The Future of Business: The Essentials - Essay Example

? Running Head: Comprehensive Exam Comprehensive Exam The company, heretofore referred to as Alpha Company, is one of the most reputable microelectronics firms in the world. It has sizeable direct investments in five different countries where it also markets its products. It currently faces challenges such as exposure in a failed joint venture, the fact that it guaranteed a bond offering in the name of that failed venture, its slow sales to RBOCs which have once been sources of strong revenues for the company, and the fact that it lags behind its competitors in terms of innovation. It was determined that bankruptcy proceedings will resolve the issue of guaranteed bonds although the firm may suffer losses if the assets of the failed joint venture shall be insufficient to pay off creditors. The RBOCs should not hold off the introduction of new product technology if other clientele will benefit from it, and markets should be explored in the emerging economies where Alpha presently operates. Finally, innovation is a vital long-term consideration which the firm could already take steps to develop in the coming years, but the change should be implemented strategically. The analysis was conducted by examining the company’s important functions, namely accounting, economics, finance, marketing and management of human resources. In light of the insights derived from each of these functions, an integrated action plan has been arrived at which embody the conclusions in favor of which the analysis had be resolved. Implementation of the action plan has implications on company strategy and operations from the short to the long term. It is expected that the directions specified by the action plan should enable the company to maintain its financially strong position while assuring it a more robust market participation. Table of Contents Abstract 2 Table of Contents 3 Introduction 4 Accounting 4 Economics 7 Finance 9 Marketing 10 Management 12 Conclusion 15 References 17 Introduction The task of managing a corporation is replete with complexities, and at times the problems involve conflicting considerations among the firm’s various functional units. This case study is no less complex although the facts have been simplified for a more integrated analysis. Important functional considerations include accounting, economics, finance, marketing, and human resources management. These considerations shall provide the focal points in the discussion of the firm which, for the purposes of the analysis, shall be called Alpha Company. Alpha Company is one of the most reputable microelectronics firms in the world. It has sizeable direct investments in five different countries where it also markets its products. It currently faces challenges such as exposure in a failed joint venture, the fact that it guaranteed a bond offering in the name of that failed venture, its slow sales to RBOCs which have once been sources of strong revenues for the company, and the fact that it lags behind its competitors in terms of innovation. These issues shall be discussed in this report and an action plan shall be recommended in the conclusion of the study. Accounting Accounting is ‘the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.’ It is also defined as ‘the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information’ (Riahi-Belkaoui, 2004, p.38) The preparation of information that is useful for managerial accounting purposes is an important function of the accounting unit in an organization. From the accounting data that is available in the company demographics, it appears that the Alpha Company is doing very well financially, with $30 billion in revenue, therefore it is commanding a good share of the global electronics and telecommunications market. It is also said to be one of the most profitable, therefore the company is efficient in its operations so that after all the costs are deducted, the firm still retains a good portion of its initial revenues to realize a healthy profit. The firm is also said to have a very positive cash flow. Indicating that its operations are generating enough cash flow to service the cash outflow needs of the firm. In the company’s cash flow report, cash is generated three ways: from operations, from financing activities, and cash flow from investing activities. Cash flow from operations pertain to the actual production and sales of the firm, which is a sustainable source of cash inflow. Cash flow from investing activities is any movement in cash due to the purchase or sale of an asset, the loans made to suppliers or received from customers, and payments related to mergers and acquisitions. Cash flow from financing activities involve cash movements as a result of the payment of dividends to shareholders, the retirement of short term or long term debt, the sale or repurchase of company shares, net borrowings and payment of dividend tax (Mulford & Comiskey, 2005). By the mention of a ‘very positive cash flow’ situation, the implication is that operating cash flow is positive and exceed any cash outflows that may be incurred in investing and financing activities. This presumes that shareholders are satisfied with dividend payments, purchase of assets is defrayed, loans are within sustainable levels and interest and principal are retired on time. Although the liabilities of the firm have been encumbered as a result of the bond guarantee, it has been mentioned that the failed joint venture has entered into bankruptcy proceedings. It is important at this point to define the nature of a guaranteed bond. A bond is an instrument of long-term indebtedness – in this case, that of the joint venture – to investors who have subscribed to the bond offering. Since this is long-term, when the bond mature, the subscribers (and thus creditors) are supposed to receive their principal and interest promised on the face of the bond. A guaranteed bond is a bond on which the payment of principal, interest, or both has been guaranteed by a party other than the issuer (Gastineau & Kritzman, 1999, p.157). In this case, the guarantor is Alpha Company who promised to make