February 2011

Master of Business Administration-MBA Semester 4

MB0036 –Strategic Management and Business Policy - 3 Credits

Assignment Set- 2 (60 Marks)

Q 5. ROLE OF CFO (Chief Financial Officer)

TRADITIONAL ROLE OF CHIEF ACCOUNTANT

The
Chief Accountants used to perform several tasks which were preparing accounts, preparing budgets, operational reporting and interpreting, evaluating operating results, preparing income tax returns, establishing internal control procedures to safe-guard the companies assets.

TRANSITION FROM CHIEF ACCOUNTANT TO CHIEF FINANCIAL OFFICER

Due to increased governance requirement there arises a need to empower the chief accountant and to make him responsible by requiring him to sign the accounts. There comes the code of corporate governance, which makes the chief accountant powerful and more responsible. With the new role, Chief Accountant becomes Chief Financial Officer (CFO).

Appointment and Approval Requirement

The appointment, removal and remuneration terms and conditions of employment of the chief financial officer of a listed company shell be determined by the Chief Executive Officer with the approval of the Board of Directors.

Qualification Requirement

The qualification requirement is defined under the code of corporate governance that is the person appointed as the Chief Financial Officer must be Member of recognized body of professional accountants or
A graduate from a recognized university or equivalent, having at least 5 years experience in handling financial and corporate affairs of a listed company.

Attending Board Meetings.

The Chief Financial Officer of a listed company is required to attend the meeting of the board of directors.

IMPLICATION OF NEW RESPONSITBILITES

The new responsibilities apply to all Chief Financial Officers of Listed Companies, Insurance Companies, Banks and DFIs.Mostly the CFO presents the financial position relating to the period which has been over, and the period which has to come that is the financial position attained and the financial projection i.e. where the organization will be.

Responsibilities towards Board of Directors

The Chief Financial Officer is required to furnish necessary and classified information to the board of directors along with his analysis and suggestions as the Chief Financial Officer attends the board meetings, any issue with financial implications is being discussed, the person likely to be most in command of these implication is on the spot and immediately available for questions.

In order to strengthen and formalize corporate decision-making process, significant issues are required to be placed for the information, consideration and decision ofthe boards of directors by the CFO. These are:
• Annual business planes, cash flow projection, forecasts and long term planes.
• Budgets include capital, manpower and overhead budgets along with variance analyses.
• Quarterly operating results of the company as a whole and in terms of its operating divisions or business segments.
• Details of joint ventures or collaboration agreements or agreements with distributors, agents, etc.
• Default in payment of principal and/or interest, including penalties on late payments and other dues, to a creditor, bank or financial institution, or default in payment of public deposit.
• Failure to recover material amounts of loans, advances, and deposits made by the company, including trade debts and inter-corporate finances.
• Significant public or product liability claims likely to be made againstthe company, including any adverse judgment or order made on the conduct of the company.

Responsibilities towards Shareholders

The Chief Financial Officer is required to provide all the necessary data to be presented in the “Director’s Report”. For this purpose Chief Financial Officer must ensure the following.

• The financial statement, prepared by the management of company, present fairly its states of affairs, the results of its operation, cash flows and changes in equities.
• Proper books of accounts of the company have been maintained
• Appropriate accounting policies have been consistently applied in preparation in financial statements and accounting estimates are based on reasonable and prudent judgment.
• International accounting standards, as applicable in Pakistan, have been followed in preparation of financial statements and any departure there from has been adequatelydisclosed.
• The system of internal control is sound in design and has been effectively implemented and monitored.
• There are no significant doubts upon the companies’ ability to continue as going concern.
• There has been no material departure from the best practice of corporate governance as detailed in the listing regulations.

Internal And External Reporting

Chief Financial Officer now has extensive responsibilities for internal and external reporting. All the information required for decision-making by the Board of Directors and Chief Executive is processed and furnished by the Chief Financial Officer. Apart from this, external reporting requirement is fulfilled by Chief Financial Officer, the accounts and financial statements are signed by the Chief Financial Officer before
they are sent to concerned authorities.

