court, and the court imposes a penalty
such as a fine or, in extreme cases, imprisonment.
TRIPS only requires that criminal procedures need be provided for intentional trademark
counterfeiting or copyright piracy on a commercial scale. The remedies available for such crimes
must include imprisonment and/or monetary fines. The monetary fines must be enough to deter
future counterfeiting.
TRIPS allows Members to provide criminal procedures and penalties in other cases of
infringement of intellectual property rights, in particular where they are committed intentionally
and on a commercial scale. That is, it is not mandatory for countries to provide criminal
procedures for intentional infringements of patents and plant breeders’ rights, although some
countries may choose to (in practice, this is unusual).
There are advantages and disadvantages to using criminal procedures. On the one hand, the
government will probably run the trial, and so the costs to the inventor of bringing the action are
minimal. But on the other hand, the penalty obtained from a conviction will usually go to the
state. This means that, if the right-holder has suffered substantial losses, criminal proceedings do
usually not directly enable them to recoup their losses.
7.12 Special Border Enforcement Measures – Customs
In relation to trade marks and copyright, TRIPS also provides for special border enforcement
measures. The purpose of the border enforcement measures is for intellectual property owners to
be able to get assistance from customs authorities to prevent the importation of counterfeit trade
marks and copyright goods (TRIPS Articles 51-60). These provisions also include safeguards to
prevent the abuse of the border enforcement provisions by trade mark and copyright owners.
7.13 Different Roles in IP Enforcement
Effective enforcement is vital if the IP system is to function properly. If there is no real risk of
legal sanctions in the event of infringement, the IP right loses its value. Enforcement is not the
role of any one body. It is a cooperative task potentially involving enforcement agencies,
including the courts, police and customs. National intellectual property offices do not usually
have a direct role in enforcing intellectual property rights, although in some countries they do
have a role, either in providing expert advice or in coordinating investigation and prosecution of
infringements.
Ultimately, it is the responsibility of the right holder to enforce their own rights. In many cases,
this is the only option. Even if there is the possibility of criminal proceedings or border control
measures, the right holder may need to initiate the complaint and assist with the provision of
evidence and testimony. For IP rights most associated with biotechnology, such as patents, plant
breeders’ rights and confidential information (trade secrets), civil actions initiated by the right
holder are often the only option. The potential cost and risks associated with IP enforcement
should be built in to your strategic planning. Infringement insurance is a possibility, and may
need to be investigated. But you should also try to involve others with an interest in the IP rights
– for instance, an exclusive licensee, who might have even more interest in seeing the licensed IP
right effectively enforced than you do. Provisions on who is responsible for enforcement are
therefore often included in license agreements and joint venture agreements.
1. The process of assessing the viability, risk, potential liabilities and commercial prospects of a
project is known as ––––––––––– .
2. The ––––––––––– to the licence are the entities that are bound by the licence as a legal
contract.
3. The person granting the licence is the ––––––––––– and the person receiving the licence is the
––––––––––– .
4. A ––––––––––– means that the licensor grants a licence to only one licensee.
5. A ––––––––––– is a further licence, when the licensee of the original licence itself grants a
licence to a third party.
7.14 Summary
One needs to make good commercial decisions to benefit from one’s intellectual property rights.
Intellectual property rights do not guarantee you a financial return on your invention, but they
can assist. Which commercial model you choose to exploit your rights will depend on the value
of your invention and how much money and time you have to exploit your rights. Options are:
licensing your intellectual property rights: a licence is a grant of permission to exercise any
rights of the patent owner, licences can be exclusive or non-exclusive selling (or assigning) your
intellectual property rights: in contrast to a licence, an assignment of intellectual property rights
is the sale of those rights joint venture with commercial partners to manufacture and market
your invention, and set up your own company to manufacture and market your invention.
A licensing agreement is a common way to exploit intellectual property rights. Key clauses in
them relate to: the name of the intellectual property rights licensed, ownership of the intellectual
property rights, royalty rates, which territory the licence applies to, whether the licence is
exclusive or non-exclusive, who will pay the costs of maintaining the patent rights,
confidentiality and publication issues, insurance, release and indemnity and dispute resolution
and termination.
It is important to enforce your intellectual property rights to protect the value of your intellectual
property rights. National legal authorities do have a role in enforcement of IP rights, but as a
rule, it is up to the owner of IP rights to initiate action against infringers. Licensees may also
have a role in enforcement.
Effective legal remedies must be available to deter and punish infringements of intellectual
property rights. The options for enforcing your intellectual property rights include: civil remedies
including injunctions, which are court orders to stop infringements, and damages, which
compensate the intellectual property owner for damages caused by the infringements criminal
procedures, which are compulsory for intentional trade mark and copyright piracy on a
commercial scale and optional for other kinds of intellectual property, such as patents, and
special border enforcement measures to stop counterfeit trade mark and pirated copyright
material coming into a country, border enforcement measures are optional for other kinds of
intellectual property, such as patents.

1. What factors need to be considered while weighing up whether to commercialise your
invention yourself, or to find commercial partners or another way of developing your invention?
2. Explain different options available for exploiting IP rights.
3. What is a licence? How can it protect IP rights?
4. How can ‘Joint Venture Agreements’ be useful for start-up companies?
5. Describe how Intellectual Property Rights are enforced.
SAQs I
1. Licence; patent holder
2. Patent right
3. Joint venture agreement
4. Spin-off
5. Start-up company
SAQs II
1. Due diligence
2. Parties
3. Licensor; licensee
4. Sole licence
5. Sub-licence
Answers to TQs:
1. Refer to 7.2
2. Refer to 7.3
3. Refer to 7.4
4. Refer to 7.5
5. Refer to 7.9
MB0036-Unit-08-Corporate Social
Responsibility
Unit 8 Corporate Social Responsibility
Structure
8.1 Introduction
Objectives
8.2 Meaning of CSR
8.2.1 The Growing Recognition of CSR
8.3 The Global Dimension of CSR

