BRAND EQUITY
is the value that customers and prospects perceive in a brand. It is measured based on how much trust a customer has in the brand. The value of a company's brand equity can be calculated by comparing the expected future revenue from the branded product with the expected future revenue from an equivalent non-branded product. The difference, usually profit, is how much customers trust the brand, and are willing to pay above and beyond the price for other competitive brands with lower value perceptions. This calculation is at best an approximation. This value can comprise both tangible, functional attributes (e.g. twice the cleaning power or half the fat) and intangible, emotional attributes (e.g. The brand for people with style and good taste).
COMPONENTS OF BRAND EQUITY
BRAND LOYALTY
BRAND AWARENESS
PERCEIVED QUALITY
BRAND ASSOCIATIONS
OTHER PROPRIETARY BRAND ASSETS



Positivity

Brand equity cannot be negative. Positive brand equity is created by effective marketing - advertising, PR and promotion in all forms, and the ability of the brand's performance to consistently maintain customer relationships -- trust.
The greater a company's brand equity, the greater the probability that the company will use a family branding strategy rather than an individual branding strategy. This is because family branding allows them to leverage the equity accumulated in the core brand.


Brand energy

is a concept that links together the ideas that the brand is experiential; that it is not just about the experiences of customers/potential customers but all stakeholders; and that businesses are essentially more about creating value through creating meaningful experiences than generating profit. Economic value comes from businesses’ transactions between people whether they be customers, employees, suppliers or other stakeholders. For such value to be created people first have to have positive associations with the business and/or its products and services and be energised to behave positively towards them—hence brand energy. It has been defined as "The energy that flows throughout the system that links businesses and all their stakeholders and which is manifested in the way these stakeholders think, feel and behave towards the business and its products or services."


Attitude Branding

Attitude branding is the choice to represent a feeling, which is not necessarily connected with the product or consumption of the product at all. Marketing labeled as attitude branding includes that of Nike, Starbucks, The Body Shop, Safeway, and Apple Inc.
"A great brand raises the bar – it adds a greater sense of purpose to the experience, whether it's the challenge to do your best in sports and fitness, or the affirmation that the cup of coffee you're drinking really matters." — Howard Schultz (CEO, Starbucks Corp.)


Brand monopoly

In economic terms the "brand" is a device to create a monopoly—or at least some form of "imperfect competition"—so that the brand owner can obtain some of the benefits which accrue to a monopoly, particularly those related to decreased price competition. In this context, most "branding" is established by promotional means. There is also a legal dimension, for it is essential that the brand names and trademarks are protected by all means available. The monopoly may also be extended, or even created, by patent, copyright, trade secret (e.g. secret recipe), and other sui generis intellectual property regimes (e.g.: Plant Varieties Act, Design Act).
In all these contexts, retailers' "own label" brands can be just as powerful. The "brand", whatever its derivation, is a very important investment for any organization. RHM (Rank Hovis McDougall), for example, have valued their international brands at anything up to twenty times their annual earnings. Often, especially in the industrial sector, it is just the company's name which is promoted (leading to one of the most powerful statements of "branding"; the saying, before the company's downgrading, "No-one ever got fired for buying IBM").


Brand extension

An existing strong brand name can be used as a vehicle for new or modified products; for example, many fashion and designer companies extended brands into fragrances, shoes and accessories, home textile, home decor, luggage, (sun-) glasses, furniture, hotels, etc. Mars extended its brand to ice cream, Caterpillar to shoes and watches, Michelin to a restaurant guide, Adidas and Puma to personal hygiene.
There is a difference between brand extension and line extension. When Coca-Cola launched "Diet Coke" and "Cherry Coke" they stayed within the originating product category: non-alcoholic carbonated beverages. Procter & Gamble (P&G) did likewise extending its strong lines (such as Fairy Soap) into neighboring products (Fairy Liquid and Fairy Automatic) within the same category, dish washing detergents.


Multiple brands

In a market fragmented with many brands, a supplier can choose to launch new brands apparently competing with its own, extant strong brand (and often with an identical product), simply to obtain a greater share of the market that would go to minor brands. The rationale is that having 3 out of 12 brands in such a market will give garner a greater, overall share than having 1 out of 10 (even if much of the share of these new brands is taken from the existing one). In its most extreme manifestation, a supplier pioneering a new market which it believes will be particularly attractive may choose immediately to launch a second brand in competition with its first, in order to pre-empt others entering the market.
Individual brand names naturally allow greater flexibility by permitting a variety of different products, of differing quality, to be sold without confusing the consumer's perception of what business the company is in or diluting higher quality products.
Once again, Procter & Gamble is a leading exponent of this philosophy, running as many as ten detergent brands in the US market. This also increases the total number of "facings" it receives on supermarket shelves. Sara Lee, on the other hand, uses it to keep the very different parts of the business separate—from Sara Lee cakes through Kiwi polishes to L'Eggs pantyhose. In the hotel business, Marriott uses the name Fairfield Inns for its budget chain (and Ramada uses Rodeway for its own cheaper hotels).
Cannibalization is a particular problem of a "multibrand" approach, in which the new brand takes business away from an established one which the organization also owns. This may be acceptable (indeed to be expected) if there is a net gain overall. Alternatively, it may be the price the organization is willing to pay for shifting its position in the market; the new product being one stage in this process.
Abercrombie & Fitch is a multi-brands company, rolling out Lifestyle Brands.


Small business brands

Some people argue that it is not possible to brand a small business. However, many small businesses have become very successful due to branding. For example, Starbucks used almost no advertising, yet over a period of ten years developed such a strong brand that the company expanded from one shop to hundreds.


Own (Private Label) brands and generics

With the emergence of strong retailers, the "own brand", the retailer's own branded product (or service), emerged as a major factor in the marketplace. Where the retailer has a particularly strong identity, such as, in the UK, Marks & Spencer in clothing, this "own brand" may be able to compete against even the strongest brand leaders, and may dominate those markets which are not otherwise strongly branded. There was a fear that such "own brands" might displace all other brands (as they have done in Marks & Spencer outlets), but the evidence is that—at least in supermarkets and department stores—consumers generally expect to see on display something over 50 per cent (and preferably over 60 per cent) of brands other than those of the retailer. Indeed, even the strongest own brands in the United Kingdom rarely achieve better than third place in the overall market. In the US, Target has "own" brands of "Market Pantry" and "Archer Farms" each with unique packaging and placement.
The strength of the retailers has, perhaps, been seen more in the pressure they have been able to exert on the owners of even the strongest brands (and in particular on the owners of the weaker third and fourth brands). Relationship marketing has been applied most often to meet the wishes of such large customers (and indeed has been demanded by them as recognition of their buying power). Some of the more active marketers have now also switched to 'category marketing'—in which they take into account all the needs of a retailer in a product category rather than more narrowly focusing on their own brand.
At the same time, generic (that is, effectively unbranded goods) have also emerged. These made a positive virtue of saving the cost of almost all marketing activities; emphasizing the lack of advertising and, especially, the plain packaging (which was, however, often simply a vehicle for a different kind of image). It would appear that the penetration of such generic products peaked in the early 1980s, and most consumers still seem to be looking for the qualities that the conventional brand provides.


Brand architecture

is the structure of brands within an organizational entity. It is the way in which the brands within a company’s portfolio are related to, and differentiated from, one another. The architecture should define the different leagues of branding within the organisation; how the corporate brand and sub-brands relate to and support each other; and how the sub-brands reflect or reinforce the core purpose of the corporate brand to which they belong.


Types of brand architecture

There are three generic relationships between a master brand and sub-brands:
• Monolithic brand or Branded house - Examples include Virgin Group, Red Cross or Oxford University. These brands use a single name across all their activities and this name is how they are known to all their stakeholders – consumers, employees, shareholders, partners, suppliers and other parties.
• Endorsed brands - Like Nestle’s KitKat, Sony PlayStation or Polo by Ralph Lauren. The endorsement of a parent brand should add credibility to the endorsed brand in the eyes of consumers. This strategy also allows companies who operate in many categories to differentiate their different product groups’ positioning.
• Product brand or House of brands - Like Procter & Gamble’s Pampers or Henkel’s Persil. The individual sub-brands are offered to consumers, and the parent brand gets little or no prominence. Other stakeholders, like shareholders or partners, know the company by its parent brand.


Brand extension or brand stretching

is a marketing strategy in which a firm marketing a product with a well-developed image uses the same brand name in a different product category. Organisations use this strategy to increase and leverage brand equity (definition: the net worth and long-term sustainability just from the renowned name). An example of a brand extension is Jello-gelatin creating Jello pudding pops. It increases awareness of the brand name and increases profitability from offerings in more than one product category.
A brand's "extendibility" depends on how strong consumer's associations are to the brand's values and goals. Ralph Lauren's Polo brand successfully extended from clothing to home furnishings such as bedding and towels. Both clothing and bedding are made of linen and fulfill a similar consumer function of comfort and homeliness. Arm & Hammer leveraged its brand equity from basic baking soda into the oral care and laundry care categories. By emphasizing its key attributes, the cleaning and deodorizing properties of its core product, Arm & Hammer was able to leverage those attributes into new categories with success. Another example is Virgin Group, which has extended its brand from from transportation (aeroplanes, trains) to games stores and video stores such a Virgin Megastores.