CCG requires that the listed companies submit their quarterly accounts to the shareholders within one month of the close of the first and third quarter of year of account.

The CCG does not prescribe the time for submitting half yearly accounts to the shareholders. Here we can refer to section 245 of companies ordinance 1984 for this purpose, which requires half yearly accounts to be submitted within two months of the close of first half. The CCG requires a limited review of half yearly accounts by external auditor.

Annual audited accounts are now required to be submitted within four months of the close of financial year.

The Securities and Exchange Commission of Pakistan is exercising strict vigilance to ensure compliance of 4th and 5th schedule of the Companies Ordinance, 1984 and timely submission of accounts by companies. It has recently imposed penalties on Directors of nine listed companies who failed to prepare and circulate the quarterly accounts. Furthermore, fines have been imposed on chief executives.

CONCLUSION

The performance of any organization is reflected by the financial statements. Any ambiguity if remains there, makes the reflection of the performance doubtful. Therefore, the role of CFO becomes very important as he controls the reflection of performance, which is reported to different authorities and the organization is assessed by them, and they must perform their job with professional competency and integrity, so that the financial statements give credible information to its users. The code of corporate governance provides the guidelines and opportunity to do this.

Q. 6 Give a note on strategies that improve sales.
---Strategies to Improve Sales

There are three alternatives to improve the sales performance of a business unit, to fill the gap between actual sales and targeted sales:

a) Intensive Growth:
It refers to the process of identifying opportunities to achieve further growth within the company’s current businesses. To achieve intensive growth, the management should first evaluate the available opportunities to improve the performance of its existing current businesses.
It may find three options:
· To penetrate into existing markets
· To develop new markets
· To develop new products
At times, it may be possible to gain more market share with the current products in their current markets through a market penetration strategy. For instance, SONY introduced TV sets with Trinitron picture tubes into the market in 1996 priced at a premium of Rs.10,000 and above over the market through a niche market capture strategy. They gradually lowered the prices to market levels. However, it also simultaneously launched higher-end products (high-technology products) to maintain its global image as a technology leader. By lowering the prices of TVs with Trinitron picture tubes, the company could successfully penetrate into the markets to add new customers to its customer base.
Market Development Strategy is to explore the possibility to find or develop new markets for its current products (from the northern region to the eastern region etc.). Most multinational companies have been entering Indian markets with this strategy, to develop markets globally. However, care should be taken to ensure that these new markets are not low density or saturated markets, which could lead to price pressures.
Product Development Strategy involves consideration of new products of potential interest to its current markets (e.g. Gramaphone Records to Musical Productions to CDs)– as part of a Diversification strategy.

b) Integrative Growth:
It refers to the process of identifying opportunities to develop or acquire businesses that are related to the company’s current businesses. More often, the business processes have to be integrated for linear growth in the profits. The corporate plan may be designed to undertake backward, forward or horizontal integration within the industry.
If a company operating in music systems takes over the manufacturing business of its plastic material supplier, it would be able to gain more control over the market or generate more profit. (Backward Integration)
Alternatively, if this company acquires some of its most profitably operating intermediaries such as wholesalers or retailers, it is forward integration. If the company legally takes over or acquires the business of any of its leading competitors, it is called horizontal integration (however, if this competitor is weak, it might be counter-productive due to dilution of brand image).

c) Diversification Growth:
It refers to the process of identifying opportunities to develop or acquire businesses that are not related to the company’s current businesses. This makes sense when such opportunities outside the present businesses are identified with attractive returns and that industry has business strengths to be successful. In most cases, this is planned with new products that have technological or marketing synergies with existing businesses to cater to a different group of customers (Concentric Diversification).
A printing press might shift over to offset printing with computerised content generation to appeal to higher-end customers and also add new application areas ( Horizontal Diversification ) – or even sell stationery.
Alternatively, the company might choose new businesses that have nothing to do with the current technology, products or markets (Conglomerate Diversification).

