Wednesday, October 29, 2008

Brand Royalty—How the World’s Top 100 Brands Thrive & Survive

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Innovation Brands

1 Adidas: the performance brand
Secrets of success
 Innovation. Studs for soccer boots; spikes for running shoes; nylon soles: these are just three of the innovations that helped build the Adidas brand.
 Performance. As an athlete himself, Adolph Dassler never neglected the performance of his products. He always looked for new ways to improve athletic standards through the use of Adidas equipment.
 Competition. Sportswear is as tribal as sport itself. Therefore it will never be a one-brand market. Adidas has stuck to its own gameplan and has thrived in competing with other brands such as Nike and Reebok.
 History. Unlike other sports brands, Adidas keeps its history alive through its Sports Heritage division. Far from making the brand seem stuffy and outdated, its ‘old-school’ ranges are considered the most fashionable among the hip-hop community.
 Key influences. Hip-hop stars like Run DMC and Missy Elliott, and sports stars such as David Beckham have helped give the brand street and sport credibility.

2 Sony: the pioneer brand
Secrets of success
 A distrust of market research. As a true pioneer, Sony has often been wary of market research. The Walkman, which was Akio Morita’s own invention, would certainly not have been invented if it had been dependent on market research. ‘I do not believe that any amount of market research could have told us that it would have been successful,’ said Morita, adding: ‘The public does not know what is possible. We do.’
 Innovation. Sony is the innovation brand and looks set to remain so in the future, with its new focus on ‘connectivity’ – the meeting of computing and home entertainment.
 A belief in buzz. When the Walkman first appeared in Japan, Sony workers walked the streets of their native Tokyo with Walkmans strapped to them, creating a valuable buzz. When the MiniDisc was launched in the UK, postcards advertising the product were placed in trendy bars and clubs.
 A belief in people. People are important to Sony. The human element is never neglected in its advertising (hence the recent slogan ‘Products for People’). It always finds a way to make technology accessible and friendly. This belief in people extends to the employees themselves. ‘Never break another man’s rice bowl’ was Morita’s motto. Morita also believed it was better to sacrifice a profit than lay off employees in a recession.

3 Hoover: the synonymous brand
Secrets of success
 It invented the category. The market for vacuum cleaners didn’t exist before Hoover. It is therefore the natural leader.
 Home improvement. New products only work if they offer a visible improvement on the way things were done before. The invention of the vacuum cleaner provided a clear step up from the broom.
 Try before you buy. Free 10-day trials in the early 20th century were key to Hoover’s market dominance in North America.

4 Xerox: the research brand
Secrets of success
 First mover. Xerox was the first in a new category when it launched its Xerox 914 copier.
 PR. As the first in a new category, it was able to generate valuable PR as the US media sought to document the technological breakthrough Xerox had made.
 Research. Through its research centre and university, Xerox remains at the cutting edge of technological research.
 Name. Xerox is a short, distinctive name that has become synonymous with the copiers it manufactures. As such, it is hard for competitors to eat into the company’s market share, even when it makes a few wrong turns.

5 American Express: the integrity brand
Secrets of success
 Foresight. Its introduction of traveller’s cheques and charge cards showed remarkable foresight, and has set the world on its long journey towards a cashless economy.
 The ability to evolve. From its origins as a freight company to its current ‘financial supermarket’ status, the American Express business has proved able to adapt to changing lines. So too has the brand: its recent move from an aspirational image to the mass market has strengthened its position as one of the world’s few super-brands.

6 L’Oréal: the individuality brand
Secrets of success
 Innovation. Great brands are launched by innovation, not advertising. That can come later.
 Individuality. L’Oréal uses different brands to attract different markets. It is unlike other global brands in that no ‘God complex’ seems to be at work, and L’Oréal shows no desire to create the world in its own, singular image.
 Personality. Because L’Oréal has different brands for different markets, it is not scared to exaggerate their personality. With other brands the tendency is to water their identity down as they expand.
 Consolidation. L’Oréal does not launch new brands just for the sake of it. It capitalizes on the brands it has already built up or acquired through carefully targeted markets.
 Nationality. Many brands play down their nationality for fear of alienating foreign markets. L’Oréal, on the other hand, exaggerates the national or regional identities and even places them next to the brand name. Think of ‘Maybelline New York’ or ‘L’Oréal Paris’, for instance.

7 Durex: the safe brand
Secrets of success
 Durability. Durability, reliability and excellence remain the brand’s guiding principles.
 Responsibility. For a product associated with safe sex and sexual health, responsibility should not be a brand add-on. Indeed, Durex has brought the issue of responsibility into the heart of its business, combining market and health research, and promoting awareness of sexually transmitted diseases.

8 Mercedes-Benz: the prestige brand
Secrets of success
 Innovation. Innovation is a natural quality you would expect from the company associated with the invention of the car.
 Price. Historically, its high prices have helped Mercedes-Benz become a prestigious brand.
 Prestige. People who drive a Mercedes-Benz like to feel superior. Whether they continue to feel superior when everyone can afford one remains to be seen.

9 Nescafé: the instant brand
Secrets of success
 Research. Seven years of intensive research went into the original Nescafé product.
 Innovation. That ‘I’ word again. Nescafé is yet another brand that shows that if you invent a market you are the natural leader within it.
 Added value. The various Nescafé brands fall roughly into the ‘popular’ and ‘prestige’ brackets, but both types of product are promoted in such a way that they add to, rather than diminish, the appeal of other Nescafé products.

10 Toyota: the big-picture brand
Secrets of success
 Mission. Toyota has switched from being a boring old car manufacturer to one with a broader mission, reflected by its partnership with Nissan to develop environmentally friendly vehicles.
 Innovation. Innovations such as ‘self-parking’ and hybrid cars have gained the company a lot of valuable PR, and positioned Toyota as a forward- thinking brand.



For more Information:
Marketing Books, Strategic Brand Management EBooks, Advertising EBook, Promotion Guide

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Attracting Investors—A Marketing Approach to Finding Funds for Your Business. Marketing Books

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Raising Capital—An Overview of Your Alternatives

The following is just a partial list of the financing sources available:
Angel financing.
Asset-based lending.
Bootstrapping.
Customer financing.
Factoring.
Franchising.
Friends and family.
Initial public offering (IPO).
Leasing.
Personal savings.
Public debt issue.
Research and development (R&D) limited partnerships.
Secondary rights offerings.
Unsecured bank lending.
Vendor financing.
Venture capital.




WHAT MOTIVATES THE ANGEL INVESTOR?
Experience has shown that angels are driven by any one or more of these motives, although a seeker of angel finance would be well served to assume that the first of these motives is the most important:
 Financial reward. Angels invest with the prospect of a high financial reward. A good rule of thumb is that angels hope to quintuple their money in five years, although only a few actually do so. While financial criteria are rarely stated explicitly, they may be implicit in the investor's decision to commit to market niches with great growth potential. In general, angels place less weight than VCs and other professional investors on the financial projections presented by the entrepreneur. Instead, they rely on gut feeling that a particular entrepreneur is worth investing in. Still, there are angels, a minority to be sure but a sizable one, who take a more professional approach, and they will often have explicit annual return goals in mind. Typically, these return objectives range between 25 and 50 percent.
 Playing a role in the entrepreneurial process. Angels enjoy their involvement in an entrepreneurial process. Given that most such investors are in their forties or fifties, and have already achieved success in their careers or with their own businesses, they like to use the time and money available to them to once again experience the thrill and challenge of nurturing a new business.
 Altruism. Although the term angels might give the impression that altruism is a motive, it is rarely the primary one. In some cases, however, investors are keen to pass on their skills to the next generation of entrepreneurs. Their hope is to encourage a spirit of entrepreneurship that can create jobs and promote economic prosperity. This motive tends to be more common among angels living in rural areas or in small towns.

TYPES OF ANGEL INVESTORS
The background, interests, and industry specializations of angel investors vary widely, but most fall into one of the following categories (although it should be noted that some investors exhibit characteristics of two or more angel types, and that the nature of a particular angel's participation can vary from one investment to the next).
 Entrepreneurial angels. These investors are sometimes prepared to invest larger sums and take bigger risks than the average angel. Most own and operate a successful business, or have done so. Their investments can run as high as $500,000, but are often far less. Such angels diversify to avoid being overly dependent on any one investment. Most entrepreneurial angels insist on board representation, but normally do not interfere with the day-to-day management of the business.
 Lifestyle angels. Investors of this type consider investment mainly as a hobby. Generally they are not involved in managing the business or advising the entrepreneur, and thus take a passive role. Their investments can be as low as $10,000, but may run into the low six figures.
 Profession-based angels. These angels are linked to a profession such as medicine, law, or accounting, and prefer to invest in companies suited to their expertise and experience. Although they will not be too actively involved in the entrepreneurial process, they will share their capabilities and knowledge. Their investments usually range from around $25,000 to the low six figures.
 Altruistic angels. These investors are motivated both by financial profit and by the desire to do good. The Community Development Venture Capital Alliance, a non-profit organization based in New York, is devoted to bringing together such investors with capital-seeking entrepreneurs.[5]
 Alliance angels. These angels invest in groups. Many such investors lack the necessary background to coach entrepreneurs, and thus tend to be passive, although an important subset does have relevant professional experience and thus tends to take on more active roles in the businesses they finance. One element that these angels have in common is that they seek to share risk with others or to participate in deals that would otherwise be too big for one investor. They sometimes operate through informal networks known as "angel alliances." These alliances usually hold meetings on a routine basis and, if interested in a particular proposal, will decide quickly whether to invest. One of the better-known examples is the Band of Angels, based in Silicon Valley. Because it pools capital from lots of angels (more than 100 at last count), its average investment is over $500,000. This level of investment is similar to the smaller deals done by venture capitalists.

