The Impact of Ownership Structure on the Dividend Policy free essay sample

We find evidence in support of the hypothesis that a positive relation exists between dividends and free cash flow and it’s greater for low-growth firms than for the high-growth firms. The results also show that the impact of managerial ownership and bank ownership on dividend yield is positive particularly for the low growth firms. This is inconsistent with the view that the managerial ownership and institutional ownership reduce the need for the dividend mechanism. Finally, there is evidence that the Keiretsu classification affects relations between ownership structure and dividend payouts. Overall, the dividend policy appears to be used by Japanese low-growth firms to control the overinvestment problem. Free cash flow hypothesis is to some degree supported. JEL classification codes: G32 G34 G35 Keywords: Ownership Structure, Dividend Policy, Free Cash Flow -2- 1. Introduction Why does a firm pay dividends? This question has been the subject of debate for many years, In the pre-Miller and Modigliani era, it was believed that increasing dividends would always increase market value. We will write a custom essay sample on The Impact of Ownership Structure on the Dividend Policy or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Miller and Modigliani (1961) establish that in a perfect capital market, given an investment policy, dividend is irrelevant in determining share value. Empirically, however, we have observed that a change in dividend policy does have a significant impact on the share price. Different researchers have concentrated on different types of imperfections in the market in order to rationalize why dividends matter. Of these, a plausible idea is that corporate dividend policy addresses agency problems between shareholders and managers (Rozeff, 1982; Easterbrook, 1984; Jensen, 1986). According to these agency theories, unless profits are paid out to shareholders as dividends, they may be committed to unprofitable projects that provide private benefits for the managers. Rozeff (1982) and Easterbrook (1984) argues that the payment of dividends expose companies to the possible need to raise external funds, and hence subjects them to greater monitoring by capital markets. Jensen (1986) argues that paying dividends reduces the discretionary resources under managerial control and so helps to mitigate the overinvestment problem. In this study, we examine the implication of the free cash flow hypothesis in corporate dividend policy, and focus specifically on cross-sectional relations between dividend payout policy and ownership structure and free cash flow. Given the severity of the overinvestment problem, relations between dividend payouts and ownership structure, free cash flow may be conditioned on the existence of growth opportunities. This research examines how the sensitivity of relations between dividend payouts and ownership structure, free cash flow varies cross-sectionally with growth opportunities. Previous studies have shown that in countries like the US, firm ownership is relatively dispersed, leading to a limited ability of owners to monitor or control management’s use of free cash flow. Thus the dividend payout is one of the primary control mechanisms whereby shareholders can reduce management access to or abuse of discretionary funds. In countries with 1) a higher concentration of ownership 2) extensive cross-shareholding and 3) strong banking relationship, like Japan, dominant shareholders are believed to have both the incentives and the ability to keep management in check. Tests using a sample of 986 observations for 350 firms from 1992 to 2000 period indicate that the sensitivity of managerial ownership and bank ownership to dividend payouts varies directly with the relative abundance of growth opportunities. we find that dividend payouts for low-growth firms are significantly related to managerial ownership and bank ownership. In -3- contrast, there are no significant relations between dividend payouts and managerial ownership, bank ownership for high-growth firms. We also investigate associations between free cash flow and dividend payouts. Consistent with the prediction by Jensen (1986), there is a strong positive relation between the level of free cash flow and dividend payouts. Furthermore, association between free cash flow and dividend payouts is stronger for low-growth firms. The rest of the paper is organized as follows. Section 2 reviews the previous theoretical and empirical research. Section 3 explains the Japanese institutional background. Section 4 describes the empirical framework. The empirical results are presented in Section 5-6 and Section 7 concludes. . Dividend payouts, Ownership Structure and Agency Cost Theory 2. 1 Dividends and Agency Costs Corporate dividend policy has been viewed as a control mechanism that mitigates agency conflicts between shareholders and managers. Jensen and Meckling (1976) suggest that one way to reduce agency costs of equity is to pay a larger proportion of its earnings as dividends to its stockholders. A high dividend payout ratio will result in lower â€Å"discretionary† cash flows available to be squandered away by managers. Rozeff (1982) argues that dividend payments are part of the firm’s optimal monitoring/bonding package and serve to reduce agency costs. Easterbrook (1984) lists some of the mechanisms by which dividends and the consequent raising of capital can control agency costs. Agency costs â€Å"are less serious if the firm is constantly in the market for new capital. When it issues new securities, the firm’s affairs will be reviewed by an investment banker or some similar intermediary acting as a monitor for the collective interest of shareholders, and by the purchasers of the new instruments†. Free cash flow hypothesis The free cash flow hypothesis is a variant of the agency argument based on the Principal-Agent framework. According to this framework, dividends are used by shareholders as a device to reduce overinvestment by managers. Jensen(1986) argues that managers with substantial free cash flow tend to invest it in wasteful projects rather than pay it out to shareholders, because managerial compensation and perquisites increase even with poor investments. These unnecessary investments lead to poor performance, creating conflicts between shareholders and managers. Jensen emphasizes the disciplinary role of dividends that restrain managerial unprofitable expansionary tendencies by limiting financial resources available to managers. Dividend payments represent an ongoing commitment to maintain higher payments in future periods, because firms are reluctant to cut dividends and have been greeted by a significant -4- negative stock market reaction when they do. Jensen suggests that dividends should be paid out in ways that instigate managers to gorge the cash beyond the optimal amount. This implies that free cash flow positively determines dividend payments. . 