Monthly Archives: April, 2013

Cluster Analysis

Cluster analysis is an exploratory data analysis tool for solving classification problems. Cluster analysis is a technique of grouping individuals or objects into unknown groups i.e. segmenting the market. The objective is to find out a group of customers in the market place that are homogeneous i.e., they share some characteristics so that they can be classified into one group.

The technique examines similarities between observations of entities based on profiles of their scores on a number of measured characteristics. Using your customer base, you may be able to form clusters of customers who have similar buying habits or demographics. You can take advantage of these similarities to target offers to subgroups that are most likely to be receptive to them. Each cluster thus describes, in terms of the data collected, the class to which its members belong; and this description may be abstracted through use from the particular to the general class or type.

Cluster analysis is thus a tool of discovery.  It may reveal associations and structure in data which, though not previously evident, nevertheless are sensible and useful once found.

The cluster/group so found out should be large enough so that the company can develop it profitably, as the ultimate objective of a company is to serve the customer and earn profits. The group of customers that the company hopes to serve should be large enough for a company so that it is an economically viable proposition for the company.

Cluster analysis is neither a single technique nor a statistical technique. It is a mathematical formula for dividing data into classes, without a preconceived notion of what those classes are, based on relationships within the data. There are many different

ways to do this, and some of them use statistical probabilities or statistical quantities such as sum of squares at various points. But overall, the techniques themselves are not really statistical, as they give you no means of assessing likelihood

Applications of cluster analysis include:

  1. Determining the number and composition of market segments
  2. Facilitating the selection of test markets
  3. Identifying groups of people with common purchasing interests in segmentation studies; this helps to identify target markets and provides information for establishing product positioning and developing promotional themes.

Thus we can conclude that cluster analysis is a method of classifying mountains of data into meaningful piles, as it is data reduction tool that creates more meaningful clusters/groups.


What is International Business?

Our great grandfathers ate food which was grown by them, wore clothes which were stitched by them. Slowly as the population of a country began to increase, there was also an advancement of technology leading to improved production and distribution methods. Slowly people began to depend on others for goods and services. Slowly some people started to specialize in one activity for example, producing food grains, stitching clothes, making food, etc… this lead to increased dependence.

People then started to buy and sell goods and services amongst themselves in the same country. Slowly with advent of modern technology and distribution system these transaction started to be conducted beyond the borders of one country.

Now you wear shirt made in Thailand, shoes made in US, use music system made in Japan, own a television set made in China. Most of you have the experience of browsing Internet and visiting different web sites, knowing the products and services offered by various companies across the globe. Some of you might have the experience of even ordering and buying the products through Internet. This process gives you the opportunity of transacting in the international business arena without visiting or knowing the various countries and companies across the globe. You get all these even without visiting or knowing the country of the company where they are produced.

We all are now a part of global economy. Political boundaries of nations, states or regions are no longer the fetters for business in the global economic paradigm. Production and consumption are globally spread for most products.

International Business is all commercial transactions – private or government – between two or more countries. International Business allows you to purchase popular items made in other countries, without global business our life probably would have been different. Private organizations may undertake these activities for profits whereas governments may or may not for profits.

International Business means carrying business activities beyond national boundaries. These activities include transactions of economic resources such as:

  • Goods
  • Capital
  • Services
  • International production

Study of international business has become very important because:

  1. It comprises a large and growing portion of the world’s total business
  2. It provides a source of raw materials and parts for foreign products
  3. It allows new markets for investments
  4. It helps improve political relations
  5. All companies are affected by global events and business

Thus, international business is the process of focusing on the resources of the globe and objectives of the organizations on global business opportunities and threats.

Objective of Financial Management

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

In simple terms objective of Financial Management is to maximize the value of firm, however it is much more complex than that. The management of the firm involves many stakeholders, including owners, creditors, and various participants in the financial market. The same is shown in below diagram:

Financial Management

Effective procurement and efficient use of finance lead to proper utilization of the finance by the business concern. It is the essential part of the financial manager. Hence, the financial manager must determine the basic objectives of the financial management

The objectives of financial management are given below:

1. Profit maximization

Main aim of any kind of economic activity is earning profit. A business concern is also functioning mainly for the purpose of earning profit. Profit is the measuring techniques to understand the business efficiency of the concern.

