Strategic Management Chapter 2

The External Environment: Opportunities, Threats, Industry Competition, and Competitor Analysis

Firms need to understand the external environments by acquiring information about competitors, customers and other stakeholders.

The General, Industry and Competitor Environments

The general environment, is composed of dimensions in the broader society that influence an industry and the firms in it. It is broken down into six segments:

• Demographic – information about the people in the segment

• Economic – Monetary information

• Political/Legal – laws that affect firm

• Sociocultural Cultural things in the Environment

• Technological – Changes in technology

• Global – changes in the world Environment

The industry environment is the set of factors that directly influence a firm and how it competes. They include the threat of new entrants, power of suppliers and customers, the threat of substitution and the intensity of rivalries. The firm also needs to do competitor analysis, study the things that make a competitor be able to do the job as well as they do.

External Environmental Analysis

Firms need to analyze things that can give them an opportunity, a condition that if exploited will give them a strategic advantage, and threats, things that can hinder a firm's efforts to gain the same. This is done with the following four things.

Scanning

Scanning is a study of all the segments of the general environment. It allows for a firm to see changes that will affect its business model. Volatile scanning systems will not work in a stable environment and vice-versa.

Monitoring

Monitoring allows firms to observe changes to see if important trends are coming. A firm needs to know who its stakeholders (or potential ones) to be able to use this information to its best advantage.

Forecasting

Forecasting deals with things that will take place in the future. While it can be helpful, it is not a perfect science, things can happen (9/11 for example) that are beyond an forecaster's control

Assessing

Assessing has to do with understanding why the other things mentioned here brought about the results that they did. If we cannot understand why we will just make more mistakes.

Segments of the General Environment

The Demographic Segment

Population size

Firms need to understand how fast a nation is growing (or not growing). This will give them an idea of the markets they need to enter.

Age Structure

As populations shift, marketing to new groups will need to be adjusted for the changing age structure.

Geographic Distribution

Population shifts affect where workers are and people are that will purchace the product.

Ethic Mix

The diversity of a people in a country effect how things are done. What is a majority today, white or male for example in the USA, is not what it is in other countries, nor what it may be shortly in the USA.

Income Distribution

Where are the people that have the money to spend.

The Economic Segment

Economic environment refers to the nature and direction of the economy in which a firm competes or may compete. Nations are now interconnected and what happens economically to one county can affect many others.

The Political/Legal Segment

The political/legal segment is the arena in which organizations and interest groups compete for attention, resources, and a voice in overseeing the body of laws and regulations guiding the interaction among nations. Business will try to influence governments and if they can not they need to see how their policies will affect their business. International organizations can also affect how things are done as well.

The Sociocultural Segment

The sociocultural segment is concerned with a society's attitudes and cultural values. These will differ between countries. Cultural differences can affect employees and purchases and need to be understood.

The Technological Segment

The technological segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, and materials. Technology is constantly changing and can be a cause of crossing boundaries that we thought were not breakable.

The Global Segment

The global segment includes relevant new global markets, existing markets that are changing, important international political events and critical cultural and institutional characteristics of global markets. Firms need to know what markets they can enter and have a reasonable success in. They also need to understand that some jobs may be able to done more cost effectively in other countries.

Industry Environment Analysis

An industry is a group of firms producing products that are close substitutes. This will have a more direct effect than the general environment. Firms need to know this for not only what they feel is their industry but what also could be a future entry in the industry as lines are now getting blurred.

Threat of New Entrants

New competitors seem to be the hardest for companies to recognize. This can be dangerous because it will take their market share unless the industry is growing. Barriers to entry and fear of retaliation keeps new entrants out sometimes.

Barriers to Entry

• Economies of scale – Smaller firms entering an industry may need to have prices higher that normal as they can not produce a product as cheep as their largest competitor.

• Product Differentiation – A firm needs to spend money to show what makes their product different than what exists already.

• Capital Requirements – without finances it may be hard to enter a field

• Switching cost – many buyers will entail a cost to switch to a new product from what they normally use. If these costs are high, then it may present a problem in selling to them.

• Access to Distribution Channels – existing firms have access to well established distribution channels, doing the job cheaply, new firms have to start from scratch with these.

• Cost disadvantages Independent of Scale – proprietary technology and bad location are things that a new firm may need to overcome.

• Government Policy – licensing and laws can affect how a company enters a market.

Expected Retaliation

Trying to take a part of a market share is sure to bring retaliation to a new firm. But if you establish a niche that they are not serving, you may exist long enough to take them on in the non-niche market.

Bargaining Power of Suppliers

Suppliers can raise prices or lower quality and affect an industry. This is effective for them if they are one of the few suppliers or substitutes are not readily available.

Bargaining Powers of Buyers

Buyers want the lowest price possible and cause a competition to take place for their finances.

Threat of Substitute Products

Availability of substitutes can affect an industry, even if they are not direct substitutes.

Intensity of Rivalry among Competitors

Steps taken by one firm in an industry can affect what others do to compete. Some things are:

• Numerous or Equally Balances Competitors

• Slow industry growth

• High Fixed Cost or High Storage Cost

• Lack of differentiation or low switching costs

• High strategic stakes

• High exit barriers – laws, emotional, specialized assets, etc.

Interpreting Industry Analysis

Much information is available for each industry. Firms need to use this information to help them get a competitive advantage.

Strategic Groups

A strategic group is a set of firms emphasizing similar strategic dimensions to use a similar strategy. Competition between members of this group will be stronger than with those outside the group. Where there are strategic groups their tends to be more stability. Being a member of a group will help you understand your competition better.

Competitor Analysis

Competitor intelligence is the set of data and information the firm gathers to better understand and better anticipate competitors' objectives, strategies, assumptions and capabilities. In collecting this information, companies need to follow ethical standards.

Strategic Management Chapter 1

Strategic Management and Strategic Competitiveness

Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy. When a firm can do this and others cannot duplicate it, then the firm has a sustained (or sustainable) competitive advantage. Because of the advantage they will get above average returns, more that what an investor can get in another company, because the risk, the chance of not getting the money back, is much lower. If a company does not have this advantage it will just have a normal or average return.

The full set of commitments, decisions, and actions for a firm to achieve strategic competitiveness is call the strategic management process. These are ever changing and must be adjusted as necessary to keep a company going.

The Challenge of Strategic Management

Business failure is common so the objective is to meet the goal of getting a competitive advantage so it can stay successful. Profits are often not as important as a well though out strategy. Strategy is the integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. Strategy can be effective or ineffective.

The Current Competitive Landscape

The nature of competition in our current time means that companies that an organization competes against may change in the short term future. In some markets this may even result in hypercompetition. This will result in really aggressive marketing by the companies involved.

The Global Economy

A global economy is one in which goods, service, people, skills, and ideas move freely across geographic borders. While the United States is the one leading in competitiveness, other countries are moving in as boundaries break down in tariffs and the like. Many companies see the advantage in to moving into the world markets as a way to grow.

The March of Globalization

Globalization is the increasing economic interdependence among countries reflected in the flow of goods and services, financial capital and knowledge across country borders. Global markets can produce products from many countries or can make standardization of one company over many countries. Many companies are merging with companies from other countries in an order to get competitive advantage. Some of the global competitions can result in higher risks for a company so they need to be done with thought.

Technology and Technological Challenges

Increasing Rate of Technological Change and Diffusion

Both technology and the speed of technology have increased over the most recent years. Perpetual Innovation is the term for rapid and consistently new technology replacing older ones. Many companies use patents to protect a competitive advantage.

The Information Age

There are huge databases of information available for use by companies with access to them. Others build huge networks in an effort to collect the information that they need to build their own. The Internet provides an infrastructure that allows for large amounts of information to be delivered efficiently.

Increasing Knowledge Intensity

Knowledge is the basis of technology. For this reason companies that want a competitive advantage will need to take the knowledge of their employees and put it into a retrievable format. In order for a company to be competitive it will need to be able to mine that knowledge.

Strategic flexibility is a set of capabilities used to respond to various demands and opportunities. In order to do this, companies have to learn to learn. Following a flawed strategy.

The I/O Model of Above-Average Returns

In the 60's through the 80's the external environment was thought to be what influence the successfulness of a company. This was the Industrial Organization (I/O) model. Success was dependent on being in the right company to start with. It had some basic assumptions:

• The external environment is assumed to impose pressures and constraints that determine strategies that will result in above average returns.

• Most firms competing in an industry will be assumed to control some strategic resources.