8.3.1 Abstract
8.3.2 Values in Corporate Responsibility
8.3.3 Challenges for its further Diffusion
8.3.4 Principles for Community Action
8.3.5 Developing CSR Management Skills
8.3.6 Fostering CSR among SMEs
8.3.7 Promoting Convergence and Transparency of CSR Practices and Tools
8.3.8 Codes of Conduct
8.3.9 Management Standards
8.3.10 Employment and Social Affairs Policy
8.3.11 Measurement, Reporting and Assurance
8.4 Summary
8.1 Introduction
CSR is “a concept whereby companies integrate social and environmental concerns in their
business operations and in their interaction with their stakeholders on a voluntary basis” as they
are increasingly aware that responsible behaviour leads to sustainable business success. CSR is
also about managing change at company level in a socially responsible manner. This happens
when a company seeks to set the trade-offs between the requirements and the needs of the
various stakeholders into a balance, which is acceptable to all parties. If companies succeed in
managing change in a socially responsible manner, this will have a positive impact at the macro-
economic level.
CSR can make a contribution to achieving the strategic goal of becoming, by 2010, “the most
competitive and dynamic knowledge-based economy in the world, capable of sustainable
economic growth with more and better jobs and greater social cohesion" as adopted by the
Lisbon Summit of March 2000, and to the European Strategy for Sustainable Development.
The consultation process on the Green Paper has supported Community action in the field of
CSR. In the present Communication, which constitutes a follow-up to last year’s Green paper,
the Commission presents an EU strategy to promote CSR. The Communication is addressed to
the European institutions, Member States, Social Partners as well as business and consumer
associations, individual enterprises and other concerned parties, as the European strategy to
promote CSR can only be further developed and implemented through their joint efforts. The
Commission invites enterprises and their stakeholders as well as Social Partners in candidate
countries to join this initiative.
This unit describes the global dimensions of CSR.
Objectives:
· Explain the meaning of CSR.
· Account for the growing recognition of CSR.
· Describe the global dimension of CSR.
8.2 Meaning of CSR
CSR is a concept whereby companies integrate social and environmental concerns in their
business operations and in their interaction with their stakeholders on a voluntary basis.
The main function of an enterprise is to create value through producing goods and services that
society demands, thereby generating profit for its owners and shareholders as well as welfare for
society, particularly through an ongoing process of job creation. However, new social and market
pressures are gradually leading to a change in the values and in the horizon of business activity.
There is today a growing perception among enterprises that sustainable business success and
shareholder value cannot be achieved solely through maximising short-term profits, but instead
through market-oriented, yet responsible behaviour. Companies are aware that they can
contribute to sustainable development by managing their operations in such a way as to enhance
economic growth and increase competitiveness whilst ensuring environmental protection and
promoting social responsibility, including consumer interests.
In this context, an increasing number of firms have embraced a culture of CSR. Despite the wide
spectrum of approaches to CSR, there is large consensus on its main features:
· CSR is behaviour by businesses over and above legal requirements, voluntarily adopted
because businesses deem it to be in their long-term interest;
· CSR is intrinsically linked to the concept of sustainable development: businesses need to

integrate the economic, social and environmental impact in their operations;
· CSR is not an optional "add-on" to business core activities – but about the way in which
businesses are managed.
Socially responsible initiatives by entrepreneurs have a long tradition in Europe. What

distinguishes today’s understanding of CSR from the initiatives of the past is the attempt to
manage it strategically and to develop instruments for this. It means a business approach, which
puts stakeholder’s expectations and the principle of continuous improvement and innovation at
the heart of business strategies. What constitutes CSR depends on the particular situation of
individual enterprises and on the specific context in which they operate, be it in Europe or
elsewhere. In view of the EU enlargement, it is however important to enhance common
understanding both in Member States and candidate countries.
8.2.1 The Growing Recognition of CSR
CSR has found recognition among enterprises, policy-makers and other stakeholders, as an
important element of new and emerging forms of governance, which can help them to respond to
the following fundamental changes:
· Globalisation has created new opportunities for enterprises, but it also has increased their
organisational complexity and the increasing extension of business activities abroad has led to
new responsibilities on a global scale, particularly in developing countries.
· Considerations of image and reputation play an increasingly important role in the business
competitive environment, as consumers and NGO’s ask for more information about the
conditions in which products and services are generated and the sustainability impact thereof,
and tend to reward, with their behaviour, socially and environmentally responsible firms.
· Partly as a consequence of this, financial stakeholders ask for the disclosure of information
going beyond traditional financial reporting so as to allow them to better identify the success and
risk factors inherent in a company and its responsiveness to public opinion.
· As knowledge and innovation become increasingly important for competitiveness, enterprises

have a higher interest in retaining highly skilled and competent personnel.
1. Explain the main features of CSR.
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2. Give reason for the growing recognition of CSR.
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8.3 The Global Dimension of CSR
Global governance, and the interrelation between trade, investment and sustainable development
are key issues in the CSR debate. Indeed, awareness of CSR issues and concerns will contribute
to promote more sustainable investments, more effective development co-operation and
technology transfers.
Both processes of trade and financial markets liberalisation should be matched by appropriate
progress towards an effective system of global governance including its social and environmental
dimensions. Globalisation has also increasingly exposed enterprises to trans-boundary economic
criminality, requiring an international response.
By abiding by internationally accepted standards, multinational enterprises can contribute to

ensure that international trade markets function in a more sustainable way and it is therefore
important that the promotion of CSR at international level takes as its basis international
standards and agreed instruments.
Those agreed instruments are, at present, of two kinds:
First, the OECD Guidelines for Multinational Enterprises are the most comprehensive,
internationally endorsed set of rules governing the activities of multinationals. In promoting CSR
in developing countries, EU businesses should demonstrate and publicise their world-wide
adherence to them.
Second, beyond CSR, international agreements are in place and their implementation by
governments should be promoted. In its communication on Promoting Core Labour Standards
and Improving Social Governance in the context of Globalisation[1], the Commission stressed
the need to ensure the respect for core labour standards in the context of globalisation. It stressed
in particular the universality of core labour standards and the need for codes of conduct to
integrate the ILO fundamental Conventions.
At the same time, identifying common frameworks for the global dimension of CSR is
challenging due to the diversity in domestic policy frameworks, protection of workers and
environmental regulation. A number of initiatives in which European companies participate,
such as Investors for Africa, World Business Council for Sustainable Development, and the UN
Global Compact have sought to identify basic principles and practices. The underlying approach
should be that, at global level, just as at European, the implementation of CSR principles should
also go over and above the legal requirements that businesses need to comply with, and
approaches should involve consultation with local stakeholders.
8.3.1 Abstract
Over the last decades, corporate environmentalism, sustainability initiatives and management
systems have resulted in a plethora of business practices to increase corporate responsibility.
Stakeholder dialogue is seen as a major instrument in the involvement of the external
stakeholders as well as for communicating the corporate vision and commitment regarding these
initiatives internally. Until recently, many researchers and practitioners have argued (or
assumed) that the vision and commitment of senior management is communicated clearly, and
understood and incorporated by all staff within the organisation in the manner as it was initially
intended.
Yet, there is academic as well as anecdotal evidence that the integration of corporate
responsibility throughout the hierarchy of organisations is marginal, and even absent in some
cases. A recent study suggested that among employees and managers there are few shared values
or meaning regarding corporate environmentalism, and that the perception of environmental
issues across levels and functions is very diverse indeed. Thus, the corporate values relating to a
firm’s responsibilities can be perceived and experienced differently yet simultaneously within
the same organisation. This implies that it will be very difficult, if not impossible, to truly embed
responsible behaviour within an organisation if individual perceptions of corporate value systems
regarding responsibility are not aligned proactively.
This paper proposes two complementary, multidisciplinary approaches to further understanding