WHAT ANGELS ARE LOOKING FOR
Entrepreneurs need to understand which aspects of their proposed business will carry the most weight in the decision of angels to invest. Here are the major questions that angels ask.
 Does the entrepreneur inspire confidence? Angels place considerable weight on the quality of the entrepreneur.[6] A business is run by people and if the people are wrong, the business will fail. Entrepreneurs must convince angels that they have both an entrepreneurial capability and a team with sound management skills. These entrepreneurs must also have a good educational background and a track record of performance in the business line of their choice. They must have great enthusiasm or passion for the business they are starting. The entrepreneur must put together a solid management team to give confidence that the various business activities can be run well.
 What is the funding to be used for? Given that angels tend to fund early-stage ventures, they strongly prefer that their investment goes directly into the company being capitalized. Although there are exceptions to this rule, investors normally exit after the angel stage of finance.
 Does the venture fit with the angel's own investment profile? This is why it is so important for capital-seeking entrepreneurs to target their pitches. There is little point in going after angels who don't invest in the venture's industry or whose risk profiles don't match the business. Prior to approaching angel investors, entrepreneurs should first understand their particular characteristics. What factors motivate the angels to invest, and what industrial sectors are attractive to them? They must be able to show how their business opportunity matches the angels' goals.
 Does the business have genuine growth potential? Entrepreneurs need to show that the business can take off. The business must have some unique characteristics that are likely to win customers against competition in the chosen market niche.[7] Is the venture doing something unique, and if so, is that something not easy for potential competitors to copy? Is the market big enough to make growth and cash flow projections possible?
Also, most angels are wary of single-product businesses. They like focus, but can the business develop multiple income flows? This is not to say that single-product companies are unworthy of investment, but when revenue streams are dependent on one product, potential investors get nervous.
 Is there a credible business plan? Most angels want to see a business plan before investing.[8] A good plan will discuss the vision and mission of the company, and will also show financial projections, a marketing plan, a sales plan, and an outline of major operating controls.[9] At this stage, the plan should be short, concise, and to the point. It should summarize the products to be sold, the credentials of the management team, the financing sought and the reasons for seeking capital, any achievements of the venture to date, expected milestones, and exit strategies.

In making their lending decisions, bankers often rely on checklists. One popular example is known as the 4 Cs:
 Character of the borrower (reputation and honesty).
 Capacity to repay (based on know-how and experience).
 Conditions (such as industry economics, products, technologies, etc.).
 Collateral (access to assets that can be sold off in the event of a default).





For more Information:
Sales Marketing, Internet Marketing, Search Engine Marketing, Strategic Marketing


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CFO Insights—Achieving High Performance Through Finance Business Process Outsourcing

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Global Sourcing of Service Delivery

Three Ways To Source Globally
 Option #1: Some large global corporations such as HSBC, British Airways, and GE have retained key F&A activities in-house but relocated their back-office operations to low-cost locations such as China and India. These are what we call ‘captured in-sourced shared service solutions.’
 Option #2: Other companies have shifted their back-office processes to one of the many niche business process outsourcing (BPO) service providers.
These are generally native operators based in low-cost countries such as India. Historically, this strategy has been used most often for IT outsourcing.
 Option #3: Buyers who select this approach utilize the global delivery networks of mega-service providers who operate from multiple locations around the world. By leveraging their outsourcers’ resources, these companies shift back-office work to the geographic-and-skill mix that best fits their requirements.

Why exactly is outsourcing growing in locations such as India, China, Eastern Europe, and the Philippines? Among the most critical factors are:
 Skilled manpower availability: India, for example, has the second largest English speaking workforce and the largest higher education system in the world (250 universities and 10,500 colleges).
 Multilingual proficiency: NOL’s service center in Shanghai, for example, offers 17 languages – and this number is increasing.
 Highly motivated employees: Labor arbitrage, surging productivity, and higher quality levels are all having a profound impact on BPO operations. Centers are attracting better-educated, strongly motivated employees who see outsourcing as a career path.
 Favorable government policies: Tax concessions, telecom deregulation, patent protection, and better policing of software and intellectual property piracy.
 Improvements in telecom infrastructure: Costs continue to plummet in this area (for example, a 45% drop in India in 2002); bandwidth is improving; and cheaper, more efficient Internet technologies are easily available.

To clarify your outsourcing goals, ask yourself the following questions:
1. How much effort is needed to simplify and standardize processes?
2. Are the benefits of scale being reaped; if so, can you get more?
3. Have you taken advantage of labor-cost arbitrage?
4. If you are already in a low-cost location, could costs be reduced still further?
5. Should your outsource goals broaden beyond simple cost reduction?
6. Is there more to be gained from further investment in technology and would it be more efficient if someone else absorbed those costs?

CFO Insights
 The debate on which single country to locate a regional shared service center in, has turned into a debate on which combination of processes should be delivered from a mix of globally interconnected service centers.
 Moving to a new location allows a new service-oriented culture to be created, one that is separate and distinct from the parent company’s heritage.
New employees are not entrenched in old patterns of behavior.
 Consider the range of geographies potentially available. If you focus on one location, you may place unnecessary constraints on the performance results that an outsource solution can deliver.
 Options range from the simple to the complex, including highly customized solutions in which a combination of onshore, offshore, and nearshore locations delivers a unique mix of processes.
 Technology has caused ‘the death of time and distance.’ Physical distance is no longer a barrier to high standards of service delivery – and no longer a crucial issue in offshore site selection. Increasingly, companies are turning to the networks of multiclient service delivery centers run by outsourcing providers.

From Insight To Action
a) DECIDE WHERE YOU ARE ON THE DEVELOPMENT CONTINUUM
Do you have more to do to simplify and standardize your processes? Could you benefit further from economies of scale? Be honest! Evaluate your capabilities to transform. Can you benefit from investments in technology by mega-service providers?

b) DETERMINE YOUR SHARED SERVICE CENTER LOCATION STRATEGY
Offshore, near-shore or in-country? Evaluate your choice of location against cost and capability criteria. Consider languages, cultural fit, local infrastructure, and skills required. Rank and weight your priorities. When you outsource, this becomes an ‘input’ rather than an ‘output’.

c) CLARIFY YOUR LOCATION OBJECTIVES FROM THE OUTSET
Are you looking for labor-cost arbitrage or do you want something more? Be clear. Your strategic options range from a pure play, global full-service provider with transformational process and ERP capability to local offshore lowest-cost outsourcers. Do you want to share a service provider with other clients or follow the one-to-one service model? Be flexible: Do not dictate the choice of location to your service provider.

d) PERFORM DUE DILIGENCE
Carefully evaluate outsourcing providers’ capabilities: process knowledge, infrastructure, quality, and risk management – as well as their financial stability and ability to offer a ‘structured control environment.’ If global sourcing, it may be wise to engage a specialist third party advisor for an independent provider qualification.

e) CONSIDER INTERNATIONAL REGULATORY, LEGAL, AND FIDUCIARY CONSTRAINTS
Different countries have different tax structures, legal accounting requirements, industry regulatory controls, labor laws, and contracting practices. These can change over time and you will need to keep abreast.

f) EVALUATE LOCATION RISKS
Low-cost countries initially seem attractive. However, political and socioeconomic conditions can change unexpectedly. Prepare contingency plans for natural disasters – flooding, earthquakes, and wars. Remember: Your corporate reputation could be at stake.

g) CAPITALIZE ON YOUR SHARED SERVICE CENTER NETWORK AS A GLOBAL ASSET
Benefit from your outsource provider’s investments. Take advantage of geographic spread – interoperability between centers offers workload management, resilience, and disaster recovery. Encourage your outsource provider to grow its capabilities. You’ll benefit from lower unit-cost levels as more companies join with you in leveraging scale.


Ensuring a Successful Transition

Here is some best-practice advice, drawn from practical experience, for successfully managing each of the four implementation stages:
1. Planning – ‘Allow lots of time upfront’ Overall, when we asked what they would do differently in structuring their outsourcing relationships, both buyers and service providers said they would do more up-front planning during the transition stage preceding actual service transfer. Outsourcing is ultimately a big management time-saver. However, launching a program generally demands substantial effort from the executives driving the change – almost
inevitably more than they bargained for. Navigating the approval process, particularly in decentralized organizations, can be a hurdle. Ingersoll-Rand’s shared services group, for example, had to win approval from the presidents, CFOs, and CIOs of each of its four main product sectors before it could finalize a contract.

2. Mobilization – ‘Build a consensus’ Don’t stop at the executive suite. Line managers often bridle at outsourcing because centralization threatens their power and authority. Ignoring this opposition is a mistake. Forcing outsourcing on an organization doesn’t lead to a productive partnership relationship. Building a team is the better approach. ‘You don’t want to do this with just a small core of people,’ says Colgate’s VP of finance, Mr Pohlschroeder. ‘You want everyone involved.’ Finding a few business-line champions who embrace the idea and lobby for adoption is one good idea. Another is to explain persuasively that outsourcing is not a loss of control but rather a form of enhanced control. ‘The major issue for most companies considering
outsourcing is the initial perception of a loss of control,’ notes OneResource Group’s chief operating officer, Mr Reilly. ‘They need to understand that they are not really losing control, but changing the way in which they exercise it. Instead of controlling employees and every step of the process, they retain control by focusing on results and demanding that they be delivered.’

