Workshop on Business/Management Studies

1. Workshop on Business/Management Studies Last Updated: June 6, 2002 Instructor: Hirao KOJIMA *Doctor of Economics, Kyushu University, Fukuoka, Japan, 1995. *Doctoral Student, UCLA, Graduate School of Management (Finance Department), Los Angeles, USA, 1979-1982. *Master of Business Administration (M.B.A.), Carnegie Mellon University, Pittsburgh, USA, 1979.

2. Corporation in a Society/Environment • Society/Environment, surrounding a corporation • Corporate system: • Input -> Manufacturing Process -> Output -> Customers/Stockholders, etc. • Input here includes managerial resources (see the next slide), etc.

3. Managerial Resources of a Firm • Three Tangible Resources • Physical: • Buildings, etc. • Financial: • Cash, etc. • Human: • Workers, Managers • Intangible Resources: Informational Resources • Marketing Know-how • Research and Development Capabilities, etc.

4. Functions/Departments of a Manufacturing/Nonmanufacturing Firm • Marketing • Research and Development • Production • Accounting and Finance • Personnel • Information Technology/System • Legalities • Note: We’ll proceed from here roughly in this order.

5. Marketing Management <1>: What is Marketing? • Bidirectional information flows in a marketing system: • Market information from market to company: • Very initial information flow • Market research to discover unmet needs in the market • Product information from company to market: • Subsequent information flow • Sales promotion and advertising of products newly manufactured to meet the needs • Application: Convenience for who? • The convenience store market

6. Marketing Management <2>: Marketing Analysis - The 3C’s • Before research and development of a new product, a company must analyse three factors in its marketing environment: • Customers(/Consumers/Stockholders): Three questions to investigate are … • Competitors in all the related industries: Three main areas to study are … • Company itself: Three major items crucial for the internal analysis are … • A rigid analysis should lead to a better understanding of the SWOT (strengths, weaknesses, opportunities, threats). • Application: PC war • The personal computer industry

7. Marketing Management <3>: Segmentation, Targeting, Positioning • Segmenting a maket into several customer groups, based on: • Demographic/geographic/lifestyle-related differences • Product-related differences • Target marketing: Three factors to consider when choosing and targeting one or more of the segments are … • Product positioning : Three factors to consider when positioning a product are … • Positioning map for PC market • Application: Fly me! • The airline industry

8. Marketing Management <4a>: The Marketing Mix - The 4P’s • A company’s marketing program consists of the marketing mix of four elements (= 4P’s ): • Product • Place • Promotion • Price • Note that cutomrer needs are in the center surrounded by all these 4P’s: See the diagram on p.62 of the text.

9. Marketing Management <4b>: The Marketing Mix - The 4P’s • Product: A set of benefits provided to the customers • Tangible features: • Physical item • Packaging • Intangible features: • Customer service • Company reputation • Brand name • Place: Distribution channels • Wholesale channel: Company -> wholesalers -> Retailers • Retail channel: Retailers -> Customers • Direct channel (Internet, etc.): Company -> Customers

10. Marketing Management <4c>: The Marketing Mix - The 4P’s • Promotion • Objective • To increase the awareness of the product and create interest in purchasing it • Advertising (see “Marketing Management <1>: What is Marketing?”) • Sales promotion (same as above) • Public relations • Personal selling

11. Marketing Management <4d>: The Marketing Mix - The 4P’s • Price • The pricing strategy takes into account: • A company’s goals • The actions of competitors • Examples of pricing strategies • Penetration pricing strategy (low initial price leading to higher sales) for: • Company’s goal=To establish a strong market share quickly • Skimming pricing strategy (high initial price leading to higher profits) for: • Company’s goal=To maximize profits in the short-run • Application: Let’s go tropical! • The marketing mix of a package tour to a tropical island targeting young single working women

12. Research and Development • After analysing those 3C’s in its marketing environment, the company starts working on the research and development of new product(s) that would meet customer needs. • 3C’s = Customers, competitors, company • See “Marketing Management <2>: Marketing Analysis - The 3C’s.”

