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Describe the Factors to Consider When Promoting Effective Communication

You need to consider a number of factors: Verbal communication: Tone and pitch of your voice, does it suit the situation or topic? A louder more direct communication maybe required if trying to get the attention of a group of children to come back inside. However this would not be suitable in a situation whereby a child is upset say for example if they have wet themselves and are embarrassed, this would need a quieter and understanding tone to reassure them.

Use of language is important, when talking to children you need to keep things simpler than if you were walking to an adult, however if you talking to an adult using very simple instructions this may be deemed as patronising, so it is important to choose your language carefully. The speed in which you talk is also key. When talking to children I tend to get down to their level and talk to them at a relatively slow speed, this way they are more likely to understand me more than if I was walking round above them talking as though I would talk to adults.

Non-verbal communication: Facial and hand gestures, again this needs to be tailored to the situation or topic. In the example above, a smile and perhaps a hand on their shoulder is sufficient to the situation. Whereby frowning and waving arms as if annoyed would be detrimental to the feelings of the child. Eye contact is an important factor as this engages the audience, keeping them focused on what you are discussing.

By making eye contact you are directing your conversation at that specific person, demonstrating that you are devoting your time and are not able to be distracted as if you would by looking around. Body language plays an important part, for example folded arms can indicate you are being defensive or not open to suggestions, whereas slouching, hands on hips, rolling of eyes and huffing can seem rude and disrespectful. It is always advisable to evaluate a number of factors before communicating information:

What is the information I need to communicate? Who is my audience? Is written or verbal the best form of communication? What is the best time of day, at morning drop off or should I book some time in with the parent? Where should the communication take place, would it be appropriate to talk within ear reach of others or is the matter sensitive, therefore needing privacy. By considering the above, you are demonstrating professionalism and considering the needs of others.

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Nokia Marketing Plan

1. Executive Summary Nokia is one of the world’s largest cell phone companies who follow a particular customer driven marketing strategy, which can be considered as a model for other company. Nokia segmented the market of world according to their economic condition and then try to targeting as much as they can. Suppose, Nokia itself launch varieties models of mobiles at varieties prices and positioning itself as more for more, the same for less and less for much less. They also try to bring their product differentiation, service differentiation provide new classic models, features and long lasting batteries.

We hopefully say that, this particular customer driven marketing strategy should be widely followed to achieve the unified whole. 2. Introduction The company I have chosen to analyze in my assignment is the mobile phone giant Nokia. This assignment tells us briefly what Nokia actually is, its Customer driven marketing strategy, how they create value for target customer view on the size and sales of the company and also the Various Market segmentation Strategies, target market strategies and differentiation and positioning their products to desired market with customer satisfaction.

Since January 2004, Nokia Group has consisted of four different business groups: Mobile Phones, Multimedia, Enterprise Solutions and Networks. “In addition, there are two horizontal groups that support the mobile device business groups: Customer and Market Operations and Technology Platforms. ” In the year 2004 Nokia’s net sales for mobile phones was 18507 million euro, which went down 12% from 2003. Nokia’s market areas were Europe/Africa/Middle East (55% of net sales), Asian Pacific and China (25%) and Americas (20%).

Nokia’s market share in Europe was 45. 8% in 2003, in 2004 it was 34. 8% and in the third quarter of 2005 it was 36%. The average number of personnel for 2004 was 53511. At the end of 2004, Nokia employed 55505 people worldwide. In 2004, Nokia? s personnel increased by a total of 4146 employees. Nokia’s turnover for the third quarter of 2005 was 8403 million euro from which mobile phones brought in 62%, multimedia 17%, Enterprise solutions 2% and Networks 9%. “The year 2004 was demanding for Nokia.

In response, the company set five top priorities in the areas of customer relations, product offering, R&D efficiency, demand- supply management and the company’s ability to offer end-to-end solutions. Nokia is making good progress in these areas, and is now better positioned to meet future challenges 3. About the Company Nokia- Connecting People! Nokia Corporation is one of the world’s largest telecommunications equipment manufacturers. With headquarters in Keilaniemi of Espoo, Finland, this Finnish telecommunications company is best known today for its leading range of mobile phones.

Nokia also produces mobile phone infrastructure and other telecommunications equipment for applications such as traditional voice telephony, ISDN, broadband access, professional mobile radio, voice over IP, wireless LAN and a line of satellite receivers. Nokia provides mobile communication equipment for every major market and protocol, including GSM, CDMA, and WCDMA. [pic] In the 1970s Nokia became more involved in the telecommunications industry by developing the Nokia DX 200, a digital switch for telephone exchanges. In the 1980s, Nokia offered a series of personal computers called MikroMikko.

However, these operations were sold to International Computers, Ltd. (ICL), which was later merged with Fujitsu-Siemens AG. Nokia also began developing mobile phones for the NMT network. In 2004, Nokia resorted to similar streamlining practices with layoffs and organizational restructuring, although on a significantly smaller scale. Recently, Nokia joined other mobile phone manufacturers to embrace Taiwanese Original Device Manufacturers. Nokia signed a contract with BenQ, a Taiwanese Original Device Manufacturer, to develop three high- end mobile phones, which are scheduled to retail by the end of 2005. . Nokia’s marketing strategy: Nokia maybe the world leader in the mobile phones arena, but it seems as if it has completely lost its way as far as the marketing strategies are concerned NO DOUBT THAT the products from the Finnish company, Nokia, are some of the very best in the world, but the company still hasn’t found a profitable way to market its goods. The very reason that other mobile phone companies are fast eating up Nokia’s market share is their superior (yet simple) marketing practices. Motorola and Samsung must now be in the FUW (frequently used words) list in Nokia’s board meetings.

These companies have made Nokia pay dearly for its rudimentary approach in marketing its phones. The aggressive marketing practices followed by Motorola have hit Nokia very hard and it is losing very crucial global market share every month to its American competitor. Nokia, quite alarmed by the dropping sales of its phones, is now putting all its weight behind the N-Series range. The N-Series is packed with multimedia features and Nokia believes that these phones might woo the costumers back to the big daddy of the mobile phone world. But Espoo, we have a problem!! (Nokia is headquartered at Espoo, Finland).

While Motorola (quite intelligently) gives a dashy-flashy name to every phone it brings into the market, Nokia tends to do the exact opposite. Nokia from the very start has relied on numbers rather than names. This strategy worked very well in the past, but only because there wasn’t much competition back then. But times have changed. Every month the market sees at least a dozen new handsets from an equal number of manufacturers. Consumers now have more than they can choose. Consumers are more attracted by names because they can thus easily relate to the features of the phone.

This is evident from the success of the MotoRazr, MotoSlvr, MotoRizr and MotoKrzr. These phones are not packed with heavy multimedia features like the N-Series; still they are selling like hot cakes. Just by reading the name of the handset, one gets a broad idea what the phone looks like or what its features are. Nokia advertises more than Motorola. Still its market share is dropping. Motorola does not need to spend much money for the promotion of its products and it doesn’t have to worry about the marketing of these phones; it just simplifies its job by naming its products right.

Take the example of Apple. It did not have to do much to promote its iPhone. Thanks to the leaked photos and technical specifications, it became the most anticipated gadget all times. It is high time that Nokia starts applying some common sense to its marketing strategies. It doesn’t have to do anything great, other than just naming its phones. A few months ago, a highly placed Nokia official told Reuters that his company would soon go the Motorola way and start using names for its new phones.

It is in Nokia’s best interest that it takes to this path as early as possible, otherwise the once market leader might see otherwise the once market leader might see its market share plummeting to even lower depths. 5. Macro-Environmental Analysis: >>Political-legal Environment 1. NOKIA is operating on global level it was important to abide to rules in different countries by their govt. 2. NOKIA surveys in order to find the rules & regulations of govt to withstand taxes, subsidies, and patents over technologies and equipments as government decides upon these things 3. Laws of copyright and abuse of phone usage” limited the misuse of mobile phones. 4. Legal decision Impacts growth e. g. recent govt decision on 3G technology in India that may impact Nokia as well. >> Economic Environment 1. Economic environment controls what to produce, how to produce and category of consumers who will use this produce. 2. Nokia is expanding globally, knowledge about the economy status of nations is important. 3. NOKIA launched the products of different price range to reach all kind of customers globally. 4.

In recent Inflation scenario, Nokia planned to lower the logistic cost so as to reduce the prices and increase profit margin as well. 5. Nokia’s market share grew to 39% (in quarter 3, 2007) & sale increased by 3% & operating margins increased by 76%. 6. Consumer’s confidence on Nokia increased as it considered all the economic groups. >> Socio-cultural Environment 1. Nokia operates in different countries with different cultures and all social classes with different products as per requirements despite of social differences on race, religion etc. . Lifestyle changes with time, Nokia tried to provide innovative products as per the changing needs of its consumers. E. g. it launched range of handsets like N-series with advanced features like camera, video recording etc. 3. Nokia launched mobile phones as per changing Work/career needs with features like MMS, WAP, Wi-Fi, 3G features etc. 4. Nokia focused on education policies & relation between industry and universities as in telecommunication sector skilled workforce is required. E. g. in 1980s CEO Kairamo paid much attention toward this. . It focused on R&D on Demographics, Age, and Social Mobility etc to cater all social classes. >> Technological Environment 1. Telecommunication is most emerging market with new technology everyday, NOKIA focused on Innovation and Development of new products and new technology. For an e. g. Nokia developed handsets with 3G feature, Wi-Fi, Touch Screen etc, remaining up-to-date with latest technology. 2. NOKIA focused on improving customer experience via developing devices and services as well. For an e. g.

Nokia planned to enter into internet services and software segment, and for this planned to create a segment of its own in 2008. 3. Get into Symbian which helped in explosion of mobile innovation. >> Natural Environment 1. In today’s market sustainability is the major factor affecting consumer’s behaviors and that’s why focus is on green product i. e. environmental friendly. 2. Greener products with minimal negative impact are in demand. Nokia is taking care of this by using renewable materials in production. For an e. g. n Finland on the bank of Nokia river company uses hydro-electricity for production of various products 3. As a part of ongoing commitment to sustainability Nokia recently promoted mobile phone recycling in Korea and raising awareness on mobile phone recycling in Middle East. 4. Nokia has also started selling its products without charger (with charger option also) minimizing the impact on environment by 25% and also encouraging users to use their old chargers. >> Demographic Environment 1. Nokia priced its products according to different income classes in society 2.

Nokia mainly targeted youth as they are more technology freak and maximum sale is from youngster’s age group. 3. Nokia’s mission statement is connecting people and as per that Nokia launched product according to need of different age groups and classes e. g. Nokia E series for working class, N-Series for age group interested in gaming, music etc. Inference: – >> From analyzing the macro-environmental factors that Nokia faced and considered we find out that Nokia has become the top leading mobile maker by considering these factors. gt;> Nokia focused on its consumer’s needs and also considered the other factors that may impact the consumer behaviors. Nokia entered into mobile sector and upon entering faced various issues like adaptability etc with various potential competitors already in the field. >> However Nokia focused and went in to R&D and able to overcome factors impacting its growth. Nokia introduced various new products & innovative products at competitive price and always incorporated new technologies as per needs of its consumers from time to time. >> Mission line of Nokia is connecting people.