• Resources used to formulate strategies are highly mobile across the firm.

• Decision makers are assumed to be rational

Above average returns can be earned when firms implement strategy dictated by the characteristics of the general industry and the competitor environments. Research shows that 20% of a firm's profitability has to do with the industry. It also shows 36% has to do with a firm's characteristics and actions.

Obviously Airline industry has shown us that this model is not a 100% fact. Hence we have other models.

The Resource-Based Model of Above-Average Returns

In this model, a firm has a collection of unique resources and capabilities that provide the basis for its strategy. Resources are inputs into a firm's production process. A capability is the capacity for a set of resources to perform a task or an activity in an integrative manner. They are either physical, human or organizational. They are also tangible or intangible in nature. Not all resources are the source of its competitive advantage, just those that are valuable, rare, costly to imitate, or nonsubstitutable. If a firm has all these they are said to have a core competency.

Strategic Intent and Strategic Mission

Strategic Intent

Strategic intent is the leveraging of a firm's resources, capabilities, and core competencies to accomplish the firm's goals in the competitive environment. Some firms may have to change their strategic intent to survive. Apple Computers no longer just make computers but also digital entertainment as well. This now means they have two competitors.

Strategic Mission

Strategic mission is a statement of a firm's unique purpose and the scope of its operations in product and market terms. Missions flow from intent. The mission clearly labels the intent of the company and who it intends to serve.

Stakeholders

Stakeholders are individuals and groups who can affect and are affected by the strategic outcomes achieved and can have enforceable claims on the firm's performance. They will stay with a firm as long as their expectations are at least being met. A firm needs to get along well with the various stakeholders.

Classification of Stakeholders

Shareholders want the return on their investment to be maximized. Short term advancements may hurt long range competitiveness of an organization.

A firm's customers want an investor to get a minimal return so they can get a lower cost, hopefully with an increase in quality.

Capital Market Stakeholders

Stakeholders and lenders have put money into a firm and therefore are important to a firm. Lenders may no longer lend and shareholders may sell their stock thereby lowering confidence in the company. If a firm is aware of this group being dissatisfied it needs to take steps to correct it.

Product Market Stakeholders

Customers demand reliable products at the lowest possible price. Suppliers want customers who are loyal and willing to pay high prices. Host communities want companies to be long term employers and provide a tax base. Union officials want secure good jobs for their members. All of these must be satisfied if a firm is to survive.

Organization Stakeholders

Employees expect a firm to provide a rewarding place to work.

Strategic Leaders

People responsible for designing and execution of strategic management processes are strategic leaders. They usually are top level managers or executives. Small firms may have one person, larger may have one but often have more. They are responsible for leading the company, and making the right decisions, or taking the blame for the failure. They are top level managers, CEOs and other managers in the company. Most leaders have some constraints due to the organizational culture. The organizational culture is the complex set of ideologies, symbols and core values that are shared throughout the firm and therefore influence how the firm conducts business. When strategic change is needed, often an organization will turn to an outsider. They have an advantage of not having the culture, but the disadvantage because they lack knowledge of the firm.

The Work of Effective Strategic Leaders

Leaders need to think clearly, deeply and ask many questions. Strategic leaders work long hours filled with ambiguous questions for a solution that may not be easy to figure out. They cannot be just dreamers or workers, they need to be both.

Predicting Outcomes of Strategic Decisions: Profit Pools

A Profit Pool entails the total profits earned in an industry at all points along the value chain. A firm needs to see where it can add to the industry by linking into some part of the chain.

The Strategic Management Process

The strategic management process is supposed to be a rational approach to help a firm. The strategic inputs provide for strategic actions to take place.

Sorry that the math stuff did not work in the Chapter 4 post. I do not have time to fix it so refrenced the book for the material folks. I tried an experiment with an editor that let me do math stuff but blogger does not seem to like it...

Chapter 4 - Risk and Return: The Basics

1. Investment Returns
   

   One way to express the return on an investment is how much of a dollar
   return you have made.

   
   

   Dollar Return = Amount received - Amount invested

   
   

   The problem with this is that It does not tell you how long the money
   was held nor how much money it took to get that return. In its place we
   can use a Rate of Return

   
   

   Rate of Return = (Amount received - Amount invested)/Amount
   Invested

   
   

   This resolves the problem by giving us a percentage of the original
   investment. If we then can express this across the years that the
   security is held then we can get the interest as an annual rate of
   return.

   
   


2. Stand Alone Risk
   

   Stand alone risk is defined as an exposure to loss or injury. In any
   security purchased one will be exposed to a chance that their will not be
   a payback of the money invested as well as any extra payback. This is the
   risk taken to invest in the security.

   
   

   One can look at these risks in two ways. The stand alone risk is where
   the security is the only one owned. If you had one security that was
   fairly secure in its return (a treasury bill for example) then it would
   be considered risk free. On the
   other hand, something moth return the same rate of return but have a
   chance of loosing your money, this is would be highly risky. How you
   invest would be a consideration of if you feel you can handle risk or
   not. In no case should you invest if your expected rate of return is not
   high enough to compensate for the perceived risk of the investment.

   
   

   One good/bad think about risky assets is they rarely return their
   expected rate of return. It is usually much higher (good) or much lower
   (bad).

   
   
   
   
   1. Probability Distributions
      

      This is defined as the chance that an event may occur. In
      investing we can say that a particular security could have a chance
      of returning a certain amount on its investment. This can even be
      broken down to the chance being strong, normal and weak, or even more
      shades as well as the percentages that they will happen with them.
      This becomes the probability distribution.

      
      
   
   
   2. Expected Rate of Return
      

      Multiply the possible outcomes by the probability that they will
      occur. Then take them and sum them up. This is the weighted average
      of outcomes. This is also know as the expected rate of return. It is
      named in formulas as r with a ^ symbol over it (called r-hat). Many
      securities can wind up with the same Expected Rate of Return even
      though they are widely varied in the chance they will succeed.
      Obviously we need another tool.

      
      
   
   
   3. Measuring Stand-Alone Risk: The Standard Deviation
      

      If we graph the probability distribution in a continuous curve we
      can see that some securities will have a tighter graph than others
      will. The tighter the graph, the smaller the risk is for the
      security. We measure this tightness by using a 'standard deviation',
      the symbol being σ and pronounced sigma. To find the standard
      deviation we do 4 steps:

      
      
      
      
      1. Calculate the expected rate of return
         

         Expected rate of return = r-hat = $$
         
         ∑
         
         i
         =
         1
         
         n
         
         P_ir_i

         
         
      
      
      2. Subtract the expected rate of return (r-hat) from each possible
         outcome (r_i) to get a set of deviations.
         

         Deviation = r_i - r-hat

         
         
      
      
      3. Square the deviation and multiple it by the chance that it
         might occur and then sum them to get the variance.
         

         Variance = σ² = $$
         
         ∑
         
         i
         =
         1
         
         n
         
         (r_i - r-hat)²P_i

         
         
      
      
      4. Finally do a square root of the Variance to find the standard
         deviation.
         

         The lower this standard deviation is, the tighter the graph it
         would produce and the less risk that it has. All things being
         normal, you can expect the actual return will be within one
         standard deviation of the expected rate of return.

         
         
      
      
      
      
   
   
   4. Using Historical Data to Measure Risk
      

      We have assumed to this point that we have a known probability
      distribution. If we have some sample return data form past periods we
      can figure out standard deviation as well.

      
      

      Estimated σ = S =$$
      
      
      
      
      ∑
      
      r
      =
      1
      
      n
      
      
      (
      
      rbar
      t
      
      
      −
      
      rbar
      Avg
      
      
      )
      
      
      
      2
      
      
      
      
      n
      −
      1
      
      
      
      

      
      

      Historic sigma is often an indicator of future sigma.

      
      
   
   
   5. Measuring Stand -Alone Risk: The Coefficient of Variation
      

      Given a choice, we will tend to choose the investment with the
      less risk, so will choose between two investments with the same
      expected returns the one with the lowest standard deviation. If two
      had the same standard deviation but one a higher expected return we
      would go for it. What do you do if neither has one that is the same.
      The coefficient of variation (CV devides the standard deviation by
      the expected return.

      
      

      CV = $$
      
      σ
      rhat
      
      

      
      

      This shows the risk per a unit of return so that they can be
      compared better. The lower this number is, the better the chance that
      it will bring a good return.