13. Production Management • Once a product has been newly developed that will most likely satisfy customers’ unmet needs, the company moves on to its production. • Technical/Quantitative Features of Production Mgmt.: • Japanese Style of Manufacturing Process • Just-in-time method (Kanban method) • Quality Control (Kaizen) • Computerized Manufacturing System • Production Abroad (For outsourcing abroad, see p.38 of the text, for instance)

14. Financial Management: Accounting and Finance <1> • Three crucial pieces of financial information • The income statement = The profit and loss (P/L) statement • The balance sheet (BS) • The cash flow statement (CF) • P/L = A set of flow data = profit, revenue generated and expesnses incurred for a certain period of time • Profit = Sales Revenue - Costs • To be maximized (for stockholders) • BS = A set of stock data = assets, etc. accumulated until a given point in time • Assets=Liabilities + Owners’ Equity • Assets are financed through “debt” and ”equity.” • Liabilities: Debt capital • Owners’ Equity: Equity capital • CF (See <4>.)

15. Financial Management: Accounting and Finance <2> • P/L • What does it look like? • Sales • Expenses • Four levels of profit • Gross profit • Operating profit • Ordinary profit • Net profit • Example(s) • Matsushita • Application: Not all profits are created equal! • What is the most important profit number?

16. Financial Management: Accounting and Finance <3> • BS • What does it look like? • Assets • Financed through “debt” and ”equity.” • Liabilities • Owners’ equity • Example(s) • Matsushita • Application: Is your company healthy? • The company should be liquid enough: • How liquid? Measure it by (net) working capital = current assets - current liabilities. • The company should not rely too much on debt to finance its assets: Its leverage shold be low enough. • In other words, equity ratio should be high enough to minimize the default risk!

17. Financial Management: Accounting and Finance <4a> • The cash flow statement • A list of the cash inflows and outflows observed for a certain length of period • Cash inflows=Decrease in assets; increase in liabilities or equity • Cash outflows= Increase in assets; decrease in liabilities or equity • Why bother with cash flow?? How much cash a company has determines its repayment ability, i.e., its default/bankruptcy risk. • Divided into 3 sections: operating; investting; financing • 1st section: Cash inflows and outflows that occur in the company’s operating activities • Inflows=Net profit; depreciation (=non-cash expense item); decrease in inventory; increase in accounts payable; etc. • Outflows= Increase in accounts receivable; decrease in current portion of long-term debt; etc.

18. Financial Management: Accounting and Finance <4b> • 2nd section: Those that occur in the investting activities • Outflows=Purchases of property, plant and equipment (PP&E); acquisitions of other businesses; etc. • 3rd section: Those that occur in the financing activities • Inflows=Sale of stock; etc. • Outflows=Decrease in long-term debt; dividend payment; etc. • What does it look like? See p.116 of the text. • Example(s) • Matsushita • Application: Cash flows -- In and out! • “Profit and yet negative cash flow,” “Loss and yet positive cash flow”: This is partly due to non-cash expense items( like depreciation).

19. Financial Management: Accounting and Finance <5a> • The time value of money for investment decisions • Thinking of investing money in a project (like purchasing a new equipment), a company expects a cash flow from the project during a future period of time (like over the next 10 years). • Investment decision=Should the firm invest money in the project? • The decision requires computing the time value of money, since a dollar tomorrow is worth less than a dollar today. • How to make investment decisions: Three things to take into account • Initial cost=Cash to be paid today for the new equipment; costs associated with starting out new hiring, training ,etc. • Future cash flow=A series of cash inflow/outflow at evry future point in time • Discount rate (to discount the value of future cash flow)

20. Financial Management: Accounting and Finance <5b> • How to make investment decisions <a>: Net present value (NPV) method • NPV = Discounted value of future cash flow - Initial cost • If NPV > [<] 0, then the project is accepted [rejected]. • How to make investment decisions <b>: • Internal rate of return (IRR) method: To compute the discount rate that lead to a zero NPV. • Payback period method: To compute the number of periods required to revover the initial cost of the project. • Application: Back to the present! • An example of NPV method

21. Personnel/Organizational Management: Human Resources and Organization <1> • Corporate culture • Recognize and create strategies to deal with cross-country or inter-firm differences with respect to: • Degree of risk-taking:Risk-lovers; risk-averters; risk-neutralists • Speed of decision-making: Fast (risk-taking); slow (risk-averse) • How to delegate authority: Based on ability?; seniority? • Application: Mission completed • Imagine you’re a Japanese employee of a company that has been recently acquired by an American company. What is its corporate culture like?

22. Personnel/Organizational Management: Human Resources and Organization <2> • Performance-based system (= Merit system) • Seniority system versus performance-based system • Pros and cons (advantages and disadvantages) of performance-based system are … • Application: A mixed bag? • While many Japanese companies are now moving more towards a performance-based system, some are instituting a hybrid (performance/seniority) system to gradually introduce change into the firm. • Such a hybrid system is difficult to implement and maintain, though: Confusion and conflict.