The finance manager tries to earn maximum profits for the company in the short-term and the long-term. He cannot guarantee profits in the long term because of business uncertainties. However, a company can earn maximum profits even in the long-term, if:

  • The Finance manager takes proper financial decisions
  • He uses the finance of the company properly

2. Wealth maximization

Wealth maximization (shareholders’ value maximization) is also a main objective of financial management. Wealth maximization means to earn maximum wealth for the shareholders. So, the finance manager tries to give a maximum dividend to the shareholders. He also tries to increase the market value of the shares. The market value of the shares is directly related to the performance of the company. Better the performance, higher is the market value of shares and vice-versa. So, the finance manager must try to maximize shareholder’s value

3. Proper estimation of total financial requirements

Proper estimation of total financial requirements is a very important objective of financial management. The finance manager must estimate the total financial requirements of the company. He must find out how much finance is required to start and run the company. He must find out the fixed capital and working capital requirements of the company. His estimation must be correct. If not, there will be shortage or surplus of finance. Estimating the financial requirements is a very difficult job. The finance manager must consider many factors, such as the type of technology used by company, number of employees employed, scale of operations, legal requirements, etc.

4. Proper mobilization

Mobilization (collection) of finance is an important objective of financial management. After estimating the financial requirements, the finance manager must decide about the sources of finance. He can collect finance from many sources such as shares, debentures, bank loans, etc. There must be a proper balance between owned finance and borrowed finance. The company must borrow money at a low rate of interest.

5. Proper utilization of finance

Proper utilization of finance is an important objective of financial management. The finance manager must make optimum utilization of finance. He must use the finance profitable. He must not waste the finance of the company. He must not invest the company’s finance in unprofitable projects. He must not block the company’s finance in inventories. He must have a short credit period.

6. Maintaining proper cash flow

Maintaining proper cash flow is a short-term objective of financial management. The company must have a proper cash flow to pay the day-to-day expenses such as purchase of raw materials, payment of wages and salaries, rent, electricity bills, etc. If the company has a good cash flow, it can take advantage of many opportunities such as getting cash discounts on purchases, large-scale purchasing, giving credit to customers, etc. A healthy cash flow improves the chances of survival and success of the company.

7. Survival of company

Survival is the most important objective of financial management. The company must survive in this competitive business world. The finance manager must be very careful while making financial decisions. One wrong decision can make the company sick, and it will close down.

8. Creating reserves

One of the objectives of financial management is to create reserves. The company must not distribute the full profit as a dividend to the shareholders. It must keep a part of it profit as reserves. Reserves can be used for future growth and expansion. It can also be used to face contingencies in the future.

9. Proper coordination

Financial management must try to have proper coordination between the finance department and other departments of the company.

10. Create goodwill

Financial management must try to create goodwill for the company. It must improve the image and reputation of the company. Goodwill helps the company to survive in the short-term and succeed in the long-term. It also helps the company during bad times.

11. Increase efficiency

Financial management also tries to increase the efficiency of all the departments of the company. Proper distribution of finance to all the departments will increase the efficiency of the entire company.

12. Financial discipline

Financial management also tries to create a financial discipline. Financial discipline means:

  • To invest finance only in productive areas. This will bring high returns (profits) to the company.
  • To avoid wastage and misuse of finance.

13. Reduce cost of capital

Financial management tries to reduce the cost of capital. That is, it tries to borrow money at a low rate of interest. The finance manager must plan the capital structure in such a way that the cost of capital it minimized.

14. Reduce operating risks

Financial management also tries to reduce the operating risks. There are many risks and uncertainties in a business. The finance manager must take steps to reduce these risks. He must avoid high-risk projects. He must also take proper insurance.

15. Prepare capital structure

Financial management also prepares the capital structure. It decides the ratio between owned finance and borrowed finance. It brings a proper balance between the different sources of capital. This balance is necessary for liquidity, economy, flexibility and stability.


Dynamic entrepreneurship Theory

Dynamic Theory of entrepreneurship was advocated by Schumpeter, it considers entrepreneurship as a catalyst that disrupts the stationary flow of the economy and sustains process of development i.e. new combination.

The Theory of Economic Development, originally published in German in 1911, in which he endorsed entrepreneurship, was hardly ever mentioned. The theory was not widely accepted in 1930,s as dominance of sellers’ market. Theory was only mere fancy till 1990 when mega corporates failed due to over emphasis on operation which worked well in past.

Embarking upon new combinations of the factors of production – which he succinctly terms innovation – the entrepreneur activates the economy to a new level of development. The concept of innovation and its corollary development embraces five functions:

  1. Introducing new goods or a new quality of good
  2. Introducing new ways of producing goods
  3. Opening up new markets (usually overseas)
  4. Discovering new sources of supply of raw materials or partly-manufactured goods
  5. Re-organizing the structure of an industry (for example, by creating a monopoly or breaking up a monopoly situation)

Schumpeter represents a synthesis of different notions of entrepreneurship. His concept of innovation included elements of risk taking, superintendence and co-ordination. However, Schumpeter stressed the fact that these attributes unaccompanied by the ability to innovate would not be sufficient to account for entrepreneurship.