      
      
   
   
   6. Risk Aversion and Required Returns
      

      Most people will choose the less risky return on investment and
      therefore we could say that they have risk aversion. While this is
      not bad in itself, it can have influence on things that get invested
      in. If you had two stocks, one was less riskier, that sold for the
      same price, most would go for the less riskier one. Since there would
      be more demand for it, the price would go up and the return would go
      down. Likewise those who own the risker one would sell causing its
      price to drop, changing its risk and return. The differences in the
      start and finish price is known as the risk premium (RP).

      
      
   
   
   
   


3. Risk in a Portfolio Context
   

   By adding stocks together in a portfolio, the risks of one stock can
   offset the risks of other stocks. In fact many stocks can be up while
   others are down and this can balance out the portfolio.

   
   
   
   
   1. Portfolio Returns
      

      To get the expected return on a portfolio add together the
      weighted averages of all the members of the portfolios.

      
      

      rbar_p = $$
      
      ∑
      
      i
      =
      1
      
      n
      
      
      w
      i
      
      
      rbar
      i
      
      

      
      
   
   
   2. Portfolio Risk
      

      The risk of the portfolio will almost always be smaller than the
      weighted average of the asset's σ. One thing should be noted
      about stocks that are up when others are down. If we had ones that
      has a perfect correlation (one was at the exact opposite point of th
      other), they would cancel each other out and have no risk. In truth
      it is not possible to get stocks in perfect alignment like this so we
      measure the correlation coefficient (noted as ρ (pronounced
      rho)). ρ can range from -1 (if exact opposites) to +1 (if exactly
      the same). For that reason, in order to diversify we must find stocks
      that have ρ that cancel each other out. In general you would want
      to have investments in tow or more separate industries instead of
      just all in one. If they are all in one industry type, the problem is
      that when that industry goes into a slump so will all the investments
      that you own in it.

      
      
   
   
   3. Diversifiable Risk versus Market Risk
      

      It is not impossible to find stocks that are negatively correlated
      as they tend to work with the economy as a whole. So there is risk in
      any investment but not as much if all is held in one stock. A market
      portfolio, all the stocks combined, should have a standard deviation
      of about 20.1 %. By research it is found that 40 or more stocks in
      diversified industries should diversify out most risk involved. The
      risk involved in a stock that moves with the market itself is called
      Market Risk, the part that deals with the stock itself and how
      lawsuits, strikes, etc. can affect it is called diversifable risk.
      Market risk can not be diversified out, diversifiable risks can.
      Capital Asset Pricing Model (CAPM), is used to analyze the
      relationship between risk and rate of return.

      
      
   
   
   4. The Concept of Beta
      

      The relevant risk of an individual stock is called its beta
      coefficient. and is defined under CPAM as the amount of risk that the
      stock contributes to a portfolio.

      
      

      $$
      
      b
      i
      
      =
      
      (
      
      
      σ
      i
      
      
      σ
      M
      
      
      )
      
      
      ρ
      iM
      
      

      
      

      A stock with a high standard deviation ($$
      
      σ
      i
      
      ) will have a high beta. It is possible to use a calculator or
      a spreadsheet to do the job. You can also take a graph and plot the
      stock as its return on the y and the market portfolio as the x, we
      could plot the graph of the graph of expectations by setting another
      point by using the slope with the various beta possibilities (2.0
      high, 1.0 average, .5 low) then we can figure out the , then we could
      see volatility possibilities.

      
      
   
   
   
   


4. Calculating Beta Coefficients
   

   Different organizations calculate Betas in different way so other than
   sticking with a beta from one organization it is a good idea to calculate
   your own. The first step is to compile the data for the company you want
   plus a standard to go by (say the S & P 500 Index). Second is to
   convert the data to rates of return (change from previous month/this
   month value) for both the stock and the standard. Plot on a graph the
   returns of the company against the standard and run a line through them
   to show the regression (Spreadsheets may make this easier). The slope of
   the line would be the beta.

   
   


5. The Relationship Between Risk and Rates of Returns
   

   The Market Risk Premium ($$
   
   RP
   M
   
   ) is the premium that people want for bearing the risk of the
   average stock. It would be the current market risk minus the risk free
   premium. We can use this to calculate our required return

   
   

   Required return = Riskfree return + premium for risk .

   
   


6. This leads to the Security Market Line (SML)
   

   $$
   
   r
   i
   
   =
   
   r
   RF
   
   +
   
   (
   
   r
   M
   
   −
   
   r
   RF
   
   )
   
   b
   i
   
   
   

   
   
   
   
   1. The Impact of Inflation
   
   
   2. Changes in Risk Aversion
      

      The slope of the SML reflects the averseness to risk of the
      investor.

      
      
   
   
   3. Changes in a Stock's Beta Coefficient
      

      A firm can influence its own beta by the assets it has and the use
      of it's debt. Other external factors can influence it as well.

      
      
   
   
   
   


7. Projects versus Securities
   

   Only by analyzing these situations can we begin to understand
   comparing projects in a business environment

   
   


8. Some Concerns About Beta and the CAPM
   

   There are some problems with CAPM. The size of a firm and it's
   market/book ratio can affect the CAPM but have no real effect on the
   beta.

   
   


9. Volatility versus Risk
   

   Volatility and risk are not the same thing. A company can have wild
   fluctuation and still be very profitable. Rule to follow, earnings
   volatility does not necessarily mean risk but stock price volatility
   does.

   
   

Chapter 3 - Financial Statements, Cash Flows, and Taxes

1. Financial Statements and Reports
   
   Annual reports contain a narrative on how company is going. It also
   contains four financial statements (Balance sheet, income statement,
   statement of retained earnings, and statement of cash flows), to show
   what is really happening. These both work together to tell us about the
   company.


2. The Balance Sheet.
   
   A balance sheet is a snapshot of a company, usually on the last day of
   business for the year but can be done at any time. It will be different
   for what ever day it is run.
   
   The left side lists Assets (money or things that can be converted to cash
   within a year). The right side will be liabilities and equity (money we
   owe to others).
   
   
   
   
   
   1. Assets
      
      
      
      
      
      • Money
      
      
      • Quickly converted securities
      
      
      • account receivable
      
      
      • Inventories (LIFO and FIFO methods of accounting can affect the
        numbers)
      
      
      • Depreciation of plant and equipment
      
      
      
      
   
   
   2. Liabilities
      
      
      
      • Accounts Payable
      
      
      • Notes Payable
      
      
      • Long Term Bonds
      
      
      • Preferred Stock Dividends
      
      
      • Common Stock Dividends
      
      
      • Retained Earnings
      
      
      
      

      Total liabilities should be equal to total assets.

      
      
   
   
   
   


3. The Income Statement
   

   Income statement shows numbers over the year. It will start with Net
   Sales and will subtract form the the operating costs. This gives us
   Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
   After this, things are listed and removed from the EBITDA that will
   affect tax payments (Depreciation and amortization). This is followed by
   Interest and then Taxes. Preceded and then common dividends follow.
   Lastly, information about per share numbers are posted.

   
   


4. Statement of Retained Earnings
   

   This statement starts with what a company started with last year and
   then adds in income for the year. It then subtracts dividends to give us
   retained earnings for the year.

   
   


5. Net Cash Flow
   

   Net Cash Flows are figured by the information from statements.

   
   

   Net Cash Flow = Net Income - Noncash revenues + Noncash charges

   
   

   Noncash charges would be depreciation and amortization. Noncash
   revenues often net out as $0 so a good rewrite on the equation would
   be

   
   

   Net Cash Flow = Net Income + Depreciation and Amortization

   
   

   Depreciation takes the cost of a machine and expenses it over the life
   of the machine instead of just the year that it is purchased. It must be
   added back here so that we can get a true net income.

   
   


6. Statement of Cash Flows
   

   This statement summarizes where cash went throughout the year. It
   contains:

   
   
   
   
   • Operating Activities
   
   
   • Investing Activities
   
   
   • Financing Activities
   
   
   
   

   Profits can be doctored in many ways but it would be difficult to do
   so and have the statement of earnings still look good.

   
   


7. Modifying Accounting Data for Managerial Decisions
   
   
   
   1. Operating Assets and Total Net Operating Capital
      

      Because two firms, or even two divisions in a company can use
      different accounting methods, it is necessary to find ways to compare
      them. To do so we compare operating income and operating assets.
      First we need to modify total assets. It becomes Operating Assets
      (necessary to run business) and non-operating assets (cash and short
      term inventory above what is needed to run company).