23. Personnel/Organizational Management: Human Resources and Organization <3> • Discrimination in the workplace regarding: • Sex • Age • Race • Disability: The disabled (with physical or mental disabilities) • Drawbacks of discrimination are …; how to prevent it includes … • Application: Illegal and expensive! • “Working to alleviate (=ease) discrimination throughout the organization makes good business sense.”

24. Personnel/Organizational Management: Human Resources and Organization <4> • Businessethics • Ethical dilemmas: To choose between: • Doing what is morally right (=operating within the rule of ethics) • Versus doing what is expedient (=operating within the rule of law) • expedient=useful in a particular situation, but sometimes not morally acceptable • Two key principles for companies to be ehtical: Transparency and accountability (Be responsible for the stakeholders! -- See Slide “Innovative Vision <3a>: Corporate Governance.”) • Making secretive decisions behind closed doors -> Less transparent • Symbolic resignation -> Less accountable for illegal or unethical actions • Application: Doing the “right thing” • Is it profitable to be ethical in business?: Short run vs long run.

25. Strategic Management: Strategy <1> • Industry analysis • Five basic forces that, combined together, determine both the profit potendial of an industry as well as the stragey of a company in that industry: • If you are a supplier, your bargaining power is strong if …see p.222. • If you are a buyer, your bargaining power is strong if …see p.222. • Threat of new entrants: Barriers to entry include …see p.224. • Threat of substitute products: Mobile phones with Internet capability vs portable PCs …see p.224. • Excisting competition in the industry is keen if …see p.224. • Application: PC war--A second look • Five forces at work in the personal computer industry are …

26. Strategic Management: Strategy <2> • Competitive advantage • Establish a clear point of “differentiation” between your company and the competitor for strategic positioning (=toposition your company in a unique or different way from your competitors. (See “Positioning Map” on p.46.) • Differentiation with regard to: • Brand image • Unique features • Proprietary technology (the one which is developed and used solely by a company which can legally do so and whose name is attached to the technology) • Superior customer service • Product/customer niche: For niche, see p.30. • Competitive advantage must be sustainable for it to be successful in the long run. • Sustainability = In the long term, the competitors should find it difficult to copy you. (Otherwise, competitive advantage would be lost after a while.) • Application: Going direct • Direct from company to customers: See p.60, too. • Direct vs traditional (=indirect) channels: Pricing conflicts, etc.

27. Strategic Management: Strategy <3> • Global strategies: Two key questions to be addressed • Which foreign markets should we enter? For example, what would induce you to enter the Chinese market rather than the German market? Consider: • Geographic/psychic proximity • Market potential • Competitive advantage • Risk • How should we enter the markets? • Exporting • Licensing-in, -out (technology transfer)/joint venture (NUMMI in US, 1983=Toyota and GM) • Direct investment • Establishing a manufacturing/marketing subsidiary(ies) abroad • Adaptation of the marketing mix (see pp.57-71) to the local (foreign) market may be needed. • Application: Growing “fast” • Three reasons for successful business in Japan by the Western fast-food companies are …

28. Strategic Management: Strategy <4a> • Diversificaiton/synergy: Three questions to be addressed • Is the targeted industry attractive enough? • Conduct the detailed industry analysis to study those five basic forces that, combined together, determine both the profit potendial of an industry as well as the stragey of a company in that industry. See pp.222-224. • Is the cost of entry reasonable? • Cost of entry includes • Initial start-up costs • First few years’s working capital/operating losses (working capital=net w.c.= p.106, operationg loss=p.80) • Ironically: Higher cost of entry => more attractive industry

29. Strategic Management: Strategy <4b> • Diversificaiton/synergy: • Is the company better off as a result of the diversificaiton? • Is there a synergy effect? Diversification => Reduced costs? Improved efficiencies? • Consider an external diversifcation in which firm A acquires an outside firm B), would it be true that Value of Firm A + Value of Firm B < Value of Firm Diversified? • Two basic methods of diversificaiton • Internal diversification within the company: Costly and time-consuming. • External diversifcation = Acquiring an outside firm: Results are quickly obtained, but corporate- culture problems arise. • Application: Hard, soft orboth? • Synergy between electronics (hardware) and entertainment (software)?: Sony acquired CBS Redords (1988), Columbia Pictures (1989); Matsushita MCA (1990).