of the role of shared values in attaining corporate responsible behaviour throughout the
organisation. These two concepts then are developed into concrete research questions for future
studies.
Introduction
Corporate Responsibility[2] is considered a key development in connecting corporate practices

with the societal goal of sustainable development, as firms can “contribute to more sustainable
patterns of production and consumption within society” (Roome, 2006: p. 137). This has been
supported by research about business and the natural environment and society, which has over
the last decade predominantly focused on the business case for sustainability and the competitive
advantages of environmental responsibility (e.g. Aragon-Correa and Sharma, 2003; Berry and
Rondinelli, 1998; Maignan and Ferrell, 2001; Porter and Van der Linde, 1995; Simpson et al,
2004). Within this field, various scholars have argued for integration of corporate responsibility
into established business routines (e.g. Banerjee, 2001; Menon and Menon, 1997), yet in practice
that does not appear to be the case (e.g. Knox et al, 2005).
Most research about corporate responsibility focuses on investigation of managers, and

particularly on managers responsible for health, safety and environmental issues (e.g. Cormier et
al, 2004; Egri and Herman, 2000; Sarkis, 1998). Banerjee (2002) argued that it was important to
understand the interpretations of decision makers regarding environmental issues. Some
researchers have looked at different levels of management
(e.g. Andersson and Bateman, 2000; Floyd and Wooldridge, 2002; Sharma, 2000). However,
little research has been published on the integration of corporate responsibility throughout the
organisation and the possible implications of wider employee understanding of
environmentalism (Wehrmeyer and McNeil, 2000) and social issues (e.g. Lyon, 2004; McNutt
and Batho, 2005). Similarly, based on the idea that strategy development and implementation is
underpinned by the understanding of people (Floyd and Woodridge, 2000; Mintzberg et al., 1998
and 2002), even experience and culture (Johnson and Scholes, 2003), it is also important to
understand how decision-implementers influence the development, implementation and success
of responsible strategies and actions. Yet, we have found little research on how employees
perceive corporate values regarding responsible behaviour.
A variety of authors (e.g. Banerjee, 2001; Gladwin et al. 1995; Hoffman, 2000) have
demonstrated how using traditional management theories (in particular institutional theory,
strategic choice, transformational leadership) can hinder efforts to change to a more responsible
state of doing business at the institutional as well as the organisational level. Therefore, new
perspectives, preferably from new domains, can challenge current assumptions and facilitate the
transition of developing appropriate organisational values (Starkey and Crane, 2003). The aim of
this discussion paper is to review the current literature on corporate values regarding Corporate
Responsibility, and to reflect on the role of employees in attaining responsible practices in an
organisation. From this, we propose two complementary, multi-disciplinary approaches to
further understanding of the role of shared values in attaining corporate responsible behaviour.
Finally, these two approaches will lead to the development of concrete research questions for
future studies.
8.3.2 Values in Corporate Responsibility
There are various theoretical perspectives on the concept of Corporate Responsibility: ranging
from a traditional view of the firm (e.g. Friedman, 1962; Walley and Whitehead, 1994) to a call
for a complete paradigm shift in business practice (e.g. Dyllick and Hockerts, 2002; Gladwin et
al, 1995). However, all views on corporate responsibility are based on the same premise: that
there is a corporate strategic approach to environmental and social issues (c.f. Banerjee et al,
2003; Lyon, 2004). Hence, it contains both corporate environmentalism and corporate social
responsibility (Dyllick and Hockerts, 2002), leading to the current construct that Corporate
Responsibility includes any initiative that reduces the environmental impact and/or contributes to
the improvement of the social conditions beyond the firm’s legal obligations (Roome, 2006). As
such, it is considered a key development in connecting corporate practices with the societal goal
of sustainable development, as firms can “contribute to more sustainable patterns of production
and consumption within society” (Roome, 2006:
p. 137).
Corporate Responsibility can be considered as encompassing two components (Banerjee, 2002;