good on the bond’s payments to creditors, in case the joint venture cannot. However, this presumes that the joint venture is still a going concern and is still viable at the maturity of the bond. This is not the case, however, because the joint venture has just entered bankruptcy proceedings. Bankruptcy is a procedure governed by federal statutory law providing for the development of a plan allowing a debtor, who is unable to pay his creditors, to resolve his debts by dividing his assets among his creditors. After a bankruptcy proceeding is filed, creditors may not seek to collect their debts outside of the proceeding (Cornell University Law School, 2013). In the case of the joint venture, the creditors have a choice, to either pursue their claims against the joint venture through bankruptcy, or to go after the guarantee of Alpha Company. It cannot do both, because such will constitute double restitution, and a creditor can only recover once the full amount of its investment. The size of the bond was not mentioned, but it definitely would have been only a fraction of the $6 billion worth of the joint venture. When it entered into bankruptcy, the joint venture was not entirely without value, because it still had its fixed and intangible assets, or whatever of the latter still has value after the business has closed, such as outstanding contracts it has with its clients. During the proceedings, the claims of the creditors shall first be satisfied, before the claims of the shareholders. This is where the bondholders should pursue their recovery, rather than rely on the guarantee of Alpha Company. The creditors have priority over the assets of the failed joint venture even before Alpha Company and the other shareholders see a single cent of their investment. When the claims of the bondholders are filed in the bankruptcy proceedings, they should be taken off the balance sheet of Alpha Company as the bankruptcy proceedings shall settle the claims. What should concern Alpha Company is whether or not it stands to recover its $1.14 billion (19% of $6 billion) investment in the joint venture. The fact that the bondholders shall pursue their case against the joint venture’s assets means that it is a claim that has priority over all shareholders of the joint venture, not just Alpha Company, so there is a greater chance for recovery and lower burden on Alpha. The worst case is that Alpha shall most likely write off the $1.14 billion investment it made in the joint venture, but it shall have no further liability that that. Furthermore, it would not be advantageous on the part of creditors to stake their claim against the guarantee of Alpha. The guarantor of a bond may only be required to make good on its guarantee under the terms and conditions of the bond. Since the bond is a long term instrument, under the terms of guarantee Alpha has no duty to pay the bondholders except after the bond matures which is years into the future (Tarullo, et al., 2007). Economics The economic considerations that pertain to the firm are described in the theory of the firm. A business firm is an economic unit that transforms factors of production into economic goods or services. The firm applies the technology available to it to create output (goods and services) from its inputs (factors of production, namely land, labor, capital, and entrepreneurship). The traditional object of a business firm is profit maximization. Total profit is the difference between total revenue and total cost. Total revenue is the product of the price of the good and the quantity purchased. The quantity purchased is that determined by the price; the quantity transacted is the quantity that buyers are willing to buy and sellers are willing to sell at a certain price. If a firm operates in a market where demand is flat and price is constant, the only means by which profits may be increased would be to reduce costs. Costs may be reduced in two ways: one could be by reducing costs of materials without reducing volume or quality purchased, which means that new suppliers could be sourced who offer lower prices without sacrificing quality. The other cost-reducing method would be by reducing operating expenses by observing more cost efficient practices. The firm could also explore cost cutting innovations either in product design or process re-engineering (Mukherjee, 2002). So far, based on the accounting information there is every indication that the production function of the firm is efficiently and sustainably carried out, and the market is generally receptive to the firm’s products. The production function should however adjust to the changing demands of the market. The environment appears to be favoring innovation, which Alpha Company is admittedly weak in. Clearly, innovation is not the firm’s competitive advantage, and while for the long term the firm can try to develop this capability, at present there is every indication that if Alpha Company jumps into competing on innovation in the short term, this is going to be costly for it. Innovation, in the form of research and development, is an expensive activity because not all initial research proceeds to market readiness (Friedman, 2012). What the Company can do is (1) develop capability in the lower-level development of new applications for existing technology, or technology developed until the laboratory stage by other research firms; and/or (2) to acquire smaller firms or purchase their patents and develop these ideas for the market. This method is closer to Alpha Company’s competitive advantage of knowing market conditions well, while allowing it to bypass the high risk, uncertainty, and costs of high failure in the early stages of research and innovation. Finance Finance is the study of how people or corporations allocate their assets over time, under conditions of certainty and uncertainty (De Matos, 2001). There are generally two kinds of financing available in the financial markets: equity capital, and debt capital. Equity capital is the funding provided by owners or shareholders of the business, and who are compensated through dividend payments. Debt capital on the other hand is borrowed