      
      

      Operating Assets are then further divided to operating current
      assets (inventory) and long term operating assets (plans and
      equipment) We will also have operating current liabilities (accrued
      wages and taxes) so that:

      
      

      Net Operating Working Capital = Operating Current Assets -
      Operating Current Liabilities

      
      

      We also have:

      
      

      Total Net Operating Capital = Net Operating Working Capital - Long
      Term Assets.

      
      
   
   
   2. Net Operating Profit After Taxes (NOPAT)
      

      NOPAT = EBIT * (1 - Tax Rate)

      
      

      EBIT is from the Income Statement (tax rate is listed there as
      well).

      
      
   
   
   3. Free Cash Flows
      

      Free Cash Flows (FCF) is cash flow actually available for
      distribution to investors after investment in fixed
      assets and working capital necessary to sustain operations have been
      taken out.

      
      
   
   
   4. Calculating Free Cash Flows
      

      FCF = NOPAT - Net investment in operating capital

      
      

      Gross Investment in Operating Capital = Net Investment +
      Depreciation

      
      

      FCF = (NOPAT + Depreciation) - Gross Investment in Operating
      Capital

      
      
   
   
   5. The Uses of FCF
      
      
      
      • Pay Interest to debt holders
      
      
      • Repay Debt holders (pay off debt)
      
      
      • Pay dividends to stockholders
      
      
      • Purchase Stock from shareholders
      
      
      • Buy marketable securities or other non-operating assets
      
      
      
      
   
   
   6. FCF and Corporate Value
      

      The value of a firm primarily depends on its expected FCF.

      
      
   
   
   7. Evaluating FCF, NOPAT, and Operating Capital
      

      Negative FCF is not necessarily a bad thing. Staying negative for
      a long rimland letting it continue could be. Negative FCF could be
      due to investing in equipment for growth purposes. Also, if the NOPAT
      and the FCF is both negative, this needs to be a warning. Check the
      Return of Invested Capital (ROIC) to see if it is in the right range
      of what an investor should be looking for, the Weighted Average Cost
      of Capital. If ROIC is above WACC then it is usually a good
      investment.

      
      
   
   
   
   


8. MVA and EVA
   
   
   
   1. Market Value Added (MVA)
      

      MVA = Total Market Value - Total Capital

      
      

      Total Market Value = (Market Value of Stock + Market Value of
      Debt).

      
      
   
   
   2. Economic Value Added (EVA)
      

      EVA = NOPAT - After Tax Dollar Cost of Capital Used to SUpport
      Operations

      
      

      EVA = EBIT * (1 - Tax Rate) - Net Operating Capital /WACC

      
      

      EVA = (Operating Capital) * (ROIC - WACC)

      
      

      EVA is an estimate of a business's true economic profit for the
      year. There is a relationship between MVA and EVA but it is no t a
      direct one. However, if one is either negative or positive, the other
      is usually the same sign.

      
      
   
   
   
   


9. The Federal Tax System
   
   
   
   1. Corporate Income Taxes
      

      Taxes are figured by income time the tax percentage charged by the
      government.

      
      
      
      
      1. Interest and Dividend Income Received by a Corporation
         

         A company can take 70% of income that it receives as a
         dividend of another corporation and not have to pay taxes on it.
         

         
         

         Also if a company pays out dividends to shareholders, those
         share holders have to pay taxes on them on top of the taxes the
         company paid. For that reason it may be worthwhile to invest in
         another corporation and get a tax break and an income as well.
         

         
         
      
      
      2. Interest and Dividends Paid by a Corporation
         

         Because debt reduces income before taxes, $1 paid to debt does
         not equal $1 paid out as dividends, it is better to pay off debt
         that to pay out dividends.

         
         
      
      
      3. Corporate Capital Gains
         

         Laws used to be in favor of these but are now not longer that
         way.

         
         
      
      
      4. Corporate Loss, Carry-Back and Carry-Forward
         

         If a company takes a loss one year, then the losses can be
         claimed against the previous two years (and get a refund from
         them), and then what is left can be claimed on future taxes up
         till 20 years from now.

         
         
      
      
      5. Inappropriate Accumulation to Avoid Payment of Dividends
         

         The IRS does not want corporations to hold what would be paid
         out in dividends. They set a limit of what could be held at
         $250,000 unless a company has a good reason for doing so.

         
         
      
      
      6. Consolidated Corporate Tax Returns
         

         When a company owns 80% of another company, the companies can
         file taxes jointly so that losses from one company can help out
         the more prosperous company.

         
         
      
      
      
      
   
   
   2. Taxation of Small Business Corporations
      

      Small business that meet IRS rules may incorporate for protection
      as an S corporation but still have the income distributed to the
      owners at a pro-rated rate to ownership.

      
      
   
   
   3. Personal Taxes
      

      This section deals with various taxes that must be paid and how
      they affect personal income.

      
      
   
   
   
   

Managerial Finance Chapter 2 - Time Value of Money

1. Time Lines
   Time lines are used to make the problem clear. You would lay out a line with tic marks on it above which would be the time periods in numerical order. Between the tic marks would be the Interest Rates, (if they do not vary only listing it once would be enough). Below the ticks would be the cash flows, real or calculated.
2. Future Value
   To know what money is going to be worth in the future, we must be able to calculate it. The following are commonly used.
   
   PV is Present value
   
   i is set as interest rate, what the money will earn. It can also be noted as I or r (mostly used in financial literature)
   
   INT is the dollars of Interest earned. INT = Beginning amount X i
   
   FV_n is the amount that you have earned at the end of n amount of periods.
   
   n is the number of periods that we are calculating for.
   
   We could calculate each period by using the formula FV = PV + INT which can be broken down to FV = PV(1+i). By extension, we could say FV_n = PV(I + i)ⁿ
   This process is called compounding.
   
   These and all other problems can be solved by using a regular calculator, a financial calculator or a spreadsheet program. What works best for you is what you should use.
   
3. Present Value
   In previous example we figured out what our amount would be worth in the future. We can also calculate for what the value of a future amount of money would be worth now. This is defined as Present Value (PV). To figure it out you need to follow a procedure called discounting. Like before, a time line would be the best way to see what is going on visually. Using the formula from before we can extrapolate a formula to figure PV
   
   PV = FV_n (1/1+i)ⁿ
   
   Again, several ways to solve, chose your best way.
4. Solving for Interest Rate and Time
   FV_n = PV(I + i)ⁿ is a handy formula to know. If we want to solve for interest (i), we must know the other values, likewise for time (n).
5. Future Value of An Annuity
   An annuity is a series of equal payments made at fixed intervals for a specific number of periods. They can be Ordinary or Due.
   
   1. Ordinary Annuities
      In an ordinary Annuity, the payments are made at the end of a time period. An example would be an deposit into a savings account of 100 each year, what would it be worth at each time point. Unlike the FV problem, We keep putting money into the account on a regular basis. This now creates a series of FV problems that must be added together.
   2. annuities Due
      The difference between this and Ordinary Annuities is that payments are made at the beginning of the periods not at the end. This changes the problem slightly but it is still a series of FV problems.
6. Present Value of an Annuity
   No notes taken from book. Mostly how to do on various methods.
7. annuities: Solving for Interest Rate, Number of Periods, or Payment
   No notes taken from book. Mostly how to do on various methods.
8. perpetuites
   Most annuities call for the payments to be made over time, but, a perpetuities is an amount paid regularly for an indefinite period of time. To find the PV you would use:
   
   PV = PMT/i
   
   This winds up being different at different interest rates.
9. Uneven Cash Flow Streams
   Our book will use PMT (Payment ) for annuity situations and CF (Cash Flow) for uneven cash flows. We will use this for when situations develop that income does not come in as steady as it would in an annuities.
   1. Present Value of an Uneven Cash Flow Stream
      Like an annuity, this becomes a series of PV problems with each amount being calculated back to the 0 year and the sums being added together. Spreadsheets are good for this as are Financial calculators that have a CF register in them.
   2. Future Value of an Uneven Cash Flow Stream
      Live the above, we now calculate the other way and again sum things up.
   3. Solving for i with Uneven Cash Flow Streams
      This will really need to be done with a spreadsheet or financial calculator. Attempting it with a regular calculator is a hit or miss way of doing things.
10. Growing Annuities
    No notes taken from book. Mostly how to do on various methods.
11. Semiannual and Other Compounding Periods
    If an interest rate is compounded once a year that would be called annual compounding, twice a year is semiannual compounding. For problems we do we must know what type of periods we are doing and if the interest is per that period or annual. It may need to be changed to deal with a solution to the problem.
    1. Types of Interest Rates
       
       1. Nominal or quoted rate: Often called the Annual Percentage Rate (APR) is the value that is most often quoted but as noted above, it must be taken into account with the times that the rate will have interest charged.
       2. Periodic rate: This is the rate charged per a period. You would use it with time lines and with calculations.
       3. Effective (or equivalent) annual rate (EAR) - annual rate that produces the same results as if we had compounded at a given periodic rate m times a year.
    2. The Result of Frequent Compounding
       Because you earn interest on interest, frequent compounding will result in increased income.
12. Fractional Time Periods No notes taken from book. Mostly how to do on various methods.
13. Amortized Loans
    amortized loans include interest as well as principal payments back to the lender. It is necessary to us tools to figure out these breakdowns as to what is payment and what is interest.