Bansal and Roth, 2000; van Marrewijk, 2004): a strategy focus (i.e. how strategically important
environmental and social issues are perceived by management), and an orientation aspect (i.e. a
set of underlying corporate values that provide an internal ‘compass’ to which the company can
orient its environmental and social actions). The orientation of an organisation has significant
strategic power in terms of shaping the organisational direction (Chen et al, 1997; Keogh and
Polonsky, 1998; Shrivastava, 1995c). As such, the ‘responsible’ orientation not only influences
the overall responsibility of a firm, it also affects the extent and form that actual responsible
strategies will take, as well as the ethical behaviour standards and the environmental protection
commitment of the organisation (Shrivastava, 1995b). Therefore, the responsible orientation
within a firm needs to be studied in more detail to provide additional insights into organisational
attitudes towards the environment and society.
Various researchers (e.g. Bansal and Roth, 2000; McKay, 2001; Prakash, 2001) found that a
multi-theoretical perspective explained some organisational responses to a greater extent than
single theories in isolation, and could explain the seemingly ad hoc choices of firms to go
beyond legal compliance. Since this paper aims to propose two complementary multidisciplinary
approaches, none of the existing theories is judged or favoured above others. Instead, the
different theories are used in combination to draw out more comprehensive notions of the role of
values in corporate responsibility.
Assuming that organisations are open systems (Katz and Kahn, 1966), and as such become
interdependent with those elements of the environment with which they transact (Pfeffer, 1982),
organisations work within such interdependencies to reduce uncertainty and ensure survival
(DiMaggio, 1988; McKay, 2001). Based on this, the central premise of resource dependence is
that power relations among actors are commonly asymmetrical and that organisations strive to
obtain power, maintain autonomy, and reduce uncertainty in the context of external pressures
and demands. Control over resources is critical in maintaining power and is therefore pursued by
organisations (McKay, 2001). As such, an organisation-wide dedication to a compelling long-
range vision (a shared vision) is the key to generating the internal pressure and enthusiasm
needed for [responsible] innovation and change (Hamel and Prahalad, 1989; Hart, 1995). Given
the difficulty of generating a consensus about a purpose, shared vision is a rare (firm-specific)
resource, and few companies have been able to establish or maintain a widely shared or enduring
sense of mission (Hamel and Prahalad, 1989). Starik and Rands (1995) extended this idea to
include values, as these act as a mechanism to unify and orient organisational units toward
sustainability. Norms and shared values are essential to understand the sustainability of
organisations, and provide links between the organisation and the environment and society
(Starik and Rands, 1995).
Institutional theory is also based on the open systems assumption as described above. However,
the central premise of institutional theory is that survival arises out of conformity to external
rules and norms. Thus, the theory examines how external social and regulatory pressures
influence organisational actions (Scott 1987). Due to the powerful nature of environmental
influences, organisations seek to conform to environmental pressures as a way to secure stability,
legitimacy and access to resources. Those organisations that are responsive to such institutional
pressures are assumed to be more likely to survive (DiMaggio and Powell, 1983; McKay, 2001).
In setting environmental strategy and structure, firms may choose action from a repertoire of
possible options. However, the internal structure and culture of the firm reflect the dominant
institutions of the organisational field, hence the range of that repertoire is bound by the rules,
norms, and beliefs of the organisational field (Hoffman, 1997).
Based on the ‘systems’ view of organisations, the central premise of stakeholder theory is that
there are specific interest groups in the outside environment, which have a stake in the behaviour
and effectiveness of that organisation (Freeman, 1984). Although stakeholder theory shares
notions of power with both previously discussed theories, neither resource dependence theory
nor institutional theory appears to suffice to explain the full range of stakeholder power. Both
theories offer explanations of reactions to economic or formal/legal pressures, but fail to account
for political pressures (Jonker and Foster, 2002): where environmental or social stakeholders are
involved, there is neither resource dependency nor formal/legal pressure to conform (Frooman,
1999). The perception of the responsible managers influences the approach to stakeholders
(e.g. Collison et al, 2003; Cormier et al, 2004; Sharma and Henriques, 2005), and it is argued
that “responses to environmental pressures can vary widely among firms depending on
managerial perceptions of environmental risks and opportunities … on their interpretation of the
importance and relationship of the natural environment to their business activity” (Banerjee,
1998: p. 148). In explicitly describing the values and responsibilities of a firm, business codes
can help by providing a framework for managers to guide their decisions, and simultaneously
informing external stakeholders (Kaptein, 2004).
A number of scholars argue that current research and practice in corporate environmentalism
may be limited by the assumptions under which much is carried out (Porter, 2005). These
authors therefore call for a revolutionary way of thinking about business regarding environment
and society (e.g. Dyllick and Hockerts, 2002; Gladwin et al, 1995; Peattie, 2000; Shrivastava
(1995a); Stern et al. (1995)). A variety of authors (e.g. Banerjee, 2001; Gladwin et al. 1995;
Hoffman, 2000) have demonstrated how using traditional management theories (in particular
institutional theory, strategic choice, transformational leadership) can hinder efforts to change to
a more ‘green’ state of doing business at the institutional as well as the organisational level.
Therefore, new perspectives, preferably from new domains, are required to challenge current
assumptions and facilitate the transition of developing appropriate organisational values (Starkey
and Crane, 2003).
From the above, we could conclude that shared values are a key component in attaining a shared
vision of the Corporate Responsibility of an organisation and to guide interactions with
stakeholders, and are formed by rules, norms and ethical behaviour standards from both inside
and outside of the organisation.
However, there is academic and anecdotal evidence that the integration of corporate
responsibility throughout the hierarchy of organisations is marginal, and even absent in some
cases (e.g. Barakat, 2006b; Knox et al, 2005). A recent study by Barakat (2006b) suggested that
among employees in three UK case studies there was a general absence of shared meaning with
regards to key environmental themes and issues (although smaller clusters around hierarchical
levels and some functional groups shared some experiences on some issues). There was no
system for the identification and definition of environmental concepts, no explicit means by
which concepts could be shared and discussed, and no mechanism to indicate to employees the
concepts and definitions that would be acceptable and those that would not. Hence, employees
experienced their firm’s corporate environmentalism predominantly in an individual manner.
The perceived corporate orientation towards environmentalism followed this, and this study
therefore offers some evidence that corporate environmental orientation can be perceived and
experienced differently within the same organisation.
Furthermore, many researchers and practitioners in the Corporate Responsibility field (e.g.
Banerjee et al, 2003; Juholin, 2004; Murphy, 1988) have argued (or assumed) that the vision and
commitment of senior management is communicated clearly, and understood and incorporated
by all staff within the organisation in the manner as it was initially intended (Preston, 2001;
Ramus, 2001). Yet, there is little evidence that this assumption is grounded in practice (Barakat,
2006a; Knox et al, 1995). Even more so, there is evidence that (mainly lower-level) employees
do not perceive their firm to be pro-active in its environmental and social responsibilities (e.g.
Barakat, 2006a; Lingard et al, 2000; Ramasamy and Woan-Ting, 2004). Research suggests that
since employees are not oblivious to the ethical climate of the company, this interaction affects
the trust that employees have of their organisations and affects their commitment to it (Van Dyne
et al, 1994; Fritz et al, 1999; Gross and Etzioni, 1985). Also, the employees’ experience of
Corporate Responsibility appears to be significantly affected by their perception of the
behaviours and attitudes of management, especially if an employee perceives an inconsistency
between the immediate manager and the corporate policy (Ramus, 2001). The resultant
dissatisfaction and lack of engagement could potentially impact the success of responsible
initiatives (e.g. Preston, 2001; Ramus, 2001). Hence, it has become important to understand how
Corporate Responsibility is interpreted by decision-makers (Banerjee, 2002) and decision
implementers (Ramus and Steger, 2001).
As a result of these gaps in the literature, we propose a two-pronged approach for future research
about values in corporate responsibility: Firstly, to study the interaction with the higher level
framework of values that is provided by Corporate Identity, and secondly, to study the role of
personal values of employees in attaining a more responsible firm. These approaches are detailed
below.
Approach 1: Corporate Identity
With its roots in Marketing, the field of Corporate Identity has grown over the past two decades.
Research in the field has focused on a number of issues, for instance corporate brands (e.g.
Keller, 1999), corporate reputation
(e.g. Greyser, 1999), visual identity (e.g. Melewar, 2001), and organisational identity (e.g.
Simoes et al, 2005). Consequently, the wide spread in use of the construct of Corporate Identity
has led to an ambiguous meaning, which makes it almost an unbounded in its range of
applications (Cornelissen and Elving, 2003). However, as a corporate construct Corporate
Identity is perceived to “indicate the way in which an organization’s identity is revealed through
behaviour, communications, as well as through symbolism to internal and external audiences”
(Van Riel and Balmer, 1997: p. 341). Analogous to Albert and Whetten’s (1985) definition of
organisational identity, van Rekom (1997) proposed three criteria for corporate identity: that it
contains the essence of a firm, that it sets a firm apart from others, and that it has continuity over
time.
Corporate identity research has the power to “probe into the quintessence of an organisation’s
existence and … can propel to the fore issues of great sensitivity and political importance”
(Balmer, 2001b: p. 269). As such, Corporate Identity provides a relevant framework for
researching shared values among employees, as “at its core is the mix of employees’ values
which are expressed in terms of their affinities to corporate, professional, national and other
identities” (Balmer, 2001: 280). Furthermore, every organisation has an organisational (Albert
and Whetten, 1985) and corporate identity (Van Rekom, 1997), and as such provides a reliable
structure in which the salience and sharedness of other value systems can be used as a reference.
Finally, understanding the place and role of corporate responsibility within a firm’s identity
could offer insights into the requirements for attaining more embedded responsibility in business
practice (e.g. Gray and Balmer, 2004).
More concretely, this leads to the following research questions:
· To what extent are the components of Corporate Responsibility part of Corporate Identity?
· Is integration of Corporate Responsibility into the Corporate Identity required to create a