Product extensions

are versions of the same parent product that serve a segment of the target market and increase the variety of an offering. An example of a product extension is Coke vs. Diet Coke in same product category of soft drinks. This tactic is undertaken due to the brand loyalty and brand awareness they enjoy consumers are more likely to buy a new product that has a tried and trusted brand name on it. This means the market is catered for as they are receiving a product from a brand they trust and Coca Cola is catered for as they can increase their product portfolio and they have a larger hold over the market in which they are performing in.


Types of product extension

Brand extension research mainly focuses on the consumer evaluation of extension and attitude of the parent brand. Following the Aaker and Keller’s (1990) model, they provide a sufficient depth and breadth proposition to examine consumer behaviour and conceptual framework. They use three dimensions to measure the fit of extension. First of all, the “Complement” is that consumer takes two product (extension and parent brand product) classes as complement to satisfy their specific needs.Secondly, the “Substitute” indicates two products have same user situation and satisfy their same needs which means the products class is very similar so that can replace each other. At last, the “Transfer” is the relationship between extension product and manufacturer which “reflects the perceived ability of any firm operating in the first product class to make a product in the second class”.The first two measures focus on the consumer’s demand and the last one focuses on firm’s ability.
From the line extension to brand extension, however, there are many different way of extension such as "brand alliance",co-branding or “brand franchise extension”.Tauber (1988) suggests seven strategies to identify extension cases such as product with parent brand’s benefit, same product with different price or quality, etc. In his suggestion, it can be classified into two category of extension; extension of product-related association and non-product related association.Another form of brand extension, is a licensed brand extension. Where the brand-owner partners (sometimes with a competitor) who takes on the responsibility of manufacturer and sales of the new products, paying a royalty every time a product is sold.


Categorisation theory
Researchers tend to use “categorisation theory” as their fundamental theory to explore the links about the brand extension.When consumers face thousands of products, they not only initially confused and disorderly in mind, but also try to categorise the brand association or image with their existing memory. When two or more products exit in front of consumers, they might reposition memories to frame a brand image and concept toward new introduction. A consumer can judge or evaluate the extension by their category memory. They categorise new information into specific brand or product class label and store it. This process is not only related to consumer’s experience and knowledge, but also involvement and choice of brand. If the brand association is highly related to extension, consumer can perceive the fit among brand extension. Some studies suggest that consumer may ignore or overcome the dissonance from extension especially flagship product which means the low perceived of fit does not dilute the flagship’s equity.

INNOVATION is typically understood as the introduction of something new and useful, for example introducing new methods, techniques, or practices or new or altered products and services.

TYPES OF INNOVATION
Scholars have identified at a variety of classifications for types innovations. Here is an unordered ad-hoc list of examples:

Business model innovation
involves changing the way business is done in terms of capturing value .

Marketing innovation
is the development of new marketing methods with improvement in product design or packaging, product promotion or pricing.

Organizational innovation
involves the creation or alteration of business structures, practices, and models, and may therefore include process, marketing and business model innovation.

Process innovation
involves the implementation of a new or significantly improved production or delivery method.

Product innovation
involves the introduction of a new good or service that is new or substantially improved. This might include improvements in functional characteristics, technical abilities, ease of use, or any other dimension.

Service innovation
refers to service product innovation which might be, compared to goods product innovation or process innovation, relatively less involving technological advance but more interactive and information-intensive .

Supply chain innovation
where innovations occur in the sourcing of input products from suppliers and the delivery of output products to customers

Substantial innovation
introduces a different product or service within the same line, such as the movement of a candle company into marketing the electric lightbulb.

Financial innovation
through which new financial services and products are developed, by combining basic financial attributes (ownership, risk-sharing, liquidity, credit) in progressive innovative ways, as well as reactive exploration of borders and strength of tax law. Through a cycle of development, directive compliance is being sharpened on opportunities, so new financial services and products are continuously shaped and progressed to be adopted. The dynamic spectrum of financial innovation, where business processes, services and products are adapted and improved so new valuable chains emerge, therefore may be seen to involve most of the above mentioned types of innovation.
Incremental innovations
is a step forward along a technology trajectory, or from the known to the unknown, with little uncertainty about outcomes and success and is generally minor improvements made by those working day to day with existing methods and technology (both process and product), responding to short term goals. Most innovations are incremental innovations. A value-added business process, this involves making minor changes over time to sustain the growth of a company without making sweeping changes to product lines, services, or markets in which competition currently exists.

Breakthrough, disruptive or radical innovation

involves launching an entirely novel product or service rather than providing improved products & services along the same lines as currently. The uncertainty of breakthrough innovations means that seldom do companies achieve their breakthrough goals this way, but those times that breakthrough innovation does work, the rewards can be tremendous. Involves larger leaps of understanding, perhaps demanding a new way of seeing the whole problem, probably taking a much larger risk than many people involved are happy about. There is often considerable uncertainty about future outcomes. There may be considerable opposition to the proposal and questions about the ethics, practicality or cost of the proposal may be raised. People may question if this is, or is not, an advancement of a technology or process.

Radical innovation
involves considerable change in basic technologies and methods, created by those working outside mainstream industry and outside existing paradigms. Sometimes it is very hard to draw a line between both.

New technological systems (systemic innovations)
that may give rise to new industrial sectors, and induce major change across several branches of the economy.

Social innovation
a number of different definitions, but predominantly refers to either innovations that aim to meet a societal need or the social processes used to develop an innovation .


DIFFUSION OF INNOVATION




Once innovation occurs, innovations may be spread from the innovator to other individuals and groups. This process has been studied extensively in the scholarly literature from a variety of viewpoints, most notably in Everett Rogers' classic book, The Diffusion of Innovations. However, this 'linear model' of innovation has been substantinally challenged by scholars in the last 20 years, and much research has shown that the simple invention-innovation-diffusion model does not do justice to the multilevel, non-linear processes that firms, entrepreneurs and users participate in to create successful and sustainable innovations.

Rogers proposed that the life cycle of innovations can be described using the ‘s-curve’ or diffusion curve. The s-curve maps growth of revenue or productivity against time. In the early stage of a particular innovation, growth is relatively slow as the new product establishes itself. At some point customers begin to demand and the product growth increases more rapidly. New incremental innovations or changes to the product allow growth to continue. Towards the end of its life cycle growth slows and may even begin to decline. In the later stages, no amount of new investment in that product will yield a normal rate of return.

The s-curve is derived from half of a normal distribution curve. There is an assumption that new products are likely to have "product Life". i.e. a start-up phase, a rapid increase in revenue and eventual decline. In fact the great majority of innovations never get off the bottom of the curve, and never produce normal returns.

Innovative companies will typically be working on new innovations that will eventually replace older ones. Successive s-curves will come along to replace older ones and continue to drive growth upwards. In the figure above the first curve shows a current technology. The second shows an emerging technology that current yields lower growth but will eventually overtake current technology and lead to even greater levels of growth. The length of life will depend on many factors.

INTRODUCTION

The phrase The Long Tail (as a proper noun with capitalized letters) was first coined by Chris Anderson in an October 2004 Wired magazine article to describe certain business and economic models such as Amazon.com or Netflix. Businesses with distribution power can sell a greater volume of otherwise hard to find items at small volumes than of popular items at large volumes. The term long tail is also generally used in statistics, often applied in relation to wealth distributions or vocabulary use.

THE LONG TAIL BY CHRIS ANDERSON
The phrase The Long Tail was, according to Chris Anderson, first coined by himself. The concept drew in part from an influential February 2003 essay by Clay Shirky, "Power Laws, Weblogs and Inequality" that noted that a relative handful of weblogs have many links going into them but "the long tail" of millions of weblogs may have only a handful of links going into them. Beginning in a series of speeches in early 2004 and culminating with the publication of a Wired magazine article in October 2004, Anderson described the effects of the long tail on current and future business models. Anderson later extended it into the book The Long Tail: Why the Future of Business is Selling Less of More (2006).

Anderson argued that products that are in low demand or have low sales volume can collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters, if the store or distribution channel is large enough.

Anderson cites earlier research by Erik Brynjolfsson, Yu (Jeffrey) Hu, and Michael D. Smith, who first used a log-linear curve on an XY graph to describe the relationship between Amazon sales and Amazon sales ranking and found a large proportion of Amazon.com's book sales come from obscure books that are not available in brick-and-mortar stores. The Long Tail is a potential market and, as the examples illustrate, the distribution and sales channel opportunities created by the Internet often enable businesses to tap into that market successfully.