Managerial Finance Chapter 1

Chapter 1 - An overview of Financial Management

1. The Five Minute MBA
   For a company to be successful it must 1) provide more value that it's competitors and 2)Sell products at enough of a cost to meet expenses and compensate owners and creditors for their exposure to risk.
   
   1. The Key Attributes Required for success
      The first thing that successful companies have is skilled people at all levels in the company. Secondly they must have a strong relationship with groups outside the company. Third they need to have enough capital to execute the plans and to support their operation.
   2. The MBA, Finance, and Your Career
      This course will meet the needs of the third need. That is the need to have enough capital. It also will deal with choosing the best projects and proposals.
2. The Corporate Life Cycle
   1. Starting Up as a Proprietorship
      This is an unincorporated business owned by one individual. All profits go to the individual and all expenses are his responsibility as well.
      Benefits: Easy to form, subject to few government regulations, income taxed as part of personal income.
      Limitations: Difficult to obtain money needed for growth, unlimited liability for owner, life of company is limited to life of individual.
      Primarily for small businesses, account for 13% of sales but 80% of companies are like this.
   2. More Than One Owner: A Partnership
      This is when two or more people join together to create an organization in either formal or semiformal way.
      benefits are the same as proprietorship but liabilities are different. They include the proprietorship as well as difficulty in transferring ownership.
      All partners are liable in results of debts in company. If one can not pay, the others may be forced into doing it. This can be changed by creating a limited partnership. General partners have control of the company, limited partners have limited liability (to what they invested) but have limited returns as well.
      In any case, at least one partner has to accept the majority of the business liability.
   3. Many Owners: A Corporation
      Corporation is a legal entity created by the state that is separate and distinct from its owners.
      benefits: Unlimited life, easy to transfer ownership of the company interests, limited liability (to what person invests).
      Disadvantages: Earnings subject to double taxing (in the company and when the dividends are paid to individual investors), difficultly in setting one up.
      To start one must have a charter that explains the name, type of business, amount of capital stock, number of directors, name and addressees of all directors. This charter is filed in state incorporated in.
      Also needed is a set of bylaws that will explain how directors are to be elected, if current stockholders get first choice on new stock sales, and how bylaws are changed if necessary.
   4. Growing and Managing a Corporation
      Many companies start as a sole owner with them putting all the money in. Eventually they borrow money to stay growing. Maybe later they will have an Initial Public Offering (IPO) to raise needed money by selling stocks to people so they can raise money for the company. As a corporation they can better borrow money from banks and investors.
      When a company is small, the investors are usually the owners and put best interest of the company forward. This is not necessarily true of corporations who hire a manager. This creates a problem as a manager will work for his best interests and not the stockholders. This is called the agency problem.
      Self test questions
      What are the key differences between proprietorships, partnerships, and corporations?
      The key differences are the ability to raise money and the liability. In proprietorships it all falls on the one person. In a partnership it gets spread around about the liability is still there. In a corporation, the liability gets to the shareholders, and there seems to be an easier time in raising money.
      Describe some special types of partnerships and corporations, and explain the differences among them.
      In a partnership there is a limited liability partnership that limits the liability of most of the members. In a corporation, a professional corporation allows for most benefits of corporation but also leaves in place the professional liabilities face by the professional (doctors, lawyers, etc.).


3. The Primary Objective of the Corporation: Value Maximization
   Shareholders own corporations and hire managers to run company for them. The objectives of the manager should be stockholder wealth maximization. In stocks the market price is what the stock is currently worth. By hiding information a manager can cause the stock price to go up for the short term but it will eventually settle back down. By using this time of inflated price to sell his shares, the manager is looking at his objectives over the stockholders.
   1. Stock Price Maximization and Social Welfare
      Owners of stock are society so looking out for society interests is not a conflict with stockholders interests.
      To keep stock prices high a company must operate efficiently. This is good for consumers as it keeps costs down.
      A well run company should be increasing in employment, not letting people go. Since employment increases, society benefits as a whole.
   2. Managerial Actions to Maximize Shareholder Wealth
      A firm's value revolves around being able to generate cash flows now and in the future. There are three basic rules for this:
      1) Any financial asset is valuable only to the extent it generates cash flows
      2) timing of cash flows matter, sooner is better
      3)investors do not like risk, so will pay more for stock with less risk.
      The cash flows that matter are those of the cash available to spend or 'free cash flows'. What determines this is sales revenues, operating costs (including taxes) and required investments in operations.
      Sales revenue is current level of sales times price of unit plus expected future growth sales. Companies need to understand how changing prices can affect things in the long run and understand how customers will react. Operating costs deal with what a company pays out to make its products or services. Cheep supplies do not always result in lower costs as there may be much waste. Money invested in operations is what is needed to keep equipment running and inventory coming in. To increase cash flow these costs need to be kept down.
      Also to be looked at is the financing of the company. What debt should be incurred and what equity from the company should be used? What dividends should be paid out to shareholders. This comes into the mix as the Weighted Average Cost of Capital (WACC).
      Self test questions
      What is management's primary objective?
      To increase stockholders wealth.
      How does stock price maximization benefit society?
      People own stock, directly or indirectly. High value stocks mean an efficient company and an efficient company means lower prices. Lastly, a well run company will be hiring people regularly.
      What three factors determine the price of a stock?
      Could not find answer
      What three factors determine cash flow?
      Sales revenues, operating costs (and taxes) and investments in operations.
      
4. The Financial Markets
   1. Types of Markets
      • Physical asset markets (real) and Financial Asset markets - paper that shows ownership in the company and what they company will do for them.
      • Spot (futures) market - items bought for relatively immediate delivery.
      • Money markets - markets for short term and highly liquid debt securities.
      • Mortgage Markets
      • World/National/Regional/Local markets
      • Primary Market - where new stock is sold
      • Initial Public Offering (IPO) market - where shares are sold when a firm goes public for the first time.
      • Secondary Market - where securities are sold amongst people
      • Private/Public Markets - agreements between two organizations under their own rules (private) or well established rules (public).
      
      Do not try to pigeon hole any type of market as the lines blur easily. These markets are necessary for a functioning economy.
   2. Recent trends
   