And it has always worked toward that by considering all the factors related to its consumers, abiding by the laws and regulation of the region. Nokia worked with aim of working towards the world where everyone is connected and contributes to sustainable development thus considering the nature environment factor which most consumers demand now days. Focusing on all these macro-environmental factors Nokia was able to expand it customer’s base, thus increasing the market share. 6. Market Segmentation for Nokia: My assignment deals with customer driven marketing strategy done in leading mobile phone company Nokia.

This part mainly focuses on various market segmentation done by Nokia Co. Ltd. in the market. Nokia is a world leader in mobile communications, driving the growth and sustainability of the broader mobility industry. Nokia connects people to each other and the information that matters to them with easy-to-use and innovative products like mobile phones, devices and solutions for imaging, games, media and businesses. Market segmentation is the process of identifying key groups or segments within the general market that share specific characteristics and consumer habits.

Once the market is broken into segments, companies can develop advertising programs for each segment, focus advertising on one or two segments or niches, or develop new products to appeal to one or more of the segments. Companies often favor this method of marketing to the one-size-fits-all mass marketing approach, because it allows them to target specific groups that might not be reached by mass marketing programs. The market can be divided into segments by using four “segmentation basis”: Psychographic, behaviorist, geographic, and demographic basis. The basic criteria for segmenting a market is are customer needs.

To find the needs of the customers in the market it is important to undergo market research. Psychographic and behaviorist bases are used to determine preferences and demand for a product and advertising content, while geographic and demographic criteria are used to determine product design and regional focus. Nokia, arguably the biggest player in the world, has divided the market into four segments: Hi-fliers: The biggest segment as far as Nokia is concerned consists of ‘Hi-Fliers’, corporate executives who use a mobile phone to increase productivity at work.

Aged between 25 to 45, the segment looks for data transmission and other business-related features. In most cases, the company sponsors the handset, hence price is not a major consideration. Trendsetters: In any technology adoption cycle, the first segment to adopt an emerging technology is dubbed as ‘the early adopters’. For Nokia, these early adopters are ‘Trendsetters’ who are most receptive to advanced models. This was the segment at which WAP-enabled models were aimed. Social contact: The third segment for Nokia is the upwardly mobile, socially-conscious segment that uses a mobile to stay in touch.

Today’s youth and affluent housewives constitute two major chunks of the segment. Assured: The fourth and last segment as defined by Nokia comprises of CEOs, high-profile celebrities, industrialists and other high “net worth” individuals. The fact that the segment cannot do without a mobile phone makes it the ‘assured’ segment. 6. 1 . The Segmentation of Nokia conducted on the basis of Consumer Markets: Geographic World region – Asia, China Country – Bangladesh Cities – Reach out maximum places Demographic Age – All age group Gender – Male, Female Income – All income groups

Occupation – Every sector Religion – Irrespective of religion Psychographic Social class – All class of people Lifestyles – Urban, rural, and even far villages Behavioral Benefits – Quality Loyalty status – Strong 6. 2 The Segmentation of Nokia conducted on the basis of Price: The price ranges are as follows: Range 1: (1000tk – 5000tk) Workers and laborers: 1. The nokia phones falling in this range are mostly used by the manual Workers because they cannot afford a high price mobile phone. 2. Some students also use cell phone from this range as they have the fear of snatch of mobile phone. . Mobile phones falling in this category are simple phones who only meet the purpose of messaging and calling. These phones do not have additional features such as camera, blue tooth or infra red. 4. The only feature available in this phone is FM radio, which is most preferred laborers, security and watch men. Range2: (5000tk – 9000tk) middle manager 1. The main users of this segment are middle managers because they have limited and average salary and cannot afford to spend it on unnecessary expenses. 2. They do not keep mobile for show off purpose. 3.

The core feature of this segment is Audio Video Player, FM Radio, Camera, EDGE, GPRS and Expandable Memory. 4. The need to remain in connection with internet, this segment offers EDGE connectivity so they can faster access information, including emails or news clips. 5. With the VGA camera, users can capture special moments with images and video clips or connect to their colleagues using push to talk technology. Range 3: (9000tk – 15000tk) university students: 1. The cell phones falling in this range are mostly used and popular in university or college students. . These cells have a stylish look and have all the essential features such as Audio Video Player, FM Radio, Bluetooth, Camera, EDGE, GPRS and Expandable Memory. 3. They are popular among this group because they have high resolution mega pixel camera, they like to click photos of family and friends and they want to save their memories. 4. They have high memory, so they can download songs videos and share it with their friends. Range 4: (15000tk – 21000tk) music lovers/ high memory 1. This segment contains cell phones for music lovers 2.

These mobile phones are specifically optimized for entertainment, music and games. These Music phones offer dedicated music or gaming keys, expanded memory, large LCD screen and extended battery performance to provide quick and easy access to entertainment content. 3. These phones offer up to 18 hours of music playback, memory for up to 3,000 songs on an optional 4GB microSD card and dedicated music keys. Range 5 (21000tk – 30000tk) Communicator/ high and young business people 1. Young and energetic business men fall into this category of age 30 –40. . These people are young and adapt new changes quickly. 3. They are busy most of the time so they want quick solutions for their problems 4. They want easy access to everything. They like challenging and new things. 5. The cell phones falling in this category are business phones including communicators and high memory storage phones. 6. These phones enable to connect the business people to one another. They have a lot of storage space and connect to GPRS anywhere. They can take their office work with them and can even download heavy files.

Range 6: (30000tk – above) Higher Class Executive It is both a mobile phone and media player rolled into one. Similar as the N95 and G600, the candy bar N82 is packed with lots of advanced function and features such as HSDPA, Bluetooth 2. 0 with A2DP, Wi- Fi, integrated GPS, FM radio, microSD and TV-out. 7. Market Targeting of NOKIA: Through the consistent releasing if the new units of the mobile phones with different services and difference feature, the company has its target market that expected to support the kind of products and services.

The company is very optimistic that their new line of products will going to support by the target market as the sports enthusiast persons for the sports services that the phone is offering. To the specified fashion fanatic for the latest trend and for the updated fashion design suitable for every their daily lives. The music driven consumers segment is also the company top target market due to the music service that the new products have offering. Including in the said music services are the radio, the mp3, the XpressMusic, and the music player.

In market targeting we have two jobs: During market targeting Nokia consider two types targeting job 1. Evaluation the market segments 2. Selecting Target market segment 7. 1. Evaluation the market segments: In evaluation Nokia follow 3 criteria. Such as- Segments Size and growth of Nokia: Nokia divide their segments on basis of the size of segments. For each segments they introduce different types of product. They divide the market according to the financial condition. For that they are able to sell their product to middle and lower class people. Structural Attractiveness of Market Segments:

Nokia looks at the attractiveness of each segment and launch the desirable products. For instance they had launched NOKIA 1100 for lower class people and N70 for middle class people. Company Objectives and Resources: Nokia balance their supply on the basis of their company’s target and available resources. 7. 2. Selecting Target market Segments After doing all evaluation Nokia decide to choose differentiated marketing policy. They launch different products for each segment. For example, NOKIA1100-Lower middle class, 5300-Higher middle class, N-95-High class executives. 8. Positioning and differentiations of Nokia: 8. 1. Nokia Positioning

When Nokia positions its brand in the crowded mobile phone marketplace, its message must clearly bring together the technology and human side of its offer in a powerful way. The specific message that is conveyed to consumers in every advertisement and market communication (though not necessarily in these words) is “Only Nokia Human Technology enables you to get more out of life” Fig. -2 Nokia Logo In many cases, this is represented by the tag line, “We call this human technology”. This gives consumers a sense of trust and consideration by the company, as though to say that Nokia understand what they want in life, and how it can help.

And it knows that technology is really only an enabler so that you-the customer-can enjoy a better life. Nokia thus uses a combination of aspiration, benefit-based, emotional features, and competition-driven positioning strategies. It owns the “human” dimension of mobile communications, leaving its competitors wondering what to own (or how to position themselves), having taken the best position for itself. 8. 2. Nokia Brand Personality Nokia has detailed many personality characteristics for its brand, but employees do not have to remember every characteristic.

They do, however, have to remember the overall impression of the list of attributes, as you would when thinking about someone you have met. As the focus is on customer relationships, the Nokia personality is like a trusted friend. Building friendship and trust is at the heart of the Nokia brand. And the human dimension created by the brand personality carries over into the positioning strategy for the brand. 8. 3. Nokia Positioning – Product The product of the Nokia goes to the high end quality controls to give its client high tech and quality worth of a product.

Including in the top-end devices of the company is the new release number of unit which is considered safe and has the quality of the materials as well as the design and together its features. Mobile phones accessories as the headset, the memory card and its features as the camera and video were some of the clients want in their mobile phones. To be able to keep abreast to the faster world, it is much important to determine the updated phones so that the company will also be up to date and cannot overcome by its competitors. Nokia Product Design:

Nokia is a great brand because it knows that the essence of the brand needs to be reflected in everything the company does, especially those that impact the consumer. Product design is clearly critical to the success of the brand, but how does Nokia manage to inject personality into product design? The answer is that it gives a great deal of thought to how the user of its phones will experience the brand, and how it can make that experience reflect its brand character. The large display screen, for example, is the “face” of the phone. Nokia designers describe it as the “eye into the soul of the product”.

Fig. -3 Nokia Various product 8. 4. Nokia Positioning – Price In cooperation of the local mobile operators, the company offers a solution which was designed for the low cost of the ownership and the providing affordable mobile phones. In this manner, though the products offers a wide range of high tech features, the company maintains its prices in order for the consumers can afford the said products. These strategic prices that the company is offering will benefit not only the consumers but also the company itself due to the affordable prices in their service that their company is offering.

In this regard, the company will accommodate and can enhance to its consumers a good quality the products with an affordable prices. 8. 5. Nokia Positioning – Place Through the plan of diversifying its products and its services, the company offers its business in the United States, Venezuela, in India, Brazil, Indonesia and to the other parts of the world which focus on the establishments of the of the luxury mobile phones, as well as the communication products. In this manner, the products and the service of the company will be well-known all throughout the world.

Furthermore, upon diversification the company will expect to come up for the ample income return. In this manner, the company also merged and shared its products to the other service provider company as the awing to have a strong team building for the promotions and for the continuous providing high quality services to its consumers. Then, these companies will provide a technology as well as the services that will allow the brands and the products to execute, to plan, to create, measures, and to optimize the mobile advertisements worldwide.

Regarding this team-up, the products will go to be a high end by providing its consumers a media sharing solution as well as the organizations of the shared photos. 8. 6. Nokia Positioning – Promotions There are many promotions that Nokia is doing in order for them to have a market. Advertisements are the first thing that the company had done. These advertisements can be through the television, to the newspapers, to the radio, to the prints and to the others as the posters. Some of the advertisements are the worldwide promotions in order for the consumer to know and the latest trends in the field of the mobile phones.

Promotions are also the strategy of Nokia in order to enhance the consumers. Distribution of these products also to the other part of the world will help for the promotions and to the knowledge of the consumers in the other part of the world. Providing the quality services and the high technology products is the bet for the promotions because the consumers will determine the quality of the products the special and unique features they will have in the said products. The demand of the consumers had pushed Nokia in pursuing its plan to serve its consumers for the services they want and they need.