responsible firm? If integration would be required, through which initiatives or activities could
responsible practices become embedded (e.g. identity scoping activities; Gray and Balmer,
2004)?
· Is the absence of shared values a common theme, or does this seem to only affect responsible
values?
· Could the sharedness of values be enhanced to attain the scarce resource as proposed by Hamel
and Prahalad (1989)? How would this be achieved?
Corporate Identity contains external and internal components (marketing and organisational
behaviour, respectively; He and Balmer, 2005). When combined with the aspects of Corporate
Responsibility, more questions arise:
· What are the interactions between the internal and external components of a firm’s identity in
the context of responsible initiatives in an organisation?
· What are the implications of the degree of internal and external alignment regarding the firm’s
objectives? E.g., if a company is accused of ‘green washing’ (e.g. Gunn, 1999), how does this
relate to its alignment with respect to marketing? Could the perceptions of corporate
responsibility as a cost (e.g. Walley and Whitehead, 1994) or a benefit (e.g. Christmann, 2000;
Shrivastava, 1995b) affect a firm’s response through its behaviour, structure and initiatives?
Answering these questions will contribute to the knowledge of the role of social and
environmental values in the construct of Corporate Identity. This knowledge could influence the
management of Corporate Responsibility initiatives within a firm as it could create an increased
awareness of the issues across various levels and functions of the organisation.
Conversely, a better understanding of where Corporate Responsibility fits within the organisation
could have an impact on Corporate Identity, and as such could develop and improve the
management of a firm’s identity.
Approach 2: Personal values of employees
Individuals have been identified as the crucial factor that influences an organisation’s sustainable
behaviour. Also, employees are important change agents in the process towards a more
responsible firm (Starik and Rands, 1995). However, it has been argued that “each individual
carries around within his or her head a subjectively valid set of beliefs. The potential for
individual subjectivity within organisations, therefore, means that acceptance of an idea is
contingent on the idea’s consistency with an individual’s belief system – not the ideology of the
organisation as a whole” (Floyd and Wooldridge, 2000: p. 112). Therefore, personal values can
also influence a firm’s responses to environmental issues (Bansal and Roth, 2000), and can
influence the individual’s perceptions of environmental issues (Daft and Weick, 1984),
behaviour (Dutton, 1997) and receptiveness to change (Andersson and Bateman, 2000). This
means that a complex relationship exists between employees, their values and perceptions, and
the organisation, its values and the success of its responsible initiatives (Beaumont et al, 1993;
Cordano and Frieze, 2000).
Stern et al. (1995) developed a framework of the level of environmental concern of an

individual, highlighting the role of values in influencing behaviour. Although personal values
have been associated with individual behaviour in the psychology literature, the role played by
personal values in decision-making within an organisation is less clear (Fritzsche, 1995). Past
research has found that managers tend to respond to ethical dilemmas situationally and Fritzsche
(1995) describes how personal values can relate to various types of ethical dilemmas.
Furthermore, there is evidence that the personal orientation of managers leads to a different
strategy focus (Keogh and Polonsky, 1998). However, a recent study focusing on employees of
different levels and functions found that the link between personal orientations and behavioural
choices at work was less clear. Many of the employees interviewed expressed strong personal
values towards social and environmental responsibility, whereas very few displayed these values
when considering environmental issues within the company (Barakat, 2006a).
Therefore, the relevance of understanding personal values as described above leads to the
following research questions:
· How and why do personal values relating to responsibility appear to be subordinated in an

organisational context? Where do social and environmental values sit with respect to a person’s
hierarchy of values?
· How does this phenomenon compare with other domains like caring for family or status?
· What are the implications of misalignments between personal ‘responsibility’ values and
organisational ones?
· Could the environmental and social personal values be harnessed to contribute to the
responsible values of the firm? How does the degree of employment of these values impact the
execution of responsible initiatives?
The outcomes of the above would further the understanding of the role of individuals in their
responses to social and environmental issues within their organisation. This could have
implications for the engagement of employees’ perceptions towards the management of
responsible initiatives. The identification of the different positions available within an
organisation has the potential to provide a platform from which shared meaning and experiences
could be developed. Furthermore, the study could provide a direction in which to develop
practices to promote or mitigate the available personal attributes towards a constructive asset of
the firm.
8.3.3 Challenges for its further Diffusion
The challenges to a further awareness, dissemination and adoption of CSR practices among
enterprises stem from insufficient:
· Knowledge about the relationship between CSR and business performance (the “business
case”);
· Consensus between the various parties involved on an adequate concept taking account of the
global dimension of CSR, in particular the diversity in domestic policy frameworks in the world.
· Teaching and training about the role of CSR, especially in commercial and management
schools;
· Awareness and resources among SMEs;
· Transparency, which stems from the lack of generally accepted instruments to design, manage
and communicate CSR policies;
· Consumers’ and investors’ recognition and endorsement of CSR behaviours;
· Coherence in public policies.
Community action in the field of CSR has to build on the core principles laid down in
international agreements and should be developed in full respect of subsidiarity principles.
Within this scope, there are at least two reasons pointing to the opportunity and the need for
Community Action in the field of CSR. Firstly, CSR may be a useful instrument in furthering
Community policies. Secondly, the proliferation of different CSR instruments (such as
management standards, labelling and certification schemes, reporting, etc.) that are difficult to
compare, is confusing for business, consumers, investors, other stakeholders and the public and
this, in turn, could be a source of market distortion. Therefore, there is a role for Community
action to facilitate convergence in the instruments used in the light of the need to ensure a proper
functioning of the internal market and the preservation of a level playing field.
CSR practices and instruments will be more effective if they are part of a concerted effort by all
those concerned towards shared objectives. They should be transparent and based on clear and
verifiable criteria or benchmarks. Public policy can contribute to the development of an action
framework with a view to promote transparency and thus credibility for CSR practices.
8.3.4 Principles for Community Action
The Commission proposes to build its strategy to promote CSR on a number of principles. These
are as follows:
– recognition of voluntary nature of CSR;
– need for credibility and transparency of CSR practices;
– focus on activities where Community involvement adds value;
– balanced and all-encompassing approach to CSR, including economic, social and