   With our new global economy and everything happening so quick, policy makers are having a hard time keeping up. And though the countries of the world should get together on these things there is much reluctance. derivatives are in high use. Also, 48% of the households own stock but 58% is in the hands of professional investors. Since the own large amount of shares they try to influence how a company is run with relationship investing.
   Self test questions
   Distinguish between (1) Physical asset markets and financial asset markets, (2) spot and future markets, (3) money and capital markets, (4) private and public markets
   1)Physical deal with things that are produced that are real, cars, food, etc. Financial are markets that deal in paper (stocks, bonds, etc.).
   2)Spot is now, futures deal with something in future, generally in 6 months.
   3)Money - short term; capital - long term.
   4)Private - between two parties openly; public - organized selling with where many parties can purchase.
   What are derivatives
   A derivative is a financial instrument that derives its value from the value of other financial instruments or an underlying asset such as a future, forward, commodity, futures contract, stock, bond, currency, index or interest rate.
   What is relationship investing
   Since most stocks are in the hands of people investing for others, they feel they can force managers to deal with their wants or they can deflate the value of the stock by selling off large chunks of stock.
   the close governance of corporations exercised by large institutional shareholders.
5. Financial Institutions
   Money is transferred through one of three types of financial institutions. The first is by a direct transfer, in which there is no middle-man between the buyers and sellers. The second would be through an investment bank. The bank buys, or underwrites a business and then sells the securities (hopefully at a profit). The last is through Financial intermediaries. Savers buy securities in the Banking house and the banking house invests in the businesses. The major classes of this third type are as follows:
   • Commercial banks - wide variety of needs met. Now includes investment services to keep up with foreign countries.
   • Savings and loan associations - traditionally where small borrowers would go, takes income from small savers and invests in projects wisely. Due to scandals a few years ago they have been absorbed by other institutions.
   • Mutual Savings Banks - similar to S & L but limited to NE states.
   • Credit Unions - joining together of people with common background to invest only in the members needs.
   • Life Insurance companies - takes in money to pay out when problems arise to people.
   • Mutual Funds - accept income from savers and invest it in financial instruments.
   • Pension funds - money set aside for retirement. Comes as two types. Defined benefits are created by the company a person works for and managed for them. Defined contribution plans are more prevalent now and require the worker to have some knowledge of investing as they have to decide where there and/or companies money is to go.
   Institutions have been regulated a lot but now are having those regulations eased up on a little bit.
   Self test questions
   Identify three ways capital is transferred between savers and borrowers
   Directly, through investment banks, through financial intermediaries.
   What is the difference between a commercial bank and an investment bank?
   A commercial bank is for saving, checking and loans. An investment bank would be for connecting savers and institutions that need money.
   Distinguish between investment banking houses and financial intermediaries.
   Investment banking house takes on a risk by buying securities that it hopes to sell to people at a profit. Financial intermediaries take money from investors and pool it with other monies invested to invest it in securities.
6. Secondary Markets
   After the initial stock sale, stocks are then traded in exchanges as are other securities. They can be done in a physical location (where people see each other in a building of some sort) or in an electronic network of some sort (where buy and sells are matched by computers). Auction systems allow for bidding of the securities. Electronic networks allow for some limitations to be put on the transactions.
   Self test questions
   What are the major differences between physical location exchanges and computer /telephone networks?
   Physical location exchanges have a location where people meet to bid on the securities, computer/telephone networks use computers to exchange the bids.
   What are the differences among open outcry auctions, dealer's markets, and ECN's.
   Open outcry have people meet face to face and yell out what they are they are buying and selling and the price. In a dealer's market, an inventory of these is kept and matched. Lastly ECN's are like the dealer's market except that it is done on computers.
7. The Stock Market
   1. The New York Stock Exchange
      NYSE is a physical location exchange. Members buy 'seats; in the exchange which vary in price depending on the current value for them. Most members are from investment banking houses. They basically do an open cry auction system though much is automated.
   2. The Nasdaq Stock Market
      NASDAQ is run by the National Association of Securities Dealers though its Automated Quotation System (NASDAQ). It has various levels where securities are exchanged at. It is unusually heavy on high tech industries.
   
   Self test questions
   What are some major differences between the NYSE and the Nasdaq stock market?
   NYSE is open face to face auction, NASDAQ is an automated computerized system.
8. The Cost of Money and Interest Rate Levels
   1. Factors That Affect the Cost of Money
      Four factors influence the cost of money. 1)Production opportunities (turn capital into benefits), 2) time preferences for consumption (how quickly providers want to use their money), 3) risk (chance money will be gotten back), 4) inflation (the growing cost of living).
   2. Interest Rate Levels
      There are different markets for different needs in finances, from home loans to businesses. The cost of the money depends on what the market is that you are dealing with and how the current economy is doing.
   
   Self test questions
   What four fundamental factors affect the cost of money?
   1)Production opportunities (turn capital into benefits), 2) time preferences for consumption (how quickly providers want to use their money), 3) risk (chance money will be gotten back), 4) inflation (the growing cost of living).
   Why does the price of capital change during booms and recessions?
   During boons, rates go up as money is need for projects so that businesses can expand. In the recessions, companies do not expand as much and interest rates will go down as an enticement to borrow.
   How does inflation affect interest rates?
   inflation will keep interest rates high as people will want to earn the money back and then some to pay back the inflation.If the interest charged does not at least pay back the rate of inflation, they will loose money.
9. The Determinants of Market Interest Rates
   The quoted rate of interest is refereed to as r and is composed of the real risk-free rate of interest (r*) plus several other factors.
   1. The Real Risk-Free Rate of Interest
      r* is defined as the interest rate that would exist in no inflation was expected. Usually short-term US Treasury securities are used for this number. It is not a static number.
   2. Inflation Premium (IP)
      Since we have inflations, an inflation premium needs to be figured in to the final interest rate charged so we can keep up with it. The inflation rate is what we expect it to be, not what it has been in the past. This is usually the interest charged on a default-free US Treasury Bill.
      r_T-bill = r_RF = r* + IP
      if r* was .6% and inflation was 1.0% then r_RF = .6% + 1% or 1.6%
   3. The Nominal, or Quoted, Risk Free Rate of Interest, r_RFThis would be the risk-free and the Inflation Premium together with no other premium added. In practice it is a theoretical value since the other values need to be added to it.
   4. Default Risk Premium (DRP)
      Since a company or person could not pay back the interest or the principal on a loan, this is the amount charged to protect the party making the loan in taking the risk. It varies with the type of company and the its past history.
   5. Liquidity Premium (LP)
      The LP is the premium paid based on how quick the money can be converted back to money if the investor needs it back. The less liquid it is (the longer it takes to turn it back to cash) the higher this will be.
   6. Maturity Risk Premium (MRP)
      As a general rule, the longer it is set to pay back a debt, the higher the interest rate will be.
   
   Self test questions
   Write out an equation for the nominal interest rate on any debt security.
   r = r* + IP + DRP + LP + MRP
   Distinguish between the real risk free rate of interest r*, and the nominal, or quoted, risk-free rate of interest r_rf.
   The former would be what would be quoted if we believed that there would be no interest charged at all. The later is the former with an Inflation Premium added in.
   How is inflation incorporated into interest rates?
   Inflation is added in by calculating it and designating it as IP in the equation listed above.
   Does the interest rate on a T-bond include a default risk premium? Explain.
   Only by subtracting the non-indexed from the index rates can one calculate what is expected to be the interest rate.
   Identify some assets that are liquid and some that are illiquid.
   Real Estate, in general would be illiquid, gold, in general would be liquid.
   Briefly explain the following statement: "Long-term bonds are heavily exposed to interest rate risks."
   My guess is that since we do not know how interest will go in general, any rate will be set either much to high (benefitting the loaner) or too low (benefitting the borrower).


10. The Term Structure of Interest Rates
    The term structure is the relationship between long and short term interest rates.
    Self test questions
    What is a yield curve, and what information would you need to draw this curve?
    A yield cure is a pictorial explanation of short, intermediate and long term rates (usually out to 20 years) of interest. The information I would need to draw this is the rates for the various bond issues for a company or country we would be interested in.
    Explain the shapes of a "normal" yield curve, an "abnormal" yield curve, and a "humped" curve.
    A normal curve would have short term interest rates low and as they extend out the rates would go up. An abnormal curve would be the opposite, with short term being high and going lower. A humped would have both end level and the middle term rates be high.
11. What determines the shape of a Yield Curve
    The yield cure is determined by what is expected to happen in the future. The major player here would be inflation. The curve here would tend to follow what is expected of inflation. but MRP, DRP and LP can also affect it.
    Self test questions
    How do maturity risk premiums affect the yield curve?
    The longer the security is expected to be held, it can be assumed that the rate would be higher.
    If the rate of inflation is expected to increase, would this increase or decrease the slope of the yield curve?
    It would increase the curve.
    Explain why corporate bonds' default and liquidity premiums are likely to increase with maturity.
    The DRP rate would likely go up because of the need to cover bases if the company did not have a good rating. The LP would go up with length of security because it would not be easy to convert it into cash needed.
12. International Risk Factors
    Dealing with overseas companies one must be aware of risks that could affect the profit that could be made. This would be the country risk. The more difficulties in the foreign country the higher the risk. One also needs to be aware that the currency rates fluctuate and the currency of that country could go up or down in regards to the dollar, therefore wiping out or increasing what could be made in profit. This is exchange rate risk.
13. Economic Factors That Influence Interest Rate Levels
    1. Federal Reserve Policy
       The adjustment of the money supply by the Federal Government can affect both long and short term interest rates, but mostly it is the short term rates.
    2. Budget Deficits or Surpluses
       If the government is running a deficit it must either print or borrow money, both of which will tend to raise interest inflation and then interest rates. If it gets a surplus it can pay debt down quicker thereby reducing this problem.
    3. International Trade Deficits or Surpluses
       Deficits in trade must be taken care of by borrowing money form other countries. This puts our interest rates in line with theirs because they can call for our debt to be redeemed if we do not go along.
    4. Business Activity
       Less business leads to less jobs, leads to less spendable income, etc. Recessions and boons in business can lead to changes in the rates of interest.
14. A Preview of What is Ahead
15. e-Resources
16. Summary

freshmeat.net: Project details for Quizmo
Something to look at for my studies in my MBA

Fundamentals of Supervision

Book: Supervision: Key Link to Productivity 8e, Rue, Leslie and Byaas, Lloyd
Chapter 4 - Ethics and Organizational Politics

1. Ethics in the Workplace
   Ethics are standards or principles of conduct that govern the behavior of an individual or a group of individuals. A major problem in discussing them is that not every one agrees what is or is not ethical. A majority of the people in the workforce have felt that they have been pressured into acting unethically.