An Amazon employee described the Long Tail as follows: "We sold more books today that didn't sell at all yesterday than we sold today of all the books that did sell yesterday."

Anderson has explained the term as a reference to the tail of a demand curve. The term has since been rederived from an XY graph that is created when charting popularity to inventory. In the graph shown above, Amazon's book sales or Netflix's movie rentals would be represented along the vertical line, while the book or movie ranks are along the horizontal axis. The total volume of low popularity items exceeds the volume of high popularity items.

In a 2006 working paper titled "Goodbye Pareto Principle, Hello Long Tail", Erik Brynjolfsson, Yu (Jeffrey) Hu, and Duncan Simester found that, by greatly lowering search costs, information technology in general and Internet markets in particular could substantially increase the collective share of hard to find products, thereby creating a longer tail in the distribution of sales. They used a theoretical model to show how a reduction in search costs will affect the concentration in product sales. By analyzing data collected from a multi-channel retailing company, they showed empirical evidence that the Internet channel exhibits a significantly less concentrated sales distribution, when compared with traditional channels. An 80/20 rule fits the distribution of product sales in the catalog channel quite well, but in the Internet channel, this rule needs to be modified to a 72/28 rule in order to fit the distribution of product sales in that channel. The difference in the sales distribution is highly significant, even after controlling for consumer differences.


Demand-side and supply-side drivers

The key supply side factor that determines whether a sales distribution has a Long Tail is the cost of inventory storage and distribution. Where inventory storage and distribution costs are insignificant, it becomes economically viable to sell relatively unpopular products; however when storage and distribution costs are high only the most popular products can be sold.

Take movie rentals as an example: A traditional movie rental store has limited shelf space, which it pays for in the form of building overhead; to maximize its profits, it must stock only the most popular movies to ensure that no shelf space is wasted.

Because Netflix stocks movies in centralized warehouses, its storage costs are far lower and its distribution costs are the same for a popular or unpopular movie. Netflix is therefore able to build a viable business stocking a far wider range of movies than a traditional movie rental store. Those economics of storage and distribution then enable the advantageous use of the Long Tail: Netflix finds that in aggregate "unpopular" movies are rented more than popular movies.

A recent MIT Sloan Management Review article, titled "From Niches to Riches: Anatomy of the Long Tail" , examines the Long Tail from both the supply side and the demand side and identifies several key drivers. On the supply side, the authors point out how e-tailers' expanded, centralized warehousing allows for more offerings, thus making it possible for them to cater to more varied tastes.

On the demand side, tools such as search engines, recommender software and sampling tools are allowing customers to find products outside of their geographic area. The authors also look toward the future to discuss second order amplified effects of Long Tail, including the growth of markets serving smaller niches.


Cultural and political impact

The Long Tail has possible implications for culture and politics. Where the opportunity cost of inventory storage and distribution is high, only the most popular products are sold. But where the Long Tail works, minority tastes are catered to, and individuals are offered greater choice. In situations where popularity is currently determined by the lowest common denominator, a Long Tail model may lead to improvement in a society's level of culture. Television is a good example of this: TV stations have a limited supply of profitable or "prime" time slots during which people who generate an income will watch TV. These people with money to spend are targeted by advertisers who pay for the programming so the opportunity cost of each time slot is high. Stations, therefore, choose programs that have a high probability to appeal to people in the profitable demographics in order to guarantee a return.

Twin Peaks, for example, did not have broad appeal but stayed on the air for two seasons because it attracted young professionals with money to spend. Generally, as the number of TV stations grows or TV programming is distributed through other digital channels, the key demographic individuals are split into smaller and smaller groups. As the targeted groups get into smaller niches and the quantity of channels becomes less of an opportunity cost, previously ignored groups become profitable demographics in the long tail. These groups along the long tail then become targeted for television programming that might have niche appeal. As the opportunity cost goes down with more channels and smaller niches, the choice of TV programs grows and greater cultural diversity rises as long as there is money in it.

Some of the most successful Internet businesses have leveraged the Long Tail as part of their businesses. Examples include eBay (auctions), Yahoo! and Google (web search), Amazon (retail) and iTunes Store (music and podcasts) amongst the major companies, along with smaller Internet companies like Audible (audio books) and Netflix (video rental).

Often presented as a phenomenon of interest primarily to mass market retailers and web-based businesses, the Long Tail also has implications for the producers of content, especially those whose products could not - for economic reasons - find a place in pre-Internet information distribution channels controlled by book publishers, record companies, movie studios, and television networks. Looked at from the producers' side, the Long Tail has made possible a flowering of creativity across all fields of human endeavour. One example of this is YouTube, where thousands of diverse videos - whose content, production value or lack of popularity make them innappropriate for traditional television - are easily accessible to a wide range of viewers.

Internet commercialization pioneer and media historian Ken McCarthy addressed this phenomenon in detail from the producers' point of view at a 1994 meeting attended by Marc Andreessen, members of Wired Magazine's staff, and others. Explaining that the pre-Internet media industry made its distribution and promotion decisions based on what he called "lifeboat economics" and not on quality or even potential lifetime demand, he laid out a detailed vision of the impact he expected the Internet would have on the structure of the media industry with what has turned out to be a remarkable degree of accuracy, foreshadowing many of the ideas that appeared in Anderson's popular book.

The recent adoption of computer games as tools for education and training is beginning to exhibit a long-tailed pattern. It is significantly less expensive to modify a game than it has been to create unique training applications, such as those for training in business, commercial flight, and military missions. This has led some to envision a time in which game-based training devices or simulations will be available for thousands of different job descriptions. Smith pursues this idea for military simulation, but the same would apply to a number of other industries.


Competition and the Long Tail

The Long Tail may threaten established businesses.Before a Long Tail works, only the most popular products are generally offered. When the cost of inventory storage and distribution fall, a wide range of products become available. This can, in turn, have the effect of reducing demand for the most popular products.
For example, Web content businesses with broad coverage like Yahoo! or CNET may be threatened by the rise of smaller Web sites that focus on niches of content, and cover that content better than the larger sites. The competitive threat from these niche sites is reduced by the cost of establishing and maintaining them and the bother required for readers to track multiple small Web sites. These factors have been transformed by easy and cheap Web site software and the spread of RSS.

Similarly, mass-market distributors like Blockbuster may be threatened by distributors like Netflix, which supply the titles that Blockbuster doesn't offer because they are not already very popular. In some cases, the area under the long tail is greater than the area under the peak.

Double jeopardy is a statistical phenomenon in marketing where, with few exceptions, brand loyalty is lower among buyers of low market share brands than buyers of high market share brands. The market leader in an industry enjoys a high level of sales due to customer loyalty, with a higher probability of repeat purchase. This phenomenon occurs because consumers believe the high sales product to be of high quality. Market challengers seek to gain this brand loyalty advantage and market leaders seek to defend their position.

It is not necessarily the incumbent or the first entrant to a market that enjoys the benefits of brand loyalty; it is the company that is the market leader once the industry has reached a substantial size. The double jeopardy effect is one reason that companies invest heavily in advertising. Once a company has gained a high market share, it will strongly defend it.


Market-challenging brands
The implication of double jeopardy is that brand managers of smaller firms should not be reprimanded for lower customer loyalty figures. Also, they should not be expected to build customer loyalty to the brand without the resources to build market share.

Exceptions to double jeopardy

Double jeopardy is not applicable if:

•the market is homogenous. There is no branding due to the homogeneity of the product.
•the market is too small. Too small a market and market share is not substantial enough to make a difference.
•the cost exceeds the benefit. If the cost of branding to achieve a high market share is greater than the benefit, then even though double jeopardy may exist, it is not worth striving for.
•the product has a monopoly. Monopolies do not need to brand themselves to increase sales.
•the product is a commodity. The market sets the price that branding does not influence.
•the product or market is new. If it is a new product or a new market, the brand may not enjoy the double jeopardy effect until the market matures and becomes substantial. An industry that has matured and become more substantial will reward the market leader with strong brand loyalty.

Breakthrough management, rather than core competencies and TQM, is the key to winning in the great new globalised world.
-Dr. Shoji Shiba
(Japanese quality expert)

HISTORY

The age of corporate management is divided into three parts:
 Controlled management
 Kaizen
 Breakthrough management

CONTROLLED MANAGEMENT

 It was in practice in 1930’s.
 Is a top down strategy
 Where quality is controlled with mass production in mind.
 Production concept, Selling concept.

KAIZEN- Continuous improvement

 Started during the 1960’s.
 It was a bottom up approach.
 The customer and the worker was the focal point.
 Basic aims:
- humanize work place
- reduce wastage
 Improvement based on internal information.

What is Breakthrough management?