3. Stabilization – ‘ Measure performance’ Metrics not only measure the success of an arrangement, they also provide data to reinforce and protect programs. ‘Benchmarks help us publicize our successes,’ says Mark Abruzino, director of financial shared services at TRW Automotive, a leading maker of automotive safety systems. TRW measures 20 key items for its outsourced payroll and check-printing activities – and keeps a scorecard for each. ‘We are
concrete. We want no gray areas,’ says Abruzino. Quantitative measurements should be combined with qualitative feedback from internal customers. Consumer-satisfaction surveys can assess whether business units are getting the service and information they really need.

4. Integration – ‘Ensure proper oversight’ Outsourcing ultimately enables senior finance executives to focus on critical business issues. But that doesn’t mean they can wash their hands of outsourcing once implementation is complete. Continuous supervision of the relationship is vital; usually this requires minding the broad strokes rather than monitoring the day-to-day detail. ‘You have to stay with it through the whole life of the contract – forever – to make it work properly and get the benefits,’ says one UK finance director. A company can never abdicate responsibility for the function.

People Strategy
The following guidelines will help ensure a well-orchestrated work-force transition:
Design phase:
 Determine the job changes needed to deliver the new process design
 Establish resource baseline to enable accurate labor savings measurement after go-live
 Benchmark workforce reduction efforts and review best practices from other organizations
 Summarize the workforce transition plan impact on timing, contingency plans and implementation sequencing
 Ensure existing workforce reduction plans are compliant and define career options
 Obtain workforce transition plan approval from human resources and business units.
Build phase:
 Develop the communication plan to help local resource professionals manage the transition
 Review process design and workforce impacts with business units and gain buy-in
 Arrange for contingency staffing to minimize the risk of business disruption
 Arrange outplacement services for those employees who will not be offered new positions
 Communicate plans to employees.

Communication Strategies
 Attend to morale: Cost-cutting logic means that outsourcing almost always entails redundancies, particularly of finance and accounting staff who work at the ‘coal-face.’ Even when operations do not move globally and outright layoffs are avoided (in fact, even when finance personnel remain at the same desk in the same building), they generally face the uncertainties of a transfer onto the books and to the authority of a new employer. Morale tends to suffer, threatening dayto-day operations and the transfer of knowledge to the outsourcing provider (or shared service center). This poses challenges for the service provider, who must motivate disgruntled staff – and for the parent firm, which must keep operations running during the transition.

 Communicate the upside: As many companies have found, it is vital to convey that a shift to an outsourcing provider is not a dead end. Far from it! Such a move can offer transferred staff new career opportunities with a company whose core competency is, after all, finance and accounting. MOL, the Hungarian oil-and-gas company, moved 406 accountants to its outsourcing partner. ‘Although there has been a headcount reduction,’ reports CFO Michel-Marc Delcommune, ‘former staff seem more motivated working for the outsourcer than as accountants at MOL.’ Thomas Cook UK found that service center employees initially felt resentment, but soon saw a link between the transfer and their rising skills. This has made them convincing advocates of change for other transfer candidates.

 Stick to specifics: To ensure continuity, affected staff need concrete information about their fate as soon as possible. What really convinced MOL’s staff was a side-by-side comparison of their pay stubs before the transfer with their salaries and benefits after it. Moods improved still further with the provision of a redundancy premium to compensate for lost vested rights. CFO Delcommune says that once employees saw that they were getting a fair deal, ‘all the turmoil stopped and people concentrated on making the project itself a success.’ Where headcount is cut outright, as happens when finance operations move around the world, it’s important to devise an incentive structure that encourages departing employees to train their successors effectively. One firm that shifted finance operations for six countries to a central European center, gave redundant staff nine months to conduct their job searches. Redundancy payments were only awarded only after relevant knowledge had been captured from departing staff.

CFO Insights
 As CFO, you have to stick with it through the transition lifecycle. A smooth, successful implementation requires a structured, disciplined framework – and a holistic view of change.
 The idea of a trouble-free transition sets unrealistically high expectations. If the challenges encountered during the first year are not handled properly, they may become pitfalls that destroy a promising outsourcing relationship. It happens little by little, as unexpected problems occur. Nevertheless, the bumps are controllable – if you are prepared.
 Companies typically underestimate the resources required to deliver a major workforce transition. Surprisingly, a high proportion of a transformation team is devoted to change management – such as organizational readiness – as opposed to purely technical tasks.
 The vast majority of employees find themselves much happier in their post-outsourcing environment. However, the initial outsourcing news is almost always a shock. An effective employee communication program is key to reducing distress and paving the way for a smooth transition.

From Insight To Action
a) START TRANSITION ACTIVITIES EARLY
Allow lots of time. Getting an outsourcing program off the ground generally takes significantly more senior management effort than you imagine.
b) CRAFT A TRANSITION FRAMEWORK
The first 12 months – the transition year – is the most crucial. Put special effort into knowledge transfer and work shadowing prior to ‘cut-over.’ Segment design, build, and roll-out phases. Prepare scenarios to deal with unexpected events, such as high attrition.
c) EMPLOY THE RIGHT LEADERSHIP
Separate the new leadership roles of change management and operations; they require different skills. Win over the ‘bosses.’ Without senior level sponsorship, outsource projects are doomed to failure.
d) HAVE A PLAN AND MANAGE TO IT
Expected project outcomes should be communicated to everyone involved, internal and external. Phased release establishes interim goals and deadlines. Keep pace and intensity high throughout the outsourcing project lifecycle. Manage through regular status and issue resolution meetings.
e) DEFINE BOTH THE SERVICE LEVEL AGREEMENT (SLA) AND THE OPERATING LEVEL AGREEMENT (OLA)
The SLA defines the service levels of the outsourcing SSC. The OLA, on the other hand, defines what is required of the company as whole – including the retained organization.
f) COMMUNICATE! COMMUNICATE! COMMUNICATE!
Attend to employees’ fears early. Prepare your managers to handle resistance to change. Communicate what you expect from people during the transition. Create baselines for current performance levels to demonstrate quick-wins. Make communication two-way.



For more Information:
Business Process Outsourcing, Business Process Management

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Monday, October 27, 2008

How to Grow Leaders—The Seven Key Principles of Effective Leadership Development

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How to Grow Leaders - The Seven Principles

Principle 1
- Training for Leadership
Principle 2
- Selection
Principle 3
- Line Managers as Leadership Mentors
Principle 4
- The Chance to Lead
Principle 5
- Education for Leadership
Principle 6
- A Strategy for Leadership Development
Principle 7
- The Chief Executive


Principle 1
- Training for Leadership

Key Points
? A natural starting point for an organization that wants to grow leaders is training. Not middle or senior managers but team leaders. The cardinal principle in leadership development is never to appoint someone a leader without the appropriate form of training or preparation. Are you applying it?
? Team leaders are at the base of a natural pyramid. They are the seedbed from which operational leaders come, and they in turn beget strategic leaders. The natural 'window of opportunity' for training leaders in the generic role/functions/qualities of leadership is when they are on the threshold of becoming team leaders at work for the first time. Miss that opportunity and you may have missed the boat.
? The micro-principles and hallmarks of effective team leadership training are well established. With the exception of the Services, however, they are little understood and not practised. Therefore poor leadership is the normal condition in organizations.
? Middle and senior managers who have had no good formal or informal leadership training when young seldom make up the deficiency. It is too late. Remedial programmes in the form of 'sheep dips' have only a very limited value, often not much more than salving the consciences of the HR department or as political tools to keep the government happy. They are seldom rigorously evaluated.
? The chief error that most organizations - I mean here their top strategic leadership teams - make in this field is that they do not think and think until it really hurts. Lacking any clear thinking about leadership and how it relates to management, they are at the mercy of the winds.
? Operational and strategic leaders who have been trained and tested at team leadership level do need further training/education-type experiences in leadership as part of their rites of passage: to review, to reflect, to recalibrate the Three Circles, to remind and to kindle again their torch of inspiration. Remember Seneca's words: 'Many might have attained to wisdom, had they not thought they had already attained it.'



Principle 2
- Selection

Key Points
? Growing leaders is not easy. Why not select people for leadership roles who already have a rich potential for leadership within them?
? Natural selection of leaders needs to be understood. Leaders are emergent, elected or appointed, or some combination of the three. A British prime minister emerges in his or her party, is elected by colleagues or party, and appointed by the Queen.
? Difficulty arises when electors or selectors lack first-hand knowledge of a candidate for a leadership role. The Qualities, Situational and Group or Functional Approaches taken together provide the necessary criteria.
? The Group or Functional Approach worked well in leadership selection. The WOSB method solved problems distinctive to the military field, but the underlying principle remains relevant today for assessing leadership potential.
? Leadership has neighbouring concepts living in the same street: the intellectual, communication and self-management galaxies of skills, qualities and abilities.
? Eclectic lists of 'competencies' drawn from these four constellations have value. But they need to be kept short and simple, which inevitably makes them more generic in nature.
? If an organization doesn't understand the key concept of leadership and its associated terms, it should not expect to be wise in its choice of leaders.