Since communication is the ultimate way of transaction whether formal or in the business sector or the informal one as the family and the friendly communication. Regarding this, it will obviously determined that the mobile is part of every people for whatever reason that is the Nokia is always and never stop in giving quality services and updating its products for the benefit of the its consumers. 8. 7. Nokia Positioning Maps: In planning their products differentiation and strategies nokia of a prepare perceptual positioning maps which show consumer perception to their particular model verses other models.

Service Better Less High Apple iphone N900 Price Sony Ericson W995 Nokia 1100 Low Figure-04: Nokia positioning Map. The figure shows us that Nokia produce 1100 for lower income people and N70 for middle class people and N900 for higher class people. 8. 8. Developing Positioning Statement of Nokia: To- Several classes people Our-NOKIA Connecting people Is- Connect people

That- high featured, durable and economic prices 8. 9. Overall Positioning Strategy of Nokia: |More |More |More | |for |for |for | |more |the same |Less | | | |The same for | | | |less | | | |Less for much | | | |less |

Fig. -Positioning Segment of Nokia More for more Nokia offers high performance handsets for much higher price such as Nokia E series , N series. Same for Less In contrast to their competitors nokia offers same features service for less price. Such as Nokia produces 5300 handsets for much less price while their competitors like Sony Ericson , Samsung offer same features for less price. Less for much less price Considering lower income people, Nokia produces handsets with less features for much less prices.

Nokia 1100, 1200, 1208 produces to provide least features but high quality at much less price. 8. 10. Differentiation policy of NOKIA Product differentiation of Nokia: Nokia launches different types of models. They have enormous number of mobile. Especially they have targeted all classes of people abd launches different models which is totally absent in other mobile companies. Their products have shaped that easy to hold, soft key, expressing personality, life styles and mode of user. Service differentiation: Nokia is reputed for their long lasting battery.

They also have larger number of dealer around the world. Recently they started to operate service center in every district named “NOKIA CARE CENTER”. By those outlets they provide customers with great service. These types of differ them from others. Channel Differentiation: Nokia maintain a huge number of outlet and distributor. This is one of the strategy by which they occupy strongest place in south asian country People differentiation: Nokia’s employees have reputation for their well behavior and skilled performance.

They provide service the whole world with high reputation for several years. Image differentiation: Nokia have particular logo, music, state like “CONCENTRATE PEOPLE”. All these things work as image of Nokia and promote their market. 8. 11. Criteria for Differentiation of Nokia Important: Nokia Offer the Consumer to Connect the over Communicating Network. Distinctive: Nokia offer the difference from other company the size, shape, model etc. Superior: The difference is superior that’s way that Nokia mobile using process is very easy and comfortable.

Communicable: Nokia’s Differentiation is communicable and visible all over the world because it is top mobile selling company of the world. Preemptive: Competitors cannot easily copy the difference because Nokia has serial number, IMEI number and Code number. Affordable: Buyers are not paying the differentiation cost of Nokia mobile. Nokia charge suitable price of each mobile. Profitable: Nokia have many difference to attract buyers and finally Nokia try to earn profit. 9. Conclusion

From the above assignment I have come to this conclusion that Nokia has implemented various segmentation strategies for its products on a large scale & becoming no. 1 leader in the world of mobile phones. Nokia segments its market according to various variables. The main segmentation is done on the basis of price. As per our opinion Nokia had introduced various schemes to attract people & gain more goodwill into market. I would like to conclude that Nokia had been launching various new products & strategies throughout the year but still it is the no. 1 brand leader in mobile phones.

Many people around the globe are purchasing Nokia phones, as they are very cheap, good & efficient to operate. Nokia have used better & efficient market segmentation strategies to market its products according to various segments of customers in the market. Nokia as such has used all modern & good techniques to tackle problems of customers in market. Customer care & feedback is also given more importance. Better, efficient & advanced techniques are used to increase the sales of product. Also Nokia is largest manufacturer of mobile phones in India & also the no. leader in it. Various segmentation strategies and positioning and differentiating strategies are being enrolled into the market to increase the sales of the products. New models & their strategies are being well utilized to enhance the product. 10. Bibliography: 1. www. nokia. com 2. En. wikipedia. org 3. www. scribd. com 4. Principles of marketing –Philip Kotler and Gary Armstrong, 13th Edition 5. Global marketing 4th Edition –Warren J. Keegan ———————– Figure 1: Nokia Headquarter ———————– 14

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Black Poems

In the past during apartheid being black meant you lost out in many privileges it also showed how black people where oppressed. In this poem we see that Mbongeni Khumalo uses the word black in connection to all the bad things.

He highlights that there is this darkness associated with the colour black and that in the 1960’s when someone called you a black person it showed nothing good and that no one should be proud of being black. He also looks at all the words that start with “black” and if one looks deep into them then we see that there’s a deeper meaning to that particular word and that it has got something to do with wrong doing or bad happenings.

The first line of the poem reads “you don’t need a BLACK-BELT to write blackpoems”, if one looks at this line and critique it then we see that he says that one doesn’t need a black belt to write black poem and the way it is written from the small letter at the beginning of the sentence to the to the black belt in a big font and black poems as one word this shows that as a black person no one really paid attention to the diction of the poem. B/LACK” when one looks at this word and the way it has been written then you can interpret it as be lack, as if he’s trying to point out that when you are black you lack in something. He further one uses the word “prac-teasing” and instead of writing practising he uses the teasing showing that he was isolated for mocking black art but in his own right one can argue that he was not mocking it but just highlighting the points that were true and that there was a time when anything that was done by a black person was just done and not taken seriously, a black person could only go so far with their art. Trampling my so(u)l/e/” the way he has chosen to break down the word soul in a way that one can say he is trampling the word himself and he also adds an “e” at the end which shows that he can do anything to this poem since it is a black poem. Served sausages made from minced pork and call(ed) it BLACK PUDDING” one can say that it was called black pudding because in the black culture the only time that the families ever ate pudding which consisted of custard and fruit was during Christmas otherwise black people always feasted with meat he could also have been referring to himself as the black sheep because he did not eat meat and in that case being black and not eating meat meant that you were a different type of black person and therefore you were out casted and you were a black sheep. I suffered a BLACK DEATH at the hands of a BLACK GUARD”, what the writer brings out in this line is how black people still killed each other regardless of the fact that they were all oppressed by the same people for the same reason. The guards were also said to be puppies for the oppressors so that the hit on them could be lighter and that they could spare them their lives. So it shows that black people were also turned against each other and killed each other just so that they can hold their own end.

The language that he has chosen to use is simple but the was in which he has broken down his words and placed them in way that one could clearly see the point he is trying to make about black poems. As one carries on to read this poem you could say that this is not a black poem but a poem about black people. He uses a playful tone but at the same time the way he stresses some words to show his point and the double meanings behind them. He also used the words to show what was happening in that time to black people trying to pass on the torch of awareness so that people could stop being naive and actually know how things were done in that time.

He attracts the reader by his title which is “BLAK POWEMS” which shows the way he wrote it as if he were a actually saying it in a Bantu accent, so he chose to write it the way he would say it because no one really paid close attention to the diction and the style of the way black poets wrote their poems because it always ended up being black people reading each others poems. The way this poem has been written it shows well that it is protest poem in such a sense as when one looks at the diction used in this poem and the style of writing that the poet has chosen to use.

He plays with associations surrounding blackness to put his point across of how blackness is associated with bas things and in this case particularly back in the 1960’s during times of black oppression and apartheid. The tone of this poem is in a playful but honest manner, not harsh but it keeps one intrigued that there could be so many things associated with the colour black that represent a darker side of life and the poet does a good job of bringing them out and also highlighting them.

This poem makes the reader see the problems that the past could add on to a simple phrase or word. The word black in this poem has been separated and put on a spectrum whereby we can all see the negatives that could and that are surrounding this one word in particular. The poet has also made us think of how history played out and he did this not by writing that in the 1960’s this is what happened but he used words that show or highlight the main events of the 60’s.

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Leveraging Social Networking Sites in Marketing Communications

Leveraging Social Networking Sites in Marketing Communications The social media networking websites represent an important media channel for reaching a diverse demography. Nowadays, consumers respond less to traditional marketing and rely more on blogs, mobile messaging, comparison shopping sites etc. What is a social networking website? It’s a website that brings people together in central location to talk, share ideas and interests and make new friends. For e. g. facebook, bebo, myspace, youtube, friendster etc.

What makes a social networking website an important tool for marketing communications? * Increase in number of people visiting networking websites * Increase in advertising spending on social networking websites * Global reach of social networking websites Importance of demographics of social networking website users for marketing communications Although the larger portion of social networking sites is still represented by youth; middle to old age users has also started joining the social networking sites. This gives marketers an opportunity to target niche customer segment.

The four major consumer categories which marketers focus are as follows: * Teens and young adults * Women and mothers * Old age users * Affluent Individuals How marketers use social networking websites for marketing communications? As use of online media grows, marketers can proactively engage their customers on social networking sites such as placing paid advertising, posting comments or feedbacks and adding a link from social networking sites to company’s site. Following are few real life examples of companies that have successfully used social networking websites for: Improving customer understanding ) Unilever: To lunch its sunsilk brand in USA, Unilever targeted 25-year old single women. It started a campaign “Hairpay” which included three actors posing as hair care specialists. The company set up profiles on MySpace for these specialists through which it offered page visitors advice on hair care, dating and women issues. This provided company a platform wherein it could interact directly with its target customers and understand customers’ needs and habits. Unilever’s MySpace profile attracted more than 4000 online visitors in the first two weeks of the campaign. ) Xerox: Second Life is a virtual world created and managed by Linden Labs in which users interact with each other using internet based avatars. Xerox scientists round the world collaborate with customers and determine what features and products customers would like to see Xerox offer. Xerox used second life to launch 15 products on “Xerox Innovation Island”. On the marketing side, Xerox provides 3D virtual demos that customers use to try products and services. Xerox attracted more than five million people to its Second Life virtual island. ) Procter and Gamble: Procter and Gamble believes that a better understanding of women customers could enable more targeted offerings. P&G launched two websites aimed at creating online communities and forums for women to share their stories and learn from each other. P&G links one these websites to its people’s choice awards and allows women to share their views on topics such as entertainment. The other site provides a forum for women to discuss subjects of interest such as parenting, pregnancy and weight loss. This helped P&G to do an extensive market research on a particular customer demographic.

Promoting issues of social concern 1) Virgin Mobile: In 2006, Virgin Mobile USA partnered with Youth Noise, a youth-based social networking website and Stand up for Kids, a non-profit organization focused on improving the lives of homeless children. Through Youth Noise, Virgin Mobile provided its customer a platform where they can interact with each other on a wide array of issues and find ways to help their communities. Virgin Mobile employed various initiatives such as allowing customers to download ringtones from its website and donating 100% profits to non-profit organizations. ) Toyota: Toyota Motor Sales, USA, Inc. , a vehicle manufacturer, launched a social networking website for its community of more than 600000 hybrid, fuel efficient vehicles working on rechargeable battery, owners. This social networking website is a forum where hybrid owners talk about their reasons for driving an energy efficient hybrid car and provide statistics about them and their vehicles. The site also includes features such as gas savings calculator and an interactive distance map which charts how fuel efficient Toyota’s Hybrid vehicles are as compared to gas powered vehicles.