 In the world of globalization of economies, BM is becoming a new buzz word.
 Radical business ideas which may even include transforming the line of business for accelerated growth.
 Or transforming the business to become more innovative and powerful.
 Creation of new customer segment where it didn’t exist before.
 The key to BM is to unlearn what has been learnt and learn new strategies.
 It Is about managing key business factors i.e.
-effectiveness
-consistency
-focused mobilization of people

BM V/S CORE COMPETENCIES

 Core competency is concerned with corporate culture and technical strengths
 Diversification is a move to protect against existing risks
 BM is about taking a future risk


IMPORTANT INGREDIENTS

 New paradigm shift to achieve exponential growth- think laterally, forget core competencies and cost cutting.
 Think radically, be willing to take risks
 See the future and chart out a break through strategy.
 Visit customers where the product or service is being used and chart out future course of action.
 Expand, export and go global.
 No mindless diversification, cap on finances that can be risked in pursuit of new ventures.
 Invest in R&D and produce new products.
 Change mental make of new CEO’s in the era of globalizations.
 Grow at accelerated speed, pursue radical business ideas.
 Change line of business or transform business- become innovative and more powerful.


HOW TO CONVINCE CEOs?

 Good business opportunity
 One who takes risks
 Knows that it is beneficial for the business
 Thus CEO needs to be convinced

CHALLENGES FACED BY CEOs

 Money has to be spend initially without any apprehensions
 Thus CEO needs to be proactively involved


FREQUENCY

 Almost every 10 years
 That’s usually the duration of a product life cycle



IMPLEMENTATION

 First phase – idea generator-forsees market-changes to be carried-prepares business case
 Second phase – develop technical capability-infrastructure- for execution of idea
EXAMPLES
 TV TO INTERACTIVE TV (TATA SKY) –
- Direct To Home (DTH)
- Channels under categories
- Interactive features
- Games
- Timings of next feature
 LANDLINES TO MOBILES
- earlier only landline phones
- difficult to communicate
- mobiles developed first in 1947
- by BELL lab engineers at AT&T
- huge success as increased convenience

 PAPERWORK TO COMPUTERWORK
- paperwork too cumbersome
- difficult in offices
- automation of all file work in offices
- more efficiency and speed
- used in all walks of life

 Books To Google
 Low cost Airlines- Air Deccan
 From Medicine and tourism to medical tourism- ATE GROUP OF COMPANIES.
 ICICI- Microfinance

Current trends in breakthrough management.
 Tata steel- chorus
 Hindalco-novellis
 Bajaj, mahindra& mahindra
 Reliance industries
 UB beverages
 Organized retail in India



Breakthrough Management Group


 BMG is the world's leading provider of training and consulting for performance excellence.
 Specializing in Lean, Six Sigma and Innovation, BMG works with leading companies around the globe to help "in-source" new capability and develop new core competencies.
 Founded in 1999 and headquartered in Longmont, Colo., BMG has developed a loyal clientele that today exceeds 200 active businesses in industries as diverse as biotechnology, health care, finance, telecommunications, manufacturing and energy.
 BMG has offices in 12 countries and has more than 100 employees worldwide.

Stretch, Leverage and Fit

To achieve Strategic Intent – you need to Stretch. As of today there is a misfit between resources and aspirations. So instead of looking at resources, you will look at resourcefulness. To achieve you will stretch and make innovative use of your resources.

This leads to Leveraging your resources. Leverage refers to concentrating your resources to your strategic intent, accumulating learning, experiences and competencies, in a manner that a scarce resource base can be stretched to meet the aspirations that an organizational resources to its environment.

The strategic fit is the traditional way of looking at strategy. Using techniques such as SWOT analysis, which are used to assess organizational capabilities and environmental opportunities, Strategy is taken as a compromise between what the environment has got to offer in terms of opportunities and the counteroffer that the organization makes in the form of its capabilities.

Under fit, the strategic intent is conservative and seems to be more realistic, but you may not be aware of the potential; under stretch and leverage it could be improbable, even idealistic, but then you look at something far beyond present possibilities and look at the potential possibilities.

To develop an effective strategy – you need to have strategic intent. Invariably – companies look at competition traditionally – i.e. focus on existing position & resources, rather than at the resourcefulness of competition and their pace at which they are building competencies. Accessing the current tactical advantages of known competitors will not help to understand the resolution, stamina and inventiveness of potential competitors.

Strategic intent envisions a desired leadership position and establishes the criterion the organization will chart its progress – it is simply something more than just unfettered ambition. It captures the essence of winning and is stable over time. It sets a target that requires personal effort and commitment and also a bit of luck – it is not a soft target. The important question that companies ask is not “How will next year be different?” – but they ask, “What must we do differently next year to get closer to our Strategic Intent?” Most companies look at change and innovation in isolation – i.e. try and keep a few people isolated and let them free – but real innovation comes from everywhere – top management role is to add value.

Strategic intent is clear about the ends, but flexible about the means – it leaves room for improvisation and creativity and the top management gives the direction. The difference is resource as a constraint versus resources as leverage. In both, it is implicit that there must be balance in the scope so as to reduce risk. In the first you do it through building a balanced portfolio of cash generating and cash consuming business, in the other you ensure a well balanced and sufficiently broad portfolio of advantages.

Strategic intent implies a sizeable stretch for an organization. Current capabilities and resources will not suffice. This will force inventiveness to make the most of existing resources. It will create a sense of urgency and force a competitor focus at all levels through widespread use of competitive intelligence. The companies will invest and train employees with the skills they need to work effectively. The management will keep on invoking challenges, but also not overwhelm the employees with unreasonable pressures and demands. They give the organization time to digest one challenge before launching another challenge. There are clear milestones, which are communicated without any ambiguity and also review mechanisms to monitor the milestones.

One important parameter is reciprocal responsibility. Invariably in bad times, the blame is put at the operating levels – i.e. the workers and junior managers would lose their jobs, take pay cuts, etc., but in the good times it is the top management which would take the credit and reward themselves with hefty bonuses, increased salaries, etc. But reciprocal responsibility means equal blame and credit. It goes a long way in building credibility and motivation. Instead of attacking competitors blindly and taking them head-on, companies must leverage their resources.

Thus they look for ways to build competitive innovation. The first common way is to build layers of advantage – i.e. to build on strengths and apply them to the next / adjoining process and improve the links and keep on extending it. The next way is to search for loose bricks – clusters of business, groups of customers that competition has ignored / not noticed - gap in the market waiting to be exploited that gives you a foothold in the market. Quite often changing the rules of engagement help, as it puts the entire way of doing business into a fresh perspective. You can start on relatively equal footing rather than being at a disadvantage. Sometimes you compete with collaborations, instead of a straight fight. There is a similarity like in judo – you may be small – but you can use the size of your rivals against them. This mapping implies a new view of strategy. It ensures consistency in resource allocation in the long run, focuses efforts in the medium term and reduces risk in the short run. Quite often blindly following the leader or playing by the industry leader’s rule is competitive suicide.

Companies with good strategic intent know the importance of documenting failure – but instead of blame fixing and nailing people – they are more interested in the management reasons and the orthodoxy that may have led to the failure. Sounds simple, but somehow not practiced. In bad times the simplest way is to sell a business doing badly. This is the common method, but then you hand over markets and profits on a platter to the competition. The challenge is to survive and turn around and also to find niches within the market and create new spaces uniquely suited to the strengths, space that quite often off the map.

Today for practically all companies, the threat is global and diverse, even industry boundaries are becoming blurred. Typical competition as understood is being redefined and unlikely competitors are coming up. But this also has the positive spill off – in the sense that even opportunities are larger and global. Typical SBU structure though helpful may prove to be a constraint in such conditions. The reasons are that it could narrowly divide resources and thus loose their leverage and flexibility.

One of the dangers that companies impose on themselves is a belief that, if an executive is put through a lot of career moves fast – it would help him to be better person. But in the industry where the amount of knowledge and expertise required is very vast – this may be counterproductive. The managers may lack the deep strength required in their areas. Thus there could be tendency for “denominator management”. Most companies would appraise their managers on the basis of some ratios and financials. These measures would have a numerator – typically turnover / sales – i.e. the figures showing the position externally. The denominator would be costs, profits, and mainly internal parameters. To show better results – there is a short cut available which is tempting – i.e. focus on the internal parameters – so restructure – cut costs – and do things that may hurt a company.

Looking at the denominator may bring short-term results, but there may be serious long-term sacrifices. So unless a company does both simultaneously – focus on increasing the numerator and also focus on reducing the denominator, there could be a serious problem in the future. It would lead to a downward spiral, as again when the next problem occurs, you look inward and shrink again and again till finally somebody else gobbles you up. Thus in many situations, managers follow a code of silence, ignoring the signals seen and keeping silent. It is better to bring the problems to the surface and discuss them, rather than increase the level of anxiety, which everybody knows of.