Principle 3
- Line Managers as Leadership Mentors

Key Points
? A mentor is a wise and trusted guide or counsellor, one who helps a person to grow in his or her role and responsibilities. A good leader begets leaders: they are natural leadership mentors.
? The natural way of learning leadership is 'on the job' - by practice - like an apprenticeship indentured to a master-artist, craftsman or practitioner. In this relationship the master is expected - it is part of the role - to give instruction. Why don't you teach the 'leaders for tomorrow' who work with you?
? 'Under the banyan tree nothing grows.' As this Indian proverb suggests, some so-called 'great leaders' stunt the growth of those around them. It is only by making others great that a leader becomes great.
? Line leaders as leadership mentors is a principle, not a system. It is a natural process, as old as mankind, so it doesn't need to be organized - merely encouraged. If you set an example as chief executive, it will happen as day follows night.
? Occasionally, your positive influence will have come at a decisive time, and a person anxious about leading will suddenly find a new confidence in themselves and an eagerness to accept the leadership challenge.
? The best teachers are also learners. As Chaucer wrote of one of his pilgrims: 'Gladly would he teach and gladly learn.' There is no point in talking if you don't listen.


Principle 4
- The Chance to Lead

Key points
? Leaders grow by facing and surmounting even more difficult leadership challenges. If organizations want to grow leaders - or at least create the conditions necessary for growth - they can do no better than to give potential leaders the chance to lead.
? That opportunity should be accomplished by practical help in the form of training and support. Training for leadership dramatically increases the likelihood of success. Learner-leaders at any level benefit from having a leader above them who can encourage and support.
? Individual and organization should put their heads together at least once a year to compare notes on 'career development' or promotion. If expectations can be matched and married, then there is harmony between the two sets of needs.
? We all need challenges in order to grow, not least leaders. 'By asking the impossible we obtain the best possible', says the Italian proverb. Stretching is painful, but it is the only way to gain stature.
? Not all specialists want to become generalists - leaders in their field. Those who do, however, need to think ahead and to prepare for tomorrow's opportunities.
? It is an error to think that promotion is the only way to grow as a leader. It is better to achieve excellence as a team leader than to sink to mediocrity at operational level.


For more Information:
Leadership Development, Strategic Leader, Power, Influence, and Persuasion,

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Thursday, October 23, 2008

St. Benedict's Rule for Business Success. Keys to Effective Organization - Harmony, Teamwork, and Stability.

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Benedictine Keys to Effective Organization

At the base of this effectiveness we find a number of Benedictine organizational keys—harmony, teamwork, and stability.

A) Harmony
It is the ultimate result of the Rule's obsession with obedience. The English translation of the word obedience implies "adherence in a severe manner." In the Latin root of Benedict's day, it meant, "to listen to."

It is true that Benedict penalized for lack of obedience, but the rationalization was to maintain order and, ultimately, to foster harmony within the community.

Harmony cannot coexist with negativity. No organization can achieve its maximum efficiency if grumbling is wide-spread. Benedict did not suppress problems or personal freedom, but required that they be channeled properly through the organization via the daily "employee" chapter meeting, through mentors or the fatherly advice of the abbott (from the root abba meaning "father"). Benedict focuses in on what most managers avoid—addressing negativity at a personal level. What is lost to today's managers is the impact on productivity and profitability. Any manager who has tried to change knows the crippling power of negativity to bind organizations.

Benedict used a process of discipline and a community spirit to avoid such an organizational breakdown and communal negativity. Of course, Benedict's biblical policy did not promote going directly to the sword but to pursue a policy of "reprove, entreat, and rebuke" (1 Tim 4:2). The real application of Benedict's Rule for managers is not to accept negativity as the norm but to aggressively seek to eliminate it. A manager must address negativity head on, and quickly. Like Benedict, managers must first be open to change and the possibility of a need to correct, but ultimately, if it is more a personality problem, it will require a stronger re-proof. It should be noted that when grumbling came from a widespread organizational problem, Benedict's open community daily counsel (employee involvement) corrected this. Failure to root out single negativity will first be reflected in a lack of organizational harmony, but ultimately, teamwork and stability will suffer.

B) Stability

Stability is at the heart of Benedictine community. Through mutual obedience, a family is created that is the infrastructure of Benedictine community. Community, as a word, has Latin roots meaning, "to eat bread together." The Rule of St. Benedict stresses the importance of coming together on a daily basis. This type of bonding was the foundation of community. Even business organizations require a measure of bonding to be successful. Long term successful organizations have strong social ties among their members. So many times business people overlook this key organizational facet. Socialization is bonding.

Stability is the organizational characteristic of strong bonding. Stability has long been a measure of business organization, and is generally expressed by the turnover rate. Business, however, viewed turnover more as an individual or department managerial measure than as a more global measure of organizational strength. Stability is, in fact, the last indicator of community strength. This is why Benedict promoted that the monk, even on a short journey, should return for the evening meal.

There is a direct equation between individual obedience and loyalty with organizational stability. It is a bond and an organizational consent. Stability flows from mutual obedience and codependency. The early industrialists knew the relationship well.

C) Teamwork

Teamwork is the end result of the Benedictine quest for humility. Teamwork personifies the true spirit of community where self is subservient to the good of the whole. Western managers, in their quest to achieve teamwork, have imposed the culturally foreign concepts of Asian teams. The Asian team concept is one rule of the whole, not one rooted in sacrifice for the overall good. In the Asian concept, it is a duty to suppress self over the team. The Asian concept requires obedience but lacks the root of humility. The Benedictine model offers a democratic team approach based on individual humility and the necessary sacrifice. The Benedictine model does not require consensus of the group, only a belief in community by the group.

The Benedictine team allows for individuality but is focused on the community. The virtue of humility is much lost today. It does not suppress individual achievement but does suppress the use of achievement to control and use as power. Some of the greatest individual craftsmen arose from the Benedictine community. It is humility that gives the individual a perspective of self and a role to build community. Individual ideas are fostered, but ultimately the good of the community is the rule by individual choice.

The Benedictine team is much closer to the American sports team where individual statistics are noted and praised, but self-sacrifice for the good of the team is held in high esteem. Furthermore, self-sacrifice for the team ultimately results in a spirit that actually maximizes individual performance. It is this "spirit" that managers seek in teams. It is this spirit that is the hallmark of high performance organizations.

Benedictine teams are democratic in nature and function. A daily chapter meeting was used at the monastery to voice issues. Ultimately, the chapter was obedient to the abbot, but the abbot was bound by the Rule to take all into decisions. It is this mutual obedience that assured harmony and fostered teamwork. The Rule only created the environment for teamwork; it did not enact it by law. Benedictine teamwork is not a result of a structure—a committee format works as well as a "team." Benedictine teamwork does not require "training" but the creation of a communal spirit. It is the result of managerial actions rather than words. Many companies claim to value teamwork, but such claims are more likely to result in employee jokes rather than increased performance. Great teams, like great sports teams, are obvious. You can feel them in spirit. Their hallmark is a great individual having great humility.

Another characteristic of Benedictine teams is that they equate to community. The push today is to form multiple teams within an organization, which actually can lead to a breakdown in community and overall teamwork. Benedictine teams are totally integrated using committees for more specific problem solving, employee involvement, and administration. Benedictine communities used the daily "team" or chapter meeting to focus on one rule, one community. Committees were used to involve employees and develop a specific focus on an issue. Committees were part of the community, not separate teams as we see in many of today's structures


Applications of the Rule

I. SET RULES AND ENFORCE THEM
Democracies are inherent organizations of laws. Our freedom and unity are established by laws and discipline. In business, an organization's harmony is dependent on mutual obedience and discipline. Rules should be clearly defined and enforced. Use an employee policy manual and train on it with new employees.

2. DEVELOP STABILITY VIA EMPLOYMENT
Stability is the cornerstone of a Benedictine organization. Stability is achieved through social ties and meeting physiological needs. The Japanese have lifelong employment, but American companies have achieved the same effect with a guranteed year in economic hard times. Employees need that type of future stability to develop community or team spirit. Employment stability builds stronger organizations than variety in benefits.

3. IMPROVE ON STABILITY VIA FAMILY
Form strong social ties within the organization. Christmas parties and the like are important to build on. Remember the root of community is "breaking bread." Be generous in company dinners and lunches for retirements, company meetings, etc. where employees eat together. Use an employee social committee to involve people. Another important activity is a family day with picnics and ball games. Most important is to maintain these activities even in hard times. Cutting the budget first in these areas is a direct signal of instability.

4. ZERO TOLERANCE OF NEGATIVITY
Managers today are trained to address negativity being caused by the organization rather than the individual. Early monasteries learned that negativity has individual roots. Negative individuals should be "rebuked and reproved" early. Benedictine obedience for the good of community should be stressed in all training. If this fails, "excommunication" is needed for the good of the organization. Remember the Rule of St. Benedict called for kindness, guidance, and even support of the excommunicated.

5. USE EMPLOYEE COMMITTEES RATHER THAN TEAMS
Benedictine management allows only one team (the community). For specific focus or problem solving, the community chose subchapters as committees. Committees have fallen on hard times in today's "team managed companies." In fact, committees offer a way to involve employees while maintaining the overall team.

6. FORM COMMUNITY VIA OFF-SITE GATHERINGS
Community cannot be built on a nine-to-five schedule. A general "chapter" meeting of all employees every year is one approach to a better working community. A two-to three-day off-site general meeting to set goals, objectives, and renew mission is a great technique to build community.