Promoting products and services 1) JP Morgan Chase: JP Morgan Chase sought to encourage the use of credit cards among college students. To promote the chase credit card, the company partnered with Facebook which has a large number of students as members. Banner ads on Facebook invited members to join a special chase network. After joining the Chase online community on Facebook, customers could activate a credit card and can avail other services also. Members also earned reward points for their activities such as paying their bills on time and could redeem these points for prizes. ) Cisco: A supplier of networking equipment and networking management for the internet. In 2006, Cisco bought two Second Life islands to conduct education and training, receive feedback from customers on products and perform presentations. One of the Second Life islands features amphitheatre for mass tutorials, spreading product information etc. The other island provides a community based platform meant to encourage people to discuss its products. Second Life enables Cisco to take advantage of the insight they gain from customer interaction. Facilitating internal knowledge sharing ) IBM: In 2006 IBM partnered with Second Life to establish a virtual business for IBM’s employees and customers. The company bought 12 Second Life islands to serve as a virtual meeting place for current and former employees, an information centre for marketing IBM’s services to customers and a virtual retail area for IBM’s customers to meet and discuss products. Through Second Life, IBM not only gives its geographically dispersed employees a common forum to meet, it also engages its customers in discussions and hence improves customer service.

Increased brand awareness 1) Burger King: To reach its target population primarily composed of younger demographics, Burger King rolled out a campaign on MySpace. It sponsored a special page reflecting the company’s US marketing slogan and used popular Burger King Mascot, The King. Burger King also partnered with Fox Entertainment Group to offer programs such as 24 free of charge to the 75 million members of MySpace. Consequently, MySpace members visited Burger King’s page to download free recordings of their favourite fox shows. ) Honda: In 2007, Honda allowed its customers to shape its marketing message for its new Honda Element SC. The advertising campaign included a variety of animal characters of which one character, Gil the Crab, gained immense popularity. Honda created a Gil the crab profile on MySpace. It was promoted as a typical social networking visitor. Gil the crab wrote blogs, comments and interacted with other visitors on its profile page. Consequently, more than 100000 people visited Honda’s MySpace page to discuss the Element SC.

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Thesis on Internet Banking

Thesis on Internet Banking Internet banking is the new method of banking using the new technologies available in the world today. Instead of needing to travel into a local branch of your bank, the Internet allows you to do a wide variety of useful things with your accounts. It can be accessed from anywhere that there is a computer with the Internet, and of course unlike bank branches the net is open 24 hours a day 7 days a week. The services available online vary from bank to bank.

Most of the general services are on all banking websites but the larger banks contain more control over your money. Here are some of the things that are possible – View your account balances Pay your bills (With the help of programs like ‘B-Pay’ View records of transactions Transfer money to linked accounts with the same bank Transfer money to specially selected unlinked accounts Order printed payment reviews Pay for shares Check interest in your accounts Send money overseas Change your details Open new accounts Receive advice on handling funds

These are not all of the services available because each bank is different and in the competitive nature of banks they are always offering new features to attract investors. These features are open to both individuals and businesses (businesses have a few more options). Everything has upsides and downsides and unfortunately so does online banking. First of all obviously it does not deposit physical money nor does it withdraw bank notes, which means you will still have to make a trip to the bank to do those things.

The fact that online banking is done over the Internet means that safety and security is a big issue. Only 28 percent of Australian websites surveyed by Australia’s consumer watchdog had some kind of privacy policy. A further 72 percent would not say whether they would disclose private information to other companies – many people are receiving advertisements from companies that they had not done business with or even heard of before both through mail and electronically, for example through email.

It is very possible to have your information stolen while it is being passed across the World Wide Web due to the latest surges in technology, sometimes even PIN numbers and user names are possible. In the near future, it is predicted that businesses will know who you are, where and how much money you have to spend etc. Every time you use electronic devices like credit cards, mobile phones, the Internet, even signing up for a competition your details are being recorded. A new science called biometrics will be able to identify people with retinal scans, fingerprints, voice or DNA samples.

While being secure it will not be too anonymous – which is why there are fears of moving into an Internet/electronic age of banking. On the other hand there are the obvious reasons why net banking is becoming popular and banks are becoming more and more online-aware – It is so much easier being able to access accounts from literally anywhere in the world at anytime than finding a bank branch and visiting it during normal business hours. The whole process also gets done much quicker than by physically talking to a teller and waiting for them to process the service.

All of the things that can be done by a teller can be done on the website of your bank and there is plenty of help and tutorials to help, and so far the services are listed in the first question but there will be many advancements in the new technology when more banks begin to cross to electronic methods and start to compete for online customers. In order to first begin to use a net banking service from your local bank, you must first have access (preferably regular access) to a computer with access to the Internet. When you go online direct your browser to the ebsite of your bank (you should check with your bank what the website is). Most banks will have a large link to net banking or otherwise use the search option to find it. There is a short process involved to receive a user name and password for online banking – follow the onscreen instructions, it usually involves a phone call and 3 working days to mail online details to you. Once you have logged on into your bank’s main account area there will be several options available to you – an outline of these were covered near the start of the document.

These options will come under different headings as links, simply click on them to take you to the list of features available. As an example, BankWest (at www. bankwest. com. au) has four options at the top of the screen – daily banking, where you can select accounts with the bank, bill payments where you can pay your bills with funds in your accounts, service center containing lots of options regarding your accounts (like printouts, statements, details, orders e. . new cheque books) and my profile where you can change your personal details. Despite doing your banking over the Internet being somewhat of a security issue it is obviously much easier and faster than talking to tellers and your local and branches. It is using new and advanced technology, which is fast evolving meaning that this method of banking will accelerate much faster in the coming years.

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Store Operations & Kpis

Store Operations & KPIs p Introduction ? 4 rules to improve performance and profitability in a store: 1. Grow sales 2. Lower the cost of goods sold 3. Improve margin by cutting overheads 4. Reduce 4 Red ce interest and inventory finance costs in entor ? Retailers with stores across multiple geographies and multi-channel operations ? no direct contact with customers / distance between HQ and consumers 2 Lesson 8: Store Operations & KPIs p Introduction ? Performance Management helps decision-makers to reconnect with both consumers and key data ?

True performance management can have a significant impact on all four of these key metrics. ? Flexible planning and reforecasting processes, effective data collection efficient transformation of data collection, into key metrics, standard and ad hoc reporting, and trend analysis are crucial for success. 3 Store Operations & KPIs p Performance Management PLANNING Plans allow analysis of past results and definition of a baseline against which to measure performance They performance. help a business to set realistic, but stretching objectives. High-Level Financial Plans Long range Long-range and detailed plans of the company’s financial company s goals, with flexibility and rolling forecasts to support the dynamic nature of retail. 4 Store Operations & KPIs p Performance Management ? Merchandise Plans Projected l P j t d sales and required i d i d inventory t meet t t to t targets in t i monetary terms, with average prices, margin and markdown to ensure profit. Sometimes space planning is profit an important component of this. ? Marketing Plans Model scenarios, analyze evaluate promotion success scenarios analyze, success, and optimize romotional monies to drive profitable growth. 5 Store Operations & KPIs p Performance Management ? Store-Level Financial Plans Sales d inventory goals, l b and controllable S l and i t l labor d t ll bl expenses, reconciled to the High-Level Financial Plan for enterprise wide consistency. enterprise-wide consistency 6 Store Operations & KPIs p Performance Management REPORTING ? The challenge is to filter the data so that users can focus on just the information they need at a given time time. ? Elements of the business that will be critical incl de b siness ill include: Store Operations & KPIs p Performance Management • • • • • • • • Store and channel operations Consumer behavior p g Competitive knowledge Labor productivity Supply chain p pp y performance Sales and margin trends y Inventory and cash flow Marketing promotions 8 Store Operations & KPIs p Performance Management ? Standard Reports Traditional fi T diti l financial statements such as Profit and L i l t t t h P fit d Loss, and trend reports such as Best Sellers. Each type of standardized report will have its own strengths for comparing numbers. Actionable reports An actionable report eliminates content that requires little or no response. Instead, it highlights issues that need attention. Such reports can save hours of research and increase productivity. i d ti it 9 Store Operations & KPIs p Performance Management ? Dashboards • Easy to access reports in real-time showing all Key Performance Indicators. • Generally dashboards are role specific, showing a single screen with only data that pertains to an individual user for a quick and efficient perspective on daily trends. 10

Store Operations & KPIs p Key Performance Indicators ? Stores should have well defined KPIs that are linked to the store’s goals and broken down on a daily level. This enables everyone to easily see how well the store is performing against its goals. ? In retail, the time cycle is very short and therefore reporting and controlling on a daily level is essential for efficient store management as it allows them to quickly pick-up and manage issues before they may have a major impact on profitability. ? Timely and effective analytics is essential 11

What can spoil a customer experience in a store? Waiting for the product that you want Waiting for packet Customer Experience Waiting for sales associate’s attention Untrained Salesperson Waiting to pay 12 Store Operations & KPIs p • 3 Pillars in Store Management Staff Customer Products 13 Store Operations & KPIs p Store Global Performance 1. Financial KPIs: • • Like-to-like sales / Comp sales Sales Turnover / Sales quantities ? vs same week last year ? vs last week ? St Store vs total chain t t l h i ? Store vs competitors 14

Store Operations & KPIs p Store Global Performance • Sales vs budget / forecasts ? In percentage already reached ? In percentage still to go • Capex summary • Contribution margin 15 Store Operations & KPIs p Store Global Performance 2. Store productivity ? ? ? ? ? ? ? ? Beat Yesterday Book Footfall Conversion rate Basket size Units per transaction (UPT) Average retail selling price (price point) Sales per sq meter / foot (or linear meter/foot) Level of sales per working hour 16 Store Operations & KPIs p Salesteam performance 3.