Thus Strategic intent is what the organization strives for. Komatsu wanted to “Encircle Caterpillar” in the earthmoving business. Canon wanted to “Beat Xerox”. These are some of the strategic intents. It is an obsession with an organization – an obsession with having ambitions that may even be out of proportion to their existing resources and capabilities. This obsession is to win at all levels of the organization which sustaining that obsession in the quest for global leadership.

COMPANY’S VISON AND MISSION STATEMENT

These terms are often misunderstood. Typically a Vision is what a company wishes to become or aspires to be and mission is what the company is and why it exists.

Jerry Porras and James Collins in their Book – “Built to Last..” have given a good framework for developing a vision and a mission. They divide this into two parts – core ideology and envisioned future.

Core ideology is the unchanging part of the organization, its character. It would not change for a long time, even if it were a disadvantage. Envisioned Future is a goal to be reached.
Core ideology in turn has two components, core values and core purpose.

Core Values
The core values are a few values (no more than five or so) that are central to the firm. Core values reflect the deeply held values of the organization and are independent of the current industry environment and management fads.
One way to determine whether a value is a core value to ask whether it would continue to be supported if circumstances changed and caused it to be seen as a liability. If the answer is that it would be kept, then it is core value. Another way to determine which values are core is to imagine the firm moving into a totally different industry. The values that would be carried with it into the new industry are the core values of the firm.
Core values will not change even if the industry in which the company operates changes. If the industry changes such that the core values are not appreciated, then the firm should seek new markets where its core values are viewed as an asset.
For example, if innovation is a core value but then 10 years down the road innovation is no longer valued by the current customers, rather than change its values the firm should seek new markets where innovation is advantageous.


The following are a few examples of values that some firms has chosen to be in their core: Excellent customer service - Pioneering technology - Creativity - Integrity -Social responsibility


Core Purpose
The core purpose is the reason that the firm exists. This core purpose is expressed in a carefully formulated mission statement. Like the core values, the core purpose is relatively unchanging and for many firms endures for decades or even centuries. This purpose sets the firm apart from other firms in its industry and sets the direction in which the firm will proceed.
The core purpose is an idealistic reason for being. While firms exist to earn a profit, the profit motive should not be highlighted in the mission statement since it provides little direction to the firm's employees. What is more important is how the firm will earn its profit since the “how” is what defines the firm.
Initial attempts at stating a core purpose often result in too specific of a statement that focuses on a product or service. To isolate the core purpose, it is useful to ask “why” in response to first-pass, product-oriented mission statements. For example, if a market research firm initially states that its purpose is to provide market research data to its customers, asking “why” leads to the fact that the data is to help customers better understand their markets. Continuing to ask “why” may lead to the revelation that the firm's core purpose is to assist its clients in reaching their objectives by helping them to better understand their markets.
The core purpose and values of the firm are not selected - they are discovered. The stated ideology should not be a goal or aspiration but rather, it should portray the firm as it really is. Any attempt to state a value that is not already held by the firm's employees is likely to not be taken seriously.


The Envisioned Future also has two components – 10 to 30 years audacious goals and a vivid description. The audacious goals are what the company would like to achieve, they are tough, need extraordinary commitment and effort, need a bit of luck and are ambitious. It is thinking far into the future of what to achieve and start today. The vivid description is putting the goals into words that evoke a picture of what it would be like to achieve your audacious goals.

Most visionary goals fall into one of the following categories:

Target - quantitative or qualitative goals such as a sales target or Ford's goal to "democratize the automobile."

Common enemy - centered on overtaking a specific firm such as the 1950's goal of Philip-Morris to displace RJR.

Role model - to become like another firm in a different industry or market. For example, a cycling accessories firm might strive to become "the Nike of the cycling industry."

Internal transformation - especially appropriate for very large corporations. For example, GE set the goal of becoming number one or number two in every market it serves.

While visionary goals may require significant stretching to achieve, many visionary companies have succeeded in reaching them. Once such a goal is reached, it needs to be replaced; otherwise, it is unlikely that the organization will continue to be successful. For example, Ford succeeded in placing the automobile within the reach of everyday people, but did not replace this goal with a better one and General Motors overtook Ford in the 1930's.

Microsoft –
Vision ‘ Empower people through great software anytime, any place, and on any device.’ (1999).
Intel-
“ Our Vision: Getting a billion connected computers worldwide, million servers, and a trillion of dollars of e – commerce. We are Vision – catalyst the chemical reaction, the starter motor that kicks the high performance engine to life. Key to action, implementation and results – the paintbrush that gives the subsequent strategy shape, form and purpose.”

The vision is quite simply the desired future for your business put over in a way that excites and motivates the other people. It is difficult.
Challenge – future state – exciting of getting there. - Collins and Porras (1996)
(BHAG) - Big Headed Audacious Goals. And this conveys something of the stretch and excitement implied in a true vision in that it must genuinely convey a picture of a desired future state. Tony Blair set BHAG if ever there was one, to the first Labour Party Conference following the party’s election victory in 1997.



Benefits of a Vision

A vision helps to create a common identity for the entire company and helps to develop a shared sense of purpose. It helps to bond the employees together. They are usually inspiring. Because they are futuristic, they encourage looking far ahead into the future. Thus they also foster risk taking, and focus on building skills and competencies to achieve the vision. It gives a direction of where the company wants to go.

Characteristics of a Mission Statement

A mission as defined by Peter Drucker says that a mission is stating what a company will be, why it exists. So it is the reason for the existence of the organization. It is the role it wants to play in society. So a mission should be feasible, realistic and achievable. Tisco wanted to become the world’s lowest cost producer. Mission should be clear and precise, so the employees have clarity on what to achieve. Phillips wants to make things better for the benefit of consumers. It should be motivating for the employees so they will put in efforts and give commitment. It should be distinctive and should indicate the strategic aspects the company wants to pursue.

Key Elements in Developing a Mission Statement:

Three key elements must be taken into account in developing mission statements:
1)History of the Organization: Critical characteristics and events of the past must be considered in formulating and developing a mission statement.
2)Organization’s distinctive competencies: The organization should seek to do what it does best. Once this has been determined, it can incorporate its competency into the mission statement.
3)The organization’s environment: The management should identify the opportunities provided and threats/challenges posed by the environment before formulating a mission statement.

Elements of a Mission Statement:

1)The mission statement should specify the products to be produced and/or services to be rendered, markets and/or customer groups to be served, markets and/or customer groups to be served and the type of technology.
2)The primary concern for survival and development through profitability.
3)The organizational philosophy in terms of basic beliefs, values, attitudes and aspirations
4)Management style to be practiced

Characteristics/Features of Mission Statement:

1)Market Focus Rather Than Product Focus: Customers are a key factor in determining an organization’s mission. In recent years a key feature of mission statements has been external rather than internal focus. Hence, it is viewed that, the mission statement should focus on the broad class of needs that the organization is intending to satisfy (external focus) not on the physical product or service that the organization is serving at present.
2)Achievable: The mission statement should realistic/feasible i.e. It should be practically achievable. Therefore the organization should consider any limitations to its resources while formulating its mission statement.
3)Motivational: A well defined mission provides a shared sense of purpose. Thus the mission should motivate the employees and managers to work for the organization, customers and the society.
4)Specific: The mission statement should be precise and specific and provide direction and guidelines for management’s choices between alternative courses of action. Similarly it should not be so narrow as to restrict the management’s activities.
5)Clear: The mission statement should be stated in clear terms.
6)Distinctive: The mission statement of one organization should be different from those of similar organizations.
7)Indicate Major Components of Strategy Objectives: The mission statement without the objectives and strategies is incomplete. The organization’s mission statement, therefore, should indicate the objectives and strategies to be employed.
8)Achievement of the Policies: The mission statements of organization’s should include major policies they plan to follow in the pursuit of their missions.

Functions Of A Mission Statement:

1)It should define what the organization is and what the organization aspires to be.
2)It should be limited enough to exclude some ventures and broad enough to allow for creative growth.
3)It should distinguish a given organization from all others.
4)It should serve as a framework for evaluating both current and prospective activities.
5)It should be stated in terms sufficiently clear to be widely understood throughout the organization.

Need For A Written Mission Statement

1)To ensure unanimity of purpose within the organization.
2)To provide a basis for motivating the use of organizational resources.
3)To develop a basis, or standard for allocating organizational resources.
4)To establish a general tone or organizational climate.
5)To serve as a focal point for those who can identify with the organization’s purpose and direction.
6)To facilitate the translation of objectives and goals into a work structure involving the assignment of tasks of responsible elements within the organization.