For more Information:
Business Success, Journey to Excellence, Creating Performance that Endures

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Monday, October 20, 2008

Decision Making—5 Steps to Better Results. The Uncertainty Problem—How to Deal with Unknowns

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The Decision Process—Five Key Steps

Business decisions are difficult when they involve uncertainty, present many alternatives, are complex, and raise interpersonal issues.
Uncertainty makes us hesitate: “How can I decide when I don’t have all the facts, and when I cannot be certain about the outcome of my decision?” Some managers prefer doing nothing to taking what appears to be a leap in the dark.
Alternative courses of action can be equally troubling when each alternative has its own uncertainties and unknowable outcomes. Complexity, too, makes decision making difficult.
Decisions also involve interpersonal issues that are difficult to measure and assess but often determine the success or failure of the actions taken.

The decision process
1. Establish a context for success.
2. Frame the issue properly.
3. Generate alternatives.
4. Evaluate the alternatives.
5. Choose the alternative that appears best.


Process is critical for effective results. Being smart or hardworking does not ensure the quality or quantity of output. It will be haphazard in the absence of an effective process, which is needed whether you’re producing ball bearings or automobiles or making decisions. When the process is right, quality will improve. If you adopt an effective process and train people in its use, output will improve and will be consistently good. If you continually improve the process, the output will continue to improve.


Step 1: Establish a Context for Success
The first step is to create an environment in which effective decisions are possible. If this task doesn’t seem necessary, take a look around you. If your company is like many others, you’ll find that choices are often influenced by factors that are antithetical to sound decision making. For example, bickering between individuals eliminates rational discussion; management cannot maintain a healthy level of differences of opinion. A command-and-control culture tends to make decisions in line with the preferences of powerful individuals. No matter how well informed they may be, in these circumstances every decision is ad hoc, and there is no consistent approach to dealing with important choices.

A decision-friendly context is generally free of these problems. In addition, it ensures that the right people participate in the process. Those people meet in a physical setting that encourages creative thinking and careful deliberation. A decision-friendly context also has ground rules that determine how a decision will be made.

Step 2: Frame the Issue Properly
Every successful decision depends on a clear understanding of the issues at hand and the ways each will affect the objectives of the business. It is critical to determine the nature of the problem. As you’ll see later, you cannot make a good decision if you fail to properly frame the problem.

Step 3: Generate Alternatives
After the issue has been properly framed, decision makers must develop alternative choices. In the absence of alternatives there can be no genuine decision.

Step 4: Evaluate the Alternatives
Once you have a realistic set of alternatives, you must assess the feasibility, as well as the risk and implications, of each possible choice.

Step 5: Choose the Best Alternative
When all previous steps have been carried out properly and the decision team is in agreement on its objective, the team members can rationally evaluate each of the alternatives. Under ideal circumstances, the right choice will be clear. But in reality, some degree of personal preferences, ambiguity, and dissention often makes the final choice difficult. Fortunately, there are techniques that can help a decision team get through these difficulties. These methods, explained in chapter 6, have fanciful names: catchball, point-counterpoint, and intellectual watchdog. Using these techniques ensures that the merits and demerits of each alternative are fully understood and debated.


In short, sound decision making is as much an art as a science. It demands good judgment and creativity in addition to technical proficiency.


The Uncertainty Problem—How to Deal with Unknowns


Most of us rely on what we know about the past to provide insights into the future. What we know of the past and the present can help us understand where we are, where we have been, and what the general trajectory of our journey looks like. But the past and present provide nothing more than hints about the future. As Coleridge put it, “History is a lantern at the stern of a ship, revealing only where it has been,” casting only a dim light on the course ahead.

This chapter addresses the knotty problem of uncertainty and offers a three-step approach for dealing with it:
Step 1: Identify the areas of uncertainty.
Step 2: Determine which uncertainties could have the greatest impact on the outcome of your decision.
Step 3: Reduce key uncertainties to the extent that you have the time and resources to do so.

These steps cannot solve the problem of uncertainty, but they can help reduce its extent and improve the odds of making a good decision.

Step 1: Identify Areas of Uncertainty
Where are the areas of uncertainty in the decisions you are trying to make?
Ideally, the time to identify uncertainties is in the evaluation phase of the decision-making process. Dealing with the unknowns too early will discourage people from developing a list of creative alternatives. A typical response might be, “Forget that one—there would be too many unknowns to get a go-ahead from senior management. ”

The evaluation phase requires a systematic identification and listing of the uncertainties associated with each alternative.

Ask for Ranges
What the decision maker needs is a range of possible outcomes for each uncertainty, as determined by experienced and knowledgeable informants.

Assign Probabilities

Step 2: Determine Which Uncertainties Could Have the Greatest Impact
One uncertainty might merely reduce your profit margin if the future doesn’t unfold as anticipated. Another uncertainty, however, might hand you a multimillion-dollar loss. The job of the decision maker is to sort out the likelihood of each decision as well as its potential impact.

Step 3: Attempt to Reduce Key Uncertainties
Here are some of the techniques that companies use to reduce uncertainties:
? Customer research
? Test marketing of new products in selected cities
? Focus group interviews
? Direct observation of how customers use products
? Computer simulations

McDonald’s, for example, owns and operates a number of restaurants (most are owned by franchisees) that it uses to test customer acceptance of new menu items before it makes the decision to introduce them broadly. This testing takes time and resources, but it reduces the risk in the company’s decisions. Other companies use sophisticated methods such as conjoint analysis (mapping how consumers see the relative value of product features) to test customer willingness to trade off one value for another. These and other methods shed light on murky areas where decision makers must operate.

Many decision uncertainties involve future customer preferences (what will they want?) and levels of future customer demand (how many will they want?). The first is critical for decisions about developing products and services; the second affects recurring decisions about production and inventory. Although most people try to clarify these uncertainties through market research, some companies have found tactical methods for reducing them. Here we look at four of these methods: narrowing time gaps, building to order, risk-limiting tactics, and staged decisions.


a) Narrow Time Gaps
In the early 1990s, researchers at Harvard Business School discovered an important difference between Japanese and American automakers: the Japanese were designing and launching new car models in roughly two years, whereas their U. S. competitors took almost four years to do the same thing. Being faster to market gave the Japanese certain advantages. The most obvious was that they began receiving revenues from their new model investments much sooner. The Americans faced four years of expenses before they earned a dollar from their work. But there was another, less obvious benefit from cutting time to market: less uncertainty.

How long does it take your company to design and launch a new product? A year? Three years? Five? Whatever it is, you can reduce some of the uncertainty by reducing the time gap between your decision and its implementation. Just as our vision becomes less clear as we turn our eyes from our immediate vicinity to the distant horizon, planning horizons become increasingly uncertain as they extend into the future.

Zara’s ability to bring new designs to stores in less than two weeks allows it to carry less inventory and minimize accumulations of stock due to suppy- demand mismatch

b) Build to Order
Another way to reduce uncertainty is to adopt a build-to- order strategy. Following this strategy, decision makers don’t have to gamble with how many products to build or how to configure them. Those decisions are made by customers in advance of production.

Dell managers are not burdened by decisions about how many machines to build and which features to include. Customers make those decisions for them every day. Dell’s supply chain swings into action only when an order is taken and the exact specifications are known. That supply chain is so efficient that Dell can deliver a custom-built machine to a customer’s doorstep in ten days or less. Rivals who build to stock, in contrast, often make too many of what customers don’t really want and end up with lots of unwanted inventory. And in the PC industry, the value of inventory deteriorates at an amazing rate of 2 percent per day. These manufacturers also risk making too few of the machines that customers want in a given month, and that results in missed sales.

If your company cannot build to order, there is a compromise solution: build items to stock with all but the finishing details added as orders come in. Benetton popularized this strategy in the clothing industry. Benetton makes sweaters, for example, from undyed material. Once the season’s popular colors are known, it quickly dyes its semi- finished stock and ships it out, thereby cutting the time between the receipt of market information and the shipment of its products and reducing the risk of producing items in unpopular colors.

c) Adopt Risk-Limiting Production Tactics
Even when decision makers lack sound data, it’s often possible to limit risk. A developer and manufacturer of music compact discs, for example, will have only a vague idea of how many copies will be ordered during the first year. Every CD experiences a different level of customer demand. Prerelease orders from music stores is one indicator of demand, but it’s unreliable at best. Nevertheless, someone must decide on an initial production run.

One practical way to limit risk is to manufacture enough copies to satisfy prerelease sales plus six or eight thousand extras, and then be prepared to restock quickly if sales take off. This strategy will reduce two risks: the risk of producing too many CDs (and ending up with worthless inventory) and the risk of producing too few (and missing sales because of an out-of-stock condition).

Consider one of the most problem-plagued areas of decision making: hiring. Because the true value of a new employee can be known only after that person is on the payroll and in the job, many employers have an official probationary period of two to four months during which the new person’s performance is regularly monitored. He can be terminated during that period without the reviews, remediation efforts, and separation costs normally accorded to long-term employees.
Other firms have taken an additional risk-reducing step: they hire people as independent contractors to handle temporary jobs. If the temp worker demonstrates good performance, the company hires her to a full-time position

d) Make Staged Decisions
Venture capitalists (VCs) take substantial risks when they fund young, entrepreneurial businesses. Few business investments, in fact, are made with so little in the way of rock-solid information. In many cases the only facts VCs have to work with are a business plan and the reputation of the start-up company’s founder and management team.

Each decision in the sequence is treated as an experiment, a practice that produces learning that feeds into the next decision (see figure 7-2). For example, if the new business needs $1 million in venture capital, a VC may provide an initial investment of $200,000 and then set up a set of milestones that must be reached within a certain period. When that time comes, the business’s progress and current circumstances are reevaluated, and another go–no go decision will be made, involving another milestone and another infusion of capital.