Salesteam performance / individual KPIs ? ? ? ? ? ? ? Sales TO per SA Salary, i S l incentives and b ti d benefits fit Top 3 performers / Bottom 3 SA Staff S ff Turnover rate Communication books Duty Roster / staffing Recording of OT 17 Store Operations & KPIs p Inventory 4. Inventory KPIs ? ? ? ? ? ? Total Quantities and per SKU Stock take results Shrinkage ratio / inventory ? Inventory Turnover Ratio p y goods vs stored q quantities Ratio displayed g Reverse logistics 18 Store Operations & KPIs p Merchandising 5. Merchandising KPIs ? Sales analysis ? ? ? ? ? ? Per brand Per category of product Per line of product Per i P price range Per selling period Per markdown level Sell-Through Rate ?S Space allocation plans / planograms ll i l l 19 Store Operations & KPIs p ? Improve efficiency of employees, productivity of the selling space and optimize inventory ? Identify and reduce sources of “waste” (MUDA): TIMWOODS ? Streamline store operations processes 20 Wasted resources can amount to a huge number o total o ed ou s of tota worked hours % of total store hours, October 2010, Shanghai store 100% 61% 37% 19% Only 9% of total store hours are spent faceto-face with the client 9% Total store hours Sources of “waste” Sales team • Stock • Support • Management Time available for l f sale Time with customers Face-to-face time with customers • Merchandising • Logistics • Etc. • Idle time • Miscellaneous 21 • Product search • Wrapping • Cashing Sources of waste in store operations p 8. Latent skills 1. Transportation 7. Defects 2. Inventory MUDA 6. 6 Overproduction 3. Motion 5. Overprocessing 22 4. Waiting g What are the sources of MUDA in a Store? 2 3 4 5 6 7 8 Transportation Inventory Motion Waiting Over-processing Overproduction Defects Latent Skills Stock Management Stock Management Staffing / Store Management Staffing / Stock Management Replenishment / Fulfillment Risk of loss, delay, deterioration Increase of leadtimes, consumption of productive floor space, unproductive assets Multiple trips to stock room to replenish / Risk of damage, wear and safety for equipment Match to traffic Match to task (reception of goods, Etc…) / Waiting for goods Multiple stock take / multi checks On product availability, etc… « Just in Time » vs « Just in Case » vs.

Generates all other Muda and Increase of all overhead costs Extra costs for repair, reschedule Production, Production quarantining inventory inventory, Re-inspecting, sraping, etc… Take advantage of potential skills Employees have, capitalize on their Creativity and potential IT / Store Management Stock Management Stock Management Staffing / Performance g management 23 Store Operations & KPIs

The objective is to increase productivity… … by applying 5 principles to all stores Staffing is in line with customer traffic S ff ff Staffing is adjusted to workload / task to achieve Sales advisor spend 100% of their time with their customers in value-added activities 1 Reduce sources of waste in stores to spend more time with customers and increase productivity i d ti it 2 3 All Goods are available on the sales floor to be shown to customers / optimization of storage space Inventory levels are adjusted at best to sales variability and delivery frequency 5 Workflows, operations processes and procedures are Streamlined and clearly communicated / optimization of day to day operations day-to-day 24 10 KEY Work Streams 1 Staffing: Match-to-traffic (adapt staffing rules) Performance management (store KPIs, individual KPIS, brief, incentives coaching, brief incentives, coaching peers benchmarking ) benchmarking…) Training: Best practices in selling skills (e. g. Selling ceremony, Cross-selling techniques, …) Simplified back-office Si lifi d b k ffi operations (e. g. eception of goods, ti ( ti f d stock control, merchandising, reporting…) Optimization of storage room / warehouse space p g p Organization of goods movements (reception of goods, reverse logistics, shelf replenishment, …) Fulfillment procedure Inventory management (min and max calculations, organization, reverse logistics, …) End-to-end packaging (simplified protections from factories, simplified wrapping, labelling / barcoding) Design-to-experience (store layout, storage layout, drawers capacity, merchandise constraints, POS System …) 22

Store management t practices 2 3 4 5 Product flow management 6 7 Support to stores 8 9 10 • Supply Chain • Store design • IT system MATCH TO TRAFFIC – Example 1 Match-to-Traffic Before Match-to-Traffic After PARTTIME Reception product Display Supervisor Key Holder Reception Product Reception Display product Reception product Cashier Supervisor Key Holder KPI Board Display Cashier Before: 5 FT on A shift After: 3 FT + I Part Timer on A shift 26 PRODUCT FLOW MANAGEMENT – Example 2 1 Products 2 3

Most of (or all) products available on sales floor Storage / Warehouse clearly organized (clear labelling, categorization, easy access) Simple and convenient packaging (reception boxes, plastic bags, hangers,… customers bags, gifts wrappings,… ) Back office team (runners) handles product preparation and wrapping of products in parallel to sales process Adequate staffing in charge of products reception and control, reverse ff f Supervisor Supervisor logistics KPI Board POS system allowing efficient nventory management in real-time (stock &J + availabilities q eries quantities, location inventory value, etc… ) a ailabilities queries in q antities location, in entor W al e etc ) Key Holder Reception product 4 Back office W Display 5 6 Key Holder 7 Sales Associates 8 9 Staffing of back office team is in line with traffic (outside peak hours) Sales advisors spend maximum time with their customers in value added activities Very strong training and coaching are required for store team to learn new operating models VM display 27 PRODUCT FLOW MANAGEMENT – Example 2

Reception product Supervisor Key Holder KPI Board No. of drawers directly available on system for any given SKU List of products in drawers – checked by sales associates every evening SKU, price and drawer reference 28 STOCK ORGANIZATION – Example 3 BEFORE AFTER Blue Bins are used for accessorIes such as shoulder straps Cabinet is now used for stocking up belts by lines. 29 BACK-DOOR STORAGE – Example 4 BEFORE O AFTER Back-door storage location filled with administrative files 30 Pre-wrapped goods and router / runner area close to sales floor REVERSE LOGISTICS – Example 5

AFTER SENDING BACK EXCESSIVE STOCK 31 RECEPTION OF MERCHANDISE – Example 6 BEFORE AFTER • Un-wrapping and check done in the store • Labelling on Boxes •C Count done b SKU td by • Un-wrapping done in the Warehouse • Bigger Label Created by Warehouse • Count done by Quantity 32 SIMPLIFIED STORE OPERATIONS WRAPPING AREA Router zone Wrapping point • Un-wrapping done in the store • Labelling on Boxes •C Count done b SKU td by Preparation p Router orders workstation board • Un-wrapping done in the Warehouse • Bigger Label Created by Warehouse • Count done by Quantity 3 KPI BOARD BEFORE AFTER Unstructured team brief, no management meeting 34 Morning brief supported with KPI board, weekly management meeting DAILY, WEEKLY BRIEFINGS BEFORE AFTER •Un-structured Team Brief • No Management Meeting •KPI Board with updated information on sales objectives, product of the day, selling tips, staff planning •Morning Brief supported by KPI board •Weekly Management Meeting to review performance 35 Impact on KPIs Benefits achieved… KPI impacted • More sales associates available to sell when needed (match-to-traffic) Conversion rate • Productivity (sales / working hour) • Units per transaction (UPT) • Basket size, price point • Higher customer satisfaction • Brand image • % of returning customers • Units per transaction (UPT) • Profitability per sq. m. • Inventory Turnover Ratio • % of damaged products (defects, returns) • More time available for sale (100% Customers • • dedicated to sales) Better skilled sales associates (cross-selling t i i ) ( lli training) Higher quality in customer service • More products presented (100% skus available) Products Reduced store inventories • Better storage / handling conditions • Clear daily tasks, goals to achieve Staff • Personal development opportunity • More training and coaching from g g management 36 and responsibilities • Staff turnover rate • Productivity (sales / working hour) Store Operations & KPIs p Additional readings ? “Customer Centricity is key to success” – Oct. 2009 ? “ Chain Retailers – Stores best practices” Mc Kinsey (2003) ? “Daily Management of Store Operations” Bearing Point Daily Operations (Aug. 2010) ? “Retail Management – A strategic Approach” P. 356 to 371 37

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Financial Intermediation and Delegated Monitoring

The Review of Economic Studies Ltd. Financial Intermediation and Delegated Monitoring Author(s): Douglas W. Diamond Source: The Review of Economic Studies, Vol. 51, No. 3 (Jul. , 1984), pp. 393-414 Published by: Oxford University Press Stable URL: http://www. jstor. org/stable/2297430 . Accessed: 03/09/2011 10:01 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www. jstor. org/page/info/about/policies/terms. sp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected] org. Oxford University Press and The Review of Economic Studies Ltd. are collaborating with JSTOR to digitize, preserve and extend access to The Review of Economic Studies. http://www. jstor. rg Review of Economic Studies (1984) LI, 393-414 ? 1984 The Society for Economic Analysis Limited 0034-6527/84/00280393$02. 00 Financial and Intermediation Delegated Monitoring DOUGLAS W. DIAMOND University of Chicago This paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders. It presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary.

Diversification within an intermediary serves to reduce these costs, even in a risk neutral economy. The paper presents some more general analysis of the effect of diversification on resolving incentive problems. In the environment assumed in the model, debt contracts with costly bankruptcy are shown to be optimal. The analysis has implications for the portfolio structure and capital structure of intermediaries. INTRODUCTION This paper develops a theory of financial intermediation based on minimum cost production of information useful for resolving incentive problems.

An intermediary (such as a bank) is delegated the task of costly monitoring of loan contracts written with firms who borrow from it. It has a gross cost advantage in collecting this information because the alternative is either duplication of effort if each lender monitors directly, or a free-rider problem, in which case no lender monitors. Financial intermediation theories are generally based on some cost advantage for the intermediary. Schumpeter assigned such a “delegated monitoring” role to banks, … he banker must not only know what the transaction is which he is asked to finance and how it is likely to turn out but he must also know the customer, his business and even his private habits, and get, by frequently “talking things over with him”, a clear picture of the situation (Schumpeter (1939), p. 116). The information production task delegated to the intermediary gives rise to incentive problems for the intermediary; we can term these delegation costs. These are not generally analysed in existing intermediation theories, and in some cases one finds that the costs are so high that there is no net advantage in using an intermediary.

Schumpeter made a similar point, although he did not consider incentives explicitly: … traditions and standards may be absent to such a degree that practically anyone can drift into the banking business, find customers, and deal with them according to his own ideas…. This in itself… is sufficient to turn the history of capitalist evolution into a history of catastrophes (Schumpeter (1939), p. 116). This paper analyses the determinants of delegation costs, and develops a model in which a financial intermediary has a net cost advantage relative to direct lending and borrowing.

Diversification within the intermediary is key to the possible net advantage of intermediation. This is because there is a strong similarity between the incentive problem between an individual borrower and lender and that between an intermediary and its 393 394 REVIEW OF ECONOMIC STUDIES depositors. The possibility of diversification within the intermediary can make the incentive problems sufficiently different to make it feasible to hire an agent (the intermediary) to monitor an agent (the borrower). Diversification proves to be important even when everyone in the economy is risk neutral.

This model is related to two literatures. It relates to the single agent-single principal literature (e. g. Harris-Raviv (1979), Holmstrom (1979) and Shavell (1979)) which develops conditions when monitoring additional information about an agent will help resolve moral hazard problems. The analysis here extends this to costly monitoring in a many principal setting, where principals are security holders of a firm or depositors in an intermediary. The other related literature is that of financial intermediation based on imperfect information.

Several interesting papers analyse the gross benefits of delegating some informational task to an intermediary without presenting explicit analysis of the costs and feasibility of this delegation (e. g. Leland-Pyle (1977) and Chan (1982)). In addition to developing a model in which overall feasibility of financial intermediation is analysed, we briefly apply our results to determine conditions when intermediation is feasible in the Leland-Pyle model. The basic model developed is of an ex-post information asymmetry between potential lenders and a risk neutral entrepreneur who needs to raise capital for a risky project.