3 Ownership structure and dividend policy One criticism of the agency cost theory is that if managers want to overinvest or spend more on jets, what is the mechanism that will force them self-commit to an action that will prevent them from doing so? Several authors address this issue in the context of ownership structure 2. 3. 1 Institutional Ownership There are several important ways in which institutions differ from individual investors. In general, institutions manage large pools of funds and therefore invest larger amounts in each stock. Because they have larger amounts at stake, they should have incentives to devote resources to monitoring (Grossman and Hart, 1980; Shleifer and Vishny,1986). Institutions are also likely to be better informed than are individual investors. Not only do institutions devote resources to gathering information, but they are also sometimes privy to corporate information that individual investors do not have ( Michaely and Shaw,1994). However, the prediction on the relationship between dividend policy and institutional ownership are mixed. The first line of research suggests a positive relation. Zeckhauser and pound (1990) suggest the arm’s length view of investment held by many institutional investors, coupled with the incentives to free ride with respect to monitoring activities, implies that institutional shareholders are unlikely to provide direct monitoring themselves. The institutions, rather than providing monitoring themselves, forces firms to increase their dividends in order that they are subsequently forced to go to the external capital market for future funds. Eckbo and Verma (1994) argue that institutional shareholders will prefer free cash flow to be distributed in the form of dividends in order to reduce the agency costs of free cash flow. From this perspective, it may be argued that institutional shareholders may counter a tendency for managers to prefer the excessive retention of cash flow and, by virtue of their voting power, force managers to pay out dividends. Moh’d, Perry and Rimbey (1994) and Short, Zhang, and Keasey (2002) also provide additional support. The second line of research suggests a negative relation. Jensen and Meckling (1976) argue that external monitoring activity is an important controlling element when agency conflict exists. If large institutional investors act as monitoring agents, and if dividends are paid to reduce agency cost, then according to this theory, there should be a substitute relation between dividend policy and institutional ownership. This implies a negative relationship between the percentage of -5- hares held by institutions and the dividend payout. D’Souz, and Saxena (1999) provide the empirical evidence. 2. 3. 2 Managerial Ownership There are several lines of argument on the role of managerial ownership. The first line of argument suggest that managerial ownership may better aligning the interest of management and shareholders and helps mitigate free cash flow problems. Therefore it results in a higher level of total payouts when managers hold more shares. ( White,1996; Fenn and Liang,2001). The second line of argument suggest that insider stock ownership provides direct incentive alignment between managers and shareholders while dividends serve as a bonding mechanism reducing management’s scope for making unprofitable investment out of internal funds. Thus, insider stock ownership and dividend policy are viewed as substitute means of addressing potential agency problem. Empirical articles have shown that managerial ownership is not a linear function of agency costs. Morck, Shleifer and Vishny (1988) and McConnell and Servaes (1990) found insider ownership is related to performance in a nonlinear fashion. Schooley and Barney (1994) report a nonmonotonic relation between CEO stock ownership and dividend yield. Farinha (2003) documented the U-shaped relationship between insider ownership and dividend payout in the UK. He argues that it stems from the effects of managerial entrenchment. Japanese Institutional Background Japan offers us a valuable opportunity to examine issues related to dividend policy under an institutional setup quite different from that in U. S. , such as the main bank, the cross-shareholding among corporations. This distinctive Japanese institutional background may result in important difference between Japanese and U. S. firms in terms of corporate monitoring and information sharing. Since, most theoretical explanations of dividends rely on agency and information issues, they would suggest different choices of dividend policy in Japan. 3. 1 Main bank -6- Aoki, Patrick and Sheard (1994) highlight a significant governance role played by the main bank for Japanese firms. The main bank effectively monitors the client firms by becoming well-informed about the firm (Diamond, 1984)). The main bank’s equity stake in the client firm mitigates agency costs between creditors and shareholders (Prowse (1990)). The main bank sometimes intervenes the management of the client firm that performs poorly by appointing bank employees to the board of directors in the client firm (Kaplan and Minton,1994; Kang and Shivdasani, 1995; Morck and Nakamura, 1999). In case of financial distress, the main bank acts as a guarantor for other creditors, reducing the cost related to the restructuring of the client firm (Hoshi, Kashyap and Sharfstein,1990).. In contrast, several authors suggest that there is a cost in having a main bank. Firms relying on the main bank for financing are likely to be constrained in raising the additional capital when the banking sector as a whole has a financial difficulty (Kang and Stulz, 2000). The main bank can extract surplus from the client firms due to its monopolistic power of information production (Rajan, 1992). In a similar context, the main bank has an incentive to force the client firms to undertake low-risk, negative NPV projects (Weinstein and Yafeh, 1998). Firms that do not depend on bank borrowing exhibit higher profitability than the matched sample of firms that have a main bank ( Kang and Shivdasani, 1999). 3. 