This staged decision approach should be familiar to anyone in new product development, where the stage-gate system of review and funding is widely used. The stage-gate system was developed by Robert Cooper in the late 1980s. [2] It is an alternating series of development stages and assessment gates that aims for early elimination of weak ideas and faster time to market for potential winners. These stages and gates control events from the initial idea all the way to commercialization.

A stage-gate system
? Stages. Stages are phases of the process in which development work is done. For example, a system would have stages for developing the raw idea, technical specifications, a prototype, and so forth. Commercialization is the final stage.
? Gates. Gates are decision checkpoints where people with expertise and the authority to allocate resources determine whether the project should be killed, sent back for more development, or advanced to the next development stage. Gates can be used at various points to determine strategic fit, whether the project passes technical and financial hurdles, whether it’s ready for testing or launch, and so forth.

e) Be Prepared for the Worst
Preparing for a bad outcome begins with making a list of the specific things that could go wrong in a decision. Each item on the list should then provoke this question: “How will we respond if this happens?” The response should take the form of a contingency plan that aims to limit the damage and, hopefully, help the company recover from the bad outcome.


When to Trust Your Gut
Research indicates that 45 percent of executives rely on their intuition rather than on facts in running their businesses. And some have been extremely successful. Consider these examples:
? One of the founders of Sun Microsystems saw an early demonstration of a search engine developed by two graduate students. He invested $100,000 on the spot in what would become Google.
? Michael Eisner heard a pitch for a new TV show with the unlikely name Who Wants to Be a Millionaire? Something told him that it would be a winner, and he made a commitment to fund it.
? At the end of World War II in 1945, many share prices on the New York Stock Exchange were still far behind their 1929 peaks. Nor did the future look particularly bright. Yet John Templeton borrowed some money and bought a handful of shares of every stock listed on the exchange. That investment made a huge profit in the years that followed.
? Decades later, financier George Soros made a fortune by following his hunch that the currency markets were approaching a major shift.

Intuition, the mental process of assessing situations and forming conclusions without the intervention of factual information or analysis, appears to become more important as a person deals with complex decisions in which uncertainties and ambiguities are greatest.

As Alden M. Hayashi told readers of Harvard Business Review in 2001, “The consensus is that the higher up on the corporate ladder people climb, the more they’ll need well-honed business instincts. In other words, intuition is one of the X factors that separate the men from the boys.

What we call intuition is based on memories, pattern recognition, accumulated experience, conditioning, and long-held personal biases.

As one author, Eric Bonabeau, put it, “Anyone who thinks that intuition is a substitute for reason is indulging in a risky delusion. Detached from rigorous analysis, intuition is a fickle and undependable guide—it is as likely to lead to disaster as to success.

Bonabeau, Hayashi, and others who have studied this issue agree that intuition can be useful, but only insofar as it works in tandem with rational analysis. In other words, the right side of the brain, which houses our intuitive power, must collaborate with the left side, the source of logic and analytical power.
Kim Wallace, chairman of Wallace and Washburn, a Boston-based marketing research and consultancy firm, discovered this for himself many years ago. “The key to making a decision,” Wallace told us in early 2005, “is to delay the decision until it makes logical sense and it feels right. The two sides of the brains must agree. If they don’t, delay the decision. Get more input from more sources until it eventually lines up on both logical and intuitive perspectives. This sounds very simple, and it is. But I have never made a bad decision using this process.

Summing Up
? When a decision involves a high level of uncertainty, try this three-step approach: (1) identify the areas of uncertainty, (2) determine which uncertainties could have the greatest impact on the outcome of your decision, and (3) reduce key uncertainties to the extent that you have the time and resources to do so.
? As you gather estimates of uncertain future outcomes, avoid point estimates. These are bound to be wrong. Instead, try to estimate a range of likely outcomes.
? In estimating the probability of a particular outcome, don’t rely solely on your own judgment. Instead, enlist the views of the most experienced and knowledgeable people.
? Narrowing time gaps, building to order, adopting risk-limiting tactics, and making staged decisions are four ways to manage the risks in decisions.
? Intuition is the mental process of assessing situations and forming conclusions without the intervention of factual information or analysis.
? Intuition can be useful when it works in tandem with rational analysis.


For more Information:
Decision Making, How to deal with Uncertainty, Problem Solving

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Monday, October 13, 2008

PeopleSmart — Developing Your Interpersonal Intelligence. How to Ask Skillful Questions to Influence Others effectively.

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Influencing Others

Learn It — Three Ways to Influence People
By connecting with others, influential people establish a genuine rapport with those they are trying to influence. Influential people take time to assess needs by finding out the viewpoints, needs, concerns, and problems others have. Finally, they use this knowledge to make a persuasive presentation that appeals to the needs of others so that they see the benefits for themselves.

1. Connecting With Others
There are various ways of connecting with others, but each works only if you are genuine when using it. Most of the time people can spot a phony a mile away. Here are four tools for making connections:
“I’ve got something for you.”
“I’ve been through this, too.”
“I admire you.”
“You interest me.”

2. Assessing Needs
Interpersonally intelligent people know their audience. They find out what needs other people have before spending time trying to influence them. They do so in three ways: they observe behavior, ask skillful questions, and obtain reactions.

Observe Behavior
Here are some things to consider:
What seems to be the best time to talk with this person?
Does the person prefer you to get right down to business or to schmooze first?
In what situations does this person smile and seem enthusiastic?
What nonverbal signals does this person give to let you know he or she is receptive? Not receptive?
How does this person use language? What are some pet expressions?
What does this person value? (success? loyalty? teamwork? dedication? hard work?)
What motivates this person? (praise? respect? attention? activity? peace and calm?)
What do you know about the person’s tastes and preferences, interests, and beliefs?
Can this person stand back and listen? Does the person like a lot of give and take?
Is the person formal or informal?

Your observations will help you decide the best way to approach this person with your ideas, advice, and suggestions.

Ask Skillful Questions
The art of asking skillful questions can be developed by paying attention to the following guidelines:
Ask questions that promote reflection. It’s better for a salesperson to ask, “What colors do you like?” than to say, “Do you like this color?”
Ask questions so that the response will be clear. It’s better for a spouse to ask, “Do you agree with me?” rather than, “OK?”
Ask what before why. For example, it’s better for a campaign worker to ask, “What do you like about our opponent?” than to ask, “Why are you voting for him?” Asking why often makes others uneasy and defensive.
Emphasize the words in your question that invite a response. For example, it’s better for a consultant to ask, “What do you think about my proposal?” rather than, “What do you think about this proposal?”

Asking skillful questions not only helps you to understand the person you are trying to influence, but also helps to open the door to the influence message you want to convey.

Obtain Reactions
Most people give advice and then wait for others to agree with them. It is much more effective to obtain someone’s reactions immediately after you have finished speaking. You not only receive immediate feedback but also learn what else you need to do to be better received.

Think of any situation in the next day or so in which you want to give advice to someone. Here are some follow-up questions to check out how your advice will be received:
How does that sound to you?
Will that work for you?
Have I been helpful?
What’s your reaction to what I’m suggesting?


3. Making a Persuasive Presentation
It all boils down to two skills: reduce resistance and make your message appealing.
The more you make the receiver comfortable, the more open he or she will be to what you have to say. The more appealing your message is, the more receptive the receiver will be.

Reduce Resistance
When people sense that you are trying to convince them of something they have not been convinced of before, they will dig in their heels before you ever get to your main point. This may happen even if you’ve already established good rapport. Fortunately, many strategies can reduce resistance or prevent it in the first place.

One approach is to take the indirect route. Ask questions that might lead the other party to explore your concerns without pressing them yourself.

With some people and in some circumstances, the best approach is to take the direct route. Before presenting your message, you might say such things as:
Let me get right to the point.
It’s not fair to you to beat around the bush.
I know your time is short, so I’ll tell you what I have on my mind.
Let me be up front.

Choosing the direct route is especially effective when you are communicating upward, that is, with people who have power or authority over you. It gets their attention, sounds confident, and yet respects who they are. Best of all, it may take them by surprise and give you time to speak before they build resistance to your message.

Another possibility is to request something that is so small it’s hard for the other person to refuse. In sales lingo, this is called gaining a foot in the door. You might employ this approach by doing one or more of the following:
Inviting someone to read something before you talk about it.
Requesting someone to try something once.
Urging someone to deal with one specific issue rather than the whole ball of wax.
Encouraging someone to do something as an experiment or as a pilot.
Asking someone to give you five minutes to hear what you have to say.

Don’t manipulate people with this approach. Adopt the attitude that they need time to come to your side. Moreover, treat them like a consumer. Give them the power to decide if they want to “shop in your store” or go elsewhere:

Along with giving up efforts to control others, emphasize the positive over the negative. When you are dealing with someone who makes you feel as if you are banging your head against the wall, it’s tempting to say things like: “You’re being ridiculous,” “You’re acting crazy,” or “You don’t make any sense.” However, negative communication just doesn’t get ideas across as well as positive communication. Saying you can, develops positive energy in someone else; saying you never engenders anger. Saying, “If you do x, you will benefit” is more convincing than saying, “If you don’t do x, you will be sorry.”

Despite all these suggestions, of course, you will still get resistance as soon as you say something that requires a change from old habits and prior beliefs. When a person disagrees, try to stop yourself from getting into an argument. Even if the other person eventually backs down, he or she will not be convinced. The person is merely surrendering—for the moment. Instead, acknowledge the existence of the other person’s views and even their validity. Says things like:
You’ve got a point there.
I see how strongly you feel about this.
You make sense.
That may be.
I understand what you’re saying.
That’s true.