Schumpeter points out, “to produce means to combine materials and forces within our reach” and that the same materials may well be used in different ways. He describes these potential alternatives as new combinations and identifies the entrepreneur’s role as the discovery and commercialization of new combinations

Theory advocates the age of discontinuity and more on formulating the right questions and then the right answers for survival.

Leibenstein’s X-efficiency theory

X-inefficiency is the difference between efficient behavior of firms assumed or implied by economic theory and their observed behavior in practice. It occurs when technical-efficiency is not being achieved due to a lack of competitive pressure. The concepts of x-inefficiency were introduced by Harvey Leibenstein

The degree of efficiency maintained by individuals and firms under conditions of imperfect competition. According to the neoclassical theory of economics, under perfect competition individuals and firms must maximize efficiency in order to succeed and make a profit; those who do not will fail and be forced to exit the market. However, x-efficiency theory asserts that under conditions of less-than-perfect competition, inefficiency may persist.

Economic theory assumes that the management of firms act to maximize economic profits—which is accomplished by adjusting the inputs used or the output produced. In perfect competition, the free entry and exit of firms tends toward firms producing at the point where price equals long run average costs and long run average costs are minimized. Thus firms earn zero economic profits and consumers pay a price equal to the marginal cost of producing the good. This result defines economic efficiency or, more precisely, allocative economic efficiency.

X-inefficiency is not the only type of inefficiency in economics. X-inefficiency only looks at the outputs that are produced with given inputs. It doesn’t take account of whether the inputs are the best ones to be using, or whether the outputs are the best ones to be producing, which is referred to as allocative efficiency. For example, a firm that employs brain surgeons to dig ditches might still be x-efficient, even though reallocating the brain surgeons to curing the sick would be more efficient for society overall.

Leibenstein regards entrepreneurship as a creative response to X-efficiency. Other people’s lack of effort and the consequent inefficiency of the organizations that employ them, create opportunities for entrepreneurs. Entrepreneurial activities pose a competitive threat to inefficient organizations.

Leibenstein identifies two main roles for entrepreneurs. The first role is the ‘input completion’ involves making available inputs which improve efficiency of existing production methods or facilitates the introduction of new ones. It is normally effected by intermediation in factor markets, in particular the markets for venture capital and management skills. The role of entrepreneur is to improve the flow of information in these markets.

The second role ‘gap filling’ is closely related to arbitrage function emphasized by Kirzner. Leibenstein provides a very vivid description of gap filling, visualizing the economy as a net made up of nodes and pathways.

The nodes represent industries or households that receive inputs (or consumer goods) along the pathway and send outputs (final goods and inputs for the other commodities) to the other nodes. The perfect competition model would be represented by a net that is complete: one that has pathways that are well marked and well defined, one that has well-marked and well-defined nodes, and one in which each element (that is firm or household) of each node deals with every other node along the pathways on equal terms for the same commodity.


Schumpeter’s Theory on Entrepreneurship

The innovative theory is one of the most famous theories of entrepreneurship used all around the world.  The theory was advanced by one famous scholar, Schumpeter, in 1991.

Schumpeter believes that creativity or innovation is the key factor in any entrepreneur’s field of specialization.  He argued that knowledge can only go a long way in helping an entrepreneur to become successful. He believed development as consisting of a process which involved reformation on various equipment’s of productions, outputs, marketing and industrial organizations.

However, Schumpeter viewed innovation along with knowledge as the main catalysts of successful entrepreneurship. He believed that creativity was necessary if an entrepreneur was to accumulate a lot of profits in a heavily competitive market.

The concept of innovation and its corollary development embraces five functions:

  1. Introduction of a new good
  2. Introduction of a new method of production
  3. Opening of a new market
  4. Conquest of a new source of supply of raw materials and
  5. Carrying out of a new organization of any industry

Schumpeter represents a synthesis of different notions of entrepreneurship. His concept of innovation included elements of risk taking, superintendence and co-ordination.

According to Schumpeter

  • Development is not an automatic process, bur must be deliberately and actively promoted by some agency within the system. Schumpeter called the agent who initiates the above as entrepreneur
  • He is the agent who provides economic leadership that changes the initial conditions of the economy and causes discontinuous dynamic changes
  • By nature he is neither technician, nor a financier but he is considered an innovator
  • Entrepreneurship is not a profession or a permanent occupation and therefore, it cannot formulate a social class like capitalist
  • Psychological, entrepreneurs are not solely motivated by profit

Features of Schumpeter Theory

  • High degree of risk and uncertainty in Schumpeterian World
  • Highly motivated and talented individual
  • Profit is merely an part of objectives of entrepreneurs
  • Progress under capitalism is much slower than actually it is
  • It is leadership rather than ownership which matters.