In this environment, debt is shown to be the optimal contract between an entrepreneur and lenders. Because of the wealth constraint that an entrepreneur cannot have negative consumption (pay lenders more than he has), the debt contracts with which the entrepreneur can raise funds involve some costs. As an alternative to incurring these costs, it is possible for lenders (who contract directly with the entrepreneur) to spend resources monitoring the data which the entrepreneur observes. In the class of contracts written directly between entrepreneurs and lenders, the less costly of these two is optimal.

However, the cost of monitoring may be very high if there are many lenders. If there are m outside security holders in a firm and it costs K > 0 to monitor, the total cost of direct monitoring is m K. This will imply either a very large expenditure on monitoring, or a free rider problem where no securityholder monitors because his share of the benefit is small. The obvious thing to do is for some securityholders to monitor on behalf of others, and we are then faced with analysing the provision of incentives for delegated monitoring. There are many methods by which delegated monitoring might be implemented.

We assume that the information monitored by a given person cannot be directly observed without cost by others. The analysis here focuses on a financial intermediary who raises funds from many lenders (depositors), promises them a given pattern of returns, lends to entrepreneurs, and spends resources monitoring and enforcing loan contracts with without monitoring. The financial entrepreneurs which are less costly than those availabled intermediary monitors entrepreneurs’ information, and receives payments from the entrepreneurs which are not observed by depositors.

An example of useful costly information in a loan contract is a covenant which is costly to monitor. A common covenant is a promise that the firm’s working captial will not fall below some minimum, unless “necessary for expansion of inventory”. (See Smith-Warner (1979). ) If it is costly to determine whether a shortfall is “necessary”, and each of the bondholders has to incur this cost to enforce the contract, the contract using costly information is unlikely to be used if the number of bondholders is large.

A contract specifying an uncontingent working capital requirement might be substituted, when the contingency would have been specified if there had been a single principal. In practice, loan covenants in bank loan contracts specify coarse contingencies which define DIAMOND FINANCIAL INTERMEDIATION 395 a “default”. Conditional on such a default, the intermediary monitors the situation and uses the information to re-negotiate the contract with new interest rates and contingent promises.

A financial intermediary must choose an incentive contract such that it has incentives to monitor the information, make proper use of it, and make sufficient payments to depositors to attract deposits. Providing these incentives is costly, but we show that diversification serves to reduce these costs. As the number of loans to entrepreneurs with projects whose returns are independent (or independent conditional on observables) grows without bound, we show that costs of delegation approach zero, and that for some finite number of loans financial intermediation becomes viable, considering all costs.

Financial intermediaries in the world monitor much information about their borrowers in enforcing loan covenants, but typically do not directly announce the information or serve such an auditor’s function. The intermediary in this model similarly does not announce the information monitored from each borrower, it simply makes payments to depositors. We show that debt is the optimal contract between the intermediary and depositors. The result that the delegation costs go to zero implies that asymptotically no other delegated monitoring structure will have lower costs.

If there is an independent demand by entrepreneurs for monitoring without disclosure of the information monitored, for example to keep competitors from learning the information as suggested by Campbell (1979), then well diversified financial intermediaries can provide it (in addition to simple monitoring services) at almost no cost disadvantage. Diversification is key to this theory, and it is interesting that because of the wealth constraint, diversification is important despite universal risk neutrality.

To develop a more general intuition into the role of diversification, some analysis is presented of a related model with risk averse agents but no wealth constraint. Two types of diversification are considered in the context of two alternative financial intermediary models; one is the traditional diversification by sub-dividing independent risks, while the other is diversification by adding more independent risks of given scale. The latter is what Samuelson (1963) has ermed a “fallacy of large numbers”, because it does not always increase expected utility. This section may be of independent interest because it provides some conditions when the fallacy of large numbers is not a fallacy. The basic model is outlined in Section 2. Delegated monitoring by a financial intermediary in the context of the basic model is analysed in Section 3. Section 4 explores the extension of the basic model to risk averse agents. Section 5 applies the analysis of section 4 to the model of Leland-Pyle.

Section 6 concludes the paper. 2. A SIMPLE MODEL OF FIRM BORROWING A model of risk neutral entrepreneurs who need to raise capital to operate a large investiment project is used to capture many of the aspects of the agency relationship between commerical borrowers and lenders. We specify a simple environment, and characterize optimal direct contracts between borrower and lender. There are N entrepreneurs indexed by i = 1, … , N in the economy. For the balance of Section 2, we examine one of them, and do not use the index.

The entrepreneur is endowed with the technology for an indivisible investment project with stochastic returns. The scale of inputs for the project greatly exceeds both his personal wealth and the personal wealth of any single lender. For simplicity, the entrepreneur’s wealth is zero. Assume a one good economy with all consumption at the end of the period. The project requires inputs of the good today, and will produce output in one period. Normalize the required initial amount of inputs to one. The expectation of the output that will be 396 REVIEW OF ECONOMIC STUDIES roduced at the end of the period exceeds R, the competitive interest rate in the economy. Therefore, the project would be undertaken if the risk neutral entrepreneur had available to him enough capital inputs. The other investors in the economy are also risk neutral: call them lenders. To undertake the project, the entrepreneur must borrow sufficient resources from them to operate it at its scale of one. Because the interest rate is R, i. e. the lenders have access to a technology which will return R per unit of input, the entrepreneur must convince potential lenders that the rate of return hich he will pay to them has an expected value of at least R. Each lender has available wealth of 1/m, thus the entrepreneur must borrow from m > 1 lenders. The capital market is competitive-if convinced that their expected return equals or exceeds R (R/m per lender), lenders will make the loan. Let the total output of the project be the random variable -. Assume that is bounded between zero and y R + K (where K > 0 and is defined below) and that y =0 is possible. The realization of 9. oes not depend on any actions of the entrepreneur. A simple information asymmetry is introduced which will make the loan contracting problem non-trivial. The realization of is freely observed only by the entrepreneur. With output observed by the entrepreneur alone, he must be given incentives to make payments to lenders. At the end of the period, he will pay a liquidating dividend. It is always feasible for him to claim a very low value of y, and keep for himself the difference between the actual value and what he pays the others.

Let z > 0 be the aggregate payment which the entrepreneur pays to the m lenders. If the realization of output is 9= y, he then keeps y – z for himself. Because consumption cannot be negative the payment which he pays cannot feasibly exceed y (plus any personal wealth he might have, assumed here to be zero). To induce the entrepreneur to select a value of z > 0, he must be provided with incentives. To raise captial to undertake the project, lenders must believe that the expectation of the value of z which he will select is at least R.

The entrepreneur must choose an incentive contract which depends only on observable variables and makes lenders anticipate a competitive expected dividend. The only costlessly observable variable is the payment z itself. Lenders know the distribution of y, and know that the entrepreneur chooses the payment z which is best for him given a realization y = y, and that z E [0, y]. If y exceeded R with probability one, then a full information optimal contract would be feasible-the risk neutral entrepreneur would offer an uncontingent payment of R. (See Harris-Raviv (1979). It might appear that the assumption that y = 0 is a possible outcome of the project rules out any borrowing, because z = 0 must be feasible, and it does not appear incentive compatible for an entrepreneur to choose a payment z > 0 when he can choose z = 0 and retain the rest. However, we will allow contracts with non-pecuniary penalties: penalties where the entrepreneur’s loss is not enjoyed by the lenders. This allows the agent’s utility function to be defined over negative values of its domain without allowing negative consumption to “produce” goods.

We will see that these penalties are best interpreted as bankruptcy penalties. Some examples include a manager’s time spent in bankruptcy proceedings, costly “explaining” of poor results, search costs of a fired manager, and (loosely) the manager’s loss of “reputation” in bankruptcy. Physical punishment is a less realistic example. Projects which could not be undertaken at all without the penalties can be operated using the penalties. DIAMOND FINANCIAL INTERMEDIATION 397 The optimal contract maximizes the risk neutral entrepreneur’s expected return, given a minimum expected return to lenders of R.

Let the function c, from the nonnegative reals to the non-negative reals, be the non-pecuniary penalty function, which depends on z, the payment to lenders selected by the entrepreneur. Assume that if the entrepreneur is indifferent between several values of z, he chooses the one preferred by the lender. The optimal contract with penalties 4*( – ) _ 0 solves1 ymax4,(. )E ^[maxzE[O,-] z – ( z)] Subject to and yE [arg maxZ,[O,-] z-(z)]_ R, z e arg maxZE[O, y- z (z) (la) (lb) (ic) where the notation “arg max” denotes the set of arguments that maximize the objective function that follows.

Proposition 1. The optimal contract which solves (1) is given by +*(z)= max (h – z, 0), where h is the smallest solution to (P(y-; h) *Ey[yJy; h]) + (P(y ;: h) *h) = R. (2) That is, it is a debt contract with face value h and a non-pecuniary bankruptcypenalty equal to the shortfallfrom face, h, where h is the smallest face value which provides lenders with an expected return of R. Proof. Given +*(z), arg maxz[o,y] z-zy (Z) {= if y 0 for each principal to monitor, and the cost must be incurred before the output realization is known to anyone, including the entrepreneur.

See Townsend (1979) for some interesting analysis of the optimal contingent monitoring policy when the decision to monitor can be made after the entrepreneur has made a payment to a lerlder. This additional complication is not introduced because given some specified probability of monitoring it would not influence our results. If it is possible for lenders to observe the outcome at some cost, there are three types of contracting situations possible. The contract can be as described above, with no monitoring. A second possiblility is for each of the m lenders to spend resources to monitor the outcome.

Thirdly, the lenders can delegate the monitoring to one or more monitoring agents. The least costly of these will be selected. If there were a single lender so m = 1 (rather than m ; 1 as we assume), monitoring would be valuable if its cost were less than the expected deadweight penalty without monitoring or K BE[p*(9)]. With many lenders and direct contracting between the entrepreneur and lenders, if each lender monitors, monitoring is valuable if and only if m K _ Ej[o*(9)]. When m is large this is unlikely because each lender’s loan is small.

Even if this condition for valuable monitoring is satisfied, it implies a large expenditure on monitoring and some sort of delegated monitoring might be desirable in this case. To obtain the benefits of monitoring, when m is large the task must be delegated rather than left to each individual lender. The entity doing the monitoring (“the monitor”) must be provided with incentives to monitor and enforce the contract. We assume that the actions taken and the information observed by the monitor are not directly observed by the lenders. It will generally be costly to provide incentives to the monitor, and below we analyse these costs.

The total cost of delegated monitoring is the physical cost of monitoring by the monitor, K, plus the expected cost of providing incentives to the monitor, which we call the cost of delegation and denote the cost per project by D. Delegated monitoring pays when K+D’ min[E k*(9)], (m. K)]. The costs of delegation are analysed when the monitor is a financial intermediary who receives payments from entrepreneurs and makes payments to principals. 3. DELEGATED MONITORING BY A FINANCIAL INTERMEDIARY A financial intermediary obtains funds from lenders and lends them to entrepreneurs.

Economists have tried to explain this intermediary role by arguing that the financial DIAMOND FINANCIAL INTERMEDIATION 399 intermediary has a cost advantage in certain tasks. When such tasks involve unobserved actons by the intermediary or the observation of private information, then an agency/incentive problem for the intermediary may exist. Any theory which tries to explain the role of intermediaries by an information cost advantage must net out the costs of providing incentives to the intermediary from any cost savings in producing information.