Q.1 Explain the importance of licensing and assigning IP rights.
A licence is a grant of permission made by the patent owner to another to exercise any specified rights as agreed. Licensing is a good way for an owner to benefit from their work as they retain ownership of the patented invention while granting permission to others to use it and gaining benefits, such as financial royalties, from that use. However, it normally requires the owner of the invention to invest time and resources in monitoring the licensed use, and in maintaining and enforcing the underlying IP right.The patent right normally includes the right to exclude others from making, using, selling or importing the patented product, and similar rights concerning patented processes. The license can therefore cover the use of the patented invention in many different ways.
Licenses are normally confined to a particular geographical area – typically, the jurisdiction in which particular IP rights have effect. You can grant different exclusive licences for different territories at the same time. For example, a patent owner can grant an exclusive licence to make and sell their patented invention in Malaysia for the term of the patent, and grant a separate exclusive licence to manufacture and sell their patented invention in India for the term of the patent. Separate licences can be granted for different ways of using the same technology.
An assignment of intellectual property rights is the sale of a patent right, or a share of the patent.
It should be remembered that the person who makes an invention can be different to the person who owns the patent rights in that invention. If an inventor assigns their patent rights to someone else they no longer own those rights. Indeed, they can be in infringement of the patent right if they continue to use it.
Patent licences and assignments of patent rights do not have to cover all patent rights together.
Licences are often limited to specific rights, territories and time periods. For example, a patent owner could exclusively licence only their importation right to a company for the territory of Indonesia for 12 months. If an inventor owns patents on the same invention in five different countries, they could assign (or sell) these patents to five different owners in each of those countries. Portions of a patent right can also be assigned – so that in order to finance your invention, you might choose to sell a half-share to a commercial partner.
If you assign your rights, you normally lose any possibility of further licensing or commercially exploiting your intellectual property rights. Therefore, the amount you charge for an assignment is usually considerably higher than the royalty fee you would charge for a patent licence. When assigning the rights, you might seek to negotiate a licence from the new owner to ensure that you can continue to use your invention. For instance, you might negotiate an arrangement that gives you licence to use the patented invention in the event that you come up with an improvement on your original invention and this falls within the scope of the assigned patent. Equally, the new owner of the assigned patent might want to get access to your subsequent improvements on the invention.

Q.2 Assess the need for Corporate Social Responsibility with supporting instances.
Corporate social responsibility (CSR) is also known as corporate citizenship, corporate philanthropy, corporate giving, corporate community involvement, community relations, community affairs, community development, corporate responsibility, global citizenship, and corporate social marketing.
Corporate social responsibility has stepped boldly and unabashedly into the limelight in the 21st century, with many firms professing an undying love for CSR. But has it always been so? Scholars note that for many years, the concept of social responsibility has been the object of intense ideologically influenced debates:
Antagonists have asserted that the business of business should remain business — simply making profits; while protagonists have spoken of the firm’s responsibility to maintain an equitable and working balance among the claims of the various directly interested groups — stockholders, employees, customers and the public at large.
It is now widely accepted that corporate governance and its CSR component has moved from the profit-centred model to the socially responsible model, a concept referring to the way in which companies exercise responsibility and accountability for the economic, social and environmental impact of their business decisions and behaviours.
Consequently, Henry Ford can boldly assert that a good company delivers excellent products and services, but a great company does all that and also strives to make the world a better place.
Why CSR?
CSR has become increasingly important because today’s heightened interest in the proper role of business in society has been promoted by increased sensitivity to and awareness of environmental and ethical issues.
Issues such as environmental damage, improper treatment of workers, and faulty production leading to customer inconvenience or danger are being highlighted ; elsewhere, investors and investment fund managers have began to take account of a firm’s CSR policy in making investment decisions; some consumers have become increasingly sensitive to the CSR programmes of the firms from which they buy their goods and services.
These trends have contributed to the pressure on companies to operate in an economically, socially and environmentally sustainable way.
Do firms gain from CSR?
Although some opponents have lambasted CSR practice for being mere ‘greenwash’ or an exercise in publicity, a great volume of CSR research also concludes that companies have experienced a range of bottom-line benefits including: increased sales and market share; strengthened brand positioning; enhanced corporate image and clout; increased ability to attract, motivate and retain employees; decreased operating costs; and increased appeal to investors and financial analysts.
Government involvement and role in CSR
The Government’s involvement in CSR seems to rest mainly with the legal dimension – which enjoins businesses to obey the law. However, there is no comprehensive CSR policy or law.
There are a variety of policies, laws, practices and initiatives that together provide the CSR framework; the Government seeks to promote CSR by putting in place legislation that defines minimum standards for business performance. Examples include constitutional provisions, local government laws and requirements for environmental impact assessments contained in an Act of Parliament.
The Government also facilitates CSR by providing incentives to companies undertaking activities that promote the CSR agenda and drive social and environmental improvements. The role of the Government here is basically catalytic, secondary, or supportive.