Many business people support this theory, and hence its popularity over other theories of entrepreneurship.


Theories of Entrepreneurship

Define Entrepreneurship

Over 200 years of the study of entrepreneurship have provided many definitions of the word “entrepreneur.”

Indeed, the search for a best definition may have impeded the development of theory. The Schumpeter economic outcome-based concept that an entrepreneur creates value by carrying out new combinations causing discontinuity is embodied in many of the definitions offered within the last 50 years.

What is a Theory?

According to Oxford Dictionaryit is supposition or system of ideas explaining something, especially one based on general principles.

For one to become a successful businessman there is need for that person to know all about the theories of entrepreneurship.  However, entrepreneurship (though famous) is not a fully known field to many people.

There are quite a lot of theories on Entrepreneurship; we will look at some of those in the coming weeks.

I have listed most of them below, which I will be covering on this blog

  1. Schumpeter’s Theory
  2. Economic Theory of Entrepreneurship
  3. Leibenstein’s X-efficiency theory
  4. Dynamic entrepreneurship Theory
  5. Harvard School Theory
  6. Theory of Achievement (N-Ach)
  7. Theory of Profit
  8. Theory of Change
  9. Theory of Adjustment of Price
  10. Theory of Market Equilibrium
  11. Theory of Entrepreneurial Supply
  12. Theory of Personal Resourcefulness
  13. Theory of Cultural Values


Economic Way of Thinking

Economic way of thinking is defined as a way of looking at, and analysing, the way the world works by comparing the costs of an action with the benefits generated

Let us look at how an economist thinks and goes about seeking answers to his questions. There are six key ideas that define the economic way of thinking, given below:

Economic Way of Thinking

1. Trade Off

In today’s world the major problem is scarcity of resources, because of this scarcity there will never be enough of everything to satisfy everyone completely, a choice is a trade-off.

Whenever you choose one thing over another, you are making a tradeoff. You are giving up one thing to get another that you want even more. We have to choose the best alternative amongst the available alternatives. For example, you have INR 25; you have to decide what you will buy with that a snack for a cold drink. Whatever choice you make, you get one and loose one.

Trade-Off is an exchange i.e. letting of one thing for another.

2. Rational Choices

Any choice you make will be a rational choice; a rational choice is a choice which compares cost and benefit. In our earlier example if you are hungry you will choose snacks over cold drink as it will give you more satisfaction than a cold drink.

This point gives rise to a question of what goods and services should be produced and in what quantity. The answer to this question is those goods which people will rationally chose to buy. Example, why are people now purchasing more Samsung phones then Nokia? Answer is more benefit and cost.

3. Benefits

Benefit is measured by economist as ‘the most that a person is willing to give up to get something.” For example, how much are you willing to pay for a pizza by Dominos? Each one of us has in reserve somewhere or the other in our mind a sense of what thing sare really worth. Their maximum value or benefit, and the maximum price we are willing to pay for it.

Benefit is something that is gained or any pleasure derived by an individual; it is determined by the likes and preferences of an individual. For example, an individual might get a kick listening to Heavy Metal, it brings him more satisfaction then a Hip-Hop.

Below grid gives a lighter view on cost and benefits of sleeping an hour late.


4. Opportunity Cost

Opportunity cost is the foregone value associated with the current rather than next-best use of an asset. In other words, cost is determined by the highest-valued opportunity that must be foregone to allow current use.

In our first example of INR 25; cold drink was the opportunity cost of snacks i.e. with rupees 25 you could either buy cold drink or snacks.

5. Margin

Let’s understand this with an example; you have to allocate your next two hours between studying and helping your brother in his project, the choice if not all or nothing. To make this decision you will compare the benefits and allocate the time accordingly. You decide how much time will you allocate to study and how much to help your brother on his project based on margin.

We all know what marginal utility, on similar lines marginal benefit is the additional benefit which a person derives from an increase in activity. For example, you have completed preparing for your exams a day in advance, however the marginal benefit will be derived by you if you revise a night before exams. The marginal benefit here would be better grades.

6. Incentives

Self-interest is what is pursued by every individual on this planet, be it you me or any doctor, politician, civil servant, etc… Incentives are the key forces which drive self-interest amongst every individual. Self-interest does not means selfishness, it is to decide how will you use your resources so that they bring the maximum benefit not only to others but also you.