2 Keiretsu Group There exist differences between keiretsu or industrial groups centered around affiliated banks and financial institutions and unaffiliated independent firms with weaker banking ties. Japanese industrial organization is characterized by groups of enterprises (keiretsu) composed of firms based in different industries but bound by ties of fractional ownership and reliant on a large commercial bank as the major but not sole lender. The large shareholders of keiretsu firms often are also large creditors of the firm as well as important long-term commercial business partners. The keiretsu and non-keiretsu firms are facing different liquidity constraints in their investment spending. Investment spending is very sensitive to liquidity constrains for non-keiretsu firms, but not so for keiretsu firms. Since keiretsu firms are likely to have better access to financing sources, keiretsu firms seemingly face less liquidity constraints in making investment decision. The differences in institutional arrangements between keiretsu and non-keiretsu firms may influence the behavior of shareholders as monitors. Kester (1990) describes the corporate governance system of keiretsu firms in terms of a complex interaction between shareholdings, credit holding and long-term business relationship that exist between the firm and its stake holders. Aoki, Patric, and Sheard (1994), and Berglof and Perotti (1994) suggest a two-tier monitor system. In the first stage, corporate cross-shareholders serve as the monitors under -7- normal circumstances because they have specific industry knowledge and observe each others’ performance through their business relations. In the second stage, the financial institutions take an active intervention role when member firms get into financial distress, replacing incumbent managers and requiring restructuring and liquidation of assets. Managerial equity ownership Because the well-known keiretsu structure and influential bank shareholders, the agency problems between Japanese managers and shareholders are considered to be minimal (e. g. Nakatani, 1984; Hoshi, Kashyap and Scharfstein, 1990, 1991; and Prowse, 1990). The manager ownership, as a way of aligning interests between managers and shareholders, has been viewed as an unnecessary corporate governance mechanism. However Kang and Stulz (1998), Mock and Nakamura (1999), and Weinstein and Yafeh (1998) questioned the effectiveness of bank oversight in Japan. Morck and Nakamura (1999) argue that for independent firms, bank equity holders pursue their interests as creditors at the expense of their equity claims. Gibson(1995) and Kang and Stulz (2000) argue that poor bank health may adversely affect their dependent firms’ investment prospects, which, in turn, would affect their ability to monitor effectively. This particular contention is especially relevant to the late 1980’s and early 1990’s as it is well known that Japanese banks have been experiencing significant financial difficulties during this time period. In light of these findings, Morck and Nakamura (1999) contend that some independent firms may require corporate control mechanisms other than bank oversight. Due to the decline in power of Japanese banks, the rarity of incentive-based compensation contracts for Japanese managers, and the fact that many Japanese firms are not affiliated with a keiretsu group, the managerial-ownership may represents an alternative mechanism to ensure that firms operate efficiently. Thus, the unique Japanese institutional arrangements provide an interesting backdrop to investigate whether cash flow theory explanation for dividend policy still apply given the differences. 4. Empirical framework 4. 1 Hypotheses If one assumes, as suggested by Jensen (1986), that managers receive utility from increasing the size of the firm, the control function of dividend payouts on the overinvestment problem varies with the firm’s growth opportunities. Management may have an incentive to pay out as few dividends as possible at shareholders’ expense. The overinvestment problem is less important and may be trivial for firms with many growth opportunities, because the objectives of managers and shareholders are more likely to coincide. On the other hand, when good projects are not -8- available, managers with substantial free cash flow must find ways to spend it and hence choose poor projects. Thus, the overinvestment problem is higher for low-growth firms than for high-growth firms, and divergence of interests between shareholders and managers over the firm’s payout policy are more severe in firms with few growth opportunities. These firms can limit management’s temptation to overinvest by paying out a larger percentage of their earnings. Their high-growth counterparts with lots of investment opportunities are likely to pay low dividends because they have profitable uses for the capital. For this reason, we expect stronger relations between free cash flow and dividend payouts for low-growth firms. Hypothesis I: relations between the level of free cash flow and dividend payouts are positive and are stronger for firms with low growth opportunities. Most of the existing agency explanations of payout rely on the implicit assumption that firms can get refinanced on the capital markets when they need funds to undertake new investment projects. Consequently, the strategy that minimizes agency costs is to maintain a high payout (to reduce the amount of free cash flow and to avoid overinvestment problems) and to raise new outside capital whenever and attractive investment opportunity emerges. Outside shareholders are harmed by a potential overinvestment and therefore they have preferences for high payout, which curbs the amount of corporate resources that can be spent by management on value reducing projects. Managerial ownership helps to align interests of management and shareholders that may yield the reduction of agency costs stemming from payout smaller. Consequently, payout ratios in a firm with managerial block holdings may be low because the severity of manager-shareholder agency conflict is low. This traditional agency view generates a set of hypothesis that the payout is negatively related with the managerial ownership. Institutional investors are more effective at monitoring management than retail investors. Due to the size of their investments and the resources at their disposal, institutional investors have greater incentive and ability to gather and analyze information pertaining to their investments, as well as a greater ability to discipline management and push for changes when management performs poorly.