2. Code of Ethics
   A Code of Ethics is a written statement of principles that should be followed in the conduct of business. It generally will include things like payments of questionable nature, meals, gifts, and involvement in political activities. This code must be communicated to all employees.


3. Setting the Tone
   A supervisor should be the one that sets the tone for things. He should not tell people what to do but should be the one to set the example of what is to be done.


4. Areas Requiring Ethical Conduct by Supervisors
   
   
   1. Loyalty
      Where does the loyalties of the supervisor lie. If a supervisor is perceived as being interested in his own self interest, he will not be able to get the cooperation of his employees
   
   
   2. Human Relations
      Is a supervisor consistent in the way he treats employees? Does he deal with employees differently depending on the situation or group? Does he play favorites? How about his supervisors. Is there ways that he treat different supervisors in different ways?
   
   
   3. Overt Personal Actions
      This covers all other ares, especially the ones that may not be covered by company policy.


5. Dealing with Dishonest Employees
   The first step in dealing with a dishonest employee is admitting that you have one. To many supervisors do not admit to it. The next step would be to gather proof that the employee is acting in a dishonest way. When facts are gathered: 1)recognize the problem, 2) confront the employee 3) follow established disciplinary system. In sealing with peers and other managers would be different, but you should still get evidence. In this case you should give it to a supervisor to handle, and if possible problems with your employees should be passed on to them as well. Do not do nothing. Problems start small and get bigger. It will not go away on its own.
   
   
   1. Whistle-Blowing
      Whistle-blowing is the attempt by an employee or former employee to disclose what they belive to be as wrongdoing in or by the organization. In doing so, the person puts them self at risk. Federal law is set up to protect the whistle-blower.


6. Building a Supervisory Power Base
   Power is the ability to get others to respond favorably to instructions and orders, the ability you have over others to do what you ask. How does one increase their power base (ethically):
   Gain the Respect of Subordinates
   If subordinates respect you they will stand up for you in a time of crisis. This will be interpreted as a sign of power by others.
   Help Employees Be Successful
   This also promotes loyalty by your employees. If they believe that their supervisors are supportive and want them to succeed, they will want to please the supervisor.
   Be "in Good" with Your Boss
   Subordinates and peers will notice if you are in good with your boss.
   Seek Responsibility
   Responsibility is accountability for reaching objectives, using resources properly and adhering to organizational policy. Seek it out rather than wait for it to come to you. Others will sense you have power when you seek accountability.


7. Organization Politics
   Organizational politics is the practice of using means other than merit or good performance for bettering your position or seeking favor in the organization. It does not have to be sneaky or under handed.
   
   
   1. How to Keep Your Boss Happy
      Know your boss What makes him or her tick? It will help you in helping him or her.
      Be Loyal Defend boss when criticized, even when you do not agree 100%. Do not talk about boss behind back (it always comes back to you).
      Show Respect for Your boss Be on time for meetings and things of that nature. Listen to him respectfully. If you disagree with him on a subject do so in a tactful way.
      Seize Opportunities to Make Your Boss Look Good
      Avoid Antagonizing Other Departments
      Insist on Feedback Be able to accept negative feedback as part of this. Seek out opinions on how you have done things on a project, right or wrong. Do not depend on formal reviews.
      Help Take the Load off Your Boss Volunteer solutions to a problem. Talk about what has been accomplished not how bad things are.


8. Socializing with Other Members of the Organization
   Let things, take there course. Use common sense. Be yourself. Do not try to use rank. Do not make work-related promises with subordinates while socializing. Do not date or become romantically involved with subordinates.

Systems Analysis and Design

Book: Systems Analysis and Design 6e Kendell & Kendall

Chapter 4 Information Gathering: Interactive Methods

1 Interviewing
The first step in interviewing is to discover where your own biases are. Interviews are in the question and answer format. But you do need to get the feelings of the interviewee. Seek their opinion. They know the organization better than you do. They have the information needed to make the project success. The interviewee is probably a stranger to you, so you will need to build up trust with them. This is done by preparation.
A. Five Steps in Interview Preparation
I. Read background material.
Check web sites, annual reports, etc. to get information on the organization.
II. Establishing Interviewing Objectives
Use the information to establish objectives.
III. Decide Whom to Interview
Strive for balance in whom you interview. Do it at many levels in the organizations.
IV. Prepare the Interviewee
Call or e-mail the person to prepare them. If detailed interview, send them questions to prepare.
V. Decide on Question Types and Structures
Decide on what type of questions and type of interview.
B. Question Types
I. Open-Ended Questions
Responses can be two words or two hundred. The interviewee responds how they feel best. Benefits include; interviewee is put at ease, interviewer can pick up jargon of interviewee, more interesting for the interviewee, more spontaneity, if caught unprepared it is a good technique. Drawbacks include; answers may contain too much and irrelevant information, chance of losing control of interview, looks like interviewer is unprepared, looks like interviewer is on 'fishing expedition'.
II. Closed Questions
The questions are answered with detailed facts. It limits the ability of the interviewee to respond. Special type is bipolar question. This is a yes or no type of question. Benefits include; saving time, ease in comparing interviews, control of interview, gets to relevant data. Drawbacks include; boring for the interviewee, missing the rich detail, no rapport built.
III. Third type is a probe question. You get the interviewee to clarify earlier question. Do not be afraid to use this question.
C. Arranging Questions in a Logical Sequence
I. Using a Pyramid Structure
Start with specific questions and go to the more general questions. Use it if interviewee needs to warm up to you
II. Using a Funnel Structure
Starts with the more open ended and ends with the specific ones. Good for the interviewee needs to have the freedom to express things because of emotional nature of interview.
III. Using a Diamond-Shaped Structure
Combines the two, starts with pyramid to get things go with closed questions. Works its way to pen questions and then starts the funnel and narrows them down to closed questions.
D. Writing the Interview Report
After you are done write up your notes on the interview. Type to review the report with the interviewee to make sure you got things correct and to show you are interested in their opinion.
2. Joint Application Design
Developed by IBM JAD is used when time (and money) is of the essence. It requires proper training to be able to run a session.
A. Conditions that support the use of JAD
I. Users want something new not standard answers
II. Organizational culture supports joint-problem solving behaviors across the organization
III. One on one interviews will not generate enough ideas
IV. Workflow allows for absence of key employees
B. Who is Involved
Several people will be involved. One IS analyst should be in the group. You as the project analyst will be there. Eight to a dozen people should be involved, including analysts, users and executives. They should be above clerical level. One scribe should be there from IS department.
C. Where to Hold JAD Meetings
They should not be held in the office but someplace where there will be few interruptions. It should only be held when all participants are available. If possible do a pre meeting about a week ahead so that everyone will know what is expected of them.
D. Accomplishing a Structured Analysis of Project Activities
All the questions brought forth should be asked the five Ws: Who, what, where, why and how.
E. Potential Benefits of Using JAD in Place of Traditional Interviewing
I. Time savings
II. Rapid development
III. Improves ownership of information system
IV. Creative development.
F. Potential Drawbacks of Using JAD
I. Large block of time commitment
II. If preparation is inadequate, or if follow up not done properly, results will be unsatisfactory
III. Organization may not be mature enough to do a JAD
3. Using Questionnaires
When people are wide spread or need to do things in their own time, a survey or questionnaire might be a good tool. In using those questions must generally be closed in nature if quick turn around time is desired.
1. Planning for the Use of Questionnaires
A proper questionnaire can take some time to develop. You must decide on what you are trying to find out. Once that is done decide on the type of questions
2. Writing Questions
Questions need to be really clear since interaction is generally impossible. Make sure that your questions if they are open ended are not too broad. Anticipate what they will answer. Use closed question whey you are able to list the items that they could respond with. One also has to be careful with the choice of words on a questionnaire. Make sure to use the language of the company (do they call them managers or supervisors). If necessary ask a test group to help you out with the correct wording.
3. Using Scales in Questionnaires
I Measurement - there are two different ways to scale your answers, nominal scales and interval scales. Nominal gives you a list and you pick from it. You then tally up the numbers for each item. Interval scales let the respondent chose from one extreme to the other, usually with a number scale.
II. Validity and Reliability - Make sure that the questions measure what they are intended to measure. If they do they are valid surveys. Reliability deals with consistency. If you took the survey again you should get the same results.
III. Constructing Scales - Problems are of three types
a) Leniency - easy raters which will move the average off of where it should be. This can be counteracted by moving the mid point to left or right of center.
b) Central Tendency - Everyone rates things as average.
c) Halo Effect - people take impressions formed and carry them on to the next question.
4. Designing the Questionnaires
Make sure there is enough white space, and allow ample room to write responses. Make it easy to mark their answers and be consistent in style. Cluster items of similar content together as well as put stuff important to respondent at the beginning. Controversial stuff should be at the end.
5. Administering Questionnaires
I. Respondents - Decide who will get the questionnaire. Make sure there is enough of a sample to be a fair representation. Remember many will not return the forms.
II. Methods of Administering Questionnaire - One should pick best way to distribute questionnaires. Most common is to let them self administer it, though this results in lower response rates. It is used the most because it allows the anonymity that many people want. Another method is to do it by email or web site.