Contents of Mission Statements

1)Company Product or Service : Identifies the goods or services produced by the organization
2)Markets: Describes the markets and customers that the organization intends to serve.
3)Technology: Techniques and processes by which the company produces goods and/or renders services
4)Philosophy/ Core Values: A statement of organizational philosophy commonly appears as part of the mission statement. It reflects the basic beliefs and values that should guide the organizations business.
5)Public Image: Mission statements normally contain some reference to the type of impression that the organization wants to leave with its public.

Anytime something bad happens, it doesn't take long before blame starts to be assigned. In the instance of subprime mortgage woes, there is no single entity or individual to point the finger at. Instead, this mess is a collective creation of the world's central banks, homeowners, lenders, credit rating agencies and underwriters, and investors. Let's investigate.

The Mess
The economy was at risk of a deep recession after the dotcom bubble burst in early 2000; this situation was compounded by the September 11 terrorist attacks that followed in 2001. In response, central banks around the world tried to stimulate the economy. They created capital liquidity through a reduction in interest rates. In turn, investors sought higher returns through riskier investments. Lenders took on greater risks too, and approved subprime mortgage loans to borrowers with poor credit. Consumer demand drove the housing bubble to all-time highs in the summer of 2005, which ultimately collapsed in August of 2006. (For an in-depth discussion of these events, see The Fuel That Fed The Subprime Meltdown.)

The end result of these key events was increased foreclosure activity, large lenders and hedge funds declaring bankruptcy, and fears regarding further decreases in economic growth and consumer spending. So who's to blame? Let's take a look at the key players.

Biggest Culprit: The Lenders
Most of the blame should be pointed at the mortgage originators (lenders) for creating these problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default. (To learn more about subprime lending, see Subprime Is Often Subpar.)

When the central banks flooded the markets with capital liquidity, it not only lowered interest rates, it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At the same time, lenders found themselves with ample capital to lend and, like investors, an increased willingness to undertake additional risk to increase their investment returns.

In defense of the lenders, there was an increased demand for mortgages, and housing prices were increasing because interest rates had dropped substantially. At the time, lenders probably saw subprime mortgages as less of a risk than they really were: rates were low, the economy was healthy and people were making their payments.

As you can see in Figure 1, subprime mortgage originations grew from $173 billion in 2001 to a record level of $665 billion in 2005, which represented an increase of nearly 300%. There is a clear relationship between the liquidity following September 11, 2001, and subprime loan originations; lenders were clearly willing and able to provide borrowers with the necessary funds to purchase a home.



Partner In Crime: Homebuyers

While we're on the topic of lenders, we should also mention the home buyers. Many were playing an extremely risky game by buying houses they could barely afford. They were able to make these purchases with non-traditional mortgages (such as 2/28 and interest-only mortgages) that offered low introductory rates and minimal initial costs such as "no down payment". Their hope lay in price appreciation, which would have allowed them to refinance at lower rates and take the equity out of the home for use in other spending. However, instead of continued appreciation, the housing bubble burst, and prices dropped rapidly. (To learn more, read Why Housing Market Bubbles Pop.)

As a result, when their mortgages reset, many homeowners were unable to refinance their mortgages to lower rates, as there was no equity being created as housing prices fell. They were, therefore, forced to reset their mortgage at higher rates, which many could not afford. Many homeowners were simply forced to default on their mortgages. Foreclosures continued to increase through 2006 and 2007.

In their exuberance to hook more subprime borrowers, some lenders or mortgage brokers may have given the impression that there was no risk to these mortgages and that the costs weren't that high; however, at the end of the day, many borrowers simply assumed mortgages they couldn't reasonably afford. Had they not made such an aggressive purchase and assumed a less risky mortgage, the overall effects might have been manageable. (To learn about moral debate surrounding all things subprime, read Subprime Lending: Helping Hand Or Underhanded?)

Exacerbating the situation, lenders and investors of securities backed by these defaulting mortgages suffered. Lenders lost money on defaulted mortgages as they were increasingly left with property that was worth less than the amount originally loaned. In many cases, the losses were large enough to result in bankruptcy.

Investment Banks Worsen the Situation

The increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum. (For a crash course on the secondary mortgage market, check out Behind The Scenes Of Your Mortgage.)

A lot of the demand for these mortgages came from the creation of assets that pooled mortgages together into a security, such as a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.

Rating Agencies: Possible Conflict of Interest

A lot of criticism has been directed at the rating agencies and underwriters of the CDOs and other mortgage-backed securities that included subprime loans in their mortgage pools. Some argue that the rating agencies should have foreseen the high default rates for subprime borrowers, and they should have given these CDOs much lower ratings than the 'AAA' rating given to the higher quality tranches. If the ratings had been more accurate, fewer investors would have bought into these securities, and the losses may not have been as bad. (To learn more on the ratings system, see What Is A Corporate Credit Rating?)

Moreover, some have pointed to the conflict of interest between rating agencies, which receive fees from a security's creator, and their ability to give an unbiased assessment of risk. The argument is that rating agencies were enticed to give better ratings in order to continue receiving service fees, or they run the risk of the underwriter going to a different rating agency (or the security not getting rated at all). However, on the flip side, it's hard to sell a security if it is not rated.

Regardless of the criticism surrounding the relationship between underwriters and rating agencies, the fact of the matter is that they were simply bringing bonds to market based on market demand.

Fuel to the Fire: Investor Behavior

Just as the homeowners are to blame for their purchases gone wrong, much of the blame also must be placed on those who invested in CDOs. Investors were the ones willing to purchase these CDOs at ridiculously low premiums over Treasury bonds. These enticingly low rates are what ultimately led to such huge demand for subprime loans.

Much of the blame here lies with investors because it is up to individuals to perform due diligence on their investments and make appropriate expectations. Investors failed in this by taking the 'AAA' CDO ratings at face value.



Final Culprit: Hedge Funds
Another party that added to the mess was th
e hedge fund industry. It aggravated the problem not only by pushing rates lower, but also by fueling the market volatility that caused investor losses. The failures of a few investment managers also contributed to the problem. (To learn more. check out Taking A Look Behind Hedge Funds.)

To illustrate, there is a type of hedge fund strategy that can be best described as "credit arbitrage". It involves purchasing subprime bonds on credit and hedging these positions with credit default swaps. This amplified demand for CDOs; by using leverage, a fund could purchase a lot more CDOs and bonds than it could with existing capital alone, pushing subprime interest rates lower and further fueling the problem. Moreover, because leverage was involved, this set the stage for a spike in volatility, which is exactly what happened as soon as investors realized the true, lesser quality of subprime CDOs.

Because hedge funds use a significant amount of leverage, losses were amplified and many hedge funds shut down operations as they ran out of money in the face of margin calls. (For more on this, see Massive Hedge Fund Failures and Losing The Amaranth Gamble.)

Plenty of Blame to Go Around

Overall, it was a mix of factors and participants that precipitated the current subprime mess. Ultimately, though, human behavior and greed drove the demand, supply and the investor appetite for these types of loans. Hindsight is always 20/20, and it is now obvious that there was a lack of wisdom on the part of many. However, there are countless examples of markets lacking wisdom, most recently the dotcom bubble and ensuing "irrational exuberance" on the part of investors.

It seems to be a fact of life that investors will always extrapolate current conditions too far into the future - good, bad or ugly.










KEY TERMS AND THEIR MEANING-REFERENCE ARTICLE


TRANCHE

the word tranche (misspelled as traunch or traunche) refers to one of several related securitized bonds offered as part of the same deal. The word tranche is French for slice, section, series, or portion; in the financial sense of the word, each bond is a slice of the deal's risk. The legal documents usually refer to the tranches as "classes" of notes identified by letter (e.g. the Class A, Class B, Class C securities).
All the tranches together make up what is referred to as the deal's capital structure or liability structure. They are generally paid sequentially from the most senior (usually Senior Secured) to most subordinate (generally unsecured.
The more senior rated tranches generally have higher ratings than the lower rated tranches. For example, senior tranches may be rated AAA, AA or A, while a junior, unsecured tranche may be rated BB. However, ratings can fluctuate after the debt is issued and even senior tranches could be rated below investment grade (less than BBB).
Tranches with a first lien on the assets of the asset pool are referred to as "senior tranches" and are generally safer investments. The natural buyers of these types of securities tend to be conduits, insurance companies, pension funds and other risk averse investors.
Tranches with either a second lien or no lien are often referred to as "junior notes". These are more risky investments because they are not secured by specific assets. The natural buyers of these securities tend to be hedge funds and other investors seeking higher risk/return profiles.


MORTGAGE

A mortgage is a method of using property (real or personal) as security for the payment of a debt.In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property (such as ships) and in some cases only land may be mortgaged. Arranging a mortgage is seen as the standard method by which individuals and businesses can purchase residential and commercial real estate without the need to pay the full value immediately.
In many countries it is normal for home purchases to be funded by a mortgage. In countries where the demand for home ownership is highest, strong domestic markets have developed, notably in Spain, the United Kingdom and the United States.