Existing intermediary theories do not make this final step. We now introduce a financial intermediary between entrepreneurs and lenders (whom we call depositors from now on), and examine conditions when this intermediary function is viable considering all costs. A financial intermediary is a risk neutral agent, with personal wealth equal to zero. The intermediary receives funds from depositors to lend to entrepreneurs and is delegated the task of monitoring the outcomes of entrepreneurs’ projects on behalf of depositors. Monitoring the i-th entrepreneur costs the intermediary K units of goods. Depositors can observe the payment they receive from the intermediary, but cannot observe the project outcomes, payments by entrepreneurs to the intermediary, or the resources expended by the intermediary in monitoring the outcomes. Each entrepreneur’s project requires one unit of initial capital. Each depositor has available capital of 1/m, as in Section 2. An intermediary which contracts with N entrepreneurs has m N depositors. To analyse the conditions when intermediation is beneficial (when the monitoring cost savings exceed the delegation costs of providing incentives) we must first characterize the delegation costs.

If the intermediary could monitor at no cost, it could enforce contracts with entrepreneurs which imposed no deadweight bankruptcy costs on them. However, there would remain an incentive problem for the intermediary, because the payments it receives from entrepreneurs are not observed by depositors. The intermediary could claim that payments from entrepreneurs were low, and pay a small amount to depositors. We now extend the results in Section 2 to analyse the optimal contract to provide incentives for an intermediary to make payments to depositors. We later show that it provides incentives to monitor as well.

Let us re-introduce the subscript i on the outcome yi of the i-th entrepreneur. For i= 1, . . . , N, the 9i are distributed independently and all are bounded below by zero and above by the real number y. The probability distribution functions of the 9i are common knowledge to all. Let gi ( *) be the non-negative real valued function which is the payment to the intermediary by the i-th entrepreneur as a function of the outcome yi, assuming the intermediary monitors yi. Because yi is then observed by the intermediary, this implies no deadweight penalties will be imposed on the i-th entrepreneur.

If the intermediary does not monitor, it must use a contract with deadweight bankruptcy penalties, as. in Section 2, but in that case there would be no reason to have an intermediary. Due to the constraint that an entrepreneur can pay only what he has, we require gi(yi) ‘-yi. The intermediary monitoring N entrepreneurs receives total payments GN when ? – = Y, Y2= Y2, * * , YN= YNequal to GN 1i GN=N gi(Yi). Let GN be the random variable with realization GN. It is bounded above by GN, and below by zero. The intermediary must make total payments to depositors with expectation R per project, or N- R in total.

Let ZN be the total payment to depositors by entrepreneurs. The intermediary can pay only what it has, thus ZN – GN. By an argument identical to that of Section 2, we see that deadweight bankruptcy penalties must be imposed on the intermediary unless the intermediary will always receive aggregate payments of at least N* R, or P(GN ‘ N R) = 1. Because of the constraint that entrepreneurs can pay the 400 REVIEW OF ECONOMIC STUDIES intermediary at most yi, we know P( GN ; N- R) C P(E,i=1yi ‘-NV R ). Any entrepreneur, i, with P(. _ R) = 1 could finance directly, with no bankruptcy penalties, thus entrepreneurs who choose to use intermediaries will lead the intermediary to incur expected deadweight bankruptcy penalties. Let 1D(ZN) be the deadweight non-pecuniary penalty imposed on the intermediary when payment ZN is made to depositors. From Proposition 1, the optimal FD(ZN)which gives incentives to make payments with expectation N- R, is given by (D(ZN) = max [HN ZN, 0], where the constant HN is the smallest solution to {(P(GNNHN The expected return of the intermediary net of expenditure NK on monitoring is EGN(GN)-HN-NK=[N. R+K+DN)]-[N(R+2N)1 =-DN>O. -(N-K) N 2 (satisfying the constraint that this be non-negative. ) The aggregate expected return to depositors is given by PN. Ec;N[GNIGN-HN]+(1-PN). HN where PN-P(GN-HN). 0 and that the aggregate expected R DN Notice that GNi-0 implying EcN[GNIGN-? HN] rerurn of depositors is greater than or equal to: ( 1-PN) *HN = ( 1 PN) (N > NX R 2 for smallPN>0 i. e. for PN E (0, (DN/2)/(R +DN/2)). There exists N* HN. This implies that the delegation cost DN can be made arbitrarily small for large N. 11 402 REVIEW OF ECONOMIC STUDIES

Proposition 2 demonstrates the key role of diversification in the provision of delegated monitoring. The intermediary need not be monitored because it takes “full responsibility” and bears all penalties for any short-fall of payments to principals. The diversification of its portfolio makes the probability of incurring these penalties very small and allows the information collected by the intermediary to be observed only by the intermediary. Proposition 1 characterized the optimal incentive compatible mechanism for financial intermediation, and this is the optimal incentive compatible mechanism with “privacy”.

It was the optimal mechanism when the agent monitoring entrepreneurs was constrained not to announce the values of the project outcomes he observed and could only use the information privately to enforce his contract with each entrepreneur. Proposition 2 shows that financial intermediation is, asymptotically, the optimal incentive compatible mechanism for financing entrepreneurs’ projects, without imposing the constraint of “privacy”. If the number of entrepreneurs monitored is N = 1, then delegation costs are so large that intermediation is never viable.

If N — oo, then expected delegation costs approach zero, and intermediation is viable whenever direct monitoring pays. There exists some N> 1 at which intermediation becomes just viable (when DN min [E5[b*(-)], m- K]). If the assumption is made that each entrepreneur’s project has the same variance, then the expected delegation costs are a monotonically decreasing function of N. This leads to increasing returns to scale due to diversification, but asymptotic constant returns to scale because expected delegation costs per project are bounded elow by zero, and they may be small for moderate values of N. The incentive contract is debt with bankruptcy penalties and high leverage. Asymptotically, the debt is riskless (as DN — 0). The leverage is high, as the face value of the debt is H(N) = N- (R + DN/2), while the expected future value of the intermediary (including value of the debt) is N (R + DN+ K). The importance of the diversification is not simply a way for principals to hold welldiversified portfolios. Principals are risk neutral, and are not made directly better off by the diversification.

Diversification within the financial intermediary organization is important, and cannot be replaced by diversification across intermediaries by principals. Correlated returnsof entrepreneurs The assumption of independently distributed project returns across entrepreneurs is quite strong. It can be weakened somewhat. Instead of independence, assume that entrepreneur’s project returns depend on several common factors which are observable. Factors might include GNP, interest rates, input prices, etc. Since these are observable, they can be used as the basis for contingent contracts.

There might exist futures markets for these variables, and the financial intermediary could hedge changes in these factors in those markets. An example is a bank’s hedging of interest rate risk using interest rate futures. If there are not active futures markets, then the intermediary can write contracts with depositors which depend on the values of these factors, rather than taking responsibility for all risks. An example of this is matching the maturity of assets and liabilities by banks, which places all interest rate risk on depositors.

In either case, the intermediary retains responsibility for (and potentially fails as a result of) all risks which are not observable. The result of Proposition 2, that DN-; 0 as N-; o follows given this alternative assumption in place of independence. This is stated in the following corollary. DIAMOND FINANCIAL INTERMEDIATION 403 Corollary to Proposition 2. If it is common knowledge that the returnsof the projects of entrepreneursi = 1,… N, are given by Yi]-= [ 13ij Fj + ?i where the Fj are observable ex post, the ? are independent and bounded and E[9 ]; R + K, then the result of Proposition 2 follows. Proof. Choose gi(yi) = ai yi where R+K+DN =ti Ey[]Yi Let the penalty contract be either +(Z) =Z+[~7i=1 Em1 * [3ij*FJA-H(N) where H(N) = N- R +DN ]E[ = 1 E ml (Xi 13ij F-J, * or let 4+(Z) be as in Proposition 2, and let the position in the futures market be aA=1i* in futures markets j = 1, . . . , M The transformed random variables are now independent, and the result Proposition 2 follows. II The intermediary monitors firm specific information, which is independent across entrepreneurs, and hedges out all systematic risks.

The description of the process generating project returns is consistent with the Arbitrage Pricing Theory of Ross (1976). The intuition behind this result is that the intermediary must bear certain risks for incentive purposes, but that risks which have no incentive component because they are common information should be shared optimally. 4 There has been a debate among various bankers and bank regulators over the desirability of allowing hedging in futures markets by banks. Our analysis suggests a reason why it is desirable. 4.

RISK AVERSION AND DIVERSIFICATION Diversification proved to be important to reduce delegation costs despite universal risk neutrality because of the wealth constraint of non-negative consumption and the asymmetry of information about project outcomes. The wealth constraint gives rise to a special type of “risk aversion”. In this section, we investigate the role of diversification within the intermediary when the agents within the intermediary are risk averse in the usual sense. To focus on risk sharing issues, we drop the wealth constraint to allow any promise to be made good.

A complete re-analysis of the model of Section 2 is not presented. This section does not present a realistic intermediary model, but simply a further investigation of the role of diversification in reducing the costs of delegation. The basic set-up is as in Section 2, each entrepreneur is endowed with a project with outcome -i which is freely observed only the entrepreneur, which has zero as a possible realization. Absent monitoring by lenders, no incentive compatible payment schedule can depend on the realization yi, because the entrepreneur could always claim a low value occurred.

For simplicity, assume that all agents in the economy, including the 404 REVIEW OF ECONOMIC STUDIES entrepreneurs, are identical and risk averse. Risk aversion implies that the payment to lenders will be a constant, rather than a random amount independent of -i, (see Holmstr6m (1979)). This implies that, absent monitoring, the risk averse entrepreneur bears all of the risk from fluctuations in -i. This is inconsistent with the optimal risk sharing which would occur if yi were observed, and this provides a potential benefit from monitoring Yi.

In this risk averse setting, we could introduce other actions, e. g. effort, which the entrepreneur could privately select to give rise to a more general motivation for monitoring. This would not change the essence of our results. We focus again on delegated monitoring by a financial intermediary. A financial intermediary raises funds from depositors who do not monitor, lends these funds to entrepreneurs, and can offer improved risk sharing with an entrepreneur because the intermediary’s monitoring reduces or eliminates the incentive problem.

In Section 2, we showed that an intermediary monitoring a single entrepreneur would have an incentive problem just as severe as would an entrepreneur. Almost the same result is true here. Because depositors do not monitor the intermediary and cannot observe its information, incentive compatible payments from the intermediary to depositors cannot depend on outcomes, and will be constant. It is true, however, that a single intermediary and a single entrepreneur can now share yi risk, but this has little to do with intermediation. an share risk with the entrepreneur Any lender who spends resources to monitor Ya without being called an “intermediary”. For a financial intermediary in an economy where everyone is risk averse to viably provide delegated monitoring services, it must have lower delegation costs than an entrepreneur. Equivalently, since risk sharing is the issue here, a viable financial intermediary which monitors many entrepreneurs with independently distributed projects must charge a lower Arrow-Pratt risk premium for bearing the risk of an entrepreneur’s project than does the entrepreneur.