funding which the firm should pay periodic interest for and the principal amount of which should be returned to the creditor when the loan matures. From the point of view of the company, debt is more risky because of the chance that the firm may default on the payment and incur penalties and legal charges; debt is also more expensive than equity, because of the need to pay a fixed rate of interest periodically whether the company is earning or has positive cash flows at that time, or not. On the other hand, equity investors do not demand periodic payments, knowing full well that they bear the risk of business, and that when the business is suffering losses, they cannot expect dividend payments and may have to shoulder the losses if written off (Yen, 2004). In the case of Alpha Company, there appears to be no problem with the finance situation. The stock has undergone several rounds of stock splits in the last three years. A stock split is defined as a process by which the par value of a stock is decreased and the number of stocks increased proportionally, so that each stockholder holds more shares at a lower par value per share, so that the total value held remains unchanged. In a 2 for 1 split, a share of stock with par value $2 prior to the split would amount to 2 shares of stock with par value $1 per share after the split. Companies typically issue stock splits to lower the per share value because it is too high for everyday investors to reach (Biafore, 2009). The fact that Alpha has found it necessary to split their shares repeatedly in the past three years is a good indication, because that means the value of the shares of Alpha stock rise quickly in the market. When the price of a stock appreciates quickly, demand is strong signifying that a good number of investors (many of whom are institutional) are eager to purchase the share at high prices, convinced that the firm is worth much more and will prove a good, low-risk investment. The firm should avoid splitting its stock too frequently in the future, however, because of the possibility of a market correction which could see lower stock prices. After a quick rise in prices, stock prices sometimes move down temporarily because of profit taking of some shareholders. This is merely a correction, and should not mean that the underlying business is poor. There is no reason to believe, however, that there is a need to control for falling stock prices in the case of Alpha, because the stock splits indicate that the stock prices are instead going up. Marketing Marketing is ‘the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.’ (American Marketing Association, 2013). Marketing involves determining what segment of the market to target its sales efforts, which products to sell, at what price they should be sold, how the products should be delivered, and how they are to be promoted. These are the 4Ps in the marketing mix in a market for goods, such as that Alpha Company is in (Gitman & McDaniel, 2008). Alpha Company’s market in the global scale is geographically broad, although there does not appear to be any difficulty on the part of the company to manage this scale of operations. The firm operates in 5 foreign countries aside from its home base, with 23 factories and total workforce of 147,000 people. The firm is concerned about a particular development in its domestic sales, involving the RBOCs (Regional Bell Operating Companies). The RBOCs are the communications companies to which the Bell Telephone Company had been broken up as a result of a court decision (Beyster & Economy, 2007). The RBOCs used to be cash cow clients of Alpha Company, however recently they have been having liquidity and probably solvency issues, causing them to delay in their payments and orders for the next generation technology. Alpha Company will have to decide whether it should pursue its current reliance on RBOCs because for the company to delay the introduction of a whole product line for the sake of just one group of clientele sacrifices all the other clients it could be servicing already, instead of allowing the competitors to fill in their demand. The Company should service the demand and not rely on one client; it should therefore develop other lines of clientele instead of relying on one failing client which historically had been profitable for it, but is no longer. While the past performance of Alpha Company has been laudable, it is however worrisome that the company is contemplating the delay of a new technology when the factor that drives competition in the electronics and telecommunications industry is the speed with which it brings new technology to customers. The local demand may also be weak generally because of the financial crisis that hit the Western economies severely. The same condition is not evident in the emerging economies, however, so the company should focus on these markets. The strength of a multinational is its ability and flexibility to transcend local issues and conditions and focus its production and marketing efforts in those parts of its operations where the conditions are more favorable (Madura, 2010). Alpha will do better if it concentrates its marketing and production efforts in India and China, which are large markets and have strong growth rates, Singapore and Taiwan which also show great promise although they are smaller markets, and England which is Alpha’s foothold in Europe. Management Management is ‘the process of designing and maintaining an environment in which individuals, working together in groups, efficiently accomplish selected aims’ (Koontz & Weihrich, 2006, p. 5). Management is all-encompassing and involves every aspect of the business organization; however, since the preceding discussion has already analyzed the specialized functions of the organization, this section shall deal with the ‘soft’ aspect of management, the human resources management aspect. The firm has identified its need to improve its innovation capability in order for it not to lose market share to its competitors which have a track record of innovative products. While stressing the earlier position that the firm should not so rashly decide to