COLLATERIZED DEBT OBLIGATION

In financial markets, collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product. CDOs gain exposure to the credit of a portfolio of fixed-income assets and divide the credit risk among different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order of seniority and so junior tranches offer higher coupons (interest rates) to compensate for the added risk. CDOs serve as an important funding vehicle for portfolio investments in credit-risky fixed-income assets.
CDOs vary in structure and underlying collateral, but the basic principle is the same. First, a CDO entity acquires its inventory - such as income securities asset-backed securities in a cash or synthetic format. Then, the CDO entity sells rights to the cash flows from the inventory along with associated risk. The sold rights are called tranches in accordance with the cash flow and risk assignment rules of the CDO: senior (rated AAA) tranches are paid first followed by mezzanine (AA to BB) tranches and, last of all, equity tranches (unrated).
As seen from above, investors have taken a position not in the mortgages or asset backed securities, but in an entity that has defined risk and reward. Therefore, the investment is dependent on not just the quality of the inventory but also of the quality of the metrics and assumptions used for defining the risk and reward of the tranches. The latter can trump the former just as the inventory can trump the investment.


ARBITRAGE
arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, a risk-free profit. A person who engages in arbitrage is called an arbitrageur. The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives, commodities and currencies.
If the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage equilibrium or arbitrage-free market

Arbitrage is possible when one of three conditions is met:
1. The same asset does not trade at the same price on all markets ("the law of one price").
2. Two assets with identical cash flows do not trade at the same price.
3. An asset with a known price in the future does not today trade at its future price discounted at the risk-free interest rate (or, the asset does not have negligible costs of storage; as such, for example, this condition holds for grain but not for securities).



REVERSE MORTGAGE

A reverse mortgage (known as lifetime mortgage in the United Kingdom) is a loan available to seniors (62 and over in the United States), and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g. into aged care).
In a typical mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term (e.g. 30 years) the mortgage has been paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, then the debt on the property increases each month.
If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home. But in certain countries (including the United States), a reverse mortgage must be the first and only mortgage on the property.

SPECIAL REFERENCE FOR QUALIFYING IN THE US FOR REVERSE MORTGAGE
To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age. There are no minimum income or credit requirements, but there are other requirements and homeowners should make sure that they qualify for the loan before they invest significant time or money into the process. For most reverse mortgages, the money can be used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds. A pending bankruptcy which has not been finalized may, however, slow the process. Some types of dwellings, such as lower-value mobile homes, do not qualify. Before borrowing, applicants must seek free financial counseling from a source which is approved by the Department of Housing and Urban Development (HUD). The counseling is a safeguard for the borrower and his/her family, to make sure the borrower completely understands what a reverse mortgage is and how one is obtained.


HEDGING

Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity. Typically, a hedger might invest in a security that he believes is under-priced relative to its "fair value" (for example a mortgage loan that he is then making), and combine this with a short sale of a related security or securities. Thus the hedger is indifferent to the movements of the market as a whole, and is interested only in the performance of the 'under-priced' security relative to the hedge.

What is loss prevention & shrinkage?
Loss prevention is concerned with the disappearance of merchandise and currency. Most retail establishments take a physical inventory annually, while some do it semiannually. When the count is completed, the
Difference between the actual inventory on hand and what it should be according to purchase and sales records is called shrinkage.

What are the causes of inventory shrinkage?
1) Shoplifting,
2) Employee theft,
3) Vendor fraud and
4) Administrative error

In the US, the top 120 retailers lose 1.5 to 2.0 percent of their total annual sales to inventory shrinkage on average.Whole retail store chains have gone out of business due to their inability to control retail theft losses.And worse yet, the cost of these losses is passed on to the consumer.In India, inventory shrinkage is a also reality, where large organized retailers may lose between 1-2.5 percent annual sales.

Source of Inventory Shrinkage
% of Loss*
• Employee Theft 48.5%
• Shoplifting 31.7%
• Administrative Error 15.3%
• Vendor Fraud 5.5%
Source: National Retail Security Survey, November 2002

What is shoplifting?
Shoplifting is a crime and occurs when someone steals merchandise offered for sale in a retail store. Shoplifting most often occurs by concealing merchandise in a purse, pocket, or bag, but can occur by a variety of methods.

Shoplifter Profile
1. Amateurs. Amateur shoplifters can be highly skilled, and some steal almost every day, but don't do it to make a living.
2. Professionals: People who make their living by stealing from retail stores. Professional shoplifters often are highly skilled and even organized in gangs. The crude professionals sometimes use force and fear much like gang intimidation and often commit grab-and-run thefts.
3. Juveniles: young persons who may be misled and do not know better.
4. Kleptomaniacs: These are mentally ill individuals who may be compulsively shop lifting and need help and treatment to overcome this problem.

SHOPLIFTING METHODS
1. Merchandise is concealed in boxes, bags or purses.
2. Merchandise is concealed in clothing. Professionals may wear garments fitted with large pockets or hooks. Oversized garments may be worn to afford easy concealment.
3. Stolen garments are worn in plain sight and out of the store.
4. Merchandise is carried between thighs and hidden by long skirt or overcoat.

SHOPLIFTING METHODS
5. Professionals wrap garments around the legs and tuck them into tops of socks.
6. Small articles may be carried out hidden in the palm of the hand.
7. Fitting Room Theft: Many items are concealed on the person of the customer when the customer is ostensibly trying on garments in the trial/fitting room.
8. Some thieves snatch articles and run out of the store. They may also attempt to hold up customers and sales staff inside the store by displaying a pistol/weapons and make away with articles/cash

INDICATIONS OF POSSIBLE
SHOPLIFTING
1. People wearing overcoats out of season, or raincoats on a clear day.
2. People carrying boxes, bags, or umbrellas, which could be used to conceal merchandise.
3. Nervous-looking people who are constantly touching the backs of their heads, tugging at sleeves, or adjusting socks.
4. Exceptionally fussy people who cannot seem to make up their minds about a purchase, or do not appear interested in purchasing an article that they have been examining.
INDICATIONS OF POSSIBLE SHOPLIFTING
5. People who walk around and constantly keep one hand in a pocket.
6. People who come back to the same area of a store several times.
7. People who are busy looking about, rather than at merchandise.
8. People who appear to be nervous.
9. People who walk into stockrooms or behind counters and have no business in such places.
10. Men who carry shopping bags.

Shoplifting Prevention
1. Plain-clothes floor detectives to observe customers as they shop.
2. Many shoplifters are detained and arrested for their indiscretions.
3. Stores use video surveillance cameras and electronic article surveillance (EAS) devices attached to their products that cause alarms to go off if not deactivated by the cashier.
4. Retailers place expensive and high theft items like small leather items, perfume, cosmetics, tools, liquor, or cigarettes in locked enclosures.
5. Cables or hanger locks that require the assistance of a sales associate to unlock the expensive item of clothing before you can inspect it.
6.Point-of-sale data mining software solutions that detect potential theft problems at the cash register and alert appropriate personnel in realtime.
7.Source tagging programs where tiny anti-theft labels about the size of a paper clip are placed inside an actual product or product package, effectively hiding it from view.
8. Self-alarming anti-theft tags that broadcast an audible alarm throughout the store when a shoplifter attempts to improperly remove it from merchandise.
9. Uniformed Security Guards as a deterrent
10. Using Sales Staff Involvement: Training to spot shop lifters and
taught the action to take to prevent the loss of merchandise. Incentive programs to encourages interest and participation in loss prevention.

Shoplifter Detention
• If caught, a retailer may detain the consumer and attempt to recover the items. The practice of physically detaining and arresting shoplifters is not without risk.
• May make the first contact with the shoplifter at the exit.
• The store detective should attempt to keep the apprehension as quiet as possible, without disturbing other shoppers or of creating a physical confrontation.
• The shoplifter may attempt to run, may assault the employee, or may even pull a weapon. The training of the security staff is the key to ensure proper action in accordance with developing circumstances
Shoplifter Detention
• When guards are posted at or near exits, they should assist in apprehensions if requested.
• Normally, the suspect will come along quietly when asked.
• If the detective has made proper observations, the recovery of stolen articles should be uncomplicated.
• A retailer may make a choice at this stage to call in the local police and press charges further.