Make Your Message Appealing
There is no question that being prepared with facts and points of evidence to back up your message is important.

Typically, examples are more powerful than statistics or narrative.
That’s because a good example focuses your attention and paints a picture you can see. For instance, imagine that you are urging someone to stop smoking. All the arguments and all the statistics in the world will not be as persuasive as examples of people who successfully kicked the habit and are healthier and happier for it.

The danger of using examples, of course, is that your audience may not find that they apply to him or her. To lessen objections, say upfront that the example you are about to give may not fit.

A visual metaphor is also a powerful tool of persuasion. Think, for a moment, how vivid the question, “Is your cup half empty or half full?” is to the person hearing (and visualizing) it. Consider the kind of images that make you receptive to a product. What works for you—a hyperactive bunny rabbit? A sex symbol? Or when we want to gently discourage someone from giving us new work to do, we say, “I wish I could, but I have so much on my plate already that there’s no room for more.” Images also inspire others and give them direction. For example, we urge volunteers to “rally the troops,” we ask managers to “use a carrot rather than a stick,” and we encourage senior citizens to “enjoy the autumn of their life.” Images also affect us emotionally. If a busy woman says to her busy partner, “I feel sometimes like we are two ships passing in the night,” the request to consider spending more time with each other may get immediate attention.

Metaphors have to fit the audience to be successful. A Baptist preacher can uplift his flock by proclaiming, “It may be Friday now, but Sunday’s coming!” but the same metaphor will mean nothing to a non-Christian. A Texan might turn off an animal lover if he says, “I’m as upset as a pig in kerosene overalls at a prairie fire.”

Another way to make a message more appealing is to reframe it. Reframing is a technique used by psychologists to help people consider something in a new light. For example, a therapist might say to parents who have been indecisive about bedtime rules, “Do you want to confuse your child?” The recasting of their indecisiveness as something that creates confusion may jar the parents into examining the impact of their behavior. Likewise, when a team leader says to a team member who is not pulling his or her weight, “I’m confused about why you don’t want to be part of the team,” the behavior is interpreted as an act of separation rather than irresponsibility. Sometimes, merely a word change reframes how things are perceived. The quality control function is now referred to in user-friendly terms as “quality services.” Realizing that “role playing” makes many people anxious, corporate trainers often use the term “skill practice.”

Perhaps most important of all, your message will be appealing if it is cast in terms of its benefits to the other person. Some people say that the most listened-to radio station is WIFM: “What’s in It For Me?”

Our final advice is to give others the time and space to decide whether they agree with you. Influential people don’t pressure others but instead, give them room to accept or reject what they suggest. In sales lingo, they understand that selling has a long cycle. The more eager you appear to want someone to agree with you right there and then, the less influential you will be. Don’t come across as too eager if you want to be persuasive.

Try It — Exercises for Developing Your Influence

Connecting With Others
1. Make it a special project to take time to develop rapport with someone you want to influence. Think about how to show interest in that person. Also, think of how you can be more interesting to him or her. Avoid giving advice during this time. Develop trust by letting the person see that you are not out to remake them in your image. Also, accentuate the positive. Seize every opportunity to compliment the person. It’s hard to influence someone you have criticized a lot.
2. Evaluate what knowledge or skill you have that would be of value to someone else. Approach that person and inform him or her of your willingness to share that knowledge or skill. If your offer is welcomed, arrange a time to meet.

Assessing Needs
1. Think of two people you want to influence as your “customers.” Devote a week to working on asking questions rather than giving advice. Learn more about their needs, wishes, and preferences, and store that information for later use.
2. Select someone you want to influence who gives you a hard time. Think about how you and the other person are alike and not alike. Observe the person’s behavior, using the checklist on page 126. Then develop a plan of approach so that this person will likely be receptive to you.

Making A Persuasive Presentation
1. For one week, try to lessen your eagerness to influence people right away. Every time you are in a situation where you want to be persuasive, try to be patient with yourself and with others. Give yourself time to think before you speak, and give others the space and elbow room to consider what you’re saying without responding right away. See if you like the results.
2. Identify a person to whom you want to be more persuasive. Develop a plan for encouraging that person to accept your idea. Prepare yourself with information about the benefits of your ideas. Think about how you might make your suggestions more appealing by using good examples, reframing, and metaphors. Try out your plan



For more Information:
Interpersonal Intelligence, Social Intelligence, Emotional Intelligence, Spiritual Intelligence

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The ART of Risk Management—Alternative Risk Transfer, Capital Structure, and the Convergence of Insurance and Capital Markets

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A Vocabulary of Risk

Basic Primer on the Vocabulary of Risk
Risk can be defined as any source of randomness that may have an adverse impact on the market value of a corporation’s assets net of liabilities, on its earnings, and/or on its raw cash flows.

? Financial risk: a financial event that can give rise to unexpected reductions in a firm’s cash flows, value, or earnings, the amount of which is determined by the movement in one or more financial asset prices
? Peril: a natural, man-made, or economic situation that may cause a personal or property loss
? Accident: an unexpected loss of resources arising from a peril
? Hazard: something that increases the probability of a loss arising from a peril

A) Financial Risks

A financial risk is a source of potential unexpected losses for a firm that will arise because of some adverse change in market conditions, the financial condition of an obligor to the firm, or the financial condition of the firm itself. Financial risk can impact a company’s cash flows, accounting earnings, and/or value (i.e., asset and liability market values). Importantly, the amount of money a firm loses from financial risks that are realized usually depends on the behavior of one or more “market-determined” prices. Five specific types of financial risk are discussed below[2]:
1. Market risk
2. Funding risk
3. Market liquidity risk
4. Credit risk
5. Legal risk



Market Risk
Market risk arises from the event of a change in some market-determined asset price, reference rate (e.g., LIBOR), or index, usually classified based on the asset class whose price changes are impacting the exposure in question. Common forms of asset class-based market risk include interest rate risk, exchange rate risk, commodity price risk (through input purchases or output sales), and equity price risk.

Delta is the risk that the value of an exposure will deteriorate as the price or value of some underlying risk factor changes, all else being equal. A bond is affected by changes in interest rates, so the interest rate is the risk factor. When interest rates rise, bond prices fall. In the bond world, this delta is called “duration.” Other examples of delta include the sensitivity of a forward purchase/sale of foreign exchange to a small change in the exchange rate, the sensitivity of a commodity delivery contract to the change in the underlying commodity price, and the variability of a futures or options contract on the S&P 500 stock index to a small change in the prices of any S&P 500 stocks.

Gamma is the risk that delta will change when the value of an underlying risk factor changes. It is sometimes referred to as “convexity risk” or “rate of change” risk. Returning to the bond example, bond prices fall as interest rates rise, but the amount of the price change depends on the level of interest rates. Large interest rate increases may cause larger bond price declines than small interest rate increases.

The risk that volatility changes in the underlying risk factor will cause a change in the value of an exposure goes by many names. Vega, lambda, kappa, and tau are among them. For purchased options (longs), declines in volatility pose the risk. Less volatility means there is a smaller chance that the option held will expire profitably. For options written (short), lower volatility increases the odds for profits by reducing the opportunities for unprofitable exercise against the short to occur.

Theta measures the risk to certain exposures due only to the passage of time. Insurance, for example, is an asset that “decays” or “wastes” over time. For every day that passes on an unused insurance policy, there is one less day for the insurance contract to become valuable.

Finally, rho is the risk that the interest rates which are used to discount future cash flows in present value calculations will change and impose unexpected losses on the firm. For many exposures, the discount rate is the borrowing or lending rate that corresponds to the maturity of the contract. For other contracts, such as swaps, a yield curve is used to discount cash flows, and hence any shifts in the level of any of several interest rates may affect cash flows.

Yet another market risk—correlation risk—is the risk of an unexpected change in the correlation of two factors affecting the value of a contract. We must be careful here to distinguish between basis risk, or correlation risk arising from the combination of a derivatives contract with another asset or portfolio, and correlation risk affecting a single asset held in isolation or in a portfolio.

Funding Risk
Funding risk occurs in the event that cash inflows and current balances are insufficient to cover cash outflow requirements, often necessitating costly asset liquidation to generate temporary cash inflows. Most firms, both financial and nonfinancial, have liquidity plans designed to manage funding risks.

The distinctions between pure funding risk and market risk are subtle, as the two are clearly related. Market risk can be viewed as the risk of changes in the value of a bundle of cash flows when adverse market events occur. But value is just defined as the discounted NPV of future cash flows. Funding risk is based on the risk of cash flows when they occur in time. For the purpose of comparing liquidity risk at one time to liquidity risk at another, discounting to an NPV serves no purpose. On the contrary, all that is relevant is cash balances per period. Market risk, by contrast, deals with cash flow risks in any period, because all future cash flows ultimately affect the current NPV of the asset or liability in question.

Market Liquidity Risk
Market liquidity risk is the risk that volatile markets will inhibit the liquidation of losing transactions and/or the establishment of new transactions to hedge existing market risk exposures. Suppose a firm has negotiated an agreement with a bank to purchase British pounds for Deutsche marks (Dmark) three months from now. If the British pound experiences a massive and rapid depreciation vis-à-vis the Dmark—as happened in September 1992 when the European Monetary System’s exchange rate mechanism imploded on “Black Wednesday”—the currency purchase agreement will decline rapidly in value.