This will carry over to more general settings, because if the intermediary can bear risks at a lower risk premium it will generally face a less severe trade-off between risk sharing and incentives, and can thus efficiently be delegated a monitoring task. Two types of diversification There are two ways in which an intermediary in an economy of risk averse agents might use diversification. They correspond to two different models of an intermediary. One model increases the number of agents working together within the intermediary organization as the intermediary monitors a larger number of entrepreneurs.

The second model assumes that the intermediary consists of a single agent who monitors a large number of entrepreneurs with independent projects. Beginning with the first model, assume that each identical agent (“banker”) in the intermediary is risk averse, and that by spending resources to monitor, each banker within the intermediary can observe the information monitored by all other bankers within the intermediary. This implies that there are no incentive problems within the intermediary.

The extreme assumption that incentive problems are absent is intended to capture the idea that there may be different mechanism for controlling incentive problems within an organization. This approach is followed in Ramakrishnan-Thakor (1983), to generalize the risk neutral analysis we present in Section 2. This model leads to the traditional “risk subdividing” type of diversification. This type of diversification works because each independent risk is shared by an increasing number of bankers.

For example, each risk averse agent will obtain a higher expected utility if each of N agents invests in a fraction 1/N of N identical independent gambles than in any single one of the gambles. DIAMOND FINANCIAL INTERMEDIATION 405 The second type of diversification, “adding risks”, occurs in the second model where a single banker bears 100% of N independent risks, with diversification occurring as N grows. This is quite different from risk subdivision, because it is not a form of risk sharing at all. The total risk imposed on the agent rises with N, while with subdivision of risks it falls with N.

Samuelson (1963) termed diversification by adding risks a “fallacy of large numbers”, because it is not true for all risk averse utility functions that the risk aversion toward the N-th independent gamble is a decreasing function of N. Samuelson provides no analysis of conditions when this type of diversification is beneficial, and I know of none in the literature. 5 We provide a partial characterization of conditions when the certainty equivalent of a given gamble is higher (and the risk premium lower) when another independent risky gamble is also held.

That is, when is the per asset certainty equivalent higher with N = 2 than with N = 1? We turn first to the relatively straightforward model of diversification by subdivision of risks. Assume that it takes one banker in the intermediary to monitor one entrepreneur, and this requires an expenditure in goods of K (or that the disutility of this monitoring task is additively separable). All bankers are identical, have increasing, concave utility of wealth functions U( W).

By spending K to monitor their entrepreneur, each banker can also observe information monitored by the other bankers within the intermediary, implying that there is no incentive problem within the intermediary. Depositors are not assumed to be able to observe any of the information generated within the intermediary, and are paid a fixed unconditional payment of NR. As N-; oo, Ramakrishnan-Thakor (1983) shows that each banker bears an arbitrarily small risk, with perfect risk sharing within the intermediary.

The interpretation of this result is that the diversification which occurs when bankers within the intermediary can share independent risks does serve to reduce the severity of its incentive problem. This occurs because the incentive problem here imposes a constraint on optimal risk sharing, and if there is improved risk sharing within the intermediary (where incentive problems may be controlled directly, or absent as assumed here), then this is analogous to reducing the risk aversion of a single agent, which reduces the tradeoff between risk sharing and the provision of incentives.

In the second model, where the intermediary consists of a single agent, diversification by adding risks is at work. The intermediary agent monitoring N loans, receives payments from each entrepreneur and bears all of the risk because he pays an unconditional return, N- R, to depositors. The financial intermediary can provide monitoring and risk sharing services superior to an individual lender if and only if his risk aversion toward the Nth independent risk is a decreasing function of N.

Put another way, when there is no wealth constraint an intermediary monitoring a single entrepreneur (N = 1) is equivalent to direct monitoring by a lender. Intermediation becomes potentially viable when the delegation cost (equal to the risk premium here) is reduced by the centralization of monitoring to a single intermediary. This is therefore equivalent to the conditions when adding independent risks reduces per-entrepreneur risk aversion, which are the conditions when the fallacy of large numbers is not a fallacy.

To provide a partial characterization of conditions when the per-risk risk premium declines, we initially focus on the case of two risks. That is, given two bounded and independent random variables gl and g2, when is the risk premium for bearing the risk of the bounded random variable l + g2 less than the sum of the two risk premia for bearing either risk separately. If both random variables represent payment chedules from entrepreneurs which a risk averse intermediary would voluntarily accept, both must have expectation greater than R + K, because the intermediary promises N- R to depositors and spends N K on monitoring. It will ease exposition to provisionally assume 406 REVIEW OF ECONOMIC STUDIES – R – K, for i =1,2. With this notation, the Egj[g] = R + K. In addition, define xi net effect of contracting to monitor an entrepreneur with payment schedule g- is equivalent to receiving the random variable x1. (In this notation, our temporary assumption is E [XI1]= 0. An agent has a four times differentiable, increasing and strictly concave von NeumanMorganstern utility function U( W), and initial wealth W0. The random variables x1 and x2 are bounded and independent. The risk premium, pi, for bearing the risk, of the single random variable xi (i = 1, 2), satisfies U( Eg-i[ Wo+ Xi+ Pi)] = U( Wo+ EJxjixi). The risk premium, P1+2, for bearing the risk of the random variable xl + x2, satisfies U( + EX1Ex2[ W0+ Xl + X2 P1+2)]= U( WO El[xl] + Adding risks reduces the risk premium if P1+2

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Bayeux Tapestry Letter

The Bayeux Tapestry was one of the most memorable and successful battles that I have ever participated in as a Norman soldier. The battle was fought between the mighty Norman soldiers and the English soldiers. It was also called the Battle of Hastings because it was fought in Hastings, England. Harold, who was the king of England at the time of the battle, had murdered his brother, and thus, his position as king was disputed. The Duke of Normandy, the Conqueror led my side, the Normans to war. In reality, William was supposed to be the King of England, and this battle was meant to prove this.

Duke William has been known to be extremely successful in the battlefield, and this has branded him as a victorious military commander. Before the battle, we travelled by water to England (BBC, 2010). There was an incredibly large fleet of warfare ships, which were used to transport me, the duke and other soldiers who fought in the war. The ship used by William was commonly known as the Mora, and it was the biggest from among the other ships. People close to Duke William said that the ship was a gift from his wife who was called Mathilda. The ship was extremely fast.

Apart from the duke, there were other leaders, such as Odo, the Bishop of Bayeux. The number of soldiers was around seven thousand men. In Norman culture, the first born son inherits all the properties of the family, the rest of the sons are left to fend for themselves, unless the first born son decides to share his wealth with them. Most of the time, these sons choose to serve in war. This explains the excessive number of Norman soldiers. There were also other supporters of the duke that had come to support him, bringing with them able men to fight in the war.

Bishop Odo came with the Bretons. There were also the French, who had been urged to join in the war by William. In return for their service to the duke, they were promised pieces of land. There were the Flemish as well, who would also get pieces of land. The journey ended at the Pevensey Bay of England and the duke alighted from the Mora, and fell in his arms and knees on the beach. This sign could be taken to mean that he was asking for blessings from God. The following day, we awoke very early in the morning in order to prepare for the long-awaited battle.

The battleground was Hastings, and since Pevensey Bay was close by, Duke William ordered us to get ready and wait for King Harold to come to us. I could sense that the decision to wait for the Saxon army that was led by King Harold was a war tactic that was adopted by William, in order to weigh the tactfulness of King Harold. Each side had its own distinct color of uniforms. Thus, I and the rest of the soldiers wore blue leather jackets. There was steel chain or ring mail weaved into the jacket. We were also provided with a conical helmet that had a nose guard.

The exact date the war began was October 14, 1066. Early in the morning, the duke led us to attack the Saxon army. My team was at the centre, the Bretons were on the right and the French were on our left. The battle began with both sides showing their military power, men fell to the ground and died, as others stood tall to support their side. I could hear and see men scream, others fell heavily to the ground, while others like me fought tactically, bringing the enemy down. The battle lasted the entire day. By around midday, the battle had escalated, as my side started to gain victory.

The Normans could be seen tackling their opponents with the axes that belonged to them. The sight of the Saxon army tearing down the Norman horses with these axes really frightened me. In the afternoon, the Bretons, who were on our side seemed to be giving up, and they were pursued by the whole of the Saxon army (Barrow, 2011). This gave the Norman side a chance to reorganize themselves, and the remaining three teams attacked the Saxon army from both sides. This threw the Saxon army into confusion, and the Norman side took this chance to mercilessly assault the Saxons.

In the afternoon, the Saxon army began to break up, and they were soon overcome. Their leader, King Harold, was wounded in the eye by a spear and fell to the ground. I watched as he tried to remove the spear from his eye, but he was finally overcome by the pain. His royal fellows came to defend him, and this action saw a deadly fight arise, between the men and the Norman soldiers. These men were crushed to the ground, and King Harold was then immediately killed by one of our men (Barrow, 2011). The king’s two brothers were also murdered on the spot.

Witnessing this, some of the remainder of the Saxon army fled. The remaining Saxon men continued to fight, but they were executed and soon, there were no more Saxon soldiers. There were heaps of bodies filled with fresh-smelling blood all over. Duke William had led the Norman army to victory, and subsequently, the bodies were removed from the center of the field and a tent was built for William, and celebrations started. I felt that it was such an honor to fight and win in the battlefield, and more so, to fight alongside the most honorable man, Duke William.

There were various weapons used in the war, as the war was a combat between two different military combats. The Normans used swords that were edged and pointed on two sides. These were seven to eight meters tall. The swords were mainly used by soldiers who were on horses. The Normans also used archers, clubs, maces and spears, which were used by the Saxon army as well. The Saxons used deadly axes that could kill a horse in a single blow. Bishop Odo, of the Norman side used a club because it was highly forbidden for clergymen to shed blood.

All the Saxons were on foot; hence they did not have any horses. Each side had its own fighting tactics. The Saxon army consisted of nobles that were from each household, these nobles formed their own troops and they were known as housecarls. These were paid troops, and thus they had utmost respect to their leader. There were also the Fryds, on the side of the Saxons. These were peasants, and most of them were not trained in war (Kelly, 2011). The Saxon army arranged themselves in a wedge-shape.

At the tip of the wedges, amply equipped soldiers were placed there in order to provide extreme defense. The other men were arranged according to ranks, and it is in these distinct ranks that these men fought. The Saxons favored the axe, as a favorite weapon. The Normans divided themselves into three groups; there were men on horses, those who used archers and dismounted soldiers. The terrifying weapon among the Normans was the arrow. The Normans attacked the Saxons from both sides. During the battle, Duke William went around the battlefield, his head barred.

This was to serve as an assurance that he was unhurt, and it also served as a motivation to the Norman soldiers (Kelly, 2011). References Barrow, Mandy. (2011). The Normans in Britain. Retrieved on August 8, 2011 from http://www. woodlands-junior. kent. sch. uk/Homework/bt/who. htm British Battles. com. (2010). The Norman Conquest of England. Retrieved on August 8, 2011 from http://www. britishbattles. com/norman-conquest/battle-hastings. htm Kelly, Patrick. (2011). The Normans. Retrieved on August 8, 2011 from http://www. albion-swords. com/articles/norman. htm