Small businesses often face a variety of problems related to their size. A frequent cause of bankruptcy is undercapitalization. This is often a result of poor planning rather than economic conditions - it is common rule of thumb that the entrepreneur should have access to a sum of money at least equal to the projected revenue for the first year of business in addition to his anticipated expenses. For example, if the prospective owner thinks that he will generate $100,000 in revenues in the first year with $150,000 in start-up expenses, then he should have no less than $250,000 available. Failure to provide this level of funding for the company could leave the owner liable for all of the company's debt should he end up in bankruptcy court, under the theory of undercapitalization.
In addition to ensuring that the business has enough capital, the small business owner must also be mindful of contribution margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the contribution margin equals fixed costs. When they first start out, many small business owners underprice their products to a point where even at their maximum capacity, it would be impossible to break even. Cost controls or price increases often resolve this problem.
In the United States, some of the largest concerns of small business owners are insurance costs (such as liability and health), rising energy costs and taxes. In the United Kingdom and Australia, small business owners tend to be more concerned with excessive governmental red tape.[5]
Another problem for many small businesses is termed the 'Entrepreneurial Myth' or E-Myth. The mythic assumption is that an expert in a given technical field will also be expert at running that kind of business. Additional business management skills are needed to keep a business running smoothly.
Still another problem for many small businesses is the capacity of much larger businesses to influence or sometimes determine their chances for success.
Being a successful business person, one has to go through mistakes and problems and try to learn from them. Business people know and realize that a mistake is only really a mistake if you don't learn from it, which will make you prone to doing it again. Otherwise when you learn from it, it makes you a better business man. You will never forget what you learned from a mistake and how it made you a better person

Q.4. Are decision support systems beneficial in strategic management and business policies? Justify your answer.
A decision system has great impact on strategic management and business policies. It forces the management to rationalize the depreciation, inventory and inflation policies. It warns the management against impending crises and problems in the company. It specially helps in following areas:
· The management knows exactly how much credit it could take, for how long (for which maturities) and in which interest rate. It has been proven that without proper feedback, managers tend to take too much credit and burden the cash flow of their companies.
· A decision system allows for careful financial planning and tax planning. Profits go up, non cash outlays are controlled, tax liabilities are minimized and cash flows are maintained positive throughout.
As a result of all the above effects, the value of the company grows and its shares appreciate.
The decision system is an integral part of financial management in the West. It is completely compatible with western accounting methods and derives all the data that it needs from information extant in the company.
So, the establishment of a decision system does not hinder the functioning of the company in any way and does not interfere with the authority and functioning of the financial department.
Decision Support Systems cost as little as 20,000 USD (all included: software, hardware, and training). They are one of the best investments that a firm can make.