become innovative and switch suddenly into the innovations market, it should however include innovation in its long-term target. The key to innovation is to recruit and develop the type of work force which could deliver in creativity and innovativeness. Presently, the firm has 147,000 people in its global work force. Several of these employees, located in China and India, are schooled in what are reputed to be the most prolific environments for technological expertise and innovativeness. Singaporean and Taiwanese employees are also potential pools for the search for technologically creative personnel. What Human Resources (HR) could do is to tap these unexplored potentials and engage them by creating an environment that encourages experimentation and exploration. This should be done within a regime that is liberal towards productive activity, but well monitored to ensure that their efforts effectively contribute towards the realization of the strategic goals set by the company. There is no hard and fast rule for the development of an environment conducive to creativity, although one model is presented in the next figure that may illustrate the factors involved. The model includes organizational and supervisory support, autonomy and freedom, sufficient resources, a healthy level of pressure in the nature of work challenge, and the elimination of organizational impediments (Bryant, 2012). Source: Bryant, 2012, p. 24 In the home office, Alpha Company should identify and recruit or promote from within an individual who could occupy an executive position, whose purpose is to spearhead and guide the company’s efforts in developing and maintaining a sustainable innovation strategy. The new unit should be provided sufficient leeway and cooperation from the other departments in developing the firm’s overall innovation strategy. Close collaboration among marketing, production, and finance is necessary to determine which goals are manageable in the short-term and which are those the firm could address in the longer term. It will be some time before the firm builds enough innovative capability to seriously challenge its more established competitors, but it should not be afraid to develop what could eventually be disruptive technologies which could break out of the status quo and set new trends (Jump Associates, 2011). Conclusion The foregoing discussion has brought light to several issues dealing with the different functions of the organization. The discussion has clarified certain issues, identified what issues are important and what are not, and arrived at what appear to be the most feasible actions to take in line with the analysis. Three issues were originally identified in the case: the postponement of new product technology to await RBOC recovery, the effect of the guaranteed bonds on Alpha Company’s balance sheet, and the lack of innovative capability in the firm. It was determined that bankruptcy proceedings will resolve the issue of guaranteed bonds although the firm may suffer losses if the assets of the failed joint venture shall be insufficient to pay off creditors. The RBOCs should not hold off the introduction of new product technology if other clientele will benefit from it, and markets should be explored in the emerging economies where Alpha presently operates. Finally, innovation is a vital long-term consideration which the firm could already take steps to develop in the coming years, but the change should be implemented strategically. These insights have been integrated and an action plan formalized in the following table: Functional Area Action Plan Target Duration Accounting Participate in bankruptcy proceedings to determine recovery of investment in the failed joint venture Revaluate balance sheet after the guaranteed bond shall have been resolved according to bankruptcy resolution Short to medium term Economics Develop capability in lower-level innovation development targeted at market readiness Acquire smaller research-based firms or purchase their patents to develop them for market Medium to long-term Finance Continue relying on strong, internally generated retained earnings Allow stock price to settle before the next stock split. Short-term Marketing Concentrate on strong growth in emerging markets Redefine local markets by relying less on RBOCs and identifying more local Short-term to medium term Management Develop internal innovative capability by engaging and motivating creative employees Establish innovation executive position, redefine strategy to include innovation Long-term The study recommends therefore that the foregoing action plan be given due course, with the collaborative effort of all the functional units of Alpha Company and according to its strategic goals. References American Marketing Association 2013 ‘Definition of Marketing.’ Available at: http://www.marketingpower.com/aboutama/pages/definitionofmarketing.aspx [Accessed 30 April 2013] Beyster, JR & Economy, P 2007 The SAIC Solution: How We Built an $8 Billion Employee-Owned Technology Company. Hoboken, NJ: John Wiley & Sons. Biafore, B 2009 Quicken 2009: The Missing Manual. Sebastopol, CA: O’Reilly Media, Inc. Bryant, ME 2012 Physical Environments Conducive to Creativity and Collaboration within the Work Environment. Abe Books Cornell University Law School 2013 ‘Bankruptcy.’ Legal Information Institute. Available at: http://www.law.cornell.edu/wex/bankruptcy [Accessed 30 April 2013]. De Matos, J A 2001 Theoretical Foundations of Corporate Finance. Princeton, NJ: Princeton University Press Friedman, LG 2012 Go-to-Market Strategy. Woburn, MA: Butterworth-Heinemann Gastineau, G L & Kritzman, M P 1999 Dictionary of Financial Risk Management. New York, NY: Swiss Bank Corporation Gitman, LJ & McDaniel, CD 2008 The Future of Business: The Essentials. Mason, OH: South-Western Cengage Learning Jump Associates 2011 ‘There are three types of innovation. Here’s how to manage them.’ Co.Design. Available at: http://www.fastcodesign.com/1665186/there-are-three-types-of-innovation-heres-how-to-manage-them Koontz, H & Weihrich, H 2006 Essentials of Management, 7th edition. 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