Salem witch trails Essay

Salem witch trails Essay Salem witch trails Essay David Saldivar Dr. Michael Faubion History 2313.01 05 November 2014 Salem Witch Trials Essay Throughout history various events have struck the foundation of humanity in many ways. One such event know as The Salem Witch Trials, had many people in various communities in turmoil. It started in 1692, in a small village named Salem, were residents were experiencing bizarre symptoms that no physician could medically explain at the time. Since most of the early settlers were religious folk and believed that any misfortunes in the village could be attributed to the work of the devil, they had come to a conclusion that witchcraft had stricken Salem. Many of the cases in Salem were merely false accusations, but almost all had resulted in various examinations and in many cases individuals were put to death. Although Salem was not the first settlement to showcase witchcraft one record states that the children of John Goodwin in Boston were plagued by unknown causes. The children all had the same pains in the exact spot at the same time, and had several fits that could not be explained. Cotton Mather stated â€Å"Skilful physicians were consulted for their help, and particularly our worthy and prudent friend Dr. Thomas Oakes, who found himself so affronted [non-plussed] by the distempers of the children, that he concluded nothing but an hellish witchcraft could be the original [origin] of these maladies.†1 Mr. Goodwin had accused a woman by the name of Glover, he had no real evidence she was the cause of his children’s fits, but was taken into custody on the account of how wretched she looked. They took her into custody and questioned her, she did not deny the interest of enchanting the children and had a suspicious behavior while apprehended. They concluded she was the cau se of the children’s mishaps and was sentenced to death. One early case in Salem, was the daughter and niece of Mr. Samuel Parris who were the first to experience unnatural behavior. These children were bitten and pinched by invisible agents; their arms, neck, and backs turned his way and that way, and returned back again, so as it was impossible for them to do of themselves, and beyond the power of any epileptic fits, or natural disease to effect.2During the fits of the children they would cry out the name of their servant Tituba, and therefore accused her of bewitching them. Tituba had confessed to taking urine of the afflicted person and using it to make a cake.

Search engine industry Essay Example | Topics and Well Written Essays - 750 words

Search engine industry - Essay Example Hence, might create rivalry shift due to intense rivalry and technological advances.Established or major competitors with strong product differentiation and backing like MSN, Yahoo, AOL/Netscape are already on board in this competition. Hence, it will alert potential newcomers to size up and determine if they can match these companies in terms of capital requirements and experience.This market size is just a fraction of the bigger industry if other leading internet companies like Amazon.com and Ebay are included in the analysis. Hence, the US$ 11.8 billion size can be considered as the floor or minimumThe intense competition, however, demands more improvements and more developments with shorter life cycles. This can significantly erode the profitability of the firm for companies like Google must allocate big resources in research and innovation in order to capture the general market.Convergence is the significant factor in the changing search engine industry. Providing highly relevan t search results will no longer be the best talking points. In the long run, it will be considered as standard in the industry. The emerging challenge is how to lump different services around the search engine.Case in point: MSN to incorporate search capabilities to MSN Encarta, MS Outlook, and Internet Explore. Another, Google is integrating other systems like Froogle, Gmail, and Blogger under the blanket search engine. The idea is to be a one-stop shop that will cater to majority of internet users. It means that one need to go to Google to make some

Measure and assessment Research Paper Example | Topics and Well Written Essays - 750 words

Measure and assessment - Research Paper Example If they are available from secondary sources, the task becomes easier for the researcher. If not, they have to necessarily resort to collection of primary data. So long as the requirements are confined to quantitative information, they can be collected easily. At the same time, if qualitative information is required, the problem gets compounded. In particular, when a researcher is interested in capturing the behavioral pattern of the chosen samples, task would not be as easy as collective quantitative information. Given the fact that the researcher cannot enter into the minds of respondents, at the best what goes on in the minds of respondents can be captured by designing appropriate questions / statements and eliciting their responses. While the subject matter has been debated over the years, there is a consensus amongst researchers on the usefulness of measurement scales. These scales are tools which sorts or rates or ranks the respondents view points on the pre-determined criteria. They have been used widely in the areas that call for using psychometric exercises. The behavior of respondents thus gets captured by noting the respondents responses on a scale, and these responses when codified become the data for further analysis. Once the researchers decide what kind of measurement scales are to be used, it is equally important to determine if the tools used reliability and validity. Of course, a researcher could use a number of measurement scales, but choosing the right scale is a challenge. Only those scales which are reliable and valid alone will have to be chosen for measurement purposes. When a tool used for measurement produces similar results on repeat, that tool could be considered as reliable. In fact, reliability of a tool is nothing but the degree to which what has been measured yields consistent result each time it get used. Moreover, if what get measured remains free of error, the tool used to measure them is considered as reliable. On the