The idea in economics is to predict self-interested choices people make by looking at the incentive. People take those activities which provide them marginal benefits.


Barriers to Listening

Day dreaming

Something which I am sure all of us have done in our life, when the speaker is speaking instead of focusing on the speaker and attempting to understand and learn, we are thinking about something else, like, what should I have for snacks, which movies should I go this weekend? If the speaker is being paid to present information to you, time and money is being wasted.

Arguing with the Speaker

Instead of listening to what someone is saying, a poor listener will disagree mentally and think about a rebuttal. People will actually play out a complete argument in their own mind at the same time they should be paying attention to what the other person is really trying to say. This kind of mental arguing is very damaging to the communication process and will often lead to misunderstanding and conflicts between people. The effective listener will wait until the speaker is totally finished with his or her statement before making an evaluation or judgement prior to responding.

Do not yield to distractions

Our lives are noisy and confusing but we shouldn’t use this as a convenient excuse for not listening. We can overcome some of the distraction by reducing noise and adjusting the listening environment. If we have no control over the distractions then we must rely on intense concentration to get as much as possible from the speaker

Lack of Interest

How many times are we in a presentation with no interest, attending it as we made to attend?

Lack of interest in the speaker’s topic does create a difficult situation. How does the saying go? Deal with it.

Good listeners try to find useful information in any presentation or message. A listener with a negative attitude about the message or the speaker will have a tough time being effective as a listener. A good way to increase listening effectiveness is to maintain a positive attitude about the speaker and really work at listening for useful information.

Desire to Talk

The most common barrier to effective listening is jumping into a conversation before the other person has finished. This includes talking loudly to others in the audience. This is conversational bad manners. It is intrusive and disruptive. Granted, most of us feel more involved and active when we are talking. Even so, it’s always good manners to remember that listening is just as important as talking.

Try Not to Assume

We often develop bad habits of not listening because we assume it will be of no interest or use to us. We also make prior judgments about the amount of resistance or approval we will get from someone. With these prior notions we act without hearing or waiting to hear the speaker. We could improve our listening skills significantly by exercising patience and, even if we think we know what will be said, allow the speaker to finish.

The Stages of Inflation

Inflation passes through three stages. In the first stage the rise in price is slow and gradual. In this stage it is easier to check the inflationary rise in the price of goods and services. But if inflation is not effectively checked in the first stage then it enters the second stage. In second stage inflation becomes a serious headache for the government. The prices of goods and services start rising much more rapidly then before. It not possible to eliminate inflation completely but if the government takes effective steps, it may be possible to prevent a further rise in price level. In the third stage, prices of goods and services now start rising almost every minute and it becomes impossible for the government to check them.

These can be illustrated by an example , in first stage price rise in a proportion is less than the supply of money. If the supply of money increases by 10%, the price rise by 5% or even less than that . In the second stage, the prices rise exactly in the same proportion in which the supply of money increases. In other words, if the supply of money is increased by 10% the price rise also goes by 10%. In the third stage, the price rise in a much greater proportion than the increase in the supply of money. In other words, if the supply of money is 10% price level may rise by 15% or even more.

The three stages of inflation are described below:

1. Pre-full Employment Stage

The rise in price level in the first stage is less than proportionate to the increase in the supply of money. Let us suppose the supply of money increases by 10%. As, a result, there will be immediate rise in the price level. Consequently, the production of goods and services receive stimulus. As a result of increase in output of goods and services, the price level will come down. But if the supply of money is again increased by 10%, the price level will rise up, giving encouragement to the production of goods and services in the economy. In this way if there is continuous increase in the supply of money, a stage will come when the output of goods and services may not increase in the same proportion in which the supply of money increases. The reason being that with the expansion of production, the supply of the factors of production goes on declining.

2. Full Employment Stage

If the supply of money continues to increase without any interruption, then after some time production will cease to increase, or in other words, production will become stagnant. The reason being that all productive resources are already fully employed.  Extra resources are not available for a further expansion of production. Hence, the further expansion of production comes to an end. Since production becomes constant, the price level now starts increasing in the same proportion in which the supply of money increases.

3. Post-full Employment Stage

If the supply of money continues to increase even after the time of full employment, then for some time the price level will increase in the same proportion in which supply of money increases. But after that the supply of money increases so much that the public loses confidence in it and the increase in the price level is much more than the increase in supply of money. For example, if the supply of money is 10%, then the price level increases by 20%, 30% or even 40%. In such a situation, it becomes difficult, to check the rise in the price level. This is the final stage of inflation. In this stage, the prices rise so high that money exchange comes to be replaced by commodity exchange in due course of time