Employee Theft:
A large part of inventory shrinkage and retailer loss in attributed to employee behavior:
1.Cash Register, Cash Handling and Bookkeeping Theft
2. Shortchanging and Refund Fraud
3. Stock Room Theft
4. Employees colluding with customers who shoplift, with the assistance of employees

PREVENTION OF MERCHANDISE THEFT BY
EMPLOYEES:
• Pre –employment screening
• Background checks and reference from former employers.
• Separate Employee Entrances with a security person posted there, and the right to frisk and even search may be reserved by a company.
• Garbage Inspection
• Stockrooms security and restricted entry

PREVENTION OF MERCHANDISE
THEFT BY EMPLOYEES:
• Receiving and Shipping:High security at this point and Test counts can be done randomly as a security measure.
• Warehouse security: Propoer procedures at receiving platforms and shipping platforms, cargo documents and purchase orders should be matched, so that proper bookkeeping is ensured.
• Theft of cash: track cashiers’ performances, spot checks of the cashier funds during the day, “Integrity Shopping” checks/ “Honesty shopping”
• Money Rooms: A special area for handling and storing cash, well constructed and burglar resistant.With convenient alarms and holdup buttons
• Refunding policy: a well laid out policy for authentication of merchandise and return of money to the customer. Procedures must be established to constantly monitor payouts against related documents and merchandise.
• Strict Policies for dealing with employees caught for theft

CREDIT CARDS FRAUD:
• Losses due to acceptance of lost or stolen credit cards are on the increase. Suggested procedures which help cut such losses are:
• Examine card for authenticity; expiration date. Imprinted name and signature must match.
• Use terminal or telephone to obtain authorization.
• Follow instructions according to code. If "hot card," confiscate if possible. If above floor limit, may need additional ID.
• Be aware that lost or stolen cards issued by out-of-state banks experience unusual time lag in appearing on "hot list".
• Examine ID carefully; compare signatures.
• Be wary of customers who appear unconcerned about price of merchandise.
• Watch out for customers in a hurry, particularly at closing time.

Tips for the Cash Till
• Know the merchandise; prices; number of pieces.
• Do not turn away from an open register drawer; keep it closed between transactions.
• Do not count the contents of register on the selling floor.
• Do not leave register unlocked; take the key.
• If unusual amount of cash has been taken in, request it be collected.
• If customer claims to be shortchanged, request assistance.
• Allow only properly identified persons behind showcases and counters.
• Be alert to detect counterfeit bills.
• On any suspicion, close the drawer.


Shrinkage is a problem, which does not cure itself. Crime is also developing, making use of technology and becoming more sophisticated. Criminals devise improved and new schemes everyday. Expertise in loss prevention is as essential in today's retail world as fashion and salesmanship. The retailers have recognized and accepted the fact the money spent to protect company assets does its share in providing profits.

Ownership
• Store based Retail Strategy mix
• Non-store based retail strategy mix

Formats by Ownership
• Independently owned –owns only one unit.

• Chain-owned-operates multiple outlets under a common ownership and usually has some level of centralized purchasing and decision making.

• Franchise-operated- involves a contractual arrangement between a franchiser and a retail franchisee, allowing the franchisee to conduct
business under the franchiser's name according to a given pattern of business.

• Leased Departments- a department in a retail store, that is rented to an outside party

• Owned by manufacturers

Formats by Store based Retail Strategy mix
• Stores use the following aspects of strategy to differentiate themselves
– Price: Very low/ low/ competitive/ average/ above average
– Location: Neighborhood/ shopping centre close by/ isolated site/ business district/ out-of the –way site
– Merchandise: Width Vs depth, Average vs. good quality, brands vs. no brands/private brands of merchandise, full selection vs specialty merchandise
– Atmosphere and Services: Very Low/Low / Average/ good/ excellent

• Convenience store: is usually a food oriented retailer that is well located, open long hours and carries a moderate number of items. Is small, has average to above average prices, average atmosphere and customer services.

• Conventional supermarket: Is a self service food store with grocery, meat and produce departments. Has a wide range of food and related products

• Food-based superstore: is a variation of a supermarket, but larger and more diversified.

• Combination store: This unites a supermarket and general merchandise sales in one facility . They are very large 30,000 to 1,00,000 sq ft, have high operating efficiencies

• Hypermarket or super center: is a variation of the combination store, but also has a discount format combined with the supermarket format. Very large store of 75,000 to 1,50,000 sq ft
• Box(Limited-line) store: A food based discounter that focuses on a small selection of items, moderate hours of operation, few services and limited manufacturer brands. Services are very low.

• Warehouse store: Is a food-based discounter offering a moderate number of food items in a no-frills setting. They concentrate on special purchases of manufactured brands. Located in secondary sites, provide little service.

• Specialty store: this concentrates on selling one goods or services line, such as apparel and accessories, toys, furniture etc. They carry a narrow, deep assortment of merchandise in their own category.

• Category killer: This is a type of specialty store, which features an enormous selection in its product category and relatively low prices, e.g.. Toys’ R” Us, Barnes and Noble etc.

• Traditional department store: Is a large retail unit with an extensive assortment of goods and services that are organized into separate departments for purposes of buying, promotion, service and control. Has a great selection of general merchandise and is often the anchor store in a shopping center or district, and is usually part of a chain. Pricing is moderate to above average, service levels are medium to high.

• Full-line discount store:Has an image of high volume, low cost fast turnover outlet selling a broad merchandise assortment for less than conventional prices, less fashion oriented, having a centralised checkout system.

• Off-price chain:features brand name apparel and accessories, footwear, linen, fabrics cosmetics and sells them at everyday low prices in an efficient, limited service environment. Carry merchandise similar to traditional department stores but priced 40-50 percent lower, Low service such as centralized checkouts, no gift wrapping etc. They depend on their ability to buy opportunistically

• Factory outlet: Is a manufacturer owned store selling manufacturer closeouts, discontinued merchandise, irregulars, cancelled orders and sometimes in season first quality merchandise

• Membership club: appeals to price conscious customers who must be
members to shop here. It is positioned between wholesaling and retailing.
Members pay a nominal membership fee and buy at wholesale prices.

Non-store based nontraditional
retail formats
• Direct Marketing: a form of retailing where a customer is first exposed to a good or service through a non-personal medium (such as direct mail, broadcast or cable TV, radio, magazine, newspaper ) and then orders by mail, phone and computer.

• Direct selling: Includes both personal contact with customer in their homes (and other non-store locations) such as offices, and phone solicitations by the retailer. E.g.. Vacuum cleaners, cosmetics, magazines, newspapers household goods etc.

• Vending machine: A retailing format involving the coin or card operated dispensing of goods and services, such a tea/coffee. Eliminates the use of sales people and allows for round-the-clock sales .

• World wide web: Selling through the online interactive retailing using the Internet and the world wide web. Also called the click and mortar format

Other emerging formats
• Video Kiosks- free standing interactive electronic computer terminal that displays products and related information on a video screen and often uses a touch screen for consumers to make selections. Consumers can place orders, complete transactions through a credit card and arrange for products to be shipped.

• Airport retailing-now airports have full blown shopping areas and there is a huge emerging potential for this type of retailing

The Ishikawa diagram (also fishbone diagram or cause and effect diagram) is the brainchild of Kaoru Ishikawa, who pioneered quality management processes in the Kawasaki shipyards and in the process, became one of the founding fathers of modern management. It is simply a diagram that shows the causes of a certain event. It was first used in the 1960s, and is considered one of the seven basic tools of quality management, along with the histogram, Pareto chart, check sheet, control chart, flowchart, and scatter diagram. It is known as a fishbone diagram because of its shape.
Causes in the diagram are often based around a certain category such as the 6 M's, 8 P's or 4 S's described below. Cause-and-effect diagrams can reveal key relationship among various variables and possible causes provide additional insight into process behavior.
Causes in a typical diagram are normally arranged into categories, the main ones of which are:
The 6 M's
Machine, Method, Materials, Measurement, Man and Mother Nature (Environment) (recommended for manufacturing industry).
Note: a more modern selection of categories used in manufacturing are Equipment, Process, People, Materials, Environment, and Management
The 8 P's
Price, Promotion, People, Processes, Place / Plant, Policies, Procedures & Product (or Service) (recommended for administration and service industry).
The 4 S's
Surroundings, Suppliers, Systems, Skills (recommended for service industry).
A common use of the Ishikawa diagram is in product design, to identify desirable factors leading to an overall effect. Mazda Motors famously used an Ishikawa diagram in the development of the Miata sports car, where the required result was "Jinba Ittai" or "Horse and Rider as One". The main causes included such aspects as "touch" and "braking" with the lesser causes including highly granular factors such as "50/50 weight distribution" and "able to rest elbow on top of driver's door". Every factor identified in the diagram was included in the final design.


Most Ishikawa diagrams have a box at the right hand side in which is written the effect that is to be examined. The main body of the diagram is a horizontal line from which stem the general causes, represented as "bones". These are drawn towards the left hand side of the paper and are each labeled with the causes to be investigated, often brainstormed beforehand and based on the major causes listed above. Off each of the large bones there may be smaller bones highlighting more specific aspects of a certain cause, and sometimes there may be a third level of bones or more. These can be found using the '5 Whys' technique. When the most probable causes have been identified, they are written in the box along with the original effect. The more populated bones generally outline more influential factors, with the opposite applying to bones with fewer "branches". Further analysis of the diagram can be achieved with a Pareto chart.