The firm in this case may attempt to neutralize its original agreement or enter into an offsetting contract. If the agreement is left unhedged or the counterparty to any offsetting contract defaults, volatility may be so high that a new hedge cannot be initiated at a favorable price, even using liquid exchange-traded futures on pounds and Dmarks. The firm’s market risk is thus exacerbated by market liquidity risk.

Credit Risk
Credit risk is the risk of the actual or possible nonperformance by an obligor to the firm. Credit risk usually comes in four forms:
1. Presettlement credit risk arises from the potential for an obligor to default on a transaction prior to the initiation of the settlement of that transaction.
2. Settlement risk is specifically associated with the failure of a firm during the settlement window, or the time period between the confirmation of a transaction and the final settlement of that transaction.
3. Migration or downgrade risk is the risk that the increase in the market’s perception of a default at a firm causes a decline in the value of the claims issued by that firm.
4. Spread risk is the risk that deteriorations in general corporate credit quality will affect the claim issued by a given firm.

Settlement risk, by contrast, arises after the transaction has entered the settlement process and one party defaults.

Legal Risk
Legal risk is the risk that a firm will incur a loss if a contract it thought was enforceable actually is not. The Global Derivatives Study Group (1993) identified several sources of legal risk for innovative financial instruments that often are associated with risk management, including conflicts between oral contract formation and the statutes of frauds in certain countries and jurisdictions, the capacity of certain entities (e.g., municipalities) to enter into certain types of transactions, the enforceability of “close-out netting,” and the legality of financial instruments. In addition, unexpected changes in laws and regulations can expose firms to potential losses as well.

Legal risk is classified here as a financial risk because this particular incarnation of risk results in losses that usually are driven in size and economic importance by changes in market prices. A netting agreement that is unenforceable in insolvency, for example, could lead to cherry-picking losses whose total amounts are based on market price movements.



Perils, Accidents, and Hazards

A peril is a natural, man-made, or economic “situation” that can cause an unexpected loss for a firm, the size of which is usually not based on the realization of one or more financial variables. A peril thus is essentially a nonfinancial risk.

An accident is a specific negative event arising from a peril that gives rise to a loss and is usually considered “unintentional.”

A hazard is something that increases the probability of a peril-related loss occurring, whether intentional or not.

Consider the peril to a firm of having its employees sustain on-the-job injuries. A related accident would be the unintended opening of a valve on some storage tank at a firm. A hazard could be alcohol or drugs that make an employee more likely to open the value, the presence of corrosive chemicals in the tank that dissolve the valve seals, and the like.

Different types of perils that firms typically face in their business operations include the following[4]:
? Production—unexpected changes in the demand for products sold, increases in input costs, failures of marketing
? Operational—failures in processes, people, or systems
? Social—adverse changes in social policy (e.g., political incorrectness of a product sold), strained labor relations, changes in fashions and tastes, etc.
? Political—unexpected changes in government, nationalization of resources, war, etc.
? Legal—tort and product liability and other liabilities whose exposures are not driven by financial variables
? Physical—destruction or theft of assets in place, impairment of asset functionality, equipment or mechanical failure, chemical-related perils, energy-related perils
? Environmental—flood, fire, windstorm, hailstorm, earthquake, cyclone, etc.

Outreville (1998) provides some examples of hazards that increase the probability of loss for different perils:
? Human—fatigue, ingnorance, carelessness, smoking
? Environmental—weather, noise
? Mechanical—weight, stability, speed
? Energy—electrical, radiation
? Chemical—toxicity, flammability, combustability



Production Perils
Production-related perils cover any perils that threaten a firm’s ability to carry out its normal business activities as expected, usually resulting from changes to the supply or demand for the firm’s product or to the physical production process. Shocks to a firm’s cost or demand functions, for example, can precipitate a loss of value owing to production risks. Three other production-related perils include customer loss risk, supply chain risk, and reputation risk.

At the core of risks facing a business is the risk that the business loses its customers, either because a competitor attracts them away or because they no longer demand the products and services the firm is selling at the prices it is quoting. Customer loss risk thus encompasses pricing risk, or the risk that firms misestimate either the level or the structure of prices for their customers.

Many nonfinancial firms also face risks from adverse events that may occur at any point along a physical “supply chain” (the chain that connects inputs to the firm’s production process to its outputs). Problems may arise at any juncture. Consider, for example, a firm that grows wheat, mills it into flour, and exports the flour to bread makers around the world. Problems could arise at origination from disease, bad weather, insects, vandalism, or any number of other factors that prevent the crop from being grown and brought in according to schedule (both time and quantity). At the transformation stage, equipment breakdowns could occur, contamination of the grain is a possibility, and losses of product during transportation are a consideration. And so on. In short, the firm faces some form of inventory or product risk at every stage here.

A third major production-related peril faced by virtually all firms is the risk of a loss to their brand name capital or reputation that can translate into reduced revenues, increased expenses, and fewer customers—hence its classification as a type of production peril. Reputation risk can arise when a firm acts negligently or is simply perceived to act negligently—as Exxon was perceived following the Valdez, Alaska, oil disaster.

Reputation risk also can arise from poor public relations management of external crises, whether or not the crises are the direct fault of the company. A plane crash due to bad weather, for example, can still impose major adverse reputation effects on both the airline and the aircraft manufacturer if the public relations dimension of the disaster is not handled properly.

Finally, reputation risk can arise when a firm simply fails to honor its commitments. An insurance company that regularly tries to avoid paying out claims even when the claims are unambiguous and legitimate, for example, will quickly find itself short of customers.

Operational Perils
“the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events.”

Examples of losses that can be attributed to operational risk include failed securities trades, settlement errors in funds transfers, stolen or damaged physical assets, damages awarded in court proceedings against the firm, penalties and fines assessed by member associations or regulators, irrecoverable or erroneous funds and asset transfers, unbudgeted personnel costs, and negligence or fraud.

Operational perils also can sometimes be considered as a type of financial risk if the operational losses are driven by market, credit, or liquidity risks. The failure of Barings to catch the huge position buildup by rogue trader Nick Leeson was in some sense an operational risk management failure. It was a failure of processes (internal audit and control), people (Leeson was defrauding the firm and others), and systems (a consolidated global position-keeping system would have revealed Leeson’s rogue positions). But in the end, Barings went bust because Leeson’s positions went underwater as a result of their market risk. Operational risk management may have failed to catch the process, personnel, and systems problem, but market risk sank the firm.



Core versus Noncore Risks

The core risks facing a firm may be defined as those risks that the firm is in business to bear and manage so that it can earn returns in excess of the risk-free rate.

Noncore risks, by contrast, are risks to which a firm’s primary business exposes it but that the firm does not necessarily need to retain in order to engage in its primary business line.

The firm may well be exposed to noncore risks, but it may not wish to remain exposed to those risks. Core risks, by contrast, are those risks the firm is literally in business not to get rid of.

Core and noncore risks are sometimes today called “business” and “financial” risks, respectively.

Knight defined noncore risks as “risks,” or situations in which the randomness facing a firm can be expressed in terms of specific, numerical probabilities. These probabilities may be objective (as in a lottery) or subjective (as in a horse race), but they must be quantifiable. Because they can be quantified, they can be managed.

Unlike risk, Knight defined “uncertainty” as situations when a firm faces some randomness that cannot be expressed in terms of the probabilities of alternative outcomes. This was “core risk” in Knight’s eyes, or the risks about which only the firm in question had some perceived special insight. To Knight, uncertainty was the source of all major profits and losses to businesses. Lord J.M. Keynes agreed, choosing the term “animal spirits” to describe essentially the same phenomenon.

A major distinction between core and noncore risk—Knightian uncertainty and risk—is driven purely by information. Those factors about which a firm perceives itself as having some comparative informational advantage will be those factors on which the business concentrates for its core business cash flows. Risks about which the firm has comparatively less information will be those risks more likely to be hedged, diversified away, insured, or controlled in some other fashion.

The distinction between core and noncore risk clearly rests on a slippery slope. Not only does it vary from one firm to the next, but it also depends not on the quality of information the firm actually has but rather on the firm’s perceived comparative advantage in digesting that information. Perceptions, of course, can be wrong. Businesses fail, after all, with an almost comforting degree of regularity. Without business failures, one might tend to suspect the market is not working quite right. Accordingly, the preponderance of actual business failures clearly means that some firms thought they had a better handle on information than they did, whether that information concerns market demand for their products, their competitors, or their costs.

Retained versus Transferred Risks
A major purpose of distinguishing between risk—especially core versus noncore risks—is to help a firm make its retention decision.

The retained risk or retention of a firm is the agglomeration of risks—core and noncore—to which the firm is naturally exposed in the conduct of its business that the firm decides to bear rather than to shift to another market participant.

Transferred risk, by contrast, is any risk to which a firm is exposed that a firm decides it is not in the business of bearing and decides to transfer to another market participant.

The decision whether to retain or transfer a given risk is essentially a determination by the firm’s shareholders of whether they want to absorb any realized losses arising from the risk in question or whether they would prefer to have the equity holders of another firm absorb those losses. A core factor to firms in making this determination will, of course, be the benefit/cost trade-off—whether the benefit of transferring the risk is above the cost at the margin. The cost of risk transfer can include both the opportunity cost of forgone profits or positive returns, the pure transaction costs of the risk transfer, and/or the price that the firm may have to pay to induce the equity holders of another corporation to assume the risk the firm is trying to transfer away.


For more Information:
Risk Management, Risk Transfer, Financial Risks, Business Risks, Legal Risk

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