Qualitative and Quantitative Risk Analysis Techniques

Qualitative and Quantitative Risk Analysis Techniques The oxford dictionary defines a risk as a situation involving exposure to danger. In business, an occurrence is said to be risky if it has the probability of an adverse outcome. Others words typically used in association with risks are words such as hazards and threats. In most cases, were mitigation controls are not implemented, a risk could result in the loss of financial or material assets, or more critically, it could lead to loss of life. Organisations therefore need a technique to assist in the identification and classification of risks; hence the relevance of Risk analysis. Risk analysis assists in defining preventive measures to reduce the probability of identified threats occurring. Information Technology (IT) managers are able to add value to organisations by using the principles of risk analysis to ensure that businesses remain existent in the face of a risk. The risk analysis process involves three processes: Hazard identification, Risk assessment and Risk evaluation. Hazard identification is the process of identifying undesired or adverse events that lead to the materialisation of a hazard []. Risk assessment is the process of determining the size and magnitude of a risk. Finally, Risk evaluation is the process of assessing the risk in terms of its significance, gravity, or seriousness. [] Mathematically, the risk equation can be expressed as: Risk = (Impact * Likelihood) or Risk = (Probability * Likelihood) [] Impact measures the level of loss to the organisation. Loss can either be financial or operational and Likelihood measures the probability of feeling the impact. Risk Assessment Methodology Risk assessment is the systematic evaluation of the likelihood of an adverse effect arising from exposure in a defined population. The focus for IT security managers is risk assessment that is geared towards meeting the confidentiality, Integrity and Availability of information resources []. Risk Analysis Techniques Risk analysis techniques can be broken down into two broad methods: Qualitative Risk Analysis and Quantitative Risk Analysis. Regardless of the technique selected by an IT security manager, an understanding of the organisations process assets i.e. how risks were handled in the past, the scope of the project in question and plans that have been put in place to manage risks have to be clearly defined. Qualitative Risk Analysis Qualitative risk analysis involves the use of relative concepts to determine risk exposure [] thereafter, a relative classification system is employed where risks are classified as high, medium or low []. Qualitative risk analysis allows IT managers perform systematic examinations of threats and risks to the organisation. It also provides the opportunity for a review of proposed countermeasures and safeguards to determine the best cost-benefit implementation []. Using this technique requires IT managers to develop a scope plan, assemble a quality team, identify threats and prioritise threats. Advantages of Qualitative Risk Assessment Technique: Ease of calculation: when compared with quantitative technique, performing calculations using a qualitative technique is relatively simple. Monetary value of assets does not need to be determined: to perform a qualitative risk assessment, IT managers dont need to come up with a monetary value assets identified during the initial asset identification phase. It is not necessary to quantify threat frequency: because this technique does not require complex calculations, IT managers do not have to quantify the number of times a certain threat is likely to It is easier to involve non-security and non-technical staff: though it is important to select as risk assessment team members, this technique does not require that selected team members consist solely of technical members. Flexibility in process and reporting Drawback of Qualitative Risk Assessment Techniques Below is a discussion on the drawbacks of qualitative risk assessment techniques Qualitative techniques are subjective in nature- i.e. rather than relying on statistical data or evidence for its results, it is dependent on the quality of the risk management team that created it. The Cost-benefit analysis technique which assists in justifying the need for investing in controls is not used in qualitative risk assessment. It does not differentiate sufficiently between important risks. Attributes of Qualitative Risk Assessments: Qualitative risk assessment techniques offer a relatively faster process when compared with quantitative techniques; its emphasises are on descriptions as against statistical data, as such, teams members need not be overly technical to take part in a qualitative analysis process. In addition, values from a qualitative risk assessment are not actual values. In other words, they are perceived valued. Finally, its findings are simple and expressed in relative terms understandable by non-technical people therefore requiring little or no training before its results can be understood. Qualitative Risk Assessment Tools / Techniques: A number of tools are available for carrying out qualitative risk assessment a few of them are discussed below: Probability and impact matrix: the probability and impact matrix illustrates a risk rating assignment for identified risks. Each risk is rated on its probability of occurrence and impact upon objective. Risk probability and impact assessment: using this tool involves the risk analysis team rating the projects risks and opportunities []. Ishikawa (Fishbone cause and effects diagrams): the cause and effect diagram can be used to explore all the possible or actual causes (or inputs) that result in a single effect (or output). This tool can be used for identifying areas where there maybe problems and to examine causes of risks. Failure Mode and Effect Analysis (FMEA): the FMEA method starts by considering the risk events and then proceeds to predict all their possible effects in a chart form. [] Quantitative Risk Assessment IT security managers as decision makers are susceptible to biased perception. as such, they require a means of accurately determining risks such that potential risk factors are not overlooked this hence the need for quantitative risk assessments. Quantitative risk analysis generally follows on from the qualitative risk analysis process. It aims to numerically analyse the probability of each risk and its consequence on the project objectives as well as the extent of overall project risk. Quantitative Risk Assessment Techniques In quantitative risk analysis processing, techniques such as Monte Carlo'[] and Bayesian simulations can be employed because they provide indispensible tools to the risk assessment team. These tools assist the team in determining the probability of achieving a specific project objective. They are equally used to quantify the risk exposure for the project and determine the size of cost and schedule contingency reserves that may be needed. Additionally, they identify the risks which require the most attention by quantifying their relative contributions to project risk. Advantages of Quantitative Risk Assessment Using quantitative assessments IT managers are able to present the results of risk assessment in a straight forward manner to support the accounting based presentation of senior managers. [] As results are statistical in nature, it aids in determining whether an expensive safeguard is worth purchasing or not. The process requires the risk assessment team to put great effort into assets value definition and mitigation as a result; its results are based substantially on independently objective processes and metrics. Finally, carrying out a quantitative risk analysis is fairly simple and can easily follow a template type approach. Drawbacks of Quantitative Risk Assessment Calculations involved in quantitative risk assessments are complex and time consuming. Its results are presented in monetary terms only and as such, may be difficult for non-technical people to interpret. The process requires expertise so participants cannot be easily coached through it. Impact values assigned to risks are based on opinions of participants.[] Attributes of Quantitative risk assessment Accuracy of results from quantitative risk assessment tends to increase over time as the organisation builds historic record of data while gaining experience. Results generated from a quantitative assessment are financial in nature, making quantitative techniques useful for cost benefit analysis. Quantitative Risk Assessment Tools Decision Trees Analysis: the decision tree is a useful tool for choosing an option from alternatives. It is used to explore different options and the outcome of selecting a specific option. Sensitivity Analysis: This technique is used to determine the risks which are likely to have the highest impact on the project. In sensitivity analysis, the effect of each risk is examined while keeping all other uncertain elements at baseline values.[] Striking a Balance As already highlighted above, both approaches to risk management have their advantages and disadvantages. Certain situations may call for organisations to adopt the quantitative approach. Conversely, smaller organisations with limited resources will probably find the qualitative approach better fitting. Furthermore, in selecting a risk analysis technique, IT security managers should select a technique that best reflects the needs of the organisation. The decision on which risk analysis technique to use should depend on what the manager is attempting to achieve. It is this suggestion of this paper that an integration of qualitative and quantitative risk analysis techniques be adopted by IT security managers to create a more comprehensive analytical approach. This can be understood as a Hybrid Risk Analysis Approach. Capturing risks and selecting controls are important, however more important is an effective risk assessment process establishing the risk levels. Before an organisation can decide on what to do, it must first identify where and what the risks are. Quantitative risk analysis requires risk identification after which both qualitative and quantitative risk analysis processes can be used separately or together. Consideration of time and budget availability and the need for both types of analysis statements about risk and impact will determine which method(s) to use.[ ]

Eastern Gear

1. What are the major problems being faced by Eastern Gear? The major problem’s Eastern Gear is facing is that they are accepting large orders to help pay their overhead, also, their sales group is not part of the business, there is no link between them and manufacturing. Their order entry is inefficient; the tolerance on products is not firm. The layout of their shop is set up to make mistakes and increased lead time has resulted in the need for an expeditor. Lastly, they are hiring too many employees for the company’s needs. 