environmental issues as well as consumer interests;
– attention to the needs and characteristics of SMEs;
– support and compatibility with existing international agreements and instruments (ILO core
labour standards, OECD guidelines for multinational enterprises)
The Commission proposes to focus its strategy on the following areas:
(1) Increasing knowledge about the positive impact of CSR on business and societies in Europe
and abroad, in particular in developing countries;
(2) Developing the exchange of experience and good practice on CSR between enterprises;
(3) Promoting the development of CSR management skills;
(4) Fostering CSR among SMEs;
(5) Facilitating convergence and transparency of CSR practices and tools;
(6) Launching a Multi-Stakeholder Forum on CSR at EU level;
(7) Integrating CSR into Community policies.
The Commission is prepared to involve the candidate countries as much as possible in the
implementation of this strategy. It will also promote CSR as an incentive to enhancing
sustainable development and good governance in developing countries.
Improve the knowledge about CSR and facilitate the exchange of experience and good
practice.
Increasing knowledge about the impact of CSR on business and society.
The responses to the Green paper reflect a broad consensus among businesses about the
expectation that CSR will be of strategic importance to ensure the long-term business success.
The potential of CSR policies to strengthen the symbiotic relationship between enterprises and
society has already been demonstrated in areas such as sustainable growth, education and social
cohesion. CSR can support the creation of an atmosphere of trust within companies, which leads
to a stronger commitment of employees and higher innovation performance. A similar
atmosphere of trust in co-operation among other stakeholders (business partners, suppliers, and
consumers) can increase the external innovation performance. Consumer confidence fostered
through CSR can be a major contributor to economic growth. More specifically, through CSR
practices, enterprises can play an important role in preventing and combating corruption and
bribery, and in helping preventing the use of enterprises for money laundering and criminal
activities financing.
CSR policies can also boost the societal benefit that enterprises create with regard to innovation.
Innovative practices aiming at better jobs, safer and employee-friendly workplaces, gender
mainstreaming and the innovation or technology transfer to local communities and developing
countries, leading to a more equitable North-South economic and social development, are further
examples of societal benefits created by innovative enterprises. Indeed, CSR may play a positive
role in fostering development in third countries by helping to establish a dialogue between these
countries, their public authorities, social partners and civil society and foreign companies.
The desire of enterprises to improve their risk management is a powerful factor behind CSR.
Enterprises generally agree that CSR helps them in managing their risks, their intangible assets,
their internal processes, and their relations with internal and external stakeholders. It has also
been argued that opportunities and advantages for enterprises stemming from complying with
international social and environmental conventions, norms or "soft law" instruments can
outweigh costs. Although most businesses support the assumption of a positive impact of CSR
on competitiveness, particularly in the long term, they are however not able to quantify this
effect.
Developing the Exchange of Experience and Good Practices on CSR between Businesses:
In their responses to the Green paper, business organisations and individual enterprises stressed
the importance of the exchange of experience and good practices about CSR between companies,
as an important vehicle to develop the concept further. It can help businesses to acquaint
themselves with the concept, to benchmark their position against competitors and to build up a
consensus about its instruments, such as reporting standards or verification procedures. These
exchanges could be particularly beneficial at sectoral level, where they can play an important
role is identifying common challenges and options for co-operation between competitors. Such
co-operation could reduce the costs of adopting CSR and help to create a level-playing field. It
could also help to diffuse CSR in supply chains.
Co-operatives, mutuals and associations as membership-led organisations have a long tradition in

combining economic viability with social responsibility. They ensure this through stakeholder
dialogue and participative management and thus can provide an important reference to other
organisations.
Developing the Exchange of Experience and Good Practices on CSR between Member
States:
Several Member states have developed CSR policies, which differ because they reflect national
traditions, situations and challenges. In order to facilitate the exchange of information about
national policies and to support its work in the area of CSR, the Commission has gathered
together a group of High-Level Social Representatives from the Member States that has met on a
regular basis.
8.3.5 Developing CSR Management Skills
Most respondents to the Green Paper stressed the importance of education and training of
managers, employees, and other actors to promote CSR. The education system, at all levels, has
a crucial role to play in the fostering of social responsibility in citizens, including those who are
working – or will work – in the world of business or outside it. It can fulfil this role by enabling
citizens to understand and appreciate social, environmental and ethical values and equipping
them to take informed decisions. Education and training in the field of business administration
have particular relevance to CSR in this context, and the encouragement of an effective dialogue
between the worlds of business and education on this subject can contribute to the promotion of
CSR principles and practices.
8.3.6 Fostering CSR among SMEs
The CSR concept was developed mainly by and for large multinational enterprises. In line with
the Commission’s “Think Small First” strategy, the CSR concept, practices and instruments
should be adapted to suit the specific situation of SMEs which make up the vast majority of
European enterprises. Because of their lower complexity and the strong role of the owner, SMEs
often manage their societal impact in a more intuitive and informal way than large companies. In
fact, many SMEs are already implementing socially and environmentally responsible practices
without being familiar with the CSR concept or communicating their activities. These practices
are often defined and understood as responsible entrepreneurship by SMEs.
50% of recently surveyed[3] European SMEs indicate that they already carry out socially and
environmentally responsible activities for the benefit of their external stakeholders. Their
community and social engagement could be characterised as being local in scope, occasional in
nature, and unrelated to business strategy. The main driver would be the ethical consideration of
the owner/manager, even though a significant number of SMEs also recognise business benefits
such as improved relations with consumers and the local community. Furthermore, a positive
correlation between SME’s strategic focus and their socially responsible activities can be
established: SMEs focussing on innovation, quality and growth also score higher on current or
future social engagement. Lack of awareness seems to be the most significant obstacle to social
engagement, especially among the smallest SMEs, followed by resource constraints. Small
business associations, support organisations and networks have an important role to play in
raising awareness through the provision of information, user-friendly tools and the dissemination
of good practices cases.
Since SMEs do not draw value from their engagement in the same way as a large company, it is
important to assist SMEs in adopting a more strategic approach. Collecting evidence on the
business case for different types of SMEs operating in diverse cultural backgrounds is key to a
better understanding and increased SME participation. In the future, the most significant pressure
on SMEs to adopt CSR practices is likely to come from their large business customers, which in
return could help SMEs cope with these challenges through the provision of training, mentoring
schemes and other initiatives.
8.3.7 Promoting Convergence and Transparency of CSR Practices
and Tools
CSR relates to a very wide range of company activities. This is particularly the case when an
enterprise operates in several countries and has to adapt its activities to the specific situations in
these countries. This diversity has helped to create an impressive richness of voluntary enterprise
initiatives, which often include innovative elements, but also implies challenges, namely the lack
of transparency and comparability.
Transparency is a key element of the CSR debate as it helps businesses to improve their practices
and behaviour; transparency also enables businesses and third parties to measure the results
achieved[4]. CSR benchmarks against which the social and environmental performance of
businesses can be measured and compared are useful to provide transparency and facilitate an
effective and credible benchmarking. The interest in benchmarks has resulted in an increase of
guidelines, principles and codes during the last decade. Not all of these tools are comparable in
scope, intent, implementation or applicability to particular businesses, sectors or industries. They
do not answer to the need for effective transparency about business social and environmental
performance. As expectations for CSR become more defined, there is a need for a certain
convergence of concepts, instruments, practices, which would increase transparency without
stifling innovation, and would offer benefits to all parties. CSR benchmarks should build upon
core values and take their starting point in international agreed instruments such as ILO core
labour standards and OECD guidelines for multinational enterprises.
Several market-driven international multi-stakeholder initiatives are emerging, which work