Systems Analysis and Design

Book: Systems Analysis and Design 6e Kendell & Kendall

Chapter 3 Determing Feasability and Managing Analysis and Design Activities

Project Initiation
Can come from many different sources. They come because people see problems that need fixing and people see opportunities for improvement in the way things are done.
Problems in the Organization
It is wise not to think of problems as that, but as situations in which objectives can get help in being met. Many of these problems will be noticed when feedback is given in the system. The feedback can often come from outside the organization.
Selection of Projects
Projects should not be chosen for political purposes, or to gain power in the organization. Remember that any change in one part of an organization will affect other parts of the organization. Criteria for taking on a project should be as follows.
Backing from management - the people that pay the bills need to support the project
Appropriate timing of project - does the organization have the time to install the new system.
Possibility of improving the reaching of goals - it should not deter from reaching the goals, it should help reach them.
Do you and/or the organization have the skills to do the project?
Is it worthy compared to other projects?
Determining Feasibility
Not a full blown study but a quick look to see if organization should go on.
Defining Objectives
Projects should be taken on if they can cause improvements. Some standards that you can look at are some things that will speed up or streamlining a process, combining processes, reducing errors, reducing redundant storage or output and improving integration of systems. An analyst should take time to make a FIG (Feasibility Impact Grid) to see how the changes will affect not only the Process Objectives but the corporate objectives as well. The analyst should look to see that a project is necessary and not just another way to spend money on bells and whistles for the purpose of having the bells and whistles.
Determining Resources
In the process of determining if company has the resources they should look at three areas of feasibility: technical, economic and operational.
In technical feasibility we look to see if the technology is currently available is available to purchase.. Remember that patching an old system may wind up costing more than doing a new system.
In looking at economic feasibility, the cost of doing a full study is analyzed as well as the cost to the company to develop what is needed.
Do users want a new system or are they tied to the old system? This is the operational feasibility study.
Judging Feasibility
The preliminary study should cover all three of these aspects. Projects that pass the test should go on to the next stage and is not a commitment from management that they will be done.
Activity Planning and Control
Estimating Time Required
A systems analyst should break down the project into three parts: analysis, design and implementation. Each of these gets broken down further. Analysis - data gathering, data flow and decision analysis and proposal presentation. Design - data entry design, input and output design, and data organization. Implementation - implementation and evaluation. These steps can be broken down into further jobs as well. A hard part of the work can be planning how much time each one of these tasks is going to take.
Using Gantt Charts for Project Scheduling
A Gantt chart is a two-dimensional chart that shows activities on a horizontal axis. The horizontal axis represents the time frame of the project. Tasks are listed in boxes to represent the time frame that they will take and when they will take place. It has as an advantage, simplicity.
Using PERT Diagrams
Program (another word for a project) Evaluation and Review Techniques (PERT) Diagrams are laid out as circles that have interconnecting lines. These lines show what tasks must be done before the next connecting circle can be done. In using Gantt charts it is unclear sometimes if a task needs to wait for another task before it can be done or if it just happens to end when another task begins. The circles are usually numbered in two digits to show the left to right progression of a task. By adding up the largest amounts of days in the progressions it is possible to determine how long it will take to do a job. This can be referred to as the critical path.
Computer-Based Project Scheduling
Computer software has made these charts easier to do. One major software that does this is Microsoft Project.
Timeboxing
This involves setting a due date for the project and what ever is not implemented will be left off for the time being. Another method used is PIM software and people's to do lists.
Managing Analysis and Design Activities
Communication Strategies for Managing Teams
Teams tend to have two leaders, one to accomplish the task at hand and another that shows concern for the socio-emotional needs of the members. Feedback must be a constant thing if the members of a group are to avoid friction. Groups form their own way of doing things, called norms. Most norms do not pass from one group to another or may even change over time. Some norms, though they have existed for a while may be counter-productive.
Setting Project Productivity Goals
Any goals that affect the team need to be agreed upon by the team.
Motivating Project Team Members
Goal setting is an excellent way to motivate people.
Managing Projects Using COTS Software
The use of commercial off-the-shelf (COTS) software can allow for quick implementation if you can find ones that fit your needs easily or can be modified by the use of templates etc. It is wise to test these out though, because installing one COTS may break another.
Managing Ecommerce Projects
Ecommerce projects can cause problems because the information is scattered over many different departments and this can cause territorial battles over who owns the information. Ecommerce teams tend to need people with more and varied skills as well. Because of linking to outside world via the Internet, security becomes a major importance.
Avoiding Project Failures
Avoid the unrealistic dates problem when ever possible. Do not buy into the myth that more people will get the job done quicker. And if needed get outside help. These all will prevent projects from failing. If a group decides to take on a project it represents them if it is completed or not.
Extreme Programming Projects
XP is a system development approach taking good development practices to an extreme. Four variables that a developer can control are time, cost, quality and scope. They must balance out with the coding, testing, designing and listening activities of project development. By controlling the amount of each of these, a project is kept in balance. If we know what the time, cost and quality are, we can adjust for the scope as needed.
Extreme Programming Resource Trade-Offs
Time - you need enough time to complete the project. Running short on time may not be a bad thing if you can implement enough of the project to keep customer happy. Try not to extend deadline, the XP approach focuses on finish on time.
Cost - Increasing cost does not always add to the project, especially hiring more people. More people lead to more confusion and overtime leads to tired workers. It is possible to purchase better tools to do the job, but all projects should stay under the budget they have set up.
Quality - Internal quality (bug checking and the like) cannot be sacrificed but it is possible to let external quality to slide. In order to meet deadlines, some bugs may have to be accepted by the customer or the user interface may not be just right.
Scope - What the customer wants may have to be delayed for another version of the software in order to meet deadlines.
Extreme Programming Core Practices and Roles
Four XP core practices
1. Short release - get it out quick and on time, even if features missing.
2. 40 hour work week - keep your people rested and they work better
3. Onsite customer - customer should be heavily involved in the development team
4. Pair programming - team programmers together can work quite well in bouncing ideas back and forth and testing things.

Roles for People
Programmer
Customer - be clear what you want
Tester (sometimes done by programmer but better done separately)
Tracker - tracks progress of how well things are being done and kept on schedule
Coach - keep people motivated
Consultant - help them learn to solve their own problems.
Big Boss confidence in project and keep things flowing

The Planning Game
The metaphor of a game helps how one looks at a project. In any game you want to maximize your potential to help team or self win.

How project risks are handled by XP
Use a fishbone diagram to view the possible problems that could develop in a project and then do not let them happen.
Developmental Process for an XP Project
1. Explore - decide to take the project or not.
2. Planning - Once taken set up time frames.
3. Iterations - testing, feedback and change in repletion until done. Celebrate your progress points
4. Productionizing final features and release
5. Maintenance - keep running smoothly, add some features.