2. What action should Rhodes take to solve his problems? First, Rhodes needs to stop accepting large orders at discounted prices to help cover overhead, doing this will not cover overhead and should only be done if the company is facing bankruptcy. Accepting the large orders causes some of the small orders to wait for processing and in-turn, are late. Also, the sales group is not part of the business, there is no direct link between them and manufacturing. Therefore, no one is paying attention to the order size. This needs to be corrected by putting a direct line of communication between sales and manufacturing. Second, the order entry system needs to be more efficient. A customer is able to request a change in design after the order has already been placed, it may be necessary to stop production on these orders and wait for the new raw materials or for the new design to be clarified. They do not have a process that charges back the variance on these orders; they need to input a system where if the customer wants a design change, they have to pay for it. Also, the customer’s prints submitted with the order do not always contain the tolerances required during machining. This is a discipline issue within the organization that needs to be eliminated; the customer must sign off on the tolerances before the order begins processing. Third, Eastern Gear needs to change the layout of the shop. Lead time has recently increased from 2 to 4 weeks, which made it necessary to hire an expeditor, there is a concerning amount of bottlenecks in the production process and inspection of the products is not done until the order is completed. The shop is set up to make production errors and ship unfinished product. The tools need to be central and equipment should not be set up by type but placed in proper sequence so that the product moves sequentially from the beginning of production to the end, and quality checks and inspection should be incorporated in the production process. Also, Eastern Gear needs to change their order fulfilment approach from made-to-order to made-to-stock. Changing the layout of the shop and order fulfilment approach will help reduce bottlenecks and lead time as well as eliminate the need for an expeditor. Lastly, Eastern Gear has a workforce of 50 people and is managed using a family- type approach. They have hired 10 new employees within the last quarter. The typical order spends 90% of the time waiting for a machine to become available, and only 10% of the time is actually spent processing the order, they should not hire more employees. 3. How can this case be related to operations strategy and process design concepts? This case related to operations strategy and process design concepts because having a good operations strategy and process design are key to running a successful manufacturing company. As witnessed in this case, the operations strategy and the process design need adjustments in order to be successful. Eastern Gear 1. What are the major problems being faced by Eastern Gear? The major problem’s Eastern Gear is facing is that they are accepting large orders to help pay their overhead, also, their sales group is not part of the business, there is no link between them and manufacturing. Their order entry is inefficient; the tolerance on products is not firm. The layout of their shop is set up to make mistakes and increased lead time has resulted in the need for an expeditor. Lastly, they are hiring too many employees for the company’s needs. 2. What action should Rhodes take to solve his problems? First, Rhodes needs to stop accepting large orders at discounted prices to help cover overhead, doing this will not cover overhead and should only be done if the company is facing bankruptcy. Accepting the large orders causes some of the small orders to wait for processing and in-turn, are late. Also, the sales group is not part of the business, there is no direct link between them and manufacturing. Therefore, no one is paying attention to the order size. This needs to be corrected by putting a direct line of communication between sales and manufacturing. Second, the order entry system needs to be more efficient. A customer is able to request a change in design after the order has already been placed, it may be necessary to stop production on these orders and wait for the new raw materials or for the new design to be clarified. They do not have a process that charges back the variance on these orders; they need to input a system where if the customer wants a design change, they have to pay for it. Also, the customer’s prints submitted with the order do not always contain the tolerances required during machining. This is a discipline issue within the organization that needs to be eliminated; the customer must sign off on the tolerances before the order begins processing. Third, Eastern Gear needs to change the layout of the shop. Lead time has recently increased from 2 to 4 weeks, which made it necessary to hire an expeditor, there is a concerning amount of bottlenecks in the production process and inspection of the products is not done until the order is completed. The shop is set up to make production errors and ship unfinished product. The tools need to be central and equipment should not be set up by type but placed in proper sequence so that the product moves sequentially from the beginning of production to the end, and quality checks and inspection should be incorporated in the production process. Also, Eastern Gear needs to change their order fulfilment approach from made-to-order to made-to-stock. Changing the layout of the shop and order fulfilment approach will help reduce bottlenecks and lead time as well as eliminate the need for an expeditor. Lastly, Eastern Gear has a workforce of 50 people and is managed using a family- type approach. They have hired 10 new employees within the last quarter. The typical order spends 90% of the time waiting for a machine to become available, and only 10% of the time is actually spent processing the order, they should not hire more employees. 3. How can this case be related to operations strategy and process design concepts? This case related to operations strategy and process design concepts because having a good operations strategy and process design are key to running a successful manufacturing company. As witnessed in this case, the operations strategy and the process design need adjustments in order to be successful.