towards convergence and transparency in the area of CSR. Member states have taken various
initiatives to promote them, in accordance with their respective approaches to CSR. The
Commission wishes to do its part in facilitating convergence and transparency in the area of
CSR, by facilitating the development, diffusion and acceptance of these international multi-
stakeholder initiatives by enterprises and stakeholders.
Increased convergence and transparency would be desirable in the following fields:
(1) Codes of Conduct,
(2) Management standards
(3) Accounting, auditing and reporting
(4) Labels
(5) Social responsible investment
8.3.8 Codes of Conduct
The increasing public interest in the social and environmental impact and ethical standards of
industry has moved many companies, in particular those of the consumer goods sector, to adopt
codes of conduct relating to labour issues, human rights and the environment.
Codes of conduct are innovative and important instruments for the promotion of fundamental
human, labour and environmental rights, and anti-corruption practices – especially in countries
where public authorities fail to enforce minimum standards. However, it should be underlined
that they are complementary to national, EU and international legislation and collective
bargaining, and not a substitute to them.
The biggest challenge related to codes is to ensure that they are effectively implemented,
monitored and verified. In this respect, the Commission promotes business widespread
adherence to codes of conducts developed by international organisations. Special attention
should be given to implementing codes in respect of workers in the informal sector and sub-
contractors and in the free-trade zones.
The Commission believes that codes of conducts should:

– Build on the ILO fundamental Conventions and the OECD guidelines for multinational
enterprises as a common minimum standard of reference;
– Include appropriate mechanisms for evaluation and verification of their implementation, as

well as a system of compliance;
– Involve the social partners and other relevant stakeholder which are affected by them,
including those in developing countries, in their elaboration, implementation as well as
monitoring;
– Disseminate experience of good practices of European enterprises.
8.3.9 Management Standards
Faced with a widening range of complex issues in areas such as labour practices and supplier
relations, with implications across their organisations, businesses, regardless of sector, size,
structure or maturity, would benefit from the inclusion of social and environmental issues into
their daily operations. In this context, CSR management systems – like Total Quality
Management systems – could allow enterprises to have a clear picture of their social and
environmental impacts, help them to target the significant ones and manage them well.
The Eco-Management and Audit Scheme (EMAS), for example, allows voluntary participation
in an environmental management scheme. It is a scheme for companies and other organisations
that are willing to commit themselves to evaluate, manage and improve their environmental and
economic performance. In addition, active employee involvement is a driving force for EMAS
and a contribution to the social management of organisations.
8.3.10 Employment and Social Affairs Policy
Within a business CSR relates to quality employment, life-long learning, information,

consultation and participation of workers, equal opportunities, integration of people with
disabilities anticipation of industrial change and restructuring. Social dialogue is seen as a
powerful instrument to address employment-related issues.
Employment and social policy integrates the principles of CSR, in particular, through the
European Employment Strategy, an initiative on socially responsible restructuring, the European
Social Inclusion Strategy, initiatives to promote equality and diversity in the workplace, the EU
Disability Strategy and the Health and Safety Strategy.
In its document "Anticipating and managing change: a dynamic approach to the social aspects of
corporate restructuring", the Commission has stressed that properly taking into account and
addressing the social impact of restructuring contributes to its acceptance and to enhance its
positive potential. The Commission has called upon the social partners to give their opinion in
relation to the usefulness of establishing at Community level a number of principles for action,
which would support business good practice in restructuring situations.
In its communication “Adapting to change in work and society: a new Community strategy on
health and safety at work 2002–2006”, the Commission has expressed its intention to encourage
instruments which promote innovative approaches, to encourage the various parties to “go a step
further” and to associate all the interested parties in achieving the overall objectives of this
strategy, more especially in new fields which do not lend themselves easily to a normative
approach.
Deeply rooted societal changes such as increasing participation of women in the labour market
should be reflected in CSR, adapting structural changes and changing the work environment in
order to create more balanced conditions for both genders acknowledging the valuable
contribution of women as strategies which will benefit the society as well as the enterprise itself.
The 2003 European Year of People with Disabilities provides an opportunity for enterprises to
exchange experience of CSR practices and strategies and to undertake actions with a view to
acting in a socially responsible manner towards people with disabilities in relation to promoting
equal employment opportunities, developing designed-for-all products as well as improving
accessibility to assistive technologies.
Enterprise policy
Only competitive and profitable enterprises are able to make a long-term contribution to
sustainable development by generating wealth and jobs without compromising the social and
environmental needs of society. In fact, only profitable firms are sustainable and have better
chances to adopt/develop responsible practices.
The role of enterprise policy is to help create a business environment, which supports the Lisbon
objective of becoming the world’s most dynamic knowledge-driven economy, supports
entrepreneurship and a sustainable economic growth. Its objective is to ensure a balanced
approach to sustainable development, which maximises synergies between its economic, social
and environmental dimensions.
Another key element is to support businesses in enhancing their competitiveness and in meeting
the challenges of the transition to the knowledge economy. A special focus of enterprise policy is
on SMEs and responsible entrepreneurship, where projects with Member states are carried out to
identify good practices in policy and support. Further action priorities focus, among others, on
research on the impact of CSR and sustainable development on business performance, industry-
sector specific aspects (ICTs, tourism, services, social economy), CSR and innovation and the
management of the intangible assets of firms.
Consumer Policy
CSR has partly evolved in response to consumer demands and expectations. Consumers, in their
purchasing behaviour, increasingly require information and reassurance that their wider interests,
such as environmental and social concerns, are being taken into account. Enterprises are
increasingly sensitive to these demands both to retain existing customers and to attract new
customers.
Consumers and their representative organisations have therefore an important role to play in the
evolution of CSR. If CSR is therefore to continue to serve its purpose, strong lines of
communication between enterprises and consumers need to be created.
Concerning fair commercial practices, the Commission is in the process of consulting interested
parties on the detail of a possible framework directive which would harmonise national rules on
the fairness of commercial practices (advertising, aggressive marketing, after-sale customer
assistance, etc.) between businesses and consumers.
8.3.11 Measurement, Reporting and Assurance
In the last decade, more and more companies have started to publish information on their social
and environmental performance. "Triple bottom line" reporting of economic, social and
environmental indicators is emerging as good practice. At this early stage of experimentation,
flexibility may ensure that reporting is appropriate to each individual business. However, a
greater consensus on the type of information to be disclosed, the reporting format, the indicators
used and the reliability of the evaluation and audit procedure would allow for a more meaningful
benchmarking and communication of companies’ performance within particular sectors and for
businesses of similar size. The guidelines developed by the Global Reporting Initiative (GRI) are
a good example of a set of guidelines for reporting which could be the base of such consensus.
1. The CSR concept was developed mainly by and for small scale enterprises.
2. Most respondents to the Green Paper stressed the importance of education and training of
managers, employees, and other actors to promote CSR.
3. Codes of conduct are innovative and important instruments for the promotion of fundamental
human, labour and environmental rights, and anti-corruption practices.
4. In their responses to the Green paper, business organisations and individual enterprises
stressed the importance of the exchange of experience and good practices about CSR between
companies, as an important vehicle to develop the concept further.
8.4 Summary
CSR is a concept whereby companies integrate social and environmental concerns in their
business operations and in their interaction with their stakeholders on a voluntary basis.
CSR is behaviour by businesses over and above legal requirements, voluntarily adopted because
businesses deem it to be in their long-term interest;
CSR is intrinsically linked to the concept of sustainable development: businesses need to