30. Innovative Vision <1a>: IT and Business (IT Management) • Direct channels (see ps. 60, 248) • Online selling: B2C (business to customer) application of the Internet • Prices fall; products may be customized to meet customer needs. • B2C e-business (by UCLA Anderson’s alumni): Online university textbook sales site=http://www.bigwords.com/; wine auctions=http://www.winebid.com/ • Luxury-type products, however, are better suited for traditional retail channels: Quality comes first.

31. Innovative Vision <1b>: IT and Business (IT Management) • Online bidding for supplier contracts: B2B (business to business) application of the Internet • The network of available suppliers is expanded from a local to a global basis. • B2B e-business (by UCLA Anderson’s alumni): Global business consulting (Pricewaterhouse-Coopers)=http://www.pwcglobal.com/; Web-centric language services=http://www.stanleymaria.com/ • Pros and cons of the Internet strategy: p.294 of the text • Application: Cyber shopping • Most successful online ventures tend to be service-oriented or commodity-based. • Customers enjoying cyber shopping are more price-sensitive (than traditional shoppers).

32. Innovative Vision <2>: Entrepreneurship • Successful entrepreneurs in the past: • Edison, Matushita (http://www.matsushita.co.jp/corp/company/person/en/index.html), Ibuka, Morita, etc. • Entrepreneurial traits: What makes for a successful entrepreneur? • Risk-takers; Thinking outside of the box; being unconventional and innovative • Nurturing entrepreneurship • A societal focus is needed on rewarding high achievers and encouraging independent thinkers. • At schools; performance-based reward system at companies. • Harold Price Center for Entrepreneurial Studies (at UCLA Anderson)=http://www.anderson.ucla.edu/research/esc/ • MBA course “Corporate Entrepreneurship”=http://www.anderson.ucla.edu/research/cmie/track/mgmt_295c.html • Application: Can you judge a book by its cover?

33. Innovative Vision<3a>: Corporate Governance • Q1=Who owns the company? Q2=Who controls the company? • Japan: • A1=shareholders. (Recall that “Owners’ Equity” is equivalent to “Stockholders’ Equity” in the balance sheet – see p.98 of the text.) • A2=managers • Management’s objective = NOT really to maximize shareholders’ (short-term) wealth, but rather to continue to grow (=expand the market share) over a long period of time, with short-run profitability being most likely sacrificed for long-run growth. • Western nations: A1&A2=shareholders. That is: • Ownership = control • Management’s objective = To maximize shareholders’ (short-term) wealth • Strategy tends to be formulated on a short-term basis: Qurterly profit projections are more important than long-term (like 5-year or longer) prosperity

34. Innovative Vision<3b>: Corporate Governance • Shareholders vs. Stakeholders • Stakeholders = Any group that is in some way affected by the company’s decisions: • The company employees, customers, suppliers, the people who live in the community, etc. • Board of Directors • New board members are elected by the shareholders at the annual shareholders meeting. • The board has the authority to make management changes as they see needed. • Made up, idieally, of key individuals from “outside” the industry. One or two “inside” management members like the CEO or president of the company are on the board. • Application: Open sesame! • Business ethical responsibility and globalization both most likely force Japanese boards to open up.

35. References • Text of the Workshop: 英語で学ぶMBAベーシックス＝Learning MBA Basics in English (March 2002, NHK): 藤井正嗣，リチャード・シーハン. • “Business Ethics – Not an Oxymoron” (UCLA Anderson Assets, Spring 2002). • Trends in Japanese Management (2001, Palgrave): T. Kono and S. Clegg. • Business Word Power Simply 400 (March 2002, NHK): 増澤史子. • 最新英和経済ビジネス用語辞典（1997, 春秋社）: 長谷川啓之. • 和英経済キーワード事典（1999, 研究社）: 日本経済新聞社英文グループ.

36. “Business Administration” vs “Management” • Business Administration • Administration of profit-oriented organizaitons • Management • Management/Administration of either profit- or non-profit-oriented organizaitons • Public administration, art management, etc.

37. Undergraduate/Graduate Business Programs Abroad • Hong Kong • Hong Kong Universtity of Science and Technology • U.S.A. • Carnegie Mellon University • France • Bordeuax Business School

38. Firms in an Economic Perspective • What is a Firm? • A Microeconomic View by R. H. Corse, “The Nature of the Firm,” Economica, November, 1937) • Managerial Economics: An Economic Analysis of Corporate Decision-making