Multinational Enterprises

Globalization is changing the way of doing business in the world today. It is the new era of business opportunity. For many major companies, going global is a matter of survival, and it means radically changing the way they work. Economic globalization changes both spatial dimension of MNE†s (Multinational Enterprises) and creates a need for more flexible production of marketing systems and new forms of organization. Firms trying to position themselves as global players face problems such as the cost of building a simultaneous presence in several product areas and foreign markets. They must also be able to manage cultural difference and be able to carry out effective cross-cultural communication. Global skills must be an integral part of an enterprise; these skills must be integrated throughout all operations of the company. Managements handling of diversity will be the most significant factor affecting MNE†s success in the global marketplace. Whether a company is concerned about the supervisors of minority employees, world trade, joint ventures or global economic cooperation, culture will have a great impact on the relationships and the operations. Edward H. Schein states it perfectly: Consider any complex, potentially volatile issue-Arab relations, the problems between Serbs, Croats, and Bosnians, corporate decision-making, getting control of U. S. deficit or health care coasts, labor/management relations, and so on. At the root of the issue we are likely to find communication failures and cultural misunderstandings that prevent the parties from framing the problem in a common way, and thus make it impossible to deal with the problem constructively (Schein 40). Every company that becomes global should have global leadership. Culturally skilled leaders are essential for the effective management of emerging global corporations. They should have persons in management that are capable of operating effectively in a global environment and they must be respectful of cultural diversity. In China, the conflict in management has been addressed as a major problem for the global-player, such as US and Chinese joint ventures. Joint ventures are designed to improve and eliminate misunderstanding of global-culture differences in management. Some Chinese and American companies try to adapt to one another, but it is not easy. Both sides have found that cultural difference is difficult to control. For example, Babcock & Wilcox joint-ventured with Grub and Lin. Workers evaluated Chinese managers by a simple standard: who ever quarreled with Americans the most aggressively would be considered comrade in arms, and whoever cooperated with the Americans would be nicknamed â€Å"Er Gui zi† (fake foreigners). The atmosphere became so tense that even the most trivial business dealings between the American and Chinese became bogged down in charges and counter charges (Tse 32). Differences in customs, behavior, and values result is problems that can be managed only through effective cross-cultural communication and interaction. All employees should learn about the about the influence of culture and be effective cross-cultural communicators if they are to work with minorities within their own society or with foreigners encountered home or abroad (Harris and Moran 59). Globalization involves doing business around the world in a new way giving companies an opportunity to explore the world market. The idea of a global-player involves low-cost and new customer. In Asia, Europe, and many other parts of the world, there are thousands of service and product markets waiting to be filled. The Chinese consumer market is one of the most attractive countries for the global-player. The Chinese economy has been growing rapidly in past decade under its â€Å"open-door† policy on foreign trade, investment and finance For example, China is one of the most discussed topics of a business opportunity for global-player around the world. This is because China has a huge and fresh consumer market waiting to be filled; â€Å"China is a major imperative for most big multinationals†. Indeed for some, such as Coca-Cola, Ericson and Procter & Gamble, the country has become one of their largest markets in Asia or even the world† (Edward Tse, 11). China is the third largest country in the world and its population is about 20 percent of the world's population. Since 1979, China has entered the new era of creating an open-door policy to carry out the construction of modernization. Opening the door to the outside world has developed a newly established special economic zone, which is on the coastal area and the area along the Changing River and much more. With the progressive improvement of the investment environment and the completion of laws and regulation concerning foreign affairs, more and more foreign investors have come to China† (Fumio ltoh, 5). As a result, import and export have increased from $20. 6 billion in 1978 to $195 billion US dollars in 1993. From the report of China Ministry of Foreign Trade and Economic Cooperation (MFTEC), â€Å"during the first seven months of 1997, there were 26 billion U. S. investment dollars flowing into China and it is 15. 5 % gain from last year† (â€Å"Chinoday. com†). China's G. D. P. has been growing at about 9 to 10 percent a year for last 15 years. Since the opening of China, people have been adapting to new cultural values. Chinese consumers are willing to spend more money on purchasing goods and services. Many international products and services have been able to succeed in this revolution because most of the Chinese consumer's decisions are influenced by promoti on, and advertising through television and magazines ads. There are increasing numbers of china's population that own their own televisions. By 1995, official statistics said that more than 80% of Chinese have their own televisions. The advertising spending in China has been growing at around 60% a year since 1990. In a survey, more than half of the people who responded, said that â€Å"television ads influenced their firs-time purchase of the brand they used most often for a home or care products† (Tse, 13). There are a lot of companies have been presented into China, such as Procter & Gamble, S. C. Johnson, Henkel, Unilever and Kao. I believe that companies going to China as a global-players need a powerful global vision to lead their organization into the future success. Arch McGill, the former president of AT&T Advanced Information System said that â€Å"Change in business starts with a vision† (Daniels, 18). Company should have a right global vision address such an important issue, such as how will they serve customer, finding local business partner and geographic concern.