integrate the economic, social and environmental impact in their operations;
CSR is not an optional "add-on" to business core activities – but about the way in which
businesses are managed.
CSR has found recognition among enterprises, policy-makers and other stakeholders, as an
important element of new and emerging forms of governance.
What constitutes CSR depends on the particular situation of individual enterprises and on the
specific context in which they operate.
Awareness of CSR issues and concerns will contribute to promote more sustainable investments,
more effective development co-operation and technology transfers.
The desire of enterprises to improve their risk management is a powerful factor behind CSR.
Enterprises generally agree that CSR helps them in managing their risks, their intangible assets,
their internal processes, and their relations with internal and external stakeholders.
1. Explain the meaning of CSR.
2. What are the challenges to further awareness, dissemination and adoption of CSR practices?
3. Describe the global dimension of CSR.
4. How can CSR management skills be developed?
SAQs I
1. Refer to 8.2
2. Refer to 8.2.1
SAQs II
1. False
2. True
3. True
4. True
Answers to TQs:
3. Refer to 8.2
4. Refer to 8.3
5. Refer to 8.3
6. Refer to 8.3
Reference:
Lawrence R. Jauch & William F. Glueck, Business Policy & Strategic Management _ McGraw-
Hill
[1] COM(2001)416
[2] Corporate Responsibility contains both corporate environmentalism and corporate social
responsibility, and includes any initiative that reduces the environmental impact and/or
contributes to the improvement of the social conditions beyond the firm’s legal obligations
(Dyllick and Hockerts, 2002; Roome, 2006).
[3] The 2001 ENSR survey of over 7,000 SMEs in: European SMEs and Social and
Environmental Responsibility, report published in the 7th Observatory of European SMEs, 2002,
European Commission, Enterprise DG
(http://europa.eu.int/comm/enterprise/enterprise_policy/analysis/observatory.htm)
[4] Greater transparency also prevents companies from being used by organised crime, and
terrorist groups to launder or generate money for their benefit.

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MB0036-Unit-01-Introduction to the Concept

of Strategic Management and Business Issues

Strategic Management and Business

Issues – Basic Investment Strategy

1.2 Purpose of Strategy

1.3 Translating Corporate Vision into Action-A Case Study

1.4 Strategies to Improve Sales

Self Assessment Questions I

1.5 Strategy Formulation & Implementation

1.5.1 Stages in Strategy Formulation and Implementation

1.5.2 Generic Strategy Alternatives

1.5.3 Strategic Alliances

1.5.4 Considering Strategy Variations

1.5.5 Selection of the Best Alternative

1.5.6 Strategic Choice

1.5.7 Allocation of Resources and Development of Organisational Structure

Self Assessment Questions II

1.6 Formulation of Policies, Plans, Programmes and Administration

Self Assessment Questions III

1.9 Terminal Questions

1.10 Answers to SAQs and TQs

After studying this unit, you will be able to:

· Explain the meaning and purposes of a strategy.

· Explain the key elements of basic investment strategy.

· Mention the key strategy initiatives within a firm.

· List the stages involved in strategy formulation and implementation.

· Explain different forms of strategic alliances.

· Explain the importance of evaluation in the strategic management process.

1.2 Purpose of Strategy

Mass Market as the Focus of Corporate Strategy

· HLL launched the WHEEL brand to cater to the requirements of large

· Articulate the vision of the company.

· Involve staff in the vision.

· Empower the staff to take risks and be innovative.

1.3 Translating Corporate Vision into Action – A Case Study

Case Study: BHEL

How do we translate this into action?

Mission – What the company wants to achieve:

· Become an international player.

· Provide total business solutions to ensure customer satisfaction.

Goals – To achieve the above mission

· To understand the status of technology in engineering and management.

· To emerge as the most competitive player in terms of price and quality.

· To upgrade innovative R&D skills among technical human resource.

· To outsource R&D services to close the gap.

· To ensure that employees are committed.

· To make key personnel more conscious of time, quality and cost.

· To develop reliable and resourceful network of customers.

· To optimise utilisation of resources, both financial as well as non-financial, material, as well as

Strategies – To achieve the above objectives

· To promote a joint venture with a strategic partner, preferably a leading multi-national.

· To select people based on aptitude and attitude.

Policies – To control strategies

· To follow structured recruitment procedures.

· To make training a compulsory element of employees’ growth strategy.

· To sell to a buyer only if he is not a significant contributor to debt levels.

· To encourage R&D and research paper presentations by employees.

Programmes – For implementation of objectives

· To work for ISO 9000 certification.

· To develop and encourage cross-function teams combining employees, customers and

· To use such data during recruitment.

· To conduct collection drive programmes for early recovery of outstandings.

· To organise cleanliness and safety weeks.